Class 11 NCERT Solutions: Chapter 11 International Business Exercise 11.1 (Business Studies)

Short Answer Questions

Question 1. Differentiate between international trade and international business.

Answer:  International Trade: The exchange of goods between different countries of the world is known as International Trade. International trade, comprising exports and imports of goods is an important component of international business.

International Business: Those business activities that take place beyond the geographical boundaries of a nation are called International Business. It involves the movement of goods, services, capital, technology, and intellectual property, like patents, trademarks, copyrights, etc. Foreign currencies are used in international businesses. Such types of businesses require heavy documentation and are subject to many formalities. It also involves a high degree of risk but helps a business to earn foreign exchange, utilise resources efficiently, and improve growth prospects and employment potentials. 

Differentiate between international trade and international business

Basis	International Trade	International Business
Meaning	The exchange of goods between different countries of the world is known as International Trade.	Those business activities that take place beyond the geographical boundaries of a nation, but also include the movement of capital, personnel, technology, and intellectual property, are called International Business.
Goods and Services	It includes only movements of goods.	International business includes goods and services such as international travel and tourism, transportation, communication, banking, warehousing, distribution, and advertising.
Currency used	International Currency is used in the case of International Trade.	International Currency of more than one country is used.
Scope	International trade has a narrower scope.	International business is broader than international trade and includes international trade.
Effect on Foreign Reserve	It has a direct impact on the foreign reserves of a country.	It also has a direct impact on the foreign reserves of a country.
Risk	It involves comparatively less degree of risk.	It involves a high degree of risk.

Question 2: Discuss any three advantages of international business.

Answer: International business refers to those business activities that take place beyond the geographical boundaries of a country. It involves not only the international movements of goods and services but also capital, technology, and IP like patents, trademarks, copyright, etc.  
For example, India selling agricultural products to foreign countries is an international business. Advancements in technology and better communication facilities have increased international business with great success in various countries. International business provides a wide market range to organizations and gives them an opportunity to satisfy the needs of customers all over the world. 

Some of the advantages of international business include:

1. Foreign Exchange: It assists a country in earning foreign exchange, which may then be utilized to buy capital goods, technology, and other products from foreign countries.

2. More Efficient Resource Utilization: It is based on the comparative cost advantage theory. It entails producing what your country can produce more efficiently and trading the surplus production with other countries to purchase what they can produce more efficiently. In this way, countries can make better use of their resources.

3. Increased Resource Utilization: Many enterprises anticipate international growth and get orders from foreign clients to set up production capabilities for their products that are more in demand in the local market. It enables them to better utilize their excess resources. 

4. Growth Prospects: When demand falls or the domestic market reaches saturation point, business enterprises become irritated. By expanding internationally, such businesses can increase their growth potential significantly.

Question 3: What is the major reason underlying trade between nations?

Answer:  Manufacturing or Trade across geographical boundaries of one’s country is known as International Business. International Business or External Business doesn’t only include the international movement of goods and services but also the movement of capital, personnel, technology, and intellectual property like patents, trademarks, and copyrights. It isn’t limited only to the export and import of goods but services such as international travel and tourism, transportation, communication, banking, warehousing, distribution, and advertising.

The major reasons underlying trade between nations include: 

1. Uneven Distribution of Natural Resources: Due to the unequal distribution of natural resources, all countries cannot produce goods at a low cost. As a consequence, it has an impact on their productivity levels. Therefore, the countries with less quantity of a natural resource either purchase the resource or the actual product itself from the countries with an abundance of these. For example, crude oil is exported from the USA as it is found in abundance there. 

2. Availability of Productivity Factors: The numerous production variables, like labor, capital, and raw materials, that are required to produce and distribute diverse commodities and services are found in different quantities in different countries. It gives rise to buying and selling of productivity factors among the countries. For example, due to unemployment in India, foreign countries can employ labor at chap rates from India. 

3. Cost Advantages: Production costs vary according to geographical, political, and socioeconomic situations in different countries. Some countries are in a better position to manufacture certain commodities at a lower cost than others. Firms participate in international trade to purchase products that are cheaper in other countries and to sell things that they can supply at a lower cost. For example, China sells various goods at a low price to different countries all over the world because of the cost advantage. 

Question 4: Differentiate between contract manufacturing and setting up wholly owned production subsidiary abroad?

Answer: 

Contract Manufacturing: Contract manufacturing is a kind of international business in which a company gets into an agreement with one or more local manufacturers in foreign countries to produce particular components or commodities to its specifications. It is commonly known as outsourcing. The goods manufactured on contract manufacturing are either used as final products or sold as finished products by international firms under their brand names in various countries including home, host, and other countries. Nike, Reebok, Levis, etc., use contract manufacturing to get their products.

Wholly Owned Subsidiaries: Companies that seek complete control over their overseas operations use this way of international business entry. The parent company gains complete control of the foreign company by investing 100% in its equity capital. A wholly-owned subsidiary is located in a country different from the parent company. The subsidiary will almost certainly have its own management team, products, and customers. With a wholly-owned subsidiary in a foreign country, the parent company may be able to continue to operate in various geographic areas, markets, or industries. These components help with the market, geopolitical, and trade practice changes. This increases the parent company’s earnings, which may then be invested in other assets and businesses.

Difference between Contract Manufacturing and Wholly Owned Subsidiary

Basis	Contract manufacturing	Wholly Owned Subsidiaries
Meaning	A kind of international business in which a company gets into an agreement with one or more local manufacturers in foreign countries to produce particular components or commodities to its specifications.	A kind of international business in which a company seeks complete control over its overseas operations.
Controlling Level	The local manufacturer is only partially under the company’s control.	Through the subsidiary, the parent company has full control over its operations in another country.
Investment	Little or no money is invested overseas.	The parent company acquires all of the ownership in the foreign company and classifies it as a subsidiary.

Question 5: Why is it necessary for an export firm to go in for a pre-shipment inspection?

Answer: Export is one of the main components of International business and involves the movement of goods and services across nations and the exchange of foreign currencies between the dealing parties. This makes export a complex process and the exporter is bound to follow the legal, and compulsory formalities imposed by the exporting country. One of the steps of the export procedure includes pre-shipment inspection.

It is necessary for an export firm to go in for pre-shipment inspection because the government of India wants an assurance that only A-one quality goods are being exported from India. For this, various Inspection Agencies have been set up under the Export Quality Control and Inspection Act of 1963. After producing or procuring the goods, an exporter requires to obtain a pre-shipment inspection certificate from the concerned authorized Inspection Agency. The inspection certificate ensures the quality of the goods and is one of the important documents required at the time of export.

If the goods to be exported falls into the A-quality category, the exporter has to contact the Export Inspection Agency (EIA) or another recognised agency to get an inspection certificate. Also, at the time of export, the pre-shipment inspection report must be presented along with other export documentation. 

However, such inspection is not required if the products are exported by star trading houses, trading houses, export houses, industrial units established in export processing zones/special economic zones (EPZs/SEZs), and 100% export-focused units (EOUs).

Question 6: What is a bill of lading? How does it differ from the bill of entry?

Answer: Bill of Lading and Bill of Entry are two different documents required in import transaction.

Bill of Lading: It is a document prepared and signed by the ship’s master acknowledging the arrival of goods on board. It specifies the terms and conditions under which the goods will be transported to the port of destination.

Bill of Entry: A bill of entry is a form provided by the customs office to the importer. It must be completed by the importer upon receipt of the goods. It must be submitted in triplicate to the customs office. The bill of entry includes information such as the importer’s name and address, the name of the ship, the number of packages, the marks on the packages, the description of goods, the quantity and value of goods, the exporter’s name and address, the port of destination, and the customs duty payable.

A bill of lading differs from a bill of entry in function; i.e., a bill of entry is a document provided by customs that must be completed by the importer as soon as the goods are received. Meanwhile, the shipping company provides a bill of lading, which is required throughout the export transaction. A bill of entry comprises details about the products as well as the destination; whereas, a bill of lading includes the terms and conditions under which the goods will be transported to the port of destination.

Question 7: What is a letter of credit? Why does an exporter need this document?

Answer:  Letter of credit: It is a document that contains a guarantee from the bank of the importer to the bank of the exporter that it will honour the payment of the bills issued by the exporter for exports of the goods to the importer up to a certain amount. 

This document is needed because it assesses the importer’s creditworthiness and secures a guarantee for payment. Simply put, after receiving an order, to minimise the risk of non-payment, the exporter inquires about the creditworthiness of the importer. The exporter demands a Letter of Credit from the importer for the security of the payment. A letter of credit is a guarantee given by the importer’s bank that in case of non-payment by an importer, the bank shall pay a certain amount of export bill to the exporter’s bank, on the behalf of the importer.

Question 8: Discuss the process involved in securing payment for exports.

Answer: The process involved in securing payment for exports:

1. Once the shipment has been made, the exporter notifies the importer about it, after which the importer submits important documents such as a bill of lading, an invoice copy, an insurance policy, and a letter of credit. These things are required by the importer when claiming the goods on arrival and getting customs clearance.

2. These documents are sent through the exporter’s bank with the directive that they should only be delivered to an importer if the importer accepts the bill of exchange. The payment is received by the exporter bank via the importer’s bank, and the amount is credited to the exporter’s account.

Immediate payment is also possible if the exporter submits the documentation and signs an indemnification letter. When payment for exports is received, the exporter must get a payment certificate from the bank. It includes all relevant documentation proving that the export consignment was provided to the import of payment and that payment was received in accordance with exchange control regulations.

Documents related to payment:

1. Letter of Credit: A letter of credit is a guarantee given by the importer’s bank that in case of non-payment by an importer, the bank shall pay a certain amount of export bill to the exporter’s bank on the behalf of the importer.
2. Bill of Exchange: Bill of exchange is a financial instrument drawn by an exporter in the name of the importer for demanding a payment related to the export consignment. The exporter’s bank transfers the necessary documents to the importer only after acceptance of a bill of exchange.
3. Bank Certificate of Payment: Bank certificate of payment is a certificate to ensure that the important documents related to a particular export consignment have been transferred to the importer and the payment has been received.