Buying and selling of goods and services between two countries are called external trade or foreign trade or international business. It facilitates specialization and efficient utilization of resources.
Reason for International Business
The basic reason behind international business is that the countries cannot produce equally well or cheaply all that they need due to the unequal distribution of various resources such as labour, raw materials, capital etc. Moreover, labour productivity and production costs differ among nations due to various socio-economic, geographical and political reasons. Therefore, some countries being in a better position to produce better quality products or at lower costs than what other nations can do.
Differences between Domestic Business and International Business
|Domestic Business||International Business|
|1.Exchange of goods with in the nation||1. Exchange of goods between two nations|
|2.Regulations and laws of only one country||2. Regulations and laws of different countries|
|3.Less documents needed||3. More documents needed|
|4.Cost of transportation is less||4. Cost of transportation is higher|
|5.Insurance is not compulsory||5.Insurance is compulsory|
|6.Goods are subject to less risk||6. Goods are subject to greater risk|
|7.Accounts are settled in national currency||7. Accounts are settled in foreign currencies|
|8.Limited formalities||8. Many formalities|
|9.Carried on retail and wholesale||9. Carried on wholesale only|
|10.Business system and practices are relatively same||10. Business system and practices between nations may vary.|
Scope of International Business – Major areas of operations of international business are briefly discussed below:
1. Merchandise exports and imports – Merchandise means goods which are tangible, ie, those that can be seen and touched.
2. Service exports and imports – It means trade in intangibles, i.e., those that cannot be seen or touched. It is also known as invisible trade. Eg. Tourism and travel, transportation, entertainment, communication, educational service etc.
3. Licensing and franchising – Permitting a person/firm in a foreign country to produce and sell goods under your trademarks, patents or copyrights for a fee is another way of operating international business. Eg. Pepsi, Coca-Cola etc. Franchising is somewhat similar to licensing with the difference that it is connected with provision of services. Eg. Mc Donald (fast food restaurants), KFC etc.
4. Foreign Investments – It means investment abroad in exchange for financial return. It can be in FDI (Foreign Direct Investment)- directly invested in properties, and FPI (Foreign Portfolio Investment)- investing by way of acquiring shares or granting loans.
Benefits of International Business
Benefits to Nations: Earning of foreign exchange, more efficient use of resources, improving growth prospects and employment potentials, increased standard of living etc.
Benefits to Firms – Higher profits, increased capacity utilization, prospects for growth, way out to intense competition in domestic market, improved business vision etc.
Modes of entry into International Business: A company can enter into international business in the following ways:
1. Exporting and Importing: Export refers to sending of goods and services for sale from the home country to foreign countries. Importing means purchasing of goods and services from foreign countries for domestic use.
Advantages: 1. It is the easiest way of entering into international markets.
2. Foreign investment risk is practically nil.
Disadvantages: 1. Additional cost involved for packaging, transportation, insurance, customs duty….
2. It is not a feasible method
3.Lack of knowledge about foreign markets.
2. Contract Manufacturing: In this a company enters into a contract with a local manufacturer in a foreign country. The contract is for getting certain components or goods produced as per specifications given. It is also called outsourcing. It may takes place in the following three forms:
a. production of certain components only
b. assembly of components into final products
c. complete manufacture of the products
a. Goods can be produced on large scale without any investment
b. Less investment risk
c. Getting products with lower material and labour costs.
d. Utilization of idle capacity of the manufacturer.
e. Producer may get export incentives from the government.
a. Quality problem – Local manufacturer in a foreign country may not be able to compete with international standards.
b. No freedom in the production process – Producer has to follow specifications given to him strictly.
c. No freedom to sell – According to the terms of contract, they cannot freely sell in the open market.
3. Licensing and Franchising: It is a contractual agreement in which one firm permits another firm in a foreign country to access its trademark, patents or technology for a fee called royalty. The firm which gives permission is called licensor and to whom it is given is called licensee.
Franchising is similar to licensing; it is concerned with provision of services. The parent company is called franchiser and the party to whom franchise is granted is called the franchisee.
a. Less expensive – It is a less expensive mode for licensor as the licensee makes all investments in his country.
b. Limited risk – The licensor or franchiser has only a limited risk, as he has not made any investment.
c. Less government intervention – Since the licensee is a local person in his country, there is only less government intervention.
d. Knowledge about the market – Since the licensee / franchisee is a local person, he might have greater knowledge about the local market.
e. Protection of trademarks – Because of strict laws in foreign countries, only the licensee can use the trademark or patent.
a. Identical or duplicate product – The licensee, when get experienced can make an identical product with a slight different brand name.
b. Loss of secrecy – There are chances of trade secret being lost in the foreign market. c. Conflicts between licensor and licensee regarding payment of royalty, maintenance of accounts, difference in quality etc.
4. Joint Ventures: It means starting a firm which is jointly owned by two or more firms. It comes into existence in three major ways:
a. foreign investor buying an interest in a local firm.
b. local firm acquiring an interest in an existing foreign firm
c. both the foreign and local entrepreneurs jointly establishing a new firm.
a. Less financial burden – Investment is made by both the parties.
b. Large scale operation – Usually joint ventures are running on large scale. c. Local partner’s knowledge – Foreign partner is also benefited because of local partner’s knowledge about competition, culture, language, business policies etc. d. Cost and risk sharing – Entering into foreign market is very costly and risky, it can be shared among the joint venture partners.
a. Loss of secrecy
b. Chances of conflicts
5. Wholly owned subsidiaries: In this system, the holding company (parent company) acquires 100% shares in a subsidiary company . A wholly owned subsidiary company can be established in a foreign market in two ways:
a. Set up a new firm in a foreign country.
b. Acquire an existing firm in a foreign country.
a. Full control over operation.
b. Trade secrets will not be lost.
a. Huge investment – Not suitable for small and medium size business. b. No sharing of loss.
c. Not allowed by some countries.
Export – Import Procedure and Documentation
International business or foreign trade involves export, import and entrepot. Export trade means sale of domestic goods to a foreign country. Import trade refers to purchase of goods from a foreign country for domestic use.
Export Procedure – Following are the major steps involved in exporting goods to a foreign country:
1. Receipt of enquiry and sending quotation – The exporter gets an enquiry from prospective buyers from a foreign country and sending quotation in the form of a proforma invoice, which is a document containing all description about the product such as price, quality, grade, size, weight, mode of delivery, type of packing, payment terms etc.
2. Receipt of order or indent – If the buyer is satisfied with the conditions in the proforma invoice, an order will be placed. This order is also called indent. It contains the description of goods, price, quality etc.
3. Assessing importer’s creditworthiness and securing a guarantee for payments – After receiving indent, the exporter conducts an enquiry about the financial capacity of the importer to ensure the promptness in settlement. Usually, exporters may demand a letter of credit in this regard.
Letter of credit is a guarantee given by the importer’s bank that it will honour payment up to a specified amount of export bills to the bank of the exporter.
4. Obtaining export license – In order to get the export license from the Import-Export Licensing Authority, the exporter has to fulfill the following formalities:
a. Open a bank account.
b. Obtaining Import Export Code (IEC) number from the Directorate General of Foreign Trade or Regional Import Export Licensing Authority.
c. Registering with appropriate export promotion council. Eg: Apparel Export Promotion Council, Council for Leather Exports etc.
d. Registering with Export Credit and Guarantee Corporation (ECGC) to cover the risk of non-payment.
5. Obtaining pre-shipment finance – After the confirmation of order the exporter may approach his bank for getting pre-shipment finance to carry out export production.
6. Production or procurement of goods – The exporter makes ready the goods as per specification either by production or by purchasing it from the market.
7. Pre-shipment inspection – In foreign trade the quality of goods must conform to international standards. For this compulsory inspection by Export Inspection Agency – EIA (Govt. of India undertaking) should be done.
8. Excise Clearance – All goods produced are subject to excise duty under Central Excise and Tariff Act, but exported goods are either exempted or if paid, it is later refunded. So the exporter has to apply to the Excise Commissioner for export clearance. If the authority is satisfied, the excise clearance is given or the claim for refund is allowed. Such refund of duty is called duty drawback.
9. Obtaining certificate of origin – Some importing countries provide tariff concession or other exemptions for goods imported from certain countries. To avail such benefits the exporter has to obtain and submit certificate of origin along with other export documents.
Certificate of Origin is a proof that the goods are actually been produced in the country from where it is exported.
10. Reservation of shipping space – The exporter has to apply for this by furnishing complete information about the goods, probable date of shipment and port of destination. On acceptance, the shipping company issues a shipping order.
Shipping order is an instruction to the captain of the ship that the specified goods after customs clearance at a designated port be received on board.
11. Packing and forwarding – Goods are packed and marked with details such as name and address of importer, gross and net weight, destination port, country of origin etc. A packing list is attached herewith all other documents.
Packing list is a document stating the number of cases or packs and the details of goods contained in these packs.
12. Insurance of goods – The exporter has to insure the goods with an insurance company to cover the risk due to sea perils in transit.
13. Customs clearance – Before loading the goods on the ship, customs clearance should be obtained by the exporter. For this the exporter prepares a shipping bill (5 copies).
Shipping bill is a document contains the particulars of goods, name of the vessel (ship), destination port, exporting country, exporter’s name, address etc.
Documents to be attached with the shipping bill for customs clearance:
a. Export order.
b. Letter of credit.
c. Commercial invoice.
d. Certificate of origin.
e. Certificate of inspection.
f. Marine insurance policy.
Based on the above documents, the port authority issues a Carting Order. It is an instruction to the staff at the gate of the port to allow the cargo inside the dock.
14. Obtaining mates receipt – After the goods are loaded on the ship, the captain or mate of the ship issues a certificate called mate’s receipt.
Mates receipt – It is a receipt issued by the captain or mate of the ship as an acknowledgement of the receipt of goods in the ship, which contains the name of ship, berth, date of shipment, description of packages, condition of cargo etc.
15. Payment of freight and insurance of bill of lading – The C&F agent (Clearing and Forwarding agent) submits the mate’s receipt to the shipping company for computation of freight. After the payment of freight, the shipping company issues a bill of lading.
Bill of lading – It is document issued by the shipping company after the cargo is loaded on the ship. It is prepared on the basis of Mates Receipt. The shipping company undertakes the delivery of goods to the buyer by producing this document.
In case goods sent by air, this document is known as airway bill.
16. Preparation of invoice – The exporter has to prepare an invoice of the goods, which contains the details such as quantity and the amount to be paid by the importer.
17. Securing payment – After shipment of goods, the exporter sends the relevant documents like Bill of lading, bill of exchange, letter of credit, invoice, etc. to the bank for completing the formalities to receive payment from the importer.
Import Procedures – Following are the steps involved in importing goods to our country.
1. Trade enquiry – The importer has to collect information about the exporters of the products he needs from various sources like trade directories, trade associations, websites etc. After identifying the exporter, he sends the trade enquiry. Trade enquiry is a written request by the importer to the overseas supplier for getting information such as price, quality and other terms and conditions for export.
2. Obtain the import license – Certain goods can be imported freely, while others require license. He has to apply for the import license at DGFT and obtain IEC number.
3. Obtaining foreign exchange – In import trade, payment is made in foreign currency, all foreign exchange transactions are regulated by RBI in India. So that the importer has to get prior sanction for foreign exchange.
4. Placing order or indent – The importer has to place an order or indent for the supply of goods. It should contain price, quality, quantity, size, grade and instructions relating to packing, shipping, delivery schedule, insurance and mode of payment etc.
5. Obtaining letter of credit – The importer should obtain the letter of credit from his bank and forward it to the exporter.
6. Arranging finance – Importer should arrange fund in advance to pay to the exporter on arrival of goods.
7. Receipt of shipment advice – It is a document sent by the exporter to the importer containing information about the shipment of goods after it is being loaded on the ship.
8. Retirement of import documents – After the goods are shipped, the exporter submits all the necessary documents with his banker for getting payment. Here the importer has to retire (receive) the documents either by ready payment or by accepting a bill of exchange.
9. Arrival of goods – On arrival of goods the person in charge of the ship informs the officer at the dock through a document called import general manifest.
Import General Manifest is a document contains the details of imported goods and on the basis of which the cargo is unloaded.
10. Customs clearance and release of goods – After fulfilling all the formalities at the dock and payment of dock dues, freight if any and the customs duty, the importer can release the goods from the port. In order to calculate the customs import duty, the importer has to submit a document called the Bill of Entry.
Bill of Entry is a form supplied by the customs office to the importer for filling and submitting for assessment of customs import duty.
Foreign Trade Promotion
Major Trade Promotion Measures – Incentives and Organizational Support
Government of India has taken various measures to support business firms to improve their export business. Some of them are given below:
1. Duty Drawback – Under this scheme customs and GST paid on raw materials and components used in export products are refunded to the exporter at the time of export.
2. Export manufacturing under bond scheme – Goods manufactured for exporting are not liable to pay GST and other duties. To avail such facility these firms have to give a bond, that the goods manufactured will be exported.
3. Exemption from payment of GST – Goods meant for export do not come under GST and income from export trade is also exempted from income tax for a long time. These schemes are applicable for 100% export oriented units and units set up in EPZs.
4. Advance license scheme – Advance export license may be issued to regular exporters on request, so that they will get duty free supply of domestic and imported inputs.
5. Export Promotion Capital Goods Scheme (EPCG) – The idea behind this is to encourage import of capital goods for export production at a lower rate of customs duty.
6. Recognition schemes for Export Houses, Trading Houses, Star Trading Houses and Super Star Trading Houses – These export houses, in different names, are given national recognition so that they can take all efforts to promote exports. The recognition is granted based on their export performance.
7. Export of Services – To promote the export of services, various categories of services houses have been given recognition. Here also recognition is granted on the basis of their export performance.
8. Export Finance – It is provided to the exporters at a concessional rate. There are two types of export finance:-
a. Pre-shipment finance – it is made available to finance the purchase, processing, manufacturing or packing of goods.
b. Post-shipment finance – it is provided to fill the gap between the sale and realization of sale.
9. Export Processing Zones (EPZs) – It has been set up by the government to provide internationally competitive duty free environment for exports. Government is providing infrastructural facilities to produce goods at a lower cost. Customs clearances and other formalities simplified.
No import license is needed to import capital goods, raw materials etc.. They are also exempted from payment of GST for those items bought from domestic market. Recently the EPZs are converted into Special Economic Zones (SEZs) by giving more privileges.
The major export processing zones in India are:-
a. Kandla Export Processing Zone (KEPZ), Kandla, Gujarat.
b. Santa Cruz Electronic Export Processing Zone (SEEPZ), Santa Cruz, Bombay. c. Noida Export Processing Zone (NEPZ), Noida, UP.
d. Chennai Export Processing Zone (CEPZ), Chennai, Tamil Nadu. e. Cochin Export Processing Zone ( CEPZ), Cochin, Kerala.
f. Falta Export Processing Zone (FEPZ), Falta, West Bengal.
g. Visakhapatnam Export Processing Zone (VEPZ), Visakhapatanam.
10. 100% Export Oriented Units – These units are set up for the export of the entire products. They can be set up anywhere in India. They get all the benefits provided to units in the EPZ.
Organizational Support – Some of the important institutions set up by Govt. of India to promote foreign trade in our country are as follows:
1. Department of Commerce – Under the Ministry of Commerce – Apex body – To maintain better commercial relation with other countries – Formulate policies on foreign trade.
2. Export Promotion Councils (EPCs)– Formed as joint stock companies or societies – non-profit organizations – to promote exports of particular products.
3. Commodity Boards – Supplementary to EPCs – Established by Govt. of India – Eg: Coffee Board, Spices Board, Silk Board, Rubber Board etc.
4. Export Inspection Council – Established by Govt. of India – under Export Quality Control and Inspection Act 1963 – To ensure the quality of goods for export.
5. Indian Trade Promotion Organization (ITPO) – Established in 1992 under the Ministry of Commerce – To promote trade and industry – Conducting trade fairs and exhibitions in India and outside – Assists export firm to participate in international trade fairs and exhibitions.
6. Indian Institute of Foreign Trade – To introduce professionalism in the country’s foreign trade management – They provide training in international trade, conducting researches, analyzing data connected with international trade and investment.
7. Indian Institute of Packaging (IIP) – A training cum research centre for packaging and testing.
8. State Trading Corporation (STC) – To stimulate export trade of domestic firms in State level.
International Trade Institutions and Trade Agreements
1. International Bank for Reconstruction and Development – IBRD also known as World Bank – Established in 1944 at Washigton DC – To finance the reconstruction efforts of war-torn European nations after World War II – Now-a-days they provide developmental loans to underdeveloped nations – providing loans to governments for agriculture, irrigation etc.
2. International Monetary Fund – IMF – 1945 – To promote international monetary cooperation, exchange rate stability, financial stability, facilitate international trade, promote employment and sustainable economic development and to reduce poverty all over the world.
Objectives of IMF
a) To promote international monetary cooperation.
b) To facilitate balanced growth of international trade.
c) To maintain high level of employment and income.
d) To promote exchange stability among member countries.
Functions of IMF
a) Acting as a short term credit institution.
b) Acting as a reservoir of the currencies of all the member countries. c) Acting as a lending institution of foreign currency.
d) Determining the value of a country’s currency.
e) Acting as an agency for international consultations.
3. World Trade Organization – WTO – 1995 – it was established to transform the GATT (General Agreement on Tariffs and Trade) into a permanent institution – Permanent body to look after multilateral trade relations between different nations.
General Agreement on Tariffs and Trade – GATT – arrangement to liberalize international trade from high tariff and restrictions – GATT was signed in 1948 and lasted till 1994 – It was replaced by WTO in 1995.
Objectives of WTO
a) To ensure reduction of tariffs and other trade barriers imposed by different countries.
b) To facilitate higher production and trade.
c) To facilitate the optimal use of world’s resources for sustainable development. d) To promote an integrated, more viable and durable trading system.
Functions of WTO
a) Mitigating grievances of member countries.
b) Laying down a commonly accepted code of conduct in international trade relations. c) Acting as a dispute settlement body.
d) Ensures that all rules and regulations in the Act as followed by member countries. e) Consultation with IMF and World Bank for global economic policy making. f) Act as a supervising agency on Trade Related Intellectual Property Rights (TRIPS).
Benefits of WTO
a) Helps in promoting international peace and facilitates international business. b) Settling disputes among member nations with mutual consultation. c) Smooth international trade and relations ensured.
d) Free trade improves the standard of living by increasing income level. e) Provided scope for getting varieties of qualitative products.
f) Achieved economic growth globally.
g) Ensured a good environment for free trade.