NCERT Solutions for Class 11 Business Studies Chapter 11: International Business

Chapter at a glance

Exercises – Short Answer Questions

Question SA – Q1

Differentiate between international trade and international business.

Answer

Question SA – Q2

Discuss any three advantages of international business.

Answer

To nations

1. Earning foreign exchange — exports earn foreign exchange needed to import capital goods, technology and essential items.
2. More efficient use of resources — countries produce what they can produce most efficiently and trade for the rest.
3. Improving growth prospects and employment — exports boost production, income and jobs.

To firms: higher profits from bigger markets, utilisation of surplus capacity, prospects for growth, way out of intense domestic competition, improved business vision.

Question SA – Q3

What is the major reason underlying trade between nations?

Answer

The basic reason is that nations cannot produce equally well or cheaply all that they need, because of:

1. Unequal distribution of natural resources — minerals, oil, fertile land, climate differ among countries.
2. Differences in productivity due to differences in labour skills, technology, capital and infrastructure.

Therefore each country specialises in goods it can produce more efficiently (at lower cost) and trades them for goods that others produce more efficiently — the principle of comparative cost advantage.

Question SA – Q4

Differentiate between contract manufacturing and setting up wholly owned production subsidiary abroad.

Answer

Question SA – Q5

Why is it necessary for an export firm to go in for pre-shipment inspection?

Answer

The government of India requires certain goods to be inspected before export to ensure that only good-quality products are exported. The exporter has to get the goods inspected by a competent agency (e.g. Export Inspection Council or its agencies) and obtain an inspection certificate, which must be produced at the time of customs clearance. Pre-shipment inspection:

1. Is a legal requirement for notified goods.
2. Builds the image of the country and the exporter in foreign markets.
3. Reduces the risk of rejection and disputes by importers.

Question SA – Q6

What is bill of lading? How does it differ from bill of entry?

Answer

A bill of lading is a document issued by the shipping company to the exporter acknowledging the receipt of goods on board the ship and undertaking to deliver them to the consignee at the port of destination. It is evidence of the contract of carriage, a receipt for goods and a document of title — it can be transferred by endorsement.

Question SA – Q7

What is a letter of credit? Why does an exporter need this document?

Answer

A letter of credit (L/C) is a guarantee issued by the importer’s bank that it will honour payment, up to a certain amount, of export bills presented by the exporter’s bank, provided the exporter submits the specified documents within the stated period.

Why the exporter needs it

1. Assurance of payment — the bank, not merely the importer, undertakes to pay; it removes the risk of non-payment by an unknown foreign buyer.
2. It helps the exporter obtain pre-shipment finance from banks.
3. It confirms the creditworthiness of the importer.
4. It facilitates smooth execution of the order by specifying terms clearly.

Question SA – Q8

Discuss the process involved in securing payment for exports.

Answer

1. After shipment, the exporter sends an advice of shipment to the importer.
2. The exporter prepares a set of documents — bill of exchange, bill of lading, commercial invoice, insurance policy, certificate of origin, packing list, letter of credit, etc.
3. These documents are sent through the exporter’s bank to the importer’s bank (negotiation of documents).
4. The importer’s bank delivers the documents to the importer against payment (sight draft — D/P) or against acceptance of the bill of exchange (usance draft — D/A).
5. The importer’s bank remits the payment to the exporter’s bank, which credits the exporter’s account.
6. The exporter may also get the bill negotiated/discounted with his bank to receive payment immediately (post-shipment finance).
7. The exporter’s bank issues a bank certificate of payment, certifying that the documents have been negotiated and payment received in accordance with exchange control regulations.

Exercises – Long Answer Questions

Question LA – Q1

“International business is more than international trade”. Comment.

Answer

International trade means only export and import of goods. International business is much broader and includes:

1. Trade in goods (merchandise exports and imports).
2. Trade in services — tourism, transport, banking, insurance, IT and consultancy (invisible trade).
3. Licensing and franchising — permitting foreign firms to use patents, trademarks, technology or business formats for a fee/royalty.
4. Contract manufacturing abroad.
5. Foreign investment — foreign direct investment (setting up or acquiring businesses abroad) and portfolio investment (investment in shares and debentures of foreign companies).
6. Joint ventures and wholly owned subsidiaries.

Thus international trade is only a part of international business; hence the statement is correct.

Question LA – Q2

What benefits do firms derive by entering into international business?

Answer

1. Prospects for higher profits — prices in foreign markets may be higher; firms can earn more.
2. Increased capacity utilisation — surplus production capacity can be used to produce for foreign markets, reducing per-unit cost.
3. Prospects for growth — domestic demand may be saturated; international markets offer new growth opportunities.
4. Way out of intense competition in the domestic market.
5. Improved business vision — exposure to global practices and technology makes firms more competitive and innovative.
6. Risk diversification — dependence on a single market is reduced.
7. Brand image and access to foreign technology and finance.

Question LA – Q3

In what ways is exporting a better way of entering international markets than setting up wholly owned subsidiaries abroad.

Answer

1. Easiest way to enter — exporting is simpler and quicker; setting up a subsidiary needs huge effort and time.
2. Less involvement — firms need not invest much time and money in foreign markets.
3. Low investment — no need to buy land, build plants or employ people abroad.
4. Low risk — risk of loss due to political or economic instability abroad is minimal compared to investments in a subsidiary.
5. Flexibility — exporting can be stopped or scaled down easily; a subsidiary involves long-term commitment.
6. Fewer legal formalities in foreign countries.

(Exporting has disadvantages like transport costs and trade barriers, but as an entry mode it is safer and cheaper.)

Question LA – Q4

Rekha Garments has received an order to export 2000 men’s trousers to Swift Imports Ltd., located in Australia. Discuss the procedure that Rekha Garments would need to go through for executing the export order.

Answer

1. Receipt of enquiry and order — Rekha Garments has received the order (indent) from Swift Imports.
2. Ascertaining the creditworthiness of the importer — ask the importer for a letter of credit from its bank.
3. Obtaining export licence — get an Importer-Exporter Code (IEC) from the DGFT and register with the Apparel Export Promotion Council (as garments are covered by it).
4. Obtaining pre-shipment finance (packing credit) from a bank, if needed.
5. Production/procurement of goods — manufacture 2000 trousers as per the importer’s specifications.
6. Pre-shipment inspection — get the goods inspected by the designated agency and obtain an inspection certificate.
7. Excise/GST clearance formalities (refund under export schemes).
8. Obtaining certificate of origin — to claim tariff concessions in Australia, if applicable.
9. Reservation of shipping space — apply to the shipping company and obtain a shipping order.
10. Packing and forwarding — pack, mark and send goods to the port; prepare documents.
11. Insurance of goods against perils of the sea (marine insurance).
12. Customs clearance — through a C&F agent: shipping bill, port trust dues receipt; goods are loaded and the captain issues a mate’s receipt.
13. Obtaining bill of lading from the shipping company on payment of freight.
14. Preparation of invoice and sending advice of shipment to the importer.
15. Securing payment — documents are sent through the bank; payment is received under the L/C; bank issues a bank certificate of payment.

Question LA – Q5

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

Answer

1. Trade enquiry — find out the countries/firms supplying textile machinery and obtain quotations (proforma invoice) from Canadian suppliers.
2. Procurement of import licence — check the EXIM/Foreign Trade policy; obtain an Importer-Exporter Code (IEC) from DGFT and an import licence if required.
3. Obtaining foreign exchange — apply to a bank authorised to deal in foreign exchange for release of Canadian dollars as per RBI regulations.
4. Placing the order (indent) with the supplier, specifying price, quality, quantity, design, packing, shipping and payment terms.
5. Obtaining letter of credit from the importer’s bank in favour of the Canadian exporter.
6. Arranging for finance to pay the exporter on arrival of goods.
7. Receipt of shipment advice from the exporter giving details of shipment.
8. Retirement of import documents — the importer pays (or accepts the bill of exchange) to the bank and receives documents such as the bill of lading, invoice, certificate of origin, insurance policy.
9. Arrival of goods — the ship arrives; the importer obtains a delivery order (endorsement on bill of lading) from the shipping company after paying freight, and pays port/dock dues.
10. Customs clearance and release of goods — the importer (through a C&F agent) files a bill of entry, goods are examined, customs duty is paid, and the goods are released and transported to the factory.

Question LA – Q6

What is IMF? Discuss its various objectives and functions.

Answer

The International Monetary Fund (IMF), set up in 1945 following the Bretton Woods Conference (1944) and headquartered in Washington D.C., is an international organisation that promotes international monetary cooperation and exchange rate stability.

Objectives

1. To promote international monetary cooperation through a permanent institution.
2. To facilitate expansion and balanced growth of international trade.
3. To promote exchange rate stability and orderly exchange arrangements, avoiding competitive devaluation.
4. To establish a multilateral system of payments and eliminate foreign exchange restrictions.
5. To help members correct balance of payments disequilibrium without measures harmful to national or international prosperity.

Functions

1. Acts as a short-term credit institution for members facing balance of payments problems.
2. Provides machinery for orderly adjustment of exchange rates.
3. Acts as a reservoir of currencies of member countries, from which members can borrow.
4. Acts as a lending institution of foreign currencies for current transactions.
5. Provides Special Drawing Rights (SDRs), an international reserve asset.
6. Provides technical assistance and advice on monetary and fiscal policy, and surveillance of member economies.

Question LA – Q7

Write a detailed note on features, structure, objectives and functioning of WTO.

Answer

Introduction: The World Trade Organisation (WTO) came into existence on January 1, 1995, replacing GATT, as a result of the Uruguay Round negotiations. It is headquartered in Geneva. India is a founder member.

Features

1. Permanent organisation with a legal status (unlike GATT, which was an agreement).
2. Covers trade in goods, services and trade-related intellectual property rights (TRIPS), and investment measures (TRIMS).
3. Rules-based, member-driven, with decisions generally by consensus.
4. Has a binding dispute settlement mechanism.

Structure

1. Ministerial Conference — highest body, meets at least once every two years.
2. General Council — conducts day-to-day work; also acts as the Dispute Settlement Body and Trade Policy Review Body.
3. Councils for Trade in Goods, Trade in Services and TRIPS.
4. Committees and the Secretariat headed by a Director-General.

Objectives

1. Raise standards of living, ensure full employment and growth of real income and demand.
2. Expand production and trade in goods and services.
3. Ensure optimum use of world resources consistent with sustainable development and environmental protection.
4. Ensure that developing countries, especially least developed ones, get a fair share of growth in world trade.
5. Reduce tariffs and other trade barriers and eliminate discrimination (most-favoured-nation and national treatment principles).

Functioning

1. Promotes an environment for negotiations to reduce trade barriers.
2. Lays down rules for global trade and monitors implementation of agreements.
3. Settles trade disputes between members.
4. Conducts trade policy reviews of members.
5. Cooperates with IMF and World Bank for coherence in global economic policy.
6. Provides technical assistance and training to developing countries.

Benefits to India: access to wider markets, reduced tariffs on exports, dispute settlement, growth in services exports.

Topic checklist

• International trade vs international business; reasons and benefits
• Modes of entry: exporting, contract manufacturing, licensing, franchising, joint ventures, subsidiaries
• Export procedure and documents
• Import procedure and documents
• Foreign trade promotion: incentives and institutions
• IMF and WTO

Total questions answered: 15 of 15