Detailed, Step-by-Step NCERT Solutions for 11 Business Studies Chapter 11 International Business 1 Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.
International Business 1 NCERT Solutions for Class 11 Business Studies Chapter 11
International Business 1 Questions and Answers Class 11 Business Studies Chapter 11
Multiple Choice Questions:
In which of the following modes of entry, does the domestic manufacturer give the right to use intellectual property such as patent and F trademark to a manufacturer in a foreign country for a fee:
(b) Contract Manufacturing
(c) Joint venture
(d) None of these
Outsourcing a part of or entire production and concentrating on marketing operations in international business is known as
(c) Contract manufacturing
(d) Joint venture
(c) Contract manufacturing
When two of more firms come together to create a new business entity that is legally separate and distinct from its parents it is known as :
(a) Contract manufacturing
(c) Joint ventures
Which of the following is not an advantage of exporting?
(a) an Easier way to enter into international markets
(b) Comparatively lower risks
(c) Limited presence in foreign markets
(d) Fewer investment requirements
(c) Limited presence in foreign markets
Which one of the following modes of entry requires higher level of risks?
(c) Contract manufacturing
(d) Joint venture
Which one of the following modes of entry permits greatest degree of control over overseas operations?
(b) Wholly owned subsidiary
(c) Contract manufacturing
(d) Joint venture
(b) Wholly owned subsidiary
Which one of the following modes of entry brings the firm closer to international markets?
(c) Contract manufacturing
(d) Joint venture
(d) Joint venture
Which one of the following is not amongst India’s major export items?
(a) Textiles and garments
(b) Gems and Jewellery
(c) Oil and petroleum products
(d) Basmati rice
(c) Oil and petroleum products
Which one of the following is not amongst India’s major import items?
(a) Ayurvedic medicines
(b) Oil and Petroleum Products
(c) Pearls and precious stones
(a) Ayurvedic medicines
Which one of the following is not amongst India’s major trading partners?
(d) New Zealand
(d) New Zealand
Short Answer Questions
Differentiate between International Trade and International Business. –
- International trade means movements of goods only.
- It involves only the movements of goods and international currency is used for dealing.
- International trade is a narrow term.
- Business transaction that takes place between two or more countries is known as international business. It involves not only the international movements of goods and services but also capital, personnel, technology and intellectual property like trademarks, patents.
- International business is much broader than international trade.
Discuss any three advantages of International business:
Not with standing greater complexities and risks, international business is important to both nations and business firms. It offers them several benefits. The growing realisation of these benefits over time has in fact been a contributory factor to the expansion of trade and investment amongst nations, resulting in the phenomenon of globalisation.
(i) Earning of Foreign Exchange – International business helps a country to earn foreign exchange which it can later use for meeting its imports of capital goods, technology, petroleum products and fertilizers, pharmaceutical products and a host of other consumer products which otherwise might not be available domestically.
(ii) Increased Standard of Living – In the absence of international trade of goods and services, it would not have been possible for the world community to consume goods and services produced in other countries that the people in these countries are able to consume and enjoy a higher standard of living.
(iii) Prospects of Higher Profits – International business can 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.
What is the major reason underlying trade between nations?
The major reason behind the international business is that the countries have unequal distribution of natural resources among them or have differences in their productivity levels because of which they cannot produce all that they need equally well or at equal costs.
Trade between nations allows a country to produce what a country can produce more efficiently, and trade the surplus production so generated with other countries to procure what they can produce more efficiently.
Discuss as to why nations trade?
The countries have unequal distribution of natural resources among them or have differences or at equal costs. Availability of various factors of production such as labour, capital and raw materials that are required for producing different goods and services differ among nations.
Moreover, labour productivity and production costs differ among nations due to various socio-economic, geographical and political reasons. Due to these differences, each country finds it advantageous to produce those select goods and services that it can produce more efficiently at home, and procuring the rest through trade with other countries which the other. countries can produce at lower costs. This is precisely the reason as to why countries trade with others.
Enumerate Limitations of Contract Manufacturing.
Limitations – The major limitation of contract manufacturing to international firm and local producer in foreign countries areas follows :
Local firms generally are not serious in regard to production design and quality standards ,thus causing serious product quality problems to the international firm.
Local manufactures in the foreign country have little control over the manufacturing process because goods are produced strictly as per the terms and specifications of the contract between the nations.
The local firm producing under contract manufacturing is not free to sell the contracted goods as per his own desire. It has to sell the goods to the international company at predetermined prices. This results in lower profits for the local firm if the open market prices for such goods happen to be higher than the prices agreed upon under the contract.
Why is it said that licensing is an easier way to expand globally?
Licensing is contractual agreement in which one firm grants access to its patents, trade secrets or technology to another firm in a foreign country for a fee caused royalty. The firm that grants such permission to the other firm is known as licensor and the other firm in the foreign country that acquires such rights to use technology or patents is called the licensee. It is not only technology that is licensed.
In the fashion industry, a no. of designers license the use of their names. In some cases, there is exchange of tech, between the two firms. Sometimes there is mutual exchange of knowledge, technology and/or patents between the firms known as cross-licensing.
(i) Since the business in the foreign country is managed by the licensee who is a local person, there are lower risks of business takeovers or government interventions.
(ii) Licensee being a local person has greater market knowledge and contracts which can prove quite helpful to the licensor in successfully conducting its marketing operations.
(iii) As per the terms of the licensing agreement, only the parties to the licensing agreement are legally entitled to make use of the licensor’s copyrights, patents and brand names in foreign countries. As a result, other firms in the foreign market cannot make use of such trademarks and patents.
Differentiate between contract manufacturing and setting up wholly-owned production subsidiary abroad.
Contract manufacturing refers to a type of international business where a firm enters into a contract with one or a few local manufacturers in foreign countries to get certain components or goods produced as per its specifications while in a wholly-owned subsidiary the parent company acquires full control over the foreign company by making 100% investment in its equity capital.
Distinguish between licencing and franchising.
Licencing and Franchising Differences – Licencing is an arrangement between the firms for granting access to patents, trademarks or technology for agreed payment, “franchising is basically a specialised form of licensing in which the franchiser not only sells intangible property (normally a trademark) to the franchisee, but also insists that the franch isee agrees to abide by strict rules as to how to does business.” Charles W.L.HiU
Franchising is a “form of licensing in which a parent company (the franchiser) grants another independent entity (the franchisee) the right to do business in a prescribed manner. This right can take the form of selling the franchisers products, ‘using its name, production and marketing technique, or general business approach.” Donald W.Hackett
Licensing and Franchising-Licensing is a contractual agreement in which one firm grants access to its patents, trade secrets or technology to another firm in a foreign country for a fee called royalty. The firm that grants such permission to the other firm is known as licensor and the other firm in the foreign country that acquires such rights to use technology or patents is called the licensee.
It may be mentioned that not only technology is licensed, but also exchange of technology. In the fashion industry, a number of designers license the use of their names. In some cases, there is exchange of technology between the two firms. Sometimes there is mutual exchange of knowledge, technology and/or patents between the firms which is known as cross-licensing.
Franchising is a term very similar to licensing. One major distinction between the two is that while the former is used in regard with production and marketing of goods, the term franchising applies to service business specifically. The other point of difference between the two is that franchising is relatively more strictly adhered than licensing.
Franch users usually set strict rules and regulations as to how the franchisees should operate while running their business. Barring these two differences, franchising is pretty much the same as licensing. Like in the case of licensing, a franchising agreement too involves grant of rights by one party to another for use of technology, trademark and patents in return of the agreed payment for a certain period of time.
The parent company is called the franchiser and the other party to the agreement is called franchisee. Various service providers like restaurant, hotel, travelling agency, bank, wholesalers and retailers has developed a unique technique for marketing of services in their own brand name and trademark.
It is the uniqueness of the technique that gives the franchiser an edge over its competitors in the field, and makes the would-be-service providers interested in joining the franchising system. McDonald, PizzaHutand Wal- Mart are examples of some of the lead ing franchisers operating worldwide.
Advantages – As compared to joint ventures and wholly-owned subsidiaries, licensing/franchising is relatively a much easier mode of entering into foreign markets with proven product/technology without much business risks and investments.
Some of the specific advantages of licensing are as follows:
(i) Under the licensing/franchising system, it is the licenser/franchisees who sets up the business unit and invests is/her own money in the business. As such, the licensor/franchiser has to virtually make no investments abroad. Licensing/franchising is, therefore, considered a less expensive mode of entering into international business.
(ii) Due to lesser foreign investment of the licensing/franchising unit is involved, the licensor or franchiser does not bear any loss arises. Licensor/franchiser is paid by the licensee/franchisee by way of fees fixed in advance as a percentage of production or sales turn over. This royalty or fee keeps to the licensor/franchiser so long as the production and sales keep on taking place in the licensee’s/ franchisee’s business unit.
(iii) 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.
(iv) Licensee/franchisee being a local person has greater market knowledge and contacts which can prove quite helpful to the licensor/’ franchiser in successfully conducting its marketing operations.
(v) As per the terms of the licensing/franchising agreement, only the parties to the licensing/franchising agreement are legally entitled to make use of the licensor’s/franchiser’s copyrights, patents and brand names in foreign countries. As a result, other firms in the foreign market cannot make use of such trademarks and patents.
Limitations – Licensing/franchising as a mode of international business suffers from the following weaknesses :
(vi) Licensee or franchisee may after becoming shilled in the “manufacture and marketing of products pose services competition to licensor or franchise.
(vii) If not maintained properly, trade secrets can get divulged to others in the foreign markets. Such lapses on the part of the licensee/ franchisee can cause severe-losses to the licensor/franchiser.
(viii) Overtime, 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 parties.
List major items of India’s exports.
The major items of India’s exports may include Textiles and garments, gems and jewellery, engiheering products and chemicals, leather products, agricultural and allied products etc. Table shows the India’s contribution in the field of export in international markets.
Commodity Composition of India’S Exports
Manufactures, textile yams fabrics, garments and tobacco, its share is much higher and ranges between 3 percent to 13 percent. India even holds the distinct position of being the largest exporter in the world in select commodities such as basmati rice, tea, and ayurvedic products.
So far as imports are concerned, products likes crude oil and petroleum products, capital goods (i.e., machinery), electronic goods, pearl, precious and semi-precious stones, gold, silver and chemicals constitute major items of India’s imports.
What are the major terns that are imported by India?
The major imports of India are crude oil and petroleum products, capital goods, electronic goods, pearl and precious stones, gold, silver, edible oils, chemicals etc.
Commodity Composition of India’S Imports
List the major countries with whom India trades.
India’s major trading partners include USA, UK, Belgium, Germany, Japan, Switzerland, Hong Kong, UAE, China, Singapore and Malaysia. USA is the leading partner sharing 11.6% in total trade. The table shows the contribution of major countries in India’s foreign trade.
Long Answer Questions
What is International Business? How is it different from Domestic Business?
The radical changes in the development of communication, technology, infrastructure have brought nations closer to each other. (WTO) World Trade Organizations and economic reforms initiated by various governments have also been a major contributory factor to the increased interactions and business relations amongst the nations.
International Business vs. Domestic Business – Due to variations in the political, social, and cultural economic systems of countries, the operation of international business becomes more complex than domestic trade. Business firms find it difficult to extend their domestic business strategy to foreign markets.
To be successful in the overseas markets, they need to adapt their product, pricing, promotion and distribution strategies and overall business plans to suit the specific requirements of the target foreign markets.
Key aspects in respec to which domestic and international businesses differ from each other are discussed below.
(i) Nationality of buyers and sellers – Nationality of the key participants (i.e., buyers and sellers) to the business deals differs between domestic and international businesses.
In the case of domestic business, both the buyers and sellers are from the same country. This makes it easier for both the parties to understand each other and enter into business deals. But this is not the case with international business where buyers and sellers come from different countries.
Because of differences in their languages, attitudes, social customs and business goals and practices, it becomes relatively more difficult for them to interact with one another and finalise business transactions.
(ii) Nationality of other stakeholders-Domestic and International Businesses also differ in respect of the nationalities of the other stakeholders such as employees, suppliers, shareholders/partners and general public who interact with business firms.
While in the case of domestic business all such factors belong to one country, and therefore relatively speaking depict more consistency in their value systems and behaviours; decision making in international business becomes much more complex as the concerned business firms have to take into account a wider set of values and aspirations of the stakeholders belonging to different nations.
(iii) Mobility of Factors of Production – Various factors of production like labour and capital are less mobile between the countries than within the same country. While these factors of movement can move freely within the country, there exist various restrictions to their movement across nations.
Apart from legal restrictions, even the variations in socio-cultural environments, geographic influences and economic conditions come in a big way in their movement across countries. This is especially true for the Iabour which finds it difficult to adjust to the climatic, economic and socio-cultural conditions that differ from country to country.
(iv) Customer heterogeneity across markets – The customers of various countries differ in their socio-cultural values and backgrounds. The demand for products also differ due to changes in tastes, customs, attitudes, languages and beliefs. It is precise because of the socio- cultural differences that while people in Chinapreferbicycles, the Japanese in contrast like to ride bikes.
Similarly, while people in India use right-hand driven cars, Americans drive cars fitted with steering, brakes, etc., on the left side. Moreover, while people in the United States change their TV, bike and other consumer durables very frequently—within two to three years of their purchase, Indians mostly do not go in for such replacements until the products currently with them have totally worn out.
Such variations greatly complicate the task of designing products and evolving strategies appropriate for customers in different countries. Though to some extent customers within a country too differ in their tastes and preferences. These differences become more striking when we compare customers across nations.
(v) Differences in Business Systems and Practices – The differences in business systems and practices are considerably much more among countries than within a country. Countries differ from one another in terms of their socio-economic development, availability, cost and efficiency of economic infrastructure and market support services, mid business customs and practices due to their socio-economic milieu and historical coincidences.
All such differences make it necessary for firms interested in entering into international markets to adapt their production, finance, human resource and marketing plans as per the conditions prevailing in the international markets.
(vi) Political System and Risks – Political factors such as the type of government, political party system, political ideology, political risks, etc., have a profound impact on business operations. Since a business person is familiar with the political environment of his/her country, he/she can well understand it and predict its impact on business operations. But this is not the case with international business.
Various countries differ on political environments in regard to business implications. Since political environment keeps on changing, one needs to monitor political changes on an ongoing basis in the concerned countries and devise strategies to deal with diverse political risks.
A major problem with a foreign country’s political environment is a tendency among nations to favour products and services originating in their own countries to those coming from other countries. While this is not a problem for business firms operating domestically, it quite often becomes a severe problem for the firms interested in exporting their goods and services to other nations or setting up their plants in the overseas markets.
(vii) Business regulations and policies – Each country frame its own set of business laws arid regulations as per their socio-cultural environment. Through these laws. Regulations and economic politician are more or less uniformly applicable within a country, they differ widely among nations. Tariff and taxation policies, import quota system, subsidies and other controls adopted by anation are not the same as in other countries and often discriminate against foreign products, series and capital.
(viii) Currency used in business transactions-Another important difference between domestic and international business is that the latter involves the use of different currencies. Since the exchange rate, i.e., the price of one currency expressed in relation to that of another country’s currency, keeps on fluctuating, it adds to the problems of international business firms in fixing prices of their products and hedging against foreign exchange risks.
Major Difference Between Domestic and International Business
“International Business is more than International Trade.” Comment.
International trade comprises exports and imports of goods and forms an important component of international business. But the scope of international business is substantially wider than that of international trade. International business includes the international exchange of services such as international travel and tourism, transportation, communication, banking, warehousing, distribution, and advertising.
It also covers foreign investments and overseas production of goods and services. Multinational companies have started making investments in foreign countries and undertaking the production of goods and services in foreign countries to explore foreign markets and produce at lower costs.
All these activities form part of international business. To conclude, we can say that international business is a much broader term and is comprised of both the trade and production of goods and services across frontiers. International trade is done through exporting of goods while international business modes include licensing, franchising, contract manufacturing, joint-ventures, and establishment of wholly-owned subsidiaries apart from exporting.
What benefits do firms derive by entering into international business?
Benefits of International Business – The importance of international business can be judged from die various benefits achieved by the business firms. Growing realisation of these benefits over time has in fact been a contributory factor to the expansion of trade and investment amongst nations, resulting in the phenomenon of globalisation. Some of the benefits of international business to the nations and business firms are discussed below.
Benefits to Nations :
(i) Earning of Foreign Exchange – Foreign exchange earning can helps in the imports of capital goods, technology, petroleum products and fertilisers, pharmaceutical products and a host of other consumer products which other wise might not be available domestically.
(ii) More Efficient Use of Resources – Each country should produce the goods and services by efficiently put all the resources without the thinking of producing for its own demand. If such an enhanced pool of goods and services is distributed equitably amongst nations, it benefits all the trading nations.
(iii) Improving Growth Prospects and Employment Potentials – Producing solely for the purposes of domestic consumption severely restricts a country’s prospects for growth and employment. Many countries, especially the developing ones, could not execute their plans to produce on a larger scale, and thus create employment for people because their domestic market was not large enough to absorb all that extra production.
Later on a few countries such as Singapore, South Korea and China which saw markets for their products in the foreign countries embarked upon the strategy ‘export and flourish’, and soon became the star performers on the world map. This helped them not only in improving their growth prospects, but also created opportunities for employment of people living in these countries.
(iv) Increased Standard of Living -In the absence of international trade of goods and services, it would not have been possible for the world community to consume goods and services produced in other countries that the people in these countries are able to consume and enjoy a higher standard of living.
Benefits to Firms:
(i) Prospects for Higher Profits – International business firm can earn more profits through selling their products in those countries where prices are high instead of selling in domestic market if prices are lower.
(ii) Increased Capacity Utilisation – Many firms setup production capacities for their products which are in excess of demand in the domestic market. By planning overseas expansion and procuring orders from foreign customers, they can think of making use of their surplus production capacities and also improving the 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.
(iii) Prospects for Growth – Business firms find it quite frustrating when demand for their products starts getting saturated 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 enter into markets of developing countries. While demand in their home countries has got almost saturated, they realised their products were in demand in the developing countries and demand was picking up quite fast.
(iv) Way out to intense competition in domestic market – International business can contact the local or domestic competition of the firms. Many companies prefer to search international market on the face of domestic competition. International business thus acts as a catalyst of growth for firms facing tough market conditions on the domestic turf.
(v) Improved Business vision-The growth of intemational business of many companies is essentially a part of their business policies or strategic management. The vision to become international comes from the urge to grow, the need to become more competitive, the need to diversify and to gain strategic advantages of internationalisation.
In what ways is exporting a better way of entering into international markets than setting up wholly-owned subsidiaries abroad.
Exporting is a better way of entering into international markets than setting up wholly-owned subsidiaries abroad in the following ways:
- Exporting is the easiest way of gaining entry into international markets. It is less complex than setting up and managing joint ventures or wholly-owned subsidiaries abroad.
- Exporting involves lesser time and effort as business firms are not required to invest that much time and money as it is needed when they set up manufacturing plants and facilities as wholly-owned subsidiaries in host countries.
- Since exporting does not require much investment in foreign countries, exposure to foreign investment risks is nil or much lower than that in establishing a wholly-owned subsidiary.
Discuss briefly the factors that govern the choice of mode of entry into international business.
The term mode means the manner in which the entry of international business comes in light. The important ways of entering into the international business are exporting and importing, contract manufacturing, licensing and franchising, Joint ventures and who owned subsidiaries companies.
Formalities regarding exporting and importing activities include shipment and financing of goods and services through middlemen such as export houses or buying offices of overseas customers located in the home country. Contract manufacturing is also known as outsourcing are production of components such as automobiles components or shoe uppers, cars accessories etc., assembling of components into final products.
Licencing and franchising are similar in nature but distinction between the two is of specialization. Franchising is more specialised form of licensing to abide by strict rules of the business.
Joint ventures is a technique of entering into foreign markets. A joint venture means establishing a firm that is jointly owned by two or more independent firms.
Wholly owned subsidiaries in a foreign market can be established by setting up a new firm altogether to start operations in a foreign country and also known as green field venture.
Acquiring an established firm in the foreign country and using that firm to manufacture mid promote its products in the host nation.
In order to select the most suitable mode of entering into international business may be judged by analysing the relative merits and limitations of each mode of entry of international business. The major factors used for the selection of best way of entering international business are production facilities, investment in the foreign countries, risk involved, brand names in foreign country, benefits to host country etc.
Discuss the major trends in India’s foreign trade. Also list the major products that India trades with other countries.
India’s Foreign Trade-The Trends – India account for a small share in world trade. The imports and exports of India constitute major economic indicators for the progress of the country. Due to faster growth achieved at the international front, share of foreign trade in the country’s Gross Domestic Product (GDP) has considerably increased from 14.6% in 1990-91 to 24.1% in 2003-04.
Both imports and exports shows the growing trend phenomenally over the years. Total exports of goods shows tremendous increase from Rs.606 crores in 1950-51 to Rs.2,93,367crores in 2003-04 representing 480 times increase in the last five decades.
The imports of the country also shows phenomenal growing trend which is 608crores in 1950-51 to Rs. 3,59,108 crores in the year 2003-04, registering a growth of590 times during the same period.
The major items of exports of India are textiles and garments, gems and jewellery, engineering products and chemicals, agricultural and allied products, tea, pearls, medicines and semi-precious stones, medicinal and pharmaceutical products, rice, spices, iron ore, leather and leather manufacturing, textiles yam fabrics, garments and tobacco.
India even holds the district position of being, the largest exporter in the world in selected commodities such as basmati rice, tea and ayurvedic products. So far as imports are concerned, products like crude oil and petroleum products, capital goods (machinery ), electronic goods, precious and semi-precious stones, gold, silver and chemicals constitute major items of India’s imports.
India’s trend in services have also undergone significant changes over the years in terms of both the volume and composition of trade; The most conspicuous change relates to emergence of software exports which of late have to account for about 49% of India’s total service exports.
India’s performance, however, does not appear very satisfactory in terms of international comparison. India’s share in world trade is a mere 0.8%. Its composition of foreign investments too is poor. India continues to lag considerably behind other developing countries which have emerged as major destinations for foreign investments.
What is invisible trade (service trade). Discuss salient aspects of India’s trade in services.
India’s trade in services have grown tremendously over the years from 1991. Both import and export services shows increasing trend remarkably from the year 1990-91 to 2004-05.
India’s Trade in Services – India’s trade in services have also grown manifold over the years. Table below contains data on exports and imports of India’s three services which have been historically important to India. It is obvious from the table that both the exports and imports of services relating to foreign travel, transportation and insurance have increased spectacularly during the last four decades.
What is more remarkable is the change in the composition of services exports. Software and other miscellaneous services (including professional technical and business services) have emerged as the main categories of India’s exports of services.
While the relative share of travel and transportation has declined from 64.3 percent in 1995-96 to 29.6 percent in 2003-2004, the share of software exports has gone up from 10.2 percent to around 49 percent in the corresponding period.