Intermediaries play an important role in facilitating international trade. There are two broad reasons for why intermediaries arise in an economy: facilitating matching of buyers and sellers and mitigating adverse selection by acting as guarantors of quality. There are 8 main advantages of making indirect export:
- Based on their productivity, companies endogenously select their mode of export – either directly or indirectly through an intermediary. The presence of intermediaries provides a mechanism by which companies can access the export market even if they are not quite productive enough to establish their own distribution network. They need to possess higher levels of productivity to overcome smaller profits from direct exports. That is why companies with lower levels of productivity are feeling more comfortable in indirect exports using intermediaries.
- It is easier for producers to penetrate more difficult markets*, using the help of intermediaries. *These are countries that are more distant, smaller in size, require more documents and fixed costs for importing.
- The use of intermediary companies is especially pervasive in developing economies.
- When the importing and exporting country do have common language and cultural heritage the exporting costs are increased. The intermediation plays a significant role for their reduction.
- Most of the companies, which aim to export, begin to export indirectly through intermediaries. This is the first step for development of stable and profitable direct exporting.
- Intermediary companies have a relative “country” focus while companies that engage in direct exporting appear to have a relative “product” focus.
Fixed and variable costs
- Companies that use intermediation services incur a one-time global fixed cost that provides indirect access to all markets, which allows them to save on market-specific bilateral fixed costs.
- Through using intermediation manufacturers avoid establishing their own distribution networks.