Manufacturing & trade beyond the boundaries of a nation is known as international or external business. Here are the international business class 11 notes.
Topics Discussed
National Business
Business transactions taking place within the geographical boundaries of a nation is known as domestic or national or internal or home trade.
Difference between National and International Business
| Basis | National Business | International Business |
| Meaning | The business in which business transactions take place within the boundaries of a nation is known as a national business. | The business in which business transactions take place beyond the boundaries of a nation is known as international business. |
| Nationality of Buyers & Sellers | People or organizations from one nation participate in domestic business transactions. | People or organizations from different countries participate in international business transactions. |
| Nationality of other Stakeholders | In the national business, stakeholders such as suppliers, employers, middlemen, etc. are usually citizens of the same country. | In international business, stakeholders such as suppliers, employers, middlemen, etc. are from different nations. |
| Mobility of Factors of Production | The degree of mobility of factors of production like labor & capital is relatively higher within a country. | The degree of mobility of factors of production like labor & capital across the nation is relatively less. |
| Political System & Risks | Domestic business is subject to the political system & risk of a single country. | Different countries have different forms of political systems & different degrees of risk which becomes a major barrier to international business. |
| Currency used in Business Transactions | The currency of the domestic country is used in national business. | International business transactions involve the use of more than one country’s currency. |
Benefits of International Business
Benefits to Nations
1) More efficient use of resources
International business operates on a simple principle is to produce what your country can produce more efficiently & trade the surplus production with other countries to produce what other countries can produce more efficiently.
2) Increase standard of living
In the absence of international trade, it would not have been possible for the world community to consume goods & services produced in other countries.
It is only due to international business that the countries can enjoy a higher standard of living.
3) Improving growth prospects & employment potential
Producing solely for domestic consumption restricts a country’s prospects for growth & development.
Very few countries such as China, and Singapore which grabbed the opportunities of business in international markets have become star performers on the world’s map.
4) Earning of foreign exchange
International business helps a country to earn foreign exchange which can be used for meeting the requirement in case of imports.
Benefits of Firms
1) Prospects of higher profits
International business is more profitable than the domestic business. When the domestic prices are lower, business firms can earn more profits by selling the products in countries where prices are high.
2) Prospects for growth
Business firms find it quite frustrating when demand for their products starts falling in the domestic market. In that case, such firms can improve their growth prospects by tracking international business.
3) Way out to intense competition in the domestic market
A highly competitive domestic market drives companies to go international when competition in the domestic market is very intense. Internationalization seems to be the only way to achieve growth.
4) Improved business vision
The growth of the international business of many companies is essentially a part of their business policies or strategic management.
Mode of Entering into International Business
There are two ways of entering into international business:
- Import: It refers to the purchase of funds for products & bringing them into the home country.
- Export: It refers to the sending of goods & services from the home country to a foreign country.
Advantages of Import/Export
- As compared to other modes exporting/importing is the easiest way of getting entering into the international market.
- Exporting/Importing is less involved in terms of finance & time which is needed when they desire to step plants in host countries.
- Exporting/Importing does not require much investment in foreign countries.
Limitations of Import/Export
- Exporting/Importing involves additional packaging transportation & insurance costs.
- Export firms operate from their home country i.e. they are not in a position to understand the demands, tastes & preferences of people of other countries.
- Exporting is not a feasible option when import restrictions exist in a foreign country.
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Export Procedure
- Receipt of inquiry & sending quotations
- Receipt of order
- Accessing importer’s credit-worthiness & securing a guarantee for payment
- Obtaining export license
- Obtaining pre-shipment finance
- Production or procurement of goods
- Pre-shipment inspections
- Excise clearance
- Obtaining the certificate of origin
- Reservation of shipping space
- Packing & forwarding
- Insurance of goods
- Custom Clearance
- Obtaining mate receipts
- Payment of fright & issuance of bill of loading
- Preparation of invoice
- Securing payment
1) Receipts of enquiry & sending quotation
An exporter receives an inquiry from the prospective buyer seeking information regarding price, quality & other terms & conditions for the export of goods.
The exporter sends a quotation known as a proforma invoice in which he/she gives full details regarding the price of goods, quality, weight, mode of delivery, type of packing & payment terms.
2) Receipt of order or indent
If the buyer is satisfied with the export price & other terms & conditions, he/she places the order or indent for the goods.
This order contains a description of the goods ordered, delivery terms, packing & market details, prices to be paid & delivery instructions.
3) Assessing importer’s credit-worthiness & securing a guarantee for payment
After receiving the order, the exporters undertake an inquiry regarding the creditworthiness of the importer. The main objective of such inquiry is to assess the risk of non-payment by the importer.
In order to minimize such risk the exporter may demand a letter of credit from the importer which is issued by the importer’s banks.
4) Obtaining an export license
When the exporter is assured about the payment, he/she initiates the steps relating to the fulfillment of export formalities.
In India, the export of goods is subject to the fulfillment of the customs laws. The process for obtaining the license is given below:
- Obtain the IEC (Import Export Code) number from the DGFT (Directorate General Foreign Trade).
- Register with the appropriate export promotion council.
- To get registered with an export credit and guarantee corporation (ECGC) to safeguard against the risk of non-payment.
5) Obtaining pre-shipment finance
After obtaining the export license, the exporter approaches his/her banker to obtain pre-shipment finance for carrying out production.
The finance is required for obtaining raw materials & other components for processing & packing of goods & transportation of goods to the port of shipment.
6) Production or procurement of goods
Exporter after obtaining the pre-shipment finance proceeds to get the goods ready as per the order of an importer.
The exporter either carries out the production of goods himself or buys from the market.
7) Pre-shipment inspection
Several steps have been initiated by the government of India to ensure that only good-quality products are exported from India.
For example, the Export Quality Control & Inspection Act 1963, has been passed by the government for this purpose.
Along with other documents, the exporter has to submit the pre-shipment inspection report at the time of export. But if the goods are exported by export houses, trading houses & industrial units set up in SEZs, no inspection is required.
8) Excise clearance
According to the Central Excise Tariff Act, excise duty is to be paid on the goods manufactured. For this purpose, export applies to the concerned excise commissioner with an invoice. If the excise commissioner is satisfied, he/she issues excise clearance.
Note: In many cases, the government exempts excise duty or the amount is refunded, if the goods produced are meant for exports. It is also known as the duty drawback.
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9) Obtaining the certificate of origin
Some importing countries provide tariff concessions or other exemptions for the goods coming from a particular country.
To obtain such benefits, the importer may ask to send the certificate of origin. The certificate is obtained from the trade consulate in the exporter country.
10) Reservation of shipping space
The exporter applies to the shipping company for the provision of shipping space. He has to provide the complete information regarding the goods to be exported, date of shipment & port of destination.
The shipping company issues a shipping order after accepting the application for shipping. A shipping order is an instruction to the caption of the ship that after customs clearance the specified goods be received on board.
11) Packing and forwarding
The goods are packed & marked with necessary details like name & address of importer, gross & net weight & port of shipment, etc.
After this, the exporter arranges the transportation of goods to the port. A railway receipt is issued by the railway authority on goods in the railway wagon.
The receipt is endorsed by the exporter in order to enable him to take delivery at the port of shipment.
12) Insurance of goods
To protect the goods against the risk of loss or damage to the prices of the sea, the exporter gets the goods insured with the insurance company.
13) Custom Clearance
Before loading the goods on the ship, they have to be cleared by customs. For this purpose, the exporter prepared a shipping bill & submitted 5 copies of the shipping bill along with the following documents to the customs appraiser.
- Certificate of Origin
- Commercial Invoice
- Export Order
- Letter of Credit(LOC)
- Certificate of Inspection
- Marine Insurance Policy
On submitting the above documents, the superintendent of the port is approached to obtain the carting order.
A carting order is the instruction given to the staff at the gate of the port to permit the entry of cargo into the dock. An exporter appoints a clearance and forwarding agent for the completion of formalities.
14) Obtaining mate’s receipt
After the goods have been loaded on the board, the captain of the ship issues a mate’s receipt to the port superintendent.
This receipt contains information regarding the vessel description of packages, date of shipment, condition of the cargo at the time of receipt on the board, etc.
The superintendent hands over the mate’s receipt to the clearance & forwarding agent.
15) Payment of freight & issuance of bill of coding
The clearance & forwarding agent hands over the mate receipt to the shipping company for calculating freight.
On receiving the freight, the shipping company issues a bill of loading, it is evidence that the shipping company has agreed to carry the goods to their designated destination.
16) Preparation of invoice
The exporter prepared an invoice for the dispatched goods. The invoice contains information regarding the quality & quantity of goods & amount to be paid.
17) Securing payment
After the shipment of goods, the importer is informed about the shipment & the need for various documents like a certified copy of the invoice, bill of loading, insurance policy, certificate of origin, & letter of credit sent by the exporter through his bank.
These documents are required by the order to get the goods clear from customs. The exporter instructs his/her banker to hand over the documents to the importer. Only when the importer accepts the bill of exchange.
Documents Involved in International Trade
- Indent
- LOC (Letter of Credit)
- Shipping Order
- Shipping Bill
- Mate’s Receipt
- Bill of Lading/Document of Title
- Certificate of Origin
1) Indent
It is an order placed by the importer to the exporter & contains all the information regarding the goods to be imported.
2) LOC (Letter of Credit)
It is a guarantee letter issued by the importer bank stating that it will honor the export bills up to a certain amount.
3) Shipping Order
It is an order which provides information about goods like number of packages, terms of delivery, etc.
4) Shipping Bill
It is the main document based on which permission is granted for the export of goods by the customs office & contains all the information regarding goods.
5) Mates Receipt
The receipt is issued by the captain of the ship to the exporter after the goods are loaded on the board of the ship.
6) Bill of Lading/Document of Title
It is a document issued by the shipping company & acts as evidence regarding the acceptance of the shipping company to carry the goods to the port of destination.
7) Certificate of Origin
It specifies the country in which the goods are being manufactured & enables the importer to claim tariff concessions.