1F Commerce Notes - Bishop Hodges Higher Secondary School PDF

+1 F COMMERCE BISHOP HODGES HIGHER SECONDARY SCHOOL, MAVELIKKARA Important Notes for +1 Business Studies by Sruthi SB (Business Studies Teacher)  CHAPTER 11 INTERNATIONAL...

+1 F COMMERCE BISHOP HODGES HIGHER SECONDARY SCHOOL, MAVELIKKARA Important Notes for +1 Business Studies by Sruthi SB (Business Studies Teacher)  CHAPTER 11 INTERNATIONAL BUSINESS INTERNATIONAL BUSINESS: Meaning Business Transactions taking place beyond National Boundaries is Known as International Business. Eg: India buys petrol from Saudi Arabia. Reasons for International Business ❖ Unequal distribution of Natural Resources: Unequal distribution of natural resources make it impossible for a nation to produce and sell all products and service they want. So they do International business to get required products. ❖ Difference in Manufacturing and labour cost. : There is difference in manufacturing and labour cost in various countries because of economic and legal factors followed in a country. Countries go for International business to purchase or produce low cost quality products from available market/country. ❖ Price Difference: Different countries charge different prices for a product. Countries do International business to get low cost quality product. ❖ Specialisation Advantage : One country may have specialisation advantage to produce quality goods at less cost than other countries. or Some countries can produce quality products at less cost than other countries (i.e, certain countries have favourable conditions for producing certain products). So they produce it more and sell it internationally. ❖ Growth and Profitability : Companies do International business to expand their market and grow. So, they can get more profit. SCOPE OF INTERNATIONAL BUSINESS ▪ Merchandise Exports and Imports ▪ Services Exports and Imports ▪ Licensing and Franchising ▪ Foreign Investment 1. Merchandise Export and Import Merchandise means goods that we can see and touch. Merchandise Export means sending goods to foreign country. Merchandise Import means receiving goods from foreign country to ones’s own country. Eg: India Export cotton products to foreign country. 2. Services Export and Import (Invisible Trade) Service Export and Import involve trade in Intangibles. Services like transportation, communication, travel and tourism, banking, insurance etc. can be exported and imported. This trade in services is also known as Invisible trade. Eg: India export IT Services. 3. Licensing and Franchising Licensing is permitting a person or a firm in a foreign country to produce and sell goods under a company’s trademark, patents, or copyrights for fee or royalty. Eg: Microsoft, Pepsi and Coca-Cola (Pepsi and Coca-Cola produced and sold products all over the world by way of licensing). Franchising is similar to licensing with a additional feature/provision of services. Eg: KFC. 4. Foreign Investments Foreign investments means investment of fund in foreign country in exchange for financial return. Foreign investment can be of two types : Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). FDI means investing directly in properties (plant, machinery etc.) of foreign countries. FPI means investment in shares of foreign companies. DOMESTIC VS INTERNATIONAL BUSINESS ❖ Nationality of Parties - Buyers and Sellers, Stakeholders ❖ Customer heterogeneity ❖ Business systems and practices ❖ Political system and risk ❖ Business regulations and policies ❖ Currency  DOMESTIC VS INTERNATIONAL BUSINESS Basis Domestic Business International Business 1. Nationality of Buyer and seller belong to Buyer and seller belong to Buyer and seller one country different countries 2. Nationality of other Various stakeholders like Various stakeholders are Stakeholders Suppliers, employees, from different countries middlemen, shareholders etc. are the citizens of same country 3. Customer Customers are more Customers are more heterogeneity homogeneous/ same in heterogeneous/ different in nature aspects like language, preferences, culture etc. 4. Mobility of factors More mobility ( factors of Less mobility of Production Production like labour and capital are movable within country) 5. Business system Relatively same business Different business systems and practices system and practice followed and practices are followed in within one country. different countries. 6. Political system Political system and risk is Political system and risk is and risk same in one country different in different countries 7. Business Subject to the rules, laws, Subject to the rules and regulations and taxation policies of the same policies followed in the policies country concerned country. 8. Currency Currency of the domestic Currencies of more than one country countries Benefits of International Business International business is important to both Nation and Business firm. It offers them several benefits. 1. Benefits to Nations: 1.Earning of foreign exchange : International business help a country to earn for exchange/ fund. This fund can be used for payment of imports of a nation. 2.More efficient use of resources: Some countries have specialisation advantage to produce some product efficiently than other countries. Countries effectively use the resources to satisfy a Nations need and also export it to satisfy other Nations needs. Improving growth prospects and Employment potentials : Business grow by international Business and it create more employment opportunities. Increased standard of living : People in one country can consume goods and services produced in other countries and can enjoy high standard of living. 2. Benefits to Firms: 1. Higher profit : When domestic price for a product is lower, business firm can earn more profit by selling their product in countries where prices are high for that product. 2. Increase the capacity utilisation : With the help of international business a company can utilise its surplus production capacity and thereby improve its profitability. 3. Prospects for growth: When the demand for product start getting down in domestic market, a firm can grow by entering a foreign market. 4. Way out to / Beat intense competition in domestic market : when competition in domestic market is very intense, internationalisation is the way to achieve significant growth. 5. It improves Business Vision. MODES OF ENTRY TO INTERNATIONAL BUSINESS Modes of entry into international business means various ways in which a company can enter into International business. The various modes of entry to International business are: 1. Exporting and Importing 2. Contract manufacturing 3. Licensing and Franchising 4. Joint venture 5. Wholly owned subsidiaries  1. Exporting and importing Export means sending of goods and service from the home country to a foreign country. Import means purchase of foreign products from foreign country to our home country. There are two types of exporting and importing viz, Direct Exporting & Importing and Indirect exporting and Importing. Advantages of exporting and importing.  Less complexity : It involves less complex formalities to do business than other modes of entry.  Easiest way of gaining entry : It is the easiest option to enter International market.  Less Investment : Comparatively less time and cost is required.  Less risk: Investment is less so risk is also less. Disadvantages of Exporting and Importing  High cost : It involves high cost because of additional cost of packaging, transportation, insurance, custom duty etc.  Import Restrictions: some countries restricts import of goods.  Less direct contact with the foreign market. 2. Contract Manufacturing (Outsourcing) In contract manufacturing a company enters into contract with a local manufacturer in a foreign country. The contract is for getting certain components (raw materials) or goods produced as per specifications given. It is also called Outsourcing. Eg: Maruti Suzuki Swift hatch car use Fiat Company’s engine. Contract manufacturing can take place in free forms: a. Production of certain components only b. Assembly of components into final products c. Complete manufacture of the products Advantages of contact manufacturing.  No / Less Investment : Goods can be produced on large scale without any investment. Here, the firm use existing production facility of foreign countries.  No / Less Investment risk : As investment is less, risk is also less.  Low cost of production : It helps to get product with low material cost and labour cost.  Utilisation of ideal capacity: It help to use available production capacity of foreign manufacturers  Export Incentives: Producers may get export incentives from government. Disadvantages of contact manufacturing.  Quality problems : Local firms not keeping International quality standard cause quality problems to International firm.  No freedom in production process: Producer has to follow specifications given to him. So they have no freedom in production process.  No freedom to sell : According to the terms of contract they cannot freely sell contracted product in opened market. 3. Licensing and Franchising Licensing is a contractual agreement between licensor and licensee. Here, one firm permit another firm in a foreign country to access and use its trade mark, patents, copyright or Technology for a fee called Royalty. The firm which gives permission is called licensor and to whom it is given is called licensee. Eg: Microsoft, Pepsi and Coca-Cola (produced and sold goods all over the world by licensing) Franchising is similar to licensing with provision of services. The two parties involved here are franchisor and franchisee. Eg: KFC, McDonald's, Pizzahut etc. Advantages of licensing & franchising  Less expensive: It is less expensive mode for licensor as the licensee makes all investments in his country.  Limited risk: The licensor / franchisor has only a limited risk as he has not made any investment.  Less government intervention: Since licensee / franchisee is a local person in his country, there is only less government intervention.  Knowledge about the market : since licensee / franchisee is a local prson, he might have greater knowledge about the local market.  Protection of Trademarks.: Because of the strict laws followed, only licensee can use trademark/ Disadvantages of licensing & franchising  Identical / duplicate product : when licencee/ franchisee becomes skilled in manufacturing and marketing of licenced product. They can duplicate the product afraid identical product with a slight different brand name.  Loss of secrecy : There are chances of loosing trade secrets in foreign market.  Conflicts : Conflict arise between licencor and licencee regarding payment of Royalty, maintenance of accounts, difference in quality etc. 4. Joint ventures Joint venture means two or more companies join hands together to carry on business with common purpose and mutual benefit. It pools resources and expertise of two companies to active common goal. Eg: Maruti Suzuki, BMW Brilliance Auto Group.  Joint venture may come to existence in three ways: a. Foreign investor joins a local firm in our domestic country. b. Local firm joins an existing foreign firm. c. Both the foreign and local entrepreneurs/firms jointly establish a new firm. Advantages of Joint ventures  Increase the resources and capacity: Two companies join together to pool their resources and work in improved capacity.  largest scale operation : Joint ventures operate on large scale.  less financial burden : The investment and risks are shared by both firms.  local partners knowledge : Foreign partner is benefited because of local partners knowledge about competition, culture, language, business policies etc.  Sharing of costs and risks: The cost of risk of entering International business is overcomed by the joint efforts of two or more firms joined. i.e, Parties share total cost and risks. Disadvantages of Joint ventures  Loss of Secrecy: There are chances of trade loosing trade secret as two companies join together as one company to acheive a goal  Chances of conflict: There can be chance of conflicts (difference in opinion and agreement) between two parties. 5. Wholly Owned Subsidiaries In this type of business, the parent company (holding company) acquires full or 100% shares in a subsidiary company. Eg: Tata Motors Insurance broking & Advisory Services Ltd. Wholly owned subsidiary of Tata Motors. , Fb owns WhatsApp etc. A wholly owned Subsidiary company can be established in foreign market in two ways: a. Set up a new firm in a foreign country. b. Acquire an existing firm in a foreign country. Advantages  Full Control : wholly owned subsidiary has full control over its operations in foreign countries.  Secrecy maintained: since company is wholly / fully owned by parent company (no chance of loss of secrets) secrecy can be maintained. Disadvantages  Huge Investment: It require 100% investment. So it's not suitable for small and medium sized business.  No risk sharing: Complete risk has to be born by that company itself.  Restrictions in countries: Some countries restrict to setup a wholly owned subsidiary of another country company.  Part II 1. EXPORT PROCEDURES The major steps involved in exporting goods to a foreign Country are: 1. Receipt of Enquiry and sending Quotation – The exporter gets an enquiry from prospective foreign buyers (Importers) Exporter sends quotation as reply to the enquiry. This quotation document is called Proforma Invoice. It includes all description about the product price, quality, grade, size, weight, mode of delivery, export & Import terms and conditions etc. 2. Receipt of order or Indent – If the foreign buyer (Importer) is satisfied with the conditions in the proforma invoice, a purchase order will be placed by Importer. This order is also called Indent. It contains the description of ordered goods , price, quality etc. 3. Assessing importer’s creditworthiness and securing a guarantee for payments – After receiving indent, the exporter conducts an enquiry about the financial capacity of the importer to make sure they get full payment for sale made. Usually, exporters asks a letter of credit for this purpose. Letter of credit is a guarantee given by the importer’s bank that they will pay upto a specified amount of export bills to the bank of the exporter. 4. Obtaining Export license -- The exporter has to fulfil the following formalities to get the export license from the Import-Export Licensing Authority. a. Open a Bank account authorised by RBI. b. Obtaining IEC (Import Export Code) number from DGFT (Directorate General of Foreign Trade) or Regional Import Export Licensing Authority. c. Registering with appropriate Export promotion council (EPC). Eg: Apparel Export Promotion Council, Council for Leather Exports etc. d. Registering with Export Credit and Guarantee Corporation (ECGC) to cover the risk of non-payment. 5. Obtaining pre-shipment finance – After the confirmation of order the exporter may approach his bank for getting pre-shipment finance to carry out export production. 6. Production or procurement of goods – After receiving finance exporter makes ready the goods as per specification either by production or by purchasing it from the market. 7. Pre-shipment inspection by EIA – A compulsory inspection by Export Inspection Agency – EIA (Govt. of India undertaking) should be done to ensure goods conform to International standards.  8. Excise Clearance – Exporter gets Excise clearance when concerned excise commissioner approves it. All goods produced are required to pay excise duty under Central Excise and Tariff Act. But exporting goods are either exempted or if paid, it is later refunded as a export incentive. Such refund of duty is called Duty drawback. 9. Obtaining certificate of origin – Some importing countries provide tariff concession or other exemptions for goods imported from certain countries. To avail such benefits the exporter has to obtain and submit certificate of origin along with other export documents. Certificate of Origin is a proof that the goods are actually been produced in the country from where it is exported. 10. Reservation of shipping space – The exporter applies to shipping company to reserve a shipping space. Exporter specifies complete information about the goods, probable date of shipment and port of destination to shipping company. On acceptance, the shipping company issues a shipping order. Shipping order is an instruction to the captain of the ship that the specified goods after customs clearance at a designated port be received on board. 11. Packing and forwarding – Goods are packed and marked with details such as name and address of importer, gross and net weight, destination port, country of origin etc. A packing list is attached herewith all other documents. Packing list is a document stating the number of cases or packs and thedetails of goods contained in these packs. 12. Insurance of goods – The exporter has to insure the goods with an insurance company to cover the risk in transit. 13. Customs clearance – Before loading the goods to ship, customs clearance should be obtained by the exporter. For this the exporter prepares a shipping bill (5 copies). Shipping bill is a document contains the particulars of goods, name of the vessel (ship), destination port, exporting country, exporter’s name, address etc. Documents to be attached with the shipping bill for customs clearance are: a. Export order. b. Letter of credit. c. Commercial invoice. d. Certificate of origin. e. Certificate of inspection. f. Marine insurance policy. Based on the above documents, the port authority issues a Carting Order. Carting Order is an instruction to the staff at the gate of the port to allow the cargo inside the dock.  14. Obtaining mates receipt – After the goods are loaded on the ship, the captain or mate of the ship issues a certificate called mate’s receipt to port superintendent. Port superintendent then forward it to C& F Agent (Clearing and forwarding agent) Mates receipt – It is a receipt issued by the captain or mate of the ship when goods are loaded in the ship. MR contains the name of ship, berth, date of shipment, description of packages, condition of cargo etc. 15. Payment of Freight and issuance of Bill of lading – The C&F Agent (Clearing and Forwarding agent) submits the mate’s receipt to the shipping company for computation of freight. After the payment of freight, the shipping company issues a bill of lading. Bill of lading – It is document issued by the shipping company after the cargo is loaded on the ship. It is prepared on the basis of Mates Receipt. The shipping company undertakes the delivery of goods to the buyer by producing this document. In case goods sent by air, this document is known as Airway bill. 16. Preparation of invoice – The exporter has to prepare an invoice of the goods, which contains the details such as quantity and the amount to be paid by the importer. 17. Securing payment – After shipment of goods, the exporter sends the relevant documents like Bill of lading, bill of exchange, letter of credit, invoice, etc. to the bank for completing the formalities to receive payment from the importer. EXPORT PROCEDURES 1) Receipt of Enquiry and Sending Quotations 2) Receipt of Order or Indent 3) Assessing importer’s creditworthiness and securing a guarantee for payments 4) Obtaining export License 5) Obtaining pre-shipment finance 6) Production or procurement of goods 7) Pre-shipment Inspection 8) Excise Clearance 9) Obtaining Certificate of Origin 10) Reservation of Shipping Space 11) Packing and Forwarding 12) Insurance of Goods 13) Customs Clearance 14) Obtaining Mates Receipts 15) Payment of Freight and Issuance of Bill of Lading 16) Preparation of Export Invoice 17) Securing Payments  MAJOR EXPORT DOCUMENTS A. Documents related to goods i) Export invoice: It contains information about goods such as quantity, value, number of packages, marks on packing, port of destination, name of ship, terms of payment etc ii) Packing list: It is a statement of the number of packs and the details of goods contained in these packs. iii) Certificate of origin: This is a certificate / proof that the goods are actually been produced in the country from where it is exported. iv) Certificate of inspection: It is a certificate issued by an Export Inspection agency authorised by the Govt. to ensure the quality of goods. B. Documents related to shipment i) Mate’s receipt : This is given by the captain or 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, date of shipment, description of packages etc. ii) Shipping bill : It contains the particulars of the goods being exported, the name of vessel, the port of destination, the country of destination, exporter’s name and address etc. iii) Bill of lading: It is a document issued/ given by shipping company as official receipt of the goods put on board its vessel (receipt when goods loaded on the ship). It gives an undertaking to carry them to the port of destination. It is prepared on the basis of Mates Receipt. iv) Airway bill: It is a document given by Airline Company as official receipt of the goods on board in aircraft. It gives an undertaking to carry them to the port of destination. v) Marine insurance policy: It is a certificate of insurance contract where insurance company agrees the insurer ( in consideration of a payment of premium) to cover loss incurred in transit due to sea perils. Export Documents C. Documents related to payment i) Letter of credit : It is a guarantee issued by the importer’s bank that it will honour up to a certain amount of payment of export bills to the bank of the exporter. ii) 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 exporting, Bill of exchange is an order by exporter to the importer to pay a certain sum of money to or to the order of a certain person or the bearer of the instrument. iii) Bank certificate of payment: It is a certificate that the necessary documents relating to the export have been negotiated and the payment has been received in accordance with the exchange control regulations. IMPORT PROCEDURE The steps involved in importing goods to our country are as follows: 1. Trade enquiry First, the importer has to gather information (from trade directories, trade associations, websites etc.) about the countries and firms which export the given product. After identifying the exporter, he sends the trade enquiry. Trade enquiry is a written request by the importer to the foreign supplier for getting information such as price, quality and other terms and conditions for exporting their goods. After receiving the trade enquiry, the exporter prepares the quotation and sends it to the importer. 2. Obtaining Import license Certain goods can be imported freely, while others require license. To obtain import license, importer has to register with DGFT or Regional Import Export Licensing Authority and obtain IEC number. 3. Obtaining Foreign exchange In import trade, payment is made in foreign currency. All foreign exchange transactions are regulated by the Exchange Control Department of the RBI in India. So, the importer has to get prior sanction for foreign exchange. After proper scrutiny of the application, the bank sanctions the necessary foreign exchange for the import transaction. 4. Placing order or indent After obtaining the import license and foreign exchange, the importer has to place an order or indent to exporter for the supply of goods. It should contain price, quality, quantity, size, grade and instructions relating to packing, shipping, delivery schedule, insurance and mode of payment etc. 5. Obtaining letter of credit The importer should obtain a letter of credit from his bank and forward it to the exporter. 6. Arranging for finance The importer should make arrangements in advance to pay to the exporter on arrival of goods at the port. 7. Receipt of shipment advice  After loading the goods on the ship, the exporter sends the shipment advice to the importer. Shipment advice is a document sent by the exporter to the importer containing information about the shipment of goods after it is being loaded on the ship. 8. Retirement of import documents After the goods shipped, the exporter prepares a set of documents. These contain bill of exchange, invoice, bill of lading, packing list, certificate of origin, marine insurance policy etc. He submits all the necessary documents with his banker for getting payment. Here the importer has to retire (receive) the documents either by ready payment or by accepting a bill of exchange. The acceptance of the bill of exchange for the purpose of getting delivery of the documents is called retirement of import documents. 9. Arrival of goods On arrival of goods, the person in charge of the ship informs the officer at the dock through a document called import general manifest. Import General Manifest is a document contains the details of imported goods. Cargo is unloaded on the basis of this document. 10. Customs clearance and release of goods All the goods imported into India have to pass through customs clearance. After fulfilling all the formalities at the dock and payment of dock dues, freight if any and the customs duty, the importer can release the goods from the port. In order to calculate the customs import duty, the importer has to submit a document called the Bill of Entry. The importer presents the bill of entry to the port authority. After receiving necessary charges, the port authority issues the release order. Bill of Entry is a form supplied by the customs office to the importer for filling and submitting for assessment of customs import duty. MAJOR IMPORT DOCUMENTS a) Trade enquiry : It 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. b) Proforma invoice : It is a document that contains details as to the price, quality, design, grade, size, weight etc. of the export product. c) Import order or indent: Indent contains the information such as quantity and quality of goods to be imported, price, method of forwarding the goods, nature of packing, mode of payment etc. d) Letter of credit: : It is a guarantee issued by the importer’s bank that it will honour up to a certain amount of payment of export bills to the bank of the exporter. e) Shipment advice : It is a document that the exporter sends to the importer informing him that the shipment of goods has been made. It contains invoice number, bill of lading number, name of vessel with date , the port of export, description of goods etc. f) Bill of lading: It is a document wherein a shipping company gives its official receipt of the goods put on board its vessel and gives an undertaking to carry them to the port of destination. g) Airway bill : It is a document wherein an airline company gives its official receipt of the goods on board its aircraft and gives an undertaking to carry them to the port of destination. h) Bill of entry : It is a form supplied by the customs office to the importer. It contains information such as name and address of the importer, name of the ship, number of packages, marks on the package, quantity and value of goods, name and address of the exporter, port of destination and customs duty payable. i) 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. j) Import general manifest : It is a document that contains the details of the imported goods. It is the document on the basis of which unloading of cargo takes place.