BBA3-BUSINESS ENVIRONMENT-UT5-MD2-Strategies For Going Global

BBA3-BUSINESS ENVIRONMENT-UT5-MD2-Strategies for Going
Global - FTAs, FDI, FII, JV and EXIM Procedure
MODES OF ENTRY AND OPERATION IN INTERNATIONAL BUSINESS

One of the critical decisions of international marketing is the mode of entering the foreign
market. At one extreme, a company may decide to produce the product domestically and
export it to the foreign market. In this case, the company need not make any investment
overseas. On the other extreme, the company may establish manufacturing facilities in the
foreign country to sell the product there. This strategy requires direct foreign investment by
the company. In between these two extremes, there are several options each of which demand
different levels of foreign investment. No matter how mighty your company may be, it is not
a practical strategy to enter all markets with a single entry method. With all its power, even a
largest company may have to formulate different entry strategies to different countries. You
may opt for one entry strategy in one market and another strategy in another market, because
one entry strategy may not suit all countries. As stated already, international marketing
activities of business firms can take varied modes ranging from indirect/ export on the one
hand to direct investment in manufacturing facilities abroad on the other. Each of these
strategies require different levels of investment ranging from no additional investment to high
investment in production facilities, where the investment is low, the international business
firm faces less risk, less control over the foreign market and may not be able to reap all the
profits. On the other hand, when the investments are high in the form of manufacturing
facilities abroad, international firm can have full control over the market and reap all the
profits, but faces higher risk.
Different Modes of Entering Into International Markets
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EXPORTING
Exporting is the easiest and most widely used mode of entering in international markets. It
allows a firm to centrally manufacture its products for several markets and obtain economies
of scale. Furthermore, when exports represent incremental volume out of an existing
production operation located elsewhere, the marginal profitability of such exports tends to be
high. The main advantage of an exporting strategy is that it is easy to implement. Risks are
least because the company simply exports its excess production when it receives orders from
abroad. Exporters can be classified as small or large, single or multi product, depending on
legal status, destination or frequency of exports.
Exporting includes indirect exporting, direct exporting and intra-corporate transfers.

Indirect Exporting - Indirect exporting is exporting the products either in their original form
or in the modified form to a foreign country through another domestic company. It is the
market entry technique which offers lowest risk & least market control. The firm is not
engaged in international marketing and no special activity is carried on within the firm. The
sale is handled just like domestic sales. Various publishers in India including Himalaya
Publishing House sell their books to UBS publishers of India, which in turn exports these
books to various foreign countries
Direct Exporting - Direct exporting is selling the products to a country directly through its
distribution arrangement or through a host country's company. Baskin Robins initially
exported its ice-cream to Russia in 1990 and later opened 74 outlets with Russian partners.
Finally in 1995 it established its ice cream plant in Moscow.
Intra-corporate Transfers - Intra-corporate transfers means selling of product; by a

company to its affiliated company in host country (another country). For example selling of
products by Hindustan Lever in India to Unilever in USA. This transaction is treated as
exports in India and imports in USA.
Some of the factors to be considered by a company while exporting are as follows:
 Government policies like export policies, import policies, export financing, foreign
exchange.
 Marketing factors like image, distribution networks, responsiveness to the customer,
customer awareness and customer preferences
 Location consideration: These factors include physical distribution costs, warehousing
costs, transportation costs, inventory carrying costs etc.
When to Export?
 Exporting may be appropriate under the following circumstances:

 The volume of foreign markets is not large enough to justify production in the foreign
market.
 Cost of production is higher in the foreign market.
 Foreign market is characterised by production bottlenecks like infrastructural
problems, problems of materials supply, labour unrest, etc.
 There are political or other risks of investments in the foreign country.
 There is no guarantee of the market available for longer period.
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 Foreign investment is not encouraged by the concerned foreign government.

 There is excess production capacity in the domestic market or expansion of existing
facility is less expensive and easier than setting up production facilities abroad.
 Very attractive incentives are available in the country for establishing facilities for
export production.
LICENSING -it is the method of foreign operation whereby a firm in one country agrees to
permit a company in another country to use the manufacturing, processing, trademark, know-
how or some other skill provided by the licensor. When a Company is unwilling to take any
risks for the sake of international business, it sometimes opts for licensing as the mode of
entry. Licensing is, simply a contract to allow another firm to use an intellectual property,
such as, patent or a trade mark which is not available to all firms. Only those which have
saleable technology, know-how, can use the licensing route. The attraction of licensing lies
in the fact that it involves no investment and very little up-front expenditures. And if
successful, it can generate a fairly high rate of return. Under a licensing agreement, the holder
of the knowledge (technology or know-how) transfers the same to the buyer for his use
against the payment of a fixed amount, which can either be a one time lump-sum payment or
a percentage of sales, or a combination of the two.
Coca Cola or Pepsi is an excellent example of licensing. In Zimbabwe, United Bottlers have
the license to make Coke and Heineken of Netherlands for Pepsi. In return the licensee
produces the licensor’s products, market these products in his assigned territory and pay the
licensor loyalties related to the sales volume of the products. International licensing is an
agreement between the licensor and the licensee over a period of time for the use of brand
name, marketing knowhow, copyright, work method, and trade mark by paying a licence fee.
The licensor has minimum involvement in day to day functions. Therefore, the returns are
also comparatively low. The domestic company can choose any international location and
enjoy the advantages without incurring any obligations and responsibilities of ownership,
managerial, investment etc.
Licensing advantages:
 Good way to start in foreign operations and open the door to low risk
manufacturing relationships
 It brings new technology and know-how in the licensees’ country.
 Linkage of parent and receiving partner interests means both get most out of
marketing effort
 Capital not tied up in foreign operation and Options to buy into partner exist or
provision to take royalties in stock.
Disadvantages of licensing:
 Limited form of participation -to length of agreement, specific product, process or

trademark;
 Potential returns from marketing and manufacturing may be lost;
 Partner develops know-how and so licence is short;
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 Licensees become competitors as once know-how is transferred, there is a risk

that the foreign firm may act on its own.
 Requires considerable fact finding, planning, investigation and interpretation.
A manufacturer should consider licensing when:
• capital is scarce
• import restrictions, discourage direct entry

• the country is sensitive to foreign ownership
When the company finds it difficult to export and at the same time not ready to invest money
in the foreign country, licensing could be suitable strategy. Under licensing, a company
assigns the right to undertake production locally using its patent (which protects a product,
technology/ process) or a trademark (which protects a product name) to a local company for a
fee or royalty. Under this strategy, the company (licensor) gives license to a foreign company
(licensee) to manufacture the company’s product for sale in that foreign country and some-
times in other specified markets also. Licensing enables a company to gain market presence
and entry overseas without equity investment.
FRANCHISING
Franchising refers to the methods of practicing and using another person's business
philosophy. The franchisor grants the independent operator the right to distribute its products,
techniques, and trademarks for a percentage of gross monthly sales and a royalty fee. Various
tangibles and intangibles such as national or international advertising, training, and other
support services are commonly made available by the franchisor. Agreements may typically
last from five to thirty years. A business for which franchising is said to work best have the
following characteristics:
–A good track record of profitability.
– A unique or unusual concept.
– A broad geographic appeal.
– Businesses which are relatively easy to operate.
– Businesses that are relatively inexpensive to operate.
– Businesses which are easily duplicated.

Franchisor: Selects franchisee and provides franchisor the services of operating systems,
receives the fixed amount trade marks, product reputations and royalty from the & support
systems like franchisee for providing the advertising, employee training, expertise and brand
quality assurance programmes reputations to franchisee etc.
Franchisee: An independent organization, agrees to follow franchisor’s requirement like
appearance, operating procedures, financial reporting, customer service under a franchising
agreement. Some Pays a fixed amount and flexibility allowed under the royalty based on the
sales to agreement the franchisor.
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Advantages For franchisors

– Expansion: Franchising is one of the only means available to access venture investment
capital without the need to give up control of the operation of the chain in the process. After
the brand and formula are carefully designed and properly executed, franchisors are able to
sell franchises and expand rapidly across countries and continents using the capital and
resources of their franchisees, and can earn profits commensurate with their contribution to
those societies while greatly reducing the risk and expense that would be inherent in
conventional chain operations.
– Legal considerations: The franchisor is relieved of many of the mundane duties necessary
to start a new outlet, such as obtaining the necessary licenses and permits. In some
jurisdictions, certain permits (especially alcohol licenses) are more easily obtained by locally
based, owner-operator type applicants while companies based outside the jurisdiction (and
especially if they originate in another country) find it difficult if not impossible to get such
licences issued to them directly. For this reason, hotel and restaurant chains that sell alcohol
often have no viable option but to franchise if they wish to expand to another state or
province.
– Operational considerations: Franchisees are said to have a greater incentive than direct
employees to operate their businesses successfully because they have a direct stake in the
start up of the branded business and the tangible assets that wear the brand name. The need of
franchisors to closely scrutinize the day to day operations of franchisees (compared to
directly-owned outlets) is greatly reduced.
Advantages for franchisees

– Employment: As practiced in retailing, franchising offers franchisees the advantage of
starting up a new business quickly based on a proven trademark and formula of doing
business, as opposed to having to build a new business and brand from scratch (often in the
face of aggressive competition from franchise operators).
– Expansion: With the help of the expertise provided by the franchisors, the franchisees may
be able to take their franchised businesses to a level which they wouldn't have been able to
without the expert guidance of their franchisors.
– Training: Franchisors often offer franchisees significant training, which is not available for
free to individuals starting their own business. Although training is not free for franchisees, it
is sometimes supported through the traditional franchise fee that the franchisor collects and
tailored to the business that is being started. When training fees and travel expenses, etc. are
required beyond the initial franchise fee, these fees are deductible as part of the start-up
expenses of the business.
Disadvantages for franchisors

– Control: Successful franchising necessitates a much more careful vetting process when
evaluating the limited number of potential franchisees than would be required in the hiring of
direct employees who may have experience in the concept sector. An incompetent manager
of a directly-owned outlet can easily be replaced, while, regardless of the local laws and
agreements in place, removing an incompetent franchisee who owns the tangible assets of the
business is much more difficult. Incompetent franchisees can easily damage the public's
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goodwill towards the franchisor's brand by providing inferior goods and services. If a
franchisee is cited for legal violations, (s)he will probably face the legal consequences alone
but the franchisor's reputation could still be damaged. – Limited pool of viable franchisees: In
any city or region there may be only a limited pool of prospects who have both the financial
resources and the desire to purchase and start up a franchised business, owned businesses, as
paid employees.
However, in periods of recession where traditional good jobs. as compared to the pool of
individuals who can be hired and trained to competently manage directly- are in short supply,
this disadvantage disappears because those who can't find good jobs are willing to invest
money in a franchise as a means of self-employment. As compared to the pool of individuals
who can be hired and trained to competently manage directly- are in short supply, this
disadvantage disappears because those who can't find good jobs are willing to invest money
in a franchise as a means of self-employment.
Disadvantages for franchisees

– No guarantee: usually, there is a guarantee of financial success for the franchisee made by
the franchisor in the written disclosure circular and the actual franchise agreement. While the
estimated start-up costs of the franchise are an implied "earnings claim" some businesses do
fail, including franchised outlets. Unfortunately, the unit financial performance statistics are
not required to be disclosed to new buyers of franchises and this omission makes it
impossible for new buyers of franchises to assess the odds of success and failure of their
investment in the franchise in terms of profitability and failure as experienced on a unit basis
of the franchise system.
– Control: loss of control while they gain the use of a system, trademarks, assistance,
training, marketing, the franchisee is required to follow the system and get approval for
changes from the franchisor. For these reasons, franchisees and entrepreneurs are very
different.
– Price: Starting and operating a franchise business carries expenses. In choosing to adopt
the standards set by the franchisor, the franchisee often has no further choice as to signage,
shop fitting, uniforms etc. The franchisee may not be allowed to source less expensive
alternatives. Added to that is the franchise fee and ongoing royalties and advertising
contributions. The contract may also bind the franchisee to such alterations as demanded by
the franchisor from time to time.
– Conflicts: The franchisor/franchisee relationship can easily cause conflict if either side is
incompetent (or acting in bad faith). An incompetent franchisor can destroy its franchisees by
failing to promote the brand properly or by squeezing them too aggressively for profits.
Franchise agreements are unilateral contracts or contracts of adhesion wherein the contract
terms generally are advantageous to the franchisor when there is conflict in the relationship.
SPECIAL MODES
These have special strategies and include contract manufacturing, management contracts
and turnkey projects:
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Contract Manufacturing
Contract manufacturing is a process that established a working agreement between two
companies. As part of the agreement, one company will custom produce parts or other
materials on behalf of their client. In most cases, the manufacturer will also handle the
ordering and shipment processes for the client. As a result, the client does not have to
maintain manufacturing facilities, purchase raw materials, or hire labor in order to produce
the finished goods. The basic working model used by contract manufacturers translates well
into many different industries. Since the process is essentially outsourcing production to a
partner who will privately brand the end product, there are a number of different business
ventures that can make use of a contract manufacturing arrangement. There are a number of
examples of pharmaceutical contract manufacturing currently functioning today, as well as
similar arrangements in food manufacturing, the creation of computer components and other
forms of electronic contract manufacturing. Even industries like personal care and hygiene
products, automotive parts, and medical supplies etc. are often created under the terms of a
contract manufacture agreement. There are several advantages to a contract manufacturing
arrangement. For the manufacturer, there is the guarantee of steady work. Having contracts in
place that commit to certain levels of production for one, two and even five year periods
makes it much easier to forecast the future financial stability of the company. For the client,
there is no need to purchase or rent production facilities, buy equipment, purchase raw
materials, or hire and train employees to produce the goods. There are also no headaches
from dealing with employees who fail to report to work, equipment that breaks down, or any
of the other minor details that any manufacturing company must face daily.
All the client has to do is generate sales, forward orders to the manufacturer, and keep
accurate records of all income and expenses associated with the business venture.
Contract manufacturing has the following advantages:
• The company does not have to commit resources for setting up production facilities abroad.
• It frees the company from the risks of investing in foreign countries.
• If idle production capacity is readily available in the foreign country, it enables the marketer
to get started immediately.
• In many cases, the cost of the product obtained by contract manufacturing is lower than if it
were manufactured by the international firm. If excess capacities are available with existing
units, it may even be possible to get the product supplied on the marginal cost basis.
• Contract manufacturing is a less risky way to start with. If the business does not pick up
sufficiently, dropping it is easy; but if the company had established its own production
facilities, the exit would be difficult.
The disadvantages of contract manufacturing are:
• The parent company has to forego the manufacturing profit to the local firm.
• It is always not easy to locate a local party with the necessary capabilities to manufacturing
the product up to the requirements of the parent firm.
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• The local party gains experience in marketing, and in course of time may pose a threat to
the parent company.
• On many occasions, local firms face difficulties in maintaining the quality of the product,
up to the standards required by the parent firm.
Management Contracts
A management contract is an arrangement under which operational control of an enterprise is
vested by contract in a separate enterprise which performs the necessary managerial functions
in return for a fee. Management contracts involve not just selling a method of doing things
(as with franchising or licensing) but involves actually doing them. A management contract
can involve a wide range of functions, such as technical operation of a production facility,
management of personnel, accounting, marketing services and training. Management
contracts have been used to a wide extent in the airline industry, and when foreign
government action restricts other entry methods. Management contracts are often formed
where there is a lack of local skills to run a project. It is an alternative to foreign direct
investment as it does not involve as high risk and can yield higher returns for the company.
Turnkey Projects
Turn-key refers to something that is ready for immediate use, generally used in the sale or
supply of goods or services. The term is common in the construction industry, for instance, in
which it refers to the bundling of materials and labour by sub-contractors. A "turnkey" job by
a plumber would include the parts (toilets, tub, faucets, pipes, etc.) as well as the plumber's
labour, without any contribution by the general contractors. This is commonly used in
motorsports to describe a car being sold with drive train (engine, transmission, etc.) as a racer
may prefer to keep the pieces to use in another vehicle to preserve a combination. Similarly,
this term may be used to advertise the sale of an established business, including all the
equipment necessary to run it, or by a business-to-business supplier providing complete
packages for business start-up. In a turnkey business transaction, different entities are
responsible for setting up a plant or equipment (e.g. trains/infrastructure) and for putting it
into operation. It can include contractual actions - at least through the system, subsystem, or
equipment installation phase. It may also include follow-on contractual actions, such as
testing, training, logistical, and operational support. It is often given to the best bidder in a
procurement process. Turnkey projects can also be extended, known as turnkey plus, where
there is perhaps a small equity interest by the supplier and it will later on continue its
operation through a management contract or licensing. Turnkey is often used to describe a
home built ready for the customer to move in. If a contractor builds a "turnkey home" they
frame the structure and finish the interior. Everything is completed down to the cabinets and
carpet.
FOREIGN DIRECT INVESTMENT WITHOUT ALLIANCES

Some companies enter the foreign markets through exporting, licensing, franchising etc., get
the knowledge and awareness of the foreign markets, culture of the country, customers'
preferences, political situation of the country etc and then establish manufacturing facilities
by ownership in the foreign countries. Baskin Robbin’s in Russia followed this strategy. In
this arrangement, the internationl firm makes a direct investment in a production unit in a
foreign market. It requires greatest commitment since there is 100% ownership. It is also
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called the Greenfield investment. The parent company starts a new venture in a foreign
country by constructing new operational facilities from the ground up. In addition to building
new facilities, most parent companies also create new long-term jobs in the foreign country
by hiring new employees. Green field investments occur when multinational corporations
enter into developing countries to build new factories and/or stores. Developing countries
often offer prospective companies tax-breaks, subsidies and other types of incentives to set up
greenfield investments. Governments often see that losing corporate tax revenue is a small
price to pay if jobs are created and knowledge and technology is gained to boost the country's
human capital.
FOREIGN DIRECT INVESTMENT WITH STRATEGIC ALLIANCES

Innovations, creations, productivity, growth, expansions and diversifications in recent years
are mostly accomplished by strategic alliances adopted by various companies. Strategic
alliances are a co-operative approach to achieve the larger goals. Strategic alliances can take
different forms like licensing, franchising, contract manufacturing, JVs etc. Alliances are a
strategy to explore a new market which the companies individually cannot do. Example:
Xerox of USA and Fuji of Japan collaborated to explore new markets in Europe and Pacific
Mergers and Acquisitions

International mergers and acquisitions are growing day by day which are taking place beyond
the boundaries of a particular country also termed as global or cross-border mergers and
acquisitions. Globalisation and worldwide financial reforms have collectively contributed
towards the development of international mergers and acquisitions to a substantial extent. In
the case of a merger, the international business firm absorbs one or more enterprises abroad
by purchasing assets and taking over liabilities of those enterprises on payment of an agreed
amount. Similarly, the international business firm may also take over the management of an
existing company abroad by taking the controlling stake in the equity of that company at a
predetermined price. This is called acquisition.
International mergers and acquisitions are taking place in different forms, for example
horizontal mergers, vertical mergers, conglomerate mergers, concentric mergers, reverse
mergers, dilutive mergers, accretive mergers and others. International mergers and
acquisitions are performed for the purpose of obtaining some strategic benefits in the markets
of a particular country. With the help of international mergers and acquisitions, multinational
corporations can enjoy a number of advantages, which include economies of scale and market
dominance.
International mergers and acquisitions play an important role behind the growth of a
company. These deals or transactions help a large number of companies penetrate into new
markets fast and attain economies of scale. They also stimulate foreign direct investment or
FDI. The reputed international mergers and acquisitions agencies also provide educational
programs and training in order to grow the expertise of the merger and acquisition
professionals working in the global merger and acquisitions sector. The rules and regulations
regarding international mergers and acquisitions keep on changing constantly and it is
mandatory that the parties to international mergers and acquisitions get themselves updated
with the various amendments. Numerous investment bank professionals, consultants and
attorneys are there to offer valuable and knowledgeable recommendations to the merger and
acquisition clients.
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Joint venture
A Joint Venture is an entity formed between two or more parties to undertake economic
activity together. The parties agree to create a new entity to share in the revenues, expenses,
and control of the enterprise. Joint ventures can be defined as "an enterprise in which two or
more investors share ownership and control over property rights and operation". The venture
can be for one specific project only, or a continuing business relationship. Entering into a
joint venture is a major decision. Businesses of any size can use joint ventures to strengthen
long-term relationships or to collaborate on short-term projects.
International joint venture is another alternative strategy you may consider to enter in
overseas market. In countries where fully foreign owned firms are not allowed or favoured,
joint venture is the alternative if the international marketer is interested in establishing an
enterprise in the foreign market. The essential feature of a joint venture is that the ownership
and management are shared between a foreign firm and a local firm.
Features: • Joint ventures involve greater risk.
• They also involve greater investment of a capital and management resources.
• On the other hand, there is a possibility of conflict of interest in joint venture, with the
national partner.
A joint venture can succeed only if both the partners have something definite to offer to the
advantage of the other, and reap definite advantages and have mutual trust and respect.
Strategic alliance
• Alliances are different from traditional joint ventures in which two partners contribute a
fixed amount of resources and the venture develops on its own. In an alliance, two firms pool
their resources directly in a collaboration that goes beyond the limits of a joint
venture/although a new entity may be formed, it is not a requirement. Sometimes, the alliance
is supported by some equity acquisition of one or both the partners.
• In an alliance, partners bring a particular skill or resource, usually one that is
complementary to each other. By joining forces, both are expected to profit from each other’s
experience. Typically, alliances involve either distribution access or technology transfers or
production technology, with each partner contributing a different aspect to the venture.
• This strategy seeks to enhance the long term competitive advantage of the firm by forming
alliance with its competition is (existing or potential in critical areas), instead of competing
with each other. The goals are to leverage critical capabilities, increase the flow of innovation
and increase flexibility in responding to market and technological changes.
• Strategic alliance is also sometimes used as a market entry strategy. For example, a firm
may enter a foreign market by forming an alliance with a firm in that foreign market for
marketing or distributing the farmer’s product.
• Strategic alliance, more than an entry strategy, is a competitive strategy. Strategic alliances
which enable companies to increase resource productivity and profitability by avoiding
unnecessary fragmentation of resources and duplication of investment and effort. Alliances
are growing in popularity and are very conspicuous in such industries as pharmaceuticals,
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computer, nuclear, telematics, etc., which are characterised by high fixed costs in R & D and
manufacturing, high technology and fast changing technology. It can be classified as:
 Technological alliances
 Production alliances
 Distribution alliances
FOREIGN DIRECT INVESTMENT (FDI)
Foreign direct investment is an investment made by a company or entity based in one
country, into a company or entity based in another country. Foreign direct investments differ
substantially from indirect investments such as portfolio flows, wherein overseas institutions
invest in equities listed on a nation’s stock exchange. Entities making direct investments
typically have a significant degree of influence and control over the company into which the
investment is made. Open economies with skilled workforces and good growth prospects
tend to attract larger amounts of foreign direct investment than closed, highly regulated
economies.
Foreign direct investment is defined as a company from one country making a physical
investment into building a factory in another country. The direct investment in buildings,
machinery and equipment is in contrast with making a portfolio investment, which is
considered an indirect investment. In recent years, given rapid growth and change in global
investment patterns, the definition has been broadened to include the acquisition of a lasting
management interest in a company or enterprise outside the investing firm’s home country.
For small and medium sized companies, FDI represents an opportunity to become more
actively involved in international business activities. In the past 15 years, the classic
definition of FDI as noted above has changed considerably. This notion of a change in the
classic definition, however, must be kept in the proper context. Very clearly, over 2/3 of
direct foreign investment is still made in the form of fixtures, machinery, equipment and
buildings. Moreover, larger multinational corporations and conglomerates still make the
overwhelming percentage of FDI. But, with the advent of the internet, the increasing role of
technology, loosening of direct investment restrictions in many markets and decreasing
communication costs means that newer, non-traditional forms of investment will play an
important role in the future. Many governments, especially in industrialized and developed
nations, pay very close attention to foreign direct investment because the investment flows
into and out of their economies can and does have a significant impact.
The investing company may make its overseas investment in a number of ways - either by
setting up a subsidiary or associate company in the foreign country, by acquiring shares of an
overseas company, or through a merger or joint venture. The accepted threshold for a foreign
direct investment relationship, as defined by the OECD, is 10%. That is, the foreign investor
must own at least 10% or more of the voting stock or ordinary shares of the investee
company.
An example of foreign direct investment would be an American company taking a majority
stake in a company in China. Another example would be a Canadian company setting up a
joint venture to develop a mineral deposit in Chile.
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According to the International Monetary Fund- foreign direct investment, commonly known
as FDI, “refers to an investment made to acquire lasting or long-term interest in enterprises
operating outside of the economy of the investor.” The investment is direct because the
investor, which could be a foreign person, company or group of entities, is seeking to control,
manage, or have significant influence over the foreign enterprise.
Foreign Direct Investment means “cross border investment made by a resident in one
economy in an enterprise in another economy, with the objective of establishing a lasting
interest in the investee economy. FDI is also described as “investment into the business of a
country by a company in another country”. Mostly the investment is into production by either
buying a company in the target country or by expanding operations of an existing business in
that country”. Such investments can take place for many reasons, including to take advantage
of cheaper wages, special investment privileges (e.g. tax exemptions) offered by the country.
Importance of FDI
Foreign direct investment (FDI) plays an extraordinary and growing role in global business. It
can provide a firm with new markets and marketing channels, cheaper production facilities,
access to new technology, products, skills and financing. For a host country or the foreign
firm which receives the investment, it can provide a source of new technologies, capital,
processes, products, organizational technologies and management skills, and as such can
provide a strong impetus to economic development.
FDI is a major source of external finance which means that countries with limited amounts of
capital can receive finance beyond national borders from wealthier countries. Exports and
FDI have been the two key ingredients in China’s rapid economic growth. According to the
World Bank, FDI and small business growth are the two critical elements in developing the
private sector in lower-income economies and reducing poverty.
In the past decade, FDI has come to play a major role in the internationalization of business.
Reacting to changes in technology, growing liberalization of the national regulatory
framework governing investment in enterprises, and changes in capital markets profound
changes have occurred in the size, scope and methods of FDI. New information technology
systems, decline in global communication costs have made management of foreign
investments far easier than in the past. The sea change in trade and investment policies and
the regulatory environment globally in the past decade, including trade policy and tariff
liberalization, easing of restrictions on foreign investment and acquisition in many nations,
and the deregulation and privatisation of many industries, has probably been the most
significant catalyst for FDI’s expanded role.
Most of the countries seek FDI because of following reasons:
– Domestic capital is inadequate for purpose of economic growth;
– Foreign capital is usually essential, at least as a temporary measure, during the period when
the capital market is in the process of development;
– Foreign capital usually brings it with other scarce productive factors like technical know-
how, business expertise and knowledge.
Advantages of FDI
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– Improves forex position of the country;

– Employment generation and increase in production ;
– Help in capital formation by bringing fresh capital;
– Helps in transfer of new technologies, management skills, intellectual property
– Increases competition within the local market and this brings higher efficiencies
– Helps in increasing exports;
– Increases tax revenues
Disadvantages of FDI
– Domestic companies fear that they may lose their ownership to overseas company;
– Small enterprises fear that they may not be able to compete with world class large
companies and may ultimately be edged out of business;
– Large giants of the world try to monopolise and take over the highly profitable sectors;
– Such foreign companies invest more in machinery and intellectual property than in wages
of the local people;
– Government has less control over the functioning of such companies as they usually work
as wholly owned subsidiary of an overseas company.
Factors Affecting Entry Decisions

The selection of a company’s best method of entry into overseas markets depends on several
factors, some of which are peculiar to the firm and the industry. A few of these main
variables related to the firm are:
1. Company goals regarding the volume of international business desired, expected
geographic coverage and the time span of foreign involvement.
2. The size of the company in terms of sales and assets.
3. The company’s product line and the nature of its products (industrial or consumer,
high or low unit price, technological content).
4. Competition abroad - The firm must evaluate these factors for itself case by case.
Beyond the factors peculiar to the firm and the industry, there are other decision
criteria that relate more generally to the method of entry into foreign markets. This
second group includes factors relatively independent of the firm and the industry.
They are briefly discussed below:
 Number of markets covered- Different entry methods offer different coverage of

international markets. For example, wholly owned foreign operations are not
permitted in some countries; the licensing approach may be impossible in some other
markets because the firm may not be able to find qualified licensees; or a trading
company might cover some markets very well, but may not have representation in
many other markets. To get the kind of international market coverage it wants, the
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firm will probably have to combine different kinds of market entry methods. In some
markets, it may have wholly owned operations; a marketing subsidiary in another and
local distributors in some other market.
 Penetration with markets covered- Related to the number of markets covered in the
quality of the coverage a combination export manager, for example, might claim to
give the producer access to a number of countries, The producer must probe further to
find out if this “access” is to the whole national market or it is limited to the capital or
a few large cities. Having a small catalogue sales office in the capital city is very
different from having a sales force to cover the entire national market.
 Market feedback available - If it is important for the firm to know what is going on in
its foreign markets, it must choose an entry method that will provide this feedback.
Although, in general, the more direct methods of entry offer better market
information, feedback opportunities will depend on how the firm prepares and
manages a particular form of market entry.
 International Market Selection - In the preceding units we have talked about economic
policies of India, methodologies for undertaking political, cultural and economic
analysis. All these analysis were essential for answering the question of which market
to enter. In this unit the topic is carried further. Here an attempt has been made to
answer questions-what should the company’s corporate market portfolio look like in
terms of number and types of markets held and what is the process for coming to such
an answer? Put more simply, the company must answer how many markets will it
capture and what would their characteristics be like, and for a particular market it
must answer whether it will build, abandon or divest that market.
EXIM Procedures:
Businesses planning to set up a trading company, or start importing or exporting from India,
must understand the stages and stakeholders involved in the process, as well as the regulatory
framework and documentation required. In India, the imports and exports are regulated by
the Foreign Trade (Development and Regulation) Act, 1992, which empowers the federal
government to make provisions for development and regulation of foreign trade. The current
provisions relating to exports and imports in India are available under the Foreign Trade
Policy, 2015-20.
Import procedures
Typically, the procedure for import and export activities involves ensuring licensing and
compliance before the shipping of goods, arranging for transport and warehousing after the
unloading of goods, and getting customs clearance as well as paying taxes before the release
of goods. Below, we outline the steps involved in importing of goods.
1. Obtain IEC
Prior to importing from India, every business must first obtain an Import Export Code (IEC)
number from the regional joint DGFT. The IEC is a pan-based registration of traders with
lifetime validity and is required for clearing customs, sending shipments, as well as for
sending or receiving money in foreign currency.
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The process to obtain the IEC registration takes about 10-15 days.
2. Ensure legal compliance under different trade laws
Once an IEC is allotted, businesses may import goods that are compliant with Section 11 of
the Customs Act (1962), Foreign Trade (Development & Regulation) Act (1992), and
the Foreign Trade Policy, 2015-20.
However, certain items – restricted, canalized, or prohibited, as declared and notified by the
government – require additional permission and licenses from the DGFT and the federal
government.
3. Procure import licenses
To determine whether a license is needed to import a particular commercial product or

service, an importer must first classify the item by identifying its Indian Trading Clarification
based on a Harmonized System of Coding or ITC (HS) classification.
ITC (HS) is India’s chief method of classifying items for trade and import-export operations.
The ITC-HS code, issued by the DGFT, is an 8-digit alphanumeric code representing a
certain class or category of goods, which allows the importer to follow regulations concerned
with those goods.
An import license may be either a general license or specific license. Under a general license,
goods can be imported from any country, whereas a specific or individual license authorizes
import only from specific countries. Import licenses are used in import clearance, renewable,
and typically valid for 24 months for capital goods or 18 months for raw materials
components, consumables, and spare parts.
4. File Bill of Entry and other documents to complete customs clearing formalities
After obtaining import licenses, importers are required to furnish import declaration in the
prescribed Bill of Entry along with permanent account number (PAN) based Business
Identification Number (BIN), as per Section 46 of the Customs Act (1962).
A Bill of Entry gives information on the exact nature, precise quantity, and value of goods
that have landed or entered inwards in the country. If the goods are cleared through the
Electronic Data Interchange (EDI) system, no formal Bill of Entry is filed as it is generated in
the computer system. However, the importer must file a cargo declaration after prescribing
particulars required for processing of the entry for customs clearance.
If the Bill of Entry is filed without using the EDI system, the importer is required to submit
supporting documents that include certificate of origin, certificate of inspection, bill of
exchange, commercial invoice cum packing list, among others. Once the goods are shipped,
the customs officials examine and assess the information furnished in the bill of entry and
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match it with the imported items. If there are no irregularities, the officials issue a ‘pass out
order’ that allows the imported goods to be replaced from the customs.
5. Determine import duty rate for clearance of goods
India levies basic customs duty on imported goods, as specified in the first schedule of
the Customs tariff Act, 1975, along with goods-specific duties such as anti-dumping duty,
safeguard duty, and social welfare surcharge. In addition to these, the government levies an
integrated goods and services tax (IGST) under the new GST system. The IGST rates depend
on the classification of imported goods as specified in Schedules notified under Section 5 of
the IGST Act (2017).
Export procedures:
Just as for imports, a company planning to engage in export activities is required to obtain an
IEC number from the regional joint DGFT. After obtaining the IEC, the exporter needs to
register with the Indian Chamber of Commerce (ICC), which issues the Non-Preferential
Certificates of Origin certifying that the exported goods are originated in India.
Import and export documents:
Businesses are required to submit a set of documents for carrying out export and import
activities in India.
These include commercial documents – the ones exchanged between the buyer and seller, and
regulatory documents that deal with various regulatory authorities such as the customs,
excise, licensing authorities, as well as the export promotion bodies that help avail export
import benefits.
The Foreign Trade Policy, 2015-2020 mandates the following commercial documents for
carrying out importing and exporting activities:
 Bill of lading or airway bill;

 Commercial invoice cum packing list;
 Shipping bill or bill of export, or bill of entry (for imports).
Additional documents like certificate of origin and inspection certificate may be required as
per the case. The important regulatory documents include:
 GST return forms (GSTR 1 and GSTR 2);

 GSTR refund form;
 Exchange Control Declaration;
 Bank Realization Certificate; and
 Registration cum Membership Certificate (RCMC).
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The RCMC helps exporters and importers avail benefit or concession under the Foreign
Trade Policy 2015-20.
Export Procedure
Step 1. Receipt of an Order The exporter of goods is required to register with various
authorities such as the income tax department and Reserve Bank of India (RBI). In addition
to this, the exporter has to appoint agents who can collect orders from foreign customers
(importer). The Indian exporter receives orders either directly from the importer or through
indent houses.
Step 2. Obtaining License and Quota After getting the order from the importer, the Indian
exporter is required to secure an export license from the Government of India, for which the
exporter has to apply to the Export Trade Control Authority and get a valid license. You can
get a license from here too. The quota is referred to as the permitted total quantity of goods
that can be exported.
Step 3. Letter of Credit The exporter of the goods generally ask the importer for the letter of
credit, or sometimes the importer himself sends the letter of credit along with the order.
Step 4. Fixing the Exchange Rate Foreign exchange rate signifies the rate at which the
home currency can be exchanged with the foreign currency i.e. the rate of the Indian rupee
against the American Dollar. The foreign exchange rate fluctuates from time to time. Thus,
the importer and exporter fix the exchange rate mutually.
Step 5. Foreign Exchange Formalities An Indian exporter has to comply with certain
foreign exchange formalities under exchange control regulations. As per the Foreign
Exchange Regulation Act of India (FERA), every exporter of the goods is required to furnish
a declaration in the form prescribed in a manner. The declaration states:-
I.The foreign exchange earned by the exporter on exports is required to be disposed of in the
manner specified by RBI and within the specified period.
II.Shipping documents and negotiations are required to be done through authorised dealers in
foreign exchange.
III.The payment against the goods exported will be collected through only approved
methods.
Step 6. Preparation for Executing the Order The exporter should make required
arrangements for executing the order:
I.Marking and packing of the goods to be exported as per the importer’s specifications.
II.Getting the inspection certificate from the Export Inspection Agency by arranging the pre-
shipment inspection.
III.Obtaining insurance policy from the Export Credit Guarantee Corporation (ECGC) to get
protection against the credit risks.
IV.Obtaining a marine insurance policy as required.
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V.Appointing a forwarding agent (also known as custom house agent) for handling the
customs and other related matters.
Step 7. Formalities by a Forwarding Agent The formalities to be performed by the agent

include –
I.For exporting the goods, the forwarding agent first obtains a permit from the customs
department.
II.He must disclose all the required details of the goods to be exported such as nature,
quantity, and weight to the shipping company.
III.The forwarding agent has to prepare a shipping bill/order.
IV.The forwarding agent is required to make two copies of the port challans and pays the
dues.
V.The master of the ship is responsible for the loading of the goods on the ship. The loading
is to be done on the basis of the shipping order in the presence of customs officers.
VI.Once the goods are loaded on the ship, the master of the ship issues a receipt for the
same.
Step 8. Bill of Lading The Indian exporter of the goods approaches the shipping company
and presents the receipt copy issued by the master of the ship and in return gets the Bill of
Lading. Bill of lading is an official receipt which provides the full description of the goods
loaded on the ship and the name of the port of destination.
Step 9. Shipment Advise to the Importer The Indian exporter sends shipment advice to the
importer of the goods so that the importer gets informed about the dispatch of the goods. The
exporter sends a copy of the packing list, a non-negotiable copy of the Bill of Lading, and
commercial invoice along with the advice note.
Step 10. Presentation of Documents to the Bank The Indian exporter confirms that he
possesses all necessary shipping documents namely; Marine Insurance Policy The Consular
Invoice Certificate of Origin The Commercial Invoice The Bill of Lading Then the exporter
draws a Bill of Exchange on the basis of the commercial invoice. The Bill of Exchange along
with these documents is called Documentary Bill of Exchange. The exporter then hands over
the same to his bank.
Step 11. The Realisation of Export Proceeds In order to realise the proceeds of the export,
the exporter of the goods has to undergo specific banking formalities. On submission of the
bill of exchange, these formalities are initiated. Generally, the exporter receives payment in
foreign exchange.
Import Procedure:
Import trade refers to the purchase of goods from a foreign country. The procedure for import
trade differs from country to country depending upon the import policy, statutory
requirements and customs policies of different countries. In almost all countries of the world
import trade is controlled by the government. The objectives of these controls are proper use
of foreign exchange restrictions, protection of indigenous industries etc. The imports of goods
have to follow a procedure. This procedure involves a number of steps.
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The steps taken in import procedure are discussed as follows:

(i) Trade Enquiry:
The first stage in an import transaction, like any other transaction of purchase and sale relates
to making trade enquiries. An enquiry is a written request from the intending buyer or his
agent for information regarding the price and the terms on which the exporter will be able to
supply goods.
The importer should mention in the enquiry all the details such as the goods required, their
description, catalogue number or grade, size, weight and the quantity required. Similarly, the
time and method of delivery, method of packing, terms and conditions in regard to payment
should also be indicated.
In reply to this enquiry, the importer will receive a quotation from the exporter. The quotation
contains the details as to the goods available, their quality etc., the price at which the goods
will be supplied and the terms and conditions of the sale.
(ii) Procurement of Import Licence and Quota:

The import trade in India is controlled under the Imports and Exports (Control) Act, 1947. A
person or a firm cannot import goods into India without a valid import licence. An import
licence may be either general licence or specific licence. Under a general licence goods can
be imported from any country, whereas a specific or individual licence authorises to import
only from specific countries.
The Government of India declares its import policy in the Import Trade Control Policy Book
called the Red Book. Every importer must first find out whether he can import the goods he
wants or not, and how much of a certain class of goods he can import during the period
covered by the relevant Red Book.
For the purpose of issuing licence, the importers are divided into three categories:
(a) Established importer,
(b) Actual users, and
(c) Registered exporters, i.e., those import under any of the export promotion schemes.
In order to obtain an import licence, the intending importer has to make an application in the
prescribed form to the licensing authority. If the person imported goods of the class in which
he is interested now during the basic period prescribed for such class, he is treated as an
established importer.
An established importer can make an application to secure a Quota Certificate. The certificate
specifies the quantity and value of goods which the importer can import. For this, he
furnishes details of the goods imported in any one year in basic period prescribed for the
goods together with documentary evidence for the same, including a certificate from a
chartered accountant in the prescribed form certifying the c.i.f. value of the goods imported in
the selected year.
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The c.i.f. value includes the invoice price of the goods and the freight and insurance paid for
the goods in transit. The quota certificate entitles the established importer to import upto the
value indicated therein (called Quota) which is calculated on the basis of past imports. If the
importer is an actual user, that is, he wants to import goods for his own use in industrial
manufacturing process he has to obtain licence through the prescribed sponsoring authority.
The sponsoring authority certifies his requirements and recommends the grant of licence. In
case of small industries having a capital of less than Rs. 5 lakhs, they have to apply for
licences through the Director of Industries of the state where the industry is located or some
other authority expressly prescribed by the Government.
Registered exporter importing against exports made under a scheme of export promotion and
others have to obtain licence from the Chief Controller of Exports and Imports. The
Government issues from time to time a list of commodities and products which can be
imported by obtaining a general permission only. This is called as O.G.L. or Open General
Licence list.
(iii) Obtaining Foreign Exchange:

After obtaining the licence (or quota, in case of an established importer), the importer has to
make arrangement for obtaining necessary foreign exchange since the importer has to make
payment for the imports in the currency of the exporting country.
The foreign exchange reserves in many countries are controlled by the Government and are
released through its central bank. In India, the Exchange Control Department of the Reserve
Bank of India deals with the foreign exchange. For this the importer has to submit an
application in the prescribed form along-with the import licence to any exchange bank as per
the provisions of Exchange Control Act.
The exchange bank endorses and forwards the applications to the Exchange Control
Department of the Reserve Bank of India. The Reserve Bank of India sanctions the release of
foreign exchange after scrutinizing the application on the basis of exchange policy of the
Government of India in force at the time of application.
The importer gets the necessary foreign exchange from the exchange bank concerned. It is to
be noted that whereas import licence is issued for a particular period, exchange is released
only for a specific transaction. With liberalisation of economy, most of the restrictions have
been removed as rupee has become convertible on current account.
(iv) Placing the Indent or Order:

After the initial formalities are over and the importer has obtained the licence quota and the
necessary amount of foreign exchange, the next step in the import of goods is that of placing
the order. This order is known as Indent. An indent is an order placed by an importer with an
exporter for the supply of certain goods.
It contains the instructions from the importer as to the quantity and quality of goods required,
method of forwarding them, nature of packing, mode of settling payment and the price etc.
An indent is usually prepared in duplicate or triplicate. The indent may be of several types
like open indent, closed indent and Confirmatory indent.
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In open indent, all the necessary particulars of goods, price, etc. are not mentioned in the
indent, the exporter has the discretion to complete the formalities, at his own end. On the
other hand, if full particulars of goods, the price, the brand, packing, shipping, insurance etc.
are mentioned clearly, it is called a closed indent. A confirmatory indent is one where an
order is placed subject to the confirmation by the importer’s agent.
(v) Despatching a Letter of Credit:

Generally, foreign traders are not acquainted to each other and so the exporter before
shipping the goods wants to be sure about the creditworthiness of the importer. The exporter
wants to be sure that there is no risk of non-payment. Usually, for this purpose he asks the
importers to send a letter of credit to him.
A letter of credit, popularly known as ‘L/C or ‘L.C is an undertaking by its issuer (usually
importer’s bank) that the bills of exchange drawn by the foreign dealer, on the importer will
be honoured on presentation upto a specified amount.
(vi) Obtaining Necessary Documents:

After despatching a letter of credit, the importer has not to do much. On receipt of the letter
of credit, the exporter arranges for the shipment of goods and sends Advice Note to the
importer immediately after the shipment of goods. An Advice Note is a document sent to a
purchaser of goods to inform him that goods have been despatched. It may also indicate the
probable date on which the ship is expected to reach the port of destination.
The exporter then draws a bill of exchange on the importer for the invoice value of goods.
The shipping documents such as the bill of lading, invoice, insurance policy, certificate of
origin, consumer invoice etc., are also attached to the bill of exchange. Such bill of exchange
with all these attached documents is called Documentary Bill. Documentary bill of exchange
is forwarded to the importer through a foreign exchange bank which has a branch or an agent
in the importer’s country for collecting the payment of the bill.
There are two types of documentary bills:

(a) D/P, D.P. (or Documents against payment) bills.
(b) D/A, D.A. (or Document against acceptance) bills.
If the bill of exchange is a D/P bill, then the documents of title of goods are delivered to the
drawee (i.e., importer) only on the payment of the bill in full. D/P bill may be sight bill or
usance bill. In case of sight bill, the payment has to be made immediately on the presentation
of the bill. But usually a grace period of 24 hours is granted.
Usance bill is to be paid within a particular period after sight. If the bill is a D/A bill, then the
documents of title of goods are released to the drawee on his acceptance of the bill and it is
retained by the banker till the date of maturity. Usually 30 to 90 days are provided for the
payment of the bill.
(vii) Customs Formalities and Clearing of Goods:

After receiving the documents of title of the goods, the importer’s only concern is to take
delivery of the goods, when the ship arrives at the port and to bring them to his own place of
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business. The importer has to comply with many formalities for taking delivery of goods.
Unless the following mentioned formalities are complied with, the goods lie in the custody of
the Custom House.
(a) To obtain endorsement for delivery or delivery order:

When the ship carrying the goods arrives at the port, the importer, first of all, has to obtain
the endorsement on the back of the bill of lading by the shipping company. Sometimes the
shipping company, instead of endorsing the bill in his favour, issues a delivery order to him.
This endorsement of delivery order will entitle the importer to take the delivery of the goods.
The shipping company makes this endorsement or issues the delivery order only after the
payment of freight. If the exporter has not paid the freight, i.e., when the bill, of lading is
marked freight forward, the importer has to pay the freight in order to get green signal for the
delivery of goods.
(b) To pay Dock dues and obtain Port Trust Dues Receipts:
The importer has to submit two copies of a form known as ‘Application to import’ duly filled
in to the ‘Lading and Shipping Dues Office’. This office levies a charge on all imported
goods for services rendered by the dock authorities in connection with lading of goods. After
paying the necessary charges, the importer receive back one copy of the application to import
as a receipt ‘Port Trust Dues Receipt’.
(c) Bill of Entry:

The importer will then fill in form called Bill of Entry. This is a form supplied by the custom
office and is to be filled in triplicate. The bill of entry contains the particulars regarding the
name and address of the importer, the name of the ship, packages number, marks, quantity,
value, description of goods, the name of the country wherefrom goods have been imported
and custom duty payable.
The bill of entry forms are of three types and are printed in three colours-Black, Blue and
Violet. A black form is used for non-dutiable or free goods, the blue form is used for goods to
be sold within the country and the violet form is used for re-exportable goods, i.e., goods
meant for re-export. The importer has to submit three forms of bill of entry along-with Port
Trust Dues Receipt to the customs office.
(d) Bill of Sight:

If the importer is not is a position to supply the detailed particulars of goods because of
insufficiency of information supplied to him by the exporter, he has to prepare a statement
called a bill of sight. The bill of sight contains only the information possessed by the importer
along-with a remark that he is not in a position to give complete information about the goods.
The bill of sight enables him to open the package and examine the goods in the presence of
custom officer so as to complete the bill of entry.
(e) To pay Customs or Import Duty:

There are three types of imported goods:
(i) Non dutiable or free goods,
(ii) Goods which are to be sold within the country or which are for home consumption, and
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(iii) Re-exportable goods i.e. goods meant for re-export. If the goods are duty free, no import
duty is to be paid at the custom office.
Custom authorities will permit the delivery of such goods after usual examination of the
goods. But if the goods are liable for duty, the importer has to pay custom or import duty
which may be based on weight or measurement of goods, called Specific Duty or on the
value of imported goods Ad-valorem Ditty.
There are three types of import duties. On some goods quite low duties are levied and they
are called revenue duties. On some others, quite high duties are charged to give protection to
home industries against foreign competition. While goods imported from certain nations are
given preferential treatment for the levy of import duties and in their case full protective
duties are not charged.
(f) Bonded and Duty paid Warehouses:

The port trust and custom authorities maintain two types of warehouses-Bonded and Duty
paid. These warehouses are situated near the dock and are very useful to importers who do
not have godown of their own to store the imported goods or who, for business reasons, do
not wish to carry them to their own godowns.
The goods on which the duty has already been paid by the importer can be kept in the duty
paid warehouses for which a receipt called ‘warehouse receipt’ is issued to him. This receipt
is a document of title and is transferable. The bonded warehouses are meant for goods on
which duty has been paid by the importer. If the importer cannot pay the duty, he may keep
the goods in Bonded warehouses for which he is issued a receipt, called ‘Dock Warrant’.
Dock Warrant, also like warehouses receipt, is a document of title and is transferable.
The bonded warehouses are used by the importer when:

(i) He has no godown of his own.
(ii) He cannot pay the duty immediately.
(iii) He wants to re-export the goods and thereby does not want to pay the duty.
(iv) He wants to pay the duty in installments.
A nominal rent is charged for the use of these warehouses. One special advantage of these
warehouses is that the importer can sell the goods and transfer the title of goods merely by
endorsing warehouse receipt or dock-warrant. This will save the importer from the trouble
and expenses of carrying the goods from the warehouses to his godown.
(g) Appointment of clearing Agents:

By now we understand that the importer has to fulfill many legal formalities before he can
take delivery of goods. The importer may take the delivery of the goods himself at the port.
But it involves much of time, expenses and difficulty. Thus, to save himself from the
botheration of complying with all the complicated formalities, the importer may appoint
clearing agents for taking the delivery of the goods for him. Clearing agents are the
specialised persons engaged in the work of performing various formalities required for taking
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the delivery of goods on behalf of others. They charge some remuneration on performing
these valuable services.
(viii) Making the Payment:

The mode and time of making payment is determined according to the terms and conditions
as agreed to earlier between the importer and the exporter. In case of a D/P bill the documents
of title are released to the importer only on the payment of the bill in full. If the bill is a D/A
bill, the documents of title of the goods are released to the importer on his acceptance of the
bill. The bill is retained by the banker till the date of maturity. Usually, 30 to 90 days are
allowed to the importer for making the payment of such bills.
(ix) Closing the Transactions:

The last step in the import trade procedure is closing the transaction. If the goods are to the
satisfaction of the importer, the transaction is closed. But if he is not satisfied with the quality
of goods or if there is any shortage, he will write to the exporter and settle the matter. In case
the goods have been damaged in transit, he will claim compensation from the insurance
company. The insurance company will pay him the compensation under an advice to the
exporter.
The world is not globalising, in fact it is regionalising. It has divided itself in various groups
based on region or preferential treatments cooperating for economic reasons- trade of goods
and services.
Regional economic integration has enabled countries to focus on issues that are relevant to
their stage of development as well as encourage trade between neighbours. Regional
integration is a process in which states enter into a regional agreement in order to enhance
regional cooperation through regional institutions and rules. It focuses on removing barriers
to free trade in the region, increasing the free movement of people, labour, goods, and capital
across national borders, reducing the possibility of regional armed conflict (for example,
through Confidence and Security-Building Measures), and adopting cohesive regional stances
on policy issues, such as the environment, climate change and migration.
The objectives of the agreement could range from economic to political to environmental,
although it has typically taken the form of a political economy initiative where commercial
interests have been the focus for achieving broader socio-political and security objectives, as
defined by national governments. Regional integration has been organized either via
supranational institutional structures or through intergovernmental decision-making, or a
combination of both.
Arguments are given in favour of Economic Integration:
1. Trade Creation and Trade Diversion:
2. Reduced Import Price:

3. Increased Competition and Economies of Scale:
4. Higher Factor Productivity:
5. Better International Political Relations:
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TYPES OF REGIONAL TRADING BLOCS

Trade blocs can be stand-alone agreements between several states (such as the North
American Free Trade Agreement (NAFTA) or part of a regional organization (such as the
European Union). Depending on the level of economic integration, trade blocs can fall into
six different categories, such as preferential trading areas, free trade areas, customs unions,
common markets, economic union and monetary unions, and political union .
1. Preferential Trade Area : Preferential Trade Areas (PTAs) exist when countries within a
geographical region agree to reduce or eliminate tariff barriers on selected goods imported
from other members of the area. This is often the first small step towards the creation of a
trading bloc.
2. Free trade area : Free Trade Areas (FTAs) are created when two or more countries in a
region agree to reduce or eliminate barriers to trade on all goods coming from other members.
This is the most basic form of economic cooperation. Member countries remove all barriers
to trade between themselves but are free to independently determine trade policies with non
member nations. An example is the North American Free Trade Agreement (NAFTA).
3. Customs union : This type provides for economic cooperation as in a free-trade zone.
Barriers to trade are removed between member countries. The primary difference from the
free trade area is that members agree to treat trade with non-member countries in a similar
manner. A customs union involves the removal of tariff barriers between members, plus the
acceptance of a common (unified) external tariff against non-members. This means that
members may negotiate as a single bloc with third parties, such as with other trading blocs, or
with the WTO. The Gulf Cooperation Council (GCC) Cooperation Council for the Arab
States of the Gulf is an example.
4. Common market: A ‘common market’ is the first significant step towards full economic
integration, and occurs when member countries trade freely in all economic resources – not
just tangible goods. This means that all barriers to trade in goods, services, capital, and labor
are removed. In addition, as well as removing tariffs, non-tariff barriers are also reduced and
eliminated. For a common market to be successful there must also be a significant level of
harmonization of micro-economic policies, and common rules regarding monopoly power
and other anti-competitive practices. There may also be common policies affecting key
industries, such as the Common Agricultural Policy (CAP) and Common Fisheries Policy
(CFP) of the European Single Market (ESM). This type allows for the creation of
economically integrated markets between member countries. Trade barriers are removed, as
are any restrictions on the movement of labor and capital between member countries. Like
customs unions, there is a common trade policy for trade with nonmember nations. The
primary advantage to workers is that they no longer need a visa or work permit to work in
another member country of a common market. An example is the Common Market for
Eastern and Southern Africa (COMESA).
5. Economic and Monetary union: This type is created when countries enter into an
economic agreement to remove barriers to trade and adopt common economic policies. An
example is the European Union (EU). Monetary union is a type of trade bloc which is
composed of an economic union (common market and customs union) with a monetary
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union. Monetary union is established through a currency-related trade pact. An intermediate

step between pure monetary union and a complete economic integration is the fiscal union.
Economic and Monetary Union of the European Union with the Euro for the Euro-zone
members is the example of monetary union.
6. Political union: In order to be successful the more advanced integration steps are typically
accompanied by unification of economic policies (tax, social welfare benefits, etc.),
reductions in the rest of the trade barriers, introduction of supranational bodies, and gradual
moves towards the final stage, a “political union”. Political union is the final stage in
economic integration with more formal political links between the countries. A limited form
of political union may exist when two or more countries share common decision making
bodies and have common policies. It is the unification of previously separate nations. The
unification of West and East Germany in 1990 is an example of total political union.
ADVANTAGES OF REGIONAL TRADING BLOCS

1. Free trade within the bloc: Knowing that they have free access to each other’s markets,
members are encouraged to specialise. This means that, at the regional level, there is a wider
application of the principle of comparative advantage.
2. Market access and trade creation: Easier access to each other’s markets means that trade
between members is likely to increase. Trade creation exists when free trade enables high
cost domestic producers to be replaced by lower cost, and more efficient imports. Because
low cost imports lead to lower priced imports, there is a ‘consumption effect’, with increased
demand resulting from lower prices. These agreements create more opportunities for
countries to trade with one another by removing the barriers to trade and investment. Due to a
reduction or removal of tariffs, cooperation results in cheaper prices for consumers in the
bloc countries. Studies indicate that regional economic integration significantly contributes to
the relatively high growth rates in the less-developed countries.
3. Economies of scale: Producers can benefit from the application of scale economies, which
will lead to lower costs and lower prices for consumers.
4. Jobs: Jobs may be created as a consequence of increased trade between member
economies. By removing restrictions on labour movement, economic integration can help
expand job opportunities.
5. Protection: Firms inside the bloc are protected from cheaper imports from outside, such as
the protection of the EU shoe industry from cheap imports from China and Vietnam.
6. Consensus and cooperation: Member nations may find it easier to agree with smaller
numbers of countries. Regional understanding and similarities may also facilitate closer
political cooperation.
DISADVANTAGES OF REGIONAL TRADING BLOCS

1. Loss of benefits: The benefits of free trade between countries in different blocs is lost.
2. Distortion of trade: Trading blocs are likely to distort world trade, and reduce the
beneficial effects of specialisation and the exploitation of comparative advantage. 3.
Inefficiencies and trade diversion: Inefficient producers within the bloc can be protected from
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more efficient ones outside the bloc. For example, inefficient European farmers may be
protected from low-cost imports from developing countries. Trade diversion arises when
trade is diverted away from efficient producers who are based outside the trading area. The
flip side to trade creation is trade diversion. Member countries may trade more with each
other than with non member nations. This may mean increased trade with a less efficient or
more expensive producer because it is in a member country. In this sense, weaker companies
can be protected inadvertently with the bloc agreement acting as a trade barrier. In essence,
regional agreements have formed new trade barriers with countries outside of the trading
bloc.
4. Retaliation: The development of one regional trading bloc is likely to stimulate the
development of others. This can lead to trade disputes, such as those between the EU and
NAFTA, including the recent Boeing (US)/ Airbus (EU) dispute. The EU and US have a long
history of trade disputes, including the dispute over US steel tariffs, which were declared
illegal by the WTO in 2005. In addition, there are the so-called beef wars with the US
applying £60m tariffs on EU beef in response to the EU’s ban on US beef treated with
hormones; and complaints to the WTO of each other’s generous agricultural support. During
the 1970s many former UK colonies formed their own trading blocs in reaction to the UK
joining the European common market.
5. Employment shifts and reductions: Countries may move production to cheaper labor
markets in member countries. Similarly, workers may move to gain access to better jobs and
wages. Sudden shifts in employment can tax the resources of member countries.
6. Loss of national sovereignty: With each new round of discussions and agreements within a
regional bloc, nations may find that they have to give up more of their political and economic
rights. The economic crisis in Greece is threatening not only the EU in general but also the
rights of Greece and other member nations to determine their own domestic economic
policies.
A Free trade Agreement (FTA) is an agreement between two or more countries where the
countries agree on certain obligations that affect trade in goods and services, and protections
for investors and intellectual property rights, among other topics. For the United States, the
main goal of trade agreements is to reduce barriers to U.S. exports, protect U.S. interests
competing abroad, and enhance the rule of law in the FTA partner country or countries.
Currently, important FTA of India are India-Thailand FTA, India-Sri Lanka Bilateral Free
Trade Area, and India-Singapore Comprehensive Economic Cooperation Agreement
(CECA).
FTAs can help your company to enter and compete more easily in the global marketplace
through zero or reduced tariffs and other provisions. While the specifics of each FTA vary,
they generally provide for the reduction of trade barriers and the creation of a more stable and
transparent trading and investment environment. This makes it easier and cheaper for U.S.
companies to export their products and services to trading partner markets.
Key Benefits of Free Trade Agreements
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If you are looking to export your product or service, the United States may have negotiated
favourable treatment through an FTA to make it easier and cheaper for you. Accessing FTA
benefits for your product may require more record-keeping but can also give your product a
competitive advantage versus products from other countries. U.S. FTAs typically address a
wide variety of government activity that affect your business:
 Reduction or elimination of tariffs on qualified. For example, a country that normally

charges a tariff of 12% of the value of the incoming product will eliminate that tariff
for products that originate (as defined in the FTA) in the United States. This makes
you more competitive in the market.
 Intellectual Property Protection: protection and enforcement of American-owned
intellectual property rights in the FTA partner country.
 Product Standards: the ability for U.S. exporters to participate in the development of
product standards in the FTA partner country.
 Selling to the government: the ability for a U.S. company to bid on certain
government procurements in the FTA partner country.
 Service companies: the ability for U.S. service suppliers to supply their services in the
FTA partner country.
 Fair treatment for U.S. investors providing they be treated as favorably as the FTA
partner country treats its own investors and their investments or investors and
investments from any third country.
References:
https://www.trade.gov/free-trade-agreement-overview
https://www.india-briefing.com/news/import-export-procedures-india-
19125.html/?utm_source=Mondaq&utm_medium=syndication&utm_campaign=LinkedIn-
integration
https://www.mondaq.com/india/international-trade-investment/845604/import-and-export-
procedures-in-india
https://cleartax.in/s/export-procedure
https://www.yourarticlelibrary.com/export-management/procedure-and-steps-involved-in-
import-of-goods/42106
International Business – elective paper under the Company secretaries of India , available at
https://drive.google.com/file/d/18YIYkKwKC8zxGqTVUNnPycjiJP8OM8Uv/view
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BBA3-BUSINESS ENVIRONMENT-UT5-MD2-Strategies For Going Global

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BBA3-BUSINESS ENVIRONMENT-UT5-MD2-Strategies for Going

Global - FTAs, FDI, FII, JV and EXIM Procedure

MODES OF ENTRY AND OPERATION IN INTERNATIONAL BUSINESS

Different Modes of Entering Into International Markets

Exporting includes indirect exporting, direct exporting and intra-corporate transfers.

Intra-corporate Transfers - Intra-corporate transfers means selling of product; by a

 Exporting may be appropriate under the following circumstances:

 Foreign investment is not encouraged by the concerned foreign government.

 Limited form of participation -to length of agreement, specific product, process or

 Licensees become competitors as once know-how is transferred, there is a risk

• import restrictions, discourage direct entry

– Businesses which are easily duplicated.

Advantages For franchisors

Advantages for franchisees

Disadvantages for franchisors

Disadvantages for franchisees

FOREIGN DIRECT INVESTMENT WITHOUT ALLIANCES

FOREIGN DIRECT INVESTMENT WITH STRATEGIC ALLIANCES

Mergers and Acquisitions

– Improves forex position of the country;

Factors Affecting Entry Decisions

 Number of markets covered- Different entry methods offer different coverage of

2. Ensure legal compliance under different trade laws

3. Procure import licenses

To determine whether a license is needed to import a particular commercial product or

5. Determine import duty rate for clearance of goods

Import and export documents:

 Bill of lading or airway bill;

 GST return forms (GSTR 1 and GSTR 2);

Step 7. Formalities by a Forwarding Agent The formalities to be performed by the agent

The steps taken in import procedure are discussed as follows:

(ii) Procurement of Import Licence and Quota:

(b) Actual users, and

(iii) Obtaining Foreign Exchange:

(iv) Placing the Indent or Order:

(v) Despatching a Letter of Credit:

(vi) Obtaining Necessary Documents:

There are two types of documentary bills:

(b) D/A, D.A. (or Document against acceptance) bills.

(vii) Customs Formalities and Clearing of Goods:

(a) To obtain endorsement for delivery or delivery order:

(c) Bill of Entry:

(d) Bill of Sight:

(e) To pay Customs or Import Duty:

(f) Bonded and Duty paid Warehouses:

The bonded warehouses are used by the importer when:

(ii) He cannot pay the duty immediately.

(iv) He wants to pay the duty in installments.

(g) Appointment of clearing Agents:

(viii) Making the Payment:

(ix) Closing the Transactions:

2. Reduced Import Price:

TYPES OF REGIONAL TRADING BLOCS

union. Monetary union is established through a currency-related trade pact. An intermediate

ADVANTAGES OF REGIONAL TRADING BLOCS

DISADVANTAGES OF REGIONAL TRADING BLOCS

Key Benefits of Free Trade Agreements

 Reduction or elimination of tariffs on qualified. For example, a country that normally

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