INTERNATIONAL BUSINESS ENVIRONMENT IN INDIA

International Business Environment:

International Business , as in the case of any other business operates under conditions
that influence the business activity. Such factors affecting the international business are
called collectively as international business environment. Some factors are favourable /
conducive to carrying of international business and some may be adverse. International
business can be successful if the favourable factors are exploited to full advantage and
control measures are taken to minimize the negative factors that influence international
business.

Business Environment related to Imports:

Imports are regulated in a country to conform with its policy of Optimising exports with
minimum corresponding imports without adversely affecting the exports. Regulatory
bodies ensure implementing this policy through lisences and other procedures. With
liberalization policy of the country, much of the stringent restrictions have been
rationalized with a view of promoting the economy.

Imports are resorted to when there is a demand in local market for such product for
consumption, production for local consumption / exports. The demand is ascertained,
sources established, best rates obtained and documentation/ formalities complied with
for movement of goods, clearance at customs, payment of dues etc.
Consumers, industries, government agencies- all of them import goods & services.
Before importing they have to get license and import-export code number from
controller of import – exports. License is issued for a period of 12 months. The
procedures have been considerably liberalized in order to boost international business.

International business has been steadily growing. India’s Imports in 2005-06 of

Rs.573000 Cr. grew to Rs.737000 Cr. in 2006-07. Our country’s exports in 2005-06 of
Rs.405000 Cr. grew to Rs.511000 Cr. in 2006-07. USA ‘s share in global market is
substantial with USA being a big importer as well as exporter of goods & services.

Pereception of opportunities & Threats:

It is necessary to have a clear understanding of the international business environment

to be successful, to be able to exploit the opportunities that open up and to stay away or
to minimize the threats of the negative factors. Clear understanding of the international
business environment gives the perception of opportunities and threats to a global
organization.

Opportunity Perception:

Strength of technology to provide quality low priced products. With suitable strategy
they can enter new markets abroad.

Requirement of compulsory employment of host country. This could also be an

opportunity to lower cost. (with proper training of local talents.

Conditions as to compulsory exports from host country- this could also be a an opener
into new potential markets .

Growing economic activities, increase in GNP, increase in per capita income of the host
country are indicators of a flourishing market for the MNC.

Developing (host) countries with cheap labour and / or availability of raw materials
provide a good environment for investment by home country.

Threat Perception:

Diversity of culture & political conditions and social behavior may prove a deterrent if

Not understood clearly by the MNC.

Inflation, weak Foreign Exchange position, low per capita income, high interest and
frequent devaluation of currency in the host country spell unsure conditions for healthy
investment for international business .

Lack of stable government, lack of transparent policies make a host country

unattractive for international business.

Restriction on employment of foreign nationals, very stringent immigration control,

government intervention in free movement of foreign exchange, restriction on
repatriation of earnings, tariff barriers make a host country unattractive for international
business.
Role of the Central Bank in encouraging exports:

The Central Bank in India is Reserve Bank of India. It does not involve itself in
providing finance to exporters, but initiates and implements policies that would create a
business environment encouraging international business. It also encourages banks by
providing re finance facilities of advances made to exporters.

The schemes introduced by Reserve Bank of India to promote international business

can be listed as below:

Pre shipment Credit: Refinance facility is given to commercial banks against advances
made by them for pre shipment credit given to bona fide exporters.

Interest Subsidy on Export Credit: RBI fixes the ceiling on interest to be charged on
export credit and provides interest subsidy to commercial banks providing export credit.

Refinance under DBK Credit Scheme: Exporters can avail interest free advance from
commercial banks (upto90 days) against shipping bills provisionally certified by customs
towards refund of customs duty.

Liberal Refinance Facility: commercial banks & financial institutions can avail refinance
facility against medium / long term loans given for exports with the stipulation that
interest should not exceed 1.5% over refinance rate.

Concessional Rate of Exchange: Reserve Bank has introduced a scheme of

concessional rate of exchange for interest, commission, discount and bank charges
encouraging the commercial banks to provide foreign exchange cover for medium and
long term exports.

Export Bill Credit Scheme under which advances could be made for maturity within 180
days has been withdrawn.

Customs Clearance Procedures: Since exports and imports involve movement of goods
from one port in a country to another port in a different country, custom clearance
procedures will have to be complied with. The procedure involves ‘Carting Order’ from
the port authorities to carry the goods inside the port followed by ‘Loading of goods on
board’. The procedures are long and cumbersome.

A clearing agent is well acquainted with these procedures and availing the help of a
clearing agent would be of assistance to an exporter. Big export houses have in house
staff trained in clearing and forwarding tasks.
Governmental Regulation of Foreign Trade: Ministry of Commerce controls the
international business by regulating exporters . A prospective exporter should first apply
for a code number from the office of Director General of Foreign Trade. Without this
IMPEX Code number no one can import or export. This is required for RBI purposes
too.

EXIM Policy of Government of India:

The purpose of EXIM policy are,
• To strengthen the base of export production to promote
exports.
• To create favourable situation for export promotion.
• To encourage indigenization and minimize imports.
• To encourage and facilitate technical upgradation to make
Indian products globally competitive.
• To simplify procedures of imports & exports.
• To provide institutional support to exporters.
• To liberalise import facilities to promote exports.
• To offer facilities, concessions and incentives for exports.
• To enable exporters to draw long term export plans.
• To facilitateavailability of imported inputs to increase/
sustain industrial growth.

EXIM policy is announced for a period of five years. The current EXIM
policy is for the years 2009 to 2014.

Impact of EXIM Policy of 2004 – 2009:

In the last five years our exports witnessed robust growth to reach a
level of US$ 168 billion in 2008-09 from US$ 63 billion in 2003-04. Our
share of global merchandise trade was 0.83% in 2003; it rose to 1.45%
in 2008 as per WTO estimates.Our share of global commercial services
export was 1.4% in
2003; it rose to 2.8% in 2008. India’s total share in goods and services
trade was 0.92% in 2003; it increased to 1.64% in 2008. On the
employment front, studies have suggested that nearly 14 million jobs
were created directly or indirectly as a
result of augmented exports in the last five years.

Current EXIM policy is for the years 2009 to 2014:

The short term objective of our policy is,
• to arrest and reverse the declining trend of exports and
 • to provide additional support especially to those sectors
which have been hit badly by recession in the developed
world.
We would like to set a policy objective of achieving an annual export
growth of
15% with an annual export target of US$ 200 billion by March 2011. In
the
remaining three years of this Foreign Trade Policy i.e.upto 2014, the
country
should be able to come back on the high export growth path of around
25% per
annum. By 2014, we expect to double India’s exports of goods and
services.

The long term policy objective for the Government is to double

India’s share in
global trade by 2020.
EXIM policy documents also specifies three categories of items in the negative list.
They are (a) prohibited items banned for exports (wild animals, exotic birds, human
skelitons, notified chemicals etc.) (b) restricted items such as cattle, camels, chemicals,
fertilizers, hides and skins etc and (c) canalized items like petroleum products, onion,
mica, scrap etc.

Trade Policies of Countries in International Business:

Trade policies of different countries have an impact on International Business. The

notable among the trade policies are,

1. Russian policy of allowing Indian imports though price and quality are
unfavourable as compared to other countries.

2. Chinese policy of importing goods on preferential terms from Pakistan

3. Subsidies provided by developing as well as advanced countries to promote

exports in varying percentages to give their exporters an edge in the global
markets.

4. Voluntary export restraint, limiting the rate of exports at the request of importing
country.

Future of International Business in India:

 International Business has resulted in erasing national borders for the purposes. The
availability of advanced technology and capital in developed countries have prompted
them to look for investment opportunities amply provided by developing countries
having abundant labour resources and untapped markets. Matching the mutual needs
have resulted in growth of international business resulting in overall growth in global
business and progress in the economy of developing countries.
With liberalized economy in 1991, India has made good progress in economy. India is
continuing its policy of liberalization in opening up Indias attractive markets for global
business in various areas. The recent Bill passes in parliament allowing foreign
universities to set up camps in India would make available international educational
opportunities to Indian population at a competitive cost locally, broadening the outlook
and perspective of the youth of India.

Gross domestic product of India

The Indian economy is the 12th largest in exchange rate terms. India is the second
fastest growing economy in the world. India’s GDP has touched US$1.25 trillion. The
crossing of Indian GDP over a trillion dollar mark in 2007 puts India in the elite group
of 12 countries with trillion dollar economy. The tremendous growth rate has coincided
with better macroeconomic stability. India has made remarkable progress in
information technology, high end services and knowledge process services.

Indian GDP –Trend Of Growth Rate

1960-1980 : 3.5%
1980-1990 : 5.4%
1990-2000 : 4.4%
2000-2009 : 6.4%

The contributions of various sectors in the Indian GDP for 2007-2008 are as follows:

Agriculture: - 17%
Industry: - 29%
Service Sector: - 54%

It is great news that today the service sector is contributing more than half of the
Indian GDP. It takes India one step closer to the developed economies of the world.
Earlier it was agriculture which mainly contributed to the Indian GDP.

The Indian government is still looking up to improve the GDP of the country and so
several steps have been taken to boost the economy. Policies of FDI, SEZs and NRI
investment have been framed to give a push to the economy and hence the GDP.
Chinese Economy in International Business Environment:

Market liberalization in the Chinese Economy has brought its huge economy forward
by leaps and bounds . China's economy is huge and expanding rapidly. In the last 30
years the rate of Chinese economic growth has been almost miraculous, averaging 8%
growth in Gross Domestic Product (GDP) per annum. The economy has grown more
than 10 times during that period, with Chinese GDP reaching 3.42 trillion US dollars by
2007. In Purchasing Power Parity GDP, China already has the biggest economy after
the United States. Most analysts project China to become the largest economy in the
world this century using all measures of GDP, followed by India ahead of other
countries.

Export Processing Zone (EPZ):

India was one of the first in Asia to recognize the effectiveness of the Export
Processing Zone (EPZ) model in promoting exports, with Asia's first EPZ set up in
Kandla in 1965. With a view to overcome the shortcomings experienced on account of
the multiplicity of controls and clearances; absence of world-class infrastructure, and an
unstable fiscal regime and with a view to attract larger foreign investments in India, the
Special Economic Zones (SEZs) Policy was announced in April 2000.

Special Economic Zones (SEZs):

The Government of India (GOI) has formulated a policy for setting up Special
Economic Zones (SEZ) in India. SEZs are proposed to be specially delineated duty free
enclaves for the purpose of trade, operations, duty and tariffs. These zones are self-
contained and integrated having their own infrastructure and support services.

Several fiscal and regulatory incentives to developers of the SEZs as well as units
within these zones have been provided. In addition to the incentives offered by the
Central SEZ Policy, there is state policy which offers several additional incentives to the
units within these zones.

An SEZ may be set-up in the public, private, or joint sector and/or by a state
government. The policy requires the minimum size of anSEZ to be 1000 hectares.
Within these zones, units may be set-up for the manufacture of goods, provisioning of
services, and other activities including processing, assembling, trading, repairing,
reconditioning, making of gold/silver, platinum jewellery etc. The Policy allows 100 per
cent foreign direct investment ("FDI") in most manufacturing activities.
Incentives and facilities offered to the SEZs

The incentives and facilities offered to the units in SEZs for attracting investments into
the SEZs, including foreign investment include:-

Duty free import/domestic procurement of goods for development, operation and

maintenance of SEZ units.

Exemption from minimum alternate tax under section 115JB of the Income Tax
Act.
External commercial borrowing by SEZ units upto US $ 500 million in a year
without any maturity restriction through recognized banking channels.

• Exemption from Central Sales Tax.

• Exemption from Service Tax.
• Single window clearance for Central and State level approvals.
• Exemption from State sales tax and other levies as extended by the
respective State Governments.
• The major incentives and facilities available to SEZ developers include:-
• Exemption from customs/excise duties for development of SEZs for
authorized operations approved by the BOA.
• Income Tax exemption on income derived from the business of
development of the SEZ in a block of 10 years in 15 years under Section
80-IAB of the Income Tax Act.
• Exemption from minimum alternate tax under Section 115 JB of the
Income Tax Act.
• Exemption from dividend distribution tax under Section 115O of the
Income Tax Act.
• Exemption from Central Sales Tax (CST).

• Exemption from Service Tax (Section 7, 26 and Second Schedule of the

SEZ Act).
Export Performances

Exports from the functioning SEZs during the last six years are as under:

Year Value (Rs. Crore) Growth Rate ( over previous year )

2003- 13,854 39%
2004
2004- 18,314 32%
2005
2005- 22 840 25%
2006
2006- 34,615 52%
2007
2007- 66,638 93%
2008
2008- 99,689 50%
2009
There are 105 Special Economic Zone Undertakings of which 13 are in Maharashtra. 19
more have been approved under the SEZ Act, 2005.

Advantages and Disadvantages of SEZ.:

A SEZ unit which has been set up for carrying on manufacturing, trading or service
activity has both advantages as well as disadvantages. SEZ advantages are quite far
more as compared to its disadvantages which are almost negligible.

Advantages

• 15 year corporate tax holiday on export profit – 100% for initial 5 years, 50% for
the next 5 years and up to 50% for the balance 5 years equivalent to profits
ploughed back for investment.
• Allowed to carry forward losses.
• No license required for import made under SEZ units.
• Duty free import or domestic procurement of goods for setting up of the SEZ
units.
• Goods imported/procured locally are duty free and could be utilized over the
approval period of 5 years.
• Exemption from customs duty on import of capital goods, raw materials,
consumables, spares, etc.
• Exemption from Central Excise duty on the procurement of capital goods, raw
materials, and consumable spares, etc. from the domestic market.
• Exemption from payment of Central Sales Tax on the sale or purchase of goods,
provided that, the goods are meant for undertaking authorized operations.
• Exemption from payment of Service Tax.
• The sale of goods or merchandise that is manufactured outside the SEZ (i.e, in
DTA) and which is purchased by the Unit (situated in the SEZ) is eligible for
deduction and such sale would be deemed to be exports.
• The SEZ unit is permitted to realize and repatriate to India the full export value of
goods or software within a period of twelve months from the date of export.
• “Write-off” of unrealized export bills is permitted up to an annual limit of 5% of
their average annual realization.
• No routine examination by Customs officials of export and import cargo.
• Setting up Off-shore Banking Units (OBU) allowed in SEZs.
• OBU's allowed 100% income tax exemption on profit earned for three years and
50 % for next two years.
 • Exemption from requirement of domicile in India for 12 months prior to
appointment as Director.
• Since SEZ units are considered as ‘public utility services’, no strikes would be
allowed in such companies without giving the employer 6 weeks prior notice in
addition to the other conditions mentioned in the Industrial Disputes Act, 1947.
• The Government has exempted SEZ Units from the payment of stamp duty and
registration fees on the lease/license of plots.
• External Commercial Borrowings up to $ 500 million a year allowed without any
maturity restrictions.
• Enhanced limit of Rs. 2.40 crores per annum allowed for managerial
remuneration.

Disadvantages

• Revenue losses because of the various tax exemptions and incentives.

• Many traders are interested in SEZ, so that they can acquire at cheap rates and
create a land bank for themselves.

Export Benefits on Production Pricing:

Government of India has provided various incentives / benefits to promote

exports. They are:

I. Duty Drawback: Exporters are allowed refund of customs duty and excise
duty. The exporter should reduce the export price accordingly. Drawback
is allowed as a % of FOB value of the exports.
II. Exemption from Excise Duty: This is allowed as ‘Export under Rebate’ or
‘Export under Bond’. In case of ‘Export under Rebate’, duty is paid first
and claimed later for reimbursement. In case of ‘Export under Bond’,
export is allowed without payment of duty on furnishing a bond in favour of
excise authorities.
III. Exemption from Sales Tax: Registered export firms are allwed exemption
from Central and State Sales Tax.
IV. Exemption from Income Tax: Income Tax Act U/S 80HHC provides 100%
tax exemption to exporters. Units in FTZ, EPZ and 100% EOUs enjoy a 5
year tax holiday.
V. Marketing Development Assistance: Under a commonly created fund for
MDA, exporters are given assistance in advertisement abroad, travel
abroad, market surveys and opening showroom abroad.
VI. Transport Facilities: Rebate is given on rail freight, conference lines and
air freight subsidy.
VII. Financial Benefits: Various financial benefits are extended in the form of
preshipment finance, post shipment finance etc.

Export Pricing:
Export price is the price quoted by exporter to importer in foreign currency. The
price offered would depend upon demand for the goods, cost of goods,
competition, alternatives, incentives and tax concessions. The price would
include the cost plus a reasonable profit. This is known as ‘cost plus pricing’.

The price quotations are given as under:

I. Free on Board: FOB quotation will include cost plus expenses upto placing
the goods on board of the ship. It does not include freight, but would be
inclusive of special packing if any, marketing etc. The price would be
including profit.
II. Free Alongside Station (FAS) quotation would include price, local packing,
labeling, local transport plus profit margin. This is applicable to exports
sent by train.
III. Cost and Freight (C&F) quotations would include FOB price plus freight.
The exporter will arrange for transport and claim the transport cost in
Invoice.
IV. Cost , Insurance & Freight quotations include FOB price plus insurance
and freight. This is quoted in cases where the importer requests the
exporter to arrange for transport and insurance coverage.

Computation of Export Price:Exporters are required to quote the price in

importer’s currency. Exporters would first calculate the price in local currency and
then convert it into importer’s currency, applying the current exchange rates.

Example:

Calculate the FOB price to be given to the importer in US. (Conversion rate US$
=Rs.46.50)

Cost (Ex Factory) Rs.212000

Local freight up to the port Rs. 8000

Packing, labeling etc. Rs. 10000

Other expenses upto loading Rs. 20000

Profit 20% of FOB Cost

Duty Drawback 10% of FOB Price

Calculation of Quotation :

FOB Price: Rs.

Cost (Ex Factory) 212000

Local freight up to the port Rs. 8000

Packing, labeling etc. Rs. 10000

Other expenses upto loading Rs. 20000 40000

FOB Cost 252000

Profit (@20%) 50400

FOB Revenue (FOB Price + Duty Drawback 10%) 272400

FOB Price = 272400 / 1.1 = Rs.247636 = US$ (247636 / Rs.46.50)=US$5326

(Figures rounded off ignoring decimals)

PROBLEMS : (from university papers)

PROBLEM #1:

Calculate the minimum FOB price in US$ for an export order from the following:

Rs.

Raw Materials 400000

Wages 100000

Overheads 50000

Local transport 20000

Freight & Insurance 30000

Duty Drawback 10% of FOB Price

Profit 10% of FOB Cost

Conversion Rate 1US$=Rs.50

SOLUTION#1:

Rs. Rs.

Raw Materials 400000

Wages 100000

Overheads 50000

Local transport 20000

FOB Cost 570000

Profit margin @10% 57000

FOB Revenue 627000

FOB Price = 627000 / 1.1 = Rs.570000 = US$ (570000 / Rs. 50)=US$11400

PROBLEM #2:

Calculate the CIF price in US$ for an export order from the following:

Rs.

Raw Materials 200000

Wages 50000

Local transport 10000

Marine Freight & Insurance 25000

Duty Drawback 10% of FOB Price

Profit 15% of FOB Cost

Conversion Rate 1US$=Rs.39.50

SOLUTION#2:

Rs. Rs.
Raw Materials 200000

Wages 50000

Local transport 10000

FOB Cost 260000

Profit margin @15% 39000

FOB Revenue 299000

FOB Price = 299000 / 1.1 = 271818

Marine Freight & Insurance 25000

CIF Price 296818

CIF Price in US$ (296818/Rs.39.50) =US$ 7514

(Figures rounded off ignoring decimals)

PROBLEM #3

Calculate the CIF price in US$ for an export order from the following:

Rs.

Raw Materials 300000

Wages 50000

Local transport & insurance 20000

Marine Freight & Insurance 25000

Duty Drawback 10% of FOB Price

Profit 15% of FOB Cost

Conversion Rate 1US$=Rs.39.50

SOLUTION#3: Rs. Rs.

Raw Materials 300000

Wages 50000

Local transport & Insurance 20000

FOB Cost 370000

Profit margin @15% 55500

FOB Revenue 425500

FOB Price = 425500 / 1.1 = 386818

Marine Freight & Insurance 25000

CIF Price 411818

CIF Price in US$ (411818/Rs.39.50) =US$ 10426

(Figures rounded off ignoring decimals)