After overcoming the internal and external analysis phases of the factors that may influence commercial activity aimed at the foreign market, and having overcome the weaknesses detected, the exporting company is in a position to adopt the strategic decision on how to penetrate and/or position itself in the destination country.
This is a matter of particular importance, requiring a rational assessment of the competitive advantages and potential shortcomings of the SME's export capacity and structure. Perhaps this is the most appropriate time to engage an external consultant to advise on, or at least confirm, the suitability of the decision.
This will determine the selection of the appropriate contractual form as a legal guarantee for the business. It is thus evident that the contract serves as the foundation for the exporter's commercial interests, which constitute the ultimate goal of the business activity.
Exporting can be managed through two methods: 1. Direct 2. Indirect or Subcontracted.
In this article, we will briefly analyze the first. Direct exporting corresponds to the traditional model of international sales, carried out using the company's own commercial structure, in which the international seller can exercise total control over international transactions. It is a somewhat risky business approach when the idiosyncrasies, legislation, and cultural values of the destination market for the products or services are unknown.
Should the business owner choose this export method, they must plan a financial investment commensurate with a sustained presence in the selected market, assessing both the costs and the inherent risks of the chosen approach. This includes:
A. International Representation Agreement
The representative is linked to the exporting company by a special employment relationship, since he does not follow the established schedules for the rest of the workers and performs his professional work outside the company premises.
The sales representative must report on their business activities to the principal, for which minimum sales targets are established. Their remuneration is agreed upon as a fixed salary plus commissions, which are paid when the company receives payment for the transaction. They typically focus on promoting business and managing orders, following the principal's instructions and excluding from their duties the signing of contracts with clients in the destination country. The contract is generally for an indefinite period. Upon termination of their employment, the representative is entitled to special compensation for the creation of "goodwill" for the principal company. This role is not very common in international business, as sales representatives are almost exclusively used to promote sales in domestic markets.
The representative can be an employee of the originating company, in which case they will need a reasonable amount of time to build a network of clients in the destination country, or rather, a national of that country who already has the necessary knowledge to make direct contact with potential buyers.
B. Commercial Delegation
A Commercial Delegation or Commercial Representative Office serves as a form of permanent representation in the target market. It is understood as a preliminary step to establishing a stable commercial base in that market, whether in the form of a branch or subsidiary. It typically stems from a history of regular international sales in the selected country, meaning the representative is familiar with the country's cultural, commercial, and business characteristics.
C. The Branch
An exporting company may make the strategic decision to establish a permanent presence in a particular foreign market, competing on equal terms with domestic companies in that country. To this end, it creates a subsidiary with its own legal personality, dependent on the parent company in the country of origin, which has a governing body to coordinate the activities carried out by the subsidiary.
The project requires a significant initial investment. In the first stage, the host company must assume a high financial risk, but once established and fully operational, the advantages are undeniable. Among others, the following should be noted: 1) Production: the dispersion of the production process creates the possibility of manufacturing at lower costs; 2) Marketing: the subsidiary's business structure allows for on-site adaptation of decisions to the actual market conditions in which it competes; 3) Financial Advantages: the parent company can adopt the most favorable strategy, managing credit and loans to the subsidiary, repatriating funds from interest and capital, altering the subsidiary's results as needed, and dealing with exchange rate fluctuations in the currency the subsidiary uses in the most advantageous way, etc.
The most significant risk is that the subsidiary in the target market could be nationalized by the government in power. Furthermore, a high level of social unrest in the host country will make it impossible to achieve the projected business objectives.
D. The Branch
The branch office serves as another legal and commercial instrument for establishing a company in the target market. Unlike a subsidiary, it does not act as a legal entity independent of the parent company. Although it may have a certain degree of autonomy, decisions made by the parent company are binding and must be complied with by the branch office.
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