Business Studies Chapter 11 International Business - I

(2) Contract Manufacturing.

(3) Licensing and Franchising.

(4) Joint Ventures.

(5) Wholly owned subsidiaries.

(2) Portfolio investment.

1. Since the local partner also contributes to the equity capital of such a venture, the international firm finds it financially less burdensome to expand globally.

2. Joint ventures make it possible to execute large projects requiring huge capital outlays and manpower.

3. The foreign business firm benefits from a local partner’s knowledge of the host countries as regards to competitive conditions, culture, language, political systems and business systems. 4. In many cases entering into a foreign market is very costly and risky. This can be avoided by sharing costs and/or risks with a local partner under joint venture agreements.

Limitations of Joint Venture are as follows :

1. Foreign firms entering into joint ventures share the technology and trade secrets with local firms in foreign countries, thus always running the risks of such a technology and secrets being disclosed to others.

2. The dual ownership arrangement may lead to conflicts, resulting in battle for control between the investing firms.

(2) Acquiring an established firm in the foreign country nation and using that firm to manufacture and/or promote its products in the host nation.

1. The local firms producing under such kind of agreement are not free to sell the contracted output to anywhere and anybody else. The local manufacturers has to sell the goods to the international company at the predetermined rates. This results in lower profits for the local firms if the open market offers them higher prices than the prices agreed up on contracting.

2. Local manufacturers has no control over manufacturing process because the goods are produced as the per the guidelines given under the contract.

3. Sometimes local manufacturers cannot adhere the quality standard hence loss should be borne by the party fixed up in the contract.

2. International trade consists of export and import of goods whereas international business not only includes this but also include trade in services such as international travel and tourism, transportation, communication, banking, warehousing, distribution and advertising etc.

1. The first important advantage of international business is that all countries cannot produce equally well or cheaply all they need because of unequal distribution of natural resources among them or differences in their productivity level. Hence, due to international business, it becames possible that a country being in a better position to produce better quality products can export these products to other countries and can import these products which it can not advantageously make. This gives them cost and quality advantage.

2. International business helps a country to earn foreign exchange which it can later use for meeting its import of different goods and services.

3. International business can be more profitable as compared to domestic business. Business firms can earn more profits by selling those products in other countries at relatively higher prices in which they have comparative advantage over other.

International trade comprises of export and import of goods. But international business includes both international trade and services such as tourism, transportation, communication, banking, warehousing etc.

Another feature of international business is growing foreign investment and overseas production of goods and services.

All this show that international trade and international business are different.

1. Unequal distribution of resources : Countries cannot produce equally well or cheaply all that they need because of unequal distribution of natural resources among them or differences in their productivity levels. Therefore, some countries have access to produce some products at lower cost that what other nations can do. Hence, the countries find it easy to produce those goods and services in which they have specialization and cost advantage and procuring the rest through trade, with other countries. This lead to emergence of international business.

2. Geographical specialisation : It is because this reason that the trade between two countries takes place e.g. developing countries are labour abundant specialise in producing and exporting garments. Since they lack capital and technology, they import textile machinery from the developed nations which the latter are in a position to produce more efficiently.

3. To avail the benefits of cheap imports : Firms prefer to import those products and services which are available at lower prices in other countries and export the goods to other countries in which they have comparative cost and quality advantage.

1. Unequal distribution of resources : Countries cannot produce equally well or cheaply all that they need because of unequal distribution of natural resources among them or differences in their productivity levels. Therefore, some countries have access to produce some products at lower cost that what other nations can do. Hence, the countries find it easy to produce those goods and services in which they have specialization and cost advantage and procuring the rest through trade, with other countries. This lead to emergence of international business.

2. Geographical specialisation : It is because this reason that the trade between two countries takes place e.g. developing countries are labour abundant specialise in producing and exporting garments. Since they lack capital and technology, they import textile machinery from the developed nations which the latter are in a position to produce more efficiently.

3. To avail the benefits of cheap imports : Firms prefer to import those products and services which are available at lower prices in other countries and export the goods to other countries in which they have comparative cost and quality advantage.

Following are the main advantages of international trade :

1. Mutual co-opcration : External trade increases mutual co-operation between different countries of the world It enables a country to obtain those goods which it does not produce or manufacture. Similarly, it can supply it surplus goods to those countries which may be in need of them.

2. Enhances production efficiency :

External trade enables a country to concentrate only on the production of such goods which it can economically and efficiently produce by itself. This results increased productivity and lowering of cost.

3. Increases overall production : Since each of country produces only such goods which it can economically and efficiently produce, hence the overall world production is increased. All factors of production throughout the world are put to best possible use.

4. Better standard of living : External trade enables each country to obtain from the other country or countries the goods which it is not position to produce and thus provides to its citizens all types of goods and services which are necessary for making their life comfortable. This results in a better standard of living.

5. Optimum use of resources : External Trade enables a country to make optimum use of resources—both natural and human. Japan is the living example of such optimum utilization of resources. It depends for its requirements of foodstuffs and raw materials on other countries. It is best equipped for manufacturing of industrial goods which it supplies in abundance at competitive price to other countries.

6. Brings price equalization : In the absence of external trade there would have been wide disparities in the prices of the same goods. However, due to free transfer of goods from one country to another prices are international traded goods are more or less equalized.

7. Use of latest technology : External trade enmables countries of the world to use the latest technology, innovative ideas and benefits of improved production techniques.

2. Enhances production efficiency :

External trade enables a country to concentrate only on the production of such goods which it can economically and efficiently produce by itself. This results increased productivity and lowering of cost.

3. Increases overall production : Since each of country produces only such goods which it can economically and efficiently produce, hence the overall world production is increased. All factors of production throughout the world are put to best possible use.

4. Better standard of living : External trade enables each country to obtain from the other country or countries the goods which it is not position to produce and thus provides to its citizens all types of goods and services which are necessary for making their life comfortable. This results in a better standard of living.

5. Optimum use of resources : External Trade enables a country to make optimum use of resources—both natural and human. Japan is the living example of such optimum utilization of resources. It depends for its requirements of foodstuffs and raw materials on other countries. It is best equipped for manufacturing of industrial goods which it supplies in abundance at competitive price to other countries.

6. Brings price equalization : In the absence of external trade there would have been wide disparities in the prices of the same goods. However, due to free transfer of goods from one country to another prices are international traded goods are more or less equalized.

7. Use of latest technology : External trade enmables countries of the world to use the latest technology, innovative ideas and benefits of improved production techniques.

1. The parent firm is able to exercise full control over its operations in foreign countries.

2. Since the parent company on its own looks after the entire operations of foreign subsidiary, it is not required to disclose its technology or trade secrets to others.

Disadvantages :

1. The parent company has to make 100 percent investments in the foreign subsidiaries. This form of international business is, therefore, not suitable to small and medium size firms which do not have much funds with them to invest abroad.

2. Since the parent company owns 100 per cent equity in the foreign company, it alone has to bear the entire losses as resulting from failure of its foreign operations.

3. Some countries are adverse to setting up of 100 per cent wholly owned subsidiaries by the foreigners in their countries. Such form of international business operations, therefore, becomes subject to higher political risks.

1. Natural resources of the respective countries : Some countries are rich in forest resources. Some have very rich fisheries, while the others have enormous cattle wealth. Some have rich soils and suitable climate for farming.

2. Highly Advanced Banking System : This facility has helped much in developing international trade by facilitating trade transactions.

The foreign exchange banks, International Monetary Fund and World Bank are playing very important roles.

3. Scientific Development : It has revolutionized the producing techniques in every sphere, namely farming, mining, fishing, forestry and manufacturing. Cold storage and refrigeration are the gifts of science.

4. Peace and co-operation : We are living in a world where there may be rivalries, yet there is universal desire for peace and co-operation. Without these two, the international trade cannot go on and in the absence of it economies of even the most developed countries are bound to shatter.

5. Scarcity of various commodities : There is no country in the world, which produces all its requirements, therefore, there is always a scarcity of number of commodities in every country. Some require consumer goods, the others need raw material. Yet others desire coal, petroleum and atomic minerals.

6. Development of Transport and Communication : We are living in a world which has developed various means of transport, namely the railways, highways-airways and ocean transport, telephone and wireless facilities etc. All these have contributed a great deal to the growth and development of international trade.

1. Merchandise exports and imports : Merchandise means goods that are tangible, i.e. those that can be seen and touched. When viewed from this perceptive, it is clear that while merchandise exports mean sending tangible goods abroad, merchandise import mean bringing tangible goods from a foreign country to one’s own country. Merchandise exports and imports, also known as trade in goods, include only tangible goods and exclude trade in services.

2. Service exports and imports : Service exports and imports involve trade in intangibles. It is because of the intangibility aspect of services that trade in services is also known as invisible trade. A wide variety of services are traded internationally and these include tourism and trade, boarding and lodging, entertainment and recreation, transportation, professional services, communication, construction and engineering, marketing educational and financial services.

3. Licensing and franchising : Permitting another party in a foreign country to produce and sell goods under your trademarks, patents or copy rights in lieu of some fee is another way of entering into international business. It is under the licensing system that Pepsi and Coca Cola are produced and sold all other the world by local bottlers in the foreign countries. Franchising is similar to licensing, but it is term used in connection with the provision of services. McDonalds, for instance, operates fast food restaurants the world over through its franchising system.

4. Foreign investments : Foreign investment is another important form of international business. Foreign investment involves investments of funds abroad in exchange for financial return. Foreign investment can be of two types : (i) direct investment and, (ii) portfolio investments.

(i) Direct investment takes place when a company directly invests in properties such as plant and machinery in the foreign countries with a view to undertake production and marketing of goods and services in those countries.

(ii) A portfolio investment, on the other hand, is an investment that a company makes into another company by way of acquiring shares or providing loans to the latter, and earns income by way of dividends or interest on loans.

1. Prospects for higher profits : International business could be more profitable than the domestic business. When the domestic prices are lower, business firms can earn more profits by selling their products in countries where prices are high.

2. Increased capacity utilization : Many firms set up production capacities which are quite in excess of demand for their products in the domestic market. By planning overseas expansion and procuring orders from the foreign customers, they can think of making use of their surplus production capacities and also improving profitability of their operations. Production on a larger scale often leads to economies of scale, which in turn lowers production cost and improves per unit profit margin.

3. Prospectus for growth : Business firms find it quite frustrating when demand for their products starts saturating in the domestic market. Such firms can considerably improve prospects of their growth by plunging into overseas markets. This is precisely what has prompted many of the multinationals from the developed countries to make an entry into markets of the developing countries. While demand in their home countries has got almost saturated, they found their products were in fancy in the developing countries and demand was picking up quite fast there.

4. Intense competition in domestic market : When competition in the domestic market is very intense, internationalization seems to be the only way to achieve significant growth. Highly competitive domestic market drives many companies to go international in search of markets for their products. International business thus acts as a catalyst of growth for firms facing tough market conditions on the domestic turf.

5. Improve business vision : The growth of international business of many companies is essentially a part of their business policies or strategic management. The vision to become international comes form the urge to grow, the need to become more competitive, the need to diversify and to gain strategic advantages of internationalization.

Advantages :

1. As compared to other modes of entry, exporting/importing is the easiest way of gaining entry into international markets. It is less complex an activity than setting up and managing joint-ventures or wholly owned subsidiaries abroad.

2. Exporting/importing is less involving in the sense that business firms are not required investing that much time and money as it needed when they desire to enter into joint ventures or set up manufacturing plants and facilities in the host countries.

3. Since exporting/importing does not require much of investments in the foreign countries, exposure to foreign investment risks is nil or much lower than that is present when firm opts for other modes of entry into international business.

Limitations :

1. Since the goods physically move from one country to another, exporting/importing involves additional packaging, transportation and insurance cost. Especially in the case of heavy items, transportation costs lone become an inhibiting factor to their exports and imports. On reaching shores of foreign countries, such products are moreover subject to custom duties and a variety of other levies and charges. Taken together, all these expenses and payments substantially increase the product costs and make them less competitive.

2. Exporting is not a feasible option when there exist import restrictions in a foreign country. In such a situation, firms have no alternative but to opt for other entry modes such as licensing/franchising or joint venture which makes to feasible to make the product available by way of producing and marketing it locally in the foreign countries.

3. The export firms basically operate from their home country. They produce in the home country and then ship the goods to the foreign countries. Excepting a few visits made by the executives of export firms to the foreign countries to promote their products, the export firms in general do not have much of the contracts with the foreign markets. This put the export firms in a disadvantages position vis-a-vis the local firms which are very near to the customers and are able to better understand and serve them.

1. Contract manufacturing permits the international firms to get the goods produced on a large scale without requiring investments in setting up production facilities. These firms rather make use of the production facilities already existing in the foreign countries.

2. Since there is no or little investment in the foreign countries, there is hardly any investment risk involved in the foreign countries.

3. Contract manufacturing also gives the advantage to the international company of getting products manufactured or assembled at lower costs especially if the local producers happen to be situated in countries which have lower material and labour costs.

4. Local manufacturer also gets the opportunity to get involved with international business and avail incentives, if any, available to the export firms in case the international firm desires goods so produced be delivered to its home country or to some other foreign countries.

Limitations are as follows :

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

2. 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.

3. The local firm producing under contract manufacturing is not free sell the contracted output as per its will. It has to sell the goods to the international company at the predetermined prices. This results in lowers profits for the local firm if the open market prices for such goods happen to be higher than the prices agreed under contracting.

1. Under the licensing/franchising system, it is the licensor/franschiser which sets up the business unit and invests its own money in the business. As such, the licensor/franchiser has to virtually make no investments abroad. Licensing/ franchising is, therefore, considered a less costly mode of entering into international business.

2. Since no or very little foreign investment is involved, licensor/franchiser is not a party to the losses, if any, that occur to foreign business. Licensor/franchiser is paid by the licensee/ franchisee by way of fees fixed in advance as a percentage of production or sales turnover. This royalty or fee keeps accruing to the licensor/ franchiser so long as the production and sales keep on taking place in the licensee’s/franchisee’s business unit.

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

4. Licensee/franchisee being the local person has greater market knowledge and contacts which can prove quite helpful to the licensor/franchiser in successfully conducting its marketing operations.

5. As per the terms of the licensing/ franchising agreement, only the parties to the licensing/franchising agreement legally entitled to make use of the licensor’s/franchiser’s copyrights, patents and brand names in the foreign countries. As a result, other firms in the foreign market cannot make use of such trademarks and patents.

Limitations :

1. When licensee/franchisee becomes skilled in the manufacture and marketing of the licensed/franchised products, there is a danger that the licensee can start marketing an identical product under a slightly different brand name. This can cause severe competition to the licensor/ franchiser.

2. If not maintained properly, trade secrets can get divulged to others in the foreign markets. Such lapses on the part of the licensee/franchiser can cause severe losses to the licensor/franchiser.

3. Over time, conflicts often develop between the licensor/franchiser and licensee/franchisee over issues such as maintenance of accounts, payment of royalty and non-adherence to norms relating to production of quality products. These differences often result in costly litigations, causing harm to both the parties.

1. India’s Foreign Trade in Goods: India’s exports and imports constitute major economic achieving for the country. India accounts for 0.8% of world exports. The share of foreign trader in the country’s across domestic product has increased from 14.6% in 1990-91 to 24.1% in 2003-2004. In absolute terms, India’s exports have increased from 606 crore in 1950-51 and 293367 crore in 2003-2004. Its imports have increased from 608 crores in 1950-51 to 359108 crore in 2003-2004. Composition wise, textiles and garments, gemus and jewellery, engineering products and chemicals and related products and agricultural and allied products are India’s major items of exports. In many items like 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 India’s share is much higher and ranges between 3% to 13%. India is the largest exporter of some commodities like basmati rice, tea and ayurvedic products. India has to import products like crude oil and petroleum products, capital goods (e.g. machinery) electronic goods, pearl, precious and semi-precious stones, gold and silver and chemicals constitute major items of India’s imports.

2. India’s Trading Partners : India has eleven trading partners comprising of USA, UK, Belgium Germany, Japan, Switzerland, Hong-Kong, UAE, China, Singapore and Malaysia. Among all these trading partners, USA accounts for first position with 11.6% of share in India’s total trade.

3. India’s trade in services : There is tremendous growth in India’s trade services. Export of services has risen from 68 crore in 1960-61 to 35758 crores during 2004-2005.

Import has also risen from 43 crores in 1960-61 to 28,486 crore in 2004-2005 (Comprising of foreign travel, transportation and Insurance). The remarkable thing is the change in the composition of service exports. Software and other miscellaneous services (including professional, technical and business services) have emerged as the main categories of India’s exports of services.

4. India’s Foreign Investment : India’s foreign investment both inward and outward have considerably increased. While the inward foreign investments have grown more than 750 times from Rs. 201 crores in 1990-91 to Rs. 151406 crore in 2003-2004. India’s investment abroad have increased by 4927 times i.e. from Rs. 19 crores in 1990-91 to Rs. 83616 crores in 2003-2004.

1. Obstacles in free movement of goods :

Full advantage of foreign trade can only be secured when there are no obstacles in the movement of commodities between countries. Such obstacles may be of two types : natural and man-made. Manmade obstacles are customs barriers raised by government to restrict or prohibit free flow of trade between countries etc.

2. Monopolistic competition : Foreign trade can produce benefits only under conditions of perfect competition.

But in real life, there are conditions of monopolistic competition, where a few economically advanced nations with their powerful multinational concerns have clearly divided the world market among themselves.

3. Dissimilar economies of trade : Trade between any two nations can flourish only when they have similar internal and external economies of scale. Only a country, with particular line, may secure enough cost advantage to neutralize high labour and costs. In reality, only economically advanced countries can achieve high levels of economies so that the world market has come to be monopolistically dominated.

4. Language Barriers : Each country has its own language and also often its own script. This creates problems of communication between countries.

5. Greater exposure to risk : People undertaking international trade transactions are separated by long geographical distances. This creates problems of transportation of goods from one country to another, yet, another problem is that goods transported from one country to another are subject to several risks, because they remain in transit for long period.

6. Blocking capital for long periods : Due

to long interval between the time, when the goods are dispatched and when they are received and paid for by the foreign importer, the exporter have to invest a large capital in his business to provide for slow turnover.

1. Loco Price : It is also known 'ex-factory' price. It includes price of goods and a small margin of profit. In such a case the importer has to bear all the expenses of transporting the goods to his place of business.

2. F.A.S. (Free Alongside Ship) : This includes cost plus all expenses of placing the goods from selter’s warehouse to port. The exporter has to bear the loading charges, freight etc. in this case.

3. F.O.B. (Free on Board) : It is the

aggregate of FAS price, shipping loading charges and export duty. In other words we can say that this includes all charges upto the loading of goods on board, the ship and export duty.

4. C and F (Cost and Freight) : It includes the cost of goods and all the expenses incurred for taking the goods to the port of destination. It is equal to the sum total of FOB and freight. It does not include insurance charges.

5. C.I.F. : Under this price quotation, the exporter pays insurance premium in addition to C and F cost.

6. Franco (Free price) : This quotation includes the cost and all expenses incurred for placing the goods in the hands of importer (buyer).

(i) Direct business : In case of such transactions, the importer places direct order with the foreign manufacturer or supplier. Thus, he saves the commission which he would have been required to pay if he had used some middlemen.

(ii) Consignment business : In case of such business the manufacturer or the supplier appointed his agent in foreign countries to sell his goods on commission basis. A minimum price for sale of goods is also fixed and the exporter usually also meets the expenses incurred by the agent for sale of his goods.

(iii) Merchant shippers : These businessmen purchase goods and sell them to foreign buyers at their own risk. They are popular in those cases where the service of agents are not readily available.

(iv) Indent firms : These firms serve as middlemen between importers and exporters. They maintain their offices in port towns. The exporters usually supply them with the samples of their products, the prices and other terms. The importers contact them for their requirements and they try to settle a bargain between importers and exporters. They charge commission for their services usually from importers.

Exporting is less complex and it requires less investment and time as compared to the establishment of 100% unit in other country.

The single benefit of setting up of wholly owned subsidiary in other country is that parent company can exercise full control over its subsidiary and can keep technology secret. But this benefit is mitigated by the number of advantages of direct exporting with other countries like.

1. In exporting exposure to foreign investment risk is nil or much lower as compared to the wholly owned subsidiary.

2. Exports are guaranteed by Export and Credit Guarantee Corporation (ECGC), hence the exporters have no fear of risk of payments.

3. Business can be wound up at any stage without involving much investment.

4. Hence, it is right said that exporting is the best way to enter into international trade.

1. Availability of Technology :

International business offers wider choice of technology at reasonable rates. Hence, sometimes, business firms finds it easier to trade in international market.

2. Easy access to finance : In international business, availability of finance is comparatively easy as number of institutes are working both at national and international level to promote exports. Hence, business firms get easy accessibility to finance to enter into international business as compared to business in their home country.

3. Existence of variety of promotion councils : Governments have set up variety of proxnotion councils to promote exports. This facilitates business firms to establish their business in international market more easily.

4. Risks are shared by councils and associates set up by the Governments : The risk of international business is shared or in some cases borne by corporations set up by the Governments. This keeps the morale of business houses up.

5. Availability of promotion schemes and incentives : A bundle of promotion schemes and incentives have been given by Government to exporters that encourages business firms to become international.

In absolute terms, both the exports and imports have witnessed phenomenal growth over the years. Exports have risen from Rs. 606 crores in 1950-51 to Rs. 293,367 crores in 2003-04 representing an increase of over 480 times within last five decades.

Imports have risen from Rs. 608 crores in 1950-51 to Rs. 3,59,108 crore in 2003-04, registering a grow in about 590 times during the last five decades.

Currently, India’s foreign trade accounts for about 20% of the country’s Gross Domestic product. India’s exports are textiles, garments, gems and jewellery products, chemicals and related products, and agricultural and allied products. India’s imports are crude oil and petroleum products, capital goods etc.

Data relating to India’s foreign investment both (inward and outward) also show remarkable growth. While the inward foreign investment have grown more than 750 times, from Rs. 201 crores in 1990-91 to Rs. 1,51,406 crore in 2003-04. India’s investments abroad have increased much more exponentially around 4927 times (from Rs. 19 crores in 1990-91 to Rs. 83,616 crores in 20903-04.

Data relating to India’s foreign investment both (inward and outward) also show remarkable growth. While the inward foreign investment have grown more than 750 times, from Rs. 201 crores in 1990-91 to Rs. 1,51,406 crore in 2003-04. India’s investments abroad have increased much more exponentially around 4927 times (from Rs. 19 crores in 1990-91 to Rs. 83,616 crores in 20903-04.

(i) Exchange of Goods : It involves purchase of goods and sale of goods. Purchase of goods, from a foreign country is known as import trade and sale of goods to another country is known as ‘export trade’. But when the goods are imported from a country with the objective of exporting them to some other country is known as ‘entrepot trade’.

(ii) Involvement of two countries : International trade is carried on mostly in large quantities both on government to government account and on private account involving individuals and business houses.

(iii) Foreign Currency : Payment for imported goods is made in foreign currency. Similarly, payment for export of goods is received in foreign currency. In India conversion of money is regulated by RBI.

(iv) Restrictions : International business is not as free as international trade. In case of several items, license is also required for import or export many goods are subject to import and export duties.

(v) Lengthy procedure : Because of geographical distance and physical barriers, transport of goods between nations is a difficult and time consuming process. Moreover, permission of appropriate authorities for import and export of goods also take time.

(vi) Language Barrier : Each country has its own language. Because of differences in languages of two countries there may be problem in entering into import and export transactions.

(vii) Risks : International business is exposed to several risks such as fluctuations in the relative price of two currencies, perils of sea, fear of obsolescence etc.

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1. Unequal distribution of resources : Countries cannot produce equally well or cheaply all that they need because of unequal distribution of natural resources among them or differences in their productivity levels. Therefore, some countries have access to produce some products at lower cost that what other nations can do. Hence, the countries find it easy to produce those goods and services in which they have specialization and cost advantage and procuring the rest through trade, with other countries. This lead to emergence of international business.

2. Geographical specialisation : It is because this reason that the trade between two countries takes place e.g. developing countries are labour abundant specialise in producing and exporting garments. Since they lack capital and technology, they import textile machinery from the developed nations which the latter are in a position to produce more efficiently.

3. To avail the benefits of cheap imports : Firms prefer to import those products and services which are available at lower prices in other countries and export the goods to other countries in which they have comparative cost and quality advantage.

1. In this the Licensor or does not make any investment in other country.

2. Licensor does not suffer any losses.

3. Lower risks of government takeovers.

4. Licensee has greater market knowledge being a local person.

5. Other firms cannot copy the patents or trademark given to licensee/franchisee.

Disadvantages of Licensing/franchising :

1. Licensee may start his personal business for an identical product under a slightly different brand name.

2. Trade secrets can be leaked out to others in the foreign markets.

3. Conflicts may take place between licensor/franchisor or licensee/franchisee.

1. Easiest way of getting entry into international market.

2. It is less complex.

3. It requires less investment.

4. Exposure to risk is nil.

Demerits of exporting and importing :

1. It involves additional cost in the form of packaging, transportation and insurance costs.

2. Exporting is not a feasible option when import restrictions exist in a foreign country.

3. The export firms do not have much contact with the foreign market.

1. Prospects for higher profits : International business could be more profitable than the domestic business. When the domestic prices are lower, business firms can earn more profits by selling their products in countries where prices are high.

2. Increased capacity utilization : Many firms set up production capacities which are quite in excess of demand for their products in the domestic market. By planning overseas expansion and procuring orders from the foreign customers, they can think of making use of their surplus production capacities and also improving profitability of their operations. Production on a larger scale often leads to economies of scale, which in turn lowers production cost and improves per unit profit margin.

3. Prospectus for growth : Business firms find it quite frustrating when demand for their products starts saturating in the domestic market. Such firms can considerably improve prospects of their growth by plunging into overseas markets. This is precisely what has prompted many of the multinationals from the developed countries to make an entry into markets of the developing countries. While demand in their home countries has got almost saturated, they found their products were in fancy in the developing countries and demand was picking up quite fast there.

4. Intense competition in domestic market : When competition in the domestic market is very intense, internationalization seems to be the only way to achieve significant growth. Highly competitive domestic market drives many companies to go international in search of markets for their products. International business thus acts as a catalyst of growth for firms facing tough market conditions on the domestic turf.

5. Improve business vision : The growth of international business of many companies is essentially a part of their business policies or strategic management. The vision to become international comes form the urge to grow, the need to become more competitive, the need to diversify and to gain strategic advantages of internationalization.
Benefits to the Nations : 
1. Earning of foreign exchange.
2. More efficient use of resources.
3. Improving growth prospects and employment potentials.
4. Increased standard of living

1. India’s Foreign Trade in Goods: India’s exports and imports constitute major economic achieving for the country. India accounts for 0.8% of world exports. The share of foreign trader in the country’s across domestic product has increased from 14.6% in 1990-91 to 24.1% in 2003-2004. In absolute terms, India’s exports have increased from 606 crore in 1950-51 and 293367 crore in 2003-2004. Its imports have increased from 608 crores in 1950-51 to 359108 crore in 2003-2004. Composition wise, textiles and garments, gemus and jewellery, engineering products and chemicals and related products and agricultural and allied products are India’s major items of exports. In many items like 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 India’s share is much higher and ranges between 3% to 13%. India is the largest exporter of some commodities like basmati rice, tea and ayurvedic products. India has to import products like crude oil and petroleum products, capital goods (e.g. machinery) electronic goods, pearl, precious and semi-precious stones, gold and silver and chemicals constitute major items of India’s imports.

2. India’s Trading Partners : India has eleven trading partners comprising of USA, UK, Belgium Germany, Japan, Switzerland, Hong-Kong, UAE, China, Singapore and Malaysia. Among all these trading partners, USA accounts for first position with 11.6% of share in India’s total trade.

3. India’s trade in services : There is tremendous growth in India’s trade services. Export of services has risen from 68 crore in 1960-61 to 35758 crores during 2004-2005.

Import has also risen from 43 crores in 1960-61 to 28,486 crore in 2004-2005 (Comprising of foreign travel, transportation and Insurance). The remarkable thing is the change in the composition of service exports. Software and other miscellaneous services (including professional, technical and business services) have emerged as the main categories of India’s exports of services.

4. India’s Foreign Investment : India’s foreign investment both inward and outward have considerably increased. While the inward foreign investments have grown more than 750 times from Rs. 201 crores in 1990-91 to Rs. 151406 crore in 2003-2004. India’s investment abroad have increased by 4927 times i.e. from Rs. 19 crores in 1990-91 to Rs. 83616 crores in 2003-2004.