NCERT Solutions for Class 11th Business Studies Chapter 11 – International Business–I
Multiple Choice Questions
Question 1. In which the following modes of entry, does the domestic manufacturer give the right to use intellectual property such as patent and trademark to a manufacturer in a foreign country for a fee?
(a) Licensing
(b) Contract manufacturing
(c) Joint venture
(d) None of these
Answer (a) Licensing refers to permitting another party in a foreign country to produce and sell goods under trademarks. patents or copy rights in lieu of some fee. Example: Pepsi and Coca Cola are produced and sold all over the world by local bottlers in foreign countries through licensing.
Question 2. Outsourcing a part of or entire production and concentrating on marketing operations in international business is known as
(a) Licensing
(b) Franchising
(c) Contract manufacturing
(d) Joint venture
Answer (c) Contract manufacturing refers to a type of outsourcing in international business where a firm enters into a contract with one or a few local manufacturers in foreign countries to get certain components or goods produced as per its specifications.
Question 3. When two or more firms come together to create a new business entity that is legally separate and distinct from its parents it is known as
(a) Contract manufacturing
(b) Franchising
(c) Joint ventures
(d) Licensing
Answer. (c) A joint venture means establishing a firm that is jointly owned by two or more otherwise independent firms.
Question 4. Which of the following is not an advantage of exporting?
(a) Easier way to enter into international markets
(b) Comparatively lower risks
(c) Limited presence in foreign markets
(d) Less investment requirements
Answer (c) Export firms basically operate from their home country. Hence, they have limited presence in foreign markets which is disadvantageous for them.
Question 5. Which one of the following modes of entry requires higher level of risks?
(a) Licensing
(b) Franchising
(c) Contract manufacturing
(d) Joint venture
Answer (d) Foreign firms entering into joint ventures share the technology and trade secrets with local firms in foreign countries, thus always running the risks of such a technology and secrets being disclosed to others apart from the risks associated with entry into foreign markets with unknown business environments.
Question 6. Which one of the following modes of entry permits greatest degree of control over overseas operations?
(a) Licensing/Franchising
(b) Wholly owned subsidiary
(c) Contract manufacturing
(d) Joint venture
Answer (b) The parent company acquires full control over the foreign company by making 100% investment in its equity capital in a wholly owned subsidiary
Question 7. Which one of the following modes of entry brings the firm closer to international markets?
(a) Licensing
(b) Franchising
(c) Contract manufacturing
(d) Joint venture
Answer (d) In a joint venture, both the foreign and local entrepreneurs jointly form a new enterprise. The foreign business firm benefits from a local partner’s knowledge of the host countries regarding the competitive conditions, culture, language, political systems and business systems, thus bringing the firm closer to international markets.
Question 8. Which one of the following is not amongst India’s major export items?
(a) Textiles and garments
(b) Gems and jewellery
(c) Oil and petroleum products
(d) Basmati rice
Answer (c) Oil and petroleum products are amongst India’s major imports.
Question 9. Which one of the following is not amongst India’s major import items?
(a) Ayurvedic medicines
(b) Oil and petroleum pre-ducts
(c) Pearls and precious stones
(d) Machinery
Answer (a) Ayurvedic medicines are not a major import item, rather India holds the distinct position of being the largest exporter in the world of ayurvedic products.
Question 10. Which one of the following is not amongst India’s major trading partners?
(a) USA
(b) UK
(c) Germany
(d) New Zealand
Answer (d) USA. UK and Germany are major trading partners of India with USA having the highest share.
Short Answer Type Questions
Question 1. Differentiate between international trade and international business.
Answer
| S.N. |
International Trade |
International Business |
| (i) |
International trade means movements of goods only. |
Business transactions that takes place between two or more countries is known as international business. |
| (ii) |
It involves only the movements of goods and international currency is used for dealing. |
It involves not only the International movements of goods and services, but also capital,personnel, technology and intellectual property like trademarks of patents. |
| (iii) |
International trade is a narrow them. |
Iinternational business is much broader than international trade. |
Question 2. Discuss any three advantages of international business.
Answer For Nations Three advantages of international business to the nations are
- International business helps a country to earn foreign exchange which it can later use for meeting its imports of capital goods, technology, petroleum products, etc.
- International trade allows a country to produce what a country can produce more efficiently, and trade the surplus production so generated with other countries to procure what they can produce more efficiently.
- International business helps the countries in improving their growth prospects and creates employment opportunities.
For Firms
Three advantages of international business to the firms are
- International business can be more profitable than the domestic business as business firms can earn more profits by selling their products In countries where prices are high.
- International business leads to fuller utilisation of production capacity as a result these firms get benefits of large economies of scale and reduction In the cost of production.
- Companies get strategic and technical advantages by going international.
Question 3. What is the major reason underlying trade between nations?
Answer
The major reason behind international business is that the countries have unequal distribution of natural resources among them or have differences in their productivity levels because of which they cannot produce all that they need equally well or at equal costs. Trade between nations allows a country to produce what a country can produce more efficiently, and trade the surplus production so generated with other countries to procure what they can produce more efficiently.
Question 4. Discuss as to why nations trade.
Answer The countries have unequal distribution of natural resources among them or have differences in their productivity levels because of which they cannot produce all that they need equally well or at equal costs.
Availability of various factors of production such as labour, capital and raw materials that are required for producing different goods and services differ among nations. Moreover, labour productivity and production costs differ among nations due to various socio-economic, geographical and political reasons.
Due to these differences each country finds it advantageous to produce those select goods and services that it can produce more efficiently at home, and procuring the rest through trade with other countries which the other countries can produce at lower costs. This is precisely the reason as to why countries trade with others.
Question 5. Enumerate limitations of contract manufacturing.
Answer Following are the limitations of contract manufacturing
- Local firms might not adhere to production design and quality standards, thus causing serious product quality problems to the international firm.
- Local manufacturer in the foreign country loses his control over the manufacturing process because goods are produced strictly as per the terms and specifications of the contract.
- The profitability of local firm producing under contract manufacturing is low as it is not free to sell the contracted output as per its will. It has to sell the goods to the international company at prices agreed upon under the contract which may be lower than the open market prices.
Question 6. Why is it said that licensing is an easier way to expand globally?
Answer Licensing is considered to be the easier way of expanding globally due to following advantages
- Under the licensing system, it is the licensor who sets up the business unit and invests his/her own money in the business and the licensor has to virtually make no investments abroad. Licensing is,therefore, considered a less expensive mode of entering into international business.
- Licensor is paid by the licensee by way of fees fixed in advance as a percentage of production or sales turnover and licensor does not bear risk of losses.
- Since the business in the foreign country is managed by the licensee who is a local person, there are lower risks of business takeovers or government interventions.
- Licensee being a local person has greater market knowledge and contacts which can prove quite helpful to the licensor in successfully conducting its marketing operations.
Question 7. Differentiate between contract manufacturing and setting up wholly owned production subsidiary abroad.
Answer Contract manufacturing refers to a type of international business where a firm enters into a contract with one or a few local manufacturers in foreign countries to get certain components or goods produced as per its specifications while in a wholly owned subsidiary the parent company acquires full control over the foreign company by making 100% investment in its equity capital.
Question 8. Distinguish between licensing and franchising.
Answer
- Licensing is an agreement between licensor and licensee where as franchising is an agreement between franchisee and franchiser.
- Licensing means permitting other party in a foreign country to produce and sell goods under trademark, patents where as franchising means sell or distribute the branded products in a specific geographical area. e.g., through its franchising system MC Donalds operates’ first food restaurants in the whole world.
Question 9. List major items of India’s exports.
Answer Major items of India’s exports are
(i) Primary Products
(a) Agriculture and allied
(b) Ores and minerals
(ii) Manufactured Goods
(a) Textiles including garments(b) Gems and jewellery
(c) Engineering goods
(d) Chemicals and related products
(e) Leather and manufactures
Question 10. What are the major items that are exported from India?
Answer The major items that are exported from India include
(i) Primary Products
(a) Agriculture and allied
(b) Ores and minerals
(ii) Manufactured Goods
(a) Textiles including garments
(b) Gems and jewellery
(c) Engineering goods
(d) Chemicals and related products
(e) Leather and manufactures
Question 11. List the major countries with whom India trades.
Answer Following are the major countries with whorn India trades
(i) USA
(ii) UK
(iii) Belgium
(iv) Germany
(v) Japan
(vi) Switzerland
(vii) Hong Kong
(ix) China
(viii) UAE
(x) Singapore
(xi) Malaysia
Long Answer Type Questions
Question 1. What is international business? How is it different from domestic business?
Answer Manufacturing and trade beyond the boundaries of one’s own country is known as international business.
International business is defined as those business activities that take place across the national frontiers. It involves not only the international
movements of goods and services, but also of capital, personnel, technology and intellectual property like patents, trademarks, know-how and copyrights.Domestic and international businesses following aspects differ from each other in the
- Nationality of Buyers and Sellers In the case of domestic business, both the buyers and sellers are from the same country but in international business buyers and seliers come from different countries and their languages, attitudes, social customs and business goals and practices are not identical as in case of domestic business. This makes relatively more difficult for them to interact with one another and finalise business transactions.
- Nationality of Other Stakeholders The other stakeholders such as employees, suppliers, shareholders/partners and general public associated with firms doing international business have different nationalities while in the case of domestic business all such factors belong to one country. Therefore, decision making in international business becomes much more complex due to wider set of values and aspirations of the stakeholders belonging to different nations.
- Mobility of Factors of Production The degree of mobility of factors like labour and capital is generally less between countries than within
a country due to legal restrictions and variations in socio-cultural environments, geographic influences and economic conditions.
- Customer Heterogeneity Across Markets Since buyers in international markets hail from different countries, they differ in their socio-cultural background. Differences in their tastes, fashions, languages, beliefs and customs, attitudes and product preferences cause variations in not only their demand for different products and services, but also in variations in their communication patterns and purchase behaviours Such variations greatly complicate the task of designing products and evolving strategies appropriate for customers in different countries.
- Differences in Business Systems and Practices The differences in business systems and practices are considerably higher among countries than within a country as countries differ from one another in terms of their socio-economic development. availability, cost and efficrency of economic infrastructure and market support services, etc which make it necessary for firms interested in international business to adapt their production, finance. human resource and marketing plans as per the conditions prevailing in the international markets.
- Political System and Risks Political factors such as the type of government, political party system. political ideology, political risks, etc, have an impact on business operations. International business firms need to monitor political changes in the concerned countries and devise strategies to deal with diverse political risks.These firms also face discrimination as nations tend to favour products and services originating in their own countries to those coming from other countries while this is not a problem for business firms operating domestically.
- Differences in Business Regulations and Policies Every country has its own set of business laws and regulations. These laws, regulations and economic policies are more or less uniformly applicable within a country but they differ widely among nations. Tariff and taxation policies, import quota system, subsidies and other controls adopted by a nation are not the same as in other countries and often discriminate against foreign products, services and capital.
- Difference in Currency International business involves the use of different currencies while in domestic business all transactions are done in the same currency. International business firms have to keep exchange rate fluctuations into consideration in fixing prices of their products and hedging against foreign exchange risks.
Question 2. “International business is more than international trade”. Comment.
Answer International trade comprises of exports and imports of goods and forms an important component of international business. But the scope of international business is substantially wider than that of international trade. International business includes international exchange of services such as international travel and tourism, transportation, communication, banking, warehousing, distribution and advertising. It also covers foreign investments and overseas production of goods and services.
Multinational companies have started making investments into foreign countries and undertaking production of goods and services in foreign countries to explore foreign markets and produce at lower costs. All these activities form part of international business. To conclude, we can say that international business is a much broader term and is comprised of both the trade and production of goods and services across frontiers.
International trade is done through exporting of goods while international business modes include licensing, franchising, contract manufacturing, joint ventures and establishment of wholly owned subsidiaries apart from exporting.
Question 3. What benefits do firms derive by entering into international business?
Answer Firms derive the following benefits by entering into international business
- Prospects for Higher Profits International business can be more profitable than the domestic business as business firms can earn more profits by selling their products in countries where prices are high when the domestic prices are lower.
- Increased Capacity Utilisation Firms can make use of their surplus production capacities and also improving the profitability of their operations by going for overseas expansion and procuring orders from foreign customers. Production on a larger scale often leads to economies of scale, which in turn lowers production cost and improves per unit profit margin.
- Prospects for Growth Business firms can improve prospects of their growth by entering into overseas markets when demand for their products starts getting saturated in the domestic market.
- Way out from Intense Competition in Domestic Market Internationalisation is the only way to achieve significant growth when competition in the domestic market is very intense. Highly competitive domestic market induces many companies to go international in search of markets for their products.
- Improved Business Vision The growth of international business of many companies is essentiaJly a part of their business policies or strategic management. The vision to become international comes from the urge to grow, the need to become more competitive, the need to diversify and to gain strategic advantages of internationalisation.
Question 4. In what ways is exporting a better way of entering into international markets than setting up wholly owned subsidiaries abroad?
Answer
Exporting is a better way of entering into international markets than setting up wholly owned subsidiaries abroad in the following ways
- Exporting is the easiest way of gaining entry into international markets. It is less complex than setting up and managing joint ventures or wholly owned subsidiaries abroad.
- Exporting involves lesser time and effort as business firms are not required to invest that much time and money as is needed when they set up manufacturing plants and facilities as wholly owned subsidiary in host countries.
- Since exporting does not require much of investment in foreign countries, exposure to foreign investment risks is nil or much lower than that in establishing wholly owned subsidiary.
Question 5. Discuss briefly the factors that govern the choice of mode of entry into international business.
Answer The following factors govern the choice of mode of entry into international business
- Ease of Entry Some modes of entry into international business like exporting involve lesser formalities than others such as going for jointventures, franchising or wholly owned subsidiaries. Thus, initially exporting is the mode generally adopted for entry into international markets.
- Associated Risk Risk of international exposure is higher in joint ventures and wholly owned subsidiaries as more investment is involved and socio-economic conditions of the host country along with political and regulatory concerns become more important. Therefore, some other mode like licensing or contract manufacturing might be chosen to reduce risk.
- Efforts Involved Time and effort one needs to put in is another factor which determines the mode of international business. Modes like exporting, licensing and franchising involve lesser effort than joint venture or wholly owned subsidiary.
- Degree of Control If a firm wants to exercise full control over the operations in foreign countries, it goes for wholly owned subsidiary. Similarly, degree of control is higher in franchising as compared to licensing and so on.
- Nature of Business If the business requires the firm to be in close contact with the customers in the foreign markets, wholly owned subsidiary or joint venture is more suitable while if the products can be supplied from a distance, modes like exporting can suffice. The nature of products being manufactured and availability of raw material also determine the mode of entry Into international business.
Question 6. Discuss the major trends in India’s foreign trade. Also list the major products that India trades with other countries.
Answer India’s share in world trade in 2003 was abysmally low i.e., just 0.8% as compared to those of other developing countries such as China (5.9%), Hong Kong (3.0%), South Korea (2.6%), Malaysia (1.3%), Singapore (1.9%), and Thailand (1.1%).India’s share in world merchandise exports started rising fast since 2004, reached 1.3% in 2009 and 1.5% in 2010. It increased to 1.9% in the first half of 2011, mainly due to the relatively higher Indian export growth of 55% compared to the 23.1% export growth of the world.
Trends in India’s Foreign Trade in Goods
Volume of Trade Share of foreign trade in the country’s Gross Domestic Product (GOP) has considerably increased from 14.6% in 1990-91 to 24.1% in 2003-04. India’s total merchandise exports were ₹ 606 crores in 1950-51 which increased to ₹ 293367 crores in 2003-04, representing an increase of over 480 times over the last five decades. During the last decade, India’s exports and imports registered a five to seven fold increase from US $ 44.6 billion and US $ 50.5 billion respectively in 2000- 01 to US $ 251.1 billion and US $ 369.8 billion in 2010-11 respectively.While the Compound Annual Growth Rates (CAGR) of India’s exports and imports (in US dollar terms) were 8.2% and 8.4% respectively in the 1990s, they increased to 19.5% and 25.1 % during 2000-01 to 2008-09. Total imports which stood at ~ 608 crores in 1950-51 increased to ₹ 359108 crores in 2003-04, thus registering a growth of about 590 times during the same period.
Composition of Trade Composition wise, textiles and garments, gems and Jewellery, engineering products and chemicals and related products and agricultural and allied products are India’s major items of India’s exports. Great changes in the sectoral composition of India’s export basket were seen in the 2oo0s decade.
The share of petroleum crude and products increased by 11.8 percentage points during the 10-year period tram 2000-1 to 2009-10, and further increased by 4.8 percentage points from 2009-10 to the first half of 2011-12. The share of the other two sectors, i. e., manufactures and primary products fell almost proportionately by 11.6 and 1.1 percentage points respectively during 2000-1 to 2009-10.
Although In overall terms India accounts for just above 1% of world exports, in many individual product items such as tea, pearls, precious and semi-precious stones, medicinal and pharmaceutical products, rice, spices, iron ore and concentrates, leather and leather manufactures, textile yarns fabrics, garments and tobacco, its share is much higher and ranges between 3% to 13%.
India even holds the distinct position of being the largest exporter in the world in select commodities such as basmati rice, tea, and ayurvedic products. As far as imports are concerned, products likes crude oil and petroleum products, capital goods (i.e., machinery), electronic goods, pearl, precious and semi-precious stones, gold, silver and chemicals constitute major items of India’s imports. India’s trade in services has also grown manifold over the years.
Question 7. What is invisible trade? Discuss salient aspects of India’s trade in services.
Answer Invisible trade refers to trade in services. Service exports and imports involve trade in intangibles because of which trade in services is also known as invisible trade. Trade in services includes trade in tourism and travel, boarding and lodging, entertainment and recreation, transportation, professional services, communication, construction and engineering, marketing, educational and financial services.
India’s trade in services has increased substantially over the years. Both the exports and imports of services relating to foreign travel, transportation and insurance have increased at a high rate during the last four decades.
Software and other miscellaneous services (including professional technical and business services) have emerged as the main categories of India’s exports of services. While the relative share of travel and transportation has declined from 64.3% in 1995-96 to 29.6% in 2003-2004, the share of software exports has gone up from 10.2% to around 49% in the corresponding period.
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