International Business

Chapter 11: International Business

11.1 Introduction

Countries globally are undergoing fundamental changes in production and marketing approaches. Economies that previously aimed for self-reliance are increasingly dependent on external sources for both supply and demand of goods and services. This shift is driven by factors such as advancements in communication, technology, and infrastructure. The rise of new communication methods and efficient transportation has led to closer interactions among previously isolated nations.

• The World Trade Organisation (WTO) has been pivotal in promoting international trade and reforms among various countries, reducing barriers to cross-border movements of goods and people.

• National economies are evolving towards a borderless world, resulting in enhanced interactions that contribute to the phenomenon of a ‘global village.’

• The expansion of international business is opening opportunities for growth and profit for firms, with India recently accelerating its integration with the world economy.

11.1.1 Meaning of International Business

• Domestic Business: Conducted within a nation’s geographical boundaries; also known as internal or home trade.

• International Business: Activities beyond national borders, including the exchange of goods, services, capital, and technology.

  • It encompasses both international trade in goods and services and foreign production of goods and services. Importantly, international business extends beyond mere trade, encompassing:

  • Trade in services such as tourism, transportation, banking, etc.

  • Foreign investments and overseas production.

  • Definition: International business involves activities that take place across national frontiers, integrating trade and production across borders.

11.1.2 Reason for International Business

• Unequal Resource Distribution: Countries cannot produce all required goods efficiently due to unequal distribution of natural resources and varying productivity levels.

• Factors of production vary among nations:

  • Labour productivity: Reflects socio-economic, geographical, and political conditions, affecting production costs.

  • Advantageous Production: Certain countries can produce specific goods at better quality or lower costs, leading others to procure those goods through trade.

  • Countries engage in international business to focus on producing select goods effectively while trading for the rest.

11.1.3 International Business vs. Domestic Business

Conducting international business is inherently more complex due to varied socio-political and economic contexts:

• Key Differences:

  • Nationality of participants: In domestic business, buyers and sellers belong to the same country, leading to greater commonality in understanding and practices.

  • Mobility of Production Factors: Less freedom for labour and capital to move across borders compared to within a country. Movement is restricted due to legal and socio-cultural barriers.

  • Customer Diversity: Variations in tastes, cultures, and purchasing behaviors complicate product strategy. For example, consumer preferences for cars differ (right-hand in India vs. left-hand in the US).

  • Business Systems: Social and economic disparities lead to different business practices across countries, requiring adaptation in strategy for international firms.

  • Political Risks: Political environments and risks vary significantly, necessitating firms to continuously monitor changes and adapt their strategies.

  • Regulatory Complexity: International operations face varying laws, tariffs, and policies, complicating their business operations.

  • Currency Fluctuation: The use of multiple currencies introduces risks associated with exchange rate volatility in international business.

11.1.4 Scope of International Business

International business encompasses a wide variety of operations:

• Merchandise Transactions: Involves tangible goods; exports mean sending goods abroad, while imports refer to bringing goods into one’s country.

• Service Transactions: Involves intangibles, termed invisible trade, encompassing services like tourism, transportation, and finance.

• Licensing and Franchising: Allows foreign firms to produce and sell under trademark or proprietary rights for fees.

• Foreign Investment: Includes both direct investments (when firms acquire properties or establish operations in foreign countries) and portfolio investments (investing in foreign securities without direct involvement in operations).

Major Difference between Domestic and International Business

11.1.5 Benefits of International Business

International business provides numerous benefits to both countries and firms:

Benefits to Countries

1. Earning Foreign Exchange: International business enables a country to acquire resources unavailable domestically, thus facilitating imports of crucial goods.

2. Efficient Resource Use: Encourages countries to specialize in producing goods most effectively, optimizing resource distribution globally.

3. Growth and Employment: Moving beyond domestic markets to international ones can significantly expand growth and job creation, as seen in countries like Singapore and South Korea.

4. Higher Standard of Living: International trade fosters consumption of diverse goods, improving living standards across nations.

Benefits to Firms

1. Higher Profit Potential: Firms can tap into foreign markets where products may command higher prices, leading to increased profitability.

2. Utilization of Capacity: Firms can leverage excess production capacity by selling in international markets, which helps achieve economies of scale.

3. Enhanced Growth Prospects: Firms can overcome saturation in domestic markets by exploring international opportunities, sustaining growth.

4. Competitive Escape: Internationalization can be a strategic move to circumvent intense domestic competition, driving growth.

5. Improved Vision and Strategy: Expanding internationally can enhance a firm’s outlook, competitiveness, and strategic positioning within the global market.

11.2 Modes of Entry into International Business

• The term mode refers to the method through which a company enters international business. Understanding the various modes is crucial for firms to select the most appropriate strategy.

11.2.1 Exporting and Importing

Exporting involves sending goods/services to a foreign country, while importing refers to the receipt of foreign products.

• Direct vs. Indirect Export/Import:

  • Direct: The firm personally handles all export/import tasks.

  • Indirect: Relies on intermediaries, minimizing direct engagement in foreign markets.

Advantages:

• Easier access to international markets compared to other methods.

• Requires lower initial investment.

• Risks associated with foreign investments are minimized.

Limitations:

• Incur additional costs due to shipping and customs charges.

• Exporting may be hindered by import restrictions
  dominating foreign markets without local insights.

11.2.2 Contract Manufacturing

Contract manufacturing allows a firm to produce goods through local manufacturers under their specifications without investing significantly.

• Form Types:

  • Production of components.

  • Assembly of components into final products.

  • Complete manufacturing.

Advantages:

• Access to existing production facilities without upfront investments.

• Significant cost savings can be gained if located in regions with low labor/material costs.

Limitations:

• Risk of not adhering to quality standards.

• Contractual restrictions can limit local producers' market flexibility.

11.2.3 Licensing and Franchising

Licensing allows a firm to permit use of its patents, trademarks, or technology to another for a fee.

• Franchising is similar but primarily applies to services, with stricter operational guidelines.

Advantages:

• Low investment and risk for licensors.

• Local knowledge capitalizes on market opportunities effectively.

Limitations:

• Risk of competition from licensees/franchisees once they gain expertise.

• Potential breaches of confidentiality regarding proprietary information.

11.2.4 Joint Ventures

Joint ventures involve two or more firms creating a new entity together.

• This may happen through local investments, purchasing interests in local firms, or creating a new company collaboratively.

Advantages:

• Financial burdens are shared, reducing risks for individual firms.

• Combines local market knowledge with foreign advantages.

Limitations:

• Possibility of conflicting interests resulting in operational disputes.

11.2.5 Wholly Owned Subsidiaries

A wholly owned subsidiary allows firms to maintain full control over overseas operations by investing 100% in foreign ventures.

• Established either through creating a new entity or acquiring existing firms.

Advantages:

• Complete operational control with protection of proprietary information.

Limitations:

• Requires significant financial investment, unsuitable for smaller firms.

• Exposure to higher political and operational risks.

11.3 Export-Import Procedures and Documentation

Engaging in international trade entails several formalities far beyond domestic contexts:

11.3.1 Export Procedure

1. Receipt of enquiry: Exporters receive inquiries and respond with quotations (proforma invoices).

2. Order Receipt: When acceptable, buyers will place orders known as indents.

3. Credit assessment: Evaluating the creditworthiness of the importer is crucial for payment guarantees.

4. Export Licensing: Compliance with export regulations includes obtaining necessary licenses.

5. Pre-shipment finance: Securing funds for production is crucial.

6. Goods Preparation: Goods are produced or procured based on the received orders.

7. Inspection Compliance: Certain goods may require quality inspection.

8. Excise Clearance: Clearances must be obtained from relevant authorities.

9. Reservation of Shipping Space: Shipping orders must be issued, reserving space for the goods.

10. Certificate of Origin: This documentation proves the originating country of goods and may include tariffs exemptions.

11. Packing and Forwarding: Goods must be packed accordingly for shipment.

12. Insurance: Policies must secure shipped goods from possible losses.

13. Customs Clearance: Essential documentation must be prepared for customs approval.

14. Mates Receipt: Confirmation of cargo loaded on board.

15. Freight Payment: Issuance of the bill of lading subsequent to payment.

16. Invoice Preparation: Comprehensive detailing of goods and charges.

17. Payment Security: Ensuring payment through negotiation of documentation and letters of credit.

11.3.2 Import Procedure

1. Trade Enquiry: Initial information gathering regarding product suppliers.

2. Import License Procurement: Understanding licensing needs and obtaining necessary licenses.

3. Placing Orders: Detailed orders specifying quantities and prices must be coordinated with suppliers.

4. Forex Requirements: Foreign exchange is necessary for payments in imports based on domestic regulations.

5. Document Retirement: Overseeing necessary documentation for smooth transaction transitions.

6. Arrival Notification: Shipment advisories must be communicated effectively upon arrival at dock.

7. Customs Clearance: Clearing goods through customs involves formal documents for inspections and approvals.

Major Documents in Export Transactions

• Export Invoice: A detailed bill specifically for goods being exported.

• Packing List: Indicates details of packaging and counts.

• Certificate of Origin: Verifies the originating country for trade benefits.

• Bill of Lading: A receipt issued by the carrier for goods onboard, includes terms of transport.

• Letter of Credit: A bank's guarantee for payment, essential in international transactions.

Major Documents in Import Transactions

• Import General Manifest: Contains details for unloading cargo.

• Bill of Entry: Custom’s formal documentation required for customs approval.

• Import License: Required permission depending on the nature of goods imported.

Key Terms

• International business, international trade, merchandise trade, foreign investment, exporting, importing, contract manufacturing, licensing, franchising, joint ventures, wholly-owned subsidiaries, proforma invoice, export license, IEC number, pre-shipment finance, customs clearance, letter of credit, bill of lading, bill of exchange.

• The World Trade Organisation (WTO) has been pivotal in promoting international trade and reforms among various countries, reducing barriers to cross-border movements of goods and people.

• Major functions of the WTO include:

  • Promoting an environment that encourages member countries to approach the WTO to mitigate their grievances.

  • Laying down a commonly accepted code of conduct to reduce trade barriers, including tariffs, and eliminating discriminations in international trade relations.

  • Acting as a dispute settlement body.

  • Ensuring that all rules and regulations prescribed are duly followed by member countries for settling their disputes.

  • Holding consultations with the IMF and IBRD and its affiliated agencies to foster better understanding and cooperation in global economic policy-making.

  • Supervising the operations of revised agreements and ministerial declarations related to goods, services, and Trade Related Intellectual Property Rights (TRIPS).

1. Receipt of enquiry: Exporters receive inquiries and respond with quotations (proforma invoices).

2. Order Receipt: When acceptable, buyers will place orders known as indents.

3. Credit assessment: Evaluating the creditworthiness of the importer is crucial for payment guarantees.

4. Export Licensing: Compliance with export regulations includes obtaining necessary licenses.

5. Pre-shipment finance: Securing funds for production is crucial.

6. Goods Preparation: Goods are produced or procured based on the received orders.

7. Inspection Compliance: Certain goods may require quality inspection.

8. Excise Clearance: Clearances must be obtained from relevant authorities.

9. Certificate of Origin: This documentation proves the originating country of goods and may include tariffs exemptions.

10. Reservation of Shipping Space: Shipping orders must be issued, reserving space for the goods.

11. Packing and Forwarding: Goods must be packed accordingly for shipment.

12. Insurance: Policies must secure shipped goods from possible losses.

13. Customs Clearance: Essential documentation must be prepared for customs approval.

14. Mates Receipt: Confirmation of cargo loaded on board.

15. Freight Payment: Issuance of the bill of lading subsequent to payment.

16. Invoice Preparation: Comprehensive detailing of goods and charges.

17. Payment Security: Ensuring payment through negotiation of documentation and letters of credit.