International Business

Definition

International Business refers to all commercial activities (sales, investments, transportation, etc.) that take place between two or more countries. It involves the exchange of goods, services, capital, or knowledge across national borders.

Why do companies go global? (Benefits)

• Market Expansion: Finding new customers when the home market becomes "saturated."
• Resource Acquisition: Accessing better raw materials (e.g., oil) or superior technology (e.g., software).
• Risk Diversification: Reducing dependency on a single country's economy to avoid total failure during local recessions.
• Economies of Scale: Reducing cost per unit by producing in massive quantities for a global audience.

Examples

• Apple Inc.: Designs in the US, sources components from Taiwan/Korea, and assembles in China.
• Netflix: A US company providing digital services globally, including India and Brazil.

Real-Life Use Case

Imagine a local organic tea brand in Darjeeling, India. By moving into International Business, they can sell in London or New York, charging premium prices in foreign currencies to build massive local infrastructure and create jobs.

Companies choose their global strategy based on their risk appetite and desired control.

Examples

• Licensing: A Disney character used by a local toy manufacturer.
• Franchising: Subway or KFC outlets managed by local entrepreneurs.

Real-Life Use Case

Starbucks uses a mixed strategy. In some regions, they operate as Wholly Owned subsidiaries, while in others, they use Joint Ventures to navigate local real estate laws and tastes.

A. Export Trade

Sending goods/services produced in the home country to a foreign country.

The Procedure:

1. Inquiry & Quotation: Price negotiation.
2. Order/Indent: Formal purchase request.
3. Letter of Credit (L/C): Bank guarantee for payment.
4. Production & Packing: Preparation for transit.
5. Shipping & Documentation: Loading and legal paperwork.
6. Customs Clearance: Government inspection.

Key Documents:

• Commercial Invoice: The official bill.
• Bill of Lading (B/L): Receipt of cargo by the carrier.
• Certificate of Origin: Proof of manufacturing location.
• Packing List: Detailed contents of shipments.

B. Import Trade

Bringing goods/services from a foreign country into the home country.

The Procedure:

1. Obtaining an Import License.
2. Arranging foreign currency finance.
3. Placing the order with a foreign supplier.
4. Customs Clearance: Paying Import Duty (taxes).

Key Documents:

• Import License: Government permission.
• Bill of Entry: Legal document filed with customs.

C. Entrepot Trade (Re-export)

A "middleman" trade where a country imports goods and then exports them to another country, often after minor processing or logistics handling.

Example: Singapore imports various raw materials and exports them as finished goods to the rest of Asia.

Chamber of Commerce

Business organizations that act as a bridge, providing certificates of origin, resolving disputes, and advocating for trade-friendly laws.

Export Promotion Measures

Governments encourage exports to bring in foreign currency through:

• SEZs (Special Economic Zones): Low-tax areas designed for export manufacturing.
• Duty Drawbacks: Refunds on import taxes paid for raw materials used in export products.
• Export Subsidies: Direct financial assistance to exporters.

The "referee" of global trade.

Objectives:

• Liberalize trade by removing barriers.
• Ensure smooth and predictable trade flows.
• Settle disputes between nations.

Functions:

1. Administering Agreements: Enforcing signed trade rules.
2. Dispute Settlement: Acting as a "court" for trade conflicts.
3. Technical Assistance: Helping developing nations follow global rules.

Problem: A retailer in India is importing 500 laptops from the USA.

• Cost per laptop: $400
• Exchange Rate: $1 = ₹83
• Customs Duty: 10% of the value
• Shipping/Insurance: $1,000 (Total)

Step-by-Step Solution:
1. Total Value in USD: 500 * $400 = $200,000
2. Total Value in INR: $200,000 * 83 = ₹1,66,00,000
3. Customs Duty (10%): 10% of ₹1,66,00,000 = ₹16,60,000
4. Shipping in INR: $1,000 * 83 = ₹83,000
5. Total Landed Cost: ₹1,66,00,000 + ₹16,60,000 + ₹83,000 = ₹1,83,43,000
        

1. Which mode of entry involves the highest risk?
   a) Exporting b) Licensing c) Wholly Owned Subsidiary d) Franchising
   Answer: c
2. The document that acts as a receipt for goods loaded on a ship is:
   a) Invoice b) Bill of Lading c) Certificate of Origin d) Bill of Entry
   Answer: b
3. Trading goods imported from one country and exporting them to another is:
   a) Export Trade b) Import Trade c) Entrepot Trade d) Domestic Trade
   Answer: c
4. WTO stands for:
   a) World Trade Organization b) World Tariff Organization c) Western Trade Office d) World Trade Office
   Answer: a
5. A 'Letter of Credit' is primarily issued by:
   a) The Seller b) The Buyer's Bank c) The Customs Dept d) The Shipping Line
   Answer: b
6. Which of these is a 'Export Promotion Measure'?
   a) High Tariffs b) SEZs c) Import Quotas d) Strict Licensing
   Answer: b
7. If a company gives a foreign entity the right to use its brand for a fee, it is:
   a) Franchising b) Licensing c) Joint Venture d) Exporting
   Answer: b
8. The main goal of the WTO is to:
   a) Increase taxes b) Liberalize trade c) Control prices d) Promote one country
   Answer: b
9. A 'Bill of Entry' is used during:
   a) Exporting b) Importing c) Entrepot d) Licensing
   Answer: b
10. Which body helps businesses resolve international trade disputes?
    a) Chamber of Commerce b) WTO c) Both a & b d) None of the above
    Answer: c

1. Define International Business and state two advantages over domestic business.
   Ans: Commercial activities between two or more countries involving exchange of goods, services, or capital. Advantages: Market expansion and risk diversification.
2. Differentiate between Licensing and Franchising.
   Ans: Licensing is broad (use of patents/tech), while Franchising is a specific model involving entire operational systems (e.g., McDonald's).
3. Explain the role of a 'Bill of Lading' in export trade.
   Ans: It acts as a receipt of goods, a contract of carriage, and a document of title.
4. What is Entrepot Trade? Give a real-world example.
   Ans: Re-exporting goods. Example: Singapore importing goods to process/distribute to Asia.
5. List four essential documents required for an Export transaction.
   Ans: Commercial Invoice, Bill of Lading, Certificate of Origin, and Packing List.
6. How does a Joint Venture help a company entering a foreign market?
   Ans: It provides local market knowledge, shared costs, and easier navigation of local laws.
7. What are Special Economic Zones (SEZs)? Why are they created?
   Ans: Areas with tax incentives and easy regulations created to boost exports and manufacturing.
8. Briefly explain the functions of the WTO.
   Ans: Administering trade agreements, dispute settlement, and trade liberalization.
9. Why is a 'Letter of Credit' important in international trade?
   Ans: It provides payment security to the exporter by involving a bank as a guarantor.
10. Explain the concept of 'Duty Drawback'.
    Ans: A government refund of import duties paid on raw materials used to manufacture export goods.

• Modes of Entry (Low to High Risk): "E-L-F-J-W"
  • Export $\rightarrow$ Licensing $\rightarrow$ Franchising $\rightarrow$ Joint Venture $\rightarrow$ Wholly Owned.
  • Mnemonic: "Every Little Frog Jumps Wide."
• Export Documents: "C-B-P-I"
  • Certificate of Origin, Bill of Lading, Packing List, Invoice.
  • Mnemonic: "Can Big Planets Import?"