Notes on International Business New

COMPILED International Business BY: VISHAL KADAM

Q) What is International Business? What are its importance? Q) Distinguish between International & Domestic Trade?

Distinction between internal and international international trade Distinction between internal and international international trade in general involves transaction for mutual benefit benefit For this this reason both the trading parties parties will have equal interest. interest. Trade is a case of geographic geographic specific area. An area specialises in an activity and trade takes place. Trade needs optimising activity. Profits are measured by minimising cost and increasing volume of trade. International trade has certain distinguishing factors as compared with ordinary trade. 1. International trade is the trade between two countries which are geographically and politically different. This gives rise to a conflict of interests in terms of benefit. 2. International trade has more restriction than internal trade. The world has transformed from free trade to protection. 3. Under protection a country prevents trade to safeguard the interest of domestic industry. 4. The factors of production are perfectly mobile within a country and immobile within countries. This feature feature helps in retaining cost advantage advantage in production. Different Different countries have different currencies. With this the problems of equating value and conversion of currencies arises. International liquidity is a major problem. Yet there is no mechanism to facilitate international payments. In 1930 IMF floated specialised instruments called Special Drawing Rights (SDR) as a common medium for international transaction. Due to disparities in economic development, SDR failed to provide adequate international liquidity. Presently the world is divided into trading blocks and associations. associations. The international trade is highly segmented segmented international trade leads leads specialised institutions institutions for promoting international co-operation, trade trade international payments payments and development assistance. Q) What is FDI ?

Foreign capital which enters the country in the form of equity capital is termed as Foreign Direct investment (FDI). It involves no interest payment, payment, but only a share in the profit to the extent extent of shares owned by foreigners. In India equity participation participation by foreigners is permisible permisible upto 51% of of the capital of a project, with higher limits of investment in selected areas, such as technology, upgradation & exports. Foreign direct investment (FDI) is a measure of foreign ownership of productive assets, such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization. Maps below show net inflows of foreign It is always better to be “WIND” than than the “OBJECT” carried away by it_ Vishal

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COMPILED International Business BY: VISHAL KADAM direct investment as a percentage of gross domestic product (GDP). The largest flows of foreign investment occur between the industrialized countries (North America, North West Europe and Japan). But B ut flows to non-industrialized countries are increasing. The foreign direct investor may acquire 10% or more of the voting power of an enterprise in an economy through any of the following methods: * By incorporating a wholly owned [subsidiary] or [company] * By acquiring shares in an associated enterprise * Through a [[merger]] or an [Takeover| acquisition] of an unrelated enterprise * Participating in an equity [[joint venture]] with another investor or enterprise *Foreign direct investment incentives may take the following forms:{Fact|date=June forms:{Fact|date=June 2009} * Low [corporate tax]and [income tax] rates * Tax Holidays * Other types of tax concessions * Preferential [tariffs] * Special economic zones * Investment financial subsidies * [soft loan] or loan [guarantees] * Free land or land subsidies * Relocation & expatriation subsidies * Job training & employment subsidies * [[infrastructure]] subsidies * R&D support * Derogation from regulations (usually for very large projects) Q) What is Bilateral Investment Treaty?

A bilateral Investment Treaty (BIT) is an agreement establishing the terms & conditions for private investment by nationals & companies of one state in another state, BIT BI T are established through trade pacts .BITS grant investments made by an investor of one contracting state in the territory of the other number of guarantees, which typically include fair & equitable treatment, protection from expropriation, free transfer of means & full protection & security.





















COMPILED International Business BY: VISHAL KADAM Mediterranean groupings), at the micro-level we speak about such forms of .new regionalism. as euroregions, working communities etc. These .new forms. are connected with the phenomenon of cross-border cooperation, which has been developing in Europe since 1950s. Q) What is the impact of FDI on distribution of wealth? Q) What is the trend of FDI in recent years?

Foreign investment has has played a very limited role so far. far. foreign investment was allowed generally in areas of hi-tech, sophisiticated technologies & substantial exports. The normal ceiling for foreign investment investment was 40% of the total equity capital, but a higher percentage of foreign equity was considered in priority industries is the technology was sophisiticated & not available in the country, or if the venture was largely export oriented. Foreign investment flows by category (us $ million) 94-95

95-96

96-97

97-98

98-99

1314

2144

2821

3557

2462

a RBI automatic route

171

169

135

202

179

b SIA/FIPB route

701

1249

1922

2754

1821

c. NRI (40% & 100)

442

715

639

241

62

---

11

125

360

3824

2748

3312

1828

- 61

a. FIIS #

1503

2009

1926

979

- 390

b. Euro equities @

2082

683

1366

645

270

c. Off shore funds & others

239

56

20

204

59

5,138

4,892

6,133

5,385

2401

A. Direct Investment

d Acquisition fo shares 400

B. Portfolio Investment

Total (A + B )

The Foreign Exchange Management Bill (FEMA) was introduced by Govt. of India in parliament on August August 4, 1998. The Bills aims aims “to consolidate and and amend the law relating to Foreign Exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of Foreign Exchange Market in India”. It was adopted by parliament in 1999 1999 and is known as Foreign Exchange Management Management Act, 1999. Chapter II of FEMA deals with the regulation regulation & management of Foreign Exchange. Exchange. Sec. 3 states that except except as otherwise provided in






















Foreign Exchange means foreign currency and includes all deposits, credits and balances, payable in any foreign currency and any drafts, traveler’s cheques, letter of credit and bills of exchange, expressed or drawn in Indian currency but payable, in any foreign currency; any instrument payable, at the option of the drawee or holders thereof or any other party thereto, either in Indian currency or in Foreign currency or partly in one or partly in other. In 1973, Act of 1947 1947 was replaced by Foreign exchange exchange regulations Act, 1973 and which is now replaced by Foreign Exchange Management Act, 1999. Q) What are TRIPS?

Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) The WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), negotiated during the Uruguay Round, introduced intellectual property rules for the first time into the multilateral trading system. The Agreement, while recognizing that intellectual property rights (IPRs) are private rights, establishes minimum standards of protection that each government has to give to the intellectual property right in each of the WTO Member countries. The Member countries are, however, free to provide higher standards of intellectual property rights protection. The Agreement is based on and supplements, with additional obligations, the Paris, Berne, Rome and Washington conventions in their respective fields. Thus, the Agreement does not constitute a fully independent convention, but rather an integrative instrument i nstrument which provides "Convention-plus" protection for IPRs. The TRIPS Agreement is, by its coverage, the most comprehensive international instrument on IPRs, dealing with all types of IPRs, with the sole exception of breeders' rights. IPRs covered under the TRIPS agreement are: The TRIPS agreement is based on the basic principles of the other WTO Agreements, like non-discrimination clauses - National Treatment and Most Favoured Nation Treatment, and are intended to promote "technological innovation" and "transfer and dissemination" of technology. It also recognizes the special needs of the least-developed country Members in respect of providing maximum flexibility in the domestic implementation of laws and regulations. Part V of the TRIPS Agreement provides an institutionalized, multilateral means for the prevention of disputes relating to IPRs and settlement thereof. It is aimed at preventing unilateral actions. Q) What is EURO?

EURO is the "Association of European Operational Research Societies" within I FORS, the "International Federation of Operational Research Societies". It is a "non profit" association domiciled in Switzerland. Its affairs are regulated by a Council consisting of representatives/alternates representatives/alternat es of all its members and an Executive Committee which constitutes its board of directors. Its aim is to promote Operational Research throughout Europe.





















COMPILED International Business BY: VISHAL KADAM Council meetings are held annually, normally in conjunction with the EURO-k conferences. The Council elects a President, a President-Elect, three Vice-Presidents, and a Secretary. These six EURO officers form the Executive Committee. The President-Elect serves for only one year whereas all others are elected for two years. Since 1993 the Executive Committee is assisted by a Permanent Secretariat. Q) What is labelling?

Environmental labelling schemes are complex, causing concerns about developing countries’ and small businesses’ ability to export. How do you use labelling to inform consumers about environmental protection without jeopardizing these weaker players? Opinions are divided. Two WTO committees are grappling with the question. In the Committee’s work programme Labelling is one of the subjects assigned to the Committee on Trade and Environment (CTE). It is part of an item (3b) on the committee’s work programme in which the committee is assigned to consider the relationship between the provisions of the WTO’s agreements and the requirements governments make for products in order to protect the environment. (In addition to labelling, this includes standards and technical regulations, and packaging, and recycling requirements.) In 2001, the Doha Ministerial Conference made this an issue of special focus for the regular CTE (i.e. the regular committee sessions that are not part of the Doha Round negotiations). (See paragraph 32(iii) of the Doha Declaration.) The use of eco-labels (i.e. labelling products according to environmental criteria) by governments, industry and non-governmental organizations (NGOs) is increasing. Concerns have been raised about the growing complexity and diversity of environmental labelling schemes. This is especially the case with labelling based on life-cycle analysis, which looks at a product’s environmental effects from the first stages of its production to its final disposal. These requirements could create difficulties for developing countries, and particularly small and medium-sized enterprises in export markets. WTO members generally agree that labelling schemes can be economically efficient and useful for informing consumers, and tend to restrict trade less than other methods. This is the case if the schemes are voluntary, allow all sides to participate in their design, based on the market, and transparent. However, these same schemes could be misused to protect domestic producers. For this reason, the schemes should not discriminate between countries and should not create unnecessary barriers or disguised restrictions on international trade. Q) What is Dumping?

It occurs when goods are exported at a price less than their normal value, generally meaning they are exported for less than they are sold in the domestic market or thirdcountry markets, or at less than production cost. Q16) Explain the legal environment for International Business? Q17) What is the importance of intellectual property rights & Patents in IB?





















COMPILED International Business BY: VISHAL KADAM 1. Subj Subjec ectt to the the pro provi visi sion ons s of para paragr grap aphs hs 2 and and 3, 3, pate patent nts s shal shalll be ava avail ilab able le for for any any inventions, whether products or processes, in all fields of technology, provided that they are new, involve an inventive step and are capable of industrial application.i Subject to paragraph 4 of Article 65, paragraph 8 of Article 70 and paragraph 3 of this Article, patents shall be available and patent rights enjoyable without discrimination as to the place of invention, the field of technology and whether products are imported or locally produced. 2. Memb Member ers s may may excl exclud ude e from from pate patent ntab abili ility ty inv inven enti tion ons, s, the the pre preve vent ntio ion n withi within n their their territory of the commercial exploitation of which is necessary to protect ordre public or morality, including to protect human, animal or plant life or health or to avoid serious prejudice to the environment, provided that such exclusion is not made merely because the exploitation is prohibited by their law. 3. Memb embers ers ma may als also o exc exclu lud de fro from m pa paten tentabi tabili lity ty:: (a) diagnostic, therapeutic and surgical methods for the treatment of humans or animals; (b) plants plants and animal animals s othe otherr than than micromicro-org organi anisms sms,, and and esse essenti ntiall ally y biol biologi ogical cal processes for the production of plants or animals other than non-biological and microbiological processes. processes. However, Members shall shall provide for the protection of of plant varieties either by patents or by an effective sui generis system or by any combination thereof. The provisions of this subparagraph subparagraph shall be reviewed four years after after the date of entry into force of the WTO Agreement. Article 28 Rights Conferred

1.

A pat paten entt sha shall ll conf confer er on its its own owner er the the fol follo lowin wing g exc exclu lusi sive ve righ rights ts::

(a) where where the subjec subjectt matt matter er of of a patent patent is a produc product, t, to to prev prevent ent third third part parties ies not having the owner’s consent from the acts of: making, using, offering for 1 sale, selling, or importing for these purposes that product; (b) where where the subjec subjectt matt matter er of of a patent patent is a proces process, s, to to preve prevent nt thir third d parti parties es not having the owner’s consent from the act of using the process, and from the acts of: using, offering for sale, selling, or importing for these purposes at least the product obtained directly by that process. 2. Pate Patent nt own owner ers s shal shalll also also hav have e the the righ rightt to ass assig ign, n, or or tran transf sfer er by by succ succes essi sion on,, the the patent and to conclude licensing contracts. Article 29 Conditions Conditions on Patent Applicants Applicants

1. Memb Member ers s shal shalll requ requir ire e that that an an appl applic ican antt for for a pate patent nt sha shall ll dis discl clos ose e the the inve invent ntio ion n in a manner sufficiently clear and complete for the invention to be carried out by a person skilled in the art and may require the applicant to indicate the best mode for carrying out the invention known to the inventor at the filing date or, where priority is claimed, at the priority date of the application. 2. Memb Member ers s may may requ requir ire e an app appli lica cant nt for for a pat paten entt to pro provi vide de inf infor orma mati tion on con conce cern rnin ing g the applicant’s corresponding foreign applications and grants.























COMPILED International Business BY: VISHAL KADAM Members may provide limited exceptions to the exclusive rights conferred by a patent, provided that such exceptions do not unreasonably conflict with a normal exploitation of the patent and do not unreasonably prejudice the legitimate interests of the patent owner, taking account of the legitimate interests of third parties. Patents: The agreement says patent protection must be available for inventions for at least 20 years. Patent protection must be available for both products and processes, in almost all fields of technology. Governments can refuse to issue a patent for an invention if its commercial exploitation is prohibited for reasons of public order or morality. They can also exclude diagnostic, therapeutic and surgical methods, plants and animals (other than microorganisms), and biological processes for the production of plants or animals (other than microbiological processes). Plant varieties, however, must be protectable by patents or by a special system (such as the breeder’s rights provided in the conventions of UPOV — the International Union for the Protection of New Varieties of Plants). The agreement describes the minimum rights that a patent owner must enjoy. But it also allows certain exceptions. A patent owner could abuse his rights, for example by failing to supply the product on the market. To deal with that possibility, the agreement says governments can issue “compulsory licences”, allowing a competitor to produce the product or use the process under licence. But this can only be done under certain conditions aimed at safeguarding the legitimate interests of the patent-holder. If a patent is issued for a production process, then the rights must extend to the product directly obtained from the process. Under certain conditions alleged infringers may be ordered by a court to prove that they have not used the patented process. An issue that has arisen recently is how to ensure patent protection for pharmaceutical products does not prevent people in poor countries from having access to medicines — while at the same time maintaining the patent system’s role in providing incentives for research and development into new medicines. Flexibilities such as compulsory licensing are written into the TRIPS Agreement, but some governments were unsure of how these would be interpreted, and how far their right to use them would be respected. A large part of this was settled when WTO ministers issued a special declaration at the Doha Ministerial Conference in November 2001. They agreed that the TRIPS Agreement does not and should not prevent members from taking measures to protect public health. They underscored countries’ ability to use the flexibilities that are built into the TRIPS





















COMPILED International Business BY: VISHAL KADAM dumping contrasts with the approach of the Subsidies and Countervailing Measures Agreement.) The legal definitions are more precise, but broadly speaking the WTO agreement allows governments to act against dumping where there is genuine (“material”) injury to the competing domestic industry. In order to do that the government has to be able to show that dumping is taking place, calculate the extent of dumping (how much lower the export price is compared to the exporter’s home market price), and show that the dumping is causing injury or threatening to do so. GATT (Article 6) allows countries to take action against dumping. The Anti-Dumping Agreement clarifies and expands Article 6, and the two operate together. They allow countries to act in a way that would normally break the GATT principles of binding a tariff and not discriminating between trading partners — typically anti-dumping action means charging extra import duty on the particular product from the particular exporting country in order to bring its price closer to the “normal value” or to remove the injury to domestic industry in the importing country.

There are many different ways of calculating whether a particular product is being dumped heavily or only lightly. The agreement narrows down the range of possible options. It provides three methods to calculate a product’s “normal value”. The main one is based on the price in the exporter’s domestic market. When this cannot be used, two alternatives are available — the price charged by the exporter in another country, or a calculation based on the combination of the exporter’s production costs, other expenses and normal profit margins. And the agreement also specifies how a fair comparison can be made between the export price and what would be a normal price. Calculating the extent of dumping on a product is not enough. Anti-dumping measures can only be applied if the dumping is hurting the industry in the importing country. Therefore, a detailed investigation has to be conducted according to specified rules first. The investigation must evaluate all relevant economic factors that have a bearing on the state of the industry in question. If the investigation shows dumping is taking place and domestic industry is being hurt, the exporting company can undertake to raise its price to an agreed level in order to avoid anti-dumping import duty. Detailed procedures are set out on how anti-dumping cases are to be initiated, how the investigations are to be conducted, and the conditions for ensuring that all interested





















COMPILED International Business BY: VISHAL KADAM They must also report on all investigations twice a year. When differences arise, members are encouraged to consult each other. They can also use the WTO’s dispute settlement procedure. Q) what is WTO? What is its impact on developing countries?

The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations and ratified in their parliaments. The goal is to help producers of goods and services, exporters, and importers conduct their business. Impact on developing nations: Expansion of world trade. •

Increase in agricultural exports.

•

Large scale export of textile clothing.

•

Domination of rich and developed countries on WTO.

• •

TRIPs and TRIMs. Uruguay round agreements and their impact.

Domination of MNCs international Business Q) Types of dumpings in International Market?

Types of Dumping » Selling same product at different prices, at home and abroad » Selling in the foreign market at price < price in home market » Selling in the foreign market at price < “fair market value” which is often taken to mean < “normal average cost” » Seasonal - when exporter has a bumper crop » Cyclical - when exporter has a slump at home » Predatory - intended to eliminate competitors » Persistent - goes on and on Sporadic Dumping: it is the occasional sale of a commodity at below cost or at a lower price abroad than domestically inorder io unload an unforeseen and temporary surplus of the commodity without having to reduce domestic prices Persistent: Persistent dumping is a practice of selling a product below its production cost. Predatory: A type of anti-competitive event in which foreign companies or governments





















COMPILED International Business BY: VISHAL KADAM Business Dictionary: Deliberate pricing of merchandise or services for the sole purpose of driving competitors of similar products or services out of the market. Once these competitors are eliminated, the intent is to raise the price. Q) What is intellectual property? Why is it considered as an asset to the company?

A product of the intellect that has commercial value, including copyrighted property such as literary or artistic works, and ideational property, such as patents, appellations of origin, business methods, and industrial processes. The Legal Term * Intellectual Property * Defined & Explained ... INTELLECTUAL PROPERTY - Property that can be protected under federal law, including copyrightable works, ideas, discoveries, and inventions. Such property would include novels, sound recordings, a new type of mousetrap, or a cure for a disease. Q) What is WTO? What are its objectives?

The below said are the objectives of WTO: Raising standard of living of members of country and income, promoting full employment. •

Better share of growth in a world trade.

•

Settlement of trade disputes among members.

•

Expanding production and trade.

•

Optimum utilization of world resources.

•

Free trade i.e. trade without discrimination. Protection and preservation of environment.

Q 26. What is economic integration Elimination of tariff of tariff and and non-tariff barriers to the flow of goods of goods,, services services,, and factors-ofproduction between a group of nations of nations,, or different parts of the same nation. Meaning of Economic Integration: •

A process whereby countries cooperate with one another to reduce or





















COMPILED International Business BY: VISHAL KADAM Q 27. What is Preferential Trade Agreement(PTA): •

•

•

•

The simplest form of economic integration Offers member countries tariff reductions in certain product categories Discrimination or preferential treatment for some countries is not allowed as it is against the principle of Most Favoured Nation (MFN) under the WTO Represents a unilateral relationship as tariffs would be reduced only in one direction

Q28. What is a Free Trade Area(FTA): •

•

•

•

An agreement between two or more countries to remove all trade barriers between themselves. Each country determines its own barriers and maintains its own external tariffs on import against non-members. Tariffs and non-tariff barriers include quotas and subsidies on international trade in goods and services Examples of FTA are: The ASEAN Free Trade Agreement(AFTA) and the North American Free Trade Areas(NAFTA)

Customs Union: •

•

An agreement between two or more countries to remove tariffs between themselves and set a common external tariff on imports from nonmember countries Each country determines its own barriers and maintains its own external tariffs on imports against non-members.
























•

•

Harmonize trade policies by having common external tariffs against nonmembers Example is the European Union (EU) previously known as European Economic Community(EEC)

Economic Union: •

•

•

•

An agreement between two or more countries to remove barriers to trade, allow free flow of labor and capital and coordinate economic policies. Sets trade policies through common external tariffs on non-members. Integration is more intense in an economic union compared to a common market, as member countries are required to harmonize their tax tax,, monetary, and fiscal policies and to create a common currency Example is the European Union(EU) where economic and monetary integration has created a single market with a common euro currency

Political Union: •

•

An agreement between two or more countries to coordinate their economic monetary and political systems. Required to accept a common stance on economic and political policies against non-members.





















COMPILED International Business BY: VISHAL KADAM Switzerland has higher productivity in i n watch production compared to the US, economists would say the US has an absolute advantage in corn production and Switzerland has an absolute advantage in watch production. In this case it is intuitive that if the US concentrates on corn production and Switzerland on watch production, then resources could be shifted from relatively lower productivity industries to higher productivity industries and the total combined output of corn and watches would rise. With greater output, and after an appropriate trading pattern is introduced, both countries could end up with more of both goods than before, meaning that both countries can gain from trade. For most who have studied economics this is what they remember as comparative advantage. However, they are only partially right. It is correct that this example of trade is consistent with comparative advantage; however, CA also covers cases that are less obviously advantageous for countries. For example, one might ask what happens if the US had higher productivity in both corn and watches compared to Switzerland? This is the question that Ricardo tackled when he formalized CA. His answer to the question also substantially expanded the number of situations in which technology differences could result in advantageous trade. Ricardo’s simple analysis demonstrated that even when one country is technologically superior in both goods, it could still be advantageous for countries to trade. In this circumstance, a comparative advantage is present for those products that the country can produce most-best in comparison to other countries, even if the most best product is produced less productively than in the other country. For example, suppose the US is 10X more productive in corn and only 2X more productive in watches compared to Switzerland. In this case the US is clearly most-best at producing corn (10x > 2x). At the same time though, Switzerland is ½X as productive in watches w atches and (1/10)X as productive in corn. Thus, Switzerland’s most-best product and hence its comparative advantage is watches (since ½ > 1/10) even though it can’t produce them as effectively as the US. The reason both countries can benefit in this case is because productivity is not the only determinant of industry advantage; instead it is the combination of productivity and average wages. In countries with lower productivity in all industries, they will also have





















COMPILED International Business BY: VISHAL KADAM just because another country is more productive in everything. Ricardo demonstrated that by specializing in producing the products that one has a comparative advantage (which MAY NOT be ones in which the country has an absolute advantage) the world can expand total world output with the same quantity of resources. The expansion of output is the realization of increased economic efficiency that economists always talk about. Finally, given the expanded output, international trade can assure that all countries in the model gain from the surplus that’s created. In other words, without raising the quantity of resources, the world economy would be able to produce greater output and generate higher living standards for everyone. Economic efficiency will rise both internationally and nationally. This is how all nations can benefit from free trade. It is important to note at this stage that the Ricardian model does not say that countries WILL gain from international trade; only that countries CAN benefit from increased output and trade if production is reorganized between countries appropriately while all resources are kept fully employed. The model is a gross simplification compared to the real world though, and thus it clearly does not incorporate everything that might happen with trade. Nevertheless the model does provide an insight that quite likely carries over to more complex situations. For example, the model results should cause observers of international trade situations to hesitate when fears grow that low wage countries may soon take over production of the world’s output, or when developing countries protect their markets because of fears that they cannot compete with the more developed countries in the world. These commonly expressed fears about international trade are shown, by virtue of the Ricardian model, to be based on a misperception. The Theory of Comparative Advantage - Overview Historical Overview The theory of comparative advantage is perhaps the most important concept in international trade theory. It is also one of the most commonly misunderstood principles.





















COMPILED International Business BY: VISHAL KADAM The original idea of comparative advantage dates to the early part of the 19th century. Although the model describing the theory is commonly referred to as the "Ricardian model", the original description of the idea can be found in an Essay on the External Corn Trade by Robert Torrens in 1815. David Ricardo formalized the idea using a compelling, yet simple, numerical example in his 1817 book titled, On the Principles of Political Economy and Taxation. The idea appeared again in James Mill's Elements of Political Economy in 1821. Finally, the concept became a key feature of international political economy upon the publication of Principles of Political Economy by John Stuart Mill in 1848. David Ricardo's Numerical Example Because the idea of comparative advantage is not immediately intuitive, the best way of presenting it seems to be with an explicit numerical example as provided by David Ricardo. Indeed some variation of Ricardo's example lives on in most international trade textbooks today. (See page 40-5 in this text) In his example Ricardo imagined two countries, England and Portugal, producing two goods, cloth and wine, using labor as the sole input in production. He assumed that the productivity of labor (i.e., the quantity of output produced per worker) varied between industries and across countries. However, instead of assuming, as Adam Smith did, that England is more productive in producing one good and Portugal is more productive in the other; Ricardo assumed that Portugal was more productive in both goods. Based on Smith's intuition, then, it would seem that trade could not be advantageous, at least for England. However, Ricardo demonstrated numerically that if England specialized in producing one of the two goods, and if Portugal produced the other, then total world output of both goods could rise! If an appropriate terms of trade (i.e., amount of one good traded for another) were then chosen, both countries could end up with more of both goods after specialization and free trade then they each had before trade. This means that England





















COMPILED International Business BY: VISHAL KADAM has the comparative advantage in one of the two goods or neither country has a comparative advantage in anything. Another way to define comparative advantage is by comparing productivities across industries and countries. Thus suppose, as before, that Portugal is more productive than England in the production of both cloth and wine. If Portugal is twice as productive in cloth production relative to England but three times as productive in wine, then Portugal's comparative advantage is in wine, the good in which its productivity advantage is greatest. Similarly, England's comparative advantage good is cloth, the good in which its productivity disadvantage is least. This implies that to benefit from specialization and free trade, Portugal should specialize and trade the good in which it is "most best" at producing, while England should specialize and trade the good in which it is "least worse" at producing. Note that trade based on comparative advantage does not contradict Adam Smith's notion of advantageous trade based on absolute advantage. If as in Smith's example, England were more productive in cloth production and Portugal were more productive in wine, then we would say that England has an absolute advantage in cloth production while Portugal has an absolute advantage in wine. If we calculated comparative advantages, then England would also have the comparative advantage in cloth and Portugal would have the comparative advantage in wine. In this case, gains from trade could be realized if both countries specialized in their comparative, and absolute, advantage goods. Advantageous trade based on comparative advantage, then, covers a larger set of circumstances while still including the case of absolute advantage and hence is a more general theory. The Ricardian Model - Assumptions and Results The modern version of the Ricardian model and its results are typically presented by constructing and analyzing an economic model of an international economy. In its most simple form, the model assumes two countries producing two goods using labor as the























COMPILED International Business BY: VISHAL KADAM technologically inferior country. The reason for this i s that wages are based on productivity, thus in the country that is more productive, workers get higher wages. The next step in the analysis is to assume that trade between countries is suddenly liberalized and made free. The initial differences in relative prices of the goods between countries in autarky will stimulate trade between the countries. Since the differences in prices arise directly out of differences in technology between countries, it is the differences in technology that cause trade in the model. Profit-seeking firms in each country's comparative advantage industry would recognize that the price of their good is higher in the other country. Since transportation costs are zero, more profit can be made through export than with sales domestically. Thus each country would export the good in which they have a comparative advantage. Trade flows would increase until the price of each good is equal across countries. In the end, the price of each country's export good (its comparative advantage good) will rise and the price of its import good (its comparative disadvantage good) will fall. The higher price received for each country's comparative advantage good would lead each country to specialize in that good. To accomplish this, labor would have to move from the comparative disadvantaged industry into the comparative advantage industry. This means that one industry goes out of business in each country. However, because the model assumes full employment and costless mobility of labor, all of these workers





















COMPILED International Business BY: VISHAL KADAM themselves that its ability to describe the real world is extremely limited, if not nonexistent. Although the results follow logically from the assumptions, the assumptions are easily assailed as unrealistic. For example, the model assumes only two countries producing two goods using just one factor of production. There is no capital or land or other resources needed for production. The real world, on the other hand, consists of many countries producing many goods using many factors of production. In the model, each market is assumed to be perfectly competitive, when in reality there are many industries in which firms have market power. Labor productivity is assumed fixed, when in actuality it changes over time, perhaps based on past production levels. Full employment is assumed, when clearly workers cannot immediately and costlessly move to other industries. Also, all workers are assumed identical. This means that when a worker is moved from one industry to another, he or she is immediately as productive as every other worker who was previously employed there. Finally, the model assumes that technology differences are the only differences that exist between the countries. With so many unrealistic assumptions it is difficult for some people to accept the conclusions of the model with any confidence, especially when so many of the results are counterintuitive. Indeed one of the most difficult aspects of economic analysis is how to interpret the conclusions of models. Models are, by their nature, simplifications of the real world and thus all economic models contain unrealistic assumptions. Therefore, to dismiss the results of economic analysis on the basis of unrealistic assumptions means






















Total

3.0

On second thought, the father decides to let his son help according to the following procedure. First the father begins the roto-tilling. Once he has completed half of the garden, the son begins raking the roto-tilled section while the father finishes roto-tilling the rest of the garden plot. After the father finishes roto-tilling he begins planting seeds in the section the son has already raked. Suppose the son rakes slower than the father plants, and that the father completes the sowing process just as the son finishes raking. Note this implies that raking takes the son almost 2 hours compared to one hour for the father. However, because the son's work is done simultaneously with the father's work, it does not add to the total time for the project. Under this plan the time needed to complete the tasks in shown in the following table. Task

Completion Time (hours)





















COMPILED International Business BY: VISHAL KADAM room! Once the father and son return, the father must complete the remaining tasks on his own. Overall efficiency declines in i n this case compared to the father acting alone. This highlights the importance of specializing in production of the task in which you have a comparative advantage. Even though the father can complete all three tasks quicker than his son, his relative advantage in roto-tilling greatly exceeds his advantage in raking and planting. One might say that the father is most-best at roto-tilling while he is leastbest at raking and planting. On the other hand, the son is least-worse at raking and planting but most-worse at roto-tilling. Finally, because of the sequential nature of the tasks, the son can remain fully employed only if he works on the middle task, namely raking. Interpreting the Theory of Comparative Advantage

The garden story offers an intuitive explanation for the theory of comparative advantage and also provides a useful way of interpreting the model results. The usual way of stating the Ricardian model results is to say that countries will specialize in their comparative advantage good and trade them to the other country such that everyone in both countries benefit. Stated this way it is easy to imagine how it would not hold true in the complex real world.





















COMPILED International Business BY: VISHAL KADAM Montenegro, which joined on 18th January, 2007. It is very important to note here that all the United Nation member countries participate directly in International Monetary Fund with exception of North Korea, Andorra, Cuba, Monaco, Tuvalu, Liechtenstein, and Nauru. The main objective of International Monetary Fund it to provide financial assistance to all the member countries that are facing financial problems. All the member states that are facing problems regarding balance of payments can easily request for loans etc for improving the situation. This can also be done by making request for the organizational management of economies at IMF." But in return of getting assistance, the member countries of International Monetary Fund are also required to launch certain types of reforms that aim at improving the financial strength of member country. The reader should note here that many times, these reforms become quite essential as the member countries, that have fixed exchange rate policies, often engage in various types of monetary, fiscal and political practices that are harmful for them. All those countries that have budget deficits or are suffering from high inflation levels or have strict prices controls, are also suffering from balance of payment problem. These reforms are carried out by means of structural adjustment programs and basic motive of these reforms is to help the member countries to come out of crisis permanently, rather than helping them temporarily with financial assistance. These reforms, however, have been criticized for their non-transparent behaviour.























COMPILED International Business BY: VISHAL KADAM The World Bank is one of two institutions created at the Bretton Woods Conference in 1944. The International Monetary Fund, Fund, a related institution is the second. Delegates from many countries attended the Bretton Woods Conference. The most powerful countries in attendance were the United States and United Kingdom which dominated negotiations. Although both are based in Washington, the World Bank is by custom headed by an American, while the IMF is led by a European. Key Factors























COMPILED International Business BY: VISHAL KADAM • • • • • • • • • •

Macroeconomic and Economic Growth Mining Poverty Reduction Poverty Private Sector Public Sector Governance Rural Development Social Development Social Protection Trade























COMPILED International Business BY: VISHAL KADAM to 500 million cases of malaria each year, leading l eading to more than 1 million deaths. Nearly all the cases and more than 95 percent of the deaths occur in Sub-Saharan Africa. 6. Ensure Environmental Sustainability: Deforestation remains a critical problem, particularly in regions of biological diversity, which continues to decline. Greenhouse gas emissions are increasing faster than energy technology advancement. 7. Develop a Global Partnership for Development: Donor countries have renewed their commitment. Donors have to ful. Ll their pledges to match the current rate of core program development. Emphasis is being placed on the Bank Group’s























COMPILED International Business BY: VISHAL KADAM The United Nations ESCWA has written that globalization "is a widely-used term that can be defined in a number of different ways. When used in an economic context, it refers to the reduction and removal of barriers between national borders in order to facilitate the flow of goods, capital, services and labor... l abor... although considerable barriers remain to the flow of labor... Globalization is not a new phenomenon. It began in the late nineteenth century, but it slowed down during the period from the start of the First World War until the third quarter of the twentieth century. This slowdown can be attributed to the inwardlooking policies pursued by a number of countries in order to protect their respective industries... however, the pace of globalization picked up rapidly during the fourth quarter of the twentieth century..."























COMPILED International Business BY: VISHAL KADAM These institutions include the International Bank for Reconstruction and Development (the World Bank), Bank), and the International Monetary Fund. Fund. Globalization has been facilitated by advances in technology which have reduced the costs of trade, and trade negotiation rounds, originally under the auspices of the General Agreement on Tariffs and Trade (GATT), which led to a series of agreements to remove restrictions on free trade. trade. Since World War II, barriers to international trade have been considerably lowered through international agreements — GATT. Particular initiatives carried out as a result of GATT and the World Trade Organization (WTO), for which GATT is the foundation, have included:




























































































































































































































































































































































































































































































































































































ORGANISATIONS :-

EXIM bank is fully owned by the Govt. of India and is managed by a Board of Directors with repatriation from the Govt., Govt., Financial Institutions, Banks, Business Business Community. The operations are grouped into Project Finance, Trade Finance, Overseas Investment Finance supported by Planning & Co-ordination groups.

Schemes of assistance operated by EXIM Bank of India :-

A) For Indian Indian Exporte Exporters rs ::-

1) Export Export ( Suppli Supplier' er's s ) Credit Credit :- enables enables Indian Indian export exporters ers to extend extend item credit credit to import importer er overseas, of eligible Indian goods. 2) Finance Finance for Consultanc Consultancy y & Technolog Technology y Services :- enables enables Indian Indian exporters exporters of consultanc consultancy y and technology services to extend credit to importer overseas. 3) Pre-sh Pre-shipm ipment ent Credit Credit :- enables enables Indian Indian export exporters ers to buy R/M and other other inputs inputs for export export contracts involving cycle time exceeding 6 months. 4) Foreign Foreign Currency Currency Pre-shipment Pre-shipment Credit :- enables enables eligible eligible exporter exporter to access access finance through through commercial banks for imports of R/M & other ouputs needed for export production. 5) Finance Finance for EOUs & units units in EPZs :- enables enables Indian Indian companies companies to acquire acquire indigeneou indigeneous s and imported machinery & other items for export production. 6) Foreig Foreign n Curren Currency cy lines of credit credit for import imports s :- enables enables eligible eligible export export orient oriented ed units to acquire imported machinery for export production. 7) Prod Produc ucti tion on Equi Equipm pmen ent. t.Fi Fina nanc nce e :- enab enable les s elig eligib ible le expo export rt-o -ori rien ente ted d unit units s to acqu acquir ire e equipments. 8) Overseas Overseas Investment Investment Finance Finance :- enables enables Indian Indian promoters promoters to finance finance equity contributi contribution on in joint ventures set up abroad. 9) Project Preparatory Preparatory Services Overseas :- enables enables Indian consultancy firms undertake undertake project preparatory studies in developing countries by grant / loan financing. 10) Business Advisory & Technical Assistance Services Overseas :enables enables Indian Consultan Consultancy cy firms firms undertake undertake specific specific financing.

assignmen assignments ts in in select select countries countries

11) Africa Project Development facility :- enables Indian consultan consultancy cy firms undertake undertake specific specific assignmen assignmentt in Sub-Sahar Sub-Saharan an Africa Africa through through grant grant financing. 12) EC International Investment Partners Facility :- enables setting up of joint ventures in India between Indian Companies & enterprises in the European Community. B) For Commercial Banks :-





















4) Re-finance of Term Loans Loans to EOUs EOUs :- enables banks banks to offer offer credit to eligible export-oriented export-oriented unit units s to acqu acquire ire indi indige gene neou ous s and and impo import rted ed mach machin iner ery y and and othe otherr asse assets ts for for expo export rt production. 5) Re-financ Re-finance e of term loans for Computer Computer Software Software Exports :- enables enables acquisitio acquisition n of imported and indigeneous computer system and project related assets. 6) Small Small Scale Industr Industry y ( SSI ) Export Export Bills Re-dis Re-discou counti nting ng :- enables enables banks banks to re-dis re-discou count nt export bills of their SSI customers with usance not exceeding 90 days. 7) Bank Import Import Finance Finance :- enables enables banks banks to offer to importer importers s for bulk import import of consumabl consumable e inputs. C) For Overseas Entities :-

1) Line Lines s of Cred Credit it :- enab enable les s over overse seas as fina financ ncia iall inst instit itut utio ions ns,, fore foreig ign n gove govern rnme ment nts, s, thei theirr agencies to on-lend terms loans to finance import of eligible goods from India. I ndia. 2) Buyer's Buyer's Credit :- enables enables overseas overseas buyers buyers to import import eligible goods goods from India India on deferred deferred credit terms. Q) What is packing credit? What are its condition? Packing credit is the another name

for

preshipment

finance

Pre-shipment funds are available in the form of credit or loan prior to the actual shipment of goods. These finances helps an exporter in purchasing raw material & components, buying equipment & machinery & manufacturing or sorting the goods meant for export. Pre-shipment finance is available in the following forms : 1. 2. 3. 4. 5. 6. 7. 8. 9.

Extend Extended ed Pack Packing ing Credit Credit Loan Loan Packin Packing g Credit Credit Loan Loan [Hypo [Hypothe thecat cation ion]] Packin Packing g Credi Creditt Loan Loan [Pledg [Pledge] e] Secu Secure red d Shi Shipp ppin ing g Loa Loan n Advance Advance Agains Againstt Back Back To Back Letter Letter Of Credit Advance Advance Against Against Red Red Clause Clause Or Green Green Clause Clause Letter Letter Of Credit Credit Packing Packing Credit Credit For Imports Imports Against Against Advanc Advance e License License Entitleme Entitlement. nt. Pre-shipme Pre-shipment nt Credit Credit in Foreig Foreign n Currency Currency System System Credit Credit Against Against Proceeds Proceeds Of Cheque Cheques s /Draft /Drafts s etc. etc. Receiv Received ed Direct Directly ly Towards Towards Advanc Advance e Payment For Exports.

Extended Packing Credit loan :

This facility, though for a short period, is granted to those exporters who are rated first class by the bank. Loan is granted for making advance payment to suppliers for acquiring exportable goods. Once goods are taken by exporter in his own custody, the bank converts the clean advance into hypothication or pledge loan. l oan. Packing Credit loan [Hypothication] : In this case packing credit is extended for obtaining raw material, work-in-progress & finished goods. The goods acquired are treated as security for the loan granted. The exporter is in possession of the goods & is required to execute hypothication deed in favour of the bank. The activity of the production or conversion of such raw materials & WIP into finished goods can be undertaken even by sub contractors.





















while possession of the goods remain with the exporter. Secured Shipping Loan : Once the raw material is converted in to the finished goods, the same has to be handed over to transport operator or to the clearing & forwarding agent. The security loan can be obtained only after this. This type of loan is of short duration & is released against lorry receipt or railway receipt. The only condition which banks insist on, is that the goods are handled by approved transport operators or clearing & forwarding agents. Advance Aginst Back To Back Letter Of Credit : In this exporter opens a letter of credit in favour of the supplier instead of blocking the funds for purchase of raw material or finished products from manufacturers. When an exporter who has received original letter of credit from importer, requests his banker to open a L/C in favour of his suppliers. Generally banks are reluctant to open back to back L/C, but if it is opened, the original L/C is retained by the bank as a security. Advance Against Red Clause Or Green Clause Letter Of Credit : Red clause L/C authorizes the negotiating bank to make advances to the beneficiary (the exporter) to enable him to purchase the goods for export. Until & unless the goods are purchased & shipped, the exporter cannot obtain bill of lading & insurance policy. Incase he needs packing credit, he has to request the buyer to arrange for opening a red clause letter of credit which contains a special clause in red L/C authorizing & advancing bank to make either immediate payment to the beneficiary in full or in part as per the terms stated in the L/C & against specified documents & conditions. After executing the order, the exporter draws a draft asper the terms of credit & the proceeds thereof are first utilized by the bank in repayment of the advance under the red clause agreement. The term Green Clause envisages the grant of storage facilities at the port in addition to the pre-shipment credit facility to the beneficiary [the exporter]. The opening of such credit, covering import of goods, in India requires prior approval of RBI. Packing Credit For Imports Against Advance License Entitlement : This credit facility is available to manufacturer exporters who are not in receipt of L/C or confirmed export order. Finance is made available for imports against license for manufacturer of export goods. However, two conditions need to be fulfilled. They are:

The bank must be satisfied that the imported material will be utilized for the goods meant for export only; The confirmed order or L/C should be produced within reasonable time not exceeding 60 days from the date of advance. Credit Against Proceeds Of Cheque/Drafts etc. : Bank can grant export credit at concessional rate of interest in such cases subject to following condition have been fulfilled :





















The bank must get satisfactory evidence that the instrument represents the advance remitted against as export order. The trade practices suggest the possibility of such instrument being received towards advance payments or the exporters are able to satisfy the ban with reasons for receiving payments directly. It is ensured by the bank in due course that the goods have been actually shipped. Q) What is L/C? What is its importance in Export Finance? Refer Pg. No 58 & also add the below said Negotiation Bill Drawn Under L/C :An exporter can avail of post-shipment credit by drawing bills or drafts under the Letter Of Credit. The bank insists on production of the necessary documents as stated in the L/C. If all documents are in order the bank negotiate the bill & advance is granted to the exporter. Q) What is financial risk? How to evaluate the financial risk in International Business? Q) What are import export documents? What is the legal importance of the documents? The importers are required to furnish the following documents along with Bill of Entry • • • • • • • • • • •

Invoice Packing list Letter of guarantee of bank Insurance policy Catalogue Contract of suppliers Price list Import license Insurance policy Bill of Lading Certificate of origin

Introduction

An exporter without any commercial contract is completely exposed of foreign exchange risks that arises due to the probability of an adverse change in exchange rates. Therefore, it becomes important for the exporter to gain some knowledge about the foreign exchange rates, quoting of exchange rates and various factors determining the exchange rates. In this section, we have discussed various topics related to foreign exchange rates in detail. Export from India required special document depending upon the type of product and destination to be exported. Export Documents not only gives detail about the product and its destination port but are also used for the purpose of taxation and quality control inspection certification. Shipping Bill / Bill of Export

Shipping Bill/ Bill of Export is the main document required by the Customs Authority for allowing shipment. A shipping bill is issued by the shipping agent and represents some kind of certificate for all parties, included ship's owner, seller, buyer and some other parties. For each one represents a kind of certificate document. Documents Required for Post Parcel Customs Clearance





















sender. •

•

•

•

•

•

• •

•

•

•

• •

•

•

•

•

•

Despatch Note- It is filled by the exporter to specify the action to be taken by the

postal department at the destination in case the address is non-traceable or the parcel is refused to be accepted. Commercial Invoice - Issued by the exporter for the full realisable amount of goods as per trade term. Consular Invoice - Mainly needed for the countries like Kenya, Uganda, Tanzania, Mauritius, New Zealand, Burma, Iraq, Ausatralia, Fiji, Cyprus, Nigeria, Ghana, Zanzibar etc. It is prepared in the prescribed format and is signed/ certified by the counsel of the importing country located in the country of export. Customs Invoice - Mainly needed for the countries like USA, Canada, etc. It is prepared on a special form being presented by the Customs authorities of the importing country. It facilitates entry of goods in the importing country at preferential tariff rate. Legalised / Visaed Invoice - This shows the seller's genuineness before the appropriate consulate or chamber or commerce/ embassy. Certified Invoice - It is required when the exporter needs to certify on the invoice that the goods are of a particular origin or manufactured/ packed at a particular place and in accordance with specific contract. Sight Draft and Usance Draft are available for this. Sight Draft is required when the exporter expects immediate payment and Usance Draft is required for credit delivery. Packing List - It shows the details of goods contained in each parcel / shipment. Certificate of Inspection – It is a type of document describing the condition of goods and confirming that they have been inspected. Black List Certificate - It is required for countries which have strained political relation. It certifies that the ship or the aircraft carrying the goods has not touched those country(s). Manufacturer's Certificate - It is required in addition to the Certificate of Origin for few countries to show that the goods shipped have actually been manufactured and is available. Certificate of Chemical Analysis - It is required to ensure the quality and grade of certain items such as metallic ores, pigments, etc. Certificate of Shipment - It signifies that a certain lot of goods have been shipped. Health/ Veterinary/ Sanitary Certification - Required for export of foodstuffs, marine products, hides, livestock etc. Certificate of Conditioning - It is issued by the competent office to certify compliance of humidity factor, dry weight, etc. Antiquity Measurement – It is issued by Archaeological Survey of India in case of antiques. Shipping Order - Issued by the Shipping (Conference) Line which intimates the exporter about the reservation of space of shipment of cargo through the specific vessel from a specified port and on a specified date. Cart/ Lorry Ticket - It is prepared for admittance of the cargo through the port gate and includes the shipper's name, cart/ lorry No., marks on packages, quantity, etc. Shut Out Advice - It is a statement of packages which are shut out by a ship and is prepared by the concerned shed and is sent to the exporter.

Q) What is role of ECGC in International Business? Export Credit Guarantee Corporation of India Ltd.

Export Credit Guarantee Corporation of India Limited, was established in the year 1957 by the Government of India to strengthen the export promotion drive by covering the risk of exporting on credit.























presently covers 17.31% of India's total exports. The present paid-up capital of the company is Rs.1.50 bn, which is expected to be enhanced to Rs.5 bn by the year 2002. Major Functions: •

•

To provide a range of credit risk insurance covers to exporters against loss in export of goods and services To offers guarantees to banks and financial i nstitutions to enable exporters obtain better facilities from them.

ECGC also helps exporters by • • • • • •

Providing insurance protection to exporters against payment risks Providing guidance in export related activities Providing information on credit-worthiness of overseas buyers Providing information on about 180 countries with its own credit ratings Making it easy to obtain export finance from banks/financial institutions Assisting exporters in recovering bad debts

The covers issued by ECGC can be divided broadly into four groups: • • • •

Standard Policy Specific Policies Financial Guarantees Special Schemes

Standard Policy:

Shipments (Comprehensive Risks) Policy, which is commonly known as the Standard Policy, is the one ideally suited to cover risks in respect of goods exported on short-term credit; i.e. credit not exceeding 180 days. The policy covers both commercial and political risks from the date of shipment. Specific Policies:

Specific Policies are designed to protect Indian firms against payment risks involved in international business. a. Export Exports s on defe deferre rred d terms terms of of paymen paymentt b. Servic Services es rende rendered red to to foreign foreign parti parties es and and c. Construct Construction ion works works and and turnkey turnkey projec projects ts underta undertaken ken abroad abroad..





















Risks covered under the Standard Policies:

Commercial Risks:

1) Inso Insolv lven ency cy of of the the buye buyerr 2) Buyer`s Buyer`s protected protected defau default lt to pay for for goods goods accepted accepted by him. him. 3) Buyer`s Buyer`s failure failure to accept accept goods goods subject subject to certain certain conditions conditions.. Political Risks :

1) Imposition Imposition of restrict restriction ion on remittance remittances s by the government government in the buyer`s country country or any government action which may block or delay payment to exporter. 2) War, revolut revolution, ion, or civil civil disturba disturbances nces in the the buyer`s buyer`s country. country. 3) New import import licensing licensing restriction restriction or cancellat cancellation ion of a valid import import license license in the buyer`s country, after the date of shipment or contract, as applicable. 4) license license in the buyer`s country country,, after the date of shipment shipment or contract, contract, as applicab applicable. le. 5) Cancellati Cancellation on of export export license or impositio imposition n of new export licensing licensing restrict restriction ion in India after a date of contract (under contract policy). 6) Payment Payment of additional additional handling, handling, transpor transportt or insurance insurance charges charges occasioned occasioned by interruption or diversion of voyage which cannot be recovered from the buyer. 7) Any other other causes of loss loss occurring occurring outside outside India, not normally normally insured insured by commercial commercial insurers & beyond the control of the exporter &/or buyer. Risks not covered under Standard policy:

The losses due to the following risks are not covered : 1) Commercia Commerciall disputes disputes including including quality disputes disputes raised raised by the buyer, unless unless the exporter exporter obtains a decree from a court of low in the buyer`s country in his favour. 2) Causes Causes inherent inherent in the the nature nature of of the the goods. goods. 3) Buyer`s Buyer`s failure failure to obtain import import or exchange exchange authorizat authorization ion from authoritie authorities s in his country. 4) Insolvency Insolvency or defaul defaultt any agent of the the exporter exporter or of the the collecting collecting bank. bank. 5) Loss or or damage to to goods which which can be covered covered by commerci commercial al insurers. insurers. 6) Exch Exchan ange ge fluct fluctua uati tion on.. 7) Discre Discrepan pancy cy in in docu documen ments. ts. Q) What is SEZ? What are its Benefits?





















Apart from providing state-of-the-art infrastructure and access to a large well-trained and skilled work force, the SEZ also provides enterprises and developers with a favorable and attractive framework of incentives which include 100% income tax exemption for a period of five years and an additional 50% tax exemption for two years thereafter. Similarly, 100% FDI is also provided in the manufacturing sector. Exemption from industrial licensing requirements and no import license requirements is also given to the SEZ units. Read more about the benefits of SEZ units » Various SEZ Units in India The area under 'SEZ' covers a wide range of zone zones, s, including Export Processing Processing Zones (EPZ), (EPZ), Free Zones (FZ), Industrial Estates (IE), Free Trade Zones (FTZ), Free Ports, Urban Enterprise Zones and others. Usually the goal of an SEZ structure is to increase foreign investment in the country. At present there are fourteen functional SEZs located at Santa Cruz (Maharashtra), Cochin (Kerala), Kandla and Surat (Gujarat), Chennai (Tamil Nadu), Visakhapatnam (Andhra Pradesh), Falta and Salt Lake (West Bengal), Nodia (Uttar Pradesh), Indore (Madhya Pradesh), Jaipur (Rajasthan), etc. Role of State Government in Establishment of SEZ Units State Sta te Gov Govern ernmen ments ts pla play y a ver very y act active ive role to pla play y in the establis establishme hment nt of SEZ unit. Any proposal for setting up of SEZ unit in the Private / Joint / State Sector is routed through the concerned State government who in turn forwards the same to the Department of Commerce with wit h its rec recomm ommend endati ations ons fo forr con consid sidera eratio tion. n. Bef Before ore rec recomm ommend ending ing any pro propos posals als to the Ministry of Commerce & Industry (Department of Commerce), the States Government properly checks all the necessary inputs such as water, electricity, etc required for the establishment of SEZ units. The State Government has to forward the proposal with its recommendation within 45 days from the date of receipt of such proposal to the Board of Approval. The applicant also has the option to submit the proposal directly to the Board of Approval. Representative of the State Government, who is a member of the Inter-Ministerial Committee on private SEZ, is also consulted while considering the proposal. Q) What is DBK? DBK or drawback means refund of custom duties paid on the imports of raw material, components & packing material used for export products. Banks offer per-shipment as well as post-ship post-shipment ment advances advances against DBK entitlement entitlements. s. However However ,the scheme of granting granting free nd advances against claims of DBK has been discounted with effect from 2 March, 1992. Q) What is FOB Price?





















The negative list of exports consists consists of these these parts: Prohibited Items Restricted Items Canalised Items

Part I: Prohibited Items: The prohibited items are banned from exporting. The list of prohibited items contains ten items. The items are: All forms of wild animals. Exotic Birds. All items of plants. Beef. Human Skeletons. Tallow, fat and / or oils of any animals origin. Wood and wood products. Chemicals as notified by DGFT. Sandalwood items as notified by DGFT. Red sanders wood in any form.

Part II: Restricted Items: The restricted items are allowed to be exported only with special licensing by the DGFT . Some of the restricted items are as follows: Beche – de – Mer of sizes below three inches. Cattle





















Part III: Canalised Items: The list contains those items which are to be exported only through designated canalized agencies. At present present there are six items which are canalized. They They are:

ITEMS CANALIZING AGENCIES

1.Petroleum ProductsIndian Oil Corporation Ltd.

2.Gum Karaya

The Tribal Co-operative Marketing Federation of India Ltd. ores and

3.Mica waste and ScrapMMTC and MITCO

4.Mineral

Concentrate

Indian Rare Earths Ltd, Kerala Minerals and Metals Ltd, MMTC.

5.Niger SeedsNAFED, TRIFED.

6.OnionsNAFED.

Q) What are imports? Why imports are necessary? Q) What is th role of RBI in export promotion? Q) How is SEZ different from EPZ? Q) What is export pricing g what factors should be considered while fixing export price?























place to the desired destination will be borne by the buyer. This terms thus represents the minimum obligation for the seller. It is mostly used for sale of plantation commodities such as tea, coffee and cocoa. Free on Rail (FOR)/Free on Truck (FOT) These terms are used when the goods are to be carried by rail, but they are also used for road transport. The seller’s obligations are fulfilled w hen the goods are delivered to the carrier. •

Free Alongside Ship (FAS) Once the goods have been placed alongside the ship, the seller’s obligations are fulfilled and the buyer notified. The buyer has to contract with the sea carrier for the carriage of the goods to the destination and pay the freight. The buyer has to bear all costs and risks of loss or damage to the goods hereafter.

•

Free on Board(FOB) The sellers’s responsibility ends the moment the contracted goods are placed on board the ship, free of cost to the buyer at a port of shipment named in the sales contract. ‘On board’ means that a Received for Shipment’ Bill of Lading is not sufficient. Such B/L if issued must be converted into ‘Shipped on Board B/L’ by using the stamp ‘Shiped on Board’ and must bear signature of the carrier or his authorised representative together with date on which the goods were ‘boarded’. •

Cost and Freight (C & F) The seller must on his own risk and not as an agent of the buyer, contract for the carriage of •

the goods to the port of destination named in the sale contract and pay the freight. This being a shipment contract, the point of delivery is fixed to the ship’s rail and the risk of loss or of damage to the goods is transferred from the seller to the buyer at that very point. As will be seen though the seller bears the cost of carriage to the named destination, the risk is





















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Exemption from customs duty on import of capital goods, raw materials, consumables, spares, etc. Exemption from Central Excise duty on the procurement of capital goods, raw materials, and consumable spares, etc. from the domestic market. Exemption from payment of Central Sales Tax on the sale or purchase of goods, provided that, the goods are meant for undertaking authorized operations. Exemption from payment of Service Tax. The sale of goods or merchandise that is manufactured outside the SEZ (i.e, in DTA) and which is purchased by the Unit (situated in the SEZ) is eligible for deduction and such sale would be deemed to be exports. The SEZ unit is permitted to realize and repatriate to India the full export value of goods or software within a period of twelve months from the date of export. “Write-off” of unrealized export bills is permitted up to an annual limit of 5% of their average annual realization. No routine examination by Customs officials of export and import cargo. Setting up Off-shore Banking Units (OBU) allowed in SEZs. OBU's allowed 100% income tax exemption on profit earned for three years and 50 % for next two years. Exemption from requirement of domicile in India for 12 months prior to appointment as Director. Since SEZ units are considered as ‘public utility services’, no strikes would be allowed in such companies without giving the employer 6 weeks prior notice in addition to the other conditions mentioned in the Industrial I ndustrial Disputes Act, 1947. The Government has exempted SEZ Units from the payment of stamp duty and registration fees on the lease/license of plots. External Commercial Borrowings up to $ 500 million a year allowed without any maturity restrictions. Enhanced limit of Rs. 2.40 crores per annum allowed for managerial remuneration.

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Revenue losses because of the various tax exemptions and incentives. Many traders are interested in SEZ, so that they can acquire at cheap rates and create a





















methods of correcting the trade. trade. For example , stagnant stagnant exports and elastic imports imports cause BoP proble problems. ms. Correc Correctio tion n of such such disequ disequilib ilibriu rium m will will need need struct structura urall change changes s in the composition of trade and foreign exchange position. Causes of disequilibrium in developing countries : BoP disequilibr disequilibrium ium is common with most most developing developing economies. economies. Study of the factors factors and nature of disequilibrium will help help in correction and design of methods methods of protection. Following are the important causes of disequilibrium : 1. Large population population,, increasing increasing growth growth rates rates of populati population. on. 2. Stagna Stagnant nt export exports s due to out out dated dated produ products cts 3. Increas Increasing ing demand demand for import imports. s. 4. Low prod product uctivit ivity y and poor poor growth growth rates rates.. 5. Lack Lack of of barg bargai aini ning ng powe power. r. 6. Large extern external al debt due due to which which the burden burden of debt debt servicing servicing increas increases. es. 7. Ad Adve vers rse e term terms s of trad trade. e. 8. Cyclical Cyclical fluctuati fluctuations ons in economic economic activity. activity. 9. Proble Problems ms of intern internat ation ional al liquid liquidity ity.. 10. Absence of ant trading association association or regional block 11. Weak currency currency 12. Absence of trade ties with developed economies. economies. In addition all the problems problems of under development contribute contribute to disequilibrium in BoP. BoP. Since there is no effective mechanism to correct, the disequilibrium becomes chronic.

Capital account : It deals with capital movements between one country and rest of the world. Capital movements can be private, governmental or institutional ( IMF, World Bank and others).It can be again classified as short term and long term capital movements. Othe Otherr item items s incl includ ude e amor amorti tisa sati tion on,, debt debt serv servic icin ing, g, mone moneta tary ry gold gold and and miscellaneous. Amortisation is the loan liquidated, liquidated, debt servicing is the repayment of principle and interest and non-monetary gold is the payments made interms of gold.





















Q) What is LERMS? It stands for liberalized exchange rate management system (LERMS) was introduction March 1992, as a result the foreign exchange market in India effectively became a two ties one, with a direct exchange rate system in force, one rate was the administration (or official) one at which specified type or proportion of currency exchange had to be transacted by demand and supply in the transaction in March 1993 this system was abolished and now single market determined rate in applicable for all transaction.

Export Promotion Councils (EPC)

Export Promotion Councils are registered as non -profit organisations under the Indian Companies Act. At present there are eleven Export Promotion Councils under the administrative control of the Department of Commerce and nine export promotion councils related to textile sector under the administrative control of Ministry of Textiles. The Export Promotion Councils perform both advisory and executive functions. These Councils are also the registering authorities under the Export Import Policy, 2002-2007. Commodity Boards

Commodity Board is registered agency designated by the Ministry of Commerce, Government of India for purposes of export-promotion and has offices in India and abroad. There are five statutory Commodity Boards, which are responsible for production, development and export of tea, coffee, rubber, spices and tobacco. Federation of Indian Export Organisations (FIEO)

FIEO was set up jointly by the Ministry of Commerce, Government of India and private trade and industry in the year 1965. FIEO is thus a partner of the Government of India in promoting India’s exports. Address: Niryaat Bhawan, Rao Tula Ram Marg, Opp. Army Hospital. Research & Referral, New Delhi 110057





















international panel of arbitrators with eminent and experienced persons from different lines of trade and professions. Address: Federation House, Tansen Marg, New Delhi-110001 India Trade Promotion Organisation (ITPO)

ITPO is a government organisation for promoting the country’s external trade. Its promotional tools include organizing of fairs and exhibitions in India and abroad, Buyer-Seller Meets, Contact Promotion Programmes, Product Promotion Programmes, Promotion through Overseas Department Stores, Market Surveys and Information Dissemination. Address: Pragati Bhawan Pragati Maidan, New Delhi-10001 Chamber of Commerce & Industry (CII)

CII play an active role in issuing certificate of origin and taking up specific cases of exporters to the Govt. Federation of Indian Chamber of Commerce & Industry (FICCI)

Federation of Indian Chambers of Commerce and Industry or FICCI is i s an association of business organisations in India. FICCI acts as the proactive business solution provider through research, interactions at the highest political level and global networking. Address: Federation House, Tansen Marg, New Delhi-110001 Bureau of Indian Standards (BIS)

The Bureau of Indian Standards (BIS), the National Standards Body of India, is a statutory body set up under the Bureau of Indian Standards Act, 1986. BIS is engaged in standard formulation, certification marking and laboratory testing. Address: 9, Manak Bhavan, Bahadur Shah Zafar Marg, New Delhi-110002 Textile Committee

Textile Committee carries pre-shipment inspection of textiles and market research for textile yarns, textile machines etc. Address: Textile Centre, second Floor, 34 PD, Mello Road, Wadi Bandar, Bombay-400009























Notes on International Business New

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