NCERT Class 11 Business Studies 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 between Internal and International Business Discuss the scope of International Busin...

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. 2019-20 264 BUSINESS STUDIES 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 the infrastructure etc. Emergence of newer way they produce and market various modes of communication and products and services. The national development of faster and more efficient economies which so far were pursuing means of transportation have brought the goal of self-reliance are now nations closer to one another. becoming increasingly dependent upon Countries that were cut-off from one 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 2019-20 INTERNATIONAL BUSINESS 265 governments of different countries India has been trading with other have also been a major contributory countries for a long time. But it has of factor to the increased interactions and late considerably speeded up its 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 Globalisation). movement of goods and persons have substantially come down. The national 11.1.1 Meaning of International economies are increasingly becoming Business borderless and getting integrated into the world economy. Little wonder that Business transaction taking place the world has today come to be known within the geographical boundaries of a nation is known as domestic or as a ‘global village’. Business in the national business. It is also referred to present day is no longer restricted to as internal business or home trade. the boundaries of the domestic Manufacturing and trade beyond the country. More and more firms are boundaries of one’s own country is making forays into international known as international business. business which presents them with International or external business can, numerous opportunities for growth therefore, be defined as those business and increased profits. activities that take place across the 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. 2019-20 266 BUSINESS STUDIES national frontiers. It involves not only countries cannot produce equally well the international movements of goods or cheaply all that they need. This is and services, but also of capital, because of the unequal distribution of personnel, technology and intellectual natural resources among them or property like patents, trademarks, differences in their productivity levels. know-how and copyrights. Availability of various factors of It may be mentioned here that production such as labour, capital and mostly people think of international raw materials that are required for business as international trade. But producing different goods and services this is not true. No doubt international differ among nations. Moreover, labour trade, comprising exports and imports productivity and production costs of goods, has historically been an differ among nations due to various important component of international socio-economic, geographical and business. But of late, the scope political reasons. of international business has Due to these differences, it is not substantially expanded. International uncommon to find one particular trade in services such as international country being in a better position to travel and tourism, transportation, produce better quality products and/ communication, banking, ware- or at lower costs than what other housing, distribution and advertising nations can do. In other words, we can has considerably grown. The other say that some countries are in an equally important developments are advantageous position in producing increased foreign investments and select goods and services which other overseas production of goods and countries cannot produce that services. Companies have started effectively and efficiently, and vice- increasingly making investments into versa. As a result, each country finds it foreign countries and undertaking advantageous to produce those select production of goods and services in goods and services that it can produce foreign countries to come closer to more effectively and efficiently at home, foreign customers and serve them and procuring the rest through trade more effectively at lower costs. All these with other countries which the other activities form part of international countries can produce at lower costs. business. To conclude, we can say that This is precisely the reason as to why international business is a much countries trade with others and engage broader term and is comprised of both in what is known as international the trade and production of goods and business. services across frontiers. The international business as it exists today is to a great extent the 11.1.2 Reason for International result of geographical specialisation as Business pointed out above. Fundamentally, it The fundamental reason behind is for the same reason that domestic international business is that the trade between two states or regions 2019-20 INTERNATIONAL BUSINESS 267 within a country takes place. Most than undertaking domestic business. states or regions within a country tend Because of variations in political, social, to specialise in the production of goods cultural and economic environments and services for which they are best across countries, business firms find it suited. In India, for example, while difficult to extend their domestic West Bengal specialises in jute business strategy to foreign markets. To products; Mumbai and neighbouring be successful in the overseas markets, areas in Maharashtra are more involved they need to adapt their product, with the production of cotton textiles. pricing, promotion and distribution The same principle of territorial division strategies and overall business plans to of labour is applicable at the suit the specific requirements of the international level too. Most developing target foreign markets (see Box B on countries which are labour abundant, Firms need to be Cognisant of for instance, specialise in producing and Environmental Differences). Key aspects exporting garments. Since they lack in respect of which domestic and capital and technology, they import international businesses differ from each textile machinery from the developed other are discussed below. nations which the latter are in a position (i) Nationality of buyers and sellers: to produce more efficiently. Nationality of the key participants (i.e., What is true for the nation is more buyers and sellers) to the business deals or less true for firms. Firms too engage differs between domestic and in international business to import what international businesses. In the case of is available at lower prices in other domestic business, both the buyers and countries, and export goods to other sellers are from the same country. This countries where they can fetch better makes it easier for both the parties to prices for their products. Besides price understand each other and enter into considerations, there are several other business deals. But this is not the case benefits which nations and firms derive with international business where from international business. In a way, buyers and sellers come from different these other benefits too provide an countries. Because of differences in their impetus to nations and firms to engage languages, attitudes, social customs in international business. We shall turn and business goals and practices, it our attention to some of these benefits becomes relatively more difficult for accruing to nations and firms from them to interact with one another and engaging in international business in a finalise business transactions. later section. (ii) Nationality of other stakeholders: Domestic and international businesses 11.1.3 International Business also differ in respect of the nationalities vs. Domestic Business of the other stakeholders such as Conducting and managing international employees, suppliers, shareholders/ business operations is more complex partners and general public who 2019-20 268 BUSINESS STUDIES interact with business firms. While in environments, geographic influences the case of domestic business all such and economic conditions come in a big factors belong to one country, and way in their movement across therefore relatively speaking depict countries. This is especially true of the more consistency in their value systems labour which finds it difficult to adjust and behaviours; decision making in to the climatic, economic and socio- international business becomes much more complex as the concerned cultural conditions that differ from business firms have to take into country to country. account a wider set of values and (iv) Customer heterogeneity across aspirations of the stakeholders markets: Since buyers in international belonging to different nations. markets hail from different countries, (iii) Mobility of factors of they differ in their socio-cultural production: The degree of mobility of background. Differences in their tastes, factors like labour and capital is fashions, languages, beliefs and generally less between countries than customs, attitudes and product within a country. While these factors of preferences cause variations in not only movement can move freely within the their demand for different products and country, there exist various restrictions services, but also in variations in their to their movement across nations. communication patterns and purchase Apart from legal restrictions, even the behaviours. It is precisely because of variations in socio-cultural the socio-cultural differences that while 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. 2019-20 INTERNATIONAL BUSINESS 269 people in China prefer bicycles, the (vi) Political system and risks: Japanese in contrast like to ride bikes. Political factors such as the type of Similarly, while people in India use government, political party system, right-hand driven cars, Americans drive political ideology, political risks, etc., cars fitted with steering, brakes, etc., have a profound impact on business on the left side. Moreover, while people operations. Since a business person is in the United States change their TV, familiar with the political environment bike and other consumer durables very of his/her country, he/she can well frequently — within two to three years understand it and predict its impact on of their purchase, Indians mostly do not business operations. But this is not the go in for such replacements until the case with international business. products currently with them have Political environment differs from one totally worn out. country to another. One needs to make Such variations greatly complicate special efforts to understand the differing the task of designing products and political environments and their evolving strategies appropriate for business implications. Since political customers in different countries. environment keeps on changing, one Though to some extent customers needs to monitor political changes on within a country too differ in their tastes an ongoing basis in the concerned and preferences. These differences countries and devise strategies to deal become more striking when we with diverse political risks. compare customers across nations. A major problem with a foreign (v) Differences in business systems country’s political environment is a and practices: The differences in tendency among nations to favour business systems and practices are products and services originating in considerably much more among their own countries to those coming countries than within a country. from other countries. While this is not Countries differ from one another in a problem for business firms operating terms of their socio-economic domestically, it quite often becomes a development, availability, cost and severe problem for the firms interested efficiency of economic infrastructure in exporting their goods and services to and market support services, and other nations or setting up their plants business customs and practices due to in the overseas markets. their socio-economic milieu and (vii) Business regulations and historical coincidences. All such policies: Coupled with its socio- differences make it necessary for firms economic environment and political interested in entering into international philosophy, each country evolves its markets to adapt their production, own set of business laws and finance, human resource and regulations. Though these laws, marketing plans as per the conditions regulations and economic policies are prevailing in the international markets. more or less uniformly applicable within 2019-20 270 BUSINESS STUDIES a country, they differ widely among country. Merchandise exports and nations. Tariff and taxation policies, imports, also known as trade in goods, import quota system, subsidies and include only tangible goods and other controls adopted by a nation are exclude trade in services. not the same as in other countries and (ii) Service exports and imports: often discriminate against foreign Service exports and imports involve products, services and capital. trade in intangibles. It is because of the (viii) Currency used in business intangible aspect of services that trade transactions: Another important in services is also known as invisible difference between domestic and trade. A wide variety of services are international business is that the latter traded internationally and these involves the use of different currencies. include: tourism and travel, boarding Since the exchange rate, i.e., the price of and lodging (hotel and restaurants), one currency expressed in relation to entertainment and recreation, that of another country’s currency, transportation, professional services keeps on fluctuating, it adds to the (such as training, recruitment, problems of international business firms consultancy and research), in fixing prices of their products and communication (postal, telephone, fax, hedging against foreign exchange risks. 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 international trade. It includes not only and insurance). Of these, tourism, international trade (i.e., export and transportation and business services import of goods and services), but also are major constituents of world trade a wide variety of other ways in which in services (see Box C). the firms operate internationally. Major (iii) Licensing and franchising: forms of business operations that Permitting another party in a foreign constitute international business are as country to produce and sell goods follows. under your trademarks, patents or (i) Merchandise exports and imports: copy rights in lieu of some fee is Merchandise means goods that are another way of entering into tangible, i.e., those that can be seen and international business. It is under the touched. When viewed from this licensing system that Pepsi and Coca perceptive, it is clear that while Cola are produced and sold all over the merchandise exports means sending world by local bottlers in foreign tangible goods abroad, merchandise countries. Franchising is similar to imports means bringing tangible goods licensing, but it is a term used in from a foreign country to one’s own connection with the provision of 2019-20 INTERNATIONAL BUSINESS 271 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 parti- different countries participate sellers cipate in domestic in international business business transactions. transactions. 2. Nationality of Various other stake- Various other stakeholders other holders such as suppliers, such as suppliers, employees, stakeholders employees, middlemen, middlemen, shareholders and shareholders and partners partners are from different are usually citizens of the nations. same country. 3. Mobility of The degree of mobility of The degree of mobility of factors factors of factors of production like of production like labour and production labour and capital is capital across nations is relatively more within a relatively less. country. 4. Customer Domestic markets are International markets lack heterogeneity relatively more homo- homogeneity due to differences across markets geneous in nature. in language, preferences, customs, etc., across markets. 5. Differences Business systems and Business systems and in business practices are relatively practices vary considerably systems and more homogeneous within across countries. 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 country. often become a barrier to international business. 7. Business Domestic business is International business trans- regulations subject to rules, laws and actions are subject to rules, laws and policies policies, taxation system, and policies, tariffs and quotas, etc., of a single country. etc. of multiple countries. 8. Currency Currency of domestic International business trans- used in country is used. actions involve use of business currencies of more than one transactions country. 2019-20 272 BUSINESS STUDIES services. McDonalds, for instance, venture on PPP. A company, if it so operates fast food restaurants the world desires, can also set up a wholly over through its franchising system. owned subsidiary abroad by making (iv) Foreign investments: Foreign 100 per cent investment in foreign investment is another important form ventures, and thus acquiring full of international business. Foreign control over subsidiary’s operations in investment involves investments of the foreign market. funds abroad in exchange for financial A portfolio investment, on the other return. Foreign investment can be of hand, is an investment that a company two types: direct and portfolio makes into another company by the investments. way of acquiring shares or providing Direct investment takes place when loans to the latter, and earns income a company directly invests in properties by way of dividends or interest on such as plant and machinery in foreign loans. Unlike foreign direct investments, countries with a view to undertaking the investor under portfolio investment production and marketing of goods does not get directly involved into and services in those countries. Direct production and marketing operations. investment provides the investor a It simply earns an income by investing controlling interest in a foreign in shares, bonds, bills, or notes in a company, known as Direct Investment, foreign country or providing loans to i.e., FDI. It can be in the form of joint foreign business firms. Box C Tourism, Transportation and Business Services dominate International Trade in Services T o u r i s m a n d t r a n s p o r t a t i o n 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. 2019-20 INTERNATIONAL BUSINESS 273 11.1.5 Benefits of International (iii) Improving growth prospects and Business employment potentials: Producing solely for the purposes of domestic Notwithstanding greater complexities and risks, international business is consumption severely restricts a important to both nations and business country’s prospects for growth and firms. It offers them several benefits. 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 on a factor to the expansion of trade and 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. Later business to the nations and business on a few countries such as Singapore, firms are discussed below. South Korea and China which saw markets for their products in the foreign Benefits to Countries countries embarked upon the strategy (i) Earning of foreign exchange: ‘export and flourish’, and soon became International business helps a country the star performers on the world map. to earn foreign exchange which it can This helped them not only in improving later use for meeting its imports of their growth prospects, but also created capital goods, technology, petroleum opportunities for employment of people products and fertilisers, pharma- living in these countries. ceutical products and a host of other (iv) Increased standard of living: In consumer products which otherwise the absence of international trade of goods might not be available domestically. and services, it would not have been (ii) More efficient use of resources: possible for the world community to As stated earlier, international business consume goods and services produced operates on a simple principle — in other countries that the people in these produce what your country can countries are able to consume and enjoy produce more efficiently, and trade the surplus production so generated with a higher standard of living. other countries to procure what they can produce more efficiently. When Benefits to Firms countries trade on this principle, they end up producing much more than (i) Prospects for higher profits: what they can when each of them International business can be more attempts to produce all the goods and profitable than the domestic business. services on its own. If such an enhanced When the domestic prices are lower, pool of goods and services is business firms can earn more profits distributed equitably amongst nations, by selling their products in countries it benefits all the trading nations. where prices are high. 2019-20 274 BUSINESS STUDIES (ii) Increased capacity utilisation: catalyst of growth for firms facing tough Many firms setup production market conditions 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 many companies is essentially a part overseas expansion and procuring of their business policies or strategic orders from foreign customers, they management. The vision to become can think of making use of their international comes from the urge to surplus production capacities and grow, the need to become more also improving the profitability of competitive, the need to diversify and their operations. Production on a to gain strategic advantages of larger scale often leads to economies internationalisation. of scale, which in turn lowers production cost and improves per 11.2 M O D E S O F E NTRY INTO unit profit margin. INTERNATIONAL BUSINESS (iii) Prospects for growth: Business Simply speaking, the term mode means firms find it quite frustrating when the manner or way. The phrase ‘modes demand for their products starts of entry into international business’, getting saturated in the domestic therefore, means various ways in which market. Such firms can considerably a company can enter into international improve prospects of their growth by business. While discussing the plunging into overseas markets. This meaning and scope of international is precisely what has prompted many business, we have already familiarised of the multinationals from the developed countries to enter into you with some of the modes of entry into international business. In the markets of developing countries. While demand in their home countries has got following sections, we shall discuss in almost saturated, they realised their detail important ways of entering into products were in demand in the international business along with their developing countries and demand was advantages and limitations. Such a picking up quite fast. discussion will enable you to know as (iv) Way out to intense to which mode is more suitable under competition in domestic market: what conditions. When competition in the domestic 11.2.1 Exporting and Importing market is very intense, internationalisation seems to be the only way to achieve Exporting refers to sending of goods significant growth. Highly competitive and services from the home country to domestic market drives many a foreign country. In a similar vein, companies to go international in search importing is purchase of foreign of markets for their products. products and bringing them into one’s International business thus acts as a home country. There are two important 2019-20 INTERNATIONAL BUSINESS 275 ways in which a firm can export or enter into joint ventures or set up import products: direct and indirect manufacturing plants and exporting/importing. In the case of facilities in host countries. direct exporting/importing, a firm Since exporting/importing does itself approaches the overseas buyers/ not require much of investment in suppliers and looks after all the foreign countries, exposure to formalities related to exporting/ foreign investment risks is nil or importing activities including those much lower than that is present related to shipment and financing of when firms opt for other modes of goods and services. Indirect exporting/ entry into international business. importing, on the other hand, is one where the firm’s participation in Limitations the export/import operations is Major limitations of exporting/ minimum, and most of the tasks importing as an entry mode of relating to export/import of the goods international business are as follows: are carried out by some middle men Since the goods physically move such as export houses or buying from one country to another, offices of overseas customers located exporting/importing involves in the home country or wholesale additional packaging, trans- importers in the case of import portation and insurance costs. operations. Such firms do not directly Especially in the case of heavy deal with overseas customers in the items, transportation costs alone case of exports and suppliers in the become an inhibiting factor to case of imports. their exports and imports. On reaching the shores of foreign Advantages countries, such products are subject to custom duty and a Major advantages of exporting include: variety of other levies and charges. As compared to other modes of Taken together, all these expenses entry, exporting/importing is the and payments substantially easiest way of gaining entry into increase product costs and make international markets. It is less them less competitive. complex an activity than setting Exporting is not a feasible option up and managing joint-ventures when import restrictions exist in or wholly owned subsidiaries a foreign country. In such a abroad. situation, firms have no alternative Exporting/importing is less but to opt for other entry modes involving in the sense that such as licensing/franchising or business firms are not required to joint venture which makes it invest that much time and money feasible to make the product as is needed when they desire to available by way of producing and 2019-20 276 BUSINESS STUDIES marketing it locally in foreign producing final products such as countries. cars and shoes; Export firms basically operate Assembly of components into final from their home country. They products such as assembly of hard produce in the home country and disk, mother board, floppy disk then ship the goods to foreign drive and modem chip into countries. Except a few visits made computers; and by the executives of export firms Complete manufacture of the to foreign countries to promote products such as garments. their products, the export firms in The goods are produced or assembled general do not have much contact by the local manufacturers as per the with the foreign markets. This puts technology and management guidance the export firms in a disadvan- provided to them by the foreign tageous position vis-à-vis the local company. The goods so manufactured firms which are very near the or assembled by the local producers customers and are able to better are delivered to the international firm understand and serve them. for use in its final products or out Despite the above mentioned rightly sold as finished products by the limitations, exporting/importing is the international firm under its brand most preferred way for business firms names in various countries including when they are getting initially involved the home, host and other countries. All with international business. As usually is the case, firms start their overseas the major international companies such operations with exports and imports, as Nike, Reebok, Levis and Wrangler and later having gained familiarity with today get their products or components the foreign market operations switch produced in the developing countries over to other forms of international under contract manufacturing. business operations. Advantages 11.2.2 Contract Manufacturing Contract manufacturing offers several Contract manufacturing refers to a type advantages to both the international of international business where a firm company and local producers in the enters into a contract with one or a few foreign countries. local manufacturers in foreign countries Contract manufacturing permits to get certain components or goods the international firms to get the produced as per its specifications. goods produced on a large scale Contract manufacturing, also known as without requiring investment in outsourcing, can take three major forms: setting up production facilities. Production of certain components These firms make use of the such as automobile components production facilities already or shoe uppers to be used later for existing in the foreign countries. 2019-20 INTERNATIONAL BUSINESS 277 Since there is no or little Limitations investment in the foreign The major disadvantages of contract countries, there is hardly any manufacturing to international firm investment risk involved in the and local producer in foreign countries 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 any contract. idle production capacities, The local firm producing under manufacturing jobs obtained on contract manufacturing is not free contract basis in a way provide a to sell the contracted output as ready market for their products per its will. It has to sell the goods and ensure greater utilisation of to the international company at their production capacities. This is predetermined prices. This results how the Godrej group is benefitting in lower profits for the local firm if from contract manufacturing in the open market prices for such India. It is manufacturing soaps goods happen to be higher than under contract for many the prices agreed upon under the multinationals including Dettol contract. soap for Reckitt and Colman. This has considerably helped it in 11.2.3 Licensing and Franchising making use of its excess soap Licensing is a contractual arrangement manufacturing capacity. in which one firm grants access to its The local manufacturer also gets patents, trade secrets or technology to the opportunity to get involved with another firm in a foreign country for a international business and avail fee called royalty. The firm that grants incentives, if any, available to the such permission to the other firm is export firms in case the known as licensor and the other firm international firm desires goods so in the foreign country that acquires produced be delivered to its home such rights to use technology or country or to some other foreign patents is called the licensee. It may countries. be mentioned here that it is not only 2019-20 278 BUSINESS STUDIES technology that is licensed. In the in joining the franchising system. fashion industry, a number of McDonald, Pizza Hut and Wal-Mart are designers license the use of their examples of some of the leading names. In some cases, there is franchisers operating worldwide. exchange of technology between the two firms. Sometimes there is mutual Advantages exchange of knowledge, technology As compared to joint ventures and and/or patents between the firms wholly owned subsidiaries, licensing/ which is known as cross-licensing. franchising is relatively a much easier Franchising is a term very similar mode of entering into foreign markets to licensing. One major distinction with proven product/technology between the two is that while the former without much business risks and is used in connection with production investments. Some of the specific and marketing of goods, the term advantages of licensing are as follows: franchising applies to service business. The other point of difference between Under the licensing/franchising the two is that franchising is relatively system, it is the licensor/ more stringent than licensing. franchiser who sets up the Franchisers usually set strict rules and business unit and invests his/her regulations as to how the franchisees own money in the business. As should operate while running their such, the licensor/franchiser has business. Barring these two differences, to virtually make no investments franchising is pretty much the same as abroad. Licensing/franchising is, licensing. Like in the case of licensing, therefore, considered a less a franchising agreement too involves expensive mode of entering into grant of rights by one party to another international business. for use of technology, trademark and Since no or very little foreign patents in return of the agreed investment is involved, licensor/ payment for a certain period of time. franchiser is not a party to the losses, The parent company is called the if any, that occur to foreign business. franchiser and the other party to the Licensor/franchiser is paid by the agreement is called franchisee. The licensee/franchisee by way of fees franchiser can be any service provider fixed in advance as a percentage of be it a restaurant, hotel, travel agency, production or sales turnover. This bank wholesaler or even a retailer - who royalty or fee keeps accruing to the has developed a unique technique for licensor/franchiser so long as the creating and marketing of services production and sales keep on taking under its own name and trade mark. It place in the licensee’s/franchisee’s is the uniqueness of the technique that business unit. gives the franchiser an edge over its Since the business in the foreign competitors in the field, and makes the country is managed by the would-be-service providers interested licensee/franchisee who is a local 2019-20 INTERNATIONAL BUSINESS 279 person, there are lower risks of Over time, conflicts often develop business takeovers or government between the licensor/franchiser interventions. and licensee/franchisee over Licensee/franchisee being a local issues such as maintenance of person has greater market accounts, payment of royalty and knowledge and contacts which non-adherence to norms relating can prove quite helpful to the to production of quality products. licensor/franchiser in successfully These differences often result in conducting its marketing costly litigations, causing harm to operations. both the parties. As per the terms of the licensing/ franchising agreement, only the 11.2.4 Joint Ventures parties to the licensing/franchising agreement are legally entitled to Joint venture is a very common make use of the licensor’s/ strategy for entering into foreign franchiser’s copyrights, patents and markets. A joint venture means brand names in foreign countries. establishing a firm that is jointly As a result, other firms in the foreign owned by two or more otherwise market cannot make use of such independent firms. In the widest sense trademarks and patents. of the term, it can also be described as any form of association which Limitations implies collaboration for more than a transitory period. A joint ownership Licensing/franchising as a mode of venture may be brought about in international business suffers from the three major ways: following weaknesses. (i) Foreign investor buying an When a licensee/franchisee interest in a local company becomes skilled in the manu- (ii) Local firm acquiring an interest in facture and marketing of the an existing foreign firm licensed/franchised products, (iii) Both the foreign and local there is a danger that the licensee entrepreneurs jointly forming a can start marketing an identical new enterprise. product under a slightly different brand name. This can cause Advantages severe competition to the licenser/ franchiser. Major advantages of joint venture include: If not maintained properly, trade secrets can get divulged to others Since the local partner also in the foreign markets. Such contributes to the equity capital of lapses on the part of the licensee/ such a venture, the international franchisee can cause severe losses firm finds it financially less to the licensor/franchiser. burdensome to expand globally. 2019-20 280 BUSINESS STUDIES Joint ventures make it possible foreign countries, thus always to execute large projects running the risks of such a requiring huge capital outlays technology and secrets being and manpower. disclosed to others. The foreign business firm The dual ownership arrangement benefits from a local partner’s may lead to conflicts, resulting in knowledge of the host countries battle for control between the regarding the c o m p e t i t i v e investing firms. conditions, culture, language, political systems and business 11.2.5 Wholly Owned Subsidiaries systems. This entry mode of international In many cases entering into a business is preferred by companies foreign market is very costly and which want to exercise full control over risky. This can be avoided by sharing costs and/or risks with their overseas operations. The parent a local partner under joint company acquires full control over the venture agreements. foreign company by making 100 per cent investment in its equity capital. A Limitations wholly owned subsidiary in a foreign market can be established in either of Major limitations of a joint venture are the two ways: discussed below: (i) Setting up a new firm altogether Foreign firms entering into joint to start operations in a foreign ventures share the technology and country — also referred to as a trade secrets with local firms in green field venture, or Foreign Trade Policy (FTP) 2015-20 The Foreign Trade Policy (FTP) 2015-20 provides a stable and sustainable policy environment for foreign trade in merchandise and services, link rules and incentives for exports and imports along with other initiatives, such as ‘Make in India’, ‘Digital India’ and ‘Skill India’ to create ‘Export Promotion Mission’, promote the diversification of India’s exports basket by helping various sectors of the Indian economy to gain global competitiveness, create an architecture for India’s global trade as an effort to reduce trade imbalance. FTP has introduced two major schemes: 1. Merchandise Exports from India Scheme (MEIS) covers agricultural products, like fruits, flowers, vegetables, tea, coffee, spices, handicrafts, handlooms, jute products, textile and garments; tharmaceuticals; surgical; herbal; auto components; telecom; transport; railways; leather; wood; paper, etc. 2. Services exports from India Scheme (SEIS) which covers legal, accounting, architectural, engineering, educational and hospital services at 5%; hotels and restaurants, travel agencies and tour operators and other business services at 3%. Source : Annual report, 2016-17, Ministry of Commerce 2019-20 INTERNATIONAL BUSINESS 281 (ii) Acquiring an established firm in international business operations, the foreign country and using that therefore, becomes subject to firm to manufacture and/or higher political risks. promote its products in the host nation. 11.3 E XPORT -IMPORT P ROCEDURES AND DOCUMENTATION Advantages A major distinction between domestic Major advantages of a wholly owned and international operations is the subsidiary in a foreign country are as complexity of the latter. Export and follows: import of goods is not that straight forward as buying and selling in the The parent firm is able to exercise domestic market. Since foreign trade full control over its operations in transactions involves movement of foreign countries. goods across frontiers and use of Since the parent company on its foreign exchange, a number of own looks after the entire operations formalities are needed to be performed of foreign subsidiary, it is not before the goods leave the boundaries required to disclose its technology of a country and enter into that of or trade secrets to others. another. Following sections are devoted to a discussion of major steps that need Limitations to be undertaken for completing export The limitations of setting up a wholly and import transactions. owned subsidiary abroad include: 11.3.1 Export Procedure The parent company has to make 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 of a Since the parent company owns product sends an enquiry to different 100 per cent equity in the foreign exporters requesting them to send company, it alone has to bear the information regarding price, quality and entire losses resulting from failure terms and conditions for export of of its foreign operations. goods. Exporters can be informed of Some countries are averse to such an enquiry even by way of setting up of 100 per cent wholly advertisement in the press put in by the owned subsidiaries by foreigners importer. The exporter sends a reply to in their countries. This form of the enquiry in the form of a quotation — 2019-20 282 BUSINESS STUDIES referred to as proforma invoice. The regulations. Export of goods in India proforma invoice contains information is subject to custom laws which about the price at which the exporter is demand that the export firm must have ready to sell the goods and also provides an export licence before it proceeds information about the quality, grade, with exports. Important pre-requisites size, weight, mode of delivery, type of for getting an export licence are as packing and payment terms. follows: (ii) Receipt of order or indent: In Opening a bank account in any case the prospective buyer (i.e., bank authorised by the Reserve importing firm) finds the export price Bank of India (RBI) and getting an and other terms and conditions account number. acceptable, it places an order for the Obtaining Import Export Code goods to be despatched. This order, also (IEC) number from the Directorate known as indent, contains a description General Foreign Trade (DGFT) or of the goods ordered, prices to be paid, Regional Import Export Licensing delivery terms, packing and marking Authority. details and delivery instructions. Registering with appropriate (iii) Assessing the importer’s export promotion council. creditworthiness and securing a Registering with Export Credit and guarantee for payments: After receipt Guarantee Corporation (ECGC) in of the indent, the exporter makes order to safeguard against risks necessary enquiry about the of non payments. creditworthiness of the importer. The An export firm needs to have the purpose underlying the enquiry is to Import Export Code (IEC) number as assess the risks of non payment by the it needs to be filled in various export/ importer once the goods reach the import documents. For obtaining the import destination. To minimise such IEC number, a firm has to apply to the risks, most exporters demand a letter Director General for Foreign Trade of credit from the importer. A letter of (DGFT) with documents such as credit is a guarantee issued by the exporter/importer profile, bank receipt importer’s bank that it will honour for requisite fee, certificate from the payment up to a certain amount of banker on the prescribed form, two export bills to the bank of the exporter. copies of photographs attested by the Letter of credit is the most appropriate banker, details of the non-resident and secure method of payment adopted interest and declaration about the to settle international transactions applicant’s non association with (iv) Obtaining export licence: Having caution listed firms. become assured about payments, the It is obligatory for every exporter to exporting firm initiates the steps get registered with the appropriate relating to compliance of export export promotion council. Various 2019-20 INTERNATIONAL BUSINESS 283 export promotion councils such as importer. Either the firm itself goes in Engineering Export Promotion Council for producing the goods or else it buys (EEPC) and Apparel Export Promotion from the market. Council (AEPC) have been set up by the (vii) Pre-shipment inspection: The Government of India to promote and Government of India has initiated many develop exports of different categories steps to ensure that only good quality of products. We shall discuss about products are exported from the export promotion councils in a later country. One such step is compulsory section. But it may be mentioned here inspection of certain products by a that it is necessary for the exporter to competent agency as designated by the become a member of the appropriate government. The government has export promotion council and obtain passed Export Quality Control and a Registration cum Membership Inspection Act, 1963 for this purpose. Certificate (RCMC) for availing benefits and has authorised some agencies to available to export firms from the act as inspection agencies. If the Government. product to be exported comes under Registration with the ECGC is such a category, the exporter needs to necessary in order to protect overseas contact the Export Inspection Agency payments from political and (EIA) or the other designated agency for commercial risks. Such a registration obtaining inspection certificate. The also helps the export firm in getting pre-shipment inspection report is financial assistance from commercial required to be submitted along with banks and other financial institutions. other export documents at the time of (v) Obtaining pre-shipment finance: exports. Such an inspection is not Once a confirmed order and also a letter compulsory in case the goods are being of credit have been received, the exported by star trading houses, exporter approaches his banker for trading houses, export houses, obtaining pre-shipment finance to industrial units setup in export undertake export production. Pre- processing zones/special economic shipment finance is the finance that the zones (EPZs/SEZs) and 100 per cent exporter needs for procuring raw export oriented units (EOUs). We shall materials and other components, discuss about these special types of processing and packing of goods and export firms in a later section. transportation of goods to the port of (viii) Excise clearance: As per the shipment. Central Excise Tariff Act, excise duty is (vi) Production or procurement of payable on the materials used in goods: Having obtained the pre- manufacturing goods. The exporter, shipment finance from the bank, the therefore, has to apply to the concerned exporter proceeds to get the goods Excise Commissioner in the region with ready as per the specifications of the an invoice. If the Excise Commissioner 2019-20 284 BUSINESS STUDIES is satisfied, he may issue the excise types of goods to be exported, probable clearance. But in many cases the date of shipment and the port of government exempts payment of excise destination. On acceptance of duty or later on refunds it if the goods application for shipping, the shipping so manufactured are meant for exports. company issues a shipping order. A The idea underlying such exemption shipping order is an instruction to the 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. The (xi) Packing and forwarding: The refund of excise duty is known as duty goods are then properly packed and drawback. This scheme of duty marked with necessary details such as drawback is presently administered by name and address of the importer, gross the Directorate of Drawback under the and net weight, port of shipment and Ministry of Finance which is responsible destination, country of origin, etc. The for fixing the rates of drawback for exporter then makes necessary different products. The work relating arrangement for transportation of goods to sanction and payment of drawback to the port. On loading goods into the is, however, looked after by the railway wagon, the railway authorities Commissioner of Customs or Central issue a ‘railway receipt’ which serves as Excise Incharge of the concerned port/ a title to the goods. The exporter airport/land custom station from endorses the railway receipt in favour where the export of goods is considered of his agent to enable him to take to have taken place. delivery of goods at the port of shipment. (ix) Obtaining certificate of origin: (xii) Insurance of goods: The exporter Some importing countries provide tariff then gets the goods insured with an concessions or other exemptions to the insurance company to protect against goods coming from a particular the risks of loss or damage of the goods country. For availing such benefits, the due to the perils of the sea during the importer may ask the exporter to send transit. a certificate of origin. The certificate of (xiii) Customs clearance: The goods origin acts as a proof that the goods must be cleared from the customs have actually been manufactured in the before these can be loaded on the ship. country from where the export is For obtaining customs clearance, the taking place. This certificate can be exporter prepares the shipping bill. obtained from the trade consulate Shipping bill is the main document on located in the exporter’s country. the basis of which the customs office (x) Reservation of shipping space: gives the permission for export. The exporting firm applies to the Shipping bill contains particulars of the shipping company for provision of goods being exported, the name of the shipping space. It has to specify the vessel, the port at which goods are to 2019-20 INTERNATIONAL BUSINESS 285 be discharged, country of final numbers, condition of the cargo at the destination, exporter’s name and time of receipt on board the ship, etc. address, etc. The port superintendent, on receipt of Five copies of the shipping bill along port dues, hands over the mate’s with the following documents are then receipt to the C&F agent. submitted to the Customs Appraiser at (xv) Payment of freight and issuance 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 Certificate of Inspection, where lading which serves as an evidence that necessary the 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 order is the instruction to the staff at (xvi) Preparation of invoice: After the gate of the port to permit the entry sending the goods, an invoice of the of the cargo inside the dock. After despatched goods is prepared. The obtaining the carting order, the cargo invoice states the quantity of goods sent is physically moved into the port area and the amount to be paid by the and stored in the appropriate shed. importer. The C&F agent gets it duly Since the exporter cannot make himself attested by the customs. or herself available all the time for (xvii) Securing payment: After performing all these formalities, these the shipment of goods, the exporter tasks are entrusted to an agent — informs the importer about the referred to as Clearing and Forwarding shipment of goods. The importer needs (C&F) agent. various documents to claim the title of (xiv) Obtaining mates receipt: The goods on their arrival at his/her goods are then loaded on board the country and getting them customs ship for which the mate or the captain cleared. The documents that are of the ship issues mate’s receipt to the needed in this connection include port superintendent. A mate receipt is certified copy of invoice, bill of lading, a receipt issued by the commanding packing list, insurance policy, officer of the ship when the cargo is certificate of origin and letter of credit. loaded on board, and contains the The exporter sends these documents information about the name of the through his/her banker with the vessel, berth, date of shipment, instruction that these may be delivered descripton of packages, marks and to the importer after acceptance of the 2019-20 286 BUSINESS STUDIES bill of exchange — a document which payment from the importer along with is sent along with the above mentioned accrued interest. documents. Submission of the relevant Having received the payment for documents to the bank for the purpose exports, the exporter needs to get a bank of getting the payment from the bank certificate of payment. Bank certificate of is called ‘negotiation of the documents’. payment is a certificate which says that Bill of exchange is an order to the the necessary documents (including bill importer to pay a certain amount of of exchange) relating to the particular money to, or to the order of, a certain export consignment has been negotiated person or to the bearer of the (i.e., presented to the importer for instrument. It can be of two types: payment) and the payment has been document against sight (sight draft) or received in accordance with the exchange document against acceptance (usance control regulations. 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 import and custom policies and other delivered to the importer against his or statutory requirements. The following her acceptance of the bill of exchange paragraphs discuss various steps for making payment at the end of a involved in a typical import transaction specified period, say three months. for bringing goods into Indian territory. On receiving the bill of exchange, the importer releases the payment in (i) Trade enquiry: The first thing that case of sight draft or accepts the usance the importing firm has to do is to gather draft for making payment on maturity information about the countries and of the bill of exchange. The exporter’s firms which export the given product. bank receives the payment through the The importer can gather such importer’s bank and is credited to the information from the trade directories exporter’s account. and/or trade associations and The exporter, however, need not organisations. Having identified the wait for the payment till the release of countries and firms that export money by the importer. The exporter the product, the importing firm can get immediate payment from his/ approaches the export firms with the her bank on the submission of help of a trade enquiry for collecting 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 2019-20 INTERNATIONAL BUSINESS 287 information regarding the price and (ii) Procurement of import licence: various terms and conditions on which There are certain goods that can be the latter is ready to exports goods. imported freely, while others need After receiving a trade enquiry, the licensing. The importer needs to exporter prepares a quotation and consult the Export Import (EXIM) sends it to the importer. The quotation policy in force to know whether the is known as p rofor 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, grade, goods can be imported only against the design, size, weight and price of the licence, the importer needs to procure export product, and the terms and an import licence. In India, it is conditions on which their export will obligatory for every importer (and also take place. for exporter) to get registered with the 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. 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 2019-20 288 BUSINESS STUDIES 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 to the goods and as such is freely transferable by the endorsement and delivery. Airway Bill: Like a bill of lading, an airway bill is a document wherein an airline company gives its official receipt of the goods on board its aircraft and at the same time gives an undertaking to carry them to the port of destination. It is also a document of title to the goods and as such is freely transferable by the endorsement and delivery. Marine insurance policy: It is a certificate of insurance contract whereby the insurance company agrees in consideration of a payment called premium to indemnify the insured against loss incurred by the latter in respect of goods exposed to perils of the sea. Cart ticket: A cart ticket is also known as a cart chit, vehicle or gate pass. It is prepared by the exporter and includes details of the export cargo in terms of the shipper’s name, number of packages, shipping bill number, port of destination and the number of the vehicle carrying the cargo. C. Documents related to payment Letter of credit: A letter of credit is a guarantee issued by the importer’s bank that it will honour up to a certain amount the payment of export bills to the bank of the exporter. Letter of credit is the most appropriate and secure method of payment adopted to settle international transactions Bill of exchange: It is a written instrument whereby the person issuing the instrument directs the other party to pay a specified amount to a certain person or the bearer of the instrument. In the context of an export-import transaction, bill of exchange is drawn by exporter on the importer asking the latter to pay a certain amount to a certain person or the bearer of the bill of exchange. The documents giving title to the export consignment are passed on to the importer only when the importer accepts the order contained in the bill of exchange. Bank certificate of payment: Bank certificate of payment is a certificate that the necessary documents (including bill of exchange) relating to the particular export consignment has been negotiated (i.e., presented to the importer for payment) and the payment has been received in accordance with the exchange control regulations. 2019-20 INTERNATIONAL BUSINESS 289 Directorate General Foreign Trade payment. The import order should be (DGFT) or Regional Import Export carefully drafted so as to avoid any Licensing Authority, and obtain an ambiguity and consequent conflict Import Export Code (IEC) number. This between the importer and exporter. number is required to be mentioned on (v) Obtaining letter of credit: If the most of the import documents. payment terms agreed between the (iii) Obtaining foreign exchange: importer and the overseas supplier is Since the supplier in the context of an a letter of credit, then the importer import transaction resides in a foreign should obtain the letter of credit from country, he/she demands payment in its bank and forward it to the overseas a foreign currency. Payment in foreign supplier. As stated previously, a letter currency involves exchange of Indian of credit is a guarantee issued by the currency into foreign currency. In India, importer’s bank that it will honour all foreign exchange transactions are payment up to a certain amount of regulated by the Exchange Control export bills to the bank of the exporter. Department of the Reserve Bank of Letter of credit is the most appropriate India (RBI). As per the rules in force, and secured method of payment every importer is required to secure the adopted to settle international sanction of foreign exchange. For transactions. The exporter wants this obtaining such a sanction, the importer document to be sure that there is no has to make an application to a bank risk of non-payment. authorised by RBI to issue foreign (vi) Arranging for finance: The exchange. The application is made in a importer should make arrangements in prescribed form along with the import advance to pay to the exporter on licence as per the provisions of arrival of goods at the port. Advanced Exchange Control Act. After proper planning for financing imports is scrutiny of the application, the bank necessary so as to avoid huge sanctions the necessary foreign demurrages (i.e., penalties) on the exchange for the import transaction. imported goods lying uncleared at the (iv) Placing order or indent: After port for want of payments. obtaining the import licence, the (vii) Receipt of shipment advice: importer places an import order or After loading the goods on the vessel, indent with the exporter for supply of the overseas supplier dispatches the the specified products. The import shipment advice to the importer. A order contains information about the shipment advice contains information price, quantity size, grade and quality about the shipment of goods. The of goods ordered and the instructions information provided in the shipment relating to packing, shipping, ports of advice includes details such as invoice shipment and destination, delivery number, bill of lading/airways bill schedule, insurance and mode of number and date, name of the vessel 2019-20 290 BUSINESS STUDIES with date, the port of export, (ix) Arrival of goods: Goods are description of goods and quantity, and shipped by the overseas supplier as per the date of sailing of vessel. the contract. The person in charge of (viii) Retirement of import the carrier (ship or airway) informs the documents: Having shipped the officer in charge at the dock or the goods, the overseas supplier prepares airport about the arrival of goods in the a set of necessary documents as per the importing country. He provides the terms of contract and letter of credit and document called import general hands it over to his or her banker for manifest. Import general manifest is a their onward transmission and document that contains the details of negotiation to the importer in the the imported goods. It is a document manner as specified in the letter of on the basis of which unloading of credit. The set of documents normally cargo takes place. contains bill of exchange, commercial (x) Customs clearance and release invoice, bill of lading/airway bill, of goods: All the goods imported into packing list, certificate of origin, marine India have to pass through customs clearance after they cross the Indian insurance policy, etc. borders. Customs clearance is a The bill of exchange accompanying somewhat tedious process and calls for the above documents is known as the completing a number of formalities. It documentary bill of exchange. As is, therefore, advised that importers mentioned earlier in connection with appoint C&F agents who are the export procedure, documentary bill well- versed with such formalities and of exchange can be of two types: play an important role in getting the documents against payment (sight goods customs cleared. draft) and documents against Firstly, the importer has to obtain acceptance (usance draft). In the case a delivery order which is otherwise of sight draft, the drawer instructs the known as endorsement for delivery. bank to hand over the relevant Generally when the ship arrives at the documents to the importer only against port, the importer obtains the payment. But in the case of usance endorsement on the back of the bill of draft, the drawer instructs the bank to lading. This endorsement is done by hand over the relevant documents to the concerned shipping company. In the importer against acceptance of the some cases instead of endorsing the bill, bill of exchange. The acceptance of bill the shipping company issues a delivery of exchange for the purpose of getting order. This order entitles the importer delivery of the documents is known as to take the delivery of goods. Of course, retirement of import documents. Once the importer has to first pay the freight the retirement is over, the bank hands charges (if these have not been paid by over the import documents to the the exporter) before he or she can take importer. possession of the goods. 2019-20 INTERNATIONAL BUSINESS 291 The importer has to also pay dock the document carefully and gives the dues and obtain port trust dues examination order. The importer receipt. For this, the importer has to procures the said document prepared submit to the ‘Landing and Shipping by the appraiser and pays the duty, Dues Office’ two copies of a duly filled if any. in form — known as ‘application to After payment of the import duty, import’. The ‘Landing and Shipping the bill of entry has to be presented to Dues Office’ levies a charge for services the dock superintendent. The same has of dock authorities which has to be to be marked by the superintendent borne by the importer. After payment and an examiner will be asked to of dock charges, the importer is given physically examine the goods imported. back one copy of the application as a The examiner gives his report on the receipt. This receipt is known as ‘port bill of entry. The importer or his agent trust dues receipt’. presents the bill of entry to the port The importer then fills in a form ‘bill authority. After receiving necessary of entry’ for assessment of customs charges, the port authority issues the import duty. One appraiser examines release order. Major Documents used in an Import Transaction Trade enquiry: A trade enquiry is a written request by an importing firm to the exporter for supply of information regarding the price and various terms and conditions on which the latter exports goods. Proforma invoice: A proforma invoice is a document that contains details as to the quality, grade, design, size, weight and price of the export product, and the terms and conditions on which their export will take place. Import order or indent: It is a document in which the buyer (importer) orders for supply of requisite goods to the supplier (exporter). The order or indent contains the information such as quantity and quality of goods to be imported, price to be charged, method of forwarding the goods, nature of packing, mode of payment, etc. Letter of credit: It is document that contains a guarantee from the importer bank to the exporter’s bank that it is undertaking to honour the payment up to a certain amount of the bills issued by the exporter for exports of the goods to the importer. Shipment advice: The shipment advice is a document that the exporter sends to the importer informing him that the shipment of goods has been made. Shipment of advice contains invoice number, bill of lading/airways bill number and date, name of the vessel with date, the port of export, description of goods and quantity, and the date of sailing of the vessel. Bill of lading: It is a document prepared and signed by the master of the ship acknowledging the receipt of goods on board. It contains terms and conditions on which the goods are to be taken to the port of destination. 2019-20 292 BUSINESS STUDIES Airway Bill: Like a bill of lading, an airway bill is a document wherein an airline/ shipping company gives its official receipt of the goods on board its aircraft and at the same time gives an undertaking to carry them to the port of destination. It is also a document of title to the goods and as such is freely transferable by the endorsement and delivery. Bill of entry: Bill of entry is a form supplied by the customs office to the importer. It is to be filled in by the importer at the time of receiving the goods. It has to be in triplicate and is to be submitted to the customs office. The bill of entry contains information such as name and address of the importer, name of the ship, number of packages, marks on the package, description of goods, quantity and value of goods, name and address of the exporter, port of destination, and customs duty payable. Bill of exchange: It is a written instrument whereby the person issuing the instrument directs the other party to pay a specified amount to a certain person or the bearer of the instrument. In the context of an export-import transaction, bill of exchange is drawn by the exporter on the importer asking the latter to pay a certain amount to a certain person or the bearer of the bill of exchange. The documents giving title to the export consignment are passed on to the importer only when the importer accepts the order contained in the bill of exchange. Sight draft: It is a type of bill of exchange wherein the drawer of the bill of exchange instructs the bank to hand over the relevant documents to the importer only against payment. Usance draft: It is a type of bill of exchange wherein the drawer of the bill of exchange instructs the bank to hand over the relevant documents to the importer only against acceptance of the bill of exchange. Import general manifest. Import general manifest is a document that contains the details of the imported good. It is the document on the basis of which unloading of cargo takes place. Dock challan: Dock charges are to be paid when all the formalities of the customs are completed. While paying the dock dues, the importer or his clearing agent specifies the amount of dock dues in a challan or form which is known as dock challan. 11.4 FOREIGN TRADE PROMOTION: international business. Major foreign INCENTIVES AND ORGANISATIONAL trade promotion schemes and S UPPORT organisations are discussed in the Various incentives and schemes are following sections. operational in the country to help 11.4.1 Foreign Trade Promotion business firms improve competitiveness Measures and Schemes of their exports. From time-to-time, the government has also setup a number Details of various trade promot