Unit 2 – NON -ECONOMIC ENVIRONMENT

CHAPTER 4 - Social and Cultural Environment

The sociocultural environment refers to trends and developments in changes. Socio – cultural
environment includes the social and cultural forces that shape and influence the business
firm. Social environment consists of factor related to human relationship that affects business.
All the business organization operates within the society to satisfy the social need. Different
social factor influences the policy, practices and activities of business. Cultural environment
refers to as the cultural surrounding that influence business.

Elements of socio-cultural environment

Attitude And Beliefs

Beliefs of a person relate from which society he came from. Attitude means how a person
behaves. Beliefs of people matters a lot in order to set up the business. i.e., western clothing
is totally different from middle east outfits.

Demographic
Demographics is about the characteristics of the population. It includes the income of a
family, area, age, society and etc.

Religion
Which religion person belong effects the buying behaviour. Religion influences food habits,
dress, and traveling.

Language
Language is a medium of communication. what you speak relates to your background.
Language effect your relations.
Education
Education leads to the person to communicate an idea and thought. An educated person
knows the value of discipline to do what is right.
Family Structure
The family structure includes the people who are considered part of the family and the quality
of the relationships among them.

Social Organization
In a Social organization, it made for fun and some small work. it may be in the form of the
group in the office. Circle of friends. The social groups are the most influencing power.
Cause we get a habit from our group. That also influences the Socio-Cultural Environment.

Class Structure
It can be classified into upper, middle, lower. It reflects income, occupation, education an
area of residence. Upper class means high earning people. Lower class means low earning
people.

Relationship between business and society

Business and society are closely interconnected and influence each other in various ways.
Businesses have a responsibility to society, as they provide goods and services that are
necessary for people’s lives and livelihoods. In turn society has an impact on businesses, as
societal norms and values influence the demand for products and services. Businesses must
consider the social and environmental impact of their activities, as well as their economic
impact.

Social Objectives of Business

This objective is desired to be achieved for societal benefit. As business operates in a society
and by utilizing its scarce resources the business functions, the society thus expects something
in return for its contribution. No activity of the business should be aimed at giving any trouble
to the society. If business activities lead to socially harmful effects, there is bound to be a public
reaction against the business sooner or later, and thus social objectives should be objected to
compensate for the same.
Social objectives of business include production and supply of quality and standard goods and
services, adoption of fair-trade practices and contribution to the general welfare of society.

1 Production and Supply of Quality Goods and Services at Reasonable Prices:

A business exists because of its customer; and the customers together fabricate a society.
Hence, a business exists because of the society it serves through the production and supply of
goods and services. These products and services should not only be of good quality but also
have reasonable prices so that the customers are in the capacity to buy them. Products or
services that have irrationally high prices automatically divert the customers to go for its
competitor business. An ethical business does not hoard its products or engage in shrewd
marketing strategies to attract customers.
2.Adoption of fair-trade practices-
It is very important to any business to adopt fair trade practices because in today’s
interconnected world, consumers have the power to shape the marketplace and drive positive
change through their purchasing decisions. Fair trade is a powerful tool for creating a more
equitable world. By opting for fair trade products, consumers directly contribute to improving
the lives of marginalized producers in developing countries. Fair trade ensures that producers
receive fair wages, safe working conditions, and access to essential resources. When consumers
choose fair trade, they support sustainable livelihoods and empower communities to thrive
economically and socially.
3. Contribution to the General Welfare of the Society
Unemployment is a considerable issue that society faces in different parts of the world. Since
the world runs through business organizations, it comes under the social responsibility of these
businesses to generate employment opportunities for individuals of the society it serves.
Through this it contributes to the general welfare of the society.
4. Fair Wages to Its Employees
A business does not only run-on raw materials, machines and capital; it comprises the diverse
employees that make these machines work for the development and eventual success of any
business. These employees are the most essential assets of a business, but before that they are
human beings that live in the same society in which the business runs.
Hence, it is important to provide these employees fair wages for their hard work. Employees
benefit programmes are also an important part for a business to meet its social objective. Such
benefits will give the employees a sense of association with the business and motivate them to
work proficiently towards its expansion.
5.Service to Employees
The success of a business depends to a large extent on the hard work and dedication of its
employees. Therefore, a business enterprise must provide reasonable compensation and
working conditions to its employees. Participation of employees in the management and
surplus of business is also the responsibility of business. Fair Deal to worker i.e. wherever
they are working for living the workers should be motivated to work for the organization so as
to make the organization successful when the business
6. Performing Community Service
The business is established and developed in a society. It works because of the society; so, it is
the responsibility of any business organization to give back to the society in whatever
considerable amount it can. It can do so by building public toilets, dispensaries, and
transportation. It can also contribute to the growth of society by encouraging education and
literacy through building foundations like schools, colleges, and libraries. If a business is not
in the financial capacity to build any institutions or infrastructure, it still has a way to give back
to the society by donating to NGOs which work in diverse fields of services. Business owes an
obligation to the community in which it functions. Business is expected to contribute to a
healthy and pollution free environment for people. Service to community also includes
generation of employment opportunities and contribution of public health, education, and
cultural heritage.

❖ Corporate Social Responsibility

🠶 Corporate Social Responsibility is a management concept whereby companies

integrate social and environmental concerns in their business operations and
interactions with their stakeholders.
🠶 CSR is a self-regulating business model that helps a company be socially accountable
to itself, its stakeholders, and the public. By practicing corporate social responsibility,
also called corporate citizenship, companies can be conscious of the kind of impact
they are having on all aspects of society, including economic, social and
environmental.
🠶 Corporate Social Responsibility (CSR) is the idea that a company should play a
positive role in the community and consider the environmental and social impact of
business decisions. It is closely linked to sustainability − creating economic, social,
 and environmental value – and ESG, which stands for Environmental, Social, and
Governance. All three focus on non-financial factors that companies, large and small,
should consider when making business decisions.
🠶 In recent years, there has been a shift from CSR to social purpose. Many companies
have pivoted from having a community investment strategy and a ‘nice to have’
mindset to adopting a holistic approach in which their mission is built into everything
they do.
🠶 CSR can involve a broad scope of approaches and initiatives—everything from
sustainable practices to community involvement. Customers increasingly expect
responsible behaviour from companies they do business with.

One of the popular models is the responsibility model mapped out by Stefanie Hiss.
She separates into three core areas, which are as follow

The internal responsibility

The internal area of responsibility includes all

internal processes that affects the corporate
strategy itself. The internal area of
responsibility is usually the responsibility of
company executives and influences important
decisions. E.g. - which business partners are acquired, one's own responsibility to the market
with regard to monopolies, fair and realistic growth planning and healthy profitability.

Middle areas of Responsibility

The middle area of responsibility includes all those actions of a company whose effects on
the environment and society can be measured more or less directly. This includes CO2
Emission and air pollution as well as working conditions for employees. This also includes
responsible supply chain management, because cooperation with morally questionable
companies ultimately supports their corporate policy.

Corporate Social responsibility in the middle area of responsibility is the most difficult to
coordinate for many large corporations, but has gained considerable importance precisely
because it is in this area that the most damage can occur. this applies not only to the
environment and society, but also to a company's own employees, stakeholders, and
reputation. Here stakeholders include employees, equity and debt capital providers, clients,
local residents, governmental agencies, media etc.

External area of responsibility

As part of their corporate social responsibility, many companies not only concentrate on
internal processes, but also assume social responsibility outside their own operations. The
external area of responsibility is often equated with the term corporate citizenship, and these
are some examples of what it constitutes: Contributions, sponsoring and social activities
IMPORTANCE OF CORPORATE SOCIAL RESPONSIBILITY

1.Brand value

A quick look at the top 10 brands in the world would suggest that responsibility is at the core
of their operations. A well-managed CSR program can help increase brand equity, awareness
and resonate with strong values

Tata Group is India’s most valuable brand at $19.5 billion dollars. People appreciate the
company not only for its high-quality products but also for the activities that they do for the
greater good of the people. The company has exceptional goodwill and the name exudes trust.

2.Increased Sales

Companies that lead with a purpose are perceived positively by the customers. According to a
study, 88% of the people surveyed would buy products from a responsible company. 85% of
the people said that they would support the company in their community. Millennials and
Generation Z connect with companies having a positive impact on the communities. This
engagement translates into greater sales in today’s highly connected world. This further
highlights the importance of Corporate Social Responsibility projects.

3.Employee Retention and Engagement

There was a time when people looked at their jobs from the bread-and-butter perspective
alone. Today, employees look for a higher purpose other than their monthly salary.
Employees enjoy working for companies that have a positive public image. CSR initiatives
incorporate volunteering programs which foster values such as empathy and loyalty. This
leads to better team-work among employees. It is a well-known fact that happy employees
lead to low attrition. Godrej Group CSR projects include a volunteering program that helps
NGOs to create sustainable models. They are also known to run several programs that help
protect the environment. This has led to higher employee satisfaction and a positive image for
the company. No wonder it is one of the most sought-after companies to work for in India.

4.Cost Savings

In the past, operating sustainably came at a huge cost to the company. Cost savings as one of
the factors in the importance of CSR would be surprising a few years ago. Responsible
companies have found new technologies that have reduced the operating costs.
Cochin Airport in India is a very good example of sustainable operations leading to cost
savings. It is the first Airport in the world to operate completely on solar power. It has
become a pioneer and is inspiring other airports to go solar and make this world a better place
to live in.

5. Poverty Alleviation

India is home to almost 1.4 billion people and the top 1% of its population owns 73% of the
wealth. In spite of the plethora of welfare programs, the gap between the haves and have-nots
is one of the steepest in the world. The corporate sector’s core competency is the execution of
projects. They have the talent and know-how to ensure maximum impact
at minimum cost. CSR programs bring out change at the grassroots level by harnessing this
operational efficiency. Mahindra and Mahindra’s Nanhi Kali is one of the pioneers when it
comes to CSR projects in India. The World Bank’s 2018 report states that limited educational
opportunities for girls and barriers to complete 12 years of education, cost countries between
$15 trillion and $30 trillion in lost lifetime productivity and earnings. Project Nanhi Kali
educates girls which not only empowers them but also helps their families come out of
poverty.

6. Risk Management

It is no longer a debate that social and environmental risk affect businesses in a big way. In
the long term, these factors affect the growth strategies and are completely out of its control.
Mumbai incurred a loss of Rs 14,000 crore due to floods from 2005 to 2015 according to a
study conducted by the United States Trade and Development Agency (USTDA) and leading
accounting company KPMG. Environmental and Social factors damage the infrastructure or
lead to the loss of business hours due to absenteeism. Depleting mangrove cover is one of the
biggest reasons for flooding in Mumbai. Bajaj Electricals’ CSR arm planted 10,000
mangroves by partnering with NGO, United Way Mumbai (UWM) to create awareness on
the importance of mangroves among the youth.

Benefits of Corporate Social Responsibility

1. Increased employee engagement

2. Cost Savings
3. More support for local and global communities
4. Increased investment opportunities
5. Press opportunities and brand awareness
6. Increased customer retention and loyalty
7. A stronger employer brands
8. An Advantage over competitors
9. More benefits to employees
10. Improved public image

Consumer Rights
The Consumer Protection Act, implemented in 1986, gives easy and fast compensation to
consumer grievances. It safeguards and encourages consumers to speak against insufficiency
and flaws in goods and services. If traders and manufacturers practice any illegal trade, this
act protects their rights as a consumer. The primary motivation of this forum is to provide aid
to both the parties and eliminate lengthy lawsuits.

This Protection Act covers all goods and services of all public, private, or cooperative
sectors, except those exempted by the central government. The act provides a platform for a
consumer where they can file their complaint, and the forum takes action against the
concerned supplier and compensation is granted to the consumer for the hassle he/she has
encountered.

Consumer Protection Act provides Consumer Rights to prevent consumers from fraud or
specified unfair practices. These rights ensure that consumers can make better choices in the
marketplace and get help with complaints.

Right to safety
Means right to be protected against the marketing of goods and services, which are hazardous
to life and property. The purchased goods and services availed of should not only meet their
immediate needs, but also fulfil long term interests. Before purchasing, consumers should
insist on the quality of the products as well as on the guarantee of the products and services.
They should preferably purchase quality marked products such as ISI, AGMARK, etc
Right to choose
Means right to be assured, wherever possible of access to variety of goods and services at
competitive price. In case of monopolies, it means right to be assured of satisfactory quality
and service at a fair price. It also includes right to basic goods and services. This is because
unrestricted right of the minority to choose can mean a denial for the majority of its fair
share. This right can be better exercised in a competitive market where a variety of goods are
available at competitive prices
Right to be informed
Means right to be informed about the quality, quantity, potency, purity, standard and price of
goods so as to protect the consumer against unfair trade practices. Consumer should insist on
getting all the information about the product or service before making a choice or a decision.
This will enable him to act wisely and responsibly and also enable him to prevent from
falling prey to high pressure selling techniques.
Right to consumer education
Means the right to acquire the knowledge and skill to be an informed consumer throughout
life. Ignorance of consumers, particularly of rural consumers, is mainly responsible for their
exploitation. They should know their rights and must exercise them. Only then real consumer
protection can be achieved with success.
Right to be heard
Means that consumer's interests will receive due consideration at appropriate forums. It also
includes right to be represented in various forums formed to consider the consumer's welfare.
The Consumers should form non-political and non-commercial consumer organizations
which can be given representation in various committees formed by the Government and
other bodies in matters relating to consumers.
Right to Seek redressal
Means right to seek redressal against unfair trade practices or exploitation of consumers. It
also includes right to fair settlement of the genuine grievances of the consumer. Consumers
must make complaint for their genuine grievances. Many a times their complaint may be of
small value but its impact on the society as a whole may be very large. They can also take the
help of consumer organisations in seeking redressal of their grievances.

Corporate governance

Corporate governance is the system of rules practices and processes by which a firm is
directed and controlled. Corporate governance essentially involves balancing the interests of
a company’s many stake holders, such as shareholders, senior management executives,
customers, suppliers, financiers, the government, and the community.

Corporate governance in the business context refers to the systems of rules, practices, and
processes by which companies are governed. In this way, the corporate governance model
followed by a specified company is the distribution of rights and responsibilities by all
participants in the organisation.

Principles of Corporate Governance

The principles of Corporate Governance are:

Accountability
Accountability means to be answerable and be obligated to take responsibility for one’s
actions. By doing so, two things can be ensured-

1. That the management is accountable to the Board of Directors.

2. That the Board of Directors is accountable to the shareholders of the company.
This principle gives confidence to shareholders in the business of the company that in case of
any unfavourable situation, the persons responsible will be held in charge.

Fairness
Fairness gives shareholders an opportunity to voice their grievances and address any issues
relating to the violation of shareholder’s rights. This principle deals with the protection of
shareholders’ rights, treating all shareholders equally without any personal favouritism, and
granting redressal for any violations of rights.

Transparency
Providing clear information about a company’s policies and practices and the decisions that
affect the rights of the shareholders represents transparency. This helps to build trust and a
sense of togetherness between the top management and the stakeholders. It ensures accurate
and full disclosure timely on material matters like financial condition, performance,
ownership.

Independence
Independence means the ability to make decisions freely without being unduly influenced.
Decisions should be made freely without having any personal interest in the company. It
ensures the reduction in conflict of interest. Corporate governance suggests the appointment
of independent directors and advisors so that decisions are taken responsibly without
influence
Accountability
Accountability in corporate governance refers to the principle that decisions and actions taken
by an enterprise should be subject to oversights to ensure they meet predefined objectives.
such accountability is ensured through the board of directors. They are held accountable for
the company’s actions and decisions. The board of directors acts as a proxy for the different
kinds of shareholders of an enterprise.
Responsibility
Responsibility in corporate governance refers to awareness of each of the stakeholders’ roles
in ensuring the enterprise functions and proceeds in a fair and transparent way towards agreed
upon goals. Responsibilities also include the role of shareholders to appoint a non-partisan
board of directors and auditors to oversee the checks and balances at their enterprise.
BUSINESS ETHICS
Ethics means the set of rules or principles that the organization should follow. While in
business ethics refers to a code of conduct that businesses are expected to follow while doing
business. Through ethics, a standard is set for the organization to regulate their behaviour. This
helps them in distinguishing between the wrong and the right part of the businesses. The ethics
that are formed in the organization are not rocket science. They are based on the creation of a
human mind. That is why ethics depend on the influence of the place, time, and the situation.
Business ethics compromises of all these values and principles and helps in guiding the
behaviour in the organizations. Businesses should have a balance between the needs of the
stakeholders and their desire to make profits.

Principles of Business Ethics

1. Honest: Businesses must show honesty in all their communications and conducts.
Abraham Lincoln has drawn a comparison between character and reputation as a tree
and its shadow. To build a reputation, one must have character and honesty at the
forefront of it. Honesty has to be accompanied with forthrightness and candidness.
2. Integrity: You demonstrate integrity when your thoughts, words and actions are in line
with each other. Ethical executives earn trust by having the integrity of character.
Integrity often requires walking the extra mile with moral courage and inner strength to
do the right thing even if it costs some personal losses.
3. Keeping Promises: An executive who makes all efforts to fulfil the spirit of their
commitments and promises earns trust and respect. They do not manipulate agreements
or misinterpret them to avoid compliance with the commitment.
4. Loyalty: Executives must be loyal with their organizations as well as people or other
organizations they work with. They must strive to protect the lawful interests of their
companies and colleagues. They need to safeguard information learned in confidence
and not use it for personal gains.
5. Fairness: Fairness means not to exercise power arbitrarily to gain or maintain any
advantage. This also means to not take undue advantage of another person’s mistakes
or difficulties.
 6. Caring: A genuine compassion should be shown towards other’s wellbeing. An ethical
business person would meet his/her business objectives without causing harm to others
and considering their good.

7. Respect For Others: Every person with whom a business executive interacts with must
be treated with respect, autonomy and dignity.
8. Law-abiding: All laws, rules and regulations related to one’s business activities must
be followed.
9. Commitment to Excellence: Excellence in their job is key to an organization's success.
Ethical executives must be well-informed and constantly work towards improving their
proficiency in diverse areas.
10. Leadership: An ethical role model would strive to be a role model for his or her
subordinates or employees. They promote ethical decision-making principled
reasoning.

11. Reputation and Morale: Reputation of a company and the pride and morale of their
employees is of the utmost importance to an ethical businessman. They are constantly
trying to build the reputation and morale of their business and people with their
affirmative words and actions.
12. Accountability: A business person must own the outcome of their decisions and
accountability of the ethical quality of decisions they make.

CHAPTER 5 - TECHNOLOGICAL ENVIRONMENT.

Technological environment refers to the changes in the output, production methods, use of
equipment and quality of the product. It includes force related to scientific innovations and
improvements in products as well as production technology. For example, with recent
improvements in technology and computerisation, marketing and selling of products is now
possible online leading to increase in sales and output of many firms.

The technological environment can have a huge impact on a business and includes all
external technological innovations and developments like disruptive technologies, Big Data
and AI, new production processes, etc. A technological change or advancement can:
● Have a sudden and substantial impact on the firm's environment,
● Advance the way an industry operates,
● Destroy industries altogether,
● Impact the demand for certain products and services,
● Shift the demand from one product or service to another.
Technological change can be very rapid in certain industries like the science or technology
industries and, on the other hand, it can be very slow in other industries like leather goods or
furniture manufacturing.

Technology has positively impacted businesses in many ways. For example, it has improved
communication, information sharing, payment processing, payroll management, and security
enforcement, among other things. As a result, it has facilitated faster and more efficient
business processes, increasing productivity.
Technology has revolutionized the way companies conduct business by enabling small
businesses to level the playing field with larger organizations. Small businesses use an array
of tech – everything from servers to mobile devices – to develop competitive advantages in
the economic marketplace. Small business owners should consider implementing technology
in their planning process for streamlined integration and to make room for future expansion.
This allows owners to create operations using the most effective technology available.

IMPACT OF TECHNOLOGY

1.Increased Efficiency and Productivity

Businesses are using technology to increase efficiency in many ways. For example,
companies can automate tasks, allowing employees to manage projects more efficiently.
Also, it helps reduce delays, streamlining workflow in business operations.
Various technological solutions can also boost your workforce’s productivity by:
● Improving communication between stakeholders
● Enhancing employee engagement and staff motivation
● Increasing staff connectivity, especially for remote workers
● Promoting collaboration between different teams in your business
● Tracking and analysing progress and performance toward goal achievement
2.Advancements in Customer Service and Engagement
Technology has helped to improve customer service in companies in various ways. For
example, it has improved payment processing through digital technology and apps, ensuring
convenience. You can now process payments online within a few seconds.
Here are the other ways technology has promoted customer service.
● Facilitating a faster flow of information to customers
● Improving problem resolution through web portals
● Encouraging more immediate delivery of products and services
3.Enabling Innovation and Growth:
Technology has become an essential part of business innovation in every business in today’s
corporate world. Companies are now using technology to improve existing products to
outsmart their competitors, fuelling growth. Besides, they use advanced analytics to promote
decision-making and marketing. As a result, they can win more sales.
4.Grow Business with Technology
Now that you know the positive impact of technology on business, consider investing in the
latest technologies. That will increase service delivery and the customer experience in the
business. Business technology helps small businesses improve their communication
processes. Emails, texting, websites and apps, for example, facilitate improved
communication with consumers. Using several types of information technology
communication methods enable companies to saturate the economic market with their
message. Companies may also receive more consumer feedback through these electronic
communication methods.

The Negative Impacts of Technology on Business:

The negative impacts of technology regarding businesses are usually in the form of loss in
business, social security, and cut down on the progress of employees.
The negative effects of information technology can vary in different businesses and what
technology is being used for more or less important work.
1.Business dependence on Technology

Dependency on technology is a huge concern. A variety of digital devices and apps have been
developed for remote business operations and to conduct business. We are using technology
so often that we have changed our business habits and it is having negative effects on our
business so badly. Even a small glitch in technology can cut off the process of business. A
very good example will be the use of the internet for online shopping. If there is any issue in
the webserver of the online store then it would be cut off from the customers and the business
process will stop because of no alternate way of business. In the modern world, technology is
determining the ways for us to live. And we have shaped our lives according to it. Examples
of such dependency are credit cards, cryptocurrency, mobile transactions, and robots for
production and processing.

2.Expanses on new technology

Modern business relies on technology for multiple purposes. The dependency has reached a
point that technology has to be upgraded to keep up with the competition. Technology
evolves continuously with time. Existing technology will be outdated and needed upgrades
result in a great expense. There is not only an upgrade that will cost you money but also the
maintenance.
Usually, tech tools cannot be sustained by local mechanics. The providing company or firms
will provide maintenance service at a high cost.

3.Security risks due to technology:

Businesses depend on the use of computers and digital devices for operations. The
dependency on technology has exposed businesses to security risks. The majority of business
deals and transactions are made through computers and the use of the internet. Any
carelessness from employees or workers can expose your business information to your
competitors, hackers, or online frauds. business could be just at a click apart from being theft
or other cyber-attacks. Cyber attackers are always in search of vulnerabilities to attack and
fraud you in business. According to a survey in 2016, 32% of businesses are affected by the
hacking. Hackers can steal valuable information, passwords, and information on bank
accounts that can result in millions of losses.

The worst victim of the 2011 hacking was the Sony company. In April 2011, hackers shut
down the Sony PlayStation network was shut down by hackers and stole information such as
user names, addresses, and credit card information which cost Sony $171 million.

4.Interruptions in the workplace due to technology:

Employees are using technology to increase productivity and efficiency. But this
technology is also driving their focus and attention away from work. As we all surf
continuously through the web and social media and we are addicted to using mobile phones
for different purposes.
The notification alerts from different social media apps and emails on phones can interrupt in
the middle of work and the hours which are assigned for work are spoiled in socializing
through apps and emails or text messages which in turn devastate the productivity level.
Employee productivity is negatively affected by these interruptions and can reduce progress.
On average, it is estimated that office workers can have more than 100 emails a day. That
many emails can digest a good amount of work time.
5.Work overload due to technology:
The expanding competition has caused work overload on the employees as well as business
owners. The race of being on top has caused the business employees’ and owners’ health
issues because they are connected to the business or work on phones and laptops every time.
This bond of technology and work at any place anywhere has increased the overload of work.
The sufferers cannot maintain work and home balance

RESEARCH AND DEVELOPMENT IN INDIA

Research and development (R&D) are when businesses gather knowledge to create new
products or discover new ways to improve their existing products and services. Larger
companies may have their own research and development team that will test and refine
products or processes before commercial use. However, many companies outsource this work
to universities due to a lack of in-house capacity and to access the expertise and advanced
research equipment they possess.
Some companies invest far more in R&D than others due to the competitiveness and demands
of their industry. For example, a consumer technology company is always trying to release
devices that are more appealing than its competitors so will invest heavily on product design
research to make their devices more innovative.
There are three types of R&D.

1 – Basic Research

Basic research is a theoretical approach to any subject. This objective aims to get complete
knowledge and understanding of one special subject, not a practical situation. This research is
also called pure or fundamental research.

2 – Applied Research

This objective aims to get complete knowledge and understanding of one special subject in a
practical situation. This research is an inverse of basic research. This research is formulated
to solve a practical problem.

3 – Development Research

This Research is a combination of applied and basic research. This research will be
implemented after getting knowledge and understanding of a specific task/subject from the
basic and applied research.

Important Points about R&D

● The objective is to obtain new scientific and technical knowledge and understanding.
● The entity should have a plan, budget, stipulated time and human resource to
complete the research and development on time.
● If Entity gets positive outcomes, it should patent it to achieve future economic
benefits.
 ● The entity should hire highly experienced and well–qualified manpower to fulfil the
requirement and get positive outcomes.
● An entity should purchase the latest machinery technology for doing research and
development.
● It requires a sufficient upfront budget to do the research and development.
● Negative outcomes can decrease the market’s goodwill/brand image/reputation.
● The market is very volatile, and some human resources should be used to know the
updated changes in the market so that entities can change the quality of the product,
costing, and design as per updated changes.
● An entity should fix its product prices after verifying the market price and quality of a
similar product; otherwise, the company will lose sales volume, revenue, and
profitability.

Advantages of R&D

● R&D has increased the productivity of goods and services

manufactured/traded/supplied by an entity.
● It has increased the income or profitability of an entity after analysis of costs such as
manufacturing/selling/general expenses, which expenses can be reduced to a certain
level so that income or profitability can be increased.
● Governments of some countries motivate industries/entities for Research and
development of their goods and supplies and provide taxes benefits.
● Positive Research and development (R&D) increase the goodwill of an entity’s
product and services.
● Gained new knowledge and understanding from research and development, an entity
can start a new business plan and find opportunities.
● The company can increase the business volumes in the market after researching the
present market scenario basis. It will increase the revenue and profitability of the
company. For e.g. - The company wants to borrow money before providing
documents to the lender. In that case, management should analyse the lender’s profile,
future forecasting about changes in the rate of interest, which country’s economy is
impacting the lender’s business, etc., and after gaining all the relevant knowledge and
understanding. Positive R&D outcomes can increase the long-term benefits of
investments in the entity.
● An entity can use available human resources at an optimum level.
● It can control the risk such as Operational Risk, Management Risk, Financial risk and
investing risk after analysing the relevant vertical scenario.

Limitations of R&D

● Research and development have increased the cost of the company. Its outcomes can
be positive and negative.
● Separate Manpower to be hired by the entity for doing R&D and this will increase the
cost of the company.
● It is a very difficult process, and highly experienced and well–qualified human
resources are required to do the research and development (R&D).
● It can produce artificial outcomes.
● Failure in R&D will not be increased in sales volume and revenue as well.
● Whether an Entity gets positive or negative outcomes, Product costs are increased by
the R&D cost, and increases in product prices can be decreased in sales volume.
 ● Outcomes/findings/results of research and development can be positive or negative
and artificial.
● Selection of the type of R&D is very difficult until human resources can’t understand
the current market scenario.
● Company cost will be incurred on all type of R&D whether its outcomes are positive
or negative.
● The risk involved in these projects and the company should have a sufficient budget
to expose the risk and timelines set by the team.
● Sometimes research and development can be terminated in the middle because of
changes in the political scenario, new market competitors, or declined prices.

CHAPTER 6 - FINANCIAL ENVIRONMENT

Financial environment of a company refers to all the financial institutions and financial
market
around the company that affects the working of the company as a whole.
The financial environment has a number of factors. It includes the financial institutions,
government, individuals and firms around the business. Firms use their financial markets to
keep
their savings as property. It is extremely important for the monetary markets.
Components of financial environment
The financial environment is composed of three key components: (1) financial
managers, (2) financial markets, and (3) investors (including creditors).
Financial environment of a company refers to all the financial institutions and financial
market
around the company that affects the working of the company as a whole.
The financial environment has a number of factors. It includes the financial institutions,
government, individuals and firms around the business. Firms use their financial markets to
keep
their savings as property. It is extremely important for the monetary markets.
Components of financial environment
The financial environment is composed of three key components: (1) financial
managers, (2) financial markets, and (3) investors (including creditors).
Financial environment of a company refers to all the financial institutions and financial
market
around the company that affects the working of the company as a whole.
The financial environment has a number of factors. It includes the financial institutions,
government, individuals and firms around the business. Firms use their financial markets to
keep
their savings as property. It is extremely important for the monetary markets.
Components of financial environment
The financial environment is composed of three key components: (1) financial
managers, (2) financial markets, and (3) investors (including creditors).
Financial environment of a company refers to all the financial institutions and financial
market
around the company that affects the working of the company as a whole.
The financial environment has a number of factors. It includes the financial institutions,
government, individuals and firms around the business. Firms use their financial markets to
keep
their savings as property. It is extremely important for the monetary markets.
Components of financial environment
The financial environment is composed of three key components: (1) financial
managers, (2) financial markets, and (3) investors (including creditors).
Financial environment of a company refers to all the financial institutions and financial
market
around the company that affects the working of the company as a whole.
The financial environment has a number of factors. It includes the financial institutions,
government, individuals and firms around the business. Firms use their financial markets to
keep
their savings as property. It is extremely important for the monetary markets.
Components of financial environment
The financial environment is composed of three key components: (1) financial
managers, (2) financial markets, and (3) investors (including creditors).
Financial environment of a company refers to all the financial institutions and financial
market
around the company that affects the working of the company as a whole.
The financial environment has a number of factors. It includes the financial institutions,
government, individuals and firms around the business. Firms use their financial markets to
keep
their savings as property. It is extremely important for the monetary markets.
Components of financial environment
The financial environment is composed of three key components: (1) financial
managers, (2) financial markets, and (3) investors (including creditors).
Financial environment of a company refers to all the financial institutions and financial
market
around the company that affects the working of the company as a whole.
The financial environment has a number of factors. It includes the financial institutions,
government, individuals and firms around the business. Firms use their financial markets to
keep
their savings as property. It is extremely important for the monetary markets.
Components of financial environment
The financial environment is composed of three key components: (1) financial
managers, (2) financial markets, and (3) investors (including creditors).
Financial environment of a company refers to all the financial institutions and financial
market
around the company that affects the working of the company as a whole.
The financial environment has a number of factors. It includes the financial institutions,
government, individuals and firms around the business. Firms use their financial markets to
keep
their savings as property. It is extremely important for the monetary markets.
Components of financial environment
The financial environment is composed of three key components: (1) financial
managers, (2) financial markets, and (3) investors (including creditors).
Financial environment of a company refers to all the financial institutions and financial
market
around the company that affects the working of the company as a whole.
The financial environment has a number of factors. It includes the financial institutions,
government, individuals and firms around the business. Firms use their financial markets to
keep
their savings as property. It is extremely important for the monetary markets
Financial environment of a company refers to all the financial institutions and financial
market
around the company that affects the working of the company as a whole.
The financial environment has a number of factors. It includes the financial institutions,
government, individuals and firms around the business. Firms use their financial markets to
keep
their savings as property. It is extremely important for the monetary markets
Financial environment of a company refers to all the financial institutions and financial
market
around the company that affects the working of the company as a whole.
The financial environment has a number of factors. It includes the financial institutions,
government, individuals and firms around the business. Firms use their financial markets to
keep
their savings as property. It is extremely important for the monetary markets
Financial environment of a company refers to all the financial institutions and financial
market
around the company that affects the working of the company as a whole.
The financial environment has a number of factors. It includes the financial institutions,
government, individuals and firms around the business. Firms use their financial markets to
keep
their savings as property. It is extremely important for the monetary markets.
Financial environment of a company refers to all the financial institutions and financial
market
around the company that affects the working of the company as a whole.
The financial environment has a number of factors. It includes the financial institutions,
government, individuals and firms around the business. Firms use their financial markets to
keep
their savings as property. It is extremely important for the monetary markets.
Financial environment of a company refers to all the financial institutions and financial
market
around the company that affects the working of the company as a whole.
The financial environment has a number of factors. It includes the financial institutions,
government, individuals and firms around the business. Firms use their financial markets to
keep
their savings as property. It is extremely important for the monetary markets.
Financial environment of a company refers to all the financial institutions and financial
market
around the company that affects the working of the company as a whole.
The financial environment has a number of factors. It includes the financial institutions,
government, individuals and firms around the business. Firms use their financial markets to
keep
their savings as property. It is extremely important for the monetary markets.
The financial environment is composed of three key components: (1) financial
managers, (2) financial markets, and (3) investors (including creditors)
The financial environment is composed of three key components: (1) financial
managers, (2) financial markets, and (3) investors (including creditors)
The financial environment is composed of three key components: (1) financial
managers, (2) financial markets, and (3) investors (including creditors)
The financial environment is composed of three key components: (1) financial
managers, (2) financial markets, and (3) investors (including creditors)
The financial environment is composed of three key components: (1) financial
managers, (2) financial markets, and (3) investors (including creditors)
The financial environment is composed of three key components: (1) financial
managers, (2) financial markets, and (3) investors (including creditors
The financial environment is composed of three key components: (1) financial
managers, (2) financial markets, and (3) investors (including creditors).
The financial environment is composed of three key components: (1) financial
managers, (2) financial markets, and (3) investors (including creditors).
The financial environment is composed of three key components: (1) financial
managers, (2) financial markets, and (3) investors (including creditors).
The financial environment is composed of three key components: (1) financial
managers, (2) financial markets, and (3) investors (including creditors).
The financial environment is composed of three key components: (1) financial
managers, (2) financial markets, and (3) investors (including creditors).
The financial environment is composed of three key components: (1) financial
managers, (2) financial markets, and (3) investors (including creditors).
ail managers are responsible for deciding how to invest a company’s funds
to expand its business and how to obtain funds (financing). The actions taken by
financial managers to make financial decisions for their respective firms are
referred to as financial management (or managerial finance).
Financial managers are expected to make financial decisions that will maximize
the firm’s value and therefore maximize the value of the firm’s stock price.
They are usually compensated in a manner that encourage
ail managers are responsible for deciding how to invest a company’s funds
to expand its business and how to obtain funds (financing). The actions taken by
financial managers to make financial decisions for their respective firms are
referred to as financial management (or managerial finance).
Financial managers are expected to make financial decisions that will maximize
the firm’s value and therefore maximize the value of the firm’s stock price.
They are usually compensated in a manner that encourage
The financial environment is composed of three key components: (1) financial
managers, (2) financial markets, and (3) investors (including creditors).
The financial environment is composed of three key components: (1) financial
managers, (2) financial markets, and (3) investors (including creditors).
A financial environment is a part of an economy with the major players being firms,
investors, and markets. Essentially, this sector can represent a large part of a well-developed
economy as individuals who retain private property have the ability to grow their capital.
Firms are any business that offer goods or services to consumers. Investors are individuals or
businesses that place capital into businesses for financial returns. Markets represent the
financial environment that makes this all possible.

Financial environment of a company refers to all the financial institutions and financial
market around the company that affects the working of the company as a whole. The
financial environment has a number of factors. It includes the financial institutions,
government, individuals and firms around the business.

Components of the Financial Environment

The complete system of financial environment comprises of four important components.
These include (1) financial managers (2) investors (3) financial markets and 4) Financial
instruments.
Financial Managers
Decision of investing funds lies with financial managers. Financial managers are responsible
for taking decision on acquiring the funds for business and appropriately investing those
funds. Finance manager is accountable on the issue of how to obtain funds (financing) and
where to invest a company’s funds to expand its business. The actions taken by financial
managers to make financial decisions for their respective firms are referred to as financial
management (or managerial finance). Financial managers are expected to make financial
decisions in such a way to optimize risk return trade off so as to ensure maximum value of
the firm and ultimately maximize the value of the firm’s stock price. Hence, the final focus of
finance manager is to take financial decisions in a way that may ensure maximum wealth to
the shareholders.
Investors
Investors may be individuals or institutions who have surplus funds and are willing to
provide these funds to borrowers such as firms, government agencies, individuals or other
institutions. This section provides a brief insight on investors and how do they create
provision of funds? Individual investors are generally small investors who commonly provide
funds to firms by purchasing their securities (equity shares or debt securities). Second
category of investors includes institutional investors. The financial institutions that provide
funds are referred to as institutional investors. Some of these institutions focus on providing
loans, whereas others commonly purchase securities that are issued by firms.

The Financial Markets

Financial markets represent place/ market that facilitate the flow of funds among investors
and borrowers. In financial markets investors and borrowers trade financial securities,
commodities and other items at a price determined by demand and supply. Financial markets
are typically defined by having transparent pricing, basic regulations on trading, costs and
fees and market forces determining the prices of securities that trade. Hence, financial
markets refer to an organized institutional structure or mechanism for creating and
exchanging financial assets. An important component of these financial markets is financial
institutions that act as intermediaries. Financial markets can be a) Capital markets b) Money
market
Financial Instruments
Financial instruments refer to tradeable securities of financial markets. These financial
instruments may represent cash, ownership interest or contractual right to pay/receive money.
Broadly, financial instruments can be of two types: a) Cash instruments b) Derivative
instruments Cash instruments are the one whose value is directly determined by the market
e.g., deposits and loans. Whereas value of derivative instrument is derived from underlying
asset e.g., forward, options, swap etc.

The Indian Financial System is one of the most important aspects of the economic
development of our country. This system manages the flow of funds between the people
(household savings) of the country and the ones who may invest it wisely
(investors/businessmen) for the betterment of both the parties.

Indian Financial System – An Overview

The services that are provided to a person by the various Financial Institutions including
banks, insurance companies, pensions, funds, etc. constitute the financial system. Given
below are the features of the Indian Financial system:

● It plays a vital role in the economic development of the country as it encourages both
savings and investment
● It helps in mobilising and allocating one’s savings
● It facilitates the expansion of financial institutions and markets
● Plays a key role in capital formation
● It helps form a link between the investor and the one saving
● It is also concerned with the Provision of funds
The financial system of a country mainly aims at managing and governing the mechanism of
production, distribution, exchange and holding of financial assets or instruments of all kinds.
Components of Indian Financial System
There are four main components of the Indian Financial System. This includes:

1. Financial Institutions
2. Financial Assets
3. Financial Services
4. Financial Markets
1. Financial Institutions
The Financial Institutions act as a mediator between the investor and the borrower. The
investor’s savings are mobilised either directly or indirectly via the Financial Markets.

The main functions of the Financial Institutions are as follows:

● A short-term liability can be converted into a long-term investment

● It helps in conversion of a risky investment into a risk-free investment
● Also acts as a medium of convenience denomination, which means, it can match a
small deposit with large loans and a large deposit with small loans
The best example of a Financial Institution is a Bank. People with surplus amounts of money
make savings in their accounts, and people in dire need of money take loans. The bank acts as
an intermediate between the two.

The financial institutions can further be divided into two types:

● Banking Institutions or Depository Institutions – This includes banks and other

credit unions which collect money from the public against interest provided on the
deposits made and lend that money to the ones in need
● Non-Banking Institutions or Non-Depository Institutions – Insurance, mutual
funds and brokerage companies fall under this category. They cannot ask for
monetary deposits but sell financial products to their customers.
Further, Financial Institutions can be classified into three categories:

● Regulatory – Institutes that regulate the financial markets like RBI, IRDA, SEBI, etc.
● Intermediates – Commercial banks which provide loans and other financial
assistance such as SBI, BOB, PNB, etc.
 ● Non-Intermediates – Institutions that provide financial aid to corporate customers. It
includes NABARD, SIBDI, etc.

2. Financial Assets
The products which are traded in the Financial Markets are called Financial Assets. Based on
the different requirements and needs of the credit seeker, the securities in the market also
differ from each other.

Some important Financial Assets have been discussed briefly below:

● Call Money – When a loan is granted for one day and is repaid on the second day, it
is called call money. No collateral securities are required for this kind of transaction.
● Notice Money – When a loan is granted for more than a day and for less than 14
days, it is called notice money. No collateral securities are required for this kind of
transaction.
● Term Money – When the maturity period of a deposit is beyond 14 days, it is called
term money.
● Treasury Bills – Also known as T-Bills, these are Government bonds or debt
securities with maturity of less than a year. Buying a T-Bill means lending money to
the Government.
● Certificate of Deposits – It is a dematerialised form (Electronically generated) for
funds deposited in the bank for a specific period of time.
● Commercial Paper – It is an unsecured short-term debt instrument issued by
corporations.

3. Financial Services
Services provided by Asset Management and Liability Management Companies. They help to
get the required funds and also make sure that they are efficiently invested. It can be divided
into fund or asset based financial services and fee based financial services

The financial services in India include:

● Banking Services – Any small or big service provided by banks like granting a loan,
depositing money, issuing debit/credit cards, opening accounts, etc.
● Insurance Services – Services like issuing of insurance, selling policies, insurance
undertaking and brokerages, etc. are all a part of the Insurance services
● Investment Services – It mostly includes asset management
● Foreign Exchange Services – Exchange of currency, foreign exchange, etc. are a part
of the foreign exchange services
The main aim of the financial services is to assist a person with selling, borrowing or
purchasing securities, allowing payments and settlements and lending and investing.

4. Financial Markets
The marketplace where buyers and sellers interact with each other and participate in the
trading of money, bonds, shares and other assets is called a financial market.
The financial market can be further divided into four types:

● Capital Market – Designed to finance the long-term investment, the Capital market
deals with transactions which are taking place in the market for over a year. The
capital market can further be divided into three types:
(a)Corporate Securities Market

(b)Government Securities Market

(c)Long Term Loan Market

● Money Market – Mostly dominated by Government, Banks and other Large

Institutions, the type of market is authorised for small-term investments only. It is a
wholesale debt market which works on low-risk and highly liquid instruments. The
money market can further be divided into two types:
(a) Organised Money Market

(b) Unorganised Money Market

● Foreign exchange Market – One of the most developed markets across the world,
the foreign exchange market, deals with the requirements related to multi-currency.
The transfer of funds in this market takes place based on the foreign currency rate.
● Credit Market – A market where short-term and long-term loans are granted to
individuals or Organisations by various banks and Financial and Non-Financial
Institutions is called Credit Market

Financial institutions and their roles

Financial Institutions are businesses that offer various types of financial services to
customers. These organizations provide many services, such as accepting deposits, making
investments, advancing loans, offering foreign exchange services, etc.

Financial Institutes are not limited to banks, as credit unions, insurance companies,
investment banks, and brokerage firms are also part of FIs. These organizations play a crucial
role within a capitalistic economic system, as they regulate the economy, ensure fair financial
practices, connect savers and spenders and facilitate prosperity to facilitate transactions
The following is the list of roles performed by financial institutions: –

1. Regulation of monetary supply

2. Banking services
3. Insurance services
4. Capital formation
5. Investment advice
6. Brokerage services
7. Pension fund services
8. Trust fund services
9. Financing the small and medium-scale enterprises
10. Act as a government agent for economic growth
1.Regulation of Monetary Supply

Financial institutions like the Central Bank help regulate the money supply in the economy to
maintain stability and control inflation. For example, the Central Bank applies various
measures like increasing or decreasing repo rate, cash reserve ratio, and open market
operations, i.e., buying and selling government securities, to regulate liquidity in the
economy.

2.Banking Services

Financial institutions, like commercial banks, help their customers by providing savings and
deposit services. In addition, they offer credit facilities like overdraft facilities to the
customers to cater to the need for short-term funds. Commercial banks also extend loans like
personal loans, education loans, mortgages, or home loans to their customers.

3.Insurance Services

Financial institutions, like insurance companies, help to mobilize savings and investment in
productive activities. In return, they assure investors against their life or some particular asset
at the time of need. In other words, they transfer their customer’s risk of loss to themselves.

4.Capital Formation

Financial institutions help in capital formation, i.e., increase in capital stock like the plant,
machinery, tools and equipment, buildings, transport, communication, etc. Moreover, they
mobilize the idle savings from individuals in the economy to the investor through various
monetary services.

5.Investment Advice

There are many investment options available at the disposal of individuals and businesses.
But it is not easy to choose the best option in the current swiftly changing environment.
Almost all financial institutions (banking or non-banking) have an investment advisory desk
that helps customers, investors, and businesses to select the best investment option available
in the market according to their risk appetite and other factors.

6.Brokerage Services

These institutions provide their investors access to several investment options available in the
market, ranging from stock bonds (common investment alternative) to hedge
funds and private equity investment (lesser-known alternative).

7.Pension Fund Services

Through their various kinds of investment plans, financial institutions help individuals plan
their retirement. One such investment option is a pension fund. The individual contributes to
the investment pool by employers, banks, or other organizations and gets the lump sum or
monthly income after retirement.
8.Trust Fund Services

Some financial organizations provide trust fund services to their clients. They manage the
client’s assets, invest them in the best option available in the market, and take care of its
safekeeping.

9.Financing the Small and Medium Scale Enterprises

Financial institutions help small and medium-scale enterprises set up themselves in their
initial business days. They provide long-term as well as short-term funds to these companies.
The long-term fund helps them form capital, and short-term funds fulfil their day-to-
day working capital needs.

10. Act as A Government Agent for Economic Growth

The government regulates financial institutions on a national level. They act as a government
agent and help grow the nation’s economy. For example, to help out an ailing sector,
financial institutions, as per the guidelines from the government, issue a selective credit
line with lower interest rates to help the industry overcome the issues it is facing.

Conclusion

Financial institutions are the backbone of the economy. Without the help of these institutions,
the economy will go down and cannot stand up. Due to their pivotal role in the development
and growth of the economy, the government regulates these institutions through the central
bank, insurance regulators, pension fund regulators, etc. Over the years, their role has
expanded from accepting and lending funds to larger service areas.

Types of financial institutions

1.Central Banks
Central banks are the financial institutions responsible for overseeing and managing all other
banks. In India, the central bank is the Reserve bank of India, which is responsible for
conducting monetary policy and supervising and regulating financial institutions. Individual
consumers do not have direct contact with a central bank. Instead, large financial institutions
work directly to provide products and services to the general public.

2. Retail and Commercial Banks

Traditionally, retail banks offered products to individual consumers, while commercial banks
worked directly with businesses. Today, most large banks offer deposit accounts, loans, and
limited financial advice to both consumers and businesses. Products offered at retail and
commercial banks include checking and savings accounts, certificates of deposit (CDs),
personal and mortgage loans, credit cards, and business banking accounts.

3. Internet banks
Internet banks offer the same products and services as conventional banks, but they do so
through online platforms instead of brick-and-mortar locations. Internet banks may allow
consumers to carry out banking services via computer, mobile device, Automated Teller
Machine (ATM), or by calling a customer service line. Using your phone and the bank's app,
you can deposit checks into your account by taking a picture of your check.

4. Credit Unions
A credit union is a type of nonprofit financial institution providing traditional banking
services and is created, owned, and operated by its members. Historically, credit unions used
to serve a specific and shared demographic group, also known as the field of membership.
The commonality might be based on employer, a geographic area, or membership in another
type of group. Today, many have loosened membership restrictions and are open to the
general public with minimal requirements, such as joining a nonprofit organization for a
small fee. Credit unions are not publicly traded and only need to make enough money to
continue daily operations, so they often can afford to provide reduced fees and better interest
rates than banks.

5. Savings and Loan (S&L) Associations

Savings and loan associations provide individual consumers with checking accounts, personal
loans, and home mortgages. Financial institutions are owned by their customers or
community. A savings and loan are a type of thrift that is required by law to produce a certain
number of loans secured by residential real estate, but the aim of most savings and loans is to
lend for residential mortgages.

6. Investment Banks
Investment banks are financial institutions that provide services and act as an intermediary in
complex transactions—for instance, when a startup is preparing for an initial public offering
(IPO), or when one company is merging with another. They can also act as a broker or
financial advisor for large institutional clients such as pension funds. Investment banks help
individuals, businesses, and governments raise capital through the issuance of securities.

7. Brokerage Firms
Brokerage firms assist individuals and institutions in buying and selling securities among
available investors. Customers of brokerage firms can place trades of stocks, bonds, mutual
funds, exchange-traded funds (ETFs), and some alternative investments.

8. Insurance Companies
Financial institutions that help individuals transfer the risk of loss are known
as insurance companies. Individuals and businesses use insurance companies to protect
against financial loss due to death, disability, accidents, property damage, and other
misfortunes. These companies can also include the self-insurance programs of other financial
institutions such as a savings and loan holding company.

9.Mortgage Companies
Financial institutions that specialize in originating or funding mortgage loans are mortgage
companies. While most mortgage companies serve the individual consumer market, some
specialize in lending options for commercial real estate only. Mortgage companies focus
exclusively on originating loans and seek funding from financial institutions that provide the
capital for the mortgages. Many mortgage companies today operate online or have limited
branch locations, which allows for lower mortgage costs and fees.
Foreign Direct Investment

Foreign direct investment (FDI) is an ownership stake in a foreign company or project made
by an investor, company, or government from another country.

Foreign direct investment (FDI) is an investment made by a company or an individual in one

country into business interests located in another country. FDI is an important driver of
economic growth. Examples of Foreign Direct Investment Foreign direct investments may
involve mergers, acquisitions, or partnerships in retail, services, logistics, or manufacturing.
They indicate a multinational strategy for company growth.

FDI Routes in India

There are three routes through which FDI flows into India. They are described in the following
table:

Category 1 Category 2 Category 3

100% FDI permitted Up to 100% FDI permitted Up to 100% FDI permitted

through Automatic Route through Government Route through Automatic +
Government Route

Importance of FDI in India

● The inflow of capital: There is an inflow of capital in a company by the foreign

investors or company in exchange for some of the stakes or equity of a company.
● Technology: A developing country also gets access to the latest technology as
investors bring it to the country. Over time, this advanced and modern technology
extends to the local economy, resulting in improved efficiency and productivity.
● Economic growth and employment: A major benefit of FDI is the economic
development of a recipient country. Increased FDI enhances both the services sector
and the development industry. This increases the employment rate in a country by
giving opportunities to trained young people and professional workers.
● Increase in exports: This is one of the biggest impacts of FDI in India. Products are
made not only for domestic use but also for markets around the world. For example,
pharmaceuticals, medicines and vaccines are not just made for the Indian market but
for the whole world. During the pandemic of Covid-19, India became a major
exporter of vaccines and medicines across the world.
● Open market: Foreign Direct Investment or FDI helps develop an atmosphere where
monopolies by domestic companies are broken as foreign companies enter the market.
 With the FDI, consumers have access to a wide range of products of good quality at
affordable prices.
● Human resource development: Human capital involves the skill, knowledge, and
competence of a workforce. Knowledge and skill gained via experience and training
help in boosting the level of education and human capital of the recipient country.
Through FDI, human resources can also be trained in other sectors

Types of Foreign Direct Investment

Foreign direct investments are commonly categorized as horizontal, vertical, or
conglomerate.

● In a horizontal FDI, a company establishes the same type of business operation in a

foreign country as it operates in its home country. A U.S.-based cell phone provider
buying a chain of phone stores in China is an example.
● In a vertical FDI, a business acquires a complementary business in another country.
For example, a U.S. manufacturer might acquire an interest in a foreign company that
supplies it with the raw materials it needs.
● In a conglomerate FDI, a company invests in a foreign business that is unrelated to its
core business. Because the investing company has no prior experience in the foreign
company’s area of expertise, this often takes the form of a joint venture.

FDI in India
The investment climate in India has improved tremendously since 1991 when the government
opened up the economy and initiated the LPG strategies.

● The improvement in this regard is commonly attributed to the easing of FDI norms.
● Many sectors have opened up for foreign investment partially or wholly since the
economic liberalization of the country.
● Currently, India ranks in the list of the top 100 countries in ease of doing business.
● In 2019, India was among the top ten receivers of FDI, totalling $49 billion inflows, as
per a UN report. This is a 16% increase from 2018.
● In February 2020, the DPIIT (Department for Promotion of Industry and Internal Trade)
notifies policy to allow 100% FDI in insurance intermediaries.
● In April 2020, the DPIIT came out with a new rule, which stated that the entity of any
company that shares a land border with India or where the beneficial owner of
investment into India is situated in or is a citizen of such a country can invest only under
the Government route. In other words, such entities can only invest following the
approval of the Government of India
● In early 2020, the government decided to sell a 100% stake in the national airline’s Air
India.
New FDI Policy
According to the new FDI policy, an entity of a country, which shares a land border with
India or where the beneficial owner of investment into India is situated in or is a citizen of
any such country, can invest only under the Government route.

A transfer of ownership in an FDI deal that benefits any country that shares a border with
India will also need government approval. Investors from countries not covered by the new
policy only have to inform the RBI after a transaction rather than asking for prior permission
from the relevant government department.

Benefits of FDI
FDI brings in many advantages to the country. Some of them are discussed below.

1. Brings in financial resources for economic development.

2. Brings in new technologies, skills, knowledge, etc.
3. Generates more employment opportunities for the people.
4. Brings in a more competitive business environment in the country.
5. Improves the quality of products and services in sectors.

Disadvantages of FDI
However, there are also some disadvantages associated with foreign direct investment. Some
of them are:

1. It can affect domestic investment, and domestic companies adversely.

2. Small companies in a country may not be able to withstand the destructive attack of
MNCs in their sector. There is the risk of many domestic firms shutting shop as a result
of increased FDI.
3. FDI may also adversely affect the exchange rates of a country

Government Measures to increase FDI in India

1. Government schemes like production-linked incentive (PLI) scheme in 2020 for

electronics manufacturing, have been notified to attract foreign investments.
2. In 2019, the amendment of FDI Policy 2017 by the government, to permit 100% FDI
under automatic route in coal mining activities enhanced FDI inflow.
3. FDI in manufacturing was already under the 100% automatic route, however, in 2019,
the government clarified that investments in Indian entities engaged in contract
manufacturing is also permitted under the 100% automatic route provided it is
undertaken through a legitimate contract.
4. Further, the government permitted 26% FDI in digital sectors. The sector has
particularly high return capabilities in India as favourable demographics, substantial
mobile and internet penetration, massive consumption along technology uptake
provides great market opportunity for a foreign investor.
5. Foreign Investment Facilitation Portal (FIFP) is the online single point interface of the
Government of India with investors to facilitate FDI. It is administered by the
 Department for Promotion of Industry and Internal Trade, Ministry of Commerce and
Industry.
6. FDI inflow is further expected to increase –

o as foreign investors have shown interest in the government’s moves to allow

private train operations and bid out airports.

o Valuable sectors such as defence manufacturing where the government

enhanced the FDI limit under the automatic route from 49% to 74% in May
2020, is also expected to attract large investments going forward.

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