NCERT Solutions For Class 11 Business Studies Chapter 5 Emerging Modes of Business

Features of WTO are as follows –

• It governs trade in goods, services and intellectual property rights among the member countries.
• It is a body created by an international treaty with the approval of the governments and legislatures of the member states.
• The decisions of the WTO are made by the governments of the member nations on the basis of consensus.

Structure of WTO is as follows –

• On January 1^st, 1995, the General Agreement on Tariffs and Trade (GATT) was transformed into WTO to facilitate international trade among member countries. The head quarters of WTO are situated at Geneva, Switzerland.
• WTO comprises the Ministerial Conference, which is composed of international trade ministers from all member countries and is responsible for setting the strategic direction of the organisation and making all final decisions on agreements under its wings. The Ministerial Conference meets at least once every two years.
• The General Council is composed of senior representatives of all members responsible for overseeing the day to day business and management of the WTO.
• The Dispute Settlement Body is also composed of all the WTO members and overseas the implementation and effectiveness of the dispute resolution process for all WTO agreements.
• Council and are composed of all members. They provide a mechanism to oversee the details of the general and specific agreements on trade in goods and services.
• The Secretariat and Director General undertakes the administrative functions of running all aspects of the organization. The Secretariat has no legal decision-making powers but provides vital services, and often advice, to those who do. The Secretariat is headed by the Director General, who is elected by the members.
• The Committee on Trade and Development and Committee on Trade and Environment have specific mandates to focus on these relationships, which are especially relevant to how the WTO deals with sustainable development issues.

Objectives of WTO are:

• To ensure reduction of tariffs and other trade barriers imposed by different countries
• To engage in such activities which improve the standards of living, create employment, increase income and effective demand and facilitate higher production and trade
• To facilitate the optimal use of the world’s resources for sustainable development
• To promote an integrated, more viable and durable trading system.

Functions of WTO are:

• Promoting an environment that is encouraging to its member countries to come forward to WTO in mitigating their grievances.
• Laying down a commonly accepted code of conduct with a view to reducing trade barriers including tariffs and eliminating discriminations in international trade relations. Acting as a dispute settlement body.
• Ensuring that all the rules and regulations prescribed in the Act are duly followed by the member countries for the settlement of their disputes.
• Holding consultations with IMF and IBRD and its affiliated agencies so as to bring better understanding and cooperation in global economic policy making.
• Supervising on a regular basis the operations of the revised Agreements and Ministerial declarations relating to goods, services and Trade Related Intellectual Property Rights (TRIPS).

International Monetary Fund (IMF) is the second international organisation next to the World Bank which came into existence in 1945 has its headquarters located in Washington DC. It aimed at facilitating a system of international payments and taking care of

the adjustments in exchange rates among national currencies.

The various objectives of IMF are:

• To promote international monetary cooperation through a permanent institution.
• To facilitate expansion of balanced growth of international trade and to contribute thereby to the.
• Promotion and maintenance of high levels of employment and real income.
• To promote exchange stability with a view to maintain orderly exchange arrangements among member countries.
• To assist in the establishment of a multilateral system of payments in respect of current transactions between members.

Functions of IMF are:

• Providing short-term credit to member countries
• Providing machinery for the orderly adjustment of exchange rates
• Acting as a reservoir of currencies of all the member countries, from which a borrower nation can borrow the currency of other nations
• Acting as a lending institution of foreign currency and current transaction
• Determining the value of a country’s currency and altering it, if needed, so as to bring about an orderly adjustment of exchange rates of member countries
• Providing machinery for inter-national consultations.

The various organisations that have been set up in the country by the government for promoting country’s foreign trade are –

• Department of Commerce: This department comes under the Ministry of Commerce, Government of India is the apex body responsible for formulating policies in the sphere of foreign trade, increasing commercial relations with other countries, state trading, export promotional measures and the development, and regulation of certain export oriented industries and commodities.
• Export Promotion Councils (EPCs): These are non profit organisations registered under the Companies Act or the Societies Registration Act. The basic objective of the export promotion councils is to promote and develop the country’s exports of particular products falling under their jurisdiction.
• Indian institute of Foreign Trade (IIFT) – This institute was established in 1963, under the Societies Registration Act. IIFT is an autonomous body responsible for the management of the country’s foreign trade. It is also a deemed university that provides training in international trade, conduct research in areas of international business and disseminates data related to international trade.
• Export Inspection Council (EIC) – The EIC was established by the Government of India under section 3 of the Export Quality Control and Inspection Act, 1963 with the objective of promoting exports through quality control and pre-shipment inspections. According to this Act, all goods that are meant for exports (except some commodities) must pass through EIC for quality inspection.
• Commodity Boards: These are the boards which have been specially established by the Government of India for the development of production of traditional commodities and their exports. These boards are supplementary to the EPCs and functions are also similar.
• Indian Trade Promotion Organisation (ITPO):  It was setup on 1st January 1992 under the Companies Act 1956 by the Ministry of Commerce, Government of India. Its headquarter is at New Delhi. It is a service organisation which serves the industry by organizing trade fairs and exhibitions within the country and abroad and helps export firms in participating in international trade fairs and in developing exports of new items.
• Indian Institute of Packaging (IIP): It was set up as a national institute jointly by the Ministry of Commerce, Government of India, and the Indian Packaging Industry and allied interests in 1966. It is a training-cum- research institute pertaining to packaging and testing and caters to both domestic and export markets. It also undertakes technical consultancy, testing services on packaging developments, training and educational programmes, promotional award contests, information services and other allied activities.
• State Trading Organisations: The State Trading Organisation was set up in 1956. Its main objective is to stimulate trade; primarily export with various trading partners in the world. Many other trading organizations were also set up by the government; like Metals and Minerals Trading Corporation (MMTC), Handloom and Handicrafts Export Corporation (HHEC) etc.

The importing firm will have to gather information about the price of the machinery, terms and conditions on which the selected Canadian exporter is willing to supply the goods. It should then send the trade enquiry to the exporter. After gathering information, the exporter will prepare a quotation called proforma invoice and send it to our firm.

The importer needs to consult the Export Import (EXIM) policy to know whether the goods that he or she wants to import are subject to import licensing. If needed, it must secure an import license.

The firm needs to obtain the IEC number. For this, the firm needs to contact Directorate General Foreign Trade (DGFT) or the relevant Regional Import Export Authority. The IEC (Import Export Code) number needs to be quoted in almost all the relevant documents.

The firm must then convert domestic currency into foreign currency to make payment to the exporter. This is done by submitting an application to a bank authorised by RBI to issue foreign exchange in the prescribed form along with documents.

After obtaining the import license, the importer places an import order or indent with the exporter for supply of the specified products containing information about the price, quantity, grade and quality of machinery and the instructions relating to packing, shipping, ports of shipment and destination, delivery schedule, insurance and mode of payment.

The importer also needs to obtain a letter of credit from its bank. The letter of credit needs to be sent to the exporter so that the exporter gets a guarantee of payment.

The importer should make arrangements in advance to pay to the exporter on arrival of goods at the port. This is necessary to avoid penalties on account of any delay in payment.

After loading the goods at the port, the exporter sends the shipment advice to the importer. The shipment advice contains various details; such as invoice number, bill of lading/airways bill, name of vessel with date, port of export, description of goods, date of sailing vessel, etc.

The importer must then prepare a bill of exchange that is to be handed over to the exporter’s banker in exchange for the export documents. After this is done, the importer is required to instruct its bank to transfer money to the exporter’s bank account.

Goods will be shipped by the overseas supplier as per the contract. The officer in charge at the dock will provide the document called import general manifest on the basis of which unloading of cargo will take place.

The importer needs to pay certain amount of custom duty. Custom clearance is a complicated procedure. Importers usually take the services of Carrying and Forwarding (C& F) Agent for getting custom clearance. Goods are released only after custom clearance.

Rekha garments will have to do the following:

As an exporter it should assess the creditworthiness of the importer, Swift Imports, through an enquiry. It should then ask for a letter of credit from the importer’s bank.

Once Rekha Garments is assured that it will be paid for the goods, it will need to register itself and secure IEC number in order to obtain and export license.

After obtaining the license, it should acquire pre-shipment finance from a bank in order to purchase raw materials to undertake production and packaging.

With the finance made available, Rekha Garments can procure the raw materials and other inputs required and start the production process.

After the goods are produced, Rekha Garments must get them inspected before exporting them. For this inspection it should contact the Export Inspection Agency (EIA)  or other designated agency and obtain a certificate of inspection.

The exporter needs to secure excise clearance, for which it must submit an invoice to the regional excise commissioner. The excise commissioner then examines the invoice and if satisfied issues the excise clearance to the exporter.

Once the excise clearance is received, Rekha Garment will need to have certificate of origin which specifies the country in which goods are being produced. It allows the importer to claim tariff concessions and other exemptions.

The next step is for the exporter to submit an application to a shipping company for booking shipping space in a vessel. In the application, it must provide details such as the type of goods to be shipped and the port of destination. After the application is received, the shipping company will issue shipping order to the captain of its ship to inform him or her that he specified goods will be received on board after the customs clearance.

The goods are then properly packed and labeled  such as importer’s name, port of destination, gross and met weight of the goods etc.

Once the goods are ready for export, Rekha Garments must insure the goods against perils of the sea or any related damage.

It must then secure customs clearance before loading the goods on the ship. For this the exporter must submit necessary documents to the customs appraiser at Customs House.

After customs clearance, mate receipt will be issued by the commanding officer or captain of the ship to the exporter as evidence that the cargo has been loaded on the ship.

After this bill of lading will have to be obtained from the shipping company as a token of acceptance that the goods have been put on board in its vessel.

After the goods are shipped, an invoice will have to be prepared by the exporter which will include the quantity of goods sent and the amount to be paid by the importer.

The exporter then needs to send a set of documents to the banker which are to be handed over to the importer on acceptance of a bill of exchange. After receiving bill of exchange , the importer, Swift imports  will instruct its bank to transfer money to the exporter’s bank account.

Lastly, Rekha garments would be required to collect a bank certificate of payment, which will state that the necessary documents, along with the bill of exchange, have been presented to the importer for payment, and that the payment has been received in accordance with the exchange control regulations.

The following are the various incentives and schemes that the government has evolved for promoting the country’s export –

 Duty drawback scheme – Under this scheme, exporters are either exempted from payment of excise duties or are refunded a certain percentage of the excise duty paid earlier. In cases where inputs are used for export production, the custom duties paid on import of raw material and machines are refunded.

• Export manufacturing under the bond scheme – This bond scheme enables exporters to undertake production of goods meant for exports without paying excise or other duties. In order to avail this scheme, the exporters must sign an undertaking that the goods produced are meant only for exports and not for domestic use.
• Exemptions from payment of sales tax – The goods that are meant for imports are not subject to sales tax. Since a long time, incomes derived from export operations were exempt from income tax. Now this benefit is limited to only those goods being produced in 100% Export Oriented Units (EOUs) and goods being produced in Export Processing Zones (EPZs) or Special Economic Zones (SEZs) for certain number of years.
• Advance License Scheme – It is a scheme under which an exporter is allowed duty free supply of domestic as well as imported inputs required for the manufacture of export goods. This facility is available both for regular exporters and intermittent exporters.
• Export Promotion Capital Goods Scheme (EPCG) – This scheme allows export firms to import capital goods at negligible or lower rates of customs duties subject to actual user condition and fulfillment of specified export obligations. This scheme helps the firm which may be interested in upgrading their manufacturing facilities.
• Scheme of recognising export house, trading house and super trading house – This scheme aims at facilitating well-established trading houses to market their products globally. Under the scheme, selected exporting firms are given the status of export house, trading house and star trading house by the government. This status is given on the basis of the past export performance of export firms.
• Export of Services: In order to boost the export of services, various categories of service houses have been recognized on the basis of the export performance of the service providers.
• Export finance: Finance is made available at concessional rates of interest to the exporters. Pre-shipment finance is provided to an exporter for financing the purchase, processing, manufacturing or packaging of goods for export purpose. Post- shipment finance is provided to the exporter from the date of extending the credit after the shipment of goods to the export country.
• Export Processing Zones (EPZs): These are industrial estates, which form enclaves from the Domestic Tariff Areas (DTA). These are usually situated near seaports or airports. They are intended to provide an internationally competitive duty free environment for export production at low cost.
• 100% Export Oriented Units (100 per cent EOUs): The 100%. Export oriented units scheme was introduced in early 1981 adopting the same production regime as EPZs but a wider option in location. EOUs were established with a view to generating additional production capacity for exports by providing an appropriate policy framework, flexibility of operations and incentives.

Exporting refers to sending of goods and services from home country to a foreign country. Exporting is a better way of entering into international markets than setting up wholly owned subsidiaries abroad in the following ways-

As compared to other modes of entry, exporting is the easiest way of gaining entry into international markets. It is less complex an activity than setting up and managing joint ventures, wholly owned subsidiaries abroad.

Exporting 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 ventures or set up manufacturing plants and facilities in host countries.

Since exporting does not required much of investments in foreign countries, exposure to foreign investments risks is nil or much lower than that is present when firms opt for other modes of entry into international business.

The following are the benefits derived by firms by entering into international business-

International business is advantageous for business firms in following ways:

Prospect of Higher profits: In case of lower domestic prices, firms can earn higher profits by supplying their products in those countries where prices are high.

Increased Capacity Utilisation: Firms can make use of their surplus production capacities & improve the profitability of operations by planning for overseas expansion & procuring orders from foreign firms. Large scale production leads to economies of scale resulting in lower production cost & improvement in per unit profit margin.

Prospect for Growth: When demand in the home countries has saturated, firms can opt for foreign market where demand is good & picking up fast, especially in developing countries. Firms can considerably increase their growth prospects by expanding into overseas markets.

To counter intense competition in the market: International business helps to achieve significant growth when competition in domestic market is very intense. Highly competitive market induces many domestic firms to tap international markets for their products.

Improved business vision: International business for many companies is part of their business policies & strategy. Companies are going international, to grow, to become competitive, to diversify & to gain strategic benefits.

International trade refers to the exchange of goods and services between two or more countries. However, international business involves international movement of goods, services, capital, personnel, technology and intellectual property like patents, trademarks, etc. across different nations

The scope of international business is much wider since it includes:

Export and import of services: Trading of services are an important constituent of international business. Services that are part of international business include travel and tourism, entertainment, communication, transportation, construction, advertising etc.

Export and import of merchandise: International business include export and import of merchandise. Merchandise means goods that are tangible, i.e those that can be seen and touched. Merchandise exports means sending tangible goods abroad, merchandise imports means bringing tangible goods from a foreign country to one’s own country.

Licensing and Franchising: International business includes activities related to licensing and franchising. Under licensing a foreign firm is granted intellectual property rights by a home company so that the firm abroad can produce and sell goods under the home company’s trademarks , patents and copyrights in exchange of a fee.

Foreign investment through FDI and portfolio investment: It 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 type:

Direct investment: It refers to investment made directly in the plants and machinery of a foreign company so as to undertake production by acquiring controlling rights.

Portfolio investment: It refers to an investment in securities or by providing loans to a foreign company with an objective of earning profits in the form of dividends or interests on loans.

After shipment of goods, exporter informs importer about it & sends important documents to enable him to claim the title of goods. Documents include copy of invoice, bill of lading, packaging list, insurance policy, certificate of origin, letter of credit etc.

The exporter sends documents through his banker with instruction that they must be delivered only when importer accepts a bill of exchange.

Submitting documents with bank for getting payment is called ‘negotiation of the documents’.

A bill of exchange can be accepted in two ways:

-  Document against sight (sight draft) in which documents are given only against payment.

-  Document against acceptance (usance draft) in which documents are given only when importer accepts bill of exchange for making payment at the end of a certain period.

On receipt of bill of exchange, importer releases payment. After receiving payment, exporter has to get a bank certificate of payment. It states that necessary documents relating to export consignment have been negotiated & payment has been received as per exchange control regulations.

A letter of credit may be defined as a letter issued by the importer’s bank in favour of the exporter containing an undertaking that the bills drawn by the exporter upon the importer up to the amount specified therein will be honored by banker on presentation.

A letter of credit is a proof of the credit worthiness of the importer. The letter of credit is an assurance that bill will be paid by the bank. This method is favored by the exporter as it ensures a quick and guaranteed payment from the importer.

A mate receipt is a receipt issued by the commanding officer of the ship when the cargo is loaded on board, and contains the information about the name of the vessel, berth, date of shipment, description of packages, condition of the cargo at the time of receipt, etc.

When goods are sent by ship, shipping company issues a document named as bill of lading. Bill of lading may be defined as a receipt given by the shipping company to the exporter for carrying the goods to the importer. When goods reach the destination, the importer gets them from the shipping company in return of bill of lading.

Bill of lading differs from Bill of entry in following respects:

Bill of lading is a document related to export transaction while bill of entry is a document related to import transaction.

Bill of lading is a receipt given by the shipping company to the exporter for carrying the goods to the importer. Bill of entry is a form supplied by the customs office to the importer for assessment of customs duties.

Pre- Shipment inspection refers to the inspection of goods before their final shipment in order to ensure that only quality goods are exported. Pre-shipment inspection is a compulsory step for inspection of certain products by a competent agency as designated by the government.

If a firm wants to export goods, then it must first obtain an export license. In order to obtain export license, a firm is required to register itself with the appropriate export promotion councils such as Engineering Export Promotion Council, Apparel Export Promotion Council.

Such councils are set up by the government for promoting the export of various goods falling under their purview. Once the registration is complete, the firm obtains the RCMC. This helps the firm again to take advantage of the benefits given by Government.

The formalities involved in getting an export license are as follows:

Bank account number: An exporter must open an account in a bank authorised by the RBI and get an account number.

IEC Code: An export firm must obtain an IEC (Importer Exporter Code) from the Directorate General of Foreign Trade or the Regional. Import Export Licensing Authority by submitting documents such as the exporter’s profile, prescribed certificates, two attested photographs and details of non –resident interest.

Registration-Cum- Membership Certificate: An export firm should get itself registered with the appropriate export promotion council, such as the Engineering Export Promotion Council and the Apparel Export Promotion Council and obtain an RCMC.

Registration with ECGC: An export firm must get itself registered with ECGC (Export Credit and Guarantee Corporation) to protect itself from any uncertainties in payments.

d. None of these

Explanation:

The TRIP (Trade Related Intellectual Property Right) agreement is a World Bank agreement that deals with trade related aspects of intellectual property rights. It states the minimum standards of protection that must be adopted by Parties dealing in intellectual properties regarding copyrights, trademarks etc.

b. Letter of credit

Explanation:

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.

a. Shipping bill

Explanation:

The shipping bill contains particulars of the goods being exported, the name of the vessel, the port at which goods are to be discharged, country of final destination, exporter’s name and address, etc.

b. Mate receipt

Explanation:

A mate’s receipt is issued by the captain or commanding officer of a ship to an exporter as evidence that the exporter’s cargo has been loaded on the ship. It contains the information about the name of the vessel, berth, date of shipment, description of packages, condition of the cargo at the time of receipt, etc.

c. Bill of entry

Explanation:

Export documents include a commercial invoice, certificate of origin and mate’s receipt. Bill of entry is part of an import transaction as the importer is required to fill this form at the time of receiving the goods.

d. Refund of income dock charges at the port   of shipment

Explanation:

Under the duty drawback scheme, administered by the Directorate of Drawback, exporters are either exempted from payment of excise duties or are refunded a certain percentage of the excise duty paid. The scheme also includes refund of custom duties and export duties but refund of income dock charges at the port of shipment are not part of the duty drawback scheme.

b. shipping bill

Explanation:

Shipping bill is the main document on the basis of which the customs office gives the permission for export.

b. letter of credit

Explanation:

To obtain an export license, an exporter requires an IEC (Importer Exporter Code) number, a registration cum membership certificate and a bank account number. A letter of credit is issued by the bank of an importer guaranteeing payments to the exporter’s bank.

a) Ayurvedic medicines

Explanation:

The major imports of India are oil and petroleum products, pearls and precious stones, machinery. Ayurvedic medicines are not part of Indian imports. Since India is the world largest exporter of Ayurvedic medicines.

d) Basmati rice

Explanation:

Basmati rice is not amongst India’s major export items. India is mainly involved in exporting gem and jewellery, textiles and garments, oil and petroleum.

b) wholly owned subsidiary

Explanation:

The companies with long term and substantial interest in the foreign market, when acquiring full control over the foreign company by making 100% investment in its equity capital are called wholly-owned subsidiaries.

c) limited presence in foreign markets

Explanation:

Exporting involves selling goods to other countries. It has various advantages such as lower risks, less requirement of investment and easier way of entering into international markets. Limited presence in foreign markets is a disadvantage of exporting

c) Joint Venture.

Explanation:

A joint venture means establishing a new firm that is jointly owned by two or more independent firms. The new firm works as a distinct entity.

a) Licensing.

Explanation:

Under the licensing model, a domestic manufacturer grants license to a foreign manufacturer to use its intellectual property such as patent and trademark.

The following are the differences between contract manufacturing and wholly-owned production subsidiary -

Major reason underlying trades between nations are:

Unequal distribution of natural resources among nations.

Availability of various factors of production like land, labour capital and enterprise differ from nation to nation.

Labour productivity and production costs differ among nations due to various socio-economic, geographical and political reasons.

The following are the three advantages of International business-

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

More efficient use of resources: International business allows a country to produce what a country can produce more efficiently and trade the surplus production so generated with other countries to procure what they can produce more efficiently.

Improving growth prospects and employment potential: International business encourages many countries especially developing ones to produce on a larger scale which not only helps in improving growth prospects but also creates opportunity for employment of people.

International trade refers to the exchange of goods and services between two or more countries. However, international business involves international movement of goods, services, capital, personnel, technology and intellectual property like patents, trademarks, etc. across different nations.

The scope of international business is much wider since it includes:

• Export and import of goods.
• Export and import of services.
• Licensing and Franchising.
• Foreign investment through FDI and portfolio investment

It is said that licensing is an easier way to expand business globally because:

Under the licensing system, it is the licensor who sets up the own business unit and invests his own money in the business. As such the licensor has to make no investments abroad. Licensing is thus considered a less expensive mode of entering into international business.

Licensor is not party to losses since no or very little foreign investment involved. Licensor is paid by the licensee by way of fees fixed in advance as a percentage of production or sales turnover and licensor does not bear the risk of losses.

Since business in a foreign country is managed by the licensee who is a local person, there are lower risks of business takeovers or government interventions.

Licensee being a local person has greater market knowledge and contacts which can prove quite helpful to the licensor in successfully conducting its marketing operations.