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Exporting to the United States - Entering your chosen U.S. market

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3. Entering your chosen U.S. market

Your research may suggest several ways of entering your new market. Depending on your product, service and resources, you might establish a United States business presence to sell directly to your buyers. Or you might use a manufacturer’s representative or set up a partnership with an American business.

These are just two of several possible approaches. In the sections that follow, we will examine these and other methods of entering the U.S., and what they might offer you. For more background information on market entry, you can consult the Step-by-Step Guide to Exporting.

3.1. Direct selling

If you do decide to set up a business presence in the United States, you should obtain the services of an American lawyer or a lawyer well acquainted with U.S. law.

Direct selling is a simple concept - you sell directly to your American end users. This end user might be another company, a level of government or an individual.

There are several modes of direct selling:

3.2. Payments, returns and warranties

If you intend to sell directly to your U.S. customers, you will need efficient methods of handling payments, returns and warranties. Your solutions will vary according to your particular business and product, but the list below describes some of the factors you will need to consider.

3.3. Selling through intermediaries

The most common intermediaries are distributors, trading houses and representatives (these last are also called agents, manufacturers’ agents or manufacturers’ representatives). One advantage of using an intermediary is that you get an immediate presence in the United States market without setting up your own sales operation. Disadvantages include, but are not limited to, a greater separation from your customer base and less control over the marketing of your product.

3.4. Finding and checking out an intermediary

No matter how you find potential intermediaries, it is essential to check them out before choosing one.

Contacts at U.S.-oriented trade fairs, on either side of the border, can often introduce you to potential intermediaries. The Canadian Trade Commissioner Service, trade associations and local chambers of commerce (both American and Canadian) can be very helpful as well, and you can ask other companies in your sector about their experiences with intermediaries.

There are also online sources of information about U.S. intermediaries. For manufacturers' representatives, a good place to begin is with the Directory of Manufacturers' Sales Agents (MANA); it is a subscription-based service that allows you to search its listings by state, territory or sector.

No matter how you find potential intermediaries, it is essential to carry out your due diligence before choosing one. Do not sign up with the first candidate who looks suitable, even if he or she has a good track record and reputation. You will make better choices if you know what the competition has to offer.

To evaluate a prospective intermediary in detail, you can use the checklist in the "Choosing an Intermediary" section in the Step-by-Step Guide to Exporting.

3.5. Working with your intermediary

No matter whether you use a distributor, trading house or manufacturer’s representative, the usual principles of good business relationships apply. In the case of a representative, you will get the best service if you pay attention to:

3.6. Partnerships, investments and acquisitions

When setting up a partnership, acquisition or investment, it is very important to use the expertise of lawyers, accountants, bankers and other professionals, so that all parties are absolutely sure who holds which rights and which responsibilities.

A solo entry into the United States market may not always be the best approach for an exporter. You might find it preferable to form a partnership with an American company to operate in a particular U.S. market, or acquire (or invest in) a U.S. firm whose strategic position complements or enhances your own.

These approaches can make operating in the U.S. considerably easier for both goods and service exporters, because it can help resolve problems related to professional accreditation, movement of personnel across the border, and U.S. tax and legal status. Moreover, combining the technical and financial strengths of two businesses can make you more competitive — a big advantage in the aggressive U.S. business environment.

When setting up such arrangements, however, it is very important to make appropriate use of lawyers, accountants, bankers and other professionals, so that all parties are absolutely sure who holds which rights and which responsibilities.

3.6.1. Partnerships

There are several different approaches to partnerships. Your major options are:

3.6.2. Investments and acquisitions

Canada’s net direct investment asset position improved in 2011 as investment stock abroad grew faster than inward investment stock, partly due to the revaluation effect as the Canadian dollar depreciated during the year against the currencies of most of Canada’s partner countries.

Foreign direct investments (FDI) are of significant size; according to the 2012 edition of Canada’s State of Trade, issued by DFAIT’s Office of the Chief Economist,

"Investment flows from the United States grew 10.0 percent during the year and accounted for just under half of the total. The highlight of U.S. activity was the acquisition of Consolidated Thompson Iron Mines Ltd. by Cliffs Natural Resources Inc. for US$4.4 billion.

By sector, 54 percent of global FDI inflows to Canada were directed toward energy and metallic minerals, followed by machinery and transportation equipment (11 percent), finance and insurance (4 percent), service and retailing (4 percent), and wood and paper (1 percent). The remaining 26 percent went to other industries.

Canadian direct investment abroad (CDIA) refers to capital outflows from Canada that are invested in industries and businesses in other countries. With respect to CDIA, while the shares of total Canadian direct investment in the United States had been declining for several years, in 2011, the United States’ share edged up to 40.3 percent. Canadian direct investment stock flows to that destination increased by $22.7 billion to reach $276.1 billion."

It is clear from the above that while CDIA into the United States has diminished during the past two decades, the U.S. remains a crucially important destination for investment by Canadian businesses. This is because a substantial capital commitment to a U.S. firm, or the outright acquisition of a U.S. company, can help a Canadian exporter in several important ways.

Because Canadian and U.S. markets are so closely interrelated in so many sectors, customers will have similar needs and preferences. This leads to lower costs for market research and product differentiation.

3.7. U.S. government procurement

The government of the United States buys a huge array of products and services on the commercial market, and this can present a rich source of contracts for Canadian exporters. Selling to U.S. government agencies and departments is a complex business, however, and can overwhelm the resources of a Canadian company that tries to undertake such a deal on its own. To help such companies, the Government of Canada has established the Canadian Commercial Corporation (CCC), a Crown Corporation that acts as Canada’s international contracting and procurement agency.

The CCC brings Canadian exporters and foreign government buyers together by assisting with the negotiation and execution of contracts. It does this not only for U.S. government procurement, of course, but also for buyers from numerous other national governments. The U.S., however, is by far the largest of these customers.

To facilitate exports at this level, the CCC signs two contracts: one with the U.S. buyer, and the other with the Canadian exporter. As the intermediary, the CCC ensures that the contract is completed according to the conditions of the agreement, and transmits the contractual obligations to the Canadian exporter. The result is a secure government-to-government contract on the best possible terms and conditions for all concerned. In addition, CCC manages the cycle of payments from the U.S. government buyer to the Canadian exporter in order to maintain a predictable and timely payment schedule.

Because of the enormous size of the U.S. defence and aerospace sectors, the CCC also specializes in managing export contracts that originate with the U.S. Department of Defense and NASA. To find out more, refer to the CCC website. For a more detailed explanation of U.S. government procurement and the opportunities it offers, visit DFAIT’s SELL2USGOV website.

3.8. Market entry for service exports

Unlike goods, service exports tend to be intangibles such as scientific knowledge, technical expertise or intellectual property. Nevertheless, the major methods of delivering services fall into categories that are quite similar to those for delivering goods. For example, exporters of goods and exporters of services can both benefit from direct selling; in fact, if you are a service company with a unique skill or knowledge, you might consider contracting your service directly to American clients.

Alternatively, you might market your service indirectly through an intermediary who negotiates a service contract for you with the client. Or you might establish a partnership with a firm whose services dovetails with yours, to the advantage of both companies.

The method you choose will depend on the nature of your service, the resources available to you and the particular U.S. market you are entering. No matter which approach you select, however, you must focus on establishing an awareness of your firm in the target market and on demonstrating the credibility, competence and professionalism of the service it offers. And, as always, you will have to ensure that your management and staff are sensitive to the culture, values and business practices of your American clients and/or business partners.

3.9. Special issues for service exports

Exporting to the United States can be more complicated for a service company than it is for a manufacturer of goods, especially if you need to send personnel across the border to provide the service. If you use this form of service export, you will have to comply with the strict immigration and labour laws that apply to non-Americans entering the U.S. to work.

It will often be easier to send your employees to the United States if you set up a formal U.S. business presence, such as a wholly owned subsidiary. This also gives you added flexibility in providing the service, because you will be able to hire American workers directly if it suits your purposes. Indeed, if you hire only Americans, the whole immigration issue will vanish.

U.S. immigration classifications are examined in more detail in Section 6, "Business Travel to the U.S.," but we will explore them briefly here, in the special context of service exports.

3.9.1. Cross-border movement of Canadian workers

Even if you establish a U.S. business presence, however, getting your people across the border can be difficult, especially in sectors such as the construction services industry. One big issue is timing. For example, a Canadian paving company that obtains a road service contract in the U.S. may need Canadian labour to do the job, but may be unable to get its employees cleared by U.S. immigration authorities by the time the project has to start. This can have serious financial and legal consequences if it causes your company to default on its contract. Any service company that lands a U.S. contract with tight deadlines may find itself in this sort of difficulty.

The variety of immigration classifications also means that a service company has to understand very clearly who it can and cannot send to work in the U.S., and exactly how its employees must be classified in order to enter. For example, it is a mistake to use a B-1 classification for an employee who is going to the U.S. to provide services for an American client. The B-1 is the business visitor classification, and only allows the holder to undertake marketing activities in the U.S., not to do any work.

3.9.2. Service exports and U.S. immigration classifications

The most common visa classification is the H-2B, which allows foreigners to work temporarily in the U.S., provided there is no American worker available to do the job — a condition that you, as the contractor, are required to prove. Other visa classifications are the TN-1 for NAFTA professionals (engineers and scientific technicians, for example) and the L-1 for intracompany transferees (including executives, managers and "specialized knowledge" personnel). Choosing the most suitable classification for your workers and getting their permits cleared is complicated, so be sure to get legal advice from a professional well versed in U.S. immigration law. And while it may be tempting to go around the rules and put people to work in the U.S. before getting clearance, it is very, very unwise to do so. If detected, your employees may be expelled from the U.S. and may not be allowed back into the country for several years.

Some types of service firms, such as companies providing software development services, may be able to export to the U.S. without sending workers there at all, except perhaps for marketing employees who would use the B-1 classification. If your company provides its services in this way, your U.S. clients will often ask you to file a "Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding," or form W 8BEN. This form applies when goods or services, for which the Canadian firm will receive payment from the American client, are provided in the U.S. by a Canadian firm.

3.10. Innovation: Science and technology exports

Historically, Canada’s major exports have been generated by our natural resources industries, especially agri-food, forest products, minerals and energy. But if we are to maintain our global competitiveness, we need to expand and diversify our international trade in sectors related to science and technology (S&T).

Our close economic relationship with the United States is an enormous advantage in this regard. The U.S., of course, is a world leader in Samp;T innovation, and one of its strengths is the willingness of its businesses and research institutions to collaborate with their counterparts in other countries. Most regions of the U.S. are home to at least one major S&T cluster, and the country as a whole presents enormous opportunities for Canadian Samp;T companies working in what has become known as the "knowledge industry."

In recognition of this, the Government of Canada has established S&T development as a major economic priority for the foreseeable future. This includes not only advanced R&D, but also the commercialization of Canadian S&T innovations and their transfer to the U.S. and global markets. This outward-looking approach is important because strong international S&T linkages help connect Canadian firms to the world marketplace of ideas, talents and technologies. In turn, this ensures that Canada’s exporters have access to leading-edge research, which boosts their competitiveness and productivity.

Looking abroad, especially to the U.S., is even more important when one considers the relatively small size of the Canadian market for many advanced technologies. In aerospace, for example, the volume of domestic demand simply cannot support the full-fledged commercialization of a service or product, so having access to the U.S. aerospace industry is absolutely vital for the survival of Canadian companies in this sector. This example could be repeated across a wide range of industries, and if your company operates in one of them, you will almost inevitably have to become an exporter. And because of its geographical accessibility, its vast S&T market and the willingness of its companies to work with Canadian firms, the U.S. is the most obvious destination for Canadian businesses that can supply technologically advanced products, services and knowledge.

But "exporting to the U.S." in this context means much more than shipping goods or providing services. It can also mean joining a U.S/global value chain through R&D collaboration with a company in the United States; forming a Canada-U.S. partnership to commercialize a product; or investing in a U.S. business whose R&D or innovations complement your own. U.S. sectors that offer excellent prospects for such investments and partnerships include aerospace and defence, life sciences, environmental technology, renewable energy and information and communications technology.

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