International business

Business Administration (BBA/BMS) · Strategy and business · free study notes for exams, placements and interviews

In short

International business is the conduct of commercial transactions — trade in goods and services, investment, licensing and production — across national borders. It matters because an Indian firm's costs, prices, competition and funding are set in global markets: India's merchandise and services exports together now run above USD 800 billion a year (figures revise monthly, check DGCI&S/RBI). It is examined in BBA/BMS strategy, IB and economics papers, and used daily in export-import, trade finance, supply-chain, consulting and IT/BPM client-facing roles.

Explained

Why firms go international, and the theories examined

Drivers: market seeking (saturated home market), resource seeking (cheap inputs, talent), efficiency seeking (scale, low-cost manufacturing), strategic-asset seeking (brands, technology), and risk spreading across countries.
Absolute advantage (Adam Smith): a country exports what it produces with fewer resources. Comparative advantage (Ricardo): trade gains exist even if one country is worse at everything, as long as *opportunity costs* differ.
Heckscher–Ohlin: a country exports the good using its abundant factor intensively — labour-abundant India exports textiles, gems, generics and IT services.
Product life-cycle (Vernon): a product is invented, exported, then produced abroad as it standardises. Porter's diamond: national competitiveness rests on factor conditions, demand conditions, related industries and domestic rivalry.
Dunning's OLI (why FDI rather than export): Ownership advantage + Location advantage + Internalisation advantage must all exist.
Globalisation vs limits: cost and scale gains against job displacement, cultural homogenisation and vulnerability to global shocks; post-2020 firms added "China plus one" and nearshoring for resilience.

Modes of entry — rising commitment, rising control

Indirect export through a merchant exporter or export house — lowest risk, lowest learning.
Direct export to overseas buyers/distributors — the usual first step for an Indian MSME.
Licensing / franchising — licensee pays royalty; fast, capital-light, but risks losing know-how (Domino's in India via Jubilant FoodWorks).
Contract manufacturing / outsourcing — Indian pharma and electronics firms manufacture for global brands.
Joint venture — shared equity, local partner's market knowledge; conflict over control is common (Maruti Suzuki, originally a Government–Suzuki JV).
Wholly owned subsidiary (greenfield or acquisition) — full control, highest cost and political risk (Tata Motors' acquisition of Jaguar Land Rover, 2008).
Choice depends on: market size, tariff/non-tariff barriers, political risk, capital available, need to protect technology, and speed required.

Environment: cultural, political, legal, economic

Culture: Hofstede's dimensions — power distance, individualism/collectivism, masculinity/femininity, uncertainty avoidance, long-term orientation, indulgence; used to explain negotiation and management style differences. High-context vs low-context communication matters in client handling.
Political and country risk: expropriation, currency inconvertibility, sanctions, local-content rules; managed by insurance (ECGC cover in India), JV with local partners and phased commitment.
Economic: exchange rates, inflation differentials, balance of payments position, stage of development.
Multilateral institutions: WTO (rules on trade, MFN and national treatment, dispute settlement); IMF (short-term BoP support); World Bank (development finance); UNCTAD. Regional blocs: EU, ASEAN, USMCA, SAARC/BIMSTEC; India's CEPA/FTAs with UAE and Australia and the India–EFTA agreement are recent examples.

India's framework, regulators and documents

FEMA, 1999 governs foreign exchange (it replaced FERA and shifted from "regulation by prohibition" to management); RBI administers it and manages the rupee under a managed-float regime.
FDI policy (DPIIT, consolidated circular): automatic route (no prior approval, only post-facto reporting) or government route; sector caps apply — 100% automatic in most manufacturing, restrictions in multi-brand retail, insurance, defence and print media. Caps change often — quote the current DPIIT circular rather than a remembered figure.
Foreign Trade (Development and Regulation) Act, 1992 and the Foreign Trade Policy administered by DGFT; every exporter needs an IEC (Importer-Exporter Code) and a GST registration. Exports are zero-rated under GST (LUT or refund route); GST slabs are 5%/18%/40% since 22 September 2025.
Customs Act, 1962 and the Customs Tariff Act, 1975: duties on HSN-classified goods; valuation normally on transaction value. Export promotion: SEZs, EOUs, Advance Authorisation, EPCG, RoDTEP and duty drawback.
Institutions: EXIM Bank (finance), ECGC (credit insurance), Export Promotion Councils and commodity boards, Indian Customs EDI/ICEGATE.
Documents: commercial invoice, packing list, shipping bill (export) / bill of entry (import), bill of lading or airway bill, certificate of origin, insurance certificate, letter of credit (UCP 600), and Incoterms 2020 terms — EXW, FOB, CFR, CIF, DAP, DDP — which fix where risk and cost pass to the buyer.
Balance of payments: current account (trade + services + income + transfers) and capital/financial account. India typically runs a merchandise trade deficit offset partly by services exports and remittances (the largest remittance recipient in the world).

Key points

International business - all commercial activity crossing borders: trade, investment, licensing, production.
Comparative advantage - gains from trade arise from differing opportunity costs, not absolute superiority.
OLI framework - FDI is chosen only when ownership, location and internalisation advantages coexist.
Entry modes - control and risk rise from exporting → licensing → JV → wholly owned subsidiary.
FDI vs FPI - FDI is lasting management interest (10%+ equity, convention); FPI is portfolio investment, easily reversed ("hot money").
FEMA, 1999 - India's forex law, administered by RBI; replaced FERA's prohibition approach.
DGFT and IEC - DGFT runs the Foreign Trade Policy; IEC is mandatory to export or import.
Incoterms 2020 - standard terms (FOB, CIF, DAP, DDP) allocating cost, risk and insurance between seller and buyer.
Letter of credit - bank's conditional payment undertaking under UCP 600; the exporter's main protection against buyer default.
Tariff vs non-tariff barriers - duties vs quotas, licensing, standards, local content and anti-dumping measures.
WTO principles - most-favoured nation, national treatment, binding dispute settlement.
Hofstede's dimensions - cultural distance explains management and negotiation differences.
Balance of payments - current plus capital account; India's services surplus and remittances offset a goods deficit.
Exchange-rate exposure - transaction, translation and economic exposure; hedged with forwards, options and natural hedges.

Formulas and examples

Nominal exchange rate: INR per USD. Real exchange rate = Nominal × (Foreign price level / Domestic price level)
Purchasing Power Parity: S = P(domestic) / P(foreign) — rupees per unit of foreign currency
Forward rate (Interest Rate Parity): F = S × (1 + i_domestic) / (1 + i_foreign), rates for the same period
Balance of trade = Exports − Imports (goods); Current account = BoT + net services + net income + net transfers
Export realisation (₹) = FOB value in foreign currency × exchange rate − bank and freight charges
Landed cost = CIF value + customs duty + other charges (IGST is creditable, so excluded from cost for a registered importer)

Example 1 — landed cost of an import. A Pune firm imports machinery with FOB USD 50,000, freight USD 3,000, insurance USD 500. Exchange rate ₹84/USD. Basic customs duty 7.5%, social welfare surcharge 10% of BCD, IGST 18% (creditable).

CIF = 50,000 + 3,000 + 500 = USD 53,500 → ₹53,500 × 84 = ₹44,94,000
BCD = 7.5% × 44,94,000 = ₹3,37,050
Surcharge = 10% × 3,37,050 = ₹33,705
Assessable + duties = 44,94,000 + 3,37,050 + 33,705 = ₹48,64,755
IGST = 18% × 48,64,755 = ₹8,75,656 — paid but credited, so excluded.
Landed cost (for a registered importer) = ₹48,64,755. Duty incidence = 3,70,755/44,94,000 ≈ 8.25% of CIF.

Example 2 — forward cover on an export receivable. An exporter will receive USD 200,000 in 6 months. Spot ₹84.00/USD; 6-month interest rates: India 7% p.a., USA 4% p.a.

Period rates (6 months) = 3.5% and 2.0%.
F = 84.00 × (1.035/1.020) = 84.00 × 1.014706 = ₹85.235/USD
Booking forward: 200,000 × 85.235 = ₹1,70,47,000
If the spot in 6 months is ₹83.00, unhedged realisation = ₹1,66,00,000 → the forward saved ₹4,47,000.
If the spot is ₹87.00, unhedged = ₹1,74,00,000 → the forward cost ₹2,53,000 of upside. Hedging buys certainty, not profit.

Mode	Investment	Control	Risk	Typical use
Export	Low	Low	Low	First overseas sales, MSME
Licensing/franchising	Very low	Low	Know-how leakage	Brands, food chains
Joint venture	Medium	Shared	Partner conflict	Restricted sectors, local knowledge
Wholly owned subsidiary	High	Full	Political, exit cost	Long-term, technology-sensitive

Where it is used

Export-import and trade finance: documentation executives, LC checking, DGFT/ICEGATE filing at banks and freight forwarders; EXIM Bank and ECGC roles.
IT and BPM services: TCS, Infosys, Wipro, HCLTech earn most revenue abroad — pricing, contract and currency-hedging decisions rest on this knowledge.
Pharma, auto components, textiles, gems and jewellery: Sun Pharma, Bharat Forge, Tirupur knitwear clusters — market access, FTA rules of origin and quality standards.
Consulting, market entry and sourcing roles: advising foreign firms on India entry under DPIIT policy, and Indian firms on acquisitions abroad (Tata–JLR, Bharti–Zain).

Interview questions

Q: Difference between FDI and FPI? A: FDI is a lasting interest with management participation in an enterprise abroad; FPI is passive investment in securities, far more liquid and reversible.
Q: Why would a firm prefer a joint venture to a wholly owned subsidiary? A: To gain a local partner's market knowledge, distribution and regulatory access, share capital and risk, and to satisfy sectoral ownership caps.
Q: What does Incoterm CIF mean? A: The seller pays cost, insurance and freight to the named destination port, but risk passes to the buyer once goods are loaded on the vessel.
Q: What is comparative advantage in one line? A: A country should specialise in goods it produces at a lower opportunity cost, so both countries gain from trade even if one is absolutely more productive.
Q: Which Indian law governs foreign exchange transactions, and what changed? A: FEMA, 1999 — it replaced FERA and treats forex as something to be managed rather than prohibited, with civil rather than criminal consequences for most contraventions.
Q: How does an exporter protect against non-payment and currency risk? A: Non-payment through a letter of credit and ECGC credit insurance; currency risk through forward contracts, options or invoicing in rupees.
Q: Why does India run a trade deficit but a smaller current account deficit? A: Its merchandise deficit (largely crude oil, electronics, gold) is partly offset by a services export surplus and large inward remittances.

Common mistakes

Treating comparative advantage as absolute advantage — the test is opportunity cost, not output per worker.
Confusing balance of trade with balance of payments, or forgetting that BoP always balances overall.
Saying FOB and CIF only differ in price — they also shift the point where risk transfers.
Quoting old rules: FERA for FEMA, or remembered FDI sector caps instead of the current DPIIT circular.
Listing entry modes without linking them to control, risk and capital — examiners mark the trade-off, not the list.