Chapter 11. International Business - I. NECRT

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1. Differentiate between international trade and international business.

w Solution:

S. No

International Business International business comprises of operations between countries right from employing personnel to the infra structure for performing a business activity. International trade International business is is a part of itself a separate entity. international business. The revenue of the International business company that brings in more foreign imports or exports investments as well. increase.

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International Trade International trade comprises of imports and exports.

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2.

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2. Discuss any three advantages of international business.

Solution: Benefits to Nations

(i) Earning of foreign exchange:

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(ii) More efficient use of resources:

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International business helps a country to earn foreign exchange which it can later use for meeting its imports of capital goods, technology, petroleum products and fertilisers, pharmaceutical products and a host of other consumer products which otherwise might not be available domestically.

Benefits to Firms

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As stated earlier, international business operates on a simple principle produce what your country can produce more efficiently, and trade the surplus production so generated with other countries to procure what they can produce more efficiently. When countries trade on this principle, they end up producing much more than what they can when each of them attempts to produce all the goods and services on its own. If such an enhanced pool of goods and services is distributed equitably amongst nations, it benefits all the trading nations.

(i) Prospects for higher profits: International business could be more fruitful than the domestic business. When the domestic prices are cheaper, business establishments can make more profits by selling their products in countries where they get a good price for their products. (ii) Increased capacity utilization:

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Many companies set up manufacturing capacities for their products which are in greater demand in the domestic market. By planning foreign expansion and obtaining orders from customers abroad, they can think of making use of their excess production capacities and also improve the profitability of their ventures. Manufacturing on a larger scale often leads to economies of scale, which thereby lowers manufacture cost and enhances per unit profit margin.

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3. What is the major reason underlying trade between nations?

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Solution: (i) Prospects for higher profits:

International business could be more fruitful than the domestic business. When the domestic prices are cheaper, business establishments can make more profits by selling their products in countries where they get a good price for their products. (ii) Increased capacity utilization:

Many companies set up manufacturing capacities for their products which are in greater demand in the domestic market. By planning foreign expansion and obtaining orders from customers abroad, they can think of making use of their excess production capacities and also improve the profitability of their ventures. Manufacturing on a larger scale often leads to economies of scale, which thereby lowers manufacture cost and enhances per unit profit margin. (iii) Prospects for growth:

It is quite annoying for the business merchants when demand for their products reaches a plateau in the domestic market. Such firms can significantly enhance prospects of their growth by getting involved with foreign markets. This is exactly what has driven most of the multinationals from the developed nations to enter into markets of developing nations. While demand in their home countries has reached a plateau, they realized their products were in demand in the developing nations and that demand was picking up quite fast.

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(iv) Way out to intense competition in domestic market: With increasing competition in the domestic market internationalization seems to be the only way to achieve considerable growth. This is the drive for many companies to go global in the search of markets for their products. Thus, international business serves as a medium of growth for companies facing tough market conditions on the domestic grounds.

4. Discuss as to why nations trade?

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(v) Improved business vision: The advancement of international business of many firms is basically a part of their business policies or strategic management. The vision to go global comes from the need to grow, the urge to become more competitive, the need to diversify and to gain strategic benefits of going global.

Solution: India sought the help of the International Monetary Fund (IMF) for raising funds to cope up and clear its debts and payment deficits. IMF agreed to lend money to India and this was possible due to the trade between nations. Indian companies had to used this opportunity to market their products to customers abroad. It includes not only the international movements of goods and services, but also of assets and resources, personnel, technology and intellectual property like patents and trademarks. 5. Enumerate the limitations of contract manufacturing



Solution: The prime limitations of contract manufacturing to overseas company and local manufacturer in foreign countries are outlined below: Local companies may not stick on to manufacture quality and design standards, thereby creating serious product quality issue to the overseas company.

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Local producer in the foreign country does not have control over the production process as products are manufactured exactly as per the terms and specifications of the contract.

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The local company manufacturing under contract manufacturing is not free to sell the contracted output as per its wish. The goods have to be sold to the international company at predetermined prices. This leads to lesser gains for the local company if the open market prices for such goods tend to be greater than the prices agreed upon under the contract. 6. Why is it said that licensing is an easier way to expand globally?

Solution:

It is the licensor/franchiser who sets up the business unit and invests his/her own money in the business, under the licensing/franchising system. As such, the licensor/franchiser does not have to invest overseas. Therefore Licensing/franchising is considered a cheaper way of entering into overseas business. Since meagre amounts of foreign investment is involved, licensor/ franchiser does not bear the losses, if any, that occur to overseas business. The Licensee/franchisee pays fees to the licensor/franchiser a fixed amount in advance as a percentage of manufacture or sales return. This royalty or fee keeps accumulating to the licensor/franchiser until the manufacture and sales gets going in the licensee’s/franchisee’s business unit.

There are lower risks of business takeovers or government interventions as the business abroad is run by the licensee/franchisee, who is a local person.

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Licensee/franchisee being a local person could prove quite helpful to the licensor/franchiser in conducting its marketing operations successfully as he has a much better market knowledge and contacts.

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As regards the terms of the licensing/ franchising agreement, only the parties to the licensing/franchising agreement are legally allowed to use the licensor’s/franchiser’s copyrights, patents and brand names in foreign countries. Hence, other companies in the overseas market cannot make use of these trademarks and patents.

Solution:

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7. Differentiate between contract manufacturing and setting up wholly owned production subsidiary abroad.

S. No

Contract manufacturing

Wholly owned subsidiary production

1.

Local manufacturers are entered into contracts by foreign countries

The foreign companies set up their own manufacturing unit.

2.

Products are produced and assembled by local manufacturers

Production and assembling is done by professionals appointed by the foreign company



3.

Investment is done by the local company

The parent company invests in the wholly owned subsidiary units.

8. Distinguish between licensing and franchising

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Solution:

S. No

Licensing

Franchising

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licensing is used in connection with manufacture and marketing of goods

Franchising refers to service business.

Licensing does not set such strict rules to be followed.

Franchisers generally set stringent rules and regulations on how the franchisees should run while running their business.

9. List major items of India’s exports

Solution: Textiles and garments, gems and jewellery, account for major economic activities for the country. Many individual product items such as tea, pearls, precious and semi-precious stones, medicinal and pharmaceutical products, rice, spices, iron ore and concentrates, leather and leather manufactures, textile yarns fabrics, garments and tobacco form the major items of export in India. 10. List the major countries with whom India trades

Solution: USA, UK, Belgium, Germany, Japan, Switzerland, Hong Kong, UAE, China, Singapore and Malaysia are India’s eleven major trading Partners.

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11. What is international business? How is it different from domestic business?

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Solution: National or Domestic Business can be defined as a transaction taking place within the geographical boundaries of a nation. It is also called as internal business or home trade. Manufacturing and trade outside the boundaries of one’s own country is referred to as international business. International business has ventured into a new age of reforms. India too was not cut off from this. It was under a severe debt trap and was having a huge burden of payment crisis. In 1991, when India approached the International Monetary Fund (IMF) for raising funds to cope up and clear its debts and payment deficits. IMF though agreed to lend money to India laying a condition that India would undergo major changes in its structure to guarantee repayment of borrowed funds. India had no alternate option but to agree to the proposal. It was this condition laid by IMF which forced India to widen its economic policies. Since then a good amount of liberalization at the economic front happened. Though the process of reforms has somewhat slowed down, India is very much on the path to globalization and integrating with the world economy. While, on the one hand, many multinational corporations (MNCs) have ventured into Indian market for selling their products and services and as a result many Indian companies had to step out of the country to market their products to customers abroad. It includes not only the international movements of goods and services, but also of assets and resources, personnel, technology and intellectual property like patents and trademarks. Undoubtedly, international trade that includes exports and imports of goods has historically been acknowledged as an important module of international business. International trade related to services such as international travel and tourism, transportation, communication, banking,

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are increased foreign investments and foreign goods and services produced. Companies have started

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progressively making investments into foreign countries and are undertaking production of goods and services in foreign countries to become close to foreign customers that would enable them serve more effectively at lower costs. These activities form part of international business. International Business vs. Domestic Business

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The process of conducting and managing international business operations is very complex than undertaking domestic business. Due to variations in political, social, cultural and economic environments across countries, business organization has difficulty in extending their domestic business strategy to foreign markets. In order to be successful in the overseas markets, they have to adapt their product, pricing, promotion and distribution strategies and their business plans to suit the exact requirements of the target of foreign markets.

(i) Nationality of buyers and sellers: Nationality of the major participants (i.e., buyers and sellers) to the business deals differs from domestic to international businesses. Wit respect to domestic business, both the buyers and sellers belong to the same country. This leads us to a better understanding among each other and enter into business deals. But where as with international business the buyers and sellers belong to different countries. Owing to differences in their languages, attitudes, social customs, objectives and practices, it becomes comparatively more difficult for them to work together and finalise business deals. (ii) Nationality of other stakeholders: National and international businesses also differ with respect to the nationalities of the other stakeholders such as employees, suppliers, shareholders/partners and general public who interrelate with business firms. Where as with respect to domestic business all these factors belong to one country, and hence depict more consistency in their value systems and behaviour. Decision making in international business becomes even more complicated as the concerned business organization has to take into account a broader set of values and aspirations of the stakeholders belonging to different countries.

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(iii) Mobility of factors of production: The extent of mobility of factors like labour and capital is usually less amid other countries than within a country. Whilst these factors of movement can move liberally within the country, there exist many restrictions to their movement across different countries. Apart from legal restrictions, even the difference in socio-cultural environments, geographic influences and economic conditions contribute in a big way to their movement across countries. This is particularly true of the labour which finds it difficult to adapt to the climatic, economic and sociocultural conditions that differ from one country to another country.

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(iv) Customer heterogeneity across markets: Since buyers in international markets belong to different countries, they vary from their socio-cultural background. Differences in their tastes, fashions, languages, beliefs and customs, attitudes and product preferences is the root for variations in not only their demand for different products and services, but also with respect to variations in their communication patterns and purchase behaviour. It is in particular, due to the socio-cultural differences. For instance, while people in India use right-hand driven cars, Americans are familiar with cars fitted with steering, brakes, etc., on the left side. Such differences largely complicate the task of designing products and evolving strategies suitable for customers in different countries. Although to some extent customers within a country also differ in their tastes and preferences. These variations become more prominent when we compare customers across nations.

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(v) Differences in business systems and practices: The variations in business systems and practices are significantly much more among countries than within a country. Countries differ from one another in terms of their socio-economic development, accessibility, cost and efficiency of economic infrastructure and market support services, business customs and practices because of their socio-economic milieu and historical coincidences. These differences make it essential for firms interested in venturing into international markets to adapt their production, finance, human resource and marketing plans as per the conditions customary in the international markets. (vi) Political system and risks: Political factors viz., type of government, political party system,



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political ideology, political risks, etc., have a deep impact on business operations. Since a business person is familiar with the political environment of his/her country, he/she can well adapt to it and predict its impact on business operations. But this is not so in international business. Political environment varies from one country to another. One has to initiate special efforts to understand the varying political environments and their business implications. Since there is a constant change in political environment one has to monitor political changes on an ongoing basis in the respective countries and plan strategies to deal with diverse political risks. The main problem with a foreign country’s political environment is the tendency among countries to favour products and services belonging to their own countries compared to other countries. Where as this is problem is not seen in business firms operating domestically, it quite often results in a severe problem for the firms interested in exporting their goods and services to other countries or setting up their plants in the overseas market. (vii) Business regulations and policies: Attached with its socioeconomic environment and political philosophy, each country frames its business laws and regulations. Though these laws, regulations and economic policies are fairly uniform and applicable within a country but they differ extensively among nations. Tariff and taxation policies, import quota system, subsidies and other controls executed by a nation are not the same as in other countries and often discriminate against foreign products, services and capital. (viii) Currency used in business transactions: Yet another important difference between domestic and international business is that the latter involves the use of different currencies. Since the exchange rate, i.e., the price of one currency expressed in relation to that of another country’s currency, keeps varying it adds to the problems of international business firms in fixing prices of their products and prevarication against foreign exchange risks.

12. "International business is more than international trade". Comment

Solution: International business is much broader than international trade. It involves not only international trade but also, a wide variety of other ways in which the organizations operate internationally. Major forms of business operations that comprise international business are as follows.

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(i) Merchandise exports and imports: Merchandise can be defined as goods that are tangible, i.e., those that can be seen and touched. When viewed from this understanding, it is clear that merchandise exports means sending tangible goods abroad and merchandise imports means bringing tangible goods belonging to a foreign country to one’s own country. Merchandise exports and imports, also known as trade in goods, comprise only tangible goods and exclude trade in services.

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(ii) Service exports and imports: Service exports and imports comprise trade in intangibles. It is because of its intangible feature of services that trade in services is also called as invisible trade. A wide variety of services are as follows: tourisim, travel, boarding, lodging, recruiting, training, construction, engineering, educational and financial services etc. Out of these, tourism and travel are considered to be the major components of world trade in services. (iii) Licensing and franchising: Permitting a new party in a foreign country in order to produce and sell goods under your trademarks, patents or copyrights in lieu of some fee is another way of entering into international business. It is under the licensing system that Pepsi and Coca Cola are produced and sold all over the world by local bottlers in foreign countries. Franchising is similar to licensing, but it is a term used in connection with the provision of services. McDonalds, for instance, operates fast food restaurants the world over through its franchising system.

(iv) Foreign investments: Foreign investment is another important form of international business. Foreign investment involves investments of funds abroad in exchange for financial return. Foreign investment can be of two types: direct and portfolio investments. Direct investment takes place



when a company directly invests in properties.

13. What benefits do firms derive by entering into international business?

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Solution: (i) Prospects for higher profits:

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International business could be more fruitful than the domestic business. When the domestic prices are cheaper, business establishments can make more profits by selling their products in countries where they get a good price for their products. (ii) Increased capacity utilisation:

Many companies set up manufacturing capacities for their products which are in greater demand in the domestic market. By planning foreign expansion and obtaining orders from customers abroad, they can think of making use of their excess production capacities and also improve the profitability of their ventures. Manufacturing on a larger scale often leads to economies of scale, which thereby lowers manufacture cost and enhances per unit profit margin. (iii) Prospects for growth: It is quite annoying for the business merchants when demand for their products reaches a plateau in the domestic market. Such firms can significantly enhance prospects of their growth by getting involved with foreign markets. This is exactly what has driven most of the multinationals from the developed nations to enter into markets of developing nations. While demand in their home countries has reached a plateau, they realised their products were in demand in the developing nations and that demand was picking up quite fast. (iv) Way out to intense competition in domestic market: With increasing competition in the domestic market internationalization seems to be the only way to achieve considerable growth. This is the drive for many companies to go global in the search of markets for their products. Thus, international business serves as a medium of growth for companies facing tough market conditions on the domestic grounds.

ca

ti

(v) Improved business vision: The advancement of international business of many firms is basically a part of their business policies or strategic management. The vision to go global comes from the need to grow, the urge to become more competitive, the need to diversify and to gain strategic benefits of going global.

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14. In what ways is exporting a better way of entering into international markets than setting up wholly owned subsidiaries abroad

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Solution:

Exporting/importing is the easiest mode of gaining entry into international markets as compared to other modes of entry. It is a less complicated activity when compared to setting up and running joint-ventures or wholly owned subsidiaries in foreign countries.

Exporting/importing is less involving in the sense that business firms are not required to invest that much time and money as is needed when they desire to enter into joint deals or set up production plants and facilities in host nations.



Since exporting/importing does not require much of investment abroad, exposure to foreign investment risks is minimal or much lower than that is present when companies opt for other ways of entry into international business. 15. Discuss briefly the factors that govern the choice of mode of entry into international business

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International trade related to services such as international travel and tourism, transportation, communication, banking, warehousing, distribution and advertising has significantly grown. The other important developments are increased foreign investments and foreign goods and services produced. Companies have started progressively making investments into foreign countries and are undertaking production of goods and services in foreign countries to become close to foreign customers that would enable them serve more effectively at lower costs. (i) Merchandise exports and imports: Merchandise can be defined as goods that are tangible, i.e., those that can be seen and touched. When viewed from this understanding, it is clear that merchandise exports means sending tangible goods abroad and merchandise imports means bringing tangible goods belonging to a foreign country to one’s own country. Merchandise exports and imports, also known as trade in goods, comprise only tangible goods and exclude trade in services. (ii) Service exports and imports: Service exports and imports comprise trade in intangibles. It is because of its intangible feature of services that trade in services is also called as invisible trade. A wide variety of services are as follows: tourisim, travel, boarding, lodging, recruiting, training, construction, engineering, educational and financial services etc. Out of these, tourism and travel are considered to be the major components of world trade in services.

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(iii) Licensing and franchising: Permitting a new party in a foreign country inorder to produce and sell goods under your trademarks, patents or copyrights in lieu of some fee is another way of entering into international business. It is under the licensing system that Pepsi and Coca Cola are produced and sold all over the world by local bottlers in foreign countries. Franchising is similar to licensing, but it is a term used in connection with the provision of services. McDonalds, for instance, operates fast food restaurants the world over through its franchising system.

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(iv) Foreign investments: Foreign investment is another important form of international business. Foreign investment involves investments of funds abroad in exchange for financial return. Foreign investment can be of two types: direct and portfolio investments. Direct investment takes place when a company directly invests in properties.

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16. Discuss the major trends in India’s foreign trade. Also list the major products that India trades with other countries

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Solution: India accounts for a small share in world trade, its exports and imports Rs. 606 crores in 1950-51 which increased to Rs. 2,93,367 crores in 2003-04, representing an increase of over 480 times over the last five decades or so (see Table 11.2). The country’s imports too show a similarly phenomenal increase. Total imports which were Rs. 608 crores in 1950-51 raised to Rs. 3,59,108 crores in 200304, thus recording a growth of about 590 times during the same period. Compostion wise, textiles and garments, gems and jewellery, account for major economic activities for the country. Owing to the faster growth attained at the external front, share of foreign trade in the country’s Gross Domestic Product (GDP) has significantly raised to 24.1 per cent in 2003-04 from 14.6 per cent in 1990-91. In absolute terms, the exports and imports have both witnessed exceptional growth over the years. India’s total merchandise exports were engineering products and chemicals and related

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Though in overall terms India accounts for just 0.8 per cent of world exports, in many individual product items such as tea, pearls, precious and semi-precious stones, medicinal and pharmaceutical products, rice, spices, iron ore and concentrates, leather and leather manufactures, textile yarns fabrics, garments and tobacco, its share is much greater and varies between 3 per cent and 13 per cent. Also, as regards commodities such as basmati rice, tea, and ayurvedic products, India holds the unique position of being the largest exporter in the world. As far as imports are concerned, products likes crude oil and petroleum products, capital goods (i.e., machinery), electronic goods, pearl, precious and semi-precious stones, gold, silver and chemicals constitute major items of India’s imports. USA, UK, Belgium, Germany, Japan, Switzerland, Hong Kong, UAE, China, Singapore and Malaysia are India’s eleven major trading Partners. While USA has been India’s leading trade partner with a share of 11.6 per cent in India’s total trade (including both exports and imports), shares of other ten countries have been in the range of 2.1 per cent to 4.4 per cent in 2003-04. 17. What is invisible trade? Discuss salient aspects of India’s trade in services.

Solution: Outstandingly over the last four decades. The change in the composition of services exports is a remarkable matter. Software and other miscellaneous services (including professional technical and business services) have turned out as the major sectors of India’s exports of services. While the relative share of travel and transportation has declined from 64.3 per cent in 1995-96 to 29.6 per cent in 2003-2004, the share of software exports has gone up from 10.2 per cent to around 49 per cent in the corresponding period

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on 9 CONTACT FOR MATHEMATICS GROUP/HOME COACHING FOR CLASS 11TH 12TH BBA,BCA, DIPLOMA CPT CAT SSC AND OTHER EXAMS Also home tutors for other subjects in DELHI AND OTHER MAJOR CITIES EMAIL:9 [email protected] web site www.badhaneducation.in

Chapter 11. International Business - I. NECRT

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