CBSE

Class 11 Business Studies

Revision Notes
Chapter 10
INTERNATIONAL BUSINESS

Manufacturing and trading beyond the geographical boundaries of a country is known as

international business. The development of communication, technology and infrastructure
etc make it possible. New modes of communication and development of faster and more
efficient means of transportation have brought nations closer to one another as a result of
which trade between them can take place. Following are the main reasons behind
international business.

1. Unequal distribution of natural resources and differences in the productivity levels of the
countries make them incapable of producing every good of their requirement.

2. Labour productivity and production costs differ among nations due to socioeconomic,
geographical and political reasons.

3. The availability of different factors of production such as labour, capital and raw materials
differ among nations.

Concept of International Business

Major forms of business operations that constitute international business are as follows

1. Merchandise exports and imports. Merchandise exports means sending tangible goods
abroad and merchandise imports means bringing tangible goods from abroad.

2. Exports and imports which involve trade in intangible items that cannot be seen or
touched. It is also called invisible trade.

3. Another way of entering into international business is licensing and franchising country to
produce and sell goods under their trademarks patents or copy light in lieu of some fee is
called licensing Pepsi and Coca-Cola are produced & sold all over the world by local
companies in foreign countries under licensing system. Franchising is similar to licensing,
but it is used in connection with the provision of services. McDonalds operates fast food

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restaurants all over the world through the system of franchising.

4. Foreign investment is another important form of international business. It can be of two

types: direct and portfolio investments. Direct investment takes place when a company
directly invests in properties such as plant& machinery in foreign countries with a view-to
undertake production and marketing of goods and services in those countries. It provides the
investor a controlling interest in a foreign country. Under portfolio investment, a company
makes investment by acquiring shares or providing loans to a foreign company & earns
income by way of dividends or interest on toad. In this investor does not get directly
involved in production or marketing of goods.

Benefits of International Business

International Business is important to both nations and business firms. It offers them various
benefits.

Benefits to Nations:

1. It helps a country to earn foreign exchange which can be used for importing various goods
from abroad.

2. It leads to specialization of a nation in the production of those goods which can be

produced by it in the most effective and economical manner.

3. It helps a nation in improving its growth prospects and also create opportunities for
employment.

4. It make it possible for people to consume goods and services produced in other countries
which help in increasing their standard of living.

Benefits to Firms:

1. It helps in increasing profits of the firms by selling goods in the countries where prices are
high.

2. It help firms in using their surplus production capacities and improving the profitability of
their operations.

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3. It help firms in improving their growth prospects.

4. It acts as one of the ways of achieving growth for firms facing tough market conditions in
the domestic market.

5. It improves business vision as it makes firms more competitive, and diversified.

Difference Between Domestic and International Business

Basis Domestic Business International Business

1. Nationality
Both buyers and sellers belong to Buyers & Sellers and belong to
of buyers and
same country. different countries.
sellers

The factors of production like

2. Mobility of There are restrictions on free mobility
capital, labour and raw material
sectors of factors of production across
can move freely within the
ofproduction countries.
country.

3. Customer International market lacks

heterogeneity Domestic market are relative homogenity due to differences in
across more homogenous in nature. languages, prefences customs etc.
market across market.

Currency used in business in

4. Currency Home currency is used in
transactions is that of more than one
used business.
country.

5. Political It has to face the political system It is subjected to political system and
system and risk of only one country. risk of different countries.

Mode of Entry into International Business

I. Exporting and Importing

Exporting refers to selling of goods and services from the home country to a foreign country
while importing refers to purchase of foreign products and bringing them into one’s home

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country.

II. Contract Manufacturing

When a firm enters into a contract with one or a few local manufacturers in foreign
countries to get certain goods produced as per its specification sit is called contract
manufacturing. It is also known as outsourcing and it can take place in following forms.

(a) Production of components like automobile components to be used later for making final
product like car.
(b) Assembling of components into final products such as assembling of tyres, seat etc in a
scooter.
(c) Complete manufacture of products such as garments.

(a) Merits

There is almost no investment risk involved as there is hardly any investment in the foreign
country.
Contract manufacturing gives the advantage to international firms to get the goods
manufactured at a lower cost.
Local manufacturers also get the benefits to be involved with international business and
start exporting.

(b) Demerits

Local firms might not follow and provide the same quality standards. causing problems to
international rums.
The local manufacturer loses his control as goods are manufactured strictly according to the
terms and specifications of international firms.
The local manufacturer is not free to sell the goods according to his will.

III. Licensing and Franchising:

Permitting another party in foreign country to produce and sell goods under their
trademarks, patents or copy right in lieu of a fee called royalty is termed as licensing. When
there is mutual exchange of knowledge, technology and patents between the firms it is called
cross-licensing. Franchising is similar to licensing, but it is used in connection with the

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provision of services. Pizza Hut and Wal-Mart are examples of some of the leading
franchisers operating worldwide.

(a) Benefits

Established brand
Quality product
Advertisement
Financing
Training
Technological upgradation
Uniform control system
Better start
Expansion
Enhancing the goodwill
Direct feedback

IV. JOINT VENTURE

Joint venture means establishing a firm that is jointly owned by two or more independent
firms. It can be brought into existence in three major ways.
(i) Foreign investor buying an interest in a local company.
(ii) Local firm acquiring an interest in an existing foreign firm.
(iii) Both the foreign and local entrepreneurs jointly forming a new enterprise.

(a) Merits
Reduces competition
Reduces risk
Protection for small companies
Advance technology
Reduction in cost
Better competence
Large capital

(b) Demerits
Problem in sharing capital

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Legal restrictions
Conflicts
Mergers and monopolies
Lack of co-ordination

V. WHOLLY OWNED SUBSIDIARIES

When a foreign company is acquired by a parent company by making 100% investment in its
equity capital then it is called wholly owned subsidiaries. A wholly owned subsidiary in a
foreign market can be established either by setting up a new firm altogether to start
operations in a foreign country or by acquiring an established firm in the foreign country.

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1. An exporter receives an enquiry from the prospective buyers seeking information
regarding price, quality & other terms conditions for export of goods. The exporter sends a
quotation known as pro forma invoice as reply.

2. If the buyer is satisfied with the export price & other terms & conditions, he places the
order or indent for the goods.

3. After receiving the order or indent, the exporter undertakes an enquiry regarding the
credit worthiness of importer to assess the risk of nonpayment by the importer.

4. According to custom laws the exporter or the export firm must have export license before
proceeding with exports. The following procedure is followed for obtaining the export
license. To open a bank account in any authorized bank.

• To obtain import export code (IEC) number from Directorate General foreign Trade (DGFT)
or Regional Import Export Licensing Authority (RIELA).

• Register with appropriate export promotion council.

• To get registered with Export Credit and Guarantee corporation(ECGC) in order to

safeguard against risk of non-payments.

5. After obtaining the export license the exporter approaches his banker in order to obtain
pre-shipment finance for carrying out production.

6. Exporter, after obtaining the pre-shipment finance from the bank, proceeds to get the
goods ready as per the orders of the importer.

7. Government of India ensures that only good quality products are exported from India. The
exporter has to submit the pre-shipment inspection report along with other documents at the
time of export.

8. According to Central Excise Tariff Act, excise duty on the material used in manufacturing
goods is to be paid. For this purpose exporter has to apply to the concerned Excise
Commissioner in the region with an invoice.

9. In order to obtain Tariff concessions or other exemptions the importer may ask the
exporter to send certificate of origin.

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10. The exporter applies to the shipping company for provision of shipping space. He has to
provide complete information regarding the goods to be exported, probable date of shipment
and port of destination. The shipping company issues a shipping order. Which is an
instruction to the captain of the ship, after accepting application for shipping.

11. The goods are packed & marked with necessary details like name & address of the
importer, gross & net weight, port of shipment & destination etc. After this the exporter
makes arrangement for the transportation of goods to the port.

12. In order to protect the goods against the risk of loss or damage due to the perils of the sea
transit the exporter gets the goods insured with an insurance company.

13. Before loading the goods on the ship they have to be cleared by the customer. For this
purpose the exporter prepares the shipping bill & submits five copies of the shipping bill
along with following documents tithe Customs Appraiser at the customs house!

(i) Certificate of origin

(ii) Commercial Invoice

(iii) Export Order

(iv) Letter of credit

(v) Certificate of Inspection, where necessary.

(vi) Marine Insurance Policy.

On submitting the above documents, the super intended of the concerned port trust is
approached for obtaining the carting order which is the instruction to the staff at the gate of
the port to permit the entry of cargo inside the dock.

14. After the goods have been loaded on board of the ship the captain or the mate of the ship
issues mate’s receipt to the port superintendent which contains information regarding
vessel, berth, description of packages, date of shipments, marks, condition of the cargo at the
time of receipt on board the ship etc.

15. The clearing & forwarding agent (C&F agent) hands over the mates receipt to the shipping

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company for calculating freight. On receiving the freight the shipping company issues a bill
of lading.

16. The exporter prepares an invoice for the dispatched goods. Invoice contains information
regarding the quantity of goods sent & the amount to be paid by the importer. It is duly
attested by the customs.

17. After shipment of goods the importer is informed about it by the exporter. Various
documents like certified copy of invoice, bill of lading packing list. Insurance policy,
certificate of origin & letter of credit are sent by the exporter through his bank. These
documents are required by the importer for getting the goods cleared from customs.

DOCUMENTS USED IN EXPORT TRANSACTIONS

A. Documents related to goods:

1. Export Invoice: It is a seller’s bill information about goods like quantity, number of
packages, marks on packing, name of ship, port of destination, terms of deli very 8: payments
etc.

2. Certificate of Inspection: For ensuring quality the government has made inspection of
certain goods compulsory by some authorised agency like export Inspection council of India
(EICI) etc. After inspecting the goods, the agency issues a certificate of inspection that the
consignment has been inspected as required under the export (Quality Control & Inspection)

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Act, 1963.

3. Packing List: This document is in the form of a statement regarding the number of cases
or packs & the details of the goods contained in these packs. It provides complete details
regarding the goods exported & the form in which they are being sent.

4. Certificate of Origin: This certificate specifies the country in which the goods are being
manufactured. This certificate enables the importer to claim tariff concessions or other
exemptions. This certificate is also required in case when there is a ban on imports of some
goods from certain countries.

B. Documents Related to Shipment:

1. Shipping Bill: It is the main document on the basis of which permission is granted for the
export of goods by the custom office. It contains full details regarding the goods being
exported name of the vessel, exporters name & address, country of final destination etc.

2. Mate’s Receipt: This receipt is issued by the captain or mate of the ship to the exporter
after the goods are loaded on board of the ship. It contains name of the vessel, description of
packages, marks, conditions of the cargo at the time of receipt onboard the ship etc.

3. Bill of lading: It is a document issued by the shipping company. It acts as an evidence

regarding the acceptance of shipping company to carry the goods to the port of destination. It
is also referred to as document of title to the goods & is freely transferable by endorsement &
delivery.

4. Airway Bill: Similar to a shipping bill, an airway bill is a document issued by the airline
company on receiving the goods on board, its aircraft and at the same time giving its
acceptance to carry them to the port of destination.

5. Marine Insurance Policy: It is a document containing contract between the exporter &
the Insurance Company to indemnify the insured against the loss incurred by the insured in
respect of goods exposed to the perils of the sea transit in consideration of a payment called
premium.

C. Document related to payment:

1. Letter to credit: It is a guarantee letter issued by the importer bank stating that it will

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honour the export bills to the bank of the exporter up to a certain amount.

2. Bill of Exchange: In export & import transaction, exporter draws the bill on the importer
asking him to pay a specified amount to a certain person or the bearer of the instrument. The
documents required by the importer for claiming title of exported goods are passed on to
him only when the importer accepts this bill.

3. Bank Certificate of Payment: It is a certificate that the necessary documents relating to

the particular export consignment have been negotiated & payment has been received in
accordance with the exchange control regulations.

IMPORT PROCEDURE

1. The first step involved in importing goods is to gather information about the countries &
firms which export the product required by the exporter. It can be gathered from trade
directories, trade associations & organizations. The exporter prepares a quotation also
known as Performa Invoice & sends it to the importer.

2. The Importer Consults the export import (EXIM) Policy in force, in order to know whether
the goods that he/she wants to import are subjected to import licensing or not. If License is
required then it is to be obtained.

3. In case of an import transaction the supplier resides in a foreign country hence he

demands payment in foreign currency. This involves exchange of Indian Currency into
foreign currency. The Exchange Control Department of the Reserve Bank of India (RBI)
regulates foreign exchange transactions in India. As per rules, every importer has to secure
the sanction of foreign exchange.

4. The importer places an import order or indent with the exporter for the supply of
specified goods. The order contains information regarding price, quality, quantity, size &
grade of goods instruction regarding packing, delivery shipping, mode of payment etc.

5. When the payment terms are agreed between the importer & the overseas supplier, the
importer obtains the letter of credit from its banker & forward sit to the overseas supplier.

6. The importer arranges for the funds in advance to pay the exporter on arrival of goods at
the port this enables the importer to avoid huge penalties on the imported goods lying

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uncleared at the port for want of payments.

7. The overseas supplier after loading the goods on the ship dispatches the Shipment Advice
to the importer. It provides information regarding, shipment of goods like invoice number,
bill of lading/airway bill, name of ship with date description of goods & quantity etc.

8. After shipping the goods, the overseas supplier hands over the various documents like
commercial invoice, bill of lading, insurance policy certificate of origin to his banker for
their onward transmission to the importer when he accepts the bill of exchange drawn by
the supplier. The acceptance of bill of exchange by the importer for the purpose of getting
delivery of the document is known as retirement of import documents.

9. When the goods arrive in the importer’s country, the person in charge of the carried
informs the officer in charge at the dock or the airport about it. The person in charge of the
ship or airway provides the document called import general manifest for unloading of cargo.

10. Imported goods are subjected to customs clearance which is a very lengthy process &
involves a lot of formalities. The importer usually appoints a C&F agent for fulfilling these
formalities.

First of all, the importer obtains a delivery order which is also known as endorsement for
delivery. This order enables the importer to take the delivery of goods after paying the
freight charges. Besides freight charges, importer also has to pay dock dues for obtaining
port trust dues receipts for which he submits two copies of a duly filled in form know as
application to import to the Landing & Shipping Dues Office. After paying dock dues the
importer get back one copy of applications a receipt which is referred as port trust dues
receipts. Finally, the importer fills in a form known as bill of entry for assessment of customs
import duty. An examiner examines the imported goods & gives his report on the bill of
entry. This bill is then presented to the port authority which on receiving necessary charges,
issues the release order.

Documents used in an Import Transaction

1. Proforma Invoice: A pro forma invoice is a document that contains details as to the
quality, grade, design, size, weight & price of the export product & the terms & conditions on
which their export will take place.

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2. Import order or Indent: It is a document in which the importer orders for supply of
requisite goods to the supplier. The order containing the information such as quantity &
quality of goods, price, method of forwarding the goods, nature of packing, mode of payment
etc.

3. Shipment advice: The exporter sends shipment advice to the importer for informing him
that the shipment of goods has been made. It contains invoice number bill of lading/airways
bill number & date, name of the vessel with date, the port of export, description of goods &
quantity & the date of sailing of the vessel.

4. Bill of Lading: It is prepared & signed by the master of the ship acknowledging the receipt
of goods on board, it contains terms & conditions on which the goods are to be taken to the
port of destination.

5. Bill of entry: It is a form supplied by the customs office to the importer who filled it at the
time of receiving the goods. It has to be in triplicate& is to be submitted to the customs office.
It contains information such as name & address of the importer, name of the ship, number of
packages, of marks on the packages, description of goods, quantity and value of goods, name
and address of the exporter, port of destination and custom duty payable.

6. Letter of Credit: It is a document that contains a guarantee from the importer’s 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 export of the goods to the importer.

7. Bills of exchange: Explained earlier.

FOREIGN TRADE PROMOTION MEASURES & SCHEMES

1. Duty Drawback Scheme: Goods meant for exports are not subjected to payment of
various excise and custom duties. Any such duties paid are refunded to exporters on
production of proof of exports of these goods to the concerned authorities such refunds are
called duty drawback.

2. Export manufacturing under BOND Scheme: Under this facility firm can produce goods
without payment of exercise and other duties. The firm can avail this facility after giving an
undertaking (i.e. bond) that they are manufacturing goods for export purposes.

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3. Exemption from payment of sales Taxes: Goods meant for export purpose are not
subject to sales tax. Income derived from export operations had been exempt from payment
of income tax for a long period, but now this exemption in only available to 100%. Export
oriented units and units setup in Export Processing Zones/Special Economic Zones for
selected years.

4. Advance License Scheme: It is a scheme under which an exporter is allowed duty free
required for the manufacture of export goods. The firms exporting intermittently can also
obtain these licenses against specific export orders.

5. Export Processing Zones: They are industrial estate which from enclaves from the
Domestic Tariff Areas. These are usually situated near seaports or airports. They are
intended to provide an internationally competitive duty free environment for export
production at low cost.

In addition to the above there are other measures such as availability of export finance,
Export promotion, Capital goods scheme etc. that are used for foreign trade promotion.

ORGANISATIONAL SUPPORT

World Trade Organization (WTO)

It Came into existence on 1st January 1995. The headquarters of WTO is situated at Geneva,
Switzerland. It is a permanent organization created by an international treaty rectified by
the Governments and legislatures of member states. It is concerned with solving trade
problems between countries and providing a forum for multilateral trade negotiations.

Objectives of WTO
1. To reduce the trade tariffs and barriers imported by different countries in the smooth flow
of international trade.
2. To improve the standard of living, create employment, increase income and effective
demand and facilitate higher production and trade.
3. To maintain sustainable development by optionally using world’s resources.
4. To promote an integrated, more viable and durable trading system among nations.

Role/Functions of WTO
1. To remove barriers of International trade.

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2. To Act as a dispute settlement body by settling trade related disputes among member
nations.
3. To ensure that all the rules and regulations prescribed in the Act are duly followed by the
member countries for settling of their disputes.
4. Laying Down a commonly accepted code of conduct for international trade aiming at
reducing tariff and non-tariff barriers in international trade.
5. To consult other agencies to bring better understanding cooperation in global economic
policy making.
6. Providing technical assistance and guidance related to management of foreign trade and
fiscal policy to its member nations.
7. Taking special steps for the development of the poorest nations.
8. Reviewing trade related economic policies of member countries with the help of its Trade
Policy Review Body.
9. Co-operating with IMF and World bank and its associates for establishing co-ordination in
global trade policy making.
10. Acting as forum for trade liberalization.

Problems of International Trade

The main problems of international trade are:
1. Language difference: When a trader of one country deals with the trader of another
country it becomes difficult for both them to understand each other because of their
Language difference.
2. More Risk: The quantum of risk is higher in foreign trade as compared to internet trade.
3. Government Control for import and export procedure various licenses are taken and
various pieces of information are to be submitted. Moreover, the procedure of import and
export is quite complex.
4. Difference in laws: the rules related to export and import are different in each country.
So, there is always some doubt in the mind of a trader regarding payment and other terms of
business.
5. Difficulty in payment: Each country has a different currency. Due to this, businessman
face a lot of problem while paying and receiving money.
6. Lack of information on about foreign trader: It is difficult to find out details about
financial position and business dealings of any businessman sitting at some far off place.

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