ppt

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• MNC’s aim is profit maximisation and not the

development needs of the poor countries• Suppression of domestic entrepreneurship• Unfavorable impact on BOP due to heave dividend,

royalty, interest etc.• Threat to sovereignty of nations• Transfer to capital intensive techniques• Retard growth of employment• Depletion of non-renewable resources• Possibility of tax evasion• political pressures

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 GlobalizationDriving Forces of Globalization• Desire to obtain financial Benefits• Reduced Cost of production• Enhance level of demand and Growth potential• Liberalization of economy• Fast reduction and convergence of transaction costs

associated with doing this business• Desire to have better access to international markets /

technology / infrastructure• To bring Economic Reforms as well as Social

Development• Industrial consolidation and restructuring

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

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

Corporate Domination• Key Issues:

– Damage to the environment?

– Exploitation of labour? – Monopoly power– Economic degradation– Non-renewable

resources– Damage to cultures

Shell and Nike’s activities have come under severe criticism in some quarters.Copyright: Homsel, stock.xchng

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

MNC’S BY DILUTING FERA (1973).• REMOVING EXPORT SUBSIDIES• DECANALISING OIL AND AGRICULTURE TRADE• COUNTERING ANTI DUMPING MEASURES• ALLOWING IN INDIAN MUTUAL FUNDS TO INVEST IN FORIGN

COMPANIES• GOVT. OF INDIA IS MAKING DUE EFFORTS TO GLOABLISE THE

INDIAN ECONOMY• MANY SPECIAL INCENTIVE SCHEMES ARE LAUNCHED IN INDIA.• INTL. EXPOSURE GIVES INDIAN COMPANIES ACQUIRE GLOBAL

EXPERTISE AND BE COST EFFECTIVENESS

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

parley’s thumps up, Limca brands• Brook Bond India ltd merged with Hindustan

Lever • Videocon acquired South Korea’s Daewoo for

700million dollars in 2006• DR Reddy acquired Betapharm

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 InvestmentForeign 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.

• Outward “direct investment abroad”. In this case it is the local capital, which is being invested in some foreign resource. Outward FDI may also find use in the import and export dealings with a foreign country.

• Vertical when a multinational corporation owns some shares of a foreign enterprise, which supplies input for it or uses the output produced by the MNC.

• Horizontal when a multinational company carries out a similar business operation in different nations.

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 GrowthFDI Inflows….Robust Growth

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Electrical Equipment (including Software) Telecommunications TransportationChemicals (other than Fert.) Services Sector Fuels (Power & Oil Refinery)Construction Activities

FDI Inflows- Sector -wise

Electrical equipment including software moves to over all 2nd position in Nov 2006.Services sector shows spurt in growth and the top sector attracting FDI – moving up from the third position.

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

Host Country Effects of FDIBenefits

–Resource -transfer–Employment–Balance-of-payment (BOP)

• Import substitution• Source of export increase

Costs–Adverse effects on the BOP

• Capital inflow followed by capital outflow + profits• Production input importation

–Threat to national sovereignty and autonomy• Loss of economic independence

Benefits to the government

Greater Per Capita Income

Greater ConsumerSpending due to

economic boom

Increasing Tax Paying Population

Greater Sourcing

From India

Reduced TaxEvasion

GDP Growth

Increased Tax Revenues

Greater Exports

Employment

Benefits to Govt.

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 country’s interests

Previous Datally permitted• Manufacturing

• 100% FDI permitted in all activities under automatic route except:– Cigar and cigarettes of tobacco - FIPB– Defence products

• FDI up to 26% - FIPB subject to licensing of Arms and Ammunitions• Mining: Coal – FDI upto 100% as per Coal Mines (Nationalization) Act 1977• Diamond, Gold, Silver , Minerals – upto 100% under automatic route as MMRD Act

• Electricity : FDI upto 100% under automatic route in Generation, Transmission, Distribution and Power Trading as per Electricity Act 2003• Roads & Highways- 100% FDI permitted under automatic route• Airports: Greenfield Projects- 100% FDI permitted under automatic route

– Existing Airports- 100% FDI, beyond 74% requires FIPB approval– Air Transport- up to 49% FDI under automatic route

• Telecom: Basic and cellular, Unified Access Services, National/International Long Distance etc.- 74%– ISP without gateway, Electronic mail and voice mail- 100%, beyond 49% requires FIPB approval

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

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, Pre-shipment Inspection, Rules for Valuation of Goods at customs

• Trade Policy Review• Plurilaterals including Fair Trade in Civil

Aircraft, Government Procurement< Dairy Product and Bovine Meat

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 RUPEEIndian Rupee has undergone 3 bouts of devaluation –

In September 1949 by 30.5%

In June 1966 by 36.5% and

In July 1991 by 20 to 23%

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 majorfinancial crises and twoconsequently devaluation of rupee. These crises

were in 1966 and 1991

The 1966 Devaluation

The 1991 Devaluation