1.

1 Introduction
Nearly all business enterprises, large and small, are inspired to carry on trade across the globe.
This may involve purchase of raw material from foreign suppliers, assembling products from
components made in several countries, or selling goods or services to customers in other nations.
Thus, international business is the process of focusing on the resources of the globe and
objectives of the organization on global business opportunities and threats, in order to produce,
buy, sell or exchange of goods and services worldwide. One of the most important trend in the
20th century has been the lowering of barriers to facilitate easy movement of goods and services
across the national borders.
1.2 Meaning of International Business: Any type of business activity that crosses
national borders is International business.
“International business is defined as buying and selling of goods and services across two or more
national boundaries, even if the management is located in a single country”.
Broadly speaking, “international business relates to those big enterprises which have their
operating units outside the national boundaries. They include
• Import and export commodities
• Management of employees in different countries
• Investment in international services like banking, tourism etc.
• Transaction involving copyrights, patents, trademarks etc.
Quite often, internationalization and globalization are used interchangeably while in truth that is
not the case. Internationalization is between a couple of countries, globalization refers to the
process of integration in to one whole market.
1.3 Need for International Business
 Uneven Distribution of Natural Resources: Due to unequal distribution of natural
resources, all countries cannot produce goods at a low cost. As a consequence, it has an
impact on their productivity levels. Therefore, the countries with less quantity of a natural
resource either purchase the resource or the actual product itself from the countries with
an abundance of these. For example, crude oil is exported from the USA as it is found in
abundance there.
 Availability of Productivity Factors: The numerous production variables, like labor,
capital, and raw materials, that are required to produce and distribute diverse
commodities and services are found in different quantities in different countries. It gives
rise to buying and selling of productivity factors among the countries. For example, due
to unemployment in India, foreign countries can employ labor at chap rates from India.
 Specialization: Some countries specialize in producing goods and services for which
they have advantages such as education, favorable climatic circumstances, and so on. It
 results in the business between different countries for the purchase and sale of specialized
products. For example, the Indian market specializes in handcraft products which
increases its exports to other countries.
 Cost Advantages: Production costs vary according to geographical, political, and
socioeconomic situations in different countries. Some countries are in a better position to
manufacture certain commodities at a lower cost than others. Firms participate in
international trade to purchase products that are cheaper in other countries and to sell
things that they can supply at a lower cost. For example, China sells various goods at a
low price to different countries all over the world because of the cost advantage.
1.4 Scope of International Business
The scope of international business is wider than domestic business as it includes the following:
 Imports and Exports of Merchandise: Merchandise refers to physical products, such as
those that can be seen and felt. Therefore, imports and exports of merchandise mean the
transfer or exchange of tangible goods from and to different countries of the world. It is
also called trade in goods as it excludes buying and selling of services.
 Imports and Exports of Services: Imports and exports of services involve intangible
goods that cannot be seen, felt, or touched. It is also known as invisible trade. Services
such as tourism and travel, transportation, communication, etc. are imported and
exported.
 Licensing and Franchising: Licensing is a contractual agreement between two firms,
where the licensor (one firm) grants the licensee (another firm), access to trademarks,
copyrights, patents, etc. in a foreign country in exchange for a fee. The fee charged by the
licensor is known as royalty. For example, Microsoft grants a license to different
companies in exchange for royalty.
Franchising is also similar to licensing. However, it provides services rather than access
to patents, etc. For example, Subway has various franchises all over the world where it
provides the same services to the customers.
 Foreign Investment: It means investing money into a foreign country in exchange for a
profit. Foreign investment can be of two types Direct and Portfolio Investment.
Direct investment occurs when a firm invests directly in the machinery and plant in
another country to produce and market goods and services in that country.
A portfolio investment is a foreign investment where a company buys shares of another
company in a different country or lends money to another company. The return on
portfolio investment is received in the form of dividends or interest respectively.
1.5 Benefits of International Business
Benefits to countries
 Foreign Exchange: It assists a country in earning foreign exchange, which may then be
utilized to buy capital goods, technology, and other products from foreign countries.
 More Efficient Resource Utilization: It is based on the comparative cost advantage
theory. It entails producing what your country can produce more efficiently and trading
the surplus production with other countries to purchase what they can produce more
efficiently. In this way, countries can make better use of their resources.
 Growth Possibilities and Job Opportunities: Countries can enhance their
manufacturing capacity to supply commodities to other countries through external trade.
If external trade holds, the production will rise, increasing the GDP level of the country,
resulting in economic growth. With more production, the demand for more labor also
rises. Therefore, the international business also creates job opportunities.
 Improved Standard of Living: International business allows individuals to consume
goods and services from other countries. Consumption of a variety of goods and services
improves the standard of living of the people.
Benefits to firms
 Profit Opportunities: When compared to local business, international business is more
profitable. When domestic prices are lower, businesses can make more money by selling
their products in other countries.
 Increased Resource Utilization: Many enterprises anticipate international growth and
get orders from foreign clients to set up production capabilities for their products that are
more in demand in the local market. It enables them to better utilize their excess
resources.
  Growth Prospects: When demand falls or the domestic market reaches saturation point,
business enterprises become irritated. By expanding internationally, such businesses can
increase their growth potential significantly.
 Decrease Competition: When domestic competition is fierce, internationalization
appears to be the only option to achieve success and required growth. Many businesses
are motivated to expand into overseas markets because of the fierce competition in the
domestic markets.
 Improved Business Vision: Many firms’ existence and goodwill depend on their ability
to expand their worldwide business. The desire to expand and diversify, as well as to take
advantage of the strategic advantages of internationalization, is expressed in the desire to
become more international.
1.6 Importance of international business:
Earn foreign exchange: International business exports its goods and services all over the world.
This helps to earn valuable foreign exchange. This foreign exchange is used to pay for imports.
Foreign exchange helps to make the business more profitable and to strengthen the economy of
its country.
Optimum utilisation of resources: International business makes optimum utilisation of
resources. This is because it produces goods on a very large scale for the international market.
International business utilises resources from all over the world. It uses the finance and
technology of rich countries and the raw materials and labour of the poor countries.
Achieve its objectives: International business achieves its objectives easily and quickly. The
main objective of an international business is to earn high profits. This objective is achieved
easily. This it because it uses the best technology. It has the best employees and managers. It
produces high-quality goods. It sells these goods all over the world. All this results in high
profits for the international business.
To spread business risks: International business spreads its business risk. This is because it
does business all over the world. So, a loss in one country can be balanced by a profit in another
country. The surplus goods in one country can be exported to another country. The surplus
resources can also be transferred to other countries. All this helps to minimise the business risks.
Improve organisation's efficiency: International business has very high organisation efficiency.
This is because without efficiency, they will not be able to face the competition in the
international market. So, they use all the modern management techniques to improve their
efficiency. They hire the most qualified and experienced employees and managers. These people
are trained regularly. They are highly motivated with very high salaries and other benefits such
as international transfers, promotions, etc. All this results in high organisational efficiency, i.e.
low costs and high returns.
Get benefits from Government: International business brings a lot of foreign exchange for the
country. Therefore, it gets many benefits, facilities and concessions from the government. It gets
many financial and tax benefits from the government.
Expand and diversify: International business can expand and diversify its activities. This is
because it earns very high profits. It also gets financial help from the government.
Increase competitive capacity: International business produces high quality goods at low cost.
It spends a lot of money on advertising all over the world. It uses superior technology,
management techniques, marketing techniques, etc. All this makes it more competitive. So, it can
fight competition from foreign companies.
Economies Of Scale: These business are able to enjoy economies of scale due to their large
scale production. International businesses produce large amount of goods for selling in different
countries. With the increase in amount of production, per unit cost of producing goods goes
down which helps them in earning large profits.
Cost Advantage: International business takes cost advantage over its competitors by producing
goods in one country and exporting them in another country. They carry on their production in a
country where factors of production are easily and cheaply available. This helps in minimizing
the cost of product and earn huge profits by selling them at better prices in other countries.
Provide Employment Opportunities: International business employs large number of people
for carrying out its operations across the globe. They perform large scale operations in many
countries for which they require large amount of human resource.
1.7 Stages of Internationalization
Most companies pass through different stages of internationalization. There are, of course, many
firms which have international business since the beginning, including hundred percent export-
oriented firms. Even in the case of many of the hundred per cent export-oriented firms, the
development of their international business would pass through different stages of evolution. A
firm which is entirely domestic in its activities normally passes through different stages of
internationalization before it becomes a truly global one. There are many firms which
enthusiastically and systematically go international as part of their corporate plan. However, in
the case of many firms the initial attitude towards international business is passive and they get
into international business in response to some external stimuli. A firm may start exports on an
experimental basis and if the results are satisfying in due course it would establish offices,
branches or subsidiaries or joint ventures abroad. The expansion process may also be
characterized by increasing the product mix and the number of market segments, markets and
countries of operation. In this process the company could be expected to become multinational
and finally global. Many experts have given different views on stages of internationalization. For
our understanding we will consider the following stages of internationalization. There are
basically five stages of internationalization and these are:
Stage 1: Domestic Operations
Stage 2: Foreign Operations (export)
Stage 3: Joint Venture or Subsidiaries
Stage 4: Multinational Operations
Stage 5: Transnational Operations
In short, in many firms overseas business initially starts with a low degree of commitment or
involvement; but they gradually develop a global outlook and embark upon overseas business in
a big way.
Stage 1: Domestic Operations - The Firm is said to have a domestic market if it purely confines
its operation in the home country. Most of the international firms initiate their operations as
domestic firms. Most of the international firms originated initially as domestic firms. Domestic
firms usually have ethnocentric orientation because at the very initial stage they do not consider
going international as an option for its growth. The firm continues with its national model of
operation for some time and when the growth gets stagnated, it expands and diversifies to new
markets within the home country instead of focusing on the international markets. However the
diminishing prospects in the domestic market and increased opportunities in the international
markets encourage the firm to redevelop and fine tune its strategies to explore international
market opportunities and the firm moves to the next level in the evolution and market its
products to foreign markets thought suitable internationalization technique viz., direct exports,
franchise and licensing.
Stage 2: Foreign Operations (Export) – In this stage the firm expands its market through sales
efforts and the production done in the domestic market. Firm expands its market to other
countries through sales effort and retails the production facilities in the domestic market. For
examples Indian firms export nuts spices textiles, Jute and Rice all around the world. Domestic
firms being ethnocentric start its internationalization by initially involving in just exporting
goods to the foreign countries which has high demand.
Stage 3: Joint Ventures or Subsidiaries - Subsidiaries or joint ventures are the business
agreements in which firm physically transfers some of its operations out of its home country and
establishes in a foreign country. The firm in this agreement goes for a mutual cost and profit
sharing and management involved with a firm which is existing in the host country. Firm then
moves from international operations being in the home country to investment expansions in the
foreign country moves to a stage from international to Multinational and Transnational firms.
Stage 4: Multinational Operations - In this stage a firm becomes a fullfledged multinational
corporation (MNC) with multiple production facilities established across the several locations in
the world. An International firm demands a greater degree of decentralization in decision making
though important decision in this system is always taken at corporate head quarter. These firms
operate worldwide and the orientation of the firm shifts form ethnocentric to polycentric. A
multinational firm decides to respond to market differences vis a vis social, cultural and legal
requirements and evolve as a stage three MNC which pursuits a multi domestic strategy. In 113
MNCs each foreign subsidiary is managed as an independent entity. The Internationalization
Process subsidiaries are a part of regional structure in which every country has its own
organization and reports to world head quarters.
Stage 5 : Transnational Operations -Firms which achieve global efficiency and local
responsiveness are called as transnational firms. These firms are highly decentralized in terms of
decision making. Every transnational business unit has freedom to take its decision with very
minimal control from corporate headquarters. However, there is no pure transnational firm and
these firms satisfy the characteristics of the global corporation. Table 6.1 gives a brief about the
firm attributes at different levels.
1.8 Tariffs and Non-Tariff barriers to international business:
Tariff barrier definition: A tariff barrier is a type of barrier a country uses to protect its domestic
consumers and producers from foreign competition.
To put it in simpler terms, a tariff is a tax imposed on all commodities imported from other
countries. You may also think of it as a ‘border tax.’
When two countries trade in commodities, the country where the goods are entered charges a tax
to generate money for the government while also raising the price of foreign goods so that
domestic firms can compete with foreign things. The tariff barriers frequently aid in lowering
reliance on imported goods and increasing self-sufficiency.
The major reasons for implementing a tariff barrier are:
 Defending domestic producers
 Increasing prices to limit imports of products and services
 In retribution for partner countries’ unjust trade practices.
Specific Tariffs
A fixed fee levied on one unit of an imported good is referred to as a specific tariff. This tariff
can vary according to the type of goods imported. For example, a country could levy a $15 tariff
on each pair of shoes imported, but levy a $300 tariff on each computer imported.
Ad Valorem Tariffs
The phrase "ad valorem" is Latin for "according to value," and this type of tariff is levied on a
good based on a percentage of that good's value. An example of an ad valorem tariff would be a
15% tariff levied by Japan on U.S. automobiles.
The 15% is a price increase on the value of the automobile, so a $10,000 vehicle now costs
$11,500 to Japanese consumers. This price increase protects domestic producers from being
undercut but also keeps prices artificially high for Japanese car shoppers.
Advantages of Tariff Barriers
There are various tariff barriers advantages, and some of those advantages are listed below:
  The tariff barrier acts as a source of government revenue.
 They encourage domestic production growth.
 Tariff barriers are a way to prevent unfair competition in international trade.
 Tariff barriers may also be a starting point for international negotiations and agreements.

What is a Non-Tariff Barrier?

Non tariff barrier definition: A non-tariff barrier restricts the import or export of products by
means other than tariffs.
In simpler terms,they are any measures that limit imports or exports into a country that are not
customs tariffs. Some of the most common and popular non tariff barriers are licenses, quotas,
import deposits, embargoes, foreign exchange restrictions, etc.
These barriers could include:
 Regulations: Any rules governing how a product is created, handled, or advertised.
 Rules of origin: Rules requiring verification of where things were manufactured.
 Quotas: Regulations that limit the quantity of a certain product that can be sold in a
market.
Advantages of Non-Tariff Barrier
There are various non tariff barriers advantages, and some of those advantages are listed below:
 They protect new or strategic industrial developments.
 Non-tariff policies are more effective in limiting import volumes.
 Due to non tariff barriers, there is a decline in the import of goods. The decline in imports
diverts demand for domestic products and thus creates jobs.
Non-tariff barriers are trade barriers that restrict the import or export of goods through means
other than tariffs. The World Trade Organization (WTO) identifies various non-tariff barriers to
trade, including import licensing, pre-shipment inspections, rules of origin, custom delayers, and
other mechanisms that prevent or restrict trade.
Developed countries use non-tariff barriers as an economic strategy to control the level of trade
they conduct with other countries. When making decisions on the non-tariff barriers to
implement in international trade, countries base the barriers on the availability of goods and
services for import and export, as well as the existing political alliances with other trade partners.
Developed countries may elect to release other countries from being subjected to additional taxes
on imported or exported goods, and instead create other non-tariff barriers with a different
monetary effect.
Origin of Non-Tariff Barriers
During the formation of nation-states, countries had to devise ways of raising money to finance
local projects and pay recurrent expenditures. One of these ways was the introduction of tariffs,
which placed restrictions on imported and exported goods and services.
However, industrialized countries transitioned from tariff barriers to non-tariff barriers since they
had built other sources of funding. Most developing nations still rely on tariff barriers as a way
of raising revenues to finance national projects while regulating international trade with other
countries.
Later, the industrialized countries switched from tariff to non-tariff barriers for several reasons.
One reason was to regulate international trade, even in the absence of tariff barriers. It exempts
certain countries from paying additional taxes on goods, and instead, created other meaningful
non-traffic barriers.
A second reason for introducing non-tariff barriers is to support weak industries that have been
affected by the reduction or withdrawal of tariff barriers. A final reason is that non-tariff barriers
are an avenue for interest groups to influence trade regulation in the absence of trade tariffs.
Types of Non-Tariff Barriers
Non-tariff barriers may take the following forms:
1. Protectionist barriers
Protectionist barriers are designed to protect certain sectors of domestic industries at the expense
of other countries. The restrictions make it difficult for other countries to compete favorably with
locally produced goods and services. The barriers may take the form of licensing requirements,
allocation of quotas, antidumping duties, import deposits, etc.
2. Assistive policies
Although assistive policies are designed to protect domestic companies and enterprises, they do
not directly restrict trade with other countries, but they implement actions that can impede free
trade with other countries. Examples of assistive barriers include custom procedures, packaging
and labeling requirements, technical standards and norms, sanitary standards, etc.
International companies must meet the requirements before they can be allowed to export or
import certain goods into the market. The governments also help domestic companies by
providing subsidies and bailouts so that they can be competitive in the domestic and international
markets.
3. Non-protectionist policies
Non-protectionist policies are not designed to directly restrict the import or export of goods and
services, but the overall outcomes may lead to free trade restrictions. The policies are primarily
designed to protect the health and safety of people and animals while maintaining the integrity of
the environment.
Examples of non-protectionist policies include licensing, packaging and labeling requirements,
plant and animal inspections, import bans for specific fishing or harvesting methods, sanitary
rules, etc.
Examples of Non-Tariff Barriers
1. Licenses
Licenses are one of the most common instruments that countries use to regulate the importation
of goods. A license system allows authorized companies to import specific commodities that are
included in the list of licensed goods.
Product licenses can either be a general license or a one-time license. The general license allows
the importation and exportation of permitted goods for a specified period. The one-time license
allows a specific product importer to import a specified quantity of the product, and it specifies
the cost, country of origin, and the customs point through which the importation will be carried
out.
2. Quotas
Quotas are quantitative restrictions that are imposed on imports and exports of a specific product
for a specified period. Countries use quotas as direct forms of administrative regulation
of foreign trade, and it narrows down the range of countries where firms can trade certain
commodities. It caps the number of goods that can be imported or exported at any given time.
3. Embargoes
Embargoes are total bans of trade on specific commodities and may be imposed on imports or
exports of specific goods that are supplied to or from specific countries. They are considered
legal barriers to trade, and governments may implement such measures to achieve specific
economic and political goals.
4. Import deposit
Import deposit is a form of foreign trade regulation that requires importers to pay the central
bank of the country a specified sum of money for a definite period. The amount paid should be
equal to the cost of imported goods.
Parameter Tariff Barrier Non-Tariff Barrier
Meaning The government imposes Non-tariff barriers cover all the
tariff barriers in the form of restrictions other than taxes
taxes or duties on its imports imposed by the government on its
imports,
Reason for imposing To protect its domestic To protect domestic companies
companies and increase and discriminate against new
government revenue. entrants.
 Nature Explicit Implicit
Barrier are imposed in Taxes and duties Regulations, requirements,
the form of conditions, etc.
Government receives Yes No
the revenue
Affects the quantity of No Yes
the imported goods
Price is charged by Government Monopolistic organization
Profits generated by Yes No
importers can be
handled
Chance of making huge Less High
profits
Time taken to Less More in comparison to a tariff
implement changes barrier
made to the trade
barrier
Example Import quotas, compound Licensing, anti-dumping duties,
duties, etc etc.

1.9 Characteristics/ features of International Business

1. The business activity of international business works across national borders and is
related to trade, or multinational business operations
2. International markets should be large in size so as it operates large geographic
segmentation.
3. In order to have impact on foreign economies international businesses should be large in
size.
1. Geographic segmentation is one of the characteristic features of international business market
2. Strong economic factors must underlie the decision to enter foreign markets
3. International businesses are in comparison with domestic environment for example work force
planning and overall distribution decisions
1.10 Protectionism
Government uses trade barriers to shield domestic companies and their workers from foreign
competition. In case of protectionism, which is an economic policy there is trade restriction.
Various methods such as tariffs on imported goods, restrictive quotas and a variety of other
government regulations designs to allow “fair competition” between imports of goods and
services produced domestically.
1.11Protectionism policies
Mentioned below are some of the policies by which the governments protect the Indian
Industries;
Tariffs: Taxes or tariffs are levied generally on imported goods. Based on the type of goods
imported, the tariff rates are applied. In case of import tariffs, there will be an increase in the cost
of the tariffs to the importer and this will in turn increase the price of the imported goods thereby
reducing the quantity of the goods imported.
Import quotas: Governments lays down directions on the amount of goods that can be imported
by a person. This is known as import quotas, which in turn helps in reducing quantity of imports.
Economists often suggest import licences are auctioned to the highest bidder or else they suggest
that some relevant tariff replace the import quotas.
Direct subsidies: Occasionally governments in the form of lump-sum payments or cheap loans
are given to local firms, which cannot compete well against imports

Export subsidies: On the contrary often governments give out export subsidies to increase
export. Export tariffs are the opposite of export subsidies. A percentage of the value of export is
paid to the exporters.
Exchange rate manipulation: In order to lower its currency by the government may intervene
in foreign exchange market by selling its currency in the foreign exchange market. This will raise
cost of imports and lower cost of exports facilitating trade balance. Such a strategy is effective in
the short-term and will lead to inflation. This measure will lead to the cost of exports and reduce
the relative price of imports.
1.12 Tariff
Tariff is tax in simplest terms. It is one of the several trade policies that a country can enforce
and adds to the cost of imported goods. Tariffs are one of the oldest forms of government
intervention in economic activity.
Tariffs serve two purposes. Firstly, they are sources of revenue to the government. Secondly,
they enhance the economic returns to the firms and suppliers of resources to the domestic
industry that face stiff economic competition from foreign imports.
1.13 Why Tariffs?
Tariffs have been created not just to protect infant industries and developing economies, but also
are created by with advanced economies with developed industries. Here are reasons why tariffs
are used:
Protecting Domestic Employment Tariffis often a political issue.
Thepossibilityofincreased competition will threaten domestic industries that may fire workers or
shift production abroad to cut costs. All this could lead to higher unemployment. This could
result in local industries complaining the whole thing spiraling in to a political issue.
Protecting Consumers
A tax may be levied by the government on important product that it feels could endanger its
population.
Infant industry: The government of a developing economy will lay a tariff on imported good s .
This increases the price of consumer goods as a result of which the domestic industry will have
space for growth and flourish.
National security
There are certain industries viewed as critical to National security and barriers are imposed to
protect those industries.
Retaliation
If a trading partner goes against the government’s foreign policy objectives the countries may set
tariffs.
1.14 Non-tariff barriers
Non-tariff barriers to trade means any restriction that is imposed by the Government in order to
restrict the imports in India include licenses, quotas, Foreign exchange restrictions and foreign
exchange controls etc.
Licenses: The most common instruments of direct regulation of imports and sometimes export
are licenses. All countries apply this non-tariff method. The license system requires that a state
through specially authorized office issues permits for foreign trade transactions of import and
export commodities.
Quotas: A quota is a limitation in value or in physical terms, imposed on import and export of
certain goods for a certain period of time. An export quota is a restricted amount of goods that
can leave the country. There are different reasons for imposing of export quota by the country,
which can be the guarantee of the supply of the products that are in shortage in the domestic
market and the control of goods strategically important for the country.
Licenses and quotas limit the independence of enterprises with a regard to entering foreign
markets.
Foreign exchange restrictions and foreign exchange controls: Foreign exchange restrictions
and foreign exchange controls occupy a special place among the non-tariff regulatory
instruments of foreign economic activity.
1.15 Cartels
 A cartel is a formal (explicit) agreement among competing firms. It is a formal organization of
producers and manufacturers that agree to fix prices, marketing and production of a product.
Cartel basically means forming of association by the producers in order to eliminate competition
and to increase profits by reducing competition.
1.16 Strategies of Entry into International Business
1. Exports & Imports : The most traditional way of doing business internationally is exporting.
Exports can be direct or indirect .In direct exporting the producer himself performs the
international selling activity. In indirect exporting, the producer transfers the responsibility of
selling job to some other independent international marketing, middleman or co- operative
organization.
Exporting and Importing – Meaning, Advantages and Disadvantages
Exporting goods and services refer to sending them from the home country to a foreign country.
Similarly, Importing goods and services means purchasing or bringing them from the foreign
market to the home country. This is the easiest way a firm can get into international business, as
it requires almost no investment in setting up a production unit in a foreign country, only
distribution channels are made to successfully import or export goods.
There are two ways a firm can export or import:
 Direct Exporting/Importing: In Direct Exporting/Importing, a firm directly deals with
the customer/supplier of the foreign country and performs all the formalities, including
shipment and financing of goods and services.
 Indirect Exporting/Importing: In Indirect Exporting/Importing, a firm deals with the
customer/supplier with the help of middlemen. They do not directly deal with the
customers/suppliers. With the help of middlemen, most of the formalities and work are
done, such as export houses or purchasing businesses or offices of overseas customers, or
wholesale importers in the case of import operations.
Advantages of Importing and Exporting:
1. Easiest and Simplest: Exporting and Importing is the easiest way to enter into the
international market as compared to any other modes of entry. Here, there is no need to set up
and manage any business unit abroad, which makes the process easier.
2. Less Investment: Less investment is required in the case of exporting/importing as it is not
mandatory for the enterprise to set up a business unit in the country they are dealing with.
3. Less Risky: If there is no investment or very less investment required in exporting/importing
in the foreign country, the firm is free from many risks involved in foreign investment.
4. Availability of Resources: As the resources are unevenly scattered around the globe, it is very
important for every country to export/import goods around the globe, as no nation can be 100%
self-sufficient.
5. Better Control: Exporting/Importing can provide better control over the trade, as there is very
less involvement in the foreign country. Everything is controlled by the home country and there
is no need to set up a unit in the foreign country.
Disadvantages of Importing and Exporting:
1. Extra Cost: Since goods are to be sent to different nations, there is some extra cost, incurred
in packaging and transportation of goods, which is a major limitation.
2. Regulations: Different countries have different policies for foreign trade, and sometimes it
becomes difficult for a company to comply with the rules and regulations of each country they
are dealing with.
3. Domestic Competition: The companies involved in exporting/importing have to face severe
competition in the domestic country due to the presence of domestic sellers.
4. Country’s Reputation on Stake: Goods that are exported to different countries are subject to
quality standards. If any goods that are of low quality are exported to any other country, the
reputation of the home country becomes questionable.
5. Documentation: Exporting/Importing requires obtaining licenses and documentation for
foreign trade from every country, which can become frustrating at times.
6. Multitasking: Managing business across different countries involves a lot of multitasking,
which can be hectic for a company.
What is Export Procedure?
Export is one of the main components of International business and involves the movement of
goods and services across the nations and the exchange of foreign currencies between the
dealing parties. This makes export a complex process and the exporter is bound to follow the
legal, and compulsory formalities imposed by the exporting country. No country in today’s
world wants to deliver illegal or bad quality goods and services to other nations, as now
international trade is governed under the strict rules of the World Trade Organization.
Therefore, a series of strict procedures have to be followed by the exporter before the goods
leave the boundaries of the home country.
Steps involved in an Export Transaction
The number and sequence of steps involved in an export process may vary from subject to
subject, i.e., the exported goods category. However, the basic steps involved in a typical export
transaction are discussed below:
1. Receipt of inquiry and sending quotation:
Like any buyer, an importer inquires from various exporters about the availability of goods,
quality, price, terms and conditions of exporting the product. Exporter extends the information
being inquired for in the form of quotation, commonly known as Proforma Invoice. The
proforma invoice contains all the relevant information, like the price at which goods will be
exported, minimum order quantity, quality and size, mode of delivery, mode of payment, etc.
2. Receipt of order or Indent:
Once the importer agrees to the terms and conditions laid down by an exporter, he/she places
the order with the exporter of the product. This order is called Indent, which contains detailed
information about the goods to be exported, quantity, price to be paid, packaging, and delivery
instructions.
3. Assessing the importer’s credit worthiness and securing a guarantee for payments:
After receiving an order, to minimize the risk of non-payment, the exporter inquires about the
credit worthiness of the importer. The exporter demands a Letter of credit from the importer for
the security of the payment. A letter of credit is a guarantee given by the importer’s bank that in
case of non-payment by an importer, the bank shall pay a certain amount of export bill to the
exporter’s bank, on the behalf of the importer.
4. Obtaining an export license:
All the export transactions in India are governed by custom law. An exporter once sure about
the payment is bound to obtain an export license under this law, before proceeding further. To
get the license, an exporter shall:
 Open a bank account in any bank authorized by the Reserve Bank of India.
 Obtain Import-Export Code(IEC) number from the Directorate General Foreign Trade
(DGFT) or Regional Import-Export Licensing Authority.
 Get registered with the appropriate export promotion council.
 Get registered with Export Credit and Guarantee Corporation to minimize the risk of non-
payment.
Every exporter must get registered with an appropriate export promotion council, such as
Engineering Export Promotion Council (EEPC) and Apparel Export Promotion Council
(AEPC). Such registration enables an exporter to avail of various export-related benefits of the
government.
5. Obtaining pre-shipment finance:
Once all the above procedures are accomplished, the exporter approaches his/her bank to obtain
pre-shipping finance to procure necessary items required for the production of the goods
ordered and other related activities like packaging and transportation of goods to the port of
shipment, delivery of goods, etc.
6. Production or procurement of goods:
After obtaining the finance from the bank, an exporter starts to procure the goods as per the
instruction of the importer. The export firm either produces the goods itself or gets the ready-
made goods from the market.
7. Pre-shipment inspection:
The government of India wants an assurance that only A-one quality goods are being exported
from India. For this, various Inspection Agencies have been set up under the Export Quality
Control and Inspection Act of 1963. After producing or procuring the goods, an exporter
requires to obtain a pre-shipment inspection certificate from the concerned authorized
Inspection Agency. The inspection certificate ensures the quality of the goods and is one of the
important documents required at the time of export.
8. Excise clearance:
Excise Duty is the tariff charged by the government on the material used for manufacturing the
goods to be exported under Central Excise Tariff Act. The exporter has to apply to the Excise
Commissioner to obtain the excise clearance certificate. However, some goods are exempted
from excise duty, and under such circumstances, an exporter either does not make any payment
or gets a refund under the duty drawback scheme.
9. Obtaining a certificate of origin:
To avail of the benefits provided by the importing nation, an exporter shall obtain a certificate
of origin. The certificate of origin is proof that the goods are actually been produced in the
country from where it is being exported.
10. Reservation of shipping space:
The exporting firm approaches the shipping company for reserving shipping space for the
goods. The shipping company on acceptance of such application, issue a shipping order to the
captain of the ship, instructing him to board the goods after their customs clearance.
11. Packing and forwarding:
Goods are then packed and marked properly with details, like:
 Name and address of an importer.
 Gross and net weight of the goods.
 Port of shipment and destination.
 Country of origin.
 Road or Railway receipt.
12. Insurance of goods:
The exporter obtains an insurance policy for the goods to be exported to avoid transit-related
risks. The insurance protects the insurer against any risk of loss or damage to the goods caused
due to sea perils at the time of transit.
13. Customs clearance:
The exporter prepares a shipping bill, giving details of the goods, the name and address of the
exporter, the name of the loading port, the name of the destination port, and so on. The five
copies of the bill, along with the following documents are submitted to the Customs Officer-
 Export Contract or Export Order.
 Letter of Credit.
 Commercial Invoice.
 Certificate of Origin.
 Certificate of Inspection.
 Marine Insurance Policy.
Only after receiving custom clearance from the Custom House, goods are loaded on the ship.
14. Obtaining mates receipt:
Once the goods are loaded on the ship, the captain of the ship issues a mate receipt to the Port
Superintendent. On receiving the port dues, Port Superintendent passes on the mate’s receipt to
the exporter directly or through the C&F agent. Mate receipt contains information, like the
name of the vessel, date of shipment, description of packages, marks and numbers, condition of
the cargo at the time of receipt on board the ship, etc.
15. Payment of freight and issuance of bill of lading:
On receiving the mate receipt, the shipping company calculates the freight charges for the
concerned goods. After receiving the charges, the bill of lading is issued by the shipping
company as proof of accepting, and delivering the goods to their destination.
16. Preparation of invoice:
After the goods are set for transmission, an exporter issue an invoice stating the number of
goods and amount to be cleared by an importer. Also, the C&F agent has to get the invoice duly
attested by the customs.
17. Securing payment:
Once the shipment is done and goods have reached the destination port, an importer needs the
following documents to claim his title on goods:
 Verified copy of the invoice.
 Invoice of lading.
  Packing list.
 Insurance policy.
 Certificate of origin.
 Letter of credit.
These documents are passed on to an importer, by an exporter’s bank after acceptance of a bill
of exchange. The importer releases payment after the maturity of the bill of exchange.
However, an exporter can get the payment immediately by submitting a letter of indemnity.
Documents required in an export transaction
1. Documents related to goods
 Export Invoice: An export invoice is a bill prepared by the seller giving information
about the quantity of bill, the number of packages, the amount of bill, the name of the
destination port, terms of delivery, etc.
 Packing list: The packing list states the number of packs and the nature of goods
contained within the packages.
 Certificate of origin: A certificate of origin specifies the name of the country in which
goods are being produced. It helps the exporter to avail of the benefits given by the
importer country to an exporter of some specific countries.
 Certificate of inspection: A certificate of inspection acts as a guarantee that goods to be
exported are of good quality. Such a certificate is issued by government authorized
agencies, such as the Export Inspection Council of India (EICI).
2. Documents related to shipment
 Mate’s receipt: A Mate’s receipt is issued by the captain of the ship to the Port
Superintendent after the goods are loaded on the ship. Port Superintendent, on receipt of
port charges, passes on the receipt to the exporter or the C&F agent. The mate’s receipt is
important for computing freight charges.
 Shipping Bill: A shipping bill is issued by an export firm that gives details of the goods,
the name and address of the exporter, the name of the loading port, the name of the
destination, and so on. The shipping bill is the most important document required to
obtain customs clearance.
 Bill of lading: After the computation of freight charges, the shipping company issues a
bill of lading issued as proof of accepting and delivering the goods to their destination.
When the transit is done through the airways, Airway Bill is issued instead of the bill of
lading.
  Marine insurance policy: Marine insurance policy is a certificate issued by an insurance
company as a promise to indemnify any loss of the insured goods in case of transit-
related tragedies.
3. Documents related to payment
 Letter of credit: A letter of credit is a guarantee given by the importer’s bank that in case
of non-payment by an importer, the bank shall pay a certain amount of export bill to the
exporter’s bank on the behalf of the importer.
 Bill of exchange: Bill of exchange is a financial instrument drawn by an exporter in the
name of the importer for demanding a payment related to the export consignment. The
exporter’s bank transfers the necessary documents to the importer only after acceptance
of a bill of exchange.
 Bank certificate of payment: Bank certificate of payment is a certificate to ensure that the
important documents related to a particular export consignment have been transferred to
the importer and the payment has been received.

The purchase of goods from a foreign country is referred to as import trade. The Import
procedure varies by country, depending on the country’s import and customs policies, as well as
other statutory requirements.
Import procedures are the procedures for import and export activities that include ensuring
licencing and compliance prior to shipping goods, arranging for transport and warehousing after
goods are unloaded, and obtaining customs clearance and paying taxes prior to the release of
goods.
Steps involved in Import transactions:
1. Trade Enquiry: The importing company should first gather information about the countries
and companies that export the given product. The importer is able to collect such data from
trade directories and/or trade associations as well as organisations. After identifying the
countries and firms that export the product, the importing firm contacts the export firms by
using a trade enquiry to learn about their export prices and terms of export.
A trade enquiry is a written request from an importing firm to an exporter for information on
the price and various terms and conditions under which the latter is willing to export goods. The
importer will receive a quotation from the exporter in response to this inquiry. The quotation
includes information about the goods available, such as their quality and price, as well as the
terms and conditions of the sale.
2. Procurement of Import Licence: Certain goods can be imported freely, while others require
licencing. The importer must consult the current Export-Import (EXIM) policy to determine
whether the goods he or she intends to import require import licencing. If goods can only be
imported with a licence, the importer must obtain an import licence. Every importer (and
exporter) in India must register with the Directorate General Foreign Trade (DGFT) or Regional
Import Export Licensing Authority and obtain an Import Export Code (IEC) number. This
number is required on the majority of import documents.
The Imports and Exports (Control) Act of 1947 governs the import trade in India. Without a
valid import licence, a person or company cannot import goods into India.
The Indian government declares its import policy in the Import Trade Control Policy Book, also
known as the Red Book. Every importer must first determine whether or not he can import the
goods he desires, as well as how much of a particular class of goods he can import during the
time period covered by the relevant Red Book.
3. Obtaining Foreign Exchange: The supplier in an import transaction requests payment in a
foreign currency because they are based overseas. Indian currency must be converted into
foreign currency in order to make a payment in another currency. The Reserve Bank of India’s
Exchange Control Department oversees all foreign exchange transactions in India (RBI).
Every importer is required by the current regulations to obtain the approval of foreign currency.
The importer must submit an application to a bank that the RBI has authorised to issue foreign
currency in order to receive such a sanction. In accordance with the Exchange Control Act’s
guidelines, the application must be submitted in the prescribed format and include an import
licence.
The exchange bank endorses and forwards the applications to the Reserve Bank of India’s
Exchange Control Department. The Reserve Bank of India sanctions the release of foreign
exchange after scrutinising the application on basis of the Government of India’s exchange
policy in effect at the time of application. The importer obtains the necessary foreign exchange
from the relevant exchange bank. It should be noted that, whereas import licences, which are
issued for a specific period of time, the exchange is only released for a specific transaction.
Most restrictions have been lifted as the rupee has become convertible on a current account as
the economy has liberalised.
4. Placing Order or Indent: The importer places an import order or indents with the exporter for
the supply of the specified products after obtaining the import licence. The import order
includes details about the cost, size, grade, and quality of the goods ordered, as well as packing,
shipping, ports of departure and arrival, delivery schedule, insurance, and payment method
instructions. In order to avoid any ambiguity and subsequent conflict between the importer and
exporter, the import order should be carefully drafted.
It contains the importer’s instructions regarding the quantity and quality of goods required, the
method of forwarding them, nature of packing, mode of payment and price, and so on.
Indentations are typically prepared in duplicate or triplicate. Indent types include open indent,
closed indent, and confirmatory indent. Because all of the necessary particulars of goods, price,
and so on are not mentioned in the indent, the exporter is free to complete the formalities at his
own end. On the other hand, a closed indent is one that clearly states the full particulars of the
goods, price, brand, packing, shipping, insurance, and so on. A confirmatory indent is one in
which an order is placed subject to the importer’s agent’s confirmation.
5. Obtaining a Letter of Credit: If a letter of credit is the preferred method of payment between
the importer and the overseas supplier, the importer must obtain one from its bank and send it to
the supplier. A letter of credit, as previously mentioned, is a guarantee made by the bank of the
importer that it will honour payment of export bills to the bank of the exporter up to a certain
amount.
A letter of credit (L/C) is an undertaking by its issuer (usually the importer’s bank) that bills of
exchange drawn by the foreign dealer on the importer will be honoured on presentation up to a
specified amount.
6. Arrangement of Finance: Prior to the arrival of the goods at the port, the importer should
make arrangements to pay the exporter. To avoid grossly overpaying demurrages (fines) on
imported goods that are lying uncleared at the port due to lack of payments, advanced planning
for financing imports is required.
7. Advice for Shipment Receipt: The international supplier sends the importer the shipment
advice after loading the goods onto the ship. Information regarding the shipment of goods is
included in shipment advice. The shipment advice includes information such as the invoice
number, bill of lading/airways bill number and date, vessel name with date, port of export,
description of goods and quantity, and date of vessel sailing.
8. Retirement of Documents: After the goods have been shipped, the overseas supplier gathers
the required paperwork in accordance with the contract and letter of credit terms and gives it to
their banker for negotiation with the importer in the manner indicated in the letter of credit. A
bill of exchange, commercial invoice, bill of lading or airline bill, packing list, certificate of
origin, marine insurance policy, etc. are generally included in a set of documents. Retirement of
import documents refers to the acceptance of a bill of exchange for the purpose of receiving
delivery of the documents. When retirement is finished, the bank will give the importer the
import documents.
9. Goods Arrival: The international supplier ships the goods in accordance with the agreement.
The person in charge of the carrier, whether it be a ship or an airline, notifies the person in
charge at the dock or the airport of the arrival of goods in the importing country. The import
general manifest document is presented by him. The specific details of the imported goods are
listed in an import general manifest document. It is a document that the unloading of cargo is
based.
10. Custom Clearance: After they cross Indian borders, all imported goods are required to go
through customs clearance. A number of formalities must be completed in the somewhat time-
consuming process of customs clearance. It is suggested that importers appoint C&F agents
who are familiar with such formalities and play a crucial role in getting the goods cleared
through customs.
 The importer must first obtain a delivery order also called an endorsement for delivery. The
importer normally gets the endorsement on the back of the bill of lading when the ship docks at
the port. The relevant shipping company provides this endorsement. In some cases, the shipping
company issues a delivery order rather than approving the invoice. The importer has the right to
accept delivery of the goods under this order. Of course, before taking possession of the goods,
the importer must first pay the freight charges (if the exporter has not already done so).
2. Licensing and Franchising: -These are the two ways of entering foreign markets with
minimum commitment of resources and efforts on the part of global marketer.
In international licensing, a firm in one country allows firm in another country to use its
intellectual property, brand, design or business programs. The monetary benefit to the licensor is
the royalty or fees which the licensee pays. These licenses are usually non-exclusive, which
means they can be sold to multiple competing companies serving the same market. In this
arrangement, the licensing company may exercise control over how its IP is used but does not
control the business operations of the licensee.
Ex: General Electric of USA licensed its advanced gas turbine technology to foreign producers.
Examples of licenses include a company using the design of a popular character, e.g. Mickey
Mouse, on their products.
MetLife uses the cartoon character ‘Peanuts’ for which they have sought license from its rightful
producer.
It can also apply to the use of software, e.g. a company using Microsoft Office on its computers.
Franchising is a form of licensing in which a parent company grants another independent entity
the right to do business in a prescribed manner. This right can take the form of selling the
franchisers products, using its name, production and marketing techniques.
Licensing and Franchising
Licensing is a contractual agreement in which one company provides another company in
foreign country access to its patents, trade secrets, or technology in exchange for a fee known as
a royalty. The firm that grants such authorization to the other firm is known as the licensor, and
the firm in the foreign nation that receives such rights to use technology or patents is known as
the licensee.
It should be noted that not just technology is licenced. A number of fashion designers licence the
use of their names. In certain cases the two companies exchange technology. Cross-licensing
refers to the mutual exchange of information, technology, and/or patents across firms.
License agreements can be exclusive or non-exclusive, and they can cover a wide variety of
intellectual property assets such as trademarks, copyright, patents, and music. License costs can
be one-time set payments or ongoing fees depending on usage, sales, and other performance
factors.
A Franchising agreement, like a licencing arrangement, includes one party granting another
rights to utilise technology, trademarks, and patents in exchange for an agreed-upon payment for
a certain period of time. The franchiser is the parent company. The franchiser can be any service
provider, it can be a restaurant, hotel, travel agency, bank wholesaler, or even a shop, that has
developed a distinctive method for creating and marketing services under its own brand and trade
mark.
The term Franchising is quite similar to licencing. One significant difference between the two is
that the former is connected with the manufacturing and marketing of goods, while the latter is
associated with the services that are provided. Another distinction is that franchising is more
stringent than licencing. Franchisers set strict rules and restrictions about how franchisees
should conduct business. Apart from these two distinctions, franchising and licencing are nearly
identical. The uniqueness of the methods and techniques offers the franchiser an advantage over
its competitors in the sector and entices would-be service providers to join the franchising
system. McDonald’s, Pizza Hut, and Wal-Mart are just a few of the world’s top franchisers.
Advantages of Licensing and Franchising
The following are some of the specific advantages of Licencing/Franchising :
1. Less expensive method: In the licensing/franchising system, the licensor/franchisor
establishes the business unit and invests his/her own money in it. As a result, the
licensor/franchisor is bound to make almost no international investment. As a result,
licensing/franchising is considered, as a less expensive method of entering an
international business.

2. Not liable for any losses: Since no or very little foreign investment is involved, the
licensor/franchisor is not liable for any losses incurred by foreign business. The
licensee/franchisee pays the licensor/franchisor fees that are fixed in advance as a
proportion of production or sales turnover. This royalty or fee continues to accrue to the
licensor/franchisor as long as production and sales continue to take place in the
licensee’s/ franchisee’s business unit.

3. Lesser Risks: There are lesser risks of business takeovers or government interference
because the licensee/franchisee is a local person who manages the company in a foreign
country.

4. Greater market knowledge and contacts: Being a local, the licensee or franchisee has a
better understanding of the market, as well as more contacts, which may be very
beneficial to the licensor or franchiser in running its marketing activities.

5. Legal safety: Only the parties to the licensing/franchising agreement are legally permitted
to use the licensor’s/copyrights, franchisor’s patents, and brand names in foreign
 countries, according to the terms of the licensing/franchising agreement. As a result, such
trademarks and patents cannot be used by other companies in the international market.
Disadvantages of Licensing and Franchising
The disadvantages of licencing and franchising are as follows:
1. Risks of starting a similar business: There is a risk that a licensee/franchisee might start
marketing an identical product under a slightly different brand name if they become
skilled in the production and marketing of the licensed/franchised products. The
licenser/franchisor may be exposed to intense competition in the industry.

2. Problem of secrecy: Trade secrets may be revealed to third parties in foreign markets if
they are not properly protected. The licensor or franchisor may suffer significant losses as
a result of the licensee’s/franchisee’s errors.

3. Conflicts and disputes: Over time, conflicts frequently arise between the
licensee/franchisee and the franchisor/licensor over matters, such as the maintenance of
accounts, payment of royalties, and the disregard of standards for the production of high-
quality products. These disagreements can lead to expensive legal disputes that affect
both parties.

Basis of Difference Franchising Licensing

Governed by Securities law Contract law
Registration Required Not required
Offered to franchisee Not offered; licensee can sell similar
licenses and products in same area
Territorial rights
Support and training Provided by franchiser Not provided
Royalty payments Yes Yes
Use of trademark/ Logo and trademark retained Can be licensed
logo by franchiser and used by
franchisee
Examples McDonalds, Subway, 7-11, Microsoft Office
Dunkin Donuts
 Control Franchiser exercise control licensor does not have control over
over franchisee. licensee

3. Contract manufacturing: In this strategy a company doing global marketing contracts with
firms in foreign countries and enters into a contract with them to manufacture or assemble the
product while retaining the responsibility of marketing the product .This is a common practice
in international business.
It can be divided into three categories:
1. Production of specific components, such as automobile components or shoe uppers to be
used later in the production of finished goods, such as automobiles and shoes.
2. Assembly of components into final products, such as hard disc, motherboard, floppy disc
drive, and modem chip are assembled into computers.
3. Complete production of products, such as garments.
Foreign companies provide technological and managerial guidelines to the local manufacturers
to produce and assemble the goods. The goods manufactured on contract manufacturing are
either used as final products or sold as finished products by international firms under their brand
names in various countries including home, host and other countries. Nike, Reebok, Levis, etc.,
use contract manufacturing to get their products.
Advantages of Contract Manufacturing
Contract manufacturing provides various benefits to both multinational companies and local
manufacturers in foreign countries.
 Less Investment: With the help of Contract Manufacturing, international firms are able to
produce their goods on a large scale without requiring investment in setting up
production facilities.
 Less Risk: Because there is minimal investment required, it is less risky. Furthermore,
local producers that have been assigned particular product design and quality standards
comply with them. Also, there is no or little investment in other countries, and there is
limited investment risk in foreign countries.
 Lower Costs: Contract Manufacturing helps international businesses in getting their
product manufactured or assembled at lower costs, especially when the local producers
are situated in countries which have lower material and labour costs.
 Better Utilisation of Resources: Local producers in foreign countries are benefitted from
contract manufacturing. Manufacturing jobs obtained on a contract basis provide a ready
market for their products and ensure greater utilisation of their production capacities if
firms have any idle production capacities. For example, Godrej group- it manufactures
 soaps for many multinationals including Dettol Soap for Reckitt and Colman. In this way,
it is making use of its excess soap manufacturing capacity.
 Opportunities for Local manufacturers: The local manufacturer also has the option to get
engaged in international business and avail incentives if any available to export
enterprises if the international firm wants the goods produced to be sent to its home
country or to other foreign countries.
Disadvantages of Contract Manufacturing
The disadvantages of Contract Manufacturing are as follows:
 Issue in adhering to production design and quality standards: Local firms may fail to
follow production design and quality standards, creating serious product quality issues for
foreign enterprises.
 Loss of control: As goods are manufactured exactly according to the terms and standards
of the contract, the local manufacturer in the foreign nation loses control over the
manufacturing process.
 No Authority to sell products: The local enterprises engaged in contract manufacturing
are not allowed to sell the contractual output as per their will. They must sell the goods to
the multinational corporation at fixed rates. If the open market prices for such
commodities are greater than the prices agreed upon in the contract, it results in lower
profits.
For example, Microsoft’s Xbox game machine is made by Flextronics Corporation
(www.flextronics.com), a huge company with factories around the world and nearly $15 billion
in sales in 2004. Flextronics also makes cellphones for Ericsson, routers for Cisco and printers
for HP. Other major contract manufacturers are Flextronics International (www.flextronics.com),
Sanmina-SCI Corporation (www.sanmina-sci. com) and Celestica (www.celestica.com).
Rockleigh Industries Inc. produces plastic parts of any desired size and composition and products
such as Scanners, Tape guns, medical devices, gymnastic products, rifles, inverters, etc.
There are several advantages to this type of arrangement. For the manufacturer, there is the
guarantee of steady work since having contracts in place that commit to certain levels of
production for one, two and even five year periods makes it much easier to forecast the future
financial stability of the company. For the client, there is no need to purchase or rent production
facilities, buy equipment, purchase raw materials, or hire and train employees to produce the
goods. There is also no dealing with employees who fail to report to work, equipment that breaks
down, or any of the other minor details that any manufacturing company must face daily. All the
client has to do is generate sales, forward orders to the manufacturer, and keep accurate records
of all income and expenses associated with the business venture.
The general concept of contract manufacturing is not limited to the production of goods. Services
such as telecommunications, Internet access, and cellular services can also be supplied by a
central vendor and private brand for other customers who wish to sell those services.
4. Management contracting: Under management contracting, the international firm supplies
management know-how to the company, in a foreign country. Under this method, the firms
providing the management know-how may not have any equity stake in the enterprise being
managed. It is usefully under various types of businesses. It can be property management, food
service managers, artist and athlete managers, sports facility managers, etc.
Ex: Tata Tea, Harrisons Malayalam have contracts to manage number of plantations in Sri Lanka

A management contract is defined as an agreement between a firm or investor and a management

company that enables the latter to coordinate and oversee all operational functions of the former.
It helps to lower the burden of operating a firm, which otherwise would have to expend
additional staffing and capital for the same.
It also provides a best-suited channel to help the business achieve economies of scale, brand
recognition, and global scaling. Usually, the contracts have a period of more than ten years. It
may also entail a fee of up to 10% of the total revenue. As a result, the hotel and airline
industries extensively use the method in their business activities.
 A management contract is a legal agreement that allows a firm to take over the
responsibility of managing certain aspects of another company as bound by the
agreement in place of a certain percentage of the revenue.
 It allows the owner of the company to handle core business more efficiently and by
saving costs, but the risk of losing business privacy and confidentiality looms over them.
 It provides an opportunity to serve international clients in the absence of foreign staff
without any foreign direct investment, like in the hotel and airline industry.
  A franchise uses the complete business model and brand to earn revenue by paying fixed
royalties. In contrast, management contract firms only charge for managing the
operational aspect assigned to it by the parent firm.
Components
Let us look at the components of a management contract:
#1 – Duration
It specifies the period for which the contracted company will remain in charge of the
management of the firm that it hired. It has to have certain terms and conditions to continue the
contract. Failure to abide by them may get the contract terminated before the duration of the
contract.
#2 – Conditions
It forms the most critical, detailed, and extensive section of the management contract. It contains:
The identity of the parties involved
The aspects of the company handed over
The functions getting transferred to the management company
Operational responsibilities of the management company
#3 – Fees
The last but most important component of the agreement is the fees. The contract must contain
the payment system and method employed for the entire duration of the contract to the managing
company. It can either be a percentage or a fixed amount of the revenue generated by the
management company.

Advantages Disadvantages
One can concentrate on the firm’s core It might create problems and difficulties for the
business instead of looking after every business owner.
detail.
One can get enough time to expand the Businesses may lose the privacy of their business
business to new geographies and model.
dimensions.
Businesses can take expert help in The confidentiality of certain products may get
handling basic responsibilities related to leaked to the outside world.
workforce.
Certain companies fail to reach the The parent company might get its best-performing
 desired success peak, which they can employees poached as the contract management
accomplish using contract management companies have contracts with many similar
firms. companies.
It maintains the consistency and A management company may never provide loyal
continuity of business for the parent and talented employees in the long run as they try
company. to cut costs on hiring the best employee.

One can easily venture into international The quality of work of employees may reduce
business operations using this model. below par.

Many governments have used to upgrade There might not be a proper connection between
and upskill the local human resources for the employee and the employer leading to below-
performing required functions. par performance of the firm.

5. Fully owned manufacturing facilities: - The firms which have long term and substantial
interests in the foreign markets normally establish fully owned manufacturing facilities. Thus
by establishing their physical presence as a producer, they maintain substantial market standing.
Ex: TVS Motors in Indonesia. Toyota has a fully owned manufacturing center in USA.
Wholly owned subsidiaries enable holding companies (i.e. the parent company) to maintain
operations in diverse geographic areas, market areas, and even entirely separate industries,
creating an important hedge against changes in the market, geopolitical and trade practice
changes, and declines in industry sectors.
6. Assembly operations: The establishment of assembly operations represents a cross between
exporting and manufacturing abroad .In this method the product meant for the foreign market is
assembled in the foreign market itself. Sometimes the products which are meant to be marketed
domestically are assembled abroad.
An assembly line is a production process that breaks the manufacture of a good into steps that
are completed in a pre-defined sequence. Assembly lines are the most commonly used method in
the mass production of products. They reduce labor costs because unskilled workers are trained
to perform specific tasks. Rather than hire a skilled craftsperson to put together an entire piece of
furniture or vehicle engine, companies hire workers only to add a leg to a stool or a bolt to a
machine.
  An assembly line is a production process whereby the manufacture of a good is a
sequence of steps completed in a pre-defined sequence.
 Assembly lines are the most commonly used mass production method.
 Assembly lines reduce labor costs because unskilled workers are trained to perform
specific tasks rather than build an entire product unit.
An assembly line is where semi-finished products move from workstation to workstation. Parts
are added in sequence until the final assembly is produced. Today, automated assembly lines are
by machines with minimal human supervision.
The introduction of the assembly line drastically changed the way goods were manufactured.
Credit Henry Ford, who set up an assembly line in 1908 to manufacture his Model T cars.
Before, workers would assemble a product (or a large part of it) in place, often with one worker
completing all tasks associated with the product's creation.
Assembly lines, on the other hand, have workers (or machines) complete a specific task on the
product as it continues along the production line rather than complete a series of tasks. This
increases efficiency by maximizing the amount a worker could produce relative to the cost of
labor.
Determining what individual tasks must be completed, when they need to be completed, and who
will complete them is a crucial step in establishing an effective assembly line. Complicated
products, such as cars, have to be broken down into components that machines and workers can
quickly assemble.
Companies use a design for assembly (DFA) approach to analyze a product and its design in
order to determine assembly order and identify issues that can affect each task. Each task is then
categorized as either manual, robotic, or automatic, and is then assigned to individual stations
along the manufacturing plant floor.
Companies can also design products with their assembly in mind, referred to as concurrent
engineering. This allows the company to manufacture a new product that has been designed with
mass production in mind, with the tasks, task order, and assembly line layout already
predetermined. This can significantly reduce the lead time between the initial product design
release and the final product rollout.
7. Joint ventures: Joint venture generally implies sharing of management and ownership in an
enterprise. But it can also take the force of licensing agreements, contract manufacturing and
management contracts.

When two or more firms join together for a common purpose and mutual benefit, it is known
as Joint Venture. It is a combination of two or more firms’ resources and skills to achieve a
certain goal. A partnership between two companies is created to share capital, technology,
human resources, risks, and benefits in order to achieve a strong market position. After the
venture is completed, the joint venture agreement will be automatically terminated.
Joint Ventures can be created with an organisation in the same industry or with an organisation
in a different industry, but after combining the two, they will get a competitive edge over other
market players. In general, a Joint Venture is formed when two or more firms join together to
form synergy and obtain a mutual competitive advantage. It can be a private, public, or even a
foreign corporation. Firms enter into a joint venture for business expansion, development of
new products or moving into a new market, especially in the case of another country.
Many Indian corporations entered into joint ventures with international companies that were
either technologically more developed or geographically more dispersed. In India, important
joint ventures were formed in industries, such as insurance, banking, commercial transportation
vehicles, and so on
Benefits of Joint Venture
The benefits of Joint venture are as follows:
1. Establishing Entry into New Markets and Distribution Networks: When one company
forms a joint venture with another, it opens up a wide market with the potential to expand and
flourish. For example, when a firm from the United States of America forms a joint venture
with another company from India, the company from the United States has access to enormous
Indian markets with different variants of paying capacity and diversification of choice.
At the same time, the Indian firm has the benefit of being able to reach markets in the United
States that are widely separated and have a high-paying capacity where the product’s quality is
not compromised. Unique Indian products have large global markets.
They can also make use of established distribution channels, such as retail outlets in various
local marketplaces. Otherwise, building their own retail shops might be too expensive.
2. Access to Technology: Technology is an alluring reason for companies to form joint
ventures. Advanced technology combined with one organisation to generate higher quality
products saves a significant amount of time, energy, and resources, as there is no need to
develop its own technology. Superior quality products are also produced which adds to the
efficiency and effectiveness of the organisation by reducing the cost of production.
3. Economies of scale: Joint Venture helps companies with limited capacity to scale up. One
organization’s strength can be utilized by another. This provides both firms with a competitive
advantage in terms of generating economies of scalability.
4. Innovation: Joint ventures provide an additional advantage in terms of technologically
upgrading products and services. Marketing may be done through a variety of innovative
platforms, and technological advancements help in the production of high-quality products at a
low cost. International corporations can develop new concepts and technologies to decrease
costs and produce higher-quality products.
5. Low Production Costs: When two or more firms join hands, the primary goal is to deliver
products at the lowest possible cost. And this is possible when manufacturing costs are
decreased or service costs are controlled. A real joint venture simply aims to provide the best
products and services to its customers.
6. Established Brand Name: The Joint Venture can be given its very own brand name. This
contributes to the brand’s distinct appearance and recognition. When two companies form a
joint venture, the goodwill of one firm that is already established in the market can be used by
another to gain an advantage over other market competitors. For example, A large European
brand entering into a joint venture with an Indian firm will provide a synergistic benefit because
the brand is already well-known throughout the world.
Types of Joint Venture
There are two types of Joint Venture:
1. Contractual Joint Venture (CJV):
A contractual joint venture does not result in the formation of a new jointly-owned business.
There is only an agreement to cooperate and work together. The parties do not share ownership
of the company, but they do have some influence over it. They exercise some elements of
control in the joint venture. A franchisee relationship is a common example of a contractual
joint venture.
The following are key elements in such a relationship:
a. Two or more parties share a common objective to run a business.
b. Each party contributes something to the venture or brings some input.
c. Both parties have some control over the business venture.
d. The relationship is not a transaction-to-transaction relationship but is of longer duration.
2. Equity-based Joint Venture (EJV):
An equity joint venture agreement is one in which a separate business entity, jointly owned by
two or more parties, is formed with the parties’ agreement. The essential operating factor in
such a scenario is joint ownership by two or more parties. The kind of business entity might
vary in the form of corporation, partnership firm, trusts, limited liability partnership businesses,
venture capital funds, etc.
The following are key elements in such a relationship:
a. There is an agreement to form a new entity or for one of the parties to join into ownership of
an existing entity.
b. Shared ownership by the parties is involved.
c. Management is shared jointly.
d. Capital investment and other financing arrangements responsibilities are shared by both
parties.
e. Profits and losses are shared according to the agreement
 It represents a combination of subsets of assets contributed by two (or more) business entities for
a specific business purpose and a limited duration. It generally has the following characteristics:-
(i) Contribution by partners of money, property, effort, knowledge, skill or other assets to the
common undertaking;
(ii) Joint property interest in the subject matter of the venture;
(iii) Right of mutual control or management of the enterprise;
(iv) Right to share in the property.
Ex: Tata Tea has a Joint Venture in Sri Lanka namely Estate Management Services Pvt Ltd.
General Motors formed a 50-50 JV with Shangai Automotive Industry Corporation to produce
Buicks, Cadillacs and Chevrolets for the Chinese market, which became highly successful.

ICICI Lombard, ING Vysya, Bajaj Allianz and all other private insurance firms in India have a
joint venture with a foreign partner.

8. Mergers and Acquisitions: These are also forms of international business. Where in merges
take place voluntarily with the consent of either the companies but acquisition takes place when
a financially stronger company takes over the equity stake of a weaker company. Sometimes,
the objective is to obtain access to a new technology or a patent right or to reduce competition.

Ex: Tata Group acquired Corus and Mittal Steel acquired Arcelor.
The merger of legendary Walt Disney and everything-we-create-kids- adore Pixar was a match
made in cartoon heaven. Disney had released all of Pixar’s movies before, but with their contract
about to run out after the release of “Cars,” the merger made perfect sense. With the merger, the
two companies could collaborate freely and easily.
Big oil got even bigger in 1999, when Exxon and Mobil signed a $81 billion agreement to merge
and form Exxon Mobil. Not only did Exxon Mobil become the largest company in the world, it
reunited its 19th century former selves, John D. Rockefeller’s Standard Oil Company of New
Jersey (Exxon) and Standard Oil Company of New York (Mobil). The merger was so big, in fact,
that the FTC required a massive restructuring of many of Exxon & Mobil’s gas stations, in order
to avoid outright monopolization (despite the FTC’s 4-0 approval of the merger).
Exxon Mobil remains the strongest leader in the oil market, with a huge hold on the international
market and dramatic earnings. In 2008, ExxonMobil occupied all ten spots in the “Top Ten
Corporate Quarterly Earnings” (earning more than $11 billion in one quarter.
 India has had its share as well. Tata Chemicals bought British Salt, in 2010 a UK based white
salt producing company for about US $ 13 billion. The acquisition gives Tata access to very
strong brine supplies and also access to British Salt’s facilities as it produces about 800,000 tons
of pure white salt every year.
Reliance Power and Reliance Natural Resources merger: This deal was valued at US $11 billion
and turned out to be one of the biggest deals of 2010. It eased out the path for Reliance power to
get natural gas for its power projects.
9. Strategic alliances: In this method the companies try to enhance their long term competitive
advantage by forming alliances with their competitors, existing or potential in critical areas
instead of competing with each other. Strategic alliance is sometimes used as a market entry
strategy also.
Strategic alliances are partnerships in which two or more companies work together to achieve
objectives that are mutually beneficial. Companies may share resources, information, capabilities
and risks to achieve this. According to Producer’s eSource, a common reason for entering into a
strategic alliance is to obtain the advantage of another company’s innovations without having to
invest in new research and development. While companies have used acquisition to accomplish
some of these goals in the past, forming a strategic alliance is more cost- effective.
Ex. Apple Computers & IBM have formed an alliance combining software and hardware
technology for a new generation of desktop computers.
Tata Tea has entered in to an alliance with Tetley so that the marketing expertise of Tetley is
available to market tea abroad.
According to Rebecca Larson, assistant Professor of Business at Liberty University, Starbucks
partnered with Barnes and Nobles bookstores in 1993 to provide in-house coffee shops,
benefiting both retailers. In 1996, Starbucks partnered with Pepsico to bottle, distribute and sell
the popular coffee-based drink, Frappacino. A Starbucks-United Airlines alliance has resulted in
their coffee being offered on flights with the Starbucks logo on the cups and a partnership with
Kraft foods has resulted in Starbucks coffee being marketed in grocery stores. In 2006, Starbucks
formed an alliance with the NAACP, the sole purpose of which was to advance the company’s
and the NAACP’s goals of social and economic justice.
According to “An Overview of Strategic Alliances,” Apple has partnered with Sony, Motorola,
Phillips, and AT&T in the past. Apple has also partnered more recently with Clearwell in order
to jointly develop Clearwell’s E-Discovery platform for the Apple iPad. E-Discovery is used by
enterprises and legal entities to obtain documents and information in a “legally defensible”
manner, according to a 2010 press release 1
10. Counter trade:
Although exchange of goods for cash is the most common method for transactions in the modern
world, international trade offers challenges, which need to be dealt with beyond cash
transactions. In such situations, companies resort to counter trade.
Countertrade involves the exchange of goods in barters or other ways in place of money. For
example, if a nation’s currency is not exchangeable overseas, they may offer a commodity or
other product in place of cash.
Countertrade was common in the USSR in the 1960s when its currency was inconvertible. It was
their only means of purchasing foreign goods. Countertrade grew in the 1980s as many other
nations did not have the foreign reserves required to make imports. Countertrade increased yet
again during the Asian financial crisis in 1997, as many currencies became devalued and had
very limited buying power.
One example of countertrade was when the USSR paid Coca-Cola with vodka. Poland did the
same with Coca-Cola but paid with beer.
It is a form of international trade in which certain import and export transactions are directly
linked with each other and the import of goods are paid for by export of goods instead of money
payments.
Countertrade has its pros and cons. A major benefit of countertrade is that it facilitates
conservation of foreign currency, which is a prime consideration for cash-strapped nations. Many
developing countries save cash reserves by using this method. Other benefits include increased
employment, protecting local industry, higher sales, better capacity utilization; assists in balance
of trade and ease of entry into challenging markets. Amongst others, serving national
competitive advantage is another important one. By providing the opportunity of counter trade to
other country you gain a competitive edge over the other nations selling or trading the same
product.

It is best described by Fisher College of Business, Ohio State University “Counter trade consists
of transactions which have a basic characteristic of linkage, legal or otherwise, between exports
and imports of goods or services in addition to, or in place of, financial settlements. Counter
trade can be used as an effective international business tool. Counter trade plays a part in 20-25
percent of world trade.”
A major drawback of countertrade is that the value proposition may be uncertain, especially in
cases where the goods being exchanged have significant price volatility. Other disadvantages of
countertrade include complex negotiations, potentially higher costs and logistical issues.
Forms of Counter Trade:
Countertrade can be separated into seven variants:
a) Barter.
b) Buyback
c) Switch trading.
d) Compensation Deal
 e) Counter purchase.
f) Offset.
g) Clearing Agreement
a) Barter: Is the direct exchange of goods of equal value, with no money or third party
involvement. For examples; like the trade relationship between China and Thailand where fruit
has been traded by Thailand for buses made by China. It is normally used in
deals with trading partners that are not trustworthy or that lack any credit. Barter is the simplest
and most restrictive type of counter trade.
b) Buy Back: The supplier of plant, equipment, training or technology agrees to purchase goods
manufactured with the same equipment or technology. In other words, involves a firm building
a facility or making an investment in a country and then it receives a percentage of that
investment’s profits as partial payment for the initial contract.
For example, a company based in the USA sets up an automobile factory in X country. They take
a part of the total produce as their own but they have setup the industry, provide the technology
and the training to X country.
This was demonstrated when a Japanese company sold sewing machines to China and received
payment in the form of 3,00,000 pairs of pyjamas.
c) Switch Trading: In this method one company trades products and services or, in some cases,
builds infrastructure like roads, railway lines, hospitals with another nation and, in turn, are
obligated to make a purchase from that nation. It occurs when a third party trading house
purchases a company’s counter purchase credits and resells them to another company, which
can make better use of them. The trading house makes a profit along the way. For example,
India exports software to the USA but needs oil. Therefore, USA pays US dollars to the UAE
and enables India to import oil without any cash transaction between India and the UAE.
d) Compensation Deal: The seller receives a part of the payment in cash and rest in the form of
products.
e) Counter purchase: Here, the overseas seller agrees to buy goods or services sourced from the
buyer’s country up to a defined amount. A recent example of this is the ongoing trade between
Congo and China where infrastructure is being traded for a supply of metals.
f) Offset: This is an agreement by one nation to buy a product from a company in another. The
terms of contract are subject to the purchase of some or all of the components and raw materials
from the buyer of the finished product, or the assembly of such product in the buyer nation.
This is more common in defense equipments or space crafts etc.
The USA imported oil from the Middle East and exported its defense products to those countries.
The difference is that this party can conclude its transaction with any company or partner in the
country to which the sale is made.
g) Clearing Agreement: It is barter with no currency transaction. Both the countries maintain
clearing accounts in the central banks of the two countries.
Countertrade and its variants can be beneficial when it offers a company a means to finance an
export transaction in the absence of other means. Companies that do not wish to engage in
countertrade activities, can lose export opportunities to other domestic competitors that may be
willing to enter such agreements. Some governments may require that exports undertake
countertrade, when dealing with certain other countries.
However, countertrade can often result in firms ending up with massive quantities of unusual
products that may be difficult to resell or dispose. In such cases, firms may have to establish in-
house trading and distribution divisions to deal with countertrade goods. Naturally, countertrade
is best handled by large, diversified, multi-national corporations that have existing distribution
channels and networks.
10. Turnkey contracts: A turnkey operation is an agreement by the seller to supply a buyer
with a facility fully equipped and ready to be operated by the buyers’ personnel, who will be
trained by the seller. It’s a common practice in the case of oil refineries, steel mills, cement,
fertilizer plants, construction projects and franchising agreements.
Many turnkey contracts involve government or public sectors as buyers.
A turnkey contractor may sub- contract different phases or parts of the project.
11. Third Country Location: When there’s no commercial transactions between two nations
because of political reasons, then the firm, which wants to enter the other nation’s market will
have to operate from a third country base. In the past Govt. of India did not permit trade with
South Africa and Mauritius.
Ex: Taiwanese entrepreneurs found it easy to enter People’s Republic of China through bases in
Hong Kong.
Rank Xerox found it easy to enter erstwhile USSR through its Indian joint venture Modi Xerox.
This idea may also be resorted to reduce cost of production and thereby increase
competitiveness.