Business Environment

Unit:D

MNCs
As per Jacques Maisonrouge, Operates in many countries at different levels of economic development. Its local subsidiaries are managed by nationals. It has a multinational central management and stock ownership. It maintains industrial organization including R & D facilities in several countries.

Objectives
Expand the business Minimise the cost of production Capture the foreign market Avail competitive advantage Achieve greater efficiency Diversification Technical advancement International corporate image

Benefits
Increase investment, income and employment level Technological advancement Export promotion Breaking monopolies Improve balance of payment Impetus in diversification Development of ancillaries in host countries Professionalism of management Contribution to R & D activities Stimulate domestic enterprises

Harmful Effects
MNCs aim is profit maximisation and not the development needs of the poor countries Suppression of domestic entrepreneurship Unfavorable impact on BOP due to heave dividend, royalty, interest etc. Threat to sovereignty of nations Transfer to capital intensive techniques Retard growth of employment Depletion of non-renewable resources Possibility of tax evasion political pressures

Globalisation
It often refers to economic globalization that is integration of national economies into international economies through trade, foreign direct investment, spread of technology, etc The movement towards the expansion of economic and social ties between countries through the spread of corporate institutions and the capitalist philosophy that leads to the shrinking of the world in economic terms.

FEATURES
Erase the difference between domestic and foreign market Movement of goods / services in international boundaries Global orientation of strategies, organization culture, structure and managerial expertise Entire globe is becoming a single market Shift towards more integrated and interdependent world economy Globalisation has two components: global market and global production It is inevitable.

STRATEGIES FOR GLOBALISTION

EXPORTS: generally resorted when cost of production in domestic market is generally lower than foreign markets JOINT VENTURES: any form of association which implies sharing of management and ownership MERGERS AND ACQUISITIONS: a company takes over another company. Its important for market entry and expansion strategy

Driving Forces of Globalization

Desire to obtain financial Benefits Reduced Cost of production Enhance level of demand and Growth potential Liberalization of economy Fast reduction and convergence of transaction costs associated with doing this business Desire to have better access to international markets / technology / infrastructure To bring Economic Reforms as well as Social Development Industrial consolidation and restructuring

THREATS TO GLOBALISATION
It strengthen only the MNCs Privatisation leads to little impact on Industrial production Leads to outflow of currency Harmful for domestic producers High Tariffs and taxes Uncertainty of stock market Old and new economy syndrome

Integration of Economies
The increasing reliance of economies on each other The opportunities to be able to buy and sell in any country in the world The opportunities for labour and capital to locate anywhere in the world The growth of global markets in finance

Stock Markets are now accessible from anywhere in the world! Copyright: edrod, stock.xchng

Integration of Economies
Made possible by:
Technology Communication networks Internet access Growth of economic cooperation trading blocs (EU, NAFTA, etc.) Collapse of communism Movement to free trade

Trade versus Aid?

Benefits of Trade:
Increased choice Greater potential for growth Increase international economies of scale Greater employment opportunities

Trade has led to massive increases in wealth for many countries. Copyright: budgetstock, stock.xchng

Trade versus Aid?

Disadvantages of trade:
Increase in gap between the rich and the poor Dominance of global trade by the rich, northern hemisphere countries Lack of opportunities for the poor to be able to have access to markets Exploitation of workers and growers
How far does trade help children like these? Copyright: clesio, stock.xchng

Corporate Expansion
Multi-national or trans-national corporations (MNCs or TNCs) businesses with a headquarters in one country but with business operations in a number of others.
No matter where you go in the world, certain businesses will always have a presence. Copyright: mkeky, stock.xchng

Corporate Expansion
Characteristics:

Controlling supplies may be one reason for global expansion. Copyright: rsvstks, stock.xchng

Expanding revenue Lowering costs Sourcing raw materials Controlling key supplies Control of processing Global economies of scale

Corporate Domination
Key Issues: Damage to the environment? Exploitation of labour? Monopoly power Economic degradation Non-renewable resources Damage to cultures
Shell and Nikes activities have come under severe criticism in some quarters. Copyright: Homsel, stock.xchng

Other Issues:
Accountability of Global businesses? Increased gap between rich and poor fuels potential terrorist reaction Ethical responsibility of business? Efforts to remove trade barriers

There are plenty of people who believe that globalisation is a negative development, protests at the G8 summits, pollution, poverty and concern over GM crops are just some of the issues. Copyright: stock.xchng

GLOBALISATION AND INDIAN ECONOMY

The main deterrent to foreign investments were the domestic economic policy that restricted the area of operation and growth The economy and domestic market were very protected Later measures were adopted by government since 1991 to promote globalization

GOVT. MEASURES
REMOVING CONSTRAINTS AND OBSTACLES TO THE ENTRY OF MNCS BY DILUTING FERA (1973). REMOVING EXPORT SUBSIDIES DECANALISING OIL AND AGRICULTURE TRADE COUNTERING ANTI DUMPING MEASURES ALLOWING IN INDIAN MUTUAL FUNDS TO INVEST IN FORIGN COMPANIES GOVT. OF INDIA IS MAKING DUE EFFORTS TO GLOABLISE THE INDIAN ECONOMY MANY SPECIAL INCENTIVE SCHEMES ARE LAUNCHED IN INDIA. INTL. EXPOSURE GIVES INDIAN COMPANIES ACQUIRE GLOBAL EXPERTISE AND BE COST EFFECTIVENESS

MEASURES TO PROMOTE GLOBALISATION

The Indian rupee was devalued by about 20% in July 1991 Liberalization in F.D.I. foreign investors were allowed to participate up to 51% in 34 selected industrial sectors 100% foreign ownership was allowed for NRIs Import duty was reduced from 150% to 110% Import duty on 35 baggage items was reduced from 255% to 150% Foreign technicians were allowed to be hired by Indian companies if certain conditions were met Inflation was controlled to control the cost of production

INDIAN INDUSRTY AND GLOBALISATION

In 1991 alone the world wide value of deals exceeded 2.3 trillion dollars At that time U.S based coca cola bought parleys thumps up, Limca brands Brook Bond India ltd merged with Hindustan Lever Videocon acquired South Koreas Daewoo for 700million dollars in 2006 DR Reddy acquired Betapharm

CONT
Ranbaxy acquired Terapia for $324million in 2006 Mahindra & Mahindra acquired 90% in German company in 2007 Corus was taken over by Tata Vodafone took over Hutchison-Essar in India in 2007 Tata Motors acquired Jaguar and Land Rover for $2.3 billion

Foreign Direct Investment

Submitted by

Rajinder (roll no.17 infra.) Shalinder ( Roll no.17 Tel n it)

Features of FDI
Foreign direct investment (FDI): a firm invests directly in foreign facilities Foreign direct investment (FDI) in its classic form is defined as a company from one country making a physical investment into building a factory in another country. A firm that engages in FDI becomes a multinational enterprise (MNE) Factors which influence FDI are related to factors that stimulate trade Involves ownership of entity abroad for production,

Marketing/service, R&D and access of raw materials or other resource Parent has direct managerial control depending on its extent of ownership and other contractual terms of the FDI It may be through Strateic Alliances (non-equity), Franchising or Licensing

Classification of FDI
Inward
'inward investment'. Here, investment of foreign capital occurs in local resources. The factors propelling the growth of Inward FDI comprises tax breaks, relaxation of existent regulations, loans on low rates of interest and specific grants. capital, which is being invested in some foreign resource. Outward FDI may also find use in the import and export dealings with a foreign country.

Outward direct investment abroad. In this case it is the local

Vertical

when a multinational corporation owns some shares of a foreign enterprise, which supplies input for it or uses the output produced by the MNC. business operation in different nations.

Horizontal when a multinational company carries out a similar

Determinants of FDI

Size as well as the growth prospects of the economy population of a country plays an important role If country has a high per capita income or Status of the human resources If a particular country has plenty of natural resources it always finds investors willing to put their money in them. Inexpensive labor force Infrastructural factors like the status of telecommunications and railways

FDI Inflows.Robust Growth

25000

19531 20000

US $ m

15000

10000 7722 6130 5035 5000 4029 4322 6051

0 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

5000

FDI Inflows- Sector -wise

4500

4000

Electrical equipment including software moves to over all 2nd position in Nov 2006.
3500

Services sector shows spurt in growth and the top sector attracting FDI moving up from the third position.
3000

US $ m

2500

Spurt in FDI in Real Estate causes the construction sector to the third position in Nov 2006.

2000

1500

1000

500

0 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 Transportation Fuels (Power & Oil Refinery) 2006-07

Electrical Equipment (including Software) Chemicals (other than Fert.) Construction Activities

Telecommunications Services Sector

Host Country Effects of FDI

Benefits Resource -transfer Employment Balance-of-payment (BOP)
Import substitution Source of export increase

Costs Adverse effects on the BOP

Capital inflow followed by capital outflow + profits Production input importation

Threat to national sovereignty and autonomy

Loss of economic independence

Benefits to the government

Greater Per Capita Income

Greater Consumer Spending due to economic boom GDP Growth

Employ Benefits Greater ment to Govt. Exports Increasing Tax Paying Population Increased Tax Revenues Greater Sourcing From India

Reduced Tax Evasion

Government Policy and FDI

industrial license With progressive liberalization and deregulation of the economy, industrial license is required in very few cases. Industrial licenses are regulated under the Industries (Development and Regulation) Act 1951. Locational restrictions Environmental Clearances The Environment (Protection) Act 1986 require Statutory clearances, relating to Pollution Control and Environment &includes petrochemicals complexes, petroleum refineries, cement, thermal power plants, bulk drugs, fertilizers, dyes, papers etc. General permission of RBI under FEMA

Government Policy and FDI

Home country
Outward FDI encouragement
Risk reduction policies (financing, insurance, tax incentives)

Outward FDI restrictions

National security,BOP

Host country
Inward FDI encouragement
Investment incentives Job creation incentives

Inward FDI restrictions

Ownership extent restrictions (national security; local nationals can safeguard host countrys interests

Previous Data Manufacturing lly permitted 100% FDI permitted in all activities under automatic route except:
Cigar and cigarettes of tobacco - FIPB Defence products
FDI up to 26% - FIPB subject to licensing of Arms and Ammunitions

Mining: Coal FDI upto 100% as per Coal Mines (Nationalization) Act 1977
Distribution and Power Trading as per Electricity Act 2003

Diamond, Gold, Silver , Minerals upto 100% under automatic route as MMRD Act

Electricity : FDI upto 100% under automatic route in Generation, Transmission,

Roads & Highways- 100% FDI permitted under automatic route Airports: Greenfield Projects- 100% FDI permitted under automatic route
Existing Airports- 100% FDI, beyond 74% requires FIPB approval Air Transport- up to 49% FDI under automatic route Telecom: Basic and cellular, Unified Access Services, National/International Long Distance etc.- 74% ISP without gateway, Electronic mail and voice mail- 100%, beyond 49% requires FIPB approval

Shipping and Ports -100% FDI under automatic route Railways- Rolling stocks open for FDI, Railway transport reserved for Public sector. Industrial Parks- 100% FDI under automatic route Hospitals- 100% FDI under automatic route Hotels & Tourism (include restaurants, beach resorts, and other Tourism related industry
include travel agencies, tour operating agencies and tourist transport operating agencies)100% FDI under automatic route

World Trade Organisation(WTO)

Evolved from the General Agreement on Tariffs and Trade (GATT) in 1995. Functions as the only global organization dealing with the rules of trade among nations. Monitors and promotes world trade. WTO agreements provide the legal groun rules for commerce.

Objectives of WTO
The agreements has three main objectives To help trade flow as entirely easy. To achieve further liberalisation gradually through negotiations. To set up an impartial means of settling of disputes. Monitor national trade policies.

Principles of the trading system

Trade without discrimination Free trade: Gradually through Negotiation Making business environment stable Promoting Fair competition

Functions of WTO
Helping Developing and Transition Economies Export Promotion Bringing Transparency through disseminating information to public Encouraging Development and Economic Reform

Cont.
Non-Tariff Barriers like import licensing, Investment Measures, Rules of Origin, Preshipment Inspection, Rules for Valuation of Goods at customs Trade Policy Review Plurilaterals including Fair Trade in Civil Aircraft, Government Procurement< Dairy Product and Bovine Meat

DEVALUATION OF RUPEE

DEVALUATION
Devaluation is a reduction in the value of a currency with respect to other monetary units. In common modern usage, it specifically implies an official lowering of the value of a country's currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency.

Devaluation And Depreciation

Both are the basic term used in the foreign exchange market. Both the term means reduction in value of domestic currency in relation with foreign currency.

Devaluation And Depreciation

DEVALUATION is the deliberate attempt by the government or financial authority of country to reduce the exchange value of national currency in relation to foreign currency ,whereas DEPRECIATION takes place on its own by the market forces active in foreign exchange market.

DEVALUATION OF RUPEE
Indian Rupee has undergone 3 bouts of devaluation In September 1949 by 30.5% In June 1966 by 36.5% and In July 1991 by 20 to 23%

Causes of Devaluation of Rupee

Foreign exchange reserve crises . Adverse balance of payment. Liberalization and globalization. IMF (International monetary fund) condition. Low loan raising capacity. Inflow of foreign capital. Promotion of tourism.

Effect of Devaluation
Devaluation in India has both types of effect - Positive (favorable) -Negative (unfavorable)

Favorable
Increase in Exports. Fall in imports. Increase in foreign capital inflow. Increase in foreign aid. Boost to tourism. Full utilization of installed capital. Increase in foreign exchange reserves.

Unfavorable
Short term remedies. Increase in the burden of foreign debt. Adverse effect on domestic industries. May reduced expert earnings. High cost of living. Scarcity of goods and services. Fall in creditability in international market.

India has faced two major financial crises and two consequently devaluation of rupee. These crises were in 1966 and 1991

The 1966
Devaluation

The 1991
Devaluation