Class XI Business Studies

Chapter 11 International Business

Revision Notes

International Business

• Manufacturing and trade beyond the boundaries of one’s own country is known as international
business.
• International or external business can, therefore, be defined as those business activities that
take place across the national frontiers
• It involves not only the international movements of goods and services, but also of capital,
personnel, technology and intellectual property like patents, trademarks, know-how and
copyrights.

Reason for International Business

• Countries cannot produce equally well or cheaply all that they need. This is because of the
unequal distribution of natural resources among them or differences in their productivity levels
• Labour productivity and production costs differ among nations due to various socio-economic,
geographical and political reasons
• Principle of territorial division of labour is applicable at the international level too. Most
developing countries which are labour abundant, for instance, specialise in producing and
exporting garments
• Firms too engage in international business to import what is available at lower prices in other
countries, and export goods to other countries where they can fetch better prices for their
products

International Business vs. Domestic Business

BASIS INTERNATIONAL BUSINESS DOMESTIC BUSINESS

NATIONALITY OF BUYERS AND Buyers and sellers come from Buyers and sellers are from the
SELLERS different countries same country
NATIONALITY OF OTHER Belong from various countries Belong to one country and
STAKEHOLDERS and hence have wider set of hence consistency in their value
values and aspirations system and behaviour
MOBILITY OF FACTORS OF Mobility with various Free mobility
PRODUCTION restrictions
CUSTOMER HETEROGENEITY Difference in taste and Difference in taste and
ACROSS preference complicate the task preference does not complicate
MARKETS of designing product in the task of designing product in
international market domestic market
DIFFERENCES IN BUSINESS The differences in business The differences in business
SYSTEMS AND PRACTICES systems and practices are systems and practices are
considerably much more among considerably less within a
different countries country
POLITICAL SYSTEM AND RISKS Political environment differs Predict the impact of political
from one country to another. environment on business
Special efforts are needed operations

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 BUSINESS REGULATIONS AND Business laws, regulations and Business laws, regulations and
POLICIES economic policies differ among economic policies are more or
different countries less uniformly applicable within
a country
CURRENCY USED IN BUSINESS The price of one currency No such problem is faced as
TRANSACTIONS expressed in relation to that of only home currency is used
another country’s currency,
keeps on fluctuating.

Scope of International Business

Merchandise exports and imports

• Merchandise exports means sending tangible goods abroad,
• Merchandise imports means bringing tangible goods from a foreign country to one’s own country.
• Merchandise exports and imports, also known as trade in goods, include only tangible goods and
exclude trade in services

Service exports and imports

• Service exports and imports involve trade in intangibles.
• It is because of the intangible aspect of services that trade in services is also known as invisible trade.
• A wide variety of services are traded internationally

Licensing and franchising

• Permitting another party in a foreign country to produce and sell goods under your trademarks,
patents or copy rights in lieu of some fee is another way of entering into international business
• Franchising is similar to licensing, but it is a term used in connection with the provision of services

Foreign investments
• Foreign investment involves investments of funds abroad in exchange for financial return.
• Foreign investment can be of two types: direct and portfolio investments.
• Direct investment takes place when a company directly invests in properties such as plant and
machinery in foreign countries with a view to undertaking production and marketing of goods and
services in those countries
• A portfolio investment, on the other hand, is an investment that a company makes into another
company by the way of acquiring shares or providing loans to the latter, and earns income by way of
dividends or interest on loans

Benefits of International Business

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Benefits to Countries Benefits to Firms

When the domestic prices are lower, business

International business helps a country to earn firms can earn more profits by selling their
foreign exchange which it can later use for products in countries where prices are high
meeting its imports of other goods
Making use of surplus production capacities and
Produce what your country can produce more thereby improving the profitability of
efficiently, and trade the surplus production so operations.
generated with other countries to procure what
they can produce more efficiently When Demand in home country gets saturated,
the company can think of growth prospects in
Exporting and flourishing in International trade developing countries
helped in improving their growth prospects and
created opportunities for employment of people When competition in the domestic market is
very intense, internationalisation seems to be
Due to International business people in world the only way to achieve significant growth
community are able to consume and enjoy a The vision to become international comes from
higher standard of living the urge to grow, the need to become more
competitive, the need to diversify and to gain
strategic advantages of internationalisation.

MODES OF ENTRY INTO INTERNATIONAL BUSINESS

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 Exporting and Importing

Meaning Merits Limitations

•Exporting refers to sending of •Easiest way of gaining entry •Expenses and paymentslike
goods and services from the into international markets. custom duty , transportation
home country to a foreign •Business firms are not required and other charges substantially
country to invest that much time and increase product costs and
•Importing is purchase of foreign money makethem less competitive
products and bringing them into •Since exporting/importing does •Exporting is not a feasible
one’s home country not require much of investment option when import restrictions
•Two ways of exporting and in foreign countries, exposure exist in a foreign country. Opt
Importing to foreign investment risks is nil for modes like licensing or
•1. direct exporting/importing, a or much lower franchising
firm itself approaches the •Export firms basically operate
overseas buyers/ suppliers and from their home country. Few
looks after all the formalities visits are made to promote the
related to exporting/ importing product which lags them in
activities including those related understanding and serving the
to shipment and financing of customer better
goods and services
•2. Indirect exporting/
importing, on the other hand, is
one where the firm’s
participation in the
export/import operations is
minimum, and most of the tasks
relating to export/import of the
goods are carried out by some
middle men

Contract Manufacturing

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 Meaning Merits Limitations

•Type of international business •They make use of the •Non adherence to production
where a firm enters into a production facilities already design and quality standards
contract with one or a few local existing in the foreign countries, causes product quality problems
manufacturers in foreign thus, investment not required to the international firm
countries to get certain •As no investment, no •Local manufacturers loses his
components or goods produced investment risk control over the manufacturing
as per its specifications •Gives advantage to international process because goods are
•Contract manufacturing, also companies to manufacture or produced strictly as per the
known as outsourcing, can take assemble the products at lower terms and specifications
three major forms: costs •They are not free to sell the
•Production of certain •Idle production capacities in contracted output as per its will.
components foreign country, obtains It has to sell the goods to the
•Assembly of components into manufacturing jobs on contract international company at
final products basis in a way provide a ready predetermined price
•Complete manufacture of the market for their products
products such as garments •Gets the opportunity to get
involved with international
business and avail incentives

Licensing and Franchising

Meaning Merits Limitations

•Licensing is a contractual •As such, the licensor/franchiser •There is a danger that the
arrangement in which one firm has to virtually make no licensee can start marketing an
grants access to its patents, investments abroad. identical product under a
trade secrets or technology to Licensing/franchising is, slightly different brand name
another firm in a foreign therefore, considered a less •If not maintained properly,
country for a fee called royalty expensive mode of entering into trade secrets can get divulged
•There is mutual exchange of international business. to others in the foreign markets
knowledge, technology and/or •No or very little foreign •Conflicts over maintenance of
patents between the firms investment is involved, licensor/ accounts, payment of royalty
which is known as cross- franchiser is not a party to the and non-adherence to norms
licensing losses relating to production of quality
•Franchising applies to service •There are lower risks of products
business business takeovers or
•Franchisers usually set strict government interventions
rules and regulations as to how •Licensee/franchisee being a
the franchisees should operate local person has greater market
while running their business knowledge and contacts which
can prove quite helpful to the
licensor/franchiser in
successfully conducting its
marketing operations.
•Make use of the licensor’s/
franchiser’s copyrights, patents
and brand names

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 Joint Ventures

Meaning Merits Limitations

•A joint venture means •Since the local partner also •The dual ownership
establishing a firm that is jointly contributes to the equity capital arrangement may lead to
owned by two or more of such a venture, the conflicts, resulting in battle for
otherwise independent firm international firm finds it control between the investing
•Three major ways: financially less burdensome to firms
•Foreign investor buying an expand globally •Share of technology and trade
interest in a local company •Possible to execute large secrets poses a threat of
•Local firm acquiring an interest projects requiring huge capital disclosing it to others
in an existing foreign firm outlays and manpower
•Both the foreign and local •The foreign business firm
entrepreneurs jointly forming a benefits from a local partner’s
new enterprise. knowledge of the host countries
regarding the competitive
conditions, culture, language,
political systems and business
systems
•Sharing costs and risks avoids
burdern on one

Wholly Owned Subsidiaries

Meaning Merits Limitations

•This entry mode of international •Exercise full control over its •Not suitable for small and
business is preferred by operations medium size firms which do not
companies which want to •Not required to disclose its have enough funds with them to
exercise full control over their technology or trade secrets to invest abroad
overseas operations others. •Has to bear the entire losses
•Established in 2 ways: resulting from failure of its
•Setting up a new firm foreign operations
altogether to start operations in •They are subject to higher
a foreign country political risks
•Acquiring an established firm in
the foreign country and using
that firm to manufacture
and/or promote its products in
the host nation

EXPORT-IMPORT PROCEDURES AND DOCUMENTATION

Export Procedure

1. Receipt of enquiry and sending quotations

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 • Exporters can be informed of such an enquiry even by way of advertisement in the press
put in by the importer.
• The exporter sends a reply to the enquiry in the form of a quotation referred to as
proforma invoice.
• The proforma invoice contains information about the price at which the exporter is
ready to sell the goods and also provides information about the quality, grade, size,
weight, mode of delivery, type of packing and payment terms

2. Receipt of order or indent

• Export price and other terms and conditions acceptable, it places an order for the goods
to be despatched.
• This order, also known as indent, contains a description of the goods ordered, prices to
be paid, delivery terms, packing and marking details and delivery instructions

3. Assessing the importer’s creditworthiness and securing a guarantee for payments

• Exporter makes enquiry about the creditworthiness of the importer
• To minimise such risks, most exporters demand a letter of credit from the importer.
• A letter of credit is a guarantee issued by the importer’s bank that it will honour
payment up to a certain amount of export bills to the bank of the exporter

4. Obtaining export licence

• Export of goods in India is subject to custom laws which demand that the export firm
must have an export licence before it proceeds with exports
• Pre-requisites for getting an export licence:
o Opening a bank account in any bank authorised by the Reserve Bank of India
o Obtaining Import Export Code (IEC) number from the Directorate General
Foreign Trade (DGFT) or Regional Import Export Licensing Authority.
o Registering with appropriate export promotion council.
o Registering with Export Credit and Guarantee Corporation (ECGC) in order to
safeguard against risks of non payments
• For obtaining the IEC number, a firm has to apply to the Director General for Foreign
Trade (DGFT) with documents such as exporter/importer profile, bank receipt for
requisite fee, certificate from the banker on the prescribed form, two copies of
photographs attested by the banker, details of the non-resident interest and declaration
about the applicant’s non association with caution listed firms.
• It is obligatory for every exporter to get registered with the appropriate export
promotion council
• Registration with the ECGC is necessary in order to protect overseas payments from
political and commercial risks

5. Obtaining pre-shipment finance

• Exporter approaches his banker for obtaining pre-shipment finance to undertake export
production.
• Pre-shipment finance is the finance that the exporter needs for procuring raw materials
and other components, processing and packing of goods and transportation of goods to
the port of shipment.

6. Production or procurement of goods

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 • Exporter proceeds to get the goods ready as per the specifications of the importer.
Either the firm itself goes in for producing the goods or else it buys from the market

7. Pre-shipment Inspection
• Compulsory inspection of certain products by a competent agency as designated by the
government
• The government has passed Export Quality Control and Inspection Act, 1963 for this
purpose and has authorised some agencies to act as inspection agencies
• The pre-shipment inspection report is required to be submitted along with other export
documents at the time of exports
• Inspection is not compulsory in case the goods are being exported by star trading
houses, trading houses, export houses, industrial units setup in export processing
zones/special economic zones (EPZs/SEZs) and 100 per cent export oriented units (EOUs

8. Excise clearance
• Excise duty is payable on the materials used in manufacturing goods. The exporter,
therefore, has to apply to the concerned Excise Commissioner in the region with an
invoice. If the Excise Commissioner is satisfied, he may issue the excise Clearance
• The refund of excise duty is known as duty drawback.
• This scheme of duty drawback is presently administered by the Directorate of Drawback
under the Ministry of Finance which is responsible for fixing the rates of drawback for
different products

9. Obtaining certificate of origin

• For availing trade concessions and other benefits, the importer may ask the exporter to
send a certificate of origin.
• The certificate of origin acts as a proof that the goods have actually been manufactured
in the country from where the export is taking place.
• This certificate can be obtained from the trade consulate located in the exporter’s
country

10. Reservation of shipping space

• The exporting firm applies to the shipping company for provision of shipping space.
• It has to specify the types of goods to be exported, probable date of shipment and the
port of destination.
• On acceptance of application for shipping, the shipping company issues a shipping order

11. Packing and forwarding

• The goods are then properly packed and marked with necessary details such as name
and address of the importer, gross and net weight, port of shipment and destination,
country of origin, etc.
• The exporter then makes necessary arrangement for transportation of goods to the
port.
• On loading goods into the railway wagon, the railway authorities issue a ‘railway receipt’
which serves as a title to the goods.
• The exporter endorses the railway receipt in favour of his agent to enable him to take
delivery of goods at the port of shipment

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12. Insurance of goods
• Goods are insured with an insurance company y to protect against the risks of loss or
damage of the goods due to the perils of the sea during the transit

13. Customs clearance

• The goods must be cleared from the customs before these can be loaded on the ship.
• For obtaining customs clearance, the exporter prepares the shipping bill.
• Shipping bill is the main document on the basis of which the customs office gives the
permission for export
• Five copies of the shipping bill along with the following documents are then submitted
to the Customs Appraiser at the Customs House:
o Export Contract or Export Order
o Letter of Credit
o Commercial Invoice
o Certificate of Origin
o Certificate of Inspection
o Marine Insurance Policy
• After submission of these documents, the Superintendent of the concerned port trust is
approached for obtaining the carting order. Carting order is the instruction to the staff
at the gate of the port to permit the entry of the cargo inside the dock

14. Obtaining mates receipt

• A mate receipt is a receipt issued by the commanding officer of the ship when the cargo
is loaded on board, and contains the information about the name of the vessel, berth,
date of shipment, descripton of packages, marks and numbers, condition of the cargo at
the time of receipt on board the ship, etc.
• The port superintendent, on receipt of port dues, hands over the mate’s receipt to the
C&F agent.

15. Payment of freight and issuance of bill of lading

• The C&F agent surrenders the mates receipt to the shipping company for computation
of freight.
• After receipt of the freight, the shipping company issues a bill of lading which serves as
an evidence that the shipping company has accepted the goods for carrying to the
designated destination.
• In the case the goods are being sent by air, this document is referred to as airway bill.

16. Preparation of invoice

• The invoice states the quantity of goods sent and the amount to be paid by the
importer. The C&F agent gets it duly attested by the customs.

17. Securing payment

• The importer needs various documents to claim the title of goods on their arrival at
his/her country and getting them customs cleared.
• The documents that are needed in this connection include certified copy of invoice, bill
of lading, packing list, insurance policy, certificate of origin and letter of credit
• Submission of the relevant documents to the bank for the purpose of getting the
payment from the bank is called ‘negotiation of the documents’

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 • On receiving the bill of exchange, the importer releases the payment in case of sight
draft or accepts the usance draft for making payment on maturity of the bill of
exchange. The exporter’s bank receives the payment through the importer’s bank and is
credited to the exporter’s account
• The exporter can get immediate payment from his/ her bank on the submission of
documents by signing a letter of indemnity
• Having received the payment for exports, the exporter needs to get a bank certificate of
payment

Import Procedure

1. Trade enquiry
• importing firm approaches the export firms with the help of a trade enquiry for
collecting information about their export prices and terms of exports.
• 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 is
ready to exports goods
• exporter prepares a quotation and sends it to the importer. The quotation is known as
proforma invoice

2. Procurement of import licence

• The importer needs to consult the Export Import (EXIM) policy in force to know whether
the goods that he or she wants to import are subject to import licensing.
• In case goods can be imported only against the licence, the importer needs to procure
an import licence
• In India, it is obligatory for every importer (and also for exporter) to get registered with
the Directorate General Foreign Trade (DGFT) or Regional Import Export Licensing
Authority, and obtain an Import Export Code (IEC) number

3. Obtaining foreign exchange

• Payment in foreign currency involves exchange of Indian currency into foreign currency.
• In India, all foreign exchange transactions are regulated by the Exchange Control
Department of the Reserve Bank of India (RBI).
• As per the rules in force, every importer is required to secure the sanction of foreign
exchange.
• For obtaining such a sanction, the importer has to make an application to a bank
authorised by RBI to issue foreign exchange

4. Placing order or indent

• Importer places an import order or indent with the exporter for supply of the specified
products.
• The import order contains information about the price, quantity size, grade and quality
of goods ordered and the instructions relating to packing, shipping, ports of shipment
and destination, delivery schedule, insurance and mode of payment

5. Obtaining letter of credit

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 • If the payment terms agreed between the importer and the overseas supplier is a letter
of credit, then the importer should obtain the letter of credit from its bank and forward
it to the overseas supplier

6. Arranging for finance

• The importer should make arrangements in advance to pay to the exporter on arrival of
goods at the port.
• Advanced planning for financing imports is necessary so as to avoid huge penalities

7. Receipt of shipment advice

• After loading the goods on the vessel, the overseas supplier dispatches the shipment
advice to the importer.
• A shipment advice contains information about the shipment of goods

8. Retirement of import documents

• the overseas supplier prepares a set of necessary documents as per the terms of
contract and letter of credit and hands it over to his or her banker for their onward
transmission and negotiation to the importer in the manner as specified in the letter of
credit.
• The set of documents normally contains bill of exchange, commercial invoice, bill of
lading/airway bill, packing list, certificate of origin, marine insurance policy, etc.

9. Arrival of goods
• The person in charge of the carrier (ship or airway) informs the officer in charge at the
dock or the airport about the arrival of goods in the importing country.
• He provides the document called import general manifest. Import general manifest is a
document that contains the details of the imported goods

10. Customs clearance and release of goods

• Firstly, the importer has to obtain a delivery order which is otherwise known as
endorsement for delivery. Generally when the ship arrives at the port, the importer
obtains the endorsement on the back of the bill of lading. This endorsement is done by
the concerned shipping company. In some cases instead of endorsing the bill, the
shipping company issues a delivery order. This order entitles the importer to take the
delivery of goods
• The importer has to submit to the ‘Landing and Shipping Dues Office’ two copies of a
duly filled in form — known as ‘application to import’. The ‘Landing and Shipping Dues
Office’ levies a charge for services of dock authorities which has to be borne by the
importer. After payment of dock charges, the importer is given back one copy of the
application as a receipt. This receipt is known as ‘port trust dues receipt’.
• The importer then fills in a form ‘bill of entry’ for assessment of customs import duty
• After payment of the import duty, the bill of entry has to be presented to the dock
superintendent
• The importer or his agent presents the bill of entry to the port authority. After receiving
necessary charges, the port authority issues the release order

FOREIGN TRADE PROMOTION: INCENTIVES AND ORGANISATIONAL SUPPORT

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Foreign Trade Promotion Measures and Schemes

1. Duty drawback scheme

• Duties paid on export goods are, therefore, refunded to exporters on production of
proof of exports of these goods to the concerned authorities. Such refunds are called
duty draw backs.
• Some major duty draw backs include refund of excise duties paid on goods meant for
exports, refund of customs duties paid on raw materials and machines imported for
export production. The latter is also called customs drawback

2. Export manufacturing under bond scheme

• This facility entitles firms to produce goods without payment of excise and other duties.
• The firms desirous of availing such facility have to give an undertaking (i.e., bond) that
they are manufacturing goods for export purposes

3. Exemption from payment of sales taxes

• Goods meant for export purposes are not subject to sales tax
• This benefit of exemption from income tax is available only to 100 per cent Export
Oriented Units (100 per cent EOUs) and units set up in Export Processing Zones
(EPZs)/Special Economic Zones (SEZs) for select years

4. Advance licence scheme

• Exporter is allowed duty free supply of domestic as well as imported inputs required for
the manufacture of export goods.
• As such the exporter is not required to pay customs duty on goods imported for use in
the manufacture of export goods.
• The advance licences are available to both the types of exporters—those who export on
a regular basis and also to those who export on an adhoc basis

5. Export Promotion Capital Goods Scheme (EPCG)

• Allows export firms to import capital goods at negligible or lower rates of customs
duties subject to actual user condition and fulfilment of specified export obligations
• This scheme is especially beneficial to the industrial units interested in modernisation
and upgradation of their existing plant and machinery.

6. Scheme of recognising export firms as export house, trading house and superstar trading house
• With an objective to promote established exporters and assist them in marketing their
products in international markets, the government grants the status of Export House
• This status is granted to a firm on its achieving a prescribed average export of
performance in past select years. Besides attaining a minimum of past average export
performance, such export firms have to also fulfill other conditions as laid down in the
import-export policy

7. Export of Services
• Objective is to boost the export of services
• These houses are recognized on the basis of the export performance of the service
providers.

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 • They are referred to as Service Export House, International Service Export House,
International Star Service Export House

8. Export finance
• Exporters require finance for the manufacture of goods
• Two types of export finances are made available to the exporters by authorised banks.
• They are termed as pre-shipment finance or packaging credit and postshipment finance.
• Under the preshipment finance, finance is provided to an exporter for financing the
purchase, processing, manufacturing or packaging of goods for export purpose.
• Under the post-shipment finance scheme, finance is provided to the exporter from the
date of extending the credit after the shipment of goods to the export country

9. Export Processing Zones (EPZs)

• Export Processing Zones are industrial estates, which form enclaves from the Domestic
Tariff Areas (DTA).
• These are usually situated near seaports or airports.
• They are intended to provide an internationally competitive duty free environment for
export production at low cost
• Recently the EPZs have been converted to Special Economic Zones (SEZs) which are
more advanced form of export processing zones. These SEZs are free from all rules and
regulations governing imports and exports

10. 100 per cent Export Oriented Units (100 per cent EOUs)
• EOUs have been established with a view to generating additional production capacity
for exports by providing an appropriate policy framework, flexibility of operations and
incentives
• It adopts the same production regime, but offers a wider option in location

Organisational Support

1. Department of Commerce
• It is the apex body responsible for the country’s external trade and all matters
connected with it.
• It formulates policies in the sphere of foreign trade.
• It also frames the import and export policy of the country in general.

2. Export Promotion Councils (EPCs)

• They are non-profit organisations registered under the Companies Act or the Societies
Registration Act
• Objective is to promote and develop the country’s exports of particular products falling
under their jurisdiction

3. Commodity Boards
• Established for the development of production of traditional commodities and their
exports.
• These boards are supplementary to the EPCs and functions are same as EPCs

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 4. Export Inspection Council (EIC)
• Setup by the Government of India under Section 3 of the Export Quality Control and
Inspection Act 1963.
• The council aims at sound development of export trade through quality control and pre-
shipment inspection

5. Indian Trade Promotion Organisation (ITPO)

• Set up under the Companies Act 1956 by the Ministry of Commerce, Government of
India
• ITPO is a service organisation and maintains regular and close interaction with trade,
industry and Government.
• It serves the industry by organising trade fairs and exhibitions—both within the country
and outside

6. Indian Institute of Foreign Trade (IIFT)

• Setup by the Government of India as an autonomous body registered under the
Societies Registration Act with the prime objective of professionalising the country’s
foreign trade management
• It provides training in international trade, conduct researches in areas of international
business, and analysing and disseminating data relating to international trade and
investments

7. Indian Institute of Packaging (IIP)

• Set up jointly by the Ministry of Commerce, Government of India, and the Indian
Packaging Industry and allied interests
• It is a training-cum-research institutepertaining to packaging and testing.
• It caters to the packaging needs with regard to both the domestic and export markets
• It also undertakes technical consultancy, testing services on packaging developments,
training and educational programmes, promotional award contests, information
services and other allied activities

8. State Trading Organisations

• The existing trade channels were unsuitable for promotion of exports and bringing
about diversification of trade with countries other than European countries which gave
need to set up State Trading Organisations
• The main objective of the STC is to stimulate trade, primarily export trade among
different trading partners of the world

INTERNATIONAL TRADE INSTITUTIONS AND TRADE AGREEMENTS

• They considered three organisations (the International Monetary Fund (IMF), International Bank
for Reconstruction and Development (IBRD) and the International Trade Organisation) as three
pillars of economic development of the world.
• While the World Bank was assigned with the task of reconstructing war-torn economies —
especially the ones in Europe, the IMF was entrusted with the responsibility of ensuring
stabilization of exchange rates to pave way for the expansion of world trade.

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 • The main objective of the ITO as they could foresee at that time was to promote andfacilitate
international trade among the member countries by overcoming various restrictions and
discriminations
• The idea of setting up of ITO, however, could not materialise due to stiff opposition from the
United States. Instead of an organisation, what eventually emerged was an arrangement to
liberalise international trade from high customs tariffs and various other types of restrictions.
This arrangement came to be known as the General Agreement for Tariffs and Trade (GATT)
• India was one of the founding members of these three international bodies

World Bank

• The International Bank for Reconstruction and Development (IBRD), commonly known as World
Bank, was result of the Bretton Woods Conference.
• The main objectives were to aid the task of reconstruction of the war-affected economies of
Europe and assist in the development of the underdeveloped nations of the world
• Having achieved success in accomplishing, turned its attention to the development of
underdeveloped nations.
• It realized that by investing more and more in these countries, especially in social sectors like
• health and education; it could bring about the needed social and economic transformation of
the developing countries
• International Development Association (IDA) was formed with objective to provide loans on
concessional terms and conditions to those countries whose per capita incomes are below a
critical level
• IDA, thus, provides interest-free long-term loans to the poor nations. IBRD also provides loans
but these carry interest charged on commercial basis
• The World Bank is a group of five international organisations responsible for providing finance
to different countries.

International Monetary Fund

• The major idea underlying the setting up of the IMF is to evolve an orderly international
monetary system, i.e., facilitating system of international payments and adjustments in
exchange rates among national currencies

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 Objectives Functions

• To promote international monetary • Acting as a short-term credit institution

cooperation through a permanent • Providing machinery for the orderly
institution, adjustment of exchange rates
• To facilitate expansion of balanced growth • Acting as a reservoir of the currencies of
of international trade and to contribute all the member countries
promotion and maintenance of high level • Acting as a lending institution of foreign
of employmet currency and current transaction
• To promote exchange stability with a view • Determining the value of a country’s
to maintain orderly exchange currency and altering it
arrangements among member countries
• Providing machinery for international
• To assist in the establishment of a consultations
multilateral system of payments in respect
of current transactions between members.

World Trade Organization (WTO) and Major Agreements

• One of the key achievements of GATT negotiations was the decision to set up a permanent
institution for looking after the promotion of free and fair trade amongst nations
• The GATT was transformed into World Trade Organization (WTO) with effect from 1 January
1995. Headquarters of the WTO are situated at Geneva, Switzerland
• It governs trade not only in goods, but also in services and intellectual property rights
• The WTO is a permanent organisation created by an international treaty ratified by the
governments and legislatures of member states.
• It is, moreover, a member-driven rule-based organisation in the sense that all the decisions are
taken by the member governments on the basis of a general consensus.
• India is a founding member of WTO

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 Objectives Functions Benefits

• To ensure reduction of tariffs • Encouraging its member • Helps promote international

and other trade barriers countries to come forward peace and facilitates
imposed by different to WTO in mitigating their international business.
countries; grievances • All disputes between
• To engage in such activities • Laying down a commonly member nations are settled
which improve the standards accepted code of conduct with mutual consultations.
of living, create with a view to reducing • Rules make international
employment, increase trade barriers, including trade and relations very
income and effective tariffs and eliminating smooth and predictable.
demand and facilitate higher discriminations in • Free trade improves the
production and trade; international trade relations living standard of the people
• To facilitate the optimal use • Acting as a dispute by increasing the income
of the world’s resources for settlement body level.
sustainable development • Ensuring that all rules • Free trade provides ample
• To promote an integrated, regulations prescribed in the scope of getting varieties of
more viable and durable Act are duly followed qualitative products.
trading system. • Holding consultations to • Economic growth has been
bring better understanding fastened because of free
and cooperation in global trade.
economic policy making • The system encourages good
• Supervising on a regular government.
basis the operations of the • WTO helps fostering growth
revised Agreements and of developing countries
Ministerial declarations
relating to goods, services
and Trade Related
Intellectual Property Rights
(TRIPS)

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