MODULE 2

FORMS OF INTERNATIONAL BUSINESS

 Exporting

 Exporting is the marketing and direct sale of

domestically-produced goods in another country.
 Exporting is a traditional and well-established method of
reaching foreign markets.
 Exporting does not require that the goods be produced in
the target country, minimal capital is needed to start and
no investment in foreign production facilities is required.
 Cost associated with exporting are marketing expenses.
 Companies design and manufacture their products in
their country and export them to another.
 Licensing

 Licensing is defined as a business arrangement in which one

company gives another company permission to manufacture

its product for a specified payment.   

 Licensing strategies are effective when a company has a

patented product or has unique technical advice and they do

not have the option of entering the foreign market or opening

their own plant or company.  

Advantages :
 To a foreign country is that they do not have the legal

or financial risk of competing in a foreign market.  

 The company has the chance to avoid foreign tariffs

and non-tariff risks.

  Under licensing agreement, a company ( the licensor)
grants rights to intangible property to another company
(the licensee) to use in a specified geographic area for a
specified period.
 In exchange, the licensee ordinarily pays a royalty to the
licensor.
 The rights may be for an exclusive license (the licensor)
can give rights to no other company for the specified
geographic area for a specified period of time) or
nonexclusive (it can give away rights).
 Governments classify intangible property into these five
categories:
a. Patents, inventions, formulas, processes, designs,
patterns.
b. Copyrights for literary, musical, or artistic
compositions.
c. Trademarks, trade names, brand names

d. Franchises, licenses, contracts

e. Methods, programs, procedures, systems

The Benefit of Licensing for Licensors
 Increasing its brand presence at retail or distribution outlet

 creating further brand awareness to support its core

products or services

 supporting and enhancing its core values by associations

with the licensed products/service or category (e.g.

association with a healthy food or with a cutting edge mode

of fashion)
 Entering new markets (consumer or geographical)

which were unfeasible with it’s own resources or

capabilities

 Generating new revenue streams, often with little

involvement or additional financial or other resource

implications
The Benefit of Licensing for Licensees
 The key benefit for a licensee (especially manufacturer or
retailer) is the ability to significantly increase consumer
interest in and sales of its products or services

 Transferring the values and consumer favour towards the

property to the licensed product or service

 Providing added value and differentiation

from competitive offerings
 Providing additional marketing support or momentum from
the core property’s activity provided by the licensor

 Appealing to new target markets who have not historically

been interested in a licensee’s product or service
 Giving credibility for moving into new market sectors
through product extension

 Gaining additional retail space and favor.

Franchising
 Franchising is defined as a continuing relationship in
which a franchisor provides a licensed privilege to the
franchisee to do business and offers assistance in
organizing, training, merchandising, marketing, and
managing in return for a monetary consideration.
 Franchising allows a business to rapidly expand beyond
its original owners.  
 The franchisee pursues a new business, experiences the
advantages of running their own business and being
their own boss, and can gain wealth through a proven
business idea.  They provide the management skills to
run the business, as well as contribute the capital to
fund the opening and ongoing operations.
 The franchisor also benefits from the partnership and
gains economy of scope advantages as more
franchisees are established.  
 National or international advertising is then possible and
the franchisor can more easily expand business
locations with the help and capital from the franchisee.
 The franchisee has a unique opportunity to run a
business with a greater chance of success.
  There is experience from the franchisor for starting the
business and many of the initial mistakes have been
made and corrected.
Comparison
Basis Franchising Licensing

Governed by Securities law Contract law

Registration Required Not required

Territorial rights Offered to franchisee Not offered; licensee can

sell similar licenses and
products in same area

Support and training Provided by franchiser Not provided

Royalty payments Yes Yes

Use of Logo and trademark retained Can be licensed

trademark/logo by franchiser and used by
franchisee

Examples McDonalds, Subway, 7-11, Microsoft Office

Dunkin Donuts

control Franchiser exercise control licensor does not have

Foreign Direct Investment
 A foreign direct investment is a controlling ownership
in a business enterprise in one country by an entity
based in another country.

 Foreign direct investment includes "mergers and

acquisitions, building new facilities, reinvesting profits
earned from overseas operations and intra company
loans”.
 Foreign direct investment (FDI) is an investment in a
business by an investor from another country for which
the foreign investor has control over the company
purchased.
 The Organization of Economic Cooperation and
Development (OECD) defines control as owning 10% or
more of the business. Businesses that make foreign
direct investments are often called multinational
corporations (MNCs) or multinational enterprises
(MNEs).
 a company from one country making a physical
investment into building a factory in another country.  
 The direct investment in buildings, machinery and
equipment is in contrast with making a portfolio
investment, which is considered an indirect investment.
 In recent years, given rapid growth and change in global
investment patterns, the definition has been broadened
to include the acquisition of a lasting management
interest  in a company or enterprise outside the
investing firm’s home country.
Taking Control: Foreign Direct Investment

To qualify as a foreign direct investment, the investor must 

have control.  
 This can be established with a small percentage of the 
holdings if ownership is  widely dispersed.  The more 
ownership a  company has, the greater its control  over

  the  management decisions of the operation.  
 There are three primary reasons for companies to 
 want a controlling interest —

Internalization theory

Appropriability  theory

Freedom to pursue global objectives
 Internalization.

 Control through self-handling of operations is known as

internalization. Transactions cost theory holds that

companies should organize operations internally when the

costs of doing lower than contracting with another party to

handle it for them. Internalization may result in lower costs

because:

 Different operating units with the same company likely

share a common culture which expedites communications.
 The company can use its own managers who

understand and are committed to carrying out its

objectives.

 Negotiations that might delay the investment or

complicate its management can be avoided.

 The company can avoid possible problems with

enforcing an agreement
 Appropriability

 Appropriability theory is the idea that companies want to

deny rivals and potential rivals’ access to resources such

as capital, patents, trademarks, and management know-

how that might be captured through collaborative

agreements.
Pursuit of Global Strategies
 When a company has a wholly owned foreign operation, it
may more easily have that operation participate in a global
or transnational strategy. Furthermore, the fact that most
countries have laws to protect minority shareholders’
interest means that sharing of ownership may restrict a
company from implementing a global or transnational
strategy.
Advantages for multinational enterprises (MNES).

 Access to markets: FDI can be an effective way for you to

enter into a foreign market. Some countries may extremely

limit foreign company access to their domestic markets.

Acquiring or starting a business in the market is a means

for you to gain access.

 Access to resources: FDI is also an effective way for you to

acquire important natural resources, such as precious

metals and fossil fuels. Oil companies, for example, often

make tremendous FDIs to develop oil fields.

 Reduces cost of production: FDI is a means for you to
reduce your cost of production if the labor market is
cheaper and the regulations are less restrictive in the
target foreign market. For example, it's a well-known
fact that the shoe and clothing industries have been
able to drastically reduce their costs of production by
moving operations to developing countries.
Advantages for foreign countries.

 For starters, FDI offers a source of external capital and

increased revenue. It can be a tremendous source of
external capital for a developing country, which can
lead to economic development.
 The development of new industries.
 Learning is an indirect advantage to foreign country.
Why is FDI important for any consideration of going global?

 Avoiding foreign government pressure for local

production.
 Circumventing trade barriers, hidden and otherwise.
 Making the move from domestic export sales to a
locally-based national sales office.
 Capability to increase total production capacity.
 Opportunities for co-production, joint ventures with local
partners, joint marketing arrangements, licensing, etc
 A more complete response might address the issue of
global business partnering in very general terms.  While
it is nice that many business writers like the expression,
“think globally, act locally”, this often used cliché does
not really mean very much to the average business
executive in a small and medium sized company.  
Basic requirements for companies considering a
Foreign investment
 Depending on the industry sector and type of business, a

foreign direct investment may be an attractive and viable

option.
 With rapid globalization of many industries and vertical

integration rapidly taking place on a global level, at a minimum

a firm needs to keep abreast of global trends in their industry.

 From a competitive standpoint, it is important to be aware of

whether a company’s competitors are expanding into a foreign

market and how they are doing that.

 To monitor how globalization is affecting domestic

clients.
 It becomes imperative to follow the expansion of key

clients overseas if an active business relationship is to

be maintained.
 New market access is also another major reason to

invest in a foreign country.

 At some stage, export of product or service reaches a
critical mass of amount and cost where foreign
production or location begins to be more cost effective.
 Any decision on investing is thus a combination of a
number of key factors including:

◦ assessment of internal resources

◦ competitiveness

◦ market analysis

◦ market expectations.
Methods for Making FDI

 FDI usually involves international capital movement,

but could also involve the transfer of other assets such
as managers, cost control systems.
 Companies can either acquire an interest in an
existing company known as Brownfield investment or
construct new facilities, known as a Greenfield
investment.
 1. Reasons for Buying: Companies may acquire
existing operations in order to avoid adding further
capacity to the market, to avoid start-up problems,
obtain easier financing, and get an immediate cash
flow rather than tying up funds during construction. A
company may also save time, reduce costs, and
reduce risks by buying an existing company.
 2. Reasons for Greenfield: Companies may choose to
build if no suitable company is available for
acquisition, if the acquisition is likely to lead to carry-
over problems, and if the acquisition is harder to
finance. In addition, local governments may prevent
acquisitions because they want more competitors in
the market and fear foreign domination.
wholly owned subsidiary/operation
 A subsidiary company is considered wholly owned
when all of the common stock is owned by another
company, the parent company.
 With a wholly owned subsidiary, the company's stock is
not traded publicly. It remains an independent legal
body, a corporation with its own organized framework
and administration. Its day-to-day operations are likely
directed entirely by the parent company.
Partially owned operation / subsidiary
 A subsidiary company has 50% or more of its voting stock
controlled by another company.
 For liability, tax and regulatory reasons, the subsidiary and parent
companies remain separate legal entities.
 The parent company is typically a larger business that often has
control over more than one subsidiary.
 Parent companies may be more or less active concerning their
subsidiaries, but they hold a controlling interest to some degree.
 The amount of control the parent company chooses to exercise
usually depends on the level of managing control the parent
company awards to the subsidiary company management staff.
 FDI Policy in India
 Foreign Investment in India is governed by the FDI policy

announced by the Government of India and the provision of the

Foreign Exchange Management Act (FEMA) 1999.

 The Reserve Bank of India (‘RBI’) in this regard had issued a

notification, which contains the Foreign Exchange Management

(Transfer or issue of security by a person resident outside India)

Regulations, 2000. This notification has been amended from time to

time.
 The Ministry of Commerce and Industry, Government of India is the

nodal agency for motoring and reviewing the FDI policy on

continued basis and changes in sectoral policy/ sectoral equity cap.

 The FDI policy is notified through Press Notes by the

Secretariat for Industrial Assistance (SIA), Department

of Industrial Policy and Promotion (DIPP).

 The foreign investors are free to invest in India, except

few sectors/activities, where prior approval from the

RBI or Foreign Investment Promotion Board (‘FIPB’)

would be required.
Sector wise FDI in INDIA
100% FDI Limit
Single Brand retail
trading

Advertisement Courier Services Road, Highways, Housing and Real

Ports and Harbors Estate

NBFC Drugs and Tourism Construction

Pharmaceuticals

Oil Exploration Electricity Special Economic Print Media

Zones (Scientific &
Periodicals)

Petroleum Power Railways Mass Rapid

Product Infrastructure Transport System
Marketing

Broadcasting Films and Studios Transportation Mining of Gold

Infrastructure and Silver
 74% FDI Limit 51% FDI Limit

Airports Multi Brand Retail

Coal and Lignite Trading

Credit Information Companies

49% FDI Limit
Direct to Home
Airlines
Mining (Diamonds & Precious
Stones) Civil Aviation

Satellites Defence

Private Sector Banking Insurance

Private Security Agencies Pension

Stock Exchange
 26% FDI Limit

Print Media (Newspaper) 20% FDI Limit

Public Sector Banks

FDI is prohibited in the following sectors
 Lottery Business including Government/private lottery, online lotteries, etc.

 Gambling and Betting including casinos etc.

 Chit funds

 Nidhi company

 Trading in Transferable Development Rights (TDRs)

 Real Estate Business or Construction of Farm Houses (Real estate business does not

include development of townships, construction of residential /commercial premises,

roads or bridges )

 Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of

tobacco substitutes
 FDI in Retailing in India:
 Until 2011, Indian central government denied Foreign
Direct Investment (FDI) in multi-brand retail, forbidding
foreign groups from any ownership in supermarkets,
convenience stores or any retail outlets.
 Even single-brand retail was limited to 51% ownership
and a bureaucratic process.
 In November 2011, India's central government announced
retail reforms for both multi-brand stores and single-brand
stores.
 These market reforms paved the way for retail
innovation and competition with multi-brand retailers
such as Wal-Mart, Carrefour and Tesco, as well single
brand majors such as IKEA, Nike, and Apple. Even
single-brand retail was limited to 51% ownership and a
bureaucratic process.
 The statement flickered intense activism, both in
opposition and in support of the reforms
 In December 2011, under pressure from the opposition,
Indian government placed the retail reforms on hold till
it reached a consensus. The statement flickered
intense reactions, both in opposition and in support of
the reforms.
 In January 2012, India approved reforms for single-
brand stores welcoming anyone in the world to innovate
in Indian retail market with 100% ownership, but
imposed the requirement that the single brand retailer
source 30% of its goods from India.
Major Players in the International
Market:
 Wal-Mart:

Wal-mart is an American multinational retailer

corporation that runs chains of large discount
department stores and warehouse stores. The company
is the worlds third largest public corporation, according
to the Fortune Global 500 list in 2019. It is also the
biggest private employer in the world with over two
million employees, and is the largest retailer in the
world.
Wal-Mart in India:
 Bharti Wal-Mart Private Limited is a joint venture between
Bharti Enterprises, one of India's leading business groups
with interests in telecom, agri-business, insurance and
retail, and Wal-Mart, the world's leading retailer, renowned
for its efficiency and expertise in logistics, supply chain
management and sourcing. The joint venture is establishing
wholesale cash-and carries stores and back-end supply
chain management operations in line with Government of
India guidelines. Under the agreement, Bharti and Wal-Mart
hold 50:50 stakes in Bharti Wal-Mart Private Limited.
 IKEA:

IKEA is a privately held, international home

products company that designs and sells ready to-
assemble furniture such as beds, chairs, desks,
appliances and home accessories. The company is the
worlds largest furniture retailer.
IKEA in India:
 Swedish furniture home accessories IKEA is planning
to enter India with a Euros 1.5 billion investment in a
single-brand retail venture. In the first phase it plans
to set up 25 stores with an investment of Euros 600
million (around Rs 4,200 crores) in opening 25 stores.
The company has already sought government
permission to set up a 100% Indian venture and has
also promised to increase its sourcing from the
country
 MANAGEMENT CONTRACTS
 Management contracts can be defined as a written piece
of agreement which states that the operational control of
an organization is vested on a separate vendor in return of
fee.
 These contracts underline all the details that are required
for the management of the organization which includes,
but not limited to, accounting, facility management,
personnel and marketing management.
 These contracts can also be helpful in sorting out issues
in case of any disagreement from either end.
 The contract should clearly and vividly state the details of

the operational activities to be carried out by the vendor.

 The process utilized by the concerned vendor should also

be listed.
 The chances of risks and hazards, their potential causes

and effects and their remedies should be specified.

 This tool should be written in lucid language and

verbosity should be avoided as much as possible.

 The contract should mention the legal proceedings to

be taken in case of necessity. Management contracts may

differ based on the organizational policies in question.

Nevertheless, the basic layout of management contracts

should abide by the above listed points for the smooth

progress of management activities.

 A management contract is an agreement between two
companies whereby one company provides managerial
assistance, technical expertise and specialized
services to the second company for a certain period of
time in return for monetary compensation.
 Eg. Schools, sports facilities, hospitals, office
buildings, malls and large businesses have on-site
cafeterias, restaurants.
 • Focus firm’s resources on its area of

Advantages
contracts
• Minimal financial exposure

• Potential returns limited by contract

Disadvantage expertise

s • May unintentionally transfer

proprietary knowledge and
techniques to contractee
Contract manufacturing
 Contract manufacturing is outsourcing entire or part of
manufacturing operations. E.g.: pharmaceuticals,
Personal Care products etc
 The iPad and iPhone, which are products from Apple
Inc., are manufactured in China by Foxconn. Hence,
Foxconn is a contract manufacturer and Apple benefits
from a lower cost of manufacturing devices
 Advantages  Disadvantages
 Low financial risks  Reduced control (may
 Minimize resources affect quality, delivery
devoted to manufacturing schedules, etc.)
 Focus firm’s resources on  Reduce learning potential
other elements of the  Potential public relations
value chain
problems
 TURNKEY OPERATIONS

 A turnkey project is an agreement where a company

agrees to construct the entire project from concept to
completion. It covers everything from the supply of
manpower and capital the erection of a plant as well as
the installation and commissioning to the trial operation
of a project. The turn key project contractors either get a
fixed fee or the cost plus profits are collected over a
period of time. Today, infrastructure projects such as
power plants, airports, refineries, railway stations,
highways and dams are constructed on turnkey basis
 A bid (also called tender or contract the public and private

sector) is the administrative procedure for the procurement

of supplies, performance of services or works that celebrate

the entities, agencies and entities within the Public Sector.

Ex.: For the construction of a highway local government

makes a contest and choose the best proposal for the

construction of this is paid in cash or through negotiation

pays part and the rest is left to the management of the group

that built to kick in a certain time in this case money

through tolls.
  For example: Bechtel, Brown Bovary, Hyundai,

Mitsubishi, L&T and Daewoo are turnkey contractors

for international projects. Term used by these

companies are ( BOT - build, Operate and Transfer) and

BOOT - Build, Own, Operate and Transfer).

 Merger and Acquisition
 Merger is a type of Amalgamation where two entities combine to form a new

entity.

 Ex. Tyco International by Johnson Controls

 Acquisition, it is similar to a takeover, in which one company acquires

another company.

Ex. Mahindra & Mahindra acquires Ssangyong

 In March 2011, Mahindra acquired a 70 % stake in ailing South Korean auto

maker Ssangyong Motor Company Limited (SYMC) at a total of 463 million

dollars. This acquisition will see the Korean company’s flagship SUV models,

the Rexton II and the Korando C foray into the Indian market.

 Oracle acquired Siebel, BEA, Peoplesoft and more recently SUN through

friendly or hostile takeovers.

 BASIS MERGER ACQUISITION

The merger means the When one entity purchases

fusion of two or more than the business of another
Meaning
two companies voluntarily entity, it is known as
to form a new company. Acquisition.
Formation of a new
Yes No
company
The mutual decision of the Friendly or hostile decision
Nature of Decision companies going through of acquiring and acquired
mergers. companies.
Minimum number
of companies 3 2
involved
To decrease competition
Purpose and increase operational For Instantaneous growth
efficiency.
The size of the acquiring
Generally, the size of
 JOINT VENTURES

 A Joint Venture is a cooperative enterprise in which two

or more business entities enter together. The business

entities, on creation of a joint venture, may form a

separate corporation or a partnership. There are also

cases where the business entities retain their own

individuality, while entering into a joint venture

agreement which is operated as a separate entity

altogether.
 What Happens In A Joint Venture?-
 

 Before two or more companies join together, they decide on the terms and

the conditions of the venture. The terms are decided in a way that all

participating companies benefit in some way. When a joint venture is

formed, the parent companies pool together agreed resources like capital,

human resource, profits, risks etc. They share business expertise,

technology, distribution channels and sometimes, even clients. Joint

ventures are usually viewed as strategic alliances.

 Uninor was a joint venture between Unitech (India) and Telenor (Norway)

and KPIT Cummins is a joint venture between KPIT and Cummins

Infosystems.
Strategic Alliance

 A strategic alliance is a legal agreement between two or

more companies to share access to their technology,

trademarks or other assets. A strategic alliance does not

create a new company.

 Example :- Apple & IBM ,

HP and Oracle had a strategic alliances wherein HP

recommended Oracle as the perfect database for their

servers by optimizing their servers as per Oracle and Oracle

also did the same

 Alliances are also used to accelerate product introduction and

overcome legal and trade barriers quickly.  In this period of

advanced technology and global markets, implementing strategies

quickly is essential.  Forming alliances is often the fastest, most

effective method of achieving objectives.  

 Companies must be sure the goal of the alliance is compatible with

their existing business so their expertise is transferable to the

alliance.  Firms often enter into alliances based on opportunity

rather than linkage with their overall goals.  The risk is greatest

when the company has a surplus of cash.

 REGIONAL ECONOMIC INTEGRATION

 Process whereby countries in a geographic region cooperate

with one another to reduce or eliminate barriers to the

international flow of products, people, or capital.

 A regional trading bloc is a group of nations in a geographic

region undergoing economic integration.

 The goal is to increase cross-border trade and investment

and raise living standards. Specialization and trade create

real gains in terms of greater choice, lower prices, and

increased productivity.

 Regional trade agreements help nations accomplish these

objectives and protect intellectual property rights, the

environment, or even eventual political union.

Levels of Regional Integration
 There are five levels:
◦ Free Trade Area

◦ Customs Union

◦ Common Market

◦ Economic Union

◦ Political Union

 Free trade area is the lowest extent of national integration,

political union the greatest. Each level of integration
incorporates the properties of those levels that precede it.
Free Trade Area

a. Countries remove all barriers to trade among

members, but each country determines its own
barriers against nonmembers.
b. Policies differ greatly against non-member countries
from one country to another. Countries in a free trade
area also establish a process to resolve trade disputes
between members.
Customs Union

a. Countries remove all barriers to trade among

members but erect a common trade policy against
non-members.
b. Differs from a free trade area in that members treat
all non-members similarly. Countries might also
negotiate as a single entity with other supranational
organizations such as the WTO.
Common Market

a. Countries remove all barriers to trade and the

movement of labor and capital between themselves,
but erect a common trade policy against non-
members.

b. Adds the free movement of important factors of

production such as people and cross-border
investment. Requires cooperation in economic and
labor policy, so is very difficult to attain.
Economic Union

a. Countries remove barriers to trade and the movement

of labor and capital, erect a common trade policy
against non-members, and coordinate their economic
policies.

b. Requires members to harmonize their tax, monetary,

and fiscal policies, create a common currency, and
concede a certain amount of sovereignty to the
supranational organization.
Political Union

 Countries coordinate aspects of economic and

political systems.

 Members accept a common stance on economic and

political policies regarding non-member nations.

Nations are allowed a degree of freedom in setting

certain political and economic policies within their

territories.
 Benefits of Regional Integration
 Nations engage in specialization and trade because of the gains in

output and consumption. Higher levels of trade between nations

should increase specialization, efficiency, and consumption, and raise

standards of living.

1. Trade Creation

Increase in trade that results from regional economic integration.

Gives consumers and industrial buyers a wider selection of goods and

services not available beforehand. buyers can acquire goods and

services more cheaply following the lowering of trade barriers such as

tariffs. Lower costs lead to higher demand for goods because people

have more money after a purchase to buy other products.

2. Greater Consensus: Eliminating trade barriers in smaller groups of

countries may make it easier to gain consensus as opposed to working in

the far larger WTO.

3. Political Co-operation: A group of nations can have significantly greater

political weight than nations have individually. The group may have more

clout in negotiating in a forum like the WTO. Integration involving political

cooperation reduces the potential for military conflict among members.

4. Employment Opportunities: Regional integration can expand employment

by enabling people to move from country to country for work, or to earn a

higher wage.
 Drawbacks of Regional Integration

1. Trade Diversion

 Diversion of trade away from nations not belonging to a

trading bloc and toward member nations. Trade diversion

can occur after formation of a trading bloc because of the

lower tariffs charged between member nations.

 Can result in reduced trade with a more efficient non-

member nation in favor of trade with a less efficient member

nation. Unless there is other internal competition, buyers

will pay more due to inefficient production methods.

2. Shifts in Employment
 Trading blocs reduce or eliminate barriers to trade, the

producer of a particular good or service will be decided by

relative productivity. Industries requiring unskilled labor shift

production to low-wage nations within a trading bloc.

 Figures on jobs lost or gained vary with the source. But job

dislocation allows a nation to upgrade the economy toward

higher-wage-paying industries that can increase

competitiveness due to a more educated and skilled workforce.

3. Loss of National Sovereignty

 Successive levels of integration require nations to

surrender more sovereignty. Political union requires nations

to give up a high degree of sovereignty in foreign policy.

 Some members have delicate ties with non-member nations

while others have strong ties, the setting of a common

foreign policy is difficult.

Ex.
 INTEGRATION IN EUROPE : European Union

 INTEGRATION IN THE AMERICAS: North American

Free Trade Agreement(NAFTA)

 INTEGRATION IN THE MIDDLE EAST AND AFRICA: Gulf

Cooperation Council (GCC)

REI Full Form Objective Member country

ASEAN
Association To accelerate the Indonesia, Malaysia,

of economic growth, Philippines,

established
Southeast social progress and Singapore and
on 8 August
Asian cultural development Thailand.
1967 in
Nations in the region through Brunei
Bangkok
joint endeavors in the Darussalam(7

spirit of equality and January 1984), Viet

partnership in order Nam (28 July 1995),

to strengthen the Lao PDR and

foundation for a Myanmar (23 July

prosperous and 1997), and

peaceful community Cambodia (30 April

REI Full Form Objective Member country

MERCOSUR mercado común del Mercosur's

Argentina,
sur founders had
Brazil,
in 1991 hoped to go

Southern Common beyond creating Paraguay,

Market a free trade area

Uruguay, and
to form a
Venezuela.
common

market similar

to the European

Union, and

even considered

introducing a
REI Full Form Objective Member country

G20 Group of aim to studying, Argentina, Australia, 

Twenty reviewing, and Brazil, Canada, 

 in 1999 promoting high- China, France,

level discussion  Germany, India, 

of policy issues Indonesia, Italy, 

pertaining to the Japan, South

promotion of Korea, Mexico, 

international Russia, Saudi

financial stability Arabia, South

Africa, Turkey, 

United

Kingdom , United
REI Full Form Objective Member country

NAFTA North American The goal of NAFTA

Canada, the
Free Trade has been to
United States,
Jan. 1, 1994 Agreement encourage trade

between Canada, and Mexico

the United States,

and Mexico. By

reducing tariffs and

trade barriers, the

countries hope to

create a free-trade

zone where

companies can
REI Full Form Objective Member country

SAARC South Asian To promote the

Bangladesh
December Association welfare of the people of
7/8,1985 Bhutan
For South Asia and to

Regional improve their quality of India

Co-operation life.
Maldives
To promote and
Nepal
strengthen collective

self-reliance among the Sri lanka

countries of South Asia.

Pakistan
To contribute to
Afghanistan(2005
mutual trust,

understanding and )
REI Full Form Objectives Member country

EU European The European

Union Union’s main Austria, Belgium,
Treaty of Rome objective is to
1 January 1958 promote peace, Bulgaria
follow the EU’s 
 Treaty of Croatia, Cyprus, Czech
values and
Maastricht
improve the
1 November Republic, Denmark
1993 wellbeing of
nations. Estonia, Finland, France,
• A common
European area Germany, Greece,
without borders.
•Internal market Hungary
•Stable and
sustainable Ireland, Italy, Latvia,
development
Lithuania, Luxembourg,
•Prevention of
 Countertrade
 Countertrade is a system of international trading that helps

governments reduce imbalances in trade between them and other

countries. It involves the direct or indirect exchange of goods for other

goods instead of currency.

 Countertrade is often used when a foreign currency is in short supply or

when a country applies foreign exchange controls, which are limits

imposed on the availability of foreign currencies to importers for the

purchase of foreign products. Countertrade is often used by developing

countries to control trade and as a development technique.

Why Countertrade
 Expand or maintain foreign markets
 Increase sales
 Sidestep liquidity problems
 Repatriate blocked funds
 Clean up bad debt situations
 Build customer relationships
 Keep from losing markets to competitors
 Gain foreign contracts for future sales
 Find lower-cost purchasing sources
Types of countertrades 
1. Offset 

  2. Counter-purchase 

  3. Tolling 

  4. Barter 

  5. Buyback 

  6. Switch Trading
 Offset
 Offset has traditionally been used by governments around the world

when they have made major purchases of military goods but is becoming

increasingly common in other sectors. There are two distinct types:

  A. direct offset: the supplier agrees to incorporate materials,

components or sub-assemblies which are procured from the importing

country. In some large contracts, successful bidders may be required to

establish local production. Direct offset has been particularly common

for trade in defense systems and aircraft. 

 B. indirect offset: the purchaser requires suppliers to enter into long

term industrial (and other) co-operation and investment but these are un-

connected to the supply contract and may be either defense related or in

the civil sector.

Counter purchase
A foreign supplier undertakes to purchase goods and
services from the purchasing country as a condition of
securing the order. Counter purchase is generally
imposed for two reasons:
 To stimulate exports and
 To alleviate the balance of payment deficit resulting
from imported goods.
 Tolling
 Manufacturers, in regions such as the Former Soviet Union, may

sometimes be unable to service customers because they lack

the foreign exchange to buy raw materials. In a tolling deal, a

supplier himself provides the raw material (steel ingots, say) and

hires capacity of the factory to turn it into finished goods (e.g.

steel tubes). These are then bought by a final customer who pays

the supplier in cash - throughout the process the supplier retains

ownership of the material as it is processed by the factory.

 this is similar to Contract Manufacturing where the Contractor

provides much of the materials.

 Barter
 Barter is one of the most common methods of Countertrade.
 In a barter deal, goods are exchanged for goods - the principal

export is paid for with goods (or services) from the importing

market.  A single contract covers both flows and in the simpler

case, no cash is involved.

 The supply of the principal export is often released only when

the sale of the bartered goods has generated sufficient cash.

This means if Country A sells mining equipment to Country B in

return for cigars - they will probably hold some of the mining

equipment back until they have made some good profit from the

cigars.
Buyback
 Suppliers of capital plant or equipment agree to be paid
by the future output of the investment concerned. For
example exporters of equipment for a chemical plant
may be repaid with part of the resulting output from the
factory. This practice is most common with exports of
process plant, mining equipment and similar orders.
Buyback arrangements tend to be much longer term
and for larger amounts than counter purchase or barter
deals.
 Switch Trading
 Imbalances in long term bilateral trading agreements

sometimes lead to the accumulation of unclear credit

surpluses in one or other country, For example, Brazil at one

time had a large credit surplus with Poland. These surpluses

can sometimes be tapped by third countries so that, for

example UK exports to Brazil could be financed from the sale

of Polish goods to the UK or elsewhere. Such transactions are

known as ‘switch' or ‘swap' deals because they typically

involve switching the documentation (and destination) of

goods on the high seas."