Onkvisit S., Shaw J. International Marketing: Analysis and Strategy

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also be the exporter, which can ask for full or partial

payment as the project progresses.Thus the seller is

assured of payment for sales made on open account.

The buyer draws by presenting the seller’s draft

with unpaid invoices, and the bank then releases all

or part of the money to the seller.

Back-to-back letter of credit

When the seller is a trading ﬁrm or middleman who

must pay a supplier before asking the supplier to

deliver goods to a foreign customer, the middleman

may have to obtain an L/C naming the supplier as

the beneﬁciary. This can become a problem if the

middleman has inadequate resources to obtain a loan

or an L/C from a bank.What the intermediary can

do is to use the commitment of the customer’s issu-

ing bank (i.e., the customer’s L/C) to collateralize

issuance of the second L/C by the intermediary’s

bank in favor of, say, the supplier.This is an entirely

separate transaction from the original or master

L/C.The intermediary (seller) assigns the proceeds

of the original L/C to its bank, which in turn issues

the bank’s own L/C in favor of the supplier for an

amount not exceeding the original L/C.

Because a back-to-back L/C is a transaction

entirely separate from the original or master L/C,

the bank issuing back-to-back credit is liable for

payment to the supplier even if there is a failure to

complete the requirements of the original credit.

Not surprisingly, many banks are reluctant to be

involved in back-to-back transactions, preferring to

handle the transferable credit option instead.

Transferable letter of credit

Again, when the seller is an agent or broker for the

supplier of the goods, it is difﬁcult for the agent to

have an L/C issued to the supplier if the agent’s

credit standing is weak or unknown. To solve the

problem, the agent or broker may request a trans-

ferable L/C from the buyer.This type of L/C allows

the beneﬁciary (i.e., agent) to transfer once rights in

part or in full to another party.The agent as the ﬁrst

beneﬁciary requests the issuing or advising bank to

transfer the L/C to its supplier (second beneﬁ-

ciary).The transferring bank receives a commission

for doing so.A reduction in the amount, unit price,

shipment period, and validity period are allowed.

Since the agent receives a fee or commission for the

selling effort, the bank will pay the supplier based

on the supplier’s invoices for the transferred (lesser)

amount. The agent then receives the difference

between the full price (the agent’s own invoice) and

the lesser amount (the supplier’s invoice).The trans-

feree (supplier), after making the shipment, submits

documentation to receive payment. After this is

completed, the original beneﬁciary (agent) obtains

a commission by substituting its invoice with any

other documents evidencing price for the total value

of the sale.The beneﬁciary presents a draft for the

difference between the supplier’s draft and sales

value covered under the credit.

The dilemma for the agent is that, unlike a back-

to-back L/C, there is a possibility that the transfer-

able L/C may reveal the identity of the supplier to

the agent’s customer and vice versa. Once the buyer

learns of this identity, the buyer may elect to contact

the supplier directly in the future to avoid paying a

commission to the agent.

If the original beneﬁciary (agent) does not want

the buyer to be identiﬁed, the beneﬁciary’s name or

a neutral forwarder’s name may be substituted for

the buyer’s name.The failure of the agent to provide

the bank with substitute documents immediately

will defeat the whole purpose, since the bank has

the right to deliver the transferee’s documents to

the issuing bank.

Advantages and disadvantages of letters

of credit

The L/C offers several advantages. First, it offers

security while minimizing risk. The bank’s accep-

tance of the payment obligation is a better credit

instrument than a bill of exchange that has been

accepted by the buyer.An L/C creates a better rela-

tionship with the buyer since all terms are speciﬁed

and both parties are protected. In addition, the

exporter can receive payment before maturity by

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discounting the L/C. An L/C can be discounted at

a lower rate because it offers greater security than

a bill of exchange. The discount charge is usually

computed at the current prime bankers’ acceptance

rate from date of purchase to maturity.

For the buyer, the L/C also offers several bene-

ﬁts even though the buyer may have to bear the

burden of ﬁnancing. First, the buyer can buy now

and pay later. Second, the L/C offers the assurance

of prompt delivery.There is also an expired date for

credit, and no payment is made until the goods are

placed in the possession of a transport carrier for

shipment. In addition, the seller must complete the

terms speciﬁed in the L/C before payment is

released.Third, the buyer may receive a better price

since the seller does not have to adopt unnecessary

safeguards or to sell the L/C at deep discount.The

buyer, as a result, may even qualify for the seller’s

cash discount.

It is imperative that the seller carefully examine

the L/C terms to make certain that he or she under-

stands them and can meet the requirements. The

seller must examine such items as the description

of the merchandise, trade terms, price, delivery

date, required documents, the party responsible

for insurance, departure and entry points, and so

on.The seller must also determine whether the L/C

received is conﬁrmed and irrevocable if requested

as such.The seller should not accept an L/C requir-

ing that the inspection certiﬁcate be signed by a par-

ticular individual because if that individual, due to

death or other reasons, cannot sign the certiﬁcate,

the exporter is unable to fulﬁll all the require-

ments and cannot collect payment.A precautionary

measure may be to insist that the certiﬁcate be

issued by a particular inspection company rather

than a speciﬁc person associated with the company.

In spite of the many advantages, the L/C does

have disadvantages as well. The instrument lacks

ﬂexibility, is cumbersome, and is the most complex

method of obtaining payment. Any changes in the

terms require an amendment to the L/C. Although

suitable for a routine transaction, the L/C does not

work well when the transaction is unusual and

requires ﬂexibility. It can also be expensive for the

buyer if the government requires a prior deposit

before establishing the L/C. For example, Lebanon

requires banks to have their customers make a

15 percent deposit on documentary letters of credit

on goods to be sold in Lebanon.

Another reason why the L/C can be a burden to

the buyer is that it entails credit exposure.As such,

the buyer’s credit must be approved in advance by

the buyer’s bank.This is understandable because the

L/C is issued on an unsecured basis, and the buyer-

applicant only pays when the issuing bank is called

on to make payment. Without a satisfactory credit

standing, the bank may require cash or other collat-

eral for its own protection. In fact, a cash deposit

may not even be acceptable if the importer has

ﬁnancial difﬁculties or an unknown credit reputa-

tion, since prior creditors may later lay claim to that

amount of money in the event of the importer’s

bankruptcy.As a result, the bank will treat a request

for an L/C as a request for a loan or line of credit.

As such, the practice will tie up a portion of the

buyer’s available line of credit. Furthermore, L/C

fees may range from 1 to 3 percent or perhaps even

higher of the L/C amount.

These fees, of course,

add to the importer’s costs.

It should be pointed out that an L/C is not a fool-

proof document. Guria, a private company based in

the Republic of Georgia, was persuaded by an

American businessman to relax the terms under

which he could collect on an L/C for his handling

of the purchase of 2900 metric tons of sugar on

behalf of Guria. The businessman then withdrew

$768,500, but the sugar was never delivered. In

another case, National Westminster Bank PLC paid

out $1.8 million on an L/C to an Italian business-

man who forged documents to show the bank that

5000 metric tons of sugar were on the way to a

buyer in Saudi Arabia.The Saudis found out that the

shipment never occurred, and the Czechoslovakian

bank that issued the L/C refused to pay the British

bank.

Certainly, the existence of an L/C is not a

substitution for proper business investigation.

The most signiﬁcant portion of the cost for

an L/C is conﬁrmation. The conﬁrmation cost,

being variable, may range from about 1 percent for

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TERMS OF SALE AND PAYMENT

a low-risk country to 6 percent or more for a high

risk country (e.g., Russia).The instrument, because

of its relative greater degree of safety, has a much

lower incidence of losses, reschedulings, or restruc-

turings than the other normal term international

loans. For almost two decades, there appear to have

been no losses on the conﬁrmed letters of credit,

except for the Dominican Republic, Nigeria, and

Iraq – countries that after all failed to meet the

minimum country risk standards at the time.

CONCLUSION

The exporter must make an effort to quote a mean-

ingful price by using proper international trade

terms.When there is doubt about how to prepare a

quotation, freight forwarders should be consulted.

These specialists can provide valuable information

with regard to documentation (e.g., invoice, bill of

lading), and the costs relevant to the movement

of goods. Special ﬁnancial documents such as letters

of credit, however, require a bank’s assistance.

International banks have international departments

that can facilitate payment and advise clients regard-

ing pitfalls in preparing and accepting documents.

Even when an exporting ﬁrm is assured of

payment, it still needs to consider the source of

payment and to determine whether it is legitimate.

The company should adopt money-laundering pre-

vention rules. It is important to know one’s client

and exercise due diligence so as to avoid undue

scrutiny from law enforcement agencies.

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CASE 17.1 COUNTERTRADE: COUNTERPRODUCTIVE?

In modern times barter and its numerous derivations, which have conceptually been gathered together under the

rubric “countertrade,” have gained renewed stature in international trade.This has occurred despite the fact that

international money and credit markets have attained unparalleled levels of sophistication.

Where readily acceptable forms of money exchange and viable credit facilities are available, markets shun cum-

bersome and inefﬁcient barter-type transactions. But, international liquidity problems and government restrictions

on the operation of markets have prompted many less-developed countries (LDCs) and nonmarket economies

(NMEs), as well as industrial countries, to promote “creative” trade transactions that circumvent the normal

exchange medium of modern markets.

The

shortcomings

of countertrade include the following:

1 Countertrade has a high inherent transaction cost.

2 Countertrade limits competitive markets.

3 Countertrade contributes to market distortions that lead to inappropriate economic planning.

Inefﬁciency in transactions costs

The underlying weakness of countertrade as a mechanism of trade and exchange is its inefﬁciency. The indivisi-

bility of goods made barter inefﬁcient, for example, and forced those involved with such trade to search for a

better way. Barter gave way to goods/services-for-money exchange, which permitted transactions to incorporate

divisibility as well as time shifting. The opportunity for more convenient (i.e., efﬁcient), multiparty trade became

a reality.

A major factor in the expansion of world trade during the last half of the twentieth century has been the

emergence of a few widely accepted currencies, especially the US dollar, as settlement currencies for international

transactions. The development of international credit markets to support trade depended on the fact that trans-

actions could be entered into without undue concern by the parties involved as to the delivery of the speciﬁc

quantity and quality of goods and the timeliness of payment. A key characteristic of this type of market is that

the channels of communication and exchange are well deﬁned and relatively simple.

As a consequence of this clarity and simplicity, such markets are efﬁcient. Speciﬁcally, the direct and indirect

costs involved in the process of exchange account for a relatively small portion of the total cost of the transaction.

Such efﬁciency is not present in the conditional transactions that make up countertrade.The inefﬁciency cost

must be borne by one or more of the parties involved.

Many countertrade transactions are entered into because the importing country is unable to obtain ﬁnancing

in the international markets and is short of hard-currency reserves. The lack of access, or limited access, to the

credit markets may be due to restrictions on the country, placed as a condition for speciﬁc new lending by the

International Monetary Fund (IMF) or foreign commercial banks. In this environment countertrade is sometimes

viewed by an LDC government as a means of engaging in trade without the cost of entering the international

ﬁnance markets.

Whereas it is correct that countertrade may mean that the international ﬁnancial markets may not have to

be tapped, it is not correct to assume that there are no ﬁnancing costs associated with a countertrade transac-

tion. In fact, because of the complexity associated with carrying out a countertrade transaction, the cost is higher

than if the LDC has had access to those credit markets. Moreover, countertrade may end up subverting the capital

and austerity restrictions that in some cases are a part of an IMF/LDC lending agreement.

In countertrade the costs of ﬁnancing are shifted. They become implicit rather than explicit. The seller may

absorb this cost in the form of accepting the obligation to buy or use or resell goods it otherwise would not accept

(thus reducing its return on the transaction). Alternatively, the seller may build the transaction’s ﬁnance costs into

the price the buyer must pay. The ﬁnance costs are there, though hidden.

Limiting competition

There is another implicit cost when countertrade is required by the LDC or nonmarket economy (NME) buyer as

a condition of the transaction. Countertrade limits the potential number of sellers in the market. Not every seller

ﬁrm is willing or able to engage in countertrade; thus, an LDC or NME buyer that insists on countertrade as part

of a trade package limits its potential for obtaining a competitive product, service, or price.The fact is that engag-

ing in countertrade costs the LDC or NME economy more in terms of real resources than a straight commercial

transaction.

Market distortions and false signals

Developing countries may not have well-developed international marketing facilities. As a result they often ﬁnd it

difﬁcult to break into international markets with goods and services that are nontraditional for their economy.

In other cases an LDC or NME may choose to develop a new domestic industry by buying the technology and

plant from abroad. Domestic demand may not be adequate for an efﬁcient plant size. In response, they may opt

for a larger, more efﬁcient (but possibly from a world supply view, redundant) plant with the expectation of placing

the marginal production on the international market.

Under such conditions counterpurchase or buyback agreements may be sought by the LDC or NME to ﬁnance

the importation of plant and equipment for a new industry (as in a buyback agreement) or general imports (as

in a counterpurchase agreement).The LDC or NME also may be seeking a more knowledgeable partner to handle

the international marketing of goods for which it does not have the expertise.

The difﬁculty with this approach is that countertrade may be used to get goods onto the international market

that would not “make it” under usual conditions and will not be competitive once the buyback agreement expires.

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Further, the industrial country ﬁrm that accepted the counter-traded goods may dump them, which would be dis-

ruptive to international markets. The result may be that the LDC or NME producer may falsely interpret the

signals and overestimate the real market demand for the dumped goods as being stronger than a longer-term,

unsubsidized, market can bear.

Moreover, the secondary consequences of countertrade transactions are not benign.The inefﬁciencies of coun-

tertrade – the false-price signals that result in the building of redundant plant and equipment – tend to promote

the establishment of bureaucracies within governments and private ﬁrms that have “bought into” countertrade.

In turn, these bureaucracies have a vested interest in maintaining the economic distortions that undergird the

growth in countertrade.

Summing up

Countertrade is a signiﬁcant factor in modern international trade. In its different forms it is used as a marketing

tool, as a competitive tool, as a tool to restrict trade alternatives, and as a tool to tie the trade of one country

to another country. Countertrade in a modern world economy with highly developed goods, capital, and ﬁnancial

markets appears on its face to be an incongruous development. Countertrade is a costly, inefﬁcient, and disrup-

tive anomaly. Yet observers of international trade suggest that the volume of countertrade is growing.

Countertrade takes place in a world of imperfection where the political and economic policies of government

and industry distort the relationships between and within the goods, capital, and ﬁnancial markets.

Points to consider

1 Discuss the pros and cons of countertrade as a form of trade.

2 As a manufacturing ﬁrm located in a developed country, you are interested in taking advantage of the Eastern

European markets’ movement toward market-oriented economies. However, your potential customers lack

hard currency and have asked you to consider countertrade. Are you willing to engage in countertrade? Why

or why not?

Source:

Abbreviated and adapted from Jack L. Hervey, “Countertrade – Counterproductive?”

Economic Perspectives

(January/February 1989): 17–24.

QUESTIONS

1 Explain these terms of countertrade: barter, counterpurchase,buyback, offsets, clearing agreement, and switch

trading.

2 Explain these terms of sale: EXW, FAS, FOB, CFR, CIF, DEQ, and DDP.

3 Explain: (a) bill of exchange, and (b) bankers’ acceptance.

4 Explain these types of letter of credit:revocable, irrevocable, conﬁrmed, unconﬁrmed,back-to-back, and trans-

ferable.

DISCUSSION ASSIGNMENTS AND MINICASES

1 Given that countertrade is a fact of life which is not going to go away, is there any valid argument from a

theoretical

standpoint for this method of doing business?

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2 Assume that you are a manufacturer being asked to submit a quotation to a potential buyer. How are you

going to prepare your quotation in terms of (a) terms of sale and (b) terms of payment?

NOTES

1 Jack L. Hervey, “Countertrade – Counterproductive?”

Economic Perspectives

(January/February 1989):

17–24.

2 “Russia: What Happens When Markets Fail,”

Business Week

, April 26, 1999, 50–2.

3 Raj Desai and Itzhak Goldberg, “Stakeholders, Governance, and the Russian Enterprise Dilemma,”

Finance

& Development

(June 2000): 14–18.

4 “Noncash Transactions Increase in Russia after Transition to Market Economy,”

IMF Survey

, November 20,

2000, 381–82.

5 “Noncash Transactions.”

6 John A. Angelidis and Nabil A. Ibrahim, “Countertrading with the Middle East: An Empirical Investigation

of Challenges and Opportunities,”

Journal of Global Marketing

8 (No. 2, 1994): 97–114.

7 Bruce Fitzgerald, “Countertrade Reconsidered,”

Finance & Development

(June 1987): 46–9.

8 Ann Ring, “Countertrade Business Opportunities in Russia,”

Business America

, January 11, 1993, 15–16.

9 Sam C. Okoroafo, “An Integration of Countertrade Research and Practice,”

Journal of Global Marketing

(No. 4, 1993): 113–27.

10 Sam C. Okoroafo, “A Managerial Approach to Predicting Countertrade Demands by Developing Countries,”

Journal of Global Marketing

6 (No. 1/2, 1992): 171–83.

11 Jean-Francois Hennart, “Some Empirical Dimensions of Countertrade,”

Journal of International Business

Studies

21 (No. 2, 1990): 243–70.

12 Donald J. Lecraw,“The Management of Countertrade: Factors Inﬂuencing Success,”

Journal of International

Business Studies

20 (spring 1989): 41–59.

13 Pompiliu Verzariu, “Trends and Developments in International Countertrade,”

Business America

, November

2, 1992, 2–6.

A Guide on Countertrade Practices in the Newly Independent States of the Former Soviet Union

(Washington, DC: US Department of Commerce, 1995).

15 “Incoterms 2000,”

Export America

, 11–12. See also the website of the International Chamber of Commerce

for Incoterms 2000. Also see www.look4logistics.com.

16 “Price, Quotations, and Terms of Sale Are Key to Successful Exporting,”

Business America

, October 4, 1993,

12–15.

17 Banks with international departments have publications that explain the various types of collection methods

and documents. For example, see

Trade Banking Services

(BankAmerica Corporation, 1994).

18 “What’s This Credit Worth?”

Collections and Credit Risk

(November 2000): 43ff.

Trade Banking Services

,5.

20 D. Grant McKinnon, “Export Sales – the Importance of Setting Competitive Payment Terms,”

Business

America

(February 1995): 6–7.

21 For an in-depth discussion see John F. Dolan,

The Law of Letters of Credit: Commercial and Standby Credits

2nd edn (Boston, MA: Warren Gorham Lamont, 1991).

22 “Deals Too Sweet to Be True,”

Business Week

, July 10, 1995, 122.

23 “Export Payment Terms Adjust the Risk to Exporters and the Cost to Importers,”

Business America

, 26–8.

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522

Owe your banker a thousand pounds, and you are at his mercy. Owe him a million, and the position

is reversed.

John Maynard Keynes

CHAPTER OUTLINE

■ Nonﬁnancial institutions

 Self-ﬁnancing and debt ﬁnancing

 Equity ﬁnancing

■ Financial institutions

■ Government agencies

■ International ﬁnancial institutions/development banks

 World Bank

 International Development Association (IDA)

 International Finance Corporation (IFC)

 Multilateral Investment Guarantee Agency (MIGA)

 International Centre for Settlement of Investment Disputes (ICSID)

■ International Monetary Fund (IMF)

 Special drawing right (SDR)

 Functions

■ Financial centers

 Euromarket

 Asian Dollar Market

■ Conclusion

■ Case 18.1 Too close for comfort

Sources of ﬁnancing and

international money markets

Chapter 18

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PURPOSE OF CHAPTER

The examples in the marketing illustration below demonstrate the crucial role that ﬁnancing plays in secur-

ing overseas projects. Financing is important to the operations of both importers and exporters. Importers

seek ﬁnancing for the purchase of merchandise. Exporters likewise need ﬁnancing to manufacture their

products and maintain their inventories. Furthermore, overseas buyers attempt to shift the ﬁnancing func-

tion to their suppliers. If an exporter agrees to extend credit, the exporter must in turn obtain ﬁnancing for

this purpose. Financing is not a problem only for small ﬁrms. In fact, in the case of international multi-

million-dollar projects, sellers’ ﬁnancing is usually expected, and ﬁnancing terms often separate winners

from losers.

Trade ﬁnance arises from the export of goods and services, when the buyer and seller negotiate the

amount, time, and terms of payment. The ﬁnancing needs of the seller and buyer are almost always not

compatible, and sometimes they may even be in conﬂict. Naturally, the buyer desires a competitive price

and a payment arrangement that does not tie up one’s credit line, whereas the seller wants a ﬁnancing

arrangement that offers quick payment and protection against default.The method of trade ﬁnance attempts

to accommodate these differences. Trade ﬁnance can be supplied by parties in the private sector (e.g., the

buyer’s cash in advance payment) or by parties in the public sector (e.g., a bank’s ﬁnancing of the sale).

The purpose of this chapter is to discuss the various aspects of ﬁnancing. The chapter covers both the

local and international sources of ﬁnancing that are available to public and private buyers, including the

various private and nonproﬁt ﬁnancial institutions.The chapter also examines such offshore ﬁnancial centers

as the Euromarket and the Asian Dollar Market.

Any business, no matter how large or small, domestic or international, always requires some kind of

ﬁnancing for its operations. Because international ﬁnancing must deal with ﬁnancial and economic condi-

tions in more than one country, this activity involves more uncertainty and complexity than does domestic

ﬁnancing. The greater complexity of international ﬁnancing, however, is accompanied by a greater number

of ﬁnancing options. In addition to the standard channels, there are also other sources available almost

exclusively for international business. These sources include:

1 Nonﬁnancial institutions

2 Private ﬁnancial institutions

3 International agencies

4 The International Monetary Fund (IMF)

5 The Euromarket.

According to the former chairman of the New York

Stock Exchange, “growth in global investing will not

allow markets to be competitive if they constrain

themselves to a time clock.”

Aegon, a Dutch insurer, listed its shares in New

York in 1985. At the time, nobody understood the full

implications of the listing. By allowing its shares to

be traded in the USA, Aegon was able to raise capital.

The stock price fourteen years later made it possible

for Aegon to use its stock as money to buy

Transamerica Corp. The $10.8 billion takeover was

ﬁnanced mainly with stock. In effect, the company

MARKETING ILLUSTRATION MONEY IS AN EMOTIONAL SUBJECT

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SOURCES OF FINANCING

became the third largest insurer in the world in terms

of market capitalization.

Likewise, DaimlerChrysler, Vodafone Group PLC,

and a growing number of competitive European com-

panies have used their soaring stock prices to ﬁnance

their acquisitions. Daimler was the ﬁrst of Germany’s

DAX 30 companies to seek a listing in the USA in

1993. The company’s US shares were instrumental

in a $335 billion merger with Chrysler Corp. Had the

US tax laws been comparable to those of Germany,

it might have been Chrysler that acquired Daimler

instead.

Amway Asia Paciﬁc Ltd., a Hong Kong-based

company, is the exclusive distributor for about 175

products of its parent ﬁrm, Amway Corp (see Figure

18.1). Amway Asia Paciﬁc distributes the products

in Australia, Hong Kong, Macau, Malaysia, New

Zealand, Taiwan, and Thailand. To raise capital to

ﬁnance its operations, Amway Asia Paciﬁc made an

initial public offering in late 1993. Its stock was

valued at $18 a share but actually opened on the New

York Stock Exchange at $26.50. One reason why the

company’s stock is attractive is that it gives investors

an opportunity to proﬁt from the burgeoning market

in China.

Sources:

“A Graveyard Shift for the NYSE?”

Business

Week

, March 8, 1999, 44; “Memo to Europe’s CEOs: Try

Listing on Wall Street,”

Business Week

, March 8, 1999, 54;

“Amway Japan Gears Up for Stock Issue; Analysts Differ on

Company’s Outlook,”

Wall Street Journal

, June 24, 1994.

Figure 18.1 Amway

and world business

Source:

Reprinted with

permission of Amway Corp.

NONFINANCIAL INSTITUTIONS

Self-ﬁnancing and debt ﬁnancing

There are several nonﬁnancial institutions that can

provide ﬁnancing. First, there is self-ﬁnancing

because a business can use its own capital or can

withhold dividends so that proﬁts can be plowed back

into the organization for further business expansion.

Second, retailers and manufacturers alike may be

able to seek trade credit and ﬁnancial assistance from

certain middlemen, such as export merchants and

trading companies. Third, when joint ventures are

formed, foreign partners can also lend a helping hand.

Fourth, subsidiaries of MNCs may borrow from

afﬁliated ﬁrms as well as from the employee retirement

fund.

Finally, the business may decide to raise equity

capital by selling stocks, or it may depend on debt

ﬁnancing by selling commercial paper or bonds. Bond

buyers or holders are the ﬁrm’s creditors rather

than its owners. US ﬁrms may sell bonds in either

the USA or foreign countries, with Eurobonds as

a prime example. Treasurers of US ﬁrms must

decide whether their bonds to be sold abroad are to

be denominated in the dollar or in foreign curren-

cies. In any case, it should be noted that debt ﬁnanc-

ing requires the services of investment banks.

Virtually every multinational bank or multinational

brokerage house has a division that acts as an invest-

ment bank.

Another source of ﬁnancing is venture capital.

Venture capitalists invest funds in a ﬁrm in exchange

for a share of ownership. Although known for their

investments in high-technology ﬁrms, venture cap-

italists have diversiﬁed their portfolios. There are

about 600 venture capital ﬁrms in the USA. Private

investors, however, fund most ventures. Venture

Capital Network in Durham, New Hampshire, is a

nonproﬁt service afﬁliated with the University of

New Hampshire. Attempting to match entrepre-

neurs with investors, the Network charges investors

$200 a year and those seeking capital $500 annually

for registration.

When self-ﬁnancing is used, a company should

take advantage of a tax shelter for its export proﬁt.

Because the EU’s exports are exempt from value-

added taxes, the US Congress gave a tax break to

American ﬁrms by creating a foreign sales cor-

poration (FSC, pronounced “ﬁsk”). A FSC is a

special kind of corporation, making its possible for it

to gain a corporate tax exemption from 15 to 32 per-

cent of the earnings generated by the sale or lease of

exported goods (i.e., extraterritorial income

derived from goods for sale or use abroad). Some

6000 US companies took advantage of it,resulting in

a $4 billion tax break. In particular, Boeing Co. was

the biggest user of this scheme in 2001, avoiding

$222 million in US taxes or 12 percent of its entire

earnings that year.Acting on the EU’s complaint, the

WTO ruled in 1999 that the FSC program was an

illegal export subsidy that gave American companies

unfair trade advantages.The USA appealed and lost

again.The WTO told the USA to change its law or

risk paying a penalty that could reach $4 billion in

damages. The USA did indeed rewrite its tax law,

creating another tax break that was even more lucra-

tive and that could result in $6 billion of tax break.

The rationale or excuse of the USA was that this

tax shelter prevented US companies from being

taxed twice on income from foreign sources. The

WTO panel, however, ruled that the law was an

illegal export subsidy because the US government

offered a lower tax rate on export proﬁts than

on import and domestic proﬁts. The US Treasury

Department was forgoing income related only to

goods being sent abroad. In addition, the said

income had no link to a foreign state and would

therefore not be taxed anywhere else.The EU com-

plained that the new US legislation made only cos-

metic changes.The WTO later ruled in 2002 against

the USA for the third time, stating that the US tax

provisions were in violation of the WTO’s rules

on subsidies.

The EU imposed sanctions in 2004.

Based on a survey of private ﬁrms in China,

80 percent feel that their lack of access to ﬁnance

is a serious constraint. These Chinese companies

rely heavily on self-ﬁnancing for both start-up and

expansion. The principal owners, start-up teams,

and their families provide more than 90 percent of

their initial capital. In the case of post-start-up

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SOURCES OF FINANCING