International Business

Written and reviewed by Rohit Singh, Computer Science & Commerce faculty at UniDrill (MCA, Osmania University · 6 years teaching). Based on NCERT Business Studies Class XI, Chapter 11.

Your shirt has travelled further than you have

Look at the label on a shirt you own. The cotton may have been grown in one country, spun in another, stitched in a third and sold to you in a fourth. No single country can grow every crop, mine every metal or build every machine at a low cost, so firms look across borders for customers, raw material, skilled people and cheaper production. This chapter explains how they do it, what it costs them and which papers move with the goods.

International business is more than international trade

International business means business activity that crosses the boundaries of a country. It covers the movement of goods, services, capital, personnel, technology and intellectual property such as patents, trademarks, know-how and copyrights. Exporting and importing goods is only one slice of it.

Why it exists. Countries are not equally rich in natural resources, and they differ in labour skills, capital and productivity. A country therefore does best by specialising in what it makes well and buying the rest. International business is the system that lets that exchange happen.

The four forms (scope).

FDI versus portfolio investment. In foreign direct investment (FDI) the firm puts money into plant and machinery abroad and takes a controlling interest. In portfolio investment it buys shares, bonds or notes of a foreign company, or lends to it, and earns only dividend or interest without running the business.

Pause and predict: a Mumbai investor buys 2 per cent of the shares of a listed Japanese company and has no say in its management. Is this FDI or portfolio investment?

Check your answer: portfolio investment. There is no controlling interest and no involvement in production or marketing. FDI would mean owning enough to control the foreign operation.

Beyond the textbook. For the exam: FDI gives a controlling interest, portfolio investment does not. In reality: international statistics usually treat an ownership of 10 per cent or more of voting power as the working line for FDI, because some influence over management starts well before full control. CUET asks the control-based difference, so write that.

Domestic versus international business: eight differences

Selling in your own state is one game. Selling in another country changes the rules of the game itself. Learn the eight bases as a list, because "which of these is NOT a basis" is a common question.

Why exchange rate risk matters. Suppose Asha Handicrafts in Jaipur agrees to sell a lot of cane furniture for a fixed price in dollars, to be paid in 90 days. If the rupee strengthens in those 90 days, each dollar buys fewer rupees and her profit shrinks, though nothing about her furniture changed.

Benefits: for the country and for the firm

Keep the two lists apart, because CUET likes to slip a country benefit into a question about firms.

Mini-case. Greenleaf Tea Estates in Assam sells all it grows at home, where prices are falling because many growers compete. By exporting to three foreign buyers it sells a larger quantity at better prices. Its factory, which ran at 60 per cent earlier, now runs near full capacity, so cost per kg falls. Higher profits, better capacity use and escape from home competition are all firm benefits. The foreign exchange it earns is a benefit to the country.

Modes of entry: how a firm steps into a foreign market

A firm chooses a mode by trading off how much money it is willing to put in, how much control it wants and how much risk it can bear. The five modes in the table run roughly from low investment and low control to high investment and full control.

Details that get tested.

Contract manufacturing comes in three forms: making components, assembling components into the final product, or complete manufacture.

Licensing usually relates to goods and processes. Franchising is the services version of the same idea and is more stringent, because the franchiser lays down detailed rules on quality, appearance and operations. The parent is the franchiser and the other party the franchisee. A restaurant chain that lets a local owner run outlets under its name is the textbook picture.

A joint venture can be formed in three ways: a foreign investor buys an interest in a local company, a local firm acquires an interest in an existing foreign firm, or both jointly form a new enterprise.

A wholly owned subsidiary can be set up in two ways: a greenfield venture, where a brand new firm is built from scratch, or by acquiring an existing foreign firm.

Mini-case. Navkar Bags of Kanpur wants to sell backpacks in Sri Lanka. In year one it only exports from Kanpur. In year two, to cut cost, it asks Lanka Stitchers to produce the bags to its design and labels them under its own brand (contract manufacturing). In year five, with a stable market, it builds its own factory in Colombo with 100 per cent of the money from Kanpur (wholly owned subsidiary, greenfield). Each step takes more money, more control and more risk than the one before.

Pause and predict: a firm wants full control over a foreign operation but does not want to wait years to build one. Which route to a wholly owned subsidiary suits it better?

Check your answer: acquisition. Buying an existing foreign firm gives full control and an operating business on day one. Greenfield gives control too, but it takes time to build.

Beyond the textbook. For the exam: contract manufacturing means getting goods produced abroad, and outsourcing is the same idea. In reality: the idea has spread well beyond factories. Many firms now outsource services such as customer support and accounting to specialist firms in other countries. The logic is identical: the buying firm sets the specifications and the local firm delivers.

Export procedure: 17 steps from enquiry to payment

An export order is a long chain, because goods must leave one country's customs and enter another's, and someone must be sure of getting paid. Learn the chain in four stages.

Export licence prerequisites. Before exporting, the firm must get an IEC (Import Export Code) number from the DGFT (Directorate General of Foreign Trade), register with the relevant export promotion council to get the RCMC (Registration cum Membership Certificate), and register with the ECGC (Export Credit Guarantee Corporation) for insurance against the risk of non-payment. Pre-shipment inspection is done under the Export (Quality Control and Inspection) Act, 1963.

The documents, and what each one is. Most wrong options in this chapter are real documents placed in the wrong job.

Sight draft versus usance draft. In a sight draft, the importer gets the shipping documents only on payment. In a usance draft, the importer gets them on acceptance and pays after a fixed period, such as 90 days. A clearing and forwarding (C&F) agent often handles customs and port formalities for the exporter.

Mini-case. Kaveri Spice Works in Kochi has an order for cardamom from a buyer in Hamburg. After the quotation and indent, the buyer's bank issues a letter of credit, which tells Kaveri it will be paid if the documents are in order. The goods are inspected, packed and cleared by customs on a shipping bill, loaded on the ship, and the ship's officer issues the mate's receipt. Kaveri pays freight and receives the bill of lading, which she hands to her bank with the invoice and bill of exchange. The bank collects the payment. At no point did Kaveri hand over the goods without a paper trail.

Beyond the textbook. For the exam: these are paper documents with the roles above. In reality: shipping bills and bills of entry are now filed electronically through the customs e-filing portal, and many other papers go online too. The job of each document stays exactly as in the table, which is why NTA still asks what each one is.

Import procedure: 10 steps

The importer faces the opposite worry: the money leaves the country, so the paper trail is about permission, foreign exchange and customs.

Mini-case. Sunrise Bakers of Nagpur imports a baking oven from Italy. It first checks the DGFT-issued IEC, gets the RBI's foreign exchange sanction and asks its bank for a letter of credit. When the ship docks, the importer files the bill of entry, pays duty and port charges and shows the delivery order to take the oven home. A shipping bill would have been filed by the Italian exporter, not by Sunrise Bakers.

Exam traps

60-second revision

Where this chapter connects

• Previous: Internal Trade covers trade inside the country, which is the "domestic" side of the comparison in this chapter.
• Next: Business Trade and Commerce gives the wider picture of trade, aids to trade and the services that every exporter relies on.
• Class XII link: Business Environment explains liberalisation and globalisation, the policy change that opened India to the international business described here.