Nternational Usiness: Hapter

Chapter 11
International Business
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
• State the meaning of International Business
• Distinguish between Internal and International Business
• Discuss the scope of International Business
• Enumerate the benefits of International Business
• Discuss the documents required for import and export transactions
• Identify the incentives and schemes available for international firms
• Discuss the role of different organisations for the promotion of

• List the major international institutions and agreements at the global

level for the promotion of international trade and development.
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INTERNATIONAL BUSINESS 253
Mr. Sudhir Manchanda is a small manufacturer of automobile components. His

factory is located in Gurgaon and employs about 55 workers with an investment
of Rs. 9.2 million in plant and machinery. Due to recession in the domestic
market, he foresees prospects of his sales going up in the next few years in the
domestic market. He is exploring the possibility of going international. Some
of his competitors are already in export business. A casual talk with one of his
close friends in the tyre business reveals that there is a substantial market for
automobile components and accessories in South-East Asia and Middle East.
But his friend also tells him, “Doing business internationally is not the same as
carrying out business within the home country. International business is more
complex as one has to operate under market conditions that are different from
those that one faces in domestic business”. Mr. Manchanda is, moreover, not sure
as to how he should go about setting up international business. Should he himself
identify and contact some overseas customers and start exporting directly to them
or else route his products through export houses which specialise in exporting
products made by others?
Mr. Manchanda’s son who has just returned after an MBA in USA suggests that
they should set up a fully owned factory in Bangkok for supplying to customers
in South-East Asia and Middle East. Setting up a manufacturing plant there will
help them save costs of transporting goods from India. This would also help them
coming closer to the overseas customers. Mr. Manchanda is in a fix as to what to
do. In the face of difficulties involved in overseas ventures as pointed out by his
friend, he is wondering about the desirability of entering into global business. He
is also not sure as to what the different ways of entering into international market
are and which one will best suit his purpose.
11.1 Introduction The prime reason behind this

radical change is the development
Countries all over the world are
of communication, technology,
undergoing a fundamental shift in infrastructure etc. Emergence of
the way they produce and market newer modes of communication and
various products and services. The development of faster and more
national economies which so far were efficient means of transportation have
pursuing the goal of self-reliance are brought nations closer to one another.
now becoming increasingly dependent Countries that were cut-off from one
upon others for procuring as well as another due to geographical distances
supplying various kinds of goods and and socio-economic differences have
services. Due to increased cross border now started increasingly interacting
trade and investments, countries are with others. World Trade Organisation
no more isolated. (WTO) and reforms carried out by the
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254 BUSINESS STUDIES
governments of different countries India has been trading with other

have also been a major contributory countries for a long time. But it has
factor to the increased interactions of late considerably speeded up its
and business relations amongst the process of integrating with the world
nations. economy and increasing its foreign
We are today living in a world trade and investments (see Box A:
where the obstacles to cross-border India Embarks on the Path to
movement of goods and persons have Globalisation).
substantially come down. The national
economies are increasingly becoming 11.1.1 Meaning of International
borderless and getting integrated into Business
the world economy. Little wonder
that the world has today come to be Business transaction taking place
known as a ‘global village’. Business in within the geographical boundaries
the present day is no longer restricted of a nation is known as domestic or
to the boundaries of the domestic national business. It is also referred
country. More and more firms are to as internal business or home trade.
making forays into international Manufacturing and trade beyond the
business which presents them with boundaries of one’s own country is
numerous opportunities for growth known as international business.
and increased profits. International or external business can,
Box A
India Embarks on the Path to Globalisation
International business has entered into a new era of reforms. India too did not
remain cut-off from these developments. India was under a severe debt trap and was
facing crippling balance of payment crisis. In 1991, it approached the International
Monetary Fund (IMF) for raising funds to tide over its balance of payment deficits.
IMF agreed to lend money to India subject to the condition that India would undergo
structural changes to be able to ensure repayment of borrowed funds.
India had no alternative but to agree to the proposal. It was the very conditions
imposed by IMF which more or less forced India to liberalise its economic
policies. Since then a fairly large amount of liberalisation at the economic front
has taken place.
Though the process of reforms has somewhat slowed down, India is very much
on the path to globalisation and integrating with the world economy. While, on
the one hand, many multinational corporations (MNCs) have ventured into Indian
market for selling their products and services; many Indian companies too have
stepped out of the country to market their products and services to consumers in
foreign countries.
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therefore, be defined as those business 11.1.2 Reason for International

activities that take place across the Business
national frontiers. It involves not The fundamental reason behind
only the international movements of international business is that the
goods and services, but also of capital, countries cannot produce equally well
personnel, technology and intellectual or cheaply all that they need. This is
property like patents, trademarks, because of the unequal distribution
know-how and copyrights. of natural resources among them
It may be mentioned here that or differences in their productivity
mostly people think of international levels. Availability of various factors
business as international trade. But of production such as labour, capital
this is not true. No doubt international and raw materials that are required for
trade, comprising exports and imports producing different goods and services
of goods, has historically been an differ among nations. Moreover, labour
important component of international productivity and production costs
business. But of late, the scope differ among nations due to various
of international business has socio-economic, geographical and
substantially expanded. International political reasons.
trade in services such as international Due to these differences, it is not
travel and tourism, transportation, uncommon to find one particular
communication, banking, ware- country being in a better position to
housing, distribution and advertising produce better quality products and/
has considerably grown. The other or at lower costs than what other
nations can do. In other words, we
equally important developments are
can say that some countries are in an
increased foreign investments and
advantageous position in producing
overseas production of goods and
select goods and services which
services. Companies have started
other countries cannot produce that
increasingly making investments into effectively and efficiently, and vice-
foreign countries and undertaking versa. As a result, each country finds it
production of goods and services in advantageous to produce those select
foreign countries to come closer to goods and services that it can produce
foreign customers and serve them more effectively and efficiently at
more effectively at lower costs. All these home, and procuring the rest through
activities form part of international trade with other countries which the
business. To conclude, we can say other countries can produce at lower
that international business is a much costs. This is precisely the reason as
broader term and is comprised of both to why countries trade with others
the trade and production of goods and and engage in what is known as
services across frontiers. international business.
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The international business as it firms from engaging in international

exists today is to a great extent the business in a later section.
result of geographical specialisation as
pointed out above. Fundamentally, it 11.1.3 International Business vs.
is for the same reason that domestic Domestic Business
trade between two states or regions
Conducting and managing international
within a country takes place. Most
business operations is more complex
states or regions within a country
than undertaking domestic business.
tend to specialise in the production
Because of variations in political, social,
of goods and services for which they
cultural and economic environments
are best suited. In India, for example,
across countries, business firms find
while West Bengal specialises in jute
it difficult to extend their domestic
products; Mumbai and neighbouring
business strategy to foreign markets.
areas in Maharashtra are more involved
with the production of cotton textiles. To be successful in the overseas
The same principle of territorial markets, they need to adapt their
division of labour is applicable at the product, pricing, promotion and
international level too. Most developing distribution strategies and overall
countries which are labour abundant, business plans to suit the specific
for instance, specialise in producing requirements of the target foreign
and exporting garments. Since they markets (see Box B on Firms need
lack capital and technology, they to be Cognisant of Environmental
import textile machinery from the Differences). Key aspects in respect
developed nations which the latter of which domestic and international
are in a position to produce more businesses differ from each other are
efficiently. discussed below.
What is true for the nation is more (i) Nationality of buyers and sellers:
or less true for firms. Firms too engage Nationality of the key participants (i.e.,
in international business to import buyers and sellers) to the business
what is available at lower prices in deals differs between domestic and
other countries, and export goods to international businesses. In the case
other countries where they can fetch of domestic business, both the buyers
better prices for their products. Besides and sellers are from the same country.
price considerations, there are several This makes it easier for both the parties
other benefits which nations and firms to understand each other and enter
derive from international business. In into business deals. But this is not the
a way, these other benefits too provide case with international business where
an impetus to nations and firms to buyers and sellers come from different
engage in international business. We countries. Because of differences
shall turn our attention to some of in their languages, attitudes, social
these benefits accruing to nations and customs and business goals and
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practices, it becomes relatively more and aspirations of the stakeholders

difficult for them to interact with belonging to different nations.
one another and finalise business (iii) Mobility of factors of production:
transactions. The degree of mobility of factors
(ii) Nationality of other stakeholders: like labour and capital is generally
Domestic and international businesses less between countries than within
also differ in respect of the nationalities a country. While these factors of
of the other stakeholders such as movement can move freely within
employees, suppliers, shareholders/ the country, there exist various
partners and general public who restrictions to their movement across
interact with business firms. While nations. Apart from legal restrictions,
in the case of domestic business all even the variations in socio-cultural
such factors belong to one country, environments, geographic influences
and therefore relatively speaking and economic conditions come in a
depict more consistency in their value big way in their movement across
systems and behaviours; decision countries. This is especially true of
making in international business the labour which finds it difficult to
becomes much more complex as the adjust to the climatic, economic and
concerned business firms have to socio-cultural conditions that differ
take into account a wider set of values from country to country.
Box B
Firms need to be Cognisant of Environmental Differences
It is to be kept in mind that conducting and managing international business is not
an easy venture. It is more difficult to manage international business operations
due to variations in the political, social, cultural and economic environments that
differ from country to country.
Simply being aware of these differences is not sufficient. One also needs to
be sensitive and responsive to these changes by way of introducing adaptations
in their marketing programmes and business strategies. It is, for instance, a well
known fact that because of poor lower per capita income, consumers in most of the
developing African and Asian countries are price sensitive and prefer to buy less
expensive products. But consumers in the developed countries like Japan, United
States, Canada, France, Germany and Switzerland have a marked preference for
high quality and high priced products due to their better ability to pay. Business
prudence, therefore, demands that the firms interested in marketing to these
countries are aware of such differences among the countries, and design their
strategies accordingly. It will be in the fitness of things if the firms interested in
exporting to these countries produce less expensive products for the consumers
in the African and Asian regions, and design and develop high quality products
for consumers in Japan and most of the European and North American countries.
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(iv) Customer heterogeneity across Countries differ from one another

markets: Since buyers in international in terms of their socio-economic
markets hail from different countries, development, availability, cost and
they differ in their socio-cultural efficiency of economic infrastructure
background. Differences in their and market support services, and
tastes, fashions, languages, beliefs business customs and practices due
and customs, attitudes and product to their socio-economic milieu and
preferences cause variations in historical coincidences. All such
not only their demand for different differences make it necessary for
products and services, but also in firms interested in entering into
variations in their communication international markets to adapt
patterns and purchase behaviours. their production, finance, human
It is precisely because of the socio- resource and marketing plans as
cultural differences that while people per the conditions prevailing in the
in China prefer bicycles, the Japanese international markets.
in contrast like to ride bikes. Similarly, (vi) Political system and risks:
while people in India use right-hand Political factors such as the type of
driven cars, Americans drive cars fitted government, political party system,
with steering, brakes, etc., on the left political ideology, political risks, etc.,
side. Moreover, while people in the have a profound impact on business
United States change their TV, bike operations. Since a business person is
and other consumer durables very familiar with the political environment
frequently — within two to three years of his/her country, he/she can well
of their purchase, Indians mostly do understand it and predict its impact
not go in for such replacements until on business operations. But this is not
the products currently with them have the case with international business.
totally worn out. Political environment differs from
Such variations greatly complicate one country to another. One needs
the task of designing products and to make special efforts to understand
evolving strategies appropriate for the differing political environments
customers in different countries. and their business implications.
Though to some extent customers Since political environment keeps
within a country too differ in their on changing, one needs to monitor
tastes and preferences. These political changes on an ongoing
differences become more striking when basis in the concerned countries and
we compare customers across nations. devise strategies to deal with diverse
(v) Differences in business systems political risks.
and practices: The differences in A major problem with a foreign
business systems and practices are country’s political environment is a
considerably much more among tendency among nations to favour
countries than within a country. products and services originating in
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their own countries to those coming international trade. It includes not only
from other countries. While this is not international trade (i.e., export and
a problem for business firms operating import of goods and services), but also
domestically, it quite often becomes a a wide variety of other ways in which
severe problem for the firms interested the firms operate internationally.
in exporting their goods and services to Major forms of business operations
other nations or setting up their plants that constitute international business
in the overseas markets. are as follows.
(vii) Business regulations and (i) Merchandise exports and imports:
policies: Coupled with its socio- Merchandise means goods that are
economic environment and political tangible, i.e., those that can be seen
philosophy, each country evolves and touched. When viewed from
its own set of business laws and this perceptive, it is clear that while
regulations. Though these laws, merchandise exports means sending
regulations and economic policies are tangible goods abroad, merchandise
more or less uniformly applicable within imports means bringing tangible
a country, they differ widely among goods from a foreign country to one’s
nations. Tariff and taxation policies, own country. Merchandise exports
import quota system, subsidies and and imports, also known as trade in
other controls adopted by a nation goods, include only tangible goods and
are not the same as in other countries exclude trade in services.
and often discriminate against foreign (ii) Service exports and imports:
products, services and capital. Service exports and imports involve
(viii) Currency used in business trade in intangibles. It is because
transactions: Another important of the intangible aspect of services
difference between domestic and that trade in services is also known
international business is that the latter as invisible trade. A wide variety of
involves the use of different currencies. services are traded internationally
Since the exchange rate, i.e., the and these include: tourism and
price of one currency expressed in travel, boarding and lodging (hotel
relation to that of another country’s and restaurants), entertainment
currency, keeps on fluctuating, it and recreation, transportation,
adds to the problems of international professional services (such as training,
business firms in fixing prices of their recruitment, consultancy and research),
products and hedging against foreign communication (postal, telephone,
exchange risks. fax, courier and other audio-visual
services), construction and engineering,
11.1.4 Scope of International
marketing (e.g., wholesaling, retailing,
Business
advertising, marketing research
As pointed out earlier, international and warehousing), educational and
business is much broader than financial services (such as banking
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Table 11.1 Major Difference between Domestic

and International Business
Basis Domestic business International business
1. Nationality of People or organisations People or organisations of

buyers and from one nation different countries participate
sellers participate in domestic in international business
business transactions. transactions.
2. Nationality Various other stake- Various other stakeholders such as

of other holders such as suppliers, suppliers, employees, middlemen,
stakeholders employees, middlemen, shareholders and partners are from
shareholders and partners different nations.
are usually citizens of the
same country.
3. Mobility of The degree of mobility The degree of mobility of factors of

factors of of factors of production production like labour and capital
production like labour and capital is across nations is relatively less.
relatively more within a
country.
4. Customer Domestic markets International markets lack

heterogeneity are relatively more homogeneity due to differences in
across markets homogeneous in nature. language, preferences, customs,
etc., across markets.
5. Differences Business systems and Business systems and practices

in business practices are relatively vary considerably across countries.
systems and more homogeneous within
practices a country.
6. Political Domestic business is Different countries have different

system and subject to political system forms of political systems and
risks and risks of one single different degrees of risks which often
country. become a barrier to international
business.
7. Business Domestic business is International business transactions

regulations subject to rules, laws and are subject to rules, laws and
and policies policies, taxation system, policies, tariffs and quotas, etc. of
etc., of a single country. multiple countries.
8. Currency used Currency of domestic International business transactions

in business country is used. involve use of currencies of more
transactions than one country.
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and insurance). Of these, tourism, (iv) Foreign investments: Foreign

transportation and business services investment is another important form
are major constituents of world trade of international business. Foreign
in services (see Box C). investment involves investments
(iii) Licensing and franchising: of funds abroad in exchange for
Permitting another party in a foreign financial return. Foreign investment
country to produce and sell goods can be of two types: direct and portfolio
under your trademarks, patents or copy investments.
rights in lieu of some fee is another way Direct investment takes place
of entering into international business. when a company directly invests
It is under the licensing system that in properties such as plant and
Pepsi and Coca Cola are produced and machinery in foreign countries with a
sold all over the world by local bottlers view to undertaking production and
in foreign countries. Franchising is marketing of goods and services in
similar to licensing, but it is a term those countries. Direct investment
used in connection with the provision provides the investor a controlling
of services. McDonalds, for instance, interest in a foreign company, known
operates fast food restaurants the as Direct Investment, i.e., FDI. It can
world over through its franchising be in the form of joint venture on PPP.
system. A company, if it so desires, can also set
Box C
Tourism, Transportation and Business Services dominate
International Trade in Services
Tourism and transportation have emerged as major components of international
trade in services. Most of the airlines, shipping companies, travel agencies and
hotels get their major share of revenues from their overseas customers and
operations abroad. Several countries have come to heavily depend on services as an
important source of foreign exchange earnings and employment. India, for example,
earns a sizeable amount of foreign exchange from exports of services related to
travel and tourism.
Business services: When one country provides services to other country and in
the process earns foreign exchange, this is also treated as a form of international
business activity. Fee received for services like banking, insurance, rentals,
engineering and management services form part of country’s foreign exchange
earnings. Undertaking of construction projects in foreign countries is also an
example of export of business services. The other examples of such services include
overseas management contracts where arrangements are made by one company of
a country which provides personnel to perform general or specialised management
functions for another company in a foreign country in lieu of the other country.
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up a wholly owned subsidiary abroad capital goods, technology, petroleum

by making 100 per cent investment in products and fertilisers, pharma-
foreign ventures, and thus acquiring ceutical products and a host of other
full control over subsidiary’s operations consumer products which otherwise
in the foreign market. might not be available domestically.
A portfolio investment, on the other (ii) More efficient use of resources:
hand, is an investment that a company As stated earlier, international business
makes into another company by the operates on a simple principle —
way of acquiring shares or providing produce what your country can
loans to the latter, and earns income by produce more efficiently, and trade the
way of dividends or interest on loans. surplus production so generated with
Unlike foreign direct investments, the other countries to procure what they
investor under portfolio investment can produce more efficiently. When
does not get directly involved into countries trade on this principle, they
production and marketing operations. end up producing much more than
It simply earns an income by investing what they can when each of them
in shares, bonds, bills, or notes in a attempts to produce all the goods
foreign country or providing loans to and services on its own. If such an
foreign business firms. enhanced pool of goods and services is
distributed equitably amongst nations,
11.1.5 Benefits of International it benefits all the trading nations.
Business (iii) Improving growth prospects and
employment potentials: Producing
Notwithstanding greater complexities
solely for the purposes of domestic
and risks, international business is
consumption severely restricts
important to both nations and business
a country’s prospects for growth
firms. It offers them several benefits.
and employment. Many countries,
Growing realisation of these benefits
especially the developing ones, could
over time has in fact been a contributory
not execute their plans to produce
factor to the expansion of trade and
on a larger scale, and thus create
investment amongst nations, resulting
employment for people because their
in the phenomenon of globalisation.
domestic market was not large enough
Some of the benefits of international
to absorb all that extra production.
business to the nations and business
Later on a few countries such as
firms are discussed below.
Singapore, South Korea and China
which saw markets for their products
Benefits to Countries
in the foreign countries embarked upon
(i) Earning of foreign exchange: the strategy ‘export and flourish’, and
International business helps a country soon became the star performers on the
to earn foreign exchange which it can world map. This helped them not only
later use for meeting its imports of in improving their growth prospects,
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but also created opportunities for improve prospects of their growth by

employment of people living in these plunging into overseas markets. This is
countries. precisely what has prompted many of
(iv) Increased standard of living: the multinationals from the developed
In the absence of international trade countries to enter into markets of
of goods and services, it would not developing countries. While demand
have been possible for the world in their home countries has got almost
community to consume goods and saturated, they realised their products
services produced in other countries were in demand in the developing
that the people in these countries are countries and demand was picking
able to consume and enjoy a higher up quite fast.
standard of living. (iv) Way out to intense
competition in domestic market:
Benefits to Firms When competition in the
domestic market is very intense,
(i) Prospects for higher profits:
internationalisation seems to be
International business can be more
the only way to achieve significant
profitable than the domestic business.
growth. Highly competitive domestic
When the domestic prices are lower,
market drives many companies to go
business firms can earn more profits
international in search of markets for
by selling their products in countries
their products. International business
where prices are high.
thus acts as a catalyst of growth for
(ii) Increased capacity utilisation:
firms facing tough market conditions
Many firms setup production
on the domestic turf.
capacities for their products which
(v) Improved business vision: The
are in excess of demand in the
growth of international business of
domestic market. By planning overseas
many companies is essentially a part
expansion and procuring orders from
of their business policies or strategic
foreign customers, they can think of
management. The vision to become
making use of their surplus production
international comes from the urge
capacities and also improving the
to grow, the need to become more
profitability of their operations.
competitive, the need to diversify
Production on a larger scale often leads
and to gain strategic advantages of
to economies of scale, which in turn
internationalisation.
lowers production cost and improves
per unit profit margin.
11.2 Modes of Entry into
(iii) Prospects for growth: Business
firms find it quite frustrating when
demand for their products starts Simply speaking, the term mode
getting saturated in the domestic means the manner or way. The phrase
market. Such firms can considerably ‘modes of entry into international
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business’, therefore, means various of overseas customers located in the

ways in which a company can enter home country or wholesale importers
into international business. While in the case of import operations. Such
discussing the meaning and scope firms do not directly deal with overseas
of international business, we have customers in the case of exports and
already familiarised you with some of suppliers in the case of imports.
the modes of entry into international
business. In the following sections, Advantages
we shall discuss in detail important Major advantages of exporting include:
ways of entering into international • As compared to other modes of
business along with their advantages entry, exporting/importing is the
and limitations. Such a discussion easiest way of gaining entry into
will enable you to know as to which international markets. It is less
mode is more suitable under what complex an activity than setting
conditions. up and managing joint-ventures
or wholly owned subsidiaries
11.2.1 Exporting and Importing abroad.
Exporting refers to sending of goods • Exporting/importing is less
and services from the home country involving in the sense that
to a foreign country. In a similar business firms are not required
vein, importing is purchase of foreign to invest that much time and
products and bringing them into money as is needed when they
one’s home country. There are two desire to enter into joint ventures
important ways in which a firm can or set up manufacturing plants
export or import products: direct and and facilities in host countries.
indirect exporting/importing. In the • Since exporting/importing does
case of direct exporting/importing, not require much of investment
a firm itself approaches the overseas in foreign countries, exposure to
buyers/suppliers and looks after all foreign investment risks is nil or
much lower than that is present
the formalities related to exporting/
when firms opt for other modes of
importing activities including those
entry into international business.
related to shipment and financing of
goods and services. Indirect exporting/
Limitations
importing, on the other hand, is one
where the firm’s participation in Major limitations of exporting/
the export/import operations is importing as an entry mode of
minimum, and most of the tasks international business are as follows:
relating to export/import of the goods • Since the goods physically move
are carried out by some middle men from one country to another,
such as export houses or buying offices exporting/importing involves
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additional packaging, trans- Despite the above mentioned

portation and insurance costs. limitations, exporting/importing is
Especially in the case of heavy the most preferred way for business
items, transportation costs alone firms when they are getting initially
become an inhibiting factor to their involved with international business.
exports and imports. On reaching As usually is the case, firms start
the shores of foreign countries, their overseas operations with exports
such products are subject to and imports, and later having gained
custom duty and a variety of familiarity with the foreign market
other levies and charges. Taken operations switch over to other forms
together, all these expenses and of international business operations.
payments substantially increase
product costs and make them less 11.2.2 Contract Manufacturing
competitive.
• Exporting is not a feasible option Contract manufacturing refers to a
when import restrictions exist type of international business where
in a foreign country. In such a a firm enters into a contract with one
situation, firms have no alternative or a few local manufacturers in foreign
but to opt for other entry modes countries to get certain components or
such as licensing/franchising goods produced as per its specifications.
or joint venture which makes Contract manufacturing, also known
it feasible to make the product as outsourcing, can take three major
available by way of producing forms:
and marketing it locally in foreign • Production of certain components
countries. such as automobile components
• Export firms basically operate or shoe uppers to be used later for
from their home country. They producing final products such as
produce in the home country and cars and shoes;
then ship the goods to foreign • Assembly of components into final
countries. Except a few visits products such as assembly of
made by the executives of export hard disk, mother board, floppy
firms to foreign countries to disk drive and modem chip into
promote their products, the export computers; and
firms in general do not have much • Complete manufacture of the
contact with the foreign markets. products such as garments.
This puts the export firms in The goods are produced or assembled
a disadvan-tageous position vis- by the local manufacturers as per the
à-vis the local firms which are technology and management guidance
very near the customers and are provided to them by the foreign
able to better understand and company. The goods so manufactured
serve them. or assembled by the local producers
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are delivered to the international any idle production capacities,

firm for use in its final products or manufacturing jobs obtained on
out rightly sold as finished products contract basis in a way provide a
by the international firm under its ready market for their products
brand names in various countries and ensure greater utilisation of
including the home, host and other their production capacities. This is
countries. All the major international how the Godrej group is benefitting
companies such as Nike, Reebok, from contract manufacturing
Levis and Wrangler today get their in India. It is manufacturing
products or components produced soaps under contract for many
in the developing countries under multinationals including Dettol
contract manufacturing. soap for Reckitt and Colman.
This has considerably helped it
Advantages
in making use of its excess soap
Contract manufacturing offers several manufacturing capacity.
advantages to both the international • The local manufacturer also gets
company and local producers in the the opportunity to get involved
foreign countries. with international business and
• Contract manufacturing permits avail incentives, if any, available
the international firms to get the to the export firms in case the
goods produced on a large scale international firm desires goods so
without requiring investment in produced be delivered to its home
setting up production facilities. country or to some other foreign
These firms make use of the countries.
production facilities already
existing in the foreign countries. Limitations
• Since there is no or little investment The major disadvantages of contract
in the foreign countries, there manufacturing to international firm
is hardly any investment risk and local producer in foreign countries
involved in the foreign countries. are as follows:
• Contract manufacturing also gives • Local firms might not adhere to
an advantage to the international production design and quality
company of getting products standards, thus causing serious
manufactured or assembled at product quality problems to the
lower costs especially if the local international firm.
producers happen to be situated • Local manufacturer in the foreign
in countries which have lower country loses his control over the
material and labour costs. manufacturing process because
• L o c a l p r o d u c e r s i n f o r e i g n goods are produced strictly as per
countries also gain from contract the terms and specifications of the
manufacturing. If they have contract.
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• The local firm producing under licensing. Franchisers usually set

contract manufacturing is not strict rules and regulations as to how
free to sell the contracted output the franchisees should operate while
as per its will. It has to sell running their business. Barring these
the goods to the international two differences, franchising is pretty
company at predetermined prices. much the same as licensing. Like in
This results in lower profits for the case of licensing, a franchising
the local firm if the open market agreement too involves grant of rights
prices for such goods happen to by one party to another for use of
be higher than the prices agreed technology, trademark and patents
upon under the contract. in return of the agreed payment for
a certain period of time. The parent
11.2.3 Licensing and Franchising company is called the franchiser and
Licensing is a contractual arrangement the other party to the agreement is
in which one firm grants access to its called franchisee. The franchiser
patents, trade secrets or technology to can be any service provider be it a
another firm in a foreign country for a restaurant, hotel, travel agency, bank
fee called royalty. The firm that grants wholesaler or even a retailer - who
such permission to the other firm is has developed a unique technique for
known as licensor and the other firm in creating and marketing of services
the foreign country that acquires such under its own name and trade mark. It
rights to use technology or patents is is the uniqueness of the technique that
called the licensee. It may be mentioned gives the franchiser an edge over its
here that it is not only technology that competitors in the field, and makes the
is licensed. In the fashion industry, a would-be-service providers interested
number of designers license the use in joining the franchising system.
of their names. In some cases, there McDonald, Pizza Hut and Wal-Mart
is exchange of technology between the are examples of some of the leading
two firms. Sometimes there is mutual franchisers operating worldwide.
exchange of knowledge, technology
Advantages
and/or patents between the firms
which is known as cross-licensing. As compared to joint ventures and
Franchising is a term very similar wholly owned subsidiaries, licensing/
to licensing. One major distinction franchising is relatively a much easier
between the two is that while the mode of entering into foreign markets
former is used in connection with with proven product/technology
production and marketing of goods, without much business risks and
the term franchising applies to service investments. Some of the specific
business. The other point of difference advantages of licensing are as follows:
between the two is that franchising • Under the licensing/franchising
is relatively more stringent than system, it is the licensor/
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franchiser who sets up the and brand names in foreign

business unit and invests his/her countries. As a result, other firms
own money in the business. As in the foreign market cannot
such, the licensor/franchiser has make use of such trademarks and
to virtually make no investments patents.
abroad. Licensing/franchising
is, therefore, considered a less Limitations
expensive mode of entering into
Licensing/franchising as a mode of
international business.
• Since no or very little foreign international business suffers from the
investment is involved, licensor/ following weaknesses.
franchiser is not a party to the • When a licensee/franchisee
losses, if any, that occur to foreign becomes skilled in the manu-
business. Licensor/franchiser is facture and marketing of the
paid by the licensee/franchisee by licensed/franchised products,
way of fees fixed in advance as a there is a danger that the licensee
percentage of production or sales can start marketing an identical
turnover. This royalty or fee keeps product under a slightly different
accruing to the licensor/franchiser brand name. This can cause
so long as the production and severe competition to the licenser/
sales keep on taking place in the franchiser.
licensee’s/franchisee’s business • If not maintained properly, trade
unit. secrets can get divulged to others
• Since the business in the foreign in the foreign markets. Such
country is managed by the lapses on the part of the licensee/
licensee/franchisee who is a local franchisee can cause severe
person, there are lower risks of losses to the licensor/franchiser.
business takeovers or government • Over time, conflicts often develop
interventions. between the licensor/franchiser
• Licensee/franchisee being a and licensee/franchisee over
local person has greater market issues such as maintenance of
knowledge and contacts accounts, payment of royalty and
which can prove quite helpful non-adherence to norms relating
to the licensor/franchiser in to production of quality products.
successfully conducting its These differences often result in
marketing operations.
costly litigations, causing harm to
• As per the terms of the licensing/
both the parties.
franchising agreement, only the
parties to the licensing/franchising
11.2.4 Joint Ventures
agreement are legally entitled
to make use of the licensor’s/ Joint venture is a very common
franchiser’s copyrights, patents strategy for entering into foreign
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markets. A joint venture means local partner under joint venture

establishing a firm that is jointly agreements.
owned by two or more otherwise
independent firms. In the widest sense Limitations
of the term, it can also be described Major limitations of a joint venture are
as any form of association which discussed below:
implies collaboration for more than a
• Foreign firms entering into joint
transitory period. A joint ownership
ventures share the technology
venture may be brought about in three
and trade secrets with local
major ways:
(i) Foreign investor buying an firms in foreign countries, thus
interest in a local company always running the risks of such
(ii) Local firm acquiring an interest a technology and secrets being
in an existing foreign firm disclosed to others.
(iii) B o t h t h e f o r e i g n a n d l o c a l • The dual ownership arrangement
entrepreneurs jointly forming a may lead to conflicts, resulting
new enterprise. in battle for control between the
investing firms.
Advantages
11.2.5 Wholly Owned Subsidiaries
Major advantages of joint venture
include: This entry mode of international
• Since the local partner also business is preferred by companies
contributes to the equity capital of which want to exercise full control over
such a venture, the international their overseas operations. The parent
firm finds it financially less company acquires full control over the
burdensome to expand globally. foreign company by making 100 per
• Joint ventures make it possible to cent investment in its equity capital.
execute large projects requiring A wholly owned subsidiary in a foreign
huge capital outlays and market can be established in either of
manpower. the two ways:
• The foreign business firm benefits (i) Setting up a new firm altogether
from a local partner’s knowledge to start operations in a foreign
of the host countries regarding the
country — also referred to as a
competitive conditions, culture,
green field venture, or
language, political systems and
(ii) Acquiring an established firm in
business systems.
the foreign country and using
• In many cases entering into a
that firm to manufacture and/or
foreign market is very costly and
promote its products in the host
risky. This can be avoided by
sharing costs and/or risks with a nation.
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Advantages 11.3 E xport -I mport P rocedures

and Documentation
Major advantages of a wholly owned
subsidiary in a foreign country are as A major distinction between domestic
follows: and international operations is the
complexity of the latter. Export and
• The parent firm is able to exercise
import of goods is not that straight
full control over its operations in
forward as buying and selling in the
foreign countries.
domestic market. Since foreign trade
• Since the parent company on transactions involves movement
its own looks after the entire of goods across frontiers and use
operations of foreign subsidiary, of foreign exchange, a number of
it is not required to disclose its formalities are needed to be performed
technology or trade secrets to before the goods leave the boundaries
others. of a country and enter into that of
another. Following sections are devoted
Limitations to a discussion of major steps that
The limitations of setting up a wholly need to be undertaken for completing
owned subsidiary abroad include: export and import transactions.
• The parent company has to make 11.3.1 Export Procedure

100 per cent equity investments
The number of steps and the sequence
in the foreign subsidiaries. This
in which these are taken vary from one
form of international business is,
export transaction to another. Steps
therefore, not suitable for small
involved in a typical export transaction
and medium size firms which do
are as follows.
not have enough funds with them (i) Receipt of enquiry and sending
to invest abroad. quotations: The prospective buyer
• Since the parent company owns of a product sends an enquiry to
100 per cent equity in the foreign different exporters requesting them
company, it alone has to bear the to send information regarding price,
entire losses resulting from failure quality and terms and conditions
of its foreign operations. for export of goods. Exporters can
• Some countries are averse to be informed of such an enquiry even
setting up of 100 per cent wholly by way of advertisement in the press
owned subsidiaries by foreigners put in by the importer. The exporter
in their countries. This form of sends a reply to the enquiry in the
international business operations, form of a quotation —referred to as
therefore, becomes subject to proforma invoice. The proforma invoice
higher political risks. contains information about the price at
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which the exporter is ready to sell the export licence before it proceeds with
goods and also provides information exports. Important pre-requisites for
about the quality, grade, size, weight, getting an export licence are as follows:
mode of delivery, type of packing and • Opening a bank account in any
payment terms. bank authorised by the Reserve
(ii) Receipt of order or indent: In case Bank of India (RBI) and getting
the prospective buyer (i.e., importing an account number.
firm) finds the export price and other • Obtaining Import Export Code
terms and conditions acceptable, it (IEC) number from the Directorate
places an order for the goods to be General Foreign Trade (DGFT) or
despatched. This order, also known Regional Import Export Licensing
as indent, contains a description of Authority.
the goods ordered, prices to be paid, • Registering with appropriate
delivery terms, packing and marking export promotion council.
details and delivery instructions. • Registering with Export Credit and
(iii) Assessing the importer’s Guarantee Corporation (ECGC) in
creditworthiness and securing order to safeguard against risks of
a guarantee for payments: After non payments.
receipt of the indent, the exporter An export firm needs to have the
makes necessary enquiry about the Import Export Code (IEC) number as
creditworthiness of the importer. The it needs to be filled in various export/
purpose underlying the enquiry is to import documents. For obtaining
assess the risks of non payment by the IEC number, a firm has to apply
the importer once the goods reach the to the Director General for Foreign
import destination. To minimise such Trade (DGFT) with documents such as
risks, most exporters demand a letter exporter/importer profile, bank receipt
of credit from the importer. A letter for requisite fee, certificate from the
of credit is a guarantee issued by the banker on the prescribed form, two
importer’s bank that it will honour copies of photographs attested by the
payment up to a certain amount of banker, details of the non-resident
export bills to the bank of the exporter. interest and declaration about the
Letter of credit is the most appropriate applicant’s non association with
and secure method of payment adopted caution listed firms.
to settle international transactions. It is obligatory for every exporter
(iv) Obtaining export licence: Having to get registered with the appropriate
become assured about payments, export promotion council. Various
the exporting firm initiates the steps export promotion councils such as
relating to compliance of export Engineering Export Promotion Council
regulations. Export of goods in India is (EEPC) and Apparel Export Promotion
subject to custom laws which demand Council (AEPC) have been set up by the
that the export firm must have an Government of India to promote and
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develop exports of different categories quality products are exported from the
of products. We shall discuss about country. One such step is compulsory
export promotion councils in a later inspection of certain products by a
section. But it may be mentioned here competent agency as designated by
that it is necessary for the exporter to the government. The government has
become a member of the appropriate passed Export Quality Control and
export promotion council and obtain Inspection Act, 1963 for this purpose.
a Registration cum Membership and has authorised some agencies
Certificate (RCMC) for availing benefits to act as inspection agencies. If the
available to export firms from the product to be exported comes under
Government. such a category, the exporter needs to
Registration with the ECGC contact the Export Inspection Agency
is necessary in order to protect (EIA) or the other designated agency
overseas payments from political and for obtaining inspection certificate.
commercial risks. Such a registration The pre-shipment inspection report
also helps the export firm in getting is required to be submitted along
financial assistance from commercial with other export documents at the
banks and other financial institutions. time of exports. Such an inspection
(v) Obtaining pre-shipment finance: is not compulsory in case the goods
Once a confirmed order and also a are being exported by star trading
letter of credit have been received, houses, trading houses, export houses,
the exporter approaches his banker industrial units setup in export
for obtaining pre-shipment finance processing zones/special economic
to undertake export production. Pre- zones (EPZs/SEZs) and 100 per cent
shipment finance is the finance that export oriented units (EOUs). We shall
the exporter needs for procuring raw discuss about these special types of
materials and other components, export firms in a later section.
processing and packing of goods and (viii) Excise clearance: As per the
transportation of goods to the port of Central Excise Tariff Act, excise
shipment. duty is payable on the materials
(vi) Production or procurement used in manufacturing goods. The
of goods: Having obtained the pre- exporter, therefore, has to apply to
shipment finance from the bank, the the concerned Excise Commissioner
exporter proceeds to get the goods in the region with an invoice. If the
ready as per the specifications of the Excise Commissioner is satisfied,
importer. Either the firm itself goes in he may issue the excise clearance.
for producing the goods or else it buys But in many cases the government
from the market. exempts payment of excise duty or
(vii) Pre-shipment inspection: The later on refunds it if the goods so
Government of India has initiated manufactured are meant for exports.
many steps to ensure that only good The idea underlying such exemption
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or refund is to provide an incentive to captain of the ship that the specified

the exporters to export more and also goods after their customs clearance at
to make the export products more a designated port be received on board.
competitive in the world markets. (xi) Packing and forwarding: The
The refund of excise duty is known as goods are then properly packed and
duty drawback. This scheme of duty marked with necessary details such
drawback is presently administered as name and address of the importer,
by the Directorate of Drawback under gross and net weight, port of shipment
the Ministry of Finance which is and destination, country of origin, etc.
responsible for fixing the rates of The exporter then makes necessary
drawback for different products. The arrangement for transportation of
work relating to sanction and payment goods to the port. On loading goods
of drawback is, however, looked after into the railway wagon, the railway
by the Commissioner of Customs authorities issue a ‘railway receipt’
or Central Excise Incharge of the which serves as a title to the goods. The
concerned port/airport/land custom exporter endorses the railway receipt
station from where the export of goods in favour of his agent to enable him
is considered to have taken place. to take delivery of goods at the port of
(ix) Obtaining certificate of origin: shipment.
Some importing countries provide (xii) Insurance of goods: The exporter
tariff concessions or other exemptions then gets the goods insured with an
to the goods coming from a particular insurance company to protect against
country. For availing such benefits, the the risks of loss or damage of the goods
importer may ask the exporter to send due to the perils of the sea during the
a certificate of origin. The certificate of transit.
origin acts as a proof that the goods (xiii) Customs clearance: The goods
have actually been manufactured in must be cleared from the customs
the country from where the export before these can be loaded on the ship.
is taking place. This certificate can For obtaining customs clearance, the
be obtained from the trade consulate exporter prepares the shipping bill.
located in the exporter’s country. Shipping bill is the main document
(x) Reservation of shipping space: on the basis of which the customs
The exporting firm applies to the office gives the permission for export.
shipping company for provision of Shipping bill contains particulars of
shipping space. It has to specify the goods being exported, the name
the types of goods to be exported, of the vessel, the port at which goods
probable date of shipment and the are to be discharged, country of final
port of destination. On acceptance of destination, exporter’s name and
application for shipping, the shipping address, etc.
company issues a shipping order. A Five copies of the shipping bill
shipping order is an instruction to the along with the following documents
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are then submitted to the Customs (xv) Payment of freight and issuance
Appraiser at the Customs House: of bill of lading: The C&F agent
• Export Contract or Export Order surrenders the mates receipt to the
• Letter of Credit shipping company for computation of
• Commercial Invoice freight. After receipt of the freight, the
• Certificate of Origin shipping company issues a bill of lading
• Certificate of Inspection, where which serves as an evidence that the
necessary shipping company has accepted the
• Marine Insurance Policy goods for carrying to the designated
After submission of these destination. In the case the goods are
documents, the Superintendent of the being sent by air, this document is
concerned port trust is approached for referred to as airway bill.
obtaining the carting order. Carting (xvi) Preparation of invoice: After
order is the instruction to the staff sending the goods, an invoice of the
at the gate of the port to permit the despatched goods is prepared. The
entry of the cargo inside the dock. invoice states the quantity of goods
After obtaining the carting order, the sent and the amount to be paid by the
cargo is physically moved into the port importer. The C&F agent gets it duly
area and stored in the appropriate attested by the customs.
shed. Since the exporter cannot make (xvii) Securing payment: After
himself or herself available all the time the shipment of goods, the exporter
for performing all these formalities, informs the importer about the
these tasks are entrusted to an shipment of goods. The importer
agent —referred to as Clearing and needs various documents to claim
Forwarding (C&F) agent. the title of goods on their arrival at
(xiv) Obtaining mates receipt: The his/her country and getting them
goods are then loaded on board the customs cleared. The documents
ship for which the mate or the captain that are needed in this connection
of the ship issues mate’s receipt to the include certified copy of invoice, bill of
port superintendent. A mate receipt is lading, packing list, insurance policy,
a receipt issued by the commanding certificate of origin and letter of credit.
officer of the ship when the cargo The exporter sends these documents
is loaded on board, and contains through his/her banker with the
the information about the name of instruction that these may be delivered
the vessel, berth, date of shipment, to the importer after acceptance of the
descripton of packages, marks and bill of exchange — a document which is
numbers, condition of the cargo at the sent along with the above mentioned
time of receipt on board the ship, etc. documents. Submission of the relevant
The port superintendent, on receipt documents to the bank for the purpose
of port dues, hands over the mate’s of getting the payment from the bank is
receipt to the C&F agent. called ‘negotiation of the documents’.
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Bill of exchange is an order to says that the necessary documents

the importer to pay a certain amount (including bill of exchange) relating to
of money to, or to the order of, a the particular export consignment has
certain person or to the bearer of the been negotiated (i.e., presented to the
instrument. It can be of two types: importer for payment) and the payment
document against sight (sight draft) has been received in accordance with
or document against acceptance the exchange control regulations.
(usance draft). In case of sight draft,
the documents are handed over to the 11.3.2 Import Procedure
importer only against payment. The
Import trade refers to purchase of
moment the importer agrees to sign the
goods from a foreign country. Import
sight draft, the relevant documents are
procedure differs from country to
delivered. In the case of usance draft,
country depending upon the country’s
on the other hand, the documents are
delivered to the importer against his or import and custom policies and other
her acceptance of the bill of exchange statutory requirements. The following
for making payment at the end of a paragraphs discuss various steps
specified period, say three months. involved in a typical import transaction
On receiving the bill of exchange, for bringing goods into Indian territory.
the importer releases the payment (i) Trade enquiry: The first thing
in case of sight draft or accepts the that the importing firm has to do
usance draft for making payment on is to gather information about the
maturity of the bill of exchange. The countries and firms which export
exporter’s bank receives the payment the given product. The importer can
through the importer’s bank and is gather such information from the trade
credited to the exporter’s account. directories and/or trade associations
The exporter, however, need not and organisations. Having identified
wait for the payment till the release of the countries and firms that export
money by the importer. The exporter the product, the importing firm
can get immediate payment from approaches the export firms with the
his/her bank on the submission help of a trade enquiry for collecting
of documents by signing a letter of information about their export prices
indemnity. By signing the letter, the and terms of exports. A trade enquiry
exporter undertakes to indemnify the is a written request by an importing
bank in the event of non-receipt of firm to the exporter for supply of
payment from the importer along with information regarding the price and
accrued interest. various terms and conditions on which
Having received the payment for the latter is ready to exports goods.
exports, the exporter needs to get a bank After receiving a trade enquiry,
certificate of payment. Bank certificate the exporter prepares a quotation and
of payment is a certificate which sends it to the importer. The quotation
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is known as profor ma invoice. A goods that he or she wants to import

proforma invoice is a document that are subject to import licensing. In case
contains details as to the quality, goods can be imported only against
grade, design, size, weight and price the licence, the importer needs to
of the export product, and the terms procure an import licence. In India, it
and conditions on which their export is obligatory for every importer (and
will take place. also for exporter) to get registered with
(ii) Procurement of import licence: the Directorate General Foreign Trade
There are certain goods that can be (DGFT) or Regional Import Export
imported freely, while others need Licensing Authority, and obtain an
licensing. The importer needs to Import Export Code (IEC) number. This
consult the Export Import (EXIM) number is required to be mentioned on
policy in force to know whether the most of the import documents.
Major Documents needed in Connection with Export Transaction

A. Documents related to goods
Export invoice: Export invoice is a sellers’ bill for merchandise and contains
information about goods such as quantity, total value, number of packages, marks
on packing, port of destination, name of ship, bill of lading number, terms of delivery
and payments, etc.
Packing list: A packing list is a statement of the number of cases or packs and the
details of the goods contained in these packs. It gives details of the nature of goods
which are being exported and the form in which these are being sent.
Certificate of origin: This is a certificate which specifies the country in which the
goods are being produced. This certificate entitles the importer to claim tariff
concessions or other exemptions such as non-applicability of quota restrictions
on goods originating from certain pre-specified countries. This certificate is also
required when there is a ban on imports of certain goods from select countries.
The goods are allowed to be brought into the importing country if these are not
originating from the banned countries.
Certificate of inspection: For ensuring quality, the government has made it
compulsory for certain products that these be inspected by some authorised agency.
Export Inspection Council of India (EICI) is one such agency which carries out such
inspections and issues the certificate that the consignment has been inspected as
required under the Export (Quality Control and Inspection) Act, 1963, and satisfies
the conditions relating to quality control and inspection as applicable to it, and is
export worthy. Some countries have made this certificate mandatory for the goods
being imported to their countries.
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B. Documents related to shipment

Mate’s receipt: This receipt is given by the commanding officer of the ship to the
exporter after the cargo is loaded on the ship. The mate’s receipt indicates the name
of the vessel, berth, date of shipment, description of packages, marks and numbers,
condition of the cargo at the time of receipt on board the ship, etc. The shipping
company does not issue the bill of lading unless it receives the mate’s receipt.
Shipping Bill: The shipping bill is the main document on the basis of which customs
office grants permission for the export. The shipping bill contains particulars of
the goods being exported, the name of the vessel, the port at which goods are to be
discharged, country of final destination, exporter’s name and address, etc.
Bill of lading: Bill of lading is a document wherein a shipping company gives its
official receipt of the goods put on board its vessel and at the same time gives an
undertaking to carry them to the port of destination. It is also a document of title
to the goods and as such is freely transferable by the endorsement and delivery.
Airway Bill: Like a bill of lading, an airway bill is a document wherein an airline
company gives its official receipt of the goods on board its aircraft and at the same
time gives an undertaking to carry them to the port of destination. It is also a
document of title to the goods and as such is freely transferable by the endorsement
and delivery.
Marine insurance policy: It is a certificate of insurance contract whereby the
insurance company agrees in consideration of a payment called premium to
indemnify the insured against loss incurred by the latter in respect of goods exposed
to perils of the sea.
Cart ticket: A cart ticket is also known as a cart chit, vehicle or gate pass. It is
prepared by the exporter and includes details of the export cargo in terms of the
shipper’s name, number of packages, shipping bill number, port of destination and
the number of the vehicle carrying the cargo.
C. Documents related to payment
Letter of credit: A letter of credit is a guarantee issued by the importer’s bank that
it will honour up to a certain amount the payment of export bills to the bank of the
exporter. Letter of credit is the most appropriate and secure method of payment
adopted to settle international transactions
Bill of exchange: It is a written instrument whereby the person issuing the instrument
directs the other party to pay a specified amount to a certain person or the bearer
of the instrument. In the context of an export-import transaction, bill of exchange
is drawn by exporter on the importer asking the latter to pay a certain amount to
a certain person or the bearer of the bill of exchange. The documents giving title
to the export consignment are passed on to the importer only when the importer
accepts the order contained in the bill of exchange.
Bank certificate of payment: Bank certificate of payment is a certificate that the
necessary documents (including bill of exchange) relating to the particular export
consignment has been negotiated (i.e., presented to the importer for payment) and
the payment has been received in accordance with the exchange control regulations.
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(iii) Obtaining foreign exchange: importer and the overseas supplier

Since the supplier in the context of is a letter of credit, then the importer
an import transaction resides in a should obtain the letter of credit from
foreign country, he/she demands its bank and forward it to the overseas
payment in a foreign currency. supplier. As stated previously, a letter
Payment in foreign currency involves of credit is a guarantee issued by the
exchange of Indian currency into importer’s bank that it will honour
foreign currency. In India, all foreign payment up to a certain amount
exchange transactions are regulated of export bills to the bank of the
by the Exchange Control Department exporter. Letter of credit is the most
of the Reserve Bank of India (RBI). As appropriate and secured method of
per the rules in force, every importer payment adopted to settle international
is required to secure the sanction of transactions. The exporter wants this
foreign exchange. For obtaining such document to be sure that there is no
a sanction, the importer has to make risk of non-payment.
an application to a bank authorised (vi) Arranging for finance: The
by RBI to issue foreign exchange. The importer should make arrangements
application is made in a prescribed in advance to pay to the exporter on
form along with the import licence arrival of goods at the port. Advanced
as per the provisions of Exchange planning for financing imports
Control Act. After proper scrutiny of is necessary so as to avoid huge
the application, the bank sanctions demurrages (i.e., penalties) on the
the necessary foreign exchange for the imported goods lying uncleared at the
import transaction. port for want of payments.
(iv) Placing order or indent: After (vii) Receipt of shipment advice:
obtaining the import licence, the After loading the goods on the vessel,
importer places an import order or the overseas supplier dispatches the
indent with the exporter for supply shipment advice to the importer. A
of the specified products. The import shipment advice contains information
order contains information about the about the shipment of goods. The
price, quantity size, grade and quality information provided in the shipment
of goods ordered and the instructions advice includes details such as invoice
relating to packing, shipping, ports number, bill of lading/airways bill
of shipment and destination, delivery number and date, name of the vessel
schedule, insurance and mode of with date, the port of export, description
payment. The import order should be of goods and quantity, and the date of
carefully drafted so as to avoid any sailing of vessel.
ambiguity and consequent conflict ( v i i i ) R e t i r e m e n t o f i m p o r t
between the importer and exporter. documents: Having shipped the
(v) Obtaining letter of credit: If the goods, the overseas supplier prepares
payment terms agreed between the a set of necessary documents as per
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the terms of contract and letter of manifest. Import general manifest is a

credit and hands it over to his or her document that contains the details of
banker for their onward transmission the imported goods. It is a document
and negotiation to the importer in the on the basis of which unloading of
manner as specified in the letter of cargo takes place.
credit. The set of documents normally (x) Customs clearance and release
contains bill of exchange, commercial of goods: All the goods imported
invoice, bill of lading/airway bill, into India have to pass through
packing list, certificate of origin, customs clearance after they cross the
marine insurance policy, etc. Indian borders. Customs clearance
The bill of exchange accompanying is a somewhat tedious process and
the above documents is known as calls for completing a number of
the documentary bill of exchange. As formalities. It is, therefore, advised that
mentioned earlier in connection with importers appoint C&F agents who are
the export procedure, documentary well- versed with such formalities and
bill of exchange can be of two types: play an important role in getting the
documents against payment (sight goods customs cleared.
draft) and documents against Firstly, the importer has to obtain
acceptance (usance draft). In the case a delivery order which is otherwise
of sight draft, the drawer instructs known as endorsement for delivery.
the bank to hand over the relevant Generally when the ship arrives at
documents to the importer only the port, the importer obtains the
endorsement on the back of the bill of
against payment. But in the case of
lading. This endorsement is done by
usance draft, the drawer instructs
the concerned shipping company. In
the bank to hand over the relevant
some cases instead of endorsing the
documents to the importer against
bill, the shipping company issues a
acceptance of the bill of exchange.
delivery order. This order entitles the
The acceptance of bill of exchange for
importer to take the delivery of goods.
the purpose of getting delivery of the Of course, the importer has to first pay
documents is known as retirement of the freight charges (if these have not
import documents. Once the retirement been paid by the exporter) before he or
is over, the bank hands over the import she can take possession of the goods.
documents to the importer. The importer has to also pay
(ix) Arrival of goods: Goods are dock dues and obtain port trust dues
shipped by the overseas supplier as receipt. For this, the importer has to
per the contract. The person in charge submit to the ‘Landing and Shipping
of the carrier (ship or airway) informs Dues Office’ two copies of a duly filled
the officer in charge at the dock or in form — known as ‘application to
the airport about the arrival of goods import’. The ‘Landing and Shipping
in the importing country. He provides Dues Office’ levies a charge for services
the document called import general of dock authorities which has to be
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borne by the importer. After payment After payment of the import duty,
of dock charges, the importer is given the bill of entry has to be presented to
back one copy of the application as a the dock superintendent. The same has
receipt. This receipt is known as ‘port to be marked by the superintendent
trust dues receipt’.
and an examiner will be asked to
The importer then fills in a form
physically examine the goods imported.
‘bill of entry’ for assessment of customs
import duty. One appraiser examines The examiner gives his report on the
the document carefully and gives bill of entry. The importer or his agent
the examination order. The importer presents the bill of entry to the port
procures the said document prepared authority. After receiving necessary
by the appraiser and pays the duty, charges, the port authority issues the
if any. release order.
Major Documents used in an Import Transaction

Trade enquiry: A trade enquiry is a written request by an importing firm to the
exporter for supply of information regarding the price and various terms and
conditions on which the latter exports goods.
Proforma invoice: A proforma invoice is a document that contains details as to the
quality, grade, design, size, weight and price of the export product, and the terms
and conditions on which their export will take place.
Import order or indent: It is a document in which the buyer (importer) orders for
supply of requisite goods to the supplier (exporter). The order or indent contains
the information such as quantity and quality of goods to be imported, price to be
charged, method of forwarding the goods, nature of packing, mode of payment, etc.
Letter of credit: It is document that contains a guarantee from the importer bank to
the exporter’s bank that it is undertaking to honour the payment up to a certain
amount of the bills issued by the exporter for exports of the goods to the importer.
Shipment advice: The shipment advice is a document that the exporter sends to
the importer informing him that the shipment of goods has been made. Shipment
of advice contains invoice number, bill of lading/airways bill number and date,
name of the vessel with date, the port of export, description of goods and quantity,
and the date of sailing of the vessel.
Bill of lading: It is a document prepared and signed by the master of the ship
acknowledging the receipt of goods on board. It contains terms and conditions on
which the goods are to be taken to the port of destination.
Airway Bill: Like a bill of lading, an airway bill is a document wherein an airline/
shipping company gives its official receipt of the goods on board its aircraft and
at the same time gives an undertaking to carry them to the port of destination. It
is also a document of title to the goods and as such is freely transferable by the
endorsement and delivery.
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Bill of entry: Bill of entry is a form supplied by the customs office to the importer.
It is to be filled in by the importer at the time of receiving the goods. It has to be
in triplicate and is to be submitted to the customs office. The bill of entry contains
information such as name and address of the importer, name of the ship, number of
packages, marks on the package, description of goods, quantity and value of goods,
name and address of the exporter, port of destination, and customs duty payable.
Bill of exchange: It is a written instrument whereby the person issuing the instrument
directs the other party to pay a specified amount to a certain person or the bearer
of the instrument. In the context of an export-import transaction, bill of exchange
is drawn by the exporter on the importer asking the latter to pay a certain amount
to a certain person or the bearer of the bill of exchange. The documents giving title
to the export consignment are passed on to the importer only when the importer
accepts the order contained in the bill of exchange.
Sight draft: It is a type of bill of exchange wherein the drawer of the bill of exchange
instructs the bank to hand over the relevant documents to the importer only against
payment.
Usance draft: It is a type of bill of exchange wherein the drawer of the bill of exchange
instructs the bank to hand over the relevant documents to the importer only against
acceptance of the bill of exchange.
Import general manifest: Import general manifest is a document that contains the
details of the imported good. It is the document on the basis of which unloading
of cargo takes place.
Dock challan: Dock charges are to be paid when all the formalities of the customs are
completed. While paying the dock dues, the importer or his clearing agent specifies
the amount of dock dues in a challan or form which is known as dock challan.
11.4 Foreign Trade 11.4.1 Foreign Trade Promotion

Promotion: Incentives and Measures and Schemes
Organisational Support Details of various trade promotion
Various incentives and schemes measures and schemes available to
are operational in the country to business firms to facilitate their export
help business firms improve and import operations are announced
competitiveness of their exports. From by the government in its export-import
time-to-time, the government has also (EXIM) policy. Major trade promotion
setup a number of organisations to measures (especially those related to
provide infra-structural support and exports) are as follows:
marketing assistance to firms engaged (i) Duty drawback scheme: Since
in international business. Major goods meant for exports are not
foreign trade promotion schemes and consumed domestically, these are not
organisations are discussed in the subjected to payment of various excise
following sections. and customs duties. Any such duties
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paid on export goods are, therefore, allowed duty free supply of domestic
refunded to exporters on production of as well as imported inputs required for
proof of exports of these goods to the the manufacture of export goods. As
concerned authorities. Such refunds such the exporter is not required to pay
are called duty draw backs. Some customs duty on goods imported for
major duty draw backs include refund use in the manufacture of export goods.
of excise duties paid on goods meant The advance licences are available to
for exports, refund of customs duties both the types of exporters — those
paid on raw materials and machines who export on a regular basis and
imported for export production. The also to those who export on an adhoc
latter is also called customs drawback. basis. The regular exporters can avail
(ii) Export manufacturing under such licences against their production
bond scheme: This facility entitles programmes. The firms exporting
firms to produce goods without intermittently can also obtain these
payment of excise and other duties. licences against specific export orders.
The firms desirous of availing such (v) Export Promotion Capital Goods
facility have to give an undertaking Scheme (EPCG): The main objective of
(i.e., bond) that they are manufacturing this scheme is to encourage the import
goods for export purposes and of capital goods for export production.
will export such products on their This scheme allows export firms to
production. import capital goods at negligible or
(iii) Exemption from payment of lower rates of customs duties subject
sales taxes: Goods meant for export to actual user condition and fulfilment
purposes are not subject to sales tax. of specified export obligations. If the
Even for a long time, income derived
said conditions are fulfilled by the
from export operations had been
manufacturers, then they can import
exempt from payment of income tax.
the capital goods either at zero or
Now this benefit of exemption from
concessional rate of import duty.
income tax is available only to 100 per
cent Export Oriented Units (100 per Supporting manufacturers and service
cent EOUs) and units set up in Export providers are also eligible to import
Processing Zones (EPZs)/Special capital goods under this scheme.
Economic Zones (SEZs) for select This scheme is especially beneficial
years. We shall shortly discuss about to the industrial units interested in
the 100 per cent Export Oriented Units modernisation and upgradation of
(100 per cent EOUs) and units set up their existing plant and machinery.
in Export Processing Zones (EPZs)/ Now service export firms can also avail
Special Economic Zones (SEZs) in the of this facility for importing items such
succeeding paragraphs. as computer software systems required
(iv) Advance licence scheme: It is for developing softwares for purposes
a scheme under which an exporter is of exports.
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(vi) Scheme of recognising export goods. Finance is also needed after the

firms as export house, trading house shipment of the goods because it may
and superstar trading house: With take sometime to receive payment from
an objective to promote established the importers. Therefore, two types of
exporters and assist them in marketing export finances are made available to
their products in international the exporters by authorised banks.
markets, the government grants They are termed as pre-shipment
the status of Export House, Trading finance or packaging credit and post-
House, Star Trading House to select shipment finance. Under the pre-
export firms. This status is granted shipment finance, finance is provided
to a firm on its achieving a prescribed to an exporter for financing the
average export of performance in purchase, processing, manufacturing
past select years. Besides attaining or packaging of goods for export
a minimum of past average export purpose. Under the post-shipment
performance, such export firms have finance scheme, finance is provided to
to also fulfill other conditions as laid the exporter from the date of extending
down in the import-export policy. the credit after the shipment of goods
Various categories of export houses to the export country. The finance
have been recognised with a view to is available at concessional rates of
building marketing infrastructure interest to the exporters.
and expertise required for export (ix) Export Processing Zones (EPZs):
promotion. These houses are given Export Processing Zones are industrial
national recognition for export estates, which form enclaves from the
promotion. They are required to Domestic Tariff Areas (DTA). These
operate as highly professional and are usually situated near seaports
dynamic institutions and act as or airports. They are intended to
an important instrument of export provide an internationally competitive
growth. duty free environment for export
(vii) Export of Services: In order to production at low cost. This enables
boost the export of services, various the products of EPZs to be competitive,
categories of service houses have both quality-wise and price-wise, in
been recognised. These houses are the international markets. These
recognised on the basis of the export zones have been set up at various
performance of the service providers. places in India which include: Kandla
They are referred to as Service Export (Gujarat), Santa Cruz (Mumbai), Falta
House, International Service Export (West Bengal), Noida (Uttar Pradesh),
House, International Star Service Cochin (Kerala), Chennai (Tamil Nadu),
Export House based on their export and Vishakapatnam (Andhra Pradesh).
performance. Santa Cruz zone is exclusively
(viii) Export finance: Exporters meant for electronic goods and gem
require finance for the manufacture of and jewellery items. All other EPZs
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deal with multifarious items. Recently Department of Commerce: The

the EPZs have been converted to Department of Commerce in the
Special Economic Zones (SEZs) which Ministry of Commerce, Government
are more advanced form of export of India, is the apex body responsible
processing zones. These SEZs are for the country’s external trade and all
free from all rules and regulations matters connected with it. This may be
governing imports and exports units in the form of increasing commercial
except relating to labour and banking. relations with other countries, state
The government has also permitted trading, export promotional measures
development of EPZs by private, state and the development, and regulation
or joint sector. The inter-ministerial of certain export oriented industries
committee on private EPZs has already and commodities. The Department of
cleared proposals for setting up of Commerce formulates policies in the
private EPZs in Mumbai, Surat and sphere of foreign trade. It also frames
Kanchipuram. the import and export policy of the
(x) 100 per cent Export Oriented country in general.
Units (100 per cent EOUs): The Export Promotion Councils (EPCs):
100 per cent Export Oriented Units Export Promotion Councils are
scheme, introduced in early 1981, is non-profit organisations registered
complementary to the EPZ scheme. It under the Companies Act or the
adopts the same production regime, Societies Registration Act, as the
but offers a wider option in location case may be. The basic objective of
with reference to factors like source the export promotion councils is to
of raw materials, ports, hinterland promote and develop the country’s
facilities, availability of technological exports of particular products falling
skills, existence of an industrial base under their jurisdiction. At present,
and the need for a larger area of there are 21 EPC’s dealing with
land for the project. EOUs have been different commodities.
established with a view to generating Commodity Boards: Commodity
additional production capacity for Boards are the boards which have
exports by providing an appropriate been specially established by the
policy framework, flexibility of Government of India for the development
operations and incentives. of production of traditional commodities
and their exports. These boards are
11.4.2 Organisational Support
supplementary to the EPCs. The
The Government of India has also functions of commodity boards are
set up from time-to-time various similar to those of EPCs. At present
institutions in order to facilitate the there are seven commodity boards in
process of foreign trade in our country. India: Coffee Board, Rubber Board,
Some of the important institutions are Tobacco Board, Spice Board, Central
as follows: Silk Board, Tea Board, and Coir Board.
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Export Inspection Council (EIC): Indian Institute of Foreign Trade

The Export Inspection Council of India (IIFT): The Indian Institute of Foreign
was setup by the Government of India Trade is an institution that was setup
under Section 3 of the Export Quality in 1963 by the Government of India
Control and Inspection Act 1963. The as an autonomous body registered
council aims at sound development of under the Societies Registration
export trade through quality control Act with the prime objective of
and pre-shipment inspection. The professionalising the country’s foreign
council is an apex body for controlling trade management. It has recently
the activities related to quality control been recognised as Deemed University.
and pre-shipment inspection of It provides training in international
commodities meant for export. Barring trade, conduct researches in areas of
a few exceptions, all the commodities international business, and analysing
destined for exports must be passed and disseminating data relating to
by EIC. international trade and investments.
Indian Trade Promotion Indian Institute of Packaging (IIP):
Organisation (ITPO): The Indian Trade The Indian Institute of Packaging
Promotion Organisation was setup was set up as a national institute
on 1 January 1992 under the jointly by the Ministry of Commerce,
Companies Act 1956 by the Ministry Government of India, and the Indian
of Commerce, Government of India. Packaging Industry and allied interests
Its headquarters is in New Delhi. in 1966. Its headquarters and principal
The ITPO was formed by merging the laboratory is situated at Mumbai and
two erstwhile agencies viz., Trade three regional laboratories are located
Development Authority and Trade Fair at Kolkata, Delhi and Chennai. It is
Authority of India. ITPO is a service a training-cum-research institute
organisation and maintains regular pertaining to packaging and testing. It
and close interaction with trade, has excellent infrastructural facilities
industry and Government. It serves that cater to the various needs of
the industry by organising trade fairs the package manufacturing and
and exhibitions—both within the package user industries. It caters
country and outside, It helps export to the packaging needs with regard
firms participate in international to both the domestic and export
trade fairs and exhibitions, developing markets. It also undertakes technical
exports of new items, providing consultancy, testing services on
support and updated commercial packaging developments, training and
business information. ITPO has five educational programmes, promotional
regional offices at Mumbai, Bengaluru, award contests, information services
Kolkata, Kanpur and Chennai and and other allied activities.
four international offices at Germany, State Trading Organisations: A large
Japan, UAE and USA. number of domestic firms in India
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found it very difficult to compete in the New Hampshire to identify measures

world market. At the same time, the to restore peace and normalcy in the
existing trade channels were world.
unsuitable for promotion of exports The meeting was concluded with
and bringing about diversification the setting up of three international
of trade with countries other than institutions, namely the International
European countries. It was under Monetary Fund (IMF), International
these circumstances that the State Bank for Reconstruction and
Trading Organisation (STC) was setup Development (IBRD) and the
in May 1956. The main objective International Trade Organisation
of the STC is to stimulate trade, (ITO). They considered these three
primarily export trade among different organisations as three pillars of
trading partners of the world. Later, economic development of the world.
the government set up many more While the World Bank was assigned
organisations such as Metals and with the task of reconstructing war-
Minerals Trading Corporation (MMTC), torn economies — especially the ones
Handloom and Handicrafts Export in Europe, the IMF was entrusted
Corporation (HHEC). with the responsibility of ensuring
stabilisation of exchange rates to
11.5 International Trade pave way for the expansion of world
Institutions and Trade trade. The main objective of the ITO
as they could foresee at that time was
Agreements
to promote and facilitate international
The First World War (1914-1919) and trade among the member countries
the Second World War (1939-45) were by overcoming various restrictions
accompanied by massive destruction and discrimi-nations that were being
of life and property the world over. practiced at that time.
Almost all the economies of the world The first two institutions, viz.,
were adversely affected. Due to scarcity IBRD and IMF, came into existence
of resources, countries were not in a immediately. The idea of setting up of
position to take up any reconstruction ITO, however, could not materialise
or developmental works. Even the due to stiff opposition from the United
international trade amongst nations States. Instead of an organisation,
got adversely affected because of the what eventually emerged was an
disruption of the world’s currency arrangement to liberalise international
system. There was no system of trade from high customs tariffs and
generally accepted exchange rate. It was various other types of restrictions.
at that juncture that representative of This arrangement came to be known
forty-four nations under the leadership as the General Agreement for Tariffs
of J.M. Keynes — a noted economist and Trade (GATT). India was one
joined together at Bretton Woods, of the founding members of these
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three international bodies. The major much longer than the repayment
objectives and functions of these three period of IBRD, and (ii) the borrowing
international institutions are discussed nation need not pay any interest on the
in more detail in the following sections. borrowed amount. IDA, thus, provides
interest-free long-term loans to the
11.5.1 World Bank poor nations. IBRD also provides loans
but these carry interest charged on
The International Bank for commercial basis.
Reconstruction and Development
Over the time, additional
(IBRD), commonly known as World
organisations have been set up under
Bank, was result of the Bretton Woods
the umbrella of the World Bank. As
Conference. The main objectives
of today, the World Bank is a group
behind setting up this international
of five international organisations
organisation were to aid the task of
responsible for providing finance to
reconstruction of the war-affected
different countries. The group and its
economies of Europe and assist in the
affiliates headquartered in Washington
development of the underdeveloped
nations of the world. For the first DC catering to various financial needs
few years, the World Bank remained are listed in the Box A on World Bank
preoccupied with the task of restoring and its affiliates.
war-torn nations in Europe. Having
achieved success in accomplishing this 11.5.2 International Monetary
task by late 1950s, the World Bank Fund
turned its attention to the development The International Monetary Fund (IMF)
of underdeveloped nations. It realised is the second international organisation
that by investing more and more in next to the World Bank. IMF which
these countries, especially in social came into existence in 1945 has its
sectors like health and education; it headquarters located in Washington
could bring about the needed social DC. In 2005, it had 191 countries
and economic transformation of the as its members.The major idea
developing countries. To give shape underlying the setting up of the IMF
to this investment aspect in is to evolve an orderly international
the underdeveloped nations, the monetary system, i.e., facilitating
International Development Association system of international payments and
(IDA) was formed in the year 1960. adjustments in exchange rates among
The main objective underlying setting national currencies.
up IDA has been to provide loans on
concessional terms and conditions Major objectives of IMF include
to those countries whose per capita
incomes are below a critical level. • To promote international monetary
Concessional terms and conditions cooperation through a permanent
mean that (i) repayment period is institution,
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• To facilitate expansion of balanced 11.5.3 World Trade Organization

growth of international trade (WTO) and Major Agreements
and to contribute thereby to the
On the lines of IMF and the World
promotion and maintenance of
Bank, it was initially decided at the
high levels of employment and
Bretton Woods conference to set up the
real income,
International Trade Organisation (ITO)
• To promote exchange stability
to promote and facilitate international
with a view to maintain orderly
trade among the member countries
exchange arrangements among
and to overcome various restrictions
member countries, and
and discriminations as were being
• To assist in the establishment of
practiced at that time. But the idea
a multilateral system of payments
could not materialise due to stiff
in respect of current transactions
opposition from the United States.
between members.
Instead of altogether abandoning
Functions of IMF the idea, the countries that were
participants to the Bretton Woods
Various functions are performed by the
conference agreed upon having some
IMF to achieve the aforesaid objectives.
arrangement among themselves so
Some of the important functions of
as to liberalise the world from high
IMF include:
customs tariffs and various other types
• Acting as a short-term credit
institution; of restrictions that were in vogue at
• Providing machinery for the that time. This arrangement came to
orderly adjustment of exchange be known as the General Agreement
rates; for Tariffs and Trade (GATT).
• Acting as a reservoir of the GATT came into existence with
currencies of all the member effect on 1 January 1948 and remained
countries, from which a borrower in force till December 1994. Various
nation can borrow the currency of rounds of negotiations have taken
other nations; place under the auspices of GATT to
• Acting as a lending institution reduce tariff and non-tariff barriers.
of foreign currency and current The last one, known as the Uruguay
transaction; Round, was the most comprehensive
• Determining the value of a one in terms of coverage of issues, and
country’s currency and altering also the lengthiest one from the point
it, if needed, so as to bring of view of duration of negotiations
about an orderly adjustment which lasted over a period of seven
of exchange rates of member years from 1986 to 1994.
countries; and One of the key achievements
• Providing machinery for inter- of the Uruguay Round of GATT
national consultations. negotiations was the decision to set
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up a permanent institution for looking standards of living and incomes,

after the promotion of free and fair trade ensuring full employment, expanding
amongst nations. Consequent to this production and trade, and optimal use
decision, the GATT was transformed of the world’s resources. The major
into World Trade Organization (WTO) difference between the objectives of
with effect from 1 January 1995. GATT and WTO is that the objectives
The headquarters of the WTO are of WTO are more specific and also
situated at Geneva, Switzerland. extend the scope of WTO to cover trade
The establishment of WTO, thus, in services. WTO objectives, moreover,
represents the implementation of talk of the idea of ‘sustainable
the original proposal of setting up development’ in relation to the optimal
of the ITO as evolved almost five use of the world’s resources so as to
decades back. ensure protection and preservation of
Though, WTO is a successor to the environment. Keeping in view the
GATT, it is a much more powerful above discussion, we can state more
body than GATT. It governs trade not explicitly the following as the major
only in goods, but also in services objectives of WTO:
and intellectual property rights. • To ensure reduction of tariffs and
Unlike GATT, the WTO is a permanent other trade barriers imposed by
organisation created by an international different countries;
treaty ratified by the governments and • To engage in such activities which
legislatures of member states. It is, improve the standards of living,
moreover, a member-driven rule-based create employment, increase
organisation in the sense that all income and effective demand and
the decisions are taken by the facilitate higher production and
trade;
member governments on the basis of
• To facilitate the optimal use of the
a general consensus. As the principal
world’s resources for sustainable
international body concerned with
development; and
solving trade problems between
• To promote an integrated, more
countries and providing a forum for
viable and durable trading system.
multilateral trade negotiations, it has
a global status similar to that of the Functions of WTO
IMF and the World Bank. India is
The major functions of WTO include:
a founding member of WTO. As on
• Promoting an environment that
11 December 2005, there were 149
is encouraging to its member
members in WTO.
countries to come forward to WTO
in mitigating their grievances;
Objectives of WTO
• L a y i n g d o w n a c o m m o n l y
The basic objectives of WTO are accepted code of conduct with a
similar to those of GATT, i.e., raising view to reducing trade barriers,
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including tariffs and eliminating system. It has been instrumental not

discriminations in international only in facilitating trade, but also
trade relations; in improving living standards and
• Acting as a dispute settlement cooperation among member countries.
body; Some of the major benefits of WTO are
• Ensuring that all rules regulations as follows:
prescribed in the Act are duly • WTO helps promote international
followed by the member countries peace and facilitates international
for the settlement of their disputes; business.
• Holding consultations with the • All disputes between member
IMF and the IBRD and its affiliated nations are settled with mutual
agencies so as to bring better consultations.
understanding and cooperation • Rules make international trade
in global economic policy making; and relations very smooth and
predictable.
and
• Free trade improves the living
• Supervising on a regular basis
standard of the people by
the operations of the revised
increasing the income level.
Agreements and Ministerial
• Free trade provides ample scope
declarations relating to goods,
of getting varieties of qualitative
services and Trade Related
products.
Intellectual Property Rights
• Economic growth has been
(TRIPS).
fastened because of free trade.
Benefits of WTO • The system encourages good
government.
Since its inception in 1995, the WTO • WTO helps fostering growth of
has come a long way in constituting developing countries by providing
the legal and institutional foundation them with special and preferential
of the present day multilateral trading treatment in trade related matters.
Key Terms
International Contract IEC number Certificate of origin
business manufacturing Registration- Customs clearance
International trade Licensing cum membership Letter of credit
Merchandise trade Franchising certificate Shipping bill
Invisible trade Outsourcing Pre-shipment Mate receipt
Foreign investment Joint ventures finance Bill of lading
FDI Wholly owned Pre-shipment Airway bill
Portfolio subsidiaries inspection Invoice
investment Proforma invoice Export inspection Bill of exchange
Exproting Order or intent agency Sight draft
Importing Export licence Excise clearance Usance draft
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Negotiation of bills Delivery order Export Promotion Commodity

Marine insurance Bill of entry Capital Goods Scheme boards
policy C&F agent (EPCG) IIFT
Cart ticket Port trust dues Export finance Indian Institute
Bank certificate of receipt Post-shipment finance of Packaging
payment Duty drawback Export processing zone ITPO
Certificate of scheme (EPZ) Export
inspection Export 100% Export Oriented Inspection
Trade enquiry manufacturing Unit (100% EOU) Council
Shipment advice under bond scheme Department of Commerce State trading
Import general Advance licence Export promotion organisations
manifest scheme council
SUMMARY
International Business: International business refers to business activities
that take place across national frontiers. Though many people use the terms
international business and international trade synonymously, the former is a
much broader term. International business involves not only trade in goods
and services, but also other operations, such as production and marketing of
goods and services in foreign countries.
International Vs Domestic Business: Conducting and managing international
business operations is more complex than undertaking domestic business.
Differences in the nationality of parties involved, relatively less mobility of
factors of production, customer heterogeneity across markets, variations in
business practices and political systems, varied business regulations and
policies, and use of different currencies are the key aspects that differentiate
international businesses from domestic business. These, moreover, are the
factors that make international business much more complex and a difficult
activity.
Export Procedures: The starting point in an export transaction is the receipt
of an enquiry from the overseas buyer. In response, the exporter prepares
an export quotation — called proforma invoice, giving out details about the
export goods and the terms and conditions of export. In case, the importer
finds the quotation acceptable, he/she places an order or indent and gets a
letter of credit issued from his/her bank to the exporter. The exporter then
proceeds with the formalities related to obtaining an export licence from the
Director General of Foreign Trade and getting a registration-cum-membership
certificate from the export promotion council looking after the export of the
concerned product. In case, the exporter requires funds, he/she can avail
of pre-shipment finance from a bank. The exporter then proceeds with the
production or procurement of the goods and gets them inspected from Export
Inspection Council. If required by the importer, the exporter approaches the
foreign consulate for obtaining the certificate of origin to enable the importer to
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claim tariff of quota concessions at the time of clearance of cargo at the import
destination. The exporter, then, makes arrangement, for reserving space on
the ship and insuring goods against transit perils. After obtaining the excise
clearance, goods are sent to the concerned port for customs clearance. Since
customs clearance is a tedious process, exporters often employ C&F agents
for availing their services in preparation of various customs documents and
getting the goods customs cleared.
After customs clearance and payment of dock charges to the port authorities
and freight charges to the shipping company, goods are loaded on the ship.
The captain of the ship issues a mate’s receipt. This mate’s receipt is submitted
to the shipping company’s office for the payment of freight. After receiving
the freight charges, the shipping company issues a bill of lading, which is
a document of contract relating to shipment of the goods by the shipping
company. Once the goods are dispatched, the exporter prepares an invoice
and sends the necessary documents, such as certified copy of invoice, bill of
lading, packing list, insurance policy, certificate of origin, letter of credit and
bill of exchange to the importer through his/her bank to release a certificate
of payment. Certificate of payment is a document that certifies that the export
transaction is over and the payment has been received.
Import Procedure: The procedure to import is also beset with several
formalities. The process starts with a search for export firms and making a
trade enquiry about the product, its price and terms and conditions of exports.
Having selected an export firm, the importer asks the exporter to send him/
her a formal quotation called proforma invoice. The importer, then, proceeds to
obtain the import licence, if required, from the office of the Directorate General
Foreign Trade (DGFT) or Regional Import Export Licensing Authority. The
importer also applies for the Import Export Code (IEC) number. This number
is required to be mentioned on most of the import documents. Since payment
for imports requires foreign currency, the importer has to send an application
to a bank authorised for sanction of the necessary foreign exchange.
After obtaining an import licence, the importer places an import order or indent
with the exporter for supply of the specified products. If required as per the
terms of contract, the importer arranges for the issuance of a letter of credit to
the exporter from the bank. Having shipped the goods under shipment advice
to the importer, the exporter sends a set of necessary documents containing
bill of exchange, commercial invoice, bill of lading/airway bill, packing list,
certificate of origin, marine insurance policy, etc., to enable the importer claim
title to the goods on their arrival at the port of destination. The exporter sends
these documents through his/her bank to the importer. The bank presents
these documents to the importer and after obtaining his/her acceptance of the
bill of exchange, delivers the documents to the importer.
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After the arrival of the goods in the importing country, the person in charge
of the carrier (ship or airway) prepares import general manifest to inform the
officer in charge at the dock or the airport that the goods have reached the
ports of the importing country. The importer or his/her C&F agent pays the
freight (if not already paid by exporter) to the shipping company and obtains
delivery order from it which entities the importer to take the delivery of the
goods at the port. At this time, port dock dues are also paid and a port trust
dues receipt is obtained. The importer, then, fills in a form ‘bill of entry’ for
assessment of customs import duty. After the payment of the import duty,
the bill of entry has to be presented to the dock superintendent for physical
examination of the goods. The examiner gives his report on the bill of entry.
The importer or his agent presents the bill of entry to the port authority for
issuance of the release order.
EXERCISES
Short Answer Questions

1. Differentiate between international trade and international business.
2. Discuss any three advantages of international business.
3. What is the major reason underlying trade between nations?
4. Why is it said that licensing is an easier way to expand globally?
5. Differentiate between contract manufacturing and setting up wholly owned
production subsidiary abroad.
6. Discuss the formalities involved in getting an export licence.
7. Why is it necessary to get registered with an export promotion council?
8. Why is it necessary for an export firm to go in for pre-shipment inspection?
9. What is bill of lading? How does it differ from bill of entry?
10. Explain the meaning of mate’s receipt.
11. What is a letter of credit? Why does an exporter need this document?
12. Discuss the process involved in securing payment for exports.
Long Answer Questions

1. “International business is more than international trade”. Comment.
2. What benefits do firms derive by entering into international business?
3. In what ways is exporting a better way of entering international markets
than setting up wholly owned subsidiaries abroad.
4. Rekha Garments has received an order to export 2000 men’s trousers to
Swift Imports Ltd., located in Australia. Discuss the procedure that Rekha
Garments would need to go through for executing the export order.
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5. Your firm is planning to import textile machinery from Canada. Describe

the procedure involved in importing.
6. Identify various organisations that have been set up in the country by the
government for promoting country’s foreign trade.
7. What is IMF? Discuss its various objectives and functions.
8. Write a detailed note on features, structure, objectives and functioning of
WTO.
I Project/Assignment — India In the World Trade

Carefully read the given data. This pertains to India’s performance in world
trade. The recent initiatives of the Government of India, such as ‘Make in
India’, ‘Digital India’, and ‘Skill India’, etc., have impacted the Indian economy
in terms of exports and imports and trade balance.
1. Table 1 shows India’s position in the world’s largest economies.
Prepare a trend report on the position of India in the global scenario of
international trade from the year 2005-2017.
2. Discuss how business and trade activities help in promoting peace and
harmony among nations.
Table
% share in
S.No. Country
global trade
1. United States 24.40
2. China 16.10
3. Japan 5.93
4. Germany 4.67
5. India 3.36
6. France 3.23
7. United Kingdom 3.19
8. Italy 2.40
9. Brazil 2.19
10. Canada 2.07
Source: International Monetary Fund
World Economic Outlook, 2018
3. Recall Section I of Chapter 1. Discuss in the class the position of exports

and imports in ancient times and compare the status of international trade
in today’s scenario.
4. Discuss the benefits of “Make in India” scheme of Government of India in
the promotion of internal and external trade of India.
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FORM NO. INC-1

(Pursuant to section 4(4) of the Companies Application for
Act, 2013 and pursuant to rule 8 & 9 of reservation of Name
the Companies
(Incorporation) Rules, 2014)
Form language English Hindi

Refer the instruction kit for filing the form.
1.* Application for :

Incorporating a new company (Part A, B, C)
Changing the name of an existing company (Part B, C, D)
Part A: Reservation of name for incorporation of a new company
2. Details of applicant (In case the applicant has been allotted DIN, then it is mandatory to
enter such DIN)
(a) Director identification number (DIN) or Income tax Pre-fill
permanent account number (PAN) or passport number Verify Details
(b) *First Name
Middle Name
*Surname
(c) *Occupation Type Self-employed Professional Homemaker Student
Serviceman
(d) Address *LINE I
LINE II
(e) *City
(f) *State/Union Territory
(g) *Pin Code
(h) ISO Country code
(i) Country
(j) e-mail ID
(k) Phone (with STD/ISD code) —
(l) Mobile (with country code) —
(m) Fax —
3. (a) *Type of company
Section 8 company Part I company (Chapter XXI) Producer company
New company (others)
(d) *State the sub-category of proposed company
Public Private Private (One Person Company)
(b) *State class of the proposed company
(c) *State the category of proposed company
4. *Name of the State/Union territory in which the proposed company is to be registered

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5. *Name of the office of the Registrar of Companies in which the proposed company is to be
registered

6. Details of promoter(s) (In case the promoter(s) has been allotted DIN, then it is mandatory to
enter such DIN)
* Enter the number of promoter(s)
*Category
DIN or Income-tax PAN or passport number or corporate
identification number (CIN) or foreign company registration Pre-fill
Number (FCRN) or any other registration number
*Name
7. *Objects of the proposed Company to be included in its MoA

8. *Particulars of proposed director(s)
(Specify information of one director in case the proposed company is One Person Company or
of two directors in case the proposed company is a private company (other than producer
company) or of three directors in case the proposed company is a public company or of five
directors in case the proposed company is a producer company)
*Director Identification Number (DIN) Pre-fill

Name
Father’s Name
Nationality Date of birth (DD/MM/YY)

Income tax permanent account number (PAN)
Passport number Voter identity card number
Aadhaar number
Present residential address
9 *Whether the Promoters are carrying on any Partnership firm, sole proprietary or unregistered
entity in the name as applied for
Yes No
(If yes, attach NOC from all owners/partners of such entity for use of such name)
Part B. Particulars about the proposed name(s)
10. *Number of proposed names for the company
(Please give maximum six names in order of preference)
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I. Proposed name
Significance of key or coined word in the
proposed name
State the name of the vernacular
language(s) if used in the proposed name
11. *Whether the proposed name is in resemblance with any class of Trade Marks
Rules, 2002
Yes No
If yes, Please specify the Class(s) of trade mark
12. *Whether the proposed name(s) is/are based on a registered trade mark or is
subject matter of an application pending for registration under the Trade Marks Act.
Yes No
If yes, furnish particulars of trade mark or application and the approval of the applicant or
owner of the trademark

13. In case the name is similar to any existing company or to the foreign holding company,
specify name of such company and also attach copy of the No Objection Certificate by way of
board resolution (Duly attested by a director of that company)
(a) Whether the name is similar to holding Company
Existing Company Foreign holding company
(b) In case of existing Company, provide CIN Pre-fill
(c) Name of the Company

14. (a) Whether the proposed name includes the words such as Insurance, Bank, Stock exchange,
Venture Capital, Asset Management, Nidhi, or Mutual Fund etc. Yes No
If Yes, whether the in-principle approval is received from
specify other Yes No
(If yes, attach the approval or if No, attach the approval at the time of filing the incorporation form
(b) *Whether the proposed name including the phrase ‘Electoral trust’ Yes No
[If Yes, attach the affidavit as per rule 8(2)(b)(vi)]
Part C. Names requiring Central Government approval
15. *State whether the proposed name(s) contain such word or expression for which the previous
approval of Central Government is required Yes No
(If Yes, this form shall be treated as an application to the Central Govt., for such approval
and shall be dealt with accordingly)
Part D. Reservation of name for change of Name by an Existing Company
16. (a) *CIN of Company Pre-fill
(b) Global Location Number (GLN) of Company
17. (a) Name of Company
(b) Address of the registered office of the Company

(c) Email ID of the Company
18. (a) * State whether the change of name is due to direction received from the Central
Government.
Yes No
(If yes, please attach a copy of such directions)
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(b) * Whether the proposed name is in accordance with the rule 8(8) and specific direction
of the Tribunal is attached.
Yes No
[If ‘Yes’ selected,attach order of tribunal as required in Rule 8(8)]
19. (a) Whether the change in name requires change in object of the company
Yes No
(b) Reasons for change in name (in case of yes above, mention proposed object of the company)

Attachments
(12) Optional attachment, if any. Attach List of attachments

Remove attachment
Declaration
*I have gone through the provisions of The Companies Act, 2013, the rules thereunder and prescribed
guidelines framed thereunder in respect of reservation of name, understood the meaning thereof and
the proposed name(s) is/are in conformity thereof.
*I have used the search facilities available on the portal of the Ministry of Corporate Affairs (MCA)
for checking the resemblance of the proposed name(s) with the companies and Limited Liability
partnerships (LLPs) respectively already registered or the names already approved. I have also used
the search facility for checking the resemblances of the proposed name(s) with registered trademarks
and trade mark subject of an application under The Trade Marks Act, 1999 and other relevant search
for checking the resemblance of the proposed name(s) to satisfy myself with the compliance of the
provisions of the Act for resemblance of name and Rules thereof.
*The proposed name(s) is/are not in violation of the provisions of Emblems and Names (Prevention
of Improper Use) Act, 1950 as amended from time to time.
*The proposed name is not offensive to any section of people, e.g., proposed name does not contain
profanity or words or phrases that are generally considered a slur against an ethnic group, religion,
gender or heredity.
*The proposed name(s) is not such that its use by the company will constitute an offence under any
law for the time being in force.
*To the best of my knowledge and belief, the information given in this application and its attachments
thereto is correct and complete, and nothing relevant to this form has been suppressed.
*I undertake to be fully responsible for the consequences in case the name is subsequently found
to be in contravention of the provisions of section 4(2) and section 4(4) of the Companies Act, 2013
and rules thereto and I have also gone through and understood the provisions of section 4(5) (ii) (a)
and (b) of the Companies Act, 2013 and rules thereunder and fully declare myself responsible for
the consequences thereof.
To be digitally signed by
*Designation
*DIN or Income-tax PAN or passport number of the applicant or Director
identification number of the director; or PAN of the manager or CEO or CFO; or Membership number
of the Company Secretary
Note: Attention is drawn to the provisions of Section 7(5) and 7(6) which, inter-alia, provides
that furnishing of any false or incorrect particulars of any information or suppression of any
material information shall attract punishment for fraud under Section 447. Attention is also
drawn to provisions of Section 448 and 449 which provide for punishment for false statement
and punishment for false evidence respectively.
Modify Check Form Prescrutiny Submit
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Nternational Usiness: Hapter

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Chapter 11

After studying this chapter, you should be able to:

• State the meaning of International Business

• Distinguish between Internal and International Business

• Discuss the scope of International Business

• Enumerate the benefits of International Business

• Discuss the documents required for import and export transactions

• Identify the incentives and schemes available for international firms

• Discuss the role of different organisations for the promotion of

• List the major international institutions and agreements at the global

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Mr. Sudhir Manchanda is a small manufacturer of automobile components. His

11.1 Introduction The prime reason behind this

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governments of different countries India has been trading with other

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therefore, be defined as those business 11.1.2 Reason for International

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The international business as it firms from engaging in international

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practices, it becomes relatively more and aspirations of the stakeholders

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(iv) Customer heterogeneity across Countries differ from one another

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Table 11.1 Major Difference between Domestic

Basis Domestic business International business

1. Nationality of People or organisations People or organisations of

2. Nationality Various other stake- Various other stakeholders such as

3. Mobility of The degree of mobility The degree of mobility of factors of

4. Customer Domestic markets International markets lack

5. Differences Business systems and Business systems and practices

6. Political Domestic business is Different countries have different

7. Business Domestic business is International business transactions

8. Currency used Currency of domestic International business transactions

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and insurance). Of these, tourism, (iv) Foreign investments: Foreign

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up a wholly owned subsidiary abroad capital goods, technology, petroleum

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but also created opportunities for improve prospects of their growth by

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business’, therefore, means various of overseas customers located in the

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additional packaging, trans- Despite the above mentioned

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are delivered to the international any idle production capacities,

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• The local firm producing under licensing. Franchisers usually set

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franchiser who sets up the and brand names in foreign

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markets. A joint venture means local partner under joint venture

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Advantages 11.3 E xport -I mport P rocedures

• The parent company has to make 11.3.1 Export Procedure

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