International Business Unit 5, Study notes of International Business

Download International Business Unit 5 and more Study notes International Business in PDF only on Docsity!

International Business

Unit 5

Foreign Trade promotion measures

and organizations in India

Contents

 Sources of finance for foreign trade

 Special Economic Zones (SEZ)

 Export Oriented Units (EOU’s)

 Documentary letters of credit  the importer obtains a Letter of Credit from its bank, which guarantees payment to the exporter via a trade bill. Though slow to arrange, this method is virtually risk free provided the exporter presents specified error free documents (eg shipping documents, certificates of origin and a fully detailed invoice ) within a specified time period.  The high bank fees for this procedure are normally borne by the importer, and the DLC is normally reserved for expensive goods only.  Factoring  the factoring company (often the subsidiary of a bank) assumes the responsibility for collecting the trade debts of another – in this case an exporter.  The factor may provide a range of services (eg providing advances, administering the sales ledger, credit insurance etc) for an additional fee. Widely regarded as a useful means of obtaining trade finance and collecting of debts for small or medium sized exporters.  However the exporter must always bear in mind the eventual consequences of dispensing with the services of the factor and undertaking the running of the sales ledger and cash collection activities itself.

 Forfaiting  a medium term source of finance whereby a domestic bank will discount a series of medium term bills of exchange, which have normally been guaranteed by the importers bank. The forfaiting bank normally forgoes the right of recourse to the exporter if the bill is dishonoured.  The exporter obtains the benefit of immediate funds, but the bank charges are expensive. Forfaiting is normally used for the export of capital goods, where the importer pays in a series of instalments over a period of years.  Leasing and hire purchase  the exporter sells capital goods to a lessor, which in turn enters into a leasing agreement with the exporter’s overseas customer.  Alternatively the equipment can be sold to a hire purchase company which resells to the importer under a HP agreement.

 Trade finance is the financial assistance provided in the field of international trade and commerce through the use of various financial products. A plethora of financial products fall under the ambit of international trade finance, each of which is designed to ease the conduct of business among importers and exporters around the world.  Types of Trade Finance available in India  The nature and purpose of trade finance are quite different from the usual financing of products and services. As such, trade finance products are unlike conventional financing products. Some typical trade finance products available in India are listed below:  Term Loans  Working Capital Limits like Overfraft and Cash Credit  Letters of Credit  Invoice Discounting or Invoice Factoring  Export Credit (Packing Credit)  Insurance

 Term Loans  What are term loans?  In Term Loans, the amount borrowed has to be repaid in installments over a certain period of time. Usually this period is upto 10 years, but in some cases it can go upto 30 years depending on the financer. Such funds are given at a certain rate of interest which is to be repaid along with the principal amount. Term Loans are mostly used for a long term project, where the business is expecting the return of investment to come in after a certain period of time.  Who provides term loans?  Term Loans are sanctioned for projected loans. They are basically provided by banks and financial institutions. Term loans are for a specific period of time and the repayment is done either in fixed rate or floating interest rate.  Benefit of term loans:  A business can have a large amount of money for urgent needs. Monthly costs can become affordable in terms of purchase of items and assets. They can easily be converted into equity and other sources at the conditions, laid by financial institutions.

 Letter of Credit  How letter of credit works in India?  Letters of credit are used to reduce the risk of non-receipt. The buyer’s bank provides a payment guarantee to the seller against the goods shipped. Banks are often ready to finance against Letter of Credit (LC) as there is an inborn security in an confirmed LC that the issuing bank will make the payment in case of default.  Who provides Letter of Credit?  Banks are involved in various aspects of international trade and offer services like letter of credit (LOC)-based financing, supply chain finance, open account financing etc. Trade finance companies also provide supply chain finance and letters of credit. Besides, they can provide structured trade finance, invoice factoring, receivables discounting, and other customised products.  LOC - Beneficial for which party:  The beneficiary is the party which gets the payment under a letter of credit. Once the beneficiary gives all the necessary documents with the bank in accordance with the terms and conditions, he becomes the main party under letter of credit.

 Invoice Factoring or Invoice Discounting  What is invoice factoring?  You can approach your bank, a financial institution or a trade finance company and present your invoice to them for faster liquidation. The banker or the financial institution could purchase, collect, or even discount the bill. For example in Invoice Discounting you can submit your invoice along with certain other documents to Drip Capital, which advances up to 80 % of the invoice value within 24 hours. On maturity of the invoice, the importer pays Drip Capital, which then settles the remaining amount after accounting for the agreed-upon fee.  How it works?  A business client makes an agreement with a factoring company, where after an agreement the company handles the clients sales and credit for a period of time. Factoring companies provide goods & service to customers who have credit worth & then submit correct invoices. Once the procedure is completed the company will then pay you the remaining balance, taking their commission in account.  Benefits of Invoice Factoring:  If you are awaiting payment against shipments made and receive a new order, you may not have the working capital to start production immediately. By factoring in your existing receivables, you get the working capital required to kick-start the next round of production. This way, you are able to expand your market presence and business volume.

Introduction

S E Z 1 3

 A Special Economic zone (SEZ) is a geographical region

that is designed to export goods and provide

employment. SEZs are exempt from federal laws

regarding taxes, quotas, FDI-bans, labor laws and other

restrictive laws in order to make the goods manufactured

in the SEZ at a globally competitive price.

 It is a specifically delineated duty-free enclave and shall

deemed to be a foreign territory for the purposes of trade

operations and duties and tariffs.

 To provide and internationally competitive and hassle-

free environment for exports

History of SEZ

First known SEZ- Puerto Rico- 1947 Ireland and Taiwan followed- 1960 China made the SEZ’s a global concept- largest number of SEZ’s – Shenzen 1980 Revolution came in 2000 - inorporatio n of SEZ in EXIM policy SEZ act introduces in India- 2005 1 S^ E^ Z 4

Free Trade Zones (FTZ)  Also known as export processing zone (EPZ), also zone, formerly free port called foreign-trade  It is an area within which goods may be landed, handled, manufactured or reconfigured, and re-exported without the intervention of the customs authorities  Only when the goods are moved to consumers within the country in which the zone is located do they become subject to the prevailing customs duties  The world's first Free Trade Zone was established in Shannon, Ireland (Shannon Free Zone)  Most FTZs located in developing countries like Brazil, Colombia, India, Indonesia, El Salvador, China, the Philippines, Malaysia, Bangladesh, etc. 5

Free Port Or Free Zones (FZ)

1 7  Most commonly a free port is a special customs area or small customs territory with generally less strict customs regulations  Many international airports have free ports, though they tend to be called customs areas, customs zones, or international zones.

Free Economic Zones 1 9  Free economic zones or free zones refer to designated areas in which companies are taxed very lightly or not at all in order to encourage economic activity.  Sometimes they are called free ports  Example : the free port of Trieste (in Italy)

Urban Enterprise Zones

20 S^ E^ Z

 It is an area in which policies to encourage

development are implemented

economic growth and

 Urban Enterprise Zone policies generally offer tax concession, infrastructure

incentives, and reduced regulations to attract investments and private

companies into the zones.

 Urban Enterprise Zones are areas where companies can locate free of certain

local, state, and federal taxes and restrictions.

 Urban Enterprise Zones are intended to encourage development in blighted

neighborhoods through tax and regulatory relief to entrepreneurs and

investors who launch businesses in the area.