International Business

Introduction

In today's increasingly interconnected world, businesses are often not confined to operating within the borders of a single country. Many enterprises engage in activities that cross national boundaries, giving rise to the concept of International Business.

Meaning Of International Business

International Business refers to business activities that take place across national borders. It involves transactions of goods, services, technology, capital, and knowledge between parties in two or more countries.

It is broader than 'international trade' (which primarily focuses on the exchange of goods and services). International business includes various modes of operating in foreign countries, such as exporting, importing, licensing, franchising, foreign direct investment (FDI) through joint ventures or wholly owned subsidiaries, contract manufacturing, etc.

Reason For International Business

Enterprises engage in international business for several reasons:

To tap into foreign markets and expand their customer base beyond domestic limits.
To procure raw materials, labour, or other resources at lower costs from foreign locations.
To gain access to advanced technology or managerial expertise available in other countries.
To diversify risks across different markets.
To achieve economies of scale by expanding production and sales volume globally.
To utilize surplus production capacity.
To gain strategic advantages or counter moves by competitors.

International Business Vs. Domestic Business

While the basic principles of business (like production, marketing, finance) are similar, international business is significantly more complex than domestic business due to several differences:

Basis	Domestic Business	International Business
Market Territory	Confined to the geographical boundaries of the home country.	Operates across national boundaries, in multiple countries.
Customer Heterogeneity	Customers generally share similar cultural, social, and economic backgrounds.	Deals with customers from diverse cultures, languages, traditions, and economic conditions.
Political Environment	Operates under a single political and legal system.	Operates under different political systems, laws, and regulations in host countries.
Economic Environment	Subject to the economic conditions and policies of the home country.	Faces varied economic systems, policies, infrastructure, and levels of development in different countries.
Currency	Uses a single currency.	Involves dealing with multiple currencies and facing exchange rate fluctuations.
Language & Culture	Generally operates in a single language and dominant culture.	Requires adapting to multiple languages and diverse cultural values and practices.
Risk	Relatively lower risks (political, economic, exchange rate).	Higher risks due to greater complexities and uncertainties in foreign environments.
Govt. Intervention	Subject to domestic government policies and regulations.	Subject to trade policies, tariffs, quotas, investment regulations of both home and host countries.

Scope Of International Business

The scope of international business is vast and growing. It includes:

Merchandise Exports and Imports: Trading of tangible goods.
Services Exports and Imports: Trading of intangible services (e.g., tourism, banking, insurance, telecommunications, professional services like IT, consulting).
Licensing and Franchising: Allowing firms in foreign countries to use domestic firm's intellectual property (patents, trademarks, know-how) or business model.
Foreign Investment: Investing resources in business activities in foreign countries. This can be:
- Foreign Direct Investment (FDI): Investment in physical assets or equity leading to control over foreign business operations (e.g., setting up a factory, acquiring a foreign company).
- Portfolio Investment: Investment in financial assets like shares and bonds of foreign companies without gaining control.
Contract Manufacturing: Getting goods produced in foreign countries under contract.

Benefits Of International Business

International business offers significant benefits to both individual nations and the global community.

Benefits to the Nation:

Earning Foreign Exchange: Exports are a major source of foreign currency, which is essential for paying for imports and meeting other international obligations.
Optimum Utilisation of Resources: Countries can specialise in producing goods/services where they have a comparative advantage and import what others produce more efficiently.
Improving Growth Prospects and Employment Potential: Expanding markets globally leads to increased production, economic growth, and job creation.
Increased Standard of Living: Access to a wider variety of goods and services at potentially lower prices improves the standard of living for consumers.
Promoting Peace and Harmony: Economic interdependence fostered by international business can encourage peaceful relations among nations.

Benefits to the Firms:

Prospects for Higher Profits: Firms may find larger markets or less competition abroad, leading to higher profitability.
Increased Capacity Utilisation: Exporting can help utilise surplus production capacity, reducing per-unit costs.
Prospects for Growth: Expanding globally provides significant opportunities for business growth and diversification.
Way out for Intense Competition in Domestic Market: Firms facing stiff competition at home can seek opportunities in foreign markets.
Improving Business Image: Operating internationally can enhance a firm's reputation and image.

Modes Of Entry Into International Business

Firms can choose various strategies or modes to enter and operate in international markets. The choice of entry mode depends on factors like the firm's objectives, resources, risk tolerance, the nature of the foreign market, and the level of control desired.

Exporting And Importing

This is the simplest and most traditional mode of international business. It involves:

Exporting: Selling goods and services produced in the home country to customers in foreign countries.
Importing: Buying goods and services from foreign countries for consumption or resale in the home country.

Exporting can be direct (selling directly to foreign buyers) or indirect (selling through intermediaries like export houses or agents).

Merits: Low risk, low investment required, access to foreign markets. Demerits: Limited control over foreign marketing, high transportation costs, potential trade barriers (tariffs, quotas).

Contract Manufacturing

Under this mode, a firm enters into a contract with a local manufacturer in a foreign country to produce goods according to its specifications. The foreign manufacturer produces the goods, and the domestic firm then sells them in the foreign market or imports them back home.

Merits: Low investment by the domestic firm, access to cheaper labour/resources abroad, focuses on marketing. Demerits: Lack of control over the manufacturing process, potential quality issues, risk of losing manufacturing know-how.

Licensing And Franchising

These involve contractual agreements allowing foreign firms to use the domestic firm's intangible assets.

Licensing: A company (licensor) grants permission to a firm in a foreign country (licensee) to use its intellectual property, such as patents, trademarks, copyrights, trade secrets, or technical know-how, for a specified period in exchange for a fee or royalty.
Franchising: A specific type of licensing where a company (franchisor) grants a foreign firm (franchisee) the right to operate under its well-established business model, including the brand name, operating system, and marketing support, in exchange for an initial fee and/or royalties. (More comprehensive than licensing).

Merits: Low investment risk, avoids trade barriers, faster entry into foreign markets, leverages local knowledge. Demerits: Limited control over the foreign firm's operations, potential loss of quality control, risk of creating future competitors, sharing of profits.

Joint Ventures

As discussed earlier, a joint venture involves two or more parties pooling resources to undertake a specific task or business activity, often by creating a new jointly owned entity in a foreign country.

Merits: Access to local knowledge and resources, shared risk and investment, potential for synergies. Demerits: Potential for conflicts between partners, sharing of profits and control, requires trust and cooperation.

Wholly Owned Subsidiaries

Under this mode, a firm sets up a new company or acquires an existing one in a foreign country and owns 100% of its equity. This represents Foreign Direct Investment (FDI).

Merits: Full control over operations, protection of technology and know-how, potential for higher profits, leverages global synergies. Demerits: High investment required, high political and economic risk, requires managing foreign operations independently.

The choice of entry mode is a strategic decision that balances the potential rewards with the costs and risks involved.

Export-Import Procedures And Documentation

Engaging in international trade requires adhering to specific procedures and completing various documents as mandated by the laws of both the exporting and importing countries, as well as international trade rules.

Export Procedure

The general steps involved in exporting goods from India are:

1. Obtaining Import-Export Code (IEC)

Any person or company involved in export or import activities must obtain an IEC from the Directorate General of Foreign Trade (DGFT), Ministry of Commerce and Industry.

2. Registration Cum Membership Certificate (RCMC)

Exporters are required to obtain RCMC from the relevant Export Promotion Council or Commodity Board to avail export incentives and benefits.

3. Obtaining Export Order

Securing an order from a foreign buyer. This is often preceded by market research, participation in trade fairs, or receiving inquiries.

4. Assessing Exporter's Creditworthiness and Securing a Guarantee

Evaluating the financial standing of the buyer and potentially securing payment through a letter of credit from the buyer's bank or obtaining export credit insurance (from ECGC - Export Credit Guarantee Corporation of India).

5. Obtaining Export License

Ensuring that the goods to be exported are not prohibited or restricted and obtaining any necessary export license if required.

6. Production or Procurement of Goods

Manufacturing the goods or procuring them from other suppliers according to the buyer's specifications.

7. Pre-shipment Inspection

If required by the buyer or mandatory for certain goods, arranging for inspection of goods by a designated agency to ensure quality and specifications are met.

8. Packaging and Labelling

Proper packaging for international transit and labelling as per requirements of the importing country and the buyer.

9. Excise Clearance (if applicable)

Complying with excise duty procedures (if applicable) or obtaining exemption if exporting under bond or LUT (Letter of Undertaking) under GST.

10. Obtaining Customs Clearance

Filing necessary documents (e.g., Shipping Bill, Invoice, Packing List) with the Customs authorities and getting approval for export. Goods are examined by Customs.

11. Obtaining Bill of Lading or Airway Bill

Issued by the shipping company or airline upon receiving the goods, this document serves as a receipt, contract of carriage, and document of title (for Bill of Lading).

12. Obtaining Marine Insurance

Insuring the goods against risks during transit.

13. Securing Payment

Presenting shipping documents (Bill of Lading, Invoice, Packing List, Insurance Policy, etc.) to the bank to get payment from the buyer's bank (if using Letter of Credit) or as per agreed payment terms.

14. Dispatch of Documents

Sending the required documents to the importer through the bank or directly.

15. Realisation of Export Proceeds and Bank Certificate

Receiving payment in foreign currency and obtaining a Bank Realisation Certificate (BRC).

16. Filing GST Returns

Complying with GST procedures for exports.

Import Procedure

The general steps involved in importing goods into India are:

1. Obtaining IEC

Importer must have an IEC (same code used for export).

2. Entering into Contract with Exporter

Finalising the purchase order and terms with the foreign supplier.

3. Obtaining Import License (if required)

Ensuring the goods are importable and obtaining any necessary import license.

4. Arranging for Finance

Securing necessary funds for the import transaction, often through banks (e.g., opening a Letter of Credit).

5. Obtaining Customs Clearance

Upon arrival of goods at the port, the importer (or their agent, a Customs House Agent - CHA) files necessary documents (e.g., Bill of Entry, Commercial Invoice, Packing List, Bill of Lading, Certificate of Origin) with the Customs authorities. Goods are examined, and import duty (Customs Duty + IGST/CGST+SGST on import) is assessed and paid.

6. Taking Delivery of Goods

After customs clearance and payment of duties, the importer can take delivery of the goods from the port authorities.

7. Making Payment to Exporter

Remitting the foreign currency payment to the exporter through the bank, as per the agreed payment terms.

8. Filing GST Returns

Claiming Input Tax Credit for IGST paid on import (if applicable) in GST returns.

Key Export Documents:

Proforma Invoice / Commercial Invoice
Packing List
Shipping Bill (for sea freight) / Airway Bill (for air freight)
Bill of Lading (for sea freight)
Certificate of Origin
Certificate of Inspection (if required)
Insurance Policy/Certificate
Letter of Credit (if used)
Bank Realisation Certificate (BRC)
Export Declaration Form (EDF) / Softex Form (for software)

Key Import Documents:

Bill of Entry
Commercial Invoice
Packing List
Bill of Lading / Airway Bill
Certificate of Origin
Import License (if required)
Foreign Exchange Control Form (e.g., A1/A2 Form for remittance)

Navigating these procedures requires specialised knowledge and often involves hiring intermediaries like freight forwarders and Customs House Agents.

Foreign Trade Promotion: Incentives And Organisational Support

Governments, including the Indian government, actively promote foreign trade (exports and imports) through various policies, incentives, and institutional support mechanisms to boost economic growth, earn foreign exchange, and integrate the domestic economy with the global market.

Foreign Trade Promotion Measures And Schemes

The Foreign Trade Policy (FTP), announced by the Ministry of Commerce and Industry, Government of India, outlines the measures and schemes for promoting exports and imports. Some common types of incentives include:

Duty Exemption Schemes: Schemes allowing duty-free import of raw materials and inputs required for export production (e.g., Advance Authorisation, Duty-Free Import Authorisation - DFIA).
Duty Remission Schemes: Schemes providing for remission or refund of duties and taxes paid on inputs used in export production (e.g., Rebate of State and Central Taxes and Levies - RoSCTL for textiles, Remission of Duties and Taxes on Exported Products - RoDTEP for various sectors).
Export Promotion Capital Goods (EPCG) Scheme: Allows import of capital goods at concessional or zero duty for manufacturing goods for export. The exporter undertakes an export obligation equivalent to a multiple of the duty saved.
Merchandise Exports from India Scheme (MEIS) / Service Exports from India Scheme (SEIS): (Historically significant schemes, replaced by others). These provided duty credit scrips based on a percentage of the Free On Board (FOB) value of exports or Net Foreign Exchange earned.
Market Access Initiative (MAI) Scheme: Supports export promotion activities like market studies, participation in international trade fairs, publicity campaigns, etc.
Special Economic Zones (SEZs): Designated areas treated as foreign territory for trade purposes, offering infrastructure facilities, simplified procedures, and various incentives (like tax benefits) for export-oriented units.
Export Oriented Units (EOUs): Units undertaking to export their entire production, receiving certain benefits.

Besides these, financial support (export credit), market information, and advisory services are also provided.

Organisational Support

Several institutions and organisations in India provide support for foreign trade:

Directorate General of Foreign Trade (DGFT): The main regulatory body for foreign trade, responsible for formulating and implementing the Foreign Trade Policy and issuing IECs.
Ministry of Commerce and Industry: The nodal ministry for foreign trade and industrial policy.
Export Promotion Councils (EPCs) and Commodity Boards: Organisations specific to different product groups or sectors (e.g., Apparel EPC, Gem & Jewellery EPC, Tea Board, Coffee Board). They promote exports of their specific products, provide market information, and assist exporters.
Indian Institute of Foreign Trade (IIFT): Provides training, research, and consulting in international trade.
Export Credit Guarantee Corporation of India (ECGC): Provides credit risk insurance and related services to exporters against losses due to commercial and political risks in foreign countries.
India Trade Promotion Organisation (ITPO): Organises trade fairs and exhibitions in India and abroad.
Federation of Indian Export Organisations (FIEO): An apex body of export promotion organisations in India.
Commercial Banks: Facilitate foreign exchange transactions, provide export/import finance, and handle documents (e.g., Letter of Credit).

These organisations work together to create a supportive ecosystem for Indian businesses to participate effectively in international trade.

International Trade Institutions And Trade Agreements

International trade is facilitated and governed by various global institutions and agreements that aim to promote free and fair trade, provide financial stability, and support development.

World Bank

The World Bank Group is an international financial institution that provides loans and grants to the governments of poorer countries for the purpose of pursuing capital projects. While its primary focus is poverty reduction and development, its activities indirectly support international trade by financing infrastructure, improving the investment climate, and promoting economic stability in developing nations.

It comprises five institutions, including the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA).

International Monetary Fund (IMF)

The International Monetary Fund (IMF) is an international organisation working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.

The IMF tracks the global economy and the economies of member countries, lends countries money when they are facing balance of payments problems (short-term financial difficulties), and gives practical help to members.

Its work contributes to a stable international monetary system, which is essential for smooth international business transactions.

World Trade Organization (Wto) And Major Agreements

The World Trade Organization (WTO) is the only global international organisation dealing with the rules of trade between nations. It was established in 1995 as the successor to the General Agreement on Tariffs and Trade (GATT).

Objectives of WTO:

Administering trade agreements.
Acting as a forum for trade negotiations.
Settling trade disputes.
Reviewing national trade policies.
Assisting developing countries in trade policy issues, through technical assistance and training.
Cooperating with other international organisations.

The core principle of the WTO is to promote trade that is free (by reducing barriers like tariffs and quotas), fair (through rules against practices like dumping and subsidies), and predictable (through binding commitments).

Major WTO Agreements:

The WTO agreements are lengthy and complex legal texts covering a wide range of activities. Some key agreements include:

GATT (General Agreement on Tariffs and Trade): Deals with trade in goods, focusing on reducing tariffs and non-tariff barriers. Its key principles include Non-discrimination (Most-Favoured-Nation - MFN treatment and National Treatment) and predictability through binding of tariffs.
GATS (General Agreement on Trade in Services): Extends the multilateral trading system to the services sector. It covers all services except those provided under governmental authority.
TRIPS (Agreement on Trade-Related Aspects of Intellectual Property Rights): Sets minimum standards for the protection and enforcement of intellectual property rights (like patents, trademarks, copyrights) by member governments.
TRIMS (Agreement on Trade-Related Investment Measures): Deals with investment measures that discriminate against foreign investors or distort trade (e.g., local content requirements).
Agreement on Agriculture: Aims to reform trade in agriculture by reducing domestic support, export subsidies, and import barriers.
Agreement on Sanitary and Phytosanitary Measures (SPS) & Agreement on Technical Barriers to Trade (TBT): Deal with standards and regulations related to food safety, animal and plant health (SPS), and technical regulations, standards, and conformity assessment procedures (TBT), ensuring they do not create unnecessary barriers to trade.
Dispute Settlement Understanding (DSU): Provides a mechanism for resolving trade disputes between member countries.

The WTO plays a critical role in establishing and enforcing the rules of global trade, contributing to a more open and stable international business environment.