89. Capital structure: Differences between Countries.

In finance, capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities. A firm's capital structure is then the composition or 'structure' of its liabilities. For example, a firm that sells $20 billion in equity and $80 billion in debt is said to be 20% equity-financed and 80% debt-financed. The firm's ratio of debt to total financing, 80% in this example, is referred to as the firm's leverage. In reality, capital structure may be highly complex and include dozens of sources. Gearing Ratio is the proportion of the capital employed of the firm which come from outside of the business finance, e.g. by taking a short term loan etc.

Consider a perfect capital market (no transaction or bankruptcy costs; perfect information); firms and individuals can borrow at the same interest rate; no taxes; and investment decisions aren't affected by financing decisions. Modigliani and Miller made two findings under these conditions. Their first 'proposition' was that the value of a company is independent of its capital structure. Their second 'proposition' stated that the cost of equity for a leveraged firm is equal to the cost of equity for an unleveraged firm, plus an added premium for financial risk. That is, as leverage increases, while the burden of individual risks is shifted between different investor classes, total risk is conserved and hence no extra value created.

For example, debt ratio (leverage) in Japan is a good thing. The bigger that leverage, the more clear operations in company. Maybe, it’s because of trust between people and companies in Japan. In Russia, leverage consider as a bad thing in capital structure (if Debt to Equity Ration >50%, it means that assets of the company are financed by equity capital). The higher the ratio, the greater risk will be associated with the firm's operation. In addition, high debt to assets ratio may indicate low borrowing capacity of a firm, which in turn will lower the firm's financial flexibility.

90. Exporting as a foreign market mode, merits, demerits

Foreign market entry modes differ in degree of risk they present, the control and commitment of resources they require and the return on investment they promise.[1]

There are two major types of entry modes: equity and non-equity modes. The non-equity modes category includes export and contractual agreements

Exporting is the process of selling of goods and services produced in one country to other countries.[4]

There are two types of exporting: direct and indirect.

Direct exports

Direct exports represent the most basic mode of exporting, capitalizing on economies of scale in production concentrated in the home country and affording better control over distribution. Direct export works the best if the volumes are small. Large volumes of export may trigger protectionism. Types of Direct Exporting.

• Sales representatives represent foreign suppliers/manufacturers in their local markets for an established commission on sales. Provide support services to a manufacturer regarding local advertising, local sales presentations, customs clearance formalities, legal requirements. Manufacturers of highly technical services or products such as production machinery, benefit the most form sales representation.

• Importing distributors purchase product in their own right and resell it in their local markets to wholesalers, retailers, or both. Importing distributors are a good market entry strategy for products that are carried in inventory, such as toys, appliances, prepared food.[5]

Advantages of direct exporting:

• Control over selection of foreign markets and choice of foreign representative companies

• Good information feedback from target market

• Better protection of trademarks, patents, goodwill, and other intangible property

• Potentially greater sales than with indirect exporting.[6]

Disadvantages of direct exporting:

• Higher start-up costs and higher risks as opposed to indirect exporting

• Greater information requirements

• Longer time-to-market as opposed to indirect exporting.[7]

Indirect exports

Indirect exports is the process of exporting through domestically based export intermediaries. The exporter has no control over its products in the foreign market.

Types of indirect exporting:

• Export trading companies (ETCs) provide support services of the entire export process for one or more suppliers. Attractive to suppliers that are not familiar with exporting as ETCs usually perform all the necessary work: locate overseas trading partners, present the product, quote on specific enquiries, etc.

• Export management companies (EMCs) are similar to ETCs in the way that they usually export for producers. Unlike ETCs, they rarely take on export credit risks and carry one type of product, not representing competing ones. Usually, EMCs trade on behalf of their suppliers as their export departments.[8]

• Export merchants are wholesale companies that buy unpackaged products from suppliers/manufacturers for resale overseas under their own brand names. The advantage of export merchants is promotion. One of the disadvantages for using export merchants result in presence of identical products under different brand names and pricing on the market, meaning that export merchant’s activities may hinder manufacturer’s exporting efforts.

• Confirming houses are intermediate sellers that work for foreign buyers. They receive the product requirements from their clients, negotiate purchases, make delivery, and pay the suppliers/manufacturers. An opportunity here arises in the fact that if the client likes the product it may become a trade representative. A potential disadvantage includes supplier’s unawareness and lack of control over what a confirming house does with their product.

• Nonconforming purchasing agents are similar to confirming houses with the exception that they do not pay the suppliers directly – payments take place between a supplier/manufacturer and a foreign buyer.[9]

Advantages of indirect exporting:

• Fast market access

• Concentration of resources for production

• Little or no financial commitment. The export partner usually covers most expenses associated with international sales

• Low risk exists for those companies who consider their domestic market to be more important and for those companies that are still developing their R&D, marketing, and sales strategies.

• The management team is not distracted

• No direct handle of export processes.[10]

Disadvantages of indirect exporting:

• Higher risk than with direct exporting

• Little or no control over distribution, sales, marketing, etc. as opposed to direct exporting

• Inability to learn how to operate overseas

• Wrong choice of market and distributor may lead to inadequate market feedback affecting the international success of the company

• Potentially lower sales as compared to direct exporting, due to wrong choice of market and distributors by export partners.[11]

Those companies that seriously consider international markets as a crucial part of their success would likely consider direct exporting as the market entry tool. Indirect exporting is preferred by companies who would want to avoid financial risk as a threat to their other goals.