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NCERT Class 11 Business Studies Chapter 11 International Business
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International Business
Chapter: 11
| PART – ⅠⅠ |
| EXERCISES |
Short Answer Questions:
1. Differentiate between international trade and international business.
Ans: International trade, comprising exports and imports of goods, has historically been an important component of international business. But of late, the scope of international business has substantially expanded. International trade in services such as international travel and tourism, transportation, communication, banking, warehousing, distribution and advertising has considerably grown.
Business transactions taking place within the geographical boundaries of a nation is known as domestic or national business. It is also referred to as internal business or home trade. Manufacturing and trade beyond the boundaries of one’s own country is known as international business.
2. Discuss any three advantages of international business.
Ans: The three advantages of international business are:
(i) International business is a much broader term and comprises both the trade and production of goods and services across frontiers.
(ii) The other equally important developments are increased foreign investments and overseas production of goods and services.
(iii) Companies have started increasingly making investments into foreign countries and undertaking production of goods and services in foreign countries to come closer to foreign customers and serve them more effectively at lower costs.
3. What is the major reason underlying trade between nations?
Ans: The main reason nations trade with each other is because they can’t produce everything they need as well or cheaply as others.It is because of the unequal distribution of natural resources among them or differences in their productivity levels.Trade enables countries to access goods that they do not produce domestically, allowing consumers a wider selection of products.
4. Differentiate between contract manufacturing and setting up wholly owned production subsidiaries abroad.
Ans: Contract manufacturing refers to a type of international business where a firm enters into a contract with one or a few local manufacturers in foreign countries to get certain components or goods produced as per its specifications.
Wholly Owned Subsidiary means a foreign entity formed, registered or incorporated according to the laws and regulations of the host country whose entire capital is held by the Indian party.
5. Why is it necessary for an export firm to go in for pre-shipment inspection?
Ans: The pre-shipment inspection report is required to be submitted along with other export documents at the time of exports. An export firm has to go in for pre-shipment inspection as required by the government of India to ensure that only good quality products are exported from the country.
6. What is the bill of lading? How does it differ from the bill of entry?
Ans: Bill of lading is a document wherein a shipping company gives its official receipt of the goods put on board its vessel and at the same time gives an undertaking to carry them to the port of destination. It is also a document of title to the goods and as such is freely transferable by the endorsement and delivery.
Bill of entry is a form supplied by the customs office to the importer. It is to be filled in by the importer at the time of receiving the goods. It has to be in triplicate and is to be submitted to the customs office. The bill of entry contains information such as name and address of the importer, name of the ship, number of packages, marks on the package, description of goods, quantity and value of goods, name and address of the exporter, port of destination, and customs duty payable.
7. What is a letter of credit? Why does an exporter need this document?
Ans: Letter of credit is a document that contains a guarantee from the importer bank to the exporter’s bank that it is undertaking to honour the payment up to a certain amount of the bills issued by the exporter for exports of the goods to the importer. It is an important document because, in international transactions, there is always a risk of the importer defaulting on payment once the goods are received.
8. Discuss the process involved in securing payment for exports?
Ans: The exporter forwards the goods and documents to a freight forwarder. The freight forwarder dispatches the goods and either the dispatcher or the exporter submits documents to the nominated bank.The exporter can receive immediate payment upon submission of documentation from his/her bank by signing a letter of indemnity. The exporter can get immediate payment from his/her bank on the submission of documents by signing a letter of indemnity. By signing the letter, the exporter undertakes to indemnify the bank in the event of non-receipt of payment from the importer along with accrued interest.
Long Answer Questions:
1. “International business is more than international trade”. Comment.
Ans: International trade, comprising exports and imports of goods, has historically been an important component of international business. But of late, the scope of international business has substantially expanded. The scope of international business is much wider than international trade. International trade means exports and imports of goods which is an important component of international business but international business includes much more than this. International trade in services such as international travel and tourism, transportation, communication, banking, warehousing, distribution and advertising has considerably grown. The other equally important developments are increased foreign investments and overseas production of goods and services. Firms too engage in international business to import what is available at lower prices in other countries, and export goods to other countries where they can fetch better prices for their products. Besides price considerations, there are several other benefits which nations and firms derive from international business.
2. What benefits do firms derive by entering into international business?
Ans: Following are the benefits firms derive by entering into international business:
(i) Prospects for higher profits: International business can be more profitable than the domestic business. When the domestic prices are lower, business firms can earn more profits by selling their products in countries where prices are high.
(ii) Increased capacity utilisation: Many firms setup production capacities for their products which are in excess of demand in the domestic market. By planning overseas expansion and procuring orders from foreign customers, they can think of making use of their surplus production capacities and also improving the profitability of their operations. Production on a larger scale often leads to economies of scale, which in turn lowers production cost and improves per unit profit margin.
(iii) Prospects for growth: Business firms find it quite frustrating when demand for their products starts getting saturated in the domestic market. Such firms can considerably improve prospects of their growth by plunging into overseas markets. This is precisely what has prompted many of the multinationals from the developed countries to enter into markets of developing countries. While demand in their home countries has got almost saturated, they realised their products were in demand in the developing countries and demand was picking up quite fast.
(iv) Way out to intense competition in the domestic market: When competition in the domestic market is very intense, internationalisation seems to be the only way to achieve significant growth. Highly competitive domestic market drives many companies to go international in search of markets for their products. International business thus acts as a catalyst of growth for firms facing tough market conditions on the domestic turf.
(v) Improved business vision: The growth of international business of many companies is essentially a part of their business policies or strategic management. The vision to become international comes from the urge to grow, the need to become more competitive, the need to diversify and to gain strategic advantages of internationalisation.
3. In what ways is exporting a better way of entering international markets than setting up wholly owned subsidiaries abroad.
Ans: In the following ways is exporting a better way of entering international markets than setting up wholly owned subsidiaries abroad:
(i) Lower Initial Investment: Exporting does not require much investment in foreign countries. Subsidiaries can be both wholly-owned and not wholly-owned, With a regular subsidiary, the parent company’s ownership stake is more than 50%.
(ii) Reduced Risk: Exporting does not require much investment in foreign countries. Therefore foreign investments risks are low as compared to when a firm starts its wholly owned subsidiary in foreign country.
(iii) Flexibility: Exporting is less expensive and time-consuming than setting up a wholly owned subsidiary. In the case of wholly owned subsidiaries, they are subject to higher political risks and have to bear the entire losses resulting from the failure of its foreign operations.
(iv) Easier Market Entry: The main advantage of exporting is that it is a relatively low-cost way to enter a new market. Exporting/importing does not require much investment in foreign countries, exposure to foreign investment risks is much lower.
(v) Market Testing: When choosing a market testing strategy, exporting is generally less risky and less expensive than setting up a wholly owned subsidiary abroad. They may even present an opportunity to capture significant global market share. Companies that export spread business risk by diversifying into multiple markets.
(vi) Less Operational Complexity: Managing a wholly owned subsidiary can be complex, requiring local market knowledge and compliance with various laws.
4. Rekha Garments has received an order to export 2000 men’s trousers to Swift Imports Ltd., located in Australia. Discuss the procedure that Rekha Garments would need to go through for executing the export order.
Ans: The number of steps and the sequence in which these are taken vary from one export transaction to another. Steps involved in a typical export transaction are as follows.
(i) Receipt of enquiry and sending quotations: The prospective buyer of a product sends an enquiry to different exporters requesting them to send information regarding price, quality and terms and conditions for export of goods. Exporters can be informed of such an inquiry even by way of advertisement in the press put in by the importer.
(ii) Receipt of order or indent: In case the prospective buyer (i.e., importing firm) finds the export price and other terms and conditions acceptable, it places an order for the goods to be dispatched. This order, also known as indent, contains a description of the goods ordered, prices to be paid, delivery terms, packing and marking details and delivery instructions.
(iii) Assessing the importer’s creditworthiness and securing a guarantee for payments: After receipt of the indent, the exporter makes necessary enquiry about the creditworthiness of the importer. The purpose underlying the enquiry is to assess the risks of non payment by the importer once the goods reach the import destination. To minimise such risks, most exporters demand a letter of credit from the importer. A letter of credit is a guarantee issued by the importer’s bank that it will honour payment up to a certain amount of export bills to the bank of the exporter.
(iv) Obtaining export licence: Having become assured about payments, the exporting firm initiates the steps relating to compliance of export regulations. Export of goods in India is subject to custom laws which demand that the export firm must have an export licence before it proceeds with exports.
(v) Obtaining pre-shipment finance: Once a confirmed order and also a letter of credit have been received, the exporter approaches his banker for obtaining pre-shipment finance to undertake export production. Pre Shipment finance is the finance that the exporter needs for procuring raw materials and other components, processing and packing of goods and transportation of goods to the port of shipment.
(vi) Production or procurement of goods: Having obtained the pre shipment finance from the bank, the exporter proceeds to get the goods ready as per the specifications of the importer. Either the firm itself goes in for producing the goods or else it buys from the market.
(vii) Pre-shipment inspection: The Government of India has initiated many steps to ensure that only good quality products are exported from the country. One such step is compulsory inspection of certain products by a competent agency as designated by the government. The government has passed the Export Quality Control and Inspection Act, 1963 for this purpose. and has authorised some agencies to act as inspection agencies.
(viii) Excise clearance: As per the Central Excise Tariff Act, excise duty is payable on the materials used in manufacturing goods. The exporter, therefore, has to apply to the concerned Excise Commissioner in the region with an invoice. If the Excise Commissioner is satisfied, he may issue the excise clearance.
(ix) Obtaining certificate of origin: Some importing countries provide tariff concessions or other exemptions to the goods coming from a particular country. For availing such benefits, the importer may ask the exporter to send a certificate of origin.
(x) Reservation of shipping space: The exporting firm applies to the shipping company for provision of shipping space. It has to specify the types of goods to be exported, probable date of shipment and the port of destination. On acceptance of application for shipping, the shipping company issues a shipping order.
(xi) Packing and forwarding: The goods are then properly packed and marked with necessary details such as name and address of the importer, gross and net weight, port of shipment and destination, country of origin, etc. The exporter then makes necessary arrangements for transportation of goods to the port.
(xii) Insurance of goods: The exporter then gets the goods insured with an insurance company to protect against the risks of loss or damage of the goods due to the perils of the sea during the transit.
(xiii) Customs clearance: The goods must be cleared from the customs before these can be loaded on the ship. For obtaining customs clearance, the exporter prepares the shipping bill. Shipping bill is the main document on the basis of which the customs office gives the permission for export.
(xiv) Obtaining mate’s receipt: The goods are then loaded on board the ship for which the mate or the captain of the ship issues mate’s receipt to the port superintendent. A mate receipt is a receipt issued by the commanding officer of the ship when the cargo is loaded on board, and contains the information about the name of the vessel, berth, date of shipment, description of packages, marks and numbers, condition of the cargo at the time of receipt on board the ship, etc.
(xv) Payment of freight and issuance of bill of lading: The C&F agent surrenders the mates receipt to the shipping company for computation of freight. After receipt of the freight, the shipping company issues a bill of lading which serves as an evidence that the shipping company has accepted the goods for carrying to the designated destination. In the case the goods are being sent by air, this document is referred to as an airway bill.
(xvi) Preparation of invoice: After sending the goods, an invoice of the despatched goods is prepared. The invoice states the quantity of goods sent and the amount to be paid by the importer. The C&F agent gets it duly attested by the customs.
(xvii) Securing payment: After the shipment of goods, the exporter informs the importer about the shipment of goods. The importer needs various documents to claim the title of goods on their arrival at his/her country and getting them customs cleared.
5. Your firm is planning to import textile machinery from Canada. Describe the procedure involved in importing.
Ans: The following paragraphs discuss various steps involved in a typical import transaction for bringing goods into Indian territory.
(i) Trade enquiry: The first thing that the importing firm has to do is to gather information about the countries and firms which export the given product. The importer can gather such information from the trade directories and/or trade associations and organisations. Having identified the countries and firms that export the product, the importing firm approaches the export firms with the help of a trade enquiry for collecting information about their export prices and terms of exports.
(ii) Procurement of import licence: There are certain goods that can be imported freely, while others need licensing. The importer needs to consult the Export Import (EXIM) policy in force to know whether the goods that he or she wants to import are subject to import licensing. In case goods can be imported only against the licence, the importer needs to procure an import licence.
(iii) Placing order or indent: After obtaining the import licence, the importer places an import order or indent with the exporter for supply of the specified products. The import order contains information about the price, quantity, size, grade and quality of goods ordered and the instructions relating to packing, shipping, ports of shipment and destination, delivery schedule, insurance and mode of payment. The import order should be carefully drafted so as to avoid any ambiguity and consequent conflict between the importer and exporter.
(iv) Obtaining letter of credit: If the payment terms agreed between the importer and the overseas supplier is a letter of credit, then the importer should obtain the letter of credit from its bank and forward it to the overseas supplier. As stated previously, a letter of credit is a guarantee issued by the importer’s bank that it will honour payment up to a certain amount of export bills to the bank of the exporter.
(v) Arranging for finance: The importer should make arrangements in advance to pay to the exporter on arrival of goods at the port. Advanced planning for financing imports is necessary so as to avoid huge demurrages (i.e., penalties) on the imported goods lying uncleared at the port for want of payments.
(vi) Receipt of shipment advice: After loading the goods on the vessel, the overseas supplier dispatches the shipment advice to the importer. A shipment advice contains information about the shipment of goods. The information provided in the shipment advice includes details such as invoice number, bill of lading/airways bill number and date, name of the vessel with date, the port of export, description of goods and quantity, and the date of sailing of vessel.
(vii) Retirement of import documents: Having shipped the goods, the overseas supplier prepares a set of necessary documents as per the terms of contract and letter of credit and hands it over to his or her banker for their onward transmission and negotiation to the importer in the manner as specified in the letter of credit.
(viii) Arrival of goods: Goods are shipped by the overseas supplier as per the contract. The person in charge of the carrier (ship or airway) informs the officer in charge at the dock or the airport about the arrival of goods in the importing country.
(ix) Customs clearance and release of goods: All the goods imported into India have to pass through customs clearance after they cross the Indian borders. Customs clearance is a somewhat tedious process and calls for completing a number of formalities. It is, therefore, advised that importers appoint C&F agents who are well- versed with such formalities and play an important role in getting the goods customs cleared.
6. What is the IMF? Discuss its various objectives and functions.
Ans: The International Monetary Fund (IMF) is an organisation of 190 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.The IMF has three critical missions, furthering international monetary cooperation, encouraging the expansion of trade and economic growth, and discouraging policies that would harm prosperity.
Though the process of reforms has somewhat slowed down, India is very much on the path to globalisation and integrating with the world economy. While, on the one hand, many multinational corporations (MNCs) have ventured into the Indian market to sell their products and services; many Indian companies too have stepped out of the country to market their products and services to consumers in foreign countries.
The various objective of IMF are discussed below:
(i) Promote International Monetary Cooperation: It does so by supporting economic policies that promote financial stability and monetary cooperation, which are essential to increase productivity, job creation, and economic well-being.
(ii) Facilitate Balanced Growth of International Trade: By promoting trade, the IMF aims to contribute to economic growth and reduce poverty globally. To improve and promote global monetary cooperation of the world. To secure financial stability by eliminating or minimising the exchange rate stability.
(iii) Provide Resources to Member Countries: The IMF is best known as a financial institution that provides resources to member countries experiencing temporary balance of payments problems on the condition that the borrower undertake economic adjustment policies to address these difficulties.It does so by supporting economic policies that promote financial stability and monetary cooperation, which are essential to increase productivity, job creation, and economic well-being.
(iv) Reduce Poverty and Enhance Living Standards: Through its policy advice, the IMF seeks to promote sound monetary, fiscal, and exchange rate policies to help countries achieve macroeconomic stability.Its role is to reduce poverty by lending money to the governments of its poorer members to improve their economies and to improve the standard of living of their people.
The various Functions of IMF are discussed below:
(i) Surveillance: The IMF monitors the international monetary system and global economic developments, while also engaging in regular health checks of the economic and financial policies of its 190 member countries.
(ii) Financial Assistance: Instead, the IMF provides financial support to countries hit by crises to create breathing room as they implement policies that restore economic stability and growth.
(iii) Capacity Development: Advising finance ministries on how to raise revenue enables governments to provide better public services such as schools, roads and hospitals.
(iv) Research and Data: IMF research covers a broad spectrum of macroeconomic and financial issues, including exchange rates, fiscal policy, monetary policy, and global financial stability.
(v) Financial Stability: It assesses economic conditions and recommends policies that enable sustainable growth. The IMF monitors economic and financial developments, assesses economic conditions, and recommends policies to enable sustainable growth.
7. Write a detailed note on features, structure, objectives and functioning of WTO.
Ans: The World Trade Organization (WTO) is a global organisation that regulates trade rules between its members. The World Trade Organization (WTO) is the only international organisation dealing with the rules of trade between nations. The WTO facilitates trade negotiations among countries by providing a framework to structure the agreements, as well as providing dispute resolution mechanisms.
The following are the features of WTO:
(i) Comprehensive Trade Organization: The World Trade Organization (WTO) is the only global international organisation dealing with the rules of trade between nations. Its main goal is to improve the welfare of people around the world by ensuring that trade flows as smoothly, predictably and freely as possible.
(ii) Permanent Institution: The World Trade Organization (WTO) is an intergovernmental organisation headquartered in Geneva, Switzerland that regulates and facilitates international trade. At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations and ratified in their parliaments.
(iii) Consensus-Based Decision-Making: The World Trade Organization (WTO) typically makes decisions by consensus, which means that no member formally objects to a decision.Ordinarily, decisions are made by consensus. A consensus is reached if no member formally objects to a decision.
(iv) Dispute Resolution Mechanism: The WTO dispute process begins with a consultation period, during which the affected member nations engage in negotiation and mediation.
(v) Non-Discrimination Principle: There are two basic rules of non-discrimination in WTO law: “national treatment” and “most-favoured nation treatment”. As with any area of law, there’s a rich history of interpretation of these requirements as countries challenge each other in dispute settlement and case law is established.
Function of WTO:
World Trade Organisation (WTO) and reforms carried out by the governments of different countries have also been a major contributory factor to the increased interactions and business relations amongst the nations. The national economies are increasingly becoming borderless and getting integrated into the world economy. Little wonder that the world has today come to be known as a ‘global village’. Business in the present day is no longer restricted to the boundaries of the domestic country. More and more firms are making forays into international business which presents them with numerous opportunities for growth and increased profits.
India has been trading with other countries for a long time. But it has of late considerably speeded up its process of integrating with the world economy and increasing its foreign trade and investments.
Structure of WTO:
(i) Ministerial Conference: It brings together all members of the WTO, all of which are countries or customs unions.It sets the strategic direction for the organisation and can make changes to the agreements.
(ii) General Council: It exercises all of the authority of the Ministerial Conference, which is required to meet no less than once every two years.Conducts reviews of the trade policies of member countries to ensure transparency and adherence to WTO rules.
(iii) Trade Negotiations Committee (TNC): Consisting of all WTO members and observer governments, the TNC meets whenever necessary to discuss progress in the negotiations.It is responsible for leading trade rounds.
Objective of WTO:
(i) Promoting Free and Fair Trade: The WTO is sometimes described as a “free trade” institution, but that is not entirely accurate. The system does allow tariffs and, in limited circumstances, other forms of protection.
(ii) Encouraging Economic Growth and Stability: The World Trade Organization (WTO) helps stabilise the global economy by establishing rules and regulations for international trade. The WTO’s overriding objective is to help its members use trade as a means to raise people’s living standards.
(iii) Ensuring Predictability and Transparency in Trade: Transparency and predictability of regulations and procedures at borders are widely recognized as an essential element of trade facilitation.For goods, these bindings amount to ceilings on customs tariff rates. Sometimes countries tax imports at rates that are lower than the bound rates.
