What is direct and indirect exporting?

The first type of exporting which will be discussed is direct exporting. This involves the sale of goods by an entrepreneur directly to a foreign recipient without the use of intermediaries. This type of exporting is a high-risk strategy and requires greater involvement and financial investment from the company than the indirect exporting approach. This is due to the fact that with direct exporting the producer sells his/her goods abroad without the support of people established in the chosen market. This solution requires a large financial and organisational commitment from the entrepreneur, because the seller (entrepreneur) is responsible for hiring people who will be responsible for operating in the selected market as well as transporting the products to the client and storing goods ready for sale. In addition to locating the company in a foreign market, direct exporting requires organisational changes within the company, involving the establishment of a separate department responsible for foreign trade, necessitating the employment of highly qualified specialists with the requisite experience and skills to work in the selected foreign market.

Additionally, it is also necessary to adapt the existing departments of the enterprise (including production, marketing and accounting) for the purposes of foreign operations and to develop appropriate procedures so that they are synchronised with the activities of the company’s export department.

It is important to note here that direct exporting is undertaken by companies who have gained experience in a selected foreign market through for example indirect exporting. Direct exporting involves a higher level of international trade activities for them and represents the next stage of expansion into another market.

Figure 1:  Direct exporting, simplified model.

Indirect exporting is an easier and a less costly method of international expansion, involving the sale of products with the help of national or foreign agents. The company can use specialised companies established in the country of the enterprise or on the foreign market, the choice is up to the entrepreneur. Using this method of exporting, the agent acts like the company’s export unit, taking over the costs associated with storage, marketing, distribution and transport and identifying potential clients. Entrepreneurs use this export solution to minimise the costs associated with creating an additional export unit and adapting the rest of their enterprise to cooperate with it. Nevertheless, they are exposed to a greater risk here when choosing an agent responsible for selling goods.

Indirect exporting is chosen by companies who do not have previous experience in foreign trade and are interesting in commencing the exporting process, as well as large companies that want to start expanding into a new market.

Figure 2: Indirect exporting, simplified model.

When comparing these two options available to enterprises interested in expanding their businesses abroad, differences exists in terms of the amount of preparation required as well as the level of risk borne by the enterprise. In indirect exporting, the entrepreneur can reduce the level of risk to a minimum with the help of an agent operating in the selected market and he/she will carry the costs associated with the creation of additional organisational units for the purposes of exporting.  On the other hand, enterprises who decide to engage in direct exporting will have to take on the indirect risk, i.e. the adjustment of the enterprise to export activities and the sale of goods without the support of an intermediary. This model also carries the following risks:

• Service / product mismatch with the needs of potential customers within the foreign destination.
• Risk of not reaching the targeted customers.
• Incorrect sales and marketing assumptions.

Therefore, it is very important for the company to complete a very in-depth analysis of its potential and of the market it wants to enter before undertaking activities relating to direct exporting.