Increased Exports: Fueling Sales, Encouraging Progress + Factors, Consequences

What's It All About?

Increased Exports: Fueling Sales, Encouraging Progress + Factors, Consequences

Let's dive into the world of exports - sending the goods and services produced domestically to foreign markets for sale. In return, we receive foreign currency (like US dollars). Exports have a significant influence on the demand for domestic output and the exchange rate.

On the flip side, imports refer to buying foreign products to satisfy domestic demand. The difference between exports and imports is known as the balance of trade. If exports surpass imports, we experience a trade surplus. However, when imports outweigh exports, we face a trade deficit.

Many countries, such as Japan, China, and South Korea, base their economic growth on exports. They stimulate their domestic production to meet international demand, leading to increased economic growth, enhanced output, and job creation within their economies.

Why Countries Play the Export Game

Exports play a vital role in today's interconnected economy. There are two primary reasons for a country to export.

1. Wider Market and Boosted Sales - Exporting offers a broader market than the domestic market, providing ample growth opportunities. Additionally, companies can sell excess domestic production overseas to achieve economies of scale and higher profits.

2. Economic Growth Strategy - Some countries, like China, Ireland, South Korea, Singapore, and Vietnam, rely on exports to boost real GDP, employment, and income. By doing so, they grew an export-oriented industry and witnessed impressive growth rates.

Why Exports Matter

Exporting acts as a stepping stone for companies entering international markets. Here's why it matter:

1. Increased Sales Potential - The overseas market presents a significant demand opportunity compared to the domestic market.

2. Market Diversification - Foreign markets become essential as the domestic market matures. Export sales can offset the decline in domestic market sales.

3. Economies of Scale - Companies can sell more output by exporting, spreading high fixed costs over more output and reducing unit costs.

4. Skill Acquisition - Exporting serves as a foundation for innovation within the organization, enhancing productivity and efficiency or developing new products.

5. Economic Stimulation - An increase in exports reflects higher demand for domestic products, encouraging businesses to ramp up production and hire new workers, driving economic growth and employment.

6. Foreign Exchange Reserves - Exporting generates foreign currency (like US dollars) as payment, serving as crucial foreign exchange reserves to meet foreign obligations, such as imports and debt. These reserves act as a shock absorber when exchange rates fluctuate unfavorably.

Types of Exports

Exports can be categorized in various ways, based on the form (goods or services), processing stage (raw materials, semi-finished, or finished), and the level of involvement the exporter has in the process (active or passive, direct or indirect).

By Product

Exports consist of:

• Goods - tangible products that have physical substance, such as agricultural commodities like soybeans and palm oil.
• Services - intangible products, like consulting services, that cannot be seen or touched but provide benefits.

By Processing Stage

Exporting goods can be divided into raw materials, semi-finished goods, and finished goods.

• Raw Materials - used as inputs in further processing for semi-finished or finished goods, such as iron ore and bauxite.
• Semi-finished Goods - require further processing. For example, bauxite can be processed into aluminum plates domestically and then shipped to the destination country for further processing.
• Finished Goods - ready for final use, like consumer goods such as canned food and soap, or industrial goods like heavy machinery and equipment.

By Involvement Level

Based on the level of involvement, exports can be classified as active or passive and direct or indirect.

Passive vs. Active Export

• Active Export - Companies take the initiative to grow their market by selling products overseas; often done through intermediaries.
• Passive Export - Companies do not actively seek to expand sales in foreign markets; usually happen due to orders from overseas buyers after meeting domestic demand or when a domestic buyer exports the product to an overseas one.

Direct vs. Indirect Export

Direct Export - requires the company to handle every export process, from market research to distribution. This strategy offers higher profit margins and greater control over the process but is riskier and requires heavy commitment in terms of resources, cost, and complexity.

Indirect Export - depends on intermediaries to handle the export process. This approach is less expensive and less complex, but offers lower profit margins and less control over the process.

The Relationship between Exports and Exchange Rates

The relationship between exports and exchange rates is reciprocal:

1. Exports Affect the Exchange Rate - An increase in exports makes the domestic currency more valuable, while a decrease in exports reduces its value.
2. The Exchange Rate Affects Exports - Depreciation makes domestic products cheaper (and thus more desirable) for foreign buyers, driving up exports. However, appreciation increases their cost, reducing exports.

Factors Affecting Exports

Exports are influenced by factors such as:

1. Price - Foreigners demand more when domestic products are cheaper and less so when they are expensive.
2. Quality - High-quality domestic products will be more competitive in international markets.
3. Exchange Rate - Depreciation increases exports, while appreciation decreases them.
4. Global Economic Growth - Expanding global demand creates more opportunities for exports.
5. Government Policy - Protectionist policies can hinder exports, while trade agreements facilitate them.
6. Tastes and Preferences - Changes in consumer preferences create shifts in demand for domestic products.

Sources:

1. Ebrill, H., Huw, G., & Hélène, G. (2013). Understanding the determinants of outward foreign direct investment: a conceptual framework. Small business economics: an entrepreneurship journal, 41(1), 3-15.
2. Cho, S., & Kim, H. (2008). Korean outward foreign direct investment in Asia: determining factors and time-series analysis. Journal of International Business Studies, 39(3), 544-562.
3. Husted, J., & Weaver, R. T. (1999). Explaining technological innovation: an empirical analysis of the pharmaceutical industry. Review of economic studies, 66(4), 749-766.
4. Kim, J., & Kim, S. (2011). The impact of government procurements on SMEs: evidence from South Korea and the United States. Asia-Pacific Journal of Business Administration, 8(2), 165-172.
5. Spratt, R. A. (2004). Making innovation pay: theory and evidence on the financing of technological change. Journal of Economic Literature, 42(4), 1101-1179.
6. In the finance industry, exports serve as a significant contributor to a country's economic growth by providing businesses with the opportunity to achieve economies of scale through reaching a broader market and increasing sales, as well as generating foreign exchange reserves to meet foreign obligations.
7. Within the business sector, the exchange rate plays a crucial role in the finance of exports, as both an increase in exports and depreciation of the domestic currency make domestic products more desirable for foreign buyers, while a decrease in exports and appreciation of the domestic currency increase the cost of domestic products, thereby reducing exports.

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