Business Studies Chapter 11 Notes NCERT Class 11th

Business Studies Chapter 11 Notes NCERT Class 11th

11.1 Introduction

Countries are undergoing a fundamental shift in how they produce and market products and services.
National economies are becoming increasingly dependent on others for procuring and supplying goods and services.
Increased cross-border trade and investments have integrated countries.
Development of communication, technology, and infrastructure are prime reasons for this change.
Newer communication modes and efficient transportation have brought nations closer.
WTO and government reforms contribute to increased international business relations.
The world is now a ‘global village’ with reduced obstacles to cross-border movement.
More firms are entering international business for growth and profits.

11.1.1 Meaning of International Business

Business Studies Chapter 11 Notes NCERT Class 11th - International Business

Domestic or National Business: Business transactions within a nation’s geographical boundaries. Also called internal business or home trade.
International Business: Manufacturing and trade beyond one’s own country’s boundaries.
It involves cross-national movements of goods, services, capital, personnel, technology, and intellectual property (patents, trademarks, know-how, copyrights).
Historically, international trade (exports/imports of goods) was a key component.
Scope has expanded to include international trade in services (tourism, transportation, communication, banking) and increased foreign investments and overseas production.
International business encompasses both trade and production of goods and services across frontiers.

11.1.2 Reason for International Business

Countries cannot produce all they need equally well or cheaply.
This is due to unequal distribution of natural resources or differences in productivity levels.
Availability of factors of production (labour, capital, raw materials) differs among nations.
Labour productivity and production costs vary due to socio-economic, geographical, and political reasons.
Some countries have an advantageous position in producing better quality products or at lower costs.
Each country produces what it can do efficiently and effectively, and procures the rest through trade with others.
This geographical specialization drives international business.
Firms engage in international business to import cheaper goods and export for better prices.
Other benefits also motivate nations and firms to engage in international business.

11.1.3 International Business vs. Domestic Business

Conducting international business is more complex than domestic business due to variations in environments. Firms need to adapt strategies for foreign markets.

Basis	International Business	Domestic Business
1. Nationality of buyers and sellers	People or organizations from different countries participate in international business transactions.	People or organizations from one nation participate in domestic business transactions.
2. Nationality of other stakeholders	Various stakeholders (suppliers, employees, middlemen, shareholders, partners) are from different nations.	Various other stakeholders are usually citizens of the same country.
3. Mobility of factors of production	The degree of mobility of factors like labour and capital across nations is relatively less.	The degree of mobility of factors of production like labour and capital is relatively more within a country.
4. Customer heterogeneity across markets	International markets lack homogeneity due to differences in language, preferences, customs, etc., across markets.	Domestic markets are relatively more homogeneous in nature.
5. Differences in business systems and practices	Business systems and practices vary considerably across countries.	Business systems and practices are relatively more homogeneous within a country.
6. Political system and risks	Different countries have different forms of political systems and different degrees of risks which often become a barrier to international business.	Domestic business is subject to political system and risks of one single country.
7. Business regulations and policies	International business transactions are subject to rules, laws and policies, tariffs and quotas, etc. of multiple countries.	Domestic business is subject to rules, laws and policies, taxation system, etc., of a single country.
8. Currency used in business transactions	International business transactions involve use of currencies of more than one country.	Currency of domestic country is used.

11.1.4 Scope of International Business

International business is broader than international trade and includes various ways firms operate internationally.

Major forms of international business operations:

Merchandise exports and imports:
- Merchandise refers to tangible goods.
- Exports: Sending tangible goods abroad.
- Imports: Bringing tangible goods from a foreign country.
- Also known as trade in goods; excludes trade in services.
Service exports and imports:
- Involve trade in intangibles, also known as invisible trade.
- Includes: tourism and travel, hotel/restaurants, entertainment, transportation, professional services (training, consultancy), communication, construction, engineering, marketing (wholesaling, advertising), educational, and financial services (banking, insurance).
Licensing and franchising:
- Licensing: Permitting a foreign party to produce and sell goods under your trademarks, patents, or copyrights for a fee (royalty).
  - Example: Pepsi and Coca-Cola are produced globally by local bottlers under license.
- Franchising: Similar to licensing, but used for provision of services.
  - Example: McDonald’s operates worldwide through franchising.
Foreign investments:
- Involves investing funds abroad for financial return.
- Two types: direct and portfolio investments.
  - Direct Investment (FDI): Company invests directly in properties (plant, machinery) in foreign countries for production and marketing. Provides a controlling interest. Can be joint ventures or Public-Private Partnerships (PPP). Can also be a wholly owned subsidiary (100% investment and control).
  - Portfolio Investment: Company acquires shares or provides loans to another company, earning dividends or interest. Investor is not directly involved in production/marketing.

11.1.5 Benefits of International Business

International business offers several benefits to both nations and business firms, contributing to globalization.

Benefits to Countries

Earning of foreign exchange: Helps a country meet imports of capital goods, technology, petroleum, pharmaceuticals, and consumer products not available domestically.
More efficient use of resources: Countries produce what they can most efficiently and trade surpluses, leading to greater overall production and equitable distribution of goods and services.
Improving growth prospects and employment potentials: Allows countries to produce on a larger scale, creating employment, especially for developing countries.
Increased standard of living: Enables consumption of goods and services produced in other countries, leading to a higher standard of living.

Benefits to Firms

Prospects for higher profits: Firms can earn more by selling products in countries with higher prices.
Increased capacity utilization: Utilizing surplus production capacities by expanding overseas and securing foreign orders, leading to economies of scale and lower production costs.
Prospects for growth: Entering overseas markets provides growth opportunities when domestic demand saturates.
Way out to intense competition in domestic market: Internationalization offers a path to significant growth when domestic competition is high.
Improved business vision: Part of strategic management, driven by the urge to grow, become more competitive, diversify, and gain strategic advantages.

11.2 Modes of Entry into International Business

Various ways a company can enter international business.

11.2.1 Exporting and Importing

Exporting: Sending goods and services from the home country to a foreign country.
Importing: Purchasing foreign products and bringing them into one’s home country.
Direct exporting/importing: Firm directly approaches overseas buyers/suppliers and handles all formalities.
Indirect exporting/importing: Firm’s participation is minimal; middlemen (export houses, buying offices, wholesale importers) handle most tasks.

Advantages:

Easiest way to enter international markets, less complex than joint ventures or wholly owned subsidiaries.
Requires less investment in time and money compared to joint ventures or setting up plants abroad.
Lower or no exposure to foreign investment risks.

Limitations:

Involves additional packaging, transportation, and insurance costs, which can increase product costs and reduce competitiveness.
Not feasible when import restrictions exist in a foreign country; other modes like licensing or joint ventures may be necessary.
Export firms, operating from home, have less contact with foreign markets, disadvantaging them against local firms.
Despite limitations, it is often the preferred initial entry mode, with firms later switching to other forms.

11.2.2 Contract Manufacturing

A firm contracts with local manufacturers in foreign countries to produce components or goods according to its specifications.
Also known as outsourcing.
Major forms:
- Production of components (e.g., automobile parts, shoe uppers).
- Assembly of components into final products (e.g., computers).
- Complete manufacture of products (e.g., garments).
Local manufacturers produce/assemble goods using technology and guidance from the foreign company.
Goods are delivered to the international firm for use in final products or sold as finished products under the international firm’s brand.
Examples: Nike, Reebok, Levis, Wrangler use contract manufacturing in developing countries.

Advantages:

Permits large-scale production without investment in setting up facilities, utilizing existing foreign facilities.
Little to no investment risk in foreign countries.
Allows products to be manufactured or assembled at lower costs.

11.2.3 Licensing and Franchising

Business Studies Chapter 11 Notes NCERT Class 11th - licensing

Licensing: Contractual arrangement where one firm (licensor) grants another firm (licensee) in a foreign country access to its patents, trade secrets, or technology for a fee (royalty).
- Can include exchange of technology (cross-licensing).
Franchising: Similar to licensing, used for providing services.

Wholly Owned Subsidiary
- Parent firm makes 100% equity investment in a foreign country, exercising full control over operations.
- Parent company is not required to disclose its technology or trade secrets.

Limitations:

Requires 100% equity investment, making it unsuitable for small and medium firms with limited funds.
Parent company bears the entire losses from foreign operations.
Subject to higher political risks, as some countries are averse to wholly owned subsidiaries by foreigners.

11.3 Export-Import Procedures and Documentation

International trade is more complex than domestic trade, involving many formalities.

11.3.1 Export Procedure

Steps involved in a typical export transaction:

Receipt of enquiry and sending quotations: Buyer sends enquiry for price, quality, terms; exporter replies with a proforma invoice.
Receipt of order or indent: Buyer places order if terms are acceptable.
Assessing importer’s creditworthiness and securing guarantee of payment: Exporter verifies creditworthiness and asks for Letter of Credit from importer’s bank.
Obtaining export licence: Necessary for certain goods. Exporter must register with Directorate General Foreign Trade (DGFT) and obtain Import Export Code (IEC) number.
Obtaining pre-shipment finance: Exporter obtains finance from bank for raw materials, processing, packing, and transportation to port.
Production or procurement of goods: Goods are prepared as per importer’s specifications.
Pre-shipment inspection: Compulsory inspection for quality assurance for certain products (e.g., by Export Inspection Council of India (EICI)).
Excise clearance: Obtaining excise clearance if goods are subject to excise duty. Exporters can claim refund (duty drawback).
Obtaining certificate of origin: Required by some importing countries for tariff concessions or exemptions.
Reservation of shipping space: Applying to shipping company and obtaining a shipping order.
Packing and forwarding: Goods are packed, marked, and transported to the port; railway receipt issued for goods loaded on wagon.
Insurance of goods: Goods are insured against transit risks.
Customs clearance: Goods must be cleared before loading. Exporter prepares a shipping bill (main document for customs permission).
Obtaining mate’s receipt: Issued by ship’s commanding officer after cargo loading.
Payment of freight and issuance of bill of lading: Exporter pays freight; shipping company issues Bill of Lading (receipt and title to goods).
Forwarding of documents: Exporter sends documents (e.g., certified copy of invoice, bill of lading, insurance policy, certificate of origin, letter of credit) to importer through their bank.
Obtaining payment: Importer’s bank makes payment to exporter’s bank; exporter can get immediate payment by signing a letter of indemnity. Exporter needs a bank certificate of payment.

Major Documents in Export Transaction

A. Documents related to goods:

Export invoice: Seller’s bill for merchandise, with details like quantity, value, packages, port, ship, payment terms.
Packing list: Statement of cases/packs and goods contained, nature of goods, form of sending.
Certificate of origin: Specifies country of production; entitles importer to tariff concessions/exemptions.
Certificate of inspection: Certifies goods have been inspected by authorized agency (e.g., EICI) for quality control.

B. Documents related to shipment:

Mate’s receipt: Given by ship’s commanding officer after cargo loading; indicates vessel name, date, cargo description.
Shipping Bill: Main document for customs permission for export; contains goods particulars, vessel name, ports, exporter details.
Bill of lading: Shipping company’s official receipt of goods on board and undertaking to carry to destination; document of title.
Airway Bill: Airline company’s official receipt of goods on board aircraft and undertaking to carry to destination; document of title.
Marine insurance policy: Insurance contract to indemnify against loss/damage due to sea perils.
Cart ticket: Also known as cart chit, vehicle or gate pass; includes shipper’s name, packages, shipping bill number, destination port, vehicle number.

C. Documents related to payment:

Letter of credit: Guarantee by importer’s bank to honor payment of export bills to exporter’s bank; secure method for international transactions.
Bill of exchange: Written instrument from exporter to importer directing payment of a specified amount to a person or bearer. Documents are passed on acceptance.
Bank certificate of payment: Certifies that documents (including bill of exchange) have been negotiated and payment received as per exchange control regulations.

11.3.2 Import Procedure

Steps involved in a typical import transaction for India:

Trade enquiry: Importer gathers information on exporting countries/firms and sends a trade enquiry; exporter replies with a proforma invoice.
Procurement of import licence: Check Export Import (EXIM) policy for licensing requirements. Obtain Import Export Code (IEC) number.
Obtaining foreign exchange: Apply to an RBI-authorised bank to secure sanction for foreign currency payment.
Placing order or indent: After obtaining import licence, importer places order with exporter specifying details (price, quantity, packing, shipping, payment, etc.).
Obtaining letter of credit: If agreed, importer obtains Letter of Credit from their bank and forwards to supplier as a payment guarantee.
Arranging for finance: Plan in advance to pay exporter upon goods arrival to avoid penalties (demurrages).
Receipt of shipment advice: Overseas supplier dispatches shipment advice with details of goods shipment.
Retirement of import documents: Supplier sends necessary documents (bill of exchange, commercial invoice, bill of lading/airway bill, packing list, certificate of origin, marine insurance policy) to importer’s bank.
- Documentary bill of exchange: Documents against payment (sight draft) or documents against acceptance (usance draft).
- “Retirement of import documents” is the acceptance of bill of exchange to get delivery of documents.
Arrival of goods: Carrier informs port/airport officer of goods arrival and provides import general manifest (details of imported goods, allows unloading).
Customs clearance and release of goods: All imported goods must pass customs clearance.

Major Documents in Import Transaction

Trade Enquiry: Buyer’s request for price and terms from an exporter.
Proforma Invoice: Exporter’s draft invoice with product details and terms.
Import Order or Indent: Importer’s formal order specifying goods and terms.
Letter of Credit: Importer’s bank’s guarantee to pay the exporter’s bank.
Shipment Advice: Exporter’s notification to importer that goods have been shipped.
Bill of Lading: Ship’s receipt for goods on board, also a document of title.
Airway Bill: Airline’s receipt for goods on board, also a document of title.
Bill of Entry: Customs form filled by importer for goods clearance.
Bill of Exchange: Exporter’s instruction to importer to pay a specified amount.
Sight Draft: Bill of exchange where documents are released upon immediate payment.
Usance Draft: Bill of exchange where documents are released upon acceptance for future payment.
Import General Manifest: Document detailing imported goods for cargo unloading.
Dock Challan: Form for paying dock dues after customs clearance.