Important BST Notes

Small Business
Short Answer Questions
1. What are the different parameters used to measure the size of business?
Answer
The different parameters that are used to measure the size of a business are:
The number of persons employed in business
Capital invested in business
Volume of output or value of output of business
Power consumed for business activities.
2. What is the definition used by Government of India for small scale industries?
Answer
The Government of India defines small industries on the basis of their investment in plant and
machinery. Industries where the amount invested in the fixed assets (particularly plant and
machinery) is less than Rs. 1 crore are regarded as small-scale industries. However, export-
oriented units that use modern production techniques are considered as small-scale industries if
their investment does not exceed Rs. 5 crore.
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3. How would you differentiate between an ancillary and a tiny unit?
Answer
Ancillary Unit Tiny Unit
A tiny unit is the business

An ancillary unit is the unit which
enterprise whose investment in
supplies minimum 50% of its
plant and machinery is not more
production to the parent unit.
than Rs. 25 lakh.
Investment limit in this unit is one Investment limit in this unit is Rs.
crore. 25 lakh.
Parent unit assists the ancillary unit
by providing technical and financial No such assistance is present here.
help.
Industries engaged in the production Business units such as small
of machine parts, tools and other shops, boutiques, STD booths and
intermediate products are example of photocopy centres are examples of
this industry. this industry.
4. State the features of cottage industries.
Answer
The features of cottage industries are:
These are organised by individuals, with private resources

It generally use family labour and locally available talent
The equipment used is simple
The capital investment is small
It produce simple products, normally in their own premises
The production of goods using indigenous technology.
Long Answer Questions
1. How do small scale industries contribute to the socio-economic

development of india?
Answer
Small scale industries enjoys a distinct position to in view of their

contribution to the socio-economic development of the country. These
are:
Small industries in India account for 95 per cent of the industrial units
in the country. They contribute almost 40 per cent of the gross industrial
value added and 45 per cent of the total exports from India.
Small industries are the second largest employers of human resources,

after agriculture and generate more number of employment opportunities
per unit of capital invested compared to large industries.
Small industries in our country supply an enormous variety of products

which include mass consumption goods, readymade garments, hosiery
goods, stationery items, handicrafts, vegetables and processed food. etc.
They also produce electric and electronic goods like televisions,
calculators etc.
Small industries which produce simple products using simple
technologies and depend on locally available resources both material and
labour can be set up anywhere in the country. Since they can be widely
spread without any locational constraints, the benefits of industrialisation
can be reaped by every region. They, thus, contribute significantly to the
balanced development of the country.
Small industries provide ample opportunity for entrepreneurship. This

industry can be a good way to channelize the latent skills and talent of
people.
These industries also enjoy the advantage of low cost of production.

Locally available resources are less expensive also establishment and
running costs of these insutries are lower. The low cost of production
which small industries enjoy is their competitive strength.
Due to the small size of the organisations, quick and timely decisions
can be taken without consulting many people as it happens in large sized
organisations.
These industries can provide customized products and services to

consumers.
2. Describe the role of small business in rural India.
Answer
The role of small business in rural India are:
Cottage and rural industries play an important role in providing

employment opportunities in the rural areas, especially for the traditional
artisans and the weaker sections of society.
Village and small industries are significant as producers of consumer

goods and absorbers of surplus labour, thereby addressing the problems
of poverty and unemployment.
These industries contribute amply to other socio-economic aspects,

such as reduction in income inequalities, dispersed development of
industries and linkage with other sectors of the economy.
Small-scale businesses have been considered as a major propeller for

the acceleration of economic growth and as an employment generator,
particularly in the rural and backward areas of India.
The settlement of these industries in rural areas also help in prevention

rural people to urban areas.
3. Discuss the problems faced by small scale industries.
Answer
The problems faced by small scale industries are:
Finance: The severe problems faced by SSIs is that of non- availability

of adequate finance to carry out its operations. Small business generally
begins with a small capital base. Many of the units in the small sector
face scarcity of capital because of their lack of assets for offering as
collateral/mortgage to secure bank loans. As a result, these businesses
have to rely on local financial resources and moneylenders for funds.
Raw materials: If raw material are available in scarce amount then SSIs
(small scale industries) have to compromise on the quality or have to pay
a high price to get good quality materials. Also, they don't have enough
storage facility and finance to buy goods in bulk. These things affects
their business.
Managerial skills: Small business is generally promoted and operated

by a single person, who may not possess all the managerial skills required
to run the business. Many of the small business entrepreneurs possess
sound technical knowledge but are less successful in marketing the
output also SSIs cannot afford to hire professional managers.
Labour: Small business firms cannot afford to pay higher salaries to the
employees, which affects employee willingness to work hard and produce
more. Thus, productivity per employee is relatively low and employee turn
over is generally high.
Marketing: SSIs don't have specialisation in marketing its products or

services. Therefore, these business depend excessively on middlemen,
who at times exploit them by paying low price and delayed payments.
Quality: These industries fo not adhere to desired standards of quality

and focus more on cutting the cost and keeping the prices low. They do
not have the necessary knowledge and expertise about quality issues.
Capacity utilisation: Due to lack of marketing skills or lack of

demand, most of the small businesses do not fully utilize their capacity.
Gradually this leads to sickness and closure of the business.
Technology: SSIs uses outdated technology which results in low

productivity and uneconomical production.
Global Competition: Due to liberalization, privatisation and globalisation

policies followed by most parts in world, small business find it difficult to
stand against large industries and MNCs.
4. What measures has the government taken to solve the problem of

finance and marketing in the small scale sector?
Answer
The small-scale sector has played a major role in employment generation,

regional development and export promotion in India. The government has
taken many initiatives to solve the problem of finance and marketing in
the small scale sector. The government has set up various institutions to
assist the small scale sector and also provide support measures and
programmes meant for the promotion of these industries:
National Bank for Agriculture and Rural Development (NABARD): It was

setup in 1982 to promote integrated rural development. Apart from
agriculture, it supports small industries, cottage and village industries,
and rural artisans. It provides credit and offers counseling and
consultancy services and organizes training and development
programmes for rural entrepreneurs.
The Rural Small Business Development Centre (RSBDC): It was set up
by the world association for small and medium enterprises and is
sponsored by NABARD. It provides management and technical support to
current and prospective micro and small entrepreneurs in rural areas.
National Small Industries Corporation (NSIC): It was set up in 1955 with

a view to
promote, aid and foster the growth of small business units in the country.
It works on promoting the use of indigenously available raw materials. It
helps small businesses in exporting their products and works on
developing export worthiness of products. It also provides mentoring and
technology development services for small businesses.
Small Industries Development Bank of India (SIDBI): It was set up to

provide direct and indirect financial assistance under different schemes.
It caters to the credit and finance requirements of especially small-scale
enterprises.
The National Commission for Enterprises in the Unorganised Sector

(NCEUS): It was constituted in September, 2004 with the objective of
improving the efficiency and enhancing the global competitiveness of
small-scale industries. It focuses on addressing the problems faced by
small enterprises, particularly in the unorganised/informal sector.
Rural and Women Entrepreneurship Development (RWED): It aims at
promoting a conducive business environment and at building institutional
and human capacities that will encourage and support the
entrepreneurial initiatives of rural people and women.
World Association for Small and Medium Enterprises (WASME): It is an

international non-governmental organisation based in India that
addresses the problems of small- and medium-scale enterprises. It has
set up an 'International Committee for Rural Industrialisation' with the
aim of designing a model for the growth and development of rural
industries.
Scheme of Fund for Re- generation of Traditional Industries

(SFURTI): The Central Government set up this fund to make the traditional
industries more productive and competitive and to facilitate their
sustainable development. The main objectives of SFURTI are to develop
clusters of traditional industries in various parts of the country; build
innovative and traditional skills, improve technologies and encourage
public-private partnerships, develop market intelligence etc.
The District Industries Centers (DICs) The District Industries Centers

Programme was launched on May 1, 1978, with a view to providing an
integrated administrative framework at the district level, which would
look at the problems of industrialisation in the district, in a composite
manner.
5. What are the incentives provided by the government for industries in

backward and hilly areas?
Answer
Some of the incentives provided by the Government for industries in

backward and hilly areas are:
Land: Every state offers developed plots for setting up of industries.
The terms and conditions may vary. Some states dont charge rent in the
initial years, while some allow payment in instalments.
Power: Power is supplied at a concessional rate of 50 per cent, while

some states exempt such units from payment in the initial years.
Water: Water is supplied on a no-profit, no-loss basis or with 50 per cent

concession or exemption from water charges for a period of 5 years.
Sales Tax: In all union territories, industries are exempted from sales
tax, while some states extend exemption for 5 years period.
Octroi: Most states have abolished octroi.
Raw materials: Units located in backward areas get preferential

treatment in the matter of allotment of scarce raw materials like cement,
iron and steel etc.
Finance: Subsidy of 10-15 per cent is given for building capital assets.
Loans are also offered at concessional rates.
Industrial estates: Some states encourage setting up of industrial

estates in backward areas.
Tax holiday: Exemption from paying taxes for 5 or 10 years is given to

industries established in backward, hilly and tribal areas.
Sources of Business Finance

Exercises
Multiple Choice Questions:
Tick () the correct answer out of the given alternatives
1. Equity shareholder are called

(a) Owners of the company
(b) Partners of the company
(c) Executives of the company
(d) Guardian of the company
(a) Owners of the company
2. The term 'redeemable' is used for

(a) Preference shares
(b) Commercial paper
(c) Equity shares
(d) Public deposits
(a) Preference shares
3. Funds required for purchasing current assets is an example of

(a) Fixed capital requirement
(b) Ploughing back of profits
(c) Working capital requirement
(d) Lease financing
(c) Working capital requirement
4. ADRs are issued in

(a) Canada
(b) China
(c) India
(d) USA
(d) USA
5. Public deposits are deposits that are raised directly from

(a) The public
(b) The directors
(c) The auditors
(d) The owners
(a) The public
6. Under the lease agreement, the lessee gets the right to

(a) Share profits earned by the lessor
(b) Participate in the management of the organisation
(c) Use the asset for a specific period
(d) Sell the assets
(c) Use the asset for a specific period
7. Debentures represent
(a) Fixed capital of the company
(b) Permanent capital of the company
(c) Fluctuating capital of the company
(d) Loan capital of the company
(d) Loan capital of the company
8. Under the factoring arrangement, the factor

(a) Produces and distributes the goods or services
(b) Makes the payment on behalf of the client
(c) Collects the client's debt or account receivables
(d) Transfer the goods from one place to another
(c) Collects the client's debt or account receivables
9. The maturity period of a commercial paper usually ranges from

(a) 20 to 40 days
(b) 60 to 90 days
(c) 120 to 365 days
(d) 90 to 364 days
(d) 90 to 364 days
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10. Internal sources of capital are those that are

(a) generated through outsiders such as suppliers
(b) generated through loans from commercial papers
(c) generated through issue of shares
(d) generated within the business
(d) generated within the business
1. What is business finance? Why do businesses need funds? Explain.
Answer
The requirements of funds by business to carry out its various activities is
called business finance.
The business need funds for:
Fixed capital requirements: In order to start business, funds are

required to purchase fixed assets like land and building, plant and
machinery, and furniture and fixtures. The funds required in fixed assets
remain invested in the business for a long period of time.
Working Capital requirements: Firms require funds for financing their

day-to-day operations such as purchase of raw materials and payment of
wages to workers. The requirement of funds for such operations is known
as the working capital requirement.
2. List sources of raising long-term and short-term finance.
Answer
Sources of long-term-finance are:

Equity shares
Retained earnings
Preference shares
Debentures
Loans from financial institutions
Loan from Banks
Sources of short-term-finance
Trade credit
Factoring
Banks
Commercial paper
3. What is the difference between the internal and external sources of

raising funds? Explain.
Answer
Internal Sources External Sources

External sources of funds includes those source that
Internal sources of funds are those that are
lie outside the organisation such as the suppliers,
generated within a business.
creditors, investors, banks and financial institutions.
Accelerating collection of receivables,
Issue of debentures, borrowing from commercial
disposing of surplus inventories and
banks and financial institutions and accepting
ploughing back of profit are examples of
public deposits are examples of these funds.
these funds.
The internal sources of funds can only fulfill Large amount of money can be raised through
limited needs of the business. external sources.
4. What preferential rights are enjoyed by preference shareholders?

Explain.
Answer
The preference shareholders enjoy a preferential position over equity

shareholders by:
They receive a fixed rate of dividend, out of the net profits of the
company, before any dividend is declared for equity shareholders;
They receive their capital after the claims of the companys creditors
have been settled, at the time of liquidation.
5. Name any three special financial institutions and state their objectives.
Answer
Financial institutions and their objectives:
Industrial Finance Corporation of India (IFCI): Its objectives include

assistance towards balanced regional development and encouraging new
entrepreneurs to enter into the priority sectors of the economy. IFCI has
also contributed to the development of management education in the
country.
Unit Trust of India (UTI): The basic objective of UTI is to mobilise the
communitys savings and channelise them into productive ventures.
Therefore, it sanctions direct assistance to industrial
concerns, invests in their shares and debentures, and participates with
other financial institutions.
Industrial Credit and Investment Corporation of India (ICICI): It assists

the creation, expansion and modernisation of industrial enterprises
exclusively in the private sector. The corporation has also encouraged the
participation of foreign capital in the country.
6. What is the difference between GDR and ADR? Explain.
Answer
Global Depository Receipts (GDR) are the depository receipts

denominated in US dollars issued by depository bank to which the local
currency shares of a company are delivered. GDR is a negotiable
instrument and can be traded freely like any other security. In the Indian
context, a GDR is an instrument issued abroad by an Indian company to
raise funds in some foreign currency and is listed and traded on a foreign
stock exchange.
American Depository Receipts (ADR) are depository receipts issued by a
company in the USA. ADRs are bought and sold in American markets like
regular stocks. ADR is similar to a GDR except that it can be issued only
to American citizens and can be listed and traded on a stock exchange of
USA.
1. Explain trade credit and bank credit as sources of short-term finance

for business enterprises.
Answer
Trade credit is the credit extended by one trader to another for the
purchase of goods and services. Trade credit facilitates the purchase of
supplies without immediate payment. Trade credit is commonly used by
business organisations as a source of short-term financing. It is granted
to those customers who have reasonable amount of financial standing
and goodwill.
Merits of trade credit as a source of short-term finance:

Trade credit helps a company to finance the accumulation of
inventories for meeting future increase in sales.
As the trade creditors do not have any rights over the assets of the
company, it can mortgage its assets to raise money from other sources.
Demerits of trade credit as a source of short-term finance:

Easy availability of trade credit can result in overtrading, which in turn
increases the future liabilities of the buyer.
The amount of funds that can be generated through trade credit is
limited to the financial capacity of the supplier or the creditor.
Bank credit: Banks all over the world extend foreign currency loans for
business purposes. They are an important source of financing non-trade
international operations. The types of loans and services provided by
banks vary from country to country.
Merits of bank credit as a source of short-term finance:

Banks maintain secrecy over information related to their customers.
Bank credit provides flexibility to the borrower as the borrower can
increase or decrease the amount of loan according to the business needs.
Demerits of bank credit as a source of short-term finance:

It is difficult to increase the loan.
The terms imposed by banks are often very restrictive as example, the
bank that has granted a loan may restrict the sale of goods mortgaged to
it by the borrower.
2. Discuss the sources from which a large industrial enterprise can raise
capital for financing modernisation and expansion.
Answer
Many financial institutions are created both by central and state

governments for financing is when
large funds are required for expansion, reorganisation and modernisation
of the enterprise. These are:
Industrial Finance Corporation of India (IFCI): It was established in July

1948 as a statutory corporation under the Industrial Finance Corporation
Act, 1948. Its objectives include assistance towards balanced regional
development and encouraging new entrepreneurs to enter into the priority
sectors of the economy. IFCI has also contributed to the development of
management education in the country.
State Financial Corporations (SFC): The State Financial Corporations

Act, 1951 empowered the State Governments to establish State Financial
Corporations in their respective regions for providing medium and short
term finance to industries which are outside the scope of the IFCI. Its
scope is wider than IFCI, since the former covers not only public limited
companies but also private limited companies, partnership firms and
proprietary concerns.
Industrial Credit and Investment Corporation of India (ICICI): This was

established in 1955 as a public limited company under the Companies Act.
ICICI assists the creation, expansion and modernisation of industrial
enterprises exclusively in the private sector. The corporation has also
encouraged the participation of foreign capital in the country.
Industrial Development Bank of India (IDBI): It was established in 1964

under the Industrial Development Bank of India Act, 1964 with an
objective to coordinate the activities of other financial institutions
including commercial banks. The bank performs three types of functions,
namely, assistance to other financial institutions, direct assistance to
industrial concerns, and promotion and coordination of financial-technical
services.
State Industrial Development Corporations (SIDC): Many state

governments have set up State Industrial Development Corporations for
the purpose of promoting industrial development in their respective
states. The objectives of the SIDCs differ from one state to another.
Unit Trust of India (UTI): It was established by the Government of India

in 1964 under the Unit Trust of India Act, 1963. The basic objective of UTI
is to mobilise the communitys savings and channelise them into
productive ventures. For this purpose, it sanctions direct assistance to
industrial concerns, invests in their shares and debentures, and
participates with other financial institutions.
Industrial Investment Bank of India Ltd.: It was initially set up as a

primary agency for rehabilitation of sick units and was known as
Industrial Reconstruction Corporation of India. It was reconstituted and
renamed as the Industrial Reconstruction Bank of India in 1985 and again
in 1997 its name was changed to Industrial Investment Bank of India. The
Bank assists sick units in the reorganisation of their share capital,
improvement in management system, and provision of finance at liberal
terms.
Life Insurance Corporation of India (LIC): LIC was set up in 1956 under
the LIC Act, 1956 after nationalising 245 existing insurance companies. It
mobilises the communitys savings in the form of insurance premia and
makes it available to industrial concerns, both public as well as private, in
the form of direct loans and underwriting of and subscription to shares
and debentures.
3. What advantages does issue of debentures provide over the issue of

equity shares?
Answer
Debentures are long term debts by which a company can raise funds
which bear a fixed rate of interest. The debenture issued by a company is
an acknowledgment that the company has borrowed a certain amount of
money, which it promises to repay at a future date.
The advantage of issue of debentures over the issue of equity shares are:
The issue of equity shares means dilution of ownership of a firm while

debentures holders do not have any rights in the company. They do not
enjoy voting rights or any kind of ownership in the firm. They are only
entitled to a fixed amount as payment.
For issuing shares a company has to incur huge costs. Also, it has to
pay dividends to its shareholders, which are not tax deductible while a
company receives tax deductions on the interest paid to its debenture
holders. Therefore, issuing debentures is advantageous for a firm in terms
of low costs.
Debentures carry a fixed rate of return which means that irrespective

of the profit earned, the company has to pay only a fixed interest to its
debenture holders while a company that issues shares has to pay
dividends to the shareholders, which varies with the profit i.e., the higher
the profit, the higher will be the dividends.
4. State the merits and demerits of public deposits and retained earnings
as methods of business finance.
Answer
Public Deposits
The deposits that are raised by organisations directly from the public are
known as public deposits. Rates of interest offered on public deposits are
usually higher than that offered on bank deposits. Any person who is
interested in depositing money in an organisation can do so by filling up a
prescribed form. The organisation in return issues a deposit receipt as
acknowledgment of the debt.
Merits of Public deposits are:
The procedure of obtaining deposits is simple and does not contain

restrictive conditions as are
generally there in a loan agreement
Cost of public deposits is generally lower than the cost of borrowings
from banks and financial
institutions
Public deposits do not usually create any charge on the assets of the
company. The assets can be used as security for raising loans from other
sources
As the depositors do not have voting rights, the control of the company
is not diluted.
Demerits of Public deposits are:

New companies generally find it difficult to raise funds through public
deposits
It is an unreliable source of finance as the public may not respond
when the company needs money
Collection of public deposits may prove difficult, particularly when the
size of deposits required is large.
Retained earnings
Business enterprise keep a portion of the net earnings may be retained in
the business for use in the future. This is known as retained earnings. It is
a source of internal financing or self- financing or ploughing back of
profits.
Merits of Retained earnings are:

Retained earnings is a permanent source of funds available to an
organisation
It does not involve any explicit cost in the form of interest, dividend or
floatation cost
As the funds are generated internally, there is a greater degree of
operational freedom and flexibility
It enhances the capacity of thebusiness to absorb unexpected losses;
It may lead to increase in the market price of the equity shares of a
company.
Demerits of Retained earnings are:

Excessive ploughing back may cause dissatisfaction amongst the
shareholders as they would get lower dividends;
It is an uncertain source of funds as the profits of business are
fluctuating;
The opportunity cost associated with these funds is not recognised by
many firms. This may lead to sub-optimal use of the funds.
5. Discuss the financial instruments used in international financing.
Answer
The financial instruments used in international financing are:

Global Depository Receipts (GDRs): These are receipts issued by
depository banks against the shares of a company. Such depository
receipts denominated in US dollars are known as Global Depository
Receipts (GDR). GDR is a negotiable instrument and can be traded freely
like any other security. In the Indian context, a GDR is an instrument
issued abroad by an Indian company to raise funds in some foreign
currency and is listed and traded on a foreign stock exchange.
American Depository Receipts (ADRs): The depository receipts issued

by a company in the USA are known as American Depository Receipts.
ADRs are bought and sold in American markets like regular stocks. It is
similar to a GDR except that it can be issued only to American citizens
and can be listed and traded on a stock exchange of USA.
Foreign Currency Convertible Bonds (FCCBs): These bonds are debt

securities that are convertible into equity shares or depository receipts
after a specific period of time. The terms and prices of such conversions
are generally specified in advance. The return on such securities is pre-
fixed and lower than the return on non-convertible securities.
6. What is a commercial paper? What are its advantages and limitations.
Answer
Commercial paper is an unsecured promissory note issued by a firm to

raise funds for a short period, varying from 90 days to 364 days. It is
issued by one firm to other business firms, insurance companies, pension
funds and banks. The amount raised by CP is generally very large. As the
debt is totally unsecured, the firms having good credit rating can issue
the CP. Its regulation comes under the purview of the Reserve Bank of
India.
Advantages of Commercial paper are:

A commercial paper is sold on an unsecured basis and does not contain
any restrictive conditions;
As it is a freely transferable instrument, it has high liquidity;
It provides more funds compared to other sources. Generally, the cost
of CP to the issuing firm is lower than the cost of commercial bank loans;
A commercial paper provides a continuous source of funds. This is
because their maturity can be tailored to suit the requirements of the
issuing firm. Further, maturing commercial paper can be repaid by selling
new commercial paper;
Companies can park their excess funds in commercial paper thereby
earning some good return on the same.
Limitations of Commercial paper are:

Only financially sound and highly rated firms can raise money through
commercial papers. New and moderately rated firms are not in a position
to raise funds by this method.
The size of money that can be raised through commercial paper is
limited to the excess liquidity available with the suppliers of funds at a
particular time;
Commercial paper is an impersonal method of financing. As such if a
firm is not in a position to redeem its paper due to financial difficulties,
extending the maturity of a CP is not possible.
Internal Trade
1. What is meant by internal trade?
Answer
Buying and selling of goods and services within the boundaries of

a nation are referred to as internal trade. Purchases of goods from a local
shop, a mall or an exhibition are all examples of internal trade.No custom
duty or import duty is levied on these goods and services. It can
be classified into two broad categories: wholesale trade and retailing
trade.
2. Specify the characteristics of fixed shop retailers.
Answer
The characteristics of fixed shop retailers are:

They have greater resources and operate at a relatively large scale as
compared with the itinerant traders.
These retailers deal in different products, including consumer durables
as well as non-durables.
They have greater credibility in the minds of customers.
They are in a position to provide greater services to the customers
such as home delivery, repairs, credit facilities etc.
3. What purpose is served by wholesalers providing warehousing

facilities?
Answer
Two purpose is served by wholesalers providing warehousing facilities in

following ways:
Wholesalers reduces the burden of manufacturers of providing for
storage facilities for the finished products.
Warehousing by wholesalers also relieves the retailers of the work of
collecting goods from several producers and keeping big inventory of the
same for maintaining adequate stock of varied commodities for the
customers.
4. How does market information provided by the wholesalers benefit
the manufacturers?
Answer
As the wholesalers are in direct contact with the retailers, they provide
information and advice the manufacturers about various
aspects including customers tastes and p.references, market
conditions, competitive activities and the features preferred by the
buyers. This information helps manufacturers to cater to the changing
needs of consumers.
5. How does the wholesaler help the manufacturer in availing the

economies of scale?
Answer
Wholesalers collect small orders from a number of retailers and pass on

the pool of such orders to the manufacturers and make purchases in bulk
quantities. This enables the producers to undertake production on a large
scale and take advantage of the economies of scale.
6. Distinguish between single line stores and speciality stores. Can

you identify such stores in your locality?
Answer
Single-line stores Speciality stores

These stores deal only in a particular type of
These are small shops that deal in only one
product from a selected product line for
product for example, garments or electronics.
example, men's clothing.
These stores generally sell all the brands of
These stores offer a wide variety of the product.
the product in which they specialise.
For example: If a store that deals in garments will For example, if a store specializes in men's
have a wide variety of clothes in all sizes for men, clothing, then it will have all the brands of
women and children. men's garments.
On the basis of these features, we can identify the different types of

stores in a locality whether they are single-line stores or speciality stores.
7. How would you differentiate between street traders and street shops?
Answer
Street traders Street shops

Small retailers who generally sell low-priced
Shops situated on street sides or main roads.
consumer items on streets.
These stores generally sell all the brands of the
Do not have permanent shops.
product in which they specialise.
Stationery items, eatables, newspapers, etc. Clothes, shoes, grocery items, bakery items, etc.
8. Explain the services offered by wholesalers to manufacturers.
Answer
The services offered by wholesalers to manufacturers are:
Facilitating large scale production: Wholesalers purchase goods in bulk

from manufacturers and sell them to retailers in small quantities for
further resale. This enables the producers to undertake production on a
large scale.
Bearing risk: The wholesalers deal in goods in their own name, take
delivery of the goods and keep them in their warehouses bearing risks of
fall in prices, theft, spoilage, fire, etc.
Financial assistance: The wholesalers provide financial assistance to

the manufacturers in the sense that they generally make cash payment
for the goods purchased by them.
Expert advice: Wholesalers can advice the manufacturers about

various aspects like customer's tastes and preferences, market
conditions, competitive activities and the features preferred by the
buyers as they are in touch with retailers.
Help in marketing function: The wholesalers take care of the

distribution of goods to a number of
retailers who, in turn, sell these goods to a large number of customers
spread over a large geographical area.
Facilitate production continuity: The wholesalers facilitate continuity

of production activity throughout the year by purchasing the goods as and
when these are produced.
Storage: Wholesalers take delivery of goods when these are produced
in factory and keep them in their godowns/warehouses.
9. What are the services offered by retailers to wholesalers and

consumers?
Answer
The services offered by retailers to wholesalers are:

Help in distribution of goods
Personal Selling
Enabling large scale operations
Collecting market information
Help in promotion of goods and services
The services offered by retailers to consumers are:

Regular availability of products
New product information
Convenience of buying
Trade selection
After sales service
Credit facilities
1. Itinerant traders have been an integral part of internal trade in India.

Analyse the reasons for their survival in spite of competition from large
scale retailers.
Answer
Itinerant retailers are traders who do not have a fixed place of business to
operate from. They keep on moving with their wares from street to street
or place to place, in search of customers.
The reasons for their survival in spite of competition from large scale
retailers are:
They normally deal in low price consumer products of daily use such as
toiletry products, fruits and vegetables, and so on.
They deal directly with consumers and are, therefore, able to give more
attention to them also provide greater customer-care services by eliciting
proper feedback and passing on the information to manufacturers.
They move from place to place and provide goods at the customer's
doorstep which facilitates easy availability of required products.
Itinerant traders even go to those places where it is difficult to sustain
a shop because of poor level of demand. They provide their services to
even the remote areas.
2. Discuss the features of a departmental store. How are they different

from multiple shops or chain stores.
Answer
The features of departmental store are:
A modern departmental store may provide all facilities such as

restaurant, travel and information bureau, telephone booth, rest-rooms,
etc.
Department stores are generally located in central areas so as to

attract a large number of customers.
As the size of these stores is very large, they are generally formed as a
joint stock company managed by a board of directors. There is a
managing director assisted by a general manager and several department
managers.
They have centralised purchasing arrangements. All the purchases in a

department store are made
centrally by the purchase department of the store, whereas sales are
decentralised in different departments.
Difference between departmental store and multiple shops.
Departmental Store Multiple Shops

They offer a wide variety of products to They deal in a single line of product and
customers. specialise in it.
They offer a wide variety of customer services. They offer limited customer services.
They are located in central parts of cities so as They have multiple locations - that is, they are
to attract a large number of customers. spread across cities or towns.
They do not follow a fixed pricing policy as the They follow a fixed pricing policy across all the
prices of products vary across departments. shops that are part of a particular chain.
These stores cater to the needs of relatively high These stores cater to different types of
income group of customers who care more for customers, including those belonging to the
the services provided rather than the prices of lower income groups, who are interested in
the product. buying quality goods at reasonable prices.
The departmental stores may provide credit
The sales are made strictly on cash basis.
facilities to some of their regular customers.
There is not much scope for flexibility in these
They have certain flexibility in respect of the
stores which deal only in limited line of
line of goods marketed.
products.
3. Why are consumers cooperatives stores considered to be less

expensive? What are its relative advantages over other large scale
retailers?
Answer
A consumer cooperative store generally buy in large quantity, directly

from manufacturer or wholesalers and sell them to the consumers at
reasonable prices. Since the middleman are eliminated or reduced, the
members get products of good quality at cheaper rates. Therefore, these
stores are considered to be less expensive.
Its advantages over other large scale retailers are:
Ease information: It is easy to form a consumer cooperative society.

Any ten people can come together to form a voluntary association and get
themselves registered with the Registrar of Cooperative Societies by
completing certain formalities.
Limited liability: The liability of the members in a cooperative store is

limited to the extent of the capital contributed by them.
Democratic management: Cooperative societies are democratically

managed through management
committees which are elected by the members. Each member has one
vote, irrespective of the number of shares held by him/her.
Lower prices: A cooperative store purchases goods directly from the

manufacturers or wholesalers, the role of middlemen is eliminated
which results in lower prices for the consumer goods to the members.
Cash sales: The consumer cooperative stores normally sell goods on

cash basis. As a result, the requirement for working capital is reduced.
Convenient location: The consumer cooperative stores are generally
opened at convenient public
places where the members and others can easily buy the products as per
their requirements.
Page No: 250
4. Imagine life without your local market. What difficulties would a

consumer face if there is no retail shop?
Answer
There are lot of difficulties people would face if there is no retail shop as
these act as a link between manufacturers/wholesalers and consumers as
they buy goods from manufacturers/wholesalers and sell them directly to
consumers. If there is retail shop in our neighbourhood then life become
so hard. For buying any simple or daily use product we have to travel a lot
of distance.
We can buy certain items as and when required if some retail stores are
within the walking distance from our house. In case of emergency, we can
easily get medicine and other necessary items if some shops are nearby.
Otherwise, life can be very difficult.
They play an essential role due to following things:
Regular availability of products:The most important service of a retailer

to consumers is to maintain regular availability of various products
produced by different manufacturers. This enables the buyers to buy
products as and when needed.
New products information: Retailers provide customers information

about new products, their features, prices, etc. This information helps the
customers in deciding which product to buy, thus facilitating their product
choice.
Convenience in buying: Customers can buy according to their

requirements. Also, they are normally situated very near to the residential
areas and remain open for long hours which offers great convenience to
the customers in buying products of their requirements.
Wide selection: Retailers generally offer customers a wide variety of

goods such as stationery goods, dairy products and food items.
After-sales services: Retailers provide important after-sales services in
the form of home delivery, supply of spare parts and attending to
customers.
Provide credit facilities: The retailers sometimes provide credit

facilities to their regular buyers which enables the customers to increase
their level of consumption and, thereby, their standard of living.
5. Explain the usefulness of mail order houses. What types of products are
generally handled by them? Specify?
Answer
Mail order houses are the retail outlets that sell their merchandise
through mail. There is generally no direct personal contact between the
buyers and the sellers in this type of trading.
The usefulness of mail order houses are:
Limited capital requirement: Mail order business does not require
heavy expenditure on building and other infrastructural facilities.
Therefore, it can be started with relatively low amount of capital.
Elimination of middle men: Mail-order houses eliminate the role of

middlemen as they deal with consumers directly. This results in a
substantial reduction in cost to consumers.
Absence of bad debt: Since the mail order houses do not extend credit
facilities to the customers, there are no chances of any bad debt on
account of non payment of cash by the customers.
Wide reach: As goods are sent via mail, the sellers are able to pass on
information about their merchandise to customers spread all over the
country.
Convenience: Under this system goods are delivered at the doorstep of

the customers. This results in great convenience to the customers in
buying these products.
Types of products which are usually handled by mail orders houses are as
follows:
Graded and standardized goods.
Goods which can be easily transported at low cost.
Goods which have ready demand in the market.
Goods which can be easily described through pictures.
International Business-I
Exercises
Multiple Choice Questions
1. In which of the following modes of entry, does the domestic

manufacturer give the right to use intellectual property such as patent
and trademark to a manufacturer in a foreign country for a fee
(a) Licensing
(b) Contracted
(c) Joint venture
(d) None of these
(a) Licensing
2. Outsourcing a part of or entire production and concentrating on

marketing operations in international business is known as
(a) Licensing
(b) Franchising
(c) Contract manufacturing
(d) Joint venture
Page No: 276
3. When two or more firms come together to create a new business entity
that is legally separate and distinct from its parents is known as
(a) Contract manufacturing
(b) Franchising
(c) Joint ventures
(d) Licensing
(c) Joint ventures
4. Which of the following is not an advantage of exporting?

(a) Easier way to enter into international markets
(b) Comparatively lower risks
(c) Limited presence in foreign markets
(d) Less investment requirements
(c) Limited presence in foreign markets
5. Which one of the following modes of entry requires higher level of

risks?
(a) Licensing
(b) Franchising
(d) Joint venture
(d) Joint venture
6. Which one of the following modes of entry permits greatest degree of

control over overseas operations?
(a) Licensing/franchising
(b) Wholly owned subsidiary
(d) Joint venture
(b) Wholly owned subsidiary
7. Which one of the following modes of entry brings the firm closer to
international markets?
(a) Licensing
(b) Franchising
(d) Joint venture
8. Which one of the following is not amongst India's major export item?
(a) Textiles and garments
(b) Franchising
(c) Oil and petroleum products
(d) Basmati rice
(b) Franchising
9. Which one of the following is not amongst India's major import items?
(a) Ayurvedic medicines
(b) oil and petroleum products
(c) Pearls and precious stones
(d) Machinery
(a) Ayurvedic medicines
10. Which one of the following is not amongst India's major trading
partner?
(a) USA
(b) UK
(c) Germany
(d) New Zealand
(d) New Zealand
Page No: 277
1. Differentiate between international trade and international business.
Answer
International trade International business

International trade refers to the International business not only includes movement of
exchange of goods and services capital, of goods and services, but also of capital, personnel,
across the international boundaries technology and intellectual property like patents,
of countries. trademarks, know-how and copyrights.
International trade means Business transaction that takes place between two or more
movements of goods only. countries is known as international business.
International business is much broader than international
International trade is a narrow term.
trade.
2. Discuss any three advantages of international business.
Answer
Three advantages of international business are:
Earning of foreign exchange: International business helps a country to

earn foreign exchange which it can later use for meeting its imports of
capital goods, technology, petroleum products and fertilisers,
pharmaceutical products and a host of other consumer products which
otherwise might not be available domestically.
More efficient use of resources: International business allows a country

to produce what a country can produce more efficiently and trade the
surplus production so generated with other countries to procure what
they can produce more efficiently.
Improving growth prospects and employment potentials: International

business encourages many countries, especially the developing ones to
produce on a larger scale which not only helps in improving their growth
prospects, but also created opportunities for employment of people living
in these countries.
3. What is the major reason underlying trade between nations?
Answer
The major reason underlying trade between nations are:

Unequal distribution of natural resources among different nations.
Availability of various factors of production such as labour, capital and
raw materials that are required for producing different goods and services
differ among nations.
Labour productivity and production costs differ among nations due to
various socio-economic, geographical and political reasons.
4. Discuss as to why nations trade.
Answer
The nations cannot produce equally well or cheaply all that they need
because of the unequal distribution of natural resources and various other
factors such as labour productivity and production costs. Therefore, some
countries are in an advantageous position in producing select goods and
services which other countries cannot produce that effectively and
efficiently, and vice-versa and procuring the rest through trade with other
countries which the other countries can produce at lower costs.
5. Enumerate limitations of contract manufacturing.
Answer
The limitations of contract manufacturing are:
Local firms might not adhere to production design and quality

standards, thus causing serious product quality problems to the
international firm.
Local manufacturer in the foreign country loses his control over the
manufacturing process because goods are produced strictly as per the
terms and specifications of the contract.
The profitability of local firm producing under contract manufacturing
is low as it is not free to sell the contracted output as per its will. It has
to sell the goods to the international company at prices agreed upon
under the contract which may be lower than the open market prices.
6. Why is it said that licensing is an easier way to expand globally?
Answer
Licensing is an easier way to expand globally because:
Under the licensing system, it is the licensor who sets up the business
unit and invests his/her own money in the business and the licensor has to
virtually make no investments abroad. Therefore, it is considered a less
expensive mode of entering into international business.
Licensor is paid by the licensee by way of fees fixed in advance as a

percentage of production or sales turnover and licensor does not bear
risk of losses.
Since the business in the foreign country is managed by the licensee

who is a local person, there are lower risks of business takeovers or
government interventions.
Licensee being a local person has greater market knowledge and

contacts which can prove quite helpful to the licensor in successfully
conducting its marketing operations.
7. Differentiate between contract manufacturing and setting up

wholly owned production subsidiary abroad.
Answer
Contract manufacturing Wholly owned production subsidiary

A firm enters into a contract with one or a few local
The parent company acquires full control
manufacturers in foreign countries to get certain
over the foreign company by making 100
components or goods produced as per its
per cent investment in its equity capital.
specifications.
The parent company has full control over
The firm has limited control over the local
its operations in another country through
manufacturer.
the subsidiary.
There is no or little investment in the foreign countries The parent company buys up the entire
equity of the firm abroad and makes this
firm its subsidiary.
8. Distinguish between licensing and franchising.
Answer
Licensing Franchising
The licensor grants licence to a foreign
The franchiser grants a foreign firm (franchisee)
company (licensee) to produce and sell goods
the right to operate a business using a common
under the licensor's logo and trademarks for a
brand name for an initial or a regular fee.
fee.
Operations are related to production and
Operations are related to the services business.
marketing of goods.
Less stringent rules and regulations Strict rules and regulations
9. List major items of India's exports.
Answer
The major items of India's exports are Tea, Basmati rice, Spices, Leather
and leather products and Semi-precious stones.
10. What are the major items that are exported from India?
Answer
The major items that are exported from India are tea, pearls, precious
and semi-precious stones,
medicinal and pharmaceutical products, rice, spices, iron ore and
concentrates, leather and leather manufactures, textile yarns fabrics,
garments and tobacco. It also holds the distinct position of being the
largest exporter in the world in select commodities such as basmati rice,
tea, and ayurvedic products.
11. List the major countries with whom India trades.
Answer
The major countries with whom India trades are USA, UK,
Belgium, Germany, Japan, Switzerland, Hong Kong, UAE, China, Singapore
and Malaysia.
1. What is international business? How is it different from domestic

business?
Answer
Manufacturing and trade beyond the boundaries of ones own country is

known as international business. It involves not only the international
movements of goods and services, but also of capital,
personnel, technology and intellectual property like patents, trademarks,
know-how and copyrights.
It is different from domestic business in following ways:
Domestic business International business

Trade within the national
Trade between two or more countries.
boundaries of a country.
People or organisations from one
People or organisations of different countries participate
nation participate
Lack homogeneity due to differences in language,
More homogeneous in nature.
preferences, customs, etc., across markets.
It have different forms of political systems and different
It is subject to political system
degrees of risks which often become a barrier to international
and risks of one single country.
business.
Subjected to rules, laws or
Subjected to rules, regulations and laws of many countries.
taxation system of one country.
Currency of domestic country is Transactions involve use of currencies of more than one
used. country.
2. International business is more than international trade. Comment.
Answer
International trade comprises of exports and imports of goods and forms

an important component of international business. But the scope of
international business has substantially expanded. International trade in
services such as international travel and tourism, transportation,
communication, banking, ware-housing, distribution and advertising has
considerably grown. The other equally important developments are
increased foreign investments and overseas production of goods and
services. Companies have started increasingly making investments into
foreign countries and undertaking production of goods and services in
foreign countries to come closer to foreign customers and serve them
more effectively at lower costs. All these activities form part of
international business. So, we can say that international business is a
much broader term and is comprised of both the trade and production of
goods and services across frontiers.
3. "What benefits do firms derive by entering into international trade".

Comment.
Answer
There are many benefits that firms derive by entering into international
trade:
Prospects for higher profits: International business can be more

profitable than the domestic business as business firms can earn more
profits by selling their products in countries where prices are high.
Increased capacity utilisation: Firms can make use of their surplus

production capacities and also improving the profitability of their
operations by going for overseas expansion and procuring orders from
foreign customers. Production on a larger scale often leads to economies
of scale, which in turn lowers production cost and improves per unit profit
margin.
Prospects for growth:Once the market in the domestic country

becomes saturated, it becomes difficult to grow the turnover. By entering
into overseas markets, business firms can improve prospects of their
growth.
Way out to intense competition in domestic market: If the competition

in the domestic market is very intense, internationalisation seems to be
the only way to achieve significant growth. International business thus
acts as a catalyst of growth for firms facing tough market conditions on
the domestic turf.
Improved business vision: The growth of international business of many
companies is essentially a part of their business policies or strategic
management. The vision to become international comes from the urge to
grow, the need to become more competitive, the need to diversify and to
gain strategic advantages of internationalisation.
4. In what ways is exporting a better way of entering into international

markets than setting up wholly owned subsidiaries abroad.
Answer
The exporting is better way of entering into international markets than

setting up wholly owned subsidiaries abroad in following ways:
Exporting is less complex than setting up and wholly owned

subsidiaries abroad.
Exporting involves lesser time and effort as business firms are not
required to invest that much time and money as is needed when they set
up manufacturing plants and facilities as wholly owned subsidiary in host
countries.
Since exporting does not require much of investment in foreign

countries, exposure to foreign investment risks is nil or much lower than
that in establishing wholly owned subsidiary.
5. Discuss briefly the factors that govern the choice of mode of entry into
international business.
Answer
The factors that govern the choice of mode of entry into international
business are:
Complexity:It is a major factor governing the choice of a mode of entry

into international business. The level of complexity differs from one mode
to another. For example: Starting an export and import business is less
complex than setting up and managing joint-ventures or wholly owned
subsidiaries abroad.
Risk factor: The risk involvement differ from one mode to another. For
example: there is no or little risk involved in the contract manufacturing,
exporting and licensing modes while the risk is comparatively higher in
setting up a wholly owned subsidiary. Thus, companies needs and
requirements play an important role in choosing risk factor.
Ownership and control: Some companies want to have full ownership

and decision-making control over the foreign firm. Therefore, they choose
wholly owned subsidiary mode to enter into international business. On the
other hand, modes of entry into international business such as licensing
and exporting do not offer ownership rights to the parent company.
Investment: It also have an important role while choosing various

modes. If a company don't want to invest more amount of money then it
can choose importing and exporting or for licensing a foreign company for
entering into international business. One should also choose wholly
owned subsidiary mode but the cost of setting up and managing is very
high. Thus, the mode of entry preferred by a firm depends on its capacity
and readiness to make an investment.
6. Discuss the major trends in India's foreign trade. Also list the major
products that India trade with other countries.
Answer
India is now the 10th largest economy in the world and the fastest
growing economy, next only to China. As per the Goldman Sach Report
2004, India is projected to be the second largest economy by 2050.
Despite these features, Indias involvement with international business is
not very impressive. Indias share in world trade in 2003 was abysmally
low, just 0.8 per cent as compared to those of other developing countries
such as China (5.9 per cent), Hong Kong (3.0 per cent), South Korea (2.6
per cent), Malaysia (1.3 per cent), Singapore (1.9 per cent), and Thailand
(1.1 per cent).
Post liberalization, the share of foreign trade in the countrys GDP

(Gross Domestic Product) has grown from 14.6% in 1990-91 to 24.1% in
2003-04. Exports and imports have been increasing continuously since
then.
Indias total merchandise export was Rs. 606 crore in 1950-51. It has
grown to Rs. 293, 367 crore in 2003-04. Thus, there has been an increase
of 480 times in exports in the last five decades.
Indias total import was Rs. 6.8 crore in 1950-51. It has grown to Rs.
359, 108 crore in 2003-03. This shows a growth of 590 times over the
same period.
Although in overall terms India accounts for just 0.8 per cent of world
exports, in many individual product items such as tea, pearls, precious
and semi-precious stones, medicinal and pharmaceutical products, rice,
spices, iron ore and concentrates, leather and leather manufactures,
textile yarns fabrics, garments and tobacco, its share is much higher and
ranges between 3 per cent to 13 per cent. Also it holds the distinct
position of being the largest exporter in the world in select commodities
such as basmati rice, tea, and ayurvedic products.
India mainly imported crude oil and petroleum products, capital goods
(i.e., machinery), electronic goods, pearl, precious and semi-precious
stones, gold, silver and chemicals
7. What is invisible trade? Discuss salient aspects of Indias trade in

services.
Answer
Invisible trade basically refers to the trading of services because of

the intangible aspect of services. Trade in services includes trade in
tourism and travel, boarding and lodging, entertainment and recreation,
transportation, professional services, communication, construction and
engineering, marketing, educational and financial services.
India's trade in services has increased substantially over the years. Both
the exports and imports of services relating to foreign travel,
transportation and insurance have increased at a high rate during the last
four decades. Software and other miscellaneous services (including
professional technical and business services) have emerged as the main
categories of India's exports of services. While the relative share of travel
and transportation has declined from 64.3% in 1995-96 to 29.6% in 2003-
2004, the share of software exports has gone up from 10.2% to around
49% in the corresponding period.
Emerging Modes of Business

Tick mark () the most appropriate answer to the following questions
1. e-commerce does not include

(a) A business's interaction with its suppliers.
(b) A business's interactions with its customers.
(c) Interactions among the various departments within the business
(d) Interactions among the geographically dispersed units of the business.
(c) Interactions among the various departments within the business
2. Outsourcing
(a) restricts only to the contracting out of Information Technology.
(b) restricts only to the contracting out of non-core business.
(c) includes contracting out of manufacturing and R&D as service
processes-both core and non-core-but restricts only to domestic territory
(d) includes off-shoring.
(b) restricts only to the contracting out of non-core business.
3. The payment mechanism typical to e-business

(a) cash on delivery (CoD)
(b) cheques
(c) credit and debit cards
(d) e-cash
(d) e-cash
4. A call center handles

(a) Only in-bound voice based business
(b) Only out-based voice based business.
(c) Both voice based and non-voice based business.
(d) Both customer facing and back-end business.
(c) Both voice based and non-voice based business.
5. It is not an application of e-business

(a) Online bidding
(b) Online procurement
(c) Online trading
(d) Contract R&D
(d) Contract R&D
Short Answer Questions (50 Words)

1. State any three differences between e-business and traditional
business.
Answer
The three differences between e-business and traditional business are:
The formation of e-business is easy while formation of traditional

business is relatively difficult.
The startup and operating cost is low in e-business as assets are

normally not purchased but business is done through network of
relationships while in traditional business high expense incurred on
startup and its operation.
Physical presence of seller or salesperson is not required in e-business

while this is required in traditional business.
2. How does outsourcing represent a new mode of business?
Answer
Outsourcing is become emerging mode of business as it allows a

company to focus on its core functions while leaving less important
activities to specialised agencies. This has made industries focus on
research and development for the continuous innovation of sophisticated
products, increasing their need to outsource less important functions.
Research has led to the development of better products for consumers,
along with round-the-clock customer care services.
3. Describe briefly any two applications of e-business.
Answer
The two applications of e-business are:
B2B: Business 2 Business commerce involves business transactions

between business organizations. All business firms buy (or sell) raw
materials, machines and other inputs and services to carry out their
business processes. In doing so, firms have to maintain a good
relationship with their distributors, suppliers and vendors. In this context,
B2B e-commerce enables businesspersons to strengthen their
communication and distribution networks, facilitating the smooth transfer
of information, technological know-how and money.
B2C: Business-to-Customers involves transactions between a business

firm and its customers. B2C e-commerce transactions not only include
activities such as sale or purchase of goods and services but also other
marketing activities through the online mode. It basically involves pre-
sale activities (such as promoting products through advertisements) and
pre-sale services (such as providing product information and cash-on-
delivery services) besides post-sale services (such as customer care
services). E-commerce enables business firms to conduct these activities
faster and at much lower costs.
4. What are the ethical concerns involved in outsourcing?
Answer
Outsourcing has also raised some ethical concerns. For reducing the
overall cost of production, the industries of developed
countries outsource their production activities to less developed and
developing countries where labour is abundant and available at lower
rates. The labour force in these countries are child or women and working
conditions are unhygienic and even unsafe. The companies cannot do so
in their developed home countries due to stringent laws forbidding use of
child labour.
This raises the ethical concern whether this sort of cost cutting by using
child labour justified. Similarly there is a concern over the ethical aspect
of outsourcing the work to countries where gender based wage-
discrimination is done and hence women are paid lower wages.
5. Describe briefly the data storage and transmission risks in e-business.
Answer
Data storage risk: Data stored in a system is subject to various kinds of

risks, especially during business transactions. If data get into the wrong
hands, they may be used by individuals to fulfill their own purposes. In
addition, because of malicious and pirated computer software, the data
stored may get corrupted by virus attacks.
Transaction risk: Online transactions are highly prone to the following

risks.
Default on order taking or giving: Such a situation arises when either the
seller denies that the buyer has placed an order, or the buyer denies that
he or she has placed an order.
Default on delivery: This refers to the situation where the wrong goods
are delivered at the right place, or the right goods are delivered at the
wrong place, or the goods are not delivered.
Default on payment: This refers to the situation in which the seller does
not receive payment, while the buyer claims that he or she has made
payment.
1. Why are e-business and outsourcing referred to as the emerging

modes of business? Discuss the factors responsible for the growing
importance of these trends.
Answer
The rapid globalisation and continuous innovations of products made

changes in the modes of business. e-business and outsourcing are latest
trends and more likely to continue. Hence, these are referred to as the
emerging modes of business.
The factors responsible for the growing importance of these trends are:
They speed up the business process: The demands of consumers are

growing, and it has become necessary to facilitate trade from anywhere
and also round the clock. E-business and outsourcing help speed up the
process of buying and selling around the clock.
They facilitate innovation and technology development: To sustain in

the market, every business needs to innovate and develop new ideas and
products. In this scenario, e-business and outsourcing have emerged as a
boon for producers as they facilitate continuous development of business
strategies and new technologies.
They help make available quality products at lower costs: The demand
for high quality and customized products has increased, and e-business
and outsourcing play a major role in providing consumers with the
required products at a reasonable cost. By facilitating the production
andsupply of quality products, e-business and outsourcing help attain the
objective of excellence.
They pave the way for effective post-sale services: It is important for
any business to cater to the needs of its customers. E-business and
outsourcing play an important role here by providing quick and effective
post-sale services to customers.
2. Elaborate the steps involved in on-line trading.
Answer
The steps involved in on-line trading are:
Registration: Before online shopping, one has to register with the

online vendor by filling-up a registration form. For doing so, the buyer is
required to key in details such as his or her name, address, unique user
name and secret password.
Placing an order: After opening an account, the buyer can start

browsing through the products listed, go through other customers'
reviews and compare products. The buyer may select various items
according to his or her preferences and put them in a 'cart'. The buyer can
place an order and proceed towards the payment window.
Payment mechanism: The payment for the purchases through online

shopping may be done in a number of ways:
Cash on delivery (CoD): Payment is made in cash at the time of delivery
of a product.
Cheque: the online: The vendor may arrange for the pickup of the cheque
from the customers end. Upon realisation, the delivery of goods may be
made.
Net banking: The user makes an electronic payment to the bank account
of the online vendor through the Internet.
Credit or debit card: The user can also use a credit or debit card to
make an online payment. The payment so made is linked to the bank
account of the user.
Digital cash or e-cash: This type of currency has no physical existence.
It is a system of purchasing cash in relatively small amounts and storing
it in the computer system. The consumer can spend the cash when
making electronic purchases over the Internet.
3. Evaluate the need for outsourcing and discuss its limitations.
Answer
Outsourcing refers to the process of contracting out less important

business activities to external agencies.
The need for outsourcing can be understood by:
Focusing of attention: Outsourcing allows a business enterprise to

focus on the activities that are more important to it. This helps it to come
up with more sophisticated and superior products, which builds goodwill
for it in the market.
Quest for excellence: This enables the firms to pursue excellence by

excelling themselves in the activities that they can do the best by virtue
of limited focus and by extending their capabilities through contracting
out the remaining activities to those who excel in performing them.
Cost reduction: This helps the firm in minimising their cost. This
happens due to the economies of
large scale accruing to the outsourcing partners as they deliver the same
service to a number of organisations.
Growth through alliance: Investment requirements are reduced when

some activities are outsourced. Outsourcing also facilitates inter
organizational knowledge sharing and collaborative learning.
Fillip to economic development: It also stimulates entrepreneurship,

employment and exports in the the countries from where outsourcing is
done.
Limitations of outsourcing are:
Confidentiality: Outsourcing depends on sharing a lot of vital

information and knowledge. If the
outsourcing partner does not preserve the confidentiality and passes it on
to competitors, it can harm the interest of the party that outsources its
processes.
Sweat-shopping: Outsourcing firms seek to lower their costs by utilizing

the low-cost manpower of the host countries. Moreover, the work that is
outsourced is not of the type which may build the competency and
capability of the outsourcing partner.
Ethical concerns: In order to reduce the manufacturing

costs manufacturing processes are being outsourced to developing
countries where they use child labour/women in the factories and working
conditions are unhygienic and even unsafe.
Resentment in the home countries: Global enterprises outsource their

activities to firms located in countries where labour costs are much less.
However, if the home countries of these enterprises are facing
unemployment, then this may lead to resentment and disturbances.
4. Discuss the salient aspects of B2C commerce.
Answer
The 'B2C commerce' refers to the transactions between a business firm

and its customers. The salient aspects of B2C commerce are:
It enables businesspersons to extend their trade to a large number of
consumers by providing them online global access to their products.
It includes a wide gamut of marketing activities such as promotion and

sometimes even delivery of products (e.g., music or e-books) that are
carried out online at a much lower cost but high speed.
It has made possible for firms to manufacture the product according to

the requirements of the customers and also to provide the convenience of
delivery and payment to the customers.
It also enables a business to be in touch with its customers on round-

the-clock basis. Companies can conduct online surveys to ascertain as to
who is buying what and what the customer satisfaction level is.
Customers can also make use of call centres set up by companies to

make toll free calls to make queries and lodge complaints round the clock
at no extra cost to them.
5. Discuss the limitations of electronic mode of doing business. Are these

limitations severe enough to restrict its scope? Give reasons for your
answer.
Answer
The various limitations of electronic mode of business are:
Low personal touch: The e-business lacks personal touch compared to

traditional business. Thus, it is relatively less suitable mode of business
in respect of product categories requiring high personal touch such as
garments etc.
Incongruence between order taking/giving and order fulfilment speed:

Information can flow at the click of a mouse, but the physical delivery of
the product takes time. This incongruence may play on the patience of
the customers.
Need for technology capability and competence of parties to e-

business: e-business requires basic knowledge of computers and Internet
familiarity. This limits the use of e-business in few hands.
Increased risk due to anonymity and non-traceability of parties:

Internet transactions occur between cyber personalities. As such, it
becomes difficult to establish the identity of the parties and their
location. Therefor, it is risky to transact through internet. e-business is
riskier also in the sense
that there are additional hazards of impersonation and leakage of
confidential information such as credit card details.
People resistance: The process of adjustment to new technology and

new way of doing things causes stress and a sense of insecurity. As a
result, people may resist an organisations plans of entry into e-business.
Ethical Fallouts: Companies use an 'electronic eye' to keep track of the

computer files, e-mail account and the websites visited by their
employees or others who use their network systems which is not
considered right on ethical grounds.
Despite the limitations, the scope of e-business remains wide, mainly

owing to the continuous implementation of new technology and new
updates that help in overcoming the limitations. Websites are becoming
more and more interactive to overcome the problem of low touch.
Communication technology is continually evolving to increase the speed
and quality of communication through internet. Efforts are on to overcome
the digital divide, for example, by resorting to such strategies as setting
up of community telecentres in villages and rural areas in India,
Social Responsibilities of Business and

Business Ethics
Exercises
1. Social responsibility is
(a) Same as legal responsibility
(b) Broader than legal responsibility
(c) Narrower than legal responsibility
(d) None of them
(b) Broader than legal responsibility
Page No: 157
2. If business is to operate in a society which is full of diverse and

complicated problems, it may have
(a) Little chance of success
(b) Great chance of success
(c) Little chance of failure
(d) No relation with success or failure
(a) Little chance of success
3. Business people have the skills to solve

(a) All social problems
(b) Some social problems
(c) No social problems
(d) All economic problems
(c) No social problems
4. That an enterprise must behave as a good citizen is an example of its

responsibilities towards
(a) Owners
(b) Workers
(c) Consumers
(d) Community
(d) Community
5. Environment protection can best be done by the efforts of

(a) Business people
(b) Government
(c) Scientists
(d) All the people
(d) All the people
6. Carbon monoxide emitted by automobiles directly contributes to

(a) Water pollution
(b) Noise pollution
(c) Land pollution
(d) Air Pollution
(d) Air Pollution
7. Which of the following can explain the need for pollution control?
(a) Cost savings
(b) Reduced risk of liability
(c) Reduction of health hazards
(d) All of them
(d) All of them
8. Which of the following is capable of doing maximum good to society?

(a) Business success
(b) Laws and regulations
(c) Ethics
(d) Professional management
(c) Ethics
9. Ethics is important for

(a) Top management
(b) Middle-level managers
(c) Non-managerial employees
(d) All of them
(d) All of them
10. Which of the following alone can ensure effective ethics programme in
a business enterprise?
(a) Publication of a code
(b) Involvement of employees
(c) Establishment of a compliance mechanism
(d) None of them
(a) Publication of a code
1. What do you understand by social responsibility of business? How is it

different from legal responsibility?
Answer
Social responsibility of business refers to its obligation to take those

decisions and perform those actions which are desirable in terms of the
objectives and values of our society.
Social responsibility is broader than legal responsibility of business. Legal
responsibility may be fulfilled by mere compliance with the law whereas
Social responsibility is a firms recognition of social obligations even
though not covered by law, along with the obligations laid down by law. In
other words, social responsibility involves an element of voluntary action
on the part of business people for the benefit of society.
Page No: 158
2. What is environment? What is environmental pollution?
Answer
The environment is defined as the totality of mans surroundings - both

natural and man-made.
Environmental Pollution is injection of harmful substances into the
environment. It is result of industrialisation. Pollution changes the
physical, chemical and biological characteristics of air, land and water.
Pollution harms human life and the life of other species. It also degrades
living conditions while wasting or depleting raw material resources.
3. What is business ethics? Mention the basic elements of business

ethics?
Answer
Business ethics refer to the values and principles that govern the
behaviour of individuals in an organisation such that the business
activities are desirable from the viewpoint of society.
Elements of business ethics are:
Top management commitment
Publication of a Code
Establishment of compliance mechanism
Involvement of employees at all levels
Measurement of results
4. Briefly explain (a) Air pollution, (b) Water pollution and (c) Land
pollution.
Answer
(a) Air pollution: Air pollution is the result of a combination of factors

which lowers the air quality. It is mainly due to carbon monoxide emitted
by automobiles which contributes to air pollution.
(b) Water pollution: Water becomes polluted primarily from chemical and
waste dumping. It has led to the death of several animals and posed a
serious threat to human life.
(c) Land pollution: Dumping of toxic wastes on land causes land pollution.
This damages the quality of land making it unfit for agriculture or
plantation.
5. What are the major areas of social responsibility of business?
Answer
The major areas of social responsibility of business are:
Economic responsibility: A business enterprise is basically an

economic entity and, therefore, its primary social responsibility is
economic i.e., produce goods and services that society wants and sell
them at a profit. There is little discretion in performing this responsibility.
Legal responsibility: Every business has a responsibility to operate

within the laws of the land. Since these laws are meant for the good of
the society, a law abiding enterprise is a socially responsible enterprise
as well.
Ethical responsibility: This includes the behaviour of the firm that is

expected by society but not codified in law. For example, respecting the
religious sentiments and dignity of people while advertising for a product.
Discretionary responsibility: This responsibility is completely voluntary

in nature. It means that a business enterprise may choose to open a
charitable school or hospital for the poor, grant aid to people affected by
natural calamities, provide employment opportunities to the physically
challenged and so on.
1. Build up argument for and against social responsibilities.
Answer
The argument for social responsibilities are:
Justification for existence and growth: Business exists for providing

goods and services to satisfy human needs. Though, profit motive is an
important justification for undertaking business activity, it should be
looked upon as an outcome of service to the people. In fact, the
prosperity and
growth of business is possible only through continuous service to
society.. Therefore, assumption of social responsibility by business
provides justifications for its existence and growth.
Long-term interest of the firm: A firm and its image stands to gain
maximum profits in the long run when it has its highest goal as service to
society. Therefore, it is in its own interest if a firm fulfills its social
responsibility. The public image of any firm would also be improved when
it supports social goals.
Avoidance of government regulation:Government regulations are

undesirable because they limit freedom. Therefore, it is believed that
businessmen can avoid the problem of government regulations by
voluntarily assuming social responsibilities, which helps to reduce the
need for new laws.
Maintenance of society: Business enterprises should assume social
responsibilities as the people who are dissatisfied with the business may
resort to anti-social activities which may harm the interest of business
itself.
Availability of resources with business: This argument holds that

business institutions have valuable financial and human resources which
can be effectively used for solving problems.
Converting problems into opportunities: Business enterprises can solve

the social problems and can reap gains from them by accepting the
challenge of converting risky situations into profitable deals.
Better environment for doing business: Business may have little chance
of success if it is to operate in a society full of diverse and complicated
problems. Therefore, the business system should do something to solve
the social problems to create a better environment conducive to its own
survival.
Holding business responsible for social problems: Some of the social

problems like environmental pollution, unsafe workplaces, corruption in
public institutions, and discriminatory practices in employment have
either been perpetuated by business enterprises themselves. Therefore, it
is the moral obligation of business to contribute in solving these
problems.
The arguments against social responsibilities are:
Violation of profit maximisation objective: Business exists only for

profit maximisation. Therefore, any talk of social responsibility is against
this objective.
Burden on consumers: It is argued that social responsibilities like

pollution control and environmental protection are very costly and often
require huge financial investments which are likely to be shifted on to the
consumers in the form of higher prices.
Lack of social skills: According to this argument, social problems

should be solved by specialized agencies as businessmen do not have the
necessary understanding and training to solve social problems.
Lack of Broad Public Support: The public in general does not like
business involvement or interference in social programmes because of
which business cannot operate successfully in solving social problems.
2. Discuss the forces which are responsible for increasing concern of

business enterprises towards social responsibility.
Answer
The forces which are responsible for increasing concern of business

enterprises towards social responsibility are:
Threat of public regulation: Democratically elected governments is

meant to safeguard the interests of society. Thus, in case the government
feels that a business enterprise is behaving in a manner that is not
socially desirable, then it can regulate the operations of that enterprise
accordingly.
Pressure of labour movement: Labour movement for ensuring fair gains

for the working class throughout the world has become very powerful as
labour has become far more educated and organized. This has forced
business enterprises to pay due regard to the welfare of workers.
Impact of consumer consciousness: Development of education and

mass media and increasing competition in the market have made the
consumer conscious of his right and power in determining market
forces. Thus, business enterprises are made to work more efficiently and
produce better products at reasonable rates to satisfy their customers.
Development of social standards: Business enterprises are not mere

profit-making entities. For their long-term growth and existence, they
require to fulfil the new standards of social welfare.
Development of business education: Educated persons as consumers,
investors, employees, or owners have become more sensitive towards
social issues than was the case earlier, when such education was not
available.
Relationship between social interest and business interest: No

business enterprise can work in isolation from society. Thus, there should
be a balance between business interests and social interests, such that
the business can grow by doing the maximum good to society.
Development of professional, managerial class: Previously business
was managed by the owners but now professional management education
in universities and specialized management institutes have created a
separate class of professional managers who have a positive attitude
towards social responsibility along with profit earning.
3. 'Business is essentially a social institution and not merely a profit

making activity'. Explain.
Answer
The primary objective of any business enterprise is profit maximisation.

This is because profit acts as a measure of success and at the same time
is the main source of income for an enterprise. Also, profits are often
used to finance the expansion projects of a business enterprise. However,
it is argued that business enterprises are not mere profit-making entities.
They are considered as social institutions, too, as they are created by
society. As every business makes use of society's resources in terms of
human and physical capital, it cannot work in isolation from society. A
business needs consumers to buy its products or services. It needs some
suppliers to source raw materials and equipments. It needs to maintain a
good relationship with its suppliers and consumers so that it can
smoothly conduct business. Thus, a need arises to create a balance
between the business interests and social interests of a business
enterprise, such that it can grow by doing the maximum good to society.
Hence, we say that a business enterprise is a social institution and not
merely a profit-making entity.
4. Why do the business enterprises need to adopt pollution control

measures?
Answer
Business enterprises need to take suitable measures for pollution control

not merely to avoid criticisms against them but also to enjoy other
benefits which are:
Reduction of health hazards: Pollutants in environment causes many

diseases like cancer, heart attacks and lung complications. Pollution
control measures can not only check the seriousness of such diseases
but can also be supportive of a healthy life on earth.
Reduced risk of liability: It is possible that an enterprise is held liable
to pay compensation to people affected by the toxicity of gaseous, liquid
and solid wastes it has released into the environment. Pollution control
helps in reducing the risk of such liabilities.
Cost savings: An effective pollution control programme is also needed

to save costs of operating business.
Improved public image: As society becomes increasingly conscious of

environmental quality, a firms policies and practices for controlling
wastes will increasingly influence peoples attitude towards its working.
Other social benefits: Pollution control results in many other benefits

like clearer visibility, cleaner buildings, better quality of life, and the
availability of natural products in a purer form.
5. What steps can an enterprise take to protect the environment from the
dangers of pollution?
Answer
The steps which can be taken by business enterprises for environmental

protection are:
A definite commitment by top management of the enterprise to create,

maintain and develop
work culture for environmental protection and pollution prevention.
Ensuring that commitment to environmental protection is shared

throughout the enterprise by all divisions and employees.
Developing clear-cut policies and programmes for purchasing good

quality raw materials, employing superior technology, using scientific
techniques of disposal and treatment of wastes and developing employee
skills for the purpose of pollution control.
Complying with the laws and regulations enacted by the Government

for prevention of pollution.
Participation in government programmes relating to management of

hazardous substances, clearing up of polluted rivers, plantation of trees,
and checking deforestation.
Periodical assessment of pollution control programmes in terms of
costs and benefits so as to increase the progress with respect to
environmental protection.
Arranging educational workshops and training materials to share

technical information and
experience with suppliers, dealers and customers to get them actively
involved in pollution control programmes.
6. Explain the various elements of business ethics?
Answer
Elements of business ethics are:
Top management commitment: Top-level officers, such as CEO's and

senior managers, must strongly follow the ethical codes and guide the
other employees in adopting such behaviour.
Publication of a Code: Enterprises must clearly define the ethical code

of conduct, which would include quality standards, laws governing
production and health and safety standards for the employees.
Establishment of compliance mechanism: In addition to standards, an

enterprise must also devise a mechanism through which compliance with
the code of conduct can be measured.
Involvement of employees at all levels: The successful implementation

of ethical standards requires the involvement of all the employees at all
levels.
Measurement of results: Although it is difficult to accurately measure

the end results of ethics programmes, the firms can certainly audit to
monitor compliance with ethical standards.

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Small Business

Short Answer Questions

Page No: 224

3. How would you differentiate between an ancillary and a tiny unit?

Ancillary Unit Tiny Unit

A tiny unit is the business

4. State the features of cottage industries.

The features of cottage industries are:

These are organised by individuals, with private resources

Long Answer Questions

1. How do small scale industries contribute to the socio-economic

Small scale industries enjoys a distinct position to in view of their

Small industries are the second largest employers of human resources,

Small industries in our country supply an enormous variety of products

Small industries provide ample opportunity for entrepreneurship. This

These industries also enjoy the advantage of low cost of production.

These industries can provide customized products and services to

2. Describe the role of small business in rural India.

The role of small business in rural India are:

Cottage and rural industries play an important role in providing

Village and small industries are significant as producers of consumer

These industries contribute amply to other socio-economic aspects,

Small-scale businesses have been considered as a major propeller for

The settlement of these industries in rural areas also help in prevention

3. Discuss the problems faced by small scale industries.

The problems faced by small scale industries are:

Finance: The severe problems faced by SSIs is that of non- availability

Managerial skills: Small business is generally promoted and operated

Marketing: SSIs don't have specialisation in marketing its products or

Quality: These industries fo not adhere to desired standards of quality

Capacity utilisation: Due to lack of marketing skills or lack of

Technology: SSIs uses outdated technology which results in low

Global Competition: Due to liberalization, privatisation and globalisation

4. What measures has the government taken to solve the problem of

The small-scale sector has played a major role in employment generation,

National Bank for Agriculture and Rural Development (NABARD): It was

National Small Industries Corporation (NSIC): It was set up in 1955 with

Small Industries Development Bank of India (SIDBI): It was set up to

The National Commission for Enterprises in the Unorganised Sector

World Association for Small and Medium Enterprises (WASME): It is an

Scheme of Fund for Re- generation of Traditional Industries

The District Industries Centers (DICs) The District Industries Centers

5. What are the incentives provided by the government for industries in

Some of the incentives provided by the Government for industries in

Power: Power is supplied at a concessional rate of 50 per cent, while

Water: Water is supplied on a no-profit, no-loss basis or with 50 per cent

Octroi: Most states have abolished octroi.

Raw materials: Units located in backward areas get preferential

Industrial estates: Some states encourage setting up of industrial

Tax holiday: Exemption from paying taxes for 5 or 10 years is given to

Sources of Business Finance

Multiple Choice Questions:

Tick () the correct answer out of the given alternatives

1. Equity shareholder are called

2. The term 'redeemable' is used for

3. Funds required for purchasing current assets is an example of

4. ADRs are issued in

5. Public deposits are deposits that are raised directly from

6. Under the lease agreement, the lessee gets the right to

8. Under the factoring arrangement, the factor

9. The maturity period of a commercial paper usually ranges from

Page No: 206

10. Internal sources of capital are those that are

Short Answer Questions