Important Questions Class 11 Business Studies Chapter 11 International Business

Q.1 What is ‘Bill of Lading’? State its features.

Ans

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 contains the following information:

1) Name of exporter;
2) Name of importer;
3) Name of notifying party;
4) Identification marks on packages;
5) Description of goods including number of packages, goods weight and volume, condition of goods at the time of loading;
6) Freight charges;
7) Name of the ship;
8) Port of shipment;
9) Port of destination;
10) Date of shipment.

Features of bill of lading are:
a) Receipt of goods: Bill of lading implies that goods have been received by the shipping company.
b) Document to title of goods: Bill of lading serves as a document of title to the goods. A bonafide holder of bill of lading has the title to the goods.
c) Contract of affreightment: Bill of lading is an evidence of the contract between the shipper and the shipping company to carry the goods in consideration of freight.

Q.2 State the problems/complexities faced in international trade.

Ans

The following types of complexities are faced in international trade:
i. Different currencies used: Business transactions involve use of foreign currencies, i.e. currencies of the countries dealt with. Firms need to account for the exchange rate differences resulting from foreign currency transactions.
ii. Nationality of buyers, sellers and other stakeholders: Different stakeholders involved in the business transaction, such as suppliers, employees, middlemen, shareholders and partners, are from different countries.
iii. Mobility of factors of production: The factors such as labour and capital face restrictions in their movement across nations. Business firms need to fulfill various formalities & regulations for their movement.
iv. Blocking of capital: Generally, there is a wide time gap between the dispatch of goods by the exporter and their payment by the importer, which blocks the finances of the exporter.

Q.3 Your firm is planning to import textile machinery from Japan. Describe the procedure involved in importing.

Ans

Following procedure would be followed for importing textile machinery from Japan:

1. IEC number, RCMC and import license: First step would be to obtain Import Export Code (IEC) number from Directorate General Foreign Trade Authority. I will also apply for import license.
2. Trade Enquiry: I will seek trade enquiry from various suppliers about the price and terms and conditions. Based on the quotations from suppliers, I will identify from whom I should import the goods.
3. Foreign Exchange: I will apply to a bank authorized by Reserve Bank of India to issue foreign exchange.
4. Placing the Order: After receiving the sanction of RBI for release of foreign exchange, I will place the order called ‘indent’ for the required goods.
5. Sending Letter of Credit: Usually, the exporter asks the importer to send a letter of credit, to be sure about the creditworthiness of the importer. I will obtain a letter of credit from my banker and send it to the exporter.
6. Retirement of Import documents: I will now retire the import documents by accepting the bill of exchange. I will receive the shipping documents.
7. Customs clearance and release of goods: I will obtain the delivery order on the back of bill of lading from the shipping company to take possession of the goods. I will the pay the ‘port trust dues’ and the dock dues. Then i will prepare the Bill of Entry for assessment of the customs import duty.
8. Taking Delivery of Goods: Having completed all the formalities and payment of customs duty, I or my clearing agent will take the delivery of goods from the dock.
   

Q.4 How does an exporter obtain payment of goods exported?

Ans

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.

He 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.

Q.5 Explain the WTO agreements pertaining to Textiles and Agriculture.

Ans

Agreement on textile and clothing (ATC):This is a Agreement to phase out quota restrictions imposed by developed countries on export of textile & clothing from developing countries. Due to this, world trade in textile & clothing became quota free which helped the developing countries in expanding exports.

Agreement on Agriculture (AoA):This WTO agreement ensures free and fair trade in agriculture. Under this, the developed countries have agreed to lower custom duty on imports and subsidies on exports of agricultural products.

Q.6 How is Bill of Lading different from Bill of Entry?

Ans

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

1. Bill of lading is a document related to export transaction while bill of entry is a document related to import transaction.
2. 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.

Q.7 Briefly explain letter of credit. Why does an exporter need this document?

Ans

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.

Q.8 Explain the step of pre-inspection certificate in an export transaction.

Ans

Goods are inspected to ensure quality according to Export Quality Control & Inspection Act, 1963.

Exporter has to obtain an Inspection Certificate from Export Inspection Agency or other designated agency.

Inspection is not compulsory for the following exporting firms:

i. Star trading houses, star export houses

ii. Industrial units set up in export processing zones/special economic zone(EPZs/SEZs)

iii. 100% export oriented units(EOUs)

Q.9 What is ‘duty drawback scheme’?

Ans

The government exempts excise duty or refunds it in many cases to provide incentive to exporters. This refund of excise duty is known as duty drawback. The scheme of duty drawback administered by Directorate of Drawback, which fixes rates of drawback.

The sanction & payment of draw back is administered by Commissioner of Customs or Central Excise Incharge of concerned port/airport/land custom station from where export takes place.

Q.10 Mention the objectives/ purpose/ functions of Import Trade.

Ans

The objectives of import Trade are:
– To speed up industrialisation by importing raw materials, capital goods and advanced technology
– To meet consumer demand by importing goods in short supply
– To improve standard of living by importing wide variety of high quality products
– To strengthen territorial integrity through import of essential defence equipments

Q.11 How is ‘custom clearance’ obtained in an export transaction?

Ans

To obtain custom clearance, an exporter prepares ‘Shipping Bill’. Shipping bill contains particulars like- goods to be exported, name of the vessel, port at which goods are to be discharged, country of final destination & exporter’s name & address etc.

5 copies of shipping bill with certain documents are submitted to the Custom Appraiser. The Port Superintendent issues a carting order, after which the cargo is moved into port area & stored at an appropriate place.

Q.12 What is meant by ‘reserving shipping space’ in an export transaction?

Ans

While exporting goods, the exporter needs to apply to a shipping company for booking a shipping space. This is called ‘reserving a shipping space’. For this, the exporter needs to specify the type of goods to be exported, date of shipment and port of destination. On acceptance of shipping application, shipping company issues a shipping order.

A Shipping order is an instruction issued to captain of ship that specified goods are to be received on board the ship after customs clearance.

Q.13 What is an IEC number?

Ans

IEC (Import Export Code) number is issued by the Directorate General Foreign Trade (DGFT) or Regional Export Licensing Authority for export/import documents.

Q.14 What do you mean by EXIM Policy and who regulates it?

Ans

EXIM Policy means export and import policy and it is regulated by the Central Government.

Q.15 What is entrepot trade?

Ans

When goods are imported with a view to re-export them, it is known as entrepot trade.

Q.16 Write notes on the WTO agreements- GATS and TRIPS.

Ans

General Agreement on Trade in Services (GATS):All member countries are required to remove restrictions on trade in services in a phased manner. Under GATS, trade in services are governed by Most Favoured Nations obligations, to prevent countries from discriminating against foreign suppliers. Member countries are required to publish laws & regulations relating to services.

Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS):Intellectual property refers to information with commercial value.TRIPS sets out minimum standards of protection adopted in respect of -Copyrights, Trademarks, Industrial Designs, Patents, etc.

Q.17 List the major export promotion measures taken by the Government of India.

Ans

Following are the major export promotion measures taken by the Government of India:

a) Duty drawback scheme

b) Export manufacturing under bond scheme

c) Exemption from payment of sales taxes

d) Advance license scheme

e) Export promotion capital goods scheme

f) Recognition of export firms as export houses

g) Export of services

h) Export finance

i) Export processing zones

j) 100% export oriented units

Q.18 Why was WTO set up? Briefly explain its objectives and functions.

Ans

World Trade Organisation was set up on January 1, 1995 replacing GATT with the sole objective of solving trade problems between countries and providing a forum for multilateral trade negotiations. Following are its objectives:

a) Raising standard of living;

b) Employment generation;

c) Optimal use of world resources;

d) Sustainable development

e) Ensuring that LDC (Least Developed Countries) secures a better share of growth in international trade.

The main functions of WTO are:

1. WTO provides a forum for further negotiations for trade liberalization in the framework of the various agreements concluded.
2. The countries might prevent imports even after they have negotiated their free entry. They may set arbitrary health or safety standards that favour their home country production. In such cases, WTO administers the dispute settlement procedure.
3. WTO establishes and directs a trade policy review mechanism so as to examine the trade policies and practices of the member countries and to suggest measures of reform.
4. WTO undertakes research and publishes information and studies for the international community.
5. WTO cooperates on equal footing with the World Bank and the International Monetary Fund for the purpose of economic policy making.
6. WTO lays down a code of conduct with a view to reduce trade barriers including tariffs and eliminate discrimination in international trade relations.
7. WTO holds consultation with IBRD and IMF so as to bring better understanding and cooperation in policy formation.
8. WTO supervises the operations of the agreement and ministerial declaration relating to goods and services and trade related intellectual property rights (TRIPS).

Q.19 Explain the benefits of international trade to nations.

Ans

The benefits of international business to nations are as follows:

1. Earns Foreign Exchange: A country earns foreign exchange through international business. It uses the foreign exchange for meeting its imports of capital goods, technology, petroleum products & fertilisers, etc, which are not produced domestically.
2. More Efficient Use of Resources: When a country produces those goods that it can produce efficiently & trades the surplus with other countries, then the country’s resources can be used efficiently and trading countries can get the benefit of specialisation.
3. Stability in Prices: In case of increasing prices of a product due to short supply, the rise in prices may be controlled by increased imports. Similarly, in case of decreasing prices resulting from surplus production, the fall in prices may be controlled by exports.
4. Improves Growth Prospects & Employment Potentials: Exports boost economic growth of a country as firms increase their production capacity to supply goods in foreign countries. Increased production results in increased demand of labour, creating employment opportunities and consequently, increasing the GDP of the country.
5. Increased Standard of Living: Underdeveloped & developing countries are able to consume a variety of goods & services which are not produced in their home countries. They are thus, able to enjoy a higher standard of living.
6. Promotes Global Understanding: International business provides opportunities to countries to interact with each other.This helps in increased understanding of culture and tradition, work culture, etc, and reduces conflicts among countries and promotes a healthy relationship among them.

Q.20 Define international business.

Ans

The international movement of goods, services, capital, personnel, technology and intellectual property in different countries is called international business.

Q.21 What is a joint venture?

Ans

A joint venture means any form of association that is jointly owned by two or more independent firms.

Q.22 What is the need for international business?

Ans

Due to unequal distribution of natural resources among countries, they cannot produce equally and cheaply all the goods that they need. Hence, they procure from other countries, the goods they are deficient in.

Q.23 Briefly state the scope of international business.

Ans

The scope of international business is quite wide. It includes not only merchandise exports, but also trade in services, licensing and franchising as well as foreign investments.

Q.24 Explain the need for international Trade.

Ans

The availability of different factors of production like land, labour, capital & raw material, differ among countries. Hence, all countries cannot produce equally or cheaply all that they need.
Due to socio, economic, geographical and political reasons, there is a difference in labour costs, productivity and production cost among countries.As a result, every country finds it advantageous to:
i. Produce selected goods and services that can be produced effectively; and
ii. Procure the rest from other countries that specialise in the production of the other goods at lower costs. This leads to need for international business.

Q.25 Explain the concept of foreign investments.

Ans

Foreign investment involves investments of funds abroad in exchange of financial return.

It takes place in the following forms:

Direct Investment– Takes place when a company directly invests in properties to undertake production & marketing of goods & services in those countries. It provides the investor a controlling interest in the foreign company.

Portfolio Investment- It refers to an investment that a company makes in another company by acquiring shares or providing loans; and earns dividends or interest on shares or loans, respectively.

Q.26 Differentiate between domestic business and international business.

Ans

Q.27 What is the major difference between international trade and international business?

Ans

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 sinc eit includes:
– Export and import of goods
– Export and import of services
– Licensing and Franchising
– Foreign investment through FDI and portfolio investment

Q.28 What are the features of international business?

Ans

International business involves those business activities that take place across the national frontiers.

It constitutes international movement of- goods & services, capital, personnel, technology, intellectual property like patents, trademarks, know how & copyrights.

It is conducted since every country finds it advantageous to produce selected goods & services that can be produce effectively; and procure the rest from other countries that specialise in the production of the other goods at lower costs.

It includes- exports & imports of goods and services, licensing & franchising and Foreign investments.

Q.29 How does international business prove advantageous for business organisations?

Ans

International business is advantageous for business firms in following ways:

1. 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.
2. 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.
3. 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.
4. 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.
5. 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.

Q.30 Explain the different modes of entering into international business.

Ans

The different modes by which a business enterprise can enter into international business are as follows:

1. Exporting and Importing: Export means producing goods in one’s own country and selling them to another country whereas import involves bringing goods into the home country from abroad.
2. Contract Manufacturing or Outsourcing: In this mode, a company may enter into a contract with another company in a foreign country to manufacture goods or components as per former’s specifications. It is also called outsourcing. Many international companies get the products or components produced in developing countries under contract manufacturing.
3. Licensing and Franchising: Licensing is a process by which a firm transfers its intangible property such as expertise, know-how, blueprints, technology and manufacturing design to a firm located abroad. It is also known as technical collaboration. On the other hand, where a firm allows another firm in a foreign market to use its technical know-how and trade mark, it is known as franchising. Under this arrangement, the franchiser grants the franchisee, the use of a trademark or other assets that are essential. The franchiser charges a fee for the same from the franchisee.
4. Joint Ventures: A joint venture is an arrangement between two or more partners sharing in a new project or venture through participation in its equity capital.
5. Wholly-Owned Subsidiaries: The companies with long term and substantial interest in the foreign market, when acquire full control over the foreign company by making 100% investment in its equity capital are called wholly- owned subsidiaries.

Q.31 Explain the procedure of customs clearance in an export transaction.

Ans

Before the exporter loads goods on a ship, he needs to get them cleared from custom authorities.

To obtain custom clearance, the exporter prepares ‘Shipping Bill’ . It is a document on the basis of which export permission is given. Shipping bill contains following particulars- goods to be exported, name of the vessel, port at which goods are to be discharged, country of final destination, exporter’s name & address etc.

5 copies of shipping bill with the following documents are submitted to the Custom Appraiser:

– Export Contract or export order

– Letter of credit

– Commercial invoice

– Certificate of inspection

– Marine Insurance Policy

After submitting these documents, Port Superintendent issues carting order (an instruction to the staff at gate of the port to permit entry of the cargo inside the dock). After obtaining carting order, cargo is moved into port area & stored at an appropriate place. The exporter can now get the goods loaded on the ship.

Q.32 What is ‘Foreign Direct Investment’?

Ans

Foreign Direct Investment (FDI) is a form of international business undertaken by companies. It takes place when a company directly invests in properties to undertake production & marketing of goods & services in those countries. It provides the investor a controlling interest in the foreign company. FDI can be of following types- Joint Venture & wholly owned subsidiary.

When one or more foreign parties make investments jointly in production & marketing facilities, the operation is known as Joint Venture.

Apart from this, when a company makes 100% investment in foreign ventures, it entity set up abroad is a wholly owned subsidiary.

Q.33 A popular company produces smartphones every year. The parts of the smartphones are manufactured in different countries by different firms. The outer body of the phone is produced in a country X, whereas the hardware along with software is produced in Country Y. The smartphones are then assembled in the home country. All product requirements and production processes are on contracts with the manufacturing companies in the respective countries.

a) Which mode of entry into international business is discussed above?

b) Give two advantages and disadvantages of the mode of entry stated above.

Ans

(i) The mode of entry into international business discussed above is Contract manufacturing.

Contract Manufacturing

In this mode, a company may enter into a contract with another company in a foreign country to manufacture goods or components as per former’s specifications. It is also called outsourcing. Many international companies get the products or components produced in developing countries under contract manufacturing.

(ii) Advantage of contract manufacturing:

• Under this mode, international firms are allowed to produce goods on a large scale without investing huge amounts as production facilities already available in other countries are used.
• There is less risk in contract manufacturing as there is no or little amount of investment in other countries.

Disadvantages of contract manufacturing:

• There can be quality issues for the international firms as local firms might not follow the production guidelines and quality standards.
• There is no control on the production processes by the local producers in the foreign country as goods are made as per the strict instructions of the contract.

Q.34 Black Limited produces handbags. It has its stores located all over the country. The firm plans to expand its business and open stores in foreign countries. . However, being new to international trade, the CEO of Black limited is not aware about what steps should be taken to expand business.

1. Explain the meaning of International business.
2. Identify any four issues that would be faced by Black Limited while conducting business internationally.

Ans

(i) International business refers to business transactions, i.e. manufacturing and trading, carried on beyond the boundaries of one’s own country. It involves international movement of goods, services, capital, personnel, technology and intellectual property in different countries.

(ii) Issues that would be faced by Black Limited while conducting business internationally are:

• Different currencies used: Business transactions involve use of foreign currencies, i.e. currencies of the countries dealt with. Firms need to account for the exchange rate differences resulting from foreign currency transactions.
• Nationality of buyers, sellers and other stakeholders: Different stakeholders involved in the business transaction, such as suppliers, employees, middlemen, shareholders and partners, are from different countries.
• Mobility of factors of production: The factors such as labour and capital face restrictions in their movement across nations. Business firms need to fulfill various formalities & regulations for their movement.
• Blocking of capital: Generally, there is a wide time gap between the dispatch of goods by the exporter and their payment by the importer, which blocks the finances of the exporter.

Q.35 The World Trade Organisation (WTO) deals with regulation of trade in goods, services and intellectual property between the member countries and provides a framework to negotiate trade agreements. It also has a dispute settlement body that aims at enforcing the countries to adhere to WTO agreements.

The organisation also prohibits discrimination among the countries but provides exceptions for concerns related to environmental protection, national security, and other important issues.

What are some of the most important WTO agreements that member countries are required to adhere to?

Ans

Important WTO agreements that member countries are required to adhere to are:

• Agreement on Agriculture: It ensures orderly and fair trade in agricultural products. The Developed countries agreed to lower custom duty on imports and provide subsidies for exports of agricultural products.
• General Agreement on Tariffs and Trade (GATT): Erstwhile GATT, after its substantial modification in 1994, it is very much a part of WTO agreements. It involves major agreements related to agreement on customs valuation, agreement on pre-shipment inspection, agreement on import licensing procedures, agreement on technical barriers to trade, agreement on subsidies and countervailing measures and agreement on anti-dumping duties
• Agreement on Textile & Clothing (ATC): It is an agreement to phase out quota restrictions imposed by developed countries on export of textile and clothing from developing countries. Due to ATC, world trade in textile & clothing became quota free which helped developing countries in expanding exports.
• General Agreement on Trade in Services (GATS): The member countries are required to publish laws and regulations relating to services. This was a landmark achievement of WTO. All the member countries removed restrictions on trade in services in a phased manner.
• Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS): Intellectual property refers to information with commercial value. TRIPS sets out minimum standards of protection adopted in respect of – Copyrights, Trademarks, Industrial Designs, Patents, etc.

Q.36 Mr. Sam is an entrepreneur and owns an IT company. His son suggested that they should set up a wholly owned new unit in a foreign country for so as to expand their business and attain international clients. This would help the company in becoming a Global firm and also increase the reputation of the company in the domestic market.

1. Identify the mode of entry being suggested by Mr. Sam’s son for entering in international market.
2. Give the merits of setting up a unit by method being discussed in (i) above.

Ans

(i) The mode of entry being suggested by Mr. Sam’s son for entering in international market is wholly owned subsidiary. This mode of entry is preferred by firms that want to exercise full control over their international operations. The parent company has full control over its foreign subsidiary by making full 100% equity investment in it.

A wholly owned foreign subsidiary is established in following ways:

• Set up a new firm to commence business operations in foreign country, which also known as green field venture
• Acquiring an established firm in a foreign country and using it to produce and promote products in host country.

(ii) Merits of setting up a wholly owned subsidiary unit are:

• In foreign countries, the parent company has full control over its operations and subsidiary unit.
• There is no disclose of trade secrets or technology methods by parent company as it looks after its whole operations in the foreign country.

Q.37 Globalisation has impacted India and its people in a huge way as many countries show interest in investing their funds in India. The government institutions have played a significant role in attracting foreign investors and making them aware about the potential of India. Many initiatives were taken to promote the country’s foreign trade. Today, India has become one of the top destinations for foreign investors. Which organisations are responsible for promoting foreign trade in India?

Ans

Organisations responsible for promoting foreign trade in India are:

• Department of Commerce: It is an apex body for promoting India’s external trade and was setup to take measures for development of commercial relations with other countries.
• Export Promotion Councils (EPCs): These are registered under the Companies Act or the Societies Registration Act and aim to increase the country’s exports of specific products under its jurisdiction.
• Commodity Boards: These were setup to promote the production of traditional commodities and their export. These boards augment EPCs.
• Export Inspection Council (EIC): This was setup under section 3 of the Export Quality Control and Inspection Act, 1963 to improve the export-related practices.
• Indian Trade Promotion Organisation (ITPO): It was established by the Ministry of Commerce by merging the Trade Development Authority and the Trade Fair Authority of India. It was setup to ensure regular interaction among the government, trade and industry.
• Indian Institute of Foreign Trade (IIFT): It was set up as an autonomous body and is now recognised as a deemed university. It conducts training, research and provides data related to international trade and investments.

Q.38 TooFit Pvt. Ltd. manufactures shoes. It has its presence all over India. Now, after having setting benchmark in India, it wants to expand its business in other nations.
Being new to this process, the owner is not aware of the course of action he should take to expand the business. With reference to this expansion, answer the below questions:
a) Bring up the process to obtain the Import Export Code.
b) Communicate the problems that may be faced by the firm while conducting business internationally.
c) Are there any benefits of such expansion to the country?

Ans

a. For obtaining the IEC number, a firm has to apply to the Director General for Foreign Trade (DGFT) alongwith the documents such as exporter/importer profile, bank receipt for requisite fee, certificate from the banker on the prescribed form, two copies of photographs attested by the banker, etc.

b. Some of the problems that can be faced by firms that want to expand internationally are international company structure, foreign laws and regulations, global pricing strategies, cost calculations, cultural differences, supply chain complexities, etc.

c. Benefits of international Business are:

– Foreign exchange: Foreign exchange earned from exports can be used for meeting its imports of capital goods, technology, petroleum products, etc.

– Efficient use of resources: It encourages the principle of produce what your country can produce more efficiently.

– Improves growth prospects: Producing only for the purposes of domestic consumption restricts a
country’s growth prospects.

Q.39 Vaastu Ltd. exports precious jewellery and diamonds to Elodie Inc., an American company. Vaastu Ltd. has shipped the goods through a well known shipment company. Explain the procedure as to how Vaastu Ltd. will secure the payment for the goods exported.

Ans

There is the risk of non-payment associated with the importer in an international transaction. To minimize such risk, Vaastu Ltd. (exporter) can demand a letter of credit from the importer. This letter is a guarantee issued by the importer’s bank that it will honour the payment up to a certain amount of export bills to the bank of the exporter.
Letter of credit is the most appropriate and secure method of payment adopted to settle international transactions.

Q.40 Omega Pvt. Ltd. is interested in importing a waste recycling machine from Australia. However, the company is unaware of the procedure to be followed for importing goods. Please guide Omega Pvt. Ltd. with the procedure to be followed. (Write the first four steps of the procedure)

Ans

Initial steps to be followed for imports are:

1. Trade enquiry: This is about gathering information about the countries and firms that export the given product. Such information can be gathered from the trade directories and/or trade associations and organisations. Then the importing firm approaches the export firms with the help of a trade enquiry for collecting information about their export prices and terms of exports.
2. Procurement of import licence: The importer needs to consult the Export Import (EXIM) policy in force to know whether the goods that are to be imported are subject to import licensing. If yes, then the importer needs to procure an import licence.
3. Obtaining foreign exchange: Payment in foreign currency involves exchange of Indian currency into foreign currency. As per the rules in force, every importer is required to secure the sanction of foreign exchange. For this, the importer has to apply to a bank authorised by RBI to issue foreign exchange.
4. Placing order or indent: Importer places an import order or indent with the exporter for supply of the specified products after obtaining the import licence. This order has information like price, quantity size, grade and quality of goods ordered, instructions relating to packing, shipping, etc.

Q.41 State true or false

A green field venture involves establishment of a whole new venture for commencing operations in another country.

Ans

True.

Establishment of a new firm altogether so as to setup operations in a foreign country is also known green field venture.

Q.42 In comparison to other modes of entry, which involves setup of alliances, joint ventures, contracts manufacturing agreements, etc., sending of goods from domestic country to foreign country is considered the easiest way. Identify the mode of entry being referred in above case.

Ans

Exporting involves sending of goods from domestic country to foreign country.

Q.43 To enter foreign markets, many business firms form collaboration with local firms located in another country. This helps them to understand the foreign markets better with respect to culture, rules and regulations, laws, etc. Explain the merits of mode of entry being discussed in above case.

Ans

The mode of entry being discussed above is Joint venture.

Merits of joint venture are:

• Joint ventures make it easy to implement large projects that require huge investment and human resources.
• A foreign business firm can get information from its local partner in another country about the market conditions, culture, language, political systems and business industry.
• Firms that form joint venture can reduce their risk by sharing costs and risks associated with the venture.

Q.44 SKL leathers is a large multinational firm. The company received an import order from a business firm located in another country. The company plans to send the delivery of goods through water transport, which wold take at least 7 days to reach the importers destination. State any three issued that can be faced by the two companies involves in international trade.

Ans

The issues that can be faced by the two companies involves in international trade are:

• Different currencies used: Business transactions involve use of foreign currencies, i.e. currencies of the countries dealt with. Firms need to account for the exchange rate differences
• Mobility of factors of production: The factors such as labour and capital face restrictions in their movement across nations. Business firms need to fulfill various formalities & regulations for their movement.
• Blocking of capital: Generally, there is a wide time gap between the dispatch of goods by the exporter and their payment by the importer, which blocks the finances of the exporter.

Q.45 Since last few years, the International commerce has seen a lot of new developments. Apart from manufacturing final products like smartphones, cars, machines, etc. many business firms have indulged in trade of services, supply of parts that produce the final product, etc. These are facilitated due to low transportation and communication expenditure and inputs of production can be availed from most economical places. Each country that is indulged in foreign trade has its own global value chain.

1. What is traded in international trade?
2. Why do you think business firms indulge in international trade?

Ans

(i) Business transaction that takes place beyond the geographical borders of a country is known as international business. It involves trading of goods and services, human resources, capital, technology and intellectual property like patents, trademarks, know-how and copyrights.

(ii) Business firms indulge in international trade as it provides following benefits to them:

• Increased capacity utilisation: With the help of foreign expansion, business firms can utilise their production facilities and increase profitability as large scale production help in economies of scale.
• Prospects for higher profits: Business firms can earn more revenues by selling their goods in countries where they can get higher prices in comparison to domestic markets.
• Improved business vision: Every business firms aims to become international and be more competitive, for which they diversify and expand their operations beyond domestic border.
• Prospects for growth: Business firms are able to increase their growth opportunities by expanding globally. As the demand for goods decreases in domestic markets, the demand for such goods can be created in the international markets.
• Way out to intense competition in domestic market: In case the competition in home country becomes intense, it drives many businesses to become global by searching new markets for their products.

Q.46 State true or false.

C&F agent refers to cooperation and forwarding agent who is responsible for surrendering letter of credit to the shipping company for computing freight charges.

Ans

False.

C&F agent refers to clearing and forwarding agent who is responsible for surrendering mate’s receipt to the shipping company for computing freight charges.

Q.47 To avail some concession from the government, Mr. A, importer asked Mr. D, exporter to send him a certificate that states that the goods exported from him were manufactured in Mr. D’s country. Identify the certificate being required by Mr. A.

Ans

Mr. A. requires certificate of origin from the exporter as it acts as an evidence stating that the goods exported have been actually produced in from where the export is taking place. It can be obtained by the exporter from the trade consulate located in his country and the importer can use this certificate to avail trade concessions and other benefits.

Q.48 Flow Plastic Exporters is a large firm. The company exports its plastic product like containers, bottles, etc. to many different countries. The company generally opts for water transport to send its goods, but in some cases, it also sends goods through airway. The company is always engaged in tasks of getting orders and deliveries, and often overlooks the documents relating to payments. Due to this, the payment from importers also gets delayed.

1. Explain the meaning of export trade.
2. What documents are required to be kept with regard to payment in export transactions?

Ans

(i) Export trade involves trade of goods manufactured in one country and being sold in another country. The seller of these goods is referred to as exporter and the buyer is known as the importer.

(ii) Documents related to payment with respect to in export transactions are:

• Letter of credit: It is a guarantee that is issued by the importer’s bank that it will honour the payment of export bills up to a certain limit to the bank of the exporter. It is the most secure method of payment for settlement of international transactions
• Bill of exchange: It is a written document that involves a person issuing the instrument to the other party for the payment of a specified amount to a particular person or the bearer of the document. With regard to export-import transaction, a bill of exchange is drawn by the exporter on the importer asking to pay a specified amount to the specified person. The documents that transfer the title to the export consignment are passed on to the importer only after the importer accepts the order contained in the bill of exchange.
• Bank certificate of payment: It is a certificate that states necessary documents (including bill of exchange) relating to export consignment has been negotiated (i.e., presented to the importer for payment) and the payment has been received as per the exchange control regulations.

Q.49 State true or false

World Trade Organisation is an international institution that aims to maintain world peace.

Ans

True.

World Trade Organisation helps in promotion of international peace and facilitation of international business.

Q.50 Export Promotion Councils were setup under the Companies Act or the Societies Registration Act as non-profit organisations. State the basic purpose of these councils

Ans

The basic objective of the export promotion councils is promotion and development of exports of particular products specified under the jurisdiction of these councils.

Q.51 India is considered the founding member of three international institutions. Name these institutions.

Ans

India is considered the founding member of World Bank, IMF and WTO.

Q.52 Give any two examples of State Trading organisations setup for promotion of exports in India.

Ans

Examples of State Trading Organisations are:

• Metal and Mineral Corporation (MMTC)
• Handloom and Handicrafts Export Corporation (HHEC)

Q.53 In India, an institution which is involved in export promotion activities also looks after the testing services on packaging developments, training and educational programmes, and promotional award contests with respect to packaging needs for export and imports. Name the institution.

Ans

The Indian Institute of Packaging (IIP) looks after the testing services on packaging developments, training and educational programmes, and promotional award contests with respect to packaging needs for export and imports.

Q.54 To increase the export of services, classification of service houses have been recognised. State such categories of service houses.

Ans

The services houses are categorised as per the export performance of the service providers. They are classified as Service Export House, International Service Export House, and International Star Service Export House.

Q.55 State true or false.

State Trading organisations were setup to provide training and conduct research in foreign trade and analyse the data being collected with respect to foreign trade.

Ans

False

Indian Institute of Foreign Trade (IIFT) provides training in international trade, carry out researches and analyses data relating to international trade and investments.

Q.56 Which institutions constitutes the World Bank?

Ans

The World Bank group comprises of five institutions namely International Bank for Reconstruction and Development (IBRD), the International Finance Corporation (IFC), the International Development Association (IDA), the International Centre for Settlement of Investment Disputes (ICSID), and the Multilateral Investment Guarantee Agency (MIGA).

Q.57 The Export Inspection Council of India was established by the Government of India under the Export Quality Control and Inspection Act 1963. Give the objectives of the council.

Ans

The aims at ensuring sound development of export trade with the help of quality control and pre-shipment inspection.

It is an apex body that controls the activities concerning quality control and pre-shipment inspection of commodities meant for export. All the goods and commodities are required to be passed by EIC, except some exceptions.

Q.58 As a result of Bretton Woods Conference, an international institution was setup to promote development of developing nations. The institution aimed at investing in such nations, particularly in social sectors like health and education so as to bring about economic transformation of the developing countries.

Identify and discuss about the institution being referred in above paragraph.

Ans

As a result of Bretton Woods Conference, the International Bank for Reconstruction and Development (IBRD), commonly known as World Bank was setup to promote development of developing nations.

Initially, its main objectives were to help in reconstruction of the war-affected economies of Europe and assist in the development of the underdeveloped nations of the world.

Later, the World Bank focussed on investing more and more in developing countries so as to bring about economic transformation of the developing countries.

The World Bank comprises of five international organisations that look after providing funds to different countries.

Q.59 Why was Indian Trade Promotion Organisation (ITPO) setup for promotion of foreign trade in India?

Ans

• The Indian Trade Promotion Organisation was established on 1st January, 1992 under the Companies Act 1956 by the Ministry of Commerce, Government of India.
• It was formed by merging the Trade Development Authority and Trade Fair Authority of India.
• ITPO is a service organisation that looks after maintaining regular and close interaction with trade, industry and Government.
• It helps the industry by conducting trade fairs and exhibitions. It encourages export firms to take part in international trade fairs and exhibitions, provides them support and commercial business information, and develop new export products.

Q.60 Red Blush is a cosmetic company. The company plans to expand its business in foreign markets and required funds. To do so, the company availed one of the export incentive scheme provided by government to promote foreign trade. The incentive opted by the company helped it to acquire funds for shipping of goods to other countries.

1. Which incentive scheme is being availed by the Red blush for its exports?
2. What other schemes are offered by government for promotion of exports?

Ans

(i) The incentive scheme availed by Red blush for its exports is Export finance.

Under this scheme, two type of funding can be availed by the exporters through authorised banks. They are called pre-shipment finance and post-shipment finance. Pre-shipment finance helps in obtaining funds for buying, producing and packaging of goods for exports while post-shipment finance offers funds at concessional rates from the date of extending the credit after the goods are shipped to the export country.

(ii) Other schemes are offered by government for promotion of e

• Advance licence scheme: Under this, exporter can avail duty free supply of domestic and imported goods and is not required to pay any custom duty on import of goods for making export goods. It is available to all exporters.
• Export Promotion Capital Goods Scheme (EPCG): It permits firms to import capital goods at lower customs duties subject to actual user condition and fulfilment of specified export obligations. It mainly benefits the industrial units plan to modernise and upgrade their existing plant and machinery.
• Export manufacturing under bond scheme: This helps firms to export goods without any payment related to customs and excise duty. A bond is required to be signed by the exporting firm stating that it is manufacturing goods for export purposes,

Q.61 Explain the concept of Export Processing Zones (EPZ’s).

Ans

Export Processing Zones refer to industrial areas that form enclaves from the Domestic Tariff Areas (DTA). These are located near airports or water ports.

These zones offer competitive duty free environment for export manufacturing at low costs. Hence, EPZs are competitive in nature with respect to quality and prices.

EPZs have been changed to Special Economic Zones (SEZs) which provide more advanced form of processing zones.

These SEZs are free from all rules and regulations that govern the imports and exports units except labour and banking. The government has also allowed development of EPZs by all private, state and joint sectors.

Q.62 The International Monetary Fund (IMF) works to encourage the global monetary cooperation, facilitate international trade, secure financial stability, stimulates employment and sustainable growth of economy and reduce poverty worldwide.

It was established in 1945 and is governed and accountable under 189 countries that constitutes its near-global membership. The IMF’s main aims focusses in ensuring stability of international monetary system i.e. exchange rate system and international payments that enables transactions between countries.

1. What are the objectives of IMF?
2. Also, state the major functions of IMF.

Ans

(i) The objectives of IMF are:

• Facilitation of balanced growth of international business so as to encourage high levels employment and real income.
• Promotion of stability of exchange rates so as to maintain smooth exchange arrangements between the countries.
• Establish a multilateral system of payments with regard to current transactions between the member countries.

(ii) The major functions of IMF are:

• It provides machinery for the adjustment of exchange rates.
• It acts as a reservoir of the currencies from which one country can borrow the currency of other.
• It assists in lending foreign currency and current transaction.
• It determines a country’s currency and amends it so as to bring about stability of rates of member countries.
• It acts as a short-term credit institution.
• It also provides machinery international consultations.

Q.63 World Trade Organisation (WTO) has settled 520 disputes among countries since 1995. According to its Annual report, the trade body had the most requests in the year 2016, which averaged to 22 active panel, arbitration and Appellate body proceedings in a month. The disputes were related to many issues related to trade along with global concerns like renewable energy, human health, environment protection, etc. Which function of WTO is being discussed here?

Ans

World Trade Organisation (WTO), in this case is performing the following functions:

• Settling disputes between its member countries with mutual consultations through its dispute settlement body
• Ensuring that international trade is free from restrictions, issues related to trade and global concerns among member countries are settled.

Q.64 China is the world’s largest importer of sugar and bought about 3 mn tonnes of sugar in year 2016. but recently, China’s Ministry of Commerce increased the duty on out of quota imports to 95% from 50 previously. The ministry said that due to excessive imports since 2011, China’s industry has been damaged seriously, which led them to increase import duty. By increasing the duty on imports China may lose out on certain opportunities. Do you agree? Give reasons.

Ans

Import Trade offers many benefits to a home country.

Hence, by increasing the duty on imports, China may lose the opportunity to:

• Fulfill its need for deficient goods like sugar as increase in tariffs might discourage foreign exporters which can affect the quality of good

• Build relations with other countries or export to countries as increase in import tariffs can cause other countries to which china exports also increase tariff rates.

Q.65 Over the corresponding month of last year, India showed negative growth in buying Petroleum, crude & products, transport equipment, fertilisers, machinery, electrical & non electrical goods from abroad in January 2021. (3 marks)

Based on the above text, answer the following questions:

i. Identify the concept we are talking about here.

1. Internal trade
2. Export
3. Import
4. Negative growth rate in economy

ii. The concept identified in (i) above falls into which of the following major category?

1. Shipment
2. Internal Trade
3. Insurance
4. International Trade

iii. Identify the first step in the procedure of concept stated in (i).

1. Obtaining foreign exchange
2. Trade enquiry
3. Placing order or indent
4. Obtaining letter of credit

Ans

i. Answer: c.

Import trade refers to buying of goods and services from other countries. It deals with process of purchasing goods from foreign countries. The import procedure differs from country to country depending upon a country’s import & custom policies and legal requirements.

ii. Answer: d.

International trade consisting of export and import of goods and is a part of international business. Export trade refers to selling of goods and services produced in the home country to markets abroad whereas import trade refers to buying of goods and services from other countries.

iii. Answer: b.

Import Procedure deals with the process of purchasing goods from foreign countries. It differs from country to country depending upon a country’s import & custom policies and legal requirements. The first step is Trade enquiry followed by Procurement of import license and foreign license.

Q.66 In 2021, a lot of foreign demand for India’s gems & jewelery, jute, floor covering, carpets, handicraft, leather & its products was seen.

Based on the above text, answer the following questions:

i. Identify the concept we are talking about here.

1. Internal trade
2. Import
3. Export
4. Negative growth rate in economy

ii. The concept identified in (i) above falls into which of the following major category?

1. Shipment
2. International Trade
3. Internal Trade
4. Insurance

iii. Identify the first step in the procedure of concept stated in (i).

1. Obtaining foreign exchange
2. Placing order or indent
3. Receiving Export Order or Indent
4. Receiving enquiry and sending quotations

Ans

i. Answer: c.

Export trade refers to selling of goods and services produced in the home country to markets abroad. Export of goods requires completion of a number of formalities.

ii. Answer: b.

International trade consisting of export and import of goods and is a part of international business. Export trade refers to selling of goods and services produced in the home country to markets abroad whereas import trade refers to buying of goods and services from other countries.

iii. Answer: d.

Export Procedure deals with the process of sending goods to foreign countries. Export Procedure is Regulated in India by Central Government. Export of goods requires completion of a number of formalities.