INTERNATIONAL BUSINESS ENVIRONMENT

UNIT 2

FOREIGN DIRECT INVESTMENT

Introduction to FDI

A foreign direct investment (FDI) is an investment made by a firm or individual in one country into business
interests located in another country. Generally, FDI takes place when an investor establishes foreign
business operations or acquires foreign business assets in a foreign company. However, FDIs are
distinguished from portfolio investments in which an investor merely purchases equities of foreign-based
companies.

Foreign direct investments can be made in a variety of ways, including the opening of a subsidiary or
associate company in a foreign country, acquiring a controlling interest in an existing foreign company, or
by means of a merger or joint venture with a foreign company.

The threshold for a foreign direct investment that establishes a controlling interest, per guidelines
established by the Organisation of Economic Co-operation and Development (OECD), is a minimum 10%
ownership stake in a foreign-based company. However, that definition is flexible, as there are instances
where effective controlling interest in a firm can be established with less than 10% of the company’s voting
shares

Example :

Foreign Direct Investment (FDI) is the practice of starting or investing in businesses in foreign countries.
For example, if an American multinational firm opens up operations in China or India, either by opening
up its own premises or by partnering with a local firm, that investment would be considered part of FDI.

Role / Importance / Advantages of FDI for Recipient Country

1. Increased Employment and Economic Growth

Creation of jobs is the most obvious advantage of FDI. It is also one of the most important reasons why a
nation, especially a developing one, looks to attract FDI. Increased FDI boosts the manufacturing as well
as the services sector. This in turn creates jobs, and helps reduce unemployment among the educated
youth – as well as skilled and unskilled labour – in the country. Increased employment translates to
increased incomes, and equips the population with enhanced buying power. This boosts the economy of
the country.

2. Human Resource Development

This is one of the less obvious advantages of FDI. Hence, it is often understated. Human Capital refers to
the knowledge and competence of the workforce. Skills gained and enhanced through training and
experience boost the education and human capital quotient of the country. Once developed, human
capital is mobile. It can train human resources in other companies, thereby creating a ripple effect.

3. Development of Backward Areas

This is one of the most crucial benefits of FDI for a developing country. FDI enables the transformation of
backward areas in a country into industrial centres. This in turn provides a boost to the social economy of
the area. The Hyundai unit at Sriperumbudur, Tamil Nadu in India exemplifies this process.

4. Provision of Finance & Technology

Recipient businesses get access to latest financing tools, technologies and operational practices from
across the world. Over time, the introduction of newer, enhanced technologies and processes results in
their diffusion into the local economy, resulting in enhanced efficiency and effectiveness of the industry.

5. Increase in Exports

Not all goods produced through FDI are meant for domestic consumption. Many of these products have
global markets. The creation of 100% Export Oriented Units and Economic Zones have further assisted FDI
investors in boosting their exports from other countries.

6. Exchange Rate Stability

The constant flow of FDI into a country translates into a continuous flow of foreign exchange. This helps
the country’s Central Bank maintain a comfortable reserve of foreign exchange. This in turn ensures stable
exchange rates.

7. Stimulation of Economic Development

This is another very important advantage of FDI. FDI is a source of external capital and higher revenues
for a country. When factories are constructed, at least some local labour, materials and equipment are
utilised. Once the construction is complete, the factory will employ some local employees and further use
local materials and services. The people who are employed by such factories thus have more money to
spend. This creates more jobs.

These factories will also create additional tax revenue for the Government, that can be infused into
creating and improving physical and financial infrastructure.

8. Improved Capital Flow

Inflow of capital is particularly beneficial for countries with limited domestic resources, as well as for
nations with restricted opportunities to raise funds in global capital markets.

9. Creation of a Competitive Market

By facilitating the entry of foreign organisations into the domestic marketplace, FDI helps create a
competitive environment, as well as break domestic monopolies. A healthy competitive environment
pushes firms to continuously enhance their processes and product offerings, thereby fostering innovation.
Consumers also gain access to a wider range of competitively priced products.

DIFFERENT FORMS OF FDI

Greenfield investment

Greenfield FDIs occur when multinational corporations enter into developing countries to build new
factories or stores. These new facilities are built from scratch—usually in an area where no previous
facilities existed. The name originates from the idea of building a facility on a green field, such as farmland
or a forested area. In addition to building new facilities that best meet their needs, the firms also create
new long-term jobs in the foreign country by hiring new employees. Countries often offer prospective
companies tax breaks, subsidies, and other incentives to set up greenfield investments.

Brownfield investment

A brownfield FDI is when a company or government entity purchases or leases existing production
facilities to launch a new production activity. One application of this strategy is where a commercial site
used for an “unclean” business purpose, such as a steel mill or oil refinery, is cleaned up and used for a
less polluting purpose, such as commercial office space or a residential area. Brownfield investment is
usually less expensive and can be implemented faster; however, a company may have to deal with many
challenges, including existing employees, outdated equipment, entrenched processes, and cultural
differences.

HORIZONTAL FDI:

under this type of FDI, a business expands its inland operations to another country. The business
undertakes the same activities but in a foreign country.

VERTICAL FDI:

In this case, a business expands into another country by moving to a different level of the supply chain.
Thus business undertakes different activities overseas but these activities are related to the main
business.

CONGLOMERATE FDI:

under the type of FDI, a business undertakes unrelated business activities in a foreign country. This type
is uncommon as in involves the difficulty of penetrating a new country and an entirely new markere, a
business expands into another country but the output from the business is then exported to a third
country.

After the liberalization of the economy in 1991, India opened its market to foreign investors. Over the
years the government has taken several reforms in foreign direct investment norms in order to encourage
more overseas investor to invest in the country.
UNIT 3
MULTINATIONAL COMPANIES & MONETARY POLICY

INTRODUCTION TO MNC’S

Multinational corporations (MNCs) are major actors in the world of international business. The
corporation whose activities are spread over more than one nation is known as a multinational
corporation. Transnational Corporation, International Corporation or Global Corporation are some of the
other names by which these corporations are known. The concept of MNCs is not new rather it is very old.
This is evident from the MNCs like The East Indian Company, The Royal African Company and Hindson
Bay.

They help in the expansion of the business both in the developed and developing countries. For the proper
allocation and utilisation of the world resources, the role of MNCs is quite significant. They use the
innovative methods of production which help to stimulate the demand for their products. Some of the
MNCs working in our country are Hindustan Liver, KFC, McDonalds, etc.

DEFINITION

A multinational company is one which is incorporated in one country (called the home country); but
whose operations extend beyond the home country and which carries on business in other countries
(called the host countries) in addition to the home country.

It must be emphasized that the headquarters of a multinational company are located in the home country.

“A multinational corporation owns and manages business in two or more countries.”

A multinational corporation is known by various names such as: global enterprise, international
enterprise, world enterprise, transnational corporation etc.
FEATURES / CHARACTERISTICS OF MNC'S

Huge Assets and Turnover:

Because of operations on a global basis, MNCs have huge physical and financial assets. This also results in
huge turnover (sales) of MNCs. In fact, in terms of assets and turnover, many MNCs are bigger than
national economies of several countries.

International Operations Through a Network of Branches:

MNCs have production and marketing operations in several countries; operating through a network of
branches, subsidiaries and affiliates in host countries.

Unity of Control:

MNCs are characterized by unity of control. MNCs control business activities of their branches in foreign
countries through head office located in the home country. Managements of branches operate within the
policy framework of the parent corporation.

Mighty Economic Power:

MNCs are powerful economic entities. They keep on adding to their economic power through constant
mergers and acquisitions of companies, in host countries.
Advanced and Sophisticated Technology:

Generally, a MNC has at its command advanced and sophisticated technology. It employs capital intensive
technology in manufacturing and marketing.

Professional Management:

A MNC employs professionally trained managers to handle huge funds, advanced technology and
international business operations.

Aggressive Advertising and Marketing:

MNCs spend huge sums of money on advertising and marketing to secure international business. This is,
perhaps, the biggest strategy of success of MNCs. Because of this strategy, they are able to sell whatever
products/services, they produce/generate.

Better Quality of Products:

A MNC has to compete on the world level. It, therefore, has to pay special attention to the quality of its
products.

DIFFERENT FORMS OF MNC’S (MULTINATIONAL COMPANIES)

1. Franchising

In this form, multinational corporation grants firms in foreign countries the right to use its trade marks,
patents, brand names etc. The firms get the right or licence to operate their business as per the terms and
conditions of franchise agreement. They pay royalty or licence fee to multinational corporations. In case
the firm holding franchise violate the terms and conditions of the agreement, the licence may be
cancelled. This system is popular for products which enjoy good demand in host countries.

2. Branches

In this system multinational corporation opens branches in different countries. These branches work
under the direction and control of head office. The headquarters frames policies to be followed by the
branches. Every branch follows laws and regulations of the head office and host countries. In this way
multinational companies operate through branches.
3. Subsidiaries

A multinational corporation may establish wholly owned subsidiaries m foreign countries. In case of partly
owned subsidiaries people in the host countries also own shares. The subsidiaries in foreign countries
follow the polices laid down by holding company (Parent company). A multinational company can expand
its business operations though subsidiaries all over the world.

4. Joint Venture

In this system a multinational corporation establishes a company in foreign country in partnership with
local firms. The multinational and foreign firm share the ownership and control of the business. Generally,
the multinational provides technology and managerial skill and the day to day management is left to the
local partner. For example, in Maruti Udyog the Government of India and Suzuki of Japan have jointly
supplied capital. Suzuki supplies technology and the day to day management lies with the Government of
India.

5. Turn Key Projects

In this method, the multinational corporation undertakes a project in foreign country. The multinational
constructs and operates the industrial plant by itself. It provides training to the staff in the operation of
plant.

ROLE / IMPACT / ADVANTAGES OF MNC’S ON HOST COUNTRIES

The possible benefits of a multinational investing in a country may include:

Improving the balance of payments

Inward investment will usually help a country’s balance of payments situation. The investment itself will
be a direct flow of capital into the country and the investment is also likely to result in import substitution
and export promotion. Export promotion comes due to the multinational using their production facility
as a basis for exporting, while import substitution means that products previously imported may now be
bought domestically.

Providing employment

FDI will usually result in employment benefits for the host country as most employees will be locally
recruited. These benefits may be relatively greater given that governments will usually try to attract firms
to areas where there is relatively high unemployment or a good labour supply.

Source of tax revenue

Profits of multinationals will be subject to local taxes in most cases, which will provide a valuable source
of revenue for the domestic government.
Technology transfer

Multinationals will bring with them technology and production methods that are probably new to the host
country and a lot can therefore be learnt from these techniques. Workers will be trained to use the new
technology and production techniques and domestic firms will see the benefits of the new technology.
This process is known as technology transfer.

Increasing choice

If the multinational manufactures for domestic markets as well as for export, then the local population
will gain form a wider choice of goods and services and at a price possibly lower than imported substitutes.

National reputation

The presence of one multinational may improve the reputation of the host country and other large
corporations may follow suite and locate as well.

DISADVANTAGES / NEGATIVE IMPACT OF MNC’S ON HOST COUNTRY

The possible disadvantages of a multinational investing in a country may include:

Environmental impact

Multinationals will want to produce in ways that are as efficient and as cheap as possible and this may not
always be the best environmental practice. They will often lobby governments hard to try to ensure that
they can benefit from regulations being as lax as possible and given their economic importance to the
host country, this lobbying will often be quite effective.

Uncertainty

Multinational firms are increasingly ‘footloose’. This means that they can move and change at very short
notice and often will. This creates uncertainty for the host country.

Increased competition

The impact the local industries can be severe, because the presence of newly arrived multinationals
increases the competition in the economy and because multinationals should be able to produce at a
lower cost.

Influence and political pressure

Multinational investment can be very important to a country and this will often give them a
disproportionate influence over government and other organisations in the host country. Given their
economic importance, governments will often agree to changes that may not be beneficial for the long-
term welfare of their people.

Transfer pricing
Multinationals will always aim to reduce their tax liability to a minimum. One way of doing this is through
transfer pricing. The aim of this is to reduce their tax liability in countries with high tax rates and increase
them in the countries with low tax rates. They can do this by transferring components and part-finished
goods between their operations in different countries at differing prices. Where the tax liability is high,
they transfer the goods at a relatively high price to make the costs appear higher. This is then recouped
in the lower tax country by transferring the goods at a relatively lower price. This will reduce their overall
tax bill.

Low-skilled employment

The jobs created in the local environment may be low-skilled with the multinational employing expatriate
workers for the more senior and skilled roles.

Health and safety

Multinationals have been accused of cutting corners on health and safety in countries where regulation
and laws are not as rigorous.

Export of Profits

Large multinational are likely to repatriate profits back to their ‘home country’, leaving little financial
benefits for the host country.

Cultural and social impact

Large numbers of foreign businesses can dilute local customs and traditional cultures. For example, the
sociologist George Ritzer coined the term McDonaldization to describe the process by which more and
more sectors of American society as well as of the rest of the world take on the characteristics of a fast-
food restaurant, such as increasing standardisation and the movement away from traditional business
approaches.

Factors that Encourage Companies for Going International

Following factors generally encourage companies for going international:

1. To Gain Access to Cheaper Resources:

Nature of business forces the companies like companies engaged in mining and petroleum business to
have an access to more reliable or cheaper supply of raw materials in foreign countries. Similarly,
manufacturing enterprises also try for cheap labour in host countries in comparison to costly labour
available in the home country. Companies are eager to invest in developing foreign countries to avoid
political instability at home or to gain access to a large pool of technological know-how available in the
host countries.

2. To Increase Return on Investment:

Companies are interested to increase their return through foreign investment. “Business is like individuals
who shift their funds from areas where return on capital are lower to those where they are higher.”
Companies also increase their chances for achieving a certain return on investment and stable or growing
profits by expanding their overseas business.

3. To Increase Market Share:

According to Ramond Vernn’s product cycle theory, companies that develop attractive new product sell
them first in their home markets. Sooner or later, foreigners learn of these products, creating enough
demand to justify exporting. If this demand continues to grow, it will eventually become more economical
to invest in foreign manufacturing facilities. Oligopolistic positions of companies also positively improve
the market share.

According to Stevan Hymer, companies that expand internationally tend to be oligopolistic that is, they
tend to dominate their domestic market, either because their products are highly desirable or because
their size lets them reap economies of scale. To continue growing, they will have to expand into
international markets.

4. To Neutralize Foreign Tariffs and Import Quotas:

Government of host country generally uses tariff or import quotas to protect domestic business
enterprises. In this enterprise direct investment plays an important role in solving the problems created
through the threat of foreign tariffs and import quotas. MNCs counter these threats by investing more
and more in terms of direct investment in host countries.

IMPACT OF MNC’S ON SMALL SCALE FIRMS

Positive impacts

1. Better & improved technology

2. Innovative production Techniques
3. Vertical Affiliations

Negative impacts

1. Increased Competition
2. Dependence upon capital intensive techniques
3. Non affordability of higher wages by small scale firms
Role of MNC’S (positive & Negative Imapcts – Technological , Economical & political)

1. Technological Impact

Positive

Introduction to Advance Technology

Innovative Methods of Production

Innovation

Negative Impacts

Loss of Jobs

Dependence on technology

Not affordable by all

UNIT 4
INTERNATIONAL TRADE

BALANCE OF TRADE

It is the difference between the money value of exports and imports of material goods [called visible items
or merchandise) during a year.

Exports and imports of services (invisible items like shipping, insurance, banking, payment of dividend and
interest, expenditure by tourists, etc.) are not included.

The difference between values of exports and imports is called Balance of trade or Trade balance.
Remember export means sending goods abroad to earn foreign exchange whereas imports means buying
goods from abroad and pay in foreign exchange. Exports are considered as income and imports as
expenditure. It includes only visible items and does not consider exchange of services.
Surplus or Deficit BOT:

Balance of trade may be in surplus or in deficit or in equilibrium. If value of exports of visible items is more
than the value of imports of visible items, balance of trade is said to the positive or favourable. Thus, BOT
shows a surplus. In case the value of exports is less than the value of imports, the balance of trade is said
to be negative or adverse or unfavourable.

Examples of visible items are clothes, shoes, machines, etc. Clearly, the two transactions which determine
BOT are exports and imports of goods.

The Balance of Trade (BoT) is the difference between the total value of exports and the total value of
imports of a country within a time period. It is also referred to as trade balance, commercial balance or
net exports (NX). The Balance of Trade shows whether the country had achieved to sell locally produced
goods and services to foreign countries (export) more than it bought products from abroad (import) in
the focused period. Therefore, BoT is considered as the main economic indicator of a country’s
international commerce activities and an important parameter to assess economic growth. When the
total value of exports is higher than imports, the Balance of Trade is positive and yields a trade surplus. A
trade surplus means that the country made profits from international trade. The government can use this
extra budget to increase either local investments to enhance the standard of living, or foreign investments
to create new income sources for the country.

When the total value of exports is lower than imports, the Balance of Trade is negative and yields a trade
deficit. A trade deficit means that the country is spending more than it earns in the global arena.
Consequently, the government might be forced to implement new taxes or borrow from other countries
or international money organisations like International Money Fund (IMF) to cover for the budget
shortage. BoT is the largest portion of the Balance of Payments (BoP), which is the record of a country’s
international finance activities. It is comprised of current account (international trade transactions), which
includes BoT, and capital account (international investment transactions). BoP is the sum of all inbound
and outbound transactions between a country’s economic entities and the rest of the world. Theoretically,
two accounts should be balancing each other and yield a zero-sum BoP. However, different economic
policies and fluctuations in the foreign exchange rates usually cause deviations.

TB (trade balance) = X (total export value) – M (total import value)

BALANCE OF PAYMENT

Balance Of Payment (BOP) is a statement which records all the monetary transactions made between
residents of a country and the rest of the world during any given period. This statement includes all the
transactions made by/to individuals, corporates and the government and helps in monitoring the flow of
funds to develop the economy. When all the elements are correctly included in the BOP, it should sum up
to zero in a perfect scenario. This means the inflows and outflows of funds should balance out. However,
this does not ideally happen in most cases. BOP statement of a country indicates whether the country has
a surplus or a deficit of funds i.e when a country’s export is more than its import, its BOP is said to be in
surplus. On the other hand, BOP deficit indicates that a country’s imports are more than its exports.

Elements or components of balance of payment

There are three components of balance of payment viz current account, capital account, and financial
account. The total of the current account must balance with the total of capital and financial accounts in
ideal situations.

1. Current Account

The current account is used to monitor the inflow and outflow of goods and services between countries.
This account covers all the receipts and payments made with respect to raw materials and manufactured
goods. It also includes receipts from engineering, tourism, transportation, business services, stocks, and
royalties from patents and copyrights. When all the goods and services are combined, together they make
up to a country’s Balance Of Trade (BOT). There are various categories of trade and transfers which
happen across countries. It could be visible or invisible trading, unilateral transfers or other
payments/receipts. Trading in goods between countries are referred to as visible items and import/export
of services (banking, information technology etc) are referred to as invisible items. Unilateral transfers
refer to money sent as gifts or donations to residents of foreign countries. This can also be personal
transfers like – money sent by relatives to their family located in another country.

2. Capital Account

All capital transactions between the countries are monitored through the capital account. Capital
transactions include the purchase and sale of assets (non-financial) like land and properties. The capital
account also includes the flow of taxes, purchase and sale of fixed assets etc by migrants moving out/in
to a different country. The deficit or surplus in the current account is managed through the finance from
capital account and vice versa. There are 3 major elements of capital account:

Loans & borrowings – It includes all types of loans from both the private and public sectors located in
foreign countries.

Investments – These are funds invested in the corporate stocks by non-residents.

Foreign exchange reserves – Foreign exchange reserves held by the central bank of a country to monitor
and control the exchange rate does impact the capital account.

3. Financial Account

The flow of funds from and to foreign countries through various investments in real estates, business
ventures, foreign direct investments etc is monitored through the financial account. This account
measures the changes in the foreign ownership of domestic assets and domestic ownership of foreign
assets. On analyzing these changes, it can be understood if the country is selling or acquiring more assets
(like gold, stocks, equity etc).

REASONS / CAUSES FOR DEFICIT IN BALANCE OF PAYMENT

Some of the major important causes of deficit (disequilibrium) in balance of payments are : 1. Economic
Factors 2. Political Factors 3. Social Factors.

Deficit in the balance of payments may be caused due to number of factors.

These factors can be divided into three groups:

1. Economic Factors:

(i) Developmental activities:

Developing countries depend on developed nations for supply of machines, technology and other
equipment. This leads to increased levels of imports, thereby, resulting in a deficit in the BOP account.

(ii) High rate of inflation:

When there is inflation in the domestic economy, foreign goods become relatively cheaper as compared
to domestic goods. It increases imports which causes a deficit in the BOP.

(iii) Cyclical fluctuations:

When the domestic economy is going through a phase of boom, then domestic production may be unable
to satisfy the domestic demand. It leads to a deficit in BOP, due to increase in imports.

(iv) Change in Demand:

Fall in demand for country’s goods in the foreign markets leads to fall in exports and it adversely affects
the balance of payments.

(v) Import of Services:

Underdeveloped countries import services from developed countries for which, they have to pay huge
amounts of money. It leads to a deficit in the BOP.
 2. Political Factors:

(i) Political Instability:

Political instability may lead to large capital outflows and reduce the inflows of foreign funds, thus,
creating disequilibrium in the BOP.

(ii) Political disturbances:

Frequent changes in the government, inadequate support to the government in parliament also
discourage inflows of capital. This leads to a deficit due to higher outflows than inflows.

3. Social Factors:

(i) Demonstration Effect:

When the people of underdeveloped countries come in contact with those of advanced countries, they
start adopting the foreign pattern of consumption. Due to this reason, their imports increase and it leads
to an adverse balance of payments for underdeveloped country.

(ii) Change in tastes, preferences, fashion and trends:

An unfavorable change for the domestic goods leads to a deficit in the balance of payments.

DIFFERENCE BETWEEN BALANCE OF TRADE & BALANCE OF PAYMENT

1. Balance of Payments (BOP)

1. Balance of Payments (BOP) – is simply put – the summary of all the ‘economic’ transactions India has
had with the rest of the world (ROW) in a financial year.

When I say India and economic transactions – I mean to say business entities
(individuals/companies/firms), Government entities etc. of India – having international business
transactions.

2. Balance of Trade (BOT)

2. Balance of Trade (BOT) – is just the summary or the balancing of the total exports and the total imports
of India in a financial year.

Or, in formulaic form it is –

BOT = Total Exports of visible items – Total Import of visible items

(what is visible item? – hang on – I’ll answer that in a bit!)

3. Difference between BOP and BOT

BOP summarizes all the inter-country transactions (ALL international transactions) and is a wider term –
which includes BOT.

So, BOT forms a part of BOP.

Whereas BOT is a narrower term, and includes only the summary of export and import of Visible Items.

4. Items that make up the BOP and BOT

BOP is a wider term – and includes:

Visible Items – are those items which are visible/ touchable/ tangible/physical – i.e., they can be seen and
measured and touched!

BOP includes the export and import of such physical goods.

Invisible Items – are those which cannot be seen (and hence invisible!) or touched – but can be felt – I am
talking about services!!

The import and export of services in included in BOP – services like banking/consultancy services of IT/
Legal/ Architecture/ Management/ CA etc./ insurance and logistics services.

5. Understanding BOP and BOT

Balanced BOP is when forex payment and receipts are equal – which never happens in reality!

Surplus BOP is when the forex receipts are more than the payments.

Deficit BOP is when the forex payments are more than the receipts.
Surplus BOT is when the exports are more than imports – it is a ‘favourable BOT’.

Deficit BOT is when the imports are more than the exports – it is ‘unfavourable BOT’.

6. Current Account and Capital Account

Current account includes transactions of visible, invisible items and unilateral transactions.

In other words – current account transactions are import and export transactions of physical goods and
services and also includes one way transfers.

Capital account includes those international transactions which causes change in the assets and liabilities
of the residents of India or the Government.

Transactions like making investments abroad or foreign investors investing in India, borrowings and
lending of funds across borders etc.

Since capital account transactions are concerned with capital assets – it does not affect the revenue
incomes, output/ production or employment scenario of the country; these are reflected by the current
account transactions instead.

SHORT NOTES ON :-

Quota

The import quota means physical limitation of the quantities of different products to be imported from
foreign countries within a specified period of time, usually one year. The import quota may be fixed either
in terms of quantity or the value of the product.

For instance, the government may specify that 60,000 colour T.V. sets may be imported from Japan.
Alternatively, it may specify that T.V. sets of the value of Rs. 50 crores can be imported from that country
during a given year.

Objectives of Import Quotas:

The system of prescribing import quota is resorted to by the government of a country for realising some
of the following objectives:

(i) To afford protection to domestic industries through restricting foreign competition

by limiting the imports from abroad.
(ii) To make adjustment in the adverse balance of payments. The restriction of
imports through quotas can reduce the balance of payments deficit faced by the
country.

(iii) To conserve the scarce foreign exchange resources of the country and to direct
their use for high-priority import items.

(iv) To ensure the stabilisation of the internal price level by properly regulating the
imports of goods from abroad.

(v) To discourage conspicuous consumption by the wealthy sections through placing

quota restrictions on the import of luxury goods.

Types of Import Quotas:

The main types of import quotas are as below:

(i) Tariff or Custom Quota:

In the case of tariff or custom quota, a certain specified quantity of a commodity is
allowed to be imported by the government of the importing country either duty free
or at a low rate of import duty. The imports in excess of this specified quantity are
subject to a relatively higher rate of tariff. A tariff quota is either an autonomous
quota or agreed quota. The autonomous tariff quota is fixed by decree or law. On the
opposite, the agreed tariff quota is one, which is the result of some agreement
between the quota-imposing country and one or more foreign countries.

(ii) Unilateral Quota:

Under the system of unilateral quota, a country places an absolute limit upon the
quantity of a commodity to be imported during a specified period. This limit is fixed
without any prior negotiation or agreement with the foreign countries.

(iii) Bilateral Quota:

In case of the bilateral quota system, the import quota is fixed after negotiations
between the importing and exporting countries.
Customs Duty

It refers to the tax that is imposed on the transportation of goods across international borders. It is a kind
of indirect tax that is levied by the government on the imports and exports of goods. Companies that are
into the export-import business need to abide by these regulations and pay the customs duty as required.
Put differently, the customs duty is a kind of fees that are collected by the customs authorities for the
movement of goods and services to and from that country. The tax that is levied for the import of products
is referred to as import duty, while the tax levied on the goods that are exported to some other country
is known as export duty.

The primary purpose of customs duty is to raise revenue, safeguard domestic business, jobs, environment
and industries etc. from predatory competitors of other countries. Moreover, it helps reduce fraudulent
activities and circulation of black money.

On what factors is the customs duty calculated?

The customs duty is calculated based on various factors such as the following:

The place of acquisition of the good.

The place where the goods were made.

The material of the goods.

Weight and dimensions of the good etc.

Moreover, if you are bringing a good for the first time in India, you must declare it as per the customs rule.

Customs Duty in India

India has a well-developed taxation structure. The tax system in India is mainly a three-tier system which
is based between the Central, State Governments and the local government organisations. Customs duty
in India falls under the Customs Act 1962 and Customs Tariff Act of 1975.

Since the implementation of India’s new taxation system, GST, integrated goods and value-added service
tax (IGST) is being charged on the value of any imported goods. Under IGST, all products and services are
taxed under four basic slabs of 5 percent, 12 percent, 18 percent, and 28 percent.

Furthermore, the office of the Director General of Foreign trade validates the registration of all importers
before they engage in any import and export activities.
Types of Customs Duty in India

Customs duties are levied on almost all goods that are imported into the country. On the other hand,
export duties are levied on a few items as mentioned in the Second Schedule. Customs duties are not
levied on life-saving drugs, fertilizers and food grains. Customs duties are divided into different taxes, such
as:

Basic Customs Duty

This is levied on imported items that are part of Section 12 of the Customs Act, 1962. The tax rate is levied
as per First Schedule to Customs Tariff Act, 1975.

Additional Customs Duty

It is levied on goods that are stated under Section 3 of the Customs Tariff Act, 1975. The tax rate is more
or less similar to the Central Excise Duty charged on goods produced within India. This tax is subsumed
under GST now.

Protective Duty

This is levied for the purpose of protecting indigenous businesses and domestic products against overseas
imports. The rate is decided by the Tariff Commissioner.

Education Cess

This is charged at 2%, with an additional higher education cess 1%, as included in the customs duty.

Anti-dumping Duty

This is levied if a particular good is being imported is below fair market price.

Safeguard Duty

This is levied of the customs authorities feel that the exports of a particular good can damage the economy
of the country.