Long Answer Type
Question 1: “International business is more than international trade”. Comment.
Answer: While many people view international trade and international business as synonymous terms; there is marked difference between the two. International trade only involves trade of goods and services between two or more countries. International business; however; encompasses more than just trade in goods and services.
International trade; comprising exports and imports had been an integral part of international business since ages. But of late, the scope of international business has substantially increased. Now-a-days, apart from trade in tangible goods; international trade in services has also been on the rise. International trade in banking, transportation, travel, warehousing, advertising and distribution has considerably grown in recent years.
Many companies have now begun to use different geographical locations for different parts of their business operation. For example; Nike prefers its shoes being manufactured in some East Asian nations because low cost of labor in these countries. India is one of the preferred destinations for outsourcing various business operations by many MNCs. More and more companies are now preferring to set up their base in a host country rather than just realizing on exporting their products to these markets. As a result, international business now involves more than just import and export of goods. A company may be procuring certain components of its product from one country and certain other components of its product from another country. The final product may get assembled in a third country and it may be sold in a different country. Various low-end administrative works may be outsourced from cheaper destinations; like India and Philippines to save the cost. Thus, international business now encompasses more than just trading the goods.
Hence, it is appropriate to say that international business is more than international trade.
Question 2: What is international business? How is it different from domestic business?
Answer: Manufacturing and trade beyond the boundaries of a country is called international business.
|Difference Between Domestic Business and International Business|
|Domestic Business||International Business|
|People of the same country participate in various operations of business.||People of different countries participate in various operations of business.|
|Various stakeholders of the business belong to the same country.||Various stakeholders of the business belong to different countries.|
|The mobility of factors of business; such as raw materials and people; is within the same country.||The mobility of factors of business is between many countries.|
|Customers are more or less homogenous in domestic business.||Customers show great heterogeneity in case of international business.|
|Business systems and practices are more or less homogenous.||Business systems and practices differ from one country to another.|
|The business is subject to political system and risk in one country.||The business is subject to political system and risks in different countries.|
|The business needs to comply with business laws of a single country.||The business needs to comply with business laws of different countries.|
|Domestic currency is used for business.||Various currencies are used for business.|
Question 3: What benefits do firms derive by entering into international business?
Answer: Following are the various benefits for firms by entering into international business:
- Prospects for higher profits: International business holds prospects for higher profits. Sometimes, the price of a product can be lower in the domestic market. However, the same product can fetch higher price in international markets. This helps a company to earn higher profits by entering into international business. Moreover, by shifting some of the operations to international locations; a firm can also save its costs and thus can improve its profit.
- Increased capacity utilization: A firm may have excess capacity than what is needed to fulfill the local demand. The excess capacity can only be utilized by exploring new market. A better way to do it is by exploring international markets for the products.
- Prospects for growth: Once the market in the domestic country becomes saturated, it becomes difficult to grow the turnover. Exploring a new market; in the form of international market becomes a good alternative rather than just focusing on the domestic market. Many MNCs from USA and Europe have been successful in growing their business by entering the emerging markets like India and China.
- Way out to intense competition in domestic market: Sometimes, the competition in the domestic market can be too much for a company. A way out of this intense competition is by exploring the markets in other countries. This can be a good way to be out of the competition in the domestic market.
- Improved business vision: After a certain period, a firm may witness static business in the domestic market. This can be because of lack of new visions for the business firm. By exploring new markets, a company develops new insights and vision and it may come up with better and innovative product. Lehar Kurkure is a good example of innovative product which has been developed by keeping in mind the unique preference of a particular market. This product was developed by keeping in mind the Indian taste bud. After successfully selling this product in the Indian market, the company is now selling this product in many other markets.
Question 4: In what ways is exporting a better way of entering into international markets than setting up wholly owned subsidiaries abroad.
Answer: Following are some of the advantages of exporting than setting up wholly owned subsidiary abroad:
Exporting is less complex than setting up a wholly owned subsidiary in another country.
Setting up a wholly owned subsidiary involves a higher amount of capital investment. However, exporting to a country does not involve that much investment.
By setting up a wholly owned subsidiary in another country, a firm gets exposed to various risks; like foreign exchange risk, political risk, etc. Exporting to a country prevents such risks.
Exporting to a country can be simply be begun by tying up with some exporting house in the domestic country or with a buying house in the host country. This way, the firm does not need to commit capital and other resources on the business.
Entry strategy to another country involves various steps and exporting can be a very good ploy for initial stages of entry. Once the company is assured of a good amount of business, then it can think over other options to spread in the host country.
Question 5: Discuss briefly the factors that govern the choice of mode of entry into international business.
Answer: Following are some of the factors which govern the choice of mode of entry into international business:
- Trade Barriers: Trade barriers play an important role in the choice of entry strategy for a company. Let us take the example of India to understand this issue. Before 1991, there were several trade barriers; like high import duty in the Indian market. Due to this, many companies were not interested in doing business in India. When trade barriers were reduced as a part of liberalization, many MNCs entered the Indian market.
- Political Risks: Political stability is another important factor which governs the entry strategy for a company. In the present scenario, very few companies would be interested in entering Afghanistan because of volatile political situation in that country. India offers more or less a stable political establishment. Changes in government happen through peaceful democratic process and hence many companies always view India as an attractive market.
- Economic Risks: A country’s economic stability also makes it an attractive market. Many emerging economies; like India, Brazil and China have become viable markets for MNCs because of future prospects in these economies.
- Costs: While opting for a particular mode of entry into another country, a firm has to think about the costs involved in that mode. We have read in the lesson that exporting is the cheapest mode of entering into a foreign market, while setting up a wholly owned subsidiary is the costliest mode. It depends on the point on growth curve at which the company’s business stands in the given scenario. For initial stages, exporting can be a good option but at later stages; a joint venture or wholly owned subsidiary can be good options.
- Firm Strategy: A particular mode of entry also depends on the future strategy of a firm. If a firm just wants to get some market share in the host country then exporting can be a good option. But if the firm wants to make long term brand equity in the host country, it may go for joint venture or wholly owned subsidiary.
Question 6: Discuss the major trends in India’s foreign trade. Also list the major products that India trades with other countries.
Answer: According to the chapter; India is the 10th largest economy in the world. In terms of growth; the Indian economy ranks second and next only to China. As per Goldman Sachs Report of 2004; India is projected to be the second largest economy by 2050. These figures project an encouraging picture about the Indian economy. But at present, the share of India in the world trade is very low. It is just 0.8%. China (5.9%), Hong Kong (3%), South Korea (2.6%), and many other countries are way ahead of India in this aspect. India also lags behind many countries; in terms of foreign direct investment (FDI).
Post liberalization, the share of foreign trade in the country’s GDP (Gross Domestic Product) has grown from 14.6% in 1990-91 to 24.1% in 2003-04.
India’s total merchandise export was Rs. 606 crore in 1950-51. It has grown to Rs. 293, 367 crore in 2003-04. Thus, there has been an increase of 480 times in exports in the last five decades.
India’s total import was Rs. 6.8 crore in 1950-51. It has grown to Rs. 359, 108 crore in 2003-03. This shows a growth of 590 times over the same period.
Textiles, garments, gems and jewelry, engineering products and chemicals account for the major share of India’s exports. In many products; like pharmaceuticals, tea, rice, cotton textiles, etc. India is ahead of many countries as far as exports are concerned.
In case of imports; petroleum, capital goods, electronic goods, pearl, precious and semi-precious stones have the major share.
USA, UK, Belgium, Germany, Japan, Switzerland, etc. are the major trading partners of India.
India’s service sector has shown remarkable growth post liberalization. Moreover, the sectoral composition of exports in services has changed dramatically. Earlier, travel and transportation formed the major chunk of services exports from India. This position has now been taken over by software exports from India.
The foreign investment in India has also witnessed significant growth in post liberalization period. From Rs. 201 crore in 1990-91, the foreign investment has grown to Rs. 151, 406 crore in 2003-04.
Question 7: What is invisible trade? Discuss salient aspects of India’s trade in services.
Answer: Trade which involves no tangible goods is called invisible trade. Invisible trade involves various kinds of services; including customer service, intellectual property and patents.
In normal course of development; most of the economies grow from primary economy to secondary economy and then graduate to the tertiary economy. This means that a country’s economy is mainly dependent on the primary sector during initial stages of its development. Dependence on the secondary sector happens in the intermediate stage. In case of India; the dependency directly shifted from the primary sector to tertiary sector after several years of liberalization. Compared to 1973; the share of the primary sector in GDP decreased from 73% to 60% in 2000. During the same period, the share of tertiary sector in GDP increased from 15% to 22%.
During this period, there was a remarkable change in composition of services exported from India. In 1995-96, the share of travel and transport in services export was 64.3%. This share reduced to 29.6% in 2003-04. During the same period, the share of software exports increased from 10.2% to 49%. This trend can be attributed to various factors. India has a large pool of educated software professionals and English speaking population.
This trend also indicates towards the positive aspect of services sector in India. The major share in the service sector comes from high value services rather than from low value services.