BUSINESS ENVIRONMENT
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UNIT-3
ECONOMIC AND GLOBAL ENVIRONMENT
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INTRODUCTION:
Economic environment consists of economic factors that influence the business in
a country. These factors include gross national product, corporate profits, inflation
rate, employment, balance of payments, interest rates, consumer income etc.
In a developing country, the low income may be the reason for the very low
demand for a product. The sale of a product for which the demand is income elastic
naturally increases with an increase in income. But a firm is unable to increase the
purchasing power of the people to generate a higher demand for its product. Hence,
it may have to reduce the price of the product to increase the sales. The reduction
in the cost of production may have to be effected to facilitate price reduction . It
may even be necessary to invent or develop a new low - cost product to suit the
low - income market. Thus Colgate designed a simple, hand - driven , inexpensive
washing machine for low - income buyers in less developed countries. Similarly,
the National Cash Register Company took an innovative step backward by
developing a crank - operated cash register that would sell at half the cost of a
modern cash register and this was well received in a number of developing
countries.
The success of any business depends mainly on economic environment in which it
operates. Economic environment of business is a composition of economic
systems, economic conditions, economic legislations and economic policies of the
country. All these aspects have an impact on the business strategies adapted by
business firms . Economic conditions , economic legislations , and economic
policies are flexible in nature and change according to the needs of the society .
The change of economic system, though can take place , takes time However , the
change in these components will have far reaching impact on business operations.
Better understanding of these components of economic environment . will facilitate
the businessmen to create a congenial business environment . Another component
which will have bearing on economic environment of business is International
Economic Environment.
Meaning of Economic environment:
Economic environment refers to all those economic factors which have a bearing
on the functioning of a business unit.
Business depends on the economic environment for all the needed inputs. The
economic environment includes factors like national income, per capita income,
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standard of living, production, education, technology, capital saving industries,
labour, infrastructure technology and atmosphere of a country.
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The economic environment refers to all the economic factors that affect
commercial and consumer behavior. The economic environment consists of all the
external factors in the immediate marketplace and the broader economy. These
factors can influence a business, i.e., how it operates and how successful it might
become.
The economic environment consists of different things for different people.
CHARACTERISTICS / NATURE OF ECONOMIC ENVIRONMENT
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1. Low per capita income:
i) Per capita income in India is low compared to other developing countries.
It is one of the lowest in the world . The extent of poverty can be derived
from the poor quality of food, clothing, housing, education and medical
facilities in the country, all indicates a low standard of living.
ii) Various factors are responsible for the negligible growth in per capita
private final expenditure:
● Unsatisfactory growth of national income ,
● Increasing pressure of growing population ,
● Unequal distribution of incremental income between different sections
of the society ,
● Increasing share of government expenditure , and
● Increasing share of private and public investments .
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Low standard of living and high poverty:
Due to the low per capita income there exists high poverty in India. The
extent of poverty can be or garged from the poor basic facilities,
food,clothing shelter, education and medical facilities. All these indicate the
lost standard of living.
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Inequalities In Income distribution:
The existence of inequalities in income distribution is another Major
characteristics or feature of Indian economy. The "world development
report" has revealed that the richest 20% took 43.3% of the total income and
the poorest 20% received only the 8.9% in the total income distribution.
This shows that one fourth of the population subsists below the line of
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poverty.
Dominance of Agriculture
Agriculture provides employment to about two - thirds of the total working
population in India. The population census, however, for the first time
registered a significant decline in the proportion of the labour force engaged
in agriculture and presently 58 percent of the labour force is estimated to be
engaged in this sector . This place is an indication of economic progress and
structural change that is gradually taking place.
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Existence of rich resources
India is gifted with a large number of renewable and non - renewable
natural resources. Renewable resources are those which are refilled or
renewed. renewable resources are water and forests.
Example: Wells, lakes, canals.
Non renewable resources that are not restorable minerals are the most
important non renewable resources which are available in India in a different
quantity
Example: iron ore, manganese, coal, mica etc.
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Inadequate capital formation
The lack of capital in the Indian economy is reflected in the low rate of
production and consumption of steel, cement and electricity,etc.
Inadequacies relating to technical know - how are well known( it leads to
use of outdated technology).
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Demographic Peculiarities
India's population has been increasing at a very fast rate During the four
decades 1961-2001 , India's population increased at an annual rate of about
22 percent and even currently is increasing at about 1.7 percent. As a
consequence, the absolute annual increase in India's population is being
estimated at about 17 million.
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Unemployment and underemployment
The Indian economy is a labour surplus economy which is characterized by
the large mass of unemployment and underemployment . This situation
arises to,
● High population,
● low level of economic activity
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● low quality education,
● low growth rate in industry etc.
Under employment is not much related to the qualification of the
employee.
Ex:- M.com graduates working as an accountant.
Quality of Human Capital
The poor quality of human capital can be judged by the high rate of illiteracy
prevalent in the country . The constitutional provision of free compulsory
education until the age of 14 years was directly eradicating illiteracy.
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Technology backwardness
India is behind in technology development and utilization, when compared
to developed economies but over decades there are some changes taken
place in technology in some of the selected segmentation of the economy.
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Infrastructure in adequacies
India infrastructure has taken major changes but it is inadequate in relation
to the demands being made on it by the process of economic growth.
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Dualistic economy
This is another feature of the Indian economy. Here dualism refers to the
existence of two extremes or segments in the economy. India has the world
largest number of illiterates on the one hand and on the other hand it has the
largest number of IT professionals.
STRUCTURE OF INDIAN ECONOMY OR ELEMENTS OF
ECONOMIC ENVIRONMENT
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1. Economic system:
Economic system is the sum total of devices, which through their interaction give
effect to economic choices, i.e. which translate choices from an idea into action.
Types of economic system
I. Capitalism :
The economic system in which business units or factors of production are
privately owned and governed is called Capitalism . The profit earning is the sole
aim of the business unit.
Examples of Capitalistic Economy : England , Japan , America etc.
II. Socialism :
Under socialism, all the economic activities of the country are controlled and
regulated by the government in the interest of the public . The first country to adopt
this concept was Soviet Russia.
The two main forms of socialism are :;
● Democratic Socialism: All the economic activities are controlled and
regulated by the government but the people have the freedom of choice of
occupation and consumption.
● Totalitarian Socialism : This form is also known as Communism . Under this
, people are obliged to work under the directions of the Government.
III. Mixed Economy :
The economic system in which both public and private sectors co - exist is known
as Mixed Economy . Some factors of production are privately owned and some are
owned by government. There exists freedom of choice for occupation and
consumption. Both private and public sectors play key roles in the development of
the country . Example - India .
2. Economic conditions
Economic conditions refer to the issues concerning standard of living, purchasing
power of the society generated by employment of natural resources and factors of
production, market mechanism (Demand,Supply and Price behaviors), distribution
of income to the factors of production, business cycles, etc.
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For example: Business cycle, national income, capital formation, market trend,
growth rate, capital market, etc..
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3. Economic legislation
Economic legislation are the ones adopted by the government to regulate and
promote the business activities of those economies.
Business legislation also covers the entry, conduct and exit policies of the
business. The legislations regarding to entry covers:⮚ The reservation of industry to the small territory sector, cooperative sector
and public sector.
⮚ Import controls
⮚ control of foreign investment and technology etc.
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Economic policies
An economic policy is a course of action that is intended to influence or control the
behavior of the economy. Economic policies are typically implemented and
administered by the government.
❖ Monetary policy
❖ Fiscal policy
❖ Industrial policy
❖ Foreign investment policy
❖ Exim policy
5. International economic environment
The international economic environment can be described as the global factors
that are outside of the control of individual organizations but that can affect the
way that businesses operate. These factors include unemployment rates, inflation
rates, and labor costs.
IMPORTANCE OF ECONOMIC ENVIRONMENT
1.Capitalizing early opportunities:
Environment friendly enterprise is the first movers to avail the existing
opportunity of resources to grab the market. These enterprises do not lose emerging
opportunities to their competitors. Asian paints have been losing their market to a
good loss nairaulic because of their failure.
2.Activating management to changing needs :
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The knowledge of environmental changes sensitizes the management to make
strategies to cope with the emerging problems .
For example : The turmoil in the USSR resulted in the loss of market to many
companies like Hoechst . In order to meet the situation Hoechst divested its
manufacturing facility in favor of IPCA Laboratories Ltd.
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Image building :
Environmental understanding by the management builds the image of the company
in the minds of the people. They feel that the company is sensitive and responsive
to their needs and problems .
For example: G E is said to be image conscious. It divested its computer and air conditioning business because they could not attain 1st or 2nd position in the
business as per their policy.
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Basis of strategy :
Strategists can gather qualitative information regarding the business environment
and utilize them in formulating effective plants.
For example : ITC Hotels foresaw bright opportunities in the travel and tourism
industry and started building hotels in India and abroad.
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Intellectual stimulation :
Knowledge of environment changes provides intellectual stimulation to planners
and decision making authorities. They can do it by paying more attention to people
by listening to their problems and suggestions. They can also eliminate procedure
complexities in a visible way.
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Continuous learning :
Environmental scanning provides continuous broad based learning to be
executives . Reliance adopted the policy of decentralization and empowered their
managers to close the deal themselves even regarding price.
FACTORS AFFECTING ECONOMIC ENVIRONMENT / ECONOMIC
FACTORS WHICH INFLUENCE ON BUSINESS ENVIRONMENT
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1. Growth strategy
Growth strategy is a strategy based on investing in companies and sectors which
are growing faster than their peers. The benefits are usually in the form of capital
gains rather than dividends.
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2. Economic system
An economic system is the combination of the various agencies, entities that
provide the economic structure that defines the social community. The economics
system involves production, allocation of economic inputs and distribution of
economic outputs, Landlords and land availability, households, Capitalists, Banks
and Government.
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3.Economic planning
Economic planning refers to any direction or planning of economic activity outside
the mechanisms of the market, in an attempt to achieve specific economic or social
outcomes.
4. Industry
As per Section 26(j) of Industrial Disputes Act,1947 "Industry " means ay
systematic activity carried on by co - operation between an employer and his
workmen (whether such workmen are employed by such employer directly or by
or through any agency, including a contractor) for the production, supply or
distribution of good through or services with a view to satisfy human wants or
wishes
5. Agriculture
Agriculture is the cultivation of animals, plants, fungi and other life forms for
food, fiber and other products used to sustain life. Agriculture was the key
development in the rise of sedentary human civilization, whereby farming
domesticated species created food surpluses that nurtured the development of
civilization.
6. Infrastructure
Infrastructure is basic physical and organizational structures needed for the
operation of a society or enterprise or the services and facilities necessary for an
economy to function. It can be generally defined as the set of interconnected
structural elements that provide a framework supporting an entire structure of
development.
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7. Financial and fiscal factor
Financial factors consider the income statement is a simple and straightforward
report on the proposed business's cash - generating ability. It is a scorecard on the
financial performance of your business that reflects when sales are made and when
expenses are incurred.
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8. Removal of regional imbalance
The Government had appointed a Fact Finding Committee ( FFC ) in August, 1983
under the Chairmanship of Dr. V.M. Dandekar for studying the problem of
imbalance between different regions of the State to identify regional backlog on the
basis of such a study and to suggest measures for removal of the regional backlog
including long term measures to avoid such regional imbalance in the future.
9. Price and distribution control
During the ongoing post - communist economic transitions, the relative well being of many people is changing rapidly and governments are not well positioned
to accurately measure individual living standards.
10. Economic reforms
India was a latecomer to economic reforms, embarking on the process in earnest
only in 1991, in the wake of an exceptionally severe balance of payments crisis.
The need for a policy shift had become evident much earlier, as many countries in
East Asia achieved high growth and poverty reduction through policies which
emphasized greater export orientation and encouragement of the private sector.
11. Per capita and national income
Per capita income or income per person is a measure of mean income within an
economic aggregate, such as a country or city. It is calculated by taking a measure
of all sources of income in the aggregate ( such as GDP or Gross National Income )
and dividing it by the total population. It does not attempt to reflect the distribution
of income or wealth.
ELEMENTS OF ECONOMIC ENVIRONMENT
1. Gross National Income ( GNI )
Gross National Income is the sum of value added by all resident producers plus
any product taxes ( minus subsidies ) not included in the valuation of output plus
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net receipts of primary income ( compensation of employees and property income )
from abroad .
GNI = GDP + Net property income from abroad ( NPIA)
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2. Gross National Product ( GNP )
Gross National Product is the total market value of all final goods and services
produced in a year . GNP includes not factor income from abroad whereas GDP
doe not . Therefore ,
GNP = GDP + Net factor income from abroad .
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Net factor income from abroad = factor income received by Indian nationals from
abroad - factor income paid to foreign nationals working in India .
3. Gross Domestic Product ( GDP )
Gross Domestic Product ( GDP ) is the total market value of all final goods and
services currently produced within the domestic territory of a country in a year.
GDP refers to the value of goods and services produced within the domestic
territory of a country by nationals or non - nationals .
Components of Gross Domestic Product ( GDP )
Four major components of GDP are:
● PrivateConsumption Expenditure
● Investment Expenditure
● Government Purchases of Goods and Services
● Net Exports ( X - M )
GLOBALIZATION OF BUSINESS:
Introduction:Globalization in India has allowed companies to increase their base of operations,
expand their workforce with minimal investment and provide new services to a
broad range of consumers. The process of globalization has been an integral part of
the recent economic progress made by india. Globalization has played a major role
in export - led growth, leading to the enlargement of the job market in india.
Globalization One of the major forces of globalization in India has been in the
growth of outsource IT and business process outsourcing ( BPO ) services . The
last few year have seen an increase in the number of skilled professionals in India
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employed by both local and foreign companies to service customers in the US and
Europe in particular Taking advantage of India's lower cost but educated and
English - speaking work force and utilizing global communications technologies
such as voice - over IP ( VOIP), email and the internet, international enterprises
have been able to lower their cost base by establishing outsource knowledge worker operations in India Globalization is characterized as a totally
interconnected marketplace, unhampered by time zones or national boundaries.
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MEANING OF GLOBALIZATION
Globalization refers to the integration of economics and societies all over the
world. It involves technological, economic, political and cultural exchanges made
possible largely by advances in communication, transportation and infrastructure.
Definition:
According to Anthony McGrew “Globalization is the process which generates the
flows and connections, not simply across nation- states and national territorial
boundaries but between the global regions, continents and civilizations”.
According to R J Holton, “Globalization represents the triumph of a capitalist
world economy tied together by global division of labor.”
FEATURES / NATURE OF GLOBALIZATION:
1. Liberalization
It stands for the freedom of the entrepreneurs to establish any industry or
trade or business venture, within their own countries or abroad.
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Free trade
It stands for free flow of trade relations among all the nations. Each States
Grants MFN (most favored nation) status to other states and keeps its
business and trade away from excessive and hard regulatory and protective
regimes.
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Globalisation of Economic Activity
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Economic activities are governed both by the domestic market and also the
world market . It stands for the process of integrating the domestic economy
with world economies .
Liberalization of Import - Export System
It stands for liberating the import export activity and securing a free flow of
goods and services across borders .
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Privatization
Keeping the state away from ownership of means of production and
distribution and letting the free flow of industrial , trade and economic
activity across borders .
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Increased Collaborations
Encouraging the process of collaborations among the entrepreneurs with a
view to secure rapid modernisation , development and technological
advancement.
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Economic Reforms
Encouraging fiscal and financial reforms with a view to give strength to free
world trade, free enterprise , and market forces.
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Borderless
Globalization is an increasingly borderless world and societal consequences
the causes of globalisation are technological, economical and ideological.
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Mobility
The characteristic of globalization given more mobility and less transport
costs means per definition more competition and dynamism.
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International co - operation
The increasing of the multinational corporations, regional and global
organizations leads to the members of the international community
expanding from a single nation to the transnational corporations ,
international organizations and international non - governmental
organizations.
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Cultural diversity
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It has been found that cultural diversity reflects on the food, music, art,
lifestyle , customs and race . The western culture has mixed with the eastern
culture.
For instance , McDonald's Corporation has expanded to be world wide and
you can see the logo of " M '' everywhere . Also , the Hollywood movies are
very popular in Asia. Globalization has not only promoted cultural blending
but also driven a lot of business opportunities.
Globally standardized products
Globally standardized products need to be marketed all over the world .
There are already many such products having world market. It includes the "
lead " products in a region taking care of dominant needs of that region.
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Globalization of economic activities
Control of economic activities by domestic market and international market
; coordination of national economy and world economy.
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Connectivity
Localities being connected with the world by breaking national boundaries ,
forging of links between one society and another and between one country
and another through international transmission of knowledge, literature,
technology, culture and information
DIMENSIONS OF GLOBALIZATION
a ) Economic :
Economic globalization is the intensification and stretching of economic
interrelations around the globe. It encompasses things such as the emergence
of a new global economic order , the internationalization of trade and
finance, the changing power of transnational corporations, and the enhanced
role of international economic institutions.
b ) Political :
Political globalization is the intensification and expansion of political
interrelations around the globe . Aspects of political globalization include
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the modern nation state system and its changing place in today's world , the
role of global governance , and the direction of our global political systems.
c ) Cultural :
Cultural globalization is the intensification and expansion of cultural flows
across the globe. Culture is a very broad concept and has many dimensions .
It includes development of a global culture and the role of the media in
shaping our identities, desires, and the globalization of languages.
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d ) Ecological :
Ecology in globalization includes population growth, access to food
worldwide reduction in biodiversity, the gap between rich and poor as well
between the global North and global South , human induced climate change ,
and global environmental degradation.
STAGES OF GLOBALIZATION
The various stages of globalization are as follows:
Stage - 1 Market Entry
In the first stage, companies tend to enter new countries using business
models that are very similar to the ones they deploy in their home markets .
To gain access to local customers, however, they often need to establish a
production presence , either because of the nature of their businesses or
because of local countries regulatory restrictions.
Stage - 2 Product Specialization
In the second stage is product specialization. The companies transfer the full
production process of a particular product to a single, low - cost location
and export the goods to various consumer markets .
Stage - 3 : Value Chain Disaggregation
The third stage ( value chain disaggregation ) represents the next step in the
company's globalization of the supply chain infrastructure. In this stage
companies start to disaggregate the production process and focus each
activity in the most advantageous location.
Stage - 4 Value Chain Re - engineering
In the fourth stage companies seek to further increase their cost savings by
re engineering their processes to suit local market conditions, notably by
substituting lower cost labour for capital.
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General Electric's ( GE ) medical equipment division
For example , has tailored its manufacturing processes abroad to take
advantage of low labour costs.
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Stage - 5 : The Creation of New Markets
Finally , in the fifth stage the focus is on market expansion. The McKinsey
Global Institute estimates that the third and fourth stages together have the
potential to reduce costs by more than 50 % in many industries , which gives
companies the opportunity to substantially lower their sticker prices in both
old and new markets and to expand demand.
ESSENTIAL CONDITIONS OF GLOBALIZATION
1. Business Freedom :
There should not be unnecessary government restrictions which come in the
way of globalization, like import restrictions, restrictions sourcing finance or
other factors from abroad , foreign investments etc.
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Facilities :
The extent to which an enterprise can develop globally from home country
base depends on the facilities available like the infrastructural facilities.
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Government Support :
Although unnecessary government interference is hindrance to globalization
, government support can encourage it . Government support may take the
form of policy and procedural reforms , development common facilities like
infrastructural facilities, R & D support, financial market reforms and so on.
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Resources :
Resources is one of the important factors which often decide the ability of a
firm to globalize. Resourceful companies may find it easier to thrust ahead
the global market Resources include finance , technology , R & D
capabilities, managerial expertise , company and brand image , human
resource etc.
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Competitiveness :
The competitive advantage of a company is a very important determinant of
success in global business. A firm may derive competitive advantage from
any one or more of the factors such as low costs and price, product quality ,
product differentiation, technological superiority, after sales service
marketing strength etc.
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Orientation :
A global orientation on the part of business firms and suitable globalization
strategies are essential for globalization.
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Supply of Labour :
There should be no restriction on supply of labour anywhere in the world to
facilitate globalization.
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Free Movement of Goods:
Different economies of the world should facilitate the free movement of
goods and services.
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Free Movement of Capital :
Different economies of the world should try to create a conducive
environment for free movement of capital across different countries.
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. Increased Tolerance and Respect :
There should be increased tolerance by people throughout the world for
others of different national, ethnic and cultural backgrounds . As trade
among people begins to take place, it becomes easier for people to see one
another in terms of the goods and services they offer , rather than in terms of
negative stereo types and fear.
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FOREIGN MARKET ENTRY STRATEGIES:-
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BUSINESS ENVIRONMENT
1. Exporting:
Exporting is a processor selling the goods and services produced in one country to
other countries
Exporting involves the marketing of the products produced in the countries in
which they are intended to be sold.
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Exporting is manufacturing in one country and selling the goods and services to
another country.
Types of Exporting:
⮚ Indirect exporting
⮚ Direct exporting
⮚ Intra- corporate transfer
2. Licensing:
In this mode of entry the domestic manufacturer leases the rights to use its
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intellectual property, technology, work methods, patents, copyrights, to a
manufacturer in a foreign country for a fee.
Licensing refers to an arrangement between licensor and licensee where the
latter party would acquire the right to use products and goods, where the
ownership remains with the licensor.
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3. Franchising:
It is a form of licensing. The franchisor can exercise the more control over
the franchised compared to that in licensing International franchising is growing
at a faster rate.
Franchising is a business relationship between two entities wherein one party
allows another to sell its products and intellectual property. For example, several
Fast food chains like Dominos and McDonalds operate in India through
franchising.
Example: MC Donald's, KFC, Pizza Hut, Subway, Eat fresh.
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Manufacturing contract
A contract manufacturing agreement is a legal document that outlines the terms
and conditions of a company's relationship with a contract manufacturer. Contract
manufacturing is a form of outsourcing used by businesses to produce products to
sell to their customers.
Examples: include commuter rail lines, rubber products, textiles, heavy
machinery, aerospace, defense, automobile field and plastic injection
molding. Industrial contract manufacturers can also produce some industrial
electronics items.
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Management contract
Management contract is an agreement between two companies, whereby one
company provides managerial assistance, technical expertise and specialized
services to the second company of the agreement for a certain agreed period in
return for monetary compensation.
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Turnkey project
A Turnkey project refers to a project when clients pay contractors to
design and construct new facilities and train personnel.
It is a way for a foreign company to export it's process and technology to other
countries by building a plant in that country.
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Outsourcing
Outsourcing is the practice of passing individual tasks, subareas, or business
processes over to a third-party and thereby receiving the results from outside of
your own company.
It refers to making an agreement with another company to handle international
product sales on the company's behalf.
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Outsourcing is an agreement whereby one company hires another company that
will be responsible for planned or existing activities that are carried out or may be
carried out within the company and sometimes involves the transfer of employees
and assets from one firm to another.
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Joint venture
A joint venture is a combination of two or more parties that seek the development
of a single enterprise or project for profit, sharing the risks associated with its
development. The parties to the joint venture must be at least a combination of two
natural persons or entities.
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Green field investment
Greenfield refers to investments where a parent company establishes a subsidiary
in a foreign country. Specifically, Greenfield FDI is when companies set up or
expand their business operations abroad, creating brand new jobs and/or facilities
from the ground up—as opposed to mergers and acquisitions, which occur when
one company buys another.
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Piggybacking
Piggybacking is a method of attaching acknowledgment to the outgoing data
packet. The concept of piggybacking is explained as follows:Consider a two-way
transmission between host A and host B. When host A sends a data frame to B,
then B does not send the acknowledgment of the frame sent immediately. The
acknowledgment is delayed until the next data frame of host B is available for
transmission. The delayed acknowledgment is then attached to the outgoing data
frame of B. This process of delaying acknowledgment so that it can be attached to
the outgoing frame is called piggybacking.
ADVANTAGES OF GLOBALIZATION
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1 . Promise of Increased Productivity and Higher Living Standards :
Globalization brings in new opportunities such as access to markets and
technology transfer. These opportunities hold out the promise of increased
productivity and higher living standards.
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2. Increase Trade in Goods and Services :
From the theoretical aspect, international trade ensures allocating different
resources and that has to be consistent. This specialization in the processes leads to
better productivity. We all know from the economic perspective that restrictive
trade barriers in emerging economies only impede growth.
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3. Movement of Capital :
The production of a developing economy gets enhanced due to capital flow across
countries . It was very much true in the 19th and 20th centuries . The mobility of
capital only through savings for the entire world and exhibited high investment
barred by domestic savings.
4. Movement of people :
Apart from the low cost of labour , there are several other aspects of human
resources to Indian favour. India has one of the largest pools of scientific and
technical manpower . The number of management graduates is also surging . It is
widely recognized that given the right environment , Indian scientists and technical
personnel can do excellently.
5. Wide Base :
India has very broad resource and industrial base which can support wide vareity
of business.
6. Growing Entrepreneurship :
Many of the established industries are planning to go international in a big way .
Added to this considerable growth of new and dynamic entrepreneurs who could
make a significant contribution to the globalization of Indian business.
7. Growing Domestic Market :
The growing domestic market enables the Indian companies to consolidate their
position and to gain more strength to make foray into the foreign market or to
expend their foreign business.
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8. Competition :
The growing competition, both from internal and external, provokes many Indian
companies to look into foreign markets seriously to improve the competitive
position and to increase the business.
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9. Globalization of Financial Markets :
Globalization of finance markets affert development because finance plays an
important role in economic growth and industrialization. Financial Globalization
affects growth in two ways. First, it increases the global supply of capital . Second ,
it promotes domestic financial development and hence , improves allocative
efficiency , creates new financial instruments and raises the quality of baking
services .
10. Increase the Level of Interdependence and Competitiveness:
Globalization is supposed to accelerate and increase the level of interdependence
and competitiveness among nations . It is a change from plan to market. As a
consequence, markets for merchandise trade are expanding, more and more service
are being traded internationally and capital is flowing in quicker and increasingly
diverse ways across countries and regions . There is increasing integration of
countries into World markets for goods , services and capital . In short ,
Globalization widens and intensifies international linkages in trade and finance.
11. Induce Domestic Firms to Improve Technology :
The better technology brought in by the MNCs may induce or provoke the
domestic firms to absorb similar technology . This may improve their
competitiveness and expansion.
12. Impact on Poverty :
The fast growth and overall development resulting from liberalization, increased
flow of trade and capital could have a major impact on poverty. It is likely to
reduce the number of people living in absolute poverty.
DISADVANTAGES OF GLOBALIZATION
1. Government policy and procedure: Government policy and procedures in
India are among the most complex, confusing and cumbersome in the world.
Even after the much publicized liberalization they do not present a very
conducive situation.
2.
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3. High Cost: High cost of many vital inputs and other factors like raw
materials and intermediaries, power, finance, infrastructural facilities like
port, etc., tend to reduce the international competitiveness of the Indian
business.
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4. Poor Infrastructure: Infrastructure in the country is generally inadequate
and inefficient and therefore, very costly. This is a serious problem affecting
growth as well as competitiveness.
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5. Obsolescence: The technology employed, modes and style of operation etc.
, in generally, obsolete and these seriously affect competitiveness.
6. Resistance to changes : There are several socio - political factors while
resist change and this comes in the way of modernization and efficiency
improvement. Technological modernization is resisted due to fear of
unemployment. The extent of excess labour employed by the industry is
alarming. Because of this labour productivity is very low and this in some
cases more than affects the advantages of cheap labour.
7. Poor Quality Image and Supply Problem : Due to various reasons the
quality of many products is poor . Even when the quality is good, the poor
quantity image India has become a handicap. Due to various reasons like
low production capacity, shortage of raw materials and infrastructure like
power and port facilities.
8. Limited R & D and Marketing Research : Marketing research and R & D
in other areas are vital inputs for development of international business .
However , the are poor in Indian business. Expenditure on R & D is less than
one percent of GNP while it is two or three per cent in most of the developed
countries.
9. Trade Barriers : Although the tariff barriers to trade have been
progressively reduced, thanks to the GATT / WTO, the non - tariff barriers
have been increasing particularly in developed countries . Further , the
trading blocs like the NAFTA EC , etc., could also adversely affect India's
business.
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10. Small Size and Lack of Experience : Because of the small size and the
low level of resources in many cases Indian firms are not able to compete
with the giants of other countries . Even the largest of the Indian companies
are small compared to the multinational giants.
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11. Ruin of Traditional Crafts and Industries : Globalization has lead to
replacement of traditional and indigenous products by modern products .
This has resulted in the ruin of traditional crafts and industries and the
livelihood of the people who depended on these sectors.
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12. Brings Instability : Globalization sometimes brings instability and
unwelcome change in the economy . It exposes workers to competition from
imports, which can threaten their jobs. The inflow of foreign capital into the
country through Globalization may undermine banks.
13. Widens the Disparity : Globalization will widen the disparity between one
who are associated with the market and ones who are not . With the
expansion of trade and foreign investment, the gaps among the developing
countries will widen. It has brought in increased income inequality in many
industrial countries.
14. Takeover of National Firms : There are a large number of cases of
takeover of national firms by foreign firms. In some cases, the domestic
firms had to handover the majority of equity to foreign partners of joint
ventures due to their inability to bring in additional capital.
GLOBALIZATION IMPACT ON INDIAN BUSINESS
1. Indian economy is opened for foreign direct investment - FDI.
2. Removing constraints and obstacles to the entry of MNCs into Indian
economy by scraping off or not strictly enforcing restrictive laws like
FERA (Foreign Exchange Regulation Act) now FEMA (Foreign
Exchange Management Act). This facilitated MNCs to enter into a
good number of crucial sectors to which their entry was previously
restricted.
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3. Foreign Trade Policies and Foreign Investment Policies were
liberalized. From the 1950s to 1980s, the Indian government protected
industries which were very essential at that point of time.
4. Import liberalization process was accelerated considerably.
Quantitative restrictions on imports were removed Custom tariffs
were reduced to 30 % from 300 %.
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5. Indian currency was devalued by 18-19 % , in July 1991 , to ease out
the BOP ( Balance of Payment ) position.
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6. In order to smoothen globalization and privatization , the protection
policy adapted to protect PSUs was removed gradually by adopting
Disinvestment Policy and paved the way to sell a portion of equity to
private sector MRTP Act was abolished.
7. The silver line of globalization is that GDP growth rate improved
substantially.
8. Technology improvement at a faster rate has taken place . It is more
visible transportation technology , which has made faster delivery of
goods across distances possible at lower costs. Impact is positive in
other sectors also.
9. Information and Communication Technology has developed at
amazing speed and is more visible in telecommunication , computer,
internet divisions.
10. In the telecommunication division, telephones including mobile,
telegraph, fax have been the devices that connect people instantly to
communicate with whatever people want to and wherever they are in
the world Computers and the amazing world of the internet, run
through satellite communication devices. Internet facilities, electronic
mail ( e - mail ) and talk ( voicemail) to any person , anywhere in the
world in seconds , at very negligible cost.
11. Foreign Exchange Reserves which are $ 315 million at the end of
March 1999 , increased after the adaption of GLP Policy to US $ 622
275 billion in March 2022 Accepting the privatization policy , private
sector was allowed to expand substantially Disinvestment policy
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adapted by Government of India paved way for a portion of equity to
private people . This means that private people were allowed to
participate in public sector undertakings to a reasonable degree But
has retained three industries in its fold for defense and environmental
protection.
12. Far reaching financial sector reforms were introduced in banking,
capital markets and insurance sectors.
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13.Major and significant change that is clearly visible is that the service
sector has grown in leaps and bounds . The contribution to GDP from
this sector stands between 52 to 53 % in January 2022 against 19
percent in 1991.
FORMS OF GLOBALIZATION
There are 2 forms of globalization:-
1. MNCS: The definition of ''multinational corporation,'' or '' MNC,'' is ''a
corporation that has its headquarters in one nation but also has part of its operations
in one or more foreign countries.'' This is also known as a multinational enterprise
(MNE) or a multinational organization
EXAMPLE: MNCs include Apple, Coca-Cola, Exxon, HSBC, Microsoft, Nike,
Samsung, Toyota, Walmart etc. which all excel within their industries in term of
sales, profits, assets and market value. The rise of MNCs and the ever growing
importance of international trade have intensified globalisation.
2. TNCS: Transnational corporations share many qualities with multinational
corporations, with the subtle difference being that multinational corporations
consist of a centralized management structure, whereas transnational
corporations generally are decentralized, with many bases in various countries
where the corporation operates.
Unilever, McDonalds and Apple are all examples of TNCs. TNCs tend to have
offices and headquarters located in the developed world. They often have factories
in countries that are not as economically developed to take advantage of cheaper
labour.
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