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Business Environment
Unit:D
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MNCs
As per Jacques Maisonrouge,• Operates in many countries at different levels
of economic development.• Its local subsidiaries are managed by
nationals.• It has a multinational central management
and stock ownership.• It maintains industrial organization including R
& D facilities in several countries.
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Objectives
• Expand the business• Minimise the cost of production• Capture the foreign market• Avail competitive advantage• Achieve greater efficiency• Diversification• Technical advancement• International corporate image
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Benefits• Increase investment, income and employment level• Technological advancement• Export promotion• Breaking monopolies• Improve balance of payment• Impetus in diversification• Development of ancillaries in host countries• Professionalism of management• Contribution to R & D activities• Stimulate domestic enterprises
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Harmful Effects• MNC’s aim is profit maximisation and not the
development needs of the poor countries• Suppression of domestic entrepreneurship• Unfavorable impact on BOP due to heave dividend,
royalty, interest etc.• Threat to sovereignty of nations• Transfer to capital intensive techniques• Retard growth of employment• Depletion of non-renewable resources• Possibility of tax evasion• political pressures
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Globalisation
• It often refers to economic globalization that is integration of national economies into international economies through trade, foreign direct investment, spread of technology, etc
• The movement towards the expansion of economic and social ties between countries through the spread of corporate institutions and the capitalist philosophy that leads to the shrinking of the world in economic terms.
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FEATURES• Erase the difference between domestic and foreign market• Movement of goods / services in international boundaries• Global orientation of strategies, organization culture,
structure and managerial expertise• Entire globe is becoming a single market• Shift towards more integrated and interdependent world
economy• Globalisation has two components: global market and global
production• It is inevitable.
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STRATEGIES FOR GLOBALISTION EXPORTS: generally resorted when cost of
production in domestic market is generally lower than foreign markets
• JOINT VENTURES: any form of association which implies sharing of management and ownership
• MERGERS AND ACQUISITIONS: a company takes over another company. Its important for market entry and expansion strategy
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Driving Forces of GlobalizationDriving Forces of Globalization• Desire to obtain financial Benefits• Reduced Cost of production• Enhance level of demand and Growth potential• Liberalization of economy• Fast reduction and convergence of transaction costs
associated with doing this business• Desire to have better access to international markets /
technology / infrastructure• To bring Economic Reforms as well as Social
Development• Industrial consolidation and restructuring
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THREATS TO GLOBALISATION
• It strengthen only the MNCs• Privatisation leads to little impact on Industrial
production• Leads to outflow of currency• Harmful for domestic producers• High Tariffs and taxes• Uncertainty of stock market• Old and new economy syndrome
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Integration of Economies• The increasing reliance of
economies on each other• The opportunities to be
able to buy and sell in any country in the world
• The opportunities for labour and capital to locate anywhere in the world
• The growth of global markets in finance
Stock Markets are now accessible from anywhere in the world!Copyright: edrod, stock.xchng
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Integration of Economies
• Made possible by:– Technology– Communication networks– Internet access– Growth of economic cooperation – trading blocs
(EU, NAFTA, etc.)– Collapse of ‘communism’– Movement to free trade
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Trade versus Aid?
• Benefits of Trade:– Increased choice– Greater potential for
growth– Increase international
economies of scale– Greater employment
opportunities
Trade has led to massive increases in wealth for many countries.Copyright: budgetstock, stock.xchng
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Trade versus Aid?• Disadvantages
of trade:– Increase in gap between the
rich and the poor– Dominance of global trade by
the rich, northern hemisphere countries
– Lack of opportunities for the poor to be able to have access to markets
– Exploitation of workers and growers
How far does trade help children like these?Copyright: clesio, stock.xchng
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Corporate Expansion
• Multi-national or trans-national corporations (MNCs or TNCs) – businesses with
a headquarters in one country but with business operations in a number of others.
No matter where you go in the world, certain businesses will always have a presence.Copyright: mkeky, stock.xchng
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Corporate Expansion
• Characteristics:– Expanding revenue– Lowering costs– Sourcing raw materials– Controlling key supplies– Control of processing– Global economies
of scaleControlling supplies may be one reason for global expansion.Copyright: rsvstks, stock.xchng
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Corporate Domination• Key Issues:
– Damage to the environment?
– Exploitation of labour? – Monopoly power– Economic degradation– Non-renewable
resources– Damage to cultures
Shell and Nike’s activities have come under severe criticism in some quarters.Copyright: Homsel, stock.xchng
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Other Issues:• Accountability
of Global businesses?• Increased gap between
rich and poor fuels potential terrorist reaction
• Ethical responsibility of business?
• Efforts to remove trade barriers
There are plenty of people who believe that globalisation is a negative development, protests at the G8 summits, pollution, poverty and concern over GM crops are just some of the issues.Copyright: stock.xchng
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GLOBALISATION AND INDIAN ECONOMY
• The main deterrent to foreign investments were the domestic economic policy that restricted the area of operation and growth
• The economy and domestic market were very protected
• Later measures were adopted by government since 1991 to promote globalization
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GOVT. MEASURES• REMOVING CONSTRAINTS AND OBSTACLES TO THE ENTRY OF
MNC’S BY DILUTING FERA (1973).• REMOVING EXPORT SUBSIDIES• DECANALISING OIL AND AGRICULTURE TRADE• COUNTERING ANTI DUMPING MEASURES• ALLOWING IN INDIAN MUTUAL FUNDS TO INVEST IN FORIGN
COMPANIES• GOVT. OF INDIA IS MAKING DUE EFFORTS TO GLOABLISE THE
INDIAN ECONOMY• MANY SPECIAL INCENTIVE SCHEMES ARE LAUNCHED IN INDIA.• INTL. EXPOSURE GIVES INDIAN COMPANIES ACQUIRE GLOBAL
EXPERTISE AND BE COST EFFECTIVENESS
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MEASURES TO PROMOTE GLOBALISATION• The Indian rupee was devalued by about 20% in July
1991• Liberalization in F.D.I. foreign investors were allowed to
participate up to 51% in 34 selected industrial sectors• 100% foreign ownership was allowed for NRIs• Import duty was reduced from 150% to 110%• Import duty on 35 baggage items was reduced from
255% to 150%• Foreign technicians were allowed to be hired by Indian
companies if certain conditions were met• Inflation was controlled to control the cost of
production
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INDIAN INDUSRTY AND GLOBALISATION• In 1991 alone the world wide value of deals
exceeded 2.3 trillion dollars• At that time U.S based coca cola bought
parley’s thumps up, Limca brands• Brook Bond India ltd merged with Hindustan
Lever • Videocon acquired South Korea’s Daewoo for
700million dollars in 2006• DR Reddy acquired Betapharm
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CONT…• Ranbaxy acquired Terapia for $324million in
2006• Mahindra & Mahindra acquired 90% in
German company in 2007• Corus was taken over by Tata • Vodafone took over Hutchison-Essar in India in
2007• Tata Motors acquired Jaguar and Land Rover
for $2.3 billion
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Foreign Direct InvestmentForeign Direct Investment
Submitted by
Rajinder (roll no.17 infra.)Shalinder ( Roll no.17 Tel n it)
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Features of FDI• Foreign direct investment (FDI): a firm invests directly in foreign
facilities • Foreign direct investment (FDI) in its classic form is defined as a
company from one country making a physical investment into building a factory in another country.
• A firm that engages in FDI becomes a multinational enterprise (MNE)
• Factors which influence FDI are related to factors that stimulate trade
• Involves ownership of entity abroad for production, Marketing/service, R&D and access of raw materials or other resource
• Parent has direct managerial control depending on its extent of ownership and other contractual terms of the FDI
• It may be through Strateic Alliances (non-equity), Franchising or Licensing
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Classification of FDI
• Inward 'inward investment'. Here, investment of foreign capital occurs in local resources. The factors propelling the growth of Inward FDI comprises tax breaks, relaxation of existent regulations, loans on low rates of interest and specific grants.
• Outward “direct investment abroad”. In this case it is the local capital, which is being invested in some foreign resource. Outward FDI may also find use in the import and export dealings with a foreign country.
• Vertical when a multinational corporation owns some shares of a foreign enterprise, which supplies input for it or uses the output produced by the MNC.
• Horizontal when a multinational company carries out a similar business operation in different nations.
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Determinants of FDI• Size as well as the growth prospects of the economy• population of a country plays an important role• If country has a high per capita income or• Status of the human resources • If a particular country has plenty of natural resources it always finds
investors willing to put their money in them. • Inexpensive labor force • Infrastructural factors like the status of telecommunications and
railways
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FDI Inflows….Robust GrowthFDI Inflows….Robust Growth
4029 4322
19531
7722
6051
5035
6130
0
5000
10000
15000
20000
25000
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07
US
$ m
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0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07
US
$ m
Electrical Equipment (including Software) Telecommunications TransportationChemicals (other than Fert.) Services Sector Fuels (Power & Oil Refinery)Construction Activities
FDI Inflows- Sector -wise
Electrical equipment including software moves to over all 2nd position in Nov 2006.Services sector shows spurt in growth and the top sector attracting FDI – moving up from the third position.
Spurt in FDI in Real Estate causes the construction sector to the third position in Nov 2006.
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Host Country Effects of FDIBenefits
–Resource -transfer–Employment–Balance-of-payment (BOP)
• Import substitution• Source of export increase
Costs–Adverse effects on the BOP
• Capital inflow followed by capital outflow + profits• Production input importation
–Threat to national sovereignty and autonomy• Loss of economic independence
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Benefits to the government
Greater Per Capita Income
Greater ConsumerSpending due to
economic boom
Increasing Tax Paying Population
Greater Sourcing
From India
Reduced TaxEvasion
GDP Growth
Increased Tax Revenues
Greater Exports
Employment
Benefits to Govt.
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Government Policy and FDI industrial license With progressive liberalization and
deregulation of the economy, industrial license is required in very few cases. Industrial licenses are regulated under the Industries (Development and Regulation) Act 1951.
Locational restrictions Environmental Clearances The Environment
(Protection) Act 1986 require Statutory clearances, relating to Pollution Control and Environment &includes petrochemicals complexes, petroleum refineries, cement, thermal power plants, bulk drugs, fertilizers, dyes, papers etc.
General permission of RBI under FEMA
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Government Policy and FDI
Home country– Outward FDI encouragement
• Risk reduction policies (financing, insurance, tax incentives)
– Outward FDI restrictions• National security,BOP
Host country– Inward FDI encouragement
• Investment incentives• Job creation incentives
– Inward FDI restrictions• Ownership extent restrictions (national security; local nationals
can safeguard host country’s interests
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Previous Datally permitted• Manufacturing
• 100% FDI permitted in all activities under automatic route except:– Cigar and cigarettes of tobacco - FIPB– Defence products
• FDI up to 26% - FIPB subject to licensing of Arms and Ammunitions• Mining: Coal – FDI upto 100% as per Coal Mines (Nationalization) Act 1977• Diamond, Gold, Silver , Minerals – upto 100% under automatic route as MMRD Act
• Electricity : FDI upto 100% under automatic route in Generation, Transmission, Distribution and Power Trading as per Electricity Act 2003• Roads & Highways- 100% FDI permitted under automatic route• Airports: Greenfield Projects- 100% FDI permitted under automatic route
– Existing Airports- 100% FDI, beyond 74% requires FIPB approval– Air Transport- up to 49% FDI under automatic route
• Telecom: Basic and cellular, Unified Access Services, National/International Long Distance etc.- 74%– ISP without gateway, Electronic mail and voice mail- 100%, beyond 49% requires FIPB approval
• Shipping and Ports -100% FDI under automatic route• Railways- Rolling stocks open for FDI, Railway transport reserved for Public sector.• Industrial Parks- 100% FDI under automatic route• Hospitals- 100% FDI under automatic route• Hotels & Tourism (include restaurants, beach resorts, and other Tourism related industry include travel agencies, tour operating agencies and tourist transport operating agencies)- 100% FDI under automatic route
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World Trade Organisation(WTO)
• Evolved from the General Agreement on Tariffs and Trade (GATT) in 1995.
• Functions as the only global organization dealing with the rules of trade among nations.• Monitors and promotes world trade.• WTO agreements provide the legal groun
rules for commerce.
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Objectives of WTO
• The agreements has three main objectives • To help trade flow as entirely easy.• To achieve further liberalisation gradually
through negotiations.• To set up an impartial means of settling of
disputes.• Monitor national trade policies.
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Principles of the trading system
• Trade without discrimination• Free trade: Gradually through Negotiation• Making business environment stable • Promoting Fair competition
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Functions of WTO
• Helping Developing and Transition Economies• Export Promotion• Bringing Transparency through disseminating
information to public• Encouraging Development and Economic
Reform
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Cont.
• Non-Tariff Barriers like import licensing, Investment Measures, Rules of Origin, Pre-shipment Inspection, Rules for Valuation of Goods at customs
• Trade Policy Review• Plurilaterals including Fair Trade in Civil
Aircraft, Government Procurement< Dairy Product and Bovine Meat
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DEVALUATION OF
RUPEE
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DEVALUATION Devaluation is a reduction in the value of a currency
with respect to other monetary units. In common modern usage, it specifically implies an official lowering of the value of a country's currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency.
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Devaluation And Depreciation
• Both are the basic term used in the foreign exchange market.
• Both the term means reduction in value of domestic currency in relation with foreign currency.
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Devaluation And Depreciation
• DEVALUATION is the deliberate attempt by the government or financial authority of country to reduce the exchange value of national currency in relation to foreign currency ,whereas DEPRECIATION takes place on its own by the market forces active in foreign exchange market.
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DEVALUATION OF RUPEEIndian Rupee has undergone 3 bouts of devaluation –
In September 1949 by 30.5%
In June 1966 by 36.5% and
In July 1991 by 20 to 23%
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Causes of Devaluation of Rupee
• Foreign exchange reserve crises .• Adverse balance of payment.• Liberalization and globalization.• IMF (International monetary fund) condition.• Low loan raising capacity. • Inflow of foreign capital.• Promotion of tourism.
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Effect of Devaluation
Devaluation in India has both types of effect - - Positive (favorable) -Negative (unfavorable)
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Favorable
• Increase in Exports.• Fall in imports.• Increase in foreign capital inflow.• Increase in foreign aid.• Boost to tourism.• Full utilization of installed capital.• Increase in foreign exchange reserves.
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Unfavorable
• Short term remedies.• Increase in the burden of foreign debt.• Adverse effect on domestic industries. • May reduced expert earnings.• High cost of living.• Scarcity of goods and services.• Fall in creditability in international market.
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India has faced two majorfinancial crises and twoconsequently devaluation of rupee. These crises
were in 1966 and 1991
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The 1966 Devaluation
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The 1991 Devaluation