International Business: Trade, Investment, and Entry Modes

• Buying and selling of goods and services between two countries is international business.
• International business facilitates specialization and efficient utilization of resources.

Reason for International Business

• Countries engage in international business because they cannot produce everything they need equally well or cheaply due to unequal resource distribution.
• Differing labor productivity and production costs among nations also drive international business.
• Some countries can produce better quality products or at lower costs than others.

Differences Between Domestic and International Business

• Nationality: Domestic business involves buyers and sellers from the same nation, while international business involves different countries.
• Stakeholders: Domestic business involves stakeholders from the same nation, whereas international business involves diverse stakeholders from different countries.
• Customer Heterogeneity: Domestic customers are more homogeneous, while international customers are more heterogeneous in terms of language, preferences, and customs.
• Business Systems: Domestic business uses relatively the same systems, but international business involves different systems and practices.
• Political Systems: Domestic business is subject to the same country, whereas international business is subject to different countries.
• Regulations: Domestic business adheres to the rules, laws, and taxation policies of the same nation, but international business is subject to the rules and policies of concerned nations.
• Currency: Domestic business uses the currency of the domestic country, while international business involves currencies of more than one countries.

Scope of International Business

• Major operations of international business include merchandise exports and imports, involving tangible goods.
• Service exports and imports involve intangible items, also known as invisible trade, it include tourism, travel, transportation, entertainment, communication, and educational services, among others.
• Licensing and franchising provides permission to a person or firm in a foreign country to produce and sell under trademarks, patents, or copyrights for a fee.
• Franchising is similar to licensing, but is connected with the provision of services.
• Foreign Direct Investment (FDI) is investment abroad in exchange for financial return, directly invested in properties.
• Foreign Portfolio Investment (FPI) is investment abroad in exchange for financial return, investing through acquiring shares or granting loans.

Benefits of International Business

• Nations benefit from earning foreign exchange, efficient resource use, improved growth, employment, and increased living standards.
• Firms benefit from higher profits, increased capacity utilization, growth prospects, reduced domestic competition, and improved business vision.

Modes of Entry into International Business

• Firms can enter international business through exporting and importing.
• Exporting refers to sending goods and services for sale from the home country.
• Importing means purchasing goods and services from foreign countries for domestic use.

Advantages of Exporting and Importing

• Less complexity
• Less investment
• Less risk

Limitations of Exporting and Importing

• High costs due to packaging, transportation, insurance, and customs duties.
• Import restrictions on various products in different countries.
• Reduced direct contact with the foreign market.

Contract Manufacturing

• Contract manufacturing involves a contract with a local manufacturer in a foreign country to produce components or goods to specific specifications.
• Contract manufacturing is also called outsourcing.
• This process may involve:
  • Production of certain components only
  • Assembly of components into final products
  • Complete manufacture of the products

Advantages of Contract manufacturing

• Goods can be produced on a large scale without any investment.
• Less investment risk
• Products can be obtained with lower material and labor costs.
• Manufacturer's idle capacity can be utilized.
• Producers may receive export incentives from the government.

Disadvantages of Contract manufacturing

• Quality issues may arise due to the local manufacturer's inability to meet international standards.
• Producers have no freedom in the production process and must follow specifications strictly.
• Producers have no freedom to sell, as they must adhere to the terms of the contract.

Licensing and Franchising

• Licensing and Franchising is a contractual agreement where one firm permits another in a foreign country to use its trademark, patents, or technology for a fee (royalty)
• The firm that gives permission is the Licensor.
• The firm that receives permission is the Licensee.
• Franchising is similar to licensing but is related to the provision of services.
• The parent company is called the Franchiser.
• The party to whom the franchise is granted is called the Franchisee.

Advantages of Licensing and Franchising

• Less expensive, as the licensee invests in their country.
• Limited risk for the licensor or franchiser, as they do not make any investment.
• Less government intervention since the licensee is a local entity.
• Greater market knowledge, as the licensee/franchisee is local.
• Trademark protection through strict laws in foreign countries.

Limitations of Licensing and Franchising

• Licensees may become experienced and create identical products with slight brand variations.
• Risks losing trade secrets in the foreign market.
• Conflicts may arise between licensors and licensees regarding royalty payments, maintenance of accounts, and differences in quality.

Joint Ventures

• Joint ventures are starting a firm that is jointly owned by two or more firms.
• Major ways joint ventures come into existence:
  • A foreign investor buys an interest in a local firm.
  • A local firm gets an interest in an existing foreign firm.
  • Both foreign and local entrepreneurs jointly establish a new firm.

Advantages of Joint Ventures

• Less financial burden, as investment is shared.
• Joint ventures usually operate on a large scale.
• The foreign partner benefits from the local partner's knowledge of competition, culture, language, and business policies.
• Cost and risk sharing makes entering foreign markets less costly and risky.

Disadvantages of Joint Ventures

• Possible loss of secrecy
• Potential for conflicts

Wholly Owned Subsidiaries

• The holding company (parent company) acquires 100% of the shares in a subsidiary company
• A wholly owned subsidiary can be established in two ways:
  • Set up a new firm in a foreign country
  • Acquire an existing firm in a foreign country

Advantages of Wholly Owned Subsidiaries

• Full control over operations
• Trade secrets are protected

Disadvantages of Wholly Owned Subsidiaries

• Requires a huge investment and is unsuitable for small to medium-sized businesses.
• No sharing of losses
• Not permitted by all countries

Export - Import Procedure and Documentation

• International or foreign trade involves import, export and entrepot
• Export trade is the sale of domestic goods to a foreign country.
• Import trade is the purchase of goods from a foreign country for domestic use.

Export Procedure

• Receipt of enquiry and sending quotation

• The exporter gets an enquiry from prospective buyers and sends a proforma invoice.

• The proforma invoice is a document containing all description about the product such as price, quality, grade, size, weight, mode of delivery, type of packing, payment terms etc.

• Receipt of order or indent

• If the buyer is satisfied with the proforma invoice, an order is placed that is also called indent and contains the description of goods, price, quality, etc.

• Assessing importer's creditworthiness and securing a guarantee for payments

• After receiving the indent, the exporter conducts an enquiry about financial capacity to ensure the promptness in settlement, often demanding Letter of Credit.

• Letter of credit is a guarantee from the importer's bank that it will honor payment up to a specified amount of export bills to the bank of the exporter.

• Obtaining Export License

• Exporters must fulfill formalities to obtain an export license from the Import-Export Licensing Authority:

  • Open a bank account
  • Obtain Import Export Code (IEC) number from the Directorate General of Foreign Trade or Regional Import Export Licensing Authority.
  • Register with the appropriate export promotion council, such as the Apparel Export Promotion Council or Council for Leather Exports.
  • Register with the Export Credit and Guarantee Corporation (ECGC) to cover the risk of non-payment.

• Obtaining pre-shipment finance

• After order confirmation, exporters can approach their bank to obtain pre-shipment finance for export production.

• Production or procurement of goods

• Exporters prepare the goods as per specifications, either through production or purchasing from the market.

• Pre-shipment inspection

• The quality of goods must conform to international standards, requiring compulsory inspection by the Export Inspection Agency (EIA), a government of India undertaking.

• Excise Clearance

• Goods produced are subject to excise duty under the Central Excise and Tariff Act, but exported goods are usually exempt, or refunds are provided.

• Exporters must apply to the Excise Commissioner for export clearance.

• A refund of duty is called duty drawback.

• Obtaining a certificate of origin

• Importing countries may provide tariff concessions or exemptions for goods imported from certain countries.

• Exporters must obtain and submit a certificate of origin with other export documents to avail these benefits.

• Certificate of Origin serves as proof that the goods were produced in the country from which they were exported.

• Reservation of shipping space

• Exporters apply for shipping space by providing information about the goods, shipment date, and destination.

• On acceptance, the shipping company issues a shipping order.

• Shipping order is an instruction to the captain of the ship to receive the specified goods after customs clearance at the port.

• Packing and forwarding

• Goods are marked with the importer's name and address, gross and net weight, destination port, and country of origin.

• A packing list is attached

• Packing list states the number of cases or packs and the details of goods contained within them.

• Insurance of goods

• Exporters must insure goods with an insurance company to cover risks during transit.

• Customs clearance

• Customs clearance must be obtained before loading goods onto the ship.

• The exporter prepares a shipping bill in 5 copies for customs clearance.

• Shipping bill is the document containing particulars of goods, name of the vessel (ship), destination port, exporting country, exporter's name, address etc.

• Documents to be attached with the shipping bill for customs clearance:

  • Export order
  • Letter of credit
  • Commercial invoice
  • Certificate of origin
  • Certificate of inspection
  • Marine insurance policy

• Based on these documents, port authorities issue a Carting Order, which allows staff to load cargo.

• Obtaining Mate’s Receipt

• After the goods are loaded on the ship, the captain or mate issues a certificate called Mate's Receipt.

• Mate’s Receipt is a receipt from the captain or mate containing the ship's name, berth, shipment date, package description, and cargo condition.

• Payment of freight and insurance of bill of lading

• The Clearing and Forwarding (C&F) agent submits the mate's receipt to the shipping company for freight calculation.

• After payment, the shipping company issues a Bill of Lading. These days freight is prepaid.

• Bill of Lading is issued by the shipping company once the cargo is loaded and company undertakes the delivery of goods to the buyer by producing this document.

• For goods sent by air, this document is known as airway bill.

• Preparation of invoice

• The exporter prepares and submits an invoice of the goods, containing such details as quantity and the amount to be paid by the buyer.

• Securing payment

• After shipment, the exporter sends documents like the Bill of Lading, bill of exchange, letter of credit, and invoice, to the bank for completing formalities and receiving the payment from the importer.

Import Procedure

• Trade enquiry
• Importers collect information about exporters from trade directories, trade associations, and websites.
• Sends trade enquiry, a written-request to the overseas supplier with such information as price, quality and other terms and conditions for export.
• Obtain the Import license
• Some goods can be freely imported; others require a license where the importer applies for the license from DGFT and obtains an IEC number.
• Obtaining Foreign Exchange
• Importers pay is made in foreign currency, with all foreign exchange transactions regulated by RBI in India and importers must get prior sanction for foreign exchange.
• Placing order or indent
• Importers has has to place an order or indent to supply goods that contains such information as: price, quality, quantity, size, grade and instructions related to, shipping, delivery schedule, insurance payment mode etc.
• Obtaining Letter of Credit
• Importers should take Letter of Credit from his bank, and forward to the exporter.
• Arranging finances
• Importers should funds in advance, to make payments upon arrival of goods.
• Receipt Of Shipment advice
• Exporters should send important documents to such as a receivers of goods with such important information after goods have been loaded and shipped.
• Retirement of Import Documents
• The importer must present the document that shows the payment has been made which, in turns, allows them to receive items
• Arrival of Goods
• Arrival of goods involves a person who notifies the officer at the dock, provides important cargo information when unloaded.
• Import General Manifest is a document comprising the details on good details on the imported goods, and which the cargo is based on when unloaded.
• Customs Clearance process and getting good released
• Customs office needs to provide importers needs documentation called bill of entry, this permits fees to be made.
• Bill Of Entry form is a form supply by customs that needs to fully comply with the important for clearance document, permitting import customs duty.

Explore international business concepts including merchandise and service trade, licensing, franchising, FDI vs FPI, and benefits/limitations of global engagement. Discover suitable entry methods for businesses with limited capital seeking international expansion. Examples included.