International Business

INTERNATIONAL BUSINESS
❖ International Business
International business refers to the trade in goods and services along with the exchange of
capital, technology, skills and patents that takes place across national boundaries.

❖ Scope of International Business

Component of international business Meaning

Merchandise exports and imports Trade in tangible commodities
Service exports and imports (invisible trade) Trade in intangible commodities
Allowing a foreign company to produce and
Licensing and franchising sell goods using the logos and trademarks of
the domestic company in return for a fee
Investments that are made outside a country
Foreign investment
with the objective of earning returns

❖ International Trade
➢ Meaning
International trade refers to only the exchange of goods and services across the boundaries
of countries.

➢ Characteristics of international trade

i. There must be an involvement of at least two countries between which the exchange of
goods and services takes place.
ii. International trade involves payment being made and received in terms of foreign
currency.
iii. It is usually a time-consuming process because of such factors as wide geographical
distances, procedural formalities and barriers to trade.
iv. A large set of legal formalities and restrictions, such as import licence and export
clearance, must be completed before international trade can begin.
v. International trade is exposed to various types of risks, such as risk of loss of goods
during transit, fluctuations in prices of goods and fluctuations in the exchange rate.

❖ Differences between International Trade and International Business

Points of difference International trade International business

Refers to only the Refers to the trade of goods
exchange of goods and and services, along with the
services across the exchange of capital,
Definition
international technology, skills and
boundaries of patents, that takes place
countries. across national boundaries
Wider (as it includes much
Scope Narrower more than international
trade)
Involves the movement of
Involves the movement goods and services,
of finished goods and emigration and immigration
Implications raw material as exports of human capital, and
and imports across exchange of technology,
countries technical know-how,
copyrights and trademarks

➢ Internal trade
Internal trade refers to the trade in goods and services within the national boundaries of a
country.

➢ Differences between internal and external trade

Basis of Difference Internal Trade External Trade

Trade across the
Trade within the national
Meaning national boundaries of
boundaries of a country
a country
Low factor mobility
High factor mobility
Degree of mobility across national
within the country
boundaries
Nature of market Homogeneous Heterogeneous
 Subject to the rules,
Subject to the rules, laws regulations and laws of
Regulations and policies and taxation system of a the countries with
single country which trading takes
place
Currency used Domestic currencies Foreign currencies
National as well as
Only national laws apply
Legal restrictions international laws
to internal trade
apply to external trade
Bill of exchange or
Mode of payment Cash or cheque
through banks
Risk involved Low High

➢ Reasons why countries engage in trade with each other

Countries engage in trade with each other because of the differences in the following
factors.
1. Endowment of resources
2. Availability of different factors of production
3. Productivity of the factors of production
Because of the differences in these factors, countries find it advantageous to produce only
those goods and services that they can most effectively and efficiently produce, and obtain
the rest at a lower cost through trade with other countries.

❖ Advantages of International Trade

➢ Benefits to nation
i. Acts as a source of earning foreign exchange, which can be used for imports
ii. Stimulates production operations, which in turn stimulates employment generation
opportunities
iii. Improves the prospects of growth by producing for international markets and for a
wider consumer base
iv. Enables the availability of a wider variety of goods and services in the country, which in
turn helps to improve the living standards of the people
v. Helps in maintaining price stability through the adjustment of demand and supply
vi. Facilitates efficient use of resources, as international trade is based on the principle of
comparative advantage (i.e., countries produce only those goods and services than can be
produced most efficiently and effectively, and obtain the rest through trade with other
countries)

➢ Benefits to firms
i. Provides opportunities to earn greater profits, by taking advantage of the price
differences between different countries
ii. Improves growth prospects by producing for a larger consumer base
iii. Enables large-scale production, which brings to firms the benefits of economies of scale
and increased capacity utilisation
iv. Serves as a strategy to avoid high domestic competition and earn greater profits
v. Fits into the modern business vision and provides an incentive to diversify products
and to reap the benefits of trading overseas

➢ Disadvantages of international trade

i. Increases the dependence on foreign goods
ii. Leads to the gradual disappearance of the individual cultural identities of nations
iii. Can prove to be a time-consuming process because of such factors as wide
geographical distances, procedural formalities and barriers to trade
iv. Can sometimes threaten domestic industries, particularly infant industries, if the trade
is unrestricted
v. Involves a large set of legal formalities, such as import licence and export clearance,
which must be completed before international trade can begin
vi. Faces lack of mobility of factors of production

➢ Problems of international trade

i. The existence of different currencies in countries creates a hindrance in trade, as one
country’s currency cannot be used in other countries.
ii. International trade involves a host of legal formalities, such as import licence and
export clearance, that must be completed before international trade can begin.
iii. Because of large physical differences, there exist problems in transport of goods across
borders.
iv. International trade can turn out to be a lengthy and time-consuming process.
v. Because of long physical distances that exist between countries, there exists a time
lag between the dispatch of goods and their delivery.
vi. International trade faces hindrances in the mobility of factors of production.

➢ Price quotations in international trade

Type of quotation Meaning

Cost of the goods and all the expenses
F.A.S. (Free Alongside Ship)
involved in transporting the goods
All the expenses including shipment and
F.O.B. (Free on Board) loading costs till the goods are loaded on
the carrier at the port of departure
Cost incurred in transporting the goods to
C&F (Cost and Freight) the port of destination (excluding
insurance charges)
C.I.F. (Cost, Insurance, Freight) C&F plus insurance charges

❖ Export Trade
➢ Meaning
Export trade refers to the selling of goods and services from the producer country (where
the goods are produced or services are offered) to another country.

➢ Objective
i. To sell the surplus produce of a country, thereby enabling its effective utilisation
ii. To enhance mutual cooperation and understanding between countries.
iii. To stimulate production operations and, thereby, generate greater employment
opportunities
iv. To increase the national income by increasing production and employment in the
country

➢ Procedure of export trade

i. Step 1: Receiving the enquiry from the importer asking for such information as price of
goods, quality and conditions for exporting
ii. Step 2: Receiving the indent (i.e., order for goods) from the importer
iii. Step 3: Assessing the credit worthiness of the importer through a letter of credit from
the importer’s bank, guaranteeing to honour a draft of a specified amount drawn on it by
the exporter
iv. Step 4: Obtaining an export licence by registering with the authority concerned
(Directorate General of Foreign Trade) and securing an Importer Exporter Code
v. Step 5: Obtaining pre-shipment finance from a bank in order to purchase raw materials
so as to undertake production and packaging
vi. Step 6: Starting the production of goods
vii. Step 7: Contacting the Export Inspection Agency (EIA) or another designated agency for
the pre-shipment inspection
viii. Step 8: Securing excise clearance by submitting an invoice to the Regional Excise
Commissioner, who, if satisfied, would issue excise clearance to the exporter
ix. Step 9: Obtaining the certificate of origin that allows the importer to claim tariff
concessions and other exemptions, if any
x. Step 10: Reserving shipping space in a vessel
xi. Step 11: Packaging and labelling of the goods with all the necessary information such
as the importer’s name, port of destination, and gross and net weight of the goods
xii. Step 12: Getting the goods insured against the perils of the sea or related risks
xiii. Step 13: Obtaining customs clearance from the customs house before loading the
goods on the ship
xiv. Step 14: Obtaining the mate’s receipt, which provides such details as the name of the
vessel and date of shipment. This serves as evidence that the cargo has been loaded on the
ship.
xv. Step 15: Receiving the bill of lading, which serves as a token of acceptance that the
goods have been put on board the vessel
xvi. Step 16: Preparation of the invoice, which contains such information as the quantity
of goods sent and the amount to be paid by the importer
xvii. Step 17: Securing payment by submitting a set of documents to the banker, which is
to be handed over to the importer on acceptance of a bill of exchange
xviii. Step 18: Receiving the certificate of payment specifying that the payment has been
received in accordance with the exchange control regulations

➢ Documents related to export trade

Document Details
Gives information such as the
quantity of the goods, their total
Export invoice
number and value, marks of
packaging and the name of the ship
Provides information related to the
goods that are packed, such as the
Packing list number of items packed in one
package and details of the goods
contained in one package
Specifies the country in which the
Certificate of origin
goods being exported were
 produced (allows the importer to
claim tariff concessions and
exemptions)
Provides proof that the goods being
Certificate of inspection
exported are of good quality
Is the receipt issued by the captain
or commanding officer of a ship to
Mate’s receipt an exporter as evidence that the
exporter’s cargo has been loaded on
the ship
Forms the basis for obtaining
Shipping bill
customs clearance
Is an undertaking signed by the
Bill of lading shipping company to transfer the
goods to the port of destination
Is issued by an airline as a token of
acceptance that the goods for
Airway bill
export have been put on board its
aircraft
Is a contract by which the insurance
company agrees to pay an exporter
Marine insurance policy a specified amount in case of loss of
goods or damage caused during
transport by sea
Provides information about the
Cart ticket / cart chit / gate pass
exporter’s cargo
Is issued by the bank of an importer
guaranteeing to honour a draft of a
Letter of credit
specified amount drawn on it by the
exporter
Indicates the amount to be paid by
Bill of exchange the importer to the bearer of the
bill
Confirms that the necessary
documents have been presented to
Bank certificate of payment the importer and that payment
from the importer has been
received

❖ Import Trade
➢ Meaning
Import trade refers to the purchase of goods from abroad.

➢ Objective
i. To improve the availability of a variety of goods to consumers, thereby enabling them to
enjoy a higher standard of living
ii. To help meet the consumer demand in the domestic market (the goods that are in
demand but are not easily available in the market because f short supply can be imported
from other countries)
iii. To help maintain price stability by filling the gap between demand and supply
iv. To speed up the production process by enabling the procurement of raw material from
abroad

➢ Procedure of import trade

i. Step 1: Making the trade enquiry with the exporter regarding the price of the goods
required and the terms and conditions on which the exporter is willing to supply the goods
ii. Step 2: Obtaining an import licence
iii. Step 3: Obtaining foreign exchange to make payment to the exporter
iv. Step 4: Placing an order with the exporter specifying the price, quantity and quality of
the goods required
v. Step 5: Obtaining a letter of credit from the bank and sending it to the exporter
vi. Step 6: Arranging for finance to make payment to the exporter on the arrival of the
goods
vii. Step 7: Receiving shipment advice from the exporter (serves as proof of despatch of
the goods)
viii. Step 8: Retirement of import documents that are to be handed over to the exporter’s
banker in exchange for the export documents
ix. Step 9: Obtaining (on the arrival of the goods) an import general manifest from the
person in charge of the carrier (ship or airliner) in which the goods are being imported. It is
on the basis of this document that unloading of the cargo will take place.
x. Step 10: Obtaining customs clearance and release of goods on presenting the delivery
order, a port duty dues receipt and a bill of entry

➢ Documents related to import

Document Detail
Is the document sent by an importer to
an exporter, seeking information
Trade enquiry about the prices of goods and the
terms and conditions for supply of
goods
Contains all the necessary information
about the goods being imported and
Pro forma invoice
also the conditions on which the
exporter will supply those goods
Refers to the order placed with the
exporter stating the quantity of goods
Import order
to be supplied and the expected time
of delivery
Refers to the licence issued by the
government, permitting the importer
Import licence
to bring in goods from outside the
country
Is the document issued by the bank of
the importer guaranteeing to honour a
Letter of credit
draft of a specified amount drawn on it
by the exporter
Refers to the document sent by the
Shipment advice exporter to the importer as proof that
the goods ordered have been shipped
 Is the undertaking signed by the
Bill of lading shipping company to transfer the
goods to the port of destination
Is issued by an airline as a token of
Airway bill acceptance that the goods have been
put on board its aircraft
Refers to the form given by the
customs clearance, which is to be filled
Bill of entry
by the importer at the time of
receiving the imported goods
Indicates the amount to be paid by the
Bill of exchange
importer to the bearer of the bill
Instructs the bank of the exporter to
hand over the documents to the
Sight draft
importer only after the payment has
been received
Instructs the bank of the exporter to
hand over the documents to the
Usance draft
importer after the bill of exchange has
been received
Is issued by the person in charge of the
carrier (ship or airliner) in which the
Import general manifest goods are being imported (on the
basis of which the cargo will be
unloaded)
Contains the dock charges that the
Dock challan importer must pay in order to get
customs clearance

❖ WTO
➢ Features of the WTO (World Trade Organization)
i. Governs trade in goods, services and intellectual property rights among the member
countries
ii. Is a body created by an international treaty with the approval of the governments and
legislatures of the member countries
iii. Takes decisions by consensus with the governments of the member nations.

➢ Structure of the WTO

• On January 1, 1995, GATT (General Agreement on Tariffs and Trade) was
transformed into the WTO to facilitate international trade among the member countries.
• The WTO is a permanent body created by an international treaty and represents the
implementation of the original proposal to form the ITO (International Trade
Organization).
• The WTO was made much more powerful than GATT, by removing tariff and non-tariff
barriers between the member nations.
➢ Objectives of the WTO

i. To reduce tariff and other non-trade barriers imposed by different nations

ii. To ensure sustainable development by optimally using the world’s resources
iii. To develop a more integrated, feasible and stable trading system

➢ Functions of the WTO

i. Providing a platform to the member countries to put forward their grievances
ii. Resolving trade disputes among member nations
iii. Eliminating discriminations in trade relations by laying down a commonly accepted
code of conduct
iv. Creating better understanding between member countries by consulting with the IMF,
World Bank and World Bank affiliates.
v. Ensuring strict adherence to the rules and regulations in the charter by all the
member nations
vi. Regularly supervising the activities and operations of the revised Agreements and
Ministerial Declarations regarding trade in goods, services and intellectual properties

➢ WTO Agreements
i. Agreements Forming Part of GATT: After a substantial modification in 1994, GATT
(General Agreements on Tariffs and Trade) included a range of regulations on foreign trade
that were to be binding on all the member nations.
ii. Agreement on Textile and Clothing (ATC): This agreement was signed to eliminate all
the quota restrictions imposed by the developed countries on the export of textiles and
clothing from the developing countries.
iii. Agreement on Agriculture (AoA): This pact was signed to ensure free and fair trade in
agricultural produce.
iv. General Agreement on Trade in Services (GATS): This agreement lays down the rules
and disciplines for the provision of services internationally.
v. Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS): This
agreement deals with the protection of seven intellectual properties, namely, copyright,
trademarks, geographical indications, industrial designs, patents, layout designs of
integrated circuits and trade secrets.