Class 11 Business Studies Notes Chapter 11 (International Business - I) – Business Studies Book

Alright, let's get started with the key concepts from Chapter 11, 'International Business - I'. This is a crucial chapter, laying the foundation for understanding how businesses operate across borders. Pay close attention, as these concepts frequently appear in various government examinations.

NCERT Class 11 Business Studies
Chapter 11: International Business - I

Detailed Notes for Government Exam Preparation

1. Meaning of International Business:

• Definition: International Business refers to the conduct of commercial transactions (like manufacturing, trading, services) across national borders. These transactions involve the exchange of goods, services, capital, technology, personnel, and intellectual property (patents, trademarks, copyrights) between two or more countries.
• Key Elements: It encompasses not just the international movement of goods (exporting/importing) but also services, tourism, transportation, licensing, franchising, foreign investments (FDI, FPI), and outsourcing.
• Contrast with Domestic Business: Domestic business involves economic activities conducted within the geographical boundaries of a single country.

2. Reasons for International Business / Need for International Business:

Why do businesses and countries engage in international trade and investment?

• Uneven Distribution of Natural Resources: Countries specialize in producing goods they can make efficiently due to resource availability and import what they lack.
• Differences in Labour Productivity and Production Costs: Variations in labour skills, technology, and costs lead countries to specialize and trade.
• Profit Advantage: Firms may find higher profit margins in international markets due to less competition or higher demand.
• Increased Market Size & Growth Potential: International markets offer significant growth opportunities beyond saturated domestic markets.
• Economies of Scale: Producing for a larger global market can lead to lower per-unit production costs.
• Access to Technology and Quality Inputs: Firms can source better technology or raw materials from other countries.
• Utilisation of Surplus Production: Companies can sell excess production capacity in foreign markets.
• Strategic Vision: Many companies aim for global presence and leadership.
• Political Relations & Stability: International business often fosters better relationships between nations.
• Countering Intense Domestic Competition: Expanding internationally can be a strategy to overcome fierce competition at home.

3. Difference between Domestic and International Business:

International business is more complex than domestic business due to several factors:

4. Scope of International Business (Modes of Entry into International Business):

These are the various ways firms can engage in international operations, often involving increasing levels of commitment, risk, control, and profit potential.

• (a) Exporting and Importing:

  • Exporting: Selling domestically produced goods/services to foreign countries.
    • Direct Exporting: Firm directly handles export activities.
    • Indirect Exporting: Firm uses intermediaries (export houses, trading companies).
  • Importing: Purchasing goods/services from foreign countries for domestic use or resale.
  • Characteristics: Simplest mode, less investment, lower risk compared to other modes.

• (b) Contract Manufacturing (Outsourcing):

  • Definition: A firm arranges with a local manufacturer in a foreign country to produce goods according to its specifications. Marketing is handled by the international firm.
  • Example: Nike getting shoes manufactured by factories in Vietnam.
  • Characteristics: Less investment, utilises local expertise, potential quality control issues, no direct market presence development.

• (c) Licensing and Franchising:

  • Licensing: A contractual arrangement where one firm (Licensor) grants rights to intangible property (patents, copyrights, trademarks, technology) to another firm (Licensee) in a foreign country for a specified period, in return for a royalty/fee.
    • Characteristics: Low investment entry, less risk, limited control over licensee, potential for creating a future competitor.
  • Franchising: A specific form of licensing where one party (Franchisor) grants another party (Franchisee) the right to operate a business using the franchisor's brand name, systems, and processes, usually in exchange for an initial fee and ongoing royalties. Common in service industries (e.g., McDonald's, Subway).
    • Characteristics: Stricter rules than licensing, brand consistency is key, faster expansion, ongoing support from franchisor.

• (d) Joint Ventures:

  • Definition: Establishing a firm that is jointly owned by two or more otherwise independent firms. Often involves a foreign firm partnering with a local firm in the host country.
  • Characteristics: Shared ownership, control, risk, and profits. Access to local partner's knowledge, market access, reduced political risk, potential for conflicts between partners.

• (e) Wholly Owned Subsidiaries:

  • Definition: A firm fully owns and controls its operations in a foreign country by setting up a new facility (Greenfield venture) or acquiring an existing firm (Acquisition).
  • Characteristics: Highest level of investment and risk, full control over operations and technology, avoids partner conflicts, bears full losses if unsuccessful.

5. Benefits of International Business:

• Benefits to Nations:

  • Earning Foreign Exchange: Helps pay for imports.
  • Efficient Resource Utilisation: Countries produce what they are best at.
  • Improving Growth Prospects & Employment: Boosts economic activity and job creation.
  • Increased Standard of Living: Access to better quality goods and services from abroad.
  • Fosters International Cooperation & Understanding: Builds economic ties.

• Benefits to Firms:

  • Prospects for Higher Profits: Access to larger markets or markets with less competition.
  • Increased Capacity Utilisation: Spreading fixed costs over larger output.
  • Prospects for Growth: Essential for firms whose domestic markets are saturated.
  • Way Out of Intense Domestic Competition: Finding new markets abroad.
  • Improved Business Vision: Becoming more competitive and diversified globally.

Key Takeaways for Exams:

• Understand the core definition of International Business and its components.
• Memorize the key reasons why firms and nations engage in it.
• Be very clear about the differences between domestic and international business – this is a common comparison area.
• Thoroughly understand each mode of entry (Export/Import, Contract Mfg., Licensing, Franchising, Joint Ventures, Wholly Owned Subsidiaries) – know their definitions, key features, advantages, and disadvantages. This is arguably the most important section for objective questions.
• Know the benefits of international business for both the nation and the individual firm.

Multiple Choice Questions (MCQs):

1. Which of the following activities falls under the scope of International Business?
   a) A company in India selling goods only in Delhi.
   b) An Indian firm setting up a manufacturing plant in Bangladesh.
   c) A farmer selling produce within their own state.
   d) A retailer buying goods from a wholesaler in the same city.

2. A primary reason for firms to engage in international business is:
   a) To reduce the complexity of operations.
   b) To operate only within a single, familiar political system.
   c) Prospects for higher profits and market growth.
   d) To avoid dealing with different currencies.

3. Which factor significantly differentiates international business from domestic business?
   a) Use of technology in production.
   b) Need for marketing activities.
   c) Nationality of buyers and sellers.
   d) The goal of earning profit.

4. Granting permission to a foreign firm to use patents or trademarks in return for a fee is known as:
   a) Exporting
   b) Joint Venture
   c) Franchising
   d) Licensing

5. McDonald's operating outlets in various countries through local investors who use its name and operating system is an example of:
   a) Licensing
   b) Franchising
   c) Contract Manufacturing
   d) Wholly Owned Subsidiary

6. Which mode of entry into international business generally involves the least investment and risk for the firm?
   a) Wholly Owned Subsidiary
   b) Joint Venture
   c) Exporting/Importing
   d) Licensing

7. When a company hires a local manufacturer in a foreign country to produce its goods, while handling the marketing itself, it is called:
   a) Joint Venture
   b) Wholly Owned Subsidiary
   c) Contract Manufacturing
   d) Franchising

8. Which mode of entry offers the highest degree of control over foreign operations but also entails the highest risk?
   a) Licensing
   b) Exporting
   c) Joint Venture
   d) Wholly Owned Subsidiary

9. Which of the following is primarily a benefit of international business to the nation?
   a) Increased capacity utilisation for a specific firm.
   b) Earning of foreign exchange.
   c) Prospects for higher profits for a company.
   d) Improved business vision for management.

10. Establishing a new firm jointly owned by a foreign company and a local company is known as:
    a) Acquisition
    b) Greenfield Venture
    c) Joint Venture
    d) Contract Manufacturing

Answer Key:

1. b
2. c
3. c
4. d
5. b
6. c
7. c
8. d
9. b
10. c

Study these notes thoroughly. Focus on understanding the differences between the modes of entry and the reasons behind international business activities. Good luck with your preparation!