1 The world economy is globalizing at an accelerating pace.

Discuss this
statement and list the benefits of globalization.
Answer- Globalisation is a process where businesses are dealt in markets around the world, apart
from the local and national markets. According to business terminologies, globalisation is
defined as the worldwide trend of businesses expanding beyond their domestic boundaries. It is
advantageous for the economy of countries because it promotes prosperity in the countries that
embrace globalisation. In this section, we will understand globalisation, its benefits and
challenges.
Global companies !ompanies, which invest in other countries for business and also operate
from other countries, are considered as global companies. "hey have multiple manufacturing
plants across the globe, catering to multiple markets.
"he transformation of a company from domestic to international is by entering #ust one market or
a few selected foreign markets as an exporter or importer. !ompeting on a truly global scale
comes later, after the company has established operations in several countries across continents
and is racing against rivals for global market leadership. "hus, there is a meaningful distinction
between a company that operates in few selected foreign countries and a company that operates
and markets its products across several countries and continents with manufacturing capabilities
in several of these countries.
!ompanies can also be differentiated by the kind of competitive strategy they adopt while
dealing internationally. $ultinational strategy and global competitive strategy are the two types
of competitive strategy.
Global competitive strategy !ompanies adopt this strategy when prices and competitive
conditions across the different country markets are strongly linked and have common synergies.
In a globally competitive industry, a companys business gets affected by the changing
environments in different countries. "he same set of competitors may compete against each other
in several countries. In a global scenario, a companys overall competitive advantage is gauged
by the cumulative efforts of its domestic operations and the international operations worldwide.
A good example to illustrate is %ony &ricsson, which has its head'uarters in %weden, (esearch
and )evelopment setup in *%A and India, manufacturing and assembly plants in low+wage
countries like !hina, and sales and marketing worldwide. "his is made possible because of the
ease in transferring technology and expertise from country to country.
Industries that have a global competition are automobiles, consumer electronics ,like televisions,
mobile phone-, watches, and commercial aircraft and so on.
Benefits of globalisation
"he merits and demerits of globalisation are highly debatable. .hile globalisation creates
employment opportunities in the host countries, it also exploits labour at a very low cost
compared to the home country. /et us consider the benefits and ill+effects of globalisation. %ome
of the benefits of globalisation are as follows0
1romotes foreign trade and liberalisation of economies.
Increases the living standards of people in several developing countries through capital
investments in developing countries by developed countries.

2enefits customers as companies outsource to low wage countries. 3utsourcing helps the
companies to be competitive by keeping the cost low, with increased productivity.
1romotes better education and #obs.
/eads to free flow of information and wide acceptance of foreign products, ideas, ethics, best
practices, and culture.
1rovides better 'uality of products, customer services, and standardised delivery models
across countries.
Gives better access to finance for corporate and sovereign borrowers.
Increases business travel, which in turn leads to a flourishing travel and hospitality industry
across the world.
Increases sales as the availability of cutting edge technologies and production techni'ues
decrease the cost of production.
4 1rovides several platforms for international dispute resolutions in business, which facilitates
international trade.
%ome of the ill+effects of globalisation are as follows0
/eads to exploitation of labour in several cases.
!auses unemployment in the developed countries due to outsourcing.
/eads to the misuse of Intellectual 1roperty (ights ,I1(-, copyrights and so on due to the
easy availability of technology, digital communication, travel and so on.
Influences political decisions in foreign countries. "he $5!s increasingly use their
economical powers to influence political decisions.
!auses ecological damage as the companies set up polluting production plants in countries
with limited or no regulations on pollution.
6arms the local businesses of a country due to dumping of cheaper foreign goods.
/eads to adverse health issues due to rapid expansion of fast food chains and increased
consumption of #unk food.
!auses destruction of ethnicity and culture of several regions worldwide in favour of more
accepted western culture.
7 Compare the Adam mith and Da!id "icardo#s theories of international trade with
e$amples.
Answer-
Adam %miths theory
In one of the most notable book .ealth of 5ations in 899:, Adam %mith attacked the
mercantilism and argued that countries differ in their ability to produce goods and services
efficiently due to variety of reasons. At that time, &ngland, by virtue of their superior
manufacturing processes, were the worlds most efficient textile manufacturers of the world. "his
was due to combination of several factors such as favourable climate, good soils, skilled
manpower and accumulated experience and expertise in textile production. 3n the other hand,
the ;rench had one of the most efficient wine industries of the world. "hus, &ngland had an
absolute advantage in the manufacturing of textiles and ;rance had an absolute advantage in the
production of wine. Adam %mith argued that a country has an absolute advantage if it has one of
the most efficient and cost effective product in comparison to any other country producing it.
%mith argued that countries should specialise in production and manufacturing of goods and
services in which they have an absolute advantage. %uch cost effective and efficient products can
be traded with goods from other countries in which that country has an absolute advantage.
According to %mith, &ngland should specialise in the production of textiles and ;rance should
specialise in the production of wine. 2oth countries should exchange such products of absolute
advantage with each other, i.e. &ngland should sell textiles to ;rance and ;rance should sell wine
to &ngland.
"he crux of %miths absolute advantage theory is that a country should not produce goods at
home in which it does not have cost advantage< instead it should import from other countries.
Absolute advantage theory was based on positive sum game where countries benefit from trade
unlike mercantilism theory which was based on =ero game. !aselet tabled as under illustrates
the benefits of absolute advantage theory.
)avid (icardos theory
)avid (icardo, in his notable book 1rinciples of 1olitical &conomy published in 8>89 came up
with an improvement on Adam %miths absolute advantage theory. (icardo argued what might
happen if one country has an absolute advantage in the production of all goods. Adam %miths
theory suggests that such a country might not have benefitted from international trade as trade is
positive sum game and countries prosper only if they exchange the goods in which they have
absolute advantage.
(icardo argued that it was not the case and showed that countries should trade goods with each
other where they have comparative cost advantage. ;or a sustainable economic system, (icardo
argued that a country should specialise in the production of those goods that it can produce most
efficiently and import the goods which it produces less efficiently even if it has absolute cost
advantage in the production of those goods. 1ractical case on comparative cost advantage is
tabled as under0
? "egional integration is helping the countries in growing their trade. Discuss this
statement. Describe in brief the !arious types of regional integrations.
Answer0 (egional integration can be defined as the unification of countries into a larger whole. It
also reflects a countrys willingness to share or unify into a larger whole. "he level of integration
of a country with other countries is determined by what it shares and how it shares. (egional
integration re'uires some compromise on the part of participating countries. It should aim to
improve the general 'uality of life for the citi=ens of those countries.
In recent years, we have seen more and more countries moving towards regional integration to
strengthen their ties and relationship with other countries. "his tendency towards integration was
activated by the &uropean *nion ,&*- market integration. "his trend has influenced both
developed and developing countries to form customs unions and ;ree "rade Areas ,;"A-. "he
.orld "rade 3rganisation ,."3- terms these agreements of integration as (egional "rade
Agreements ,("A-.
Types of Integration
Preferential trading agreement:- 1referential trading agreement is a trade pact between
countries. It is the weakest type of economic integration and aims to reduce taxes on few
products to the countries who sign the pact. "he tariffs are not abolished completely but are
lower than the tariffs charged to countries not party to the agreement. India is in 1"A with
countries like Afghanistan, !hile and %outh !ommon $arket ,$&(!3%*(-. "he introduction
of 1"A has generated an increase in the market si=e and resulted in the availability and variety of
new products.
Free trade area
;ree "rade Area ,;"A- is a type of trade bloc and can be considered as the second stage of
economic integration. It comprises of all countries that are willing to or agree to reduce
preferences, tariffs and 'uotas on services and goods traded between them. !ountries choose this
kind of economic integration if their economical structures are similar. If countries compete
among themselves, they are likely to choose customs union.
"he importers must obtain product information from all suppliers within the supply chain in
order to determine the eligibility for a ;ree "rade Agreement ,;"A-. After receiving the supplier
documentation, the importer must evaluate the eligibility of the product depending on the rules
pertaining the products. "he importers product is 'ualified individually by the ;"A. "he product
should have a minimum percentage of local content for it to be 'ualified.
Custom union
!ustom *nion is an agreement among two or more countries having already entered into a free
trade agreement to further align their external tariff to help remove trade barriers. !ustom union
agreement among negotiating countries may encompass to reduce or eliminate customs duty on
mutual trade. *nder customs union agreement, countries generally impose a common external
+tariff ,!";- on imports from non+member countries. %uch common external tariff helps the
member countries to reap the benefits of trade expansion, trade creation and trade diversification.
In the absence of common external tariff, there is a possibility that countries with lower custom
duties may become conduits for members which has higher custom duty. !ustom union is third
stage in level of economic integration and is followed only after free trade agreement among
participating countries.
Common market
!ommon market is a group formed by countries within a geographical area to promote duty free
trade and free movement of labour and capital among its members. &uropean community is an
example of common market. !ommon markets levy common external tariff on imports from
non+member countries.
A single market is a type of trade bloc, comprising a free trade area with common policies on
product regulation, and freedom of movement of goods, capital, labour and services, which are
known as the four factors of production. "his agreement aims at making the movement of four
factors of production between the member countries easier. "he technical, fiscal and physical
barriers among the member countries are eliminated considerably as these barriers hinder the
freedom of movement of the four factors of production. "he member countries must come
forward to eliminate these barriers, have a political will and formulate common economic
policies.
A common market is the first step towards a single market. It may be initially limited to a ;"A
with moderate free movement of capital and services, but it is not capable of removing the other
trade barriers.
Benefits and costs
A single market has many advantages. "he freedom of movement of goods, capital, labour and
services between the member countries results in the efficient allocation of these production
factors and increases productivity.
A single market presents a challenging environment for businesses as well as for customers
making the existence of monopolies difficult. "his affects inefficient companies and hence,
results in a loss of market share and the companies may have to close down. 6owever, efficient
companies can gain from the increased competitiveness, economies of scale and lower costs.
%ingle market also benefits the consumers in a way that the competitive environment provides
them with inexpensive products, more efficient providers of products and increased variety of
products.
A country changing over to a single market may experience some short term negative effects on
the national economy due to increased international competition. 5ational companies that earlier
benefited from market protection and subsidies may find it difficult to cope with their efficient
peers. If these companies fail to improve their methods, they may have to close down leading to
migration and unemployment.
Economic union
&conomic union is a type of trade bloc and is instituted through a trade pact. It comprises of a
common market with a customs union. "he countries that are part of an economic union have
common policies on the freedom of movement of four factors of production, common product
regulations and a common external trade policy.
"he purpose of an economic union is to promote closer cultural and political ties while
increasing the economic efficiency between the member countries.
&conomic unions are established by means of a formal intergovernmental legal agreement
among independent countries with the intention of fostering greater economic integration. "he
members of an economic union share some elements associated with their national economic
#urisdictions.
"hese include the free movements of0
Goods and services within the union along with a common taxing method for imports from
non+member countries.
!apital within the economic union.
1ersons within the economic union. %ome forms of cooperation usually exist while framing
fiscal and monetary policies.
Political union
A political union is a type of country, which consists of smaller countries@nations. 6ere, the
individual nations share a common government and the union is acknowledged internationally as
a single political entity. A political union can also be termed as a legislative union or state union.
A %rite short note on&
a' (AT )(eneral Agreement on trade in ser!ices'
b' *+, )*nternational +abour organization'
Answer
(AT )(eneral Agreement on trade in ser!ices'
General greement on Trade in !ervices "GT!# GA"% is a framework agreement defining
the rules under which trade in services must occur. GA"% aims at extending the rules covering
trade in goods to trade in services. A detailed rule has been included to take into account the
differences between goods and services and the way in which trade in services is conducted.
"rade in services cover a wide range of activities in the area of telecommunication, information,
banking, insurance and education. ."3 has recognised over 8BC service sub+sectors.
"he main ob#ective of GA"% is to establish a framework for liberalising trade in services. It
encourages countries to modify their domestic regulations. "his modification results in
elimination of restrictions applied to service products entering the country and is applicable to
international service suppliers who are carrying out business in various modes. According to the
GA"%, $;5 status and transparency is applicable to all services. 3ther commitments such as
national treatment and market access are only applicable to services that are opened according to
the specified negotiated commitments. GA"% covers services known as consumption abroad
where services such as e+commerce are used by the consumers in a host country and citi=ens of a
country travel overseas to consume products such as tourism or education.
4 Trade-$elated spects of Intellectual Property $ig%ts "T$IP!# "he Agreement on
"rade+(elated Aspects of Intellectual 1roperty (ights ,"(I1%- is one of the ."3 agreements
that is compiled by all ."3 members. According to "(I1%, developed and developing members
of ."3 must adopt the same minimum levels of intellectual property protection. "he "(I1%
Agreement includes rules on domestic enforcement procedures. "(I1% Agreement focuses on
issues such as innovation and the dissemination of technology, development of biotechnology,
health care and the operation of multilateral environment agreements.
"he "(I1% agreement states that members can take actions to protect the public health and
nutrition. It encourages protection of new plant varieties. "he members are encouraged to
develop national systems that promote local breeding, rights of farmers and protect human
fundamental human rights which include the right to food and health. It promotes the use and
protection of knowledge that is relevant to the conservation and use of biological diversity. "his
includes knowledge in technology and genetic material. "he 8DDB ."3 "(I1% Agreements
covers copyright and related rights, geographic indications, trademarks, and patents of integrated
circuits, protection of information and control of anticompetitive practices in contractual
licenses.
4 General greement on Tariffs and Trade "GTT# GA"" is a multilateral agreement
among countries providing a framework for conducting international trade. GA"" is regarded as
an international institution governing international trade relations. It consists of disciplines on
governments and matters related to import and export of goods. It was established to promote
international trade by reducing tariff and non+tariff restrictions on imports imposed by member
nations. "ariff barrier refers to imposing import duty and non+tariff barriers means restricting
imports through import licensing and by banning the imports. GA"" provides a framework for
negotiations on the level of tariff. It promotes multilateral trade among member nations. It
provides protection against unfair trade and obstructions to trade.
International &abour 'rganisation "I&'#
International /abour 3rganisation ,I/3- is a specialised agency of the *nited 5ations which
deals with labour issues. "he head'uarters is situated in Geneva, %wit=erland. "he secretariat
comprises of the people employed by the organisation throughout the world. "he secretariat is
known as the International /abour 3ffice. "he I/3 manages work through three main bodies.
"hey are0
International &abour Conference "he members of the I/3 meet at the International
/abour !onference every year in Eune, in Geneva. "wo government delegates along with an
employer delegate and a worker delegate represents their respective member state. "he technical
advisors also accompany the delegates. "he !abinet $inisters are usually responsible for labour
affairs, head the delegations and present
the viewpoint of their government. "he !onference creates and implements standards for
international labour. %ocial and labour issues are discussed in the !onference. It also assigns the
budget of the organisation and elects the Governing 2ody.
Governing Body "he executive council of the I/3 is known as the Governing 2ody. It
meets thrice a year in Geneva and takes decisions on the I/3 policies. It forms programmes and
budgets which are submitted to the !onference for adoption. "he Governing 2ody has 7>
government members, 8A employer members and 8A worker members. "en government seats are
permanently held by states of chief industrial importance. "aking into consideration the
geographical distribution, representatives of other member countries are elected at the
!onference once in every three years. "he representatives are elected by the employers and
workers.
4 International &abour 'ffice "he permanent secretariat of the International /abour
3rganisation is the International /abour 3ffice. It is the central point for all activities that are
administered by the governing body. "he 3ffice is a center for administration, research and
documentation. It employs more than 8,9CC officials from 88C nationalities. "he 3ffice also
organises certain programmes to extend technical help to all member nations. *nder this
programme of technical cooperation, around :CC experts undertake missions in all regions of the
world.
International &abour Code
"he International /abour !ode is composed of !onventions and (ecommendations adopted by
the International /abour !onference. In 8DD9, the !ode contained 8>8 conventions and 8>>
recommendations that covered important sub#ects in labour and social fields. "he main function
of the I/3 is to set international labour standards by adopting conventions and recommendations
covering the ma#or labour+related issues which are referred to as the International /abour !ode.
"he !onference adopts conventions and recommendations which is prepared by the International
/abour 3ffice and the governing body. "he representatives of the member nations bring the
conventions and recommendations to the notice of the authorities.
4 Conventions "hese treaties are not bound to a country unless they are approved by that
country. I/3 conventions that have secured a two+third ma#ority should be presented by the
member country in the !onference. "he I/3 conventions are approved as written and without
reservations. ;lexibility clauses are included in the conventions to accommodate different
climatic conditions or states of development of particular countries.
$ecommendations .hen state practices vary largely, non+binding guidelines known as
recommendations are issued. (ecommendations are issued when the sub#ect is0
4 Fery technical and cannot be handled by a convention.
Already covered by a convention but needs to be addressed in more detail.
$ember states are re'uired to bring recommendations to the attention of their governments.
B %hat is the difference between domestic and international accounting and how
will you measure this difference-
Answer&
(omestic vs) international accounting
)ifferent countries whether domestic or international, have different accounting standards. A
common belief is that these differences reduce the 'uality and importance of accounting
information. Accounting standards determine the financial reporting 'uality and provides
separately verified information about an organisationGs financial performance to investors
creditors.
"hough there are differences in accounting methods, domestic businesses are not affected. "he
accounting system of a domestic organisation must meet the specialised and regulatory standards
of its home country. 2ut, an $5! and its subsidiaries must meet differing accounting and
auditing standards of all the countries in which it operates. "his leads to a need for comparability
between businesses in the group. In order to successfully manage and organise their operations,
local managers re'uire accounting information, which should be prepared according to the local
accounting concepts and denomination in the local currency. Het, for financial controllers, to
measure the foreign subsidiarys performance and worth, the subsidiarys accounts must be
translated into the organisations home currency. "his translation is done using accounting
concepts and measures, which are detailed by the organisation. Investors worldwide look for the
highest possible returns on their capital, in order to interpret the track record, though they use a
currency and an accounting system of their own. "he organisation also has to pay taxes to the
countries where it does business, based on the accounting statements prepared in these countries.
2esides this, when a parent corporation tries to combine the accounting records of its
subsidiaries to produce consolidated financial statements, extra complexities occur because of
the changes in the value of the host and home currencies.
"here are many differences between International Accounting %tandards ,IA%- and )omestic
Accounting %tandards ,)A%-. 3n the basis of difference between the two, two indices, namely
GdivergenceG and GabsenceG, are created. Absence is the difference between )A% and IA%< the rules
on certain accounting issues are missed out in )A% and covered in IA%. )ivergence represents
the differences between )A% and IA%< the rules on the same accounting issue differ in )A% and
IA%.
*easurement of differences bet+een I! and (!
Hou can measure the differences between IA% and )A% in the following way0
&iterature on international accounting differences , (eferring to earlier reports on
international accounting could give more information about the sub#ect. $ost of the earlier
reports understand international accounting differences as various options adopted by nations for
the similar accounting problems, which correspond to divergence concept.
4 Frame+ork of analysis , /inks between variations in accounting standards and financial
reporting 'uality of various countries could be clearly seen from the reports published earlier. .e
should consider the institutional determinants of accounting differences such as legal origin,
governance structure, economic development, and e'uity market.
-ational differences in accounting
3ne of the ma#or problems encountered by an international business is lack of consistency in
accounting standards in various countries. 3rganisations show opposite financial results because
of the differences in accounting standards.
)ifferences in accounting standards exist because of diverse political, legal, economic, and
cultural systems of the countries. Accounting standards and practices are also pre#udiced by the
sources of capital used to fund business. ;igure D.8 shows the influencing factors on a countrys
accounting practices.
Hou might think that accounting systems in the world were uniformly influenced by a few
historical developments. "here could be some similarities but no two countries and their systems
are alike. Accounting systems are developed suiting the countrys specific needs. It is a fact that
different countries evolved in different ways. Accounting systems were influenced by private
ownership, industrialisation, inflation, and so on. .hen there are differences in economic
conditions, it is not surprising to find differences in accounting practices. 6owever, there are
other influencing elements apart from economic factors. "hese are legal systems, educational
systems, socio cultural features, and political systems. "hese also influence the need for
accounting, speed and direction of its development. )ue to the increasing trend in globalisation
of business, understanding various accounting systems is important.
&egal systems
/aw system is divided into civil law and common law in countries worldwide. In countries like
*%, Australia, *I and 5ew Jealand accounting procedures originate from decisions of
independent standards setting boards, such as *% ;inancial Accounting %tandards 2oard ,;A%2-.
&ach board works with professional accounting groups. In countries, which follow common law,
accountants follow Generally Accepted Accounting 1rinciples ,GAA1-, which provides a Gtrue
and fair viewG of the organisationGs performance, based on the standards approved by these
professional boards. $any civil law countries also have a similar approach as that of GAA1.
;unctioning within the limitations of these standards, accountants have freedom to implement
their professional #udgment in reporting a Gtrue and fairG representation of the organisationGs
performance.
!ountries following civil law are likely to codify their national accounting measures and
standards. In these countries, accounting practices are determined by the law. "o assist the legal
role, all business accounting records must be officially registered with the government.
"he way in which the accounting practices are imposed depends on the legal system. $ost of the
developed countries depend on both private and public enforcement of business performance,
though the public or private combination varies from country to country. "he difference of legal
system is a ma#or restriction in the growth of accounting standards. In some countries, the
accounting policies are restricted to detailed legislation, which is passed by governments. "his
restriction forms a ma#or problem to international accounting bodies that are created to increase
harmonisation of national accounting frameworks. "his is because, such government+controlled
regimes are inclined to be less flexible, and perceive private sector influences as less acceptable.
: Discuss the !arious payment terms in international trade. %hich is the safest
method and why-
Answer&- .nderstanding Payment *ec%anism in Foreign Trade-;or successfully conducting
international trade in todays competitive international environment, it is essential for the
exporters to offer attractive sales terms and payments to importers so as to woo them for
business. 3ne of the ma#or concerns for en exporter is to choose the appropriate payment method
in order to minimise risks related to payments of trade transaction. 1ayment should be done after
understanding the economic scenario of importers country, importer credit worthiness and to
certain extent accommodating the needs of the importer. &xporter can choose any mode of
payment depending on risk perception, si=e of deal, importer credit worthiness and economic
situation in importers country.
In case of domestic business, main factor driving salesmans decision criteria for realisation of
payments is based on the buyerGs ability, willingness and honesty to make payment coupled with
exporter trust on buyer. *sually sale in domestic market are on open account and in certain cases
it can be on cash in advance. %uch methods also depend on buyers and sellers power to
negotiate and nature of competition such as0
$onopoly condition will favour to the seller.
1erfect competition will favour to the buyers.
6owever, in case of international trade, exporter has to take more precautions as some methods
of payment are uni'ue and usually used in case of international trade only. Iey consideration
while deciding upon a payment term in foreign trade is elaborated as under.
A. %ome of the ma#or risks involved in realisation of payments in international trade can be
either at importer, importer bank and importers country such as insolvency and default by
importer, insolvency of importer bank and exchange control restrictions, inconvertibility issues
with importers country.
2. %ome of the risks involved in international trade in /iberalisation, 1rivatisation and
Globalisation era can be under control of exporter but some cannot be. ;or example, credit risk
which arises from a change in
the credit worthiness of importer can be covered by &!G!. &xchange (ate ;luctuation risk can
be covered by hedging the currency invoiced in forward contract market but risk such as ;orce
$a#eure which arises from change in policy of a country, which in turn affects the trade
capability, and by a natural disaster cannot be anticipated in complex international
environments/) 3ther risks mainly arises due to a difference in culture, law, or language are also
beyond exporter control.
!. International "rade 3perations offers different types, 'uantum and location of risks, thereby
confusing the exporter with uncertainty over realisation of payments and timing of payments
between the exporter and importer7.
). ;or exporters, any international sale will be e'uivalent to gift until he has not realised the
payment from the importer. ;or importer any payment is donation until he has received the cargo
as sent by exporter.
&. &xporter will always be interested to receive the payments as soon as he@she sends the goods
to importer through shipment. Importer will be willing to delay the payments as he@she will be
interested to sell these goods in markets and then make the payments to exporter.
;. 6owever, the selection criteria for mode of payment is based on mutual negotiation of
exporter and importer and in /1GK$ era there are other parties such as bank, credit insurer
involved which helps in exporter in financing and assuring about the payment.
G. "hough safe mode of payment such as /@! is getting popular, this is not usually used by small
exporters and importers due to heavy transaction costs. ;or example, /@! is used as mode of
payment only in 8AL trade transactions due to heavy transactions costs?.
6. &xporter can alternatively divide the payment category into secure mode and unsecure mode.
"he secure mode of payment for exporter is cash in advance and letter of credit. Unsecure mode
of payment are 3pen Account, )ocuments against Acceptance and )ocuments against 1ayments.
Payment terms in foreign trade
%ince international trade deals with exchange of goods, there are various ways in which the
payment terms ,finance- will be handled.
2othe seller and trader should be careful about the method of payment as they are at different
locations and transactions happen without face+to+face interaction. "here are four methods of
payment for the international transactions. "his includes the !ash+in+advance method, /etter of
!redit, )ocumentary collections and the 3pen Account. "hese are shown in figure 8A.8.
As shown in figure 8A.8, there is uncertainty during the time when payment transactions happen
between importer and exporter. "he figure compares and contrasts the most suitable
methodology from the perspective of importer and exporter. Apparently the most secure
methodologies that work for the exporter is not safe for the importer. ;or exporters, documentary
collection and open account are less secure and letter of credit and cash in advance are more
secure methods. In the same way, with respect to the importer, the letter of credit and cash in
advance are less secure and the documentary collection and open account are more secure. "hese
terms are explained as follows.
Cas%-in-advance
!ash+in+advance helps in removing the risks of credit by the exporter. 2y this method, exporter
receives the payment before the transfer of goods. "he options that are available with the cash+
in+advance method include wire transfers and credit cards. "his is the least attractive method for
many of the buyers as it creates cash flow problems. "he buyers are concerned about the
'uality@'uantity and delivery of the goods that are not sent if the payment is made in advance.
&etters of credit
"he letter of credit is the most secure instrument available for international traders. "his is the
commitment made by the bank that the payment will be made to the exporter if the terms and
conditions are met. "he terms and conditions of the payment are explained in the re'uired
documents.
(ocumentary collections
)ocumentary collection is a transaction in which, the exporterGs bank ,remitter bank- sends the
documents to the importerGs bank ,collecting bank-. "he document contains information about
the payment. "he funds are collected from the importer and paid to the exporter through the
banks involved in the collection, in exchange for the documents.
'pen account
"he open account transaction involves the shipping and delivery of goods in advance. "he
payment is due usually from ?C to DC days. "his is advantageous for the importer in cash flow
and cost terms, but at the same time it is very risky for the exporters. 2uyers from abroad stress
on open accounts since the extension of credit from the seller to the buyer are more common in
many countries. &xporters who avoid extending credit may face loss in the sale because of
competitors in the market.
&etter of credit
International "rade is affected by distance, laws, political instability and lack of familiarity by
the transacting parties. /etter of credit assumes significance since it can be used to mitigate risk.
It is a document that is issued by the bank that guarantees payment to a beneficiary. It is written
by the financial institution in favour of the importer of goods to the seller. In the letter, the bank
promises that it will honour the drafts drawn on it if the seller confirms to the specific conditions
that are set forth in the letter of credit. "he process of letter of credit works as shown under0