The document discusses globalization and its benefits. It defines globalization as businesses dealing in markets around the world beyond local and national markets. Globalization promotes prosperity in countries that embrace it. Global companies operate from multiple countries and continents to cater to various markets. Industries like automobiles, consumer electronics, and commercial aircraft experience global competition. Benefits of globalization include increased foreign investments, cost reductions, cultural acceptance, and technology transfers across countries. However, globalization can also exploit cheap labor and influence political decisions.

1. 1 “The world economy is globalizing at an accelerating pace”. Discuss this
statement and list the benefits of globalization.
Answer- Globalisation isaprocesswhere businessesare dealtinmarketsaroundthe world,apartfrom
the local and national markets.Accordingtobusinessterminologies,globalisationisdefinedas‘the
worldwide trendof businessesexpandingbeyondtheirdomesticboundaries’.Itisadvantageousforthe
economyof countriesbecause itpromotesprosperityinthe countriesthatembrace globalisation.Inthis
section,we will understandglobalisation,itsbenefitsandchallenges.
Global companies – Companies, which invest in other countries for business and also operate
from other countries, are considered as global companies. They have multiple manufacturing
plants across the globe, catering to multiple markets.
The transformationof a companyfromdomestictointernational is byenteringjustone marketora few
selectedforeignmarketsasanexporterorimporter.Competingona trulyglobal scale comeslater,after
the companyhas establishedoperationsinseveral countriesacrosscontinentsandisracingagainst
rivalsforglobal marketleadership.Thus,there isameaningfuldistinctionbetweenacompanythat
operatesinfewselectedforeigncountriesandacompany thatoperatesandmarketsits productsacross
several countriesandcontinentswithmanufacturingcapabilitiesinseveral of thesecountries.
Companiescanalsobe differentiatedbythe kindof competitive strategytheyadoptwhile dealing
internationally.Multinationalstrategyandglobal competitive strategyare the twotypesof competitive
strategy.
Global competitive strategy – Companies adopt this strategy when prices and competitive
conditions across the different country markets are strongly linked and have common synergies.
In a globally competitive industry, a company’s business gets affected by the changing
environments in different countries. The same set of competitors may compete against each
other in several countries. In a global scenario, a company’s overall competitive advantage is
gauged by the cumulative efforts of its domestic operations and the international operations
worldwide.
A good example to illustrate is Sony Ericsson, which has its headquarters in Sweden, Research
and Development setup in USA and India, manufacturing and assembly plants in low-wage
countries like China, and sales and marketing worldwide. This is made possible because of the
ease in transferring technology and expertise from country to country.
Industriesthathave a global competitionare automobiles,consumerelectronics(liketelevisions,mobile
phone),watches,andcommercial aircraftandsoon.
Benefitsofglobalisation
The merits and demerits of globalisation are highly debatable. While globalisation creates
employment opportunities in the host countries, it also exploits labour at a very low cost
compared to the home country. Let us consider the benefits and ill-effects of globalisation.
Some of the benefits of globalisation are as follows:

2. g countries through capital
investments in developing countries by developed countries.
companies to be competitive by keeping the cost low, with increased productivity.
e acceptance of foreign products, ideas, ethics, best
practices, and culture.
across countries.
owers.
across the world.
decrease the cost of production.

Provides several platforms for international dispute resolutions in business, which facilitates
international trade.
Some of the ill-effects of globalisation are as follows:
easy availability of technology, digital communication, travel and so on.
economical powers to influence political decisions.
with limited or no regulations on pollution.

3. consumption of junk food.
city and culture of several regions worldwide in favour of more
accepted western culture.
2 Compare the Adam Smith and David Ricardo’s theories of international trade with
examples.
Answer-
Adam Smith’s theory
In one of the mostnotable book’Wealth of Nations‘in1776, AdamSmithattackedthe mercantilismand
arguedthat countriesdifferintheirabilitytoproduce goodsandservicesefficientlydue tovarietyof
reasons.Atthat time,England,byvirtue of theirsuperiormanufacturingprocesses,werethe world’s
mostefficienttextile manufacturersof the world.Thiswasdue tocombinationof several factorssuchas
favourable climate,goodsoils,skilledmanpowerandaccumulatedexperience andexpertise intextile
production.Onthe otherhand,the French hadone of the most efficientwineindustriesof the world.
Thus,Englandhad an absolute advantage inthe manufacturingof textilesandFrance hadan absolute
advantage inthe productionof wine.AdamSmitharguedthata country hasan absolute advantage if it
has one of the mostefficientandcosteffectiveproductincomparisontoanyothercountry producingit.
Smith argued that countries should specialise in production and manufacturing of goods and
services in which they have an absolute advantage. Such cost effective and efficient products
can be traded with goods from other countries in which that country has an absolute advantage.
According to Smith, England should specialise in the production of textiles and France should
specialise in the production of wine. Both countries should exchange such products of absolute
advantage with each other, i.e. England should sell textiles to France and France should sell
wine to England.
The crux of Smith’sabsolute advantagetheoryisthata countryshouldnotproduce goodsat home in
whichitdoesnot have cost advantage;insteaditshouldimportfromothercountries.Absolute
advantage theorywasbasedon‘positive sumgame’where countriesbenefitfromtrade unlike
mercantilismtheorywhichwasbased on‘zerogame’.Caselettabledasunderillustratesthe benefitsof
absolute advantage theory.
David Ricardo’s theory
David Ricardo, in his notable book ‘Principles of Political Economy’ published in 1817 came up
with an improvement on Adam Smith’s ‘absolute advantage theory’. Ricardo argued what might
happen if one country has an absolute advantage in the production of all goods. Adam Smith’s
theory suggests that such a country might not have benefitted from international trade as trade
is positive sum game and countries prosper only if they exchange the goods in which they have
absolute advantage.

4. Ricardoargued thatit was notthe case and showedthatcountriesshouldtrade goodswitheachother
where theyhave comparative costadvantage.Fora sustainable economicsystem, Ricardoarguedthata
countryshouldspecialise inthe productionof those goodsthatitcan produce mostefficientlyand
importthe goodswhichit produceslessefficiently even if it hasabsolutecostadvantagein the
production of thosegoods.Practical case oncomparative costadvantage istabledasunder:

5. 3 Regional integration is helping the countries in growing their trade. Discuss this
statement. Describe in brief the various types of regional integrations.
Answer: Regional integration can be defined as the unification of countries into a larger whole.
It also reflects a country’s willingness to share or unify into a larger whole. The level of
integration of a country with other countries is determined by what it shares and how it shares.
Regional integration requires some compromise on the part of participating countries. It should
aim to improve the general quality of life for the citizens of those countries.
In recentyears,we have seenmore andmore countriesmovingtowardsregionalintegrationto
strengthentheirtiesandrelationshipwithothercountries.Thistendencytowardsintegrationwas
activatedbythe EuropeanUnion(EU) marketintegration.Thistrendhasinfluencedbothdevelopedand
developingcountriestoformcustomsunionsandFree Trade Areas(FTA).The WorldTrade Organisation
(WTO) termsthese agreementsof integrationasRegional Trade Agreements(RTA).
Types of Integration
Preferential tradingagreement:- Preferential tradingagreementisatrade pact betweencountries.Itis
the weakesttype of economicintegrationandaimstoreduce taxesonfew productsto the countries
whosignthe pact.The tariffsare not abolishedcompletelybutare lowerthanthe tariffschargedto
countriesnotparty tothe agreement.IndiaisinPTA withcountrieslikeAfghanistan,ChileandSouth
CommonMarket (MERCOSUR).The introductionof PTA has generatedanincrease inthe marketsize
and resultedinthe availabilityandvarietyof new products.
Free trade area
Free Trade Area (FTA) is a type of trade bloc and can be considered as the second stage of
economic integration. It comprises of all countries that are willing to or agree to reduce
preferences, tariffs and quotas on services and goods traded between them. Countries choose
this kind of economic integration if their economical structures are similar. If countries compete
among themselves, they are likely to choose customs union.
The importersmustobtainproductinformationfromall supplierswithinthe supplychaininorderto
determine the eligibilityforaFree Trade Agreement(FTA).Afterreceivingthe supplierdocumentation,
the importermustevaluate the eligibilityof the productdependingonthe rulespertainingthe products.
The importersproductis qualifiedindividuallybythe FTA.The productshouldhave a minimum
percentage of local contentforitto be qualified.
Custom union
CustomUnionis an agreementamongtwoormore countrieshavingalreadyenteredintoafree trade
agreementtofurtheraligntheirexternal tariff tohelpremovetrade barriers.Customunionagreement
amongnegotiatingcountriesmayencompasstoreduce or eliminate customsdutyonmutual trade.
Under customsunionagreement,countriesgenerallyimpose acommonexternal -tariff (CTF) onimports
fromnon-membercountries.Suchcommonexternaltariff helpsthe membercountriestoreapthe
benefitsof trade expansion,trade creationandtrade diversification.Inthe absence of commonexternal

6. tariff,there isa possibilitythatcountrieswithlowercustomdutiesmaybecome conduitsformembers
whichhas highercustomduty.Customunionisthirdstage inlevel of economicintegrationandis
followedonlyafterfree trade agreementamongparticipatingcountries.
Common market
Common market is a group formed by countries within a geographical area to promote duty free
trade and free movement of labour and capital among its members. European community is an
example of common market. Common markets levy common external tariff on imports from non-
member countries.
A single market is a type of trade bloc, comprising a free trade area with common policies on
product regulation, and freedom of movement of goods, capital, labour and services, which are
known as the four factors of production. This agreement aims at making the movement of four
factors of production between the member countries easier. The technical, fiscal and physical
barriers among the member countries are eliminated considerably as these barriers hinder the
freedom of movement of the four factors of production. The member countries must come
forward to eliminate these barriers, have a political will and formulate common economic
policies.
A commonmarketisthe firststeptowardsa single market.Itmaybe initiallylimitedtoaFTA with
moderate free movementof capital andservices,butitisnotcapable of removingthe othertrade
barriers.
Benefits and costs

7. A single market has many advantages. The freedom of movement of goods, capital, labour and
services between the member countries results in the efficient allocation of these production
factors and increases productivity.
A single market presents a challenging environment for businesses as well as for customers
making the existence of monopolies difficult. This affects inefficient companies and hence,
results in a loss of market share and the companies may have to close down. However, efficient
companies can gain from the increased competitiveness, economies of scale and lower costs.
Single market also benefits the consumers in a way that the competitive environment provides
them with inexpensive products, more efficient providers of products and increased variety of
products.
A countrychangingoverto a single marketmayexperience some shorttermnegative effectsonthe
national economydue toincreasedinternational competition.National companiesthatearlierbenefited
frommarketprotectionandsubsidiesmayfinditdifficulttocope withtheirefficientpeers.If these
companiesfail toimprove theirmethods,theymayhave toclose downleadingtomigrationand
unemployment.

8. Economic union
Economic union is a type of trade bloc and is instituted through a trade pact. It comprises of a
common market with a customs union. The countries that are part of an economic union have
common policies on the freedom of movement of four factors of production, common product
regulations and a common external trade policy.
The purpose of an economicunionisto promote closercultural andpolitical tieswhile increasingthe
economicefficiencybetweenthe membercountries.
Economic unions are established by means of a formal intergovernmental legal agreement
among independent countries with the intention of fostering greater economic integration. The
members of an economic union share some elements associated with their national economic
jurisdictions.

9. These include the free movements of:
non-member countries.
fiscal and monetary policies.
Political union
A political unionisatype of country,whichconsistsof smallercountries/nations.Here,the individual
nationsshare a commongovernmentandthe unionisacknowledgedinternationallyasasingle political
entity.A political unioncanalsobe termedasa legislative unionorstate union.
4 Write short note on:
a) GATS (General Agreement on trade in services)
b) ILO (International Labour organization)
Answer
GATS (General Agreement on trade in services)
General Agreement on Trade in Services (GATS) – GATS is a framework agreement defining
the rules under which trade in services must occur. GATS aims at extending the rules covering
trade in goods to trade in services. A detailed rule has been included to take into account the
differences between goods and services and the way in which trade in services is conducted.
Trade in services cover a wide range of activities in the area of telecommunication, information,
banking, insurance and education. WTO has recognised over 150 service sub-sectors.
The main objective of GATSisto establishaframeworkforliberalisingtrade inservices.Itencourages
countriestomodifytheirdomesticregulations.Thismodificationresultsineliminationof restrictions
appliedtoservice productsenteringthe countryand isapplicable tointernational service supplierswho
are carryingout businessinvariousmodes.Accordingtothe GATS,MFN statusand transparencyis
applicable toall services.Othercommitmentssuchasnational treatmentandmarketaccessare only
applicable toservicesthatare openedaccordingtothe specifiednegotiatedcommitments.GATScovers
servicesknownas‘consumptionabroad’where servicessuchase-commerce are usedbythe consumers
ina hostcountry andcitizensof a countrytravel overseas toconsume productssuchas tourismor
education.

Trade-Related Aspects of Intellectual Property Rights (TRIPS) – The Agreement on
Trade-Related Aspects of Intellectual Property Rights (TRIPS) is one of the WTO agreements
that is compiled by all WTO members. According to TRIPS, developed and developing
members of WTO must adopt the same minimum levels of intellectual property protection. The
TRIPS Agreement includes rules on domestic enforcement procedures. TRIPS Agreement
focuses on issues such as innovation and the dissemination of technology, development of
biotechnology, health care and the operation of multilateral environment agreements.
The TRIPS agreement states that members can take actions to protect the public health and
nutrition. It encourages protection of new plant varieties. The members are encouraged to

10. develop national systems thatpromote local breeding,rightsof farmersandprotecthuman
fundamental humanrightswhichinclude the righttofoodandhealth.Itpromotesthe use and
protectionof knowledge thatisrelevanttothe conservationanduse of biological diversity.Thisincludes
knowledge intechnologyandgeneticmaterial.The 1995 WTO TRIPSAgreementscoverscopyrightand
relatedrights,geographicindications,trademarks,andpatentsof integratedcircuits,protectionof
informationandcontrol of anticompetitivepracticesincontractual licenses.

General Agreement on Tariffs and Trade (GATT) – GATT is a multilateral agreement
among countries providing a framework for conducting international trade. GATT is regarded as
an international institution governing international trade relations. It consists of disciplines on
governments and matters related to import and export of goods. It was established to promote
international trade by reducing tariff and non-tariff restrictions on imports imposed by member
nations. Tariff barrier refers to imposing import duty and non-tariff barriers means restricting
imports through import licensing and by banning the imports. GATT provides a framework for
negotiations on the level of tariff. It promotes multilateral trade among member nations. It
provides protection against unfair trade and obstructions to trade.
International Labour Organisation (ILO)
International Labour Organisation (ILO) is a specialised agency of the United Nations which
deals with labour issues. The headquarters is situated in Geneva, Switzerland. The secretariat
comprises of the people employed by the organisation throughout the world. The secretariat is
known as the International Labour Office. The ILO manages work through three main bodies.
They are:
International Labour Conference – The members of the ILO meet at the International
Labour Conference every year in June, in Geneva. Two government delegates along with an
employer delegate and a worker delegate represents their respective member state. The
technical advisors also accompany the delegates. The Cabinet Ministers are usually responsible
for labour affairs, head the delegations and present
the viewpoint of their government. The Conference creates and implements standards for
international labour. Social and labour issues are discussed in the Conference. It also assigns
the budget of the organisation and elects the Governing Body.
Governing Body– The executive council of the ILO is known as the Governing Body. It
meets thrice a year in Geneva and takes decisions on the ILO policies. It forms programmes
and budgets which are submitted to the Conference for adoption. The Governing Body has 28
government members, 14 employer members and 14 worker members. Ten government seats
are permanently held by states of chief industrial importance. Taking into consideration the
geographical distribution, representatives of other member countries are elected at the
Conference once in every three years. The representatives are elected by the employers and
workers.

International Labour Office – The permanent secretariat of the International Labour
Organisation is the International Labour Office. It is the central point for all activities that are
administered by the governing body. The Office is a center for administration, research and
documentation. It employs more than 1,700 officials from 110 nationalities. The Office also
organises certain programmes to extend technical help to all member nations. Under this

11. programme of technical cooperation, around 600 experts undertake missions in all regions of
the world.
International Labour Code
The International Labour Code is composed of Conventions and Recommendations adopted by
the International Labour Conference. In 1997, the Code contained 181 conventions and 188
recommendations that covered important subjects in labour and social fields. The main function
of the ILO is to set international labour standards by adopting conventions and
recommendations covering the major labour-related issues which are referred to as the
International Labour Code. The Conference adopts conventions and recommendations which is
prepared by the International Labour Office and the governing body. The representatives of the
member nations bring the conventions and recommendations to the notice of the authorities.

Conventions – These treaties are not bound to a country unless they are approved by that
country. ILO conventions that have secured a two-third majority should be presented by the
member country in the Conference. The ILO conventions are approved as written and without
reservations. Flexibility clauses are included in the conventions to accommodate different
climatic conditions or states of development of particular countries.
Recommendations – When state practices vary largely, non-binding guidelines known as
recommendations are issued. Recommendations are issued when the subject is:

Very technical and cannot be handled by a convention.
5 What is the difference between domestic and international accounting and how
will you measure this difference?
Answer:
Domestic vs. international accounting
Different countries whether domestic or international, have different accounting standards. A
common belief is that these differences reduce the quality and importance of accounting
information. Accounting standards determine the financial reporting quality and provides
separately verified information about an organisation's financial performance to investors’
creditors.
Though there are differences in accounting methods, domestic businesses are not affected. The
accounting system of a domestic organisation must meet the specialised and regulatory
standards of its home country. But, an MNC and its subsidiaries must meet differing accounting
and auditing standards of all the countries in which it operates. This leads to a need for
comparability between businesses in the group. In order to successfully manage and organise
their operations, local managers require accounting information, which should be prepared
according to the local accounting concepts and denomination in the local currency. Yet, for
financial controllers, to measure the foreign subsidiary’s performance and worth, the
subsidiary’s accounts must be translated into the organisation’s home currency. This translation
is done using accounting concepts and measures, which are detailed by the organisation.
Investors worldwide look for the highest possible returns on their capital, in order to interpret the

12. track record, though they use a currency and an accounting system of their own. The
organisation also has to pay taxes to the countries where it does business, based on the
accounting statements prepared in these countries. Besides this, when a parent corporation
tries to combine the accounting records of its subsidiaries to produce consolidated financial
statements, extra complexities occur because of the changes in the value of the host and home
currencies.
There are many differences between International Accounting Standards (IAS) and Domestic
Accounting Standards (DAS). On the basis of difference between the two, two indices, namely
'divergence' and 'absence', are created. Absence is the difference between DAS and IAS; the
rules on certain accounting issues are missed out in DAS and covered in IAS. Divergence
represents the differences between DAS and IAS; the rules on the same accounting issue differ
in DAS and IAS.
Measurement of differences between IAS and DAS
You can measure the differences between IAS and DAS in the following way:
Literature on international accounting differences – Referring to earlier reports on
international accounting could give more information about the subject. Most of the earlier
reports understand international accounting differences as various options adopted by nations
for the similar accounting problems, which correspond to divergence concept.

Framework of analysis – Links between variations in accounting standards and financial
reporting quality of various countries could be clearly seen from the reports published earlier.
We should consider the institutional determinants of accounting differences such as legal origin,
governance structure, economic development, and equity market.
National differences in accounting
One of the major problems encountered by an international business is lack of consistency in
accounting standards in various countries. Organisations show opposite financial results
because of the differences in accounting standards.
Differences in accounting standards exist because of diverse political, legal, economic, and
cultural systems of the countries. Accounting standards and practices are also prejudiced by the
sources of capital used to fund business. Figure 9.1 shows the influencing factors on a country’s
accounting practices.

13. You mightthinkthataccountingsystemsinthe worldwere uniformlyinfluencedbyafew historical
developments.There couldbe some similaritiesbutnotwocountriesandtheirsystemsare alike.
Accountingsystemsare developedsuitingthe country’sspecificneeds.Itisafact that different
countriesevolvedindifferentways.Accountingsystemswere influencedbyprivate ownership,
industrialisation,inflation,andsoon.Whenthere are differencesineconomicconditions,itisnot
surprisingtofinddifferencesinaccountingpractices.However,there are otherinfluencingelements
apart fromeconomicfactors.These are legal systems,educational systems,socioculturalfeatures,and
political systems.These alsoinfluencethe needforaccounting,speed anddirectionof itsdevelopment.
Due to the increasingtrendinglobalisationof business,understandingvariousaccountingsystemsis
important.
Legal systems
Law systemisdividedintocivillawandcommonlaw incountriesworldwide.Incountrieslike US,
Australia,UKand NewZealandaccountingproceduresoriginatefromdecisionsof independent
standardssettingboards,suchas US Financial AccountingStandardsBoard(FASB).Eachboardworks
withprofessional accountinggroups.Incountries,whichfollow commonlaw,accountantsfollow
GenerallyAcceptedAccountingPrinciples(GAAP),whichprovidesa'true andfair view'of the
organisation'sperformance,basedonthe standardsapprovedbythese professionalboards.Manycivil
lawcountriesalsohave a similarapproachas thatof GAAP.Functioningwithinthe limitationsof these
standards,accountantshave freedomtoimplementtheirprofessional judgmentinreportinga'true and
fair' representationof the organisation'sperformance.
Countries following civil law are likely to codify their national accounting measures and
standards. In these countries, accounting practices are determined by the law. To assist the
legal role, all business accounting records must be officially registered with the government.
The way inwhichthe accountingpracticesare imposeddependsonthe legal system.Mostof the
developedcountriesdependonbothprivate andpublicenforcementof businessperformance,though
the publicor private combinationvaries fromcountrytocountry.The difference of legal systemisa
majorrestrictioninthe growthof accountingstandards.Insome countries,the accountingpoliciesare
restrictedtodetailedlegislation,whichispassedbygovernments.Thisrestrictionforms amajor
problemtointernational accountingbodiesthatare createdto increase harmonisationof national

14. accountingframeworks.Thisisbecause,suchgovernment-controlledregimesare inclinedtobe less
flexible,andperceiveprivate sectorinfluencesaslessacceptable.
6 Discuss the various payment terms in international trade. Which is the safest
method and why?
Answer:-Understanding Payment Mechanism in Foreign Trade-For successfullyconducting
international trade intoday’scompetitive international environment,itisessential forthe exportersto
offerattractive salestermsandpaymentstoimporterssoas towoo themforbusiness.One of the major
concernsfor enexporteristochoose the appropriate paymentmethodinordertominimiserisks
relatedtopaymentsof trade transaction.Paymentshouldbe done afterunderstandingthe economic
scenarioof importer’scountry,importercreditworthinessandtocertainextentaccommodatingthe
needsof the importer.Exportercanchoose anymode of paymentdependingonriskperception,sizeof
deal,importercreditworthinessandeconomicsituationinimporter’scountry.
In case of domestic business, main factor driving salesman’s decision criteria for realisation of
payments is based on the buyer's ability, willingness and honesty to make payment coupled
with exporter trust on buyer. Usually sale in domestic market are on open account and in certain
cases it can be on cash in advance. Such methods also depend on buyer’s and seller’s power
to negotiate and nature of competition such as:
However,incase of international trade,exporterhastotake more precautionsassome methodsof
paymentare unique and usuallyusedincase of internationaltrade only.Keyconsiderationwhile
decidinguponapaymentterminforeigntrade iselaboratedasunder.

15. A. Some of the major risks involved in realisation of payments in international trade can be
either at importer, importer bank and importer’s country such as insolvency and default by
importer, insolvency of importer bank and exchange control restrictions, inconvertibility issues
with importer’s country.
B. Some of the risks involved in international trade in Liberalisation, Privatisation and
Globalisation era can be under control of exporter but some cannot be. For example, credit risk
which arises from a change in
the credit worthiness of importer can be covered by ECGC. Exchange Rate Fluctuation risk can
be covered by hedging the currency invoiced in forward contract market but risk such as Force
Majeure which arises from change in policy of a country, which in turn affects the trade
capability, and by a natural disaster cannot be anticipated in complex international
environments1. Other risks mainly arises due to a difference in culture, law, or language are also
beyond exporter control.
C. International Trade Operations offers different types, quantum and location of risks, thereby
confusing the exporter with uncertainty over realisation of payments and timing of payments
between the exporter and importer2.
D. For exporters, any international sale will be equivalent to gift until he has not realised the
payment from the importer. For importer any payment is donation until he has received the
cargo as sent by exporter.
E. Exporter will always be interested to receive the payments as soon as he/she sends the
goods to importer through shipment. Importer will be willing to delay the payments as he/she will
be interested to sell these goods in markets and then make the payments to exporter.
F. However, the selection criteria for mode of payment is based on mutual negotiation of
exporter and importer and in LPG&M era there are other parties such as bank, credit insurer
involved which helps in exporter in financing and assuring about the payment.

16. G. Though safe mode of payment such as L/C is getting popular, this is not usually used by
small exporters and importers due to heavy transaction costs. For example, L/C is used as
mode of payment only in 14% trade transactions due to heavy transactions costs3.
H. Exporter can alternatively divide the payment category into secure mode and unsecure
mode. The secure mode of payment for exporter is cash in advance and letter of credit.
Unsecure mode of payment are Open Account, Documents against Acceptance and Documents
against Payments.
Payment terms in foreign trade
Since international trade deals with exchange of goods, there are various ways in which the
payment terms (finance) will be handled.
Bothe seller and trader should be careful about the method of payment as they are at different
locations and transactions happen without face-to-face interaction. There are four methods of
payment for the international transactions. This includes the Cash-in-advance method, Letter of
Credit, Documentary collections and the Open Account. These are shown in figure 14.1.
As shown in figure 14.1, there is uncertainty during the time when payment transactions happen
between importer and exporter. The figure compares and contrasts the most suitable
methodology from the perspective of importer and exporter. Apparently the most secure
methodologies that work for the exporter is not safe for the importer. For exporters,
documentary collection and open account are less secure and letter of credit and cash in
advance are more secure methods. In the same way, with respect to the importer, the letter of
credit and cash in advance are less secure and the documentary collection and open account
are more secure. These terms are explained as follows.
Cash-in-advance
Cash-in-advance helps in removing the risks of credit by the exporter. By this method, exporter
receives the payment before the transfer of goods. The options that are available with the cash-
in-advance method include wire transfers and credit cards. This is the least attractive method for

17. many of the buyers as it creates cash flow problems. The buyers are concerned about the
quality/quantity and delivery of the goods that are not sent if the payment is made in advance.
Letters of credit
The letter of credit is the most secure instrument available for international traders. This is the
commitment made by the bank that the payment will be made to the exporter if the terms and
conditions are met. The terms and conditions of the payment are explained in the required
documents.
Documentary collections
Documentary collection is a transaction in which, the exporter's bank (remitter bank) sends the
documents to the importer's bank (collecting bank). The document contains information about
the payment. The funds are collected from the importer and paid to the exporter through the
banks involved in the collection, in exchange for the documents.
Open account
The open account transaction involves the shipping and delivery of goods in advance. The
payment is due usually from 30 to 90 days. This is advantageous for the importer in cash flow
and cost terms, but at the same time it is very risky for the exporters. Buyers from abroad stress
on open accounts since the extension of credit from the seller to the buyer are more common in
many countries. Exporters who avoid extending credit may face loss in the sale because of
competitors in the market.
Letter of credit
International Trade is affected by distance, laws, political instability and lack of familiarity by the
transacting parties. Letter of credit assumes significance since it can be used to mitigate risk. It
is a document that is issued by the bank that guarantees payment to a beneficiary. It is written
by the financial institution in favour of the importer of goods to the seller. In the letter, the bank
promises that it will honour the drafts drawn on it if the seller confirms to the specific conditions
that are set forth in the letter of credit. The process of letter of credit works as shown under: