Académique Documents
Professionnel Documents
Culture Documents
PROCEDURE
MARKETING EXPORT &
DECISION
PROMOTION DOCUMENTS
EXPORTS
PAYMENTS
INTERNATIONAL TRADE
UNIT ONE:
UNIT TWO:
UNIT THREE:
UNIT FOUR:
Procedure for execution of Export order – Export of Goods – Export by Air and
Sea – Export Documents (Quality control and Preshipment Inspection) –
Marine Insurance.
UNIT FIVE;
REFERENCE BOOKS:
INTERNATIONAL BUSINESS ENVIRONMENT – FRANCIS CHERUNILAM
MAHESWARI.
INTERNATIONAL TRADE
UNIT ONE
Kotler defines marketing as 'human activity directed at satisfying needs and wants through
exchange process.' International marketing can be defined as "marketing carried on across national
boundaries".
International marketing has also been defined as ' the performance of business activities
that direct the flow of goods and services to consumers or users in more than in one nation'. It is
different from domestic marketing in as much as the exchange takes place beyond the frontiers,
thereby involving different markets and consumers who might have different needs, wants and
behavioral attributes.
Opening a branch/ subsidiary abroad for processing, packaging, assembly or even complete
manufacturing through direct investment.
Negotiating licensing/ franching arrangements whereby foreign enterprises are granted the
right to use the exporting company's know-how's, viz., patents, processes or trademarks
with or without financial investment.
Establishing joint ventures in foreign countries for manufacturing and or marketing and
Offering consultancy services and undertaking turnkey projects broad.
Depending upon the degree of firm’s involvement, there may be several variations of these
arrangements.
There are a number of similarities and differences between international and domestic
marketing.
1. Both in domestic marketing and international marketing success depend upon satisfying the
basic requirements of consumers. This necessarily involves finding out what the buyers
want and meeting their needs accordingly.
2. It is necessary to build goodwill both in the domestic market and international market. If a
firm is able to develop goodwill of consumers or customers, its tasks will be simpler than the
one, which has not been able to do so.
3. Research and development for product development and modification is necessary both for
international marketing and domestic marketing.
However, there are some salient features of difference between international marketing and
domestic marketing. They are as follows:
1. Sovereign Political Entities: Each country has is a sovereign political entity and goods and services
had to move across national boundaries. S a result, they may have to face a number of restrictions.
This my fall in any of the following categories;
Quantitative restrictions
Exchange controls
Local Taxes.
2. Different Legal Systems: Each country has its own legal system and it differs from country to country.
The existence of different legal systems makes the task of businessmen more difficult as they are not
sure as to which particular system will apply to their transactions. In the case of domestic marketing
the buyers are aware of the legal systems in their country.
3. Cultural Differences: In domestic marketing there is only one nation, same language and culture
where as at international marketing many languages and different cultures.
4. Different Monetary Systems: Each country has its own monetary system and the exchange value of
each country's currency is different from that of the other. The exchange rates between currencies
fluctuate every day. In case of domestic marketing there is only one currency prevailing in the
country.
5. Differences in the Marketing infrastructure: The availability of the marketing facilities available in
different countries may vary widely. For example, an advertisement medium very effective in one
market may not be available or may be under developed in another market.
6. Trade Restrictions: Trade restrictions, particularly import controls are a very important problem
which an international marketer faces.
7. Transport Cost: In International trade, transport cost is a major marketing expense where as in
domestic trade transport cost influences only to certain extent.
8. Procedures and Documentations: Each country has its own procedures and documentary requirements
and traders have to comply with these regulations if they want to export or import goods from
foreign countries.
9. Degree of Risk: There is a greater degree of risk involved in international marketing than in domestic
marketing due to
The Decision to enter foreign markets must be based on strong economic factors. Temperamental
decision to export is transient in character and totally unsuitable for export marketing. Success in
exporting requires total involvement and determination, which can come only out of basic economic
necessity as perceived by the corporate unit. They grouped as Pre-export behaviour and Motivation
to Export.
1. Pre-Export Behaviour:
Every firm at some point of time starts as a non-exporter. The point to be studied is what
made some of these firms get involved in export business. This must give a clue to the question as
to whether a present non-exporter will become an exporter and if so why and when. The factors,
which influence a non-exporting firm's decision to go in for export business, can be classified under
the following categories:
(a) Firm characteristics: Firm characteristics include product characteristics; size and
growth of the domestic market, optimum scale of production, and potential export
markets. If the firm is manufacturing a product, which is internationally marketable, and
the present and future market prospects in the domestic market are not much
encouraging, the motivation of the firm to get involved in export business will be
considerable.
(b) Perceived External Export Stimuli: This will include fortuitous order, market opportunity
and government's stimulation in the form of incentives and assistance.
(c) Perceived Internal Export Stimuli: This refer to the management's expectations about
the effects of exports on the firm's business. This covers the level of capacity utilization,
the higher level of profits and the growth objectives of the firm.
(d) Level of Organizational commitment: The decision makers must agree on the level of
commitment. This is crucial because it will determine whether adequate resources will
be made available for embarking on international marketing. Resources will be required
for hiring new staff specialized in international marketing, hiring of consultants for
carrying out overseas market potential studies etc.,
There are some basic economic reasons which might influence a firm decision regarding export
business: These are under:
Relative Profitability: The rate of profit to be earned from export business may be higher
than the corresponding rate on the domestic sales.
Insufficiency of Domestic Demand: The level of domestic demand may be insufficient for
utilizing the installed capacity in full. Export business offers a suitable mechanism for
utilizing the unused capacity. This will reduce costs and improve the overall profitability of
the firm. Recession in the domestic market often serves as a stimulus to export ventures.
Reducing business risks: When a firm is selling in a number of markets, the downward
fluctuations in sales in one market, which may be the domestic market, may be fully or
partly counter balanced by a rise in the sales in other markets. Secondly, geographic
diversification also provides the momentum to growth in as much as a single or few markets
will have only limited absortive capacity.
Legal restrictions: Governments may impose certain restrictions on further growth and
capacity expansion of some firms within the domestic market in order to achieve certain
social objectives. But there may not be any such restrictions, if the additional capacity is
utilized for exports. Then the firm may be tempted to export its products abroad.
Obtaining imported inputs: Nations have to pay for imports of materials, technology or
processes not available within their national boundaries. Governments, therefore, may be
compelled to impose export obligations on the firms, especially those in need of imported
inputs. In other words, in order to import, the firms will have to export.
Social responsibility: Sometimes businessmen themselves feel a sense of responsibility and
contribute towards the national exchequer by increasing their exports. They also build up
their image in domestic marketing by their export activities. They also look at exporting to
attain status and prestige.
Increased productivity: Increased productivity is necessary for ultimate survival of a firm.
This will lead the firm to increase production and then move to export business. To meet
the increased costs of Research and Development, larger markets become a necessity and
exports become unavoidable.
Technological improvement: Entry to export market may enable a firm to pick up new
produce ideas and to add to product line, improve its product, reduce costs and discover
new applications for its product.
SPECIAL DIFFICULTIES IN INTERNATIONAL MARKETING
There are a number of difficulties in undertaking international business. Some of them the
special difficulties are as follows:
Controllable Factors:
Control will have to be defined with reference to a company's management. The company is
in a position to control and design marketing mix elements i.e. product, price, export to any place by
choosing any distribution channels and follow any promotional methods.
Uncontrollable Factors:
There are some factors on which the company can not have any control. Such
uncontrollable factors in international marketing are described here.
SOCIAL FACTORS:
In short, the type of products to be manufactured and marketed, the marketing strategies to
be employed, the way the business should be organized and governed, the values and norms it
should adhere to, are all influenced by social structure and the culture of a society. The tastes and
preferences, purpose of consumption, method of consumption, occasion of consumption, quantity
of consumption, values associated with consumption, etc of a product may show wide variations
between cultures.
Because of cultural differences, a promotion strategy that is very effective in one market
may utterly fail in another, or may even result in social or legal reprisals. Etiquettes differ from
culture to culture. The ways of meeting and greeting people, expression of appreciation or
disapproval, methods of showing respect, ways of conducting meetings and functions, table
manners etc. vary quite widely between cultures. So familiarity with cultural is necessary for
success.
The other social factors which influences the international marketing inclusive of
The following political and government factors must be taken into consideration by an
international marketer while planning to entry any market abroad:
ECONOMIC FACTORS:
I. Commercial policy variables e.g. tariffs, quotas, licensing or any other non-tariff
barriers.
II. Currency restrictions - depending on the policy of the central bank of the country.
III. Internal demand management policies and instruments followed by the country.
The exporters have to be thorough with the above policies and adjust them accordingly.
DEMOGRAPHIC FACTORS:
Demographic factors such as size of the population, population growth rates, age
composition, ethic composition, family size, family life cycle, income levels, have very significant
implications for business. The demographic environment differs from country to country and from
place to place within the same country or region. Further, it may change significantly over time.
Because of the diversity of the demographic environment companies are sometimes compelled to
adopt different strategies within the same market
COMPETITON:
Competition will also influence the international marketing. As like domestic marketing the trader
always aware of his competitors. But the quantum of competitors is more in international marketing
than domestic marketing. Normally by the following ways the international merchant will face the
competitors.
LOGISTICS:
Logistics is that part of the supply chain process that plans, implements, and controls the
efficient, effective forward and reverses flow and storage of goods, services, and related information
between the point of origin and the point of consumption in order to meet customers'
requirements. The concept of logistics play vital role in international marketing by the ways sense.
The merchant has to seek the availability of required type of transport such as sea,
air freezer space, etc.
Cost of transportation.
Unless the exporters are in a position to meet the above requirements of transport facilities and
costs they cannot export their products to the target markets.
RISKS:
CONCEPT OF GLOBALIZATION
"Globalization means the production and distribution of products and services of a homogeneous
type and quality on a world wide basis”. Globalization also means globalizing the marketing,
production, investment, technology and other activities. How do these happen? Globalization does
not take place in singly instance. It takes place gradually through and evolutionary approach.
FEATURES OF GLOBALIZATION
BUSINESS FREEDOM:
There should not be unnecessary government restrictions which come in the way of globalization,
like import restriction restrictions on sourcing finance or other factors fro broad foreign investments
etc.
FACILITIES:
The extent to which an enterprise can develop globally from home country base depends on the
facilities available like the infrastructural facilities.
GOVERNMENT SUPPORT:
RESOURCES:
Resources is one of the important factors which often decides the ability of a firm to globalize.
Resourceful companies may find it easier to thrust ahead in the global market.
COMPETITIVENESS:
The competitive advantage of the company is a very important determinant of success in global
business. A firm may derive competitive advantage from any one or more of the factors such as low
costs and price, product quality product, product differentiation, technological superiority, after
sales service, marketing strength etc.
ORIENTATION:
A global orientation on the part of the business firms and suitable globalization strategies are
essential for globalization.
ADVANTAGES:
Free Flow of Capital: Globalization helps for free the flow of capital from one country to the other. It
helps the investors to get a fair interest rate or dividend and the global companies to acquire finance
at lower cost of capital. Further Globalization increases capital flows from surplus countries to the
needy countries, which in turn increases the global investment.
Free flow of Technology: Globalization helps for the flow of technology from advanced countries to
the developing countries. It helps the developing countries to implement new technology.
Increase in Industrialization: Free flow of capital along with the technology enables the developing
countries to boost-up industrialization in their countries.
Spread up Production facilities throughout the Globe: Globalization of production, leads to spread
up manufacturing facilities in all the global countries depending upon the locational various
favorable production factors.
Balanced development of world economies: With the flow of capital, technology and locating
manufacturing facilities in developing countries, the developing countries industrialize their
economies. This in turn leads to the balanced development of all the countries.
Increase in Production and Consumption: Increased industrialization in the globe leads increase in
production and thus results in balanced industrial development along with increase in income which
enhances the levels of consumption.
Lower prices with high quality: Indian consumers have already been getting the products of high
quality at lower prices. Increased industrialization spread up of technology, increased production
and consumption level enable the companies to produce and sell the products of high quality t lower
prices.
Cultural exchange and demand for variety of products: Globalization reduces the physical distance
among the countries and enables people of different countries to acquire the culture of other
countries. The cultural exchange, in turn makes the people to demand for a variety of products
which are being consumed in other countries. For example, demand for American Pizza in India and
Masala dosa and Hyderabad Briyani and Indian styled garments in USA and Europe.
Increase in Employment and Income: Globalization results in shift of manufacturing facilities to the
low wage developing countries. As such, it reduces job opportunities in advanced countries and
alternatively creates job opportunities in developing countries.
Higher Standards of Living: Further, globalization reduces prices and thereby enhances consumption
and living standards of people in all the countries of the world.
Balanced Human Development: Increase in industrialization on balanced lines in the globe, improves
the skills of the people of developing countries. Further, the increased economic development of
the country enables the government to provide welfare facilities like hospitals educational institutes
etc. which in turn contributes for the balanced human development across the globe.
Increase in the Welfare and Prosperity: The balanced industrial, social and economic development of
the world nations consequent upon the globalization along with the welfare measures provided by
the governments lead to increase in the welfare of the people and prosperity of the world countries.
DISADVANTAGES:
Globalization kills Domestic Business: The MNCs from advanced countries utilize the opportunities
created by globalization, establish manufacturing and marketing facilities in developing countries.
The domestic business of the developing countries fails to compete with the MNCs on the
technology and quality front.
Exploits Human Resources: The foreign companies which are located in developing countries
invariably violate the labor and environmental laws in order to have the cost advantage. These
companies employ child labor, pollute environment, and ignore workplace safety and health issues.
However, it is viewed that, globalization enables the developing countries to become rich and
enforce the labor and environmental regulations.
MNCs produce the products in their home countries or in some other foreign countries and market
in developing countries. Therefore, the domestic country’s operations are to be reduced. This in
term leads to reduction in employment opportunities particularly in less developed countries.
Decline in demand for domestic products: Selling of high quality foreign products at low prices by
MNCs reduces the demand for the domestic products.
Decline in Income: Unemployment and decline in demand for domestic products of both industrial
agricultural goods leads to reduction in income of the people.
Widening gap between rich and poor: Globalization not only results in decline in income but widens
the gap between rich and poor. This is because, competent people, people with innovative skills,
efficiency etc., get abnormal income, while other average people have to strive for even a minimum
wage. This results in widening the gap between have and the have-nots,
Transfer of natural resources: MNCs establish their manufacturing facilities in developing countries
exploit their natural resources and sell the products in other countries. Through these means, the
natural resources of developing countries are transferred to other countries.
UNIT TWO
In developing a foreign operation, the marketer has to take four decisions. These are:
Marketing Decision
Marketing selection decision
Market entry decision
Marketing Mix Decision
Marketing Decision:
All the business involves risk. One of the risk element is sudden fall in demand. In such
circumstances the firm which concentrating only domestic market will find thread about its survival.
At the same time if the company is doing international trade they can concentrate for international
market to balance the fall in demand in domestic market.
When a firm thinks of entering into an international market, it should develop a marketing
strategy to be used for both domestic and foreign business. Before taking the marketing decision of
entering into international market it should satisfy itself for the following questions.
1. Are there any opportunity open to firm and its product in abroad?.
2. Whether it can meet the demand in domestic as well as in international market?
3. Whether it can adapt the product according to the needs of the consumers?
4. Whether it can formulate and implement a policy and regulations pertaining to exports
and imports?
Even if the opportunities appear favorable, the firm must have the resources in men, money and
materials to capitalize them.
To be successful in initial exports, the first step is to choose the right place for the initial
export venture, so that the returns may be quicker and certain, and the risks may be minimum. No
firm has unlimited resources. A proper selection of markets would ensure that time and efforts are
not wasted.
While selecting initial markets for exports, the trader should consider the following points
carefully:
Select one or two markets initially so that is the activity may be within manageable units:
Smaller less obvious markets should not be overlooked. It would be unwise to sell in the
more competitive European market, when a less competitive Arab or African market is
available;
It is advisable to spend some time and money on visiting the overseas market. This will
enable the marketer to solve many practical problems.
Enter the export business only when the marketer is sure of its profitability.
Do not enter those markets where there are a lot of import restrictions;
Take guidance from government and non-government institutions.
Collect the latest data on export surveys and commercial intelligence from India's
Commercial Representatives abroad;
Collect the address of potential customers abroad and start correspondence with them;
avoid any trade disputes; but if such disputes arise, settle them amicably.
Make certain at the start that your export business is going to be profitable.
Find a need and fill it, this will ensure success.
SELECTION OF MARKET:
The company in this connection has to take the following steps so that it can ultimately
choose one or two markets of its choice:-
1) The company should examine export statistics of the product from its country. The company
can look into these statistics and find out where the products are exported. The concerned
export promotion council also publishes such statistics.
2) It should examine import statistics of the product in the target markets.
3) The company can also visit some Government offices, libraries, trade associations to find out
the policy, names of importers etc.
4) The company also has discussion with some successful exporters.
5) It can also have discussions with Commodity boards, ECGC, etc
6) It may also contact our Trade representative located in our Embassies and High commissions
abroad.
7) It may also contact Foreign Embassies and High Commissions located in India.
8) The company can also send some officers to the target markets to find out the market
conditions there.
9) It can take part in trade fairs and exhibitions conducted by ITPO and other agencies.
10) It must also find out economic, social and cultural factors in the target markets.
11) It must also decide whether it should choose one market or a few markets.
After examining various details as above the exporters have to avoid a market in the following
cases:
The marketing firm should have a set of decision criteria for selecting the target markets.
While the complete set will have to take into account the product and marketing characteristics of
specific products, some of the common elements are:
(ii)Growth:
It is enough that the market is existing but it should also be in the growth stage. Higher scales over
time become easier when the overall demand is increasing. It is not enough if additional sales come
at the cost of the competitions.
(iii) Logistics:
Dispatching the goods to the right place at the right time is the essence of all marketing, including
international marketing. Inadequate logistic support can play havoc in the planning of export
shipments, which will jeopardize any marketing efforts. Further , in the case f certain products,
special types of logistic infrastructure is necessary.
(iv) Distance:
The transport cost and distance are intimately correlated. For low-valued items, the incidence of
higher transport cost may reduce export competitiveness quite appreciably. The selection process
of the target market will have to take this factor into account.
(v) Competition:
The nature and extent of competition is a very crucial factor to reckon with. A thorough study will
have to be made to determine how the firm's product profile compares with that of the competitive
product line. The firm will have to evaluate whether it is in a position to match such competition
onslaught.
The availability of a capable agent or distributor is a very important consideration, especially for
products requiring pre-selling, such as demonstration and post-selling, such as after- sales services. A
good distributor is essential. Even if a market is otherwise promising, if no good distributor or agent
is available, the company should think twice before deciding to enter that market, unless it is in
position to set up its own office there.
THE MARKET ENRTY DECISION:
Once the target market has been identified, the next step relates to the decisions regarding
the alternative methods of entry. The various methods of market entry open to firm in a given
country are:
Indirect exporting
Direct Exporting
Licensing
Franchising
Joint Venture
Foreign subsidiaries
Special Modes
INDIRECT EXPORTING:
The indirect way of exporting is almost equivalent to domestic sales. The firm sells its
products in its country to another party, who takes the responsibility of actual export. This can be
done by:
There are many merchant exporters and or recognized export houses in India, which are
willing to buy goods from the Indian manufacturers and sell them abroad. Merchant exporters or
export houses sell and buy on their account and thus assume the risks involved in exporting. A
merchant exporter is free to decided what he will buy, where he will buy and at what price.
Merchant exporters are usually well financed and maintain their branches at port towns and in
important centers abroad. They usually have a system of gathering market information and keep a
close watch on market trends. This method of exportation is useful when the company is small and,
therefore, not in position to start an export department to like after exports sales.
Many big foreign companies have their resident buying representatives in India and other
countries who are entrusted with the job of procurement. Some other companies regularly send
buying teams for the same purpose. The amount of business that is conducted by such buying
operations is substantial. The advantage of selling in this way is similar to what had been mentioned
for exporting through export houses.
It involves little time or effort because the merchant exporter takes care of all the difficulties
involved and assumes all the sales and credit risks;
It requires less investment and the firm's capital is not tied up;
It carries less risk, and the firm does not have to spend money on market research or on
setting up branches abroad;
It makes possible the utilization of the know-how and experience of middlemen;
The manufacturing firm is free to concentrate on production.
Disadvantages of Indirect Exporting:
For practical purposes, the manufacturer cannot be called an exporter, and he cannot claim
or avail of export incentives given on a fairly liberal scale;
Indirect exporting provides little control over the operations of middlemen. Export
merchants may concentrate on the products, which offer them the greatest profit. The
small manufacturer's products may be ignored.
The middleman, particularly the agent on commission basis, may not be aggressive, with the
result that sales may suffer;
Export merchants middlemen may not be available for all the markets.
DIRECT EXPORTING:
In case the firm decides not to operate through any of the intermediaries described in the
earlier paragraphs, and opts for direct exporting, it will have to choose most carefully between one
and or the other kind of export sales organization to be created. If its export plans are ambitious
and the prospects of selling in a number of markets are promising, it may make a modest start-
appoint an export manager plus a clerk. Depending upon the firm's export sales turnover, existing
and potential, it may create/set up a separate export department or even a separate export
company. Direct Exporting may also be undertaken by:
Setting up a sales branch or a subsidiary sales organization in a foreign country, which may
be a substitute for, or a supplement to the home organization;
Appointing home-based sales representatives, who would travel abroad and book orders;
Selecting suitable distributors in a foreign country who would buy his product and sell it
there, or suitable agents in that country who would sell it on commission basis without
taking any title to it.
Advantages of Direct Exporting:
Under this method, the manufacturer enters into an agreement with a licensee in the
foreign country and this gives him the right to use the manufacturing process, a patent design or a
trademark, technical information or some facility in return for some fee or royalty. It is often the
quickest way of entering overseas markets - sometimes the only possible way as in centrally planned
economies. It is clearly a method that involves little expense, and avoids all distribution costs.
Advantages Disadvantages
Licensing mode carries low investment on the Licensing agreements reduce the market
part of the licensor. opportunities for both licensor and licensee.
Licensing mode carries low financial risk to the Both the parties have the responsibilities to
licensor. maintain the product quality and promoting
the product. Therefore one party can affect
the other through their improper acts.
Licensor can investigate the foreign market Costly and tedious litigation may crop up and
without much effort on his part. hurt both the parties and the market.
Licensing gets the benefits with less There is scope for misunderstanding between
investment on research and development. the parties despite the effectiveness of the
agreement.
License escapes himself from the risk of There is a problem of leakage of the trade
product failure. secrets of the licensor.
FRANCHISING:
Franchising is also a form of licensing. The franchisor can exercise more control over the
franchise compared to that in licensing. Under franchising, an independent organization called the
franchise operates the business under the name of another company called franchisor. The
franchisor provides the following services to the franchisee:
Trade marks
Operating system
Product reputations
Continuous support systems like advertising, employee training, reservation service, and quality
assurance programme etc.
Advantages Disadvantages
Franchisor can enter global markets with low International franchising may be more
investment and low risks. complicated than domestic marketing.
Franchisor can get the information regarding It is difficult to control the international
the markets, culture, customers and franchisee.
environment of the host country.
Franchisor learns more lessons from the Franchising agents reduce the market
experiences of the franchisees, which he could opportunities for both the franchisor and
not experience from the home country’s franchisee.
market.
Franchisee can early start a business with low Both the parties have the responsibilities to
risk as he selects an established and proven maintain product quality and product
product and operating system. promotion.
Franchise gets the benefit of R & D with low There is a problem of leakage of trade secrets.
cost.
JOINT VENTURE:
A joint venture involves a capital partnership and may be arranged for manufacturing
activities, marketing activities, or both. This takes place when:
FOREIGN SUBSIDIARIES:
The marketer establishes a subsidiary manufacturing unit in a foreign country. He is its
exclusive owner and controller, the monarch of all that it contains. This is the culmination of
international marketing. It is international production-cum marketing. When a company engages in
such production in a number of countries, it is called multinational company.
A. Contract Manufacturing:
Some companies outsource their part of or entire production and concentrate on marketing
operations. This practice is called the contract of manufacturing or outsourcing.
B. Management Contracts:
The companies with low level technology and managerial expertise may seek the assistance of a
foreign company. Then the foreign company may agree to provide technical assistance and
managerial expertise. This agreement between these two companies is called the management
contract.
C. Turnkey projects:
A turnkey project is a contract under which firms agrees to fully design, construct and equity a
manufacturing/business/service facility and turn the project over to the purchaser when it is ready
for operations for a remuneration. International turnkey projects include nuclear power plants, air
ports, oil refinery, national highways, railway lines etc.
Market research is a complete analysis of the market. Information regarding the nature,
size, organization, profitability of different markets, changes in markets and various factors, such as
economic, social and political, affecting those changes are studies vigorously. The main purpose of
market research is to know about the consumers and markets of the exporter's products and
services. The research is mainly concerned with details regarding consumers. The research is mainly
concerned with details regarding consumers.
Marketing research covers all aspects of the marketing activities such s markets, products,
consumers, advertisements, sales promotion techniques, channels of distribution, warehousing,
transport, pacing problems etc relating to firm's product while on the other hand market research
emphasis research on the market and market segments and consumers and their behaviour. Thus
the market research is only a part of marketing.
Market research is required to identify which markets should be selected as the target,
based on the market size, growth, accessibility and competitive factors.
Identification of suitable products is also dependent upon research. Detailed field research
investigations are required to determine the extent of product adaptation required to make
the product acceptable in a given market.
Research can help prevent the use of inappropriate market entry method.
Research can help to determine the positioning of the product, taking into account the
socio-cultural factors.
Promotional campaigns should be decided only when proper research has been carried out
regarding their acceptability in a given environment.
Research also helps in taking appropriate packaging decisions.
Considerable amount of data collection and analysis are required to arrive at pricing
decisions. Pricing is crucial for success in international marketing and a blunder can mar all
prospects.
It is useful in converting uncertainty into certainty. Marketing research by providing
information on market information on market environment, reduces uncertainty in it and
makes the environment known. The uncertainty is mitigated.
The research becomes inevitable when the income, fashion, habits and preferences are
changing very fast.
The needs for research also arise when the sale of the product is showing a downward trend
and the reason for the fall could not be established.
METHODOLOGY FOR MARKET RESEARCH:
Market research in almost all cases is carried out into two phases: viz., Desk research and
field research. Stepwise formulation of a research plan comprising both desk and field research
will be as follows:
Desk research is the first phase of the marketing research. It involves collection of all relevant
information from known published and unpublished documentations available within and outside
the organization.
This information can be had from any published documents which may provide data on the
problems to be analysed. However before relying on any published documents the researcher
should consider the following points:
Political situation Bank reports, press reports and IMF year book
FIELD RESEARCH:
An analysis of data collected from desk research would reveal the gaps in information that
still remain. Generally speaking product specific marketing in formations are not available from
secondary (desk) sources. Going directly to the market may cover the gaps in information. There are
two specific important steps before field research can be undertaken viz., design and testing of a
questionnaire and preparation of a sample of respondents. In order to secure the best possible
return on the limited time that can be spent on export market research.
Field research can be conducted through personal interviews, telephone interviews and
stores checks. Of the three methods, personal interview is the most dependable if reliable data are
to be required. Unfortunately, however, in many developing countries, the personal interview
presents special problems for two main reasons. First the recruitment of interview is difficult and ins
some cultures it is impossible to recruit female interviewers at all.
(Refer Research methodology book for further details for the above said techniques)
COMPETITIVE INTELLIGENCE:
Modern marketing is very competitive. Modern business is a many sided game in which
rivals and opponents continuously try to formulate strategies to gain advantage over one another.
Predicting the behaviour of one's competitors and outguessing of the competitor will need the
services of marketing intelligence. A marketer cannot survive under keen competitions without up to
date market information particularly regarding the nature, character and size of competition to be
met. It is therefore, necessary for the exporter to obtain competitive intelligence and make a study
about competitions for his products. Regarding that the trader should have answer for the following
questions about his competitors:
Basic Factors:
What are the competitive products are sold in that particular country?
Who are their local officers, and how good are they?
What problems do the face, and how are they trying to solve them?
Finance:
What are their financial resources and how do they finance expansion?
Production:
Marketing:
What are their advertising media? How much cost is incurred regarding that?
What credit, pricing, and other terms are extended by foreign suppliers?
One of the distinctive features of international marketing is that exporters have to deal with
different legal systems. An Indian exporter selling his product to an importer, say in the USA, must
contend with the fact that US laws may well have some influence either on the contractual terms to
be agreed upon between him and the importer, or on the settlement of disputes, if any arising out of
the contract. The function of a sales contract is to set forth in writing what one party agrees to do
for the other and what each may expect of the other.
The elements or the clauses of an export contract vary depending upon the nature of
product being exported. There are, however, some elements that are almost universal in their
application. These elements are as follows:
Managing any business strategically needs an understanding of the business policies. But in case of
global companies, an understanding of trade policies is more essential. International trade policies
deal with the policies of the national governments relating to exports of various goods and services
to various countries either on equal terms and conditions or on discriminatory terms and conditions.
Government announces their trade policies with regard to the following from time to time.
They are also called the instruments of trade policy. They are: Tariffs, Subsidies and Import quotas.
TARIFFS
Tariff refers to the tax imposed on imports. It is a duty or tax imposed on internationally traded
commodities when they cross the national borders. The objectives of Tariffs are
Tariff affect on economy in different ways. An import duty generally has the following effects:
Protective effect:
An import duty is likely to increase the price of imported goods. This increase in the price of imports
is likely to reduce imports and increase the demand for domestic goods. Import duties may also
enable domestic industries to absorb higher production costs. Thus, as a result of the protection by
tariffs, domestic industries are able to expand their output.
Consumption Effect:
The increase in prices resulting from the levy of import duty usually reduces the consumption
capacity of the people.
Redistribution Effect;
If the import duty causes an increase in the price of domestically produced goods, it amounts to
redistribution of income between the consumers and producers in favor of the producers. Further a
part of the consumer income is transferred to the exchequer by means of the tariff.
Revenue Effect:
The tariff may cause a switch over from spending on foreign goods to spending on domestic goods.
This higher spending within the country ay cause an expansion in domestic income and employment.
Competitive Effect:
The competitive effect on the tariff is, in fact, an anti-competitive effect in the sense that the
protection of domestic industries against foreign competition may enable the domestic industries to
obtain monopoly power with all its associated evils.
QUOTAS
Quota is direct restriction on the quantity of goods which are imported into a country. These
restrictions are imposed by issuing import licenses to certain firms and individuals to import certain
quantity of the goods. India had quotas of imports of various goods like cars, motor cycles, milk etc.
up to 31st march 2001. Import quotas provide the protection to the domestic firms from the foreign
countries.
IMPACT OF QUOTAS
As quotas enable a country to restrict the aggregate imports within specified limits, quotas are
helpful in improving its balance of payments position.
Price Effect:
As quotas limit the total supply, they may cause an increase in domestic prices.
Consumption Effect:
If quotas lead to an increase in prices, people may be constrained to reduce their consumption of
the commodity subject to quotas or some other commodities.
Protective Effect:
By guarding domestic industries against foreign competition to some extent, quotas encourage the
expansion of domestic industries.
Redistributive Effect:
Quotas also have a redistributive effect if the fall in supply due to important restrictions enables the
domestic producers to raise prices. The rise in prices will result in the redistribution of income
between the producers and consumers in favour of the producers.
Revenue Effect:
Quotas may also have a revenue effect. As quotas are administered by means of licences, the
government may obtain some revenue by charging a licence fee.
Quotas may affect the terms of trade of the country imposing them. The effect of quotas on the
terms of trade depends upon the elasticity of the foreign offer curves.
TARIFFS Vs QUOTAS
The differences between tariffs and quotas will be clear by the following way of comparison:
As a protective measure, a quota is more effective than the tariff. A tariff seeks to
discourage imports by raising the price of imported articles. It however fails to restrict
imports when the demand for imports is price inelastic.
When compared to tariffs, quotas are much precise and their effects much more certain.
The reactions or responses to tariffs are not clear and accurately predictable; but the effect
of quotas on imports is certain.
It has been argued that quotas tend to be more flexible; more easily imposed and more
easily removed instruments of commercial policy than tariffs. Tariffs are often regarded as
relatively permanent measures and rapidly build powerful vested interests, which make
them all the more difficult to remove. Quotas have many characteristics of a more
temporary measure, are designed to deal only with a current problem, and removable as
soon as circumstances warrant.
Quotas, however, suffer from certain effects. Tariffs in some respects are superior to quotas.
The effects of quotas are more rigorous and arbitrary and they tend to distort international
trade much more than the tariffs. That is why GATT condemns quotas and prefers tariffs to
quotas for controlling imports.
Quotas tend to restrict competition much more than tariffs by helping importers and
exporters to acquire monopoly power. If import quotas are allocated only to a few
importers, they may enable them to amass fortunes by exploiting the market. Similarly,
quotas tend to promote the concentration of economic power among foreign exporters.
Quotas may support inflationary pressures within the country by restricting supply. Tariffs
also suffer from the same defect.
Quotas offer greater scope for corruption than tariffs.
SUBSIDIES
In order to encourage domestic production or to protect the domestic producer from the foreign
competitors, government pays to a domestic producers reducing operations cost. Such payments
are called subsidies. Subsidies are in different forms. They are: Cash grants, loans and advances at
low rate of interest, tax holidays, government procurement of out put at a higher rate, equity
participation and supply of inputs at lower prices.
Counter Trade refers to any one of several different arrangements by which goods and services re
traded for each other, on either bilateral or multilateral basis. There are a variety of forms of
counter trade. Basically it is a barter (exchange of one type of goods for another type of goods) or
quasi-barter agreement, where cash may not involve but there is always a link between the imports
and exports transactions. In other words imports are paid out of exports in counter trade. For
example India exports iron and steel against import of heavy machinery under a contract it is called a
counter trade transaction.
There are a number of forms of counter trade. We may examine them in detail in detail as
in the following paragraphs.
Barter: In the barter agreement, the exporter sells specified goods to the importer in exchange for
specified goods. In other words barter involves trading goods for goods. In this case no cash in
involved. Pure barter of this type is rare in now a days.
Compensation counter trade: Under compensation arrangement the exporter agrees to accept a
part of consideration in cash and the balance in kinds, but the exporter transfers the purchasing
commitment to a third party who may be an end user of products or a trading house. This type of
counter trade is not very common as it takes considerable time to find a suitable third party to
whom the exporter can transfers the purchasing agreement.
Buy back arrangement: This type of arrangement sis the most popular arrangement involving a
relatively large volume of trade. Under this arrangement, the exporter, usually an industrial firm,
provide plant, equipment or technology to an importer and agrees to accept, in full or part
considerations, the goods to be produced by the importer with the exporter s' equipment or
technology. The contract period of buy back arrangements is, by necessity, considerably longer than
that of counter purchase arrangements.
Counter purchase arrangement: This type of counter trade arrangement is also common but it is
complicated. Under this arrangement, the exporter sells the goods, services or technology to a
foreign importer against the purchase of a specified total value of goods selected from a list that
excludes those goods produced by the technology being exported, within a specified period. The
goods purchased will not be used by the exporter himself and he will have to arrange for their sale
with a third party who may market them.
Swap: In a swap contract two countries agree to trade, products from different locations with a view
to save transportation cost. This is ideally suited for commodities such as sugar, chemicals and oils.
In swap transactions differences in quality of the goods being substituted are worked out in swap
contract.
Switch: This method of counter trade is useful when international currency flow is sluggish or
uneven. One country that is a party to a bilateral trade agreement will transfer its imbalance to a
third party or nation. One example of switch is western firm that sold a plastic manufacturing plant
to the then USSR which had no cash to pay. However, Russia had a clearing agreement with
Australia which was buying natural gas to Russia, it paid to the western firm direct the amount equal
to the price of the plant sold to Russia. Thus in a switch agreement, the amount is paid or accepted
through a third country or party. This method of counter trade is useful when international currency
flow is sluggish or uneven.
Evidence Accounts: Under evidence accounts, the company sells its products or services to a local
foreign trade organization and purchases goods and services of its requirements form another local
foreign trade organization of the equal amount. These kinds of transactions are set to occur over a
specified period, generally one year. Such accounts are monitored by the country's bank of foreign
trade that deals in foreign exchange and where the company maintains its accounts.
The reasons to engage in counter trade include those basic to business; t o enter new
markets, sell products and gain an edge over competition. Counter trade is considered a way of
overcoming of uncertainty of domestic production plans and, at the same time, of achieving bilateral
balancing of trade-an important objective of foreign trade policy in the centrally planned East
European countries. shortage of foreign exchange and the desire to stimulate foreign technology
inflows motivated East European countries to enter into counter trade arrangements. The
developing countries, particularly those maintaining overvalued exchange rates, have resorted to
counter trade for the reasons such as balance of payments difficulties, creation of overcapacity etc.
Some other reasons for the growth of counter trade are as follows:
- The desire to conceal from the domestic public the fact that the sale is being made below
its costs. This motive for counter trade is important for many developing countries and also for a
number of communist countries.
- A counter trade transaction may provide some slight additional certainty in an uncertain
world.
- A counter trade transaction permits concealed discounting in a period of weak markets. In
other worlds counter trade permits price discrimination among customers.
-Developing countries will have confident to export their products to other countries.
Counter trade transactions are often extremely complex and difficult as compared with
straightforward trade. This requires planning and commitment.
The General Agreement on Tariff and Trade is a multilateral treaty that lays down agreed rules for
conducting international trade. It came into force in January 1948. 119 governments which together
account for 90 per cent of the world merchandise trade subscribe it to. Its basic aim is to liberalize
trade and for the last 45 years it has been concerned with negotiating the reduction of trade barriers
and with international trade relations. The rapid and uninterrupted growth in the volume of
international trade till 1992 provides a good testimony for the success of the GATT.
3. A Stable basis of trade: The binding of the tariff levels negotiated among the contracting
countries provides a stable predictable basis for trade. Binding of tariffs means that these
cannot be increased unilaterally. Although provision is made for the renegotiation of bound
tariffs, a return tariffs is discouraged by the requirement that any increase be compensated
for.
4. Consultation: A basic principle of GATT is that member-countries should consult one
another on trade matters and problems. They can call on GATT for a fair settlement of cases
in which they feel that their rights under the GATT are being withheld or compromised by
other members.
The agreement consists of four parts:
Part II: A code of fait trade practices to guide members in their commercial policies;
Eight major trade negotiations took place under the GATT auspice as follows:
WEAKNESS OF GATT:
The weakness of GATT is that its benefits have mainly gone to the industrialized countries.
Under GATT, Most negotiations and tariff reductions have taken place in respect of manufactured
goods. So the trade gap for the developing countries has become more unfavourable. A search for a
new institutional arrangement, especially one which one would tackle the problems of the global
trade of developing countries, led to the formation of united Nations Committee on Trade and
Development in 1946.
Established on January 1, 1995 WTO is the embodiment of the Uruguary Round results and the
successor to GATT. T is not a simple extension of GATT; it completely replaces its predecessor and
has a very different character. As on 6th November 2000, the membership of the WTO stood at 139.
76 Governments became members of the WTO on its first day. The present membership accounts
for more than 90 per cent of world trade. Many more countries have requested to WTO. The WTO is
based in Geneva, Switzerland. Its essential functions are as follows.
(ii) The GATT was applied on a "Provisional basis" even if, after more than 40 years,
governments chose to treat it as a permanent commitment. The WTO commitments are full
and permanent.
(iii)The GATT rules applied to trade in merchandise goods. In addition to goods, the WTO
covers trade in services and trade related aspects of intellectual property.
(iv)While GATT was multilateral instrument by the 1980s many new agreements had been
added of plurilateral, and therefore selective, nature. The agreements which constitute the
WTO are almost all multilateral and thus involve commitments for the entire membership.
(v)The WTO dispute settlement system is faster, more automatic and thus much less
susceptible to blockages than the old GATT system.
WTO is a watchdog of international trade, regularly examine the trade regimes of individual
members. Trade disputes that cannot be solved through bilateral talks are adjudicated under the
WTO dispute settlement 'court'. The WTO is also a management consultant for world trade. It
economists keep a close watch on the pulse of the global economy and provide studies on the main
trade issues of the day. The mandate of the WTO includes trade in goods, trade in services, trade
related in investment measures and trade related intellectual property rights.
A number of simple and fundamental principles run throughout all of the instruments which,
together, make up the multilateral trading system . They are:
The industrial sector can be classified as production sector and service sector. Production sector
refers the industries that are engaged in production and supply of goods. Service sector refers
providing services and exchanging services to the public as well as society. The growing importance
of services is reflected in the international trade also. The value of the international trade in services
comes to about one fourth of the value of the value of the trade in goods. Services make up a major
share of the invisible account in the Balance of payments of a country. The most important services
in international trade include:
Transport
Travel
Communication
Media
Business services
Insurances
Engineering and constructions services
Banking Financial Services
Characteristics and Categories of Services:
An important characteristics of services that has far reaching implications for marketing of
services is their inseparability. That is services cannot be sepearated from their providers, whether
they are persons or machines. This does not, however mean that all services require the physical
proximity of the provider and user.
CHARACTERISTICS:
(a)Those that necessarily require the physical proximity of the provider and the user; and
(b) Those that do not, though such physical proximity may be useful.
The services where physical proximity is essential fall into three categories:
-The mobile provider and immobile user categorize the first category. In this case the
provider goes into the place of user and doing services. For example the technical people of L & T
Company in India goes to Srilanka and do the construction work. Similarly a technician may have to
go a plant abroad to rectify a problem with the plant.
- Mobile user and immosbile provider characterizes the second category. I.e. user goes
towards the provider. For example a patient who wants an open-heart surgery will have to go to a
hospital where the required facilities are available.
-The third category consists of of mobile user and mobile provider. In this case either the
provider going to the user or the user going to the provider may achieve proximity. For example dry-
docking facilities for ships.
Due to the special characteristics and the socio economic and political implications of certain
services, they are generally subject to various types of national restrictions. Protective measures
include visa requirements, investment regulations, marketing regulations, restrictions on the
employment of foreigners, compulsion to use local facilities etc. Heavily protected r restricted
services in different countries include banking and insurance; transportation, television, radio, film
and other forms of communications and so on.
The Government of India has set up a number of institutions whose main functions are to help an
exporter in its export efforts. It is therefore, necessary for the exporters to acquaint themselves
with these institutions and the nature of help they can render to them so that they can initially
contact them to get whatever help they could get from these institutions in exporting their products.
1.DEPARTMENT OF COMMERCE:
The Department of commerce in the Ministry of Commerce and Industry is the Primary
Government agency responsible for evolving and directing foreign trade policy and programmes,
including commercial relations with other countries. This department is headed by a Secretary and
he is assisted in the discharge of duties by a Special Secretary , Additional secretaries and a number
of other senior officers functioning as Divisional heads. The department consisting of the following
Divisions concerning with various subjects connected with exports and imports.
Economic Division
2.ADVISORY BOARDS
Board of Trade : The Board of Trade is the highest advisory body under the Department of
commerce to deliberate on policy matters. It has its members as follows:
3.AUTONOMUS BODIES:
There are 20 export promotion councils covering the following products: Apparels,
chemicals, pharmaceuticals and cosmetics, carpet, cashew, cotton textiles, electronics and computer
software, gem and jewellery, handicrafts, handlooms, leather, poweerloom, construction, plastics,
shellac, silk, synthetic , sports goods and wool and woolens. These councils are registered under the
companies Act as non-profit making agencies. The department of commerce provides necessary
financial assistance in relation to their export promotion work.
These councils advise the Government regarding current developments in the export sector
and measures the necessary to facilitate future growth in exports, assist manufacturers and
exporters to overcome the various constrains and extend to them the full range of services for the
development of market overseas. The councils also perform certain regulatory functions as they
have the power to register and issue Registration cum-membership certificate under the Export and
Import policy and also de-register errant or defaulting exporters.
The councils also conduct market surveys, assist in product development,. Sponsor trade
delegations and guide newcomers in the export trade.
There are 9 Statutory Boards for the following commodities: Handicrafts and Handloom, Silk,
Power loom, coffee, coir, rubber, tea, tobacco and spices. The commodity boards del with the entire
range of problems of production, development, marketing etc. In respect of commodities
concerned, they act themselves as if they were the Export Promotion Councils. Some of these
Boards have opened their branch in foreign countries in order to promote the consumption of the
commodities under their jurisdiction.
1. Development of off-shore and deep- sea fishing in all its aspects and conservation and
management of off-shore and deep-sea fisheries;
2. Registration of fishing vessels, processing plants, storage premises and exports with a
view to promote a healthy development.
3. Laying down standards and specifications for marine products for the purpose of export.
4. Rendering financial assistance.
5. Arranging for training in different aspects connected with export with special reference
to fishing, processing and marketing.
(IV) Agricultural and Processed Food Products Export Development Authority
The Indian Institute of Foreign Trade is functioning under the Ministry of commerce. This is
registered under the Societies Act.
The ECGC a Government of India undertaking has been established for minimizing the risk
element in export business and to facilitate the flow of finance from the banks to exporters. In
addition to the normal risk policies, the corporation assists the exporters through special schemes
such as packing credit guarantee, post shipment credit guarantee and export production finance
guarantee. To suit varying needs of exporters, the corporation provides different types of cover
which may be divided into the following three broad groups:
Standard polices
Financial guarantees
Special policies
Under its policies intended o protect the exporters against overseas credit risks, ECGC bears the
main risks and pays the exporter 90% of his loss on account of commercial risks and Political risks.
The EXIM Bank was established on January 1, 1982 for the purpose of financing, facilitating
and promoting foreign trade of India. It extends finance to exporters of capital and manufactured
goods, exporters of soft wares and consultancy services and overseas joint ventures and
construction projects abroad. The bank is the principal financial institution in India for coordinating
the work of institutions engaged in financing export and import trade. The EXIM bank concentrates
mainly on medium and long term credit for export of goods and services on deferred payment
terms.
Quality control and pre shipment inspection is one of the important factors in the export
marketing. In order to ensure the quality of the products exported, a legislation entitled "Export
(Quality control and Inspection) Act" was enacted by the Indian Parliament in 1963. As per this act
The Government of India has established the Export Inspection Council. The functions of this council
are generally to advise the central government regarding the measures for the enforcement of
quality control and inspection in relation to commodities intended for export and draw up a
programme therefore.
Objectives:
The Export-Import Bank of India was set up[ the Government of India in 1982 as a public
sector financial institution under an Act passed in the parliament for the purpose of financing,
facilititating and promoting foreign trade of India. The board of directors manages the EXIM BANK
with representation from government financial institutions, banks and business community.
FUNCTIONS:
Suppliers credit: This enables the exporters to extend credit to overseas importers of
eligible Indian goods.
Finance for consultancy and technology services; This enables Indian exporters of
consultancy and technology services to extend term credit to overseas importers.
Pre-shipment credit: This enables Indian exporters to buy raw materials and other inputs
for fulfilling export contracts involving cycle time exceeding six months.
Finance for deemed exports.
Finance for EOU and EPZ Units
Software Training Institutes
Export marketing finance
Export-Product Development Finance: This Indian firms to undertake product development,
R & D for exports.
Services Offered to Indian Exporters:
Underwriting: This enables the Indian exporters to raise finance from capital markets with
the backing of EXIM Bank's underwriting commitment.
Forfeiting: This Indian exporters to convert sale to cash on without recourse basis.
Guarantee Facility: To execute export contracts and import transactions.
Business Advisory and Technical assistance
Cooperation arrangement with African Management Services.
For Commercial Banks:
The bank helps Indian companies go global by setting up subsidiaries and joint ventures
abroad.
It provides information to potential exporters about projects abroad specially about
multilaterally agencies.
It also helps companies in preparing bids according to strict condition prescribed by the
multilateral agencies.
It also entertains proposals for various facilities under he European Community Investment
Partners like feasibility studies for setting up export units.
The bank introduced the "cluster of Excellence" programme for up gradation of quality
standards and obtaining ISO certification.
The scheme of 100 EOU's were introduced in 1980 with a view to generating additional
production capacity for exports by providing an appropriate policy frame work, flexibility of
operations and incentives. In order to enable them to operate successfully in the international
market such units are allowed to import machinery, raw material, components and consumable at
free of custom duties. These units have to operate under custom bond and achieve the level of value
addition fixed by the Board of Approval. At present more than 500 units are in operation under the
EOU scheme.. Some of the modifications done to facilitate the exporting units in the EOUs are as
follows:
The entire production of EOU units shall be exported subject to the following:
Rejects may be sold in the domestic tariff area on payment of duties on prior intimation
to the customs authorities.
Scrap/waste arising out of production process or in connection therewith may be sold in
the domestic tariff area on payment of duties within the overall ceiling of 50% FOB
value of exports.
By products may also be sold in the domestic tariff are subject to achievement of
positive net foreign exchange on payment of applicable duties within the overall
entitlement.
The risk element in export business is greater than the risk involved in domestic tradebecause the
two parties of the export contract (exporter and importer) belong to different countries. In the
context of growing competition no exporter can manage without selling goods on credit. Giving
credit poses two problems to an exporter:
- He should have enough money to offer credit to his overseas buyers and
- He should be prepared to take the credit risks.
Exporting on credit is not without risk. The overseas buyer may default; he may go
bankrupt; there may be earthquake or typhoon, a war in his country, which may wreck his fortunes.
The ECGC, a Government of India undertaking, covers the exports against these risks. The ECGC also
provides guarantees to the financing banks to enable them to provide adequate finance to the
exporters.
COVERS ISSUED BY ECGC:
The covers issued by ECGC may be divided broadly into four groups as follows:
a) Standard policies issued to exporters to protect them against the risk of not receiving
payments while trading with overseas buyers on short term credit.
b) Specific policies designed to protect Indian Firms against the risk of not receiving payments
in respect of
- Export on deferred payment terms
- Services rendered to foreign parties and
- Construction work-undertaken abroad.
c) Financial guarantees issued to banks against risks involved in providing credit to exporters;
and
d) Special schemes viz: Transfer Guarantee, Insurance cover for buyer's credit, Line of credit,
Joint ventures and overseas investment.
A. RISKS COVERED UNDER STANDARD POLICIES:
Under its policies to protect the exporters against overseas credit risks, ECGC bears the main
brunt of the risks and pays the exporter 90 per cent of his loss on account of commercial and
political risks.
Commercial Risk:
a. Restriction on remittance in the buyer's country or any government action which may block
or payment to the exporter;
b. War, revolution or civil disturbances in the buyer's country
c. Cancellation of export license or imposition of new export licensing restrictions in India
(under contracts policy)
d. New import licensing restrictions or cancellation of a valid import license in the buyer's
country:
e. Additional handling transport or insurance charges due to interruption or diversion of
voyage which cannot be recovered from the buyer: and
f. Any other cause of loss occurring outside India, not normally insured by commercial
insurers. And beyond the control of both the exporter and the buyer.
RISKS NOT COVERED
a. Commercial disputes, including quality disputes raised by the buyer unless the exporter
obtains a decree from a competent court of law in buyer's country in his favour.
c.Buyer's failure to obtain import or exchange authorization from the appropriate authority:
f.Flucturations in exchange rates (except under Exchange Fluctuation Risk over Schemes)and
g.Failure of the exporter to fulfill the term of contract or negligence on his part.
B. SPECIFIC POLICIES
Contracts for export of capital goods or projects for construction works and for rendering
services abroad are insured by ECGC on case to case basis under specific policies. Special mention
may be made of the services policy to protect Indian firms against payment for their services policy
to protect Indian firms against payment for their services policy o protect Indian firms against
payment for their services and the construction works policy to cover all payments that fall due to a
contractor under a composite contract for execution of services as well as supply of material.
The small exporter's policy is basically the Standard Policy, incorporating certain
improvements in terms of cover, in order to encourage small exporters to obtain and operate the
policy. It will be issued to exporters whose anticipated export turnover for the next 12months does
not exceed Rs.25 lakes. The premium payable for a small exporter's policy is less than the standard
policy.
To meet the varying needs of exporters. The Corporation has evolved the following types of
Guarantees;
The Guarantee is issued for a period of 12 months against a proposal made for the
purpose and covers all the advances that may be made by the banks during the period to a
given exporter within an approved limit.
To banks, which undertake to obtain cover for packing credit advances, granted to
all its customers on an all India basis.
The Premium rate for this Guarantee is 7 paise per Rs. 100/-per month The
percentage of loss covered under the individual post-shipment Guarantee is 75%
The Premium rate for this Guarantee is 7paise per Rs. 100 per month and the cover
is 75 percent. Banks having WTPSG are eligible for concessional rate of premium and higher
percentage of cover.
Export assistance has become an important tool in any developing country to motivate the
manufacturer and businessmen to enter the international market. Most developing countries have
resorted to a number of export promotion measures. India has also been providing export
assistance for the past about forty years. From 1922, export incentive system in India has been
made very simple. There are essentially three major incentives, available to exporters. These are
(i)Market-based Exchange Rate: Since March 1993 the exchange rate of the rupee is fully
determined by the demand and supply condition in the market as the rupee was made fully
convertible for export-import transactions in March 1993. Under the Libralised Exchange Rate
Management System (LERMS) exporters will get benefit when rupee depreciates while importers will
lose. When rupee appreciates the balance of benefits will the just the reverse.
(ii) Fiscal concession: The different types of fiscal concessions are as follows:
In the computation of total income Sec.80. HHC of the Income Tax Act allows a deduction of
the whole of the profit derived from the export of goods or merchandise. This benefit is also
available to supporting manufacturers exporting through Export/ Trading Houses provided that the
amount of deduction claimed is retained as a reserve for the purpose of the business of the
assessee. However, the budget for the year 2000-2001 has reduced this exemption by 20% every
year to be phased out in five years.
- Exemption from taxation of the profits from over seas projects to the extent of 50 percent.
-Exemption from taxation 50 per cent of royalty, commission, fees or any similar payment
obtained from the exports of technical know-how and technical services.
- A 10 year tax holiday for 100 per cent export oriented units and for units located in Free
trade zone/Export processing zones.
-Concessional rate of customs duty on imports of selected items of machinery for export
production under EPCG scheme.
a. EPCG Scheme
b. Duty Exemption Scheme
c. Export Houses/Trading Houses
d. Export processing Zones
e. 100 % Export oriented units
(iv)Other facilities available to exporters:
In addition to the above mentioned incentives, the Central Government is offering the following
facility to exporters.
(a)Duty Drawback: This is a refund of import duty or excise duty paid on the raw materials and
components, which have gone into the production of exported products.
(b)Rebate of excise duty: If the goods exported attract central excise duty either the duty is
exempted or refunded if already paid
©Export Finance: Exporters are allowed to get export finance both pre-shipment and post shipment
credit at concessional rate of interest.
(d)Insurance of credit risk: The ECGC is willing to cover 90% of the political and commercial risks of
export operations. The commercial banks which give credit to exporters can also get guarantee from
ECGC.
(e)Deemed exports; Certain transactions in which goods supplied do not leave the country and the
payment for the goods which is received by the suppliers sin India have been treated as deemed
exports and are entitled some benefits such as duty exemption in respect of deemed export
categories, deemed export drawback, refund of terminal excise duty, special import license, etc
EXPORT FINANCE
Businessmen, industrialists and others require finance for their day-to-day activities. In
export business also finance plays an important role. Export finance starts as soon as the exporter
gets an order to export. An exporter needs finance for processing or manufacturing or assembling
or procuring or packing the goods for export, Pre-shipment finance is provided to the exporter to
meet such requirements. After the shipment is made exporter will have to give credit the exporter
has to wait till the documents reach the importer and he makes the payment. It will take some more
time before the advice of payment is finally, communicated to the exporter. Post-shipment finance
is therefore provided to the exporter to meet his needs for funds during the intervening period
between the shipment of the goods and the receipt of payment therefore.
Export packing credit is a loan or any other credit given by a bank to an exporter for
financing (a) procuring raw materials and components to manufacture the product or (b) processing
or assembling or packing the goods for export. The banks on the basis of the following give the
packing credit.
A letter of Credit (L/C) opened in favour of the exporter by the importer's bank: A confirmed
or irrevocable order for the export of goods from India having been placed on the exporter, or Any
other evidence of an order for exports of goods from India having been placed on the exporter or
Relevant policy issued by the ECGC; or Personal bond in the case of party's already known to the
exporter.
Freight and insurance charges if the contract is either CIF contract or C&F contract and
Export duty or tax, if any.
Post-shipment finance is required by the exporters to bridge the gap between the time of
shipment of goods and the actual payment for the goods exported. Post -shipment credits are given
by commercial banks
(i) Short term: The short term credit is usually for 6 months and provided by banks.
(ii) Medium term: Medium term loans are offered for a period beyond 6 months and up to
5 years. These loans are also provided by commercial banks in collaboration with EXIM
Bank of India. Medium term loans are provided for in the case of durable consumer
goods and light capital goods.
(iii) Long term: Long term loans are provided in the case of sale of capital goods complete
plants and turnkey jobs. The period of credit is usually more than 5 years.
Banks enjoy certain benefits for advancing loans to exporters, They are as follows.
Forfaiting enable an exporter to convert an overseas credit sale into a cash sale through the
process of discounting of export receivables. The bill of exchange accepted by the importer is
surrendered to the forfeiting agency which pays him in cash after deducting a fee. The
understanding is that the agency will collect the dues from the importer on expiry of the said period.
Our exchange control regulations stipulate that exporter should realize the foreign
exchange for their exports within 180 days from the date of shipment. Contracts for export of goods
against payment to be received fully or partly after the expiry of the stipulated period for the
realization of export proceeds are treated as deferred payment export contract. Extension of long
term export credit has become an accepted export market strategy and therefore, provision has
been made for the extension of medium and long term credit to finance the sale of Indian capital
goods and related services.
These are also referred to as Export Processing Zones, are set up with the intension of
providing an internationally competitive duty free environment for export production, at low cost.
This enables the products of EPZ to be competitive, both quality wise and price wise, in the
international market.
India has seven EPZ at different parts of our country. EPZ operating units broadly under the
product groups of electronics, engineering items, chemicals and allied products, gems and jewellery,
textiles, garments, plastics and rubber products.
Each of the zones provides basic infrastructure such as developed land for construction of
factory sheds, standard design factory buildings, roads, power, water supply and drainage. In
addition customs clearance is arranged within the zone at no extra charge. Provision is made for
locating banking\post office facilities and offices of clearing agents in the service centers located in
each of the zones.
Exemption from industrial licensing for manufacture of items reserved for SSI sector.
The following the parties and agencies involved in executing an export order:
1. Exporter
2. Importer.
3. The negotiating bank
4. Shipping company
5. Insurance company
6. Reserve Bank of India
7. ECGC
8. Directorate General of Foreign Trade
9. Customs House
10. Port Trust
11. Inspection Agency
12. Clearing Agents
The exporter has to process the export order in the following manner:
1.The exporter should scrutinize the export order with reference to the terms and conditions
of the contract. The order should specify the mode of payment such as letter of credit, document
against acceptance or document against payment, and the terms of conditions as specified in the
letter of credit. The following documents have to be prepared.
3.As soon as the goods are manufactured and kept ready for shipment the following have to
be done:
4.Thereafter the works manager sends a dispatch advice to the export department. They
will obtain the marine insurance cover for the goods. Then the exports department sends the
following documents to its clearing and forwarding agents along with detailed instructions:
Commercial invoice
Original L/C
Packing list
Certificate of inspection
5. The clearing and forwarding agent takes delivery of the consignment and arranges its
storage in the warehouse. Thereafter he prepares requisite copies of shipping bill and submits them
to the Export Department of the Customs house along with necessary documents mentioned above.
6. After the shipping ill has been passed by the customs, the clearing and forwarding agents
presents the Port Trust copy of the shipping bill to the respective authorities. Thereafter, in the case
of shed cargo, the Dock challan is prepared. Where the ship loads overside, the dock charges are
indicated in the shipping bill itself and therefore, no dock challan is prepared.
7.The passed Shipping Bill including dock challan will be submitted to the Port
Commissioners.
8. In response to that the Ship's Export Clerk calls for cargo from shed or boat and after
loading prepares the Mate Receipt. A mate receipt is a receipt issued by the commanding office of
the ship when the cargo is loaded on the ship and contains information about the name of the
vessel, berth, date of shipment, description of packages, marks and numbers, condition of the cargo
at the time of receipt on board the ship etc. The mate receipt is first handed over to the Port Trust
authorities so that the exporter may pay all the port dues. After paying all the port dues, the clearing
agent collect the mate receipt from the Port Trust Authorities.
9. The clearing and forwarding agent forwards the following documents to the exporter: Full
set of bill of lading, export promotion copy of the bill, copies of customs invoice, original export
order.
10. As soon as the exporter receives the above documents from the clearing and forwarding
agent, he completes the remaining formalities. He will present the following documents to the
negotiating bank.
GR Form, Customs invoice, Certificate of origin, Packing list, Marine insurance policy and
Bank certificate
11. The negotiating bank transmits duplicate copy of the GR form to the exchange control
department of the Reserve Bank of India after receipt of the export proceeds.
12.The original copy of the bank certificate along with attested copies of the commercial
invoice are returned to the exporter. The duplicate copy of the bank certificate is forwarded to the
office of the DGFT in the area.
13.Finally the exporter will get the value of the value of export consignment against the
above-mentioned documents.
IEC NUMBER:
Every person importing or exporting goods require and Importer-Exporter Code number.
The regional licensing authorities normally allot the IEC number. This code number is required to be
incorporated in the various export documents submitted to the authorities for purposes of export.
Membership of certain bodies will help the exporters in a number of ways. There are
specified Export Promotion Councils , commodity boards and export development authorities for
various products. Members of EPC will receive different kind of assistance and services in respect of
the export business.
Exporters are advised to become members of local chamber of commerce, productivity
council or any other trade promotion organization recognized by the Ministry of Commerce.
Membership of such bodies will help the exporters in different ways, including obtaining the
certificate of orgin, which is necessary document required for export to certain countries.
As soon as the exporter receives a business inquiry from party abroad, it should be promptly
attended to. The exporter should bear in mind that the foreign buyer have a large number of
prospective suppliers in a number of countries and thus he is in a very competitive situation. Serious
and sincere care should, therefore, be exercised in dealings with foreign country customers.
As a starting point of the negotiations, the exporter would have to make an offer to the
foreign customer. An offer is a proposal in which an exporter submits, may be in the form of a letter,
his quotation and other relevant information. The offer, when accepted by the foreign buyer,
becomes an order.
CONFIRMATION OF ORDER:
Once the negotiations are completed and the terms and conditions are acceptable to the
buyer and seller, the buyer may place an order with the exporter. The exporter should immediately
confirm the order by sending this acceptance. For the confirmation of the order, the proforma
invoice is generally sent in triplicate to the buyer, and the buyer is asked to return two copies signed
by him. The exporter should again send once copy to the importer with the exporter's signature to
confirm the acceptance of the order. The confirmation of the order usually takes the form of a
contract.
EXPORT LICENSE:
These exports of some items are banned and of some items controlled by means of licenses,
though many items are permitted to be exported freely. Needless to say, the exporter should make
sure that the item sought to be exported is not one, which falls in the banned list. If the item to be
exported requires a license, it is necessary to obtain it before finalizing the contract.
FINANCE:
If the exporter requires pre-shipment financial assistance, he should take the necessary
steps to obtain it.
PRODUCTION/PROCRUMENT OF GOODS:
Once the order is confirmed, the exporter should take necessary steps to ensure the timely
availability of the goods of the specifications required and execute the export order promptly. If the
exporter is not a manufacturer, he should contract with his suppliers and ensure timely availability
of the goods of the buyer's specifications.
SHIPPING SPACE:
As soon as the export order is confirmed, the exporter should contract the shipping
companies which have sailings for the port to which goods have be sent and book the required
shipping space. On the exporter's application or on the application of the freight broker on the
exporter's behalf, the shipping company issues sits acceptance if the space applied for is given.
Once the goods re ready, they are marked and marked properly. If the buyer has given
instructions about packing and marking, they should be followed accordingly. If there are no such
instructions, it should be ensured that the packing and marking are of the standards recommended
or specified.
Thereafter get the goods inspected by the inspecting authorities under the compulsory
quality control and pre-shipment inspection. They are as follows:
As a matter of policy, the government has granted excise duty exemption for the export
products. Excisable goods may be exported either under claim for rebate of excise duty or in bond.
In the case of export under claim for refund of excise duty, the duty is first paid and its refund is
claimed. Some times with specification the goods are allowed to export without payment of duty on
execution of a bond with sufficient surety and security in the prescribed bond.
CUSTOMS FORMALITIES:
Goods may be shipped out of India only after the customs clearance has been obtained. For
this purpose, the exporter (or the clearing and forwarding agent on behalf of the exporter) should
present the following documents to the customs authorities.
- Shipping Bill
- Declaration regarding truth of statement made in the shipping bill
- Invoice
- GR form
- Export license (if required)
- Quality control
- Original contract
- Letter of credit (if applicable)
- Certificate from quality control authorities
- Marine insurance policy
- Certificate of orgin
- Mate receipt or bill of lading
- Packing list
- AR-4 Form
- Any other documents
The customs authorities scrutinize the shipping bill and other requisite documents, and if,
prima-facie, satisfied, they pass it for export, subject to a physical examination by the staff of the
customs. The shipping bill passed by the exporter department has to presented to the cargo
supervisor or the steamship company or the shed manager, who is the port official, for permission to
bring in the cargo for export.
Once all the said above process are over and as and when goods are loaded into cargo or
ship, the exporter will inform the importer about the dispatch of goods and departure of the ship. So
that the importer get ready for his actions.
NEGOTIATION OF DOCUMENTS:
After shipping the goods, the exporter should arrange to obtain payment for the exports by
negotiation with the relevant documents through the bank.
APPLYING FOR REFUND (if any)
Then appropriate steps to be taken by way of applying to get the Duty Draw bank from
customs and other assistance, if any from Government.
EXPORTS BY AIR
In international trade the use of air-freight is increasing day by day. Now-a-days all
types of products like food, readymade garments, finished leather and leather products, gems and
jewellery, electronic products etc., are sent by air freight. International Air Transport Association
was set up in 1945. IATA has made rapid expansion because of three developments for which it has
been responsible. They are as follows:
Basically, there are ten reasons which can make total distribution costs cheaper through the
use of air transport, at least for certain categories of merchandise. The reasons are as follows.
1. Speed of delivery
2. Savings in cost
3. Good service to customers without having any warehouse.
4. Greater security and protection during transit.
5. A satisfying customer.
EXPORT BY SEA
If the goods are sent by sea the exporter has to obtain/submit the following documents:
Bill of Lading
EXPORT DOCUMENTS
INVOICE:
An invoice is the seller's bill for merchandise and contains particulars of goods, such as the
price per unit at a particular location, quantity, total value, packing specifications, terms of sale,
identification marks of the package , bill of lading number, name and address of the importer,
destination, name of the ship etc.
Some importing countries insist that the importing country's consul located in the exporter's
country should sign the invoice. Such invoices are known as consular invoice. The main purpose of a
consular invoice is to enable the authorities of the importing country to collect accurate information
about the volume, value, quality, grade, sources etc. of its imports for purpose of assessing
importing duties and also for statistical purposes.
The difference between packing note and a packing list is that the packing note refers to
the particular of the contents of an individual pack, while the packing list is a consolidated statement
of the contents of a number of cases or packs.
A packing note should include the packing note number, the date of packing, the name and
address of the exporter, the name and address of the importer, the order number, date, shipment
per bi, bill of lading number and date, marking numbers, case number to which the note relates, and
the contents of the goods is in terms of quantity and weight. Apart from the details in the packing
note, a packing list should also include item wise details.
CERTIFICATE OF ORGIN:
A certificate of orgin, as the name indicates, is a certificate, which specifies the country of the
production of the goods. This certificate has also to be produced before clearance of goods and
assessment of duty, for the customs law of the country may require this procedure. This certificate is
a necessity where a country offers a preferential tariff to India and the former is to ensure that only
goods of Indian Orgin benefit from such concession, A certificate of orgin may be required when
goods of a particular type from certain countries are banned. A certificate of orgin from may be
obtained from chambers of commerce, export promotion councils, and various trade associations
that have been authorized by the government.
MATE RECEIPT
A mate receipt is a receipt issued by the commanding office of the ship when the cargo is
loaded on the ship, and contains information about the vessel, berth, date of shipment, description
of packages, marks and numbers, condition of the cargo at that time of receipt on board the ship,
etc. The mate receipt is first handed over to the Port Trust authorities so that all the port dues may
be paid by the exporter,. After paying all the port dues, the merchant or the gent may collect the
mate receipt from the Port Trust authorities. The bill of lading prepared by the shipping agent after
the mate receipt has been obtained.
SHIPPING BILL
The shipping bill is the main document on the basis of which the customs' permission for
export is given. The shipping bill contains particulars of the goods exported, the name of the vessel,
master or agents, flag, the port at which goods are to be discharges, the country of final destination,
the exporter's name and address, etc. It also contains details of the packages and the goods, such as
number and description, marks and numbers, quantity details about each case, real value as defined
in the sea customs act, whether Indian or foreign merchandise to be re-exported, total number of
packages, their total weight and value etc.
CART TICKET
A cart ticket also known as a cart chit, vehicle and gate pass, is prepared by the exporter and
includes details of the export in terms of the shipper's name, the number of packages, the shipping
bill number, the port of destination and the number of the vehicle carrying the cargo. The driver of
the vehicle carrying cargo should posses the ticket, and when the vehicle is brought at the port gate,
it should be presented to the gate warden/inspector along with other shipping and port documents.
The inspector, after satisfying himself that the vehicle is carrying the cargo as mentioned in the
document, allows it to pass the gate.
CERTIFICATE OF MEASUREMENT
Freight is charged either on the basis of weight or measurement. When it is charged on the
basis of weight, the weight declared by the shipper may be accepted. However, a certificate of
measurement from the Indian chamber of commerce or other approved organization may be
obtained by the shipper and given to the shipping company for calculation of the necessary freight.
BILL OF LADING
The Bill of lading is a document where in the shipping company gives its official receipts of
the goods shipped in its vessel and at the same time contracts to carry them to the port of
destination. It is also an document of title to the goods, and, as such, is freely transferable by
endorsement and delivery.
A Bill of lading serves three main purposes: I) As a document of title to the goods' (ii) as a
receipt from the shipping company'; and (iii) as a contract for the transportation of goods.
Each shipping company has its own Bill of lading. The exporter prepares the Bill of lading in
the forms obtained from the shipping company or from the agents of the shipping company. The
information contained in the Bill of lading includes the date and place of shipment; the name of the
consignor; the name and destination of the vessel; the description, quality and destination of the
goods; the marks and numbers; the invoice number and the date of export; the gross eight and net
weight; the number of packages; the amount of freight etc.
A Bill of lading acknowledging receipt of the goods apparently in good order and condition
and without any qualification is termed as a clean bill of lading; if a Bill of lading is qualified with
certain adverse remarks such as 'goods insufficiency packed in accordance with carriage of goods by
Sea Act", "one box damaged" etc., it is termed as a claused bill of lading.
AIRWAY BILL
An airway bill, also called an air consignment note, is a receipt issued by an airline for the
carriage of goods. As each shipping company has its own bill of lading, each has its own airway bill.
The Export Inspection council of India was set up by the Government f India in 1963 to
provide for sound development of export trade through quality control and pre-shipment
inspection. The Export Inspection Council (EIC) consists of a Chairman appointed by the Central
Government, 4 ex-officio members and 15 members nominated by the central government. The
main functions of EIC as assigned are:
For carrying out pre-shipment inspection of export of goods, the Government of India has
established five export inspection agencies one each at Calcutta, chennai, cochin, Delhi and Mumbai
under the technical and administrative control of the EIC. The Export inspection agencies have also
been authorized by the Government of India to issue certificates of orgin under the Generalised
system of preferences for export to Japan, EEC, USA and East European countries.
SYSTEM OF INSPECTION
1. Consignment-Wise Inspection
2. In-Process Quality Control
3. Self-certification
CONSIGNMENT-WISE INSPECTION:
Under consignment-wise inspection, each export consignment is inspected and tested by the
recognized inspection agencies by selecting consignments on the basis of statistical sampling plan to
satisfy conformity of the products with the prescribed standards.
This system lays emphasis on the responsibility of the manufacturers and processors in
ensuring consistent quality during each stage of production by exercising checks on materials,
components through inspecting process centers. The certifications of inspection in favour of units
approved under the scheme are issued by the Export Inspecting Agencies. These units are under the
supervision by the Export Inspection Agencies through random spot checks.
SELF-CERTIFICATION:
Under this system the manufacturing units fulfilling the norms prescribed are authorized by
the central government to issue certificates of inspection under the Act by themselves for their
products.
LETTER OF CREDIT
A letter of credit is a document containing the guarantee of a bank to honour drafts drawn
on it by an exporter, under certain conditions and up to certain amounts , provided that the
beneficiary fulfils the stipulated conditions
BILL OF EXCHANGE
The Negotiable Instruments Act, 1881, defines the bill of exchange as " an instrument in
writing containing an unconditional order, signed by the maker, directing a certain person to pay a
certain sum of money only to, or t the order of, a certain person or the bearer of the instrument.
There are five important parties to a bill of exchange:
The Drawer
The Drawee
The Payee
The Endorser
The Endorsee
TRUST RECEIPT
If the importer is unable to take possession of the documents by making the payment on the
D/P bill following the arrival of the goods, the merchandise may be made available to the importer
by his bank under an arrangement whereby the importer signs a trust receipt. Under this
arrangement, the importer is allowed to sell the imported goods by acting as an agent of the bank;
but the retains ownership of the merchandise until the importer has made full settlement; all sums
received from the sale of goods must be credited to the bank until such settlement is made.
LETTER OF HYPOTHECATION
MARINE INSURANCE
Insurance granted to cover loss or damage to ships or goods in transit either by sea, air or
land is called Marine Insurance. Insurance of ships is called " Hull Insurance" while cover provided in
respect of goods sis termed as cargo insurance.
Insurance Interest: A person has an insurable interest in a thing if he will be benefited by its safety or
due arrival or be prejudicial by its loss, damage or detention or incur in respect thereof.
Utmost Good Faith: It is the duty of the proposer to disclose clearly and accurately all material facts
related to the risk.
Indemnity: Marine insurance is a contract of indemnity whereby the underwriter or assurer or the
insurance company agrees for a stated consideration known as premium, to protect and indemnity
the shipper or the owner of the goods against loss or damage or expense in connection with the
goods at the risk, if the damage is caused by perils specified in the contract known of policy of the
insurance.
Subrogation: The insurer upon payment of loss is entitled to the benefits of any rights against third
parties that may be held by the assured himself.
Contribution: If there are more than one insurer it is desirable not only to ensure that the insured
does not receive more than indemnity but that any loss is fairly spread between all the insurers
involved.
Proximate Cause: Proximate cause means the active efficient cause that sets in motion a train of
events, which brings about a result, without the intervention of any force started and working
actively from a new and independent source.
How to Insure:
Under marine insurance the policy will be taken by two ways. One is open policy and another one is
specific policy. In open policy the insurance will be made for all the shipments made in a period.
Whereas in specific policy the insurance will be made by shipment wise.
RISKS COVERED:
Perils of the Sea: It includes out-of-the ordinary wind and wave action, lightning, collision and
damage by sea water when caused by perils such as opening of the seams of the vessel by collision.
Fire: Fire includes both direct fire damage and also consequential damage as by smoke or stream,
and loss resulting from efforts to extinguish a fire.
Assailing thieves: This refers to a forcible taking rather than clandestine theft or mere pilferage.
Jettison: Jettison is the throwing of articles over board, usually to lighten the ship in times of
emergency.
Barratry: Barratry is the willful misconduct of master or crew and would include theft, wrongful
conversion, intentional casting a way of vessel or any breach of trust with dishonest intent.
All other perils: This clause does not mean all the perils that be fall a shipment, but sea perils of the
sort listed in the clause.
Marine insurance does not cover the losses or damages expected to occur in the following
cases:
Under Normal Conditions: Because of the nature of goods themselves their inherent vice
such as breakage of fragile glasses packaged inadequately. Damage caused by original packing is
excluded no matter when the damage itself may occur.
Leakages or hook losses on goods packed in bags, solidification of palm and coconut oil
unless heated storage is provided.
Delay: This means that loss of market and loss, damage or deterioration arising out of delay
in transit are not covered.
Ordinary unavoidable Trade Losses: These losses such as shrinkage and evaporation in bulk
shipment are also not covered unless specially insured.
Wars, Strikes and Commotions: Such as these perils are commonly excluded unless
endorsed.
Dangerous Drugs Clause: The dangerous drugs clause stipulates that losses connected with
the shipment of optimum and other dangerous drugs will not be paid for unless certain specified
conditions are met.
IMPLIED CONDITIONS:
i. that the assured will exercise utmost good faith in disclosing the actual facts.
ii. That the generally accepted usages of trade applicable to the insured subject-matter
are followed; and
iii. That the assured shall not contribute to the loss through willful fault or negligence.
HOW MUCH TO INSURE FOR?
In a marine insurance the polices are normally 'valued'. That is insurance is done at the
agreed value, i.e. Cost of the price of the cargo plus freight and all charges plus an allowance for
normal expected profit. Normally, the expected profit is calculated at 10% of CIF value, but this
figure may be increased upon the consignee's specific request.In the case of total loss, the agreed
price is paid and in the case of partial loss, a percentage of the total insured value is recoverable.
Duties of Assured: Before making a claim the assured must perform certain duties. They
are:The assured must make reasonable effort to minimize the loss.
o He must immediately inform the nearest agent of his underwriter, arrange for a
survey of the damage and supply the necessary commercial documents.
o He must make timely written claim upon the carrier for the loss or damage within a
reasonable time with the necessary documents.
The following documents are usually sent with the claim application.
Original and duplicate copies of the marine insurance policy or the certificate.
Ocean bill of lading
Original shippers invoice
Packing list, weight certificate or other evidence of the nature and conditions of the
goods at the time of shipment.
Survey report of the underwriter's re[representative .
Claim bill: This sets out the actual claim giving the details of the loss or damage of
the cargo.
TOTAL LOSS:
A total loss may be actual or constructive. An actual total loss may occur when the goods are
destroyed or when they arrive so damaged as to cease to be a thing of the description insured. A
constructive total loss occurs when the expenses of recovering or repairing the goods would exceed
their value after the expenditure has been incurred.
PARTIAL LOSS:
If loss is less than total it is called average in insurance term. Average may be particular or
general.
PARTIAL: There are two types of particular average losses.i.e. Total loss of a part of the
goods and goods arrived in a damaged condition. That means when a part of the total consignment
is completely lost, the insured value of such goods shall be calculated proportionately. The second
type is that the part goods are arrived with damaged condition.
The exporter has to receive payment for the goods he supplied to the importer. How it is to be paid
can be decided by the exporter and importer before the shipment is made. Generally there are five
methods of export payment and they are explained below:
PAYMENT IN ADVANCE:
This type of payment is most uncommon. However, if thee is heavy demand for the goods
and the goods are tailor-made for the customer, the exporter may get payment in advance. Under
this method, the exporter receives a bank or a bank advice either on confirmation of the order or at
any time before shipment. This is the most advantageous form of payment as the exporter does not
have any risk but, as we have already observed, it is not very common.
OPEN ACCOUNT:
Under this method, the exporter sends the documents directly to the importer with a
covering letter asking for the invoice value to be remitted to him. In this case the exporter does not
draw any bill of exchange. Hence, there is no evidence of the obligation to pay. Though this
method is simple and less expensive the exporter carries the burden of finance and it also involves
real risk for the exporter. The exporter may accept this method of payment if there is keen
competition and there is a long and established relationship between and the importer.
DOCUMENTARY BILLS:
This method of payment finances a large proportion of overseas trade. These bills act as a
bridge between the exporter's willingness to part with his money unless he is paid for and importer's
unwillingness to part with his money unless he is sure of receiving the goods. The commercial banks
that deal in foreign exchange provide a via media by giving the necessary assurances to both the
parties. Under this method of payment the exporter agrees to submit documents to his bank along
with the bill of exchange. The documents include bill of lading, involve and a marine insurance
policy.
Under this method there are two types of payments viz: Documents against payment (D/P)
and documents against Acceptance (D/A). Under D/P bills, the exporter's bank will send the
documents to its correspondent bank in the importer's country, which will present the documents to
the importer and ask him to pay the money for the goods exported. On payment of the bill of
exchange the bank will deliver the documents to the importer so that he can take possession of the
goods. In case of D/A bills, the correspondent bank will submit the bill of exchange to be signed by
the importer t indicate his acceptance of the payment obligation. After the importer accepts the bill
he will get possession of the documents for taking delivery of the goods. On the due date of
payment, the bank will again present the bill to the importer who then makes the payment. The
money received is remitted through usual banking channels to be credited to the exporter's account.
LETTRS OF CREDIT
A letter of credit is a document containing the guarantee of a bank to honour drafts drawn
on it by an exporter, under certain conditions and up to certain amounts, provided that the
beneficiary fulfils the stipulated conditions (Detailed explanation for letter of credit was given
separately).
In this case, the exporter makes shipment to the overseas consignee/agent, but retains the
title to the goods as also the risk attendant thereto; even though the overseas consignee will have
the physical possession of the goods. The payment for the goods shipped is made only when the
agent ultimately sells the goods to other parties. If the agent fails to sell the goods, he may return
the goods at any time without any liability and at the seller's expense.
LETTER OF CREDIT
A letter of credit is a document containing the guarantee of a bank to honour drafts drawn
on it by an exporter, under certain conditions and up to certain amounts, provided that the
beneficiary fulfils the stipulated conditions. The letter of credit offers advantages to both the seller
and buyer. As far as the seller is concerned, a letter of credit ensures him payment for the goods he
sells, provided, of course, that he follows the instructions. Though the buyer has to have the
botheration of arranging for the letter of credit, it may enable him to obtain more liberal discounts
and a lower price from the seller. Further, the buyer is assured that the shipment will be made by
the date specified in the letter of credit, or else the credit will expire.
1. The Opener: The opener is the buyer(importer). The letter of credit is opened at the
initiative and request of the buyer.
2. The Issuer: The issuer, also called the opening or issuing bank, is the bank in the
importer's country issuing the letter of credit at the request of the importer.
3. The Beneficiary: The beneficiary is the party in whose favour the credit is issued; that is
the beneficiary is the seller or exporter.
4. The confirming Bank: The confirming bank is a bank in the exporter's country, which
guarantees the credit at the request of the issuing bank. The confirming bank
undertakes all the obligations of the issuing bank as a primary party to the credit, and
even if the issuing bank fails during the currency of the credit, the confirming bank is
obliged to honour its commitment.
5. The Notifying Bank: The notifying bank is the bank, which, at the request of the issuing
bank, notifies the beneficiary that the credit has been opened in his favour. If the letter
of credit is confirmed, the confirming the bank advises the beneficiary accordingly.
6. The Paying Bank: The paying bank is the bank on which the draft or bill of the exchange
is to be drawn under the commercial credit. The paying bank may be the issuing bank,
the confirming bank or the notifying bank.
7. The Negotiating Bank: The negotiating bank is the bank, which pays or accepts the drafts
of the exporter. If no paying bank is specified in the credit, the beneficiary may go the
any bank and present the draft and related documents under the credit; and if the bank
agrees to negotiate the documents, it becomes the negotiating bank.
1. Clean Letter of Credit: This kind of letter of credit may be negotiated against a clean draft. A
clean draft is a draft without any documents attached to it.
2. Documentary Letter of Credit: Under this, the draft must be accompanied by the documents
specified in the letter of credit.
3. Assignable Credit; Under this kind of L/C, the beneficiary may assign his rights to another
beneficiary, either within a stated period or before the expiry date of the credit.
4. Non-Assignable Credit: As opposed to the assignable credit, the named beneficiary of a non-
assignable L/C cannot transfer his rights to another party.
5. Cash credit; under the cash credit, the exporter may draw a sight draft on the bank. The
great advantage of this type of credit, therefore, is that the beneficiary will receive cash for
his draft as soon as the goods are ready for shipment and the relevant documents in proper
order are represented to the bank.
6. Acceptance Credit: Under this arrangement, the bank merely 'accepts' the drafts drawn by
the exporter. After the bank has accepted it, the draft becomes a bank acceptance, which
may be readily discounted or sold by the exporter to the accepting bank, to other banks or
to exchange dealers.
7. Revocable credit: The revocable letter of credit may be revoked or cancelled at any time
without the consent of, and without notice to, the beneficiary. As the revocable L/C does not
adequately protect the beneficiary on the basis of this type of L/C are not common.
8. Irrevocable Credit: An irrevocable L/C is one, which cannot be revoked, amended or
modified by the issuing bank without the express consent of all the parties concerned.
9. Confirmed Credit: If a bank in the beneficiary country confirms the L/C, it becomes a
confirmed credit. In this case, the bank issuing the L/C sends it through its branch or
correspondent bank located in the beneficiary's country with the request to add its
confirmation to the credit.
10. Back-to-Back Credit: A back-to back credit is essentially a secondary credit, opened by a bank
on behalf of the beneficiary of an original credit, in favour of a domestic supplier. The
original credit backs another credit and facilitates the purchase of the goods from a local
supplier by the beneficiary of the original L/C.
11. Revolving Credit: A revolving credit is designed to obviate the need for establishing new
credit for each shipment when the transactions are more or less continuous. Under the
revolving credit, provision may be made for making available the credit again as soon as the
importer reimburses the issuing bank with the drafts already negotiated by the paying bank.
12. Red Clause Credit: The red clause L/C enables the beneficiary to draw a predetermined value
of the L/C as its established. The red clause is an authority to the negotiating bank to make
advances to the beneficiary for the purpose of purchasing the relevant merchandise. The
conditions on which such advances may be made are incorporated in the L/C.
STEPS IN THE OPERATION OF LETTER OF CREDIT:
In Letter of credit, normally four parties are involved, viz, the applicant for the credit
(importer), the beneficiary of the credit (exporter), the issuing bank and the advising bank incase of
unconfirmed credit or the confirming bank in case of confirmed credit. The step-by-step procedure
involved can be discussed by taking an example.
M/S Rainbow limited. Chennai has secured a contract for the supply of 200 ceiling
fans to a Nigerian importer. It has been decided that the terms of payment will be a
confirmed irrevocable letter of credit. The total value of the contract is Rs.2, 00,000. Once the
contract is duly signed the Nigerian bank then sends instructions to its correspondent bank to
the credit and the advice the Rainbow limited accordingly. On receipt of this advice from the
local correspondent bank in India, the Rainbow limited., makes the shipment of he cling fns
and gets the shipping documents and other related documents. He presents these to the
correspondent bank, which scrutinizes the documents. If these are in full conformity with the
terms of the credit, it will accept the documents and make the payment to the exporter. The
documents are then forwarded to the issuing bank, which reimburses the amount to the
correspondent bank. The issuing bank in turn presents the documents to the importer and
debits his account for the corresponding amount.
The steps involved, therefore, relate to three distinct activities, viz., opening of credit,
presentation of documents and the process of payment. The entire scheme of operation can be
easily visualized with reference to the Flow chart given below.
SALES CONTRACT
BUYER SELLER
CONFIRMATION
ISSUING ORDER
OPENING ADVICE
ISSUING CONFIRMING
DOCUMENTS
BANK
BANK
The straight lines show the flow of the credit. The dashed lines shows the flow of the
documents and the dotted lines show the process of payment.
1. Purchase without cash: The importer can purchase goods on credit from foreign merchants, who
do not know him and may rely upon his standing, on the banker's credit issuing the letter of credit.
2. Payment after satisfying conditions: The importer is assured in case of documentary letter of
credit that the exporter cannot obtain any benefit under the letter of credit without actually
shipping the merchandise and handing over the documents to the bank.
3. Better terms of trade: The issuing banker lends the advantage of his own credit to the importer,
who is able to secure terms of trade from the foreign supplier, which is otherwise not possible.
4. Release against trust receipt: When banks are willing to assume credit risk of the importer,
shipping documents are surrendered to him in return for his trust receipt, and the goods released.
5. Certainty of Payment: Though the importer and the exporter are not known each other, the letter
of credit provides an absolute assurance that the bills of exchange drawn under the letter of credit
will be honoured.
6.Credit facilities: The exporter can secure loans from his bank to buy or manufacture the goods to
be supplied on the strength of the letter of credit.
7. Discount facilities: The bills of exchange drawn under the letter of credit are readily discounted
with the advising/confirming banker or any other banker, because of the firm undertaking given by
the opening banker.
COMMODITY BOARDS
The government of India has established a number of commodity boards to be
responsible for the production, development and export of some commodities like tea, coffee,
rubber, tobacco spices etc. These boards are statutory bodies.
TEA BOARD:
The Tea Boards head office is in Calcutta. The functions of these boards includes
- The coffee board participates in selected international exhibitions and trade fairs for
highlighting the high quality and excellent flavour of Indian coffee for the awareness of
importers and roasters from different countries.
- Special advertisements on the excellence of the Indian coffee were released in
important coffee trade journals and magazines in countries, which have potential
markets for Indian coffee.
- Studies on diseases of coffee and their control were carried out.
- For improving the productivity and quality of coffee, contact programme was launched
in 4 regions covering a total number of 1018 growers.
- Keeping view the production of quality coffee at estate level, training programme was
conducted.
TOBACCO BOARD:The following are the functions rendered by tobacco board to promote export of
tobacco:
- Allowing exports to countries facing foreign exchange crunch on long term credit terms.
- Allowing exports of tobacco to Russia through debt repayment route.
- Sponsoring delegations abroad and participation in international trade fairs.
- Improving yield and quality of tobacco through control of diseases in tobacco nurseries,
balanced fertilization, pest and disease control.
- Improvement of curing and storing facilities by conservation of energy by roof insulation
of tobacco barns, supply of tarpaulins and supply of coal for curing.
- Improving tobacco grading through establishment of community grading centers.
SPICES BOARD:
The Spices Board has number of schemes of assistance to spice exporters such as Brand
promotion, Logo Promotion, grant of Spice House certificate etc. They are explained below:
Brand Promotion: Under this scheme, interest free long-term loans up to a maximum of 50%
of the promotion cost for a period of three years are provided to the exporters of spices in consumer
packs for promoting their individual brands in overseas markets.
Logo Promotion: In the exports of spices, quality is a key element. The spices board has a
scheme to promote a "logo mark" as a mark of quality and Indian ness of spices. The logo mark is
awarded to exporters of spices in consumer packs who fulfill certain stipulated conditions of
hygiene/processing/packaging and product quality. Logo is registered in six countries and would be
registered in another 14 countries.
Spice House Certificate: The Board has introduced a concept of 'Spice House' and it is
awarded only to those exporters who fulfill the prescribed quality standards and have necessary
processing infrastructure for production of clean quality process. Certificates have been awarded to
many manufacturers/processors of spices.
Apart from those schemes, spices board has been supplementing activities of Ministry of
Agriculture with a number of schemes that include:
The basic objective of Export Promotion Councils is to promote and develop the exports of
the country. Each council is responsible for the promotion of a particular group of products, projects
and services. There are 20 EPCs and a number of specified agencies/boards which shall be regarded
as EPCs under the Export and Import Policy. They issue Registration cum membership certificate to
exporters.
The main role of EPC is to project India's image abroad as a reliable supplier of high quality
goods and services. The major functions of the EPCs are as under:
The scheme of 100 EOU's were introduced in 1980 with a view to generating additional
production capacity for exports by providing an appropriate policy frame work, flexibility of
operations and incentives. In order to enable them to operate successfully in the international
market such units are allowed to import machinery, raw material, components and consumable at
free of custom duties. These units have to operate under custom bond and achieve the level of value
addition fixed by the Board of Approval. At present more than 500 units are in operation under the
EOU scheme.. Some of the modifications done to facilitate the exporting units in the EOUs are as
follows:
An EOU unit may export all goods and services except the items prohibited by the exim
policy.
An EOU unit may import without payment of duty for all type of goods, including capital
goods required by it for its activities provided they are not prohibited items of imports.
EOU units may import/procure from Domestic Tariff Area without payment of duty.
Second hand capital goods may also be imported duty free without any age limit.
EOU unit shall be positive net foreign exchange earner.
Only project having an investment of Rs.1 crore and above in building, plant and machinery shall
be considered for establishment under EOU scheme. Application for setting up of units under EOU
scheme may be approved by the units Approvals Committee within 15 days.
The entire production of EOU units shall be exported subject to the following:
Rejects may be sold in the domestic tariff area on payment of duties on prior intimation
to the customs authorities.
Scrap/waste arising out of production process or in connection therewith may be sold in
the domestic tariff area on payment of duties within the overall ceiling of 50% FOB
value of exports.
By products may also be sold in the domestic tariff are subject to achievement of
positive net foreign exchange on payment of applicable duties within the overall
entitlement.
Under the Foreign Trade (Development and Regulation) Act, 1992 the Central Government
has notified the Export and Import Policy for the period 2002-2007 which came into force with effect
from 1st April 2002 and shall remain in force up to 31st March 2007. The following are the salient
features of the policy as amended up to 31st March 2003.
a) Exports and Imports shall be free except in cases where they are regulated by provisions of
this policy or any other law. The item wise export and import policy shall be, as specified in
ITC, published and notified by DGFT.
b) Any person without an importer-exporter code number shall make no export or import
unless specifically exempted. This number shall be issued by DGFT.
c) The provisions given in Handbook shall govern import of samples.
d) Import of gifts shall be permitted where such goods are otherwise freely importable under
this policy.
e) Export of samples and Free of charge goods shall be governed by the provisions given in the
Hand Book.
f) All export contracts currency and invoices shall be denominated in freely convertible
currency or Indian Rupees but the export proceeds shall be realized in freely convertible
currency.
g) Goods including edible items of value not exceeding Rs.1,00,000/- in a licensing year, may be
exported as a gift.
h) Goods imported may be exported in the same or substantially the same form without a
license/certificate/permission provided that the item to be imported or exported is not
mentioned as restricted for Import or Export in the ITC.
i) A license shall contain such terms and conditions as may be specified by the licensing
authority may include the quantity, description and value of goods, actual user, the value of
addition to be achieved if any.
j) Every license shall be valid for the period of validity specified in the license.
State governments shall be encouraged to fully participate in encouraging exports from their
respective states. For this purpose, suitable provisions shall be made in the Annual Plan of the
Department of commerce for allocation of funds to the states on the twin criteria of gross exports
and the rate of growth of exports from different states. The states shall utilize this amount for
developing complementary and critical infrastructure such as rods connecting production centers
and creation of new state level economic processing zones, industrial parks etc.
Financial assistance shall be available under this scheme to the Economic Processing Zones, industry
and trade associations etc., on the basis of the competitive merits of proposal received in this regard
for marketing studies on country product focus approach basis, participation in international trade
fairs, seminars, buyer-seller meet etc.
The industrial cluster towns that export substantial portion of their products, which are world class,
should be granted recognition with a view to maximize their export profile. The common service
providers in these towns should be entitled for facility under different schemes offered by the Govt.
for export promotion. Selected towns producing goods of Rs.1000 crores or more will be notified as
Towns of Export Excellence on the basis of Potential for growth in exports.
The small-scale sector along with the cottage and Handicraft sector has been contributing to
more than half of the total exports of the country. The cottage and handicraft sector, which mostly
employs artisan and rural people, contributes significantly to this effort. In recognition of the export
performance of this sector and to further increase its competitiveness, the following facilities shall
be extended to this sector.
The units shall be eligible for funds from Market Access Imitative scheme.
Under EPCG scheme, these units will not be required to maintain average level of exports.
The units shall be entitled to the benefit of export house status on achieving lower total
export/deemed export performance of Rs.15 crores during the preceding three licensing
years.
They are also entitled to duty free imports of specified items upto 3% of FOB value of their
exports.
5.Agri Export Zones:
The services, rendered to Agri Export Zones which would be managed and coordinated by
state government would include provision of pre/post harvest treatment and operations plant
protection, processing,. Packing, storage and related R & D etc. Units Agri export zones would be
entitled for all the facilities available for exports of goods in terms of provisions of the respective
schemes.
The central government will extend support and assistance to trade and industry to launch a
nationwide programme on quality awareness and to promote the concept of total quality
management. The Regional Sub-Committee on quality complaints shall investigate quality
complaints received from foreign buyers.
7.Status Certificate:
Merchant as well as manufacturer exporters, service providers, Export Oriented Units shall be
eligible for such recognition. The status holders shall be eligible for the following new\special
facilities:
8.Service Exports:
The Service providers shall be entitled for all the facilities mentioned in the policy.
Apart from the above provisions, benefits and facilities the new Export and Import Policy
showed its emphasis through the following schemes:
FOREIGN EXCHANGE
The importing country pays money to the exporting country in return of goods either in its
domestic currency or the hard currency. This currency which facilitates the payment to complete
the transaction is called foreign exchange. This foreign exchange is the money in one country for
money or credit or goods or services in another country. Foreign exchange includes foreign
currency, cheques and foreign drafts. ` Foreign exchange is bought and sold
in foreign exchange markets. The components of foreign exchange market rate include: the buyers,
the sellers and the intermediaries. The market intermediaries of foreign exchange market include
Exchange banks dealing in foreign exchange, bill brokers, acceptance houses and Central Bank of the
country.
The transactions in the foreign exchange market, viz., buying and selling foreign currency take at a
rate which is called exchange rate. Exchange rate is the price paid in the home currency for a unit of
foreign currency. The exchange rate can be quoted in two ways namely
The Exchange rate between US dollars and Indian Rupees can be determined by demand for
and supply of US dollars in India or by Indians. The price of US $ is fixed in Indian Rupees.
The exchange rate between Indian Rupees and US $ dollars can also be determined by
demand for and supply of Indian Rupees by Americans or in USA. The price of Indian Rupee
is determined in US dollars. But the prices are same in both these methods.
Demand for Foreign Exchange: The demand for foreign exchange is determined by the country’s
Under this system, the governments used to fix the exchange rate and the central bank to operate it
by creating ‘exchange establishment fund’. The central bank of country purchases the foreign
currency when the exchange rate falls and sells the foreign exchange when the exchange rate
increases. The countries follow fixed exchange rates due to its advantages. They are:
Fixed exchange rates ensure certainty and confidence and thereby promoters international
business.
Fixed exchange rates promote long-term investments by various across the globe.
Most of the world currency like US dollar areas and sterling pound areas prefer fixed
exchange rates.
Fixed exchange rates result in economic stabilization.
Fixed exchange rates stabiles international business and avoid foreign exchange risks to a
greater extent. As such the small but international business oriented countries like UK and
Demark prefer fixed exchange rate system.
Despite these advantages, most of the world countries at present are not in favour of this system
because of the following reasons;
Due to problems with the fixed exchange rate system, IMF permits occasional
changes in the system. The system is changed into managed flexibility system. The
managed flexibility system needs large foreign exchange reserves to buy or sell
foreign exchange in order to manage the exchange rate. Maintenance of greater
reserves aggravate the problem of international liquidity.
Fixed exchange rates system may result in a large
scale destabilizing speculation in foreign exchange markets.
Long-term foreign capital may not be attracted as the exchange rates are not
pegged permanently.
The economic policies and foreign exchange policies of the countries are rarely
coordinated. In such case, the exchange rate system does not work.
Most of the economies in recent years are liberalized and globalize. These
economies prefer flexible exchange rate system.
Deficit of balance of payments of most of the countries increases under fixed
exchange rate system as the elasticities in international markets are too low for
exchange rate exchanges.
Flexible exchange rates are also called floating or fluctuating exchange rates. Flexible
exchange rates are determined by market forces like demand for and supply of foreign exchange.
Either the government or monetary authorities do not interfere or intervene in the process of
exchange rate determination. Under this system, if the supply of foreign exchange is more than that
of demand for the same, the exchange rate is determined at a low rate and vice versa. Most of the
countries in recent times are in favour of flexible exchange rates due to their advantages.
This system is simple to operate. This system does not result in deficit or surplus of foreign
exchange. The exchange rate moves automatically and freely.
The adjustment of exchange rate under this system is a continuous process.
The system helps for the promotion of foreign trade.
Stability in exchange rate in the long-run is not possible even in fixed exchange rate system.
Hence, this system provides the same benefit like fixed exchange rate system for long term
investments.
This system permits the existence of free trade and convertible currencies on a continuous
basis.
This system also confers more independence on the government regarding their domestic
policies.
This system eliminates the expenditure of maintenance of official foreign exchange reserves
and operation of the fixed exchange rate system.
Disadvantages:
However this system is also not free from the disadvantages. The disadvantages of this system
include:
Market mechanism may fail to bring about an appropriate exchange rate. The equilibrium
exchange rate may fail to give correct signals to correct the balance of payments position.
It is rather difficult to define flexible exchange rate.
Under flexible exchange rate system, the exchange rate changes quite frequently. These
frequent changes result in exchange risks, breed uncertainty and impede international trade
and capital movements.
Under flexible rate system, speculation adversely influences fluctuations in supply and
demand for foreign exchange.
Under this system a reduction in exchange rates leads to a vicious circle of inflation.
Despite the advantages of fixed exchange rate and the disadvantages of floating exchange rate
system, it is viewed that the flexible rate system is suitable for the globalization process. In addition,
the convert ability also helps the floating rate system and the globalization of foreign exchange
process.
UNIT ONE
Export by sea