NCERT Solutions Class 11 Business Studies International Business-1

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NCERT Solutions for Class 11 Business Studies Chapter: 11 International Business - 1

Multiple Choice Questions

Q1. In which of 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

  1. Licensing
  2. Contract
  3. Joint Venture.
  4. Joint Venture

Answer: a) Licensing.

Q2. Outsourcing a part of or entire production and concentrating on marketing operations in international business is known as

  1. Licensing
  2. Franchising
  3. Contract manufacturing.
  4. Joint venture.

Answer: c) contract manufacturing.

Q3. When two or more firms come together to create a new business entity that is legally separate and distinct from its parents is known as

  1. Contract manufacturing.
  2. Franchising
  3. Joint Ventures.
  4. Licensing

Answer: c) Joint Venture.

Q4. Which of the following is not an advantage or exporting?

  1. Easier way to enter into international markets
  2. Comparatively lower risks
  3. Limited presence in foreign markets
  4. less investment requirements

Answer: c) limited presence in foreign markets

Q5. Which one of the modes of entry requires higher level of risks?

  1. Licensing
  2. Franchising
  3. Contract manufacturing
  4. Joint Venture

Answer: d) Joint Venture

Q6. Which one of the following modes of entry permits greatest degree of control over overseas operations?

  1. Licensing/franchising
  2. Wholly owned subsidiary
  3. Contract manufacturing
  4. Joint venture

Answer: b) wholly owned subsidiary

Q7. Which one of the following modes of entry brings the firm closer to international markets?

  1. Licensing
  2. Franchising
  3. Contract manufacturing
  4. Joint venture

Answer: c) Contract manufacturing

Q8. Which one of the following is not amongst India’s major export items?

  1. Textiles and garments
  2. Gems and Jewellery
  3. Oil and petroleum products
  4. Basmati rice

Answer: d) Basmati rice

Q9. Which one of the following is not amongst India’s major import items?

  1. Ayurvedic medicines
  2. Oil and petroleum products
  3. Pearls and precious stones
  4. Machinery

Answer: a) Ayurvedic medicines

Q10. Which one of the following is not amongst India major trading partners?

  1. USA
  2. UK
  3. Germany
  4. New Zealand

Answer: d) New Zealand

Short Answer questions

Q1. Differentiate between International trade and International business. Answer:

International trade refers to the exchange of goods and services between two or more countries. However, international business involves international movement of goods, services, capital, personnel, technology and intellectual property like patents, trademarks, etc. across different nations.

The scope of international business is much wider since it includes:

  1. Export and import of goods.
  2. Export and import of services.
  3. Licensing and Franchising.
  4. Foreign investment through FDI and portfolio investment

Q2. Discuss any three advantages of International business.

Answer: The following are the three advantages of International business-

  1. Earning foreign exchange: International business helps a country to earn foreign which it can later use for meeting its imports of capital goods, technology, petroleum products and fertilizers, pharmaceutical products and a host of other consumer products which otherwise might not be available domestically.
  2. More efficient use of resources: International business 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.
  3. Improving growth prospects and employment potential: International business encourages many countries especially developing ones to produce on a larger scale which not only helps in improving growth prospects but also creates opportunity for employment of people.

Q3. What is the major reason underlying trade between nations?

Answer: Major reason underlying trades between nations are

  1. Unequal distribution of natural resources among nations.
  2. Availability of various factors of production like land , labour capital and enterprise differ from nation to nation.
  3. Labour productivity and production costs differ among nations due to various socio- economic, geographical and political reasons.

Q4. Discuss as to why nations trade.

Answer: The following are the reasons why nations trade: Earns Foreign Exchange: A country earns foreign exchange through international business. It uses the foreign exchange for meeting its imports of capital goods, technology, petroleum products & fertilisers, etc, which are not produced domestically.

  1. More Efficient Use of Resources: When a country produces those goods that it can produce efficiently & trades the surplus with other countries, then the country's resources can be used efficiently and trading countries can get the benefit of specialisation.
  2. Stability in Prices: In case of increasing prices of a product due to short supply, the rise in prices may be controlled by increased imports. Similarly, in case of decreasing prices resulting from surplus production, the fall in prices may be controlled by exports.
  3. Improves Growth Prospects & Employment Potentials: Exports boost economic growth of a country as firms increase their production capacity to supply goods in foreign countries. Increased production results in increased demand of labour, creating employment opportunities and consequently, increasing the GDP of the country.
  4. Increased Standard of Living: Underdeveloped & developing countries are able to consume a variety of goods services which are not produced in their home countries. They are thus, able to enjoy a higher standard of living.
  5. Promotes Global Understanding: International business provides opportunities to countries to interact with each other. This helps in increased understanding of culture and tradition, work culture, etc, and reduces conflicts among countries and promotes a healthy relationship among them.

Q5. Enumerate limitations of contract manufacturing.

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. Contract manufacturing, also known as outsourcing. The limitations of contract manufacturing to international firm and local producer in foreign countries are as follows

  1. Local firms might not adhere to production design and quality standards, thus causing serious product quality problems to the international firm.
  2. Local manufacturer in foreign country loses his control over the manufacturing process because goods are produced strictly as per the terms and specifications of the contract.
  3. Local firm producing under contract manufacturing is not free to sell the contracted output as per its will. It has to sell the goods to the international company at predetermined prices. This results in lower profits for the local firm if the open market prices for such goods happen to be higher than the prices agreed upon under the contract.

Q6. Why is it said that licensing is an easier way to expand globally?

Answer: It is said that licensing is an easier way to expand business globally because

  1. Under the licensing system, it is the licensor who sets up the own business unit and invests his own money in the business. As such the licensor has to make no investments abroad. Licensing is thus considered a less expensive mode of entering into international business.
  2. Licensor is not party to losses since no or very little foreign investment involved. 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.
  3. Since business in a foreign country is managed by the licensee who is a local person, there are lower risks of business takeovers or government interventions.
  4. 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.

Q7. Differentiate between contract manufacturing and setting up wholly owned production subsidiary abroad.

Answer: The following are the differences between contract manufacturing and wholly owned production subsidiary -

Contract manufacturing

Wholly owned

production subsidiary

 

A firm enters into contract

The parent company

with one or a few local

acquires full control over

manufacturers in foreign

the foreign company by

countries to get certain

making 100%investment

components or goods

in its equity capital.

produced as per its

 

specifications

 

The firm has limited control

The parent company has

over the local manufacturer

full control over its

operations in another

 

country through the

 

subsidiary.

 

There is no or little

The parent company buys

investment in foreign

up the entire equity of the

 

countries

firm abroad and makes

this firm its subsidiary.

 

Q8. Distinguish between licensing and franchising.

Answer: The following are the differences between licensing and franchising –

Licensing

Franchising

The licensor grants licence

The franchiser grants a

to a foreign company (

foreign firm ( franchisee)

Licensee) to produce and

the right to operate a

sell goods under the

business using a common

licensor’s logo and

brand name for an initial

trademarks for a fee.

or a regular fee.

Operations are related to

Operations are related to

production and marketing of

the services business.

goods.

 

Less stringent rules and

Strict rules and

regulations

regulations

Q9. List major items of India’s exports.

Answer: The following are the major items exported from India-

  1. Tea
  2. Basmati rice
  3. Spices
  4. Leather and leather products
  5. Semi precious stones

Q10. What are the major items that are exported from India?

Answer: India is well known for exporting both primary goods as well as finished products.

The major items that are exported from India are 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. It also hold a distinct position of being the largest exporter in the world of basmati rice, tea and ayurvedic products.

Long Answer Questions

Q1. What is international business? How is it different from domestic business?

Answer: The international movement of goods, services, capital, personnel, technology and intellectual property in different countries is called international business.

The difference between international trade and domestic business are as follows –

Difference

Domestic

International

 

 

business

business

 

 

 

Employees,

Employees,

 

 

 

suppliers,

suppliers,

 

 

 

middleman,

middleman,

 

 

 

shareholders

shareholders and

 

 

 

and partners

partners are from

 

 

 

Nationality

are usually

different nations,

 

 

citizens of the

making it difficult

 

 

same country.

to transact due to

 

differences in

   

 

language, attitude,

   

 

social custom, etc.

   

 

Free movement

There is restrictions

  

 

of factors of

on free movement

  

 

production like

of labour & capital

  

 

labour & capital

across countries,

  

 

is possible

due to legal

  

 

Mobility of

within a

restrictions,

 

 

factors of

country.

variations in socio-

 

 

production

cultural

  

 

environments,

   

 

geographic

   

 

influences &

   

 

economic

   

 

conditions.

   

 

More

Variations in

  

 

Customer

homogenous in

demand & purchase

 

 

heterogeneity

demand for

behaviour due to

 

 

across markets

different goods

diversity in socio

 

 

& services and

cultural

  

 

purchase

background- tastes,

  

 

 

behaviour, etc.

preferences,

 

 

fashion, & language

 

 

 

among different

 

 

 

countries.

 

 

 

Involves use of

 

 

 

Currency of

different

 

 

domestic

currencies;

 

 

country is used;

fluctuating currency

 

 

Currency used

no risk of

exchange rate

 

 

currency

make it difficult for

 

 

in transactions

exchange

firms to fix prices

 

 

fluctuation

of their products &

 

 

 

faced by

services & hedging

 

 

 

businesses.

against exchange

 

 

 

risks.

  

 

 

Less risk since

More risky, since

 

 

 

familiarity with

political

 

 

 

the political

environment keeps

 

 

 

environment of

on changing from

 

 

 

businessmen’s

one country to

 

 

 

Political system

own country

another, one needs

 

 

& risks

makes him

to understand &

 

 

understand it

monitor changes on

 

 

well & predict

an ongoing basis &

 

its impact on

devise strategies

  

 

business

accordingly.

  

 

operations.

   

 

Business

Subjected to

Each country differ

 

 

laws, rules,

in its set of laws &

 

 

policies

 

 

policies,

regulations,

 

 

  

 

 

taxation

economic policies,

system, of own

tariff & taxation

country.

policies.

Q2. ‘International business is more than international trade’. Comment.

Answer: International trade refers to the exchange of goods and services between two or more countries. However, international business involves international movement of goods, services, capital, personnel, technology and intellectual property like patents, trademarks, etc. across different nations. The scope of international business is much wider since it includes:

  1. Export and import of services: Trading of services are an important constituent of international business. Services that are part of international business include travel and tourism, entertainment, communication, transportation, construction, advertising etc.
  2. Export and import of merchandise: International business include export and import of merchandise. Merchandise means goods that are tangible, i.e those that can be seen and touched. Merchandise exports means sending tangible goods abroad, merchandise imports means bringing tangible goods from a foreign country to one’s own country.
  3. Licensing and Franchising: International business includes activities related to licensing and franchising. Under licensing a foreign firm is granted intellectual property rights by a home company so that the firm abroad can produce and sell goods under the home company’s trademarks , patents and copyrights in exchange of a fee.
  4. Foreign investment through FDI and portfolio investment: It is another important form of international business. Foreign investment involves investments of funds abroad in exchange for financial return. Foreign investment can be of two type:
    • Direct investment: It refers to investment made directly in the plants and machinery of a foreign company so as to undertake production by acquiring controlling rights.
    • Portfolio investment: It refers to an investment in securities or by providing loans to a foreign company with an objective of earning profits in the form of dividends or interests on loans.

Q3. What benefits do firms derive by entering into international business?

Answer: The following are the benefits derived by firms by entering into international business-

International business is advantageous for business firms in following ways:

  1. Prospect of Higher profits: In case of lower domestic prices, firms can earn higher profits by supplying their products in those countries where prices are high.
  2. Increased Capacity Utilisation: Firms can make use of their surplus production capacities & improve the profitability of operations by planning for overseas expansion & procuring orders from foreign firms. Large scale production leads to economies of scale resulting in lower production cost & improvement in per unit profit margin.
  3. Prospect for Growth: When demand in the home countries has saturated, firms can opt for foreign market where demand is good & picking up fast, especially in developing countries. Firms can considerably increase their growth prospects by expanding into overseas markets.
  4. To counter intense competition in the market: International business helps to achieve significant growth when competition in domestic market is very intense. Highly competitive market induces many domestic firms to tap international markets for their products.
  5. Improved business vision: International business for many companies is part of their business policies & strategy. Companies are going international, to grow, to become competitive, to diversify & to gain strategic benefits.

Q4. In what ways is exporting a better way of entering into international markets than setting up wholly owned subsidiaries abroad.

Answer: Exporting refers to sending of goods and services from home country to a foreign country. Exporting is a better way of entering into international markets than setting up wholly owned subsidiaries abroad in the following ways-

  1. As compared to other modes of entry, exporting is the easiest way of gaining entry into international markets. It is less complex an activity than setting up and managing joint ventures, wholly owned subsidiaries abroad.
  2. Exporting is less involving in the sense that business firms are not required to invest that much time and money as is needed when they desire to enter into joint ventures or set up manufacturing plants and facilities in host countries.
  3. Since exporting does not required much of investments in foreign countries, exposure to foreign investments risks is nil or much lower than that is present when firms opt for other modes of entry into international business.

Q5. Discuss briefly the factors that govern the choice of modes of entry into international business.

Answer: The following are the factors that govern the choice of modes of entry into international business –

  1. Complexity: It is a major factor governing the choice of a mode of entry into international business. The level of complexities differs from one mode to another. For example, starting an export and import business is less complex than setting up and managing joint –ventures or wholly owned subsidiaries abroad.
  2. Risk factor: There is little or no risk involved in contract manufacturing, exporting and licensing modes while risk is comparatively higher in setting up a wholly owned subsidiary.
  3. Ownership and control: Some companies want to have full ownership and decision making control over the foreign company. Therefore they choose wholly owned subsidiary mode to enter into international business. On the other hand modes of entry into international business such as licensing and exporting do not offer ownership rights to the parent company.
  4. Investment: If a company is not in favour of investing more amount of money then it can choose importing and exporting or licensing a foreign company for entering into international business. Thus the mode of entry preferred by a firm depends on its capacity and readiness to make an investment.

Q6. Discuss the major trends in India’s foreign trade. Also list the major products that India trades with other countries.

Answer: India is the tenth largest economy in the world and the fastest growing economy, next only to China. As per the Goldman Sach Report 2004, India is projected to be the second largest economy by 2050. Despite these features, India’s involvement with international business is not very impressive.

  1. India’s share in world trade in 2003 was abysmally low, just 0.8 per cent as compared to those of other developing countries such as China (5.9 per cent), Hong Kong (3.0 per cent), South Korea (2.6 per cent),
  2. Malaysia (1.3 per cent), Singapore (1.9 per cent), and Thailand (1.1 per cent).
  3. Post liberalization, the share of foreign trade in the country’s GDP (Gross Domestic Product) has grown from 14.6% in 1990-91 to 24.1% in 2003-04. Exports and imports have been increasing continuously since then.
  4. India’s total merchandise export was Rs. 606 crore in 1950-51. It has grown to Rs. 293, 367 crore in 2003-04. Thus, there has been an increase of 480 times in exports in the last five decades.
  5. India’s total import was Rs. 6.8 crore in 1950-51. It has grown to Rs. 359, 108 crore in 2003-03. This shows a growth of 590 times over the same period.
  6. Although in overall terms India accounts for just 0.8 per cent 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 percent to 13 per cent. Also it holds the distinct position of being the largest exporter in the world in select commodities such as basmati rice, tea, and ayurvedic products.
  7. India mainly imported crude oil and petroleum products, capital goods (i.e., machinery), electronic goods, pearl, precious and semi-precious stones, gold, silver and chemicals.

Q7. What is invisible trade? Discuss salient aspects of India’s trade in services.

Answer: Service exports and imports involve trade in intangibles. It is because of the intangible aspect of services that trade in services is also known as invisible trade. A wide variety of services are traded internationally and these include : tourism and travel, boarding and lodging ( hotel and restaurants ) entertainment and recreation, transportation , professional services (such as training, recruitment, consultancy and research) , communication (postal, telephone, fax, courier and other audio- visual services), construction and engineering, marketing (e.g, wholesaling, retailing, advertising , marketing research and warehousing), educational and financial services such as banking and insurance). Of these , tourism, transportation and business services are major constituents of world trade in services.

 

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