Chapter 11--International Business – I

One Mark Questions

1. Give an example for international Trade in Services.

Transportation is an example for international Trade in Services.

2. Name any one mode of entering into international business.

Exporting and Importing of goods and services is one mode of entering
into international business.

3. What is export trade?

Exporting refers to sending of goods and services from the home country
to a foreign country.

4. What is import trade?

Importing is purchase of foreign products and bringing them into one’s
home country.

5. Which is the easiest mode of gaining entry into international

markets?
Exporting/importing is the easiest way of gaining entry into international
markets.

6. Give an example of a business organization that has entered into

international business through licensing system.
Coco-Cola is an example of a business organization that has entered into
international business through licensing system.

7. Give an example of a business has entered into international business

through franchising system.
McDonald is an example of a business has entered into international
business through franchising system.

8. What is Contract Manufacturing known as?

Contract manufacturing, also known as outsourcing.

9. Mention one type of foreign investment.

Direct investment is one type of foreign investment.
10.Name the parties in licensing system.
Licensor and Licensee are the parties in licensing system.

11.Name the parties in franchising system.

Franchiser and franchisee are the parties in franchising system.

12.State any one way by which wholly owned subsidiaries enter into
international business.
Setting up a new firm altogether to start operations in a foreign country
— also referred to as a green field venture.

Multiple Choices One Mark Questions

1. In which of the following modes of entry, does the domestic
manufacturer give the right to use intellectual property such as
patent and trademark to a manufacturer in a foreign country for a
fee
(a) Licensing
(b) Contract Manufacturing
(c) Joint Venture
(d) None of these

Ans:- (a) Licensing

2. Outsourcing a part or entire production and concentrating on

marketing operations in international business is known as
(a) Licensing
(b) Franchising
(c) Contract Manufacturing
(d) Joint Venture

Ans:- (c) Contract Manufacturing

3. When two or more firms come together to create a new business

entity that is legally separate and distinct from its parents, it is
known as
(a) Contract manufacturing
(b) Franchising
(c) Joint ventures
(d) Licensing

Ans:- (c) Joint ventures

4. Which of the following is not an advantage of exporting?
(a) Easier way to enter into international market
(b) Comparatively lower risks
(c) Limited presence of markets in foreign markets
(d) Less investment requirements

Ans:- (c) Limited presence of markets in foreign markets

5. Which one of the following modes of entry requires higher level of

risks?
(a) Licensing
(b) Franchising
(c) Contract manufacturing
(d) Joint venture

Ans:- (d) Joint venture

6. Which one of the following modes of entry permits greatest degree of

control over overseas operations?
(a) Licensing/Franchising
(b) Wholly owned subsidiaries
(c) Contract manufacturing
(d) Joint venture

Ans:- (b) Wholly owned subsidiaries

7. Which one of the following modes of entry brings the firm closer to
international markets?
(a) Licensing
(b) Franchising
(c) Contract manufacturing
(d) Joint venture

Ans:- (d) Joint venture

Two Marks Questions

1. Define international business.

Manufacturing and trade beyond the boundaries of one’s own country is
known as international business.
 2. Give any two reasons for international business.
a) The countries cannot produce equally well or cheaply all that they need.
b) Availability of various factors of production such as labour, capital and
raw materials that are required for producing different goods and services
differ among nations.

3. Write the meaning of licensing.

Licensing refers to Permitting another party in a foreign country to
produce and sell goods under your trademarks, patents or copy rights in
lieu of some fee.

4. What is franchising?
Franchising refers to grant of rights by one party to another for use of
technology, trademark and patents relating to services in return of the
agreed payment for a certain period of time.

5. What is meant by foreign direct investment?

When a company directly invests in properties such as plant and
machinery in foreign countries with a view to undertaking production and
marketing of goods and services in those countries are called foreign
direct investment.

6. What is portfolio investment?

It is an investment that a company makes into another company by the
way of acquiring shares or providing loans to the latter, and earns income
by way of dividends or interest on loans.

7. Write the meaning of contract manufacturing.

Contract manufacturing refers to a type of international business where a
firm enters into a contract with one or a few local manufacturers in
foreign countries to get certain components or goods produced as per its
specifications.

8. Write the meaning of cross licensing.

The mutual exchange of knowledge, technology and/or patents between
the two firms which is known as cross-licensing.

9. State the two differences between the licensing and franchising.

(i) Licensing is used in connection with production and marketing of
goods, the term franchising applies to service business.
(ii) Franchising is relatively more stringent (strict rules and regulations )
than licensing.
 10.Write the meaning of joint venture.
A joint venture means establishing a firm that is jointly owned by two or
more otherwise independent firms.

11.Mention any two ways of forming joint venture.

(i) Foreign investor buying an interest in a local company
(ii) Local firm acquiring an interest in an existing foreign firm

12.Name any two countries with which India trades.

U S A (America) and Japan are the two countries with which India trades.

13.What is meant by direct export/import?

A firm itself approaches the overseas buyers/ suppliers and looks after all
the formalities related to exporting/ importing activities including those
related to shipment and financing of goods and services are called direct
export/import.

14.Write the meaning of indirect export/import.

where the firm’s export/import are carried out by some middle men such
as export houses or buying offices of overseas customers located in the
home country or wholesale importers in the case of import operations are
called indirect export/import.

Difference between Domestic business and International business

SI Domestic Business International Business

NO
1 People or organisations from one People or organisations of different
nation participate in domestic countries participate in international
business transactions. business transactions.
2 Various other stakeholders such Various other stakeholders such as
as suppliers, employees, suppliers, employees, middlemen,
middlemen, shareholders and shareholders and partners are from
partners are usually citizens of different nations.
the same country.
3 The degree of mobility of factors The degree of mobility of factors of
of production like labour and production like labour and capital
capital is relatively more within across nations is relatively less.
a country.
4 Domestic markets are relatively International markets lack
more homogeneous in nature. homogeneity due to differences in
language, preferences, customs,
 etc., across markets.
5 Business systems and practices Business systems and practices vary
are relatively more homogeneous considerably across countries.
within a country.

6 Domestic business is subject to Different countries have different

political system and risks of one forms of
single country. political systems and different
degrees of risks which often become
a barrier to international business.
7 Domestic business is subject to International business transactions
rules, laws and policies, taxation are subject to rules, laws and
system, etc., of a single country. policies, tariffs and quotas, etc. of
multiple countries
8 Currency of domestic country is International business transactions
used. involve use of currencies of more
than one country.

Scope of International Business

Major forms of business operations that constitute international business are as

follows.

(i) Merchandise exports and imports:

Merchandise means goods that are tangible, i.e., those that can be seen
and touched. When viewed from this perceptive, it is clear that while
merchandise exports means sending tangible goods abroad,
merchandise imports means bringing tangible goods from a foreign
country to one’s own country. Merchandise exports and imports, also
known as trade in goods, include only tangible goods and exclude
trade in services.

(ii) Service exports and imports:

Service exports and imports involve trade in intangibles. It is because
of the intangible aspect of services that trade in services is also known
as invisible trade. A wide variety of services are traded internationally
and these include: tourism and travel, boarding and lodging (hotel and
restaurants), entertainment and recreation, transportation, professional
services , communication etc.,
 (iii) Licensing and franchising:
Permitting another party in a foreign country to produce and sell
goods under your trademarks, patents or copy rights in lieu of some
fee is another way of entering into international business. It is under
the licensing system that Pepsi and Coca Cola are produced and sold
all over the world by local bottlers in foreign countries. Franchising is
similar to licensing, but it is a term used in connection with the
provision of services. McDonalds, for instance, operates fast food
restaurants the world over through its franchising system.

(iv) Foreign investments:

Foreign investment is another important form of international
business. Foreign investment involves investments of funds abroad in
exchange for financial return. Foreign investment can be of two types:
direct and portfolio investments. Direct investment takes place when a
company directly invests in properties such as plant and machinery in
foreign countries with a view to undertaking production and marketing
of goods and services in those countries. A portfolio investment, on
the other hand, is an investment that a company makes into another
company by the way of acquiring shares or providing loans to the
latter, and earns income by way of dividends or interest on loans.

Benefits of International Business to Nations

Benefits to Nations are as follows:-

(i) Earning of foreign exchange:
International business helps a country to earn foreign exchange which
it can later use for meeting its imports of capital goods, technology,
petroleum products and fertilisers, pharmaceutical products and a host
of other consumer products which otherwise might not be available
domestically.
(ii) More efficient use of resources:
As stated earlier, international business operates on a simple principle
produce what your country can produce more efficiently, and trade the
surplus production so generated with other countries to procure what
they can produce more efficiently. When countries trade on this
principle, they end up producing much more than what they can when
each of them attempts to produce all the goods and services on its
own. If such an enhanced pool of goods and services is distributed
equitably amongst nations, it benefits all the trading nations.
 (iii) Improving growth prospects and employment potentials:
International business helps in improving the growth prospects and
also created opportunities for employment of people living in the
countries.

(iv) Increased standard of living:

In the absence of international trade of goods and services, it would
not have been possible for the world community to consume goods
and services produced in other countries that the people in these
countries are able to consume and enjoy a higher standard of living.
Benefits of International Business to firms

Benefits to Firms are as follows:-

(i) Prospects for higher profits:
International business can be more profitable than the domestic
business. When the domestic prices are lower, business firms can earn
more profits by selling their products in countries where prices are
high.
(ii) Increased capacity utilisation:
Many firms setup production capacities for their products which are
in excess of demand in the domestic market. By planning overseas
expansion and procuring orders from foreign customers, they can
think of making use of their surplus production capacities and also
improving the profitability of their operations.

(iii) Prospects for growth:

Business firms find it quite frustrating when demand for their products
starts getting saturated in the domestic market. Such firms can
considerably improve prospects of their growth by plunging into
overseas markets.

(iv) Way out to intense competition in domestic market:

When competition in the domestic market is very intense,
internationalisation seems to be the only way to achieve significant
growth.
Modes of Entry into International Business

Modes of entry into international business means various ways in which a

company can enter into international business.

Following are the different modes of entry into international business.

Exporting & Importing:

Exporting refers to sending of goods and services from the home country to a
foreign country. In a similar vein, importing is purchase of foreign products and
bringing them into one’s home country.

Major advantages of exporting & importing are as follows:-

1. As compared to other modes of entry, exporting/importing is the easiest
way of gaining entry into international markets. It is less complex an
activity than setting up and managing joint-ventures or wholly owned
subsidiaries abroad.

2. Exporting/importing is less involving in the sense that business firms are

not required to invest that much time and money as is needed when they
desire to enter into joint ventures or set up manufacturing plants and
facilities in host countries.

3. Since exporting/importing does not require much of investment in foreign

countries, exposure to foreign investment risks is nil or much lower than
that is present when firms opt for other modes of entry into international
business.

Major limitations of exporting/ importing as an entry mode of international

business are as follows:
1. Since the goods physically move from one country to another,
exporting/importing involves additional packaging, transportation and
insurance costs. Especially in the case of heavy items, transportation costs
alone become an inhibiting factor to their exports and imports.

2. Exporting is not a feasible option when import restrictions exist in a

foreign country. In such a situation, firms have no alternative but to opt
for other entry modes such as licensing/franchising or joint venture which
makes it feasible to make the product available by way of producing and
marketing it locally in foreign countries.
 3. Export firms basically operate from their home country. They produce in
the home country and then ship the goods to foreign countries. Except a
few visits made by the executives of export firms to foreign countries to
promote their products, the export firms in general do not have much
contact with the foreign markets. This puts the export firms in a
disadvantageous position vis-à-vis the local firms which are very near the
customers and are able to better understand and serve them.

Contract Manufacturing

It refers to a type of international business where a firm enters into a contract

with one or a few local manufacturers in foreign countries to get certain
components or goods produced as per its specifications.

Advantages:

1. Contract manufacturing permits the international firms to get the goods

produced on a large scale without requiring investment in setting up
production facilities.
2. There is less investment risk involved in the foreign countries due to no
or little investment.
3. It helps the international company to get products manufactured or
assembled at lower costs if the local producers happen to be situated in
countries which have lower material and labour costs.
4. It benefit the local producers in foreign countries. If they have any idle
production capacities, manufacturing jobs obtained on contract basis in a
way provide a ready market for their products and ensure greater
utilisation of their production capacities.
5. The local producers gets the opportunity to get involved with
international business and avail incentives.

Limitations

1. Local firms might not adhere to production design and quality standards,
thus causing serious product quality problems to the international firm.
2. Local manufacturer in the foreign country loses his control over the
manufacturing process because goods are produced strictly as per the
terms and specifications of the contract.
3. The local firm producing under contract manufacturing is not free to sell
the contracted output as per its will. It has to sell the goods to the
international company at predetermined prices.
Licensing and Franchising

Licensing is a contractual arrangement in which one firm grants access to its

parents, trade secrets or technology to another firm in a foreign country for a fee
called royalty.

The firm that grants such permission to the other firm is known as licensor and
the other firm in the foreign country that acquires such rights to use technology
or patents is called the licensee.

Advantages

1. Under the licensing/franchising system, it is the licensor/franchiser who

sets up the business unit and invests his/her own money in the business.
As such, the licensor/franchiser has to virtually make no investments
abroad.
2. since no or very little foreign investment is involved, licensor/franchiser
is not party to the losses, if any, that occur to foreign business,
licensor/franchiser is paid by the licensee/franchisee by way of fees fixed
in advance as a percentage of production.
3. Since the business in the foreign country is managed by the
licensee/franchisee who is a local person, there are lower risks of business
takeovers or government interventions.
4. Licensee/franchisee being a local person has greater market knowledge
and contacts which can prove helpful to the licensor/franchiser in
successfully conducting its marketing operations.

Limitations

1. When a licensee/franchisee becomes skilled in the manufacture and

marketing of the licensed/franchised products, there is a danger that the
licensee can start marketing an identical product under a different brand
name.
2. If not maintained properly, trade secrets can get into others in the foreign
markets. Such situation creates several losses to the licensor/franchiser.
3. Over time, conflicts develop between the licensor/franchiser and
licensee/franchisee over issued such as maintenance of accounts, payment
of royalty and non-adherence to norms relating to production of quality
products.
Joint ventures

A joint venture means establishing a firm that is jointly owned by two or more
otherwise independent firms.

Major advantages of joint venture include:

(i) Since the local partner also contributes to the equity capital of such a
venture, the international firm finds it financially less burdensome to
expand globally.

(ii) Joint ventures make it possible to execute large projects requiring

huge capital outlays and manpower.

(i) The foreign business firm benefits from a local partner’s knowledge of
the host countries regarding the competitive conditions, culture,
language, political systems and business systems.

(ii) In many cases entering into a foreign market is very costly and risky.
This can be avoided by sharing costs and/or risks with a local partner
under joint venture agreements.

Major limitations of a joint venture are discussed below:

(i) Foreign firms entering into joint ventures share the technology and trade
secrets with local firms in foreign countries, thus always running the risks of
such a technology and secrets being disclosed to others.

(ii) The dual ownership arrangement may lead to conflicts, resulting in battle for
control between the investing firms.

Wholly owned subsidiaries

This entry mode of international business is preferred by companies which want

to exercise full control over their overseas operations. The parent company
acquires full control over the foreign company by making 100 per cent
investment in its equity capital.
Advantages

1. The parent firm is able to exercise full control over its operations in
foreign countries.
2. Since the parent company on its own looks after the entire operations of
foreign subsidiary, it is not required to disclose its technology or trade
secrets to others.

Limitations

1. The parent company has to make 100 per cent equity investments in the
foreign subsidiaries. This is not suitable for small and medium size firms
which do not have enough funds with them to invest abroad.
2. Since the parent company owns 100 per cent equity in the foreign
company, it has to bear the entire losses from failure of its foreign
operations.
3. Some countries are setting up of 100 per cent wholly owned subsidiaries
by foreigners in their countries. This leads to higher political risks.