Chapter 11 — International Business

Chapter 11 covers the meaning and scope of International Business, how it differs from domestic business, benefits to nations and firms, five modes of entry (exporting, contract manufacturing, licensing, franchising, joint ventures, wholly owned subsidiaries), and detailed export and import procedures with key documents.

International business refers to business activities that take place across national frontiers. It involves not only the international movements of goods and services, but also of capital, personnel, technology, and intellectual property like patents, trademarks, know-how, and copyrights.

Key differences include: buyers and sellers belong to different nations with different languages and customs; stakeholders such as employees and suppliers come from different countries; mobility of labour and capital is lower across borders; customer preferences vary greatly across markets; business systems, political risks, regulations, and currencies all differ across countries.

Scope includes merchandise exports and imports (tangible goods), service exports and imports known as invisible trade (tourism, transportation, banking, insurance, etc.), licensing and franchising, and foreign investments — both FDI which gives controlling interest in a foreign company, and portfolio investment where a company earns income through dividends or interest on shares and bonds.

Countries benefit through earning foreign exchange to meet import needs for capital goods, technology, and other products; more efficient use of resources by specialising in what they produce best; improved growth prospects and employment potentials; and an increased standard of living by consuming goods produced in other countries.

Firms gain prospects for higher profits by selling in markets where prices are higher, increased capacity utilisation through overseas orders, growth opportunities when domestic demand is saturated, an escape route from intense domestic competition, and improved business vision driven by the urge to grow, compete, and diversify.

Contract manufacturing, also known as outsourcing, is where a firm enters into a contract with local manufacturers in foreign countries to produce certain components or goods as per its specifications. Major companies like Nike, Reebok, Levis, and Wrangler get their products produced in developing countries through contract manufacturing. The Godrej group in India manufactures Dettol soap for Reckitt and Colman under such an arrangement.

Licensing is a contractual arrangement where one firm (licensor) grants another firm in a foreign country (licensee) access to its patents, trade secrets, or technology for a fee called royalty — it applies to production and marketing of goods. Franchising is similar but applies to service businesses and is more stringent, with the franchiser setting strict rules on how franchisees operate. McDonald's, Pizza Hut, and Wal-Mart are examples of franchisers operating worldwide.

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. It is the most appropriate and secure method of payment adopted to settle international transactions, protecting the exporter against the risk of non-payment by the importer.

A bill of lading is an export document in which the shipping company gives its official receipt of goods put on board its vessel and undertakes to carry them to the port of destination; it is a document of title to the goods and is freely transferable by endorsement. A bill of entry is a customs document filled in by the importer at the time of receiving imported goods, containing details such as the name of the ship, description and value of goods, and customs duty payable — it is used to obtain customs clearance in the importing country.

An IEC (Import Export Code) number is a mandatory registration number that every exporter and importer in India must obtain. It is issued by the Directorate General Foreign Trade (DGFT) or Regional Import Export Licensing Authority and must be mentioned on most import and export documents.

A proforma invoice is the quotation sent by the exporter in response to a trade enquiry from a prospective buyer. It contains information about the price at which the exporter is ready to sell the goods and also provides details about quality, grade, size, weight, mode of delivery, type of packing, and payment terms.

Both are types of bill of exchange used to secure export payment. In a sight draft, the bank hands over the relevant documents to the importer only against immediate payment. In a usance draft, the documents are delivered to the importer against acceptance of the bill of exchange, with payment to be made at the end of a specified period such as three months.

Advantages include financial sharing with the local partner, ability to execute large capital-intensive projects, access to the local partner's knowledge of culture, language, and political systems, and reduced cost and risk. Limitations include the risk of technology and trade secrets being disclosed to others, and the potential for conflict between the investing firms over control.

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