ESP231 - FINAL REVISION

A+ IN ESP 231 GÉT GÔ

What is international trade?

International trade is the exchange of capital, goods, and services across borders, allowing access to products not available domestically. It includes visible trade (e.g., Vietnam exporting coffee) and invisible trade (e.g., tourism or banking). Notably, Vietnam's trade boomed after the 1986 "Doi Moi" reforms, shifting from a centralized to a market economy.

What is Mercantilism?

Mercantilism is a theory (16th–18th century) stating a nation's power comes from accumulating wealth (gold/silver) by maximizing exports and minimizing imports. Governments intervened to ensure a trade surplus. A historical example is the British Empire restricting its colonies to trade only with Britain to protect its own wealth.

What is Absolute Advantage?

Absolute advantage is a nation's ability to produce a good more efficiently using fewer resources than others. For example, Saudi Arabia has an absolute advantage in oil due to natural reserves, while Vietnam has one in robusta coffee due to climate, making it efficient for them to specialize and export these goods.

What is Comparative Advantage?

Comparative advantage occurs when a nation produces a good at a lower opportunity cost than others, even if it lacks absolute efficiency. For instance, the US specializes in high-tech airplanes (capital-intensive), while Vietnam specializes in textiles (labor-intensive), allowing both to trade and benefit from global efficiency.

What is the Factor Proportions Theory?

This theory states countries export goods requiring locally abundant resources and import goods requiring scarce ones. For example, labor-abundant Bangladesh exports labor-intensive clothing, while capital-abundant Germany exports capital-intensive luxury cars.

What are Terms of Trade (TOT)

TOT is the ratio of a country's export prices to import prices. It measures the purchasing power of exports; if export prices rise relative to imports, TOT improves. For example, if the price of Vietnam's coffee exports rises while oil imports fall, Vietnam can buy more foreign goods for the same amount of coffee exported.

What is the Balance of Trade

BOT is the difference in value between a country's exports and imports of physical goods over a period. A surplus means Exports > Imports. For example, in 2022, Vietnam had a trade surplus of over $11 billion, exporting more phones and textiles than the value of goods it imported.

What is the Balance of Payments

BOP is a systematic record of all economic transactions (goods, services, investments) between a country and the rest of the world. The identity is: Current Account + Financial Account + Errors = 0. For example, the US often has a trade deficit (Current Account) balanced by a surplus of foreign investment (Financial Account).

What is Protectionism?

Protectionism is the policy of restricting imports to shield domestic industries from foreign competition using tariffs or quotas. Governments use it to protect jobs or support "infant industries" (like VinFast in its early years) until they are strong enough to compete globally, or to secure strategic sectors like agriculture.

What is an Import Quota?

A quota is a direct physical limit on the quantity of a good that can be imported. Unlike tariffs, it strictly limits supply regardless of price. For example, the US might limit sugar imports to a specific tonnage per year to protect domestic sugar farmers from being undercut by cheaper global competitors.

What is a Tariff?

A tariff is a tax imposed on imported goods to make them more expensive than domestic alternatives. It generates revenue and protects local firms. For instance, during trade disputes, the US imposed tariffs on Chinese steel to protect American manufacturers from unfair low-price competition.

Why do most economists oppose protectionism?

Most economists oppose protectionism because it contradicts the comparative cost principle, which holds that nations maximize global output and real income by specializing in goods they produce most efficiently. By restricting trade, protectionism misallocates resources, stifles competition, and forces consumers to pay higher prices, ultimately resulting in a net loss to economic welfare and growth

Why do most governments impose import tariffs and/or quotas?

Governments impose tariffs and quotas primarily to protect domestic industries and jobs from foreign competition, particularly to nurture "infant industries" until they achieve economies of scale and to safeguard strategic sectors like agriculture for national security. Additionally, these measures are used to prevent dumping, correct balance of payments deficits by curbing imports, and generate tax revenue

Why were many developing countries for a long time opposed to GATT?

Many developing countries opposed GATT for a long time because they wanted to industrialize via import substitution to counter the inevitable fall in primary commodity prices. They believed they needed to impose high tariffs and trade barriers to protect their "infant industries" from superior foreign competition, whereas GATT aimed to reduce such protections. Consequently, they viewed free trade as a threat to their development and economic independence until their domestic sectors matured.

Why have many developing countries recently reduced protectionism and increased their international trade?

Many developing countries have recently reduced protectionism to export more in order to repay huge debts under IMF pressure. Additionally, they were motivated by the export successes of the East Asian "Tiger" economies and the collapse of the Soviet economic model. Finally, they feared being excluded from the global trading system due to the rise of major trading blocs like the EU and NAFTA

What is free trade?

Free trade is a trade policy where the government does not restrict imports or exports through barriers such as tariffs, quotas, or subsidies. Ideally, it allows nations to specialize in the production of goods where they hold a comparative advantage, thereby maximizing global efficiency, output, and standards of living. Examples include regional agreements like the European Union or NAFTA, which lower barriers among member countries.

What are the advantages and disadvantages of protectionism?

Advantages: Protectionism primarily benefits domestic businesses and workers by shielding them from foreign competition through tariffs and quotas. This allows new "infant industries" to survive and grow until they achieve economies of scale, while also preserving existing jobs in strategic sectors that might otherwise be lost to cheaper imports.

Disadvantages: The main drawback falls on consumers, who suffer from higher prices and limited product choices due to restricted trade. Additionally, protected businesses may become inefficient and lack the incentive to innovate without competitive pressure, while export-oriented firms risk losing revenue if other countries retaliate with their own trade barriers.

What are Reasons for Protectionism/Free Trade?

Reasons for Protectionism: Governments implement protectionist policies primarily to safeguard domestic jobs and shield vulnerable "infant industries" from fierce global competition until they can grow. Additionally, protectionism is used to protect strategic sectors (like agriculture or defense) for national security, to prevent unfair trade practices like "dumping," and sometimes to retaliate against trade barriers imposed by other nations.

Reasons for Free Trade: Economists advocate for free trade based on the "comparative cost principle," which argues that nations should specialize in what they produce most efficiently. This specialization increases global efficiency, lowers prices for consumers, fosters innovation through competition, and ultimately raises the living standards and real income for all participating countries.

What are the differences between domestic and international business?

The primary difference is complexity and risk. While domestic business deals with a single currency, legal system, and culture, international business faces Foreign Exchange Risk due to fluctuating currency values and must navigate diverse legal and political environments (e.g., local labor laws, tariffs). Additionally, international business requires adapting to significant cultural differences in consumer behavior and management styles, and involves far more complex logistics and supply chains compared to operating within a single country.

What are the reasons for firms to enter international business?

Firms primarily enter international business to expand their markets and increase sales revenue, especially when domestic markets become saturated. They also seek to access resources that are unavailable or cheaper abroad, such as raw materials, low-cost labor, or specific technical "know-how." Furthermore, going global allows firms to achieve economies of scale by increasing production volume to lower unit costs, and to diversify risk, ensuring that an economic downturn in one country does not jeopardize the entire company.

What difficulties do firms have to face when doing their international business?

Firms operating internationally face significant challenges, including cultural and language barriers that can lead to misunderstandings in marketing and management. They must also navigate complex legal and political risks, such as changing government regulations, trade barriers (tariffs/quotas), and political instability. Financially, they are exposed to currency fluctuations (Foreign Exchange Risk) which can erode profits. Additionally, managing global logistics and supply chains across borders is far more complicated and costly than domestic distribution.

What is Foreign Portfolio Investment (FPI)?

Foreign Portfolio Investment is the purchase of shares and long-term debt obligations (like bonds) from a foreign entity where the investor does not aim to take control of the corporation. Unlike FDI, FPI is passive; investors are primarily interested in financial returns and can liquidate their investment at market value at any time. An example is a foreign fund buying stocks of Vinamilk on the Ho Chi Minh Stock Exchange (HOSE) to earn dividends without managing the company’s daily operations

What is Foreign Direct Investment (FDI)?

FDI involves establishing a plant or distribution network abroad, where investors acquire part or all of the equity to control or share control over sales, production, and R&D. Since the "Doi Moi" policy in 1986 opened Vietnam's economy, FDI has become a crucial driver of growth. A prime example is Samsung establishing high-tech manufacturing complexes in Bac Ninh, contributing significantly to Vietnam's export turnover and global supply chain integration

What is Strategic Approach?

This refers to FDI decisions based on long-term business strategies where investors seek access to raw materials, new markets, product efficiency, and technological "know-how" rather than just short-term profits. For instance, multinational corporations like Apple or Foxconn invest in Vietnam not only for low labor costs (efficiency seeking) but also to diversify supply chains away from China ("China Plus One" strategy) and access the growing Southeast Asian market

What is Cash Flow?

Cash Flow is the total amount of cash remaining in a company after it has paid taxes and other cash expenses. It is a critical financial metric for foreign investors to assess the viability of a project; a positive cash flow ensures the subsidiary can sustain operations, repay debts, and generate returns (dividends) to send back to the parent company abroad, confirming the project is financially healthy

What is Investment Incentives?

These are government-sponsored benefits such as cash grants, tax credits, accelerated depreciation, and low-interest loans designed to attract foreign investment into national or local areas. In Vietnam, the government offers specific incentives, such as corporate income tax exemptions for high-tech zones, to attract giants like LEGO or Samsung to industrial hubs like Binh Duong and Bac Ninh, thereby boosting local employment and technology transfer

What is Exclusive Distributor?

An Exclusive Distributor is an independent sales agent granted the sole right, under contract, to sell a foreign manufacturer's products within a specific territory. This arrangement incentivizes the distributor to invest heavily in marketing and brand building, as they face no direct competition for that brand in their region. For example, a local Vietnamese company securing exclusive rights to distribute a luxury car brand ensures they capture all market demand for that specific vehicle in Vietnam.

What is Multiple Distributor?

A Multiple Distributor is a sales agent who represents products from more than one manufacturer simultaneously. This approach allows the agent to offer a wider variety of goods to customers, maximizing sales volume. It is common in sectors like electronics retail in Vietnam (e.g., Mobile World), where the retailer sells smartphones from various global competitors like Samsung, Apple, and Xiaomi under one roof to cater to diverse consumer preferences

What are Royalty Payments?

Royalty Payments are the fees paid by a foreign manufacturer (licensee) to a company (licensor) that has licensed the right to produce its products or use its intellectual property. For example, if a Vietnamese garment factory produces clothing under a foreign brand's license (like Disney characters on shirts), they must pay a percentage of their revenue back to the brand owner as a royalty fee for using the trademark and designs.

What is Joint Venture?

A Joint Venture is a subsidiary formed by two or more corporations to share capital, risks, and "know-how" in a specific project. This is a common entry mode when full ownership is restricted or risky. A historic example is Vietsovpetro, established in 1981 between Vietnam and the Soviet Union for oil exploration, or more recently, the partnership between Vingroup and foreign partners to develop industrial real estate projects.

What is Horizontal FDI?

Horizontal FDI arises when a firm duplicates its home country-based activities at the same value chain stage in a host country to expand its market reach. An example would be the Vietnamese coffee chain Phúc Long opening stores in the U.S. that operate exactly like their shops in Vietnam, producing and selling the same beverage products to reach new international customers directly.

What is Vertical FDI?

Vertical FDI takes place when a firm moves upstream (sourcing materials) or downstream (distribution/sales) in different value chains within a host country to control its supply chain. An example is Vinamilk investing in Driftwood Dairy in the USA (downstream) to control distribution channels, or investing in organic farms in Laos (upstream) to secure raw milk supply for its production facilities

Why Firms engage in FDI?

Based on the Strategic Approach, firms engage in FDI to access raw materials, new markets, product efficiency, and "know-how",.

• From the Host Country's perspective, firms invest to utilize comparative advantages such as cheaper labor or available resources (Resource/Efficiency Seeking) and to benefit from investment incentives like tax credits or cash grants. In return, the host receives capital, technology transfer, and job creation,.

• From the Home Country's perspective, firms invest abroad to escape saturated domestic markets, bypass trade barriers, or secure supply chains (Vertical FDI). This allows firms to maintain global competitiveness and repatriate profits, though it may be criticized for reducing domestic employment

When foreign direst investors acquire a company, what do they normally seek to control?

Foreign direct investors acquire part or all of the equity of an existing foreign company, they normally seek to control or share control over sales, production, and research and development. Unlike portfolio investors, who do not aim to take control, FDI investors take a strategic approach to actively manage the enterprise. This control allows them to integrate the acquired company into their global strategy to access raw materials, new markets, or product efficiency.

In considering foreign investment, what is an MNC's first strategic objective?

MNC's first strategic objective when considering foreign investment is to locate or create markets for its present and future products. This approach is driven by the globalization of markets, where national boundaries are less relevant. To achieve this, the MNC pools all its resources, including research and development, raw materials, investment capital, and managerial skills to achieve the highest possible efficiency and obtain the maximum return on investments.

What are some financial considerations in making a foreign direct investment?

Financial considerations are often the most decisive factors in FDI decisions. Investors must evaluate the expected return on investment, prevailing interest rates, and available sources of working capital. A crucial calculation is the cash flow projection, which determines the cash remaining after taxes and expenses. Ultimately, a project is termed viable only if it has reliable access to outside financing and its expected rate of return exceeds that of comparable investments in the host country.

When is a foreign project said to be viable? What is a nonviable project?

A foreign project is termed viable only when it has reliable access to outside financing to support its operations. Conversely, a project is considered non-viable if its expected rate of return (profits realized on assets employed) is likely to be lower than that of a comparable investment available in the host country. Financial considerations, such as cash flow projections and interest rates, are the most decisive factors in making this determination.

Name two kinds of legislation that foreign investors study closely prior to making an investment?

Foreign investors closely study the following two kinds of legislation before investing:

1. Antitrust legislation: Investors must ensure their acquisition does not violate laws prohibiting corporations from dominating or monopolizing an industry, which could lead to the investment being blocked by local authorities.

2. Labor laws: Investors evaluate the local workforce environment, specifically looking at "right-to-work" laws and the existence or absence of labor unions.

Why are investment incentives highest in a depressed area?

Investment incentives are highest in depressed areas because these regions have typically experienced long periods of unemployment. National and local authorities offer benefits such as cash grants, tax credits, and low-interest loans to attract foreign direct investment specifically to these locations. By providing these maximum incentives, the host government aims to compensate for the area's economic disadvantages and encourage foreign firms to establish operations there to create jobs and stimulate economic recovery.

When a corporation starts to export for the first time, how will it organize its sale?

When a corporation starts to export for the first time, it typically organizes its sales by appointing an independent sales agent (distributor) rather than establishing its own sales network immediately. This approach is chosen because establishing a proprietary sales network is "complicated and expensive," especially when the market potential is unproven. Distributors, whether exclusive (selling only the exporter's goods) or multiple (selling various brands), already possess local market knowledge and existing customer relationships, offering a lower-risk entry strategy. However, the trade-off is a loss of control, as the exporter relies entirely on the distributor's performance and reputation to represent their product.

What is a drawback of licensing or authorizing foreign distribution?

A major drawback of licensing or authorizing foreign distribution is the loss of direct control over the business compared to Foreign Direct Investment (FDI). While FDI allows a company to control or share control over production, research and development, and sales, licensing or using distributors transfers these responsibilities to an outside party. Additionally, if a company utilizes a multiple distributor, that sales agent represents more than one manufacturer. This can be a significant disadvantage if the agent sells competing products or fails to prioritize the company's goods, unlike an exclusive distributor who is contractually granted the sole right to sell the manufacturer's products.

If a company does not want complete manufacturing responsibility for a foreign market, what ownership possibility remains?

If a company does not want complete manufacturing responsibility for a foreign market, the ownership possibility that remains is a Joint Venture, which is defined as a subsidiary formed by two or more corporations. By choosing this model, a firm can share the costs, risks, and manufacturing responsibilities with a partner (often a local entity) rather than bearing the full burden of a wholly-owned subsidiary. This allows the company to maintain an equity stake and access local market knowledge or resources without taking on 100% of the operational responsibility.

What is Foreign Exchange?

Foreign Exchange refers to the money or currency of a foreign country used in international settlements. It is not a physical marketplace but a mechanism of telecommunications through which currencies are traded between banks, brokers, and customers. For example, if a Vietnamese furniture manufacturer exports goods to the US, they are paid in USD, which constitutes foreign exchange. They must convert this into VND to pay local workers, facilitating international trade by overcoming the barrier of different national currencies.

What is Gold Standard?

The Gold Standard was a monetary system used in the 19th and early 20th centuries where the value of a country's currency was directly linked to gold. Under this system, currency holders could convert their paper money into gold at the central bank upon request, providing fixed exchange stability. A classic example is the post-WWII Bretton Woods system, where the US dollar was convertible to gold at $35 an ounce, and other currencies were pegged to the dollar, ensuring that money supply was backed by tangible reserves.

What is Central Bank?

A Central Bank is a country’s government-owned chief bank responsible for regulating commercial banks and holding gold and foreign currency reserves. Its critical function in foreign exchange is to actively intervene in markets by buying or selling currency to keep its value within a desirable range. For instance, the State Bank of Vietnam (SBV) manages monetary policy and intervenes to stabilize the Vietnamese Dong (VND) against the US Dollar to control inflation and support export stability.

What is Fixed Exchange Rate?

A Fixed Exchange Rate is a system where central banks are required by international agreements to maintain their currency's value at a relatively fixed level against another currency or gold. This is achieved by the central bank buying the currency when it hits a low "intervention point" and selling when it reaches a high point. An example is the Bretton Woods era, where countries like France and England were required to keep their currencies within 1 percent of their par value against the US dollar.

What is Floating Exchange Rate?

A Floating Exchange Rate is a system in which currencies have no specific par value, and their value is determined primarily by the market forces of supply and demand. Unlike fixed systems, central banks are not required to intervene, though they may do so to avoid wild fluctuations. For example, major currencies today like the US Dollar, Euro, and Japanese Yen float freely, meaning their exchange rates change daily based on factors like interest rates and economic performance.

What is Spot Transaction?

A Spot Transaction involves buying or selling currency for immediate delivery, which technically takes place two business days later to allow for settlement. This is the most common type of transaction for immediate financial needs. For instance, if a French father needs to send money immediately to his son studying in New York for living expenses, the bank uses the current "spot" rate to exchange Euros for Dollars, ensuring the funds are delivered quickly without a long waiting period.

What is Forward Transaction?

A Forward Transaction is an agreement to buy or sell a specific amount of currency at a fixed price on a future date. This tool is essential for businesses to protect themselves against the risk of fluctuating exchange rates. For example, a Japanese exporter of Toyota cars who expects to receive US dollars in six months can sell those dollars forward now. This locks in a specific exchange rate, guaranteeing they receive a set amount of Yen regardless of how the dollar weakens or strengthens in the meantime.

What is Hedging?

Hedging is a risk management strategy used to offset a "buy" contract with a "sell" contract (and vice versa), matching the amounts and time span exactly. The goal is to leave no "open position" exposed to adverse price movements. For example, if a dealer buys currency forward for thirty days, they should immediately sell the same amount forward for thirty days. This ensures that a profit margin is realized from the transaction fees, regardless of whether the market exchange rate rises or falls during that month.

What is Speculation?

Speculation occurs when dealers do not offset a "buy" contract with a "sell" contract, meaning their position is left "open" in hopes of making a profit from price changes. This is a high-risk activity; a "long" position bets the currency will rise, while a "short" position bets it will fall. For instance, if a trader sells currency forward without owning it (short selling), hoping to buy it back cheaper later, they face disastrous losses if the exchange rate rises rapidly instead.

What is Premium?

A Premium refers to the additional amount it costs to buy or sell a currency at a future date compared to the current spot (today's) price. It indicates that the currency is stronger in the forward market than the spot market. For example, if the spot rate for the British Pound is $1.80 but the one-month forward rate is $1.81, the Pound is trading at a premium. This often occurs when interest rates in the domestic country are lower than those abroad, increasing demand for the currency.

What is Discount?

A Discount is the lesser amount it costs to buy or sell a currency at a future date relative to the spot price, implying the currency is weaker in the forward market. This typically happens when interest rates in the domestic country are higher than in the other country. For instance, if interest rates in England are 2% higher than in the US, the British pound might trade at a discount in the forward market to offset the investment advantage gained by holding pounds.

What is Arbitrage?

Arbitrage is the practice of transferring funds from one currency to another to benefit from rate differentials or disparities in interest rates. It involves entering at least two markets simultaneously to capture a risk-free profit. For example, if the dollar spot rate is lower in London than in New York, an arbitrageur would buy dollars in London and immediately sell them in New York, capitalizing on the temporary price difference before the markets equalize.

Name a payment mechanism used in earlier times. What was it later replaced by?

In earlier times, trade was conducted through barter, the direct exchange of goods for other goods (e.g., trading wheat for cloth). This system was inefficient as it required a "double coincidence of wants." Barter was later replaced by precious metals like gold and silver, which served as a standardized medium of exchange. By the 19th century, this evolved into the Gold Standard, where currencies had a fixed par value in gold, allowing for stable international trade until industrialization made gold reserves inadequate for the volume of global commerce.

Briefly describe the importance of the gold standard?

The Gold Standard was a critical monetary system used in the 19th and early 20th centuries where a currency's value was directly pegged to gold, allowing holders to convert paper money into gold at central banks upon request. Its primary importance lay in providing fixed exchange rate stability between nations, preventing wild currency fluctuations and facilitating international trade. A prime example is the Bretton Woods system, where the US dollar was convertible at $35 an ounce, anchoring global currencies until the shift to floating rates in the 1970s.

Under the gold standard, currencies were convertible into gold. This convertibility was abolished for most currencies. Which currency remained convertible into gold until 1971?

Under the Bretton Woods Agreement, while all member countries expressed their currency values in gold, only the United States dollar remained directly convertible into gold at the fixed price of $35 an ounce. This unique convertibility lasted until 1971, when the US devalued its currency due to economic turbulence and draining gold reserves, leading to the collapse of the fixed rate system and the transition to the floating exchange rate system.

What is the system of fixed exchange rates? Which conference agreed upon this system?

A Fixed Exchange Rate is a system where central banks are required by international agreements to maintain their currency's value at a relatively fixed level against another currency or gold. To maintain this "par value," central banks must actively intervene by buying the currency when it hits a low point and selling when it reaches a high point. This system was agreed upon at the Bretton Woods Conference in New Hampshire (1944), which also established the IMF and stipulated that the US dollar would be convertible to gold at $35 an ounce to anchor the system.

Where and how does the foreign exchange market take place?

The foreign exchange market is not a physical marketplace but a global mechanism of telecommunications where currencies are traded. Instead of a central floor, it takes place through a system of telephone, telex, and electronic communications connecting banks, customers, and middlemen (foreign exchange brokers). Transactions primarily occur within the special foreign exchange trading departments of banks, where dealers and staff buy and sell currencies to serve clients (such as tourists or exporters) and minimize fluctuations,.

What is the function of a foreign exchange broker?

A foreign exchange broker acts as an intermediary or middleman in the forex market, facilitating the buying and selling of currencies between parties such as banks, corporations, and individual customers. Unlike dealers who may trade for their own accounts, brokers trade on behalf of clients to execute orders. For example, ECN (Electronic Communications Network) brokers provide a direct routing service, sending client orders straight to the central interbank market to be filled at the best available rates without dealer intervention, often charging a commission for this service,.

Name at least five active participants in the foreign exchange market.

The foreign exchange market consists of a diverse network of participants including commercial banks (trading for themselves or clients), foreign exchange brokers (intermediaries), customers (such as tourists, importers, and exporters), investors (speculators), and central banks (governments regulating currency value and reserves),,.

Briefly describe spot and forward transactions. Give an example of each.

A Spot Transaction is the buying or selling of currency for immediate delivery, technically settled within two business days; e.g., a French parent exchanging Euros for Dollars at the current rate to send immediate funds to a child studying in New York,. A Forward Transaction is a contract to exchange currency at a fixed price on a specific future date; e.g., a Japanese Toyota exporter expects USD income in six months and sells those dollars forward now to lock in the exchange rate and protect against volatility.

Review how foreign exchange trading developed through the years, how international agreements today have shaped it, and what its main functions are.

Foreign exchange trading evolved from the Gold Standard (19th century) to the Fixed Exchange Rate system established by the Bretton Woods Agreement (1944), which pegged currencies to the US Dollar (convertible to gold at $35 an ounce). Following the US dollar's devaluation in 1971, the global economy shifted to the current Floating Exchange Rate system, where currency values are determined dynamically by market supply and demand rather than government intervention. The market's primary functions are to facilitate international settlements for trade and to reduce the risk of fluctuating exchange rates through mechanisms like hedging.

What is Open Account?

A payment method where the exporter ships goods and documents to the importer before payment is received, usually settling 30-90 days later. This option places the highest risk on the seller but is attractive to buyers. Example: A Vietnamese coffee exporter ships beans to a long-term US partner and agrees to receive payment 60 days after the invoice date to maintain a competitive relationship.

What is Documentary Letter of Credit?

A written undertaking by a bank (Issuing Bank) to pay the seller (Beneficiary) upon presentation of compliant commercial documents. This shifts credit risk from the buyer to the bank. Example: A German machine manufacturer requires a Vietnamese buyer to open an L/C, ensuring they are paid by Vietcombank upon presenting the Bill of Lading, regardless of the buyer's financial status.

What is Revocable / Irrevocable Letter of Credit?

A Revocable L/C can be cancelled by the issuing bank at any time without notice, offering little security to the seller. An Irrevocable L/C cannot be changed without the agreement of all parties. Example: Under UCP 600 rules, all credits are deemed irrevocable to protect exporters, such as a textile factory, from having an order cancelled after purchasing raw materials.

What is Deferred Payment Letter of Credit

A credit where payment is not made immediately upon presentation of documents but at a later, determinable date specified in the credit. It allows the buyer time to sell goods before paying. Example: An L/C stipulating payment "90 days after bill of lading date" allows a Vietnamese electronics importer to sell the goods domestically to generate revenue before the bank debits their account.

What is Red Clause Letter of Credit

A special L/C authorizing the confirming or paying bank to make an advance payment to the beneficiary before shipment (originally written in red ink). It acts as pre-shipment finance. Example: A US furniture buyer opens a Red Clause L/C allowing a Vietnamese manufacturer to draw 30% of the funds upfront to purchase raw timber required for production.

What is Transferable Letter of Credit

An L/C that allows the primary beneficiary (usually a middleman) to make the credit available to one or more second beneficiaries (suppliers). Example: A trading house in Singapore receives an L/C from a French buyer and transfers a portion of it to a Vietnamese garment factory, allowing the factory to be paid directly by the bank upon shipment.

What is Revolving Letter of Credit

An L/C where the amount is reinstated after a drawing without specific amendment, useful for repetitive shipments over a long period. Example: A Vietnamese coal power plant uses a revolving L/C to import coal from Indonesia every month for a year, avoiding the administrative cost of opening a new L/C for every single shipment.

What is Back-to-Back Letter of Credit

Involves two separate credits: a "Master L/C" in favor of a middleman, used as security to open a second "Baby L/C" for the actual supplier. Example: A Hong Kong trader receives a Master L/C from a US buyer and uses it as collateral to open a separate L/C for a factory in Vietnam, keeping the buyer and supplier identities separate.

What is Standby Letter of Credit

A credit used as a secondary payment mechanism or guarantee, drawn against only if the applicant fails to perform a specific obligation (default). Example: A Vietnamese contractor provides a Standby L/C to a real estate developer; if the contractor fails to finish the building on time, the developer claims funds from the bank as compensation.

What is Advised Letter of Credit

An L/C for which the issuing bank requests a second bank (Advising Bank), usually in the exporter's country, to notify the beneficiary of the credit's authenticity without engaging to pay. Example: A US bank issues an L/C, and a Vietnamese bank notifies the local exporter that the credit exists but assumes no financial liability if the US bank defaults.

What is Confirmed Letter of Credit

An L/C where a second bank (Confirming Bank) adds its definite undertaking to pay the beneficiary, in addition to the issuing bank. This covers country/bank risk. Example: An exporter selling to a politically unstable region requests confirmation from a global bank (e.g., HSBC) to ensure payment even if the local issuing bank cannot transfer funds due to currency controls.

Usance Draft (Time Draft)

A bill of exchange payable at a fixed future date (e.g., 60 days after sight) rather than immediately. This effectively grants credit to the buyer. Example: An exporter issues a draft marked "payable 30 days after sight," allowing the importer to receive the goods and potentially sell them before the payment obligation matures.

Banker’s Acceptance

A time draft drawn on and "accepted" by a bank, meaning the bank guarantees payment at maturity. It becomes a tradable financial instrument. Example: A Vietnamese exporter sells a Banker’s Acceptance to an investor at a discount to receive immediate cash, while the investor waits for the bank to pay the full face value at maturity.

Bills for Collection

A process where the exporter entrusts financial and/or commercial documents to a bank to collect payment from the importer. The bank acts only as an agent, not a guarantor. Example: An exporter sends a Bill of Exchange to the buyer's bank, instructing them to release documents only when the buyer pays (Documents Against Payment) or accepts the draft (Documents Against Acceptance).

Clean Collection

The collection of financial documents (like bills of exchange, promissory notes, or cheques) without accompanying commercial documents (invoices, bills of lading). Example: A service provider collects a cheque for consulting fees from an overseas client where no physical goods were shipped, thus requiring no transport documents.

Documentary Collection

A collection of financial documents accompanied by commercial documents (e.g., invoices, bills of lading). Documents are released to the buyer only against payment or acceptance. Example: A Vietnamese rice exporter uses "Documents against Payment" (D/P), ensuring the buyer only gets the Bill of Lading to claim the rice at the port after paying the draft.

Advance Payment

A method where the buyer pays the seller in full or in part before the goods are shipped. This places maximum risk on the buyer. Example: A Vietnamese furniture manufacturer requires a 30% deposit upfront to purchase raw materials before starting production on a custom order for a European client.

Marketing

Marketing is a societal process by which individuals or groups obtain what they need and want through creating, offering, and exchanging products and services of value freely with others. Unlike simple selling, which focuses on the seller's needs, marketing focuses on the buyer's satisfaction. For example, companies use the marketing mix (Product, Price, Place, Promotion) to understand consumer demands rather than just pushing existing stock to generate sales.

Marketplace

A marketplace refers to a physical location where buyers and sellers meet to exchange goods and services face-to-face. This is the traditional form of commerce involving tangible interactions and physical infrastructure. Examples include brick-and-mortar locations like a local supermarket (e.g., WinMart), a shopping mall (e.g., Vincom Center), or a traditional wet market where customers inspect products physically before purchasing.

Marketspace

Marketspace is the digital environment where commercial transactions take place electronically via the Internet, removing physical boundaries. It allows for global reach and 24/7 access to goods and services without visiting a physical store. Examples include e-commerce platforms like Shopee, Lazada, or Amazon, where consumers browse digital catalogs, compare reviews, and pay online.

Market

A market is defined as the condition that permits buyers and sellers to work together to exchange goods and services. It consists of all actual and potential buyers who share a particular need or want and have the ability to pay for it. For instance, the "smartphone market" includes all consumers looking for mobile devices and manufacturers like Samsung or Apple supplying them.

Market Research

Market research involves collecting, analyzing, and reporting data relevant to a specific market situation, such as the potential for a proposed new product. It is essential for reducing business risk by understanding consumer preferences before production. Methods include conducting surveys or questionnaires to gather feedback on product features, pricing, or customer satisfaction.

Needs, Wants, and Demands

Needs are basic human requirements for survival, such as food, water, and shelter. Wants are specific objects that satisfy those needs, often shaped by culture (e.g., needing food but wanting a bowl of Pho). Demands occur when these wants are backed by the ability to pay, transforming a wish into a transaction for specific products.

Market Segmentation

Market segmentation is the process of dividing a market into distinct groups of buyers who have different requirements, characteristics, or buying habits. This allows companies to tailor their products and marketing strategies to specific target groups rather than using a "one size fits all" approach. For example, a car manufacturer might segment the market into luxury buyers (Mercedes) and economy buyers (Toyota Vios)

Brand

A brand is a name, symbol, design, or combination thereof that identifies a product and distinguishes it from competitors. A strong brand helps consumers identify the quality and consistency of a product. For example, the Nike "Swoosh" logo or the name "Coca-Cola" instantly conveys a specific image and promise of quality to the consumer, building long-term loyalty.

Trademark

A trademark is a brand name, symbol, or design that is legally registered and cannot be used by another producer. It provides the owner with exclusive rights to use the branding to identify their goods and protects against counterfeiting. For example, the golden arches of McDonald's are a trademark, preventing other restaurants from using that symbol to mislead customers.

Value

Value reflects the sum of the perceived tangible and intangible benefits and costs to customers. It is primarily a combination of quality, service, and price (QSP), known as the "customer value triad." A customer perceives value when the benefits (like high quality, prestige, or convenience) exceed the monetary and psychological costs of acquiring the product.

Penetration Pricing

This strategy involves setting a low initial price for a new product to quickly attract a large number of buyers and gain a large market share. The purpose is to enter the market rapidly, raise brand image, and discourage competitors. An example is a new streaming service offering a very low monthly fee for the first year to sign up millions of subscribers.

Skimming Pricing

This involves setting a high initial price for a new product to "skim" maximum revenues layer by layer from the segments willing to pay the high price. The purpose is to maximize profits early before competitors enter the market. An example is Apple releasing a new iPhone at a premium price, targeting early adopters who value the latest technology.

Competitive Pricing

This strategy involves setting prices based on what competitors charge for similar products. The purpose is to maintain market share and avoid price wars by keeping prices in line with the market average. An example is a gas station setting its fuel prices to match the station across the street.

Product-Line Pricing

This involves setting price steps between various products in a product line based on cost differences, customer evaluations of different features, and competitors' prices. The purpose is to maximize profits across the entire range of products. An example is a car manufacturer offering a base model, a mid-range model, and a luxury model at different price points.

Psychological Pricing

Psychological pricing is a pricing strategy that uses knowledge of consumer behavior to set prices that feel more attractive, even when the economic difference is very small. The goal is to influence how customers perceive value, quality, or affordability. An example is pricing a product at $9.99 instead of $10.00 to make it appear significantly cheaper.

Communication Channels

Communication channels are the means used to deliver and receive messages from target buyers to facilitate the flow of information. They include various media formats such as newspapers, magazines, radio, television, mail, telephone, billboards, posters, fliers, and CDs.

Distribution Channels

Distribution channels are the pathways used to display, sell, or deliver physical products or services to the buyer or user. These intermediaries bridge the gap between producers and consumers and include entities such as distributors, wholesalers, retailers, and agents.

Service Channels

Service channels are used to carry out and facilitate commercial transactions with potential buyers by providing necessary support infrastructure. Examples include warehouses for storage, transportation companies for logistics, banks for financial processing, and insurance companies.

Road transport

Road transport is the movement of passengers or goods on roads using vehicles like trucks. It offers the unique advantage of "door-to-door" service, allowing goods to be delivered directly from the supplier to the customer without intermediate handling. It is generally cheaper than air and highly flexible for inland distribution. However, its viability depends heavily on the distances involved and the quality of road infrastructure; it is less efficient for moving massive bulk loads over very long distances compared to sea or rail.

Rail transport

Rail transport is a method of conveyance using wheeled vehicles on rails, making it a robust alternative for land transport. Its primary advantage is the ability to carry heavy bulk liquids and dry cargo using special wagons over long distances. The main disadvantage is its lack of flexibility compared to road transport, as it is confined to fixed track networks and often requires road transport for the final leg of the journey.