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  same10. 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.  

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. 

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.