Class 11-commerce NCERT Solutions Business Studies Chapter 11: International Business- I

Advantages of international business:

1. Improves the standard of living: Every nation cannot produce all the goods which are required for their day-to-activity. Some nations produce goods in plenty, but those goods may not be produced in few other nations as either the raw materials are not available or the cost of production is high. So, the people cannot satisfy their wants in their home country. Hence, goods can be imported from other nations to satisfy their requirements. In this way, import of goods from other nations develops international business and thus improves the standard of living of the people.
2. International cooperation: International business enables good relations with trading nations. As the business activities develop with the other nations, they tend to understand each other's culture, problems and share the benefits. This leads to a helping tendency among every nation in times of problems such as famine, flood, earthquake or other natural calamity.
3. Specialisation: Every nation engages in the production of a particular good for which the required amount of raw materials and other natural resources are available in abundance and low cost. This enables them to specialise in the production process. 

Reasons for encouraging trade between nations:

1. Overcome the limitation of scarcity: Natural resources are not equally available among nations. Some nations may be rich in minerals, while other nations may be rich in agricultural products. So, the nation which faces a shortage of oil and petroleum products such as India can import from a nation which is abundant in the production of that product. This enables different nations to bridge the gap which they may face due to the shortage of certain goods.
2. Maximising the profit through better utilisation of resources: Some nations which have surplus natural resources at low price can export to other nations to earn a good value for their product. While certain nations import goods at a low rate from other nations which are expensive to produce within the nation. Therefore, every nation can maximise their profit by either import or export of goods for better utilisation of available resources. 

Licensing is an easier way to expand globally because of the following:

1. Low investment: Licensor does not make heavy investments in international firms, and thus, it is cost effective and an easy mode to enter international business.
2. Low interference of the government: Business transactions in the production and sale of goods are controlled and maintained by a local person called licensor. Therefore, there is less scope of government interference in business dealings and it is easy to enter international business.
3. Control over copyrights and brand names: Parties involved in the contract are entitled to use the licensor's copyrights, trademarks and brand names in international business. Therefore, other firms cannot use the brand name in the international market or have control over the copyright. 

International business is the movement of capital, personnel, technology and intellectual property such as patents, trademarks, know-how and copyrights across countries. While international trade is only exchange of goods and services between two or more countries in foreign currency. The scope of international business is not restricted to international trade but more to international trade activities. Therefore, international business is more than international trade.

Points highlighting the major operations of international business compared to international trade:

1. International trade in services such as banking, travel and tourism and other services is the major operation of international business.
2. Licensing and franchising are the activities of international business. Licensing is a contractual agreement in which a firm grants access to its trademarks, patents or technology to another firm in a foreign country for a fee. On the other hand, franchising is when a parent company grants another independent entity the right to do business in a specified manner.
3. Direct and portfolio investments are the components of foreign investment in international business. Foreign investments are funds raised from abroad in exchange for financial return. Direct investment means a company directly invests in properties such as machinery in foreign countries to produce and market goods and services in those countries. Portfolio investment is when a company makes an investment in another company by way of acquiring shares or loans to earn income in the form of dividend or interest on loans. 

Firms derive the following benefits by entering international trade:

1. Scope for higher profits: Goods which are domestically produced are sold at a low price in the domestic market. As price differences exist across countries, the same product can be sold at higher prices in other countries. Therefore, a firm can derive benefits by entering international trade.
2. Enhanced capacity utilisation: A firm may enhance the production capacities of their products which are highly demanded in the domestic market. These excess production capacities can be used to increase international trade by receiving orders from foreign customers and to improve the profit of their operations.
3. Prospects for growth: A firm may reach the saturation point at which the production of goods in the domestic market will be more than the demand for the product. Such firms can start overseas operations for their products and thus improve growth prospects.  
4. Intense competition in domestic market: If a firm faces tough competition in the domestic market, then such firms can sell their products in the international market.
5. Improved business vision: Growth of international business can be achieved only through appropriate policies and strategies of company's management. Therefore, companies diversify their production activities and become more competitive to gain the benefits of international trade. 

Export is selling goods and services from the home country to a foreign country. On the other hand, a wholly owned subsidiary is another mode of entry which permits the greatest degree of control over overseas operations. The parent company holds 100% equity capital in the international business to exercise full control over their overseas operations.

The following points highlight that exporting is a better way of entering international markets compared to setting up wholly owned subsidiaries abroad:

1. Less complexity: It is the easiest way to enter international markets compared to other modes because the steps involved in setting up joint ventures or whole owned subsidiaries are more complex.
2. Low investment: This mode of entry in the international market does not require more investment in foreign countries, and hence, there is no risk involved in this business. Also, the time and energy required for business operation is less compared to wholly owned subsidiaries.
3. Low risk: When investment is low, there is less exposure to risk. 100% equity capital is owned by the parent company which is exposed to high risk in operations in the wholly owned subsidiary in another country.  

Formalities involved in getting an export license:

1. The exporter should have a working bank account authorised by the Reserve Bank of India.
2. An exporter needs to obtain the Import Export Code (IEC) number, a 10-digit number, which is obtained after submitting documents such as the exporter's profile, prescribed certificates, two attested photographs and details of non-resident interest with the Directorate General for Foreign Trade (DGFT) or the Regional Import Export Licensing Authority.
3. The exporter needs to register with export promotion council. Export promotion council issues the Registration-cum-Membership Certificate (RCMC) which enables an exporter to take advantage of the benefits such as the export license made available to export firms by the government.
4. To protect itself from any uncertainties in payments brought upon by political or commercial risks, an exporter must get registered with the Export Credit and Guarantee Corporation (ECGC). 

An exporter needs to register with an export promotion council to get a Registration-cum-Membership Certificate (RCMC). These councils provide certain benefits and incentives to exporters like duty exemptions.

As required by the Government of India, every good which needs to be shipped should go for a pre-shipment inspection so as to ensure that only good quality products are exported form the country. Established under Section 3 of the Export Quality Control and Inspection Act, 1963, the Export Inspection Agency (EIC) ensures sound export through quality control and pre-shipment inspections. Goods meant for export are to pass quality inspection by the EIC to establish standard of quality. Inspection is not required when goods are exported by star trading houses, export houses, 100% export-oriented units and industrial units set up in export processing zones (EPZs) or special economic zones (SEZs).

Bill of lading is the official contract between the exporter and the shipping company issued post-shipment for the carriage of goods between the ports of loading and destination. It is issued by the shipping company concerned and is considered a token of acceptance that the goods have been put on board in its vessel. It is prepared on the basis of mate's receipt. They are freely transferable.

In contrast, a bill of entry is required at the time of an import transaction. After the goods have been received, the importer issues a formal declaration known as the bill of entry for the verification of customs duty. It contains information such as the name and address of the importer, name of the ship in which the goods were transported and number of packages. The importer fills in the bill form and returns it to the customs office which verifies the contents of the shipment and determines the required tariffs and taxes which need to be applied on the goods.

Mate's receipt specifies the goods exported, its description, date of shipment of goods, the ship's name, marks and numbers on the packages and the cargo's condition. It is issued to the exporter by the captain or commanding officer (mate) of the ship after an inspection of goods. The receipt acts as evidence that the exporter's cargo has been loaded on the ship.

Letter of credit is issued by the importer's bank to assure the exporter that there will not be any risk of non-payment. Thus, to validate the credit worthiness of the importer, the exporter, before passing the export order, desires to have a proof regarding the payment or rather asks for the letter of credit. It is considered the most reliable method of payment to make international transactions.

Process involved in securing payment for exports:

1. The exporter informs the importer after the shipment of goods.
2. For the importer to claim the title of goods on arrival at the destination, the exporter sends documents such as letter of credit, certificate of origin, bill of lading, invoice copy and packaging list. These documents provided by the exporter's bank will be received by the importer only when the bill of exchange has been signed and accepted by the importer.
3. The importer's bank releases the payment on maturity of the bill of exchange.
4. After the payment is received, the exporter receives a bank certificate which states that the details of that particular consignment have been presented to the importer for payment and that the payment has been received in accordance with the exchange control regulations. 

Procedure to be followed for executing the export order:

• Obtaining letter of credit: First, the exporter Rekha Garments needs to obtain a letter of credit from the importer Swift Imports Ltd. so that it can protect itself from risks related to non-payment.
• Obtaining export license: The exporter needs the IEC number to obtain the export license. The IEC number can be procured from the Directorate General Foreign Trade or from the Regional Import Export Licensing Authority.
• Arranging pre-shipment finance and producing goods: After receiving the license, the company needs to collect finance from the bank so as to purchase raw materials, get garments made and then transport the final products to consumers.
• Pre-shipment inspection: After the production of garments, the company needs to get its pre-shipment inspected. Inspection is performed so that the importer receives only quality goods. This can be done with the help of the Export Inspection Agency or any other designated agency.
• Excise clearance: After pre-shipment inspection, the exporter needs to attain excise clearance from the regional excise commissioner.
• Obtaining certificate of origin: Certificate of origin is sent to the importer by the exporter so that the importer can avail tariff concessions, if applicable. It shows the country in which the goods are produced.
• Reserving shipping space: The exporter needs to reserve a shipping space for their shipments. This can be done by applying to a shipping company along with necessary details such as the type of goods to be shipped, date of shipment and destination of shipment. The company issues a shipping order after being satisfied with the application.
• Packing and forwarding: After receiving the shipping order, the company needs to pack the goods which have to be shipped. They need to mention the necessary details-name with address of the importer, gross and net weight of the shipment, origin of country and destination. The company needs to arrange for proper transport of goods to the destination.
• Insuring goods: The company needs to insure its shipment to safeguard goods from all possible risks.
• Getting customs clearance: The exporter needs to get clearance of goods from the customs department by preparing the shipping bill. Along with five copies of the shipping bill, the company also needs to submit the export order, letter of credit, commercial invoice, certificate of origin, certificate of inspection and marine insurance policy.
• Obtaining mate's receipt: After loading of the assignment, the captain of the ship issues the mate's receipt, thereby helping in further processes. 

Procedure involved in importing textile machinery from Canada:

1. Trade enquiry: It is a request by an importer to different exporters to provide information regarding the price and terms and conditions of goods. After receiving a trade enquiry, the exporter provides the details of goods such as quality, size, weight, price and terms and conditions in the quotation form which is known as pro forma invoice.
2. Procurement of import license: The exporter needs to have the IEC number as it has to be quoted in all import documents. For this, the company needs to contact the Directorate General of Foreign Trade (DGFT) or the relevant Regional Import Export Authority.
3. Obtaining foreign exchange: The importer requires the currency of the exporter's country to purchase goods. However, many nations usually accept the US dollar to conduct international transactions. In this regard, banks and many authorised dealers provide foreign exchange.
4. Placing order or indent: Import order or indent is placed by the importer to the exporter.  This order contains details such as price, size, grade, quality of goods and instructions related to shipping, packing, port of shipment and destination.
5. Obtaining letter of credit: Letter of credit is obtained by the importer from its bank and then sent to the exporter. It ensures that there will be no non-payment risk from the importer's side.
6. Arranging for finance: This step involves arranging finance for the payment of imported goods which needs to be paid at the time of arrival of goods at the port. It is essential to make advance arrangement of finance so as to avoid penalties for imported goods which have not been cleared at the port.
7. Receipt of shipment advice: Shipment advice is sent by the exporter to importer when the goods are loaded on the vessel. It contains various details such as invoice number, bill of lading/airways bill, name of vessel with date, port of export, description of goods and date of sailing vessel.
8. Retirement of import documents: The exporter prepares various documents according to terms of contract and letter of credit when the goods are shipped. These documents are handed over to the banker for transmission and negotiation to the importer.
9. Arrival of goods: The ship in-charge informs the importing country about the arrival of goods and prepares a document containing the details of the imported goods known as import general manifest. This document helps in unloading of goods.
10. Custom clearance and release of goods: Custom clearance is a complex procedure as it involves many formalities. Thus, the importer hires a CandF agent who helps in clearing the goods from customs. Goods are released when they are cleared by customs. 

Organisations set up in the country by the government for promoting the country's foreign trade:

1. Department of Commerce is an apex body which looks into India's external trade. It was set up to ensure that measures were taken to develop commercial relations with other countries. As a result, policies relating to external trade and import and export were formulated.
2. Export Promotion Councils (EPCs): As the case may be, these are registered under the Companies Act or the Societies Registration Act. This council is a non-profit organisation whose objective is to increase the country's exports of specific products under its jurisdiction.
3. Commodity Boards: They are set up by the Government of India with the purpose of promoting production of traditional commodities and their export. These boards augment EPCs.
4. Export Inspection Council (EIC): The Government of India under Section 3 of the Export Quality Control and Inspection Act, 1963, brought this Council into existence with the intention to improve export-related practices.
5. Indian Trade Promotion Organisation (ITPO):  Indian Trade Promotion Organisation (ITPO) was established on 1^st January 1992 by the Ministry of Commerce under the Companies Act, 1956. It was formed by merging Trade Development Authority and Trade Fair Authority of India. It was created so that regular interaction with government, trade and industry can be managed.
6. Indian Institute of Foreign Trade (IIFT): It was setup in 1963 by the Government of India as an autonomous body. It has recently been recognised as a deemed university. It conducts training in international trade, research in areas of international business and analyses and provides data related to international trade and investments. 

International Monetary Fund (IMF), established in 1945, is the second international monetary organisation after World Bank with a membership of 189 countries. Its primary purpose is to ensure the stability of the international monetary system-the system of exchange rates and international payments which enables countries (and their citizens) to transact with each other. It has its headquarters located at Washington DC.

Objectives:

1. To encourage cooperation in money-related matters through a permanent institution among various nations
2. To ensure international trade expansion which would help maintain high levels of employment and real income
3. To assist in the formulation of multilateral system of payments
4. To eliminate foreign exchange restrictions which may hamper world trade growth

Functions:

1. To lend foreign currency for transactions
2. To provide short-term goals and technical assistance
3. To arrange machinery for exchange rates adjustments and for international consultations
4. To bring about adjustment in exchange rates of member nations, it determines the value of a nation's currency and if required adjusts it 

WTO stands for World Trade Organization. It is the only organisation which deals with various rules and regulations of trade between several nations. It came into effect on 1^st January 1995 and its headquarters is located at Geneva, Switzerland.

Features of WTO:

1. It is a permanent organisation created by international treaty affirmed by the various governments and legislatures of member states.
2. It oversees the trade of goods and services as well as intellectual rights.
3. It is a member-driven organisation, i.e. all the decisions of WTO are taken by consensus of member nations.
4. All member states are treated equally. No discrimination occurs among any of the trading nations.
5. It is a legal entity which is concerned with solving trade-related problems and providing a forum for multilateral trade negotiations.

Structure of WTO:

• The Ministerial Conference: It heads the WTO. It is the highest governing authority having the power to take the ultimate decision on all matters which come up in WTO. It comprises representatives of all member countries.
• The General Council: Referred to as the engine of WTO, it is responsible for inspecting day-to-day working and management of WTO. It consists of representatives of all members. It reports to the Ministerial Conference; however, in its absence, it acts as the governing head of the WTO. It also acts as the Dispute Settlement Body and the Trade Policy Review Body.

It also constitutes of the following three councils:

• Council for Trade in Goods
• Council for Trade in Service
• Council for Trade-Related Aspects of Intellectual Property Rights

These councils along with their subsidiary bodies carry out their specific responsibilities.

Further, three committees which carry out functions assigned to them by the WTO Agreement and General Council are

• Committee on Trade and Development
• Committee on Balance of Payments Restrictions
• Committee on Budget, Finance and Administration

Objectives of WTO:

1. To reduce the tariff and other barriers to trade by various nations
2. To eliminate discriminatory treatment in international trade relations
3. To provide higher standard of living and income to people, full employment, increase in production and trade in goods and services
4. To optimally use the world's resources for sustainable development
5. To promote durable, viable and integrated trading system and international peace embodying all the resolutions of the multilateral trade negotiations
6. Framing common rules and regulations so as to create a positive effect on the least developed nations so that even they have a level of share in international trade

Functions of WTO:

1. Arranging an environment which helps in encouraging the members to come forward to WTO with their problems
2. Laying down a substantive code of conduct with the objective of reducing trade barriers among various nations including tariffs; it also tries to eliminate discrimination in international trade relations
3. Working in cooperation with IMF and WB and their associates to establish coherence in trade policy-making
4. Functioning as a dispute settlement body
5. Ensuring that the rules and regulations are duly followed by the members for settlement in case of disputes