Business Studies Chapter 11 Solutions NCERT Class 11th
EXERCISES
Short Answer Questions
1. Differentiate between international trade and international business.
Answer: International trade primarily refers to the exchange of tangible goods (merchandise exports and imports) between countries. International business is a broader concept. It encompasses not only merchandise and service trade but also global movements of capital, personnel, technology, and intellectual property (e.g., patents, trademarks, copyrights).
2. Discuss any three advantages of international business.
Answer:
- Earning Foreign Exchange: International business helps a country acquire foreign currency, essential for importing capital goods, technology, and other necessary products.
- Prospects for Higher Profits: Firms can achieve higher profits by selling products in foreign markets where prices might be more favorable than in domestic markets.
- Increased Capacity Utilization: Businesses with surplus production capacity can utilize this by expanding into overseas markets, securing more orders, and thereby improving profitability and achieving economies of scale.
3. What is the major reason underlying trade between nations?
Answer: The major reason for trade between nations is that countries cannot produce everything they need equally well or cheaply. This is due to unequal distribution of natural resources and differences in productivity levels, leading countries to specialize in efficient production and procure other goods through trade.
4. Differentiate between contract manufacturing and setting up wholly owned production subsidiary abroad.
Answer:
- Contract Manufacturing: Involves an international firm contracting with local foreign manufacturers to produce goods according to its specifications. This mode requires little to no investment risk from the international firm in foreign production facilities.
- Wholly Owned Production Subsidiary: Involves a parent company making a 100% equity investment in a foreign country to establish its own production and marketing facilities. This mode offers full control but carries higher investment and political risks.
5. Why is it necessary for an export firm to go in for pre-shipment inspection?
Answer: Pre-shipment inspection is necessary to ensure that the quality of goods meant for export conforms to the importer’s specifications and international standards. This helps maintain the exporter’s reputation and fulfills import requirements of certain countries, which may mandate such inspection.
6. What is bill of lading? How does it differ from bill of entry?
Answer: A bill of lading is a document issued by a shipping company. It serves as an official receipt of goods loaded onto the vessel and an undertaking to carry them to the destination. It is also a document of title to the goods, freely transferable.
A bill of entry, on the other hand, is a legal document filed by the importer (or their agent) with customs authorities when goods arrive at the port of destination. It contains detailed information about the imported goods such as description, quantity, and value and is used for assessing customs duties and obtaining clearance of the goods.
7. What is a letter of credit? Why does an exporter need this document?
Answer: A letter of credit (LC) is a guarantee issued by the importer’s bank. It assures the exporter’s bank that payment for the export bills will be honored up to a specified amount. An exporter needs this document because it is the most secure method of payment in international transactions, minimizing the risk of non-payment from the importer.
8. Discuss the process involved in securing payment for exports.
Answer: After goods are shipped and customs cleared, the exporter dispatches various documents (including the commercial invoice, bill of lading, and bill of exchange) to the importer through their bank. The importer’s bank then facilitates the payment to the exporter’s bank. The exporter can often receive immediate payment from their bank by signing a letter of indemnity. A bank certificate of payment confirms that the funds were received in accordance with exchange control regulations.
Long Answer Questions
1. “International business is more than international trade”. Comment.
Answer: The statement “International business is more than international trade” is accurate. International trade traditionally refers to the cross-border exchange of tangible goods (merchandise exports and imports). However, international business encompasses a much broader range of global economic activities. Its scope has expanded significantly beyond simple buying and selling of goods. It includes:
- Trade in Services: This involves intangible services like tourism, transportation, banking, communication, and professional services.
- Licensing and Franchising: Allowing foreign parties to use trademarks, patents, copyrights, or business models for a fee.
- Foreign Investments: This involves direct investments (FDI) where a company establishes its own production or marketing facilities abroad, gaining controlling interest. It also includes portfolio investments, where a company acquires shares or loans in foreign firms for financial returns without direct operational involvement. These activities demonstrate that international business covers the entire gamut of business operations conducted across national boundaries, making it a much wider concept than just international trade.
2. What benefits do firms derive by entering into international business?
Answer: Firms derive several key benefits from engaging in international business:
- Prospects for Higher Profits: Companies can often achieve better profit margins by selling their products in foreign markets where demand or pricing structures may be more favorable than in their domestic market.
- Increased Capacity Utilization: Many firms face situations where their domestic demand is insufficient to fully utilize their production capacity. International business provides an opportunity to utilize this surplus capacity by securing foreign orders, leading to economies of scale and improved profitability.
- Prospects for Growth: When domestic markets become saturated or offer limited growth opportunities, entering international markets provides new avenues for expansion and significant growth potential. This is a primary driver for many multinational corporations.
- Way Out of Intense Competition in Domestic Market: Faced with fierce competition at home, firms can internationalize to seek new markets where competition might be less intense, allowing them to gain a competitive edge and expand their operations.
- Improved Business Vision: Venturing into international business often fosters a broader and more strategic business vision. It encourages firms to think globally, enhance their competitiveness, diversify operations, and leverage strategic advantages from operating on a worldwide scale.
3. In what ways is exporting a better way of entering international markets than setting up wholly owned subsidiaries abroad.
Answer: Exporting is often a more favorable way to enter international markets compared to setting up wholly owned subsidiaries abroad due to several reasons:
- Lower Investment and Risk: Exporting requires significantly less financial investment and exposure to foreign investment risks. Firms can utilize their existing domestic production facilities and do not need to incur substantial capital expenditure for setting up new plants abroad. In contrast, a wholly owned subsidiary demands a 100% equity investment, making it a high-cost and high-risk venture.
- Simplicity and Ease of Entry: Exporting is considered the easiest mode of entry into international markets. The procedural complexities are relatively lower compared to establishing and managing a full-fledged foreign subsidiary, which involves navigating diverse legal, regulatory, and operational environments in a new country.
- Flexibility: Exporting offers greater flexibility. Firms can adjust their export volumes more easily in response to market conditions or political changes without the long-term commitments associated with owning foreign assets. Closing or scaling down an export operation is far simpler than divesting a wholly owned subsidiary.
- Limited Foreign Market Contact: While a limitation in some aspects, for initial entry, this can be an advantage as it reduces the need for deep knowledge of foreign market nuances, cultural adaptations, and direct management of foreign employees.
4. Rekha Garments has received an order to export 2000 men’s trousers to Swift Imports Ltd., located in Australia. Discuss the procedure that Rekha Garments would need to go through for executing the export order.
Answer: For Rekha Garments to execute the export order for 2000 men’s trousers to Swift Imports Ltd. in Australia, they would typically follow these key steps:
- Receipt of Order (Indent): Swift Imports Ltd. would formally place an order (indent) specifying quantity, quality, price, payment terms, and delivery schedule.
- Assessing Importer’s Creditworthiness and Securing Guarantee of Payment: Rekha Garments would assess Swift Imports’ financial standing. They would likely request a Letter of Credit (LC) from Swift Imports’ bank, which guarantees payment upon fulfillment of export terms.
- Obtaining Export License: Rekha Garments must ensure they have a valid Import Export Code (IEC) number. If specific licenses are required for garments or exports to Australia, they must obtain them. Registration with ECGC might also be considered for payment risk coverage.
- Obtaining Pre-shipment Finance: Rekha Garments would approach their bank for pre-shipment finance to cover costs of raw materials, manufacturing, packaging, and transporting the trousers to the port.
- Production or Procurement of Goods: The 2000 men’s trousers would be manufactured according to Swift Imports’ specifications and quality standards.
- Pre-shipment Inspection: If mandatory for garments or required by Australia, the trousers would undergo inspection by an authorized agency (e.g., Export Inspection Council of India) to obtain a quality certificate.
- Excise Clearance: If excise duty is applicable on the trousers, Rekha Garments would obtain excise clearance and may apply for a duty drawback.
- Obtaining Certificate of Origin: Swift Imports might request a Certificate of Origin to avail tariff concessions in Australia. Rekha Garments would obtain this from the relevant trade consulate.
- Reservation of Shipping Space: Rekha Garments would apply to a shipping company for space, providing details of the consignment. Upon acceptance, they would receive a “shipping order.”
- Packing and Forwarding: The trousers would be carefully packed in seaworthy containers and marked with necessary details. Arrangements would be made for transportation to the port, obtaining a railway receipt if transported by rail.
- Insurance of Goods: Rekha Garments would insure the consignment against loss or damage during sea transit.
- Customs Clearance: Before loading, the goods must be cleared by customs. Rekha Garments would prepare a “shipping bill” with all required details and submit it for approval.
- Obtaining Bill of Lading: Once the goods are loaded onto the ship and cleared by customs, the shipping company would issue a Bill of Lading, which serves as a receipt and a document of title.
- Dispatch of Documents: Rekha Garments would send all original documents (commercial invoice, bill of lading, packing list, insurance policy, certificate of origin, Letter of Credit, and a bill of exchange) to Swift Imports through their bank.
- Receipt of Payment: Upon presentation of documents and acceptance by Swift Imports, their bank would make the payment to Rekha Garments’ bank, completing the transaction.
5. Your firm is planning to import textile machinery from Canada. Describe the procedure involved in importing.
Answer: To import textile machinery from Canada, your firm would typically follow this import procedure:
- Trade Enquiry: Your firm would gather information on potential Canadian suppliers. This involves sending a “trade enquiry” to inquire about prices, specifications, and terms of the textile machinery. The Canadian exporter would respond with a “proforma invoice.”
- Procurement of Import License: Your firm would check the Export Import (EXIM) policy to determine if an import license is required for textile machinery. If so, they must obtain one. Your firm must also have an Import Export Code (IEC) number.
- Obtaining Foreign Exchange: Since payment to the Canadian supplier will be in foreign currency (e.g., Canadian Dollars or US Dollars), your firm would need to secure foreign exchange sanction from an RBI-authorized bank. This application would be made along with the import license.
- Placing Order (Indent): After obtaining the necessary license and foreign exchange sanction, your firm would place a formal “import order” (indent) with the Canadian exporter. This order would specify the machinery’s details, price, quality, packing, shipping, delivery schedule, insurance terms, and payment mode.
- Obtaining Letter of Credit: If the agreed payment terms involve a Letter of Credit (LC), your firm would obtain it from its bank and forward it to the Canadian supplier. This LC acts as a guarantee of payment to the exporter.
- Arranging for Finance: Your firm must arrange for the necessary funds to pay the Canadian exporter upon the machinery’s arrival, to avoid any penalties like demurrages.
- Receipt of Shipment Advice: After shipping the machinery, the Canadian supplier would send a “shipment advice” to your firm. This document provides crucial details such as the invoice number, bill of lading, name of the vessel, ports of loading and destination, description of goods, quantity, and sailing date.
- Retirement of Import Documents: The Canadian supplier would send the essential import documents (e.g., bill of exchange, commercial invoice, bill of lading, packing list, certificate of origin, marine insurance policy) to your firm’s bank. Your firm would then obtain these documents by either paying the bill of exchange (sight draft) or accepting it (usance draft).
- Arrival of Goods: The carrier (shipping line) would inform port authorities about the machinery’s arrival by providing an “import general manifest,” which details all imported goods on board and permits unloading.
- Customs Clearance and Release of Goods: All imported goods, including the textile machinery, must undergo customs clearance procedures. After clearance and payment of duties, the machinery would be released to your firm.
6. What is IMF? Discuss its various objectives and functions.
Answer: The International Monetary Fund (IMF) is an international organization established in 1944 to promote global economic stability and cooperation. It works to ensure the smooth functioning of the international monetary system.
Objectives of IMF:
- To promote international monetary cooperation among member countries.
- To ensure exchange rate stability and orderly exchange arrangements.
- To facilitate balanced growth of international trade.
- To provide financial support to member countries facing balance of payment problems.
- To reduce poverty around the world through economic support and technical assistance.
Functions of IMF:
Stabilization Support: Helps countries stabilize their economies by supporting adjustment policies and reforms.
Surveillance: Monitors the economic and financial policies of member countries and provides policy advice.
Financial Assistance: Provides short- and medium-term loans to help countries overcome balance of payment difficulties.
Capacity Development: Offers technical assistance and training to help countries strengthen their capacity in areas like tax administration, monetary policy, and financial regulation.
7. Write a detailed note on features, structure, objectives and functioning of WTO.
Answer: The World Trade Organization (WTO) is an international institution established in 1995, replacing the General Agreement on Tariffs and Trade (GATT). It is the only global organization dealing with the rules of trade between nations.
Features of WTO:
- A permanent organization headquartered in Geneva, Switzerland.
- It has legal status and enjoys privileges similar to other international organizations.
- Currently has over 160 member countries.
- Operates on the principle of consensus and equal voting rights for all members.
Structure of WTO:
- Ministerial Conference: The top decision-making body, meets every two years.
- General Council: Conducts day-to-day operations and oversees dispute settlement and trade policy review.
- Council for Trade in Goods, Services, and TRIPS: Handles sector-specific matters.
- Dispute Settlement Body and Appellate Body: Enforce the organization’s rules.
Objectives of WTO:
- To promote free and fair trade among nations.
- To eliminate trade barriers and restrictions.
- To ensure transparency and predictability in international trade policies.
- To provide a platform for negotiation and settlement of trade disputes.
- To improve the living standards and employment opportunities globally.
Functioning of WTO:
Technical Assistance: Supports developing and least-developed countries with trade capacity building.
Administering Trade Agreements: Ensures proper implementation of multilateral trade agreements.
Forum for Negotiations: Provides a forum for trade negotiations and policy dialogue.
Dispute Settlement: Handles trade disputes and ensures compliance through a structured mechanism.
Monitoring National Policies: Conducts trade policy reviews of member countries.