International Business: notes

International business means business activities, such as trade, manufacturing and investment, carried on across the boundaries of countries. International trade, the exchange of goods and services between countries, is one part of it.

Why it takes place:

1. Unequal natural resources: a country may lack what another has in plenty.
2. Differences in labour productivity and cost of production.
3. Specialisation: each country concentrates on what it makes best and buys the rest.

Worked check: with a hundred workers each, Tesoria and Kolmark together make 2,000 kg of tea and 1,500 m of cloth when workers are split equally, and 3,000 kg of tea and 2,000 m of cloth when each specialises.

Scope: merchandise exports and imports; service exports and imports; licensing and franchising; foreign investment.

Benefits to nations: earning foreign exchange; more efficient use of resources; growth prospects and employment; a higher standard of living.

Benefits to firms: prospects of higher profits; better capacity utilisation; growth prospects; a way out of intense domestic competition; improved business vision.

Worked check: a firm that can make 5,000 sarees and sells 3,000 at home uses 60 per cent of capacity; a foreign order for 2,000 raises it to 100 per cent.

The modes rise in investment, risk and control:

1. Exporting and importing, direct or indirect. Merit: little investment and risk. Limitation: transport costs, trade barriers, less control.
2. Contract manufacturing. Merit: low investment, quick entry. Limitation: quality control, leakage of secrets.
3. Licensing and franchising. Merit: little capital, quick entry. Limitation: the licensee may become a competitor; loss of control.
4. Joint ventures. Merit: shared investment and risk, local knowledge. Limitation: disagreement between partners; shared profits.
5. Wholly owned foreign subsidiaries. Merit: full control. Limitation: heavy investment and the whole risk.

Worked checks: a 5 per cent royalty on Rs 2,00,00,000 is Rs 10,00,000; a joint plant of Rs 50,00,000 financed 60 to 40 needs Rs 30,00,000 and Rs 20,00,000.

The standard sequence of an export:

1. Receipt of an enquiry and sending a quotation (proforma invoice).
2. Receipt of the order (indent).
3. Checking the importer's creditworthiness and securing a letter of credit.
4. Obtaining the Importer Exporter Code from the Directorate General of Foreign Trade and registering with an export promotion council (as of 2024).
5. Obtaining pre-shipment finance.
6. Production or procurement of the goods.
7. Pre-shipment inspection.
8. Obtaining a certificate of origin.
9. Reserving shipping space.
10. Packing and forwarding.
11. Insurance.
12. Customs clearance, through a shipping bill.
13. Obtaining the mate's receipt.
14. Paying freight and obtaining the bill of lading.
15. Preparing the invoice.
16. Securing payment, through documents sent via a bank against a bill of exchange.

Dated note (as of 2024): much of the paperwork is now filed electronically. A step of excise clearance in older books belongs to the older procedure and is not taught as current.

Worked check (imagined): 2,000 sarees at 25 US dollars is 50,000 US dollars; at an imagined Rs 80 to one US dollar it is Rs 40,00,000.

The standard sequence of an import:

1. Trade enquiry.
2. Obtaining the Importer Exporter Code (as of 2024).
3. Arranging foreign exchange.
4. Placing the order (indent).
5. Obtaining a letter of credit.
6. Arranging finance.
7. Receipt of shipment advice.
8. Retirement of import documents.
9. Arrival of goods.
10. Customs clearance, through a bill of entry, and release of the goods.

Worked check (imagined): a machine of 12,000 US dollars plus 1,500 US dollars of freight and insurance is 13,500 US dollars, or Rs 11,07,000 at an imagined Rs 82; an imagined duty of 10 per cent is Rs 1,10,700, so the total cost is Rs 12,17,700.

1. Commercial invoice: the seller's bill.
2. Packing list: the contents of each package.
3. Certificate of origin: proof of the country where the goods were made.
4. Shipping bill: the exporter's declaration to customs.
5. Mate's receipt: the ship's receipt that the goods are loaded.
6. Bill of lading or airway bill: the carrier's receipt and evidence of the contract of carriage; a bill of lading is also a document of title.
7. Marine insurance policy: cover against loss in transit.
8. Bill of exchange: a written order to pay a sum.
9. Letter of credit: a bank's undertaking to pay against conforming documents.
10. Bill of entry: the importer's declaration to customs.

The documents and their forms are as of 2024.

The World Trade Organization was established on 1 January 1995 and succeeded the General Agreement on Tariffs and Trade, which came into force in 1948. India is a founding member; the membership has grown to over 160 members as of 2024.

Objectives: raise standards of living and promote full employment; expand the production of and trade in goods and services; use resources sustainably; help developing countries to share in the growth of trade.

Functions: administer trade agreements; provide a forum for negotiations; settle disputes; review the trade policies of members; cooperate with the International Monetary Fund and the World Bank.

Benefits to members: predictable rules; settlement of disputes; lower barriers; growth and incomes; fair treatment.

Other bodies: the International Monetary Fund (monetary cooperation, exchange stability, short-term help); the World Bank (loans for reconstruction and development); UNCTAD (helping developing countries to gain from trade and investment).