International Business
Part I: Short Answer Questions
International Trade strictly refers to the cross-border exchange (buying and selling) of physical goods (merchandise). It is a narrower concept.
International Business is a much broader term. It encompasses international trade but also includes the exchange of services, international investments (Foreign Direct Investment and portfolio investments), licensing, franchising, and contract manufacturing across national borders.
- Earning Foreign Exchange: It helps a country earn foreign currency, which can be used to import capital goods, technology, and petroleum products necessary for national development.
- Efficient Resource Utilization: It allows countries to produce goods in which they have a comparative cost advantage, leading to an efficient allocation and utilization of global resources.
- Improved Standard of Living: Consumers get access to a wider variety of high-quality goods and services produced globally, which significantly elevates their standard of living.
The fundamental reason for international trade is the unequal distribution of natural resources and the differences in geographical, climatic, and economic conditions among nations. Because no single country can produce everything it needs efficiently and at a low cost, nations specialize in producing goods where they have a comparative advantage and trade with others for the rest.
Contract Manufacturing: A firm outsources the production of its goods to an independent local manufacturer in a foreign country. It requires minimal investment and carries very low risk, but the firm has limited control over the production process.
Wholly Owned Subsidiary: A firm sets up its own manufacturing facility from scratch in a foreign country, owning 100% of the equity. It requires massive financial investment and carries high political and financial risk, but the parent company retains absolute control over operations and trade secrets.
The government mandates pre-shipment inspection to ensure that only good quality products are exported from the country. Exporting inferior goods damages the image of the exporting country in the global market. Under the Export Quality Control and Inspection Act, authorized agencies inspect the goods and issue an inspection certificate, without which customs clearance is not granted.
- Bill of Lading: It is a vital export document issued by the shipping company. It serves as a receipt acknowledging that the goods have been placed on board the vessel and acts as a contract of carriage between the exporter and the shipping line.
- Bill of Entry: It is an import document filed by the importer with the customs department. It contains details regarding the imported goods, their origin, and their value, and is used to assess and pay the required customs import duties.
A Letter of Credit (L/C) is a guarantee issued by the importer's bank stating that it will honor the payment up to a certain amount to the exporter, provided the goods are shipped as per agreed terms. An exporter needs this document to completely eliminate the risk of non-payment or credit default by an unknown foreign buyer.
Once the goods are shipped, the exporter prepares an invoice and attaches it to the transport documents (Bill of Lading), insurance policy, and a Bill of Exchange. The exporter submits this complete set of documents to their bank. The exporter's bank forwards them to the importer's bank. The importer's bank releases the documents to the importer only after the importer either accepts the Bill of Exchange (promises to pay on a future date) or makes an immediate payment. The collected funds are then transferred back to the exporter's account.
Part II: Long Answer Questions
This statement is entirely accurate. Historically, the term "international trade" was the primary method of doing business across borders, which simply meant the export and import of physical goods.
However, modern International Business is a vastly expanded universe. While it includes international trade, it extends far beyond it to cover:
- Trade in Services: The cross-border exchange of intangibles like banking, tourism, software, and transportation.
- Capital Investments: The movement of capital across nations in the form of Foreign Direct Investment (FDI) and Foreign Institutional Investments (FII).
- Intellectual Property: Utilizing modes like licensing and franchising to allow foreign firms to use patents, trademarks, and copyrights.
- Operational Modes: Engaging in complex arrangements like contract manufacturing, turnkey projects, and joint ventures.
Therefore, international trade is merely one subset of the massive, multifaceted umbrella of international business.
Firms expand beyond domestic borders to secure several strategic and financial advantages:
- Prospects for Higher Profits: International markets often offer higher prices and better profit margins than saturated domestic markets.
- Utilizing Excess Capacity: Firms producing more than the domestic demand can easily sell their surplus inventory in foreign markets, achieving economies of scale and lowering per-unit production costs.
- Way Out of Intense Competition: When domestic markets become highly competitive and stagnant, moving to international markets provides a lifeline for continued revenue growth.
- Improved Business Vision: Operating globally forces companies to upgrade their technology, improve product quality, and adopt global best practices, which enhances their overall competitiveness.
Exporting is generally considered a safer and more practical entry strategy for the following reasons:
- Lower Investment: Exporting requires producing goods in the home country and shipping them. It does not require the massive capital outlay needed to buy land, build factories, and hire foreign labor for a subsidiary.
- Minimal Risk: Since there is no physical asset investment in the foreign country, the exporter is insulated from foreign political risks, expropriation, or sudden changes in foreign industrial laws.
- Ease of Operation: The firm does not have to deal with the immense complexities of managing a foreign workforce, navigating foreign labor unions, or understanding complex local production regulations.
- High Flexibility: If a particular foreign market becomes unprofitable, an exporting firm can simply redirect its shipments to another country. Shutting down a wholly owned subsidiary is a massive financial and legal ordeal.
To successfully execute this export order, Rekha Garments must follow a systematic procedure:
- Assessing Creditworthiness: Rekha Garments should demand a Letter of Credit from Swift Imports to ensure payment security before beginning production.
- Obtaining Pre-shipment Finance: The firm can approach its bank for working capital finance to procure fabric, tailoring supplies, and pay wages.
- Production and Procurement: The 2000 trousers must be manufactured exactly according to the quality, size, and packaging specifications demanded by the Australian buyer.
- Pre-shipment Inspection: The garments must be inspected by an authorized government agency to secure an inspection certificate ensuring quality standards are met.
- Excise and Customs Clearance: The firm must clear central excise formalities and obtain a shipping bill from customs authorities by submitting the required documentation.
- Reservation of Shipping Space: Rekha Garments will contact a shipping company to book cargo space and obtain a Mate's Receipt once the goods are loaded onto the vessel.
- Bill of Lading & Insurance: The firm will exchange the Mate's Receipt for a Bill of Lading from the shipping company and insure the cargo against transit risks.
- Securing Payment: Finally, Rekha Garments will send the invoice, Bill of Lading, Certificate of Origin, and Letter of Credit to Swift Imports through banking channels to receive the final payment.
The procedure for importing capital goods like textile machinery involves strict regulatory and financial steps:
- Trade Inquiry: Send an inquiry to Canadian machinery suppliers to get a proforma invoice detailing the price, weight, and delivery terms.
- Procurement of Import License: Since it is heavy machinery, verify the Export-Import (EXIM) policy to see if a specific import license is required from the Directorate General of Foreign Trade (DGFT).
- Obtaining Foreign Exchange: Apply to the Reserve Bank of India (RBI) through an authorized bank to sanction the required Canadian Dollars for payment.
- Placing the Order (Indent): Send the final purchase order (indent) to the Canadian supplier containing specific instructions regarding machinery specifications, packaging, and shipping marks.
- Arranging Letter of Credit: Instruct the bank to issue a Letter of Credit in favor of the Canadian supplier to guarantee payment upon shipment.
- Receipt of Shipment Advice: Once shipped, the Canadian supplier will send an advice containing the vessel name, date, and Bill of Lading number.
- Retirement of Import Documents: Upon arrival of the documents at the bank, pay the bill of exchange to take physical possession of the Bill of Lading and other commercial documents.
- Customs Clearance: File a Bill of Entry, pay the assessed customs import duties, and hire a clearing and forwarding (C&F) agent to release the machinery from the port.
The International Monetary Fund (IMF) is an international financial institution established in 1945, headquartered in Washington, D.C. It acts as the central institution of the international monetary system.
Key Objectives:- To promote international monetary cooperation through a permanent institution.
- To facilitate the balanced expansion of international trade, contributing to high employment and real income.
- To promote exchange rate stability and avoid competitive exchange depreciation among member nations.
- Providing Short-Term Credit: It acts as a lending reservoir, providing short-term foreign currency loans to member nations facing severe Balance of Payments (BOP) deficits.
- Exchange Rate Mechanism: It helps establish a multilateral system of payments for current transactions and eliminates foreign exchange restrictions that hamper world trade.
- Consultation and Advice: It acts as a consulting body, offering technical assistance, economic surveillance, and policy advice to help members manage their economies efficiently.
The World Trade Organization (WTO) was established on January 1, 1995, replacing the General Agreement on Tariffs and Trade (GATT). It is the only global international organization dealing with the rules of trade between nations.
Objectives:- To ensure the reduction of tariffs and other trade barriers globally.
- To raise the standard of living, generate full employment, and expand a growing volume of real income and effective demand.
- To ensure that developing countries secure a better share of growth in international trade.
- To promote sustainable development and protect the environment while expanding trade.
- Ministerial Conference: The highest decision-making body, comprising representatives of all member countries, meeting at least once every two years.
- General Council: The executive body that oversees the day-to-day operations and agreements, also acting as the Dispute Settlement Body and Trade Policy Review Body.
- Secretariat: Headed by the Director-General, providing administrative and technical support.
- Administering Agreements: It facilitates the implementation, administration, and operation of multilateral trade agreements.
- Forum for Negotiations: It provides a permanent platform for member nations to negotiate further trade liberalization and resolve trade conflicts.
- Dispute Settlement: It utilizes a robust, rule-based mechanism to settle trade disputes between member nations peacefully, preventing unilateral trade wars.
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