Chapter-10

International Business
 International Business

Meaning
Manufacturing and trade beyond the boundaries of one’s own country is known as international business.

International or external business can, therefore, be defined as those business activities that take place
across the national frontiers.

It involves not only the international movements of goods and services, but also of capital, personnel,
technology and intellectual property like patents, trademarks, know-how and copyrights.
 International Trade vs. Internal Trade
Basis Domestic business International Business
1. Nationality of buyers People or organisations from People or organisations of
and sellers one nation participate in different countries participate
domestic business transactions. in international business
transactions.

2. Nationality of other Various other stakeholders Various other stakeholders

stakeholders such as suppliers, employees, such as suppliers, employees,
middlemen, shareholders and middlemen, shareholders and
partners are usually citizens partners are from different
of the same country. nations.

3. Mobility of factors The degree of mobility of The degree of mobility of

of production factors of production like labour factors of production like labour
and capital is relatively more and capital across nations is
within a country. relatively less.
[Link] of customers Customers are relatively Customers lack homogeneity
more homogeneous in their due to differences in
tastes,preferences,consumpti language, preferences,
on patterns and buying customs, etc., across
behaviour . markets.
5. Differences in Business systems and Business systems and
business systems practices are relatively more practices vary considerably
and practices homogeneous within a across countries.
country.
6. Political system Domestic business is subject Different countries have
and risks to political system and risks different forms of political
of one single country. systems and different
degrees of risks which often
become a barrier to
international business.
7. Currency used in Currency of domestic International business
business country is used. transactions involve use of
transactions currencies of more than one
country.
 Benefits of International Trade

I. Benefits to Nations
1) Earning of foreign exchange:
International business helps a country to earn foreign exchange which can be used for payment for imports
of capital goods, technology, petroleum products, fertilisers, pharmaceutical products, etc.
2) More efficient use of resources.
External trade enables the countries to specialise in production of those goods for which they possess
natural resources and can produce more economically and efficiently. The countries export surplus
production of such goods to import those goods in which other countries have specialisation. It facilitates
more efficient use of resources. (produce what your country can produce more efficiently)
3) Improving growth prospects and employment potentials:
International business improves the growth prospects of many countries, especially the developing ones as
firms can raise their production capacity and export surplus output to foreign countries. External trade also
creates employment both directly and indirectly. (It provides direct employment to those people who are
hired by different firms to meet increased demand for exports. Indirectly, a number of intermediary firms are
established to facilitate business of export oriented industries.)
4) Increased standard of living: A country rarely has capacity to produce everything required by its citizens.
Through International trade, it can procure the products for domestic consumptions which it can’t produce.
Thus, International business is helpful in improving the living standards in the country.
 II. Benefits to Business Firms
1) Prospects for higher profits: International business can be more profitable than the domestic business.
When the domestic prices are lower, business firms can earn more profits by selling their products in
the international markets where prices are high.

2) Increased capacity utilisation: By procuring export orders, a firm can make use of its surplus
production capacity. Production on large-scale leads to economies of scale which, in turn, lowers the
cost of production.

3) Way out to intense competition in domestic market: (Highly competitive domestic market drivesmany
companies to go international in search of markets for their products.) When there is intense
competition in the domestic market, then the international business facilitates the firms to grow and
expand by operating in the foreign market.
4) Prospects for growth: When demand of a firm’s products starts getting saturated in the domestic
market, the firm has to search overseas markets for improving its growth prospects.

5) Improved business vision: International business enables the firms to improve their business vision.
The vision to become international comes from the urge to grow, the need to become more competitive, the
need to diversify and to gain strategic advantages of internationalisation.
 Import Procedure
Meaning: Import trade refers to purchase of goods from a foreign country.

The process of import involves the following procedure:

1) Trade enquiry
2) Procurement of import licence:
3) Obtaining foreign exchange
4) Placing order or indent
5) Obtaining a letter of credit
6) Arranging for finance
7) Receipt of shipment advice
8) Retirement of import documents
9) Arrival of goods
10) Customs clearance and release of goods
 Import Procedure
The process of import involves the following procedure:
1) Trade enquiry- The first step involved in importing goods is to gather information about the countries &
firms which export the product required by the exporter. The exporter prepares a quotation also known as
Performa Invoice & sends it to the importer.

2) Procurement of import licence-There are certain goods that can be imported freely, while others need
licensing. In case goods can be imported only against the licence, the importer needs to procure an import
licence.

3) Obtaining foreign exchange- In case of an import transaction the supplier resides in a foreign country
hence he demands payment in foreign currency. This involves exchange of Indian Currency into foreign
currency. The Exchange Control Department of the RBI regulates foreign exchange transactions in India. As
per rules, every importer has to secure the sanction of foreign exchange.

4) Placing order or indent- The importer places an import order or indent with the exporter for the supply of
specified goods. The order contains information regarding price, quality, quantity, size & grade of goods
instruction regarding packing, delivery shipping, mode of payment etc.

5) Obtaining a letter of credit- When the payment terms are agreed, the importer obtains the letter of credit
from its banker & forward it to the overseas supplier. A letter of credit is a guarantee issued by the importer’s
bank that it will honour payment up to a certain amount of export bills to the bank of the exporter.
6) Arranging for finance - The importer arranges for the funds in advance to pay the exporter on arrival
of goods at the port.

7) Receipt of shipment advice- The overseas supplier after loading the goods on the ship dispatches
the Shipment Advice to the importer. It provides information regarding, shipment of goods like invoice
number, bill of lading/airway bill, name of ship with date, description of goods & quantity etc.

8) Retirement of import documents- The overseas supplier prepares a set of necessary documents and
instructs the bank to hand over the relevant documents to the importer against acceptance of the bill of
exchange.

9) Arrival of goods - When the goods arrive in the importer’s country, the person in charge of the carrier
(ship), informs the officer in charge at the dock or the airport about it. The person in charge of the ship or
airway provides the document called import general manifest for unloading of cargo.

10) Customs clearance and release of goods- Imported goods are subjected to customs clearance
which is a very lengthy process & involves a lot of formalities. The importer usually appoints a C&F agent
for fulfilling these formalities
 Export Procedure

The process of export involves the following procedure:

1) Receipt of enquiry and send a quotation
2) Receipt of order or indent
3) Assessing the importer’s creditworthiness and securing a guarantee for payments:
4) Obtaining export licence
5) Obtaining pre-shipment finance
6) Production or procurement of goods
7) Pre-shipment inspection
8) Obtaining a certificate of origin
9) Reservation of shipping space
10) Packing and forwarding & Insurance of goods
11) Customs clearance
12) Obtaining a mates receipt
13) Payment of freight and issuance of bill of lading
14) Preparation of invoice & Securing payment
Export Procedure
The process of export involves the following procedure:
1) Receipt of enquiry and send a quotation- An exporter receives an enquiry from the prospective buyers
seeking information regarding price, quality & other terms conditions for export of goods. The exporter sends a
quotation known as pro forma invoice as reply.

2) Receipt of order or indent- If the buyer is satisfied with the export price & other terms & conditions, he
places the order or indent for the goods.

3) Assessing the importer’s creditworthiness and securing a guarantee for payments-The exporter
makes necessary enquiry about the creditworthiness of the importer. The purpose underlying the enquiry is to
assess the risks of non payment by the importer once the goods reach the import destination. To minimise
such risks, most exporters demand a letter of credit from the importer.

4) Obtaining export license- According to custom laws the exporter or the export firm must have export
license before proceeding with exports. The following procedure is followed for obtaining the export license.
To open a bank account in any authorized bank.

5) Obtaining pre-shipment finance- After obtaining the export license the exporter approaches his banker in
order to obtain pre-shipment finance for carrying out production.
6) Production or procurement of goods- Exporter, after obtaining the pre-shipment finance from the
bank, proceeds to get the goods ready as per the orders of the importer.

7) Pre-shipment inspection- Government of India ensures that only good quality products are exported
from India. The exporter has to submit the pre-shipment inspection report along with other documents at the
time of export.

8) Obtaining a certificate of origin- In order to obtain Tariff concessions or other exemptions the importer
may ask the exporter to send certificate of origin.

9) Reservation of shipping space- The exporter applies to the shipping company for provision of shipping
space. He has to provide complete information regarding the goods to be exported, probable date of
shipment and port of destination. The shipping company issues a shipping order. Which is an instruction to
the captain of the ship, after accepting application for shipping.

10) Packing and forwarding & Insurance of goods- The goods are packed & marked with necessary
details like name & address of the importer, gross & net weight, port of shipment & destination etc. After this
the exporter makes arrangement for the transportation of goods to the port.
In order to protect the goods against the risk of loss or damage due to the perils of the sea transit the
exporter gets the goods insured with an insurance company.
11) Custom clearance- Before loading the goods on the ship they have to be cleared by the customs
officer. For this purpose the exporter prepares the shipping bill & submits five copies of the shipping bill
along with relevant documents to the Customs officer at the customs house

12) Obtaining a mates receipt- After the goods have been loaded on board of the ship the captain or the
mate of the ship issues mate’s receipt to the port superintendent which contains information regarding
vessel, berth, description of packages, date of shipments, marks, condition of the cargo at the time of
receipt on board the ship etc.

13) Payment of freight and bill of lading- The clearing & forwarding agent (C&F agent) hands over the
mates receipt to the shipping company for calculating freight. On receiving the freight the shipping
company issues a bill of lading.

14) Preparation of invoice & Securing payment- The exporter prepares an invoice for the dispatched
goods. Invoice contains information regarding the quantity of goods sent & the amount to be paid by the
importer. It is duly attested by the customs.
After shipment of goods the importer is informed about it by the exporter. Various documents like certified
copy of invoice, bill of lading packing list. Insurance policy, certificate of origin & letter of credit are sent by
the exporter through his bank. These documents are required by the importer for getting the goods cleared
from customs.
 Major Documents needed in Connection with
Import- Export Transaction
1) Trade enquiry: A trade enquiry is a written request by an importing firm to the exporter for supply of
information regarding the price and various terms and conditions on which the latter exports goods.

2) Import order or indent: It is a document in which the buyer (importer) orders for supply of requisite
goods to the supplier (exporter). The order or indent contains the information such as quantity and
quality of goods to be imported, price to be charged, method of forwarding the goods, nature of
packing, mode of payment, etc.

3) Letter of credit: A letter of credit is a guarantee issued by the importer’s bank that it will honour up
to a certain amount the payment of export bills to the bank of the exporter. Letter of credit is the most
appropriate and secure method of payment adopted to settle international transactions

4) Certificate of origin: This is a certificate which specifies the country in which the goods are being
produced. This certificate entitles the importer to claim tariff concessions or other exemptions such as
non-applicability of quota restrictions on goods originating from certain pre-specified countries. This
certificate is also required when there is a ban on imports of certain goods from select countries.
5) Bill of lading: It is a document prepared and signed by the master of the ship acknowledging the
receipt of goods on board. It contains terms and conditions on which the goods are to be taken to the
port of destination.

6) Mate’s receipt: This receipt is given by the commanding officer of the ship to the exporter after the
cargo is loaded on the ship. The mate’s receipt indicates the name of the vessel, berth, date of
shipment, description of packages, marks and numbers, condition of the cargo at the time of receipt on
board the ship, etc. The shipping company does not issue the bill of lading unless it receives the mate’s
receipt.

7) Shipment advice: The shipment advice is a document that the exporter sends to the importer
informing him that the shipment of goods has been made. Shipment of advice contains invoice number,
bill of lading/airways bill number and date, name of the vessel with date, the port of export, description
of goods and quantity, and the date of sailing of the vessel.