Internationalizing Procurement: Determinants of Countertrade Involvement

As protectionist governments around the world have toppled, free trade zones opened up, and trade barriers dissolved through either multilateral agreements (such as the GATT) or through regional free trade agreements (such as NAFTA), greater numbers of enterprises have looked to foreign markets as sources of supply. International procurements, as a share of a firm's total purchase volume, have expanded steadily since the end of the 1970s. In 1977, only 2.5 percent of total purchased value in the U.S. was procured from other countries; the global proportion of purchases expanded to around 5 percent by 1981, and grew to 19 percent of total procurements in 1990. [1] This steady increase in global sourcing is one observable dimension of the internationalization of American firms. Internationalization, the expanding involvement of a firm's business functions in the global arena, has brought new consumer goods to some countries, lower component costs to other countries, and increased employment for many. [2] The growth in worldwide sourcing has been accompanied by a similar expansion in unconventional trade financing mechanisms, the most prominent of which is countertrade. Countertrade, the exchange of goods and/or services for other goods and/or services as full or partial payment for a trade transaction, has been estimated to accompany anywhere from 15 to 30 percent of all world trade. [3] From the early 1970s to the mid-1980s, the number of countries involved in countertrade rose from 15 to 94. [4] Due to the lack of reporting requirements in most countries around the world, these figures are simply estimates; exact volume numbers are not known. BACKGROUND Countertrade has traditionally been demanded by countries with limited foreign exchange reserves and/or inconvertible currencies as a means for financing imports. [5] Well-known examples, such as the construction of the gas pipeline between the (former) Soviet Union and Western Europe (where payment for the pipeline was made with the natural gas that later flowed through it) and McDonnell-Douglas's compensation of canned hams for the sale of aircraft to Poland, involved centrally planned economies with insufficient convertible currency funds to pay for the purchases with cash. [6] Less developed countries have also mandated countertrade from time to time to diversify their foreign exchange earnings. This motivation has been particularly true for countries that are heavily dependent on one or a handful of commodities for their entire national export earnings. For example, Indonesia, which issued countertrade regulations in December 1981, received 71.8 percent and 81.4 percent of its export earnings from petroleum sales in 1980 and 1981, respectively. [7] Its increasing dependence on one commodity made the country's export earnings very vulnerable to shifts in prices on the world oil markets. By mandating countertrade, Indonesia and other countries could earn foreign exchange from alternative exports and thereby curtail their economic exposure. Countertrade has also been used as a means of developing labor-intensive exports, and in turn, increasing a country's employment rate. [8] As with diversifying export earnings, the use of countertrade to increase labor-intensive exports is typically resorted to because of inadequate marketing channels through which the items could be sold for cash. [9] The imposition of countertrade allows a country to take advantage of multinationals' established distribution channels. Because countertrade requires the location and matching of buyers and sellers for a wide variety of goods in a short period of time, trading companies are often used to facilitate the transactions. These trading companies charge a fee for their services, thereby inflating the price of the products sold to the country mandating countertrade. This margin means the importing country must pay a premium for their imports, which is equivalent to placing a discount on their exports. …