NCERT Solutions for Class 11 Commerce Business studies Chapter 11 - International Business

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Under the licensing model, a domestic manufacturer (licensor) grants licence to a foreign manufacturer (licensee) to use its intellectual property such as patent and trademark.

Hence, the correct answer is option (a).

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It is under contract manufacturing that a firm outsources the production of its goods and services to foreign firms and concentrates on marketing operations in international business. On the other hand, in the licensing and franchising models, a company grants intellectual property rights to a foreign firm, and in a joint venture, two or more firms pool their resources to launch a new business enterprise.

Hence, the correct answer is option (c).

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The model in which two or more firms pool their resources to form a new business entity that is legally separate and distinct from its parent companies is known as a joint venture. On the other hand, contract manufacturing is an outsourcing process, and the licensing and franchising models are those in which intellectual property rights are granted to foreign firms for a fee.

Hence, the correct answer is option (c).

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Exporting involves selling of goods to other countries. It has various advantages, such as lower risks, less requirement of investment and easier way of entering into international markets. However, the limited presence that it offers exporting firms in international markets is a disadvantage of exporting.

Hence, the correct answer is option (c).

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It is the joint venture model that requires a very high level of risk. This is because, in a joint venture, two or more firms join together to share their technology and trade secrets. This in turn raises the possibility that the shared information or secrets might be revealed.

Hence, the correct answer is option (d).

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A wholly owned subsidiary exercises all the decision-making powers and complete managerial control over the overseas operations of its parent company. A wholly owned subsidiary is created by a company by buying up the entire equity of a foreign firm.

Hence, the correct answer is option (b).

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The mode of entry that brings a domestic firm closer to international markets is contract manufacturing. This is because contract manufacturing enables the firm to be associated with international markets and reap benefits from the opportunities available. On the other hand, modes such as licensing and franchising and joint ventures do not allow much access to foreign markets.

Hence, the correct answer is option (c).

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India is mainly involved in exporting textiles and garments, gems and jewellery, and oil and petroleum products. However, basmati rice is not a major item of India's exports.

Hence, the correct answer is option (d).

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The major items of India’s imports are oil and petroleum products, machinery, pearls and precious stones. However, Ayurvedic medicines are not a part of Indian imports. India is the world’s largest exporter of Ayurvedic medicines.

Hence, the correct answer is option (a).

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The USA, UK and Germany are India’s major trading partners. New Zealand is not among India’s top trading partners.

Hence, the correct answer is option (d).

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The following are the advantages of international business.

(a) Medium for earning foreign exchange: By facilitating the exchange of goods and services in the international market, international business acts as a medium for acquiring sufficient foreign exchange reserves for nations. This in turn enables them to import goods that may not be available domestically—for example, technology, capital goods and petroleum products.

(b) Tool for speeding up economic growth: As international business provides a big platform to countries and local producers to cater to the needs of an international consumer base, it helps in promoting their growth prospects. It also helps in increasing employment opportunities for the people living in these countries.

(c) Means of improving living standards: International business facilitates the consumption of goods and services that are produced in other countries. This in turn helps the people living in the importing countries to enjoy a higher standard of living and facilitates the growth and development of the exporting countries.

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The following are the important reasons that encourage nations to engage in trade.

(a) Difference in resource endowment: Every country is endowed with different kinds and combinations of resources. Thus, in order to obtain the resources which are not domestically available but are available in other countries, nations trade with one another.

(b) Aim of attaining specialisation: Because of the availability of distinct resources, culture, labour force and technical know-how, every country has a specialisation in particular types of products. Thus, countries trade with an aim of attaining specialisation in the goods in which they have a superior technical know-how or the goods that can be produced only with the domestically available specific resources which are not available in other countries.

(c) Difference in labour productivity and production cost: Production costs and labour productivity differ from one country to another. Thus, countries export the goods which they can produce efficiently at a low production cost. On the other hand, they import the goods which they are not able to produce efficiently at a lower cost.

Answer:

The following are the important reasons that encourage nations to engage in trade.

(a) Difference in resource endowment: Every country is endowed with different kinds and combinations of resources. Thus, in order to obtain the resources which are not domestically available but are available in other countries, nations trade with one another.

(b) Aim of attaining specialisation: Because of the availability of distinct resources, culture, labour force and technical know-how, every country has a specialisation in particular types of products. Thus, countries trade with an aim of attaining specialisation in the goods in which they have a superior technical know-how or the goods that can be produced only with the domestically available specific resources which are not available in other countries.

(c) Difference in labour productivity and production cost: Production costs and labour productivity differ from one country to another. Thus, countries export the goods which they can produce efficiently at a low production cost. On the other hand, they import the goods which they are not able to produce efficiently at a lower cost.

Answer:

The following are the major limitations of contract manufacturing.

(a) Difficulty in adhering to international quality standards: There are numerous reasons why local firms (which have received contracts for manufacturing goods) may find it difficult to follow the instructions of international companies. As a result, they might fail to produce goods strictly as per international quality and standards. If international companies pass on these inferior goods to their customers, this might hamper their goodwill and brand name.

(b) Lack of freedom over decision-making process: In contract manufacturing, local manufacturers lose their power to alter their production process according to their own decisions. This is because, in contract manufacturing, it becomes an obligation for the manufacturing company to follow the instructions given by the foreign company which is its client. This results in a lack of freedom for local manufacturers as they cannot take any decisions on their own.

(c) Possibility of incurring losses due to contracted prices: A contract signed between a local contract manufacturer and an international company is binding. Local manufacturers have to abide by the contract clauses and sell the output only to the foreign company at the predetermined prices. They cannot sell the output in the local market. This narrows the scope of local manufacturers for earning profits in case the domestic prices are higher than the prices in the contract with their international clients.

Answer:

The following are the important reasons put forward in favour of licensing as an easier way for a company to expand globally.

(a) Less expensive: The licensor need not make huge investments abroad, and thus it is a relatively less expensive mode of entering into international markets.

(b) Lesser risk of government intervention: The business in the overseas market is managed by the licensee, who is a local person. Thus, licensing involves lesser risk of government intervention in the operations.

(c) Better knowledge and contacts: As the licensee is a local person, he or she has a better knowledge of the market conditions in his or her country than the licensor. This in turn helps the licensor to conduct the market operations smoothly and expand globally.

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The following are a few major items exported from India.

(a) Tea

(b) Basmati rice

(c) Spices

(d) Leather and leather products

(e) Semi-precious stones

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India is well known for exporting both primary goods as well as finished products. It has a comparative advantage in exporting a few primary products such as tea, basmati rice and semi-precious stones, and a few manufactured goods such as leather, medicinal and pharmaceutical products.

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Today, India is growing at a fast pace with regard to foreign trade and exchange. The major countries that are involved in trade with India are the US, UK, Belgium, Germany, Japan and China.

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International business consists of all the trade and manufacturing activities that take place across national boundaries. These activities involve the exchange and movement of goods, services, capital, technology, skills and patents across countries. The following table highlights the key differences between domestic and international businesses.

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International business refers to the business transactions that take place across national boundaries. It encompasses all international activities including manufacturing and movement of goods, services, capital, personnel and intellectual property. On the other hand, international trade is an activity that is confined to just import and export of goods. It is itself a small part of international business. Therefore, we can say that international business is much bigger than international trade.

The following are some of the major operations that are a part of international business and help in distinguishing it from the international trade.

(a) Import and export of services: Trading of services is an important constituent of international business. Services that are a part of international business include travel and tourism, entertainment, communication, transportation, construction, advertising, R&D and banking.

(b) Licensing and franchising: International business includes activities related to licensing and franchising. Under licensing, a foreign firm is granted intellectual property rights by a home company, so that the firm abroad can produce and sell goods under the home company’s trademarks, patents or copyrights in exchange of a fee. Similarly, under franchising, a home country grants a foreign firm the right to produce and sell goods under a common brand name using the same operations support system in exchange of a fee.

(c) Foreign investment: It refers to the funds that are invested abroad for some returns. It is an important part of international business and involves two components, as follows.

(i) Direct investment: It refers to an investment made directly in the plants and machinery of a foreign company so as to undertake production by acquiring controlling rights.

(ii). Portfolio investment: It refers to an investment made in securities or by providing loans to a foreign company with an objective of earning profits in the form of dividends or interests on loans.

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The following are some of the benefits that firms enjoy by entering into international business.

(a) Higher profits: International business allows firms to earn higher profits by taking advantage of the price differences prevailing between countries. For instance, if the price of a commodity in the domestic market is lower than that prevailing in international markets, a firm can benefit by selling the commodity in international markets.

(b) Growth prospects: Often, firms face a saturated domestic demand. In such cases, international trade provides a platform to them to increase their consumer base by opening up the route to overseas markets. This increases their growth prospects.

(c) Higher capacity utilisation: Sometimes, the production capacity of a firm may exceed the demand for its product in the domestic market. Therefore, in such cases, trading in international markets helps in utilising its capacity fully (by serving a larger consumer base). This in turn helps the firm to improve the profitability of its operations and benefit from the economies of scale by lowering production costs and increasing the per unit profit margin.

(d) Method to escape high domestic competition: International trading allows firms to escape the stiff competition in domestic markets. If domestic traders face high competition in domestic markets, they can turn towards international markets to sell their products and earn higher profits.

(e) Enhanced business perceptions: Every business firm strives to achieve long-term growth and expansion. This objective is aligned with the objective of stepping into international markets. Hence, companies aim at diversifying their products to enter into foreign markets to reap the benefits of overseas trading, and also to achieve growth.

Answer:

Exporting refers to the process of selling goods and services to companies in other countries as per their requirements. It involves the movement of goods by air or sea from the home country (where the goods are produced) to other countries (which import these goods). On the other hand, a wholly owned subsidiary is a firm in which a parent company makes an equity investment to acquire full control over it. Despite the fact that a parent company has full control over a wholly owned subsidiary abroad, the exporting model is a better way of entering into international markets. This is because of the following factors.

(a) Lesser complexities involved: Compared with setting up a wholly owned subsidiary, exporting is a much easier way of entering into international markets. This is because export management is a much simpler and easier process without complexities. On the other hand, the management of a wholly owned subsidiary is a complex and rigorous task.

(b) Less investment required: The amount of time and money required to be invested in an export business is less than that in a wholly owned subsidiary. This is because subsidiaries involve setting up manufacturing plants and starting operations in other countries, which require large amounts of money and effort. Thus, export is a favourable mode of entering into international markets.

(c) Less exposure to risks and losses: As exporting requires a smaller investment, the risk involved is negligible. On the other hand, in the case of a wholly owned subsidiary in another country, the parent company owns 100 per cent share, and thus, it bears the entire risk in case of failure of the subsidiary. Hence, exporting is said to be a better mode of entering into international markets.

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International business is basically concerned with trading of goods and services across national boundaries. In order to enter into international business, firms have various modes available to them. The following are the different factors governing the choice of a mode of entry into international business.

(a) Complexity: Complexity is a major factor governing the choice of a mode of entry into international business. The level of complexity differs from one mode to another. For instance, the degree of complexity in setting up a wholly owned subsidiary abroad is higher than that in starting an export and import business. Thus, for businesses which want to avoid complexities in their operations, certain modes are better than others.

(b) Risk involved: Different modes of entry into international business involve different levels of risks. For instance, the risk involved in the contract manufacturing, exporting and licensing modes are comparatively negligible. On the other hand, the risk is comparatively higher in setting up a wholly owned subsidiary for entering international trade. Thus, generally, modes with lower risks are preferred by companies.

(c) Ownership and control: Some entrepreneurs prefer to have full ownership and decision-making control over the foreign firm involved in their international business. A wholly owned subsidiary gives full decision-making control to the parent company over its foreign subsidiary. On the other hand, modes of entry into international business such as licensing and exporting do not offer ownership rights to the parent company.

(d) Investment: Every mode of entry does not require the same amount of investment. For instance, the level of investment required for setting up a wholly owned subsidiary is higher than for engaging in importing and exporting or for licensing a foreign company. Thus, the mode of entry preferred by a firm depends on its capacity and readiness to make an investment.

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Foreign trade primarily involves the export of goods from countries and the import of goods by countries. In India, import and export of goods form an essential part of the overall economic activities. This can be seen in the increase of foreign trade in India’s GDP from 14.6 per cent in 1990-91 to 24.1 percent in 2003-04. Exports and imports have been increasing continuously since then.

The following table shows the major trends in India’s foreign trade.

India’s Exports and Imports: 2004-05 to 2011-12 (in crores of rupees)

Source: NCERT Page-270, Table 11.2

From the table, the following facts can be derived.

(a) Since 2004-05, there has been a continuous rise in the values of both exports and imports. As we can see, the total value of exports was Rs. 3,75,340 crore in 2004-05. However, the value increased to Rs. 11,42,649 crore in 2010-11. Similarly, the value of imports increased from Rs. 5,01,065 crore in 2004-05 to Rs. 16,83,467 crore in 2010-11. Thus, from the table, we can infer that the country has registered an impressive growth in foreign trade since 2004.

(b) Despite the tremendous increase in both exports and imports, a trend of increasing negative trade balance was seen during the same period. This negative trade balance depicts the excess of imports over exports. As we can see, the trade balance was negative in all the years mentioned and was continuously rising negatively. We can, thus, infer two important facts.

(i) The value of imports was always more than that of exports.

(ii) The rate of increase in imports was always higher than the rate of increase in exports.

However, it can be concluded that both imports and exports have experienced a phenomenal growth during the last few years. The total value of exports has been lower than the total value of imports (as inferred from the negative trade balance in the last seven years).

To analyse the major components in India’s trading, we can study the following table.

Commodity Composition of India’s Exports

Source: NCERT page-271, Table 11.3

The following conclusions can be drawn from the table above.

(a) India mainly exported products such as manufactured goods; petroleum, crude and related products; gems and jewellery; and engineering goods. In other words, India was primarily engaged in the export of finished goods.

(b) Manufactured goods were a major component of Indian exports as they made up 68 per cent of the total exports. The share of gems and jewellery and petroleum products in the total exports was also significant.

Commodity Composition of India’s Imports

Source: NCERT Page-271, Table 11.4

The following conclusions can be drawn from the table above.

(a) India mainly imported petroleum, oil and lubricants, capital goods, gold and silver, etc. In other words, India was primarily engaged in importing raw materials.

(b) Petroleum products were a major component of Indian imports as they made up 28.6 per cent of the total imports. The share of capital goods and gold and silver was also significant.

Answer:

Invisible trade basically refers to the trading of services. In other words, as services are intangible and cannot be touched or seen, the trade in services is also known as invisible trade. This trade includes services such as travel and tourism, communication and intellectual property rights. In India, the trade in services has been increasing over the years. This can be seen from the following table that depicts the share of three major components (i.e., travel, transportation and insurance) of trade in services in India.

India's Trade in Services (in Rs. Crores)

The following conclusions can be drawn from the table above.

(a) The trade in three major services (foreign travel, transportation and insurance) increased significantly during the last four decades. Out of the three, a spectacular increase was witnessed in the export of foreign travel—from Rs. 15 crores in 1960-61 to Rs, 18,873 crores in 2004-05.

(b) The imports of the three services also increased manifold. Major increases were recorded in foreign travel (from Rs.12 crores in 1960-61 to Rs.16,111 crores in 2004-05) and transportation (from Rs. 25 crores in 1960-61 to Rs.10703 crores in 2004-05).

The following table highlights the major components of service exports of India.

Percentage Shares of Major Services in Total Services Exports

Source: NCERT page-273, Table 11.7

The following trends can be seen from the table above.

(a) The change in the composition of exports has been phenomenal with a major shift from travel services to software services in the past few years. The software sector, which had only 10.2 per cent share of exports in 1995-96, enjoyed the highest share with 48.9 percent in 2003-04 and 41.7 percent in 2010-11. On the other hand, the share of travel and transportation declined from 64.3 per cent in 1995-96 to 22.2 per cent in 2010-11.

(b) In 2010-11, the share of miscellaneous items increased tremendously to 34.2 percent from 22.9 per cent in 1995-96..