SKILL BASED SUBJECT

FUNDMANTALS OF FOREIGN TRADE AND

DOCUMENTATION

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 Syllabus
Objective: This paper is designed to inculcate the basic knowledge of foreign trade,
its prospects and barriers. It enables to gain a deep sense of knowledge about the
international market trade and documentation.

Unit I
International trade Meaning Evolution Foreign Market Entry and Operating Forms
- Nature Significance Reasons for going international International orientation
Stages of International trade International Business decisions Problems in
International trade.

Unit II
International Commodity Agreements: Meaning Types: Quota agreements Buffer
Stock Agreements Bilateral and Multilateral Contracts Cartels. State trading
Reasons for State Trading Advantages and Disadvantages of State trading
Canalization State trading in India.

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Unit III

Terms of trade Factors influencing Terms of trade Terms of trade of Developing

countries Terms of trade and Economic welfare. Balance of Payments Meaning
Structure of Balance of Payments Meaning of Disequilibrium in Balance of Payments
Balance of trade and Balance of Payments.

Unit IV
Institutional Facilitating International Trade in India- Ministry of Commerce Advisory
Body Commodity Organizations- Autonomous Bodies Service Institutions

Unit V

International trade regulatory framework Export sales contract Processing of an

export order EXIM documents: Regulatory documents Statutory Documents
Transport documents Preparing for shipment.

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 Reference Books

1. Money,Banking,International Trade and Public Finance

Dr.D.M.Mithani,Himalaya Publlising House

2. International Buiness
P.Subba Rao,Himalaya Publising House.

3. International Business
K.Ashwathappa,Tata McGraw Hill Publishing House

4. International Business Environment

Franchis Cherunillam,Himalaya Publising House

5. International Business
C.Jeevanadham,Sultan Chand Publishing House

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 UNIT-I
International Trade
Basics

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 International Trade - Meaning

International trade is the exchange of capital, goods,

and services across international borders or territories.

It is the exchange of goods and services among nations of the world.

In most countries, such trade represents a significant share of gross domestic
product (GDP).

While international trade has existed throughout history (for

example Uttarapatha, Silk Road, Amber Road, salt roads), its economic,
social, and political importance has been on the rise in recent centuries.

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Foreign market Entry/Operating Forms

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 Manufacturing at home
number and type of intermediaries-One or more than one
functions performed full
service - high specialization (clearing goods)

PARTNER MINDSHARE (= the measurement of the strength
of a relationship between manufacturer and export-partner
in terms of trust, commitment, and cooperation
(1) commitment and trust; (2) collaboration; (3) mutuality of
interest and common purpose + product, brand and profitt
3 major types:
a) indirect export through usually another domestic company
export house, trading company that performs exporting
activities
b) direct export company performs exporting activities
(majority of or all) itself

c) cooperative export collaborative agreements with other

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organizations some exp. activities
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 Indirect export modes
Limited international Little or no control over the way
expansion objectives the product is marketed
Minimal resources No contact
Gradual market entry Little or no information
Test of market
1. Export buying agent (export commission house) the overseas customer's hired
purchasing agent operating on basis of orders received from the customerr/buyer scan
domestic market
2. Broker to bring a buyer and seller together; performs a contractual function; does not
actually handle the products sold or bought; the broker is paid a commission (5%);
commodity specialist
3. Export management company (export house) export department for a range of
companies; conduct business in the name of each manufacturer it represents; knowledge
of the market!!!; specialization by geographical area, product or customer type; paid a
commission;
competitive products, interest in high profitable products, lower specialization
4. Trading company colonial times, Africa and East Asia, in Japan over 50% of whole
export; barter or counter trade, financing 10

5. piggy back non-competitive but related and complementary products; SME with a
larger exporting company full utilization of export facilities of a larger company
 Direct export modes
Manufacturer sells directly to the importer located in the foreign market

DISTRIBUTOR AGENT
independent company that Independent company that
stocks the manufacturer's sells on behalf of the
product manufacturer
It has freedom to choose own Usually it will not see or stock
customer and price the product
Profit from the differences Exclusive, semi-exclusive, non-
between seller and buyer price exclusive
Exclusive representatives = Commission on a pre-agreed
sole distributors in a country basis
Buy on their own accounts Sells to wholesalers and
Usually represents the retailers
manufacturer in all aspect of Gathering some market and
sales and servicing financial information- but not
always depends on contract
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 INTERMEDIATE ENTRY MODES
transfer of skills and knowledge

(1) Contract manufacturing

(2) Licensing
(3) Franchising
(4) Strategic alliances/joint ventures

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 Contract manufacturing
Contract manufacturing Factors encouraging
is the term used to refer to foreign market production
manufacturing which is Desirability of being close to
outsourced to an external foreign customers
partner, one that specializes Foreign production costs
in production and are low
production technology.
Transportation costs may
render heavy products non-
competitive
Tariffs can prevent entry of
an exporters products
Government preference for
national suppliers 13
 Licensing
the exchange of rights, such Rights that may be offered
as manufacturing rights, to in a licensing agreement
another in exchange for Patent covering a product
payment or process
Manufacturing know-how
not subject to a patent
Technical advice and
assistance
Marketing advice and
assistance
Use of a trade mark/trade
name
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 Franchising

the exchange of rights between a franchisor and

franchisee, such as the right to use a total
business concept including use of trade marks,
against some agreed royalty

Types:
Product and trade name franchising
Business format package franchising

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 Joint venture and strategic alliances

An equity partnership Reasons for using joint ventures

between two or Complementary technology or
more partners? management skills can lead to
A+B C JOINT
new opportunities
VENTURE Firms with partners in host
A B - countries can increase speed of
STRATEGIC ALLIANCE market entry
Less developed countries may
restrict foreign ownership
Costs of global operations in R&D
and production can be shared
Entering new markets
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 Nature of International Business

Accurate Information
Information not only accurate but should be timely
The size of the international business should be large
Market segmentation based on geographic
segmentation
International markets have more potential than
domestic markets

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Significance of International Business

It acquires more sales

It opens new opportunities
It gives new technologies
It utilizes the resources
It provides quality products
It helps in earning foreign exchange
It acquires investment in infrastructure

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 Reason for International Trade

Differences in Technology
Differences in Resource
Endowments
Differences in Demand
Existence of Economies of Scale
in Production
Existence of Government Policies

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 Reason for International Trade
Explanation

1.Differences in Technology
Advantageous trade can occur between countries if the countries differ in their
technological abilities to produce goods and services. Technology refers to the
techniques used to turn resources (labor, capital, land) into outputs (goods and
services).

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 Reason for International Trade
Explanation
2.Differences in Resource Endowments
Advantageous trade can occur between countries if the countries differ in their
endowments of resources.

Resource endowments refer to the skills and abilities of a countrys workforce, the
natural resources available within its borders (minerals, farmland, etc.), and the
sophistication of its capital stock (machinery, infrastructure, communications systems).

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 Reason for International Trade
Explanation

3.Differences in Demand
Advantageous trade can occur between countries if demands or preferences
differ between countries.

Individuals in different countries may have different preferences or demands

for various products.

For example, the Chinese are likely to demand more rice than Americans,
even if consumers face the same price.

Canadians may demand more beer, the Dutch more wooden shoes, and the
Japanese more fish than Americans would, even if they all faced the same
prices.
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 Reason for International Trade
Explanation

4.Existence of Economies of Scale in Production

The existence of economies of scale in production is sufficient to generate

advantageous trade between two countries.

Economies of scale refer to a production process in which production costs

fall as the scale of production rises.

This feature of production is also known as increasing returns to scale.

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 Reason for International Trade
Explanation

5.Existence of Government Policies

Government tax and subsidy programs alter the prices charged for goods and
services.

These changes can be sufficient to generate advantages in production of

certain products.

In these circumstances, advantageous trade may arise solely due to

differences in government policies across countries.

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 Problems in International Trade

1. Different Trade Patterns

2. Regulatory Measures
3. Lop Sided Development of Developing Countries
4. Economic Unions
5. National Policy of Development
6. Procedural Difficulties 7. Other Problems.

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 Problems in International Trade
Explanation

1. Different Trade Patterns

International business has to deal with the business patterns

among the various countries of the world.

It has to take into account these business policies of various

countries which govern their imports and exports. These policies
and practices impose certain constraints and restrictions on
international business.
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 Problems in International Trade
Explanation
2. Regulatory Measures
Every country wants to export its surplus natural resources, agricultural
produce and manufactured goods to the extent, it can and import only these
goods and products which are not produced or manufactured within the
country.

For this purpose regulatory measures like tariff barriers (custom duties) non-
tariff barriers, quota restrictions, foreign exchange restrictions, technological
and administrative regulations, consulter formalities, state trading and
preferential arrangements, trade agreements and joint commissions etc. Come
in the way of free trade and unfettered flow of foreign business.

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 Problems in International Trade
Explanation

3.Lop Sided Development of Developing Countries:

Developed counters are equipped with sophisticated, technologies capable of

transforming raw materials into finished goods on a large scale.

While developing countries on the other-hand lack technological knowledge

and latest equipment.

It leads to the lop sided development in the international business.

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 Problems in International Trade
Explanation

4. Economic Unions

There is an increasing tendency among nations to form small

groups of Economic Unions which help them to negotiate terms
for the business with other countries.

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 Problems in International Trade
Explanation

5. National Policy of Development:

The country desirous of achieving self-sufficiency, follows a

strategy of importing capital goods equipped with latest and
sophisticated technology and restricting imports of less important
consumer goods with a view to lowering down its import bill.

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 Problems in International Trade
Explanation

6. Procedural Difficulties:

Different countries have evolved different procedures, practices

and documents in order to regulate the export trade.

Some of these such as foreign exchange control regulations and

others have been formulated after keeping in view the national
objectives and have posed certain procedural problems to
exporters and importers.
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 Problems in International Trade
Explanation
7. Other Problems:

(i) Business and industry have not recognized the importance of

international business,

(ii) Inflation, high prices and black marketing are starting us in the face. If the
situation persists it may put our price level beyond the means of our
customers abroad, no matter how badly they need our export,

(iii) Our internal economy is being managed very badly in recent years. If it
continues we cannot supply our own essential need.

(iv) Poor business ethics is also responsible for our international business.

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 Stages in International Business

Stage -1
Domestic

Stage-2
International

Stage-3
Multinational

Stage--4 Global

Stage-5
Transnational
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Stages in International Business

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Stages in International Business

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International Orientation

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