International Business - Shiv Das (for B.Com Hons Semester 6 for Delhi University) (With OCR) [Latest ed.] 9389574854, 9789389574852

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Delbl Unlversltv se,111

GBCS

[HonsJ

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I

INTERNATIONAL BUSINESS Pager DSE 4(c)

Semester

PAST YEARS

Examination Papers (Solved)

• University QUHtion Papers with Answers • Examination Questions - Topic-wise

• Strictly occo, dit'9 to Semester Courw

• Latest Syllabus

Sllllla&Sa.n www.shivdas.in

( }ii1t·r

1948

Shiv Das

Delhl l■ln- Serles

INTERNATIONAL BUSINESS PAST YEARS Examination Papers (Solved)

Shiv Das & Sons

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ANILKUMAR Best i>r.ctlc• boolc Reviewed on 8 March 2020 •

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Shiv Das College books are excellent study material for the college students. Question patterns are according to the new CBCS pattern. I also recommend Shiv Das to every B.Com. students.

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I am a student of B.Com. (Hons.) Sem V. Many questions were repeated In exam and they are from Shiv Das books. Price is also low than other books.

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By Rajiv Kumar on 12 Dec 2019 Received your books today. I find it very useful for the exam preparation. I'm impressed that you have given the latest syllabus in your books. Thank you so much for this.

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CONTENTSSyllabus

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Unit I 1. Introduction to international Business 2. lntemationaJ Business Environment Unit 3. 4. 5.

11 International Trade International and Econo1nic Organizations Regional Economic integration

Unit III 6. International FinanciaJ Environment Unit IV 7. Exchange Rate Determination

Unit V 8. Foreign Trade Promotion Measures and Organizations in India

University Question Papers

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SYLLABUS

B.Com. (Hons.) CBCS

INTERNATIONAL BUSINESS Duration: 3 ltours

Maximum Marks: 100 Lech1res: 75

Objective: The objective of the course is to expose students to the concept, importance and dynamics of international business and lndia's involvement with global business operations.

UNIT I

1. Introd11ction to International B11.siness. Globalization and its growing importance in world economy; Impact of globalization; International business contrasted with domestic business-complexities of international business; lntemati.onalization Stages and Orientations. Modes of entry into international business. 2. Intemational Brl.siness Em,ironinent. National and foreign environments and their components-Physical, ecooomic, demographic, cultural and poLitical-legaJ environments; Global trading environment -recent trends in world trade in goods and services; Trends in 111dia's foreign tmd:port. It refers to selling of goods produced in one's own country for use or resale in other countries. It may be in the fomi of merchandise export. For exnmple, export of clothing, raw materials, computers, etc., Or Export of services, F11r example, tourism, banking, insurance, engineering, management sen,ices, etc. Exports may be direct or indirect. Advantages of Export: • It avoids substantial costs of establishing manufacturing operations in the host country. • It is less risky and less costl y.

1. INTRODUCTION TO INTERNATIONAL BUSINESS

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• It gives flexibility to enter in a large number of markets outside the producer's country. Disadvantages of Export: • Fluctuations in exchange rate may cause losses to the Exporting £inn. • Less control over marketing and sale of product. • Transportation cost is an important factor. If it is very high, it may wipe out profits. Contractual agreements. Licensing, Franchising, Turnkey projects. 1. Lice11si11g. A lice11sing agreeme11t allows foreign firms, either exclusively or non-exclusively, to manufacture a proprietor's (Exporter's) product for a fixed term in a specific market. Advantages of Licensing: • Obtain extra income for technical know-how and services. • Quickly expand without much risk and large capital investment. • Pave the way for future investments in the market. • Political risk is minimized as the Licensee is usually 100% local. • ls highly attractive for companies that are new in International Business. Disadvantages of Licensing: • Lower income than in other entry modes. • Loss of control over the licensee manufacturer and his marketing operations and practices leading to loss of quality. • Risk of having trademark and reputation rained by an incompetent partner. 2. Franclrising. A firm in one country (the franchiser) authorizes a firm in a another country (the franchisee) to utilize its operating system as well as its brand names, trademarks and logos etc. The franchi�or receives royalty payments which amounts to some percentage of the franchisee's revenues. Advantages of Franchising: • Low political risk • Low cost • Simultaneous expansion into different regions of the world. • Well selected partners bring financial investment as well as managerial capabilities to the operation. Disadvantages of Franchising: • Franchisees may tum into future competitors. • A wrong franchisee may ruin the company's name and reputation in the market. 3. Tiimkey prujects. A turnkey project refers to a project when clients pay contractors to design and construct new facilities and train personnel. It is a way for a foreign company to export its process and technology. Advantages of Turnkey projects: Possibility for a company to establish a plant and earn profits in a foreign country where FDI opportunities are limited and lack of expertise in a specific area.

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Disadvantages of Turnkey projects: • Risk of revealing company's secrets to rivals. • Take over of the plant by the host country. 4. Wholly Owned S11bsidia·ries. A wl,olly owned subsidiary includes two types of strategies: Greenfield investment and Acquisitions. To decide which entry mode to use depends on the ground situation. The firm can either set up a new operation in a foreign country, known as Greenfield venture, or it can aquire an established firm in that host nation and use that firm to promote its products (acquisitions).

Advantages of Wholly Owned Subsidiaries: • Wholly owned subsidiary gives the firm tight control over operations in different countries. • It may be beneficial if a firm is trying to realize location and experience curve economies. Disadvantages of Wh.oUy Owned Subsidiaries: • It is a costly method of serving a foreign market from Capital investm.ent point of view. • By applying acquisitions, some companies significantly increase their levels of debt which can have negative effects on the firm because high debt may cause bankruptcy. 5. Joint Ventures. A JV refers to establishing a firm that is jointly owned by two or more independent firms. There are five common objectives in a Joint venture: market entry, risk/reward sharing, technology sharing and joint product development, and conforming to government regulations. Other benefits include political coMections and distribution channel access. Disadvantages Joint Venture: • Conflict over asymmetric new investments. • Mistrust over proprietary knowledge. Q. 12. Identify the mode of entry in the following cases and explain ibi advantages and disadvantages: [2015 (1) Airtel has pl.ll'Chued Zain TelecommunicatiOJlli in South Africa. (2) There are a large no. of Pizza-hut restauranbi in India but none of them is owned by Pizza-hut. (b) (1) Mode of entry-Acquisition. International acquisition is one in which a firm acquires an existing host country. By acquiring a current business, the purchaser gains control over the acquired .firm's assets, employees, technology, brand names and distribution. It is faster than any other mode. Advantages ofAcquisition: • Speed. It provides the ability to speedily acquire resources and competencies not held in house. It allows entry into new products and new markets. Risks and costs of new product development decrease. • Market power. It builds market presence. Market share increases. Competition decreases. Excessive competition can be avoided by shut down of capacity. Diversification is aggrieved and synergistic benefits are gained.

1. INTRODUCTION TO INTERNATIONAL BUSINESS

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• Overcomes entiy barrier. It overcomes market entry barrier by acquiring an existing organization. The risk of competitive reaction decreases. Financial gain. Organization with low share value or low price earning • ratio can be acquired to take short-term gains through as.sets stripping. • Resources and competencies. Acquisition of resources and competencies n.ot available in-house can be a motive for merger and acquisition. • Stakeholder expectations. Stakeholders may expect growth through acquisitions.

Dis11dvantages of A cq11isition:

• Integration problems. The activities of new and old organizations may be difficult to integrate. Cultural fit can be problematic. All organizations will involve some conflict and turbulence during the process of acculturation. Employees may resist it. • High cost. The acquirer may pay high cost, especially in cases of hostile takeover bids. Value may not be added for the acquirer. • Firancial consequences. 1be returns from acquisitions may not be attractive. Executed cost saving may not materialize. • Unrelated diversification. This may create problem of managing resources and competencies. • Too much focus. Too much managerial focus on acquisition can be detrimental to internal development. (2) Model of Entry-francl1ising. It is a contractual agreement of goods, services and business model for specified fees usually a signing fee and percentage of the franchisee's revenue or profits. The franchiser provides I.Tade mark, operating system, well-known products as well as service support such as advertising, quality assurance, specialized training to the franchisee. Advantages of Franclrising: • association with a well established brand, reputation and product or service; • assistance with site selection, lease negotiation, site development, builders and shop fitters; • assistance with outlet design and equipment purchasing; • initial management training and continuing management assistance; • access to group/national market research, along with advertising and merchandising assistance; • access to established standard procedures, operating manuals and stock control systems; • assistance in securing finance and sometimes financial assistance in establishing tl1e business; • access to financing packages which may be more attractive and easier to access than for non-franchised businesses; and • access to established financial systems and checks which can provide early warning signals to highlight trouble spots. Disadvantages of Franchising: • inconsistent product quality may affect product image negatively.

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• the agreement generally prohibits the originating firm from exploiting the assets in particular .foreign markets. • does not give firm tight control over manufacturing, marketing and strategy to realize experience curve and economies of scale. • firm can lose control over the competitive advantage of their technological know-how.

Q. 13. \Vhat is a Transnational Corporation (TNC)? Explain its characteristic features.

Ans. A Transnational Corporation is an enterprise that manages production or delivers services in more than one country. A 1NC is a corporation that has its headquarters in one country, known as the home country and operates in several other countries, known as host countries. Examples ofTNCs. Royal Dutch Shell Group (Netherlands/United Kingdom); Daimler Ouysler AG (Germany/USA), Unilever (Netherlands/United Kingdom); Rio Tinto Pk (Australia/United Kingdom). The growth in the number and size of transnational corporations since the 1950s has generated controversy because of their economic and political power and the mobility and complexity of their operations. Feature�Characteristics of Transnation11l corporations:

(t) Transnational compa.nies operate in two or more countries, including in its country of origin. Its business, such as sales, extraction or manufacturing and spans multiple countries. Its management system focuses on a global or regional outlook. (i1) Transnational companies tend to adapt their services or goods to the local preferences of the host countries. (iii) 11,ey also strive to craft a business model that suits the particular regions in which they operate by blending their strategies wiili the development policies of the host countries. (iv) There is often an emphasis on green and sustainable development in ilie local region as a result of studying and responding to the local ecological envirorunent' s needs. (v) Transnational companies emphasize their own global strategies that ensure ilieir continued thriving in ilie international scene and ilieir long­ term development and expansion.

The main advantag es of Transnational corporations:

(1) 11le investment level, employment level, and income level of the host country increases due to the operation of TNCs. (i1) The industries of the host country get latest technology from foreign countries through TNCs. (iit) The host country's business also gets management expertise from 1NCs. (iv) The domestic traders and market intermediaries of the host country get inc�sed business from the operation of 1NCs. (v) 1NCs break protectionism, curb local monopolies, create competition among domestic companies and thus enhance their competitiveness. (m) Domestic ind.ustries can rnake use of R and D outcomes of TNCs. (vit) 11le host country can reduce imports and increase exports due to goods

1. INTRODUCTION TO INTERNATIONAL BUSJNESS

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produced by TNCs in the host country. This helps to improve balance of payment (uiir) Level of industrial and economic development increases due to the growth of TNCs in the host country. The limitations of Transnational Corporations. Some critics argue that trans­ national corporations exhibit no loyalty to the countries in which they are incorporated but act solely in their own best interests. Transnational corporations with headquarters in the United States have played an increasingly dominant role in the world economy. This dominance is most pronounced in the developing countries that rely primarily on a narrow range of exports, usually primary goods. A transnationals corporation has the ability to disrupt traditional economies, impose monopolistic pra.ctices, and assert a political and economic agenda on a country. The basic difference between a m11lti11ational and a transnational lies in the fact that transnational company is borderless, as it does not consider any particular country as its base, home or headquarters. Multinationals have branches in other countries, whereas transnational have subsidiaries.

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2.

International

Business

Environment:

National and foreign environments and their components -Physical, Economic, Demographic, cultural and political-legal environments; Global trading environment; Recent Trends in World Trade in goods and Services; Trends in India's foreign trade.

Q. 1. \'Vhat do you understand by Busin.ess Environment? Ans. The business environment is the set of forces surrouncling an organisation that has the potential to affect the way it operates and has access to resources. It may be visualiz.ed in temlS of three layers surrouncling the organisation from the General environment to Specific environment and to Domain, beginning with the immediate internal environment of the organisation, to the general environment. The environment influences the organisation, i.e., its strategy, structure and operations. T11e General environment. It includes those sectors that might not have direct impact on the daily operations of the firm but will influence it. It is less overt and indirect but creates major opportunities and threats to all industries and to all organisations in a given industry, but in different ways which may be favourable or unfavourable in varying degrees. It consists of several sectors or dimensions such as - economic, political legal, technological, cultural and social. Each sector has its own structural, regulatory and ethical practices. T11e Specific e11viron111ent. lt consist of forces of stakeholde.r groups that directly affect an organisation's capacity to attract resoun:es. lt entails suppliers, customers, shareholders, unions and distributors, etc. with whom the organisation interacts on regular basis and on whose support depends its survival and growth. An organisation's strategy and achievement of goals largely depend on how much it satisfies them. Govemmtnt and intm111tiona/ forces prevail both in general as we.II as specific environment. Tl1e Organisational Do,nain. It refers to the particular range of goods and services that the organisation produces, the customets and other stakeholders and market it serves. Earlier these environmental forces were seen as centred on the home country of the business, but the environmental horizon of business has now widened and grown to many countries requiring consideration of internal forces along with global forces.

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□ Gelegations. Trade/Economic Missions result in creating necessary awareness in the region regarding India's economic reforms, strength of Indian industry and its export capabilities. These also provide impetus for businessmen to explore new markets, High­ level trade missions shall be mounted to the OS region. 89

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(iu) Roles ide.ntified for some important Government Organisations: India Trade Promotion Organisation (JTPO). The India Trade Promotion Organisation (ITPO) shall undertake various trade promotion measUJ'es, which would include: • Participation in specialised and commodity specific fairs and exhibitions in the countries of the region. countries. • Special promotion and publicity in the • India Promotion in Departmental Stores in respect of consumer products. • Organising Buyer-Seller Meets. • Promotion by Indian Mission by organising catalogue/brochure exhibitions. • To award top export performers to the CIS countries.

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National Centre far Trade Infannation (NCTI):

• Jointly promoted by India Trade Promotion Organisation (ITPO) and National Informatics Centre (Nlq, this organisation is involved in assimilation and dissemination of useful trade information. • Ncn provides contact details of product wise specific buyers through the World Trade Point Federation Network (www.ncti-india.com) initiated under the Trade Efficiency programme of UNCTAD. Currently there are more than 100 Trade Points across the globe two of which are located in Russia and one in Uzbekistan. • NCTI also has access to the requisite database and expertise to provide trade data analysis helpful in country and product specific strategy formulation. • NCTI has signed an MoU with National Centre for Marketing and Price Study, Ministry of Foreign Affairs of the Republic of Belarus for exchange of trade related information. Various Organizations tl,at l1aue been set up to promote Foreign Trade: (r) Export Promotion Councils. These are set up with a view to securing active cooperation of growers, producers and exporters in order to increase exports. These councils have been set up as non-profit organizations under the Companies Act. For example, Cashew Export Promotion Council, Cochin; Silk Export Promotion Council, Mumbai; Engineering Export Promotion Council, Kol.kata. (ii) Commodity Boards. These are set up for the development of certain commodities £or export purposes. They deal with the entire range of problems of production, development, marketing etc. Example, the Coffee Board, the Rubber Board, the Central Silk Board, the Tea Board, etc. (ii,) The Export Inspection Council (EiC). EIC has been set up with the objective of exporting goods of good quality and for lending confidence in foreign buyers in respect of quality. lt has been set up in five zones­ Delhi, Mumbai, Kol.kata, Chennai and Cochin. (iv) Trade Development Authority. The authority was set up in 1971. lt assists in product development and helps in raising the technological level of the selected industrial exports. It works through lnfonnation Division Research and Analysis Division and Merchandising Division.

8. FOREIGN TRADE PROMOTION Ml!ASURES &: ORGANIZATIONS IN INDL4. 91

(v)

Indian Institute of Foreign Trade (IlFI'). It is an autonomous body

registeted under the Societies Registration Act. The main functions of IIFT are training of personnel in export trade, research and surveys of projects in export and collection and dissemination of information. (v1) Department of Commerce. The Deparbnent of Commerce in the Ministry of Commerce is the apex body of the institutional infra­ structure created for the promotion of exports. It is responsible for making and directing India's foreign trade policy and programmes. It is also responsible for implementing various trade promotional measures and the development and regulation of export oriented industries. (vii) Freight Investigation Bureau (FIB). It serves as a link between shippers and shipping companies to solve shipping and freight problems. It was set up in 1959 under the Directorate General of Shipping. It collects, maintains and examines freight rates of Shipping Lines and analyses the impact of changes in rates of freight. Q. 2. Write short notes on the foUowing: (11) SEZs and their importance in the Indian Economy (b) EOUs (c) EXIM Bank Ans. (11) SEZs 11nd tlreir import11nce in the Indian Economy. Special Economic Zone (SEZ) is a geographical region that has special economic laws different from a country's typical economic laws. An SEZ is a trade capacity development tool with the goal to promote rapid economic growth by using tax and business incentives to attract foreign investment and technology. The functions of the SEZs in lndia are governed by a three tier administrative body. The Board of Approval is the apex body and is headed by the Secretary, Department of Commerce. Tire main objectives of tire SEZ Act, 2005 are: (1) Generation of additional economic activity; (ii) Promotion of exports of goods and services; (iit) Promotion of investment from domestic and foreign sources; (iv) Creation of employment opportunities; and (v) Development of infrastructure facilities. It is expected that this will trigger a large flow of foreign and domestic investment in SEZs, infrastructure and productive capacity, leading to generation of additional economic activity and creation of employment opportunities. In India, SEZs have played an important role in facilitating exports, thereby enabling the country to be a part of the globalization process. The SEZ sector contributed 924 per cent of the total exports from the Central Government SEZs in FY 2011. Over the years the increasing attractiveness of the Indian market has lured investors from across the world making India a preferred destination for FDI from Asian, European and North American investors. Some of the successful Indian SEZs include• Nokia Special Economic Zone ([elecom Equipment SEZ} • Mahendra City SEZ (Apparel and Fashion Accessories, IT/ Hardware, Auto-ancillary) • Apache SEZ Development India Private Limited (Footwear SEZ).

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(b) EOU. An Export Oriented Unit (EOU) is one which only produces goods which are meant for export. 100 per cent of its output has to be exported against which the company gets many benefits and preferences including tax benefits and export subsidies. The main objective of the EOU scheme is to increase exports, earn foreign exchange for the country, and import of latest technologies to stimulate direct foreign investment and to generate additional employment. The EOUs are licensed to manufacture goods within the bonded time period for the purpose of export. As per the Exim Policy, the period of bonding is initially five years, which is extendable to another five years by the Development Commissioner. The EOUs are required to achieve the minim.wn NFEP (Net Foreign Exchange Earning as a Percentage of Exports) and the minimum EP (Export Performance) as per the provisions of EXIM Policy which vary from sector to sector. Major Sectors in EOU. Granite, Textiles/Garments, Food Processing, Chemicals, Computer Software, Coffee, Pharmaceuticals, Gem & Jewellery, Engineering Goods, Electricals & Electronics, Aqua & Pearl Culture. In tl,e following sectors, a11 EOU owner needs a special license. • Anns and ammunition, • Explosives and allied items or Defense Equipment, • Defense aircraft and warships, • Atomic substances, • Narcotics and psychotropic substances and hazardous chemicals, • Distillation and brewing of alcoholic drinks, • Cigarettes/cigars and manufactured tobacco substitutes. (c) .EXlM Bank. Export-Import Bank of lndia is the premier export finance institution of the country, set up in 1982 under the Export-Import Bank of India Act, 1981. Government of India launched the institution with a mandate, not just to enhance exports from India, but to integrate the country's foreign trade and investment with the overall economic growth. Since its inception, Exim Bank of India has been both a catalyst and a key player in U1e promotion of cross border trade and investment. Commencing operations as a purveyor of export credit, like other Export Credit Agencies in the world, Exim Bank of India has, over the period, evolved into an institution that plays a major role in partnering Indian industries, particularly the Small and Medium Enterprises, in. their globalization efforts, through a wide range of products and services offered at all stages of the bm,iness cycle, starting from import of technology and export product development to export production, export marketing, preshipment and post­ shipment and overseas investment. Objectives of EXlM Biink. The objectives of EXIM Bank are as follows: • Provision of financial, technical and administrative assistance in the import and export sectors. • Planning, promotion, development and financing of export imported concerns. • Undertaking and financing research, surveys and techno-economic studies in relation with the promotion and development of foreign trade. • Collection, compilation and dissemination of market and credit information in respect of international trade.

8. FOREIGN TRADE PROMOTION MEASURES & ORGANIZATIONS IN INDL� 93

F11nctio11s of Exim Bank • Provision of .financial support for the export and import of goods and services, not only of India but also of third world countries. • Provision of financial help for the exports and imports of machin ery and equipment on lease basis. • Provision of financial help for facilitating joint ventures in foreign countries. • Undertaking of limited merchant banking activities such as underwriting of stocks, shares, debentures, etc. of companies engaged in the export­

import sectors; • Provision of financial, technical and administrative assistance to parties engaged in the export-import sectors. The Bank has strong linkages with other stakeholders in agri-sector such as Ministry of Food Processing industries, GOI, NABARD, APEDA, Small Farmers Agri-Business Consortiun1 (SPAC), National Horticulture Board, etc. Apart from financing, the bank also provides a range of advisory services to exporters. Th.e Bank also publishes a number of Occasional Papers, Working Papers on export potential of various sub-sectors in agriculture and bi-monthly publication in different languages on global scenario in agri-business and opportunities therein. Q. 3. Write a note on lndilln Joint Ventures and acquisitions abroad.

Ans. Indian Joint Venhires Abroad. A Joint Ventw:e Abroad means a foreign concern formed, registered or incorporated in a foreign country with a foreign partner in accordance with the laws and regulations of the country in which investment has been made by an lndian entity. Joint venture undertakings are established abroad by the Indian entrepieneurs for building up an export potential for their products manufactured through foreign collaboration in the developing countries where there is a favourable political climate and a demand for the Indian products. Significance of ]Vs abroad: • Joint Ventures/Wholly Owned Subsidiaries abroad promote economic co-operation between India and the host countries. • Joint Ventures abroad result in transfer of technology and skills, sharing the results of Research and Development, access to the global market, promotion of the brand image, generation of employment and utilization of raw materials available in India and the host country, • Increased exports of plant and machinery and goods and services from India, foreign exchange earnings through dividend earnings, royalty, technical know-how fee, etc. For t1iis purpose, tl,e Government offers t1,e following oppommities: (1) Opportunities to increase the export potential of the Indian companies; (i1) Facility of repatriation of capital, dividend and royalty and remuneration earned outside India from Joint Ventures; (iir) Incentives under the Income-tax Act Q. 4. Write a brief note on regional economic integration. Or, Define regional economic integration. Discuss its advantages and disadvantages. Also discuss its types.

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Or, Discuss the cost and benefit of regional econ.omic integration.

Aru. Regional economic integration refers to the efforts to promote free and fair trade on a regional basis. It enables countri.es to focus on issues that are relevant to their stage of development as well as encourage trade between neighbours. Regional economic integration refers to cooperation between various countries of a particular region in order to develop that particular area. It includes eco11omic integration of various trading areas of different countries.

Types of regional economic integration: (1) Free trade area. This is the most common form of regional economic

integration. Member countries remove all barriers to trade between themselves but are free to independently determine trade policies with non-member nations. Example, North American Free Trade Agreement (NAFTA). (it) Custom union. It encourages economic cooperation as in a tree trnde zone. Barriers to trade are removed between member countries in a sim.ilar manner. Members may agree to treat trade with non-members. Example, The Gulf Cooperation council (GCq. (iii) Common market. It allows for the creation of economically integrated markets between member countries. Trade barriers are removed along with restrictions on the movement of labour and capital between member countries. There is a common trade policy regarding trade with union members. Example, Common Market For Eastern And Southern Africa (COMFSA). (iv) Economic union. It is created when countries enter into an economic agreement to remove barriers to trade and adopt common economic policies. Example, European Union (EU).

Advantages/benefits of regio1,nl economic integration: (1) Regional economic market can provide a larger market as compared to

the domestic market. With the widened size of market both intern.al as well as external economies of scale are possible. (ii) Large market allows a high degree of sophistication and specialisation of products conducive to expansion of industrial development Moreover the specialisation for regional trade would encourage the flow of investment into industries that have a comparative cost advantage.

Gains from i11ternational trade increases: (1) Regional economic integration can result in favourable change in cost and price structure along with desirable change in the structure and

composition of foreign trade for the 01ember countries. (ii) Regional economic integration can facilitate optimum allocation of resources thereby increasing the efficiency in production. (iit) Better production and enhanced consumption along with rise in real income results in overall growth and development for the member countries. ('iv) Increased competition within the common market is very beneficial for the consumers.

Disadvantagefi/'cost/limit«tions associated witlr regional economic integration.

(1) Regional economic integration can create trade barriers against non­ member countries.

8. FOREIGN TRADE PROMOTION MEASURES & ORGANIZATIONS IN INDL� 95 (i1) Due to trade barriers trade may get diverted from a non-member countxy to a member country despite the inefficiency in cost. (iii) Regional economic integration requires member countries to give up certain degree of control over major policies like trade, monetary and fiscal policies. Higher the level of integration, greater the degree of controls that need to be given up. (iv) It can result in employment shifts and reductions. Nations may move to cheaper labour markets in member countries, while workers may move to gain access to better jobs and wages. (v) Retaliation of non-members is another disadvantage of regional economic integration. Non-members may form their own trade blocks leading to trade wars. (rr) Increased competition can lead to substantial corporate restructuring resulting in layoffs and other undesirable consequences. (vii) Another disadvantage of regional economic integration is that it provides protection to inefficient membeI nations. (viii) Once new regional laws come into effect, member countries may lose their sovereignty. (ix) Regional economic integration Hice European Union may create a common currency. Th.is can lead to financial crisis. (x) Regional economic integration can result in cultural centralisation. Q. 5. What are the different modes of payment In Foreign Trade? (2013 Ans. Differe11t modes of payment in Foreig,1 Trade. To succeed in today's global marketplace and win sales against foreign competitors, exporters must offer their customers attractive sales tenns supported by appropriate payment methods. An appropriate payment method must be chosen carefully to minimize the risks involved while also accommodating the needs of the buyer. Tliere are four primary met/iods of payment for international transactions. 1. Cash-in-Advance. With cash-in-advance payment terms, the exporter can avoid credit risk because payment is received before the ownership of the goods is transferred. For example, Payments made through wire transfers and credit cards. However, aslcing for payment in advance is the least attractive option for the buyer, because not only does it create cash-flow problems, but the buyers are also concerned whether the goods would be delivered or not. Thus, exporters who insist on advance payment method as their sole manner of doing business may lose to competitors who offer more attractive payinent tenns.

2 Letter of Credit (Lq. Letters of credit (LC) is one of the most secure instruments available to international traders. An LC is a commitment by a banlc on behalf of the buyer that payment will be made to the exporter, provided that the terms and conditions mentioned there in or agreed u:pon have been roet, as verified through the presentation of all required documents. The buyer pays his or her bank to render this service. An LC is useful when reliable credit information about a foreign buyer is difficult to obtain, but the exporter is satisfied with the creditworthiness of the buyer's foreign banlc. 3. Documentary collection (D/C). Documentary collection (D/ C) is a transaction whereby the exporter entrusts the collection of a payment to the

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smvA DELHl UNIVERSTIY SERIES

remitting bank (exporter's bank), which sends documents to a collecting bank (importer's bank), along with instructions for payment. Funds are received from the importer and remitted to the exporter through the banks involved in the collection in exchange for those documents. 4. Open Account transaction. An open account transaction is a sale where the goods are shipped and delivered before payment is due, which is usually within 30 to 90 days. Obviously, this option is the most advantageous option to the importer in terms of cash flow and cost, but it is consequently the highest risk option for an exporter. Therefore, exporters who are reluctant to extend credit may lose a. saJe to their competitors. However, the exporter can offer competitive open account terms while substantially reducing the risk of non-payment by using one or more of the appropriate trade finance techniques, such as export credit insurance. Q. 6. Distinguish between Trade &; Investment-related modes of entry into international business.

Ans. Trade-Related modes of entry. Foreign trade is exchange of capital, goods and services across international borders or territories. In most countries, it represents a significant share of gross domestic product (GDP). It is a trade between two or more countries and we can separate it into three parts. • Import-Affluent countries import resources and commodities when they find comparative advantages in sourcing from foreign locations. • Export-It involves selling domestically produced products in foreign market through brokers or overseas distribution centres. • Entrepot-lmport goods for re-export after previous operations. Every country has lack of any resource and due to this fact they have to trade goods etc. with other countries worldwide. Now-a-days, in the era of globalization demand for goods and services is increasing. This natural trade has existed for centuries, but now we have better logistics and faster shipments and cooperation between countries is easier. Problems that traders are facing are in general different currencies, Jaw systems, regulations and in some places trade barriers. Investment-Related mode of entry. Investment from one country into another (normally by companies rather than governments), that involves establishing operations or acquiring tangible assets, including stakes in other businesses. POI means investment of foreign assets into domestic structures, organizations and equipments. It is a key element in economic integration and creates direct, stable and long-lasting llnl