International Business and EXIM

Instructor : Amit Kumar

 Class 1 & 2
• Instructions for online learning
• About the course
• Globalization
• In class assignments
 Discussion
• Course Outline
• Career in international business
 Module 1 - Globalization
• Understand what is meant by the term
globalization.
• Recognize the main drivers of globalization.
• Describe the changing nature of the global
economy.
• Explain the main arguments in the debate
over the impact of globalization.
• Understand how the process of globalization
is creating opportunities and challenges for
management practice.
 Module 1 - Globalization
• Cross border commerce
• Diminishing physical border
• Technology transfer
• Immigration
• Cultural influence
• Social influence
 What is Globalization
• Globalization of markets
• Falling barriers to cross-border trade and investment
• Global tastes
• Benefits small and large companies
• Significant differences between national markets
• Products that serve universal needs are global
• Competitors may not change among nations
 What is Globalization
The Globalization of Production
• Sourcing goods to take advantage of differences in cost
and quality of factors of production
• Early outsourcing was confined to manufacturing
• Technology now used for outsourcing
• Impediments
• Formal and informal barriers to trade
• Transportation costs
• Political and economic risk
• Coordination
• Pandemic ( Covid 19)
 Pandemic effect on GVC’s

IMF GDP Projections 2020 IMF GDP Projections 2020

Pre Covid 19 (%) Pre Covid 19 (%)

World economy 3.3 -4.9 (latest)

Advanced economy 1.6 -6.1 (april)
Emerging markets 4.4 -1 (april)
India 5.8 -4.5 (latest)
China 6 1 (latest)
 In class assignment
• Search and read any one article on internet on
disruption of GVC for the world and discuss
any 1 specific impact with some data
• Time limit for assignment – 5 minutes
• Time limit for explanation – 2 to 3 minutes per
student
• Random roll nos.
 Drivers of Globalization
• Declining Trade and Investment Barriers
• 1920s-30s: Barriers to international trade and foreign
direct investment
• High tariffs resulted in retaliatory trade policies
• GATT lowered barriers
• Uruguay Round
• Established World Trade Organization (WTO)
Figure 1.1 Value of world trade, world production, number of regional trade
agreements in force, and world population from 1960 to 2020 (index 1960 = 100).

Jump to long description in

appendix

Sources: World Bank, 2017; World Trade Organization, 2017; United Nations, 2017.
 Drivers of Globalization
Role of Technological Change
• Communications
• Development of the microprocessor
• Moore’s Law
• Internet of things
• Half the world’s population uses the Internet
• Global e-commerce sales over $2 trillion
• The Internet is an equalizer
 Drivers of Globalization
Role of Technological Change continued

• Transportation technology
• Commercial jet travel, super freighters, and
containerization
• Implications for the globalization of production
• Has become more economical
• Worldwide communications network
• Implications for the globalization of markets
• Convergence of consumer tastes and preferences
Containerization
 The Changing Demographics of the
Global Economy
Learning Objective : Describe the changing nature of the global economy.

The Changing World Output and World Trade

Picture
• U.S. has experienced a relative decline reflecting the
faster economic growth of several other economies
• BRIC countries growing more rapidly
• Developing nations may account for more than 60 percent
of world economic activity by 2025
 The Changing Demographics of the
Global Economy
The Changing Foreign Direct Investment Picture
• Non-U.S. firms are increasingly investing across
national borders
• Desire to disperse production activities to optimal locations
and to build a direct presence in major foreign markets
Share of FDI stock outward as a percentage of GDP.

Sources: OECD data 2017, FDI stocks.

FDI inflows (in millions of dollars)

Jump to long description in appendix

Source: United Nations Conference on Trade and Development, World Investment Report 2017. (Data for 2018–2020 are forecast.)
 The Changing Demographics of the
Global Economy
The Changing Nature of the Multinational
Enterprise
• Non-U.S. multinationals
• In 2003, 38.8 percent of the world’s 2000 largest
multinationals were U.S. firms
• By 2017, 27 percent of the top 2000 global firms are now
U.S. multinationals, a drop of 236 firms
The Changing Demographics of the
Global Economy
2000 2010 2019
General Motors Walmart Walmart

Walmart Royal Dutch Shell Sinopec Group

Exxon Mobil Exxon Mobil Royal Dutch Shell

Ford BP p.l.c. China National Petroleum Corporation

Daimler Chrysler Toyota State Grid Corporation of China

Mitsui & Co. Japan Post Holding Co. Ltd Saudi Aramco
Mitsubishi China Petrochemical Corp BP
Toyota State Grid Corporation of China Exxon Mobil

General Electric AXA Volkswagen

Itochu China National Petroleum Toyota
Corporation
 The Changing Demographics of the
Global Economy
The Changing World Order
• Former communist countries present export and
investment opportunities
• Signs of growing unrest and totalitarianism
• China moving to industrial superpower
• Latin America debt and inflation are down, more private
investors, expanding economies

• A lot can change post

covid 19
 Anti – Globalization Debate
High Correlation observed between globalization index
(KOF) and Income inequality index (Ginni index) for many
countries
For example, between the period 1990 to 2010, the KOF
index for China increased by 74% & the income inequality
increased by 31%
However, this is debatable as an 89% increase in KOF
index for Bangladesh between 1990 & 2010, but the Gini
index increased only by 11%
The Pro-Globalization highlights the increase in positive
increase in HDI as an effect of globalization
 Anti – Globalization Debate
Threat to national sovereignty – Debt Trap
 Anti – Globalization Debate
High Correlation observed between globalization index
(KOF) and Ecological footprint ( Figge et al., 2017; Sasana
et al., 2018)
 Anti – Globalization Debate
Poor labour conditions and regulations
 In Class Reading & Group Discussion
Read the article and Discuss in group ‘The World is Flat or
Not Flat’
What are some key takeaways from the article
Present 3-4 key takeaways as bullet points

Reading & Additional research on article – 15 minutes

 Class 3 & 4
• Globalization Strategies
• Orientation
• Reading & class discussion to understand global strategy
development
• Lenovo case study ( Students need to make a group of 3-5 and do
research on how Lenovo became a global brand).
• Answer questions such as
• Lenovo’s history
• Why Lenovo wanted to become a global player
• How lenovo did the global branding
• How lenovo positioned itself as a quality Chinese brand and an
international firm
• Find any 1 successful marketing campaign of Lenovo in non-
Chinese market
Prerequisites for understanding global
strategies
Students are expected to know the following
concepts
- Basic principles of strategy (Profitability &
Profit growth)
- Understanding of two main strategies (low
cost & differentiation)
- Value chain
 The Big Question for Firms going
global

•How can firms increase

its profitability & profit
growth with global
expansion
Global Expansion, Profitability, and Profit
Growth
Location Economies
• Can lower the costs of value creation and help the
firm achieve a low-cost position
• Can enable a firm to differentiate its product offering
from those of competitors
Global Expansion, Profitability, and Profit
Growth
Location Economies
• Creating a global web
• Should create a competitive advantage vis-à-vis a firm that
bases all of its value creation activities at a single location
• Should be able to better differentiate its product offering
(thereby raising perceived value, V) and lower its cost
structure (C) than its single-location competitor
• Caveats
• Transportation costs and trade barriers
Global Expansion, Profitability, and Profit
Growth
Experience Effects
• Experience curve
• Costs decline by some quantity about each time cumulative output
doubles
• Learning effects
• Economies of scale
• Strategic significance
• Moving down the experience curve allows a firm to reduce its cost of
creating value and increase its profitability.
The experience curve
Global Expansion, Profitability, and Profit
Growth
Leveraging Subsidiary Skills
• Development of valuable skills can occur in foreign
subsidiaries.
• Leveraging the skills created within subsidiaries and
applying them to other operations within the firm’s
global network may create value.
Global Expansion, Profitability, and Profit
Growth
Leveraging Subsidiary Skills continued
• Managers must:
• Recognize that valuable skills that lead to competencies can
arise anywhere within the firm’s global network, not just at
the corporate center
• Establish an incentive system that encourages local
employees to acquire new skills
• Have a process for identifying when valuable new skills have been
created in a subsidiary
• Act as facilitators, helping transfer valuable skills within the firm
 Cost Pressures and Pressures for Local
Responsiveness

Pressures for Cost Reductions

• Require a firm to try to lower the costs of value creation
• Greater in industries producing commodity-type products
• Universal needs

• Also in industries where major competitors are based in low-cost

locations, where there is persistent excess capacity, and where
consumers are powerful and face low switching costs
 Cost Pressures and Pressures for Local
Responsiveness
Pressures for Local Responsiveness
• Differences in customer tastes and preferences
• Customer demands for local customization are on the decline
worldwide in some markets, but not others.

• Differences in infrastructure and traditional practices

• May require the delegation of manufacturing and production
functions to foreign subsidiaries
 Cost Pressures and Pressures for Local
Responsiveness

Pressures for Local Responsiveness continued

• Differences in distribution channels
• May necessitate delegation of marketing functions to national
subsidiaries

• Host-government demands
• Economic and political
• Threats of protectionism, economic nationalism, and local content
rules dictate that international businesses manufacture locally.
 Cost Pressures and Pressures for Local
Responsiveness
Pressures for Local Responsiveness continued
• Rise of regionalism
• Tendency toward the convergence of tastes, preferences,
infrastructure, distribution channels, and host-government
demands with a broader region that is composed of two or
more nations
• Examples: EU, North America, Latin America
 Choosing a Strategy
Four International Strategies
• Global standardization
• Localization strategy
• Transnational strategy
• International strategy
Four basic strategies
 Choosing a Strategy
Global Standardization Strategy
• Goal is to pursue low-cost strategy on global scale
• Production, marketing, R&D, and supply chain
activities are concentrated in a few favorable
locations.
• Avoids customization
• Makes the most sense when there are strong
pressures for cost reductions and demands for local
responsiveness are minimal
 Choosing a Strategy
Localization Strategy
• Most appropriate when:
• There are substantial differences across nations with regard
to consumer tastes and preferences
• Cost pressures are not too intense

• Customization limits the ability of the firm to capture

the cost reductions associated with mass-producing a
standardized product for global consumption.
 Choosing a Strategy
Transnational Strategy
• Makes most sense when demands for local
responsiveness are high but cost pressures are
moderate
• Must focus on leveraging subsidiary skills
• Places conflicting demands on the company
• Differentiating the product to respond to local demands in
different geographic markets raises costs, which runs counter
to the goal of reducing costs.
 Choosing a Strategy
International Strategy
• For firms with low cost pressures and low pressures
for local responsiveness
• Involves taking products first produced for their
domestic market and selling them internationally with
only minimal local customization
• Tend to centralize product development functions
such as R&D at home, but may establish
manufacturing and marketing functions in each major
country or geographic region in which they do
business
 Explain the internationalization
strategies
• Global brands
• Local brands
 International Orientations

• The degree and nature of involvement in international

business or the international orientations of companies
vary
• Wind, Douglas and Perlmutter suggested EPRG framework
for understanding the international orientations
• 4 types of orientations in the successive stages in the
evolution of international operations
1. Ethnocentrism (home country orientation);
2. Polycentrism (host country orientation),
3. Regiocentrism(regional orientation); and
4. Geocentrism(world orientation)
 Ethnocentric

• overseas operations are viewed as secondary to

domestic operations and can be a means of disposing
of “surplus” domestic production
• domestic techniques and personnel are considered
superior to foreign markets
• Operations mostly carried through an export
department or international business div
• Overseas operations are conducted from home country
• Domestic product mix is extended for foreign markets
 Polycentric

• Local personnel and techniques are more suited

for local markets than foreign
• Subsidiaries are setup and they have own
marketing objectives and plan
• Market segmentation on country basis
• Local laws, customs and culture is taken care
• Maximum geographic decentralisation as
adaptation strategy is used in marketing strategy
• Example –Unilever, P&G, Philips, Nestle
 Regiocentric

• A particular region with certain important

marketing characteristics is regarded as single
market
• Strategy integration, organizational approach and
product policy tend to be implemented at
regional level
• Objectives are set by negotiation between HQ
and regional HQ and also between regional HQ
and individual subsidiaries
• Example –Middle East, Asia Pacific regions
 Geocentric

• Entire world as 1 market

• Standardised product mix
• Uniform image and practices followed by company
• The business of the geocentric multinational is usually
characterized by sufficiently distinctive national markets
that the ethnocentric approach is unworkable, and where
the importance of learning curve effects in marketing,
production technology and management makes the
polycentric philosophy substantially sub-optimal
• Example –Apple, Uber have higher geocentric orientation
 Entry Strategy
• International firms must consider:
1. The decision of which foreign markets to enter,
when to enter them, and on what scale
2. The choice of entry mode
3. The role of strategic alliances

• Strategic alliances include:

– Cross-shareholding deals
– Licensing arrangements
– Formal joint ventures
– Informal cooperative arrangements
 Which Foreign Markets?

– Choice based on assessment of a nation’s long-run profit

potential
• Size of the market
• Present and likely future wealth of consumers
• Costs and risks
• Value an international business can create in a foreign market
depends on suitability of its products to that market and the
nature of indigenous competition
 Timing of Entry

– First-mover advantages
• Preempt rivals and capture demand by establishing a strong brand
name and customer satisfaction
• Build sales volume in that country and ride down the experience
curve ahead of rivals
• Create switching costs that tie customers into their products or
services
 Timing of Entry
– First-mover disadvantages
• Pioneering costs
– The enterprise has to devote considerable effort, time, and
expense to learning the rules of the game.
– Costs of business failure
– Costs of promoting and establishing a product offering,
including the costs of educating customers
– Regulations may change in a way that diminishes the value of
an early entrant’s investments.
– Need to educate customers about your company's products
 Scale of Entry and Strategic
Commitments
– A strategic commitment has a long-term impact and is
difficult to reverse.
• Rapid large-scale market entry can have an important influence on
the nature of competition in a market.
• Must be balanced against the resulting risks and lack of flexibility
associated with significant commitments
• Small-scale entry allows a firm to learn about a foreign market
while limiting the firm’s exposure to that market.
 Entry Modes

Exporting
• Advantages
• Avoids the often substantial costs of establishing
manufacturing operations in host country
• May help firm achieve experience curve and location
economies
 Entry Modes
Exporting continued
• Disadvantages
• May not be appropriate if lower-cost locations for manufacturing the
product can be found abroad
• High transport costs can make exporting uneconomical, particularly
for bulk products
• Tariff barriers can make exporting uneconomical
 Entry Modes
Turnkey Projects
• Advantages
• Can earn great economic returns
• Can be less risky than conventional FDI

• Disadvantages
• The firm that enters into a turnkey deal will have no long-term
interest in the foreign country.
• May inadvertently create a competitor
• Selling a technology through a turnkey project is also selling
competitive advantage to potential and/or actual competitors.
 Entry Modes
Licensing
• Intangible property
• Patents, inventions, formulas, processes, designs,
copyrights, and trademarks

• Advantages
• No development costs and risks associated with opening a
foreign market
• Used when a firm wishes to participate in a foreign market
but is prohibited from doing so by barriers to investment
• Used when a firm possesses some intangible property that
might have business applications, but it does not want to
develop those applications itself
 Entry Modes
Licensing continued
• Disadvantages
• Does not give a firm the tight control over manufacturing,
marketing, and strategy that is required for realizing
experience curve and location economies
• Limits a firm’s ability to coordinate strategic moves across
countries by using profits earned in one country to support
competitive attacks in another
• A firm can lose control over its technology by licensing it
• To reduce this risk, enter into a cross-licensing
agreement or joint venture
 Entry Modes
Franchising
• Employed primarily by service firms
• Advantages
• Firm experiences lower costs and risks than opening a foreign
market on its own
• Helps build a global presence quickly

• Disadvantages
• May inhibit the firm’s ability to take profits out of one country to
support competitive attacks in another
• Quality control
 Entry Modes
Joint Ventures
• 50-50 ventures are most common
• Advantages
• Local partner’s knowledge of the host country’s competitive
conditions, culture, language, political systems, and business
• Shared costs and risks
• Political considerations (government interference,
nationalism, etc.)
 Entry Modes
Joint Ventures continued
• Disadvantages
• Loss of technology control
• Lack of control over subsidiaries that it might need to realize
experience curve or location economies
• Can lead to conflicts and battles for control between the
investing firms if their goals and objectives change or if they
take different views as to what the strategy should be
 Entry Modes
Wholly Owned Subsidiaries
• Greenfield venture - set up a new operation in host country
• Acquisition - acquire an established firm in a host nation
• Advantages
• Reduces the risk of losing control over technology
• Can tightly control operations in different countries
• Location and experience curve economies
• 100 percent share of profits

• Disadvantages
• Bear full cost and risk of establishing new market
• Can be problems associated with acquisitions
 Problem 1 – Entry Strategy
• An automotive firm is considering an entry
into an unfamiliar country with a track record
for discriminating against foreign owned
enterprise through tariffs and regulations. The
country is attractive on macro economic
indicators. What could be a suitable entry
strategy in this case and why?

• Joint Venture
 Problem 2
• A global telecommunication infrastructure firm’s
competitive advantage is the Technological
knowledge and its patents .The firm is planning to
enter a foreign market with very strong
macroeconomic indicators, friendly and easy
foreign investment policies. What should be the
preferred mode of entry for such firm?

• Wholly Owned Subsidiary

 Problem 3
• A firm wants to use the profit earned from
one country to counter competition in other
country. Under which entry mode will the firm
have the flexibility to manage strategic global
coordination at best?

• Wholly Owned Subsidiary

 Problem 4
• A firm wants to use the location and
experience economy for entry into multiple
foreign markets as the firm is also facing
intense cost reduction pressure. The FDI rules
are not favourable for the firm. What is the
preferred mode of entry in such situation?

• Exporting
 Strategic Alliances

Advantages of Strategic Alliances

• May facilitate entry into a foreign market
• Allow firms to share the fixed costs (and associated risks) of
developing new products or processes
• Brings together complementary skills and assets that neither
company could easily develop on its own
• May help the firm establish technological standards for the
industry that will benefit the firm

Disadvantages of Strategic Alliances

• May give competitors a low-cost route to new
technology and markets
 Case Study
• GE Medical Equipment
MULTINATIONAL ENTERPRISES FROM EMERGING
MARKETS

Module II – Dr Arpita Shrivastava

WHAT ARE EMERGING
MARKETS?
▪ “Emerging markets” is a term that refers to an economy that experiences
considerable economic growth and possesses some, but not all, characteristics of
a developed economy. Emerging markets are countries that are transitioning
from the “developing” phase to the “developed” phase.

▪ Such countries constitute approximately 80% of the global population and

represent about 20% of the world’s economies
▪ Countries whose economies fall into this category of EMEs are usually considered
emerging because of their developments and massive reforms. Sometimes big and
small countries are lumped together as EMEs
▪ For ex, The Wall Street Journal commented that in India it can take 6-12 weeks to
deliver products from India to the United States while Chinese exports can move
from the factory floor to U.S. stores in as little as 3 weeks
▪ China invested huge sums in infrastructure development in the late 1990s to
improve surface transport. India has recently started restructuring its physical
infrastructure with a national highway project, airport modernization, and the
rebuilding of new ports.
https://www.gfmag.com/global-data/economic-data/emerging-markets-hot-spots-2019
CHARACTERISTICS OF
EMERGING MARKETS
▪ Market volatility
Market volatility reduction in political instability, external price movements,
and/or supply-demand shocks due to natural calamities. It exposes investors to the
risk of fluctuations in exchange rates, as well as market performance.

▪ Growth and investment potential

Emerging markets are often attractive to foreign investors due to the
high return on investment they can provide. Using their competitive advantage,
such countries focus on exporting low-cost goods to richer nations, which boosts
GDP growth, stock prices, and returns for investors.
▪ High rates of economic growth
Governments of emerging markets tend to implement policies that favor
industrialization and rapid economic growth. Such policies lead to lower
unemployment, higher disposable income per capita, higher investments, and
better infrastructure.
▪ Income per capita
Emerging markets usually achieve a low-middle income per capita relative to
other countries, due to their dependence on agricultural activities. As the economy
pursues industrialization and manufacturing activities, income per capita increases
with GDP. Lower average incomes also function as incentives for higher economic
growth.
The Five Major Emerging Markets

Russia

China
India

Africa

Brazil
Source - Global Business
Strategy Multinational
Corporations Venturing into
Emerging Markets – a book by
Kazuyuki Motohashi
 MARKET STRUCTURES IN EMERGING COUNTRIES - HBR

https://hbr.org/2006/10/emerging-giants-building-world-class-companies-in-developing-co
untries
According to the article published in BCG there
are SIX SECRETS OF SUCCESS:

1. Smart market entry and expansion

2. Innovative products and pricing
3. An intimate understanding of consumers and
how to meet their needs
4. Fast and widespread delivery of goods
5. A focus on tackling the talent agenda
6. Strong stakeholder engagement

Source site - https://www.bcg.com/publications/2018/mncs-still-winning-big-emerging-markets

 Emerging market - China

HOW INNOVATIVE MARKETING HELPED STARBUCKS EXPAND IN CHINA

Almost immediately after Starbucks brought high-end, handcrafted beverages to

tea-drinking China by opening a Beijing store in 1999, the copycat coffee shops began to
appear. But in contrast to many multinationals that have pioneered industries in China,
Starbucks was not deterred. Today, it has nearly 3,200 stores across China.
Among the keys to Starbucks’ success has been an innovative marketing and
brand-building campaign based on the company’s intimate understanding of Chinese
consumers. Another has been a smart expansion strategy that gave Starbucks better
control over its business.
Starbucks positioned itself squarely as a premium coffeehouse experience in China and
invested heavily to establish its brand as a status symbol in order to differentiate itself from
other coffeehouse chains. Its bet was well placed: between 2007 and 2012, for example,
sales at Starbucks coffeehouses in China surged by around 200%.
The company envisions no slowdown. It plans to have more than 5,000 stores in China by
2021. In 2016, Belinda Wong, the head of Starbucks’ China operations, told Hong
Kong’s South China Morning Post that the company is still in “the early chapter of our China
growth.”
L’Oréal has established itself as that nation’s market leader in beauty products, and it
is still gaining momentum; in 2018, it reported its highest sales growth rate in China
in 14 years.

In the early 1970s, Toyota became a dominant force in Indonesia when it opened its
first auto assembly joint venture. Despite dramatic growth in the Indonesian market
and mounting competition, Toyota remains the undisputed leader, with around half of
passenger car sales, including its Daihatsu brand.

Back in the late 19th century, Siemens supplied China’s first pointer telegraph and
helped build the country’s first power plant and tram line.

Today, China is Siemens’ second-largest overseas market, with 35,000 employees and
21 R&D hubs, which are helping to build everything from leading-edge unattended
train systems and smart-city solutions to digital manufacturing systems.
Emerging market – Africa (strategy of long term commitment)

In Africa, General Electric has similarly continued to make bold, long-term

investments to sustain its success. GE entered South Africa in 1898 and has
been in a number of other African markets since the 1960s and ’70s. The
company has long-term partnerships in Tunisia, Egypt, Kenya, Tanzania,
South Africa, and Nigeria in power generation, aviation, and health care. It
recently began collaborating with Angolan and Nigerian government agencies
to help achieve national development goals in energy and health. In Morocco,
it has partnered with the government to meet the country’s renewable-energy
goals, and in Kenya, GE Healthcare was selected by the Ministry of Health to
provide radiology infrastructure.
WHY COMPANIES OFTEN TARGET THE WRONG COUNTRIES OR
DEPLOY INAPPROPRIATE GLOBALIZATION STRATEGIES…?

In December 2004, when the McKinsey Global Survey of Business Executives polled
9,750 senior managers on their priorities and concerns, 61% said that market size and
growth drove their firms’ decisions to enter new countries. While 17% felt that political
and economic stability was the most important factor in making those decisions, only
13% said that structural conditions (in other words, institutional contexts) mattered
most.
 Emerging market – India

▪ Investments in a strong on-the-ground organization have been critical to

LG’s ability to maintain its market share in India, where it is the leader in
refrigerators and second in televisions. The South Korean company’s share of
India’s rapidly growing TV market has dipped only slightly since 2015, to
26%, even though the number of available brands over that period has
increased tremendously.
▪ LG’s Indian management team has had virtual autonomy in running the
business since the company entered the market in 1995. The Indian team has
built an efficient local manufacturing and distribution base and a strong R&D
organisation. In 2016, LG India adopted a new strategy of building products
based on insights into specific Indian needs and preferences. LG also has an
extensive regional distribution network in India staffed by its own personnel
and a nationwide retail network that offers more than 250,000 consumer
touchpoints. This enables LG to quickly rotate its stock in retail outlets and
penetrate smaller cities and rural areas better than most of its competitors.
 Emerging market – Indonesia

▪ Toyota entered the Indonesian market in 1970, when it began assembling

Land Cruisers with Gaya Motor. It then launched a joint venture with the PT
Astra group that in 1977 introduced Kijang multipurpose vehicles, which it
sold mainly in Southeast Asia. In 2003, the company launched the Avanza, a
mini multipurpose vehicle developed with Daihatsu. Over the years, Toyota
has brought its lean manufacturing system to Indonesia. In 2012, it
announced a $1.3 billion capacity expansion plan to enable it and other
Toyota Group companies to better target the country’s rapidly growing
middle class. Toyota now has four world-class plants in North Jakarta and
Karawang that are supported by a well-developed domestic supply chain.
Toyota exports around half of its Indonesian production, primarily to other
Southeast Asian nations and to Africa. It exports parts to more than 80
countries.
▪ Toyota has also invested steadily in its Indonesian talent, which it views as a
knowledge workforce. In 2016, it opened the Toyota Indonesia Academy. The
Toyota Learning Center and Toyota Technical Center, meanwhile, support
THE FIVE CONTEXTS
FRAMEWORK BY HBR
Product Markets

Labor Markets.

Political and Social Systems.

Openness

Capital Markets

Read more - https://hbr.org/2005/06/strategies-that-fit-emerging-markets

APPLYING THE FRAMEWORK
▪ five contexts framework to emerging markets in four countries—Brazil, Russia, India,
and China—the differences between them became apparent, Multinationals face
different kinds of competition in each of those nations.
BENEFITS OF INVESTING IN EMERGING MARKETS

• Growth. The biggest advantage of emerging market investments is the potential for

high growth.
• Diversification. International investments can be a good diversifier for your investment
portfolio because economic downturns in one country or region, including the U.S., can
be offset by growth in another.
RISKS OF INVESTING IN EMERGING MARKETS

• Political risk. Emerging markets may have unstable, even volatile, governments.

Political unrest can cause serious consequences to the economy and investors.
• Economic risk. These markets may often suffer from insufficient labor and raw
materials, high inflation or deflation, unregulated markets and unsound monetary
policies. All of these factors can present challenges to investors.
• Currency risk. The value of emerging market currencies compared to the dollar can be
extremely volatile. Any investment gains can be potentially lessened if a currency is
devalued or drops significantly.
 CHALLENGES

1. There is the risk of economic nationalism and a trade war, especially in the current
political environment
2. Corruption and the failure of economic progress
3. Domestic Infrastructure Problems
4. Unreliable Distributors
5. Fractured Supply Chains
6. Weak market capacity: constrained financial system
7. High costs of doing business—implicit and explicit costs such as commissions, fees,
taxes, degree of market liquidity, etc.
8. Restrictions on foreign accessibility.
9. Low corporate governance or transparency.
10. Limited legal protection for investors
Environment Analysis in International Business

Dr. Arpita Shrivastava

 Definition

Environmental analysis is defined as ―

the process by which strategists monitor the

economic, governmental/legal, market/competitive,
supplier/technological, geographic, and social settings
to determine opportunities and threats to their firms.
 What and why?

Environmental diagnosis consists of managerial decisions made

by analyzing the significance of the data (opportunities and
threats) of the environmental analysis

Environmental analysis is the cornerstone of new business

opportunity analysis too.
 Definitions
• According to Coulson -Thomas (1991), “Organizations face an unprecedented range of
challenges and opportunities in the social, economic, political and business environment.
This external environment is characterized by uncertainty, surprise, turbulence and
discontinuity”.

• Andrew Harrison also states in Business Environment in a global context: “No

organization exits within a vacuum. Its strategies and operations are influenced by and
must take account of its external environment.”

• A. Harrison propounded that external environment or business environment includes the

activities of consumers and competitors, the government policies, technology
developments, social and cultural context.

The business environment is also considered as a complex adaptive system with many
elements which operate independently and interact with each other.
 Tools for International Business
Environment Analysis
• PEST ANALYSIS
• PESTEL MODEL
• SWOT ANALYSIS
• ETOP
 PEST Analysis

factors used in the environmental

scanning component of
international business management
Continued…
 Case lets - political

• To protest Iraq's invasion of Kuwait in 1990, many

world governments levied economic sanctions
against the import of Iraqi oil. Political
considerations affect international business daily
as governments
enact tariffs (taxes), quotas (annual
limits), embargoes (blockages), and other types of
restriction in response to political events.
 Impact of political instability
Businesses engaged in international trade must consider the
relative instability of countries such as Iraq, South Africa, and
Honduras. Political unrest in countries such as Peru, Haiti, Somalia,
and the countries of the former Soviet Union may create hostile or
even dangerous environments for foreign businesses. In Russia, for
example, foreign managers often need to hire bodyguards; sixteen
foreign businesspeople were murdered there in 1993. Civil wars,
may disrupt business activities and place lives in danger. And a
sudden change in power can result in a regime that is hostile to
foreign investment; some businesses may be forced out of a country
altogether. Whether they like it or not, companies are often
involved directly or indirectly in international politics.
 Legal Enviornment

• China,has recently been threatened with severe

trade sanctions because of a history of allowing
AmericanThegoods
economic to be copied or counterfeited
environment

there. As a result, businesses engaging in

international trade may need to take extra steps
to protect their products because local laws may
be insufficient to protect them.
 The economic environment

Managers must monitor currency, infrastructure, inflation,

interest rates, wages, and taxation. In assessing the economic
environment in foreign countries, a business must pay
particular attention to the following four area

1. Average income levels of the population. If the average

income for the population is very low, no matter how
desperately this population needs a product or service, there
simply is not a market for it.
2. Tax structures. In some countries, foreign firms pay much higher
tax rates than domestic competitors. These tax differences may be
very obvious or subtle, as in hidden registration fees.

3. Inflation rates: Business profits fell as consumers' purchasing

power was eroded by inflation. High interest rates and
unemployment reached alarmingly high levels.

4. Fluctuating exchange rates: A foreign investor may sustain large

losses if the value of the currency drops substantially.
 Socio Culture Environment
In China, a harmonious environment is more important than
day‐to‐day productivity. In Morocco, women can assume
leadership roles, but they are usually more self‐conscious than
American women. In Pakistan, women are not often found in
management positions, if they're in the workplace at all.

For example, the Japanese feel that work is an important part of

their lives. This belief in work, coupled with a strong group
orientation, may explain the Japanese willingness to put up with
things that workers in other countries would find intolerable
Americans tend to emphasize personal growth, accomplishment, and
“getting what you deserve” for performance as the most important
motivators. However, in Asian cultures, maintaining group solidarity and
promoting group needs may be more important than rewarding individual
achievement

Few examples (language)

• Coca‐Cola's English “Coke adds life” theme translated into “Coke brings
your ancestors back from the dead” in Japanese

• In Chinese, the English Kentucky Fried Chicken slogan “finger‐lickin'

good” came out as “eat your fingers off.”
 The technological environment

• The technological environment contains the

innovations, from robotics to cellular phones, that
are rapidly occurring in all types of technology.
Before a company can expect to sell its product in
another country, the technology of the two
countries must be compatible.
 PESTEL Model
• PESTEL model is PEST
including legal,
environmental, ethical &
demographic forces.
• Some analysts added Legal and rearranged the mnemonic to SLEPT; inserting
Environmental factors expanded it to PESTEL or PESTLE, which is popular in
the UK.

• The model has recently been further extended to STEEPLE and STEEPLED,
adding education and demographic factors. It is a part of the external
analysis when conducting a strategic analysis or doing market research, and
gives an overview of the different macroenvironmental factors that the
company has to take into consideration. It is a useful strategic tool for
understanding market growth or decline, business position, potential and
direction for operations.
 Social / technological Environment

• With change in the consumption habits of people,

Neelesh, who was running a sweets shop shifted to
chocolate business. On the eve of Diwali he offered
chacolates in attractive packages at reasonable
prices. He anticipated huge demand and created a
website chocolove.com for taking orders online. He
got lot of orders online and earned huge profit by
selling chocolates.
Identify and explain the dimensions of business
environment discussed in the above case
 Economical Environment

• A recent rate cut in the interest on loans announced

by the Banks encouraged Amit, a science student of
Progressive School to take a loan from State Bank of
India to experiment and develop cars to be powered
by fuel produced from garbage. He developed such a
car and exhibited it in the Science Fair organized by
Directorate of Education. He was awarded first prize
for his invention.
Identify and explain the dimensions of business
environment discussed in the above case?
1.  With the election of a new government the sensex drops by
748 points.
2. A particular channel refrains from showing the
advertisement of a particular product as it is banned by the
government.
3.  A software is in high demand among the industrial buyers
as it can connect all the branches of a company as a single
integrated unit.
4.  At the time of holi a large number of manufacturing firms
get involved in making colours which are used in the
celebration of this colourful festival.
5.  It is not advisable to open a luxury car showroom in the
middle of an economy where per capita income is very low
1. Political environment.
2.  Legal environment.
3.  Technological environment.
4.  Social environment.
5.  Economic environment.
 SWOT ANALYSIS

• Strengths: the factors that give an edge for the company

over its competitors.
• Weaknesses: factors that can be harmful if used against
the firm by its competitors.
• Opportunities: favorable situations which can bring a
competitive advantage.
• Threats: unfavorable situations which can negatively
affect the business.
 SWOT Analysis Strategies

In the process of adaptability analysis, enterprise top management should be based on the determination of internal and
external variables, using leverage, inhibitory, vulnerability, and problematic four basic concepts to analyze this model.

1. Leverage (S + O). Leverage effects arise when internal and external opportunities are consistent and adaptive
to one another. In this situation, companies can use their internal advantages to pick up external
opportunities and fully integrate opportunities and advantages. However, opportunities are often fleeting, so
companies must sharply capture opportunities and seize the opportunity to seek greater development.

2. Inhibitory (W + O). Inhibiting means impeding, preventing, influencing and controlling. When the

opportunities provided by the environment are not suited to the internal resource advantages of the
company, or cannot be overlapped with each other, the advantages of the enterprise will no longer be
realized. In this situation, companies need to provide and add certain resources to promote the
transformation of internal resources and disadvantages into advantages to cater to or adapt to external
opportunities.

3. Vulnerability (S + T). Vulnerability means the decrease or decrease in the degree or intensity of

advantages. When environmental conditions pose a threat to the company’s strengths, the advantages cannot
be fully exerted and ending up with a fragile situation. In this situation, companies must overcome the threats
to take advantage of them.

4. Problematic (W + T). When the company’s internal weaknesses and corporate external threats meet,
companies face severe challenges. If they are not properly handled, they may directly threaten the survival of
the company.
 Read the case on SWOT

• https://businesscasestudies.co.uk/swot-analysis-in-ac
tion/
 Environmental Threat & Opportunities Profile
- ETOP
• ETOP analysis is a management tool DEVELOPED BY GLUECK that analyses
environmental information and determines the relative impact of threats and
opportunities for the systematic evaluation of the environment.
Environment scanning is the process of gathering, analyzing and dispensing
information for tactical or strategic purposes.
ETOP process involves dividing the environment into different environmental
sectors and then analyzing the impact of each sector on the organisation.
ETOP gives a clear picture to the strategies about each aspect of the business
environment, the various individual factors within each sector which affect the
business favourably or otherwise.
 Components of external scanning that could
be considered include:

• Trends: What trends are occurring in the marketplace or industry that could
affect the organization either positively or negatively?
• Competition: What is your competition doing that provides them an advantage? 
Where can you exploit your competition's weaknesses? 
• Technology: What developments in technology may impact your business in the
future?  Are there new technologies that can make your organization more
efficient?
• Customers: How is your customer base changing?  What is impacting your
ability to provide top-notch customer service?
• Economy: What is happening in the economy that could affect future business? 
• Labor supply: What is the labor market like in the geographies where you
operate?  How can you ensure ready access to high-demand workers?
• Political/legislative arena: What impact will election outcomes have on your
business?  Is there impending legislation that will affect your operations?
 PORTER’S FIVE FORCES MODEL
5 forces model was created by the Michael Porter in 1979
to understand how 5 key competitive forces are affecting
the industry.
 The threat of new entrants:

This force determines how easy (or not) it is to enter a particular industry. If an industry is profitable & there are
almost few barriers to enter & the rivalry soon increases. When most organizations compete for the same market
share, profits start to fall. It is essential for existing organizations to create high barriers to entry to deter new entrants.

The threat of new entrants is high when:

• Low amount of the capital is required to enter the market;
• Existing companies can do little to hit back;
• Existing firms don’t retain the patents, the trademarks or don’t have established brand reputation;
• There is no government regulation;
• Customer switching costs are low (it doesn’t cost a lot of money for a firm to switch to other industries);
• There is low customer loyalty;
• Products are nearly identical;
• Economies of scale can be easily achieved.
 Bargaining power of suppliers
Strong bargaining power permits the suppliers to sell the higher priced or the
low-quality raw materials to their buyers. This directly affects a buying firms’ profits
because it has to pay more for the materials. The Suppliers have strong bargaining
power when:
• There are few suppliers but many buyers;
• Suppliers are large & threaten to forward integrate;
• Few substitute raw materials exist;
• Suppliers hold scarce resources;
• Cost of switching raw materials is especially high.
 Bargaining power of buyers

Buyers have the power to demand a lower price or a higher product quality from the industry producers when their
bargaining power is strong. Lower price means the lower revenues for the producer, while the higher quality
products usually raise the production costs. Both scenarios result in lower profits for producers. Buyers exert strong
bargaining power when:

• Buying in large quantities or control many access points to the final customer;
• Only a few buyers exist;
• Switching costs to other supplies are low;
• They threaten to backward integrate;
• There are many substitutes;
• Buyers are price sensitive
 The threat of substitutes

This force is especially threatening when buyers can easily find substitute products with attractive prices
or better quality & when buyers can switch from one product or service to another with little cost. For
example, to switch from a coffee to tea doesn’t cost anything, nothing like switching from the car to a
bicycle. Rivalry among existing competitors: This force is the major determinant of how competitive &
profitable an industry is. In the competitive industry, the firms have to compete hostilely for a market
share, which results in low profits. Rivalry among the competitors is intense when:
• There are many competitors;
• Exit barriers are high;
• Industry of growth is slow or negative;
• Products are not differentiated & can be easily substituted;
• Competitors are of equal size;
• Low customer loyalty.
 Coca-Cola – Competitive analysis

1. Threat of New Entrants/Potential Competitor:

Medium Pressure
Coca-Cola is seen not only as a beverage but also as a brand. It has held a very significant market share
for a long time and loyal customers are not very likely to try a new brand

2. Threat of Substitute Products:

Medium to High pressure
There are many kinds of energy drink s/soda/juice products in the market. Coca-cola doesn’t really have
an entirely unique flavor. In a blind taste test, people can’t tell the difference between Coca-Cola and
Pepsi
3. The Bargaining Power of Buyers:
Low pressure
• The individual buyer no pressure on Coca-Cola
• Large retailers, like Wal-Mart, have bargaining power because of the large order quantity, but the bargaining
power is lessened because of the end consumer brand loyalty.

4. The Bargaining Power of Suppliers:

Low pressure
• The main ingredients for soft drink include carbonated water, phosphoric acid, sweetener, and
caffeine. The suppliers are not concentrated or differentiated.
• Coca-Cola is likely a large, or the largest customer of any of these suppliers.

5. Rivalry Among Existing Firms:

High Pressure
Currently, the main competitor is Pepsi which also has a wide range of beverage products
under its brand. Both Coca-Cola and Pepsi are the predominant carbonated beverages
and committed heavily to sponsoring outdoor events and activities.
 Class Room Excercise

• A review of external sources to discover factors that

impact business.
• Education level, age, income, population and expectations
of students.
• Looks at the strengths, weaknesses, opportunities and
threats of the business and its competition.
• Scanning for internal sources that can improve business
function.
Module 4 - International
Trade Theory
 Introduction

International trade theory

– explains why it is beneficial for countries to
engage in international trade
– helps countries formulate their economic policy
– explains the pattern of international trade in the
world economy
 An Overview of Trade Theory

Question: How has international trade theory evolved?

Answer:
• Mercantilism (16th and 17th centuries) encouraged
exports and discouraged imports
– Adam Smith (1776) promoted unrestricted free trade
– David Ricardo (19th century) built on Smith ideas
– Eli Heckscher and Bertil Ohlin (20th century ) refined
Ricardo’s work
– Paul Krugman developed ‘New Trade Theory’
– The Product Life Cycle theory
– Michael Porter built on New Trade Theory called as
‘National Competitive Advantage’
 Mercantilism

Mercantilism (mid-16th century) - it is in a

country’s best interest to maintain a trade surplus
- to export more than it imports

it advocated government intervention to achieve a

surplus in the balance of trade
it viewed trade as a zero-sum game (one in which a
gain by one country results in a loss by another)

Mercantilism is problematic and not economically

valid, yet many political views today have the goal
of boosting exports while limiting imports by
seeking only selective liberalization of trade
 Absolute Advantage

Smith (1776) - countries differ in their ability to

produce goods efficiently
A country has an absolute advantage in the
production of a product when it is more efficient
than any other country in producing it

According to Smith
trade is not a zero-sum game
countries should specialize in the production of goods
for which they have an absolute advantage and then
trade these goods for the goods produced by other
countries
Limitations of Absolute Advantage
• Absence of absolute advantage for
technologically weak nations will not lead to
any advantage in free trade
• Assumption on resources does not hold true
• Only focuses on Inter-industry trade between
countries but the countries also engage in
Intra-industry trade based on market power
and economies of scale
 Comparative Advantage

• Ricardo (1817) - what happens when one

country has an absolute advantage in the
production of all goods
• Ricardo’s theory of comparative advantage - a
country should specialize in the production of
those goods that it produces most efficiently
and buy the goods that it produces less
efficiently from other countries
– even if this means buying goods from other
countries that it could produce more efficiently
itself
 Problem 1
• The following table shows how many cars
or airplanes can be produced with a unit
of resources in Canada and Japan.
Based on theory of comparative advantage
which countries should export cars and
computers and what can be the terms of
trade (price) range?
Number of Cars or Computers Produced Per
Unit of Resources

Cars Computers
United States 9 3
China 20 4
 Solution
Opportunity cost table
Cars Computers
United States 1Car= 1/3 Computer 1CO=3CARs

China 1Car= 1/5 Computer 1CO=5CARs

China will export cars and US will export

computers.
The terms of trade for cars will be greater than
1/5CO and less than 1/3CO
 Problem 2
• The following table provides productivity of single
unit of resource in producing wheat and microchips
in both Canada and Japan.
• Which country has an absolute advantage in the
production of wheat? Of
• microchips?
• (b) What is the opportunity cost of producing a ton
of wheat in Canada? In Japan?
• (c) Which country has a comparative advantage in
the production of wheat?
• Of microchips?
 Qualifications and Assumptions

• The simple example of comparative advantage

assumes
– only two countries and two goods
– zero transportation costs
– similar prices and values
– resources are mobile between goods within
countries, but not across countries
– constant returns to scale
– fixed stocks of resources
 The Gains from Trade

• The theory of comparative advantage - trade

is a positive sum gain in which all gain
– potential world production is greater with
unrestricted free trade than it is with restricted
trade
– provides a strong rationale for encouraging free
trade
 Heckscher-Ohlin Theory

• Heckscher and Ohlin - comparative advantage

arises from differences in national factor
endowments (the extent to which a country is
endowed with resources such as land, labor,
and capital)
– the more abundant a factor, the lower its cost
– countries will export goods that make intensive
use of those factors that are locally abundant, and
import goods that make intensive use of factors
that are locally scarce
 The Product Life Cycle Theory

The market share of feature phones rose to 61% in 2017 from

55.4% in 2016, while market share for smartphones fell to
39% from 44.6%, according to data provided by IDC.
https://qz.com/africa/1206462/smartphones-lost-market-
share-to-feature-phones-in-africa-last-year/
 The Product Life Cycle Theory
• Vernon (mid-1960s ) proposed the product life-cycle theory -
as products mature both the location of sales and the optimal
production location will change affecting the flow and
direction of trade
– the wealth and size of the U.S. market gave a strong
incentive to U.S. firms to develop new products
• In the early stages of a product’s life cycle demand may grow
in the U.S., but demand in other advanced countries is limited
to high-income groups
– it is not worthwhile for firms in those countries to start
producing the new product, but it does necessitate some
exports from the U.S. to those countries
 The Product Life Cycle Theory

• Over time, demand for the new product starts

to grow in other advanced countries making it
worthwhile for foreign producers to begin
producing for their home markets
– U.S. firms might also set up production facilities in
those advanced countries where demand is
growing limiting the exports from the U.S.
• As the market in the U.S. and other advanced
nations matures, the product becomes more
standardized, and price becomes the main
competitive weapon
 The Product Life Cycle Theory

• Producers based in advanced countries where

labor costs are lower than the United States
might now be able to export to the U.S.
• If cost pressures become intense, developing
countries begin to acquire a production
advantage over advanced countries
• The United States switches from being an
exporter of the product to an importer of the
product as production becomes more
concentrated in lower-cost foreign locations
 The Product Life Cycle Theory
Figure 5.5: The Product Life Cycle
 Evaluating The Product Life Cycle Theory

• While the product life cycle theory accurately explains what

has happened for products like photocopiers and a number of
other high technology products developed in the US in the
1960s and 1970s, the increasing globalization and integration
of the world economy has made this theory less valid in
today's world
– today, many new products are initially introduced in Japan
or Europe, or are introduced simultaneously in the U.S.,
Japan, and Europe
– production may also be dispersed to those locations where
it is most favorable
 New Trade Theory

New trade theory (1970s) suggests

1. Because of economies of scale (unit cost
reductions associated with a large scale of
output), trade can increase the variety of
goods available to consumers and decrease
the average cost of those goods
2. In those industries when the output required
to attain economies of scale represents a
significant proportion of total world demand,
the global market may only be able to
support a small number of firms
 Economies of Scale and First Mover
Advantages
• Firms with first mover advantages (the
economic and strategic advantages that
accrue to many entrants into an industry) will
develop economies of scale and create
barriers to entry for other firms
• The pattern of trade we observe in the world
economy may be the result of first mover
advantages and economies of scale
 Increasing Product Variety and Reducing
Costs
• Without trade
– a small nation may not be able to support the
demand necessary for producers to realize
required economies of scale, and so certain
products may not be produced
• With trade
– a nation may be able to specialize in producing a
narrower range of products and then buy the
goods that it does not make from other countries
– each nation then simultaneously increases the
variety of goods available to its consumers and
lowers the costs of those goods
 Porter’s Diamond

 Conducted a 4 year study of ten trading nations

- Denmark
- Germany
- Italy
- Japan
- Korea
- Singapore
- Sweden
- Switzerland
- United Kingdom
- United States
 Porter’s Diamond

• Porter (1990) tried to explain why a nation achieves

international success in a particular industry
• Porter identified four attributes he calls the diamond that
promote or impede the creation of competitive advantage
1. Factor endowments
2. Demand conditions
3. Related and supporting industries
4. Firm strategy, structure, and rivalry
• In addition, Porter identified two additional variables
(chance and government) that can influence the diamond in
important ways
 Porter’s Diamond

Figure 5.6: Determinants of National

Competitive Advantage: Porter’s Diamond
 Factor Endowments

• A nation's position in factor endowments

(factors of production) can lead to competitive
advantage
– These factors can be either basic (natural
resources, climate, location) or advanced (skilled
labor, infrastructure, technological know-how)
• Basic factors can provide an initial advantage
that is then reinforced and extended by
investment in advanced factors
 Demand Conditions

• Demand conditions - the nature of home

demand for an industry’s product or service
– influence the development of capabilities
• Sophisticated and demanding customers
pressure firms to be more competitive and to
produce high quality, innovative products
 Related and Supporting Industries

• Related and supporting industries - the

presence supplier industries and related
industries that are internationally competitive
– investing in these industries can spill over and
contribute to success in other industries
• Successful industries tend to be grouped in
clusters in countries which then prompts
knowledge flows between firms
– having world class manufacturers of semi-
conductor processing equipment can lead to (and
be a result of having) a competitive semi-
conductor industry
 Firm Strategy, Structure, and Rivalry

• Firm strategy, structure, and rivalry - the

conditions in the nation governing how
companies are created, organized, and
managed, and the nature of domestic rivalry
– nations are characterized by different
management ideologies which influence the
ability of firms to build national competitive
advantage
• There is a strong association between vigorous
domestic rivalry and the creation and
persistence of competitive advantage in an
industry
 Evaluating Porter’s Theory
• Porter - the four attributes of the diamond
together with government policy, and chance
work as a reinforcing system, complementing
each other and in combination creating the
conditions appropriate for competitive
advantage
• Government policy can
– affect demand through product standards
– influence rivalry through regulation and antitrust
laws
– impact the availability of highly educated workers
and advanced transportation infrastructure
Porter’s Diamond for Indian IT- ITES Industry
 Classroom Performance System

Which theory did not suggest that there could

be gains from specialization and trade?
a) Mercantilism
b) Absolute advantage
c) Comparative advantage
d) Heckscher-Ohlin theory
 Classroom Performance System

Which theory viewed trade as a zero sum game?

a)Mercantilism
b)Absolute advantage
c)Comparative advantage
d)Heckscher-Ohlin theory
 Classroom Performance System

Economies of scale and first mover advantages

are central to which theory of trade
a) Porter’s diamond of competitive advantage
b) New trade theory
c) Vernon’s product life cycle
d) Comparative advantage
 Classroom Performance System

Porter’s Diamond is made up of all of the

following except
a) Factor endowments
b) Related and supporting industries
c) Firm strategy, structure, and rivalry
d) Supply conditions
 International Trade
Instruments – Tariff and
Non Tariff Barriers
 Instruments of Trade Policies
• Trade policies are the policies that governments adopt toward
international trade.
• Instruments of Trade Policies:

– Taxes on imports or exports, quantitative restrictions of

international transactions, subsidies and many other measures that
for convenience are often divided into two broad categories: tariffs
and non-tariff measures (NTMs).

– Governments typically apply different combinations of measures to

each of the thousands of products imported or exported.
 Origin and Destination of
Goods
• A tariff is a duty or tax imposed by the government of a country
upon the traded commodity as it crosses the national boundaries.

• Tariff can be levied both upon exports and imports.

– Export Duty:

– Export duties are levied occasionally to mop up excess

profitability in international prices of goods in respect of which
domestic prices may be low at the given time.
– The tariff or duties imposed upon the goods originating in the
home country and scheduled for abroad are called as the
export duties.
– Countries, interested in maximising their exports generally
avoid the use of export duties.
– Tariffs have, therefore, become synonymous with import
duties.
 Case Study : Export duty on iron
ore
The Federation of Indian Mineral Industries (FIMI) wants the Centre to scrap the 30 per cent export tax on iron
ore
There is a 30 per cent export duty on iron ore having Fe (iron) content above 58 per
cent. “Government has abolished export duty only on iron ore up to 58 per cent Fe
in the budget 2016-2017, but export duty continues to be 30 per cent on iron ore
above 58 per cent Fe...During the year 2018-19, quantity of exports of iron ore
declined drastically to 16.19 million tonnes from 30.48 million tonnes in 2016-
2017.”
• “There is stockpile of 162.85 (provisional) million tonnes of iron ore at mine-heads
as on March 31, 2019, which is mainly accounted by Jharkhand and Odisha states.
Most of the 162.85 million tonnes of iron ore, which is estimated to be lying at the
mine heads is in the grade of 58 per cent Fe to 62 per cent Fe,” FIMI said.
• The abolition of export duty up to 62 per cent Fe will help in liquidating the huge
stockpile of iron ore at mine-heads which will result in enhanced foreign exchange
earnings besides more production of iron ore in the country, the industry body
noted.
 Case Study : Export duty on
iron ore
• “This was not the time to put additional burden on the export of iron ore. If
government wanted more revenue there were various other instruments they
could have used. Export of iron ore was picking up recently. Therefore
government should have given stimulus, but on the contrary they have
punished the iron ore export sector,” said S Sridhar, executive director of the
Goa Mineral Ore Exporters Association.

• “Demand for Indian iron ore lumps had started shrinking in Chinese spot market
as Australian and Brazilian variants were low priced.”
– They had also claimed in the letter that “iron ore lumps are a key input in
steel making. But the tax barrier along with high transportation cost had
out-priced the ore in the global market.”
– government is using the duty as an instrument to curb the export of iron
ore and divert it to the domestic steel industry.
• Environmentalist’s lobby is happy over the Central government’s move.
– Reduce mining activity in Goa and thus help maintain the ecological
balance of the state.
 Origin and Destination of
Goods
• Import Duties:

– Levied upon the goods originating from abroad and scheduled for the home
country.

• Transit Duty:

– It is imposed upon the goods originating in the foreign country and scheduled
for a third country crossing the borders of the home country.

• For instance, if India imposes tariffs on goods that Bangladesh exports to

Nepal through the Indian Territory, these will be called as transit duties.
Such duties are usually a matter of much concern for the land-locked
countries.
 Quantification of Tariff
• Specific Duties : A specific duty is a flat sum per
physical unit of the commodity imported or
exported.
• Ad - Valorem Duties : Are levied as a fixed
percentage of the value of the commodity
imported/exported.
• Compound Duties : When a commodity is
subject to both specific and ad-valorem duties
, the tariff is generally referred to as compound
duty
 Harmonized commodity description and
coding systems (HS)
• International nomenclature for the classification of products. It allows
participating countries to classify traded goods on a common basis for
customs purposes. At the international level, the Harmonized System (HS)
for classifying goods is a six-digit code system
• The HS comprises approximately 5,300 article/product descriptions that
appear as headings and subheadings, arranged in 99 chapters, grouped in
21 sections.
• The six digits can be broken down into three parts. The first two digits (HS-
2) identify the chapter the goods are classified in, e.g. 09 = Coffee, Tea,
Maté and Spices. The next two digits (HS-4) identify groupings within that
chapter, e.g. 09.02 = Tea, whether or not flavoured. The next two digits
(HS-6) are even more specific, e.g. 09.02.10 Green tea (not fermented).
 Important links to know the tariff
on products
• http://icegate.gov.in
• This is a portal for Indian Customs Ecommerce
Gateway where tariff on any products can be
found.
• This portal also has an integrated payment
gateway and the duties and taxes can be paid
through this portal.
• Through this portal all the export import
documentation can be done online than paper
documentation.
 Major Impacts of Tariff
• Protective effect – Increase in price of imported products will reduce
demand for imported products, will help domestic producers absorb
higher production cost and expand their output
• Consumption effect – The increase in prices resulting from import duty
usually reduces the consumption capacity of people
• Redistribution effect – If the import duty causes an increase in the price of
domestically produced goods, it amounts to redistribution of income
between the consumers & producers in favour of the producers
• Revenue effect – will increase the revenue of the govt
• Income & employment effect – Switchover from foreign goods will lead to
higher spending within the country causing an expansion of domestic
income and employment
• BOP Effect – May help country to improve its BOP deficit
 Effective rate of protection
• Earlier concept was that nominal rate of tariff which is applied is the
effective rate of protection say 10% tariff is applied to TV than the
effective rate of protection was 10%
• However, the limitation of this was that it considered import duty on the
final product and not the input (raw material or intermediate goods used
to produce the domestic substitute of imports)
• A country, many often, imports a raw material either duty-free or imposes
a very low tariff rate on the imports of inputs than on the import of final
commodity
• Such a policy is adopted for encouraging domestic production and
expansion of employment
• In the words of Corden, “The effective protective rate is the percentage
increase in value added per unit in an economic activity which is made
possible by the tariff structure relative to the situation in the absence of
tariff but with the same exchange rate”
 Calculation of Nominal rate of protection &
Effective rate of protection
• The effective rate of protection is measured by following formula
g=V’-V/V
• where V is the domestic value added under free trade and V’ is the
value added after duty is imposed
• The domestic value added in a machine produced in the home country
under free trade is determined by the international fixed prices of the
machine under free trade minus the cost of all imported inputs at their
fixed international free trade price
 Caselet problems on ERP
• Consider a producer of ‘cotton garments’ that requires only one
intermediate input ‘cloth’. Suppose that production of garments worth 100
at world market prices requires the use of cloth worth 75 in world
markets.
• ‘World value added’ or the cost of all manufacturing margins, including
labor and normal returns to capital is 25 (the difference between 100 and
75)
• Now ABC garment company based in Surat, India is a domestic producer.
The import duty on ‘cloth’ is 20% and the import duty on cotton garments
is 30%.
• Find the effective rate of protection to ABC garment company?
 Solution
• Using the formula g= V’-V/V
• V’= 100(1+30/100)- 75(1+20/100)= 130-90 =
40
• V= 100-75 = 25
• The ERP = (40-25/25) * 100 = 60%

Q. Do you think ABC will be able to compete in

the export market? Explain with the working
 Non Tariff Barriers
• Often called as ‘New Protectionism measures’
• Have grown considerably since 1980
• Offsets the benefits achieved by trade
liberalisation of GATT negotiations 1995
 Demerits of NTB

• Less transparent, difficult to quantify the impact

• Causes higher prices for consumers
• Lost tariff revenue for the government
• Diminished competition
• Diversion of production and exports

• As per an ADB study the reduction in tariff barriers has

increased the NTB’s in industrialized countries and the
developing countries have suffered because of this even if
these developing countries have comparative advantage
NTBs- Less Transparent & Difficult
to Quantify
• Methodological limitations in converting NTM’s into as a tariff
• Difficult to correctly estimate the price gap between the imported and
domestic products as the CIF or invoice price of the imported good will
not give the correct price of goods when actually sold in the retail
market
• For example the CIF prices can be far lower for an apparel than the
retail price as the availability of these apparels is less in the market
and the domestic apparels poor substitute for imported apparels
• It is also difficult to net out the price increase due to consumers’
willingness to pay for higher quality
• This quantification becomes more complex in case of multiple Ntb’s
 NTBs- Less Transparent &
Difficult to Quantify – Example
• Consider the global supply chain of producing a computer disk drive as
discussed in Hiratsuka (2005) and Baldwin (2008)
• The disk drive is assembled in Thailand, which acts as the hub of the supply
network, using 43 components from ten other countries in addition to 11
components produced in Thailand
• Furthermore, since the disk drive will be shipped to the location of final
computer assembly (e.g. China), where the other major computer
components are gathered, the number of cross-border moves multiplies
even further
• Importantly, in a global supply chain that requires semi finished goods to
move back and forth across international borders more than once, the
effects of non-tariff measures (and other trade costs) are compounded
 NTB’s – Higher prices for
consumers
• Consumers have to pay higher prices especially where the demand is price
inelastic in nature
• For the apparel sector, prices in the United States, the European Union
and Canada were 15 per cent, 66 per cent and 25 per cent higher,
respectively, due to the presence of NTBs
• In South-East Asia, South Asia and Japan, paper products were 67 per
cent, 119 per cent and 199 per cent more expensive respectively due to
NTBs, while NTBs on leather shoes raised their prices in Japan by 39 per
cent and in Mexico/Central America by 80 per cent
 NTB –Unfair & Diminished
Competition
• NTB’s are less transparent and unfair because they
don’t treat the exporters equally
• The bigger exporters are on an advantage over the
smaller exporters as they have more bargaining
power than the small exporters
• The established exporters tend to enjoy greater than
perfectly competitive returns from their export sales
since quota rights enable them to sell in the
protected markets
• The small exporters suffers the most due to NTB
 NTB’s – Diversion of Production
and Exports
• Some Indian textile & apparel firms had
moved their manufacturing facilities to Nepal
to circumvent MFA quota controls of their
exports from India and to avoid the local costs
of purchasing added quota rights
• Exporters also attempt to diversify their
exports to non-quota countries
 Major Non-Tariff Measures
• Quota and VER
• Administrative Protection Policies
• Safeguards Measures
• Anti Dumping duties
• Domestic subsidy
• Health and Product Standards
• Licensing
• Local content requirement
 Quotas
• Tariff Quota : Under a tariff quota, imports of a
commodity up to specified volume are allowed duty free
or low rate but any import in excess of this limit are
subject to higher rate of duty
• Unilateral Quota : A country unilaterally fixes a ceiling on
the quantity of import of the particular commodity
• Bilateral Quota : Results from the negotiation between
the importing country & a particular supplier country
Example – Japanese Car export to
US - VER
• In 1981, US pressurized Japan to restrict its car
exports to US to 1.68 millions vehicle per year
• Japan agreed to US demand for Voluntary
Export Restraints (VER)
• What do you think are the implications of such
policies on the following :
• Domestic Producers
• Consumers
• Japanese Producers
 Example – Japanese Car export to
US - VER
• Domestic Producers – These quota based helped domestic industries to
get surplus earnings of almost $3.2 billion estimated. The domestic
industries had no fear of losing the business
• Consumers - average price per new car has risen by $2,600 since the
market restrictions were imposed
• Japanese Producers – They got higher prices for their import from the
consumers.
• The extra profit that producers make when supply is artificially limited by
an export quota is called ‘Quota Rent’
 J- Countervailing and
antidumping
•
Countervailing Duty:
– Imposed on certain imports where products are subsidised by
exporting governments.
– As a result of government subsidy, imports become more cheaper
than domestic goods.
– To nullify the effect of subsidy, this duty is imposed in addition to
normal duties.
Antidumping
• Dumping is defined as selling goods in a foreign market at below their
costs of production or as selling goods in a foreign market at below their
fair market value
• Antidumping policies are designed to punish foreign firms engaging in
dumping
• The ultimate objective is to protect domestic producers from unfair
foreign competition
• They are not a measure to restrict imports or cause an unjustified
increase in product price
Antidumping duties - Example

• The government has imposed an antidumping duty of up to USD

60.35 per tonne for five years on a chemical (Ammonium Nitrate)
used in fertiliser industry from four countries -- Russia, Indonesia,
Georgia and Iran
• Deepak Fertilizers and Petrochemicals Corporation Ltd and
Smartchem Technologies Ltd had jointly filed an application before
the Directorate General of Antidumping and Allied Duties (DGAD)
for initiation of the antidumping investigations
• The finance ministry imposed the duty after the DGAD in its finding
concluded that the product has been exported to India from these
four countries below its normal value, resulting in dumping
• The duty ranges between USD 11.42 to USD 60.35 per tonne
 Safeguard Measures

• A WTO member may take a “safeguard” action (i.e., restrict imports of a

product temporarily) to protect a specific domestic industry from an
increase in imports of any product which is causing, or which is
threatening to cause, serious injury to the industry.
• Safeguard measures were always available under the GATT (Article XIX).
• The WTO Safeguards Agreement broke new ground in prohibiting “grey
area” measures and setting time limits (“sunset clause”) on all safeguard
actions
• In the event of critical circumstances, a provisional safeguard measure
may be imposed based upon a preliminary determination of serious injury.
The duration of such a provisional measure would not exceed 200 day
• Example – Safeguard measure for Solar cells
Example - Solar Panel Import India
• India imposed a safeguard duty in July 2018 for two years. The duty was pegged at 25%
for the first year, 20% for the next six months, and 15% for the last six-month period.
• One year after India imposed an additional import duty on solar cells and modules to
stimulate local production and reduce dependence on imports, no new domestic
manufacturing unit has been set up, according to a renewable energy consultancy firm.

• The government has imposed safeguard duty on solar cells for one more year till July
2021 to protect domestic manufacturers and discourage cheap imports from countries
like China.
• A duty of 14.9% will be levied during July 30, 2020, to January 29, 2021, and then
14.5% during January 30, 2021, to July 29, 2021, it added.
• India imposed the duty for the first time on July 30, 2018, for two years. China accounts
for nearly 80% of module supplies in India.
• Do you think this NTB helped the solar power developers
 Example – Export Quota by China
for Rare Earth Metals
• China had set up an export quota for 17 Rare Earth Metals from export of
50,000 tonnes in 2009 to 30,996 tonnes in 2012
• These rare metals are critical in manufacturing of High Tech products like
wind turbines, iphones, batteries for hybrid cars
• Rare metals mining is environmentally dangerous which makes difficult to
mine it in developed country
• The reason for limiting export by China was that many of its domestic
companies does not meet the environmental regulations and hence they
need to be shut down
• Do you agree with this ?
 Example – Export Quota by China
for Rare Earth Metals
• This gave a cost disadvantage to foreign
manufactures and a cost advantage to domestic
manufacturers
• Many of the hi tech product manufacturing were
forced to move production from foreign
manufacturers to Chinese manufacturers
• The Chinese manufacturers could move up the value
chain by not supplying lowly raw materials but
supplying finished products
• China pushed its ‘industrial policy’ through ‘trade
measures’
 Subsidy

• Article 1.1 of WTO Agreement on Subsidies and Countervailing

Measures defines Subsidy as “a means of financial contribution by
Government or any public body within the territory of the
member in form of direct transfer of funds, potential direct
transfer of funds or liabilities or Government revenue which is due
but is foregone or not collected or provides goods or services
other than general infrastructure or purchase goods”.
Subsidy – China’s Auto Export to
US
• In 2002 China’s auto exports to US was $7.4 billion and in 2011 the
exports was $ 69.1 billion
• One of the reason for such growth has also been the huge subsidy
provided by China to its auto sector
• The subsidy provided was $1 billion between 2009-2011 in the
form of cash grants for exporting, grants for R&D, Subsidies to pay
interest for loans and preferential tax treatment
• US Govt had filed a complaint against China with WTO, however
there was not much support from many major US auto
manufacturer
• What do you think would have prevented these US auto
manufacturers from supporting this claim even though it was
hitting US manufacturing jobs?
 facts – India subsidy to agriculture
• Name Source Year Magnitude
• Fertilizer Union Budget 2017/18 70,000
• Power Dharmadhikari et.al (2018) based on Power Finance Corporation data 2015/16 91,000
• Credit Union Budget 2017/18 20,000
• Irrigation Central Water Commission (2017) 2013/14 17,500
• Crop Insurance Union Budget 2018/19 13,000
• Price Support Author’s estimate 2014/15-2016/17 24,000
• Total (without inflating to 2017/18 pricelevels) 2,35,500

• Loan waivers 2017/18 1,22,200

• Input Subsidy per hectare (Bathla et. al, 2017) Rs. 7750
• Price support subsidy per hectare (Author’s Estimate) Rs. 1050
• Total subsidy income Rs. 8800
• Farm cultivator income per hectare (Chand, 2017) Rs. 42,644
• Subsidy income/Farm Income 21%
 Administrative Policies
• Are bureaucratic rules designed to make the
imports difficult
• FedEx had a difficult time expanding its global
shipping operations in Japan as custom’s
inspected a large proportion of shipments by
opening them that delayed the delivery of
shipped parcels
 Administrative Policies Used by
China
• A small-time exporter from Mumbai wanted to ship out engineering
goods to China. He was told that a Chinese team was required to visit his
factory and he would have to pay for it. He agreed, and spent some Rs10
lakh on the team’s visit. After six months he was told that another team
would land up at his factory again before getting to the next stage of
obtaining the order.
• What are the likely direct implications on exporting countries shipping
costs due to administrative barriers by importing countries?
 Administrative Policies Used by
China
• As per Journal of Economics study in 2015 ‘administrative barriers’
Exporters tend to ship fewer and larger shipments as they face scrutiny by
health & sanitary officials, documentation issues by custom’s
• Due to infrequent shipping the exporters has a risk of losing timely order
from buyers and overall exports decline
• Delay in shipment has a cost which reduces the competitiveness of the
exporting countries
• Country pairs at the 25th percentile of per-shipment costs trade 68%
more than country pairs at the 75th percentile
• A 50 percent reduction in per-shipment costs is equivalent to a 9
percentage point reduction in tariffs
Local Content Requirement
• The Public Procurement (Preference to Make in India), order is
aimed at defining purchase preference (linked with local
content) in Government procurements wherein the preference
in Government procurement will be given to local suppliers
• Entities from countries where Indian suppliers are not allowed to
participate or compete in bids for government procurement,
may be restricted or excluded from public procurement tenders
in India
• As per the Order, the minimum local content shall ordinarily be
50%. The Nodal Ministry may prescribe a higher or lower
percentage in respect of any particular item and may also
prescribe the manner of calculation of local content.
• Write down the probable advantages and disadvantages
associated with this kind of policy?
 Local Content Requirement
Advantages Disadvantages
Flow of capital into domestic Domestic manufacturing becoming
manufacturing & services inefficient due to protectionism
Flow of technology Foreign players can reciprocate the action
against Indian suppliers
Realignment of local supply chain as Import substitute of inputs can lead to
foreign players will start local higher prices and increased spending by
procurement public sectors especially in sectors where
domestic inputs are very expensive

More Strategic alliances will happen Can lead to dispute in WTO under ‘national
between foreign manufacturer & local treatment’ condition
player
Upgrading technical knowledge of
domestic workers
 Health and Product Standards

• Article 20 of the General Agreement on Tariffs and Trade (GATT)

allows governments to act on trade in order to protect human,
animal or plant life or health, provided they do not discriminate or
use this as disguised protectionism
• A separate agreement on food safety and animal and plant health
standards (the Sanitary and Phytosanitary Measures
Agreement or SPS) sets out the basic rules
• It allows countries to set their own standards. But it also says
regulations must be based on science. They should be applied only to
the extent necessary to protect human, animal or plant life or health.
• There is a ‘Technical Barriers to Trade’ committee is a major clearing
house for members to share the information and to discuss new
regulations
 Health and Product Standards

• China is one of the largest buyers of non-Basmati rice from Pakistan,

but it doesn’t allow such supplies from India.
• Certain oilseed exports require as many as 11 certificates stating the
items are pest-free. Interestingly, 10 of the 11 pests are already
present in China.
• The EU had imposed the ban on May 1, 2014, after EU’s trade
authorities in Brussels found 207 consignments of Indian fruits and
vegetables to be infested with fruit flies – pests that are native to
Indian soil but that could infest and damage European crops.

Along with the famous Alphonso and other Indian mangoes, the ban
stalled Indian exports of four vegetables: bitter gourd (karela),
eggplant (brinjal), taro plant (arbi) and snake gourd (chichinda).
 How India responded to Mango
ban by EU
• India exports at least 4,000 tonnes of mangoes every year
• Working overtime to modify its certification mechanisms according to
European guidelines, APEDA and the central government pushed for the EU to
send an inspection team to audit Indian packing houses in 2014 itself. In
September, the EU’s Food and Veterinary Office finally sent a team of officials
for an exhaustive audit of packing houses across India.
• trade experts believe mangoes were prioritised largely because of persistent
lobbying by a strong industry of traders both in India and in Europe, and the
particular efforts of Indian-origin British parliamentarian Keith Vaz
• Soon after the plan to ban Indian imports was announced in March,
Vaz sent British Prime Minister David Cameron a boxful of Alphonso mangoes
as an early effort to push the United Kingdom to oppose the ban. In May, he
launched a ‘Reverse the Mango Ban’ campaign to bring other parliamentarians
on board and has referred to mangoes as “symbolic of India”.
 Import Licensing
• The Indian Trade Classification (ITC)-Harmonized System (HS) classifies goods into
three categories: Other than these 3 all other categories can be imported freely with
an IE license
• Restricted : Restricted items can be imported only after obtaining an import license
from the relevant regional licensing authority. Certain speciality chemicals, wild
animals are on restricted items.
• Canalized : Canalized goods are items which may only be imported using specific
procedures or methods of transport. Goods in this category can be imported only
through canalizing agencies. The main canalized items are currently petroleum
products, bulk agricultural products, such as grains and vegetable oils, some minerals
& metals and some pharmaceutical products
• Prohibited : goods listed in ITC (HS) which are strictly prohibited on all import
channels in India. These include certain wild animals, tallow fat and oils of animal
origin, animal rennet, and unprocessed ivory, illegal drugs, firms arms & ammunition
etc.
 B - Balance of Payments
• BOP Payments and its Components
• BOP Dis equilibrium and its corrections
 Balance of Payment
• As per RBI, BOP is ‘ a statistical statement
that systematically summarizes, for a specific
time period, the economic transactions of an
economy with the rest of the world.’
• Components of BOP
- Current Account
- Capital Account and Financial Account
- Net Errors and Omissions
Current Account Capital Account Financial Account
Trade of Goods Gross acquisitions Direct investment : equity & investment
(Debit) & Gross disposal fund shares, debt instruments
(CR) of non produced
non financial assets
Trade of Services Capital transfers : capital Portfolio investment : equities&
transfers, debt investment fund shares, debt securities
forgiveness, migrant
transfers
Income receipts & Financial derivatives & ESOP’s
payments : interests,
dividend, remittances,
employee compensation,
personal transfers
Other investment : ADRs/GDRs,
Currency & Deposits, Loans, Insurance,
pension & other guaranteed schemes,
trade credit & advances, SDRs
Reserve assets : Monetary gold, SDRs,
foreign currency assets
 Questions
• A Financial leases(purchase) of land by a
foreign enterprise in India will be included in
A)Current Account
B)Capital Account
C)Financial Account

Answer : B
• Interest earned from financial leases are
recorded in
A)Current Account
B)Capital Account
C)Financial Account

Answer : A
• An US tourist comes to India and spends into
buying goods and services. This will be recorded
in

A)Current Account
B)Capital Account
C)Financial Account

Answer : A
 Quiz
• Indian company imports car produced in
Japan by Toyota for $20,000
It will enter the BOP statement of India as
a)Credit on current account
b)Debit on the current account
c) Credit on the capital account
d)Debit on the capital account
Answer - b
 Quiz
• Imagine that Toyota deposits this money in
Japanese Bank for Yen and then the Japanese
Bank buys Indian Govt bond worth $ 20,000
• It will enter the BOP statement of India as
a) Credit on current account
b)Credit on the current account
c) Credit on the financial account
d)Debit on the financial account
Answer - c
 Net Errors and Omissions
• While BOP in theory must be balanced i.e. the sum
of current account, capital account and financial
account should always add up to Zero
• In practice this does not occur due to statistical
discrepancies
• Imbalances may occur in practice of imperfect
compilation procedures and different data sources
• Net errors and omissions in simple terms are derived
residually as the difference between total of receipts
and payments (both current and capital together
with the financial account)
 BOP Disequilibrium
• BOP is in equilibrium when the demand for
foreign exchange is exactly equivalent to the
supply of it
• BOP is in surplus or deficit then the BOP is in
disequilibrium
• When demand of foreign exchange > supply
the BOP is in deficit
• When demand of foreign exchange < supply
the BOP is in surplus
Factors Causing BOP Disequilibrium
• Economic
• Political
• Sociological
Correction of Disequilibrium

• Deliberate Measures
- Monetary measures
- Trade measures
- Miscellaneous measures
 Deliberate Measures - Monetary
• A country is facing BOP deficit and you are
required to suggest action in case of below
appropriate monetary measures for restoring
the BOP. Explain your answer
• Money supply
• Devaluation
• Exchange Control
 Money Supply
• Contraction of money supply will reduce the
purchasing power, domestic demand and
reduce the domestic prices
• This will lead to fall in imports
• Due to reduced domestic prices the export is
likely to increase
• Hence the BOP deficit will be restored
 Devaluation
• Devaluation means reduction of the official
rate at which the currency is exchanged for
another currency
• A country with BOP deficit may devalue its
currency in order to stimulate its exports and
discourage imports
• This will make import dearer and export
cheaper
 Exchange Controls
• Under exchange control the govt or Central
Bank assumes complete control over the
foreign exchange reserves and earnings of the
country
• Exporters are required to surrender foreign
exchange to the govt/Central Bank in
exchange for domestic currency
• By controlling the use of Fx the govt can
control the imports
 Trade Measures
• Export Promotion – Reducing or abolishing
export duty, export subsidy, encouraging
export promotion and export marketing by
giving monetary, fiscal, physical and
institutional incentives and facilities
• Example – Merchandise Exports From India
Scheme (MEIS)
• SEZ/EOU/STPI schemes
 Trade Measures
• Import Control
- Increasing import duties
- Restricting imports through import quotas
- Licensing and prohibiting the import of certain
inessential items
 Miscellaneous Measures
• Foreign Loans
• Encouraging foreign investment in the country
• Tourism development
• Incentives for foreign remittances
• Import substitution
 Quiz
• The best measure to fund the Current account
deficit will be
A)Portfolio investment
B)FDI
C)Loans
• A duty to be paid as a fixed sum per unit is
called
A)Specific duty
B)Ad Valorem duty
C)Compound duty
D)None of the above
• If the nominal rate of protection is the same
on all of an activity’s inputs and its output, the
effective rate of protection will be _________
to this common rate of nominal protection.
A)identical
B)smaller
C)larger
• __________ theory explain trade through the
interplay between the proportions in which the
factors of production are available in different
countries and the proportions in which they are
need for producing particular goods
A)Comparative
B)New trade
C)Product life cycle
D)None of the above
• __________ theory as products
mature both the location of sales and
the optimal production location will
change affecting the flow and direction
of trade
A)Comparative
B)New trade
C)Product life cycle
D)None of the above
• __________ theory suggests In those industries
when the output required to attain economies of
scale represents a significant proportion of total
world demand, the global market may only be able
to support a small number of firms

A) Comparative
B) New trade
C) Product life cycle
D) None of the above
 Module V
Global Sourcing and Supply Chain

By- Dr Arpita Shrivastava

Learning objectives

Strategy of global production, logistics and outsourcing

Where to produce

Make or Buy
Strategic Considerations

Global sourcing generally refers to sourcing outside of a company's traditional market. Two quite
different strategic drivers may be behind a company's desire to source globally:

Global expansion into new markets often forces a company to

establish a local supply base.

Suppliers outside the home market may offer superior

technology or low labor cost in products
 A case study of Apple's supply chain
Awards
One key aspect of Apple’s supply chain is its use of Apple has received multiple awards for its
multiple suppliers for the same component. Apple supply chain strategy. Recently, for example,
has an extensive network of third party suppliers in Gartner, a US-based research and advisory
its supply chain. According to recent research, Apple company, awarded Apple its inaugural “Masters”
award after previously ranking Apple No. 1 on its
has 785 suppliers in 31 countries worldwide, 349 of Invests “Top 25 Supply Chains” list for the past 5 years.
which are based in China. It has also recently announced environmental programs
with its Chinese manufacturing partners to offset carbon
emissions and utilize more clean energy.
Diversification into New products (Apple
Watch).
Apple has also diversified its supply chain to include
new manufacturing partners in China and Taiwan. It
has also secured multiple suppliers for key components
relating to new products
2015 Supplier List
97% of its supply chain (including
procurement, manufacture and
assembly) is accounted for by its top
200 supplier

Reference link - https://aicd.companydirectors.com.au/advocacy/governance-leadership-centre/governance-driving-performance/a-case-study-of-apples-supply-chain

 When Tim Cook came onboard he realized Apple’s supply chain was too
complex. He made drastic changes over the years to streamline the Key Factors Contributing
process, generating huge cost savings and improving service by:
to the Success of Apple’s
•focusing on making great products using ground breaking innovation Supply Chain
•supplying products that are not seasonal and have a life cycle of more
than 12 months
•reducing the number of warehouses to one centralized location in
California
•synchronizing data between the central warehouse and its own stores
and customers, making operations more efficient and cost-effective
•outsourcing manufacturing and as a result reducing the manufacturing
cycle time
•reducing the number of key suppliers involved in manufacturing,
shipping and storing
•requesting price reductions and asking suppliers to relocate closer to
Apple’s factories
•extraordinary inventory management
 What can we learn from Apple’s supply chain strategy?
“More progressive global organizations are now starting to demonstrate bimodal thinking around how to
maximize the opportunities out of the third party extended ecosystem while managing the related risks at the
same time”, suggests Deloitte..

Apple’s Chief Executive Officer, Tim Cook,

has been described as a “supply chain
specialist”. He is credited for
streamlining inefficient areas of Apple’s Consider the benefits of multiple suppliers
for the same component
supply chain and using inventory
reduce single supplier risks or provide an
tracking mechanisms to reduce its avenue for improving performance
number of suppliers and warehouses.
Measure and evaluate performance
closely monitor supply chain performance
by analyzing financial metrics

Encourage a compliance culture and the

use of regular audits
Strategic Objective behind Global Sourcing

01 Lower the cost of value creation

Add value by better serving customer needs, product

02 quality

Meet demand for local responsiveness arising due to national differences

03 in consumer taste & preferences, infrastructure, distribution channels &
host consumer demands

Production & logistics must be able to respond quickly to

04 shifts in consumer demand
 levels of sourcing globally

Level 1 – Only domestic sourcing and purchasing

Strategy : Domestic Buyers for International Purchasing
Designated by the Business Unit.
Level 2– International purchasing only when needed
Strategy: Subsidiaries or other Corporate Units
provide international sourcing assistance Level 3 – International purchasing as part of global
sourcing strategy

Strategy: Establishment of International Purchasing Offices

Level 4– Globally integrated and coordinated sourcing
(IPOs)
strategies at different locations

Strategy: Assign Design, Build, and Sourcing

Responsibility to a Specific Business Unit. Level 5– Globally integrated and coordinated
sourcing strategies at different divisions

Strategy : Worldwide Integrated and

Coordinated Global Sourcing Strategy
 Zara supply chain analysis - the secret behind Zara's retail success
Owned by the distribution group Inditex, we had a look at what makes Zara so fast that
the New York Times called it "mind-spinningly supersonic".

In 2019 Zara was ranked as the 46th most valuable brand in the world by Forbes

What’s the secret to Zara’s competitive advantage?

Their supply chain and Sourcing strategies

Zara produces around 450 million items a year. How can it stay
so efficient with the sheer volume that passes through its
supply chain?

Because a regular, small-batch deliveries happen with

clockwork precision twice a week to all of their stores around
the world.
Synergy between Zara’s business strategy and operational processes

Vertical Integration
It adapts designs, manufactures, distributes, and
retails clothes within two weeks of the original design
first appearing on catwalks. This is in contrast to the
average six months it takes to produces items in the
fashion industry by the competitors.

idea of 'fast fashion'.

The company owns its supply chain and competes on

its speed to market.
 ZARA’s Business Model - Manufacturing and Supply Chain Operations
Quick deliveries of bulk quantities of fabric
Zara buys large quantities of only a few types of fabric (just four or five types, but they can
change from year to year), and does the garment design and related cutting and dyeing in-
house. Suppliers are in Italy, Spain, Portugal and Greece. They deliver within 5 days of orders
being placed. Inbound logistics from suppliers are mostly by truck.

highly automated
Facts abouts ZARA manufacturing Operations
ZARA has a underground monorail links Zara competes on flexibility and agility instead of low
to 11 Zara-owned clothing factories cost and cheap labor.
within a 16 km (10 mile ) radius of the flexible manufacturing systems
Cube. All raw materials pass through the
Cube on their way to the clothing 50% of all items are manufactured in Spain
factories, and all finished goods also
pass through on their way out to the 26% in the rest of Europe
stores. 24% in Asia and Africa

less inventory
They do only 50 – 60 percent of their
manufacturing in advance versus the 80 – 90
percent done by competitors. Zara does not need
to place big bets on yearly fashion trends. They
can make many smaller bets on short term trends
that are easier to call correctly..
Zara operational efficiencies……

Zara can deliver garments to stores worldwide in just

a few days: China – 48 hrs; Europe – 24 hrs; Japan –
72 hrs; United States – 48 hrs

It uses trucks to deliver to stores in Europe and uses

air freight to ship clothes to other markets

Zara can afford this increased shipping cost because it

does not need to do much discounting of clothes and
it also does not spend much money on advertising.
..
Key learnings from ZARA’s supply chain

Lean inventory management

• shipments that go out twice every
01 week
Centralized order fulfilment
• ship more often and in smaller batches
Zara sticks to a deep, predictable and fast
02 rhythm, based around rapid deliveries to
stores.

Solid distribution network

Zara’s strong distribution network enables
03 the company to deliver goods to its Fast fashion success
European stores within 24 hours, and to
its American and Asian outlets in less than
40 hours.
04 Zara is all about staying on top of the
hottest trends, and exuding an exclusive
feel, but its supply chain is the real star of
the show
Sourcing Strategy – Lean inventory by Toyota (India)
Sourcing strategy - Cost Leadership
Fedex – Competition based on Time
 Where to produce- Location Decision
Plant location refers to the choice of the region where men, materials, money, machinery and equipment are brought
together for setting up a business or factory

1. Location:

Regions of a country are often identified by the local geography, signified by being in the mountains, near the coast, or
on the plains. Local geography includes the topology and drainage as well as soil conditions, all of which impact the cost
of construction in one way or another.

2. Governmental Policy and Political Climate: A company must understand how local, regional, and state
governmental regulations will impact its business and project. Critical issues such as building plan approvals,
environmental permits, utility connection approvals, and waste disposal permits can have a significant financial and
timing impact on a company’s project.
3. Distance:
•How far will your vendors need to transport materials?
•How far will you need to transport finished goods to warehouses and distribution centers?
•Are there enough skilled labor and professional workers nearby to staff your plant?
•Can you reach your customers easily and cost-effectively?

4. Availability of labour: The combination of the adequate number of labor with

suitable skills and reasonable labor wages can highly benefit the firm. However, labor-
intensive firms should select the plant location which is nearer to the source of
manpower.

5. Transport facilities: such as roads, water, rail, and air. Here the transportation costs highly
increase the cost of production, such organizations can not complete with the rival firms. The
transportation costs must be kept low.
6. Infrastructure: There must be an adequate infrastructure in place to meet the project’s current and
future requirements. Transportation, telecommunications, and electronic infrastructure, to name just a few,
are critical infrastructure factors to evaluate during the site selection process.

7. Competition :
If there is too much competition then it may be a warning sign to expand your horizons to a new location.
Likewise, if you have an element of your offering that is unique or offers some kind of new innovation, then
choosing an area that already has a ripe market could be the ideal way to pick up customers very quickly and
establish a presence in a new area in a relatively short time frame.

8. Skill base in the area: Employees are often a business’s biggest asset thus choosing a location that’s
lacking in required talent may be the start of your business’s downfall
 Examples of Plant location in India

1. IT/BPO/Software industries are majorly depend upon the availability of skilled

personnel and infrastructure. Therefore, most such organizations are located
and operate in urban areas such as Delhi, Chennai, Banglore, Ahemdabad,
Gujrat and Pune.
2. Steel plants are generally located near Jharkhand, Bengal, Chhatisgarh, and
Orrisa. This choice of site is mainlybecause of more economical
transportation of finished goods.
3. Most textiles mills are located in Ahemdabad and Mumbai because of the
humid climate in these areas.
 Make vs Buy Decisions
International businesses invariably face decisions about whether they make all or just some of the
components used in their final product and therefore buy in from other sources (outsourcing) those
components they decide not to make

Make .
Buy
 FACTORS INFLUENCING THE DECISION

The assessment should include qualitative ( calculated

and compared) and quantitative (subjective
judgment) factors

Quantitative
The incremental costs arising
from making or purchasing the
component.

Qualitative
Qualitative factors to look at call
for more subjective assessment.
Factors favouring in-house manufacture
•Wish to integrate plant operations
•Need for direct control over manufacturing and/or quality
•Cost considerations (costs less to make the part)
•Improved quality control
•No competent suppliers and/or unreliable suppliers
•Quantity too little to interest a supplier
•Design secrecy is necessary to protect proprietary technology
•Control of transportation, lead time, and warehousing expenses
•Political, environmental, or social reasons
•Productive utilization of excess plant capacity to assist with absorbing fixed overhead
(utilizing existing idle capacity)
•Wish to keep up a stable workforce (in times when there are declining sales)
•Greater guarantee of continual supply
Factors favoring purchase from outside

•Suppliers’ specialized know-how and research are more than that of the
buyer
•Lack of expertise
•Small-volume needs
•Cost aspects (costs less to purchase the item)
•Wish to sustain a multiple source policy
•Item not necessary to the firm’s strategy
•Limited facilities for a manufacture or inadequate capacity
•Brand preference
 Costs for the make analysis

•Direct labor expenses

•Incremental inventory-carrying expenses
•Incremental capital expenses
•Incremental purchasing expenses
•Incremental factory operating expenses
•Incremental managerial expenses
•Any follow-on expenses resulting from quality and
associated problems
 Cost factors for the buy analysis

•Transportation expenses
•Purchase price of the part
•Incremental purchasing expenses
•Receiving and inspection expenses
•Any follow-on expenses associated with service or
quality
HOW TO ARRIVE AT A MAKE OR BUY DECISION?

Carry out Qualitative factors Qualitative factors to

the quantitative to manufacture the buy the products from
analysis products external suppliers

Step 1 Step 2 Step 3

Qualitative aspects
Final make-or-buy into the quantitative
decision assessment

Step 5 Step 4
Dell Extraordinary practices in Operation
The Power of Virtual Integration: An Interview with Dell Computer’s Michael Dell

https://hbr.org/1998/03/the-power-of-virtual-integration-an-interview-with-dell-computers-michael-dell
Unilever Solves Distribution Issues in India
Hindustan Unilever Limited (HUL), Unilever’s Indian subsidiary, wanted to reach the 70
percent of Indians who live in rural villages. This underserved market is very hard to reach.
Not only is marketing to remote villages difficult, but the physical transport of products is no
easier. Most of the villages lack paved roads, making traditional truck-based distribution
arduous. The only way to reach many of these remote villages is by single-track dirt trails.
In response to these conditions, HUL has created Project Shakti (the word means “strength”)
and developed a network of 14,000 women and women-owned cooperatives to serve 50,000
villages. The women handle the logistics and door-to-door retailing of a range of personal-care
products. To address the needs of the market and this novel distribution system, HUL has
packaged its products in much smaller sizes. The effort has created $250 million in new
revenues for HUL, of which 10 percent is used for financing the women entrepreneurs. By
using this approach, HUL doesn’t have to deal with the problem of moving products in rural
India. The women or their employees come to the company’s urban distribution centers to get
the products.
Module 6 - Learning Objectives

WTO – Objectives, Principles, and functioning

WTO is……

 Is a multilateral trading system formally set up on 1St Jan, 1995 by replacing

GATT (General Agreement on Tariffs and Trade)
 An organization for liberalizing trade
 A negotiation forum for nations
 A Set of rules for International Commerce
 Helps to settle disputes
 The top most decision making body of WTO is the ministerial conference
which meets every 2 years
 164 members (29th July 2016)
Principles of WTO

Trade without discrimination : country should not discriminate between its trading partners (giving
them equally ―most-favoured-nation‖ or MFN status); and it should not discriminate between its own
and foreign products, services or nationals (giving them ―national treatment‖);
- tariff, payments transfer on import/export
- method for levying any charges
- Rules & formalities for import/export
- No advantage, favour, privilege, or immunity granted to products originating from any country

Exceptions allowed
- countries can set up a free trade agreement that applies only to goods traded within the group
- they can give developing countries special access to their markets
- Or a country can raise barriers against products that are considered to be traded unfairly from
specific countries
MFN – Article 1

 "Most-Favoured-Nation treatment" or "MFN," which requires Members to

accord the most favourable tariff and regulatory treatment given to the
product of any one Member at the time of import or export of "like
products" of all other Members, is one of the bedrock principles of the WTO
 Under the Most-Favoured-Nation rule, should WTO Member country A
agree in negotiations with country B, which needs not be a WTO Member,
to reduce the tariff on the same product X to five percent, this same "tariff
rate" must also apply to all other WTO Members as well
 Against this background, the MFN principle in particular must be observed
as a fundamental principle for sustaining the multilateral free trade system
 Regional integration and related exceptions need to be carefully
administered so as not to undermine the MFN principle as a fundamental
principle of the WTO
Economic Implications of MFN

 Increased Efficiency in the World Economy : First, most-favoured-nation

treatment makes it possible for countries to import from the most efficient
supplier, in accordance with the principle of comparative advantage
 Stabilization of the Free Trading System : Second, the most-favoured-nation
rule requires that favourable treatment granted to one country be
immediately and unconditionally granted to all other countries. By
stabilizing the free trade system in this manner MFN increases predictability
and therefore increases trade and investment.
 Reduction of the Cost of Maintaining the Free Trade System : The
establishment and maintenance of the most-favoured-nation rule enables
WTO Members to reduce their monitoring and negotiation costs - the cost
of watching and comparing treatment received with that given to third
countries - and of negotiating remedies to disadvantageous treatment
Principles of WTO

National treatment: Treating foreigners and locals equally- Article I & III
- Imported and locally-produced goods should be treated equally — at least
after the foreign goods have entered the market. The same should apply to
foreign and domestic services, and to foreign and local trademarks, copyrights
and patents
- Internal taxes, charges, laws, regulations & requirements affecting internal sale,
offering for sale, purchase, transportation, distribution, or use of products,
internal quantitative regulations, internal local mixing requirements
- National treatment only applies once a product, service or item of intellectual
property has entered the market. Therefore, charging customs duty on an
import is not a violation of national treatment even if locally-produced products
are not charged an equivalent tax
- https://www.livemint.com/news/india/india-wins-solar-case-against-us-at-wto-
1561634893762.html
TRIMs Agreement

 Related to only goods trade

 Not to apply the following measures on foreign investors that can distort
trade as per National Treatment article
- Obligation to use local input
- to produce for export as a condition to obtain imported goods as inputs
- to balance foreign exchange outgo on importing inputs with foreign
exchange earnings through export and not to export more than a specified
proportion of the local production
Principles of WTO

Freer trade: gradually, through negotiation

- Lowering trade barriers is one of the most obvious means of encouraging
trade. The barriers concerned include customs duties (or tariffs) and measures
such as import bans or quotas that restrict quantities selectively
- From time to time other issues such as red tape and exchange rate policies
have also been discussed
- The WTO agreements allow countries to introduce changes gradually,
through ―progressive liberalization‖. Developing countries are usually given
longer time to fulfil their obligations
Principles of WTO

Predictability: through binding and transparency

Sometimes, promising not to raise a trade barrier can be as important as
lowering one, because the promise gives businesses a clearer view of their
future opportunities
With stability and predictability, investment is encouraged, jobs are created
and consumers can fully enjoy the benefits of competition — choice and
lower prices
The multilateral trading system is an attempt by governments to make the
business environment stable and predictable
Principles of WTO

Promoting fair competition

 The system does allow tariffs and, in limited circumstances, other forms of
protection. More accurately, it is a system of rules dedicated to open, fair
and undistorted competition.
 The rules on non-discrimination — MFN and national treatment — are
designed to secure fair conditions of trade. So too are those on dumping
(exporting at below cost to gain market share) and subsidies
 The issues are complex, and the rules try to establish what is fair or unfair,
and how governments can respond, in particular by charging additional
import duties calculated to compensate for damage caused by unfair
trade.
Principles of WTO

Encouraging development and economic reform

 The WTO system contributes to development
 Over three quarters of WTO members are developing countries and
countries in transition to market economies
 During the seven and a half years of the Uruguay Round, over 60 of these
countries implemented trade liberalization programmes autonomously
Functioning of WTO

 All members have joined the system as a result of negotiation and therefore
membership means a balance of rights and obligations
 They enjoy the privileges that other member-countries give to them and
the security that the trading rules provide
 In return, they had to make commitments to open their markets and to
abide by the rules — those commitments were the result of the membership
(or ―accession‖) negotiations
 Countries negotiating membership are WTO ―observers‖
GATS – General Agreement on Trade in
Services
 Cross-border supply is defined to cover services flows from the territory of one
member into the territory of another member (e.g. banking or architectural
services transmitted via telecommunications or mail);
 Consumption abroad refers to situations where a service consumer (e.g. tourist
or patient) moves into another member's territory to obtain a service;
 Commercial presence implies that a service supplier of one member establishes
a territorial presence, including through ownership or lease of premises, in
another member's territory to provide a service (e.g. domestic subsidiaries of
foreign insurance companies or hotel chains); and
 Presence of natural persons consists of persons of one member entering the
territory of another member to supply a service (e.g. accountants, doctors or
teachers). The Annex on Movement of Natural Persons specifies, however, that
members remain free to operate measures regarding citizenship, residence or
access to the employment market on a permanent basis.
 Outside territory
Consumer of residence
or Mode 2
property
located

Within territory
of residence

Commercial
has presence presence
within customer
territories Supply
Supplier Mode 3
through

No presence
within customer
territories Presence of
natural persons
Mode 1
Mode 4
GATS – General Agreement on Trade in
Services
 General Obligations under GATS
-MFN Treatment
-Transparency - include the establishment of administrative review and
appeals procedures and disciplines on the operation of monopolies and
exclusive suppliers
 Specific commitments
- Market access: Market access is a negotiated commitment in specified
sectors.
- National treatment:
 Functioning of WTO
 Dispute Settlement of WTO
-Resolving trade disputes is one of the core activities of the WTO. A dispute
arises when a member government believes another member government is
violating an agreement or a commitment that it has made in the WTO. Since
1995, over 500 disputes have been brought to the WTO and over 350 rulings
have been issued.
60 days Consultations, mediation, etc

45 days Panel set up and panellists appointed

6 months Final panel report to parties

3 weeks Final panel report to WTO members

60 days Dispute Settlement Body adopts report

(if no appeal)

Total = 1 year (without appeal)

60-90 days Appeals report
30 days Dispute Settlement Body adopts appeals
report

Total = 1y 3m (with appeal)

International Monetary Fund – IMF-B,C

 Set up in 1945 at Bretton Woods, Hampshire along with World Bank

 Task of IMF – to maintain order in the international monetary system
 Task of World Bank – to promote general economic development
 IMF and World Bank
 The International Monetary Fund (IMF) and the World Bank are institutions in the United
Nations system. They share the same goal of raising living standards in their member
countries. Their approaches to this goal are complementary with the IMF focusing on
macroeconomic issues and the World Bank concentrating on long-term economic
development and poverty reduction.
 · IMF: promotes international monetary cooperation and provides policy
advice and technical assistance, povides loans and helps countries design policy programs
to solve balance of payments problems, loans are short and medium term and funded
mainly by the pool of quota contributions that its members provide. IMF resources are usually
made available under a lending ―arrangement,‖

 · World bank: promotes long-term economic development and poverty reduction by

providing technical and financial support, is funded both by member country contributions
and through bond issuance. The Managing Director of the IMF and the President of the
World Bank meet regularly to consult on major issues. Example of WB project – $ 250 mn Skill
India Mission Operations. MDG
Work of IMF

 The IMF oversees the international monetary system and monitors the economic
and financial policies of its 189 member countries. As part of this process, which
takes place both at the global level and in individual countries, the IMF
highlights possible risks to stability and advises on needed policy adjustments
 A core responsibility of the IMF is to provide loans to member countries
experiencing actual or potential balance of payments problems. This financial
assistance enables countries to rebuild their international reserves, stabilize their
currencies, continue paying for imports, and restore conditions for strong
economic growth, while undertaking policies to correct underlying problems
 IMF capacity development—technical assistance and training—helps member
countries design and implement economic policies that foster stability and
growth by strengthening their institutional capacity and skills. The IMF seeks to
build on synergies between technical assistance and training to maximize their
effectiveness
Source of funding - IMF

The quota system

 Each member of the IMF is assigned a quota, based broadly on its relative
size in the world economy. This determines its maximum contribution to the
IMF’s financial resources. On joining the IMF, a country normally pays up to
one-quarter of its quota in the form of widely accepted foreign currencies
(such as the U.S. dollar, Euro, Japanese yen, or pound sterling) or Special
Drawing Rights (SDRs). The remaining three-quarters are paid in the
country’s own currency.
Importance of Quota

 Quotas play several key roles in the IMF

 A member's quota determines that country’s financial and organizational relationship with
the IMF, including:
Subscriptions . A member's quota subscription determines the maximum amount of
financial resources the member is obliged to provide to the IMF. A member must pay its
subscription in full upon joining the Fund: up to 25 percent must be paid in SDRs or widely
accepted currencies (such as the U.S. dollar, the euro, the yen, or the pound sterling),
while the rest is paid in the member's own currency.
Voting power . The quota largely determines a member's voting power in IMF decisions.
Each IMF member’s votes are comprised of basic votes plus one additional vote for each
SDR 100,000 of quota. The 2008 reform fixed the number of basic votes at 5.502 percent of
total votes. The current number of basic votes represents close to a tripling of the number
prior to the implementation of the 2008 reforms.
Access to financing . The amount of financing a member can obtain from the IMF (its
access limit) is based on its quota.
Backup Slides - Special Drawing Rights

 The SDR is an international reserve asset, created by the IMF in 1969 to

supplement its member countries’ official reserves. SDRs can be exchanged
for freely usable currencies. The value of the SDR is based on a basket of
five major currencies—the U.S. dollar, euro, the Chinese renminbi (RMB), the
Japanese yen, and pound sterling—as of October 1, 2016
 The respective weights of the U.S. dollar, euro, Chinese renminbi, Japanese
yen, and pound sterling are 41.73 percent, 30.93 percent, 10.92 percent,
8.33 percent, and 8.09 percent
 The value of the SDR was initially defined as equivalent to 0.888671 grams of
fine gold—which, at the time, was also equivalent to one U.S. dollar
 http://www.imf.org/external/np/fin/data/rms_mth.aspx?SelectDate=2017-
03-31&reportType=CVSDR
Source of funding - IMF

The quota system

 The largest member of the IMF is USA with a quota of SDR82.99 billion
 The total quota stands at SDR 477 billion
Post 2008
 shifted more than 6 percent of quota shares from over-represented to
under-represented member countries,
 shifted more than 6 percent of quota shares to dynamic emerging market
and developing countries (EMDCs),
 significantly realigned quota shares. China became the third largest
member country in the IMF, and there are now four EMDCs (Brazil, China,
India, and Russia) among the 10 largest shareholders in the IMF
Backup Slides

 The current quota formula is a weighted average of GDP (weight of 50

percent), openness (30 percent), economic variability (15 percent), and
international reserves (5 percent).
Backup Slides

 Blended GDP – For the purpose of the formula, a country’s gross domestic product (GDP) is
measured as a blend of GDP based on market exchange rates (weight of 60 percent) and
on PPP exchange rates (40 percent).
 Variability - This measures the volatility of current receipts (for example, earnings from the
export of goods and services, as well as receipts on foreign investments) and net capital
flows to an economy. (The data series used is derived by a three-year moving average
over a 13 year period and the variability is measured by the standard deviation of this time
series.)
 Openness – This measures how open an economy is to international trade and financial
flows. It is based on the annual average of the sum of current payments and current
receipts (goods, services, income and transfers) for a five year period.
 International reserves – This measures the average stock of international reserves held by a
country. It is based on the twelve month average over one year of official reserves (foreign
exchange, SDR holdings, reserve position in the Fund, and monetary gold).
Source of funding - IMF

 Gold holdings
 The IMF also has gold holdings, accumulated from payments by member countries. The
gold holdings amount to about 90.5 million troy ounces (2,814.1 metric tons), making the
IMF one of the largest official holders of gold. The IMF’s Articles of Agreement strictly limit
the use of this gold. If approved by an 85 percent majority of the total voting power of
member countries, the IMF may sell or accept gold as payment by member countries. It is
prohibited from buying gold or engaging in other gold transactions.
 In December 2010, the IMF concluded the sale of 403.3 metric tons of gold (about one-
eighth of its holdings) following authorization by its Executive Board. The limited gold sale
was conducted with strong safeguards in place to avoid market disruption. All gold sales
were at market prices, including direct sales to official holders.
 Profits amounting to SDR 4.4 billion from the sale of gold were used to establish an
endowment as part of a new income model, designed to put the IMF’s finances on a
sustainable footing. A proportion of the gold sales is used to subsidize concessional
financing for low-income countries.
 Learning
Outcome
 What is Regional Economic Integration
 Levels of Economic Integration
 Advantages and Disadvantages of a
RTA
 Case study on RTA
What is Regional Economic Integration

 Agreements among the countries in a geographic region to reduce and

ultimately remove tariff and non-tariff barriers to the free flow of goods,
services and factors of production between each other
 Such agreements are good for the consumers
 But creates competition for the domestic producers
Example – Tomato Export by Mexico to US hurt the production of tomatoes by
Florida growers in US
Popular RTA

 The largest and most comprehensive group is the European Union and its 27
member states.
 A lesser degree of economic integration has so far been achieved by WTO
members in the Association of South East Asian Nations (ASEAN) — Brunei,
Cambodia, Indonesia, Malaysia, Myanmar, Philippines, Thailand, Singapore,
Laos and Viet Nam
 MERCOSUR, the Southern Common Market(Argentina, Brazil, Paraguay,
Uruguay and Venezuela (Suspended), with Bolivia, Chile, Colombia,
Ecuador and Peru as associate members), has a similar set-up
 North American Free Trade Agreement: NAFTA (Canada, US and Mexico)
NAFTA is now USMCA
 Levels of Economic Integration
Economic Union

Political Union Common Market

Custom Union

FTA
FTA
FTA

 All barriers to the trade of goods and service among member countries
removed
 Each country is allowed to have its own trade policies among non
members
 Most popular form of RTA
 90% of RTA are FTA
Customs Union

 Eliminates trade barriers between different countries & adopts a common

external trade policy
 Significant administrative machinery required to oversee trade relations
with non-members
 EU started as a customs union, Customs union of Russia, Belarus and
Kazakhstan, which was formed in 2010
Common Market

 No barriers to trade among member countries

 Common external trade policy
 Allows factor of production to move freely among members
 Demands a significant degree of harmony and cooperation on fiscal, monetary
and employment policies
 The key feature of a common market is the extension of free trade from just
tangible goods, to include all economic resources. This means that all barriers
are eliminated to allow the free movement of goods, services, capital, and
labour
 Example – Mercosur
 EU for long functioned as a common market before moving to the next stage
Economic Union

 Free flow of products

 Flow of factors of production
 Common external trade policy
 Common currency
 Harmonization of member tax rates and a fiscal and monetary policy
 EU is an imperfect Economic Union
Political Union

 A central political apparatus coordinates the economic, social, and foreign

policy of the member states
 EU is moving towards partial Political Union
 European parliament has been directly selected by citizens of EU countries
 Council of ministers is composed of government ministries from each EU
member
Advantages of Regional Economic
Integration
 Economic advantage
 Political advantage
Disadvantages of Regional Economic
Integration
 Trade Diversion against Trade Creation
 Trade diversion occurs when lower cost external suppliers are replaced by
higher cost suppliers within the free trade area
International Financial
Environment
Learning Objectives
• Foreign Exchange Markets and Risk Management
• PPP Theory of Exchange rate determination
What is Foreign Exchange Exposure?
• Simply put, foreign exchange exposure is the risk
associated with activities that involve a global firm in
currencies other than its home currency.
• Essentially, it is the risk that a foreign currency may
move in a direction which is financially detrimental to
the global firm.
• Given our observed potential for adverse exchange
rate movements, firms must:
• Assess and Manage their foreign exchange exposures.
 Implications for Managers – Fx Risk

- Understand the Influence of exchange rates on the profitability of trade and investment deals
- Understand the different types of Fx risk
- Devise Strategies to reduce Fx
Does Foreign Exchange Exposure Matter? What do
Global Firms Say
• Nike: “Our international operations and sources of supply are subject to
the usual risks of doing business abroad, such as possible revaluation of
currencies…” (2005).
• Starbucks: “In fiscal 2004, international company revenue [in US dollars]
increased 32%, [in part] because of the weakening U.S. dollar against both
the Canadian dollar and the British pound.” (2005).
• McDonalds: “In 2000, the weak euro, British pound and Australian dollar
had a negative impact upon reported *US dollar+ results.” (2000).
• Volkswagen Quarterly profit in 2004 decreased from 1.05 billion Euros to
50 million Euros
Global Companies and FX Exposure
• What are the specific risks to a global firm from foreign
exchange exposure?
– Cash inflows and outflows, as measured in home currency
equivalents, associated with foreign operations can be
adversely affected.
• Revenues (profits) and Costs
– Settlement value of foreign currency denominated contracts,
in home currency equivalents, can be adversely affected.
• For Example: Loans in foreign currencies.
– The global competitive position of the firm can be affected by
adverse changes in exchange rates.
• Influence on required return.
– End Result: The value (market price) of the firm can be
adversely affected.
Problem 1
• You are the CEO of a machine tools company supplying to a US automobile
major. You have signed a deal to supply machine tools of value $1 million.
You are exporting from India to US. You have calculated a profit of 60 Lacs
INR at the current exchange rate. The payment receiving time is 30 days
after the delivery. However, some reports suggest that the Rupee is going
to appreciate and touch 63 INR against dollar during the time of the
payment. The current rate is 1USD = 70 INR
• What is the implication on your earnings
• What strategies can you take to safeguard from this
• Assuming you are going to supply to US automobile for a longer period in
future and you anticipate INR appreciating strongly against $; what will
be your likely strategy
Types of Foreign Exchange Exposure
• There are three distinct types of foreign exchange
exposures that global firms may face as a result of their
international activities.
• These foreign exchange exposures are:
– Transaction exposure
• Any MNC engaged in current transactions involving foreign currencies.
– Translation exposure (sometimes called “accounting” exposure).
• Important for MNCs with a physical presence in a foreign country.
– Economic exposure
• Results for future and unknown transactions in foreign currencies
resulting from a MNC long term involvement in a particular market.

• We will develop each of these in the slides which follow.

Transaction Exposure
• Transaction Exposure: Results from a firm taking on
“fixed” cash flow foreign currency denominated
contractual agreements.
• Examples :
• An Account Receivable denominate in a foreign currency.
• A maturing financial asset (e.g., a bond) denominated in a foreign
currency.
• An Account Payable denominate in a foreign currency.
• A maturing financial liability (e.g., a loan) denominated in a foreign
currency.
Translation Exposure
• Translation Exposure: Results from the need of a
global firm to consolidated its financial statements to
include results from foreign operations.
• Consolidation involves “translating” subsidiary financial
statements from local currencies (in the foreign markets
where the firm is located) to the home currency of the firm
(i.e., the parent).
• Consolidation can result in either translation gains or
translation losses.
• These are essentially the accounting system’s attempt to measure
foreign exchange exposure.
Economic Exposure
• Economic Exposure: Results from the “physical” entry (and
on-going presence) of a global firm into a foreign market.
• This is a long term foreign exchange exposure resulting from a
previous FDI location decision.
• Over time, the firm will acquire foreign currency denominated
assets and liabilities in the foreign country.
• The firm will also have operating income and operating costs in the
foreign country.
• Economic exposure impacts the firm through contracts and
transactions which have yet to occur, but will, in the future,
because of the firm’s location.
• These are really “future” transaction exposures which are unknown
today.
• Economic exposure can have profound impacts on a global firm’s
competitive position and on the market value of that firm.
The Two Channels of Economic Exposure
Impact on the home
Foreign currency currency value of
denominated asset foreign assets and
& liability exposure liabilities

Exchange MNC’s
Rate Competitive
Fluctuations Position and Value

Impact on home
Operating exposure currency amount of
(Revenues and Costs)
future operating
cash flows
 Reducing Translation and Transaction Risk
- Forward Exchange Rates
- Currency Swap
- Leading Strategy : Leading Payment or Receivables
- Lagging Strategy : Lagging Payments or Receivables
 Reducing Translation and Transaction Risk
• Leading Strategy :
- To collect foreign receivables early when a foreign currency is expected to depreciate
and paying foreign currency payables before they are due when the foreign currency is
expected to appreciate
• Lagging Strategy :
- Delaying of collection of foreign currency receivables if foreign currency is expected to
appreciate and delaying payables if the foreign currency is going to depreciate
• Difficult to implement lead & lag strategies as firms may lack bargaining power
• Countries often set a time limit for receiving payments or making the payment to
avoid pressure on weaker currency
Reducing Economic Exposure
• Distribute firm’s productive assets to various locations so as to avoid
firm’s long term financial health due to adverse changes in exchange rates
• Toyota and Caterpillar have set up production facilities across the world
• This strategy for firms with distributed locations around the world worked
as real hedge for them during the year _________
Spot, Forward Exchange Rates & Currency
Swap
• A spot exchange rate is an exchange rate for an immediate delivery (that
is, exchange) of currencies.
• A forward exchange rate is an exchange rate for the exchange of
currencies at some specified, future point in time.
• Currency Swap : is the simultaneous purchase and sale of a given amount
of foreign exchange for two different value dates.
Example – Forward Exchange Rate
• A US company imports camera from Japan @ 2,00,000 JPY for each camera
• The current rate is $1=120JPY. At this rate the camera will cost $1667
• The US importer knows it can sell camera @ $2,000 on the day it arrives
and make a $333 profit. But it can’t pay the Japanese exporter until it sells
the camera
• If after 30 days the spot rate is $1=95 JPY, the camera will cost $2,105 and
hence the US company will make a loss
• The US company to hedge itself against the currency risk enters into a
forward rate contract of $1=110 JPY for 30 days. Hence, the US importer
doesn’t have to pay more than $1,818 for camera thus making a profit of
$182 per camera
Problem 2
- You head a German firm with a wholly owned subsidiary in India, that is
manufacturing components for your assembly operations in Germany.
Your company have taken borrowings from German Bank to fund this
subsidiary. Your financial risk analyst have come out with a report that Rs
is going to depreciate by 10% on the Fx market over the next 1 year. You
are the CEO of the company. What are the issues the company can face
and what actions, if any should you take?
Problem 2 - Answer
- If Rs depreciates against the Euro, the Euro value of the Indian subsidiary
will decrease
- Will decrease the total Euro value of the firm in consolidated earnings
report
- The cost of borrowing will increase and also will limit its access to the
capital market
- Company can use forward and swap contracts
- Company can use lead strategy and collects its foreign receivables early
Economic Theories of Exchange Rate
Determination

(Part II – Module VII)

Dr Arpita Shrivastava
 What determines Exchange rate??
• Determined by the demand and supply of currency at world market.
For example, If the demand for dollar outstrips the supply of the them and if the supply of Japanese yen is
greater than the demand for them, the dollar yen exchange rate will change. The dollar will appreciates against
the yen (or can be called as yen will depreciates against dollar)

The rate of exchange is said to be equilibrium

when demand for some currency in terms of
other currency is equal to its supply
Sources of demand for Forex
• Purchase of foreign goods by domestic residents ( i.e. imports)
• Payments of international loans
• Gifts and grants to rest of the world
• Investments in rest of the world.
Sources of Supply
• Purchase of domestic goods by foreigner ( i.e. exports)
• FDI
• Speculative purchases
• Tourism and remittance abroad.
• Transfer of foreign exchange by residents of country abroad
Nothing is fixed , it can not reveal…
1. What are the exact factors?
2. When the demand supply change?
3. Under what conditions demand and supply of currency is
calculated?
To get this better understanding, economist suggested few theories of
exchange rate determination:

o Purchasing Power Parity

- Absolute PPP
- Relative PPP
o Interest Rate Parity Theory
 What is PPP?
• Purchasing Power Parity is an economic theory that allows comparison of
the purchasing power of the various world currencies to one another.

• Oldest theory, Developed by Gustav Cassel in 1918

• It is a theoretical exchange rate that allows you to

buy the same amount of goods and services in
every country.

This theory states that, in ideally efficient markets, identical goods

should have only one price. The law of one Price (LOOP)
Purchasing Power Parity (PPP)
• Based on THE LAW OF ONE PRICE……

$5 $5
What is LOOP
The law of one price states that, in the absence of trade frictions and conditions of free
competition and price flexibility all identical goods whatever be the market must have only
one price if they are using a common currency.
- It assumes that there would be no tariff, taxes, quotas..etc ( a limitation to the theory)

- Not relate to immobile goods such as land, house, buildings etc.

Suppose, the one USD is equal to 70 INR. If a Toy sells for $15 in United states while in India
they sell it for 700 rupees.
Since 1 USD = 70 INR, the toy which cost $15 in US costs only $10 in India (700/70) if we buy it
from India.

Clearly, there is an advantage of buying the toy in India as customers would be at gain.
Continue with the given example if the consumers will decide to do
this. We should expect to see these three things:

1. American consumers demand for Indian rupees would increase

which will cause Indian rupees to become more expensive.
2. The demand for toy sold in US market would decrease and hence its
prices would tend to decrease.
3. The increase demand for toy in India would make them more
expensive.

Thus the prices in US and India would start moving towards an equilibrium.
PPP theory states that….
• Currencies are used to purchased goods and services.
• Value of currencies depends upon the quantity of goods and services
that can be purchased by the currencies.
• Thus, value of money is the purchasing power.
• Exchange rate can also be calculated on the basis of purchasing power
• Exchange rate is the expression of one currency in terms of another
currency ( for eg, 1USD =60 INR)
Types of PPP
1. Absolute PPP: It postulates that the equilibrium exchange rate
between currencies of two countries is equal to the ratio of the
price levels of two nations.
Therefore the price of a product in country X and the price of the
product in country Y (in Y’s currency) should be such that, the ratio of
the prices is the exchange rate between the currencies of the two
countries.
Illustration 1
Suppose a particular basket of goods in India cost rs 7000/- and $100 in
USA. That means the exchange rate would be:

7000/100 = 70/1

1 USD = 70 INR
2. Relative PPP theory
• Purchasing power of currency changes due to inflation ans deflation
• When there is an inflation, price level increases, quantity of goods that can
be purchased by one unit of currency, declines. Thus the purchasing power
also declines and vice versa.
• Thus, inflation/deflation affect the exchange rate.

“The relative purchasing power parity theory is an economic theory which

predicts the relationship between inflation rates of two countries over a
specified period of time and the movement in the exchange rate between
the two currencies over the same period”.
Relative PPP is the dynamic version of Absolute PPP
- The difference in the rate of change in prices at the home and abroad
is the difference in the inflation rates - is equal to the percentage of
depreciation or appreciation of the exchange rate.

For example, if India has a inflation rate of 5% and the US has an

inflation rate of 3%, this means the INR will depreciate against dollar by
2% every year.
Illustration 2
Suppose, Prices are expected to rise in Japan by 10% in coming year. And If US want to trade with them then
They should plan currency in such a manner that it will give the same amount of yen in next year.
- so, to keep purchasing power unchanged, USD should rise by 10% against Japanese yen by next year. (if we
want to keep the same basket)
- Now, Expected rate of exchange for next year, E (Si), should be equal to So x (1+ 0.10)

Now, suppose if inflation in US is also expect to increase by 7% in coming year.

So, relative to USA, the prices in Japan will only be rising by 3%

So expected exchange rate in this case would be : E (Si) = So x (1+ 0.03)

If spot exchange rate of Japan now is So = 120 JYP (against dollar). Then next year’s
expected rate of exchange would be

E (Si) = 120 (1+0.03)

Yen 123.6 = 1 USD
Problem 1
Suppose the Canadian spot exchange rate is 1.18 Canadian Dollars per
US dollar. US inflation rate is expected to be 3% per year, and Canadian
inflation is expected to be 2%.
Do you expect US dollar to appreciate or depreciate relative to
Canadian Dollar?

Expected spot rate in 1 year = 1.18 * [ 1+ (0.02-0.03)]

Esi = 1.17 Canadian dollar per $
Usefulness of PPP
• Develop reasonable accurate economic statistics to compare the
market conditions of different countries

• Compare quality and standard of living in different countries which

may not be possible if we look only to per capita income.
Nominal GDP

PPP GDP

Source : World Bank and IMF 2019

https://www.businesstoday.in/current/economy-politics/india-remains-3rd-largest-economy-in-purc
hasing-power-parity-still-way-behind-china-us/story/407776.html#:~:text=India%20accounts%20for%
206.7%20per,States%2C%20World%20Bank%20data%20for
Limitations of PPP
1. It ignores many real determinants
2. Based on unrealistic assumption
3. The theory assumes that the change in price levels could only
bring change in exchange rates and vice versa
4. The government regularly intervene in trade between countries
5. It disregards the basis of international trade
Interest Rate Parity Theory (IRP)
• IRP is a theory in which the interest rate deferential between two
countries is equal to the differential between forward exchange rate
and spot exchange rate.
• Forward exchange rates for currencies are exchange rates at a future
point in time, as opposed to spot exchange rates, which are current
rates.
• It plays a crucial rate in Forex markets.
• The interest rate parity presents an idea that there is no arbitrage in
the foreign exchange markets.
The exchange rate Purely depend upon the
between two interest rates prevailing in
currencies the two respective countries
Formula for IRP

• Borrowed amount = $100000

• Interest rate prevailing in India = 12%
• Interest rate prevailing in USA = 7%
• Anyone want to take advantage of the
situation
Where; • Try borrowing from US @7% and invest
Fo = Forward Rate it to India by extending load at 12%
So = Spot rate
Ic = Interest rate for country C • Thereby earning 5% differential interest.
Ib = Interest rate for county b

Is this Possible??
No….Not even possible !!!
Lets extend the above example –
Assume , spot rate is $1 = 64 rs
Hypothetically, Resulting gain = $100000*64*5% = 3,20,000

Lets find out the one year forward rate,

Fo = 64 * (1+ 0.12)/ (1+ 0.07)

Fo = 66.99 or 67
 Amount Borrowed Interest @7% $100000
Interest @7% $7000
Total $107000

Amount Payable as per spot rate at the beginning of the year 68,48,000 rupees
($107000 * 64)

Amount Payable as per expected rate at the end of the year 71,68,000 rupees
($107000 * 66.99 Rs)

As per the interest rate parity theory the resulting exchange loss has been
completely off set the gain made through interest rate differential

Resulting gain = $100000*64*5% = 3,20,000 Excess payable because of the change exchange rate is =
71,68,000 – 68,74,000 = 3,20,000
IRP theory states that
• The exchange rate between rupees and dollars would have changed adversely in such a way that
the interest rate differential so earned that it shall compensate the exchange loss arising on
repayment of the US loan
• The currency with higher interest rate will suffer depreciation while currency with lower interest
rate will appreciate
• In an efficient money and capital market in existence within the two countries, the exchange rates
will adjust in such a way that it will bring the parity in the interest rate, and in turn remove the
possibility of any arbitrage opportunity
• Arbitrage is not possible
• Using the interest rate parity can have many advantages because it can be used to predict the
forward exchange rate of currencies, can be used to represent no-arbitrage state, and can
also be used to describe the relationship between interest rates and exchanges rates of two
countries
Limitation
In many cases, countries with higher interest rate often experience its
currency appreciate due to higher demands and higher yields and has
nothing to do with the risk-free arbitrage.
International Fisher Effect

• link between interest rates and exchange rate movements.

• Irving Fisher, a U.S. economist, developed the theory.
• According to Fisher, changes in inflation do not impact real
interest rates, since the real interest rate is simply the
nominal rate minus inflation.

Real interest rate = nominal interest rate – expected

inflation.

https://corporatefinanceinstitute.com/resources/knowledge/economics/international-fisher-effect
-ife/
Foreign Direct Investment
• FDI refers to the flow of capital between countries.
• The growth of FDI has accompanied the rise of globalization.
• According to the United Nations Conference for Trade and
Development (UNCTAD), FDI is ‘investment made to
acquire lasting interest in enterprises operating outside
of the economy of the investor.’
• The investor has control over the assets invested in
• FDI is undertaken by both private sector firms and governments
Where is FDI made?

Foreign Direct Investments are commonly made in open

economies that have skilled workforce and growth prospect.
FDIs not only bring money with them but also skills,
technology and knowledge.
Benefits of Foreign Direct
Investment

Some of the benefits for Some of the benefits for

businesses: the host country:
• Market diversification • Economic stimulation
• Tax incentives • Development of human capital
• Lower labor costs • Increase in employment
• Preferential tariffs • Access to management expertise,
• Subsidies skills, and technology
 
Types and Examples of Foreign Direct
Investment

• Horizontal: a business expands its domestic operations to a foreign country. In this

case, the business conducts the same activities but in a foreign country. For example,
McDonald’s opening restaurants in Japan would be considered horizontal FDI.

• Vertical: a business expands into a foreign country by moving to a different level of

the supply chain. In other words, a firm conducts different activities abroad but these
activities are still related to the main business. Using the same example, McDonald’s
could purchase a large-scale farm in Canada to produce meat for their restaurant
FDI in India
 
During the fiscal ended March 2019, India received the highest-ever FDI inflow of $64.37 billion.
The FDI inflows were $45.14 billion during 2014-15 and $55.55 billion in the following year

https://www.investindia.gov.in/foreign-direct-investment
Test your Understanding
1.  Purchasing Power Parity theory is related with
(a) Interest rate
(b) Bank rate
(c) Wage rate
(d) Exchange rate

(d) Exchange rate

An accounting loss or gain that arises from translating the assets and
liabilities of a foreign subsidiary (non-dollar denominated) into the parent
company's currency is accounted for as a translation adjustment
__________.

1. in the owners' equity section

2. on the income statement
3. in both the balance sheet and income statement
4. on internal accounting records only and does not materially impact
accounting income

1. in the owners' equity section

Purchasing-power parity (PPP) refers to__________.
1. the concept that the same goods should sell for the same price across countries after exchange
rates are taken into account
2. the concept that interest rates across countries will eventually be the same
3. the orderly relationship between spot and forward currency exchange rates and the rates of
interest between countries
4. the natural offsetting relationship provided by costs and revenues in similar market environments

1. the concept that the same goods should sell for the same
price across countries after exchange rates are taken into
account
The forward exchange rate __________.
1. is the rate today for exchanging one currency for another for immediate delivery
2. is the rate today for exchanging one currency for another at a specific future date
3. is the rate today for exchanging one currency for another at a specific location on a specific future
date
4. is the rate today for exchanging one currency for another at a specific location for immediate
delivery

2. is the rate today for exchanging one currency for another at a

specific future date
The spot exchange rate __________.

1. the rate today for exchanging one currency for another for immediate delivery
2. is the rate today for exchanging one currency for another at a specific future date
3. is the rate today for exchanging one currency for another at a specific location on a specific future
date
4. is the rate today for exchanging one currency for another at a specific location for immediate
delivery

1. the rate today for exchanging one currency for another for
immediate delivery
Rf (foreign currency’s interest rate) in Japan is 6% p.a., while that
in India is 3% p.a. Spot Rupee Yen is 0.4002 and the twelve
month yen rate is 0.388874. You wish to invest Rs.1,00,000 in
risk free investments for one year. Will you invest the Rs.100,000
in India or convert it into yen and invest in Japan?
Module VII and IX – Export
Management
Dr Arpita Shrivastava
 Exports of India

• https://tradingeconomics.com/india/exports-by-category
Classification of Goods for Exports:
(a) Prohibited Goods: Prohibited items are not permitted to be
exported. An export licence will not be given in the normal course
for goods in the prohibited category. Some of the prohibited items
of exports are all forms of wild animals, exotic birds, beef, sea
shells, human skeleton, peacock feathers, etc.

Example, Narcotic drugs, Pornographic and Obscene materials,

counterfeit goods, Indian coins, Antiquities etc
(b) Restricted Goods: The restricted items can be permitted for export
under licence. The procedures/conditions wherever specified against the
restricted items may be required to be complied with, in addition to the
general requirement of license in all cases of restricted items.
Plants and their fruits, Gold, silver or other ornaments, endangered species, sandalwood etc

(c) State Trading Enterprises: Export through State Trading Enterprises

STE(s) is permitted without an Export License through designated STEs only
as mentioned against an item and is subject to conditions of EXIM Policy.

(d) Restrictions on Countries of Export: Export to Iraq is subject to

conditions as specified in Exim Policy and other conditions which may be
listed in the title ITC (HS) Classification of Export and Import items.
Categories of Exports
1. Merchant exporter

Merchant exporter does not have own manufacturing unit or processing factory. Merchant
Exporter can export the excisable goods either directly from the premises of the
manufacturer, with or without sealing of the export consignments, or through his premises
under claim for rebate or under bond
Specialization of Merchant Exporter
❑ They have intimate knowledge about the market and exportable products.

❑ They have extensive contact and networks all over the regions/ markets in the world.

❑ They have market based information system which keeps a close watch for trends in global world.

❑ They buy and sell on their own accounts and hence assume the risk involved in exporting.

❑ They often specialize in certain commodities ( certain regions)

❑ They have extensive knowledge in technical and commercial transactions

❑ Merchant exporters often co operate with producers in developing countries to adapt products.

This method of exportation and through merchant exporter is useful

when the company is small and lacks expertise in the exporting
Advantages
❑ Take care of all bothering and assumes all sales and credit risk.
❑ Does not have to spend money on bringing up the technology
and manufacturing know how.
❑ Its easiest and least costly
❑ Sales opportunities are more
❑ Very good for new exporters, as its less risky.
2. Manufacturer exporters
❑ Person who manufactures goods and exports or intends to export such
goods. The manufacturer exporter procures and process raw materials at
his factory and exports finished products.

❑ They won’t need any intermediates for exporting.

❑ The main advantage is, Manufacturer exporter can easily prepare the
sample as per requirement of the importer and also can make changes or
any modification in the product comfortably.
Physical Exports:
• If the goods physically go out of the country or services are
rendered outside the country then it is called as physical export.
Deemed Exports
"Deemed Exports" refers to those transactions in which the goods
supplied do not leave the country and the payment for such supplies is
received either in Indian rupees or in free foreign exchange.

Duration: application can be filed within 12 months from the last date of such supplies. For
supply to Projects, etc. within 12 months from the date of receipt of supplies by the project
authority or from the date of receipt of payment by the supplier.
Supply of goods under following categories by a manufacturer and by main/ sub-contractors shall
be regarded as ‘deemed exports’:-

•Supply of goods against Advance Authorization/ DFIA/capital goods against EPCG Authorization
and to EOU.
•Supply to Project financed by multilateral/ bilateral agencies, ICB, UN Projects, Nuclear Power
Projects, etc.
DUTY EXEMPTION & REMISSION SCHEMES
 Duty Exemption Scheme - Advance
Authorisation Scheme
An Advance Authorisation is issued to allow duty free import of inputs, which are physically incorporated in export product
(making normal allowance for wastage). In addition, fuel, oil, energy, catalysts which are consumed/ utilised to obtain export
product, may also be allowed. DGFT, by means of Public Notice, may exclude any product(s) from purview of Advance
Authorisation. Advance Authorisations are exempted from payment of basic customs duty, additional customs duty,
education cess, anti- dumping duty and safeguard duty, if any.

Advance Authorisation can be issued either to a manufacturer exporter or merchant exporter tied to supporting manufacturer(s)
for:

i) Physical exports (including exports to SEZ); and/ or

ii) Intermediate supplies; and /or

Advance Authorisations necessitate exports with a minimum value addition of 15 %,however it varies for different products
such as minimum VA for Tea is 50 %.
Duty Exemption Scheme - Advance
Authorisation Scheme
• Allow duty free import of input, physically incorporated in export product, on the basis of Standard
Input Output Norms (SION) or Self Declaration. Minimum 15% value addition is required to be
achieved. Period for fulfilment of export obligation is 18 months from the date of issue of
Authorization.
• As per Notification No. 53 dated 10.01.2019, imports under Advance Authorisation have been
exempted from IGST and Compensation Cess till 31.03.2020.
• Under Self Ratification Scheme, eligible exporter, on self-declaration and self-ratification basis,
can apply for an Advance Authorisation where there is no SION/valid Adhoc Norms for an export
product and where SION has been notified but exporter intends to use additional inputs in the
manufacturing process.
• Subject to certain conditions, where an item is specified in SION, Advance Authorization can be
issued for the annual requirements. It is not available on a self-declaration basis. Exporters need to
have a past export performance in at least two preceding financial years, in order to be entitled to
such authorization. 300% of FOB value of physical export/and or deemed export in preceding
financial year Or 1 Crore, which ever is higher.
Calculation of VA
Duty Exemption Scheme - DUTY FREE IMPORT
AUTHORISATION (DFIA) SCHEME
• DFIA is a variant of Advance Authorisation
• DFIA is issued to allow duty free import of inputs, fuel, oil, energy sources, catalyst which are required for
production of export product. DGFT, by means of Public Notice, may exclude any product(s) from purview
of DFIA. This scheme is in force from 1st May, 2006.
• However, these Authorisations shall be issued only for products for which Standard Input and Output
Norms (SION) have been notified
• A minimum 20% value addition shall be required for issuance of such authorisation, except for items in
gems and jewellery sector, for which value addition would be as per paragraph 4A.2 .1 of HBP v1 . Items
for which higher value addition is prescribed under Advance Authorisation Scheme, shall be applicable.
• Once export obligation has been fulfilled, request for transferability of Authorisation or inputs imported
against it may be made. Once, transferability is endorsed, Authorisation holder may transfer DFIA or duty
free inputs, except fuel and any other item(s) notified by DGFT. However, for fuel, import entitlement
may be transferred only to companies which have been granted authorisation to market fuel by Ministry
of Petroleum and Natural Gas.
 Duty Remission Scheme - Duty Drawback

Duty drawback, or Drawback, is an export incentive program that allows

importers, exporters, and manufacturers to recover, in part or in whole,
certain duties, taxes, and fees paid on imported merchandise or domestically
produced.
Rebate on State and Central Taxes and Levies (RoSCTL)
The Scheme was notified by the Ministry of Textiles on 07.03.2019 to be
implemented by DGFT. The Scheme will rebate all embedded State and Central
Taxes/levies for meant for exports of made-up articles & garments.
Under the RoSCTL, the benefit to exporters shall be given by DGFT in the form of
transferable duty credit scrips.
Scrips are benefits that can be used to pay duties.
 PROMOTIONAL SCHEMES

In the Foreign Trade Policy 2015-20, under Export from India Schemes, there are
two Schemes for exports of merchandise and services viz.:

The objective of MEIS is to offset infrastructural inefficiencies and associated

costs involved in export of goods/products, which are produced/ manufactured in
India, especially those having high export intensity, employment potential and
thereby enhancing India’s export competitiveness.

Similarly, the objective of SEIS is to encourage export of notified Services from

India.
MEIS Scheme
The MEIS Entitlement would be 2% / 3% / 5% / 7% of FOB value
of notified goods exported to notified markets [based on three
distinct categories framed and covered in Appendix 3B] in free
foreign exchange or FOB value of exports as given in the Shipping Bills
in free foreign exchange, whichever is less.

As per recent announcement MEIS will now be replaced by

Remission of Duties or Taxes on Export Product (RoDTEP).
Units located in SEZs have also been made eligible for MEIS &
SEIS benefit.
Export of goods through Courier or Foreign Post Offices
using e-Commerce (as notified in Appendix-3C) of FOB value only
upto Rs. 5,00,000/- per consignment are entitled for rewards under
MEIS.
SEIS Scheme
• Under SEIS, Service providers of notified services (under
Appendix 3D) will be eligible for rewards in the form of duty credit
scrips @ 5% and 7% on the net foreign exchange earned from
notified services (w.e.f. 05.12.2017).
• Minimum net free foreign exchange earnings of USD 15,000 in the
year of rendering service is the eligibility criteria. For Individual
Service Providers and Sole Proprietorship minimum USD 10,000/- in
the year of rendering service.
 PROMOTIONAL SCHEMES

STATUS HOLDER
Status Holder Scheme is for business leaders who have excelled in
international trade and have successfully contributed to country’s
foreign trade. An applicant shall be categorized as status holder on
achieving export performance during the current and previous three
financial years (for Gems & Jewellery Sector the performance during
the current and previous two financial years shall be considered for
recognition as status holder) as under:
PROMOTIONAL SCHEMES

Export Performance
FOB/FOR
Status Category
(as converted)
Value (in US $ million)

One Star Export House 3

Two Star Export House 25
Three Star Export House 100
Four Star Export House 500
Five Star Export House 2000
Benefits to Star Export Houses
• Approved Exporter Scheme - Self certification by Status Holders
• Manufacturers who are also Status Holders will be enabled to
self-certify their manufactured goods as originating from India with a
view to qualify for preferential treatment under different Preferential
Trading Agreements [PTAs], Free Trade Agreements [FTAs],
Comprehensive Economic Cooperation Agreements [CECAs] and
Comprehensive Economic Partnerships Agreements [CEPAs] which
are in operation.
• Licence/certificate/permissions and Customs clearances for both imports
and exports on self-declaration basis.
• Exemption from compulsory negotiation of documents through banks. The
remittance, however, would continue to be received through banking
channels;
• Status holders are eligible to export freely exportable items on free of cost
basis for export promotion subject to an annual limit of Rs.10 lakhs or 2%
of average annual export realisation during preceding three licensing years,
whichever is higher.
• Status holders would be entitled to preferential and priority treatment
while handling of consignments by concerned agencies.
 Preliminaries of Exports
Starting an export business is not an easy task; it needs a proper guidelines and understanding
of the foreign market. The base of every successful business is proper planning and proper
knowledge of all the aspects of business.

1. Selection of business
2. Selection of mode of operation
3. Selection of name for the business
4. Selection of product
5. Select effective way of business correspondence
6. Selection of Markets
7. Selection of prospective Buyers
8. Selection of Channel of Distribution
9. Understanding risks in International trade
1. Selection of business
The first and the foremost important thing for a prospective exporter
have to decide about the kind of business for export. The proper
selection of business will depend upon:
• Ability to raise finance
• Capacity to bear the risk
• Desire to exercise control over the business
• Nature of regulatory framework applicable to you
2. Selection of mode of operation
• You can do export by many ways like:
• Be a Merchant Exporter: By this you can buy the goods from actual
manufactures and then export these goods.
• Be a Manufacturer: By this you can manufacture the goods by your
own and then export them.
• Be a Sales Agent/Commission Agent/Indenting Agent: By this you
can export the goods on behalf of another seller and charging
commission.
3. Selection of name for the business
The name and style should be attractive, short and meaningful and
indicating the nature of business.

4. Selection of product
• Product must be in demand in the countries
• Familiar with government policy and regulations in respect of
product selected for export.
• import regulations
5. Select effective way of business correspondence
- Necessary information about the buyer’s expectation from your product.
- Beautiful letter head giving fully particulars of your firm’s name, telephone, telex and fax number etc.
- Your language should be polite, soft, brief and to the point.

6. Selection of Markets : factors like

• political embargo,
• scope of exporter’s selected product,
• demand stability,
• preferential treatment to products from developing countries,
• market penetration by competitive countries and products,
• distance of potential market, transport problems,
• language problems,
• tariff and non-tariff barriers,
• distribution infrastructure,
• size of demand in the market,
• expected life span of market and product requirements,
• sales and distribution channels. :
7. Selection of prospective Buyers
One can collect addresses of the prospective buyers of the commodity from the following sources:
• Enquiries from friends and relatives or other acquaintances residing in foreign countries.
• Visiting/ participating in International Trade Fairs and Exhibitions in India and abroad.
• Contact with the Export Promotion Councils, Commodity Boards and other Government Agencies.
• Collecting addresses from various Private Indian Publications
• Making contacts with Trade Representatives of Overseas Govt. in India and Indian Trade and Other
Representatives/ International Trade Development Authorities abroad.
• Reading biweekly, fortnightly, monthly bulletins such as Indian Trade Journal, Export Service
Bulletin, Bulletins and Magazines issued and published by Federation of Exporters’ Organizations,
ITPO, EPCs, Commodity Boards and other allied agencies. A list of Indian Trade Periodicals
containing names and addresses of importers is given in Appendix 6 of this book.
• Visiting Embassies, Consulates etc. of other countries and taking note of addresses of importers
for products proposed to be exported.
• Advertising in newspapers having overseas editions and other foreign newspapers and magazines
etc.
• Contacting authorized dealers in foreign exchange with whom exporter is maintaining bank
account.
8. Selection of Channel of Distribution
Some of the channels of distribution in exporting business are as follows:
• Exports through Export Consortia
• Export through Canalizing Agencies
• Export through Other Established Merchant Exporters or Export Houses, or Trading Houses
• Direct Exports
• Export through Overseas Sales Agencies

9. Understanding risks in International trade

While selling abroad, you must consider the following risks:
• Credit risk
• Currency risk
• Carriage risk
• Country risk
Export Procedure - Summary
Step 1 - Get an IEC code
Step 2 - Get RCMC certificate from export promotion council
Step 3 - Receipt of an indent or export order
Step 4 - Verify credit worthiness of buyer
Step 5 - Check if an export license is required for the goods
Step 6 - Order acceptance and Performa invoice generation
Step 7 - Arrange for any pre-shipment finances
Step 8 - Arrange for goods
Step 9 - Arrange for export documentations
Step 10 - Shipment of goods
Step 11 - Submission of documents to banks
Step 12 - Payment realization
Step 13 - Availing of export incentives schemes
Step 1 – IEC code
IEC number : IMPORTER EXPORTER CODE ( in short IEC ) is a ten digit number
granted by Directorate General of Foreign Trade under Ministry of Commerce and
Industry, to any bonafide person/ company for carrying out import/export.
IEC can be obtained from any of the Zonal and Regional offices of Director General
of Foreign Trade depending on area/region where the individual/company is located.
Step 2 - RCMC
• As per the Foreign Trade Policy, a Status Holder exporter is required to get a Registration-cum-Membership
Certificate (RCMC) from FIEO (Federation of Indian Export Organizations) for availing various benefits
under the Policy. RCMC is also required for getting certain benefits from the Customs and Central Excise
authorities. For registration purposes, FIEO has been recognized by the Government as an Export
Promotion Council.
• Registration Cum Membership Certificate (RCMC) is issued by Export Promotion Councils/Commodity
board/Development authority or other competent authority as prescribed in FTP.
• An individual applying for the following purposes can apply for this certificate.
• An authorization to import/ export on restricted items
• To seek benefits or concession under Foreign Trade Policy (FTP) like duty drawback, duty credit scrips, etc.
Step 3 - Receipt of an indent or export order
Inquiry and Offer under Exports
• Exporter may receive inquiries, directly. An inquiry is a request from the prospective buyer to
keep him informed of the terms and conditions of sale. Any export inquiry has to be attended with
promptness and meticulous care. It is to be remembered that importers are in an advantageous
position many exporters compete to clinch the deal.
• If the inquiry is from a new person it is usual to inquire about the credentials of the potential
importer. Importer may furnish his bank reference or trade reference.
• Trade reference means the importer may furnish the names of persons with whom he had business
dealings, earlier, to facilitate the exporter to gather required details.
• As export business is becoming highly competitive, many a time, exporters have to take the
initiative, without waiting for inquiries, in identifying potential buyers by gathering information
from trade journals which publish trade inquiries.
• Whatever be the mode of gathering information, exporter has to react with speed and elegance by
submitting the offer, through proforma invoice, with detailed literature in respect of product such
as specifications, quality, packing, price, mode of transport and period required for supply of
goods, after receipt of confirmed order.
Step 4 - Verify credit worthiness and details
of buyer
Confirmation of Order
• On receiving an export order, it should be examined
carefully in respect of items, specification, payment
conditions, packaging, delivery schedule, terms of payment,
licenses, insurance documents etc. and then the order should
be confirmed.
• Accordingly, the exporter may enter into a formal contract
with the overseas buyer.
Step 5 - Check if an export license is required
for the goods
Export License
• All items are freely exportable except few items appearing in
prohibited/ restricted list.
• If its under prohibited list, proper licenses should be obtained for
exporting
Step 6 - Order acceptance and Performa invoice
generation
• It is a preliminary bill of sale that comes in advance of delivery, issued by sellers to buyers. This
type of invoice serves as a binding agreement for the seller to provide the products or services.

• A proforma invoice outlines the terms of the sale and typically contains product descriptions, price
of products, terms of delivery, and an expiration date of the invoice. It is meant to give a cost
estimate of the sale, not the final sale, and the terms are subject to change.

A typical proforma invoice should contain the following information:

•Detailed product descriptions such as the country of origin and the product classification.
•Price of the products
•Delivery terms, such as the package origin and the delivery location
•Expiration date of the proforma invoice
Step 7 - Arrange for any pre-shipment finances

• Exporters are eligible to obtain pre-shipment and post-shipment finance from Commercial Banks at
concessional interest rates to complete the export transaction. Packing Credit advance in
pre-shipment stage is granted to new exporters against lodgment of L/C or confirmed order for 180
days to meet working capital requirements for purchase of raw material/finished goods, labour
expenses, packing, transporting, etc.
• Normally Banks give 75% to 90% advances of the value of the order keeping the balance as margin.
Banks adjust the packing credit advance from the proceeds of export bills negotiated, purchased or
discounted.

• Post Shipment finance is given to exporters normally upto 90% of the Invoice value for normal
transit period and in cases of usance export bills upto notional due date. The maximum period for
post-shipment advances is 180 days from the date of shipment. In case export bill becomes overdue
Banks will charge commercial lending rate of interest.
Step 8 - Arrange for goods

After confirmation of the export order, immediate steps may be taken for
procurement/manufacture of the goods meant for export. It should be remembered that the
order has been obtained with much efforts and competition so the procurement should
also be strictly as per buyer’s requirement.
Quality Control & Pre Shipment Inspection

• The Export Inspection Council of India (EIC) was set up by the Government of India under Section 3 of the Export (Quality
Control & Inspection) Act, 1963 as an apex body to provide for sound development of export trade through quality control
and pre-shipment inspection. The Act empowers the Central Government to notify commodities and their minimum
standards for exports, generally international standards or standards of the importing countries and to set up suitable
machinery for inspection and quality control.
• Some products like food and agriculture, fishery, certain chemicals, etc. are subject to compulsory pre-shipment inspection.
Foreign buyers may also lay down their own standards/specifications and insist upon inspection by their own nominated
agencies. Maintaining high quality is necessary to sustain in export business.
Step 9 – Export Documentation
Export documentation is used to
• keep shipment and delivery on schedule
• to describe cargo
• for customs clearance
• to indicate the ownership of goods for collection purposes or in the
event of dispute
• to obtain payment
 EXPORT DOCUMENTATION

Export Documents

Commercial Documents Regulatory Documents(6)

Principal(8) Auxiliary(7)
Principal Auxiliary
documents documents
1. The Commercial Invoice 1. Proforma Invoice

2. Packing List 2. Intimation for inspection

3. Bill of Lading/Air Waybill 3. Shipping instructions

4. Certificate of 4. Insurance Declaration
Inspection/Quality control 5. Application for certificate of
5. Certificate of origin origin.
6. Bill of Exchange and 6. Mate's Receipt
7. Shipment Advice 7. Letter to bank of
8. Insurance Certificate collection/negotiation of documents
Regulatory documents
1. Shipping Bill/Bill of Export(for Customs)
• - For export of goods Ex. Bond (Pink)
• - For export of duty free goods ( White)
• - For export of dutiable goods (yellow)
• - For export of goods under claim of drawback (Green)
- For export of goods under claim of DEPB (Blue)
2. Port Trust Copy of Shipping Bill/ Export Application/Dock Challan-Port
3. Vehicle ticket -Port
4. Exchange Control Declaration/GR/PP forms-RBI
5. Freight Payment Certificate-Steamer Agents
6. Insurance Premium Payment Certificate- Insurance Co.
 Commercial Invoice:
It is the basic and most important document in an export transaction and extreme care has to be
taken by the exporter to prepare this document.

• This document requires the exporter to submit details such as

1. his own details,
2. Invoice number with date,
3. details of the consignee and buyer (if the buyer is other than consignee),
4. buyer’s order number with date,
5. country of origin of the goods,
6. country of final destination,
7. terms of payment and delivery,
8. pre-carriage details (Road/Rail),
9. vessel/flight number,
10. port of loading,
11. port of discharge,
12. final destination,
13. container number,
14. number and kind of packaging,
15. detailed description of goods,
16. quantity,
17. rate and
18. total amount chargeable etc
Packing List:

• This document provides the details of number of packages; quantity packed in each of them; the
weight and measurement of each of the package and the net and gross weight of the total
consignment.
• Net weight refers to the actual weight of the items and the gross weight means the weight of the
items plus the weight of the packing material.
• The packing list serves a useful purpose of the exporter while dispatching the consignment as a cross
check of goods sent.
• For the port personnel, it comes handy while planning the loading and offloading of cargo.
• It is also an essential document for the customs authorities as they as they can carry out the physical
examination of the cargo and conduct checks on the weight and measurements of the goods smoothly
against the declarations made by the exporter in the packing list.
•
Bill of Lading
• This is issued when the goods are shipped using ocean (marine)
transport.
• When the exporter finally hand over the goods to the shipping
company for loading on board the ship for transport to their final
destination, the shipping company issues a set of Bills of Lading to the
exporter.
Airway Bill:
• Airway Bill is a bill of lading when the goods are shipped using air
transport.
• It is also known as air consignment note or airway bill of lading.
Certificate of Inspection:
• This is the Certificate issued by the Export Inspection Agency after it
has conducted the pre-shipment inspection of goods for export
provided the goods fall under the notified category of goods requiring
compulsory shipment of inspection.
Certificate of Origin
• This document serves as a proof of the country of origin of goods for the importer in his
country.
• Imported countries usually require this to be produced at the time customs clearance of
import cargo.
• It also plays an important part in computing the liability and the rate of import duty in the
country of import.
• This certificate declares the details of goods to be shipped and the country where these
goods are grown, manufactured or produced.
• This certificate is necessary where a country offers a Generalized System of Preference
tariff to India (29 nations offers GSP to India)
• A certificate of origin form may be obtained from Chambers of Commerce, Export
Promotion Councils and various trade associations authorized by government
Bill of Exchange
• Also known as Draft, this is an instruments for payment realization. Bills
of exchange work the same way. Like cheques, bills of exchange are transferable.
... When a bill of exchange is issued by a bank, it is sometimes called a bank draft.
Trade draft is another term used for bills of exchange issued by an individual payer

• Process by which a buyer (called a 'drawee') accepts the seller's bill of exchange
by signing under the words 'accepted' on face of the bill. By this act, the drawee
becomes the acceptor and converts the bill into a post-dated check an
unconditional obligation to pay it on or before its maturity date.

• The exporter is the drawer and he draws (prepares and signs) this unconditional
order in writing upon the importer (drawee) asking him to pay a certain sum of
money either to himself or his nominee (endorsee).
Important parties to a Bill of Exchange:

• The Drawer: The drawer is the person who has issued the bill. In an
export transaction, exporter draws the bill as money is owed to him.
• The Drawee: The drawer is the person on whom the bill is drawn.
Exporter draws the bill on the importer who is the drawee. Drawee is
the debtor who owes money the exporter (creditor).
• The Payee: The payee is the person to whom the money is payable.
The bill can be drawn by the exporter payable to the drawer (himself)
or his banker.
Types of Bill of Exchange

(a) Sight Bill of Exchange: In this Bill of Exchange, also known as

demand Bill of Exchange, the drawee has to make the payment, on
presentation.

(b) Usance Bill of Exchange: In case of Usance or Time Bill of

Exchange, payment is to be made on the maturity date, after a certain
period, known as tenor.
Shipping Advice-

• The exporter sends this document , called shipping advice, to the

buyer soon after the shipment is made to provide him all the
shipment details.

• This serves as an advance intimation of the shipment and allows the

importer to arrange for delivery of the same.
Shipping Bill
• An exporter, while sending goods from one country to another has to go
through various formalities including submitting various applications,
acquiring licenses, paying duties and so on. To acquire a clearance for
export, from the Customs, an exporter will have to submit an application
called the ‘shipping bill’. One cannot load the goods unless the exporter files
the shipping bill. The export may be by air, vehicle, or vessel.

• A shipping bill can be filed after the particular vessel/ship, etc., is granted
with entry outwards that allows it to move out of the country. Once the bill
is submitted, it is physically verified and the value of the goods intended for
export are assessed by the customs authorities. The customs authorities
verify these bills and endorse the copy with ‘LET EXPORT ORDER’ and
‘LET SHIP ORDER.’
Other Certificates
1. Antiquity Certificate (Unique/ antiques Items)
2. Bank certificate of export and Realisation
3. Black list certificate
4. Language Certificate
5. Certificate of chemical Analysis
6. Health/ Sanitary certificate
7. Phyto Sanitary certificates
8. Certificate of Measurement
Step 10 - Shipment of goods
Shipping Space

• The exporter has to make the necessary reservation, in case goods are to be sent by
sea. The reason is there is shortage of shipping space and equally their frequency is
also limited.
• Exporter has to gather information about the sailings for the port of destination,
matching the delivery schedule. Necessary information can be gathered from Daily
Shipping intelligence to which exporters may subscribe.
• Clearing and Forwarding agents are the specialized people in this line of activity
who can be appointed. Exporter sends the cargo to the clearing and forwarding
agents who take care of shipment of goods. In case, goods are to be sent by air, the
problem is not that difficult as there are adequate airlines for booking the cargo.
Labelling, Packing and Marking

• The export goods should be labelled, packaged and packed strictly as per the buyer’s
specific instructions. Good packaging delivers and presents the goods in top condition
and in attractive way. Similarly, good packing helps easy handling, maximum loading,
reducing shipping costs and to ensuring safety and standard of the cargo.
• Marking such as country of origin, address, package number, port and place of destination,
weight, handling instructions, etc. provides identification and information of cargo packed.
• The British Standard Packing Code & Exporters Encyclopaedia published in US provides
detailed packaging instructions for shipping purpose.
Labeling provides the following instructions-

• Shipper's mark
• Country of origin
• Weight marking (in pounds and in kilograms)
• Number of packages and size of cases (in inches and centimeters)
• Handling marks (international pictorial symbols)
• Cautionary markings, such as "This Side Up."
• Port of entry
• Labels for hazardous materials
Handling and cautionary marks-
Purpose Symbol

FRAGILE

USE NO HAND HOOKS

THIS WAY UP

KEEP AWAY FROM SUNLIGHT

PROTECT FROM RADIOACTIVE SOURCES

Purpose
Handling and cautionary marks- Symbol

KEEP AWAY FROM RAIN

CENTRE OF GRAVITY

DO NOT ROLL

DO NOT USE HAND TRUCK HERE

USE NO FORKS
Purpose Symbol
Handling and cautionary marks-
CLAMP AS INDICATED

DO NOT CLAMP AS INDICATED

STACKING LIMITED BY MASS

STACKING LIMITED BY NUMBER

DO NOT STACK
 Handling and cautionary marks-
Purpose Symbol

SLING HERE

TEMPERATURE LIMITS
Step 11 - Submission of documents to banks

The exporter or the clearing and forwarding agent on behalf of the exporter should
present the following documents to the custom authorities :
1.Shipping bill
2.Invoice
3.Export license (if required)
4.Quality control inspection certificate (wherever required)
5.Original contract
6.Letter of Credit
7.Packing List
Step 12 - Payment realization

Negotiation of Documents

• After shipping the goods the exporters should arrange to obtain payments
for exports by negotiation of the relevant documents through the bank. The
set of negotiable documents usually consist of the following : letter of credit,
commercial invoice, packing slip, GR-I form, certificate of origin, Marine
insurance policy, bill of lading

• In accordance with the foreign exchange regulations the exporter must lodge
a full set of shipping documents with the bank within prescribed period. His
bank would forward the necessary documents to the buyer’s bank for the
collection of the amount from the importer.
Step 13 - Availing of export incentives schemes
If the exporter is entitled to any export incentives, he should take the
necessary steps to realise it
Payment Terms in EXIM
1. Clean Payments

In clean payment method, all shipping documents, including title documents are handled
directly between the trading partners. The role of banks is limited to clearing amounts as
required. Clean payment method offers a relatively cheap and uncomplicated method of
payment for both importers and exporters.
• There are basically two type of clean payments:
• Advance Payment
• In advance payment method the exporter is trusted to ship the goods after receiving
payment from the importer.
• Open Account
• In open account method the importer is trusted to pay the exporter after receipt of goods.
• The main drawback of open account method is that exporter assumes all the risks while the
importer get the advantage over the delay use of company's cash resources and is also not
responsible for the risk associated with goods.
2. Payment Collection of Bills in International
Trade

The Payment Collection of Bills also called “Uniform Rules for Collections” is published by
International Chamber of Commerce (ICC) under the document number 522 (URC522) and
is followed by more than 90% of the world's banks.
• In this method of payment in international trade the exporter entrusts the handling of
commercial and often financial documents to banks and gives the banks necessary
instructions concerning the release of these documents to the Importer. It is considered to
be one of the cost effective methods of evidencing a transaction for buyers, where
documents are manipulated via the banking system.
• There are two methods of collections of bill :
• Documents Against Payment D/P
In this case documents are released to the importer only when the payment has been done.
• Documents Against Acceptance D/A
In this case documents are released to the importer only against acceptance of a draft.
3. Letter of Credit
• Letter of Credit L/c also known as Documentary Credit is a widely used term to make payment secure in
domestic and international trade. The document is issued by a financial organization at the buyer request.
• The International Chamber of Commerce (ICC) in the Uniform Custom and Practice for Documentary Credit
(UCPDC) defines L/C as:
"An arrangement, however named or described, whereby a bank (the Issuing bank) acting at the request and on
the instructions of a customer (the Applicant) or on its own behalf : Is to make a payment to or to the order third
party ( the beneficiary ) or is to accept bills of exchange (drafts) drawn by the beneficiary.
• Authorised another bank to effect such payments or to accept and pay such bills of exchange (draft).
• Authorised another bank to negotiate against stipulated documents provided that the terms are complied with.
A key principle underlying letter of credit (L/C) is that banks deal only in documents and not in goods. The decision
to pay under a letter of credit will be based entirely on whether the documents presented to the bank appear on
their face to be in accordance with the terms and conditions of the letter of credit.
Parties to Letters of Credit
• Applicant (Opener): Applicant which is also referred to as account party is normally a buyer or customer of the
goods, who has to make payment to beneficiary. LC is initiated and issued at his request and on the basis of his
instructions.
• Issuing Bank (Opening Bank) : The issuing bank is the one which create a letter of credit and takes the
responsibility to make the payments on receipt of the documents from the beneficiary or through their banker.
The payments has to be made to the beneficiary within seven working days from the date of receipt of
documents at their end, provided the documents are in accordance with the terms and conditions of the letter
of credit. If the documents are discrepant one, the rejection thereof to be communicated within seven working
days from the date of of receipt of documents at their end.
• Beneficiary : Beneficiary is normally stands for a seller of the goods, who has to receive payment from the
applicant. A credit is issued in his favour to enable him or his agent to obtain payment on surrender of
stipulated document and comply with the term and conditions of the L/c.
If L/c is a transferable one and he transfers the credit to another party, then he is referred to as the first or
original beneficiary.
• Confirming Bank : Confirming bank adds its guarantee to the credit opened by another bank, thereby
undertaking the responsibility of payment/negotiation acceptance under the credit, in additional to that of the
issuing bank. Confirming bank play an important role where the exporter is not satisfied with the undertaking of
only the issuing bank.
Types of LC
1. Revocable Letter of Credit L/c
A revocable letter of credit may be revoked or modified for any reason, at any time by the
issuing bank without notification. It is rarely used in international trade and not considered
satisfactory for the exporters but has an advantage over that of the importers and the issuing
bank. There is no provision for confirming revocable credits as per terms of UCPDC, Hence
they cannot be confirmed. It should be indicated in LC that the credit is revocable. if there is
no such indication the credit will be deemed as irrevocable.

2. Irrevocable Letter of CreditL/c

In this case it is not possible to revoked or amended a credit without the agreement of the
issuing bank, the confirming bank, and the beneficiary. Form an exporters point of view it is
believed to be more beneficial. An irrevocable letter of credit from the issuing bank insures
the beneficiary that if the required documents are presented and the terms and conditions are
complied with, payment will be made.
3. Confirmed Letter of Credit L/c
Confirmed Letter of Credit is a special type of L/c in which another bank
apart from the issuing bank has added its guarantee. Although, the cost of
confirming by two banks makes it costlier, this type of L/c is more beneficial
for the beneficiary as it doubles the guarantee.

4. Sight Credit and Usance Credit L/c

Sight credit states that the payments would be made by the issuing bank at
sight, on demand or on presentation. In case of usance credit, draft are drawn
on the issuing bank or the correspondent bank at specified usance period. The
credit will indicate whether the usance draft are to be drawn on the issuing
bank or in the case of confirmed credit on the confirming bank.
4. Exchange Earner's Foreign Currency
(EEFC) Account
• Exchange Earners' Foreign Currency Account (EEFC) is an account
maintained in foreign currency with an Authorised Dealer Category -
i.e. a bank authorized to deal in foreign exchange. It is a facility
provided to the foreign exchange earners, including exporters, to
credit 100 per cent of their foreign exchange earnings to the account,
so that the account holders do not have to convert foreign exchange
into Rupees and vice versa, thereby minimizing the transaction costs.
• All categories of foreign exchange earners, such as individuals,
companies, etc., who are resident in India, may open EEFC accounts.
• An EEFC account can be held only in the form of a current account.
No interest is payable on EEFC accounts
Permissible Credits in EEFC Account
• Inward remittance through normal banking channels, other than remittances
received on account of foreign currency loan or investment received from abroad
or received for meeting specific obligations by the account holder;
• Payments received in foreign exchange by a 100 per cent Export Oriented Unit or
a unit in (a) Export Processing Zone or (b) Software Technology Park or (c)
Electronic Hardware Technology Park for supply of goods to similar such units or
to a unit in Domestic Tariff Area;
• Payments received in foreign exchange by a unit in the Domestic Tariff Area for
supply of goods to a unit in the Special Economic Zone (SEZ);
• Advance remittance received by an exporter towards export of goods or services;
• Professional earnings including directors’ fee, consultancy fee, lecture fee,
honorarium and similar other earnings received by a professional by rendering
services in his individual capacity;
• Re-credit of unutilised foreign currency earlier withdrawn from the account
permissible debits
• Payment outside India towards a permissible current account transaction [in accordance
with the provisions of the Foreign Exchange Management (Current Account Transactions)
Rules, 2000] and permissible capital account transaction [in accordance with the Foreign
Exchange Management (Permissible Capital Account Transactions) Regulations, 2000].
• Payment in foreign exchange towards cost of goods purchased from a 100 percent Export
Oriented Unit or a Unit in (a) Export Processing Zone or (b) Software Technology Park or
(c) Electronic Hardware Technology Park
• Payment of customs duty in accordance with the provisions of the Foreign Trade Policy of
the Central Government for the time being in force.
• Trade related loans/advances, extended by an exporter holding such account to his
importer customer outside India, subject to compliance with the Foreign Exchange
Management (Borrowing and Lending in Foreign Exchange) Regulations, 2000.
• Payment in foreign exchange to a person resident in India for supply of goods/services
including payments for airfare and hotel expenditure.
Marine/ Cargo Insurance
Policy
MARINE INSURANCE POLICY
The fundamental principles of Marine Insurance are drawn from the Marine Insurance Act, 1963

As in all contracts of insurance on property, the contract of Marine Insurance is based on the:
- fundamental principles of Indemnity,
- Insurable Interest,
- Utmost Good Faith,
- Proximate Cause,

Practitioners of Marine Insurance must familiarize themselves with the Act and uphold these Principles
when negotiating Contracts and settling claims under the contract.

https://www.gicouncil.in/insurance-education/types-of-insurance/marine/
INDEMNITY
• The object of an insurance contract is to place the assured after a loss
in the same relative financial position which the loss has occurred.
• By the Marine Insurance Act, the indemnity that is provided is “in
manner and to the extent agreed.”
• insurers cannot undertake to reinstate or replace cargo in the event of
loss or damage, they pay a sum of money, agreed in advance, that will
provide reasonable compensation.
• Upon total loss of the entire cargo by an insured peril the sum insured
is paid in full, and if part of the cargo is a total loss, the appropriate
proportion of the insured value is paid.
INSURABLE INTEREST
• It states that there must be a physical object exposed to marine perils
and that the insured must have some legal relationship to the object,
in consequence of which he benefits by its preservation and is
prejudiced by loss or damage happening to it or where he may incur
liability in respect thereof.
GOOD FAITH
• In Marine Insurance, it is the duty of the proposer to disclose clearly
and accurately all material facts related to the risk.
• A material fact is a fact, which would affect the judgement of a
prudent Underwriter in considering whether he would enter into a
contract at all or enter into it at one rate of premium or another and
subject to what terms.
• Apart from the duty of disclosure, the insured must act towards the
insurer in good faith throughout the duration of the contract.
PROXIMATE CAUSE:
• “Proximate cause means the active, efficient cause that sets in motion
a train of events which brings about a result, without the intervention
of any force started and working actively from a new and independent
source.”
• This means that the insurer becomes liable to pay for the loss if
insured peril on risk is the proximate (nearest) cause of loss.
Types of insurance Documents
1. Insurance Policy
2. Certificate of insurance
3. Insurance Broker's note
Contents of insurance Policy
1. The name insured, or of some person who effects the insurance on
behalf of the insured
2. He subject matter insured and the risk against the losses.
3. The voyage or period of time or both
4. The sum or sums assured
5. The name or names of the insurers.
FEATURES OF MARINE INSURANCE
POLICY
1. Offer & Acceptance: It is a prerequisite to any contract. Similarly, the goods under marine (transit) insurance will be
insured after the offer is accepted by the insurance company.
2. Payment of premium: An owner must ensure that the premium is paid well in advance so that the risk can be covered.
3. Contract of Indemnity: Marine insurance is contract of indemnity and the insurance company is liable only to the
extent of actual loss suffered.
4. Utmost good faith: The owner of goods to be transported must disclose all the relevant information to the insurance
company while insuring their goods.
5. Insurable Interest: The marine insurance will be valid if the person is having insurable interest at the time of loss
6. Contribution: If a person insures his goods with two insurance companies, then in case of marine loss both the
insurance companies will pay the loss to the owner proportionately.
7. Period of marine Insurance: The period of insurance in the policy is for the normal time taken for a transit. Generally,
the period of open marine insurance will not exceed one year.
8. Deliberate Act: If goods are damaged or loss occurs during transit because of deliberate act of an owner then that
damage or loss will not be covered under the policy.
9. Claims: To get the compensation under marine insurance the owner must inform the insurance company immediately
so that the insurance company can take necessary steps to determine the loss.
Types of Marine Insurance

a) Special Declaration Policy This is a form of floating policy issued to clients whose annual estimated
dispatches (i.e. turnover) by rail / road / inland waterways exceed Rs 2 crores.

b) Special Storage Risks Insurance This insurance is granted in conjunction with an open policy or a special
declaration policy. The purpose of this policy is to cover goods lying at the Railway premises or carrier’s
godowns after termination of transit cover under open or special declaration policies

c)Annual Policy This policy, issued for 12 months, covers goods belonging to the insured, which are not under
contract of sale, and which are in transit by rail / road from specified depots / processing units to other specified
depots / processing units.
Role of Overseas Agents
Meaning
•  An export agent is a firm (or individual) that undertakes most of
the exporting activities on behalf of an exporter usually for a
commission
• A sales agent acts on your behalf in the overseas market by
introducing you to customers who you supply and invoice direct.
• They are paid a commission for any sales they make ranging
between 2.5 per cent and 15 per cent
• The key benefit of using an overseas sales agent is that you
get the advantage of their extensive knowledge of the
target market.
 What exactly does the export agent do?

Travel Abroad Research Prepare an export plan

Advise the exporter on how to
adapt their marketing mix
Take care of all
promotional activities

negotiate deals with the buyers handle the logistics and documentation make contact with potential buyers
Advantages of using an overseas agent

• Saved cost and time for recruitment, training and payroll

• An agent should be well placed to identify and exploit
opportunities.
• They have solid relationships with potential buyers – it
might take you some time to build up your own contacts.
• Using an agent allows you to maintain more control over
matters such as final price and brand image – compared
with the other intermediary option of using a distributor.
Disadvantages of using an overseas agent

• You remain responsible for shipping and other

trade-related logistics – although your agent should be able
to help.
• Need to specify in an agent’s contract
• Arrangements must be made to allow access to your sales
ledger as part of the commission payments process.
• After-sales service can be difficult when selling through an
intermediary.
• You may lose some control over marketing and brand image,
compared with entering the market yourself.
Government SEZ, EHTP, STP & EOU policies
• Various schemes have been introduced by the Government from time to
time to encourage exports, viz, Special Economic Zones (SEZs),
Export-oriented Units (EOUs), Software Technology Parks (STPs),
Electronics Hardware Technology Parks (EHTPs), Biotechnology Parks
(BTPs), etc.
• The Special Economic Zone (SEZ) policy in India first came into
inception on April 1, 2000. The prime objective was to enhance
foreign investment and provide an internationally competitive and
hassle free environment for exports. 
• The idea was to promote exports from the country and
realising the need that level playing field must be made
available to the domestic enterprises and manufacturers
to be competitive globally.
• Special Economic Zone (SEZ) is a specifically delineated
duty-free enclave and shall be deemed to be foreign territory
for the purposes of trade operations and duties and tariffs.

• In order words, SEZ is a geographical region that has

economic laws different from a country's typical economic
laws.

• Usually the goal is to increase foreign investments. SEZs

have been established in several countries, including China,
India, Jordan, Poland, Kazakhstan, Philippines and Russia.
• Who can set up SEZs? Can foreign companies set up SEZs?

Any private/public/joint sector or state government or its agencies can set up an SEZ.

• What are the special features for business units that come to the zone?

Business units that set up establishments in an SEZ would be entitled for a package of
incentives and a simplified operating environment. Besides, no license is required for
imports, including second hand machineries.
• Are SEZ's controlled by the government?

In all SEZs the statutory functions are controlled by the government. Government also
controls the operation and maintenance function in the seven central government
controlled SEZs. The rest of the operations and maintenance are privatised.
Objectives of Special Economic
Zones in India
• Generation of additional economic activity
• Promotion of exports of goods and services
• Promotion of investment from domestic and foreign sources
• Creation of employment
• Development of infrastructure facilities
• Simplified procedures for development, operation, and maintenance
of the Special Economic Zones and for setting up units and
conducting business
• Single window clearance for setting up of a SEZ and an unit in SEZ
• Single window clearance on matters relating to Central as well as
State Governments
• Easy and simplified compliance procedures and documentations
with stress on self certification
Facilities and Incentives

The incentives and facilities offered to the units in SEZs for attracting
investments into the SEZs, including foreign investment include:-
• Duty free import/domestic procurement of goods for development,
operation and maintenance of SEZ units
• 100% Income Tax exemption on export income for SEZ units under
Section 10AA of the Income Tax Act for first 5 years, 50% for next 5 years
thereafter and 50% of the ploughed back export profit for next 5 years.
(Sunset Clause for Units will become effective from 01.04.2020)
• Exemption from Central Sales Tax, Exemption from Service Tax and
Exemption from State sales tax. These have now subsumed into GST and
supplies to SEZs are zero rated under IGST Act, 2017. 
• Other levies as imposed by the respective State Governments.  
• Single window clearance for Central and State level approvals.
• The export-oriented unit (EOU) Scheme was introduced in 1980 and is
covered under Chapter 6 of the Foreign Trade Policy. Establishment of units
and their performance is monitored by the jurisdictional Development
Commissioner under the Foreign Trade Policy provisions.

• Export-oriented units are units undertaking to export their entire

production of goods. EOUs can engage in manufacturing, services,
development of software, repair, remaking, reconditioning, re-engineering
including making of gold/silver/platinum jewellery and articles.

• Further, units involved in agriculture, agro-processing, aquaculture, animal

husbandry, biotechnology, floriculture, horticulture, pisciculture, viticulture,
poultry, sericulture and granites can also obtain the status of EOU.
Benefits of Export Oriented Units

• EOUs has a permit to procure raw material or capital goods duty-free,

either through import or through domestic sources;
• EOUs are eligible for reimbursement of GST;
• EOUs are eligible for reimbursement of duty paid on fuels procured from
domestic oil companies;
• EOUs are eligible for claiming input tax credit on the goods and services
and refund thereof;
• Fast track clearance facilities;
• Exemption from industrial licensing for the manufacture of items reserved
for SSI sector.
Eligibility Criteria for EOU

For the status of EOU, the project must have a minimum investment of Rs.1
crore in plant and machinery.

This condition does not apply for software technology parts, electronics
hardware technology parks and biotechnology parks. Further, EOU involved
in handicrafts, agriculture, animal husbandry, information technology,
services, brass hardware and handmade jewellery does not have any
minimum investment criteria.
Electronics Hardware Technology Parks
(EHTPs)
• The Electronics Hardware Technology Parks (EHTPs) Scheme is covered
under Chapter 6 of the Foreign Trade Policy. The EHTP Scheme is
administered by the Ministry of Communications and Information
Technology. Under the EHTP Scheme, an EHTP can be set up by the Central
Government, State Government, public or private sector undertaking or any
combination of them.
• An EHTP unit can be located in areas designated as EHTP complex or at any
place where EOUs can be set up.

• Such a unit is a duty-free custom-bonded area and is entitled to refund of

CST paid on purchases. EHTP units are allowed to import all types of goods
(except prohibited goods, namely capital goods, raw materials, consumables,
office equipment, etc) for the purpose of manufacture/production of export
products and export thereof, without payment of duty.
• For EHTP units, the period of realisation and repatriation of export proceeds
shall be nine months from the date
Software technology parks

• The Software Technology Parks (STP) Scheme is covered under Chapter 6 of

the Foreign Trade Policy. The STP Scheme is a 100% export-oriented
scheme for the development and export of computer software and services
using data communication links or in the form of physical media including
the export of professional services. The major attraction of this scheme is a
single-point contact service to the STP units.

• For implementing the STP scheme, the Ministry of Communications and

Information Technology formed the Software Technology Park of India
(STPI) in 1991.

• STPI is an autonomous body for the management and regulation of IT

Parks or STPs in India. The main aim of STPI is to develop India into an IT
giant and one of the leading generators and exporters of IT and software
within the coming few years. STP scheme approvals are given under a
Export Houses

• Export house is mostly home-based organization, located in the

manufacturer’s country, which is involved in the export of products that the
manufacturer has produced. These export houses carry out most of the
export-related activities overseas, via their own agents and distributors who
are in place in the country where the product is being exported.

• The objective of the scheme is to recognise established exporters as Export

House, Trading House, Star Trading House and Super Star Trading House
with a view to building marketing infrastructure and expertise required for
export promotion. Such Houses should operate as highly professional and
dynamic institutions and act as important instruments of export growth.
The level of export performance for the purpose of
recognition shall be as per the table below:
•
International Trade Terms
International Commercial Terms: Incoterms
• Incoterms are a standard set of terminology, created by the
International Chamber of Commerce (ICC), used universally, defining
the key parts of freight forwarding.
• They tell the parties what to do with respect to carriage of the goods
from buyer to seller, and export & import clearance. They also explain
the division of costs and risks between the parties.
• Incoterms can be only for sea transport or multi modal transport
• In 1936 the ICC first defined
the INternational COmmerce Terminology (INCO Terms), and
following are the 11 most commonly used terms.
1. Ex Works (EXW)
• Ex Works is a rule making the seller (or shipper / supplier) of goods
responsible for packaging and leaving the goods at their factory or
place of manufacture.
• The buyer (or consignee) is then responsible for everything else:
Loading goods onto transport
Transporting goods to a port or terminal
Shipping the goods
Unloading the goods at the buyer’s port or terminal
Transporting the goods to the end destination or warehouse
Case
• A Colorado company received a large order from an overseas buyer.
Since the company was eager to accept this large order, it offered a
steep discount on the Ex Works price quote. The buyer quickly
agreed, but soon after delivery the exporter found these goods selling
at discounted prices in a chain of U.S. retail stores, which was
sabotaging their own sales.
• Unknown to the naïve exporter, the Ex Works term does not require
the buyer to export the goods at all, and diversion becomes a real
risk. They learned an expensive lesson. The company had to buy back
their own under-priced merchandise off the shelves to avoid
competing with their own domestic products.
 2. Free Carrier (FCA)

• Free Carrier is a common agreement where a seller (or shipper / supplier) of goods is
responsible for packaging and loading goods onto a truck and bear the cost and risk till
the transport hub/port.
• The seller is also responsible for export clearance of the goods at the port or terminal.
• The buyer (or consignee) is then responsible for everything else:
 Shipping the goods
 Unloading the goods at the buyer’s port or terminal
 Transporting the goods to the end destination or warehouse

• FCA and EXW are similar, but the key difference is that FCA requires the seller to clear the
goods at customs and load them at the first carrier.
 3. Free Alongside Ship (FAS)
• Carriage to be arranged by the buyer.
• Risk transfer from the seller to the buyer when the goods have been placed alongside the
ship.
• "Alongside" means that the goods are within reach of a ship's lifting tackle. So, in this
case, the seller has an obligation to deliver goods to right next to, or alongside a vessel
specified by the buyer.
• The origin terminal charges are to be paid by the seller.
• Cost transfer from the vendor to the buyer when the goods have been placed alongside
the ship.
4. Free On Board (FOB)

• FOB is the short form term for Free On Board (or Freight on Board) and roughly
translates to mean that the cost of product being delivered to the nearest port is
included in the purchase price, but the purchaser is liable to pay the shipping
costs from that port.
• This is along with all other fees for the onward journey to the port of the buyer’s
destination.
 Carriage to be arranged by the purchaser.
 Risk transfer from the seller to the buyer when the goods pass the ship’s rail.
5. CFR – Cost and Freight
• Carriage have to be arranged by the seller.
• Risk transfer from the vendor to the buyer when the goods pass the ship’s rail.
• Cost transfer at the port of destination buyer, paying such fees as are not for the sellers
account under the carriage contract.
• In relation to a CFR trade, the exporter will pay for and arrange transportation to the port
of destination that is specified by the receiving party. The exporting company will arrange
and fund the transportation that is set out by the purchasing party.
• In relation to liability and ultimate responsibility, the purchaser will take on the
responsibility when the ship has docked in the port of destination.
• The further costs that will include further transportation and the unloading of the vessel
will be bared by the buyer.
6. CIF (COST insurance and freight)

• CIF is an Incoterm where the seller would need to pay for the freight insurance
and delivery costs to bring the goods to the end port. The risk however, is
transferred to the buyer as soon as the goods are put onto the ship.
Carriage and insurance have to be arranged by the seller.
Risk transfer from the seller to the buyer when the goods pass the ship’s rail.
Cost transfer at the port of destination buyer, paying such costs as are not for the
sellers account under the carriage contract.
 7. CPT – Carriage Paid to (duty paid)
• CPT is a fairly uncommon incoterm where the seller is responsible for the freight and shipping of
the goods up until they arrive at the terminal or warehouse in the country of the buyer.
• Under CPT, the seller is not responsible for providing insurance of the goods when they are
shipped.
 Risk transfer from the seller to the buyer when the goods loaded onto first carrier.
 Cost transfer at the port of destination/place mentioned in the contract to buyer , paying such costs
as are not for the sellers account under the carriage contract.
• CPT can be used on any form of transport mechanism; inland waterway, rail, road, sea, air or a
combination.
• If the transport includes multiple forms of transport, the responsibility shifts from the seller to
the buyer once the goods have been handed over to the first carrier.
CPT – Carriage Paid to (duty paid)
8. CIP Carriage and Insurance paid to

• CIP (or Carriage and Insurance Paid To) is an Incoterm where the
seller is responsible for the delivery of goods to an agreed destination
in the buyers country, and must pay for the cost of this carriage.
• The buyer can pay for additional insurance during carriage of the
goods.
CIP Carriage and Insurance paid to
9. Delivery at Place - DAP

• DAP, or, Delivery at Place is an incoterm defining the buyer and seller’s
responsibilities when moving goods.
• In this case, the seller is responsible for moving the goods from the country of
origin right through to the end destination, which includes responsibility for
loading and transport to the place mentioned in the contract.
• DAP means that seller bears the risk of any issues with the goods until the agreed
delivery point. If there are any extra fees for unloading the goods except
unloading at the final place, the seller must incur these.
• The buyer will take the responsibility of unloading the goods at the destination.
Delivery at Place - DAP
10. Delivered at Place Unloaded - DPU

• DPU, is where the seller clears goods for export and is fully responsible for the
goods until they have arrived at a named destination. The goods must be
unloaded at the named destination.
• It can be used with any transportation mode.
Delivered at Place Unloaded - DPU
11. Delivered Duty Paid - DDP

• Under DDP, the supplier is responsible for paying for all of the costs associated with the
delivery of goods right up until they get to the named place of destination. The buyer is
then responsible for unloading the goods at the end destination.
• DDP can be used to describe ocean, road or air transportation of goods, including
multimodal transportation.
• It’s also expected that the seller clears the goods at export and import customs.
• DDP is most risky for the seller of goods, so is normally used by advanced suppliers. DDP
is used particularly when the cost of supply doesn’t vary too much and is easy to predict.
• Sellers may not understand the complex and bureaucratic import clearance procedures
that exist in some countries and make mistakes or miscalculations that affect their
bottom line; therefore, it may be best left to the buyer who has local knowledge and
understanding. Keep this in mind before choosing DDP.
Delivered Duty Paid - DDP
Quiz – identify the relevant Incoterms
1. Buyer responsible for all carriage
2. Seller arranges first carrier and Buyer arranges main carriage
3. Seller arranges main carriage, risk passes after main carriage
4. Seller arranges main carriage, but risk passes before main carriage
Answers
1. EXW
2. FAS; FOB; FCA
3. DAP;DPU; DDP
4. CFR; CIF; CPT; CIP