UNIT-II  High Income Economies—e.g., USA.

India is the 6th largest economy in terms of GDP.

Q- 1 Briefly discuss the economic environmental factors.
Ans. Economic Environment : The economic environment of a
country comprises the structure of economic system, economic
infrastructure, economic policies of the Govt. nature of markets etc.
The factors like increase in demand of goods facilitates business
growth, increase in excise duty adds to the cost of production and export
incentives by the Govt. lead to increase in export and the profit margin
of exporters.
The economic system of a country states the ownership and control
of the economy. There are basically two types of economic system :
(a) Capitalistic,
(b) Socialistic.
In capitalistic economy the ownership of the company is private
sector and its resources are allocated and controlled by the public or
private sector.
In socialist type economy, the ownership of the economic activity is
on the hands of the govt. and also the resources are allocated and
controlled by the public sector.
The macro-economic indicators affecting international or national
business are :
Economic Growth : Gross Domestic Product (GDP) : GDP of
the country is measured by the overall production of goods and services
in the financial years, economies are of 3 types :
 Low Income Economies—e.g., African Countries.
 Middle Income Economies—e.g., India.
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Inflation : Inflation is a condition where price increases, higher the
price of the product lowers the capacity of purchase of customer due to
which demand decrease which affects the business environment.
Surplus and Deficits : A record of a country’s international
transaction in a current year is known as balance of payment. When the
export exceed imports, the balance is surplus, whereas when the imports
are greater than exports, the trade balance is deficit.
Debt : Debt is categorized into external and internal debt. External
debt is the amount of money borrowed from foreign public or private
sector banks, whereas internal debt results from excess of govt.
expenditure over revenues. So, to reduce internal debt disinvestments is
being done in which sale of share state owned enterprises to domestic or
foreign private sectors is done. For e.g., ITDC, Maruti Udyog etc.
Infrastructure : State the nervous system of business, it plays an
important role in promoting investment from foreign investors. It
includes—proper banking system, transportation, electricity,
telecommunication, water, railways etc.
TRAI (Telecom Regulatory Authority of India) : It controls all
regulatory functions and policy of Telecommunication and Govt. also
planning for other infrastructure like power.
Analysis of Economic Environment :
To collect data
Sources :
Secondary Primary Consultants
Own Resource Evaluation of
 Sources : Market potential Statistics : (b) Trade Policy,

 World bank (c) Foreign Exchange Policy,

 Consumption Patterns (d) Foreign Investment and Technology Policy,
 Govt. Agencies
(e) Monetary and Fiscal Policy etc.
 Possible future
 Growth rate
 Eco. trend
Q- What are the key environmental factor/drivers responsible for
 Expected Demand
international trading? Or
 Prediction
 Private Agencies Discuss the environmental factor effecting international trade?

The economic policies like monetary policy and fiscal policy are Explain why domestic company go for transnational Business?
very important to regulate the economy of the country as there are
various incentives such as : DOMESTIC TO TRANSNATIONAL BUSINESS-

(a) Tax Concession,
(b) Cash Grants,
(c) Specific Subsidies,
(d) Domestic Infrastructure,
(e) Local Skills,
(f) Demands and Expectations of Foreign Investors.
The monetary policies which regulates the money supply in the
country has a considerable influence to attract investors. Good monetary
policy is able to keep the inflation manageable and keeps interest rates
lowers and strengths the financial institutions and banks; credit
availability for a firm will be easier and cheaper which attracts the
foreign investors.
The fiscal policy, involved with the tax collection and public
expenditure can act as motivating factor to the foreign investors.
Economic policies plays an important role in economic
environment, the various economic policies are :
(a) Industrial Policy,
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Factors/Drivers that affect or influence the international business/ trade
include Social and Cultural factors, Technological factors, economic
factors, International factors, natural factors etc.
Business Environmental Factors-
Social and Cultural
 Social and cultural factors in various countries of the globe affect
the international business. These factors include attitude of the
people to work, attitude to wealth, family, marriage, religion,
education, ethics, human relations, social responsibilities etc.
 Culture is, the thought and behaviour patterns that member of a
society learns through language and other forms of symbolic
interaction their customs, habits, beliefs and values, the common
viewpoints, which bind them together as a social entity.
 Cultures change gradually picking up new ideas and dropping
old ones, but many of the cultures of the past have been so
persistent and self contained that the impact of such sudden
change has torn them apart, uprooting their people
psychologically.
  Characteristics of culture:
Culture is:
 Derived mostly from the climatic conditions of the geographical
region and economic conditions of the country.
 A set of traditional beliefs and values which are transmitted and
shared in a given society 1* a total way of life and thinking
patterns that are passed from generation to generation
 Norms, customs, art values etc.
Prescriptive:
It prescribes the kinds of behavior considered acceptable in the society.
It limits product choices to those which are socially acceptable. For
example, consumption of wine is acceptable in the West, but it is not
socially acceptable in India and it is socially and legally unacceptable in
Saudi Arabia. Similarly, smoking is medically unacceptable even in
USA in the recent times.
Socially Shared: Culture is based on social interaction and creation. In
fact, it is out of need For example, child marriages in India during the
18th and 19th centuries were to protect the teenaged girls, Chinese
parents, at one time preferred their female children to have small feet
The practice of the Sikhs wearing turbans and keeping a knife was
originally out of the necessity of protecting themselves from invaders
from other countries.
Learned:
Culture is acquired through learning but not inherited genetically. If a
person absorbs or learns the culture of the society where he is raised,
that learning is called socialization or enculturation. However, some
people learn the culture of the society other than the one in which they
are raised. Such learning is called ‘acculturation.’ The societies of Asian
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and African countries complain that their cultures are being
contaminated by the Western influences.
Subjective:
Culture is subjective in the sense that people of different cultures have
different ideas about the same object. Regarding the object of marriage
the parents of the bridegrooms in many countries offer money (dowry)
to the parents of the bride whereas the situation in India is quite
opposite. This is because, the parents of bridegrooms in other countries
pay dowry as a compensation for raising the bride while the parents of
bride in India pay dowry to the bridegroom to meet the expenses of
establishing a new family.
Enduring:
Culture is relatively stable as it is passed from generation to generation.
Taking care of the old people, respecting the elders and offering food
first to the guests, next to old people and children and last to the young
people are the practices from generations together in Indian society.
Failure of birth control in India and China is due to culture.
Cumulative:
Uncertainty of rains, crop and thereby income in developing countries
years resulted in the culture of saving for to the next years. Thus, culture
is based accumulated circumstances over the hundreds or even
thousands of years.
Dynamic:
Culture is not immune to change. It goes on changing. New ideas are
added ideas are dropped. The present generation youth want to become
slim. Therefore, they fat contents in all the food items unlike the
previous generations. Further, the present generation Youth would like
to work smart but not hard unlike their
parents. Japanese tastes have been changing from rice and fish to meat
and dairy products.
Social Environment
Social environment consists of religious aspects, language, customs,
traditions, beliefs, tastes, and preferences, social institutes, living habits,
eating influences the level of consumption. For example, though the
economic position of Germans living habits, dressing habits etc. Social
environment and French
people is more or less the same culturally they are different.
Consumption level of French people is more than that of Germans.
Hence, the study of social environment helps in deciding up on the type
of product, market, and the like. Following aspects are considered:-
 Religion
 Family System
Other Key Macroeconomic Issues / drivers Affecting International
trade
 Economic Growth- Just as the world was recovering from the
Asian financial crisis of 1997, the dot-com (Internet-based
companies) bubble burst in 2000, thus triggering the slowdown
in economic growth in the United States that has filtered
throughout the world, particularly in Japan and the euro zone.
The terrorist attacks of September 11 compounded this economic
slowdown by eroding consumer and business confidence. The
(IMF) listed the direct impact as one of the impacts of the
attacks-that is, the destruction of life and property and the
downturn of specific industries, such as the airline industry. The
U.S. Bureau of Economic Analysis puts the figure 7.3 of
damages and other insurance costs around $21.4 billion.
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 Inflation- Another economic factor that management needs to
consider is inflation. Inflation means mat prices are going up.
The inflation rate is the percentage increase in the change in
prices from one period to the next, usually a year. Economists
use different types of indices to measure inflation, but the one
they use the most is the consumer price index (CPI). The CPI
measures a fixed basket of goods and compares its price from
one period to the next. A rise in the index results in inflation.
Inflation occurs becau se aggregate demand is growing faster
than aggregate supply. The demand can occur because of
government spending in which spending is rising faster than the
tax revenues that are used to fund the spending or because of
increases in the money supply. Inflation affects interest rates,
exchange rates, the cost of living, and the general confidence in a
country’s political and economic system.
 Surpluses and Deficits- Other measures of a country’s
economic stability-and potential as a location for investment-are
external and internal surpluses and deficits. Managers need to
monitor these balances as indicators of economic strength or
weakness. Surpluses rarely are a problem, but deficits are. An
external deficit is when a country’s cash outflows exceed its
inflows. An internal deficit is when government expenditures
exceed government revenues.
 The Balance of Payments The balance of payments records a
country’s international transactions. These can be transactions
between companies, governments, or individuals. U.S.
International Transactions 2001,” the balance of payments is
divided into the current account and the capital and financial
account. The current account is comprised of trade in goods and
services and income from assets abroad and payments on foreign
owned assets in the country.
 The Process of Transition - The transition process has provided
significant opportunities for MNEs. As the countries in
transition have liberalized and opened their doors to the outside
world, many foreign companies have increased their exports to
them. In addition, the privatization process has provided many
opportunities for foreign companies to acquire state-owned
companies and enter the market through acquisition.
 The Globalization of Production- The globalization of
production refers to the sourcing of goods and services from
loca-tions around the globe to take advantage of national
differences in the cost and quality of factors of production (such
as labor, energy, land, and capital). By doing this, companies
hope to lower their overall cost structure and/or improve the
quality or functionality of their product offering, thereby
allowing them to compete more effectively.
 Declining Trade and Investment Barriers- During the 1920s
and 30s, many of the nation-states of the world erected
formidable barriers to international trade and foreign direct
investment. International trade occurs when a firm exports goods
or services to consumers in another country. Foreign direct
investment occurs when a firm invests resources in business
activities outside its home country. Many of the barriers to
international trade took the form of high tariffs on imports of
manufactured goods.
 The Role of Technological Change - The lowering of trade
barriers made globalization of markets and production a
theoretical possibility. Technological change has made it a
tangible reality. Since the end of World War II, the world has
seen major advances in communication, information processing,
and transportation technology, including the explosive
emergence of the Internet and World Wide Web.
 Implications for the Globalization of Markets- In addition to
the globalization of production, technological innovations have
also facilitated the globalization of markets. As noted above,
low-cost transportation has made it more economical to ship
products around the world, thereby helping to create global
markets. Low-cost global communications networks such as the
World Wide Web are helping to create electronic global
marketplaces. In addition, low-cost jet travel has resulted in the
mass movement of people between countries. This has reduced
the cultural distance between countries and is bringing about
some converge of consumer tastes and preferences. At the same
time, global communication networks and global media are
creating a worldwide culture.
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 The Changing Demographics of the Global Economy- Hand
in hand with the trend toward globalization has been a fairly
dramatic change in the demographics of the global economy over
the past 30 years. As late as the 1960s, four stylized facts
described the demographics of the global economy.
 The Changing Foreign Direct Investment Picture- Reflecting
the dominance of the United States in the global economy, U.S.
firms accounted for 66.3 percent of worldwide foreign direct
investment flows in the 1960s. British firms were second,
accounting for 10.5 percent, while Japanese firms were a distant
eighth, with only 2 percent. The dominance of U.S. firms was so
great that book were written about the economic threat posed to
Europe by U.S. corporations. Several European governments,
most notably that of France, talked of limiting inward in
vestment by U.S. firms.
 The Rise of Mini-Multinationals- Another trend in international
business has been the growth of
medium-sized and small multinationals (mini-multinationals).
When people think of international business, they tend to think of
firms such as Exxon, General Motors, Ford, Fuji, Kodak,
Matsushita, Procter &Gamble, Sony, and Unilever-large,
complex multinational corporations with operations that span the
globe.
 Globalization, Jobs, and Income - One concern frequently
voiced by opponents of globalization is that falling barriers to
international trade destroy, manufacturing jobs in wealthy
advanced economies such as the United States and the United
Kingdom.
 Labor Policies, and the Environment - A second source of
concern is that free trade encourages firms from advanced
nations to move manufacturing facilities to less developed
countries that lack adequate regulations to protect labor and the
environment from abuse by the unscrupulous.
 (5) Orientation—New strategies etc.

Q. . What is globalization ? Discuss in brief the important forces of Important Foreign Market Entry Strategies for Globalization :
globalization. [UPTU-MBA-2004-05] (1) Exporting.
Or (2) Licencing/franchising.
What is globalization ? What are the main drives of globalization ? (3) Contract marketing.
Discuss them in brief. (4) Management contracts.
[UPTU-MBA-2005-06] (5) Assembly Operations.
Or (6) Manufacturing Facilities.
What do you understand by Globalization and factors favoring (7) Joint Venture.
globalization in India ? (8) Counter Trade.
(9) Merger and Acquisition.
(10) Strategic Alliance.
Ans. Globalization : The growing economic interdependence of (11) Third Country Location.
countries worldwide through increasing volume and variety of cross Obstaclss to Globalization :
border transactions in goods and services and of international capital (1) Government Policy and Procedure.
flows and also through the more rapid and widespread diffusion of (2) High Cost.
technology. (3) Poor Infrastructure.
(4) Resistance to Change.
Globalization constitute the following : (5) Poor Quality Image.
(1) Doing or planning to expand, business globally, (6) Supply Problems.
(2) Domestic market synchronizes with foreign market and developing a (7) Small Size.
global outlook of the business. (8) Lack of Experience.
(3) Locating the production and other physical facilities on a (9) Limited R & D and Marketing Research.
consideration of the global business dynamics. (10) Growing Competition.
(4) Product development and production planning. (11) Trade Barriers.
(5) Allocation of raw material, components, machinery, technology, Components of Globalization
finance etc. (i) Reduction of Trade Barriers : As to permit free flow of goods
(6) Orientation of organization structure and management culture. across national frontiers.
Essential Conditions for Globalization :
(ii) Free Flow of capital among nation states : i.e. no restriction on
(1) Business freedom—liberalization. foreign investments.
(2) Facilities—e.g. infrastructure facilities etc. (iii) Free flow of technology.
(3) Resources—e.g. R & D, Management, HR etc. (iv) Free movement of labour among different countries of the
(4) Competitiveness—e.g. pricing, product quality, product world.
differentiation, advance technology, sales services, marketing strength. Causes of Globalization :
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 (a) The rapid improvement in communication, media and
information technology.
(b) Rapid growth of research and development.
(c) De-regulation of money markets.
(d) Free movement of investment over the greater part of the world
freely, making national economies less and less national and moving
towards interlinked, interdependent national economies.
(e) Spread out of the manufacturing processes by the large
companies (getting different parts and components to be produced or
processed in different countries).
(f) Removal of artificial barriers to the movements of goods,
services and capitals.
(g) Restrictions on acquisition/transfer of shares have been
removed.
Factors Favoring Globalization in India :
(1) Human Resources.
(2) Wide Base e.g., industrial base and variety of business.
(3) Growing Entrepreneurship.
(4) Growing Domestic Market.
(5) Niche Markets (Niche means small or specific segment of market).
(6) Expanding markets.
(7) Transnationalization of world economy i.e., the integration of the
national economies into a single world economy.
(8) NRI’s e.g., their interest to invest money in India.
(9) Economic liberalization.
(10) Competition.
The drivers of globalization can be classified into.
1. Market Drivers:
(a) Per capita income converging among industrialized nations
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(b) Convergence of lifestyles and tastes
(c) Organizations beginning to behave as global consumers
(d) Increasing travel create global consumers
(e) Growth of global and regional channels
(f) Establishment of world brands
(g) Push to develop global advertising
2. Cost Drivers:
(a) Continuing push for economies of scale
(b) Accelerating technological innovation
(c) Advances in transportation
(d) Emergence of newly industrialized countries with productive
capability and low labour costs
(e) Increasing cost of product development relative to market life
3. Government Drivers:
(a) Reduction of tariff barriers
(b) Reduction of non-tariff barriers
(c) Creation of blocs
(d) Decline in role of governments as producers and consumers
(e) Privatization in previously state-dominated economies
(f) Shift to open market economies from closed communist systems in
eastern Europe 4.
Competitive Drivers:
(a) Continuing increases in the level of world trade
(b) Increased ownership of corporations by foreign acquirers
(c) Rise of new competitors’ intent upon becoming global competitors
(d) Growth of global networks making countries interdependent in
particular industries
(e) More companies becoming globally centered rather than nationally
centered
(f) Increased formation of global strategic alliances
5. Other Drivers:
(a) Revolution in information and communication
(b) Globalization of financial markets
(c) Improvements in business travel

Definition of International Business
International business includes any type of business activity that crosses
national borders. Though a number of definitions in the business
literature can be found but no simple or universally accepted definition
exists for the term international business.
International business is defined as organization that buys and/or
sells goods and services across two or more national boundaries,
even if management is located in a single country.
International business is equated only with those big enterprises, which
have operating units outside their own country.
The business operations performed without any barriers, with the
implementation of L.P.G (Liberalization, Privatization, Globalization)
there is boom in the global business and the trade barriers have been
liberalized. This has given rise to Attract F.D.I ( Foreign direct
investment)
 Encourage flexible import and export policies
 Import of jobs in the field of I.T enabled services (B.P.O)
 Increase in foreign currency reserves
 Improve standard of living
 Increase in purchasing power
 Improve quality of goods and services
Today, any company which is going globally need to assess different
environmental factors like economic, technological, political, cultural,
legal and design their operations. Domestic Environment Forces with in
a country, which are very familiar and which are controllable or
uncontrollable Foreign Environment Forces outside the country, which
are not very familiar and which are controllable or uncontrollable
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International Environment Forces acting on business from different
nations which are not familiar and which are controllable or
uncontrollable
The Forces Forces acting upon business are classified as follows
Internal Environmental Forces
Forces with in the organization, which are controllable, like production,
finance, marketing, human resources research and development etc
External Micro Environmental Forces
Forces outside the organization, which are controllable, like competitors,
suppliers, creditors, consumers, financial institutions etc
External Macro Environmental Forces
Forces outside the organization, which are uncontrollable, like political
environment, legal environment, technological environment, economic
environment, cultural environment etc
Basis for Going Global
a) Arability of Highly Skilled & Cheap Labour
India is a country with the potential of highly skilled human resources
with comparatively cheaper labour, which has attracted many M.N.C ‘s
from U.S.A and U.K to outsource these resources from India which will
cut short their heavy expenditure on wage and salary. Eg. T.I enabled
services outsourced form India, business process outsourcing (B.P.O),
knowledge process outsourcing (K.P.O), recently legal process
outsourcing (L.P.O)
b) Bigger Pie in Market Share
To increase the market share of the firm many companies are going
global eg. In 1888, less than four years after William Hesketh Lever
launched Sunlight Soap in England, his newly-founded company, Lever
Brothers, started exporting the revolutionary laundry soap to India. By
the time the company merged with the Netherlands-based Margarine
Unie in 1930 to form Unilever, it had already carved a niche for itself in
the Indian market. Coincidentally, Margarine Unie also had a strong
presence in India, to which it exported Vanaspati (hydrogenated edible
fat).
c) Sever Competition in Home Country
Due to many players in the home country and the increase in
competition the weaker companies, which are unable to withstand
competition has moved its operations to other countries
d) Quality Improvement and new product development
To improve the quality of existing products and developing new
products the companies with joint collaboration with companies of other
countries has gone globally eg. M.R.F a leader in Indian tyres market
has entered into a technical collaboration with the B.F. Goodrich Tyre
Company of USA, which was involved with the development of tyres
for the N.A.S.A space-shuttle. With this began a significant exercise in
quality improvement and new product development.
e) To Reach Higher Profits Level
To reach higher levels of profits the companies has expanded globally.eg
The roots of Nokia go back to the year 1865 with the establishment of a
forest industry enterprise in South-Western Finland by mining engineer
Fredrik Idestam. Elsewhere, the year 1898 witnessed the foundation of
Finnish Rubber Works Ltd, and in 1912 Finnish Cable Works began
operations. Gradually, the ownership of these two companies and Nokia
began to shift into hands of just a few owners. Finally in 1967 the three
companies were merged to form Nokia Corporation. Today we find
Nokia in every part of the globe.
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f) Free Trade Policies
The North American Free Trade Agreement (NAFTA) has lifted all the
trade barriers among U.S.A, Canada and Mexico which has enabled
companies to expand their operations among those countries eg. General
Motors has 284 operations in 35 states and 158 cities in the United
States. In addition GM of Canada operates 21 locations, GM de Mexico
operates 5 locations, and GM has assembly, manufacturing, distribution
or warehousing operations in 49 other countries, including equity
interests in associated companies.
g) Availability of Abundant Raw Materials
India is rich in natural resources like coal, iron etc which is attracting
many foreign companies to establish their facility. Eg. Volkswagan and
Nokia are planning to establish their facility in India
h) Government Regulations
Business firms prefer to enter the countries where there are flexible
government policies, which will not change because of political
instability. Countries like U.S.A has stable government policies which
will attract business firms to enter into their country eg. All the U.S
automobile industry is flooded by Japanese automobile companies like
Toyota because of stable government regulations.
i) Availability of Technology
To keep abreast of world technology and to protect its competitive edge,
Asian Paints has from time to time entered into technology alliances
with world leaders in the paint industry. It has a 50:50 joint venture with
Pittsburgh Paints & Glass Industries (PPG) of USA, the world leader in
Automotive coatings, to meet the increasing demand of the Indian
automotive industry.
j) Limited Home Market
Toyota motors of Japan has extended its base to U.S and India because
of limited home market and U.S and India has got a greater demand for
Japanese automobiles.
COMPARATIVE ANALYSIS OF BUSINESS ENVIRONMENT
INDIA AND OTHER COUNTRIES
A country’s international competitiveness is a function of several
factors, including factor conditions and demand conditions Factors
Conditions Essential inputs to the production process (human resources,
physical resources, knowledge resources, capital resources, and
infrastructure)
Demand Conditions Composition of home demand, the size and pattern
of growth of home demand.
Gross National product (GNP): broadest measure of economic
activity. Defined as the market value of inal goods and services newly
produced by domestic factors of demand. Note: the production by
domestic factors could take place at home or abroad. a) Gross Domestic
Product Measures the value of production that occurs within a country’s
borders without regard to whether the production is done by domestic or
foreign factors of production.
Per Capita GNP: Low-income ($725 or less), Mozambique ($80)
Middle-income ($726-$8,955) Colombia ((2,140) High-Income ($8,956
or more) Japan (40,940) U.S. (28,020) Low- and middle-income
countries is where the vast majority of the world’s population lives
North-South Dialogue
4. Relative Importance of High-income Countries:
They represent only 21% of the number of economies and 15.2% of the
population, but they generate 79.5% of the world’s GNP.
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5. Relative Importance of Middle-income Countries:
They represent 28.1% of the world’s population, 15.6% of its GNP, and
represent 48.3% of the total countries.
6. Relative Importance of Low-income Countries:
Account for 30.6% of the number of economies in the world, 56.7% of
the population, but only 4.9% of the GNP.
7. Purchasing Power Parity (PPP): The basic idea is to identify the
number of units of a country’s currency required to buy the same
amounts of goods and services in the domestic economy as one dollar
would buy in the U.S. Thus, even though per capita GNP is the primary
measure of wealth in a country, purchasing power GNP is an alternative
way to measure wealth that is more indicative of the purchasing power
of a country’s currency.
8. Structure of Production: Percentage of GDP generated by
agriculture, industry, manufacturing, and services. The key is to note
that as income rises, the percentage of GDP devoted to agriculture falls,
and the percentage devoted to services rises.
COMPOSITION OF INDIA‘S EXPORTS SINCE- 2000
By composition, we mean the commodities exports which are exported
from the country to the rest of the world and the commodities which are
imported from abroad. India.s share in the world export trade has moved
up from 0.7% in 2000 to 1.2% in 2009. In 2009, India.s export share in
world trade is very low as compared to other developing countries like
China 9.1%, South Korea 2.9%, Hong-Kong 2.5%, and Singapore 2.1%.
The following table shows composition of India.s merchandise exports
during 2000-01 and 2008-09.
The composition of India.s merchandise exports are explained in brief
as follows-
(a) Agricultural and Allied Products countries. The process of trade liberalization and world trade dynamics
This includes tea, coffee, tobacco, spices, sugar, raw cotton, fruits, have brought out major shifts in the directional pattern of India.s foreign
vegetable and pulse. The share of exports of agriculture and allied trade. For the purpose of direction of exports, the countries to which
products has declined from 14.0% in 2000-01 to about 9.1 % in 2008-09. India exports are broadly divided
(b) Ores and Minerals into five groups that is –
This includes manganese ore, mica and iron ore. The export of ores and
minerals was 2% of total exports in 2000-01 and increased to 4.2% in  Organization for economic co-operation and development
2008-09. A major share of ores and minerals exports comes from the (OECD) comprising of USA, Canada, European Union, Australia
export of iron ore. and Japan.
(c) Manufactured Items  Organization of Petroleum Exporting Countries (OPEC) which
This includes textiles, ready-made garments, leather and footwear, includes Kuwait, Iran, Iraq, Saudi Arabia, UAE and others.
engineering goods, chemicals, and so on. The share of manufactured  Eastern Europe which includes Rassia, Georgia and others.
goods in total export earnings was about 79% in 2000-01 and reduced to  Developing countries of Asia, Africa, Latin America and
66.4% in 2008-09. Caribbean
(d) Mineral Fuels and Lubricants  Other countries which do not fall in the above four groups
There has been an improvement in the export of mineral fuels and
lubricants both in terms of value and in terms of percentage. In
percentage terms, its share has increased from 4.3% in 2000-01 to 14.9% Direction of India.s exports. These one explained as follows-
in 2008-09. (a) Exports to OECD Countries
The first category of exports includes traditional items while the other The share of total export earnings to OECD countries has slightly
categories include non-traditional items of exports. After 2000, positive declined over the years. In 2000-01, the share of total export earning
changes are noticed in the composition of India.s foreign tread. Exports from OECD countries was about 52.7%. However, the share of total
now cover wide range of items from agricultural, industrial, services and export earning from OECD countries has come down to about 38.4% in
other sectors. 2007-08.
The share of some of the important OECD countries in India.s export
The importance of non-traditional items is increasing while the trade is stated as follows
importance of traditional items is declining. New items like ready made USA 2000-01 21% 2007-08 12.6%
garments, sports goods, engraining goods, gems and jewellery and UK 2000-01 5.2% 2007-08 4.1%
marine products are being exported on a large scale from India. Germany 2000-01 4.3% 2007-08 3.1%
Projects exports have also made significant progress in recent years. Japan 2000-01 4.1% 2007-08 2.4%
Electronic hardware and software exports have increased in a (b) OPEC Countries
significant way. This suggests that there is diversification on the The share of total export earning from OPEC counties has increased. In
composition of India.s export trade. 2000-01 it was about 10.9%. It has increased to 16.3% in 2007-08. The
share of export to UAE has increased from
5.8% in 2000-01 to 9.6% in 2007-08.
DIRECTION OF INDIA‘S EXPORTS SINCE 2000 (c) Eastern Europe
By direction of export trade, we mean the countries to which we export Over the years, the exports to Eastern Europe have declined mainly due
goods and services. India has trading relations with large number of to the disintegration of USSR. In 2001-01, the total export earning from
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this group was 3%. It came down to 2% in 2007-08. The main country in
this group is Russia. Its share in India.s export trade has come down
from 2% in 2000-01 to 0.6% in 2007-08.
(d) Developing Countries
India.s exports to developing countries have increased over the years. It
has increased from nearly 29% in 2000-01 to 42.6% in 2007-08. Among
the developing countries, the major contribution comes from china.
China.s share in India.s exports has increased from 1.9% in 2001-01 to
6.6% in 2007-08.
Q- Explain LPG Policy/Model in India?
LPG Policy in India
The economy of India had undergone significant policy shifts in the
beginning of the 1990s. This new model of economic reforms is
commonly known as the LPG or Liberalisation, Privatisation and
Globalisation model.
The primary objective of this model was to make the economy of India
the fastest developing economy in the globe with capabilities that help it
match up with the biggest economies of the world.
The concepts of liberalization, globalization and privatization are
actually closely related to one another.
This LPG phenomenon was first initiated in the Indian Economy in 1990
when the Indian Economy experienced a severe crisis.At that time the
government decided to introduce the New Industrial Policy (NIP) in
1991 to start liberalizing the Indian economy.
The chain of reforms that took place with regards to business,
manufacturing, and financial services industries targeted at lifting the
economy of the country to a more proficient level. These economic
reforms had influenced the overall economic growth of the country in a
significant manner.
Liberalisation
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Liberalisation refers to the slackening of government regulations. The
economic liberalisation in India denotes the continuing financial reforms
which began since July 24, 1991. orin other words you can say that
Liberalization means elimination of state control over economic
activities. It implies greater autonomy to the business enterprises in
decision-making and removal of government interference. It was
believed that the market forces of demand and supply would
automatically operate to bring about greater efficiency and the economy
would recover. This was to be done internally by introducing reforms in
the real and financial sectors of the economy and externally by relaxing
state control on foreign investments and trade.
Objectives
 To boost competition between domestic businesses
 To promote foreign trade and regulate imports and exports
 Improvement of technology and foreign capital
 To develop a global market of a country
 To reduce the debt burden of a country
 To unlock the economic potential of the country by encouraging the
private sector and multinational corporations to invest and expand.
 To encourage the private sector to take an active part in the
development process.
 To reduce the role of the public sector in future industrial
development.
 To introduce more competition into the economy with the aim of
increasing efficiency.
Reforms under Liberalisation
Deregulation of the Industrial Sector
 Financial Sector Reforms
 Tax Reforms
 Foreign Exchange Reforms
 Trade and Investment Policy Reforms
 External Sector Reforms
 Foreign Exchange Reforms
 Foreign Trade Policy Reforms
Economic Reforms during Liberalisation
Several sectors were affected by the outburst of the impact of
Liberalization. Few economic reforms were:
 Financial Sector Reforms
 Tax Reforms / Fiscal Reforms
 Foreign Exchange Reforms / External Sector Reforms
 Industrial Sector Reforms
Impacts of Liberalisation in India
Positive impacts of liberalisation in India
1) Free flow of capital: Liberalisation has improved flow of capital into
the country which makes it inexpensive for the companies to access
capital from investors. Lower cost of capital enables to undertake
lucrative projects which they may not have been possible with a higher
cost of capital pre-liberalisation, leading to higher growth rates.
2) Stock Market Performance: Generally, when a country relaxes its
laws, taxes, the stock market values also rise. Stock Markets are
platforms on which Corporate Securities can be traded in real time.
Impact of FDI in Banking sector: Foreign direct investment allowed in
the banking and insurance sectors resulted in decline of government’s
stake in banks and insurance firms.
3) Political Risks Reduced: Liberalisation policies in the country
lessens political risks to investors. The government can attract more
foreign investment through liberalisation of economic policies. These
are the areas that support and foster a readiness to do business in the
country such as a strong legal foundation to settle disputes, fair and
enforceable laws.
4) Diversification for Investors: In a liberalised economy, Investors
gets benefit by being able to invest a portion of their portfolio into a
diversifying asset class.
5) Impact on Agriculture: In the area of agriculture, the cropping
patterns has undergone a huge modification, but the impact of
liberalisation cannot be properly measured. It is observed that there are
still all-pervasive government controls and interventions starting from
production to distribution for the produce
Negative impacts of liberalisation in India
1) Destabilization of the economy: Tremendous redistribution of
economic power and political power leads to Destabilizing effects on the
entire Indian economy.
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Threat from Multinationals: Prior to 1991 MNC’s did not play much role
in the Indian economy. In the pre-reform period, there was domination
of public enterprises in the economy. On account of liberalisation,
competition has increased for the Indian firms.
Multinationals are quite big and operate in several countries which has
turned out a threat to local Indian Firms.
2) Technological Impact: Rapid increase in technology forces many
enterprises and small scale industries in India to either adapt to changes
or close their businesses.
3) Mergers and Acquisitions: Acquisitions and mergers are increasing
day-by-day.
In cases where small companies are being merged by big companies, the
employees of the small companies may require exhaustive re-skilling.
Re-skilling duration will lead to non-productivity and would cast a
burden on the capital of the company.
4) Impact of FDI in Banking sector: Foreign direct investment allowed
in the banking and insurance sectors resulted in decline of government’s
stake in banks and insurance firms.
Privatisation
Privatisation refers to the participation of private entities in businesses
and services and transfer of ownership from the public sector (or
government) to the private sector as well.
Privatization is the transfer of control of ownership of economic
resources from the public sector to the private sector. It means a decline
in the role of the public sector as there is a shift in the property rights
from the state to private ownership. The
public sector had been experiencing various problems , since planning,
such as low efficiency and profitability, mounting losses, excessive
political interference, lack of autonomy, labour problems and delays in
completion of projects. Hence to remedy this situation with Introduction
of NIP’1991. Another term for privatization is Disinvestment. The
objectives of disinvestment were to raise resources through sale of PSUs
to be directed towards social welfare expenditures, raising efficiency of
PSUs through increased competition, increasing consumer satisfaction
with better quality goods and services, upgrading technology and most
importantly removing political interference.
Objective of Privatisation
Providing strong momentum to the inflow of FDI
 Privatisation aims at providing a strong base to the inflow of FDI. as BT, and British Airways have shown degrees of improved efficiency
 Increased inflow of FDI improves the financial strength of the and higher profitability.
economy. 2. Lack of political interference:- It is argued governments make poor
Improving the efficiency of public sector undertaking (PSU’s) economic managers. They are motivated by political pressures rather
 The efficiency of PSU’s was improved by giving them the autonomy than sound economic and business sense. For example, a state enterprise
to makevdecisions. may employ surplus workers which is inefficient. The government may
 Some companies were given a special category of Navratna and Mini- be reluctant to get rid of the workers because of the negative publicity
Ratna. involved in job losses. Therefore, state-owned
Ways of Privatisation: enterprises often employ too many workers increasing inefficiency.
Government companies are transformed into private companies in 2 3. Short term view:- A government many think only in terms of the
ways, next election. Therefore, they may be unwilling to invest in
Transfer of Ownership infrastructure improvements which will benefit the firm in the long term
 Government companies can be converted into private companies in because they are more concerned about projects that give a benefit
two ways : before the election. It is easier to cut public sector investment than
 By withdrawal of the government from ownership and management frontline services like healthcare.
of publicvsector companies. 4. Shareholders:- It is argued that a private firm has pressure from
 By outright sale of public sector companies. shareholders to perform efficiently. If the firm is inefficient then the firm
Disinvestment could be subject to a takeover. A state-owned firm doesn’t have this
 Privatisation of the public sector undertakings by selling off part of pressure and so it is easier for them to be inefficient.
the equity of PSUs to the private sector is known as disinvestment. 5. Increased competition:- Often privatisation of state-owned
 The purpose of the sale is mainly to improve financial discipline and monopolies occurs alongside deregulation – i.e. policies to allow more
facilitate modernization. firms to enter the industry and increase the competitiveness of the
However, there are six methods of Privatisation: market. It is this increase in competition that can be the greatest spur to
 The public sale of shares improvements in efficiency. For example, there is now
 Public auction more competition in telecoms and distribution of gas and electricity.
 Public tender  However, privatisation doesn’t necessarily increase competition; it
 Direct negotiations depends on the nature of the market. e.g. there is no competition in tap
water because it is a natural monopoly. There is also very little
 Transfer of control of State or municipally controlled enterprises competition within the rail industry.
 Lease with a right to purchase 6. Government will raise revenue from the sale:- Selling state-owned
Impact of Privatisation assets to the private sector raised significant sums for the UK
Positive Aspect- government in the 1980s. However, this is a one-off benefit. It also
1. Improved efficiency:- The main argument for privatisation is that means we lose out on future dividends from the profits of public
private companies have a profit incentive to cut costs and be more companies.
efficient. If you work for a government run industry managers do not Negative Aspect-
usually share in any profits. 1. Natural monopoly:- A natural monopoly occurs when the most
However, a private firm is interested in making a profit, and so it is more efficient number of firms in an industry is one. For example, tap water
likely to cut costs and be efficient. Since privatisation, companies such has very significant fixed costs. Therefore there is no scope for having
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competition amongst several firms. Therefore, in this case, privatisation
would just create a private monopoly which might seek to set higher
prices which exploit consumers. Therefore it is better to have a public
monopoly rather than a private monopoly which can exploit the
consumer.
2. Public interest:- There are many industries which perform an
important public service, e.g., health care, education and public
transport. In these industries, the profit motive shouldn’t be the primary
objective of firms and the industry. For example, in the case of health
care, it is feared privatising health care would mean a greater priority is
given to profit rather than patient care. Also, in an industry like health
care, arguably we don’t need a profit motive to improve standards.
When doctors treat patients, they are unlikely to try harder if they get a
bonus.
3. Government loses out on potential dividends.:- Many of the
privatized companies in the UK are quite profitable. This means the
government misses out on their dividends, instead going to wealthy
shareholders.
4. Problem of regulating private monopolies.:- Privatisation creates
private monopolies, such as the water companies and rail companies.
These need regulating to prevent abuse of monopoly power. Therefore,
there is still need for government regulation, similar to under state
ownership.
5. Fragmentation of industries:- In the UK, rail privatisation led to
breaking up the rail network into infrastructure and train operating
companies. This led to areas where it was unclear who had
responsibility. For example, the Hatfield rail crash was blamed on no
one taking responsibility for safety. Different rail companies has
increased the complexity of rail tickets.
6. Short-termism of firms:-As well as the government being motivated
by short term pressures, this is something private firms may do as well.
To please shareholders they may seek to increase short term profits and
avoid investing in long term projects. For example, the UK is suffering
from a lack of investment in new energy sources; the privatised
companies are trying to make use of existing
plants rather than invest in new ones.
Globalisation
. market.
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Globalization essentially means integration of the national economy
with the world economy. It implies a free flow of information, ideas,
technology, goods and services, capital and even people across different
countries and societies. It increases connectivity between different
markets in the form of trade, investments and cultural exchanges.
The concept of globalization has been explained by the IMF
(International Monetary Fund) as ‘the growing economic
interdependence of countries worldwide through increasing volume and
variety of cross border transactions in goods and services and of
international capital flows and also through the more rapid and
widespread diffusion of technology.’
LPG and the Economic Reform Policy of India
Following its freedom on August 15, 1947, the Republic of India stuck
to socialistic economic strategies. In the 1980s, Rajiv Gandhi, the then
Prime Minister of India, started a number of economic restructuring
measures. In 1991, the country experienced a balance of payments
dilemma following the Gulf War and the downfall of the erstwhile
Soviet Union. The country had to make a deposit of 47 tons of gold to
the Bank of England and 20 tons to the Union Bank of Switzerland. This
was necessary under a recovery pact with the IMF or International
Monetary Fund.
Furthermore, the International Monetary Fund necessitated India to
assume a sequence of systematic economic reorganisations.
Consequently, the then Prime Minister of the country, P V Narasimha
Rao initiated groundbreaking economic reforms. However, the
Committee formed by Narasimha Rao did not put into
operation a number of reforms which the International Monetary Fund
looked for.
Dr Manmohan Singh, the then Prime Minister of India, was the Finance
Minister of the Government of India. He assisted. Narasimha Rao and
played a key role in implementing these reform policies.
Narasimha Rao Committee's Recommendations
The recommendations of the Narasimha Rao Committee were as
follows:
Bringing in the Security Regulations (Modified) and the SEBI Act of
1992 which rendered the legitimate power to the Securities Exchange
Board of India to record and control all the mediators in the capital
Doing away with the Controller of Capital matters in 1992 that
determined the rates and number of stocks that companies were
supposed to issue in the market.
Launching of the National Stock Exchange in 1994 in the form of a
computerized share buying and selling system which acted as a tool to
influence the restructuring of the other stock exchanges in the country.
By the year 1996, the National Stock Exchange surfaced as the biggest
stock exchange in India.
In 1992, the equity markets of the country were made available for
investment through overseas corporate investors. The companies were
allowed to raise funds from overseas markets through issuance of GDRs
or Global Depository Receipts.
Advantages of Globalisation in India
1) Increase in Employment: With the opportunity of Special Economic
Zones (SEZ), there is an increase in the number of new jobs availability.
Including Export Processing Zones (EPZ) Centre in India is very useful
in employing thousands of people. Another additional factor in India is
cheap labour. This feature motivates big companies in the west to
outsource employees from other region and cause more employment.
2) Increase in Compensation: After Globalisation, the level of
compensation has increased as compared to domestic companies due to
the skill and knowledge a foreign company offers. This opportunity also
emerged as an alteration of the management structure.
3) High Standard of Living: With the outbreak of Globalisation, Indian
economy and the standard of living of an individual has increased. This
change is notified with the purchasing behaviour of a person, especially
with those who are associated with foreign companies. Hence, many
cities are undergoing a better standard of living along with business
development.
4) Extension of Market- Due to globalisation any company can extend
their limits the size of business. Now no nation can any longer hope to
lead an existence of solitude and isolation in which only domestics
industries can function.
5) Development of Infrastructure- Its help in the improvement and
development of infrastructure. For exmple, growing financial facilities,
faster communication, rapid technology changes, new sources of
industrial energy etc.
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6) Development of healthy competition. Integration of global markets
reduces manufacturing costs, improves quality, reduces processing
time,and business becomes dominant drivers.
7) Multiplicity of Manufacturing Plants- In globalisation, an MNC by
operating in more than one country gains research and development
production, marketing and financial advantages in its cost and
reputation, that are not available to purely domestic marketeers.
Disadvantages of Globalisation
1. Inequality: Globalisation has been linked to rising inequalities in
income and wealth. Evidence for this is the growing rural–urban divide
in countries such as China, India and Brazil. This leads to political and
social tensions and financial instability that will constrain growth. Many
of the world’s poorest people do not have access to basic technologies
and public goods. They are excluded from the benefits.
2. Inflation: Strong demand for food and energy has caused a steep rise
in commodity prices. Food price inflation (known as agflation) has
placed millions of the world’s poorest people at great risk.
3. Vulnerability to external economic shocks – national economies are
more connected and interdependent; this increases the risk of contagion
i.e. an external event somewhere else in the world coming back to affect
you has risen / making a country more vulnerable to macro-economic
problems elsewhere
4. Threats to the Global Commons: Irreversible damage to
ecosystems, land degradation, deforestation, loss of bio-diversity and the
fears of a permanent shortage of water afflict millions of the world’s
most vulnerable
5. Trade Imbalances: Global trade has grown but so too have trade
imbalances.
Some countries are running big trade surpluses and these imbalances are
creating tensions and pressures to introduce protectionist policies such as
new forms of import control. Many developing countries fall victim to
export dumping by producers in advanced nations (dumping is selling
excess output at a price below the unit cost of supply.)
6. Unemployment: Concern has been expressed by some that capital
investment and jobs in advanced economies will drain away to
developing countries as firms switch their production to countries with
lower unit labour costs. This can lead to higher levels of structural
unemployment.
7. Standardisation: Some critics of globalisation point to a loss of
economic and cultural diversity as giant firms and global multinational
brands dominate domestic markets in many countries.
Impact of Globalisation on Indian Economy.
In the Economic welfare, globalisation refers to the unique
econonomically interdependent international Environment. Each
countrys prosperity is interlinked with the rest of the world. A further
development will be the super national enterprise.It serves all nation
without being specially attached to any of the.

The Impacts of Globalisation are as follows:

1. Economical Impact
2. Cultural Effects
3. Political Effects
4. Technological Changes

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