Chapter 11 International Business PDF

Chapter 11 International Business LEARNING OBJECTIVES After studying this chapter, you should be able to: State the meaning of International Business Distinguish be...

Chapter 11 International Business LEARNING OBJECTIVES After studying this chapter, you should be able to: State the meaning of International Business Distinguish between Internal and International Business Discuss the scope of International Business Enumerate the benefits of International Business Discuss the documents required for import and export transactions Identify the incentives and schemes available for international firms Discuss the role of different organisations for the promotion of International Business List the major international institutions and agreements at the global level for the promotion of international trade and development. 2024-25 Chapter 11.indd 246 9/2/2022 2:24:10 PM  INTERNATIONAL BUSINESS 247 Mr. Sudhir Manchanda is a small manufacturer of automobile components. His factory is located in Gurgaon and employs about 55 workers with an investment of Rs. 9.2 million in plant and machinery. Due to recession in the domestic market, he foresees prospects of his sales going up in the next few years in the domestic market. He is exploring the possibility of going international. Some of his competitors are already in export business. A casual talk with one of his close friends in the tyre business reveals that there is a substantial market for automobile components and accessories in South-East Asia and Middle East. But his friend also tells him, “Doing business internationally is not the same as carrying out business within the home country. International business is more complex as one has to operate under market conditions that are different from those that one faces in domestic business”. Mr. Manchanda is, moreover, not sure as to how he should go about setting up international business. Should he himself identify and contact some overseas customers and start exporting directly to them or else route his products through export houses which specialise in exporting products made by others? Mr. Manchanda’s son who has just returned after an MBA in USA suggests that they should set up a fully owned factory in Bangkok for supplying to customers in South-East Asia and Middle East. Setting up a manufacturing plant there will help them save costs of transporting goods from India. This would also help them coming closer to the overseas customers. Mr. Manchanda is in a fix as to what to do. In the face of difficulties involved in overseas ventures as pointed out by his friend, he is wondering about the desirability of entering into global business. He is also not sure as to what the different ways of entering into international market are and which one will best suit his purpose. 11.1 Introduction The prime reason behind this radical change is the development Countries all over the world are of communication, technology, undergoing a fundamental shift in infrastructure etc. Emergence of the way they produce and market newer modes of communication and various products and services. The development of faster and more national economies which so far were efficient means of transportation have pursuing the goal of self-reliance are brought nations closer to one another. now becoming increasingly dependent Countries that were cut-off from one upon others for procuring as well as another due to geographical distances supplying various kinds of goods and and socio-economic differences have services. Due to increased cross border now started increasingly interacting trade and investments, countries are with others. World Trade Organisation no more isolated. (WTO) and reforms carried out by the 2024-25 Chapter 11.indd 247 9/2/2022 2:24:10 PM  248 BUSINESS  STUDIES governments of different countries India has been trading with other have also been a major contributory countries for a long time. But it has factor to the increased interactions of late considerably speeded up its and business relations amongst the process of integrating with the world nations. economy and increasing its foreign We are today living in a world trade and investments (see Box A: where the obstacles to cross-border India Embarks on the Path to movement of goods and persons have Globalisation). substantially come down. The national economies are increasingly becoming 11.1.1 Meaning of International borderless and getting integrated into Business the world economy. Little wonder that the world has today come to be Business transaction taking place known as a ‘global village’. Business in within the geographical boundaries the present day is no longer restricted of a nation is known as domestic or to the boundaries of the domestic national business. It is also referred country. More and more firms are to as internal business or home trade. making forays into international Manufacturing and trade beyond the business which presents them with boundaries of one’s own country is numerous opportunities for growth known as international business. and increased profits. International or external business can, Box A India Embarks on the Path to Globalisation International business has entered into a new era of reforms. India too did not remain cut-off from these developments. India was under a severe debt trap and was facing crippling balance of payment crisis. In 1991, it approached the International Monetary Fund (IMF) for raising funds to tide over its balance of payment deficits. IMF agreed to lend money to India subject to the condition that India would undergo structural changes to be able to ensure repayment of borrowed funds. India had no alternative but to agree to the proposal. It was the very conditions imposed by IMF which more or less forced India to liberalise its economic policies. Since then a fairly large amount of liberalisation at the economic front has taken place. Though the process of reforms has somewhat slowed down, India is very much on the path to globalisation and integrating with the world economy. While, on the one hand, many multinational corporations (MNCs) have ventured into Indian market for selling their products and services; many Indian companies too have stepped out of the country to market their products and services to consumers in foreign countries. 2024-25 Chapter 11.indd 248 9/2/2022 2:24:10 PM  INTERNATIONAL BUSINESS 249 therefore, be defined as those business 11.1.2 Reason for International activities that take place across the Business national frontiers. It involves not The fundamental reason behind only the international movements of international business is that the goods and services, but also of capital, countries cannot produce equally well personnel, technology and intellectual or cheaply all that they need. This is property like patents, trademarks, because of the unequal distribution know-how and copyrights. of natural resources among them It may be mentioned here that or differences in their productivity mostly people think of international levels. Availability of various factors business as international trade. But of production such as labour, capital this is not true. No doubt international and raw materials that are required for trade, comprising exports and imports producing different goods and services of goods, has historically been an differ among nations. Moreover, labour important component of international productivity and production costs business. But of late, the scope differ among nations due to various of international business has socio-economic, geographical and substantially expanded. International political reasons. trade in services such as international Due to these differences, it is not travel and tourism, transportation, uncommon to find one particular communication, banking, ware- country being in a better position to housing, distribution and advertising produce better quality products and/ has considerably grown. The other or at lower costs than what other nations can do. In other words, we equally important developments are can say that some countries are in an increased foreign investments and advantageous position in producing overseas production of goods and select goods and services which services. Companies have started other countries cannot produce that increasingly making investments into effectively and efficiently, and vice- foreign countries and undertaking versa. As a result, each country finds it production of goods and services in advantageous to produce those select foreign countries to come closer to goods and services that it can produce foreign customers and serve them more effectively and efficiently at more effectively at lower costs. All these home, and procuring the rest through activities form part of international trade with other countries which the business. To conclude, we can say other countries can produce at lower that international business is a much costs. This is precisely the reason as broader term and is comprised of both to why countries trade with others the trade and production of goods and and engage in what is known as services across frontiers. international business. 2024-25 Chapter 11.indd 249 9/2/2022 2:24:10 PM  250 BUSINESS  STUDIES The international business as it firms from engaging in international exists today is to a great extent the business in a later section. result of geographical specialisation as pointed out above. Fundamentally, it 11.1.3 International Business vs. is for the same reason that domestic Domestic Business trade between two states or regions Conducting and managing international within a country takes place. Most business operations is more complex states or regions within a country than undertaking domestic business. tend to specialise in the production Because of variations in political, social, of goods and services for which they cultural and economic environments are best suited. In India, for example, across countries, business firms find while West Bengal specialises in jute it difficult to extend their domestic products; Mumbai and neighbouring business strategy to foreign markets. areas in Maharashtra are more involved with the production of cotton textiles. To be successful in the overseas The same principle of territorial markets, they need to adapt their division of labour is applicable at the product, pricing, promotion and international level too. Most developing distribution strategies and overall countries which are labour abundant, business plans to suit the specific for instance, specialise in producing requirements of the target foreign and exporting garments. Since they markets (see Box B on Firms need lack capital and technology, they to be Cognisant of Environmental import textile machinery from the Differences). Key aspects in respect developed nations which the latter of which domestic and international are in a position to produce more businesses differ from each other are efficiently. discussed below. What is true for the nation is more (i) Nationality of buyers and sellers: or less true for firms. Firms too engage Nationality of the key participants (i.e., in international business to import buyers and sellers) to the business what is available at lower prices in deals differs between domestic and other countries, and export goods to international businesses. In the case other countries where they can fetch of domestic business, both the buyers better prices for their products. Besides and sellers are from the same country. price considerations, there are several This makes it easier for both the parties other benefits which nations and firms to understand each other and enter derive from international business. In into business deals. But this is not the a way, these other benefits too provide case with international business where an impetus to nations and firms to buyers and sellers come from different engage in international business. We countries. Because of differences shall turn our attention to some of in their languages, attitudes, social these benefits accruing to nations and customs and business goals and 2024-25 Chapter 11.indd 250 9/2/2022 2:24:10 PM  INTERNATIONAL BUSINESS 251 practices, it becomes relatively more and aspirations of the stakeholders difficult for them to interact with belonging to different nations. one another and finalise business (iii) Mobility of factors of production: transactions. The degree of mobility of factors (ii) Nationality of other stakeholders: like labour and capital is generally Domestic and international businesses less between countries than within also differ in respect of the nationalities a country. While these factors of of the other stakeholders such as movement can move freely within employees, suppliers, shareholders/ the country, there exist various partners and general public who restrictions to their movement across interact with business firms. While nations. Apart from legal restrictions, in the case of domestic business all even the variations in socio-cultural such factors belong to one country, environments, geographic influences and therefore relatively speaking and economic conditions come in a depict more consistency in their value big way in their movement across systems and behaviours; decision countries. This is especially true of making in international business the labour which finds it difficult to becomes much more complex as the adjust to the climatic, economic and concerned business firms have to socio-cultural conditions that differ take into account a wider set of values from country to country. Box B Firms need to be Cognisant of Environmental Differences It is to be kept in mind that conducting and managing international business is not an easy venture. It is more difficult to manage international business operations due to variations in the political, social, cultural and economic environments that differ from country to country. Simply being aware of these differences is not sufficient. One also needs to be sensitive and responsive to these changes by way of introducing adaptations in their marketing programmes and business strategies. It is, for instance, a well known fact that because of poor lower per capita income, consumers in most of the developing African and Asian countries are price sensitive and prefer to buy less expensive products. But consumers in the developed countries like Japan, United States, Canada, France, Germany and Switzerland have a marked preference for high quality and high priced products due to their better ability to pay. Business prudence, therefore, demands that the firms interested in marketing to these countries are aware of such differences among the countries, and design their strategies accordingly. It will be in the fitness of things if the firms interested in exporting to these countries produce less expensive products for the consumers in the African and Asian regions, and design and develop high quality products for consumers in Japan and most of the European and North American countries. 2024-25 Chapter 11.indd 251 9/2/2022 2:24:10 PM  252 BUSINESS  STUDIES (iv) Customer heterogeneity across Countries differ from one another markets: Since buyers in international in terms of their socio-economic markets hail from different countries, development, availability, cost and they differ in their socio-cultural efficiency of economic infrastructure background. Differences in their and market support services, and tastes, fashions, languages, beliefs business customs and practices due and customs, attitudes and product to their socio-economic milieu and preferences cause variations in historical coincidences. All such not only their demand for different differences make it necessary for products and services, but also in firms interested in entering into variations in their communication international markets to adapt patterns and purchase behaviours. their production, finance, human It is precisely because of the socio- resource and marketing plans as cultural differences that while people per the conditions prevailing in the in China prefer bicycles, the Japanese international markets. in contrast like to ride bikes. Similarly, (vi) Political system and risks: while people in India use right-hand Political factors such as the type of driven cars, Americans drive cars fitted government, political party system, with steering, brakes, etc., on the left political ideology, political risks, etc., side. Moreover, while people in the have a profound impact on business United States change their TV, bike operations. Since a business person is and other consumer durables very familiar with the political environment frequently — within two to three years of his/her country, he/she can well of their purchase, Indians mostly do understand it and predict its impact not go in for such replacements until on business operations. But this is not the products currently with them have the case with international business. totally worn out. Political environment differs from Such variations greatly complicate one country to another. One needs the task of designing products and to make special efforts to understand evolving strategies appropriate for the differing political environments customers in different countries. and their business implications. Though to some extent customers Since political environment keeps within a country too differ in their on changing, one needs to monitor tastes and preferences. These political changes on an ongoing differences become more striking when basis in the concerned countries and we compare customers across nations. devise strategies to deal with diverse (v) Differences in business systems political risks. and practices: The differences in A major problem with a foreign business systems and practices are country’s political environment is a considerably much more among tendency among nations to favour countries than within a country. products and services originating in 2024-25 Chapter 11.indd 252 9/2/2022 2:24:10 PM  INTERNATIONAL BUSINESS 253 their own countries to those coming international trade. It includes not only from other countries. While this is not international trade (i.e., export and a problem for business firms operating import of goods and services), but also domestically, it quite often becomes a a wide variety of other ways in which severe problem for the firms interested the firms operate internationally. in exporting their goods and services to Major forms of business operations other nations or setting up their plants that constitute international business in the overseas markets. are as follows. (vii) Business regulations and (i) Merchandise exports and imports: policies: Coupled with its socio- Merchandise means goods that are economic environment and political tangible, i.e., those that can be seen philosophy, each country evolves and touched. When viewed from its own set of business laws and this perceptive, it is clear that while regulations. Though these laws, merchandise exports means sending regulations and economic policies are tangible goods abroad, merchandise more or less uniformly applicable within imports means bringing tangible a country, they differ widely among goods from a foreign country to one’s nations. Tariff and taxation policies, own country. Merchandise exports import quota system, subsidies and and imports, also known as trade in other controls adopted by a nation goods, include only tangible goods and are not the same as in other countries exclude trade in services. and often discriminate against foreign (ii) Service exports and imports: products, services and capital. Service exports and imports involve (viii) Currency used in business trade in intangibles. It is because transactions: Another important of the intangible aspect of services difference between domestic and that trade in services is also known international business is that the latter as invisible trade. A wide variety of involves the use of different currencies. services are traded internationally Since the exchange rate, i.e., the and these include: tourism and price of one currency expressed in travel, boarding and lodging (hotel relation to that of another country’s and restaurants), entertainment currency, keeps on fluctuating, it and recreation, transportation, adds to the problems of international professional services (such as training, business firms in fixing prices of their recruitment, consultancy and research), products and hedging against foreign communication (postal, telephone, exchange risks. fax, courier and other audio-visual services), construction and engineering, 11.1.4 Scope of International marketing (e.g., wholesaling, retailing, Business advertising, marketing research As pointed out earlier, international and warehousing), educational and business is much broader than financial services (such as banking 2024-25 Chapter 11.indd 253 9/2/2022 2:24:10 PM  254 BUSINESS  STUDIES Table 11.1 Major Difference between Domestic and International Business Basis Domestic business International business 1. Nationality of People or organisations People or organisations of buyers and from one nation different countries participate sellers participate in domestic in international business business transactions. transactions. 2. Nationality Various other stake- Various other stakeholders such as of other holders such as suppliers, suppliers, employees, middlemen, stakeholders employees, middlemen, shareholders and partners are from shareholders and partners different nations. are usually citizens of the same country. 3. Mobility of The degree of mobility The degree of mobility of factors of factors of of factors of production production like labour and capital production like labour and capital is across nations is relatively less. relatively more within a country. 4. Customer Domestic markets International markets lack heterogeneity are relatively more homogeneity due to differences in across markets homogeneous in nature. language, preferences, customs, etc., across markets. 5. Differences Business systems and Business systems and practices in business practices are relatively vary considerably across countries. systems and more homogeneous within practices a country. 6. Political Domestic business is Different countries have different system and subject to political system forms of political systems and risks and risks of one single different degrees of risks which often country. become a barrier to international business. 7. Business Domestic business is International business transactions regulations subject to rules, laws and are subject to rules, laws and and policies policies, taxation system, policies, tariffs and quotas, etc. of etc., of a single country. multiple countries. 8. Currency used Currency of domestic International business transactions in business country is used. involve use of currencies of more transactions than one country. 2024-25 Chapter 11.indd 254 9/2/2022 2:24:10 PM  INTERNATIONAL BUSINESS 255 and insurance). Of these, tourism, (iv) Foreign investments: Foreign transportation and business services investment is another important form are major constituents of world trade of international business. Foreign in services (see Box C). investment involves investments (iii) Licensing and franchising: of funds abroad in exchange for Permitting another party in a foreign financial return. Foreign investment country to produce and sell goods can be of two types: direct and portfolio under your trademarks, patents or copy investments. rights in lieu of some fee is another way Direct investment takes place of entering into international business. when a company directly invests It is under the licensing system that in properties such as plant and Pepsi and Coca Cola are produced and machinery in foreign countries with a sold all over the world by local bottlers view to undertaking production and in foreign countries. Franchising is marketing of goods and services in similar to licensing, but it is a term those countries. Direct investment used in connection with the provision provides the investor a controlling of services. McDonalds, for instance, interest in a foreign company, known operates fast food restaurants the as Direct Investment, i.e., FDI. It can world over through its franchising be in the form of joint venture on PPP. system. A company, if it so desires, can also set Box C Tourism, Transportation and Business Services dominate International Trade in Services Tourism and transportation have emerged as major components of international trade in services. Most of the airlines, shipping companies, travel agencies and hotels get their major share of revenues from their overseas customers and operations abroad. Several countries have come to heavily depend on services as an important source of foreign exchange earnings and employment. India, for example, earns a sizeable amount of foreign exchange from exports of services related to travel and tourism. Business services: When one country provides services to other country and in the process earns foreign exchange, this is also treated as a form of international business activity. Fee received for services like banking, insurance, rentals, engineering and management services form part of country’s foreign exchange earnings. Undertaking of construction projects in foreign countries is also an example of export of business services. The other examples of such services include overseas management contracts where arrangements are made by one company of a country which provides personnel to perform general or specialised management functions for another company in a foreign country in lieu of the other country. 2024-25 Chapter 11.indd 255 9/2/2022 2:24:10 PM  256 BUSINESS  STUDIES up a wholly owned subsidiary abroad capital goods, technology, petroleum by making 100 per cent investment in products and fertilisers, pharma- foreign ventures, and thus acquiring ceutical products and a host of other full control over subsidiary’s operations consumer products which otherwise in the foreign market. might not be available domestically. A portfolio investment, on the other (ii) More efficient use of resources: hand, is an investment that a company As stated earlier, international business makes into another company by the operates on a simple principle — way of acquiring shares or providing produce what your country can loans to the latter, and earns income by produce more efficiently, and trade the way of dividends or interest on loans. surplus production so generated with Unlike foreign direct investments, the other countries to procure what they investor under portfolio investment can produce more efficiently. When does not get directly involved into countries trade on this principle, they production and marketing operations. end up producing much more than It simply earns an income by investing what they can when each of them in shares, bonds, bills, or notes in a attempts to produce all the goods foreign country or providing loans to and services on its own. If such an foreign business firms. enhanced pool of goods and services is distributed equitably amongst nations, 11.1.5 Benefits of International it benefits all the trading nations. Business (iii) Improving growth prospects and employment potentials: Producing Notwithstanding greater complexities solely for the purposes of domestic and risks, international business is consumption severely restricts important to both nations and business a country’s prospects for growth firms. It offers them several benefits. and employment. Many countries, Growing realisation of these benefits especially the developing ones, could over time has in fact been a contributory not execute their plans to produce factor to the expansion of trade and on a larger scale, and thus create investment amongst nations, resulting employment for people because their in the phenomenon of globalisation. domestic market was not large enough Some of the benefits of international to absorb all that extra production. business to the nations and business Later on a few countries such as firms are discussed below. Singapore, South Korea and China which saw markets for their products Benefits to Countries in the foreign countries embarked upon (i) Earning of foreign exchange: the strategy ‘export and flourish’, and International business helps a country soon became the star performers on the to earn foreign exchange which it can world map. This helped them not only later use for meeting its imports of in improving their growth prospects, 2024-25 Chapter 11.indd 256 9/2/2022 2:24:10 PM  INTERNATIONAL BUSINESS 257 but also created opportunities for improve prospects of their growth by employment of people living in these plunging into overseas markets. This is countries. precisely what has prompted many of (iv) Increased standard of living: the multinationals from the developed In the absence of international trade countries to enter into markets of of goods and services, it would not developing countries. While demand have been possible for the world in their home countries has got almost community to consume goods and saturated, they realised their products services produced in other countries were in demand in the developing that the people in these countries are countries and demand was picking able to consume and enjoy a higher up quite fast. standard of living. (iv) Way out to intense competition in domestic market: Benefits to Firms When competition in the domestic market is very intense, (i) Prospects for higher profits: internationalisation seems to be International business can be more the only way to achieve significant profitable than the domestic business. growth. Highly competitive domestic When the domestic prices are lower, market drives many companies to go business firms can earn more profits international in search of markets for by selling their products in countries their products. International business where prices are high. thus acts as a catalyst of growth for (ii) Increased capacity utilisation: firms facing tough market conditions Many firms setup production on the domestic turf. capacities for their products which (v) Improved business vision: The are in excess of demand in the growth of international business of domestic market. By planning overseas many companies is essentially a part expansion and procuring orders from of their business policies or strategic foreign customers, they can think of management. The vision to become making use of their surplus production international comes from the urge capacities and also improving the to grow, the need to become more profitability of their operations. competitive, the need to diversify Production on a larger scale often leads and to gain strategic advantages of to economies of scale, which in turn internationalisation. lowers production cost and improves per unit profit margin. 11.2 Modes of Entry into (iii) Prospects for growth: Business International Business firms find it quite frustrating when demand for their products starts Simply speaking, the term mode getting saturated in the domestic means the manner or way. The phrase market. Such firms can considerably ‘modes of entry into international 2024-25 Chapter 11.indd 257 9/2/2022 2:24:10 PM  258 BUSINESS  STUDIES business’, therefore, means various of overseas customers located in the ways in which a company can enter home country or wholesale importers into international business. While in the case of import operations. Such discussing the meaning and scope firms do not directly deal with overseas of international business, we have customers in the case of exports and already familiarised you with some of suppliers in the case of imports. the modes of entry into international business. In the following sections, Advantages we shall discuss in detail important Major advantages of exporting include: ways of entering into international As compared to other modes of business along with their advantages entry, exporting/importing is the and limitations. Such a discussion easiest way of gaining entry into will enable you to know as to which international markets. It is less mode is more suitable under what complex an activity than setting conditions. up and managing joint-ventures or wholly owned subsidiaries 11.2.1 Exporting and Importing abroad. Exporting refers to sending of goods Exporting/importing is less and services from the home country involving in the sense that to a foreign country. In a similar business firms are not required vein, importing is purchase of foreign to invest that much time and products and bringing them into money as is needed when they one’s home country. There are two desire to enter into joint ventures important ways in which a firm can or set up manufacturing plants export or import products: direct and and facilities in host countries. indirect exporting/importing. In the Since exporting/importing does case of direct exporting/importing, not require much of investment a firm itself approaches the overseas in foreign countries, exposure to buyers/suppliers and looks after all foreign investment risks is nil or much lower than that is present the formalities related to exporting/ when firms opt for other modes of importing activities including those entry into international business. related to shipment and financing of goods and services. Indirect exporting/ Limitations importing, on the other hand, is one where the firm’s participation in Major limitations of exporting/ the export/import operations is importing as an entry mode of minimum, and most of the tasks international business are as follows: relating to export/import of the goods Since the goods physically move are carried out by some middle men from one country to another, such as export houses or buying offices exporting/importing involves 2024-25 Chapter 11.indd 258 9/2/2022 2:24:10 PM  INTERNATIONAL BUSINESS 259 additional packaging, trans- Despite the above mentioned portation and insurance costs. limitations, exporting/importing is Especially in the case of heavy the most preferred way for business items, transportation costs alone firms when they are getting initially become an inhibiting factor to their involved with international business. exports and imports. On reaching As usually is the case, firms start the shores of foreign countries, their overseas operations with exports such products are subject to and imports, and later having gained custom duty and a variety of familiarity with the foreign market other levies and charges. Taken operations switch over to other forms together, all these expenses and of international business operations. payments substantially increase product costs and make them less 11.2.2 Contract Manufacturing competitive. Exporting is not a feasible option Contract manufacturing refers to a when import restrictions exist type of international business where in a foreign country. In such a a firm enters into a contract with one situation, firms have no alternative or a few local manufacturers in foreign but to opt for other entry modes countries to get certain components or such as licensing/franchising goods produced as per its specifications. or joint venture which makes Contract manufacturing, also known it feasible to make the product as outsourcing, can take three major available by way of producing forms: and marketing it locally in foreign Production of certain components countries. such as automobile components Export firms basically operate or shoe uppers to be used later for from their home country. They producing final products such as produce in the home country and cars and shoes; then ship the goods to foreign Assembly of components into final countries. Except a few visits products such as assembly of made by the executives of export hard disk, mother board, floppy firms to foreign countries to disk drive and modem chip into promote their products, the export computers; and firms in general do not have much Complete manufacture of the contact with the foreign markets. products such as garments. This puts the export firms in The goods are produced or assembled a disadvan-tageous position vis- by the local manufacturers as per the à-vis the local firms which are technology and management guidance very near the customers and are provided to them by the foreign able to better understand and company. The goods so manufactured serve them. or assembled by the local producers 2024-25 Chapter 11.indd 259 9/2/2022 2:24:11 PM  260 BUSINESS  STUDIES are delivered to the international any idle production capacities, firm for use in its final products or manufacturing jobs obtained on out rightly sold as finished products contract basis in a way provide a by the international firm under its ready market for their products brand names in various countries and ensure greater utilisation of including the home, host and other their production capacities. This is countries. All the major international how the Godrej group is benefitting companies such as Nike, Reebok, from contract manufacturing Levis and Wrangler today get their in India. It is manufacturing products or components produced soaps under contract for many in the developing countries under multinationals including Dettol contract manufacturing. soap for Reckitt and Colman. This has considerably helped it Advantages in making use of its excess soap Contract manufacturing offers several manufacturing capacity. advantages to both the international The local manufacturer also gets company and local producers in the the opportunity to get involved foreign countries. with international business and Contract manufacturing permits avail incentives, if any, available the international firms to get the to the export firms in case the goods produced on a large scale international firm desires goods so without requiring investment in produced be delivered to its home setting up production facilities. country or to some other foreign These firms make use of the countries. production facilities already existing in the foreign countries. Limitations Since there is no or little investment The major disadvantages of contract in the foreign countries, there manufacturing to international firm is hardly any investment risk and local producer in foreign countries involved in the foreign countries. are as follows: Contract manufacturing also gives Local firms might not adhere to an advantage to the international production design and quality company of getting products standards, thus causing serious manufactured or assembled at product quality problems to the lower costs especially if the local international firm. producers happen to be situated Local manufacturer in the foreign in countries which have lower country loses his control over the material and labour costs. manufacturing process because Local producers in foreign goods are produced strictly as per countries also gain from contract the terms and specifications of the manufacturing. If they have contract. 2024-25 Chapter 11.indd 260 9/2/2022 2:24:11 PM  INTERNATIONAL BUSINESS 261 The local firm producing under licensing. Franchisers usually set contract manufacturing is not strict rules and regulations as to how free to sell the contracted output the franchisees should operate while as per its will. It has to sell running their business. Barring these the goods to the international two differences, franchising is pretty company at predetermined prices. much the same as licensing. Like in This results in lower profits for the case of licensing, a franchising the local firm if the open market agreement too involves grant of rights prices for such goods happen to by one party to another for use of be higher than the prices agreed technology, trademark and patents upon under the contract. in return of the agreed payment for a certain period of time. The parent 11.2.3 Licensing and Franchising company is called the franchiser and Licensing is a contractual arrangement the other party to the agreement is in which one firm grants access to its called franchisee. The franchiser patents, trade secrets or technology to can be any service provider be it a another firm in a foreign country for a restaurant, hotel, travel agency, bank fee called royalty. The firm that grants wholesaler or even a retailer - who such permission to the other firm is has developed a unique technique for known as licensor and the other firm in creating and marketing of services the foreign country that acquires such under its own name and trade mark. It rights to use technology or patents is is the uniqueness of the technique that called the licensee. It may be mentioned gives the franchiser an edge over its here that it is not only technology that competitors in the field, and makes the is licensed. In the fashion industry, a would-be-service providers interested number of designers license the use in joining the franchising system. of their names. In some cases, there McDonald, Pizza Hut and Wal-Mart is exchange of technology between the are examples of some of the leading two firms. Sometimes there is mutual franchisers operating worldwide. exchange of knowledge, technology Advantages and/or patents between the firms which is known as cross-licensing. As compared to joint ventures and Franchising is a term very similar wholly owned subsidiaries, licensing/ to licensing. One major distinction franchising is relatively a much easier between the two is that while the mode of entering into foreign markets former is used in connection with with proven product/technology production and marketing of goods, without much business risks and the term franchising applies to service investments. Some of the specific business. The other point of difference advantages of licensing are as follows: between the two is that franchising Under the licensing/franchising is relatively more stringent than system, it is the licensor/ 2024-25 Chapter 11.indd 261 9/2/2022 2:24:11 PM  262 BUSINESS  STUDIES franchiser who sets up the and brand names in foreign business unit and invests his/her countries. As a result, other firms own money in the business. As in the foreign market cannot such, the licensor/franchiser has make use of such trademarks and to virtually make no investments patents. abroad. Licensing/franchising is, therefore, considered a less Limitations expensive mode of entering into Licensing/franchising as a mode of international business. Since no or very little foreign international business suffers from the investment is involved, licensor/ following weaknesses. franchiser is not a party to the When a licensee/franchisee losses, if any, that occur to foreign becomes skilled in the manu- business. Licensor/franchiser is facture and marketing of the paid by the licensee/franchisee by licensed/franchised products, way of fees fixed in advance as a there is a danger that the licensee percentage of production or sales can start marketing an identical turnover. This royalty or fee keeps product under a slightly different accruing to the licensor/franchiser brand name. This can cause so long as the production and severe competition to the licenser/ sales keep on taking place in the franchiser. licensee’s/franchisee’s business If not maintained properly, trade unit. secrets can get divulged to others Since the business in the foreign in the foreign markets. Such country is managed by the lapses on the part of the licensee/ licensee/franchisee who is a local franchisee can cause severe person, there are lower risks of losses to the licensor/franchiser. business takeovers or government Over time, conflicts often develop interventions. between the licensor/franchiser Licensee/franchisee being a and licensee/franchisee over local person has greater market issues such as maintenance of knowledge and contacts accounts, payment of royalty and which can prove quite helpful non-adherence to norms relating to the licensor/franchiser in to production of quality products. successfully conducting its These differences often result in marketing operations. costly litigations, causing harm to As per the terms of the licensing/ both the parties. franchising agreement, only the parties to the licensing/franchising 11.2.4 Joint Ventures agreement are legally entitled to make use of the licensor’s/ Joint venture is a very common franchiser’s copyrights, patents strategy for entering into foreign 2024-25 Chapter 11.indd 262 9/2/2022 2:24:11 PM  INTERNATIONAL BUSINESS 263 markets. A joint venture means local partner under joint venture establishing a firm that is jointly agreements. owned by two or more otherwise independent firms. In the widest sense Limitations of the term, it can also be described Major limitations of a joint venture are as any form of association which discussed below: implies collaboration for more than a Foreign firms entering into joint transitory period. A joint ownership ventures share the technology venture may be brought about in three and trade secrets with local major ways: (i) Foreign investor buying an firms in foreign countries, thus interest in a local company always running the risks of such (ii) Local firm acquiring an interest a technology and secrets being in an existing foreign firm disclosed to others. (iii) B o t h t h e f o r e i g n a n d l o c a l The dual ownership arrangement entrepreneurs jointly forming a may lead to conflicts, resulting new enterprise. in battle for control between the investing firms. Advantages 11.2.5  Wholly Owned Subsidiaries Major advantages of joint venture include: This entry mode of international Since the local partner also business is preferred by companies contributes to the equity capital of which want to exercise full control over such a venture, the international their overseas operations. The parent firm finds it financially less company acquires full control over the burdensome to expand globally. foreign company by making 100 per Joint ventures make it possible to cent investment in its equity capital. execute large projects requiring A wholly owned subsidiary in a foreign huge capital outlays and market can be established in either of manpower. the two ways: The foreign business firm benefits (i) Setting up a new firm altogether from a local partner’s knowledge to start operations in a foreign of the host countries regarding the country — also referred to as a competitive conditions, culture, green field venture, or language, political systems and (ii) Acquiring an established firm in business systems. the foreign country and using In many cases entering into a that firm to manufacture and/or foreign market is very costly and promote its products in the host risky. This can be avoided by sharing costs and/or risks with a nation. 2024-25 Chapter 11.indd 263 9/2/2022 2:24:11 PM  264 BUSINESS  STUDIES Advantages 11.3 E xport -I mport P rocedures and Documentation Major advantages of a wholly owned subsidiary in a foreign country are as A major distinction between domestic follows: and international operations is the complexity of the latter. Export and The parent firm is able to exercise import of goods is not that straight full control over its operations in forward as buying and selling in the foreign countries. domestic market. Since foreign trade Since the parent company on transactions involves movement its own looks after the entire of goods across frontiers and use operations of foreign subsidiary, of foreign exchange, a number of it is not required to disclose its formalities are needed to be performed technology or trade secrets to before the goods leave the boundaries others. of a country and enter into that of another. Following sections are devoted Limitations to a discussion of major steps that The limitations of setting up a wholly need to be undertaken for completing owned subsidiary abroad include: export and import transactions. The parent company has to make 11.3.1 Export Procedure 100 per cent equity investments The number of steps and the sequence in the foreign subsidiaries. This in which these are taken vary from one form of international business is, export transaction to another. Steps therefore, not suitable for small involved in a typical export transaction and medium size firms which do are as follows. not have enough funds with them (i) Receipt of enquiry and sending to invest abroad. quotations: The prospective buyer Since the parent company owns of a product sends an enquiry to 100 per cent equity in the foreign different exporters requesting them company, it alone has to bear the to send information regarding price, entire losses resulting from failure quality and terms and conditions of its foreign operations. for export of goods. Exporters can Some countries are averse to be informed of such an enquiry even setting up of 100 per cent wholly by way of advertisement in the press owned subsidiaries by foreigners put in by the importer. The exporter in their countries. This form of sends a reply to the enquiry in the international business operations, form of a quotation —referred to as therefore, becomes subject to proforma invoice. The proforma invoice higher political risks. contains information about the price at 2024-25 Chapter 11.indd 264 9/2/2022 2:24:11 PM  INTERNATIONAL BUSINESS 265 which the exporter is ready to sell the export licence before it proceeds with goods and also provides information exports. Important pre-requisites for about the quality, grade, size, weight, getting an export licence are as follows: mode of delivery, type of packing and Opening a bank account in any payment terms. bank authorised by the Reserve (ii) Receipt of order or indent: In case Bank of India (RBI) and getting the prospective buyer (i.e., importing an account number. firm) finds the export price and other Obtaining Import Export Code terms and conditions acceptable, it (IEC) number from the Directorate places an order for the goods to be General Foreign Trade (DGFT) or despatched. This order, also known Regional Import Export Licensing as indent, contains a description of Authority. the goods ordered, prices to be paid, Registering with appropriate delivery terms, packing and marking export promotion council. details and delivery instructions. Registering with Export Credit and (iii) Assessing the importer’s Guarantee Corporation (ECGC) in creditworthiness and securing order to safeguard against risks of a guarantee for payments: After non payments. receipt of the indent, the exporter An export firm needs to have the makes necessary enquiry about the Import Export Code (IEC) number as creditworthiness of the importer. The it needs to be filled in various export/ purpose underlying the enquiry is to import documents. For obtaining assess the risks of non payment by the IEC number, a firm has to apply the importer once the goods reach the to the Director General for Foreign import destination. To minimise such Trade (DGFT) with documents such as risks, most exporters demand a letter exporter/importer profile, bank receipt of credit from the importer. A letter for requisite fee, certificate from the of credit is a guarantee issued by the banker on the prescribed form, two importer’s bank that it will honour copies of photographs attested by the payment up to a certain amount of banker, details of the non-resident export bills to the bank of the exporter. interest and declaration about the Letter of credit is the most appropriate applicant’s non association with and secure method of payment adopted caution listed firms. to settle international transactions. It is obligatory for every exporter (iv) Obtaining export licence: Having to get registered with the appropriate become assured about payments, export promotion council. Various the exporting firm initiates the steps export promotion councils such as relating to compliance of export Engineering Export Promotion Council regulations. Export of goods in India is (EEPC) and Apparel Export Promotion subject to custom laws which demand Council (AEPC) have been set up by the that the export firm must have an Government of India to promote and 2024-25 Chapter 11.indd 265 9/2/2022 2:24:11 PM  266 BUSINESS  STUDIES develop exports of different categories quality products are exported from the of products. We shall discuss about country. One such step is compulsory export promotion councils in a later inspection of certain products by a section. But it may be mentioned here competent agency as designated by that it is necessary for the exporter to the government. The government has become a member of the appropriate passed Export Quality Control and export promotion council and obtain Inspection Act, 1963 for this purpose. a Registration cum Membership and has authorised some agencies Certificate (RCMC) for availing benefits to act as inspection agencies. If the available to export firms from the product to be exported comes under Government. such a category, the exporter needs to Registration with the ECGC contact the Export Inspection Agency is necessary in order to protect (EIA) or the other designated agency overseas payments from political and for obtaining inspection certificate. commercial risks. Such a registration The pre-shipment inspection report also helps the export firm in getting is required to be submitted along financial assistance from commercial with other export documents at the banks and other financial institutions. time of exports. Such an inspection (v) Obtaining pre-shipment finance: is not compulsory in case the goods Once a confirmed order and also a are being exported by star trading letter of credit have been received, houses, trading houses, export houses, the exporter approaches his banker industrial units setup in export for obtaining pre-shipment finance processing zones/special economic to undertake export production. Pre- zones (EPZs/SEZs) and 100 per cent shipment finance is the finance that export oriented units (EOUs). We shall the exporter needs for procuring raw discuss about these special types of materials and other components, export firms in a later section. processing and packing of goods and (viii)  Excise clearance: As per the transportation of goods to the port of Central Excise Tariff Act, excise shipment. duty is payable on the materials (vi) Production or procurement used in manufacturing goods. The of goods: Having obtained the pre- exporter, therefore, has to apply to shipment finance from the bank, the the concerned Excise Commissioner exporter proceeds to get the goods in the region with an invoice. If the ready as per the specifications of the Excise Commissioner is satisfied, importer. Either the firm itself goes in he may issue the excise clearance. for producing the goods or else it buys But in many cases the government from the market. exempts payment of excise duty or (vii) Pre-shipment inspection: The later on refunds it if the goods so Government of India has initiated manufactured are meant for exports. many steps to ensure that only good The idea underlying such exemption 2024-25 Chapter 11.indd 266 9/2/2022 2:24:11 PM  INTERNATIONAL BUSINESS 267 or refund is to provide an incentive to captain of the ship that the specified the exporters to export more and also goods after their customs clearance at to make the export products more a designated port be received on board. competitive in the world markets. (xi) Packing and forwarding: The The refund of excise duty is known as goods are then properly packed and duty drawback. This scheme of duty marked with necessary details such drawback is presently administered as name and address of the importer, by the Directorate of Drawback under gross and net weight, port of shipment the Ministry of Finance which is and destination, country of origin, etc. responsible for fixing the rates of The exporter then makes necessary drawback for different products. The arrangement for transportation of work relating to sanction and payment goods to the port. On loading goods of drawback is, however, looked after into the railway wagon, the railway by the Commissioner of Customs authorities issue a ‘railway receipt’ or Central Excise Incharge of the which serves as a title to the goods. The concerned port/airport/land custom exporter endorses the railway receipt station from where the export of goods in favour of his agent to enable him is considered to have taken place. to take delivery of goods at the port of (ix) Obtaining certificate of origin: shipment. Some importing countries provide (xii) Insurance of goods: The exporter tariff concessions or other exemptions then gets the goods insured with an to the goods coming from a particular insurance company to protect against country. For availing such benefits, the the risks of loss or damage of the goods importer may ask the exporter to send due to the perils of the sea during the a certificate of origin. The certificate of transit. origin acts as a proof that the goods (xiii) Customs clearance: The goods have actually been manufactured in must be cleared from the customs the country from where the export before these can be loaded on the ship. is taking place. This certificate can For obtaining customs clearance, the be obtained from the trade consulate exporter prepares the shipping bill. located in the exporter’s country. Shipping bill is the main document (x) Reservation of shipping space: on the basis of which the customs The exporting firm applies to the office gives the permission for export. shipping company for provision of Shipping bill contains particulars of shipping space. It has to specify the goods being exported, the name the types of goods to be exported, of the vessel, the port at which goods probable date of shipment and the are to be discharged, country of final port of destination. On acceptance of destination, exporter’s name and application for shipping, the shipping address, etc. company issues a shipping order. A Five copies of the shipping bill shipping order is an instruction to the along with the following documents 2024-25 Chapter 11.indd 267 9/2/2022 2:24:11 PM  268 BUSINESS  STUDIES are then submitted to the Customs (xv) Payment of freight and issuance Appraiser at the Customs House: of bill of lading: The C&F agent Export Contract or Export Order surrenders the mates receipt to the Letter of Credit shipping company for computation of Commercial Invoice freight. After receipt of the freight, the Certificate of Origin shipping company issues a bill of lading Certificate of Inspection, where which serves as an evidence that the necessary shipping company has accepted the Marine Insurance Policy goods for carrying to the designated After submission of these destination. In the case the goods are documents, the Superintendent of the being sent by air, this document is concerned port trust is approached for referred to as airway bill. obtaining the carting order. Carting (xvi) Preparation of invoice: After order is the instruction to the staff sending the goods, an invoice of the at the gate of the port to permit the despatched goods is prepared. The entry of the cargo inside the dock. invoice states the quantity of goods After obtaining the carting order, the sent and the amount to be paid by the cargo is physically moved into the port importer. The C&F agent gets it duly area and stored in the appropriate attested by the customs. shed. Since the exporter cannot make (xvii) Securing payment: After himself or herself available all the time the shipment of goods, the exporter for performing all these formalities, informs the importer about the these tasks are entrusted to an shipment of goods. The importer agent —referred to as Clearing and needs various documents to claim Forwarding (C&F) agent. the title of goods on their arrival at (xiv) Obtaining mates receipt: The his/her country and getting them goods are then loaded on board the customs cleared. The documents ship for which the mate or the captain that are needed in this connection of the ship issues mate’s receipt to the include certified copy of invoice, bill of port superintendent. A mate receipt is lading, packing list, insurance policy, a receipt issued by the commanding certificate of origin and letter of credit. officer of the ship when the cargo The exporter sends these documents is loaded on board, and contains through his/her banker with the the information about the name of instruction that these may be delivered the vessel, berth, date of shipment, to the importer after acceptance of the descripton of packages, marks and bill of exchange — a document which is numbers, condition of the cargo at the sent along with the above mentioned time of receipt on board the ship, etc. documents. Submission of the relevant The port superintendent, on receipt documents to the bank for the purpose of port dues, hands over the mate’s of getting the payment from the bank is receipt to the C&F agent. called ‘negotiation of the documents’. 2024-25 Chapter 11.indd 268 9/2/2022 2:24:11 PM  INTERNATIONAL BUSINESS 269 Bill of exchange is an order to says that the necessary documents the importer to pay a certain amount (including bill of exchange) relating to of money to, or to the order of, a the particular export consignment has certain person or to the bearer of the been negotiated (i.e., presented to the instrument. It can be of two types: importer for payment) and the payment document against sight (sight draft) has been received in accordance with or document against acceptance the exchange control regulations. (usance draft). In case of sight draft, the documents are handed over to the 11.3.2 Import Procedure importer only against payment. The Import trade refers to purchase of moment the importer agrees to sign the goods from a foreign country. Import sight draft, the relevant documents are procedure differs from country to delivered. In the case of usance draft, country depending upon the country’s on the other hand, the documents are delivered to the importer against his or import and custom policies and other her acceptance of the bill of exchange statutory requirements. The following for making payment at the end of a paragraphs discuss various steps specified period, say three months. involved in a typical import transaction On receiving the bill of exchange, for bringing goods into Indian territory. the importer releases the payment (i) Trade enquiry: The first thing in case of sight draft or accepts the that the importing firm has to do usance draft for making payment on is to gather information about the maturity of the bill of exchange. The countries and firms which export exporter’s bank receives the payment the given product. The importer can through the importer’s bank and is gather such information from the trade credited to the exporter’s account. directories and/or trade associations The exporter, however, need not and organisations. Having identified wait for the payment till the release of the countries and firms that export money by the importer. The exporter the product, the importing firm can get immediate payment from approaches the export firms with the his/her bank on the submission help of a trade enquiry for collecting of documents by signing a letter of information about their export prices indemnity. By signing the letter, the and terms of exports. A trade enquiry exporter undertakes to indemnify the is a written request by an importing bank in the event of non-receipt of firm to the exporter for supply of payment from the importer along with information regarding the price and accrued interest. various terms and conditions on which Having received the payment for the latter is ready to exports goods. exports, the exporter needs to get a bank After receiving a trade enquiry, certificate of payment. Bank certificate the exporter prepares a quotation and of payment is a certificate which sends it to the importer. The quotation 2024-25 Chapter 11.indd 269 9/2/2022 2:24:11 PM  270 BUSINESS  STUDIES is known as profor ma invoice. A goods that he or she wants to import proforma invoice is a document that are subject to import licensing. In case contains details as to the quality, goods can be imported only against grade, design, size, weight and price the licence, the importer needs to of the export product, and the terms procure an import licence. In India, it and conditions on which their export is obligatory for every importer (and will take place. also for exporter) to get registered with (ii) Procurement of import licence: the Directorate General Foreign Trade There are certain goods that can be (DGFT) or Regional Import Export imported freely, while others need Licensing Authority, and obtain an licensing. The importer needs to Import Export Code (IEC) number. This consult the Export Import (EXIM) number is required to be mentioned on policy in force to know whether the most of the import documents. Major Documents needed in Connection with Export Transaction A. Documents related to goods Export invoice: Export invoice is a sellers’ bill for merchandise and contains information about goods such as quantity, total value, number of packages, marks on packing, port of destination, name of ship, bill of lading number, terms of delivery and payments, etc. Packing list: A packing list is a statement of the number of cases or packs and the details of the goods contained in these packs. It gives details of the nature of goods which are being exported and the form in which these are being sent. Certificate of origin: This is a certificate which specifies the country in which the goods are being produced. This certificate entitles the importer to claim tariff concessions or other exemptions such as non-applicability of quota restrictions on goods originating from certain pre-specified countries. This certificate is also required when there is a ban on imports of certain goods from select countries. The goods are allowed to be brought into the importing country if these are not originating from the banned countries. Certificate of inspection: For ensuring quality, the government has made it compulsory for certain products that these be inspected by some authorised agency. Export Inspection Council of India (EICI) is one such agency which carries out such inspections and issues the certificate that the consignment has been inspected as required under the Export (Quality Control and Inspection) Act, 1963, and satisfies the conditions relating to quality control and inspection as applicable to it, and is export worthy. Some countries have made this certificate mandatory for the goods being imported to their countries. 2024-25 Chapter 11.indd 270 9/2/2022 2:24:11 PM  INTERNATIONAL BUSINESS 271 B. Documents related to shipment Mate’s receipt: This receipt is given by the commanding officer of the ship to the exporter after the cargo is loaded on the ship. The mate’s receipt indicates 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. The shipping company does not issue the bill of lading unless it receives the mate’s receipt. Shipping Bill: The shipping bill is the main document on the basis of which customs office grants permission for the export. The shipping bill contains particulars of the goods being exported, the name of the vessel, the port at which goods are to be discharged, country of final destination, exporter’s name and address, etc. Bill of lading: 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 is also a document of title