NCERT Solutions for Chapter 11 International Business Class 11 Business Studies

Three advantages of international business are:

→ Earning of foreign exchange: International business helps a country to earn foreign exchange which it can later use for meeting its imports of capital goods, technology, petroleum products and fertilisers, pharmaceutical products and a host of other consumer products which otherwise might not be available domestically.

→ More efficient use of resources: International business allows a country to produce what a country can produce more efficiently and trade the surplus production so generated with other countries to procure what they can produce more efficiently.

→ Improving growth prospects and employment potentials: International business encourages many countries, especially the developing ones to produce on a larger scale which not only helps in improving their growth prospects, but also created opportunities for employment of people living in these countries.

The major reason underlying trade between nations are:

→ Unequal distribution of natural resources among different nations.

→ Availability of various factors of production such as labour, capital and raw materials that are required for producing different goods and services differ among nations.

→ Labour productivity and production costs differ among nations due to various socio-economic, geographical and political reasons.

Licensing is an easier way to expand globally because:

→ Under the licensing system, it is the licensor who sets up the business unit and invests his/her own money in the business and the licensor has to virtually make no investments abroad. Therefore, it is considered a less expensive mode of entering into international business.

→ Licensor is paid by the licensee by way of fees fixed in advance as a percentage of production or sales turnover and licensor does not bear risk of losses.

→ Since the business in the foreign country is managed by the licensee who is a local person, there are lower risks of business takeovers or government interventions.

→ Licensee being a local person has greater market knowledge and contacts which can prove quite helpful to the licensor in successfully conducting its marketing operations.

The formalities involved in getting an export license are:

→ Opening a bank account in any bank authorised by the Reserve Bank of India (RBI) and getting an account number.

→ Obtaining Import Export Code (IEC) number from the Directorate General Foreign Trade (DGFT) or Regional Import Export Licensing Authority.

→ Registering with appropriate export promotion council.

→ Registering with Export Credit and Guarantee Corporation (ECGC) in order to safeguard against risks of non payments.

It is necessary for firm to register with an export promotion council and obtain the registration-cum-membership certificate (RCMC). This enables the firm to take advantage of the benefits made available to export firms by the government. Export promotion councils carry out various promotional activities to create demand for domestically manufactured products in the international market. By joining appropriate export promotion council a firm can get support in the form of continuous promotion of its products.

Pre-shipment inspection is a compulsory step for inspection of certain products by a competent agency as designated by the government. The government has passed Export Quality Control and Inspection Act, 1963 for this purpose. and has authorised some agencies to act as inspection agencies. If the product to be exported comes under such a category, the exporter needs to contact the Export Inspection Agency (EIA) or the other designated agency for obtaining inspection certificate.

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 differ from bill of entry in following manner:

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.

A letter of credit is a guarantee issued by the importer’s bank that it will honour up to a certain amount the payment of export bills to the bank of the exporter.

An exporter need this document as it is the most appropriate and secure method of payment adopted to settle international transactions.

After the shipment of goods, the exporter informs the importer about the shipment of goods. The exporter sends the documents like certified copy of invoice, bill of lading, packing list, etc. needed by the importer to claim the title of goods on their arrival at his/her country and getting them customs cleared. These documents are sent through exporter's banker with the instruction that these may be delivered to the importer after acceptance of the bill of exchange. The exporter's bank receives the payment through the importer's bank and is credited to the exporter's account. The exporter can get immediate payment from his/ her bank on the submission of documents by signing a letter of indemnity. After receiving the payment for exports, the exporter needs to get a bank certificate of payment which states that the necessary documents relating to the particular export consignment have been presented to the importer for payment and the payment has been received in accordance with the exchange control regulations.

International trade comprises of exports and imports of goods and forms an important component of international business. But the scope of international business has substantially expanded. International trade in services such as international travel and tourism, transportation, communication, banking, ware-housing, distribution and advertising has considerably grown. The other equally important developments are increased foreign investments and overseas production of goods and services. 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. All these activities form part of international business. So, we can say that international business is a much broader term and is comprised of both the trade and production of goods and services across frontiers.

There are many benefits that firms derive by entering into international trade:

→  Prospects for higher profits: International business can be more profitable than the domestic business as business firms can earn more profits by selling their products in countries where prices are high.

→ Increased capacity utilisation: Firms can make use of their surplus production capacities and also improving the profitability of their operations by going for overseas expansion and procuring orders from foreign customers. Production on a larger scale often leads to economies of scale, which in turn lowers production cost and improves per unit profit margin.

→ Prospects for growth:Once the market in the domestic country becomes saturated, it becomes difficult to grow the turnover. By entering into overseas markets, business firms can improve prospects of their growth.

→ Way out to intense competition in domestic market: If the competition in the domestic market is very intense, internationalisation seems to be the only way to achieve significant growth. International business thus acts as a catalyst of growth for firms facing tough market conditions on the domestic turf.

→ 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.

The exporting is better way of entering into international markets than setting up wholly owned subsidiaries abroad in following ways:

→ Exporting is less complex than setting up and wholly owned subsidiaries abroad.

→ Exporting involves lesser time and effort as business firms are not required to invest that much time and money as is needed when they set up manufacturing plants and facilities as wholly owned subsidiary in host countries.

→ Since exporting does not require much of investment in foreign countries, exposure to foreign investment risks is nil or much lower than that in establishing wholly owned subsidiary.

Rekha Garments will have to do the following tasks in order to execute the export order:

→ After receiving receipt of order, they should first makes necessary enquiry about the creditworthiness of the importer, Swift Imports Ltd. They can also demand a letter of credit by the importer’s bank that it will honour payment up to a certain amount of export bills to the bank of the exporter to minimise credit risks.

→ Becoming assured about payments, it will need to register itself and secure an Importer Exporter Code number in order to obtain an export licence.

→ After obtaining licence, this company will need to obtain pre-shipment finance from the importer’s bank in order to purchase raw materials to undertake production and packaging.

→ After obtaining the pre-shipment finance from the bank, Rekha garments proceeds to get the garments ready as per the specifications of the importer.

→ After the goods are ready, Rekha Garmets must get them inspected before exporting them. For this inspection, it must contact the Export Inspection Agency (EIA) or another designated agency for obtaining a certificate of inspection.

→ After clearing the pre-shipment inspection, it will have to obtain excise clearance from the relevant Excise Commissioner. The excise commissioner then examines the invoice and, if satisfied, issues the excise clearance to the exporter.

→ After excise clearance is received, Rekha Garments needs a certificate of origin, which specifies the country in which the goods are being produced. It allows the importer to claim tariff concessions and other exemptions, if any.

→ Now, Rekha garments 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 destination, the port of destination. On acceptance of application for shipping, the shipping company issues a shipping order.

→ The goods are then properly packed and labelled with all the necessary information such as the importer's name, port of destination, and gross and net weight of the goods, port of shipment and destination, country of origin, etc.

→ After that, Rekha garments needs to get the consignment insured against the risks involved during sea voyage.

→ The goods must be cleared from the customs before loading the goods on the ship. For getting customs clearance, the exporter must submit the necessary documents to the customs appraiser at Customs House. For obtaining customs clearance, Rekha Garments would have to prepare the shipping bill. Five copies of the shipping bill along with the other required documents would then be submitted to the Customs Appraiser at the customs house.

→ 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.

→ After the receipt of freight, the shipping company would issue a bill of lading which serves as an evidence that the shipping company has accepted the goods for carrying to the designated destination.

→ After sending the goods, an invoice of the dispatched goods would be prepared which states the quantity of goods sent and the amount to be paid by the importer and would be presented to Swift Imports Ltd. for payment.

→ The exporter then needs to send a set of documents to the banker, which are to be handed over to the importer on acceptance of a bill of exchange. After receiving the bill of exchange, the importer, Swift Imports, will instruct its bank to transfer money to the exporter's bank account.

→ Lastly, Rekha garments would be required to collect a bank certificate of payment, which will state that the necessary documents, along with the bill of exchange, have been presented to the importer for payment, and that the payment has been received in accordance with the exchange control regulations.

To import textile machinery from Canada, the firm will have to do following procedure:

→ The importing firm will have to gather information about the price of the machinery, terms and conditions on which the selected Canadian exporter is willing to supply the goods. It should then send the trade enquiry to the exporter. After gathering information, the exporter will prepare a quotation called proforma invoice and send it to our firm.

→ The importer needs to consult the Export Import (EXIM) policy to know whether the goods that he or she wants to import are subject to import licensing. If needed, it must secure an import license.

→ The firm needs to obtain the IEC number. For this, the firm needs to contact Directorate General Foreign Trade (DGFT) or the relevant Regional Import Export Authority. The IEC (Import Export Code) number needs to be quoted in almost all the relevant documents.

→ The firm must then convert domestic currency into foreign currency to make payment to the exporter. This is done by submitting an application to a bank authorised by RBI to issue foreign exchange. in the prescribed form along with documents.

→ After obtaining the import licence, the importer places an import order or indent with the exporter for supply of the specified products containing information about the price, quantity, grade and quality of machinery and the instructions relating to packing, shipping, ports of shipment and destination, delivery schedule, insurance and mode of payment.

→ The importer also needs to obtain a letter of credit from its bank. The letter of credit needs to be sent to the exporter so that the exporter gets a guarantee of payment.

→ The importer should make arrangements in advance to pay to the exporter on arrival of goods at the port. This is necessary to avoid penalties on account of any delay in payment.

→ After loading the goods at the port, the exporter sends the shipment advice to the importer. The shipment advice contains various details; such as invoice number, bill of lading/airways bill, name of vessel with date, port of export, description of goods, date of sailing vessel, etc.

→ The importer must then prepare a bill of exchange that is to be handed over to the exporter's banker in exchange for the export documents. After this is done, the importer is required to instruct its bank to transfer money to the exporter's bank account.

→ Goods will be shipped by the overseas supplier as per the contract. The officer in charge at the dock will provide the document called import general manifest on the basis of which unloading of cargo will take place.

→ The importer needs to pay certain amount of custom duty. Custom clearance is a complicated procedure. Importers usually take the services of Carrying and Forwarding (C&F) Agent for getting custom clearance. Goods are released only after custom clearance.

The various organisations that have been set up in the country by the government for promoting country's foreign trade are:

→ Department of Commerce: This department comes under the Ministry of Commerce, Government of India is the apex body responsible for formulating policies in the sphere of foreign trade, increasing commercial relations with other countries, state trading, export promotional measures and the development, and regulation of certain export oriented industries and commodities.

→ Export Promotion Councils (EPCs): These are non profit organisations registered under the Companies Act or the Societies Registration Act. The basic objective of the export promotion councils is to promote and develop the country’s exports of particular products falling under their jurisdiction.

→ Commodity Boards:These are the boards which have been specially established by the Government of India for the development of production of traditional  commodities and their exports. These boards are supplementary to the EPCs and functions are also similar.

→ Export Inspection Council of India: It was setup by the Government of India under Section 3 of the Export Quality Control and Inspection Act 1963. The council aims at sound development of export trade through quality control and pre-shipment inspection.

→ Indian Trade Promotion Organisation  (ITPO):  It was setup on 1st January 1992 under the Companies Act 1956 by the Ministry of Commerce, Government of India. Its headquarter is at New Delhi. It is a service organization which serves the industry by organizing trade fairs and exhibitions within the country and abroad and helps export firms in participating in international trade fairs and in developing exports of new items.

→ Indian Institute of Foreign Trade (IIFT): It is an institution that was setup in 1963 by the Government of India as an autonomous body registered under the Societies Registration Act with the prime objective of professionalising the country’s foreign trade management. It provides training in international business, conducts research in related areas and analyses and disseminates data related to international trade and investment.

→ Indian Institute of Packaging (IIP): It was set up as a national institute jointly by the Ministry of Commerce, Government of India, and the Indian Packaging Industry and allied interests in 1966. It is a training-cum-research institute pertaining to packaging and testing and caters to both domestic and export markets. It also undertakes technical consultancy, testing services on packaging developments, training and educational programmes, promotional award contests, information services and other allied activities.

→ State Trading Organisations: The State Trading Organisation was set up in 1956. Its main objective is to stimulate trade; primarily export with various trading partners in the world. Many other trading organizations were also set up by the government; like Metals and Minerals Trading Corporation (MMTC), Handloom and Handicrafts Export Corporation (HHEC) etc.

International Monetary Fund (IMF) is the second international organisation next to the World Bank which came into existence in 1945 has its headquarters located in Washington DC. It aimed at facilitating a system of international payments and taking care of the adjustments in exchange rates among national currencies.

The various objectives of IMF are:

→ To  promote  international monetary cooperation through a permanent institution
→ To facilitate expansion of balanced growth of international trade and to contribute thereby to the promotion and maintenance of high levels of employment and real income,
→ To promote exchange stability with a view to maintain orderly exchange arrangements among member countries
→  To assist in the establishment of a multilateral system of payments in respect of current transactions between members.

Functions of IMF are:
→ Providing short-term credit to member countries
→ Providing machinery for the orderly adjustment of exchange rates
→ Acting as a reservoir of the currencies of all the member countries, from which a borrower nation can borrow the currency of other nations
→ Acting as a lending institution of foreign currency and current transaction
→ Determining the value of a country’s currency and altering it, if needed, so as to bring about an orderly adjustment of exchange rates of member countries
→ Providing machinery for inter-national consultations.

Features of WTO are:

→ The GATT was transformed into World Trade Organisation (WTO) with effect from 1st January 1995.

→ The head quarters of WTO are situated at Geneva, Switzerland.

→ It governs trade in goods, services and intellectual property rights among the member countries.

→ It is a body created by an international treaty with the approval of the governments and legislatures of the member states.

→ The decisions of the WTO are made by the governments of the member nations on the basis of consensus.

Structure of WTO is:

→ WTO comprises of The Ministerial Conference, which is composed of international trade ministers from all member countries and is responsible for setting the strategic direction of the organization and making all final decisions on agreements under its wings. The Ministerial Conference meets at least once every two years.

→ The General Council is composed of senior representatives of all members responsible for overseeing the day-to-day business and management of the WTO.

→ The Trade Policy Review Body is also composed of all the WTO members. It periodically reviews the trade policies and practices of all member states.

→ The Dispute Settlement Body is also composed of all the WTO members and oversees the implementation and effectiveness of the dispute resolution process for all WTO agreements.

→ Council and are composed of all members. They provide a mechanism to oversee the details of the general and specific agreements on trade in goods and services.

→ The Secretariat and Director General undertakes the administrative functions of running all aspects of the organization. The Secretariat has no legal decision-making powers but provides vital services, and often advice, to those who do. The Secretariat is headed by the Director General, who is elected by the members.

→  The Committee on Trade and Development and Committee on Trade and Environment have specific mandates to focus on these relationships, which are especially relevant to how the WTO deals with sustainable development issues.

Objectives of WTO are:

→ To ensure reduction of tariffs and other trade barriers imposed by different countries

→ To engage in such activities which improve the standards of living, create employment, increase income and effective demand and facilitate higher production and trade

→ To facilitate the optimal use of the world’s resources for sustainable development

→ To promote an integrated, more viable and durable trading system.

Functions of WTO are:

→ Promoting an environment that is encouraging to its member countries to come forward to WTO in mitigating their grievances.

→ Laying down a commonly accepted code of conduct with a view to reducing trade barriers including tariffs and eliminating discriminations in international trade relations.

→ Acting as a dispute settlement body.

→ Ensuring that all the rules and regulations prescribed in the Act are duly followed by the member countries for the settlement of their disputes.

→ Holding consultations with IMF and IBRD and its affiliated agencies so as to bring better understanding and cooperation in global economic policy making.

→ Supervising on a regular basis the operations of the revised Agreements and Ministerial declarations relating to goods, services and Trade Related Intellectual Property Rights (TRIPS).