Introduction to International Business

In the contemporary world, countries are undergoing a fundamental shift in how they produce and market goods and services. The traditional pursuit of national economic self-reliance is giving way to a new era of global interdependence. National economies are becoming increasingly reliant on one another for both procuring and supplying a vast array of products and services. This growing integration is a result of increased cross-border trade, investment, and collaboration, effectively blurring the lines between national economies.

The primary catalysts for this radical change have been the revolutionary advancements in communication technology and physical infrastructure. The emergence of the internet, mobile communication, and more efficient and faster means of transportation has dramatically reduced the barriers of geographical distance and brought nations closer than ever before. Simultaneously, global institutions like the World Trade Organisation (WTO) and the economic reforms undertaken by the governments of different countries have been major contributory factors to the surge in interactions and business relations among nations.

We now live in a world where the obstacles to the cross-border movement of goods, services, capital, and people have been substantially reduced. National economies are becoming increasingly borderless and are integrating into a single global economy. It is no wonder that the world today is often referred to as a ‘global village’. Business is no longer confined to the boundaries of one's home country. More and more firms are venturing into international business, which presents them with numerous opportunities for growth, diversification, and increased profits.

India has a long and rich history of trading with other countries. However, in recent decades, and particularly since the economic liberalization of 1991, India has significantly accelerated its process of integrating with the world economy, leading to a substantial increase in its foreign trade and investment. This has resulted in a two-way flow: many multinational corporations (MNCs) have entered the Indian market, while a growing number of Indian companies have also stepped out to compete and market their products and services on the global stage.

Meaning of International Business

It is important to first distinguish between domestic and international business. A business transaction that takes place within the geographical boundaries of a single nation is known as domestic or national business. It is also referred to as internal business or home trade.

In contrast, international business refers to manufacturing and trade that occurs beyond the boundaries of one's own country. It can be defined as those business activities that take place across national frontiers. It is a much broader concept than just international trade. International business involves not only the international movements of goods and services (exports and imports) but also the cross-border movement of capital, personnel, technology, and intellectual property, such as patents, trademarks, and copyrights.

Many people mistakenly use the terms international business and international trade synonymously, but this is not correct. While international trade, comprising the export and import of goods, has historically been a major component of international business, its scope has expanded substantially in recent times. International trade in services—such as tourism, transportation, banking, and communication—has grown tremendously. Equally important are the increased levels of foreign investment and the overseas production of goods and services. Companies are increasingly investing in foreign countries and setting up manufacturing and service facilities there to be closer to their foreign customers and to serve them more effectively and at a lower cost. All these activities—trade, services, investment, and overseas production—form part of international business.

In conclusion, international business is a comprehensive term that includes both the trade (exports and imports) and the production of goods and services across national borders.

Reason for International Business

The fundamental reason underlying the existence of international business is that countries cannot produce equally well or cheaply all that they need. This is due to the unequal distribution of natural resources among them and the significant differences in their productivity levels. The availability of various factors of production—such as skilled labour, capital, raw materials, and technology—that are required for producing different goods and services differs from nation to nation. Moreover, labour productivity and production costs vary among nations due to a host of socio-economic, geographical, and political factors.

Because of these differences, it is common to find that one particular country is in a better position to produce a certain product of a higher quality and/or at a lower cost than other nations can. In other words, some countries have a comparative advantage in producing select goods and services. As a result, each country finds it advantageous to specialize in producing those goods and services that it can produce most effectively and efficiently at home, and to procure the rest of its needs through trade with other countries that can produce them at a lower cost. This principle of specialization and exchange is precisely the reason why countries trade with each other and engage in international business.

This principle of geographical specialization is not just applicable at the international level; it is the same reason that domestic trade occurs between different regions within a single country. For example, in India, West Bengal specializes in jute products, while Maharashtra is a hub for cotton textiles. The same principle of territorial division of labour applies globally. Most developing countries, which are abundant in labour, specialize in producing and exporting labour-intensive goods like garments. They, in turn, import capital-intensive goods like machinery from developed nations, which have the capital and technology to produce them more efficiently.

For individual firms, the motivation is similar. They engage in international business to import what is available at lower prices in other countries and to export their goods to other countries where they can fetch better prices. Beyond just price considerations, there are several other benefits that nations and firms derive from international business, which will be discussed later in this chapter.

International Business vs. Domestic Business

Conducting and managing international business operations is significantly more complex and challenging than undertaking a purely domestic business. This is because international business operates across different political, social, cultural, and economic environments. A business firm cannot simply extend its domestic business strategy to foreign markets and expect to succeed. To be successful in overseas markets, firms must carefully adapt their product, pricing, promotion, and distribution strategies to suit the specific requirements of each target foreign market. The key aspects in which domestic and international businesses differ from each other are discussed below:

(i) Nationality of Buyers and Sellers

In domestic business, both the buyers and sellers are from the same country. This shared nationality makes it easier for them to understand each other's culture, language, and business practices, facilitating smoother transactions. In international business, however, the buyers and sellers come from different countries. These differences in language, attitudes, social customs, and business goals can make communication and negotiation more difficult and can lead to misunderstandings.

(ii) Nationality of Other Stakeholders

In domestic business, other stakeholders such as employees, suppliers, and shareholders are typically citizens of the same country, sharing a relatively consistent set of values. In international business, the firm has to interact with stakeholders from multiple nations. This makes decision-making much more complex, as the firm must take into account a wider and often conflicting set of values and aspirations.

(iii) Mobility of Factors of Production

The degree of mobility of factors of production, especially labour and capital, is generally much lower between countries than it is within a single country. While these factors can move freely within a country's borders, their movement across nations is restricted by legal barriers (like immigration laws and capital controls) as well as by socio-cultural and economic differences that make it difficult for labour to adjust.

(iv) Customer Heterogeneity Across Markets

Domestic markets are relatively more homogeneous. While there are regional differences, they are not as stark as the differences between customers from different countries. Buyers in international markets come from diverse socio-cultural backgrounds, with significant differences in their tastes, fashions, languages, beliefs, and customs. These differences complicate the task of product design and marketing strategy, requiring significant adaptation for each market.

(v) Differences in Business Systems and Practices

Business systems and practices can vary considerably from country to country. Nations differ in terms of their level of economic development, the availability and quality of their infrastructure, and their business customs. These differences require firms entering international markets to adapt their production, finance, and marketing plans to suit the local conditions.

(vi) Political System and Risks

The political environment, including the type of government, political stability, and the risk of political interference, has a profound impact on business operations. In international business, a firm must navigate multiple and often unpredictable political environments. A major political risk is the tendency of some nations to favour domestic products and services over those from foreign countries, creating a significant barrier for international firms.

(vii) Business Regulations and Policies

Each country has its own set of business laws, regulations, and economic policies. While these are relatively uniform within a country, they differ widely among nations. An international business must contend with a complex web of varying tariff and taxation policies, import quota systems, and other controls that often discriminate against foreign products and services.

(viii) Currency Used in Business Transactions

Domestic business transactions are conducted in a single currency. International business, however, involves the use of multiple currencies. The exchange rate—the price of one currency in terms of another—is constantly fluctuating. This currency fluctuation adds a layer of complexity and risk to international transactions, affecting pricing, profitability, and financial management.

Major Differences Between Domestic and International Business

Scope of International Business

As highlighted earlier, the scope of international business is much broader than just international trade. It encompasses a wide variety of ways in which firms can operate internationally. The major forms of business operations that constitute international business are as follows:

(i) Merchandise Exports and Imports

This is the most traditional and visible form of international business. Merchandise refers to goods that are tangible, meaning they can be seen and touched. Merchandise exports involve sending tangible goods from the home country to a foreign country. Merchandise imports involve bringing tangible goods from a foreign country into one's own country. This is also known as trade in goods and excludes trade in services.

(ii) Service Exports and Imports

This involves trade in intangibles. Because of the intangible nature of services, this is often referred to as invisible trade. A wide variety of services are traded internationally, including tourism and travel, transportation, communication, banking, insurance, professional services (like consultancy and research), marketing, and educational services. For many countries, including India, the export of services has become a major source of foreign exchange earnings.

(iii) Licensing and Franchising

This involves a contractual arrangement where one firm (the licensor or franchiser) grants another party in a foreign country the right to use its intellectual property—such as patents, trademarks, or technology—in return for a fee, typically called a royalty. Licensing is generally used in connection with the production and marketing of goods. For example, Pepsi and Coca-Cola are produced and sold worldwide by local bottlers under a licensing system. Franchising is a similar concept but is typically used in connection with the provision of services. The rules set by the franchiser are usually much stricter. McDonald's and Pizza Hut are classic examples of businesses that have expanded globally through franchising.

(iv) Foreign Investments

Foreign investment is another crucial form of international business. It involves the investment of funds from one country into another in exchange for a financial return. Foreign investment can be of two main types:

• Foreign Direct Investment (FDI): This takes place when a company directly invests in physical assets, such as a plant or machinery, in a foreign country with the intention of undertaking production and marketing activities there. FDI provides the investor with a controlling interest in the foreign company. It can be done by setting up a joint venture with a local partner or by establishing a wholly owned subsidiary (with 100% ownership).

• Portfolio Investment: This involves a company making an investment in another company by acquiring its shares or providing it with loans. The investor in a portfolio investment does not get directly involved in the production and marketing operations; they simply earn an income in the form of dividends or interest. This is a more passive form of investment compared to FDI.

Benefits of International Business

Despite its greater complexities and risks, international business is of immense importance to both nations and individual business firms. It offers them a multitude of benefits that have been a major driving force behind the phenomenon of globalisation.

Benefits to Countries

(i) Earning of Foreign Exchange

International business helps a country to earn valuable foreign exchange. This foreign currency can then be used to pay for its imports of essential goods and services that might not be available domestically, such as capital goods, advanced technology, petroleum products, and certain pharmaceuticals.

(ii) More Efficient Use of Resources

International business allows countries to specialize in producing what they can produce most efficiently and to trade their surplus with other countries to procure what others can produce more efficiently. This global specialization leads to a much more efficient use of the world's resources, resulting in a larger total output of goods and services that benefits all trading nations.

(iii) Improving Growth Prospects and Employment Potentials

Producing solely for the domestic market can severely restrict a country's growth and employment prospects. By tapping into foreign markets, countries, especially developing ones, can produce on a larger scale, which stimulates economic growth and creates significant employment opportunities for their people. The success stories of countries like Singapore and South Korea, which adopted an 'export and flourish' strategy, are a testament to this.

(iv) Increased Standard of Living

In the absence of international trade, the variety and quality of goods and services available to consumers would be severely limited. International business allows people to consume goods and services produced in other countries, giving them access to a wider range of products and often at lower prices, which leads to an overall improvement in their standard of living.

Benefits to Firms

(i) Prospects for Higher Profits

International business can often be more profitable than domestic business. When domestic prices are low or the market is saturated, business firms can earn higher profits by selling their products in countries where prices are higher and demand is strong.

(ii) Increased Capacity Utilisation

Many firms set up production capacities that are in excess of the demand in their domestic market. By seeking out orders from foreign customers, these firms can utilize their surplus production capacity more effectively, which leads to economies of scale, lower production costs, and improved profitability.

(iii) Prospects for Growth

When the demand for a firm's products starts to stagnate or saturate in the domestic market, venturing into overseas markets can provide significant new growth opportunities. This is precisely what has prompted many multinational corporations from developed countries to enter the rapidly growing markets of developing countries.

(iv) Way Out of Intense Competition in the Domestic Market

When the competition in the domestic market becomes very intense, internationalization can seem like the only viable path to achieve significant growth. A highly competitive domestic market often drives companies to go international in search of new, less-contested markets for their products.

(v) Improved Business Vision

For many forward-thinking companies, the decision to go international is a part of their long-term strategic vision. It stems from an urge to grow, a need to become more competitive globally, a desire to diversify their operations and risks, and to gain the strategic advantages of internationalisation.

Modes of Entry into International Business

The term 'mode' simply means the manner or way. Therefore, the phrase 'modes of entry into international business' refers to the various ways in which a company can enter into and operate in international markets. These modes vary significantly in terms of the level of commitment, control, risk, and profit potential they offer. The main modes of entry are:

Exporting and Importing

Exporting refers to sending goods and services from the home country to a foreign country, while importing is the purchase of foreign products and bringing them into one's home country. This can be done in two ways:

• Direct Exporting/Importing: The firm itself approaches the overseas buyers/suppliers and manages all the formalities of the transaction, including shipment and financing.

• Indirect Exporting/Importing: The firm's participation is minimal, and most of the tasks are carried out by middlemen, such as export houses or buying offices.

Advantages

• It is the easiest and least complex way of entering international markets.

• It requires less investment of time and money compared to other modes like setting up a foreign plant.

• As there is no direct investment in foreign countries, the exposure to foreign investment risks is nil or very low.

Limitations

• It involves additional costs for packaging, transportation, and insurance, which can make the product less competitive.

• It is not a feasible option when there are import restrictions (like high tariffs or quotas) in the foreign country.

• Export firms have limited contact with the foreign markets and may not be able to understand and serve the customers as well as local firms can.

Contract Manufacturing

Contract manufacturing, also known as outsourcing, is a type of international business where a firm enters into a contract with local manufacturers in a foreign country to get its goods or components produced as per its specifications. Major international companies like Nike and Reebok get their products manufactured in developing countries through this mode.

Advantages

• It allows the international firm to get its goods produced on a large scale without any investment in setting up production facilities.

• As there is no investment in the foreign country, there is hardly any investment risk.

• It gives the firm the advantage of getting its products manufactured at a lower cost, especially if the local producers are in countries with lower material and labour costs.

• The local manufacturer also benefits by getting a ready market and greater utilization of their production capacity.

Limitations

• The local firms might not adhere to the required quality standards, causing product quality problems for the international firm.

• The local manufacturer loses control over their manufacturing process, as the goods must be produced strictly as per the contract's terms.

• The local firm is not free to sell the output as per its will and has to sell it to the international company at a predetermined price.

Licensing and Franchising

Licensing is a contractual arrangement in which one firm (the licensor) grants another firm in a foreign country access to its patents, trade secrets, or technology for a fee called a royalty. Franchising is a similar concept but is typically used in the service industry, and the rules set by the franchiser are usually much stricter.

Advantages

• The licensor/franchiser has to make virtually no investment abroad, making it a less expensive mode of entry.

• As there is no foreign investment, the licensor/franchiser is not a party to any losses that might occur.

• As the business is managed by a local person, there is a lower risk of business takeovers or government interventions.

• The licensee/franchisee has greater market knowledge and contacts, which can be very helpful.

Limitations

• There is a danger that once the licensee becomes skilled, they could start marketing a similar product under a different brand name, becoming a competitor.

• If not maintained properly, trade secrets can be divulged to others in the foreign market.

• Conflicts can develop between the licensor and the licensee over issues like the payment of royalty and quality standards.

Joint Ventures

A joint venture means establishing a firm that is jointly owned by two or more otherwise independent firms. This can be done in three ways: a foreign investor buying an interest in a local company, a local firm acquiring an interest in an existing foreign firm, or both the foreign and local entrepreneurs jointly forming a new enterprise.

Advantages

• As the local partner also contributes equity capital, the international firm finds it financially less burdensome.

• The foreign firm benefits from the local partner's knowledge of the host country's culture, political systems, and business systems.

• It allows the firms to share the costs and risks of entering a foreign market.

Limitations

• The foreign firm has to share its technology and trade secrets with the local partner, running the risk of them being disclosed.

• The dual ownership arrangement can lead to conflicts and battles for control between the investing firms.

Wholly Owned Subsidiaries

This entry mode is preferred by companies that want to exercise full control over their overseas operations. The parent company acquires full control over the foreign company by making a 100% investment in its equity capital. This can be established in two ways: by setting up a new firm from scratch (a greenfield venture) or by acquiring an established firm in the foreign country.

Advantages

• The parent firm is able to exercise full control over its operations in the foreign country.

• The parent company is not required to disclose its technology or trade secrets to others.

Limitations

• The parent company has to make a 100% equity investment, which is not suitable for small and medium-sized firms.

• The parent company has to bear the entire risk of losses from the failure of its foreign operations.

• Some countries are averse to the setting up of 100% wholly owned subsidiaries by foreigners, which can lead to higher political risks.

Export-Import Procedures and Documentation

A major distinction between domestic and international operations is the sheer complexity of the latter. Exporting and importing goods is not as straightforward as buying and selling in the domestic market. Since foreign trade transactions involve the movement of goods across national frontiers and the use of foreign exchange, a number of complex formalities must be performed. The following sections provide a discussion of the major steps and documentation involved in completing export and import transactions.

Export Procedure

The typical steps involved in an export transaction are as follows:

1. Receipt of Enquiry and Sending Quotations: The prospective buyer (importer) sends an enquiry to the exporter, requesting information on price, quality, and terms. The exporter replies with a quotation, also known as a proforma invoice.

2. Receipt of Order or Indent: If the buyer finds the quotation acceptable, they place an order, also known as an indent, which contains all the details of the goods required.

3. Assessing Importer’s Creditworthiness and Securing a Guarantee for Payments: To minimize the risk of non-payment, the exporter demands a Letter of Credit (LC) from the importer. An LC is a guarantee issued by the importer's bank that it will honour the payment of the export bills.

4. Obtaining Export Licence: The exporting firm must have an export licence. This involves opening a bank account, obtaining an Import Export Code (IEC) number from the DGFT, and registering with the appropriate export promotion council and the ECGC (Export Credit and Guarantee Corporation).

5. Obtaining Pre-shipment Finance: The exporter approaches their bank for pre-shipment finance to procure raw materials and process the goods.

6. Production or Procurement of Goods: The exporter gets the goods ready as per the importer's specifications.

7. Pre-shipment Inspection: The Government of India has made the inspection of certain goods compulsory to ensure quality. The exporter must obtain an inspection certificate from the Export Inspection Agency (EIA).

8. Excise Clearance: The exporter applies to the Excise Commissioner for excise clearance. Often, the government exempts goods meant for export from excise duty, or refunds it later (this refund is known as a duty drawback).

9. Obtaining Certificate of Origin: This certificate proves that the goods have been manufactured in the country from where the export is taking place. It is required by the importer to claim tariff concessions.

10. Reservation of Shipping Space: The exporter applies to a shipping company for space on a ship and receives a shipping order.

11. Packing and Forwarding: The goods are properly packed and marked, and then transported to the port of shipment.

12. Insurance of Goods: The exporter gets the goods insured to protect against the risks of loss or damage during transit.

13. Customs Clearance: The goods must be cleared by customs before they can be loaded. This involves preparing a shipping bill and submitting it along with other documents. Exporters often hire a Clearing and Forwarding (C&F) agent for this.

14. Obtaining Mate’s Receipt: After the goods are loaded on the ship, the captain issues a mate's receipt to the port superintendent.

15. Payment of Freight and Issuance of Bill of Lading: The C&F agent surrenders the mate's receipt to the shipping company, which then issues a Bill of Lading. The Bill of Lading is a crucial document that serves as evidence of the contract to carry the goods and is a document of title to the goods.

16. Preparation of Invoice: An invoice is prepared, stating the quantity of goods sent and the amount to be paid by the importer.

17. Securing Payment: The exporter sends the necessary documents (including the invoice, bill of lading, and a bill of exchange) through their bank to the importer's bank. The importer's bank releases the documents to the importer only after the importer either pays the bill of exchange (in the case of a sight draft) or accepts it for future payment (in the case of a usance draft).

Import Procedure

The typical steps involved in an import transaction are as follows:

1. Trade Enquiry: The importing firm gathers information about export firms and sends a trade enquiry to them.

2. Procurement of Import Licence: The importer must check the Export-Import (EXIM) policy to see if a licence is required for the goods they want to import. They must also obtain an Import Export Code (IEC) number.

3. Obtaining Foreign Exchange: The importer has to apply to a bank authorized by the RBI to get the necessary foreign exchange sanctioned for the payment.

4. Placing Order or Indent: The importer places an import order with the exporter.

5. Obtaining Letter of Credit: If required, the importer obtains a letter of credit from their bank and sends it to the exporter.

6. Arranging for Finance: The importer arranges for the funds to pay the exporter upon the arrival of the goods.

7. Receipt of Shipment Advice: The exporter sends a shipment advice to the importer with details of the shipment.

8. Retirement of Import Documents: The exporter sends the shipping documents through their bank to the importer's bank. The importer 'retires' the documents by either paying or accepting the bill of exchange.

9. Arrival of Goods: The person in charge of the carrier informs the port authorities about the arrival of the goods.

10. Customs Clearance and Release of Goods: This is a tedious process for which importers often hire a C&F agent. It involves obtaining a delivery order, paying dock dues, filing a bill of entry for the assessment of customs duty, paying the duty, and finally, getting the goods released from the port.

Foreign Trade Promotion: Incentives and Organisational Support

To enhance the competitiveness of its exports and to facilitate international trade, the Government of India has implemented various incentives and schemes and has also set up a number of specialized organizations to provide infrastructural and marketing support to firms engaged in international business.

Foreign Trade Promotion Measures and Schemes

The government announces these measures in its export-import (EXIM) policy. The major trade promotion schemes, especially those related to exports, are:

• Duty Drawback Scheme: Under this scheme, any excise and customs duties paid on goods meant for export are refunded to the exporter. This is done because taxes are not meant to be exported.

• Export Manufacturing Under Bond Scheme: This facility allows firms to produce goods for export without paying excise and other duties, provided they give a bond (an undertaking) that the goods are for export purposes.

• Exemption from Payment of Sales Taxes: Goods meant for export are not subject to sales tax (now GST).

• Advance Licence Scheme: This scheme allows an exporter to import the inputs required for manufacturing export goods without paying customs duty.

• Export Promotion Capital Goods (EPCG) Scheme: This scheme allows export firms to import capital goods (machinery) at a lower or zero rate of customs duty, provided they fulfill a certain export obligation.

• Scheme of Recognising Export Firms: The government grants the status of Export House, Trading House, and Star Trading House to established exporters based on their past export performance. These houses receive certain privileges and incentives.

• Export Finance: Banks provide finance to exporters at concessional rates of interest. This includes pre-shipment finance (for producing the goods) and post-shipment finance (after the goods have been shipped).

• Export Processing Zones (EPZs) and Special Economic Zones (SEZs): EPZs (now converted to SEZs) are industrial estates that provide an internationally competitive, duty-free environment for export production at a low cost.

• 100 per cent Export Oriented Units (100 per cent EOUs): This scheme is similar to the SEZ scheme but offers a wider choice of location. These units are established with the sole purpose of exporting their entire production.

Organisational Support

The Government of India has also set up several institutions to facilitate foreign trade:

• Department of Commerce: This is the apex government body responsible for formulating and implementing the country's foreign trade policy.

• Export Promotion Councils (EPCs): These are non-profit organizations that promote and develop the exports of specific products under their jurisdiction.

• Commodity Boards: These boards are specifically established for the development and export of traditional commodities like tea, coffee, rubber, and spices.

• Export Inspection Council (EIC): This council is responsible for enforcing quality control and pre-shipment inspection of goods meant for export.

• Indian Trade Promotion Organisation (ITPO): This is a service organization that helps export firms by organizing trade fairs and exhibitions both within India and abroad.

• Indian Institute of Foreign Trade (IIFT): This is a prestigious autonomous institution that provides training in international trade, conducts research, and disseminates data related to international trade.

• Indian Institute of Packaging (IIP): This institute is dedicated to research and training in the field of packaging, which is crucial for exports.

• State Trading Organisations: The government has set up organizations like the State Trading Corporation (STC) and the Metals and Minerals Trading Corporation (MMTC) to stimulate and diversify trade.

International Trade Institutions and Trade Agreements

The devastation of the two World Wars led the international community to recognize the need for global institutions to restore peace, normalcy, and economic stability. In 1944, at the Bretton Woods Conference, representatives of forty-four nations came together to create a framework for post-war economic cooperation. This conference led to the creation of three pillars of economic development:

1. The International Bank for Reconstruction and Development (IBRD), commonly known as the World Bank.

2. The International Monetary Fund (IMF).

3. The proposed International Trade Organisation (ITO).

While the World Bank and the IMF were established immediately, the idea of the ITO could not materialize due to opposition from the United States. Instead, an arrangement called the General Agreement on Tariffs and Trade (GATT) was created to liberalize international trade. India was a founding member of all three of these international bodies.

World Bank

The World Bank was initially established to aid in the reconstruction of the war-torn economies of Europe. After successfully accomplishing this task, it turned its attention to the development of underdeveloped nations. Today, the World Bank is a group of five international organizations that provide finance to different countries for development projects, with a focus on alleviating poverty and promoting shared prosperity.

International Monetary Fund (IMF)

The IMF came into existence in 1945. Its primary objective is to promote an orderly international monetary system. Its major functions include promoting international monetary cooperation, facilitating the balanced growth of international trade, promoting exchange rate stability, and acting as a short-term credit institution to help member countries overcome their balance of payment difficulties.

World Trade Organization (WTO)

GATT, which came into existence in 1948, served as a forum for various rounds of negotiations to reduce tariffs and other trade barriers. The last and most comprehensive round, the Uruguay Round (1986-1994), led to the decision to create a permanent institution to promote free and fair trade. Consequently, GATT was transformed into the World Trade Organization (WTO) with effect from January 1, 1995. The WTO, headquartered in Geneva, Switzerland, is a much more powerful body than GATT. It governs trade not only in goods but also in services and intellectual property rights.

Objectives of WTO

The basic objectives of the WTO are to ensure the reduction of tariffs and other trade barriers, to improve standards of living, create employment, and facilitate the optimal use of the world's resources for sustainable development.

Functions of WTO

The major functions of the WTO include acting as a forum for trade negotiations, administering trade agreements, acting as a dispute settlement body, and ensuring that all rules and regulations are followed by member countries.

Benefits of WTO

The WTO helps to promote international peace and facilitates international business by making trade relations smooth and predictable. It is believed that free trade improves the living standards of people, fastens economic growth, and encourages good governance. The WTO also helps in fostering the growth of developing countries by providing them with special and preferential treatment in trade-related matters.

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