Big picture
International business means business activities that cross national borders: trade in goods and services, licensing, franchising and investment. It exists because countries differ in natural resources, labour costs and skills, so each gains by specialising and trading.
International business is more complex than domestic business: there are different currencies, laws, languages and much longer distances. That is why exporters and importers follow defined procedures and use specific documents. Exam questions often test the mode of entry, a step in the procedure, or the name and purpose of a document.
Learning goals
Explain international business and how it differs from domestic business.
Explain the scope and benefits of international business.
Explain the modes of entry into international business, with merits and limitations.
Explain the export and import procedures and the key documents.
Explain export promotion measures and organisations.
Explain the objectives and functions of the WTO.
Core ideas
1. International business and domestic business
International trade means the exchange of goods and services across borders. International business is wider: it also includes licensing, franchising and foreign investment.
Basis | Domestic business | International business |
|---|---|---|
Nationality of buyers and sellers | Same country | Different countries |
Mobility of factors of production | Relatively free | Restricted across borders |
Currency | Single national currency | Several currencies; exchange rate risk |
Laws and regulations | One set of laws | Laws of several countries, plus trade restrictions |
Market | Relatively homogeneous | Different tastes, languages and practices |
Risk | Lower | Higher (political, exchange rate, transport) |
2. Scope of international business
Merchandise exports and imports: trade in tangible goods.
Service exports and imports: trade in services such as software, tourism, transport, banking and insurance (invisible trade).
Licensing and franchising: allowing a foreign firm to use patents, trademarks, technology or a business format for a fee or royalty.
Foreign direct investment (FDI): investing directly in plant and machinery abroad, with control over the business.
Foreign portfolio investment (FPI): buying shares and bonds of foreign companies, without control.
3. Benefits of international business
To nations: earning foreign exchange; more efficient use of resources (producing what a country is best at); improving growth prospects and employment; increased standard of living (access to goods not produced at home).
To firms: prospects for higher profits; better use of excess production capacity; a way out of intense domestic competition; improved business vision and growth.
4. Modes of entry into international business
Mode | Meaning | Merits | Limitations |
|---|---|---|---|
Exporting and importing | Selling goods to, or buying from, a foreign country, directly or through intermediaries | Easiest and least risky way; low investment | Transport costs, trade barriers and less control over foreign marketing |
Contract manufacturing (outsourcing) | A firm contracts a local manufacturer in a foreign country to make goods to its specifications | Production without heavy investment in factories; lower cost; less risk | Local firm may not maintain quality; less control over production |
Licensing | A firm (licensor) allows a foreign firm (licensee) to use its patent, trademark or technology for a royalty | Low investment and risk; licensee bears costs of entry | Licensee may become a competitor; trade secrets may leak; limited income |
Franchising | Like licensing, but for services: the franchisor allows the franchisee to use its business model, brand and systems for a fee | Rapid expansion with little investment; local knowledge of franchisee | Less control; franchisee may damage the brand; profits shared |
Joint venture | Two or more firms from different countries jointly own a new business | Shares cost and risk; access to local knowledge and distribution | Conflict between partners; shared control and profits |
Wholly owned subsidiary | The parent firm owns 100% of a foreign company, set up new or acquired | Full control over operations and technology; all profits retained | Very high investment and risk; only large firms can afford it |
Examples: a fast-food chain operating abroad through local franchisees (franchising); an Indian pharmaceutical company licensing its formula to a foreign maker (licensing); a global phone brand having its handsets made by a contract manufacturer in India (contract manufacturing).
5. Export procedure
Receipt of enquiry and sending quotations: the foreign buyer enquires; the exporter replies with a proforma invoice giving price, quality, terms of delivery and payment.
Receipt of order (indent) from the importer.
Assessing the importer's creditworthiness and securing a guarantee for payment: the exporter asks for a letter of credit (L/C), a guarantee by the importer's bank to pay the exporter on presentation of documents.
Obtaining export licence: the exporter needs an Import Export Code (IEC) from the Directorate General of Foreign Trade and must register with the relevant Export Promotion Council (registration-cum-membership certificate).
Obtaining pre-shipment finance (packing credit) from a bank to buy materials and make the goods.
Production or procurement of goods.
Pre-shipment inspection, where required, to ensure quality.
Obtaining certificate of origin, which states the country where the goods were produced, so the importer can claim any tariff concessions.
Reservation of shipping space by applying to the shipping company; the company issues a shipping order.
Packing and forwarding to the port.
Insurance of goods against risks of sea voyage (marine insurance).
Customs clearance: the exporter (or clearing agent) files a shipping bill, the main document on the basis of which customs grants export permission.
Obtaining mate's receipt: the captain (mate) of the ship issues a receipt for goods loaded on board.
Payment of freight and issuance of bill of lading: the shipping company issues a bill of lading, a document of title to the goods, after receiving freight. (For air cargo, an airway bill.)
Preparation of invoice stating the details of goods and amount due.
Securing payment: the exporter sends documents (bill of lading, invoice, insurance policy, certificate of origin) through its bank to the importer's bank; payment is made under the letter of credit or on acceptance of a bill of exchange.
6. Import procedure
Trade enquiry: the importer contacts exporters and receives a quotation (proforma invoice).
Procurement of import licence: the importer needs an IEC number; some goods need a specific licence.
Obtaining foreign exchange: the importer applies to a bank authorised to deal in foreign exchange.
Placing the order (indent) with the exporter.
Obtaining a letter of credit from the importer's bank in favour of the exporter.
Arranging for finance to pay for the goods.
Receipt of shipment advice from the exporter with details of the goods shipped.
Retirement of import documents: the importer pays (or accepts a bill of exchange) to the bank and collects the documents, including the bill of lading.
Arrival of goods at the port; the importer is informed.
Customs clearance and release of goods: the importer files a bill of entry, pays import duty, and the goods are released after customs examination.
7. Key documents
Document | Purpose |
|---|---|
Proforma invoice | A quotation giving details of goods, price and terms, sent before the order |
Letter of credit | Guarantee by the importer's bank to pay the exporter, on presentation of documents |
Import Export Code (IEC) | Registration number needed to export or import |
Shipping bill | Main document for customs to permit export |
Mate's receipt | Receipt by the ship's captain for goods loaded on the ship |
Bill of lading | Issued by the shipping company; a receipt for goods and a document of title, transferable by endorsement |
Airway bill | The air transport equivalent of a bill of lading |
Certificate of origin | Certifies the country where the goods were produced |
Bill of entry | Filed by the importer for customs clearance and assessment of import duty |
Dock challan | For payment of dock dues on goods at the port |
8. Export promotion
Measures and schemes
Duty drawback: refund of customs and other duties paid on inputs used in exported goods.
Export Promotion Capital Goods (EPCG) scheme: import of capital goods at reduced duty, subject to export obligations.
Export processing zones and Special Economic Zones (SEZs): industrial areas with special facilities and tax benefits to promote exports.
Export-oriented units (EOUs): units that export all or most of their output, with special concessions.
Export finance: pre-shipment (packing credit) and post-shipment finance at concessional rates.
Tax concessions on export earnings, under schemes notified from time to time.
Organisations
Organisation | Role |
|---|---|
Department of Commerce | Frames trade policy and promotes exports |
Export Promotion Councils (EPCs) | Promote exports of specific products, such as engineering goods or textiles |
Commodity Boards | Promote production and export of specific commodities, such as the Tea Board, Coffee Board and Spices Board |
Indian Institute of Foreign Trade (IIFT) | Trains personnel in international trade and does research |
India Trade Promotion Organisation (ITPO) | Organises trade fairs and exhibitions in India and abroad |
Export Credit Guarantee Corporation (ECGC) | Insures exporters against the risk of non-payment by foreign buyers |
9. World Trade Organization (WTO)
The WTO was established on 1 January 1995, replacing the General Agreement on Tariffs and Trade (GATT). Its headquarters is in Geneva; India is a founding member.
Objectives: raise standards of living and incomes; ensure full employment; expand production and trade; make optimal use of the world's resources; and promote sustainable development.
Functions: promoting an environment that encourages members to reduce tariff and non-tariff barriers; acting as a forum for trade negotiations; settling trade disputes between members; administering trade agreements; reviewing members' trade policies; and cooperating with the IMF and World Bank for global economic policy.
A reliable approach to case-based questions
Identify the mode of entry from the arrangement: making goods abroad through a local firm (contract manufacturing), allowing use of a patent (licensing), allowing use of a business model (franchising), jointly owned new firm (joint venture), 100% owned foreign firm (wholly owned subsidiary).
Identify the document from its use: guarantee of payment (letter of credit), title to goods (bill of lading), customs clearance for export (shipping bill), customs clearance for import (bill of entry), proof of loading (mate's receipt).
Arrange procedure steps in order when asked.
Connections that matter
Business services: marine insurance, banking and bonded warehouses support international trade.
Public, private and global enterprises covers MNCs and joint ventures.
Class 12 economics: balance of payments records exports, imports and capital flows.
Common mistakes
Confusing licensing and franchising. Licensing usually covers products, patents and technology; franchising covers a whole business model, especially services.
Calling a shipping bill a bill of lading. The shipping bill is for customs; the bill of lading is issued by the shipping company as a document of title.
Saying the importer files a shipping bill. The importer files a bill of entry.
Saying the WTO replaced the IMF. It replaced GATT.
Revision checklist
I can distinguish international and domestic business and explain the scope and benefits of international business.
I can explain each mode of entry with its merits and limitations.
I can list the export and import procedures in order.
I can explain the purpose of each key document.
I can explain export promotion measures and organisations, and the WTO.