International Business — NCERT Solutions

Given: We need to justify the statement that international business is broader than international trade.

Concept Used: International trade refers only to import and export of goods and services, while international business encompasses all commercial activities conducted across national borders.

Explanation:

The statement is absolutely correct. International business is indeed much more than international trade. The following points justify this:

1. International Trade — A Component of International Business:
International trade involves only the cross-border movement of goods (merchandise trade) and services (invisible trade). It is limited to buying and selling activities between countries. International business, on the other hand, includes international trade as just one of its many components.

2. Other Forms of International Business:
International business includes several other modes of conducting business across borders:

(a) Licensing: A firm (licensor) in one country grants permission to a firm (licensee) in another country to use its intellectual property (patents, trademarks, technology) in exchange for a fee or royalty. No physical movement of goods takes place.

(b) Franchising: Similar to licensing, a franchisor allows a franchisee in a foreign country to operate under its brand name and business model (e.g., McDonald's, KFC operating in India).

(c) Contract Manufacturing: A firm contracts with a foreign manufacturer to produce goods as per its specifications. The firm retains marketing control.

(d) Joint Ventures: Two or more firms from different countries come together to form a new business entity, sharing ownership, risks, and profits.

(e) Wholly Owned Subsidiaries: A firm sets up its own 100% owned production or marketing subsidiary in a foreign country (e.g., Hyundai's manufacturing plant in India).

(f) Management Contracts: A firm provides managerial expertise to a foreign firm in exchange for a fee.

3. Movement of Factors of Production:
International business also involves the international movement of capital (Foreign Direct Investment), technology, and human resources — none of which are covered under international trade.

4. Broader Objectives:
While international trade aims at earning foreign exchange through exports and meeting domestic needs through imports, international business aims at global market expansion, resource acquisition, risk diversification, and achieving competitive advantage.

Conclusion:
International trade is merely the exchange of goods and services across borders, whereas international business encompasses a wide range of activities including production, marketing, investment, licensing, and franchising in foreign countries. Therefore, it is rightly said that international business is more than international trade.

Given: We need to discuss the benefits that firms gain by entering international business.

Benefits Derived by Firms from International Business:

1. Prospects for Higher Profits:
Firms enter international markets to earn higher profits. When domestic markets are saturated or profit margins are low, foreign markets offer better price realisations and higher profit opportunities. For example, Indian pharmaceutical companies earn higher profits by exporting medicines to developed countries.

2. Increased Capacity Utilisation:
Many firms invest in large-scale production facilities to achieve economies of scale. When domestic demand is insufficient to utilise full capacity, exporting the surplus production to foreign markets helps in better utilisation of installed capacity, thereby reducing per-unit cost.

3. Prospects for Growth:
Domestic markets may become saturated over time, limiting a firm's growth. International business provides access to larger global markets, enabling firms to achieve higher sales volumes, revenues, and growth rates.

4. Way Out to Intense Domestic Competition:
In highly competitive domestic markets, firms may find it difficult to maintain their market share and profitability. Entering international markets provides an alternative avenue for growth and reduces dependence on the domestic market.

5. Improved Business Vision:
Operating in international markets exposes firms to global best practices, advanced technologies, and innovative management techniques. This improves the overall competitiveness and business vision of the firm.

6. Diversification of Risk:
By operating in multiple countries, firms can spread their business risk. A recession or downturn in one country may be offset by growth in another, thereby stabilising the firm's overall revenues and profits.

7. Enhanced Reputation and Brand Image:
Successful international operations enhance a firm's reputation and brand image both globally and domestically. Being recognised as a global player adds to the firm's credibility and competitive strength.

8. Access to Resources:
International business enables firms to access raw materials, technology, skilled labour, and capital that may not be available or may be expensive in the domestic market.

Conclusion: International business offers firms numerous strategic and financial benefits — from higher profits and growth to risk diversification and enhanced competitiveness — making it an attractive proposition for firms seeking long-term success.

Given: We need to compare exporting with setting up wholly owned subsidiaries as modes of entering international markets.

Exporting as a Mode of Entry:
Exporting involves producing goods in the home country and selling them in foreign markets. It is the simplest and most traditional form of international business.

Wholly Owned Subsidiary:
A wholly owned subsidiary involves setting up a 100% owned production or marketing facility in the foreign country. It requires substantial investment and long-term commitment.

Ways in which Exporting is Better than Wholly Owned Subsidiaries:

1. Lower Investment and Financial Risk:
Exporting requires minimal capital investment — the firm only needs to produce goods and arrange for their shipment. Setting up a wholly owned subsidiary requires massive investment in land, plant, machinery, and infrastructure in a foreign country, involving very high financial risk.

2. Ease of Entry and Exit:
Exporting is easy to start and easy to stop. If the foreign market does not respond well, the firm can simply stop exporting without significant losses. Exiting a wholly owned subsidiary is extremely difficult and costly due to large sunk costs.

3. No Political and Legal Complications:
Setting up a subsidiary in a foreign country involves complying with the host country's laws, regulations, labour laws, environmental norms, and tax laws. Exporting avoids most of these legal and political complications.

4. No Risk of Nationalisation or Expropriation:
Wholly owned subsidiaries face the risk of being nationalised or taken over by the host country government, especially in politically unstable countries. Exporters do not face this risk.

5. Flexibility:
Exporting allows firms to serve multiple foreign markets simultaneously without being tied to any single country. A wholly owned subsidiary commits the firm to one specific location.

6. Suitable for Small and Medium Enterprises:
Not all firms have the financial resources and managerial expertise to set up foreign subsidiaries. Exporting is accessible even to small and medium-sized enterprises.

7. Lower Managerial Complexity:
Managing a foreign subsidiary requires dealing with cultural differences, language barriers, local labour issues, and foreign management practices. Exporting is operationally simpler.

However, Limitations of Exporting:

• High transportation costs and import tariffs may make exports uncompetitive.
• The firm has limited control over marketing and distribution in the foreign market.
• Exporting does not allow the firm to benefit from lower production costs in the host country.

Conclusion: For firms that are new to international business, have limited resources, or want to test foreign markets before committing large investments, exporting is a safer, simpler, and more flexible mode of entry compared to setting up wholly owned subsidiaries abroad.

Given: Rekha Garments has received an export order for 2000 men's trousers to be sent to Swift Imports Ltd., Australia.

Export Procedure to be followed by Rekha Garments:

Step 1: Receipt of Enquiry and Sending Quotation
Rekha Garments receives a trade enquiry from Swift Imports Ltd. and sends a detailed quotation (proforma invoice) specifying price, quality, quantity, delivery terms, and payment terms.

Step 2: Receipt of Order (Indent)
Swift Imports Ltd. places a confirmed purchase order (indent) with Rekha Garments specifying the details of the goods required.

Step 3: Obtaining Export Licence
Rekha Garments checks whether an export licence is required for exporting garments. For most garments, no specific licence is needed, but the firm must be registered with the relevant Export Promotion Council (e.g., Apparel Export Promotion Council — AEPC).

Step 4: Opening of Letter of Credit
Rekha Garments requests Swift Imports Ltd. to arrange for a Letter of Credit (L/C) to be opened in its favour through an Australian bank. This provides payment security to the exporter.

Step 5: Arrangement of Pre-shipment Finance
Rekha Garments approaches its bank for pre-shipment finance (packing credit) to finance the procurement of raw materials and production of the export order.

Step 6: Production/Procurement of Goods
Rekha Garments manufactures 2000 men's trousers as per the specifications mentioned in the export order.

Step 7: Pre-shipment Inspection
Rekha Garments arranges for inspection of the goods by an authorised agency under the Export (Quality Control and Inspection) Act, 1963. Upon satisfactory inspection, a Certificate of Inspection is issued.

Step 8: Excise Clearance
Rekha Garments obtains excise clearance (if applicable) and packs the goods properly. A packing list is prepared.

Step 9: Obtaining Certificate of Origin
Rekha Garments obtains a Certificate of Origin from the AEPC or Chamber of Commerce, certifying that the goods are manufactured in India. This may entitle Swift Imports Ltd. to preferential tariff treatment in Australia.

Step 10: Reservation of Shipping Space
Rekha Garments (or its C&F agent) books shipping space with a shipping company and obtains a Shipping Order.

Step 11: Customs Clearance and Shipping Bill
Rekha Garments files a Shipping Bill with the customs authorities. After customs examination and clearance, the goods are allowed to be loaded on the ship. The customs officer endorses the shipping bill with Let Export Order.

Step 12: Loading of Goods and Receipt of Bill of Lading
The goods are loaded onto the ship. The shipping company issues a Bill of Lading acknowledging receipt of goods for transportation to Australia.

Step 13: Obtaining Marine Insurance
Rekha Garments obtains a Marine Insurance Policy to cover the risk of loss or damage to goods during transit.

Step 14: Preparation of Invoice
Rekha Garments prepares a Commercial Invoice giving details of the goods, quantity, price, and total value.

Step 15: Negotiation of Documents and Receipt of Payment
Rekha Garments submits the complete set of documents (Commercial Invoice, Bill of Lading, Certificate of Origin, Certificate of Inspection, Marine Insurance Policy, Packing List, and Bill of Exchange) to its bank (negotiating bank). The bank scrutinises the documents against the L/C and makes payment to Rekha Garments. The documents are then forwarded to the opening bank in Australia, which hands them over to Swift Imports Ltd. upon payment.

Step 16: Shipment Advice
Rekha Garments sends a Shipment Advice to Swift Imports Ltd. informing them about the shipment details (vessel name, date of sailing, expected arrival, etc.).

Step 17: Claiming Export Incentives
After the export is complete, Rekha Garments can claim export incentives such as Duty Drawback (refund of customs/excise duty paid on inputs used in export production) from the government.

Conclusion: The export procedure involves multiple steps from receiving the order to securing payment and claiming incentives. Proper documentation and compliance at each stage is essential for the smooth execution of the export order.

Given: Our firm plans to import textile machinery from Canada.

Import Procedure:

Step 1: Trade Enquiry
Our firm sends a trade enquiry to the Canadian supplier (or their Indian agent) requesting information about the price, quality, specifications, delivery terms, and payment terms for the textile machinery.

Step 2: Obtaining Import Licence
Our firm checks whether an import licence is required for importing textile machinery. Capital goods like textile machinery are generally placed under the Open General Licence (OGL) and do not require a specific import licence. However, the firm must have an Importer-Exporter Code (IEC) issued by the Director General of Foreign Trade (DGFT).

Step 3: Obtaining Foreign Exchange
Since payment has to be made in Canadian dollars (or US dollars), our firm applies to its bank for foreign exchange as per the provisions of the Foreign Exchange Management Act (FEMA).

Step 4: Placing the Order (Indent)
After finalising the terms, our firm places a purchase order (indent) with the Canadian supplier specifying the machinery details, quantity, price, delivery schedule, and payment terms.

Step 5: Opening a Letter of Credit
Our firm requests its bank (opening bank) to open a Letter of Credit (L/C) in favour of the Canadian supplier. This assures the supplier of payment upon submission of required documents.

Step 6: Shipment of Goods by the Supplier
The Canadian supplier ships the machinery and sends the following documents to our bank through their bank:

• Commercial Invoice
• Bill of Lading
• Certificate of Origin
• Packing List
• Marine Insurance Policy
• Inspection Certificate

Step 7: Receipt of Shipment Advice
The Canadian supplier sends a Shipment Advice to our firm informing us about the vessel name, date of shipment, bill of lading number, and expected date of arrival.

Step 8: Arrival of Goods and Import General Manifest
When the ship arrives at the Indian port, the shipping company files an Import General Manifest (IGM) with the port authorities giving details of all cargo on board.

Step 9: Bill of Entry
Our firm (or its C&F agent) files a Bill of Entry with the customs authorities. The Bill of Entry contains details of the imported goods — description, quantity, value, country of origin, and the customs tariff heading. It is filed in triplicate:

• Home Consumption Copy (if goods are for direct use)
• Warehousing Copy (if goods are to be stored in a bonded warehouse)
• Ex-Bond Copy (when goods are removed from the warehouse)

Step 10: Customs Assessment and Payment of Import Duty
The customs authorities assess the Bill of Entry, verify the documents, and determine the applicable import duty. Our firm pays the customs duty (basic customs duty, IGST, etc.) as assessed.

Step 11: Release Order and Delivery
After payment of customs duty, the customs authorities issue a Release Order (also called a Delivery Order). Our firm presents this to the port authorities along with the Port Trust Dues Receipt (payment of port charges) to take delivery of the machinery.

Step 12: Making Payment to the Supplier
Our bank (opening bank) makes payment to the Canadian supplier's bank (negotiating bank) as per the terms of the L/C, and debits our account accordingly.

Conclusion: The import procedure involves several legal, financial, and logistical steps. Proper documentation and compliance with customs regulations are essential for the smooth and timely clearance of imported goods.

Given: We need to explain the IMF, its objectives, and functions.

International Monetary Fund (IMF):

The International Monetary Fund (IMF) is an international financial institution established in 1944 at the Bretton Woods Conference held in New Hampshire, USA. It came into existence in 1945 and began operations in 1947. Its headquarters is in Washington D.C., USA. Currently, it has 190 member countries. India is a founding member of the IMF.

The IMF was established to promote international monetary cooperation, facilitate international trade, and provide financial assistance to member countries facing balance of payments difficulties.

Objectives of IMF:

1. Promote International Monetary Cooperation: To provide a forum for consultation and collaboration on international monetary problems among member countries.

2. Facilitate Expansion of International Trade: To facilitate the balanced growth of international trade and thereby contribute to high levels of employment and real income.

3. Promote Exchange Rate Stability: To promote exchange rate stability, maintain orderly exchange arrangements among members, and avoid competitive currency devaluations.

4. Establish Multilateral System of Payments: To assist in the establishment of a multilateral system of payments in respect of current transactions between members and eliminate foreign exchange restrictions.

5. Provide Financial Assistance: To make the general resources of the Fund temporarily available to member countries facing balance of payments difficulties, under adequate safeguards.

6. Shorten Duration and Lessen Degree of Disequilibrium: To shorten the duration and lessen the degree of disequilibrium in the international balance of payments of members.

Functions of IMF:

1. Regulatory Function:

• The IMF acts as a regulatory body by overseeing the international monetary system.
• It monitors the exchange rate policies of member countries and ensures that they follow the agreed code of conduct.
• It promotes exchange rate stability and discourages competitive devaluations.

2. Financial Function:

• The IMF provides financial resources to member countries facing balance of payments problems.
• It lends money from its pool of funds (contributed by member countries as quotas) to help countries stabilise their currencies and restore economic balance.
• Various lending facilities include: Stand-By Arrangements, Extended Fund Facility, Poverty Reduction and Growth Facility, etc.

3. Consultative/Advisory Function:

• The IMF provides a forum for member countries to consult each other on monetary and financial issues.
• It provides technical assistance and policy advice to member countries on fiscal policy, monetary policy, exchange rate policy, and financial sector reforms.
• It conducts regular Article IV Consultations with member countries to review their economic policies.

4. Surveillance Function:

• The IMF monitors the economic and financial policies of member countries and the global economy.
• It publishes regular reports such as the World Economic Outlook and Global Financial Stability Report to assess global economic trends.

5. Special Drawing Rights (SDR):

• The IMF created Special Drawing Rights (SDR) as an international reserve asset to supplement member countries' official reserves.
• SDRs can be used by member countries to settle international payments.

Conclusion: The IMF plays a crucial role in maintaining international monetary stability, facilitating global trade, and providing financial support to countries in economic distress. It is one of the most important pillars of the international economic order.

Given: We need to write a detailed note on the WTO covering its features, structure, objectives, and functioning.

World Trade Organisation (WTO):

Introduction:
The World Trade Organisation (WTO) is the only international organisation that deals with the rules of trade between nations. It was established on 1st January 1995, replacing the General Agreement on Tariffs and Trade (GATT) which had been in existence since 1948. The WTO is headquartered in Geneva, Switzerland. It currently has 164 member countries (as of 2016), accounting for over 98% of world trade. India is a founding member of the WTO.

Features of WTO:

1. Permanent International Organisation: Unlike GATT, which was a provisional agreement, the WTO is a permanent international organisation with a proper legal framework and institutional structure.

2. Broader Scope: While GATT dealt only with trade in goods, the WTO covers trade in goods, services (GATS — General Agreement on Trade in Services), and intellectual property rights (TRIPS — Trade-Related Aspects of Intellectual Property Rights).

3. Most Favoured Nation (MFN) Principle: Under this principle, any trade advantage given by a WTO member to one country must be extended to all other WTO members. This ensures non-discrimination in international trade.

4. National Treatment Principle: Imported goods, once they have entered a country's market (after paying customs duty), must be treated the same as domestically produced goods.

5. Transparency: WTO requires member countries to make their trade policies and regulations transparent and publicly available.

6. Dispute Settlement Mechanism: WTO has a binding dispute settlement mechanism. If a member country believes another member is violating WTO rules, it can bring the case to the WTO's Dispute Settlement Body (DSB) for resolution.

7. Trade Liberalisation: WTO promotes free trade by encouraging member countries to reduce tariffs, eliminate non-tariff barriers, and open their markets.

Structure of WTO:

1. Ministerial Conference: The highest decision-making body of the WTO. It meets at least once every two years and is composed of trade ministers from all member countries. It has the authority to take decisions on all matters under any WTO agreement.

2. General Council: The day-to-day work of the WTO is handled by the General Council, which is composed of ambassadors and heads of delegations of member countries based in Geneva. It also functions as the Dispute Settlement Body (DSB) and the Trade Policy Review Body (TPRB).

3. Councils: Three main councils operate under the General Council:

• Council for Trade in Goods (oversees GATT)
• Council for Trade in Services (oversees GATS)
• Council for Trade-Related Aspects of Intellectual Property Rights (oversees TRIPS)

4. Committees and Working Groups: Various committees and working groups handle specific areas such as agriculture, textiles, environment, development, etc.

5. Secretariat: The WTO Secretariat, headed by the Director-General, provides administrative and technical support to the organisation.

Objectives of WTO:

1. To raise standards of living and ensure full employment in member countries.
2. To ensure growth of real income and effective demand.
3. To expand production of and trade in goods and services.
4. To ensure optimal use of the world's resources in accordance with the objective of sustainable development.
5. To protect and preserve the environment.
6. To integrate developing countries and least-developed countries into the world trading system.
7. To reduce tariffs and other trade barriers and eliminate discriminatory treatment in international trade.

Functioning of WTO:

1. Trade Negotiations: The WTO provides a forum for member countries to negotiate trade agreements aimed at reducing trade barriers. Major negotiating rounds include the Uruguay Round (which created the WTO) and the ongoing Doha Development Round (launched in 2001).

2. Implementation of Agreements: The WTO ensures that member countries implement and adhere to the trade agreements they have signed. It monitors compliance through regular reviews.

3. Dispute Settlement: The WTO's Dispute Settlement Mechanism is one of its most important functions. When a member country believes another member is violating WTO rules, it can:

• Request consultations with the offending country.
• If consultations fail, request the establishment of a Panel to examine the case.
• Appeal the Panel's ruling to the Appellate Body.
• The rulings of the Appellate Body are binding on member countries.

4. Trade Policy Review: The WTO regularly reviews the trade policies of member countries through the Trade Policy Review Mechanism (TPRM) to ensure transparency and compliance with WTO rules.

5. Technical Assistance and Capacity Building: The WTO provides technical assistance and training to developing and least-developed countries to help them understand WTO rules and participate effectively in international trade.

6. Cooperation with Other Organisations: The WTO cooperates with the IMF, World Bank, and other international organisations to achieve coherence in global economic policy-making.

Conclusion:
The WTO is the cornerstone of the international trading system. By promoting free, fair, and non-discriminatory trade, providing a forum for negotiations, and resolving trade disputes, the WTO plays a vital role in fostering global economic growth and development. For developing countries like India, the WTO provides both opportunities (access to global markets) and challenges (competition from developed countries), making active and informed participation in WTO negotiations crucial.