Chapter 11 International Business-I NCERT SOLUTION CLASS 11TH BUSINESS STUDIES | EDUGROWN NOTES

Short Answer Type Question:

Q.1 Differentiate between international trade and international business.
ANSWER:

International trade	International business
International trade refers to the exchange of goods and services across the international boundaries of countries.	International business not only includes movement of capital, of goods and services, but also of capital, personnel, technology and intellectual property like patents, trademarks, know-how and copyrights.
International trade means movements of goods only.	Business transaction that takes place between two or more countries is known as international business.
International trade is a narrow term.	International business is much broader than international trade.

Q.2 Discuss any three advantages of international business.
ANSWER: Three advantages of international business are:
→ Earning of foreign exchange: International business helps a country to earn foreign exchange which it can later use for meeting its imports of capital goods, technology, petroleum products and fertilisers, pharmaceutical products and a host of other consumer products which otherwise might not be available domestically.
→ More efficient use of resources: International business allows a country to produce what a country can produce more efficiently and trade the surplus production so generated with other countries to procure what they can produce more efficiently.

→ Improving growth prospects and employment potentials: International business encourages many countries, especially the developing ones to produce on a larger scale which not only helps in improving their growth prospects, but also created opportunities for employment of people living in these countries.

Q.3 What is the major reason underlying trade between nations?

ANSWER: The major reason underlying trade between nations are:
→ Unequal distribution of natural resources among different nations.
→ Availability of various factors of production such as labour, capital and raw materials that are required for producing different goods and services differ among nations.
→ Labour productivity and production costs differ among nations due to various socio-economic, geographical and political reasons.

Q.4 Discuss as to why nations trade.

ANSWER: The nations cannot produce equally well or cheaply all that they need because of the unequal distribution of natural resources and various other factors such as labour productivity and production costs. Therefore, some countries are in an advantageous position in producing select goods and services which other countries cannot produce that effectively and efficiently, and vice-versa and procuring the rest through trade with other countries which the other countries can produce at lower costs.

Q.5 Enumerate limitations of contract manufacturing.
ANSWER: The limitations of contract manufacturing are:

→ Local firms might not adhere to production design and quality standards, thus causing serious product quality problems to the international firm.

→  Local manufacturer in the foreign country loses his control over the manufacturing process because goods are produced strictly as per the terms and specifications of the contract.

The profitability of local firm producing under contract manufacturing is low as it is not free to sell the contracted output as per its will. It has to sell the goods to the international company at prices agreed upon under the contract which may be lower than the open market prices.
Q.6 Why is it said that licensing is an easier way to expand globally?
ANSWER: Licensing is an easier way to expand globally because:

→ Under the licensing system, it is the licensor who sets up the business unit and invests his/her own money in the business and the licensor has to virtually make no investments abroad. Therefore, it is considered a less expensive mode of entering into international business.

→ Since the business in the foreign country is managed by the licensee who is a local person, there are lower risks of business takeovers or government interventions.

→ Licensee being a local person has greater market knowledge and contacts which can prove quite helpful to the licensor in successfully conducting its marketing operations.
Q.7 Differentiate between contract manufacturing and setting up wholly owned production subsidiary abroad.

ANSWER:

Contract manufacturing	Wholly owned production subsidiary
A firm enters into a contract with one or a few local manufacturers in foreign countries to get certain components or goods produced as per its specifications.	The parent company acquires full control over the foreign company by making 100 per cent investment in its equity capital.
The firm has limited control over the local manufacturer.	The parent company has full control over its operations in another country through the subsidiary.
There is no or little investment in the foreign countries	The parent company buys up the entire equity of the firm abroad and makes this firm its subsidiary.

Q.8 Distinguish between licensing and franchising.
ANSWER:

Licensing	Franchising
The licensor grants licence to a foreign company (licensee) to produce and sell goods under the licensor’s logo and trademarks for a fee.	The franchiser grants a foreign firm (franchisee) the right to operate a business using a common brand name for an initial or a regular fee.
Operations are related to production and marketing of goods.	Operations are related to the services business.
Less stringent rules and regulations	Strict rules and regulations

Q.9 List major items of India’s exports.
ANSWER: The major items of India’s exports are Tea, Basmati rice, Spices, Leather and leather products and Semi-precious stones.
Q.10 What are the major items that are exported from India?

Answer:
The major items that  are exported from India are tea, pearls, precious and semi-precious stones,medicinal and pharmaceutical products, rice, spices, iron ore and concentrates, leather and leather manufactures, textile yarns fabrics, garments and tobacco. It also holds the distinct position of being the largest exporter in the world in select commodities such as basmati rice, tea, and ayurvedic products
Q.11 List the major countries with whom India trades.
ANSWER: The major countries with whom India trades are USA, UK, Belgium, Germany, Japan, Switzerland, Hong Kong, UAE, China, Singapore and Malaysia.

Long Answer Type Question:

Q.1 What is international business? How is it different from domestic business?
Answer:  International business refers to business which is carried on in two or more nations. It means carrying on business activities beyond national boundaries. These activities normally include the transaction of economic resources such as goods, capital, services (comprising technology, skilled labour, and transportation, etc.), and international production. It refers to that business activity that takes place beyond the geographical limits of a country. Production may either involve production of physical goods or provision of services like banking, finance, insurance, construction, trading, and so on. Thus, international business includes not only international trade of goods and services but also foreign investment, especially foreign direct investment.
Differences between International Business and Domestic Business are summarised below:

Q.2“International business is more than international trade”. Comment.
Answer:  It is rightly said that international business is more than international trade. The scope of international business is much wider than international trade. International trade means exports and imports of goods which is an important component of international business but international business includes much more than this. International trade in services like travel and tourism, transportation, communication, banking, warehousing, distribution and advertising is a part of international business. International business also includes foreign direct investments, contract manufacturing, and setting up wholly owned subsidiaries etc. which are not included in international trade. It is clear from the diagram given below:

Q.3 What benefits do firms derive by entering into international business?
Answer:  The trade between two or more nations is termed as foreign trade or international trade. It involves exchange of goods and services between the trades of two countries. Foreign trade consists of import trade, export trade and entrepot trade. In the early stages of human civilization, production was confined as per consumption. Human wants were limited. Nowadays, human wants are increasing and as such no man was considered to be self-dependent. Like this no country can live in isolation and claimed the status to be self-sufficient. Because of this reason countries have trade relationships with each other. The primary objective of foreign trade is to increase foreign trade and increase the standard of living of its people. There is an increasing demand for foreign trade because of the following reasons:

1. The natural resources are unevenly distributed.
2. The presence of specialisation and division of labour.
3. Different countries have difference in economic growth rate.
4. The presence of the theory of comparative cost.
   The following are some of the advantages of foreign trade:

1. Optimum use of Resources: Foreign trade helps in the optimum use of natural resources and avoids wastages of resources.
2. Stable Price: It ensures the presence of stable price by avoiding wide fluctuations in prices. It tries to equalise the world price.
3. Availability of all types of goods: It enables a country to import those goods which it cannot produce.
4. Increased Standard of living: It ensures more production to meet the demand of the people of different countries. By increased production, it becomes possible to increase income and the standard of living of its people. It also increases the standard of living by increasing more employment opportunities.
5. Large Scale production: It ensures large production because the production is carried on to meet the demand of its people as well as world market. Large scale production also ensures a great deal of internal economies which reduces the cost of production.

Q.4 In what ways is exporting a better way of entering into international markets than setting up wholly owned subsidiaries abroad.
Answer:  Exporting is a better way of entering into international markets than setting up wholly owned subsidiaries abroad in following ways:

1. Easiest Way: It is easy to enter international markets through exports as compared to wholly owned subsidiaries.
2. Less Involving: It is less involving as compared to establishing a wholly owned subsidiary because firms need not invest that much time and money.
3. Zero risk of Foreign Investment: Exporting does not require much of investment in foreign countries. Therefore, foreign investments risks are low as compared to when a firm starts its wholly owned subsidiary in foreign country.
4. Less Costly: In a wholly owned subsidiary, 100% equity investment is to be made by foreign company. Therefore, small and medium size producers can’t think of this mode of entering into international business.
5. Risk of Profit and Loss: In wholly owned subsidiary, 100% equity capital is contributed by foreign company alone. Therefore, it alone has to bear the risk of losses.
6. Government Intervention: Some countries are averse to setting up of 100% wholly owned subsidiaries by foreign companies. This form of business operations is subject to high degree of political risks.

Q.5 Discuss briefly the factors that govern the choice of mode of entry into international business.
Answer:  Following factors govern the choice of mode of entry into international business,

1. Ease of entry: First and foremost factor that determines the choice of mode of entry into international business is ease of entry. A businessman wants to adopt such mode of entry into international business which is easy and less formalities requiring. Exporting, importing, licensing and franchising are better ways from this perspective.
2. Cost: Second determining factor is cost involved. For example, very less cost is involved in exporting, importing, licensing, franchising and contract manufacturing as compared to joint ventures and setting wholly owned subsidiaries.
3. Control over production: If the foreign company or producer wants full control over production activities in local country, he will prefer franchising, wholly owned subsidiary or joint venture with majority share holding. If it is not so important, he will prefer exporting, importing, contract manufacturing licensing etc.
4. Sharing of Technology: If the company has no problem in sharing of technology then it may choose joint venture or franchising. But if it does not want to share its technology and trade secrets, it will prefer wholly owned subsidiary or exporting,
5. Risk Involved: If a firm is ready to take risk, it may choose wholly owned subsidiary or joint ventures but if it is willing to minimize its loss then it should choose exporting, licensing, franchising or contract manufacturing.

Q.6 Discuss the major trends in India’s foreign trade. Also list the major products that India trades with other countries.
Answer:  India is 10th largest economy in the world. It is the second fastest growing economy, next only to China. But India’s performance in international business is not very good. India’s share in world trade in 2003 was just 0.8%. In absolute terms, there has been significant increase in imports as well as exports. Total exports have increased from 606 crores in 1950-51 to Rs. 2, 93,367 crores in 2003-04 while imports have increased from 608 crores in 1950-51 to 3, 59,108 crores in 2003-04. Exports increased 480 times while imports increased 590 times indicating that there is adverse balance of trade. India’s major trading partners are USA, UK, Germany, Japan, Belgium, Hong Kong, UAE, China, Switzerland, Singapore and Malaysia.
India’s major items of exports include: Textiles, garments, gems and jewellery, engineering products and chemicals, agriculture and allied products.
India’s major items of imports include: Crude oil and petroleum products, capital goods, electronic goods, pearls, precious and semi precious stones, gold, silver and chemicals.
Before 1991, promotion of import substitution and discouraging of exports was government strategy. Imports consisted of machinery, equipment and intermediates in production, petroleum and petroleum-products. After green revolution, imports of fertilizer too increased.
Before 1991, India’s exports consisted of agricultural products like tea, raw cotton with the diversifying industrial structure, promoted by import substitution, exports of manufactures were growing. During 1986-91, external trade formed only 13.40 % of the GDP. During the 1990-2000, this share is rising continuously.
India’s foreign trade has grown to exports of $250 billion and imports of $380 billion in 2010-11. The ratio of exports plus imports to GDP has grown from 13.40 % during 1985-90 to almost three times that, being 37.7 % in 2010-11. On adding services it becomes from 22.9 % in the 1990s to 49.0 % in 2010-11.
Leading role has been played by ‘invisibles’ which includes both services, mainly software services, export of which has grown to $59 billion in 2010-11. It has decreased the current account deficit from $130 billion to $44. This deficit was compensated by capital account surplus of $59 billion in that year.
But it is only because of IT services and we are still lacking in manufacturing exports which can generate a large volume of employment. We have not done as well as China and Malaysia have done.

Q.7 What is invisible trade? Discuss salient aspects of India’s trade in services.
Answer:  Trade in services is called invisible trade. Since services are invisible, export and import of services has been named as invisible trade. In absolute terms, there has been significant increase in India’s foreign trade in services. Export and import of foreign travel, transportation and insurance has largely increased during last four decades. There has been a change in composition of services exports. Software and other miscellaneous services have emerged as the main categories of India’s export of services. Share of travel and transportation has declined to 29.6% in 2003-04 from 64.3% in 1995-96 while the share of software exports has increased from 10.2% in 1995-96 to 49% in 2003-04.

The composition of India’s external trade has been changing. During 1950s and 60s exports were mainly of primary goods. Over time, the role of engineering goods has been increasing. Overall manufactured goods constitute 66 % of total exports, of which engineering goods are 27%. Textiles and textile products, garments and leather products make around 10 % of India’s exports.
In nutshell, we can say that the role of the external or internationally traded goods sector has been growing steadily in Indian economy. At present imports and exports together account for upto 49 % of India’s GDP which was 18% in 1990s. In India there is greater share of exports of services which are IT software services, called IT- enabled services (ITES). It contributed more than 20% of India’s export earnings. India accounts for about 45% of the world’s BPO services. The major Indian IT companies, TCS, Infosys and Wipro, initiated and perfected the Global Services Delivery (GSD) model. It is because India has a vast pool of software engineers and an even bigger pool of English-knowing staff. With growing competition in the market for such services, Indian companies have moved from BPO to Knowledge Process Outsourcing (KPO), which involves providing services for R and D and to high-end consulting.