INTERNATIONAL

BUSINESS
 MEANING
Domestic business, or domestic trade, occurs within a
nation's geographical boundaries, while international
business involves manufacturing and trade across national
borders. This includes international movements of goods
and services, capital, personnel, technology, and
intellectual property. While often associated with
international trade, international business has expanded to
include services like international travel, tourism,
transportation, communication, banking, warehousing,
distribution, and advertising. Companies are also investing
in foreign countries and producing goods and services to
better serve foreign customers at lower costs.
REASONS OF INTERNATIONAL
BUSINESS
International business is driven by the unequal distribution of
natural resources and differences in productivity levels among
nations. Factors of production, such as labor, capital, and raw
materials, also vary among nations due to socio-economic,
geographical, and political reasons. This leads to countries
producing select goods and services that others cannot produce
effectively or at lower costs. This advantage allows countries to
produce these goods and services at home and procure the rest
through trade with other countries. International business is
largely a result of geographical specialization, with states or
regions specializing in their best-suited products. This principle
applies to international trade, as developing countries often
import textile machinery from developed nations to produce
more efficiently. Additionally, firms engage in international
business to import goods at lower prices and export goods to
countries with better prices.
 INTERNATIONAL BUSINESS VS
DOMESTIC BUSINESS
International business operations are more complex than
domestic ones due to variations in political, social, cultural,
and economic environments. Firms must adapt their product,
pricing, promotion, and distribution strategies to suit foreign
market requirements, highlighting key differences between
domestic and international businesses.
Domestic and international businesses differ in key participants'
nationality. Domestic businesses have buyers and sellers from the same
country, making communication easier. International businesses,
however, face language, attitudes, social customs, and business goals,
making it harder to finalize transactions.

Domestic and international businesses differ in their nationalities, with

domestic businesses having more consistency in value systems and
behaviors, while international businesses face more complexity due to
the diverse values and aspirations of stakeholders.

Factors like labour and capital generally move less within a country than
between, with restrictions due to legal and socio-cultural differences,
geographic influences, and economic conditions, particularly for labor,
which struggles to adapt to these differences.
International market buyers come from diverse countries with unique socio-cultural
backgrounds, resulting in varying tastes, fashions, languages, beliefs, customs, attitudes,
and product preferences. These differences cause variations in demand, communication
patterns, and purchase behaviors. For example, Japanese prefer bicycles, Indians use
right-hand-driven cars, and Americans drive on the left side. These variations complicate
product design and strategy development for customers in different countries.

Business systems and practices vary significantly among countries due

to socio-economic development, economic infrastructure, market
support services, and historical coincidences. Firms entering
international markets must adapt their production, finance, human
resource, and marketing plans to meet international market conditions.

Political factors like government, party system, ideology, and risks significantly
impact business operations. International businesses need to understand and
adapt to different political environments, as they differ from one country to
another. Monitoring political changes and developing strategies to deal with
diverse risks is crucial. A major issue in foreign countries is the tendency to
favor domestic products over foreign ones.
Each country has unique business laws and regulations, influenced by
its socioeconomic environment and political philosophy, which can
vary widely among nations, often discriminating against foreign
products, services, and capital.

International business involves using different currencies, causing

fluctuating exchange rates and posing challenges for firms in determining
product prices and mitigating foreign exchange risks.
Major Difference between Domestic and
International Business :-
 SCOPE OF
INTERNATIONAL BUSINESS
International business encompasses not only
international trade, but also various forms of
business operations, including export and import
of goods and services.
 MAJOR FORMS OF BUSINESS OPERATIONS THAT
CONSTITUTE INTERNATIONAL BUSINESS ARE AS
FOLLOWS :-

Merchandise exports Service exports and Licensing and

Foreign investments
and imports imports franchising Foreign investment is a crucial
Merchandise means goods that Service exports and imports Licenses allow foreign aspect of international business,
are tangible, i.e., those that can involve trade in intangibles, involving investments in foreign
parties to produce and
be seen and touched. When also known as invisible trade. countries for financial return. It
It includes various services sell goods under
viewed from this perceptive, it can be direct or portfolio
is clear that while merchandise like tourism, travel, trademarks, patents, or
investments. Direct investment
exports means sending tangible entertainment, copyrights for a fee. This
transportation, professional
involves a company investing in
goods abroad, merchandise system is used by
services, communication, properties in foreign countries for
imports means bringing tangible companies like Pepsi and
construction, engineering, production and marketing, giving
goods from a foreign country to
marketing, and financial Coca Cola, and the investor a controlling interest.
one’s own country. Merchandise
services. Tourism, franchising allows Portfolio investments involve
exports and imports, also known
transportation, and business acquiring shares or providing
as trade in goods, include only services like McDonald's
services are major
tangible goods and exclude to operate globally. loans to another company, earning
components of world trade in
trade in services. income through dividends or
services.
interest on loans.
 Benefits of International
Business
Not with standing greater complexities and risks,
international business is important to both nations and
business firms. It offers them several benefits. Growing
realisation of these benefits over time has in fact been a
contributory factor to the expansion of trade and investment
amongst nations, resulting in the phenomenon of
globalisation.
Benefits to Countries
1 Earning of foreign exchange:-
International business generates foreign exchange for a country, which it can use
to import capital goods, technology, petroleum products, fertilizers,
pharmaceuticals, and other consumer goods not available domestically.

2 More efficient use of resources:-

International business operates on the principle of producing what a country can

efficiently and trading surplus production with other countries to procure more
efficient goods and services. This leads to increased production and benefits all
trading nations.
Benefits to Countries
3 Improving growth prospects and employment potentials:-
Domestic consumption limits a country's growth and employment prospects.
Many developing countries struggle to expand production due to insufficient
domestic markets. However, countries like Singapore, South Korea, and China
have adopted the 'export and flourish' strategy, improving growth prospects and
creating employment opportunities.

4 Increased standard of living:-

International trade facilitates the global community's access to goods and

services produced in other countries, enabling them to enjoy a higher standard
of living.
 *BENEFITS TO FIRMS*
Way out to intense competition in
Increased capacity utilisation domestic market
Firms often set production capacities The intense domestic market necessitates
exceeding domestic demand, planning internationalization for significant growth.
overseas expansion and acquiring foreign Companies seek markets abroad, acting as
orders to utilize surplus capacities, catalysts for growth in tough domestic
thereby improving profitability and conditions, as international business is highly
resulting in economies of scale. competitive.

2. 4.

1. 3. 5.

Prospects for higher profits Prospects for growth Improved business vision
International business can be more Business firms face frustration when Many companies' growth in
profitable than domestic business, as domestic demand for their products international business is a strategic
businesses can sell their products in becomes saturated, leading to management decision driven by
countries with higher prices when multinationals entering developing growth, competitiveness,
domestic prices are lower. countries to improve growth diversification, and strategic
prospects. They realize their advantages of internationalization.
products are in high demand in
developing countries.
Modes of Entry into International
Business
The term "mode" refers to the manner or way a
company can enter international business. This
discussion will detail important modes of entry, their
advantages and limitations, and help determine which
mode is most suitable under specific conditions.
Exporting and Importing
Exporting involves sending goods and services from one's
home country to a foreign country, while importing involves
purchasing and importing foreign products. Firms can export
or import products through direct and indirect methods.
Direct exporting involves a firm handling all formalities,
while indirect exporting involves minimal participation and
most tasks being handled by middlemen, such as export
houses or wholesale importers.
Advantages :-
1.
Exporting/importing is the most straightforward method for
entering international markets, as it is less complex than
managing joint-ventures or wholly owned subsidiaries abroad.

2.
Exporting/importing is less costly for businesses as they don't
need to invest as much time and money to establish joint
ventures or manufacturing facilities in host countries.

3.
Exporting/importing, due to its low investment requirement in
foreign countries, offers firms significantly lower exposure to
foreign investment risks compared to other international business
entry modes.
Limitations :-
1.
Exporting and importing goods involve additional packaging,
transportation, insurance costs, custom duty, and other charges,
making them less competitive and increasing product costs due
to physical movement between countries.

2.
Exporting is not feasible in foreign countries with import
restrictions, forcing firms to use alternative entry modes like
licensing, franchising, or joint ventures for local production and
marketing.

3.
Export firms operate from their home country, producing and
shipping goods to foreign countries. They have limited contact
with foreign markets, disadvantageously compared to local firms
that are closer to customers and better understand their needs.
Contract manufacturing is an international business where a firm contracts local manufacturers in foreign countries to produce specific
components or goods according to its specifications. It can take three forms: production of components, assembly of components into
final products, and complete manufacture of products like garments. The goods are delivered to the international firm for use in its final
products or sold under its brand name in various countries.
Advantages :-
Contract manufacturing allows international firms to produce
goods on a large scale without investing in production
facilities, using existing facilities in foreign countries.

Since there isno or little investment in the foreign countries,

there is hardly any investment risk involved in the foreign
countries.

Contract manufacturing offers international companies the

advantage of lower costs, particularly when local producers
are located in countries with lower material and labor costs.
Advantages :-
Contract manufacturing benefits local producers in foreign countries by
providing a ready market for their products and ensuring greater utilization
of their production capacities. The Godrej group in India is benefiting from
contract manufacturing by manufacturing soaps for multinationals.

Local manufacturers can engage with international business

and receive incentives from export firms for goods to be
delivered to their home country or other foreign countries.
Limitations :- 01
Local firms might not adhere to production design and
quality standards, thus causing serious product quality
problems to the international firm.
The major disadvantages of contract manufacturing to international firm and
local producer in foreign countries are as follows:

Local manufacturer in the foreign country loses his

02 control over the manufacturing process because goods
are produced strictly as per the terms and specifications
of the contract.

03 A local manufacturer in a foreign country loses control

over the manufacturing process as goods are produced
strictly according to the terms and specifications of the
contract.
Licensing and Franchising
Licensing is a contractual agreement where a firm
grants access to its patents, trade secrets, or
technology to another firm in a foreign country for a
fee called royalty. The licensor grants permission, and
the licensee acquires the rights. In the fashion industry,
designers license the use of their names. Cross-
licensing involves mutual exchange of knowledge,
technology, and/or patents between firms. Franchising
is similar to licensing but applies to service businesses.
The parent company is the franchisor, and the
franchisee is the franchisee. The franchisor's unique
technique gives them an edge over competitors and
attracts potential franchisees.
 01.
Licensing/franchising is a less expensive
method for entering international business,
as the licensor/franchiser invests their own

ADVANTAGES :-
money in the business unit, making it
virtually no-expensive.

As compared to joint ventures and wholly owned subsidiaries,

licensing/ franchising is relatively a much easier mode of entering

02.
The licensor/franchiser is not involved in
into foreign markets with proven product/technology without much foreign business losses and is paid by the
licensee/franchisee through pre-set fees
business risks and investments. based on production or sales turnover, as
long as production and sales continue.

03.
Since the business in the foreign country is
managed by the licensee/franchisee who is
a local person, there are lower risks of
business takeovers or government
interventions.
 04.
L icensee/franch isee being a local person

ADVANTAGES :-
has greater market k n o w l e d g e a n d c
o n t a c t s which can prove quite helpful to
the licensor/franchiser in successfully
conducting its marketing operations

As compared to joint ventures and wholly owned subsidiaries,

licensing/ franchising is relatively a much easier mode of entering
As per the terms of the licensing/ franchising
into foreign markets with proven product/technology without much

05.
agreement, only the parties to the
licensing/franchising agreement are legally
business risks and investments.
entitled to make use of the licensor’s/
franchiser’s copyrights, patents and brand names
in foreign countries. As a result, other firms in the
foreign market cannot make use of such
trademarks and patents.
 LIMITATIONS :-
01. 02. 03.
Licensee/franchisee's skilled If not maintained properly, Licensor/franchiser and
manufacturing and marketing trade secrets can get licensee/franchisee often face
of licensed products may lead divulged to others in the conflicts over account
to competition with foreign markets. Such maintenance, royalty
licenser/franchiser, as they may lapses on the part of the payment, and quality product
market identical products licensee/ franchisee can production norms, leading to
under different brand names. cause severe losses to the costly litigations and harm to
licensor/franchiser. both parties.
 A joint venture is a strategy for entering
foreign markets, involving the joint
ownership of two or more independent
firms. It can be achieved through
foreign investors buying an interest in a
local company, local firms acquiring an
interest in an existing foreign firm, or
both parties forming a new enterprise.

Joint Ventures
 Advantages :-

Since the local partner also contributes to the Joint ventures make it possible to execute large
01 equity capital of such a venture, the international
firm finds it financially less burdensome to expand
02 projects requiring huge capital outlays and
manpower.
globally.

The foreign business firm benefits from a local In many cases entering into a foreign market is
03 partner’s knowledge of the host countries
regarding the competitive conditions, culture,
04 very costly and risky. This can be avoided by
sharing costs and/or risks with a local partner
language, political systems and business systems. under joint venture agreements.
Limitations :-

01. Foreign firms entering into joint ventures share the

technology and trade secrets with local firms in foreign
countries, thus always running the risks of such a technology
and secrets being disclosed to others.

02. The dual ownership arrangement may lead to conflicts,

resulting in battle for control between the investing firms.
WHOLLY OWNED
SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY
IN A FOREIGN MARKET CAN BE
ESTABLISHED THROUGH A GREEN
FIELD VENTURE OR BY
ACQUIRING AN ESTABLISHED
FIRM IN THE HOST COUNTRY,
ALLOWING THE PARENT
COMPANY TO GAIN FULL
CONTROL OVER THE FOREIGN
COMPANY'S OPERATIONS.
 Advantages :-
A wi de v a r i et y o f e a si ly sc a la b ly n e two rk
1
s ol ut i o ns t ha t ca n b e e a si l y i n te gra te d i n to
a n y i nf r a s t r uct ur e .

2 En a bl e s t he l i g ht n i n g - sp e e d n e two rk sp e e d to
t he cus t omer s .
The parent company has to make 100 per cent equity
investments in the foreign subsidiaries. This form of
international business is, therefore, not suitable for small
and medium size firms which do not have enough funds Limitations :-
with them to invest abroad.

Since the parent company owns 100 per cent equity in

the foreign company, it alone has to bear the entire
losses resulting from failure of its foreign operations.

Some countries are averse to setting up of 100 per cent

wholly owned subsidiaries by foreigners in their
countries. This form of international business operations,
therefore, becomes subject to higher political risks.
Export
Procedure
The number of steps and the sequence in which
these are taken vary from one export transaction to
another
 Steps involved in a typical export
transaction are as follows :-

Assessing the importer’s

Receipt of enquiry and Receipt of order or creditworthiness and
sending quotations indent securing a guarantee for
payments
A buyer contacts exporters for information If an importing firm finds the export price Exporters inquire about importer
on price, quality, and export terms. and terms acceptable, they place an order creditworthiness to assess risks of non-
Exporters respond with a quotation, known for the goods to be dispatched, including payment. To minimize these risks, most
as a proforma invoice, which includes details description, payment terms, packing details, demand a letter of credit from the
about the goods' price, quality, and payment and delivery instructions. importer's bank, which is a guarantee that
terms, and can be notified through press the importer's bank will honor export bills
advertisements.
 Steps involved in a typical export
transaction are as follows :-

Obtaining export licence Obtaining pre-shipment Production or procurement

finance of goods
Exporting firms in India must comply with export regulations
and obtain an export license before exporting goods. Pre-
requisites include opening a bank account, obtaining an Import Exporter obtains pre-shipment finance after Having obtained the preshipment finance
Export Code (IEC) number from the Directorate General receiving confirmed order and credit letter, from the bank, the exporter proceeds to get
Foreign Trade (DGFT) or Regional Import Export Licensing
requiring procurement of raw materials, the goods ready as per the specifications of
Authority, registering with the appropriate export promotion
council, and registering with the Export Credit and Guarantee
processing, packing, and transportation to the importer. Either the firm itself goes in for
Corporation (ECGC) to safeguard against non-payment risks. port. producing the goods or else it buys from the
Exporters must also apply to the DGFT with necessary market.
documents and obtain a Registration cum Membership
Certificate (RCMC) to avail government benefits. ECGC
registration helps protect overseas payments from political
and commercial risks and helps export firms secure financial
assistance from commercial banks.
 Steps involved in a typical export
transaction are as follows :-

Pre-shipment Obtaining certificate of

Excise clearance
inspection origin
The Indian government has implemented the The Central Excise Tariff Act requires exporters to
Export Quality Control and Inspection Act, 1963 to apply for excise clearance from the Excise Importers can request a certificate of origin
ensure good-quality exports. Exporters must Commissioner in their region. However, the from exporters to receive tariff concessions
contact the Export Inspection Agency (EIA) or government may exempt or refund excise duty or exemptions from a country, which serves
another designated agency for inspection payments for goods intended for exports, aiming to as proof of the goods' manufacturing in the
certificates. Pre-shipment inspection reports are encourage exports and make products more exporting country.
required at exports. However, inspections are not competitive in global markets. Duty drawback is
mandatory for exports by star trading houses, administered by the Directorate of Drawback under
trading houses, export houses, industrial units in the Ministry of Finance, while the Commissioner of
export processing zones, special economic zones, Customs handles sanction and payment.
and 100% export oriented units.
 Steps involved in a typical export
transaction are as follows :-

Reservation of shipping
Packing and forwarding Insurance of goods
space
The exporting firm requests shipping The exporter packs goods with importer
The exporter then gets the goods insured
space from a shipping company, details, arranges transportation to the
with an insurance company to protect
specifying goods, shipment date, and port, and issues a railway receipt as a title.
against the risks of loss or damage of the
destination port. The company issues a The exporter endorses the receipt for goods due to the perils of the sea during the
shipping order, instructing ship captain to their agent, allowing delivery at the port of transit.
receive goods after customs clearance. shipment.
 Steps involved in a typical export
transaction are as follows :-

Customs clearance Obtaining mates receipt

Payment of freight and
issuance of bill of lading
Customs clearance is necessary for goods to The goods are then loaded on board the ship for
be loaded on ships. Exporters prepare a which the mate or the captain of the ship issues
The C&F agent transfers the mate's receipt
shipping bill, which contains details about the mate’s receipt to the port superintendent. A mate
to the shipping company for freight
goods, vessel, port, destination, and exporter's receipt is a receipt issued by the commanding
computation, who issues a bill of lading or
officer of the ship when the cargo is loaded on
address. Five copies of the bill and other airway bill, confirming acceptance of goods.
board, and contains the information about the name
documents are submitted to the Customs
of the vessel, berth, date of shipment, descripton of
Appraiser. The Superintendent of the port
packages, marks and numbers, condition of the
trust obtains a carting order, allowing cargo
cargo at the time of receipt on board the ship, etc.
entry into the dock. The cargo is then The port superintendent, on receipt of port dues,
physically moved into the port area and hands over the mate’s receipt to the C&F agent.
stored.
 Steps involved in a typical export
transaction are as follows :-

Preparation of invoice Securing payment

Payment of freight and
issuance of bill of lading
The exporter informs the importer about the shipment of
After sending the goods, an invoice of the goods and requires documents such as an invoice, bill of
lading, packing list, insurance policy, certificate of origin, and
despatched goods is prepared. The invoice
letter of credit. These documents are sent through the
states the quantity of goods sent and the
exporter's banker, with the intention of being delivered to the
amount to be paid by the importer. The C&F importer after acceptance of the bill of exchange. The bill of
agent gets it duly attested by the customs. exchange is an order for the importer to pay a certain amount
to a person or bearer of the instrument. The importer releases
the payment upon receipt, and the exporter's bank receives
the payment. The exporter can also receive immediate
payment by signing a letter of indemnity, agreeing to
indemnify the bank in case of non-receipt and accrued
interest.
IMPORT PROCEDURE

Import trade refers to purchase of

goods from a foreign country. Import
procedure differs from country to
country depending upon the country’s
import and custom policies and other
statutory requirements
 The following paragraphs discuss various steps involved in a
typical import transaction for bringing goods into Indian
territory

01. 02. 03.

Trade enquiry Procurement of import licence Obtaining foreign exchange

The importing firm gathers information about There are certain goods that can be imported freely, while In import transactions, suppliers in foreign
exporting countries and firms from trade directories or others need licensing. The importer needs to consult the
countries demand payment in foreign
associations. They use trade enquiries to gather Export Import (EXIM) policy in force to know whether the
goods that he or she wants to import are subject to import currency. In India, foreign exchange
information about export prices and terms. The
licensing. In case goods can be imported only against the transactions are regulated by the Reserve
exporter then prepares a quotation, known as a
proforma invoice, detailing the product's quality,
licence, the importer needs to procure an import licence. In Bank of India's Exchange Control
India, it is obligatory for every importer (and also for exporter) Department. Importers must secure sanction
grade, design, size, weight, price, and export terms.
to get registered with the Directorate General Foreign Trade
This process ensures smooth and efficient export for foreign exchange by applying to a bank
(DGFT) or Regional Import Export Licensing Authority, and
operations. obtain an Import Export Code (IEC) number. This number is
authorized by RBI, which then issues the
required to be mentioned on most of the import documents. necessary foreign exchange.
 The following paragraphs discuss various steps involved in a
typical import transaction for bringing goods into Indian
territory

04. 05. 06.

Placing order or indent Obtaining letter of credit Arranging for finance

Upon obtaining an import licence, an importer A letter of credit is a guarantee issued by an importer's bank The importer should make arrangements in
submits an order to the exporter detailing the goods' to honor payment up to a certain amount of export bills to the
advance to pay to the exporter on arrival of
price, quantity, quality, packing, shipping, and overseas supplier. It is the most appropriate and secured
method for international transactions. goods at the port. Advanced planning for
payment methods, ensuring a well-drafted order
financing imports is necessary so as to avoid
prevents ambiguity and potential conflict.
huge demurrages (i.e., penalties) on the
imported goods lying uncleared at the port
for want of payments.
 The following paragraphs discuss various steps involved in a
typical import transaction for bringing goods into Indian
territory

07. 08. 09.

Receipt of shipment advice Retirement of import documents Arrival of goods

The overseas supplier sends shipment advice to the After shipping goods, the overseas supplier prepares a set of Goods are shipped by the overseas supplier
importer after loading goods on the vessel, detailing documents, including a bill of exchange, commercial invoice,
as per the contract. The person in charge of
details like invoice number, bill of lading, vessel and other items, according to the terms of contract and letter
of credit. These documents are handed over to the banker for the carrier (ship or airway) informs the officer
name, port of export, goods description, and sailing
transmission and negotiation with the importer. The in charge at the dock or the airport about
date.
documentary bill of exchange can be either against payment the arrival of goods in the importing country.
(sight draft) or against acceptance (usance draft). The He provides the document called import
acceptance of the bill of exchange is known as retirement of
general manifest. Import general manifest is
import documents.
a document that contains the details of the
imported goods. It is a document on the
basis of which unloading of cargo takes
place.
The following paragraphs discuss various steps involved in a
typical import transaction for bringing goods into Indian
territory

10.

Customs clearance and release of goods

Customs clearance is a tedious process for all imported
goods in India. It involves obtaining a delivery order,
endorsement for delivery, dock dues, and port trust dues
receipt. The importer must pay freight charges, dock charges,
and obtain a receipt from the Landing and Shipping Dues
Office. They then fill out a bill of entry for customs import duty
assessment, which is examined by an appraiser and paid by
the importer. The bill of entry is then presented to the dock
superintendent, where an examiner examines the goods. The
importer or their agent then presents the bill of entry to the
port authority, who issues the release order after receiving
necessary charges.
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