International Business

INTERNATIONAL BUSINESS - COMPREHENSIVE CHAPTER NOTES

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11.1 INTRODUCTION TO INTERNATIONAL BUSINESS

**Definition of International Business:**

International business refers to **business activities and transactions that take place across national boundaries**. It encompasses manufacturing, trade, and all commercial activities that occur beyond the geographical limits of a single country.

**Key Difference:**

**Domestic/Internal Business**: Business transactions within geographical boundaries of one nation

**International/External Business**: Manufacturing and trade beyond the boundaries of one's own country

**Meaning and Scope:**

International business involves:

**International movements of goods and services** across borders

**Movement of capital, personnel, technology, and intellectual property** (patents, trademarks, know-how, copyrights)

Trade in services including international travel, tourism, transportation, communication, banking, warehousing, distribution, and advertising

**Foreign direct investments** and overseas production of goods and services

**Exam Point**: International business is **NOT limited to international trade alone** — it is a broader term encompassing both trade and production of goods/services across frontiers.

**Historical Context (India's Globalisation):**

India faced severe debt trap and balance of payment crisis in 1991

IMF provided funds with condition of structural economic reforms

This forced India to liberalise economic policies

Result: India integrating with world economy through increased foreign investments and multinational corporations (MNCs)

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11.1.2 REASONS FOR INTERNATIONAL BUSINESS

**Fundamental Reason:**

Countries cannot produce equally well or cheaply all that they need due to **unequal distribution of natural resources and differences in productivity levels**.

**Key Factors Creating Need for International Business:**

1. **Unequal Distribution of Natural Resources**: Different countries possess different quantities and qualities of raw materials

2. **Differences in Factor Availability**:

Labour availability and productivity differ

Capital availability varies

Raw material sources differ

Technology and expertise vary

3. **Variations in Production Costs**: Due to socio-economic, geographical, and political differences

4. **Principle of Geographical Specialisation**:

Each country specialises in producing goods it can produce most **effectively and efficiently**

Each country imports goods it cannot produce cost-effectively

Example: India — West Bengal specialises in jute products; Mumbai and Maharashtra in cotton textiles

5. **International Division of Labour**:

**Developing countries (labour-abundant)** — specialise in labour-intensive products like garments

**Developed countries (capital and technology-rich)** — specialise in capital and technology-intensive products like textile machinery

Example: Labour-rich Asian countries export garments; developed nations export machinery

**Firm-Level Reasons for International Business:**

**Import cheaper goods** available at lower prices in other countries

**Export goods** to countries offering better prices

**Capture new markets** for growth

**Achieve economies of scale**

**Reduce production costs** by locating near raw materials or low-cost labour

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11.1.3 INTERNATIONAL BUSINESS VS. DOMESTIC BUSINESS

International business is **significantly more complex** than domestic business due to variations in political, social, cultural, and economic environments across countries.

KEY DIFFERENCES TABLE:

| ASPECT | DOMESTIC BUSINESS | INTERNATIONAL BUSINESS |

|--------|-------------------|------------------------|

| **Buyers & Sellers** | Same nationality; easier communication | Different nationalities; language and cultural barriers |

| **Stakeholders** | Single country origin; consistent values | Multi-country stakeholders; diverse values and aspirations |

| **Factor Mobility** | Free movement of labour and capital | Restricted movement due to legal, cultural, and economic barriers |

| **Customer Base** | Relatively homogeneous tastes | Heterogeneous tastes across countries; different preferences |

| **Business Practices** | Uniform systems and customs | Different systems, customs, and practices |

| **Political Environment** | Familiar and predictable | Unfamiliar; requires ongoing monitoring; political risks |

| **Regulations** | Uniform laws and policies | Different tariffs, taxation, quotas, subsidies |

| **Currency** | Single currency used | Multiple currencies; exchange rate fluctuations |

DETAILED DIFFERENCES:

**(i) Nationality of Buyers and Sellers:**

Domestic: Both parties from same country → easier understanding

International: Different countries → language barriers, different attitudes, social customs, business goals

**Example**: Indian exporter selling to US buyer requires understanding US business culture, communication style, contract laws

**(ii) Nationality of Stakeholders:**

Includes employees, suppliers, shareholders, public

International firms must accommodate **diverse value systems and behavioural patterns**

**Example**: MNC managing workforce across India, UK, and Australia must adapt to different labour laws, work culture expectations

**(iii) Mobility of Factors of Production:**

Less mobility between countries than within

Restrictions include: legal barriers, visa issues, language differences, climatic conditions

Labour faces adjustment challenges to climate, economy, and socio-cultural conditions

**Example**: Indian skilled worker moving to Germany faces visa restrictions and cultural adjustment

**(iv) Customer Heterogeneity Across Markets:**

Customers differ in **socio-cultural background, tastes, languages, beliefs, customs, attitudes**

**Example 1**: China — bicycles preferred; Japan — motorcycles preferred

**Example 2**: India — right-hand driven cars; USA — left-hand steering

**Example 3**: US consumers replace TV/durables every 2-3 years; Indian consumers retain products until worn out

Requires **product customisation and strategy modification** for each country

**(v) Differences in Business Systems and Practices:**

Socio-economic development levels differ

Economic infrastructure quality varies

Market support services differ

Business customs vary due to historical and cultural factors

**Requires adaptation** of production, finance, HR, and marketing plans

**(vi) Political System and Risks:**

Political environment differs country-to-country: government type, ideology, political party system

**Political Risks**: Government instability, nationalisation, policy changes, war, civil unrest

Nations favour domestic products over foreign (protectionism)

Requires **ongoing political monitoring and risk management**

**Example**: Brexit created regulatory changes for UK-EU business; Venezuelan political instability deterred foreign investments

**(vii) Business Regulations and Policies:**

Each country has **different laws, regulations, economic policies**

Differences in: tariff policies, taxation, import quotas, subsidies, controls

Often **discriminate against foreign products, services, capital**

**Example**: India's FDI policy restricts foreign ownership in certain sectors; different GST rates vs international tax systems

**(viii) Currency Used in Business Transactions:**

International business involves **multiple currencies**

**Exchange rate** (price of one currency relative to another) constantly fluctuates

Creates challenges:

Difficulty in fixing product prices

Foreign exchange risks (currency depreciation)

Need for hedging strategies

**Example**: Indian exporter selling $1 million to USA; rupee depreciation from ₹75/$ to ₹80/$ reduces revenue when converted

**Box B Learning**: **Firms must be cognisant of environmental differences** — not just aware, but actively responsive through:

Product adaptation (affordable products for developing nations; premium quality for developed nations)

Marketing strategy customisation

Pricing adjustments based on purchasing power parity

Communication style modification

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11.1.4 SCOPE OF INTERNATIONAL BUSINESS

International business scope extends beyond merchandise trade to diverse operations:

(i) MERCHANDISE EXPORTS AND IMPORTS

**Definition**:

**Merchandise** = tangible goods that can be seen, touched, and physically transported

**Exports** = selling domestic goods to foreign countries

**Imports** = purchasing foreign goods for domestic consumption

**Characteristics:**

Most visible and traditional form of international business

Historically most important component

Involves physical movement of goods across borders

Requires customs documentation, tariffs, inspection

**Examples:**

India exports **automobiles, pharmaceuticals, software services, garments, gems, jewellery** to global markets

India imports **crude oil, electronic goods, machinery, fertilisers** from other countries

**Flow**: Domestic Producer → Export Documentation → Customs → Foreign Port → Importer → End Consumer

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(ii) INTERNATIONAL TRADE IN SERVICES

**Definition**: Exchange of **intangible services across national boundaries** without physical movement of goods

**Major Service Categories:**

1. **Travel and Tourism Services**

International travel by citizens for business, leisure, medical tourism

**Example**: Indians visiting Switzerland for holidays; Medical tourism from USA to India for surgeries

2. **Transportation Services**

International shipping, airline services, cargo movement

**Example**: Shipping Indian textiles to USA via maritime routes; Air freight of perishables

3. **Communication Services**

International telecommunications, internet services, postal services

**Example**: International phone calls, cross-border data transmission, email services

4. **Banking and Financial Services**

International banking, currency exchange, loans, investment services

**Example**: ICICI Bank providing international remittance services; Overseas investment in Indian stock markets

5. **Warehousing and Distribution Services**

Storing goods in foreign countries, managing supply chains

**Example**: Amazon warehouses in UK storing goods for European distribution

6. **Advertising and Marketing Services**

International advertising campaigns, market research

**Example**: Coca-Cola's global advertising campaigns across countries

7. **Professional Services**

Legal, accounting, consulting, engineering services across borders

**Example**: Indian IT consulting firms providing services to US companies

**Growth Trend**: International services trade has **considerably grown** and now forms substantial component of international business

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(iii) FOREIGN DIRECT INVESTMENT (FDI) AND FOREIGN PORTFOLIO INVESTMENT

**Definition**: **Foreign Direct Investment** = Investment in productive assets (factories, machinery, land) in foreign countries with aim of producing goods/services

**Characteristics:**

Involves actual **ownership and control** of foreign operations

Long-term investment orientation

Risk-sharing with foreign partners or full ownership

**Example**: Maruti Suzuki's manufacturing plant in India (Japanese FDI); Tata Motors' car manufacturing in UK

**Benefits to Recipient Country:**

Employment creation

Technology transfer

Capital inflow

Skill development

Infrastructure development

**Foreign Portfolio Investment**: Investment in stocks, bonds, securities without management control

**Example**: Foreign investor buying shares of Reliance Industries without management role

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(iv) OVERSEAS PRODUCTION AND MANUFACTURING

**Definition**: **Establishing manufacturing plants or production facilities in foreign countries** to produce goods and services locally

**Reasons for Overseas Production:**

1. **Cost Reduction**: Lower labour costs in developing countries

2. **Proximity to Customers**: Serving customers more effectively at lower transportation costs

3. **Raw Material Access**: Locating near natural resources

4. **Market Access**: Overcoming tariff barriers through local production

5. **Skilled Labour Access**: Accessing specialised workforce

**Example**:

Toyota producing cars in India → saves transportation costs, enters growing market

Nokia manufacturing phones in China → leverage low labour costs

**Methods:**

Wholly-owned subsidiaries

Joint ventures with local partners

Contract manufacturing arrangements

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11.2 FORMS OF INTERNATIONAL BUSINESS ENTRY

(A) EXPORTING

**Definition**: Producing goods/services domestically and selling them in foreign markets

**Types:**

1. **Indirect Exporting**

**Definition**: Exporting through **intermediaries** who specialise in exporting

**Intermediaries Include**: Export houses, export trading companies, merchant exporters

**Advantages**:

No direct involvement in export process

Lower investment and risk

Intermediary handles documentation, customs, logistics

Suitable for small businesses with limited resources

**Disadvantages**:

Lower profit margins (intermediary takes commission)

Reduced control over product presentation and customer relations

Limited market feedback

**Example**: Small Indian food company selling to export house which handles international sales

2. **Direct Exporting**

**Definition**: Exporter **directly contacts foreign buyers** and exports products

**Advantages**:

Higher profit margins (no intermediary)

Direct customer relationships and feedback

Better market understanding and control

Brand building in foreign market

**Disadvantages**:

Higher investment required (export infrastructure, documentation)

Greater risk exposure

Need for export expertise

Complex logistics and customs procedures

**Example**: Mr. Manchanda directly identifying and contacting overseas customers in South-East Asia

**Advantages of Exporting:**

**Low investment** compared to overseas production

**Risk minimisation** — limited foreign exposure

**Market testing** — understand foreign demand before major investment

**Flexibility** — can increase/decrease export volumes

**Utilise domestic capacity** — full utilisation of manufacturing capacity

**Foreign exchange earnings** — valuable for country's balance of payments

**Disadvantages:**

**Tariff barriers** — import duties increase product cost

**Non-tariff barriers** — quotas, licensing restrictions

**Transportation costs** — high for bulky, low-value goods

**Quality issues** — long transit times may damage products

**Exchange rate risks** — currency fluctuations affect profitability

**Limited market control** — reduced influence on product positioning

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(B) LICENSING AND FRANCHISING

**1. LICENSING**

**Definition**: **Agreement where licensor (foreign company) grants licensee (domestic firm) right to use technology, patents, brand names, know-how** in exchange for royalty payments

**How It Works:**

Licensor grants **intellectual property rights**

Licensee pays **royalty** (percentage of sales revenue)

Licensee manufactures and sells products using licensor's technology/brand

Licensor retains ownership; licensee gains operational rights

**Example**: Indian pharmaceutical company licensed to manufacture **Viagra-equivalent generic drug** using Pfizer's patent (after patent expiry) by paying royalties

**Advantages for Licensor:**

**Rapid market entry** without capital investment

**Low risk** — licensee invests capital

**Revenue generation** through royalties

**Technology/brand promotion** globally

**Disadvantages for Licensor:**

**Loss of control** over product quality and marketing

**Royalty limitations** — income capped by agreement

**Competitive risk** — licensee may become competitor after agreement ends

**Quality concerns** — licensee may damage brand reputation

**Advantages for Licensee:**

**Access to proven technology** without R&D investment

**Reduced risk** — using established brand/technology

**Quick market entry** — established products/processes

**Disadvantages for Licensee:**

**Limited control** over pricing and marketing

**Ongoing royalty payments** reduce profitability

**Dependence on licensor** for updates and technical support

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**2. FRANCHISING**

**Definition**: **Agreement where franchisor (parent company) grants franchisee (independent operator) right to use brand name, business model, operational systems** in exchange for franchise fee and royalties

**How It Works:**

Franchisor provides: brand name, operational systems, training, quality control

Franchisee invests capital, operates business using franchisor's model

Franchisee pays: initial franchise fee + ongoing royalties + advertising contributions

Franchisor maintains control through quality standards and operational guidelines

**Key Difference from Licensing**: Franchising is **more comprehensive** — includes entire business model, not just technology

**Example**:

**McDonald's franchising model** — franchisee opens McDonald's outlet using company's brand, menu, procedures, training systems

**Domino's Pizza in India** — franchisees operate stores following Domino's global standards

**Advantages of Franchising:**

**For Franchisor:**

**Rapid expansion** without capital investment

**Lower risk** — franchisee invests and operates

**Standardised operations** — maintain brand consistency globally

**Continuous revenue** through royalties and fees

**Local market expertise** — franchisee understands local market

**For Franchisee:**

**Established brand** — immediate market recognition

**Proven business model** — reduced failure risk

**Training and support** — franchisor provides continuous assistance

**Purchasing power** — bulk buying discounts through franchisor

**Marketing support** — national/global advertising

**Disadvantages for Franchisor:**

**Quality control challenges** — franchisee may not maintain standards

**Brand damage risk** — poor franchisee performance affects brand

**Complex management** — monitoring multiple franchisees

**Limited revenue** compared to wholly-owned operations

**Disadvantages for Franchisee:**

**High initial investment** — franchise fees are substantial

**Ongoing royalties** — continuous payment burden

**Limited control** — must follow franchisor's procedures

**Dependence on franchisor** — cannot independently modify business model

**Conflict risk** — disputes with franchisor over operations

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(C) JOINT VENTURES

**Definition**: **Agreement between two or more companies (domestic and foreign) to establish and operate a new business entity** with shared ownership, management, and profits/losses

**Key Features:**

**Shared ownership** — both parties hold equity stakes

**Shared control** — joint decision-making in management

**Shared risks and profits** — both gain/lose based on performance

**Legal entity** — creates new separate company

**Time-limited** — usually for specific period or project

**How It Works:**

1. Indian company + Foreign company = Joint Venture Company

2. Each contributes capital, technology, market knowledge

3. JV board manages operations with both companies represented

4. Profits divided as per ownership stake

**Example**:

**Maruti Suzuki** — Suzuki Motor Corporation (Japan) + Government of India (now Bharat Petroleum, public shareholders)

**Hero Honda** (now Hero MotoCorp) — Hero Cycles (India) + Honda Motors (Japan) for motorcycle manufacturing

**Advantages of Joint Ventures:**

**For Foreign Company (Investor):**

**Market entry** through local partner knowledge

**Reduced investment** — shared capital requirement

**Risk sharing** — divided among partners

**Government approval easier** — local partner has connections

**Technology transfer** — access to local adaptation expertise

**For Domestic Company (Local Partner):**

**Foreign capital and technology** — access to advanced resources

**Management expertise** — learning from foreign partner

**Market expansion** — entering international markets

**Technology upgrade** — modern manufacturing/processes

**Risk sharing** — reduced financial burden

**General Advantages:**

**Synergy** — combined strengths of both companies

**Market knowledge** — local partner understands regulations, culture

**Cost efficiency** — shared infrastructure and resources

**Innovation** — combining different expertise

**Disadvantages of Joint Ventures:**

**Conflict of interest** — different business philosophies, profit expectations

**Shared control issues** — slower decision-making, deadlock possibilities

**Profit sharing** — reduced individual company returns

**Management complexity** — dual reporting structures

**Communication challenges** — language and cultural differences

**Partner dependence** — cannot act independently

**Technology leakage risk** — proprietary information shared with partner

**Exit difficulties** — complex dissolution procedures

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(D) WHOLLY-OWNED SUBSIDIARIES / FOREIGN SUBSIDIARIES

**Definition**: **Establishment of manufacturing plant or business operation in foreign country with 100% ownership and control** by parent company

**How It Works:**

Parent company establishes new entity in foreign country

100% equity ownership by parent company

Parent controls all operations, strategic decisions, profit remittance

Local management operates on parent's directives

**Example**:

**Tata Motors UK** — wholly-owned subsidiary manufacturing engines in Britain

**IBM India** — wholly-owned subsidiary operating IBM offices and services in India

**Mr. Manchanda's son's suggestion** — setting up fully owned factory in Bangkok for South-East Asia operations

**Advantages of Wholly-Owned Subsidiaries:**

**Strategic Control:**

**100% control** over operations, product quality, pricing, distribution

**Strategic flexibility** — can modify strategy without partner approval

**Protection of technology** — proprietary information remains within company

**Consistent brand image** — maintain global standards without compromise

**Operational Benefits:**

**Full profit retention** — no profit sharing with partners

**Operational efficiency** — streamlined decision-making

**Faster decision-making** — no need for partner consultation

**Independent market strategy** — customise for specific market

**Long-term Benefits:**

**Long-term investment** — commitment to foreign market

**Gradual market expansion** — build presence systematically

**Knowledge accumulation** — develop local market expertise

**Local workforce development** — train and develop local talent

**Disadvantages of Wholly-Owned Subsidiaries:**

**Financial Burden:**

**High capital investment required** — 100% funding responsibility

**Significant financial risk** — full exposure to market losses

**Long payback period** — return on investment takes years

**Currency risks** — entire investment exposed to exchange rate fluctuations

**Operational Challenges:**

**Complex management** — distance and time zone challenges

**Regulatory compliance** — full responsibility for foreign laws

**Local resistance** — concerns about foreign ownership

**Government restrictions** — some countries limit foreign ownership

**Staffing challenges** — recruiting and managing local workforce

**Infrastructure investment** — must build entire facility and operations

**Market Risks:**

**Market entry risks** — expensive way to test new markets

**Political risks** — government policies, nationalisation, instability

**Cultural integration challenges** — understanding local business culture

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11.3 DOCUMENTS REQUIRED FOR IMPORT AND EXPORT

International business requires extensive documentation for customs clearance, quality assurance, and legal compliance.

EXPORT DOCUMENTS

**1. COMMERCIAL INVOICE**

**Definition**: Document issued by **exporter listing goods sold, quantities, prices, terms of payment**

**Purpose**: Essential for customs clearance and billing

**Required Information**: Description of goods, unit prices, total amount, payment terms, exporter details, consignee details

**Example**: Indian textile exporter issuing invoice to US buyer for ₹50 lakhs

**2. BILL OF LADING (B/L)**

**Definition**: **Document issued by shipping company proving receipt of goods and commitment to deliver**

**Purpose**: Acts as receipt, evidence of shipment, and title document

**Types**:

Straight Bill of Lading (non-negotiable)

Bearer Bill of Lading (negotiable — can be transferred)

**Contains**: Ship name, voyage number, loading port, discharge port, goods description, quantity, shipping date

**3. BILL OF EXCHANGE**

**Definition**: **Document representing exporter's claim for payment from buyer** at specified future date

**Purpose**: Ensures exporter receives payment; buyer gets credit period

**Parties**: Drawer (exporter), Drawee (importer), Payee (often bank)

**Conditions**: Sight (immediate payment) or Usance (payment after period) bills

**4. PACKING LIST**

**Definition**: **Detailed list of contents, quantities, weight of goods in each package**

**Purpose**: Helps importer verify shipment contents; important for customs

**Details**: Item descriptions, quantities, weights, box numbers, marks

**5. CERTIFICATE OF ORIGIN**

**Definition**: **Official document certifying goods manufactured in exporter's country**

**Purpose**: Proves origin for tariff classification and preferential trade agreements

**Issuer**: Chamber of Commerce or government authority

**Example**: Certificate proving Indian textiles are made in India (relevant for India-US FTA benefits)

**6. INSPECTION CERTIFICATE**

**Definition**: **Certificate issued by third-party inspector certifying goods quality and specification compliance**

**Purpose**: Assures buyer of quality before shipment

**Issued By**: Approved inspection agencies (like SGS, Bureau Veritas)

**Example**: Pharmaceutical products inspected for quality standards before export

**7. INSURANCE CERTIFICATE**

**Definition**: **Document issued by insurance company confirming goods insurance during transit**

**Purpose**: Protects against loss/damage during shipment

**Coverage**: Typically includes war risks, natural disasters, theft

**Example**: Indian exporter insuring goods shipment against maritime risks

**8. LETTER OF CREDIT (L/C)**

**Definition**: **Bank guarantee issued by importer's bank assuring exporter of payment** if documents presented properly

**Purpose**: Guarantees exporter receives payment; reduces payment risk

**Process**:

Importer applies to bank for L/C

Bank issues L/C guaranteeing payment

Exporter ships goods against L/C

Exporter submits documents to bank

Bank verifies and pays exporter

Bank recovers from importer

**Example**: US buyer's bank issuing L/C guaranteeing payment for Indian auto parts

**9. EXPORT LICENSE**

**Definition**: **Government permission to export specific goods** (if restricted)

**Purpose**: Controls export of sensitive materials (defence, dangerous goods, cultural items)

**Required For**: Arms, nuclear materials, restricted chemicals, certain technologies

**10. CUSTOMS DECLARATION**

**Definition**: **Statement filed with customs declaring goods details, value, tariff classification**

**Purpose**: Government control and tariff collection

**Details**: Item descriptions, HSN codes, declared values, exporter/importer details

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IMPORT DOCUMENTS

**1. PURCHASE ORDER (P/O)**

**Definition**: **Buyer's formal order specifying goods, quantities, prices, delivery terms**

**Purpose**: Legally binding commitment to purchase

**2. PROFORMA INVOICE**

**Definition**: **Preliminary invoice sent before actual shipment** with estimated costs

**Purpose**: Buyer arranges payment; seller prepares goods

**3. BILL OF LADING (Same as Export)**

**Purpose for Importer**: Proves title to goods; essential for customs clearance

**4. IMPORT LICENSE**

**Definition**: **Government permission to import specific goods**

**Purpose**: Controls import of restricted items, protects domestic industry

**Example**: India requires import licenses for certain agricultural products, defence items

**5. CUSTOMS DUTY ASSESSMENT**

**Definition**: **Government assessment of duty payable on imported goods**

**Based On**: Goods value, tariff classification, country of origin

**6. INSPECTION REPORTS**

**Definition**: **Inspection certifying goods meet quality standards**

**Purpose**: Quality assurance before customs clearance

**7. PHYTOSANITARY CERTIFICATE** (for agricultural products)

**Definition**: **Certificate confirming agricultural goods are disease-free**

**Purpose**: Health and safety compliance for food/plant products

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11.4 INCENTIVES AND SCHEMES FOR INTERNATIONAL BUSINESS

Governments provide incentives to encourage exports and foreign investments.

EXPORT INCENTIVES

**1. EXPORT SUBSIDY**

**Definition**: **Financial assistance provided by government to reduce export prices**

**Purpose**: Make products more competitive in international markets

**Example**: Government cash incentive of 5% on export value

**WTO Compliance**: Many countries restricting subsidies due to WTO rules

**2. DUTY DRAWBACK**

**Definition**: **Refund of customs duties paid on imported raw materials** used in exported goods

**Purpose**: Prevent double taxation; reduce export costs

**Example**: Indian exporter importing raw materials @ 10% duty, then exporting finished product — duty refunded on exported portion

**Benefit**: Competitive pricing in international markets

**3. BOND LICENSING**

**Definition**: **Permission to import raw materials without paying customs duty** against bond/guarantee for export obligation**

**Purpose**: Reduce working capital requirement; encourage export-oriented industries

**Example**: Export-oriented unit importing machinery without duty if commits to export minimum quantity

**4. SPECIAL ECONOMIC ZONES (SEZs)**

**Definition**: **Designated geographical areas with special tax, customs, labour benefits** for export-oriented units

**Incentives Provided**:

Income tax exemptions (5-15 years)

Duty-free import of capital goods and raw materials

Relaxed labour laws

Quick customs clearance

**Example**: SEEPZ in Mumbai, Cochin SEZ — units get duty exemptions and fast clearance

**Purpose**: Encourage exports and foreign investment

**5. EXPORT CREDIT GUARANTEE**

**Definition**: **Insurance coverage guaranteeing exporter payment** if importer defaults

**Provider**: Government agencies (like ECGC in India)

**Benefit**: Reduces export risk; encourages sales to risky countries

**Example**: Exporting to politically unstable countries with credit guarantee

**6. CONCESSIONAL FINANCING**

**Definition**: **Loans at below-market interest rates** for export-related activities

**Purpose**: Reduce borrowing costs for exporting firms

**Example**: EXIM Bank providing 7% interest loans vs. market 12% for export machinery

**7. TAX EXEMPTIONS/DEDUCTIONS**

**Definition**: **Tax benefits for export income**

**Example**: Export profit exemption, deduction for export promotion expenses

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FOREIGN INVESTMENT INCENTIVES

**1. TAX HOLIDAYS**

**Definition**: **Income tax exemption for specified period** (usually 5-10 years)

**Purpose**: Attract FDI by reducing tax burden

**Example**: FDI in manufacturing gets 10-year tax holiday

**2. ACCELERATED DEPRECIATION**

**Definition**: **Faster depreciation of assets** allowing greater tax deductions

**Purpose**: Reduce tax liability; encourage capital investment

**Example**: Equipment depreciating 50% yearly vs. 10% standard rate

**3. REDUCED TARIFFS**

**Definition**: **Lower import duties on capital goods and raw materials** for FDI units

**Purpose**: Reduce import costs; improve competitiveness

**Example**: FDI manufacturing units importing machinery at 0% duty vs. 15% standard

**4. INFRASTRUCTURE SUBSIDIES**

**Definition**: **Government provision of subsidised infrastructure** (ports, roads, electricity)

**Purpose**: Reduce FDI operational costs

**Example**: Special roads, water supply, electricity at subsidised rates in industrial parks

**5. REPATRIATION OF PROFITS**

**Definition**: **Permission to transfer profits from foreign subsidiary to parent company**

**Purpose**: Assure FDI firms can take earnings home

**Restrictions**: Some countries limit repatriation to control capital flight

**6. INVESTMENT GUARANTEES**

**Definition**: **Government guarantee against nationalisation or unfair expropriation**

**Purpose**: Reduce political risk for FDI

**Example**: Government guarantee in contracts that factories won't be seized

**7. SPECIAL INDUSTRIAL ZONES**

**Definition**: Industrial parks with **specially designed infrastructure and incentives**

**Example**: FIPB (Foreign Investment Promotion Board) designated zones with special benefits

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11.5 ORGANISATIONS PROMOTING INTERNATIONAL BUSINESS

Various domestic and international organisations support and promote international business.

DOMESTIC ORGANISATIONS

**1. MINISTRY OF COMMERCE AND INDUSTRY (Government of India)**

**Role**:

Frame international trade policies

Negotiate trade agreements with other countries

Regulate import-export through tariffs and quotas

Grant export/import licenses

**Function**: Primary policy-making body for international business

**2. DIRECTORATE GENERAL OF FOREIGN TRADE (DGFT)**

**Role**:

Administer export-import policy

Issue export/import licenses and exemptions

Maintain restricted/prohibited items lists

Monitor import-export statistics

**Example**: Issues licenses for exporting restricted items like defence equipment

**3. EXPORT-IMPORT BANK OF INDIA (EXIM BANK)**

**Role**:

Provide concessional financing for exporters

Offer export credit guarantees

Finance FDI by Indian companies

Technical assistance to exporters

**Example**: EXIM Bank providing loans for export machinery at 7% interest

**4. EXPORT CREDIT GUARANTEE CORPORATION (ECGC)**

**Role**:

Provide export credit insurance/guarantees

Cover risks of exporter non-payment by buyer

Cover political risks (war, government action)

**Benefit**: Encourage exports by reducing credit risk

**5. FEDERATION OF INDIAN CHAMBERS OF COMMERCE AND INDUSTRY (FICCI)**

**Role**:

Represent business interests

Provide market information to exporters

Organise trade fairs and exhibitions

Promote exports through business networks

**Example**: FICCI trade missions identifying new markets for Indian products

**6. CONFEDERATION OF INDIAN INDUSTRY (CII)**

**Role**:

Promote industrial competitiveness

Facilitate international partnerships

Organise B2B (business-to-business) meetings

Provide industry benchmarking data

**7. RESERVE BANK OF INDIA (RBI)**

**Role**:

Manage foreign exchange reserves

Regulate currency exchange and payments

Control external trade financing

Monitor balance of payments

**Example**: RBI setting exchange rate policy affecting export profitability

**8. STATE EXPORT PROMOTION COUNCILS**

**Role**:

Promote exports of specific commodities from states

Provide quality certifications

Organise exhibitions

Examples: Tea Board (tea exports), Spices Board (spices), Marine Products Export Development Authority (MPEDA) (seafood)

**9. EMBASSIES AND CONSULATES**

**Role**:

Provide visa facilitation for business travel

Disseminate market information

Support business delegations

Protect business interests abroad

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INTERNATIONAL ORGANISATIONS

**1. WORLD TRADE ORGANISATION (WTO)**

**Founded**: 1995 (replacing GATT)

**Members**: 164 countries (India member since 1995)

**Objectives**:

Facilitate international trade

Reduce tariff barriers

Resolve trade disputes

Enforce