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Answers to small business questions on international opportunities.

Here are responses to clients' most common queties.

No longer constrained by national borders, companies of all types and sizes are entering the dynamic arena of international business. CPAs with small business clients will be confronted with questions on how to enter and remain competitive in the global marketplace. Here are some of the most common questions they will be asked - and the appropriate answers.

Q. What challenges should I expect if I decide to enter international markets?

A. The most significant challenge will be the increased cost of doing business. International business is an expensive undertaking that requires not only patience but also a substantial investment of time and resources. Other factors include time-consuming planning and investigation of financial, legal, production and marketing issues. Long-distance travel frequently is required and, in some circumstances, increased sensitivity to local business customs is necessary during planning and negotiation. Delays may be incurred because of differences in language, local laws and regulations, accounting and legal systems, business practices, currency, buying patterns and culture, among other things.

Q. How will I know if my company is ready for international business?

A. A company that succeeds in international ventures often tends to exhibit many of the following characteristics:

1. Exceptional domestic demand for a product and a demonstrated international market.

2. Decline in domestic sales of a product after more technically advanced competitors have been introduced. However, less developed countries may not need or may be unable to afford state-of-the-art products and may be completely satisfied with a product considered old by U.S. consumers.

3. A unique product that is difficult to duplicate abroad.

4. Secure capitalization, operations and management to sustain an international venture.

5. Strong relationships with creditors.

6. The ability to expand staff and facilities if necessary.

7. An understanding of global markets and the willingness to devote the necessary time and resources to a new venture.

8. Senior management's commitment to provide resources and direction.

9. Personnel experienced or trained in international business.

Q. Why do international ventures fail, and how can I increase my own chances of success?

A. Too often, failures are due to inadequate research and planning rather than problems with the technology and quality of products or services.

Before plunging into the international market, company leaders should educate themselves and key staff about the local market, consumers, politics, laws and business practices. Some of the major planning issues to be addressed include which product to sell, needed product modifications, targeted countries, likely risks and obstacles and how to face them as well as the amount of company resources necessary and how their use will affect domestic operations.

Before attempting to develop an international plan, senior management must have a working knowledge of international trade rules, agreements, associations and alliances. These include the North American Free Trade Agreement, the European Community and the Association of South East Asian Nations. Senior management also must understand the components of global trade policy as embodied in the General Agreement on Tariffs and Trade.

Company leaders should obtain expert counseling and develop an international operating and marketing plan before launching the venture. They should determine qualification requirements for all of the available public and private financing.

Q. How do companies usually go about conducting international business?

A. Most manufacturers enter international business as either direct or indirect exporters. The former have their own foreign sales operations, agents, distributors or other channels and are responsible for all phases of the operation from market research and financing to sales promotion and collections. Direct exporting is the most expensive, time-consuming approach, but, when successful, it is the most effective way that a company that is interested in international business can realize profits and growth.

Indirect exporting is a good beginning for a company new to exporting or one unable or unwilling to commit the resources to direct exporting. It involves minimal start-up costs and low risk. The following are the three forms of indirect exporting:

1. The company passively fills orders from domestic buyers who subsequently export the product to foreign consumers.

2. The company seeks out domestic buyers - usually other U.S. companies, foreign corporations, foreign trading companies, foreign government agencies or foreign distributors and retailers - to purchase its product for export. The buyer assumes the risk as well as the responsibility for exporting.

3. The company retains a domestic intermediary, such as an export management company (EMC) or an international consultant, to identify foreign consumers for its products. The domestic company, as the actual exporter, retains control over exporting operations. Although representatives may be costly, their knowledge of products and established networks of foreign distributors make them a valuable asset to companies wanting to export their products indirectly. Further information on EMCs can be obtained from the U.S. Department of Commerce, trade publications as well as EMC associations.

The major drawback to indirect exporting is the lack of total control over foreign sales. To minimize this problem, companies should exercise care when selecting foreign representatives, maintain frequent contact and request status reports. Any questions should be resolved before entering into an agreement and all terms and conditions should be included in the written agreement.

The two export approaches are not mutually exclusive. A company may directly export to more easily accessible countries, such as Canada and Mexico, and use indirect channels for more complex exporting activities. It also can switch to direct exporting after gaining experience and determining a product's desirability to foreign consumers.

Q. How else can my company engage in international business?

A. A company can participate in an international joint venture - a collaboration between companies in two or more countries to produce goods or provide services. The companies share ownership, rights, expenses, responsibilities and profits. The joint venture can be established through a new business or through the purchase of an existing local company.

Joint ventures can help lower expense and risk and minimize cultural problems as well as social and political discrimination against foreign enterprises. The chief disadvantage is the need to divide the profits and accommodate a partner's potentially conflicting best interests and a possible loss of autonomy.

EXECUTIVE SUMMARY

* COMPANIES OF ALL types and sizes are entering the dynamic arena of international business. CPAs with small business clients will be confronted with questions on how to enter and remain competitive in the global marketplace. It's a good idea to keep up-to-date in order to keep clients current.

* AMONG THE MOST common questions for small business owners will be those on challenges awaiting them in the international marketplace and how to tell when a business is ready for the global market.

* CPAs WILL BE called on to advise on ways to ensure against failure in an international venture. In addition, clients will want to understand the many different specifics of how business is conducted overseas.

MARK F. MURRAY is a manager in the American Institute of CPAs practice management division. This article is adapted from his book International Business, published by the AICPA management of an accounting practice committee.

Mr. Murray is an employee of the American Institute of CPAs and his views, as expressed in this article, do not necessarily reflect the views of the AICPA. Official positions are determined through certain specific committee procedures, due process and deliberation.
COPYRIGHT 1993 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Title Annotation:Small Business: CPAs Can Help
Author:Murray, Mark F.
Publication:Journal of Accountancy
Article Type:Cover Story
Date:Aug 1, 1993
Words:1214
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