11 Business Studies Notes Ch10 International Business 02

8/12/2019 11 Business Studies Notes Ch10 International Business 02

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CHAPTER 10

International BusinessManufacturingand tradingbeyond thegeographical boundaries of a countryisknown as international business. The development of communication,technology and infrastructure etc make it possible. New modes ofcommunication and development of faster andmore efficientmeans oftransportation have brought nations closer to one another as a result of whichtrade between them can take place. Following are themain reasons behindinternationalbusiness.1. Unequaldisributionofnaturalresourcesanddifferencesintheproductivity

levels of the countriesmake them incapable of producing every good oftheir requirement.

2. Labour productivity and production costs differ among nations due tosocioeconomic,geographicalandpoliticalreasons.

3. Theavailabilityofdifferentfactorsofproductionsuchaslabour,capitalandrawmaterials differ among nations.

ConceptofInternationalBusinessMajor forms of business operations that constitute international business are asfollows1. Merchandise exports and imports.Merchandies exportsmeans sending

tangible goods abroad andmerchandise importsmeans bringing tangiblegoods from abroad.

2. Exports and importswhich involvetradein intagibleitems thatcan notbeseen ortouched.Itis alsocalled invisibletrade.

3. Another way of entering into international business is licensing andfranchising country to produce and sell goods under their trademarkspatentsorcopyrightin lieuofsomefeeis calledlicensingPepsiandCoca-Colaareproducted&sold allovertheworld bylocalcompanies inforeigncountriesunderlicensingsystem.Franchisingissimilartolicensing,butitisusedinconnectionwiththeprovisionofservices.MCDonaldsoperatesfastfood restaurants all overtheworld through the system of franchising.


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4. Foreign investment is another important form of international business. Itcan be of two types : direct and portfolio investments. Direct investmenttakes placewhen a company directly invests in properties such as plant&machinery in foreign countries with a view to undertake production andmarketingofgoodsandservicesinthosecountries.Itprovidestheinvestora controlling interest in a foreign country. Under portfolio investment, acompanymakes investment by acquiring shares or providing loans to aforiegncompany&earnsincomebywayofdividendsorinterestonload.Inthis investor does not get directly involved in producion ormarketing ofgoods.

BenefitsofInternationalBusinessInternational Business is important to both nations and business firms.It offersthem various benefits.Benefits toNations :1. Ithelpsacountrytoearnforeignexchangewhichcanbeusedforimporting

various goods from abroad.2. Itleadstospecialisationofanationintheprodcutionofthosegoodswhich

canbe producedbyitin themosteffectiveand economicalmanner.3. It helps a nation in improving its growth prospects and also create

opportunities for employment.4. Itmake it possible for people to consume goods and services produced in

othercountrieswhichhelpin increasingtheirstandardofliving.BenefitstoFirms:-1. It helps in increasing profits of the firms by selling goods in the countries

whereprices arehigh.2. Ithelpfirmsinusingtheirsurplusproductioncopacitiesandimprovingthe

profitability of their operations.3. Ithelpfirms inimprovingtheirgrowth prospects.4. Itactsasoneofthewaysofachievinggrowthforfirmsfacingtoughmarket

conditions in the domesticmarket.5. It improves business vision as itmake firmsmore competitive, and

diversified.


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Difference between Domestic& International Business.Basis DomesticBusiness International Business.

1. Nationality of Both Buyers& Sellers Buyers&Sellors belongbuyers& Sellers belongto samecountry to different countries.

2. Mobility of sectors The factors of production There are restrictions onof production Likecapital,labourand freemobility of factors of

rawmaterialcanmove prodcution acrossfreelywithin the country countries

3. Customer Domesticmarkets are Internationalmarketsheterogencity relativemore homo- lackhomogeneity duetoacrossmarket geneousinnature differences,in languages,

preferences customs etcacrossmarkets.

4. Currencyused Currencyof home currency used in businesscountryisused in transactions is that ofbusiness morethan onecountry.

5. PoliticalSystem Ithastofacethe It is subjected to politicalpoliticalsystemand system& risk of differentriskof onlyonecountry countries.

ModeofEntryintoInternationalBusinessI. Exporting and Importing

Exportingrefers tosellingof goods and services from thehome countrytoa foreign country while importing refers to purchase of foreign productsandbringingthemintoones homecountry.

II. Contract ManufacturingWhenafirmentersintoacontractwithoneorafewlocalmanufacturersinforeigncountriestogetcertaingoodsproducedasperitsspecificationsitiscalledcontractmanufacturing.Itisalsoknowasoutsourcinganditcantakeplaceinfollowingforms.

a) Production of componentslikeautomobilecomponents tobeused laterformakingfinalproductlikecar.

b) Assemblingof componentsintofinalproducts such asassemblingof tyres,seatetc in a scooter.

c) Completemanufactureofproductssuchasgarments.


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III. Licensing and Franchising :-Permitting another party in foreign country to produce and sell goodsundertheirtrademarks,patentsorcopyrightinlieuofafeecalledroyaltyistermed as licensing.When there ismutual exchange of knowledge,technology and patents between the firms it is called cross-licensing. Franchising is similar to licensing, but it is used in connection with theprovision of services.PizzaHutandWal-Martareexamplesof someof theleading franchisers operating worldwide.

IV. JOINTVENTUREJointventuremeansestablishingafirmthatisjointlyownedbytwoormoreindependentfirms.Itcan be broughtintoexistencein threemajorways.

i) Foreigninvestorbuyinganinterestinalocalcompany.ii) Localfirmacquiringaninterestinanexistingforeignfirm.iii) Both theforeign and local entrepreneursjointlyforming anew enterprise.WHOLLYOWNEDSUBSIDIARIESWhen a foreign company is acquired by a parent company bymaking 100%investment in its equity capital then it is called wholly owned subsidiaries.Awhollyownedsubsidiaryinaforeignmarketcanbeestablishedeitherbysettingupanewfirmaltogethertostartoperationsinaforeigncountryorbyacquiringan established firmin theforeign country.EXPORTPROCEDURE1. An exporter receives an enquiry from the prospective buyers seeking

information regarding price,quality&otherterms conditions for exportofgoods.Theexportersendsaquotationknown asproformainvoiceasreply.

2. Ifthebuyerissatisfiedwiththeexportprice&otherterms&conditions,heplaces the order or indent for the goods.

3. After receiving the order or indent, the exporter undertakes an enquiryregarding the credit worthiness of importer to assess the risk of non-payment by the importer.

4. Accordingtocustomlawstheexporterortheexportfirmmusthaveexportlicense before proceeding with exports. The following procedure isfollowed for obtaining the export license.

- Toopenaccountinanyauthorisedbank


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- To obtain import export code (IEC) number from Directorate Generalforeign Trade (DGFT) or Regional Import Export Licensing Authority(RIELA).

- Registerwith appropriateexport promotion council.- To getregisteredwith ExportCredit andGuarantee corporation (ECGC) in

order to safeguard against risk of non-payments.5. After obtaining the export license the exporter approaches his banker in

order toobtain preshipmentfinance for carryingout production.6. Exporter, after obtaining the preshipment finance from the bank, proceeds

to get the goods ready as per the orders of the importer.7. Governmentof Indiaensures thatonlygood qualityproducts areexported

from India. The exporter has to submit the preshipment inspection reportalongwith other documents atthetime of export.

8. According to Central Excise TariffAct, excise duty on thematerial used inmanufacturing goods is to be paid. For this purpose exporter apply to theconcernedExciseCommissionerintheregionwithaninvoice.

9. In order toobtain Tariff concessions or otherexemptions the importermayask the exporter to send certificate of origin.

10. The exporter applies to the shipping company for provision of shippingspace. He has to provide complete information regarding the goods to beexported, probable date of shipment& port of destination. The shippingcompany

issues

a

shipping

order.

Which

is

an

instruction

to

the

captain

of

theship,afteracceptingapplicationforshipping.

11. Thegoodsarepacked&markedwithnecessarydetailslikename&addressof the importer, growss& net weight, port of shipment& destination etc.After this the exportermakes arrangement for the transportation of goodsto the port.

12. In order to protect the goods against the risk of loss or damage due to theperils of the sea transit the exporter gets the goods insured with aninsurancecompany.

13. Before loading the goods on the ship they have to be cleared by thecustomer.Forthispurposetheexporterpreparestheshippingbill&submitsfive copies of the shipping bill alongwith following documents to theCustomsAppraiseratthecustomshouse.!

(i) Certificate of origin(ii) CommercialInvoice


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3. Packing List :- This document is in the form of a statement regarding thenumber of cases or packs& the details of the goods contained in thesepacks. It provides complete details regarding the goods exported& theforminwhichtheyarebeingsent.

4. Certificate of Origin :- This certificate specifies the country in which thegoodsarebeingmanufactured.Thiscertificateenablestheimportertoclaimtariff concessions or other exemptions. This certificate is also required incasewhenthereisabanon importsof somegoods fromcertain countries.

B. Documents Related to Shipment :-1. ShippingBill:Itis thmain documenton thebasis ofwhich permission is

grantedfortheexportofgoods bythecustomoffice.Itcontains fulldetailsregarding thegoods being exported name of the vessel, exporter s name&address, country of final destination etc.

2. MatesReceipt:-Thisreceiptisissuedbythecaptainormateoftheshiptothe exporter after the goods are loaded on board of the ship. It containsnameof the vessel,description of packages,marks,conditions of thecargoatthetimeof receipton board theshipetc.

3. Billoflading-Itisadocumentissuedbytheshippingcompany.Itactsasanevidenceregardingtheacceptanceof shippingcompanytocarrythegoodsto the port of destination. It is also referred to as document of title to thegoods& is freely transferable by endorsement& delivery.

4. AirwayBill:Similartoashippingbill,anairwaybillisadocumentissuedby theairline companyon receiving thegoods on board,its aircraftand atthesametimegivingitsacceptancetocarrythemtotheportofdestination.

5. Cart Ticket :- Also known as cart chit or gate pass, it is prepared by theexporter. It contains details regarding export cargo like number ofpackages,shippingbillnumber,portofdestination etc.

6. MarineInsurancePolicy:Itisadocumentcontainingcontractbetweentheexporter&theInsuranceCompanytoindemnitytheinsuredagainstthelossincurred bytheinsuredin respectof goods exposed totheperils of theseatransitinconsiderationofapaymentcalledpremium.

C.

Documentrelated

to

payment

:-

1. Lettertocredit:-Itisaguaranteeletterissuedbytheimporterbankstating

thatitwillhonourtheexportbillstothebankoftheexporteruptoacertain


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2. BillofExchange:Inexport&importtransaction,exporterdrawsthebillontheimporteraskinghimtopayaspecifiedamounttoacertainpersonorthebearer of the instrument. The documents required by the importer forclaiming title of exported goods are passed on to him only when theimporteracceptsthis bill.

3. Bank Certificate of Payment :- It is a certificate that the necessarydocuments relating to the particular export consignment have beennegotiated& payment has been received in accordancewith the exchangecontrol regulations.

IMPORTPROCEDURE1. The first step involved in importing goods is to gather information about

thecountries&firms which exporttheproductrequired by theexporter.Itcan be gathered from trade directories, trade associations& organisations.TheexporterpreparesaquotationalsoknownasPerformaInvoice&sendsit to the importer.

2. TheImporterConsultstheexportimport(EXIM)Policyinforce,inordertoknow whether the goods that he/she wants to import are subjected toimportlicensingornot.If Licenseis required then itis tobe obtained.

3. In case of an import transaction the supplier resides in a foreign countryhencehe demands payment in foreign currency. This involves exchangeofIndian Currency into foreign currency. The Exchange Control Departmentof

the

Reserve

Bank

of

India

(RBI)

regulates

foreign

exchange

transactions

in India.As per rules, every importer has to secure the sanction of foreignexchange.

4. The importer places an import order or indent with the exporter for thesupply of specified goods. Theorder contains information regarding price,quality, quantity, size& grade of goods instruction regarding packing,deliveryshipping,modeof paymentetc.

5. When the payment terms are agreed between the importer& the overseassupplier, the importer obtains the letter of credit from its banker&forwards it to the overseas supplier.

6.The

importer

arranges

for

the

funds

in

advance

to

pay

the

exporter

on

arrivalofgoodsattheportthisenablestheimportertoavoidhugepenaltieson the imported goods lying uncleared atthe portforwant of payments.

7. The overseas supplier after loading the goods on the ship dispatches theShipment Advice to the importer. It provides information regarding


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shipmentofgoodslikeinvoicenumber,billoflading/airwaybill,nameofshipwith datedescription of goods&quantityetc.

8. After shipping the goods, the overseas supplier hands over the variousdocuments like commercial invoice, bill of lading, insurance policycertificate of origin to his banker for their onward transmission to theimporter when he accepts the bill of exchange drawn by the supplier. Theacceptance of bill of exchange by the importer for the purpose of gettingdeliveryof thedocumentis known as retirementof importdocuments.

9. Whenthegoodsarriveintheimporter scountry,thepersoninchargeofthecarries informs the officer incharge at the dock or the airport about it. Thepersoninchargeoftheshiporairwayprovidesthedocuementcalledimportgeneralmanifest forunloading of cargo.

10. Imported goodsaresubjectedtocustomsclearancewhichis averylengthyprocess&involvesalotofformalities.Theimporterusuallyappointsac&Fagent forfulfilling these formalities.First of all the importer obtains a delivery order which is also known asendorsement for delivery. This order enables the importer to take thedelivery of goods after paying the freight charges.Besides freight charges, importer also has to pay dock dues for obtainingporttrustdues receipts forwhich hesubmits twocopies of adulyfilled inform know as application to import to the Landing& Shipping DuesOffice . After paying dock dues the importer get back one copy ofapplication as areceiptwhich is referred as porttrustdues receipts.Finallytheimporterfillsinaformknownas billofentry forassessmentofcustomsimportduty.Anexaminerexaminestheimportedgoods&giveshisreport on the bill of entry. This bill is then presented to the port authoritywhich on receiving necessarycharges, issues therelease order.

DocumentsusedinanImportTransaction1. ProformaInvoice:-Aproformainvoiceisadocumentthatcontainsdetails

astothequality,grade,design,size,weight&priceoftheexportproduct&theterms&conditions onwhichtheirexportwilltakeplace.

2.

Importorder

or

Indent

:It

is

a

document

in

which

the

importer

orders

for

supply of requisite goods to the supplier. The order containg theinformationsuchasquantity&qualityofgoodssuchasquantity&qualityof goods price,method of forwarding the goods, nature of packing,modeof payment etc.


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3. Shipmentadvice:-Theexportersendsshipmentadvicetotheimporterforinformaing him that the shipment of goods has beenmade. It containsinvoice number bill of lading/ airways bill number& date, name of thevesselwith date, the port of export, description of goods& quantity& thedateof sailing of thevessel.

4. Bill of lading :- It is prepared& signed by themaster of the shipacknowledging the receipt of goods on board. it contains terms&conditions on which the goods are tobe taken to theport of destination.

5. Bill of entry :- It is a form supplied by the customs office to the importerwhofilleditatthetimeofreceivingthegoods.Ithastobeintriplicate&istobesumittedtothecustomsoffice.Itcontainsinformationsuchasname&address of the importer, name of the ship, number of packages,marks onthe packages, description of goods, quantity& value of goods, name&address of the exporter, port of destinations& customs duty payable.

6. Letterofcredit:-Itisdocumentthatcontainsaguaranteefromtheimporterbanktotheexporter sbankthatitisundertakingtohonourthepaymentupto a certain amount of the bills issued by the exporter for exports of thegoods to the importer.

7. Bill ofexchange :Explained ealier.8. Trade Enquiry : It is a written requestmade by an importing firm to the

overseassupplierforprovidinginformationregardingthepriceandvariousterms and conditions for exporting goods.

ForeignTradePromotionMeasures&Schemes.1. Duty drawback scheme : Goodsmeant for export are not subjected to

payment of various excise and custom duties. Any such duties paid arerefunded to exporters on production of proof of exports of these goods totheconcerned authorities.Such refunds arecalleddutydraw backs.

2. Export Manufacturing under bond scheme : Under this facility firms canproduce goods without payment of excise and other duties. The firms canavail this facility after giving an undertaking (i.e. bond) that they aremanufacturing goods for exportpurposes.

3. Exemptionfrompaymentofsalestaxes:-Goodsmeantforexportpurposeare not subject to sales tax. Income derived from export operations hadbeeen exempt from payment of Income tax for a long period but now thisexemptionisonlyavailableto100%ExportorientedunitsandunitssetupinExportProcessingZones/specialeconomiczonesforselectedyear


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4. Advance Licence Scheme : - It is a scheme under which an exporter isallowed duty free supply of domestic as well as imported inputs requiredforthemanufactureofexportgoods.Thefirmsexportingintermittentlycanalsoobtain theselicencesagainstspecific exportorders.

5. ExportProcessingZones:-Theyareindustrialestates,whichformenclavesfrom theDomestic TariffAreas. Theseare usuallysituated near seaportsorairports. They are intended to provide an internationally competitive dutyfree environment for export production at low cost.In additiontoabovethereareothermeasuressuch as availabilityof exportfinance, export promotion, capital goods sheme etc are used for foreigntrade promotion.

ORGANISATIONALSUPPORTWorld TradeOrganisation :ItcameintoexistenceonIstJanuary1995.TheheadquartersofWTOaresituatedat Geneva, Switzerland. It is a permanent organisation created by aninternational treaty ratified by the Governments and legislatures ofmemberstates. It is concerned with solving trade problems between countries&providing a forum formultilateral trade negotiations.Role/Functions ofWTO1. To remove barriers of International trade.2. To Act as a dispute settlement body by settling trade related disputesamongmembernations3. To ensure that all the rules regulations prescribed in the Act are duly

followed by themember countries for the settlement of their disputes.4. Layingdownacommonlyacceptedcodeof conductforinternationaltrade

aiming at reducingtariff and non-tariff barriers in international trade.5. To consult other agencies to bring better understanding/cooperation in

globaleconomicpolicymaking.6. Providing technical assistance and guidance related tomanagement of

foreign tradeand fiscalpolicytoitsmembernations.7. Taking specialsteps forthe development of poorest nations.8. Reviewing trade related economic policies ofmember countries with the

helpof its Trade PolicyReview Body.


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9. Co-operating with IMF andWorld Bank and its associates for establishingco-ordination in global tradepolicymaking.

10. Acting as forum for trade liberalisation.PROBLEMSOFINTERNATIONALTRADEThemain problems in InternationalTrade are:1. Language difference When a trader of one country deals with the trader

ofanothercountry,itbecomesdifficultforbothofthemtounderstandeachothers because of their different languages.

2. MoreRisk Thequantum of riskis higherin foreign tradeas compared tothat in the internal trade.

3. Government Control For import and export procedure various licencesare taken and various piece of information are to be submitted.Moreoverthewholeprocedureofimportexportisquitecomplex.

4. DifferenceinLaws Therulesrelatedtoexport-importaredifferentineachcountry. So, there is always some doubt in themind of a trader regardingpaymentandotherterms of business.

5. Difficulty in payment - Each country has a different currency. Due to this,businessmanfacealotofproblemswhilepayingandreceivingmoney.

6. Lackof Information aboutForeign Trader Itis difficulttofind outdetailsaboutfinancialpositionandbusinessdealingsofanybusinessmansittingatsomefaroff place.

11 Business Studies Notes Ch10 International Business 02

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