International Business

International trade is only the exchange of goods and services across national borders, i.e. exports and imports.

International business is a broader term. It includes international trade, but also includes foreign investment, production in foreign countries, licensing, franchising, contract manufacturing, and movement of capital, personnel, technology and intellectual property across frontiers.

So, international trade is only one part of international business.

Any three advantages are:

1. Earning foreign exchange: A country earns foreign exchange through exports, which can be used to pay for imports of capital goods, petroleum, technology, fertilisers and other products.
2. More efficient use of resources: Countries can specialise in producing goods they can make more efficiently and trade their surplus for other goods. This leads to better utilisation of resources.
3. Improving growth prospects and employment: International business allows firms and countries to produce on a larger scale, increase exports, expand output and create more jobs.

Other advantages mentioned in the chapter include higher profits for firms, better capacity utilisation, and improved standard of living.

The major reason is that countries cannot produce equally well or cheaply all the goods they need. This happens because of unequal distribution of natural resources and differences in productivity, labour, capital, raw materials, technology and production costs. Therefore, countries trade with one another.

Contract manufacturing means a foreign firm enters into a contract with local manufacturers in another country to get components or goods produced as per its specifications. The local producer carries out production or assembly, and the international firm receives the goods.

A wholly owned subsidiary abroad is when the parent company makes 100% investment in the equity capital of the foreign company and gets full control over its operations. It may be set up as a new greenfield venture or by acquiring an existing firm.

### Difference
- Ownership: Contract manufacturing is based on a contract with local producers; a wholly owned subsidiary is fully owned by the parent company.
- Investment: Contract manufacturing needs little or no investment abroad; a wholly owned subsidiary requires 100% equity investment.
- Control: In contract manufacturing, control over production is limited; in a wholly owned subsidiary, the parent has full control.
- Risk: Contract manufacturing involves less investment risk; wholly owned subsidiaries involve higher financial and political risk.
- Technology disclosure: In contract manufacturing, the firm may depend on local producers; in a wholly owned subsidiary, the parent can keep tighter control over technology and trade secrets.

Pre-shipment inspection is necessary to ensure that only good quality products are exported. The government has made inspection compulsory for certain products so that exported goods meet the required quality standards.

It also helps because:
- it protects the reputation of the exporter and the country,
- it is often required for obtaining the inspection certificate,
- and it supports better acceptance of goods in foreign markets.

Such inspection is done by the Export Inspection Agency (EIA) or other designated agency where required.

A bill of lading is a document issued by the shipping company after goods are loaded on board its vessel. It serves as:
- an official receipt for the goods,
- an undertaking to carry them to the destination, and
- a document of title to the goods.

Difference from bill of entry:
- Bill of lading is a shipping document used in export/import shipment and proves that the carrier has received the goods.
- Bill of entry is a customs document filled by the importer for assessment of import duty and customs clearance.
- Bill of lading is issued by the shipping company; bill of entry is supplied by the customs office and submitted by 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 the export bills to the exporter’s bank.

An exporter needs this document because it:
- gives assurance of payment,
- reduces the risk of non-payment by the importer,
- and is described in the chapter as the most appropriate and secure method of payment in international transactions.

The process of securing payment for exports is as follows:

1. After shipment, the exporter informs the importer about the dispatch of goods.
2. The exporter sends the required documents through his/her banker, including invoice, bill of lading, packing list, insurance policy, certificate of origin and letter of credit, along with a bill of exchange.
3. The documents are negotiated through the bank. This is called negotiation of documents.
4. The bank delivers the documents to the importer only after the importer:
- makes payment in the case of a sight draft, or
- accepts the bill in the case of a usance draft.
5. The importer’s bank sends the payment to the exporter’s bank, and the amount is credited to the exporter’s account.
6. If immediate payment is needed, the exporter may obtain it from his/her bank by signing a letter of indemnity.
7. After payment is received, the exporter gets a bank certificate of payment as proof that the export proceeds have been realised according to exchange control regulations.