Bba G Unit-1 Ibm-306 E-Notes

Chanderprabhu Jain College of Higher Studies
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School of Law
An ISO 9001:2015 Certified Quality Institute
(Recognized by Govt. of NCT of Delhi, Affiliated to GGS Indraprastha University, Delhi
and Approved by Bar Council of India)
E-NotesUniversity, Delhi)
Class : BBA (G) Semester- VI

Paper Code : BBA (G)-306
Subject : International Business Management
Faculty Name : Ms. Ruchi Arora
UNIT -I
INTERNATIONAL BUSINESS – INTRODUCTION
The world has become a ‘global village’. Business has expanded and is no longer
restricted to the physical boundaries of a country. Even countries which were self-
reliant are now depending upon others for procurement of goods and services. They are
also ready to supply the goods and services to developing countries. There is a change
from self-reliance to dependence. This is because of the development of new modes of
telecommunication and infrastructure facilities like faster and efficient means of
transportation. They have brought countries closer to each other.
Besides development in technology, infrastructure and communication efforts of World
Trade Organisation (WTO) and the reforms carried out by governments of different
countries have also been a major reason for increasing commercial interactions among
the countries.
India has been trading with other countries for a long time but now it has caught up in
the process of globalisation in a big way and is integrating its economy with the world
economy.
International business refers to those business activities that take place beyond the
geographical limits of a country. It involves not only the international movements of
goods and services, but also of capital, personnel, technology and intellectual property
like patents, trademarks, knowhow and copyrights.
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Business activities done across national borders is International Business. The
International business is the purchasing and selling of the goods, commodities
and services outside its national borders. Such trade modes might be owned by the state
or privately owned organization. In which, the organization explores trade opportunities
outside its domestic national borders to extend their own particular business activities, for
example, manufacturing, mining, construction, agriculture, banking, insurance, health,
education, transportation, communication and so on.
Nations that were away from each other, because of their geological separations and
financial and social contrasts are now connecting with each other. World Trade
Organization established by the administration of various nations is one of the major
contributory factors to the expanded connections and the business relationship among the
countries. The national economies are dynamically getting borderless and fused into
the world economy as it is clear that the world has today come to be known as a ‘global
village’. Numerous more organization are making passage into a worldwide business
which presents them with opportunities for development and tremendous benefits.
India was trading with different nations for quite a while, yet it has quickened its progress
of incorporating with the world economy and expanding its foreign trade and investment
INTERNATIONAL BUSINESS – MEANING AND DEFINITIONS: BY

MICHAEL R. CZINKOTA AND ROGER BENNETT
The Definition of International Business
International business relates to any situation where the production or distribution of
goods or services crosses country borders. Globalization—the shift toward a more
interdependent and integrated global economy—creates greater opportunities for
international business. Such globalization can take place in terms of markets, where
trade barriers are falling and buyer preferences are changing. It can also be seen in
terms of production, where a company can source goods and services easily from other
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countries. Some managers consider the definition of international business to relate
purely to “business,” as suggested in the Google case. However, a broader definition of
international business may serve you better both personally and professionally in a
world that has moved beyond simple industrial production. International business
encompasses a full range of cross-border exchanges of goods, services, or resources
between two or more nations. These exchanges can go beyond the exchange of money
for physical goods to include international transfers of other resources, such as people,
intellectual property (e.g., patents, copyrights, brand trademarks, and data), and
contractual assets or liabilities (e.g., the right to use some foreign asset, provide some
future service to foreign customers, or execute a complex financial instrument). The
entities involved in international business range from large multinational firms with
thousands of employees doing business in many countries around the world to a small
one-person company acting as an importer or exporter. This broader definition of
international business also encompasses for-profit border-crossing transactions as well
as transactions motivated by nonfinancial gains (e.g., triple bottom line, corporate
social responsibility, and political favor) that affect a business’s future.
International business refers to those business activities that take place beyond the
geographical limits of a country.
“International business consists of transactions that are devised and carried out across
national borders to satisfy the objectives of the individuals, companies and
organisations. These transactions take on various forms which are often interrelated.” –
Michael R. Czinkota
“International business involves commercial activities that cross national frontiers” –
Roger Bennett
Thus, it involves not only the international movement of goods and services, but also of
capital, personnel, technology and intellectual property like patents, trademarks,
knowhow and copyrights etc.
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It is a business which takes place outside the boundaries of a country, i.e., between two
countries. It includes the international movements of goods and services, capital,
personnel, technology and intellectual property rights like patents, trademarks and
knowhow. It refers to the purchase and sale of goods and services beyond the
geographical limits of a country.
It is of three types:
(i) Export Trade – It is selling of goods and services to foreign countries.
(ii) Import Trade – It is buying goods and services from other countries.
(iii) Entreport Trade – It is import of goods and services for re-export to other
countries.
INTERNATIONAL BUSINESS – NATURE AND SCOPE
Nature:
1. International Business is much broader term than that of International Trade.
International business includes:
(a) Export and import of goods.
(b) Export and import of services or intellectual property rights.
(c) Licencing and franchising.
(d) Foreign Investments including both direct investment and portfolio investments.
2. International Trade refers to only export and import of merchandise, i.e., goods
only. It is also called visible trade.
The goods are tangible, like machinery, gold, silver, electronic goods etc.
Scope:
(i) International Trade:
International business involves export and import of goods.
(ii) Export and Import of Services:
It is also called invisible trade. Items of invisible trade include tourism, transportation,
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communication, banking, warehousing, distribution and advertising.
(iii) Licensing and Franchising:
Licensing is a contractual agreement in which one firm (the licensor) grants access to
its patents, copyrights, trademarks or technology to another firm in a foreign country
(the licensee) for a fee called royalty. It is under the licensing system that Pepsi and
Coca Cola are produced and sold all over the world.
Franchising is also similar to licensing, but it is a term used in connection with the
provision of services. For example, McDonald’s operates fast food restaurants all over
the world through its franchising system.
(iv) Foreign Investments:
It involves investments of funds abroad in exchange for financial return.
Foreign investments can be of two types:
(a) Foreign Direct Investment (FDI) – Investment in properties such as plant and
machinery in foreign countries with a view to undertaking production and marketing of
goods and services in those countries.
(b) Portfolio Investment – Investments in shares or debentures of foreign companies
with a view to earn income by way of dividends or interest.
INTERNATIONAL BUSINESS – FEATURES
Involves Two Countries, Use of Foreign Exchange, High Degree of Risk, Heavy
Documentation, Time Consuming and Lack of Personal Contact
The main features of international business are as follows:
1. Involves Two Countries – International business is possible only when there are
transactions across different countries.
2. Use of Foreign Exchange – Every country has its own different currency. This gives
rise to the problem of exchange of currencies as foreign currency is used in making
transactions.
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3. Legal Obligations – Each country has its own laws regarding foreign trade, which
have to be complied with. Further, there is more government intervention in case of
international transactions.
4. High Degree of Risk – International business faces huge risk due to long distances,
risk of fluctuations in two currencies, fear of obsolescence, etc.
5. Heavy Documentation – It is subject to number of formalities. Many documents
have to be filled in and despatched to the other party.
6. Time Consuming – The time gap between sending and receiving of goods and
payment is wider as compared to inland trade.
7. Lack of Personal Contact – It lacks direct and personal contact between importer and
exporter.
REASONS FOR INTERNATIONAL BUSINESS
The international business is Needed due to the following reasons:

1. Uneven Distribution of Natural Resources – All the countries cannot produce equally
well or cheaply due to unequal distribution of natural resources among them or
differences in their productivity levels. As a result, they exchange their surplus
production with goods that they are in short supply in their country.
2. Availability of Factors of Production – The various factors of production such as
labour, capital and raw materials, needed for producing different goods and services
differ among nations.
3. Specialisation – Some countries specialise in the production of goods and services
for which they have some advantages like advanced technical know-how, high labour
productivity, suitable climatic conditions, etc. For example, West Bengal specialises in
jute products.
4. Cost Benefits – Production costs differ in different countries due to difference in
socio-economic, geographical and political conditions. Some countries are in a better
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position to produce some goods more economically than other countries. As a result,
firms engage in international business to import what is available at lower prices in
other countries and export goods on which they can fetch better prices.
INTERNATIONAL BUSINESS – BENEFITS: TO NATIONS AND TO
BUSINESS FIRMS
International business is important to both ‘Nations’ and ‘Business Firms’ and offers
them several benefits.
Benefits to Nations:
1. Earning of Foreign Exchange:
It helps a country to earn foreign exchange, which can be further used to import capital
goods, technology, petroleum products, etc. which are not available domestically.
2. More Efficient Use of Resources:
External trade enables the countries to specialise in production of those goods for
which they possess natural resources and can produce more economically and
efficiently. The countries export surplus production of such goods to import those
goods in which other countries have specialisation. It facilitates more efficient and
optimum use of resources.
International Business operates on a simple principle- Produce what your country can
produce more efficiently and trade the surplus production with other countries, to
procure what they can produce more efficiently.
3. Improving Growth Prospects and Employment Potentials:
International business improves the growth prospects of many countries, especially the
developing ones as firms can raise their production capacity and export surplus output
to foreign countries. Countries can also import technical know-how and capital
equipments to boost up the economic growth.
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External trade also creates employment both directly and indirectly. It provides direct
employment to those people who are hired by different firms to meet increased demand
for exports. Indirectly, a number of intermediary firms (like forwarding and clearing
agents) are established to facilitate business of export-oriented industries.
4. Increased Standard of Living:
External trade enables each country to obtain all types of goods and services from
different foreign countries, which the country was unable to produce. It improves
standard of living of people, especially of developing and underdeveloped countries.
Benefits to Business Firms:
1. Prospects for Higher Profits – International business can be more profitable than the
domestic business, especially when the firms are able to sell their products at higher
prices in foreign countries as compared to home country.
2. Increased Capacity Utilisation – Firms can utilise their surplus production capacity
and improve profitability by getting engaged in international business. With increase in
production capacity, firm is able to take advantage of economies of scale, which
reduces the production cost and improves profit margin.
3. Prospects for Growth – When demand for the products starts getting saturated in the
domestic market, then international business enables the firm to enhance its growth
prospects by entering into overseas market. For your reference: Many MNCs like
General Motors, Ford entered Indian market when they recognised the potential of
demand for cars in India.
4. Way out to Intense Competition in Domestic Market – When there is intense
competition in the domestic market, then the international business facilitates the firms
to grow and expand by operating in the foreign market.
5. Improved Business Vision – International business enables the firms to improve their
business vision. The vision to become international comes from the urge to grow, the
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need to become more competitive, the need to diversify and to gain strategic
advantages of internationalization.
INTERNATIONAL BUSINESS – 7 MAJOR PROBLEMS:
There are various complexities or problems involved in the international business.
The major problems faced are as follows:
1. Different currencies – Every country has its own currency. So, importer has to make
payment in the currency of exporter’s country. It involves risk of loss due to exchange-
rate fluctuation.
2. Legal Formalities – International business is subject to a large number of legal
formalities and restrictions. The government of every country exercises strict control
over business with other nations. Heavy documentation and various legal formalities
involve much time and effort.
3. Distance Barriers – Due to large distances between countries, it is difficult to
establish quick and personal contacts between traders from different countries. It also
creates problem of time-gap between placement of order and its execution, transport of
goods and greater transit risk.
4. Language Barrier – Due to different languages in different countries, it becomes
difficult for traders to understand the terms and conditions of the contract.
5. Difference in laws – International business transactions are subject to laws, rule and
regulations of multiple countries.
6. Information Gap – It is difficult to obtain accurate information about foreign markets
and about the financial position of foreign merchants.
7. Transport Problem – Water (shipping) and air transport (airways) are the important
modes of transport used in international business. Shipping is less costly but time-
consuming. On the other hand, airways are faster but the cost involved is very high.
TRENDS IN INTERNATIONAL BUSINESS

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As the economy grows slowly at home, yourUniversity,

business Delhi)
may have to look at selling
internationally to remain profitable. Before examining foreign markets, you have to be
aware of the major trends in international business so you can take advantage of those
that might favor your company. International markets are evolving rapidly, and you can
take advantage of the changing environment to create a niche for your company.
Growing Emerging Markets
Developing countries will see the highest economic growth as they come closer to the
standards of living of the developed world. If you want your business to grow rapidly,
consider selling into one of these emerging markets. Language, financial stability,
economic system and local cultural factors can influence which markets you should
favor.
Population and Demographic Shifts
The population of the industrialized world is aging while many developing countries
still have very youthful populations. Businesses catering to well-off pensioners can
profit from a focus on developed countries, while those targeting young families,
mothers and children can look in Latin America, Africa and the Far East for growth
Speed of Innovation
The pace of innovation is increasing as many new companies develop new products
and improved versions of traditional items. Western companies no longer can expect to
be automatically at the forefront of technical development, and this trend will intensify
as more businesses in developing countries acquire the expertise to innovate
successfully.
More Informed Buyers
More intense and more rapid communications allow customers everywhere to purchase
products made anywhere around the globe and to access information about what to
buy. As pricing and quality information become available across all markets,
businesses will lose pricing power, especially the power to set different prices in
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different markets.
Increased Business Competition
As more businesses enter international markets, Western companies will see increased
competition. Because companies based in developing markets often have lower labor
costs, the challenge for Western firms is to keep ahead with faster and more effective
innovation as well as a high degree of automation.
Slower Economic Growth
The motor of rapid growth has been the Western economies and the largest of the
emerging markets, such as China and Brazil. Western economies are stagnating, and
emerging market growth has slowed, so economic growth over the next several years
will be slower. International businesses must plan for profitability in the face of more
slowly growing demand.
Emergence of Clean Technology
Environmental factors are already a major influence in the West and will become more
so worldwide. Businesses must take into account the environmental impact of their
normal operations. They can try to market environmentally friendly technologies
internationally. The advantage of this market is that it is expected to grow more rapidly
than the overall economy.
Opportunities Challenges
Access to new, cheaper sources of finance Global financial contagion
Learning about customers in new markets Costs of meeting a multitude of
local/national laws and regulations
Government incentives to relocate Exchange rate fluctuations
Access to regional trading New competition for existing customers in
agreements/avoidance of trade barriers domestic markets
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Access to customers in new countries Adjusting products to local tastes and
cultural peculiarities
Economies of scale Global financial contagion
Access to new resources (e.g. cheap Managing long supply chains
skilled labour, natural resources)
MEANING & IMPORTANCE OF INTERNATIONAL COMPETITIVE

ADVANTAGE
Competitive advantage is the conditions that enable an organization or nation to create
a decent or administration of equivalent incentive at a lower cost or in a more attractive
manner. These conditions enable the gainful element to create more deals or better
edges thought about than its market rivals. Upper hands are ascribed to an assortment
of variables including cost structure, marking, the nature of item contributions, the
circulation arrange, protected innovation and client benefit.
Competitive advantage creates more prominent incentive for a firm and its investors in
view of specific qualities or conditions. The more feasible the competitive advantage,
the more troublesome it is for contenders to kill the preferred standpoint. The two
principle sorts of upper hands are near favorable position and differential preferred
advantage.
Examples of Competitive Advantage
Access to natural resources that are restricted from competitors
Highly skilled labor
A unique geographic location
Access to new or proprietary technology
Ability to manufacture products at the lowest cost
Brand image recognition
Constructing a Competitive Advantage
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Before a competitive advantage can be established, it is important to know the:
Benefit: A company must be clear what benefit(s) their product or service provides. It
must offer real value and generate interest.
Target Market: A company must establish who is purchasing from the company and
how it can cater to its target market.
Competitors: It is important for a company to understand other competitors in the
competitive landscape.
To construct a competitive advantage, a company must be able to detail the benefit that
they provide to their target market in ways that other competitors cannot.
STRATEGIES FOR COMPETITIVE ADVANTAGE
There are three strategies for establishing a competitive advantage: Cost Leadership,
Differentiation, and Focus (Cost-focus and Differentiation-focus).
#1 Cost Leadership
In a cost leadership strategy, the objective is to become the lowest-cost producer. This is
achieved through large-scale production where companies can exploit economies of scale.
If a company is able to utilize economies of scale and produce products at a cost lower
than that of its competitors, the company is then able to establish a selling price that is
unable to be replicated by other companies. Therefore, a company adopting a cost
leadership strategy would be able to reap profits due to its significant cost advantage over
its competitors.
#2 Differentiation
In a differentiation strategy, a company’s products or services are differentiated from that
of its competitors. This can be done by delivering high-quality products or services to
customers or innovating products or services.
If a company is able to differentiate successfully, the company would then be able to set a
premium price on its products or services.
#3 Focus
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In a focus strategy, a company focuses on a narrow target market segment. This strategy
is successful if the company is able to successfully create products/services that can cater
to these customers. The focus strategy also has two variants;
Cost-focus: Lowest-cost producer in a narrow market segment
Differentiation-focus: Differentiated products/services in a narrow market segment
INTERNATIONAL MONETARY SYSTEM
The International Monetary System (IMS) constitutes an integrated set of money flows
and related governance institutions that establish the quantities of money, the means for
supporting currency requirements and the basis for exchange among currencies in order
to meet payments obligations within and across countries. Central banks, international
financial institutions, commercial banks and various types of money market funds —
along with open markets for currency and, depending on institutional structure,
government bonds — are all part of the international monetary system. The key
distinguishing factor for the IMS is that money (in contrast to financial assets) is not
interest bearing. Money is used as a unit of account and/or a medium of exchange to
support and foster the exchange of goods and services, and capital flows, within and
across countries; to calibrate values and advance the exchange of financial assets; and to
foster the development of financial markets. Traditional definitions of money also
include its role as a store of value, but that role has been largely assumed by financial
assets. Although this view may be controversial, the store of value for money is, at a
minimum, shared with the international financial system and may be completely assumed
by it.
INTERNATIONAL FINANCIAL SYSTEM
The international financial system (IFS) constitutes the full range of interest‐ and
return‐bearing assets, bank and nonbank financial institutions, financial markets that
trade and determine the prices of these assets, and the nonmarket activities (e.g., private
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equity transactions, private equity/hedge fund joint ventures, leverage buyouts whether
bank financed or not, etc.) through which the exchange of financial assets can take
place. The IFS lies at the heart of the global credit creation and allocation process. To
be sure, the IFS depends on the effective functioning and prudent management of the
IMS and the ready availability of currencies to support the payment
system. Nevertheless, the IFS extends far beyond IMS’s common payments and
currency pricing role to encompass the full range of financial assets, including
derivatives, credit classes and the institutions that engage in the exchange of these
assets as well as their regulatory and governing bodies. The IFS encompasses the IMS
— but extends in function and complexity well beyond the IMS. Government debt
links the two systems, as government debt can function as “near money” in a zero
interest rate environment. Many financial transactions pass through a stage of payment
in money (i.e., a demand deposit) — quickly — to a “riskless” interest‐bearing asset,
like government bonds. When “riskless” assets become more “risky” and less liquid,
the payment system slows down andmay even be upended. Examples The sovereign
debt crisis, such as the one now under way in Europe, is primarily a crisis of the
IMS. Sovereign debt lies at the heart of a monetary system because it constitutes a
source of riskless assets that balance the risk profile of other assets held on bank
balance sheets. When interbank markets become concerned about the quality of
sovereign debt, the event creates counter‐party risk that disrupts interbank borrowing,
which is a critical instrument of shared bank liquidity. As is the case in the current
European crisis, the liquidity crisis within the bankingsystem can have liquid currency
implications because the mix of currencies on bank balance sheets may not match the
mix of currencies required to meet payment obligations. To date, the European crisis is
primarily a crisis of the IMS because it has not influenced international financial
markets and/or the international economy in any systematic way — yet. Global
financial markets certainly suffered a shock in the summer from the intensity of the
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euro crisis. Thus far, the monetary crisis hasUniversity, Delhi)

not undermined confidence in global
financial asset values or had a significant effect on trade and economic growth. The
Asian financial crisis of the 1990s was a crisis that began as a monetary crisis but
quickly migrated into a full‐fledged financial crisis. It was the inability to access U.S.
dollars in sufficient amounts to cover withdrawals from Asian banks and the
dollar‐based debt obligations of Asian governments and businesses that created a
liquidity crisis. The result was a capital withdrawal from virtually all asset classes in
the region. In short, the Asian financial crisis was an international monetary crisis that
turned into an international financial crisis. The recent global financial crisis worked in
the opposite direction. The global financial crisis started in the financial system with
high‐profile bankruptcies prompted by financial innovations in the derivatives markets
that purported to create near‐riskless assets from a combination of low‐grade mortgage
debt, other debt (including government debt) and supposedly smart equity structures
that concentrated risk in the issuer. The magnitude of the collapse of major financial
institutions and government support of the banking system transmitted the liquidity
crisis from the financial sector to the nonfinancial sector as nonfinancial business raced
to translate working capital into cash. These events rocked the global economic and
financial systems back on their heels and produced a banking crisis in Europe that had
important monetary dimensions (e.g., shortage of U.S. dollars in the payment system).
The World Bank Group
The World Bank Group is one of the world’s largest sources of funding and knowledge
for developing countries. Its five institutions share a commitment to reducing poverty,
increasing shared prosperity, and promoting sustainable development.
Together, IBRD and IDA form the World Bank, which provides financing, policy
advice, and technical assistance to governments of developing countries. IDA focuses
on the world’s poorest countries, while IBRD assists middle-income and creditworthy
poorer countries.
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IFC, MIGA, and ICSID focus on strengthening the private sector in developing
countries. Through these institutions, the World Bank Group provides financing,
technical assistance, political risk insurance, and settlement of disputes to private
enterprises, including financial institutions.
 Established in 1944, the Group assists development with the primary focus of helping
the poorest people and the poorest countries.
 It has 183 member countries, and is composed of five organizations - IBRD, IDA, IFC,
MIGA and ICSID. 2.2.3 IBRD: International Bank for Reconstruction and Development
 Better known as the World Bank, the IBRD provides loans and development assistance
to middle-income countries and creditworthy poorer countries.
 In particular, its structural adjustment loans are intended to enhance a country‘s long-
term economic growth.
 The IBRD is not a profit-maximizing organization. Nevertheless, it has earned a net
income every year since 1948.
 It may spread its funds by entering into cofinancing agreements with official aid
agencies, export credit agencies, as well as commercial banks.
The International Monetary Fund (IMF)
The IMF works to foster global monetary cooperation, secure financial stability,
facilitate international trade, promote high employment and sustainable economic
growth, and reduce poverty around the world.
The IMF's primary purpose is to ensure the stability of the international monetary
system—the system of exchange rates and international payments that enables
countries and their citizens to transact with each other. It does so by keeping track of
the global economy and the economies of member countries, lending to countries with
balance of payments difficulties, and giving practical help to members.
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The IMF is an organization of 183 member countries. Established in 1946, it aims
 To promote international monetary cooperation and exchange stability;
 To foster economic growth and high levels of employment; and
 To provide financial assistance to ease imbalances of payments.
 Promote cooperation among countries on international monetary issues,
 To promote stability in exchange rates
 Provide temporary funds to member countries attempting to correct imbalances of
international payments
 Promote free mobility of capital funds across countries
 Promote free trade. Its operations involve surveillance, and financial and technical
assistance. In particular, its compensatory financing facility attempts to reduce the impact
of export instability on country economies. The IMF uses a quota system, and its unit of
account is the SDR (special drawing right). It is clear from these objectives that the IMF‘s
goals encourage increased internationalization of business
International Finance Corporation (IFC):
International Finance Corporation (IFC) was established in July 1956 as an affiliate of the
World Bank to provide finance to the private sector. The World Bank grants loans to the
governments of the member countries or provides loan capital to the private enterprises
on the guarantee of the member governments.
Moreover the World Bank does not provide risk capital. The IFC was established with the
specific purpose of providing risk capital to the private enterprises in the less developed
countries without government guarantee.
Organisation:
Though the IFC is affiliated to the World Bank, but it is a separate legal entity with
separate fund and functions. The membership of the Corporation is open only to the
members of the World Bank. The organisation of the Corporation is the same as that of
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the World Bank.
The Board of Governors and the Executive Directors of the World Bank also function as
the Board of Governors and the Executive Directors of the IFC. The Corporation started
with the initial authorised capital of $ 100 million which has been increased from time to
time. The subscription quota of each member is proportionate to its share of subscription
to the capital of the World Bank.
Investment Policy:
The following are the main features of the investment policy of the IFC:
(i) The IFC considers only those enterprises which are predominantly industrial and
contribute to economic development of the country.
(ii) The project to be financed by the IFC must be in the private sector and must be
productive in nature.
(iii) Before making any investment, the Corporation satisfies itself that the enterprise has
experienced and competent management.
(iv) The IFC’s loan will not be more than half of the capital needed for an enterprise.
(v) The minimum investment to be made by the IFC to a single enterprise is fixed at
$100,000- no upper limit is fixed.
(vi) The rate of interest for the IFC loan is determined by mutual negotiation, depending
upon the degree of risk involved and other terms of investment.
(vii) The IFC’s loans are disbursed in lump-sum or in installments and are repayable in a
period of 5 to 15 years.
Working:
To start with, the IFC has been very slow in making investment. Moreover, its lending
operations were concentrated mainly in Latin and Central American countries. But, later
on, the IFC extended its operations to other areas, particularly to Asian and African
countries. The important industries financed by the IFC are iron and steel, mining,
fertilisers, paper, cement, textiles, chemicals, etc.
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The main drawbacks of the working of IFC are- (a) insufficient resources; (b) high
interest rates; (c) rigid terms and conditions of loans; (d) repayment of loans in U. S.
dollars; (e) bias towards Latin American countries; etc.
But, in spite of these defects, the IFC has played a significant role in promoting economic
development by stimulating the international flow of private capital from the developed to
the less developed countries and, in future, is expected to expand its dynamic role in the
progress of the backward nations.
International Development Association (IDA):
The International Development Association (IDA) was established in 1960 as an affiliate
to the World Bank. As matter of policy, the World Bank’s finance is conditional and
inadequately meets the credit requirements of the underdeveloped countries. Its loans are
for specific development purposes; bear relatively high rate of interest (5 to 7%); and are
for relatively short period (5 to 20 years).
There are many projects (such as irrigation, railway construction, education, public
health, housing, etc.) in the underdeveloped countries which are vital to general economic
development, which have longer gestation period and which do not yield sufficient
returns to meet the amortisation charges.
As per rates of the World Bank, loans cannot be given for such general development
projects. The IDA was started to supplement the World Bank’s development assistance
and to make available loans to the developing countries on softer terms and for longer
periods. Thus, the IDA has been aptly regarded as the ‘Soft Loans Window’ of the World
Bank.
Objectives:
The main objectives of the IDA are as follows:
(i) To provide development finance to the less developed countries on easy and flexible
terms.
(ii) To promote economic development, increase productivity, and thus, raise the standard
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of living in the less developed countries.
(iii) To supplement the objectives and activities of the World Bank.
Organisation:
The membership of the IDA is open to all the members of the World Bank. The members
of the IDA are divided into two parts. Part I countries are developed countries which are
required to pay their subscription in gold or freely convertible currencies.
Part II countries are less developed countries which are required to pay only 10% of their
subscription in gold or freely convertible currencies and the remaining 90% is payable in
their domestic currencies. India falls in Part II.
The initial capital of the IDA was $ 1000 million which has been raised from time to
time. Although, legally and financially, IDA is a distinct entity from the World Bank, but
administratively it is managed by the same staff.
Financing Policy:
The IDA loans are different from the convential loans.
The following are the distinctive features of the financing policy of the IDA:
(i) The IDA grants loans for projects whether they are directly productive or not.
(ii) The IDA loans are interest free; only a nominal annual rate of 3.4% on the amounts
withdrawn and outstanding is charged to meet the administrative expenses.
(iii) The IDA loans are for long periods, i.e., for 50 years.
(iv) There is a 10 years of grace and no amount is repayable during this period of grace.
After this only 1 % of the principal is to be repaid annually for 10 years and 3% annually
for the remaining 30 years.
(v) IDA loans are generally repayable in foreign exchange.
(vi) IDA loans are granted to the government of the country concerned.
Working:
The functions and progress of the IDA has been discussed below:
I. General Progress:
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The IDA is a symbol of multilateral cooperation and worldwide commitment to
development. Since its inception, it has made a great contribution to economic
development by granting soft loans to the less developed countries. Most of its assistance
has gone to the building up of infra-structure of the developing countries. By June 1988,
the IDA had granted loans worth 47766 million dollars.
II. Lending Operations:
Cumulatively, the IDA had granted loans worth 47766 million dollars upto June 30, 1988.
Table-4 shows cumulative lending operations of the IDA by different purposes. Table-4
indicates that out of the cumulative lending of 47766 million dollars by IDA upto June
1988, about 37% was for agricultural and rural development, 13% for transportation, 11%
for energy, 8% for urban development and water supply and sewerage and 7% for
education.
III. Assistance to the Poorest Countries:
The IDA gives special attention to the poorest countries whose per capita income was less
than $ 425. This assistance to these countries has increased from an annual average of
3459.4 million dollars during 1979-83 to 4130.3 million dollars in 1988.
Assistance to India:
India has been the largest beneficiary of IDA loans. Upto June 1988, India has received
176 IDA credits amounting to $ 15.2 billion. In 1980-81, India received IDA loans worth
Rs. 522 crores, which rose to Rs. 1198 cores in 1985-86 and Rs. 3407 crores in 1992-93.
In 1993-94, IDA’s lending to India was Rs. 2083 crore.
The IDA’s assistance to India has been for financing the projects like construction of
national highway, river valley projects, sinking tubewells, rural electrification, water
supply and sewerage, railways, telecommunications, fertiliser industry, etc.
In the end, we may conclude with the World Bank’s remarks in its publication ‘IDA in
Retrospect’- “While substantial progress has been made, the poorest countries of the
world remain in desperate need of fresh assistance. The IDA now stands in front line of
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the struggle against poverty. It continues to needUniversity,

the supportDelhi)
of both traditional and new
donors.”
Asian Development Bank (ADB):
Asian Development Bank (ADB) is a regional financial institution which was established
under the auspices of a United Nations body, i.e., Economic Commission for Asia and
Far East (ECAFE) for promoting economic development and cooperation in the Asian
region. The Bank started functioning in 1966 and has the head office at Manila in the
Philippines.
Objectives and Functions:
The main objectives of ADB, as laid down in its Charter, are “to foster economic growth
and cooperation in the region of Asia and Far East, and to contribute to the acceleration of
the process of economic development of the developing members in the region,
collectively and individually.”
The Bank aims at achieving this broad objective through the following functions:
(i) Mobilisation and promotion of investment of private and public capital for productive
purposes.
(ii) Utilisation of its resources for financing those development projects which contribute
most to the harmonious economic growth of the region as a whole, with special emphasis
on the needs of the smaller or less developed members.
(iii) Coordination of plans and policies of the member countries with a view to achieving
better utilisation of their resources, making them economically more complementary, and
expanding their foreign trade.
(iv) Provision of technical assistance to the member countries for the preparation,
financing and execution of development projects.
(v) Cooperation with the United Nations and its various organs and other international
organisations with the objective of persuading them to make investments in this region.
(vi) Undertaking of such other activities which may help to achieve its main objectives.
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Membership, Organisation and Financial Resources:
Membership:
The membership of the ADB is open to:
(i) Members of ESCAP;
(ii) Associate members of ESCAP; and
(iii) Other countries in the ESCAP region which are members of the United Nations or
any of its specialised agencies.
Organisation:
The Bank has a board of Governors, a Board of Directors, a President, a Vice President,
and the other staff. The Board of Governors is the highest policy-making body of the
bank. Each member country nominates a Governor and an alternate Governor who
attends the meetings of the Board in the absence of the Governor. All the powers of the
Bank are vested in the Board of Governors which may delegate some of these powers to
the Board of Directors.
The Board of Governors elects a Board of Directors. Originally the Board of Directors
had ten members; 7 from regional countries and 3 from non- regional countries.
Subsequently, the number has been increased to 12. The Board of Governors is
responsible for the general conduct of the day-to-day business of the Bank.
The President of the Bank, who is elected by the Board of Directors is the chairman of the
Board of Directors. He is elected for a period of five years. President is assisted by the
Vice President in the management of the Bank.
Financial Resources:
Initially, the ADB started with an authorised capital of $1000 million, of which $965
million were subscribe for. The authorised capital can be increased by the Board of
Governors if two-third of the members vote for this increase. One half of the
subscribed capital is to be paid up and the balance 50% is callable capital. Of the paid
up capital, 50% has to be in gold and convertible currencies.
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The Bank has two types of resources:
(i) Ordinary Capital Resources:
These consist of subscribed capital, borrowed funds, funds received by repayment of
loans, income derived from loans and guarantees.
(ii) Special Fund Resources:
These consist of contributions from time to time by members under special agreement,
income from special fund loans and investments, contributions from ordinary resources
as approved by Governors of ADB, etc.
Lending Operations:
The lending operations of the ADB may be classified into two categories:
I. Ordinary operations, and
II. Special operations.
I. Ordinary Operations:
Ordinary operations refer to those lending activities which are financed out of ordinary
capital resources of the Bank. The loans under this category are provide in two forms-
(a) in the form of foreign currencies, and (b) in the form of national currency of the
borrower. The Bank also lends funds to the central bank of a member country, which
then re-lends them to the specific institutions for the specific projects.
II. Special Operations:
Special operations refer to those lending activities which are financed out of the special
funds of the Bank, such as, multi-purpose special funds, the Asian development fond,
agricultural special fond, technical assistance special fond, etc. The loans provided out
of the special funds are on liberal terms; they carry low interest rates and are for longer
duration.
Progress of ADB:
ADB is an excellent example of mutual cooperation among the countries of Asia to
assist their own economic development. The Bank provides loans for the projects in the
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areas of agriculture, industry, transport, communication, power generation, water
supply, education, etc.
India and ADB:
India has been one of the founder members of the ADB and is the second largest
subscriber, first being Japan. Until 1986, India, though eligible, had voluntarily
refrained from borrowings from the Bank. But the stagnation in the capital flows from
other sources made such borrowing necessary. The assistance from ADB, which
commenced in 1986-87 with Rs. 193 crores, has increased sharply to Rs. 801 cores in
1990-91, and Rs. 833 crores in 1995-96.
Suggestions for Improvement:
ADB has attempted a self-appraisal through ‘A Study of Bank’s Operational Priorities
and Plans for the 1980s’ by experts and different countries.
The main recommendations made by study are given below:
(i) Maximum amount of Bank’s concessional assistance should be directed to the
poorest countries.
(ii) High income developing Member Countries (DMCs) should be encouraged to
cooperate more actively in helping the poorest countries of the region.
(iii) The Bank should develop a more close partnership with its DMCs and donors.
(iv) The Bank’s loan policy should be changed. Loans should be extended to support
the development strategy of a member country.
(v) The Bank should increase its local cost financing and programme sector lending
activities.
(vi) The Bank should also provide more technical assistance in promoting the
institutional development of executing agencies of DMCS.
(vii) Greater emphasis should be laid on project implementation.
(viii) The Bank should promote the use and development of domestic consultants to
reduce dependence of DMCs on outside expertise.
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(ix) In order to increase the flow of official and private resources to the DMCs, the
Bank should support such measures as increased co-financing with commercial and
export credit sources; equity financing operations; partial guarantees, unguaranteed
loans; technical assistance in support of private initiatives.
(x) The Bank should explore opportunities to actively support and coordinate with
other regional groups and research institutes. It should build and participate in a variety
of inter-locking information, research, analytical and training networks.
(xi) All these measures would be effective only if they are adopted as a whole and not
implemented in a piece-meal fashion.
FOREIGN DIRECT INVESTMENT (FDI)
Any investment from an individual or firm that is located in a foreign country into a
country is called Foreign Direct Investment.
 Generally, FDI is when a foreign entity acquires ownership or controlling stake

in the shares of a company in one country, or establishes businesses there.
 It is different from foreign portfolio investment where the foreign entity merely
buys equity shares of a company.
 In FDI, the foreign entity has a say in the day-to-day operations of the company.
 FDI is not just the inflow of money, but also the inflow of technology,
knowledge, skills and expertise/know-how.
 It is a major source of non-debt financial resources for the economic
development of a country.
 FDI generally takes place in an economy which has the prospect of growth and
also a skilled workforce.
 FDI has developed radically as a major form of international capital transfer
since the last many years.
 The advantages of FDI are not evenly distributed. It depends on the host
country’s systems and infrastructure.
 The determinants of FDI in host countries are:
 Policy framework
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 Rules with respect to University,

entry Delhi)
and operations/functioning
(mergers/acquisitions and competition)
 Political, economic and social stability
 Treatment standards of foreign affiliates
 International agreements
 Trade policy (tariff and non-tariff barriers)
 Privatisation policy
Foreign Direct Investment (FDI) in India – Latest update
From April to August 2020, total Foreign Direct Investment inflow of USD 35.73
billion was received. It is the highest ever for the first 5 months of a financial year. FDI
inflow has increased despite Gross Domestic Product (GDP) growth contracted 23.9%
in the first quarter (April-June 2020).
FDI received in the first 5 months of 2020-21 (USD 35.73 billion) is 13% higher as
compared to the first five months of 2019-20 (USD 31.60 billion).
FDI in India
The investment climate in India has improved tremendously since 1991 when the
government opened up the economy and initiated the LPG strategies.
The improvement in this regard is commonly attributed to the easing of FDI norms.
Many sectors have opened up for foreign investment partially or wholly since the
economic liberalization of the country.
Currently, India ranks in the list of the top 100 countries in ease of doing business.
In 2019, India was among the top ten receivers of FDI, totalling $49 billion inflows, as
per a UN report. This is a 16% increase from 2018.
In February 2020, the DPIIT notifies policy to allow 100% FDI in insurance
intermediaries.
In April 2020, the DPIIT came out with a new rule, which stated that the entity of nay
company that shares a land border with India or where the beneficial owner of
investment into India is situated in or is a citizen of such a country can invest only
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Category 1 Category 2 University,

Category Delhi)
3 under the
Government
100% FDI Up to 100% FDI Up to 100% FDI
route. In other
permitted permitted permitted
words, such
through Automatic through Government through Automatic +
entities can
Route Route Government Route
only invest
following the approval of the Government of India
FDI Routes in India
There are three routes through which FDI flows into India. They are described in the
following table:
Automatic Route FDI

In the automatic route, the foreign entity does not require the prior approval of the
government or the RBI.
Examples:
Medical devices: up to 100%
Thermal power: up to 100%
Services under Civil Aviation Services such as Maintenance & Repair Organizations
Insurance: up to 49%
Infrastructure company in the securities market: up to 49%
Ports and shipping
Railway infrastructure
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Pension: up to 49%
Power exchanges: up to 49%
Petroleum Refining (By PSUs): up to 49%
Government Route FDI
Under the government route, the foreign entity should compulsorily take the approval
of the government. It should file an application through the Foreign Investment
Facilitation Portal, which facilitates single-window clearance. This application is then
forwarded to the respective ministry or department, which then approves or rejects the
application after consultation with the DPIIT.
Examples:
Broadcasting Content Services: 49%
Banking & Public sector: 20%
Food Products Retail Trading: 100%
Core Investment Company: 100%
Multi-Brand Retail Trading: 51%
Mining & Minerals separations of titanium bearing minerals and ores: 100%
Print Media (publications/printing of scientific and technical magazines/speciality
journals/periodicals and a facsimile edition of foreign newspapers): 100%
Satellite (Establishment and operations): 100%
Print Media (publishing of newspaper, periodicals and Indian editions of foreign
magazines dealing with news & current affairs): 26%
Sectors where FDI is prohibited

There are some sectors where any FDI is completely prohibited. They are:
Agricultural or Plantation Activities (although there are many exceptions like
horticulture, fisheries, tea plantations, Pisciculture, animal husbandry, etc.)
Atomic Energy Generation
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New FDI Policy
According to the new FDI policy, an entity of a country, which shares a land border
with India or where the beneficial owner of investment into India is situated in or is a
citizen of any such country, can invest only under the Government route.
A transfer of ownership in an FDI deal that benefits any country that shares a border
with India will also need government approval.
Investors from countries not covered by the new policy only have to inform the RBI
after a transaction rather than asking for prior permission from the relevant government
department.
The earlier FDI policy was limited to allowing only Bangladesh and Pakistan via the
government route in all sectors. The revised rule has now brought companies from
China under the government route filter.
Benefits of FDI
FDI brings in many advantages to the country. Some of them are discussed below.
 Brings in financial resources for economic development.
 Brings in new technologies, skills, knowledge, etc.
 Generates more employment opportunities for the people.
 Brings in a more competitive business environment in the country.
 Improves the quality of products and services in sectors.
Disadvantages of FDI
However, there are also some disadvantages associated with foreign direct investment.
Some of them are:
It can affect domestic investment and domestic companies adversely.
Small companies in a country may not be able to withstand the onslaught of MNCs in
their sector. There is the risk of many domestic firms shutting shop as a result of
increased FDI.
FDI may also adversely affect the exchange rates of a country.
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Government Measures to increase FDI in India
Government schemes like production-linked incentive (PLI) scheme in 2020 for
electronics manufacturing have been notified to attract foreign investments.
In 2019, the amendment of FDI Policy 2017 by the government, to permit 100% FDI
under automatic route in coal mining activities enhanced FDI inflow.
FDI in manufacturing was already under the 100% automatic route, however, in 2019,
the government clarified that investments in Indian entities engaged in contract
manufacturing is also permitted under the 100% automatic route provided it is
undertaken through a legitimate contract.
Further, the government permitted 26% FDI in digital sectors. The sector has
particularly high return capabilities in India as favourable demographics, substantial
mobile and internet penetration, massive consumption along technology uptake
provides great market opportunity for a foreign investor.
Foreign Investment Facilitation Portal (FIFP) is the online single point interface of the
Government of India with investors to facilitate FDI. It is administered by the
Department for Promotion of Industry and Internal Trade, Ministry of Commerce and
Industry.
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Chanderprabhu Jain College of Higher Studies

Class : BBA (G) Semester- VI

INTERNATIONAL BUSINESS – MEANING AND DEFINITIONS: BY

The international business is Needed due to the following reasons:

TRENDS IN INTERNATIONAL BUSINESS

As the economy grows slowly at home, yourUniversity,

MEANING & IMPORTANCE OF INTERNATIONAL COMPETITIVE

euro crisis. Thus far, the monetary crisis hasUniversity, Delhi)

the struggle against poverty. It continues to needUniversity,

 Generally, FDI is when a foreign entity acquires ownership or controlling stake

 Rules with respect to University,

Category 1 Category 2 University,

Automatic Route FDI

Sectors where FDI is prohibited

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