Chapter 11: International Business

Ans: A letter of credit is a guarantee issued by the importer's bank that it will honour payment of export invoices to the exporter's bank up to a specific amount. A  letter of credit is asked from the importer to reduce the extent of risk. The importer should get the letter of credit from its bank and send it to the overseas supplier. 

This document is important for an exporter to determine the creditworthiness of the importer and obtain a payment guarantee.

Ans: The process is as follows:

• The importer will require a variety of documentation in order to claim ownership of goods upon their arrival in his or her nation and get them customs cleared.

• In this case, a certified copy of the invoice, a bill of lading, a packing list, an insurance policy, a certificate of origin, and a letter of credit is needed.

• The submission of necessary documents to the bank for the purpose of receiving payment from the bank is referred to as "document negotiation."

• When the bill of exchange is received, the importer either releases the money in the event of a sight draught or accepts the usance draught for payment on the bill of exchange's maturity date. 

• The payment is collected by the exporter's bank through the importer's bank and credited to the exporter's account. 

• The exporter can receive immediate payment upon submission of documentation from his/her bank by signing a letter of indemnity.
  
  

Ans:  Scope of international business is much wider than international trade because it includes the following:

• Merchandise Exports and Imports:
  Merchandise export and import implies the export and import of tangible goods to and from abroad. Merchandise export and import is also known as trade in goods, including only tangible goods and excluding trade in services.

• Service Exports and Import:
  It is also called invisible trade, and Includes, transportation, communication, warehousing, distribution and advertising, banking, tourism etc. Service exports and imports involve trading of intangible goods.

• Licensing and Franchising
  Licensing is defined as a contractual arrangement in which one firm (licensor) grants access to its patents, copyrights, trademarks, or technology to another firm in a foreign country for a fee called royalty. Franchising is also similar to licensing. It is a term used in context with the provision of services.

• Foreign Investments
  Foreign investments involve investments of funds abroad in exchange for financial return.Foreign investments are of two types namely, 

• Foreign Direct Investment: When a firm invests directly in properties such as plants and machinery in foreign countries with the intention of producing and distributing goods and services in those countries, this is known as Foreign Direct Investment.

• Portfolio investment: A portfolio investment, on the other hand, is an investment made by one company into another by the acquisition of shares or the provision of loans, with the latter earning income through dividends or interest on loans.

• Foreign Direct Investment: When a firm invests directly in properties such as plants and machinery in foreign countries with the intention of producing and distributing goods and services in those countries, this is known as Foreign Direct Investment.

• Portfolio investment: A portfolio investment, on the other hand, is an investment made by one company into another by the acquisition of shares or the provision of loans, with the latter earning income through dividends or interest on loans.

Hence, due to these the scope of international business has considerably multiplied, as it entails International exchange offerings along with international journey and tourism, transportation, communication, banking, ware-housing, distribution and advertising.

Companies have started making an increasing number of investments into foreign nations. So, we are able to say that international business is a far broader term than international trade.

Ans:  Benefits of international trade to firms are:

• More Profitable: International business can be more profitable than domestic business. When the domestic prices are lower, business firms can earn more profits by selling their products in countries where prices are high enough.

• Improved profitability: A firm can make use of its surplus production capacity and thereby improve the profitability of the operations.

• Growth prospects: When demand in the home country gets saturated in the domestic market, the company can think of growth prospects in developing countries.

• Facing Competition: When competition in the domestic market is very intense, internationalism seems to be the only way to achieve significant growth.

• Self- Improvement: When a country visualizes becoming international, then it develops the urge to be more competitive, more diversified, and more strategically strong.
  
  

Ans: Exporting: Exporting refers to sending of goods and services from the home country to a foreign country. 

Wholly Owned Subsidiary: Those companies which want to exercise full control over their overseas operations, set up a wholly owned subsidiary in an overseas country.

Benefits of Exporting over Wholly Owned Subsidiary:

• Ease of entry: Exporting is the easiest way of gaining entry into international markets as compared with wholly-owned subsidiaries.

• Investment: Business firms are not required to invest that much time and money in exporting whereas in the case of wholly-owned subsidiaries, it is not suitable for small and medium size firms as they do not have enough funds with them to invest abroad.

• Risk: Because exporting and importing do not necessitate a large amount of foreign investment, the risk of foreign investment is negligible or very low.  In the case of wholly owned subsidiaries, they face greater political risks and are responsible for all damages resulting from the failure of their international activities.

• Government Interference: There are high political risks in the case of wholly owned subsidiaries as against exporting.

• Profit/Loss Risk: 100% equity is invested in case of wholly owned subsidiaries, making it riskier in comparison to exporting/importing.

• Complexity: The degree of complexity is higher in case of wholly owned subsidiaries as compared to exporting/importing.
  
  

Ans: Rekha Garments should follow the export procedure given below:

A. Receipt  of  enquiry  and  sending  quotation

• Exporters can be notified of a request for information even if the importer places an advertisement in the press.

• The exporter responds to the inquiry with a quotation, often known as a proforma invoice.

• The proforma invoice comprises information about the price at which the exporter is willing to sell the goods, as well as information about the quality, grade, size, weight, mode of delivery, packing type, and payment terms.

B. Receipt  of  order  or  indent 

• It sets an order for the items to be sent if the export price and other terms and conditions are acceptable.

• Also referred to as indent, contains  the details of the goods ordered, and other information in respect to price, delivery, packing, marking etc.

C. Determining the creditworthiness of the importer and obtaining a payment guarantee

• The importer's creditworthiness is investigated by the exporter.

• A  letter of credit is asked from the importer to reduce the extent of risk. 

• A letter of credit is a guarantee issued by the importer's bank that it will honour payment of export invoices to the exporter's bank up to a specific amount.

D. Obtaining  export  licence

• In India, exporting commodities is governed by customs laws, which require that an export firm obtain an export licence before proceeding with exports.

• Prerequisites  for  getting  an  export  licence:
  Opening a bank account with any bank that has been approved by the Reserve Bank of India;

• Getting an Import Export Code (IEC) from the Directorate General of Foreign Trade (DGFT) or a Regional Import Export Licensing Authority;

• Creating an account with the right export promotion council. 

• To protect against non-payment risks, you should register with the Export Credit and Guarantee Corporation (ECGC).

• A company must submit an exporter/importer profile, a bank receipt for the required fee, a certificate from the banker on the prescribed form, two copies of photographs attested by the banker, details of non-resident interest, and a declaration about the application to obtain an IEC number to the Director General for Foreign Trade (DGFT).

• It is a legal requirement for all exporters to register with the proper export promotion council.

• To secure international payments from political and commercial interference, you must register with the ECGC.

• Creating an account with the right export promotion council. 

• To protect against non-payment risks, you should register with the Export Credit and Guarantee Corporation (ECGC).

• A company must submit an exporter/importer profile, a bank receipt for the required fee, a certificate from the banker on the prescribed form, two copies of photographs attested by the banker, details of non-resident interest, and a declaration about the application to obtain an IEC number to the Director General for Foreign Trade (DGFT).

• It is a legal requirement for all exporters to register with the proper export promotion council.

• To secure international payments from political and commercial interference, you must register with the ECGC.

E. Obtaining  pre-shipment  finance 

• To begin pre-production, the exporter asks his banker for pre-shipment financing.

• Pre-shipment finance is the funding required by an exporter to purchase raw materials and other components, process items, and transport goods to the port of shipment.

F. Production or procurement of goods

• The exporter then gets the goods ready according to the importer's specifications.

• Either the company produces the commodities itself or it purchases them from the market.

G. Pre-shipment Inspection

• Inspection of some products by a competent agency recognised by the government is required.

• For this aim, the government created the Export Quality Control and Inspection Function in 1963 and authorised specific entities to act as inspection agencies.

• At the time of export, the pre-shipment inspection report is required to be submitted along with other export paperwork.

H. Excise Clearance

• The materials used to make the items are subject to excise duty.

• The exporter must submit an invoice to the relevant Excise Commissioner in the region.

• The Excise Commissioner issues the Excise clearance if he is satisfied with the invoice.

• The refund of an excise duty is known as a duty drawback.

• This scheme of duty drawback is administered by the Directorate of drawback under the ministry of finance which fixes the rates of drawback for different products.

I. Obtaining certificate of origin

• To avail the   trade  concessions  and  other  benefits,  the  importer  has to  ask  the  exporter  to send  a  certificate  of  origin.

• The certificate of origin issued by the importer acts as a proof that the goods are manufactured in the country from where the export is taking place.

J. Reservation of shipping space

• The exporting company submits a request for shipping space to the shipping company. 

• It must specify the types of commodities to be exported, the expected shipment date, and the final destination port. 

• The shipping business issues a shipping order after accepting the application for shipping.

K. Packing and forwarding

• The items are then properly packed and labelled with relevant information such as the importer's name and address, gross and net weight, shipping port and destination, country of origin, and so on.

• The exporter then arranges for the transportation of the goods to the port.

• The railway authorities issue a "railway receipt" when commodities are loaded into a railway waggon, which serves as a title to the items.

• To enable his agent to take delivery of goods at the port of shipping, the exporter endorses the railway receipt in his favour.

L. Insurance of goods

• During transit, items are covered for loss with an insurance company to safeguard against the danger of loss or damage due to the perils of the sea.

M. Custom clearance

• Before the products can be loaded into the ship, they must first be cleared from customs.

• The exporter prepares the shipping bill in order to gain custom clearance.

• The main document on which the customs office grants export permission is the shipping bill.

• Five copies of the shipping bill are subsequently presented to the Customs Appraiser at the Customs House, together with the following documents:

• Export Contract or Export Order

• Letter of Credit

• Commercial Invoice

• Certificate of Origin

• Certificate of Inspection

• Marine Insurance Policy 

• Following the submission of these documents, the Superintendent of the relevant port trust is contacted to acquire a carting order. 

• The command to the workers at the port's gate to allow the goods to enter the dock is known as a carting order.

• Letter of Credit

• Commercial Invoice

• Certificate of Origin

• Certificate of Inspection

• Marine Insurance Policy 

N. Obtaining mates receipt

• A mate receipt is a receipt that is provided by the ship's commanding officer when the cargo is loaded on board. 

• The receipt contains information such as the vessel's name, berth, date of shipping, package description, marks and numbers, cargo condition at the moment of receipt on board the ship, and so on.

• The port superintendent gives the C&F agent the mate's receipt after receiving the port dues.

O. Payment of freight and bill of lading

• The C&F agent hands along the mate's receipt to the shipping business for freight calculation.

• The shipping company issues a bill of lading after receiving the freight, which acts as proof that the goods have been accepted for transport to the specified destination.

• This document is referred to as an airway bill when goods are being shipped by air.

P. Preparation of invoice 

• The invoice specifies the quantity of products shipped as well as the money due from the importer. 

• The C&F representative arranges for it to be duly authenticated by customs.

Q. Securing payment

• The importer will require a variety of documentation in order to claim ownership of goods upon their arrival in his or her nation and get them customs cleared.

• In this case, a certified copy of the invoice, a bill of lading, a packing list, an insurance policy, a certificate of origin, and a letter of credit is needed.

• The submission of necessary documents to the bank for the purpose of receiving payment from the bank is referred to as "document negotiation."

• When the bill of exchange is received, the importer either releases the money in the event of a sight draught or accepts the usance draught for payment on the bill of exchange's maturity date. 

• The payment is collected by the exporter's bank through the importer's bank and credited to the exporter's account. 

• The exporter can receive immediate payment from his/her bank upon submission of documentation by signing a letter of indemnity.
  
  

Ans: The import procedure is as follows: 

I. Trade enquiry

• With the use of a trade inquiry, an importing firm contacts export firms to learn about their export pricing and terms of export.

• A trade enquiry is a formal request from an importing company to an exporter for information on the price and other terms and conditions under which the latter is willing to export products.

• A quotation is always prepared by the exporter. It is sent to the importer.

II. Procurement of import licence

• To determine whether the items he or she wishes to import are subject to import licencing, the importer should review the current Export Import (EXIM) policy.

• If items can only be imported with a permit, the importer must get a permit.

• Every importer (and exporter) in India is required to register with the Directorate General Foreign Trade (DGFT) or the Regional Import Export Licensing Authority and get an Import Export Code (IEC) number.

III. Obtaining foreign exchange

• Payment in foreign currency necessitates the conversion of Indian currency into that of the foreign country.

• The Reserve Bank of India's (RBI) Exchange Control Department regulates all foreign exchange transactions in India.

• Every importer is required to obtain foreign exchange sanctions under the current laws.

• To acquire such a sanction, the importer must apply to a bank that is authorised by the RBI to issue foreign exchange.

IV. Placing order or indent

• The import order which is also called indent comprises information about the price, amount, size, grade, and quality of items requested. It also includes the instructions related to packing, shipping, ports of shipment and destination, delivery schedule, insurance, and mode of payment.

V. Obtaining letter of credit

• If the importer and the overseas supplier agreed on a letter of credit as payment terms, the importer should get the letter of credit from its bank and send it to the overseas supplier.

VI. Arranging for finance

• Importers should plan ahead of time to pay the exporter when the items arrive at the port.

• Import finance should be planned ahead of time to prevent large penalties.

VII. Receipt of shipment advice

• The overseas supplier sends the shipment advice to the importer after loading the products onto the vessel.

• A shipment advice is a document that contains information on the products being shipped.

VIII. Retirement of import documents

• The overseas supplier creates a set of required documents in accordance with the terms of the contract and the letter of credit, and then gives them to his or her banker for transmission and negotiation to the importer in the manner described in the letter of credit.

• A bill of exchange, commercial invoice, bill of lading/airway bill, packing list, certificate of origin, maritime insurance policy, and other documents are usually included in the package.

IX. Arrival of goods

• The person in command of the carrier (ship or airline) notifies the officer in charge at the dock or airport when goods arrive in the importing country.

• He gives an import general manifest. An import general manifest is a document that contains information on the products being imported.

X. Custom clearance and release of goods

• To begin, the importer must get a delivery order, often known as an endorsement for delivery. 

• The importer usually obtains the endorsement on the back of the bill of lading when the ship arrives at the port. The shipping firm in question is responsible for this endorsement. 

• The shipping company may issue a delivery order instead of certifying the bill in some instances. This order allows the importer to accept items for delivery.

• The importer must submit two copies of a completed "application to import" form to the "Landing and Shipping Dues Office." 

• The ‘Landing and Shipping Dues Office' imposes a fee for dock authorities' services, which must be paid by the importer. The importer receives one copy of the application as a receipt after paying the dock fees. The receipt is referred to as a "port trust dues receipt."

• The importer then completes a ‘bill of entry' form for customs duty assessment.

• The bill of entry must be delivered to the dock superintendent after the import duty has been paid.

• The bill of entry is presented to the port authority by the importer or his representative. The port authority issues the release order after obtaining the relevant charges.
  
  

Ans: The various organizations are:

I. Department of Commerce

• This department is responsible for foreign trade, and issues relating to it. It formulates foreign trade policy.   

• It also sets the tone for the country's overall import and export policies.

II. Export Promotion Councils (EPCs)

• They are non-profit organisations that are registered under the Companies Act or the Societies Registration Act with the goal of promoting and developing the country's exports of specific items.

• There are 21 EPCs currently active. 

III. Commodity Boards

• These boards are supplemental to Export Promotion Councils (EPCs) and perform the same functions as EPCs in the development of conventional commodity production and its exports.

IV. EIC- Export Inspection Council

• The Export Quality Control and Inspection Council was established by the Government of India under Section 3 of the Export Quality Control and Inspection Act 1963, with the goal of sound development of the export trade using quality control and pre-shipment inspection.

V. Indian Trade Promotion Organisations

• On 1 January 1992, the Ministry of Commerce, Government of India, established it under the Companies Act 1956.

• New Delhi is where the headquarters  of Indian Trade Promotion Organisations is located.

• It helps the industry by organising trade fairs and exhibitions both within and outside the country.

• It is a service organisation that maintains regular and close engagement with trade, industry, and government.

VI. Indian Institute of Foreign Trade (IIFT)

• It provides training in international trade, conducts research in areas of international business, and analyses and disseminates data relating to international trade and investments. 

• It is an autonomous body established by the Government of India and is registered under the Societies Registration Act with the foremost objective of professionalising the country's foreign trade management.

VII. Indian Institute of Packaging 

• In 1966, the Ministry of Commerce, Government of India, and the Indian Packaging Industry and Allied Interests established the Indian Institute of Packaging as a national institute. 

• Mumbai is where the company's headquarters and principal laboratory are located. 

• The three other regional laboratories are in Kolkata, Delhi, and Chennai. 

• It is a training and research institute that focuses on packaging and testing. 

• It offers good infrastructure to meet the diverse needs of the packaging manufacturing and user industries.

• Also training, education and consultancy services regarding packaging development is provided by this institute.

VIII. State Trading Organisations (STC)

• Existing trade channels were insufficient for promoting exports and diversifying commerce with countries other than European countries, necessitating the establishment of State Trading Organizations.

• The STC's, which was set up in 1956 has a major goal to promote international trade, particularly export trade, among various trading partners across the world.

Ans: The IMF was established with the primary goal of developing an orderly international monetary system, which includes facilitating international payments and adjusting exchange rates between national currencies.

Objectives

• Facilitate the expansion of balanced international commerce and contribute to the promotion, maintenance of a high level of employment through the establishment of a permanent institution.

• Assist in the construction of a multilateral system of payments for current transactions between members to enhance exchange stability and preserve orderly exchange arrangements among member nations.

Functions

• Acting as a short-term credit institution.

• Providing machinery for the orderly adjustment of exchange rates Acting as a short-term credit institution.

• Provision of necessary facilities to ensure that the exchange rates are adjusted timely and orderly

• Acting as a repository for all member countries' currencies.

• Acting as a foreign currency and current transaction lending institution Determining the value of a country's currency and altering it.

• Providing machinery for international consultations.
  
  

Ans: One of the key achievements of GATT negotiations was the decision to set up a permanent institution for looking after the promotion of free and fair trade amongst nations. The GATT was transformed into the World Trade Organization (WTO) with effect from 1 January 1995. Its headquarters are in Geneva, Switzerland. 

Features

• It regulates not just products but also services and intellectual property rights. 

• It is a member-driven rule-based organization. 

• All the decisions are taken by the member governments on the basis of a general consensus. 

• The World Trade Organization (WTO) has a global significance comparable to that of the World Bank and the International Monetary Fund (IMF).

• India is the founding member of the World Trade Organisation.

Structure

The WTO's highest authority, the Ministerial Conference, is made up of delegates from all WTO members who are expected to meet at least every two years and who have the authority to make decisions on all aspects of any multilateral trade agreement.

Objectives

• To ensure that tariffs and other trade barriers imposed by different countries are reduced.

• To engage in activities that improve living standards, create jobs,

• Increase income and effective demand, and facilitate increased production and trade; 

• To facilitate the most efficient use of the world's resources for sustainable development.

• To promote a more integrated, viable, and long lasting trade system.

Functions

• Establishing a commonly accepted code of behaviour with the goal of reducing trade obstacles, such as tariffs, and eradicating discrimination in international trade relations by encouraging its member countries to come forward to the WTO to resolve their problems.

• Acting as a dispute resolution body.

• Ensuring that all of the Act's rules and regulations are obeyed.

• Holding consultations to improve understanding and cooperation in global economic policymaking.
  
  

Project/Assignment - India In the World Trade