EDC - INTERNATIONAL BUSINESS ENVIRONMENT

Class : II MIB
HINTS
UNIT I
Business environment refers to different forces or surroundings that affect business
operations. Such forces include customers, competitors, suppliers, distributors, industry trends,
substitutes, regulations, government activities, the economy, demographics, and social and
cultural factors. Others are innovations and technological developments. Broadly speaking,
the environment of business is composed of the micro environment and macro environment.
Features of business environment

Totality of external forces:

Specific and general forces
Dynamic nature
Uncertainty
Relatl2ivity

BUSINESS ECOLOGY
Physiological factors to cope up with the environment and the extent to which the
environment is conducive to the development of the individual, the survival and success of a
business firm depend on its innate strength resources at its command, including physical
resources, financial resources, human resources, the inter-linkages and synergy, skill and
organization- and its adaptability to the environment and the extent to which the environment is
favorable to the development of the organization. The survival and success of a firm, thus,
depend on two set of factors, via, the internal factors (the internal environment) and external
factors(the external environment).
BUSINESS-ENVIRONMENT INTERRELATIONSHIP
Any meaningful organization has certain mission, objectives and goals and a strategy to
achieve them. Business environment has a bearing on the shaping of all these integral and
interrelated elements.

TYPES OF ENVIRONMENT

On the basis of the extent of intimacy with the firm, the environmental factors may be
classified into different types-internal and external.
INTERNAL ENVIRONMENT

Value system

Mission and vision and objectives

Management structure and nature

Internal power relationship

Human resources

Company image and brand equity

Miscellaneous factors

EXTERNAL ENVIRONMENT
Micro Environment
The micro environment consists of the actors in the companys immediate environment that
affects the performance of the company. These include the suppliers, marketing intermediaries,
competitors, customers and the public.
Macro Environment
Macro environment is also known as General environment and remote environment.
Some of the macro environment factors are discussed below:

Economic Environment
Social Environment
Political Environment
Legal Environment
Technical Environment
Demographic Environment
Global Environment

Competitive Structure of industries

Overview of the Five Forces Model
Porter identified five factors that act together to determine the nature of competition within an
industry. These are the:

Threat of new entrants to a market

Bargaining power of suppliers

Bargaining power of customers (buyers)

Threat of substitute products

Degree of competitive rivalry

He identified that high or low industry profits (e.g. soft drinks v airlines)
Threat of new entrants to an industry

If new entrants move into an industry they will gain market share & rivalry will intensify

The position of existing firms is stronger if there are barriers to entering the market

If barriers to entry are low then the threat of new entrants will be high, and vice versa

Bargaining power of suppliers

If a firms suppliers have bargaining power they will:

Exercise that power

Sell their products at a higher price

Squeeze industry profits

Bargaining power of customers

Powerful customers are able to exert pressure to drive down prices, or increase the
required quality for the same price, and therefore reduce profits in an industry.

Threat of substitute products

A substitute product can be regarded as something that meets the same need
Substitute products are produced in a different industry but crucially satisfy the same
customer need. If there are many credible substitutes to a firms product, they will limit
the price that can be charged and will reduce industry profits.

Degree of competitive rivalry

If there is intense rivalry in an industry, it will encourage businesses to engage in

Price wars (competitive price reductions),

Investment in innovation & new products

Intensive promotion (sales promotion and higher spending on advertising)

All these activities are likely to increase costs and lower profits.

Strategic Groups
A strategic group is a concept used in strategic management that groups companies
within an industry that have similar business models or similar combinations of strategies. For
example, the restaurant industry can be divided into several strategic groups including fast-food
and fine-dining based on variables such as preparation time, pricing, and presentation.
Strategic Group Analysis
Strategic Group Analysis (SGA) aims to identify organizations with similar strategic
characteristics, following similar strategies or competing on similar bases.

Competitor Analysis
Competitor analysis in marketing and strategic management is an assessment of the
strengths and weaknesses of current and potential competitors. This analysis provides both an
offensive and defensive strategic context to identify opportunities and threats.
Competitor Array
One common and useful technique is constructing a competitor array. The steps include:

Define your industry - scope and nature of the industry

Determine who your competitors are

Determine who your customers are and what benefits they expect

Determine what the key success factors are in your industry

Rank the key success factors by giving each one a weighting - The sum of all the
weightings must add up to one.

Rate each competitor on each of the key success factors

Multiply each cell in the matrix by the factor weighting.

This can best be displayed on a two dimensional matrix - competitors along the top and key

success factors down the side.

Competitor Profiling
The strategic rationale of competitor profiling is powerfully simple. Superior knowledge
of rivals offers a legitimate source of competitive advantage. The raw material of competitive
advantage consists of offering superior customer value in the firms chosen market.
Media Scanning
Scanning competitor's ads can reveal much about what that competitor believes about
marketing and their target market. Changes in a competitor's advertising message can reveal new
product offerings, new production processes, a new branding strategy, a new positioning
strategy, a new segmentation strategy, line extensions and contractions, problems with previous
positions, insights from recent marketing or product research, a new strategic direction, a new
source of sustainable competitive advantage, or value migrations within the industry.
A competitor's media strategy reveals budget allocation, segmentation and targeting
strategy, and selectivity and focus. From a tactical perspective, it can also be used to help a
manager implement his own media plan. By knowing the competitor's media by, media selection,
frequency, reach, continuity, schedules, and flights, the manager can arrange his own media plan
so that they do not coincide.

New Competitors
In addition to analyzing current competitors, it is necessary to estimate future competitive
threats. The most common sources of new competitors are:

Companies competing in a related product/market

Companies using related technologies

Companies already targeting your prime market segment but with unrelated products

Companies from other geographical areas and with similar products

New start-up companies organized by former employees and/or managers of existing

companies

VALUE CHAIN

A value chain is a set of activities that an organization carries out to create value for its
customers. Porter proposed a general-purpose value chain that companies can use to examine all of their
activities, and see how they're connected.

Porter described a chain of activities common to all businesses, and he divided them into
primary and support activities, as shown below.

Primary Activities
Primary activities relate directly to the physical creation, sale, maintenance and support of a
product or service. They consist of the following:

Inbound logistics These are all the processes related to receiving, storing, and
distributing inputs internally. Your supplier relationships are a key factor in creating
value here.

Operations These are the transformation activities that change inputs into outputs
that are sold to customers. Here, your operational systems create value.

Outbound logistics These activities deliver your product or service to your

customer. These are things like collection, storage, and distribution systems, and they
may be internal or external to your organization.

Marketing and sales These are the processes you use to persuade clients to
purchase from you instead of your competitors. The benefits you offer, and how well you
communicate them, are sources of value here.

Service These are the activities related to maintaining the value of your product or
service to your customers, once it's been purchased.

Support Activities
These activities support the primary functions above. In our diagram, the dotted lines show that
each support, or secondary, activity can play a role in each primary activity. For example,
procurement supports operations with certain activities, but it also supports marketing and sales
with other activities.

Procurement (purchasing) This is what the organization does to get the resources it
needs to operate. This includes finding vendors and negotiating best prices.

Human resource management This is how well a company recruits, hires, trains,
motivates, rewards, and retains its workers. People are a significant source of value, so
businesses can create a clear advantage with good HR practices.

Technological development These activities relate to managing and processing

information, as well as protecting a company's knowledge base. Minimizing information
technology costs, staying current with technological advances, and maintaining technical
excellence are sources of value creation.

Infrastructure These are a company's support systems, and the functions that allow
it to maintain daily operations. Accounting, legal, administrative, and general
management are examples of necessary infrastructure that businesses can use to their
advantage.

Benefits of Structural Analysis

Structural Analysis can be used to study any kind of system, text, or material. It applies
equally to the Humanities and Social Sciences as well as to the "hard" Sciences, though with
different connotations. The methods of Structural Analysis might be different in each discipline.

ENVIRONMENTAL ANALYSIS
An environmental analysis in strategic management plays a crucial role in businesses by
pinpointing current and potential opportunities or threats outside the company in its external
environment.
The purpose of an environmental analysis is to help in strategy development by keeping
decision-makers within an organization informed on the external environment. This may include
changing of political parties, increasing regulations to reduce pollution, technological

developments, and shifting demographics. If a new technology is developed and is being used in
a different industry, a strategic manager would see how this technology could also be used to
improve processes within his business. An analysis allows businesses to gain an overview of
their environment to find opportunities or threats.
The Five Stages of the Strategic Management Process

Goal-Setting

Analysis

Strategy Formulation

Strategy Implementation

Evaluation and Control

STRATEGIC MANAGEMENT PROCESS

Determination of
Mission

Evaluation and
Control

Establishment of
Objectives

Implementation

SWOT ANALYSIS

Choice of
Strategy

Consideration of
Strategic Alternatives

UNIT II
GLOBALISATION
The IMF defines globalization 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.

GLOBALISATION OF WORLD ECONOMY

The world economy has been emerging as global or transnational economy. A global or
transnational economy is one which transcends the national borders unhindered by artificial
restrictions like Government restrictions on trade and factor movements.
According to Drucker, the transnational economy is characterized by, inter alia the
following features:
The transnational economy is shaped mainly by money flows rather than by trade in
goods and services. These money flows have their own dynamics. The monetary and fiscal
policies of sovereign governments increasingly react to events in the international money and
capital markets rather than actively shape them.
In the transnational economy management has emerged as the decisive factor of
production and the traditional factors of production, land and labor, have increasingly become
secondary. Money and capital markets too have been increasingly becoming transnational and
universally obtainable.
In the transnational economy the goal is market maximization and not profit
maximization.
Trade, which increasingly follows investment, is becoming a function of investment.
The decision making power is shifting from the national state to the region. (e.g.,
European Union, NAFTA, etc.)
There is a genuine and almost autonomous world economy of money, credit and
investment flows. It is organized by information which no longer knows national boundaries.
Finally, there is a growing pervasiveness of the transnational corporations which see the
entire world as a single market for production and marketing of goods and services.
Drivers of Globalisation

In general, globalisation represents the increasing integration of the world economy,

based on five interrelated drivers of change:

International trade (lower trade barriers and more competition)

Financial flows (foreign direct investment, technology transfers/licensing, portfolio

investment, and debt)

Communications (traditional media and the Internet)

Technological advances in transportation, electronics, bioengineering and related fields

Population mobility, especially of labor

GLOBALISATION OF BUSINESS
Globalisation is an attitude of mind it is a mind-set which views the entire world as a
single market so that the corporate strategy is based on the dynamics of the global business
environment.
Globalisation encompasses the following:

Doing or planning to expand business globally.

Giving up the distinction between the domestic market and foreign market and
developing a global outlook of the business.

Locating the production and other physical facilities on a consideration of the global
business dynamics, irrespective of national considerations.

Basic product development and production planning on the global market considerations.

Global sourcing of factors of production, i.e., raw materials, components,

machinery/technology, finance etc., are obtained from the best source anywhere in the
world.

Global orientation of the organizational structure and management culture.

FEATURES OF CURRENT GLOBALISATION

The main features of Globalization:
1. Globalization involves expansion of business operations throughout the world.
2. Integration of individual countries of the world into one global market thereby erasing
differences between domestic markets and foreign markets.
3. It creates interdependency between nations.
4. Buying and selling of goods and services takes place from to/any country in the world.
5. Manufacturing and marketing facilities are set up anywhere in the world n the basis of their
feasibility and viability rather than on national considerations.
6. Products are planned and developed for the world market.
7. Factors of production like raw materials, labor, finance, technology and managerial skills are
sourced from the entire globe.
8. Corporate strategies, organizational structures, managerial practices have a global orientation.
The entire globe is viewed as a single market.

9. Globalization does not take place overnight. It proceeds gradually through several stages of
internationalization.
STAGES OF GLOBALISATION
There are 6 stages of globalization. From an international firm it may then develop into a
multinational firm and finally into a global firm.

The domestic company which moves into new markets by linking up with local dealers
and distributors.

Then the company takes over these activities on its own.

Then company begins to carry out its own manufacturing, marketing and sales in the
foreign markets.

R&D and engineering have been implemented to involve into the markets deeper.

In the next stage it moves toward a genuinely global mode of operation.

After becoming global firm as a sixth stage, therere serving based on the customers
interest not about governments. They invest, they train, they pay taxes, they build up
infrastructure and they provide good value to the customers in all the countries.

ESSENTIAL CONDITIONS FOR GLOBALISATION

Business Freedom

Facilities

Government Support

Resources

Competitiveness

Orientation

FOREIGN MARKET ENTRY STRATEGIES

Global marketers have to make a multitude of decisions regarding the entry mode which
may include:

(1) the target product/market

(2) the goals of the target markets

(3) the mode of entry

(4) The time of entry

(5) A marketing-mix plan

(6) A control system to check the performance

in the entered markets

1. Selecting the Target Market

2. A crucial step in developing a global expansion strategy is the selection of potential target
markets (see Exhibit 9-1 for the entry decision process).
3. A four-step procedure for the initial screening process:
1. Select indicators and collect data
2. Determine importance of country indicators
3. Rate the countries in the pool on each
indicator
4. Compute overall score for each country
2. Choosing the Mode of Entry

Decision Criteria for Mode of Entry:

Market Size and Growth

Risk

Government Regulations

Competitive Environment/Cultural Distance

Local Infrastructure

Important foreign market entry strategies are the following.

1. Exporting
2. Licensing / franchising
3. Contract Manufacturing
4. Management Contract
5. Assembly operations
6. Fully owned manufacturing facilities
7. Joint Venture
8. Counter trade
9. Mergers and Acquisitions
10. Strategic alliance
11. Third country location
Foreign market entry strategies are numerous and imply a varying degree of risk and of
commitment from the international firm. In general, the implementation of an international

development strategy is a process achieved in several steps. Indirect exporting is often used as
the starting point; if the results are satisfactory, more committing agreements are made by
associating local firms.
1. Exporting
Exporting is the process of selling of goods and services produced in one country to other
countries. There are two types of exporting: direct and indirect.
Direct Exports
Types
1. Sales representatives
2. Importing distributors
Indirect exports
Types
1. Export trading companies (ETCs)
2. Export management companies (EMCs)
3. Export merchants
4. Confirming houses
5. Nonconforming purchasing agents
II. LICENSING
An international licensing agreement allows foreign firms, either exclusively or nonexclusively to manufacture a proprietors product for a fixed term in a specific market.
Summarizing, in this foreign market entry mode, a licensor in the home country makes
limited rights or resources available to the licensee in the host country. The rights or resources
may include patents, trademarks, managerial skills, technology, and others that can make it
possible for the licensee to manufacture and sell in the host country a similar product to the one
the licensor has already been producing and selling in the home country without requiring the
licensor to open a new operation overseas. The licensor earnings usually take forms of one time
payments, technical fees and royalty payments usually calculated as a percentage of sales.
FRANCHISING
The franchising system can be defined as: A system in which semi-independent business
owners (franchisees) pay fees and royalties to a parent company (franchiser) in return for the

right to become identified with its trademark, to sell its products or services, and often to use its
business format and system.
III. TURNKEY PROJECTS
A turnkey project refers to a project when clients pay contractors to design and construct
new facilities and train personnel. A turnkey project is a way for a foreign company to export its
process and technology to other countries by building a plant in that country. Industrial
companies that specialize in complex production technologies normally use turnkey projects as
an entry strategy.
IV. WHOLLY OWNED SUBSIDIARIES (WOS)
A wholly

owned

subsidiary includes

two

types

of

strategies: Greenfield

investment and Acquisitions. Greenfield investment and acquisition include both advantages and
disadvantages. To decide which entry modes to use is depending on situations.
Greenfield investment is the establishment of a new wholly owned subsidiary. It is often
complex and potentially costly, but it is able to provide full control to the firm and has the most
potential to provide above average return.
Acquisition strategy offers the fastest, and the largest, initial international expansion of
any of the alternative. Many multinational corporations apply acquisitions to achieve their
greater market power require buying a competitor, a supplier, a distributor, or a business in
highly related industry to allow exercise of a core competency and capture competitive
advantage in the market.
V. JOINT VENTURE
There are five common objectives in a joint venture: market entry, risk/reward sharing,
technology sharing and joint product development, and conforming to government regulations.
Other benefits include political connections and distribution channel access that may depend on
relationships.
VI. STRATEGIC ALLIANCE
A strategic alliance is a type of cooperative agreements between different firms, such as
shared research, formal joint ventures, or minority equity participation. The modern form of
strategic alliances is becoming increasingly popular and has three distinguishing characteristics:
1. They are frequently between firms in industrialized nations.

2. The focus is often on creating new products and/or technologies rather than distributing
existing ones.
3. They are often only created for short term durations.
Motivation for contract manufacturing
Contract manufacturing is done for three primary reasons:
1. Cost savings
2. More time to focus on core competencies
3. Market entry
VII. CONTRACT MANUFACTURING
Contract manufacturing is a process that establishes a working agreement between two
companies. As part of the agreement, one company custom produces parts or other materials on
behalf of their client.
The basic working model used by contract manufacturers translates well into many
different industries. Since the process is essentially outsourcing production to a partner that
privately brands the end product, there are a number of different business ventures that can make
use of this arrangement. There are many pharmaceutical contract manufacturing currently
functioning today, as well as similar arrangements in food manufacturing, the creation of
computer components and other forms of electronics. Even industries like personal care and
hygiene products, automotive parts, and medical supplies are often created under the terms of
such an agreement.
VIII. MANAGEMENT CONTRACT
A management contract is an arrangement under which operational control of
an enterprise is vested by contract in a separate enterprise which performs the necessary
managerial functions in return for a fee. Management contracts involve not just selling a method
of doing things (as with franchising or licensing) but involve actually doing them. A management
contract can involve a wide range of functions, such as technical operation of a production
facility, management of personnel, accounting, marketing services and training.
IX. ASSEMBLY OPERATIONS
A market entry strategy in which an organization sends parts for products to a foreign
plant for final assembly. The products are then sold in the foreign market or exported to other
countries. Assembly plants may allow a company to take advantage of low cost labor in the most

labor intensive portion of production. There may also be lower duties and other taxes because
unfinished products are imported instead of finished products. Assembly plants also allow a
foreign manufacturer to meet host country requests for more domestic production while at the
same time allowing the manufacturer to continue control over production by using its own sub
products as supplies and materials for the foreign assembly plant. A potential problem, especially
with plants located to meet foreign government needs for domestic production, is that the foreign
government may institute requirements on the amount of foreign parts which may be used in the
host country. These requirements are referred to as domestic content requirements (DCRs).
X. COUNTERTRADE
Countertrade means exchanging goods or services which are paid for, in whole or part,
with other goods or services, rather than with money. A monetary valuation can however be used
in counter trade for accounting purposes. In dealings between sovereign states, the term bilateral
trade is used. OR "Any transaction involving exchange of goods or service for something of
equal value."
Need for counter trade

Money

Protect local industries

Balance of trade

Competitive advantage

Six main types of countertrade

1. Offset

Direct offset

indirect offset

2. Counter purchase
3. Tolling
4. Barter
5. Buyback
6. Switch Trading
XI. MERGER & ACQUISITION

They have been a very important market entry strategy as well as expansion strategy for
maximization of a company's growth by enhancing its production and marketing operations.
They are being used in a wide array of fields such as information technology,
telecommunications, and business process outsourcing as well as in traditional businesses in
order to gain strength, expand the customer base, cut competition or enter into a new market or
product segment.
Varieties of Mergers

Horizontal merger

Vertical merger

Market-extension merger

Product-extension merger

Conglomeration

Acquisitions
Like mergers, acquisitions are actions through which companies seek economies of scale,
efficiencies and enhanced market visibility. In an acquisition two or more companies may remain
independent, separate legal entities, but there may be a change in control of the companies.
When an acquisition is 'forced' or 'unwilling', it is called a takeover. In an unwilling acquisition,
the management of 'target' company would oppose a move of being taken over. But, when
managements of acquiring and target companies mutually and willingly agree for the takeover, it
is called acquisition or friendly takeover.
XII. THIRD COUNTRY LOCATION
When there is no commercial transactions between two countries due to various reasons,
firm which wants to enter into the market of another nation, will have to operate from a third
country base. For instance, Taiwans entry into china through bases in Hong Kong.
Third country location is sometimes used as an entry strategy when there is no
commercial transactions between two nations because of political reasons or when direct
transactions between two nations are difficult due to political reasons International Marketing
PROS AND CONS OF GLOBALISATION

Advantages of Globalization
1. Wider Markets
Globalization offers larger markets to domestic producers. Domestic firms can export
their surplus output. They can understand the nature of foreign markets through direct and
indirect marketing channels. Domestic firms can realize higher prices from foreign markets.
Global operations help to improve public image which is helpful in attracting better talent.
2. Rapid Industrialization
Globalization helps in the free flow of capital and technology between countries. Global
firms can acquire finance at lower cost of capital. Free flows of capital and technology from
advanced countries help the developing countries to boost up their industrialization.
Industrialization of developing countries leads to balanced development of all the countries.
3. Greater Specialization
Globalization enables the domestic firms to specialize in areas where they enjoy
competitive or comparative advantage. By focusing on the functions or products of their core
competence domestic firms can compete successfully in the international markets. Specialization
also helps to save resources and promote exports of the country.
4. Competitive Gains
Globalization increase competition for domestic firms through imports and multinational
corporations. Domestic firms learn about new products, new technologies and new management
systems. They are under pressure to increase efficiency, introduce innovations and reduce costs.
The domestic entrepreneurs who fail to learn from their foreign rivals suffer in the long run.
5. Higher Production
Globalization leads to spread up of manufacturing facilities in different countries. Firms
with worldwide contacts can outsource funds, technology, distribution and other functions from
anywhere in the world. They can negotiate subcontracting to remain focused on areas of their
core competence. International outsourcing and subcontracting help to improve operational
efficiency and o reduce costs.
6. Price Stabilization
Globalization can reduce price differences between countries. Free trade and international
competition help to equalize price levels in international markets. Countries with a high degree

of globalization can attract greater foreign investment which supplements domestic funds, brings
in foreign and improves balance of payments.
7. Increase in Employment and Income
Globalization creates job opportunities in developing countries and the incomes of people
increases due to increased industrialization.
8. Higher Standards of Living
Lower prices, better quality and higher incomes help to enhance consumption and living
standards of people particularly in developing countries. Moreover, increased economic
development enables the governments of these countries to provide better welfare facilities like
education, health, sanitation, etc. There is all round increase in welfare and prosperity of public.
9. International Economic Cooperation
Globalization improves economic cooperation between nations in the form of trade
agreements, international treaties, standardization of commercial procedures, avoidance of
double taxation, intellectual property protection and so on. International cooperation also helps
countries to harmonize their macroeconomic policies for their mutual benefit.
10. World Peace
Globalization promotes cultural exchange and mutual understanding among different
nations. International cooperation and brotherhood contribute to peace and prosperity in the
world.
Disadvantages of Globalization
1. Interdependence
Globalization increases interdependence between nations of the world. As a result,
economic sovereignty and control over the domestic economy are reduced. There is a danger of
foreign economic dominance over the developing economies.
2. Threat to Domestic Industry
Globalization leads to the establishment of manufacturing and marketing facilities by
multinationals n developing countries. The domestic firms in these countries fail to face the
onslaught of multinationals. As a result they sell out to foreign firms. Cheap imports from china
and other countries also kill domestic business particularly in the small sector. Availability of
high quality foreign products reduces the demand for domestic products and domestic production
is eroded.

3. Unemployment
Globalization leads to restructuring of industry. Technology upgradation and focus on
areas of comparative advantage create unemployment and underemployment among low skilled
workers. As a result income inequality, poverty and social unrest may increase.
4. Drain of Basic Resources
Globalization results in exploitation of natural resources and basic raw materials in
developing countries. These countries are often the sellers of agricultural and other inputs and
buyers of finished products. Talented human resources are also transferred to developed nations
which offer better remuneration and career prospects. Economic underdevelopment of poor
countries is the result of exploitative character of international trade.
5. Technological Dependence
Globalization offers readymade foreign technology which scuttles domestic research and
development. Foreign technologies are available at a high cost and often are not adaptable to
local conditions. Developing countries become technologically dependent on developed
countries.
6. Alien Culture
Globalization promotes consumption patterns and lifestyles which are inconsistent with
the local culture and values. It may lead to shift in the industrialization pattern contrary to the
national priorities.
Now after looking at Globalization from both supportive and contradicting point of view; we can
now take a stand on whether the claims against globalization are sustainable or not.
Based on the above points, we can firmly say that globalization is not responsible fully for the
global economic situations alone. It might have played a part in the crisis, but it did not start the
fire.
GLOBALISATION OF INDIAN BUSINESS
Indias economic integration with the rest of the world was very limited because of the
restrictive economic policies followed until 1991. Indian firms confined themselves, by and
large, to the home market. Foreign investment by Indian firms was very insignificant.

With the new economic policy ushered in 1991, there has, however, been a change.
Globalization has in fact become a buzz-word with Indian firms now, and many are expanding
their overseas business by different strategies.
Obstacles to Globalization

Government policy and procedures

High Cost

Poor Infrastructure

Obsolescence

Resistance to Change

Poor Quality Image

Supply Problems

Small Size

Lack of Experience

Limited R&D and Marketing Research

Growing Competition

Trade Barriers

Factors Favoring Globalisation

Human Resources

Wide Base

Growing Entrepreneurship

Growing Domestic Market

Niche Markets

Expanding Markets

Transnationalisation of World Economy

NRIs

Economic Liberalization

Competition

UNIT III
BUSINESS AND SOCIETY
Changing Concept and Objectives of Business
Traditionally, the term business commonly referred to commercial activities aimed at
making a profit or to organizations formed to make a profit. In short, the definition of a business
as a commercial activity to make a profit or an organization formed to make a profit is a narrow
one.
Davis and Blomstorm point out that, in taking an ecological view of business in a systems
relationship with society, three ideas are significant in addition to the systems idea. The three
ideas are

values,

viability and

Public visibility.

PROFESSIONALISATION
The growth of management education and training has contributed to the growing
professionalization which, in turn, has contributed to the growing social orientations of business.
Professionalization

imparts

a certain social responsibility and dignity to management. A

professional is one who possesses systematic knowledge and skill to perform certain responsible
functions with authority and who is bound but certain ethics in the use of his knowledge and skill
.According to Lewis Allen, a professional manager is one who specializes in the work of
planning, organizing, leading and controlling the efforts of others and does so through a
systematic use of classified knowledge , a common vocabulary and principles, and

who

subscribes to the standards of practice and code of ethics established by a recognized body.
A professional has enormous responsibilities. He shall not use his knowledge, skill and
authority unscrupulously, He shall not knowingly do harm to his customers. He is socially bound
by the ethics of his profession.
Professionalization makes business more efficient, dynamic and socially responsible. The
growth of management education in the country and the facilities abroad to obtain management
education has contributed to professionalization in the business field.
BUSINESS ETHICS

The term business ethics refers to the system of moral principles and rules of conduct
applied to business.
That there should be business ethics means that the business should be conducted according
to certain self-recognized moral standards. Business, being a social organ, shall not conduct itself
in a way detrimental to the interests of society and the business sector itself.
The code, premium non noncore, encompasses most business ethics. We may, however, list
the important ethical principles that a business should follow:
1. Do not deceive or cheat customers by selling sub-standard or defective products, by
2.
3.
4.
5.
6.
7.
8.

under-measurement or by any other means.

Do not resort to hoarding, black-marketing or profiteering.
Do not destroy or distort competition.
Ensure sincerity and accuracy in advertising, labelling and packaging.
Do not tarnish the image of competitors by unfair practices.
Make accurate business records available to all authorised persons.
Pay taxes and discharge other obligations promptly.
Do not form cartel agreements, even informal, to control production, price, etc., to the

common detriment.
9. Refrain from secret kickbacks or payoffs to customers, suppliers, administrators,
politicians, etc.
10. Ensure payment of fair wages to and fair treatment of employees.
Role of Trade Associations
Trade associations which are voluntary organizations of businessmen formed to promote
their common interests can promote business ethics in three important ways:

Education and persuasion

Code of Ethics

Moral Sanctions

BUSINESS AND CULTURE

Meaning of Culture
There are varying definitions of culture:Culture, in its broadest definition, refers to that part
of the total repertoire of human action (and its product) which is socially, as opposed to
genetically, transmitted. A very popular definition is that of E.B Taylor: Culture of civilization
is that complex whole which includes knowledge, belief, art, morals, law, custom, and other
capabilities and habits acquired by man as a member of society.

On the basis of the various definitions of culture, Francis Merill formulates the concept of
culture as follows. Culture:

is the characteristically human product of social interaction;

provides socially acceptable patterns for meeting biological and social needs;

is cumulative, for it is handed down from generation to generation in a given society;

is meaningful to human beings because of its symbolic quality;

is learned by each person in the course of his development in a particular society;

is, therefore, a basic determinant of personality; and

Depends for its existence upon the continued functioning of society but is independent of
any individual or group.

Culture consists of both material culture and non-material culture. Material culture involves
man-made things (e.g., automobile, television, telephone, etc.) and man-made alternations in the
environment. Non-material culture includes such factors as language, ideals, beliefs, values,
music, etc.
Elements of Culture
Culture includes at least three elements, namely,

knowledge and beliefs,

ideals and

Preferences.

Organisation of Culture
The term organisation of culture refers to the social structure and the integration of traits,
complexes and patterns that make up the cultural system.
Those cultures are organized or integrated does not mean that every single item of each
culture is neatly and precisely integrated with everything else. It means rather that it is normal
for the parts to be somewhat organized, and that culture traits receive their significance and
meaning out of their relation to the rest of the culture.
The organisation of a culture is determined to a large extent by major social institutions.
According to MacIver and Page, institutions are established forms or conditions of procedure
characteristic of group activity. The group which performs these standardized actions has been
termed by them an association. According to Biesanz and Biesanz, institutions are clusters of

norms organized and established for the pursuit of some need or activity of a social group,
supported by the groups knowledge, beliefs and valued, as well as by the meaningful aspects of
material culture.
The important common institutions of modern cultures are the economic system, the
political administrative system, the educational system; religion, family, expressionistic,
aesthetic and recreational institutions, etc. Such institutions have been established to meet
societys common need of a biological, sociological, psychological, economic, and political
nature - the type and nature of institutions reflects the common goals, aspirations and the ways
of achieving them, definition and regulation of roles, positions, inter- relationships, etc., of the
individuals and sub-groups and groups and the overall organisation of the culture.
Cultural Adaptation
The term cultural adaptation refers to the manner in which a social system or an individual
fits into the physical or social environment. The social system may be a small group ,such as the
family or a larger collectivity ,such as an organisation, or even a total society, like a tribal
society.
Adaptation is essential for survival. The type of clothing, food and dwelling, suitable for the
climatic and weather conditions, are forms of adapted to the energy crisis caused by the oil price
hikes by modifying our energy policy and intensifying oil exploration, developing, alternative
source of energy and restricting oil consumption. Humanity adapts to contagious diseases by
immunization.
It is often necessary to know the progress and nature of the cultural environment for a
successful formulation of business strategies. For example, while introducing new ideas,
techniques, product; while segmenting the market; while formulating the product and promotion
mix strategies; one should consider the extent to which different categories of consumers adapt
to the new things or environment and the factors favoring and disfavoring adaptations.
Cultural Shock
Environmental changes sometimes produce culture shock- a feeling of confusion, insecurity,
and anxiety caused by the strangeness of the new environment. For example, if a youngster, born
and brought up in a large city; is posted to a bank office I a remote village, he may experience a
cultural shock. Similarly, a villager may experience a cultural shock when he takes up a job in a

large modern company in a far away metropolitan city or foreign nation. They have, however, to
adapt to the new culture in due course if they want to survive.
Executives and other employees on foreign assignments may experience culture shock in
alien environment. Sometimes the organisation itself may suffer shock. Proper home work to
understand the culture can help avoid the shock. This also highlights the importance of the
selection of people for foreign markets.
Cultural Transmission
A very important character of culture is its transmissive quality. The elements of culture are
transmitted among the members of the culture, from one generation to the next, and to the new
members admitted into culture. Some of the aspects of a culture may be transmitted to other
cultures also.
The transmissive quality of culture makes it cumulative. Every generation inherits a stock of
cultural elements, many of which have been accumulated over a long period of time. As time
goes on, cultures accumulate more techniques, ideas, products and skills. It is also quite obvious
that certain old elements are dropped as new ideas and traits are acquired.
Cultural transmission takes place by means of symbolic communication. A symbol is any
sign, signal or word that conveys a meaning. The great importance of language in cultural
transmission is quite clear. Literature, film, TV and some other electronic gadgets, social
institutions, advertising and marketing techniques, and so on, play very important roles in
cultural transmission.
Transmission also facilitates cultural diffusion, i.e., the spread of cultural elements from one
place to another. Cultural transmission and diffusion are easy in a culture with high educational
levels and a well-organized communication system. An effective communication system and
high educational levels facilitate socio-economic change through better cultural transmission and
diffusion, for new ideas and innovations are easily and quickly transmitted, diffused, and
absorbed in such a culture. In the context of the generally low literacy rates in India, the
government has realized the importance of the media, such as film TV and radio in transmitting
information such as better agricultural practices and techniques, market information, the concept
and importance of family planning, and so on.
The nature and process of cultural transmission and diffusion in a society is important to
business decision-making. For example, to formulate a promotional policy for a product, a

service or an idea, it is important to identify the relevant elements of transmission, to evaluate

the relative effectiveness of alternative communication media, to identify the reference groups
and the extent of their influence, to identify the channel of influence on the reference groups ,
and so on.
Cultural conformity
Individuals in a cultural tend either to conform to the cultural norms or to deviate from
them. If the culture endures as it is, most people would conform to the norms. As inkless
observes, the social order depends on the regular and adequate fulfillment of the role
obligations incurred by the incumbents of the major status-positions in a social system. It follows
that the most important process in society is that which endures that people do indeed meet their
role obligation.
A student who abides by the rules of his school discipline, does his home-works promptly
and studies properly is conforming to his role obligation. And an employee who stakes work for
a reasonable cause in response to a strike call by his union is also conforming to his role as
member of the union. when an individual has incorporated within himself the knowledge and
appropriate skills necessary to the fulfillment of a role, and when he accepts the value or
appropriateness of the action, sociologists speak of his having internalized the role and its
psychological underpinnings. Such internalization helps achieve cultural conformity.
If a society is ,by and large, characterized by blind conformity, it would be very difficult to
market new revolutionary ideas ( including products and techniques) in such a society. Special
efforts may be required in such a society to change the attitudes of the people in favor of
unconventional ideals. It is also important to understand the extent and nature of the snowballing effects of initial deviation in a society.
Cultural Lag
The culture lag thesis put forward by William F Orgburn says that the various parts of
modern culture do not change at the same rate and that since there is a correlation and
interdependence of parts, a rapid change in one part of our culture requires readjustments
through other changes in various correlated parts of that culture. The cultural lag thus places
constraints on the scope of social inertia and religious sentiments come in the way of population
control, though a variety of techniques are available for birth control.

International business arena is replete with cases of cultural lag. It indicates that different
markets may be in different levels of readiness to accept a new product or ideal. To successfully
market a new idea (including product, service, technique), it is necessary to identify the factors
causing the lag and to overcome them by taking appropriate measures. It would be a blunder to
introduce a product to a market which is not ready to adopt it.
CULTURAL TRAITS
Cultures have some important traits. An understanding of these cultural dimensions will be
helpful in business.
Low-Context and High-Context Cultures
A high context culture is one that places great value on the intangible aspects of a
negotiation or business deal. Individuals from such cultures look beyond the facts and figures
and take into consideration such factors as personal relationships, atmosphere and attitudes
toward respect, religion and trust.
A low context culture, on the other hand, assumes a high degree of shared knowledge on the
behalf of a transaction partner and thus deals only in such tangible aspects of the deal as facts,
figures and performance. The atmosphere and the personal relationship with the business
partners mean little. In a low-context culture, business can be conducted without ever meeting
face-to-face.
Masculine and Feminine Cultures
A masculine culture contrasts with feminine culture which appreciates inter-personal
relationships, put quality of life before material acquisition, and applaud concern for individual
and society is made up of leaders and followers.
Monochronic and Polychronic Societies
Monochronic is a term that describes how a culture views time. In a monochromic society
time is used for ordering ones life, for setting priorities and for doing tasks in a sequential orderone thing at a time. Most of the societies of the developed world are monochromic. It contrasts
with a polychromic society which uses time to accomplish diverse goals simultaneously and to
interact with as many individuals as possible-even at the same time. Polychromes are a
characteristic of emerging societies.
Universal vs. Particularism

This is one of the five cultural dimensions identified by Fons Trompenaars, a Dutch
researcher. The other four follows this.
Universalism is the belief that an ideas or practice can be applied as it is universally in
contrast to particularism which holds that the environment dictates how ideas should be applied.
In cultures with high universalism, the focus is more on rules than on relationships, business
contrasts are adhered to very closely, and people believe that a deal is a deal. In cultures with
high particularism, the focus is on relationships and trust than on formal rules. In a particularist
culture, legal contracts often are modified, and as people get to know each better, they often
change the ways in which deals are executed.
Individualism vs. Communitarianism
In individualism people regard themselves as individuals, while in communitarianism they
regard themselves as part of a group. Countries like the United States, Czechoslovakia, and the
former Soviet Union have high individualism.
Neutral vs. Emotional
A neutral culture is one in which emotions are held in check whereas an emotional culture is
one in which emotions are openly and naturally expressed.
Japan and the United Kingdom are regarded high neutral cultures. People in these countries
try not to show their feelings; they act stoically and maintain their composure. People in
emotional cultures often smile a great deal, talk loudly when they are excited, and greet each
other with a great deal of enthusiasm. Mexico, the Netherlands, and Switzerland are examples of
high emotional cultures.
Specific vs. Diffuse
A specific culture is one in which individuals have a large public space they readily let
others enter and share and a small private space they guard closely and share with only close
friends and associates. A diffuse culture is one in which both public and private space is similar
in size and individuals guards their public space carefully, because entry into public space affords
entry into private space as well. Austria, the United Kingdom, the United States, and Switzerland
all are specific cultures, while Venezuela, China, and Spain are diffuse cultures.
Achievement vs. Ascription
An achievement culture is one in which people are accorded status based on how well they
perform their functions. An ascription culture is one in which status is attributed based on who or

what a person is. Achievement cultures give high status to high achievers where as ascription
cultures accord status based on age, gender, or social connections.
RELIGION
Different peoples have their own religious convictions, beliefs, sentiments, customs, rituals,
festivals etc. The cost of ignoring certain religious aspects could be very high, sometimes even
fatal, in business.
When an American fast food chain was planning to enter India, one political party stated
that it would oppose the marketing of beef product in the country by the multinational. In a
country where cow is regarded sacred, although there were some protests against slaughter of
cow, beef is consumed by a sizable population and the number of the beef consumers in India is
larger than the total population of many countries.
Pork is banned in Muslim countries. During the holy Ramzan period, restaurants and the
like owned by Muslims remain closed during day time. Muslims would consume the meat of
only those animals / birds slaughtered following the prescribed religious rituals. Many Christian
do not consume non-vegetarian during the lent (50 days preceding Easter) during the 24 days
preceding Christmas and on all Fridays. During these periods, Christians do not conduct
marriages and other celebrations like baptism. Hence, the weeks following Christmas and Easter
are seasons of such celebrations. However, it is interesting to note that although according to the
Bible, Christians are expected to fast on Sundays (the Sabbath day) and devote the whole day to
God, and not to indulge in any worldly activities, most of them rather eat merrily and celebrate
this holyday.
Many business decisions in India and in several other countries are based on astrological
advices. These include the decisions regarding the timing of the launch, location of the
enterprise, name of the firm, brand name, business portfolio and so on. The only forecasting
technique some people depend upon is astrological.
The customs of marriage, naming ceremony of the child, festivals etc, wary significantly
between religions. These have implications for many types of business like textiles, jewellery,
catering, and consumer durables.
The influence of religion on politics is on the increase in many parts of the world. And
politics often plays an important role in shaping economic policies and business regulation and
promotion. In a number of countries, religion and government are inseparably united.

ETHNODOMINATION
In many countries one or other industry or trade is dominated by certain ethnic groups. This
is particularly true of trade. Ethonodomination in distribution is defined as a situation where an
ethnic group occupies a majority position in a channel of distribution with respect to the
ownership and control of physical and financial resources, or through the manipulation of social
environment. The control is manipulated through the familiar coercive dealing arrangements and
discrimination among customers or suppliers.
There are number of cases of ethno domination in India. For example, the automobile spare
parts business is dominated by the Sikhs. There is domination of some communities in the
wholesale trade in several products. In several parts of the country, there is dominance of some
or other community in banking and money lending like the Chettiars in Tamil Nadu and Vysyas
in Karnataka and other places.
Many ethnic businesses can go international. For example, Punjabi restaurants, Udupi
restaurants, Chinese restaurants etc. are popular in several foreign countries. Several exporters
target ethnic population abroad as in the case of Indian curry powders, pickles etc.
LANGUAGE
Difference in the language is a very important problem area in business. Switzerland, for
examples is country with three fairly distinct cultures, divided between the French, Italian and
German-speaking Swiss and the regional differences are profound. In South America there are
more than 40 languages. The African continent has the largest number of languages spoken.
Zaire alone has more than 200 languages. Kenya has about 40 ethnic groups, each with its own
language and culture. Some 750 languages, each distinct and mutually unintelligible are spoken
in Papua New Guinea.
India has numerous languages and their dialects, besides the 18 officially recognized
languages. Of the 1652 mother tongues listed by the Census of India, 33 are spoken by people
numbering. A lakh or more.
CULTURE AND ORGANISATIONAL BEHAVIOR
The cultural impact on the international management is reflected by several basic beliefs
and behaviors. Given below are some specific examples where the culture of a society can
directly affect management approaches and organizational behavior, highlighted by Hodgess and
Luthans.

Centralized vs. Decentralized Decision Making

Safety vs. Risk

Individual vs. Group Reward

Informal vs. Formal Procedure

High vs. low organizational loyalty

Cooperation vs. competition

Short-term vs. Long-term Horizon

Stability vs. Innovation

OTHER SOCIAL- CULTURAL FACTORS

Consumer Preferences, Habits and Beliefs
For a business to be successful, its strategy should be the one that is appropriate in the
socio-cultural environment. The marketing mix will have to be so designed as best to suit the
environmental characteristics of the market.
Bicycles, for example, are mostly a basic means of transportation in many developing
countries whereas on several developed countries they are used largely for exercising and
sporting. Honda found that in North America, where motorcycles are used primarily for leisure
and sports, consumers look for high horsepower output and speed. Low cost and ease of
maintenance are scoring points in South East Asia where motorcycles are a basic means of
transportation. The low speed torque is preferred to either high speed or ease of maintenance by
the shepherds of Australia who use it to drive sheep.
Eating habits, consumer preferences and the resultant demand patterns vary greatly from one
market to another. For example, certain seafood species which are in great demand in some
markets may be non-existent in certain markets. Even when the same species is widely used in
different markets, product forms and product attributes demanded may vary significantly.
Etiquettes
There are great differences in the manners of greeting people and physical distance to be
kept between people. While embracing, hugging or kissing is common in some cultures they are
quite embarrassing, and even highly objectionable in many societies.
Even laughter is interpreted differently around the world. While most countries consider it
an expression joy, some cultures discourage it. In many West African countries, laughter

indicates embarrassment, discomfort, or surprise. Smiles of people who are not very familiar do
not generate smiles in return everywhere; sometimes it may cause suspicion.
Handshake while greeting and bidding good-bye are common in many societies. But it is
not common in many others. Some peoples dislike it or object to it. Shaking hands with people
of opposite sex should be avoided in some culture. Even in societies where handshake is quite
common, the manner of doing it may differ. Some cases presented by Chaney and Martin are
reproduced here.
Properly responding to a guests invitation / treat is very important. Knowing well the right
response in different occasions is the crux of the problems. While a very profitable opportunity
was being negotiated, one U.S. executive innocently made the mistake of refusing a Saudi
Arabia. Naturally, the Saudi became much less sociable, and the negotiation process was much
less successful than it might have been.
Gift giving has its own place in most cultures. It is indeed customary on many occasions.
There are many aspects of gift giving that must be meticulously understood such as what is an
appropriate gift, to who should it be given, when it should be given and how should it be given.
Failure to take meticulous care of these factors can sometimes produce negative effects.
Sometimes gifts are expected and the failure to supply them is seen as insulting. Other times,
however, the mere offer of such a token is considered offensive. In many parts of Latin
America, cutlery or handkerchiefs should not be given because these gifts imply a cutting off of a
relationship or the likelihood of tearful event .And giving a clock to someone in China is not
good idea, either. The Chinese word for clock sounds similar to their word for funeral. In fact,
even the way in which gift is presented is important. In most parts of Asia gifts should be given
privately to avoid embarrassing the Asians, but in the Middle East they need to be offered
publicly in order to reduce the possible impression that bribery is being attempted.
Some Social Trends
There are also a number of the other social and demographic factors, such as the age and
sex composition of population, family size, habitat, attitude towards employment, occupational
pattern etc. which influence the business.
The number and promotion of the women in the work force have been rising in most of the
countries. However, the percentage of women working outside the household varies significantly
between nations. This ratio is generally high in the advanced countries in comparison with the

developing countries. Birth control has been a contributory factor in raising the proportion of
women employees.
That the wife as well as the husband is working means less time and energy available for
cooking at home. It is estimated that, in the US, of the three meals a day, one and a half are eaten
away from the home and of the remainder, half are ready prepared. It also means that the family
operates differently. It was estimated that $40 billion in family funds was spent by teenagers,
mostly for groceries and other household items. This has lot of implications for the marketers: In
the developing countries, particularly, the situation would be different from that in the U.S.
The rise in the number of double households increases the demand for a number of products
like household appliances. Electronic gadgets, packaged food products etc.
There are also several other demographic trends which have implications for business
strategy formulation. While some of these trends are confined to certain countries only, the
strength of other trends varies greatly between nations. For example, the number of unmarried
couples living together has risen in the two decades ended 1990 from about half million to 2.5
million in the U.S. Such a thing is quite unheard of in several countries like India.
Similarly, the high divorce rate has created over a million single parent families in the U.S.
Most of the divorced remarry, leading to the emergence of a large number of blended families.
This is not the situation in several countries where people attach more sanctity to marriage so
that the marriage lasts lifelong. In countries where the culture is that a marriage relationship is to
last life long, a company may advertise that its durable product will be a lifelong companion like
ones life partner, but to use such a promotional theme in a culture where divorce rate is high and
even unmarried partnerships which normally last for only short periods is common, will be a
blunder.
TECHNOLOGICAL DEVELOPMENTS AND SOCIAL CHANGE
According to Han Gerth and Wright Mills, social change refers to whatever may happen in
the course of time to the roles, the institutions or the orders comprising the social structure: their
emergence, growth and decline. To Morris Ginsberg, social change means a change in the social
structure, e.g., the size of a society, the composition or balance of its part or the type of its
organization. As Biesanz and Biesanz observe: social change includes significant alterations in
social structure, in cultural definitions, and in the products of socio-cultural action. Social
structure may change in size, in the degree of formality and informality, in the types of social

relationships, and in the system of statuses and roles. Cultural change is reflected in changing
knowledge, beliefs, values and norms. Material products will change as a result of advances in
science and technology. In short, social change may cause one or more of the following:
changes in the size of society: changes in social institutions: changes in occupational patterns;
changes in positions, status and roles ,changes in values, beliefs and attitudes, changes in social
interactions; changes in social mobility; and so on.
The impact of developments in the field of transport and communications on society is very
profound. The automobile and telephone made suburbanization possible in the USA and the
other countries. Films, television and radio have become very helpful in the transmission and
diffusion of information and in the education of the common man. These media play an
important role in bringing about social change. Television or radio enables a person to address, at
one time, millions and millions who are geographically widely spread. Free radio and television
make possible the rapid rise of new political and social movements. No wonder that, in a number
of countries, these media have brought about significant changes in the sphere of family and
individual recreation. Such technologies have considerably reduced the social distance between
the urban and rural areas.
UNIT IV
POLITICAL ENVIRONMENT
FUNCTIONS OF STATE
There are very divergent perceptions of the functions of the state. On the extreme is the
view that the government that governs is the best and on the other extreme is the demand for
government ownership or control of almost everything. Further, the philosophy regarding the
states role in the society has undergone significant changes over time in many countries over
time. A number of countries are, in fact, transitioning from Marx to the market.
The economic role of the state has been recognized for several centuries now. States have
come in all shapes and size, depending on a mix of factors including culture, natural
endowments, opportunities for trade and distribution of power seventeenth century mercantilists
wanted the state to play a major role in guiding trade.
In the most modern economies the states regulatory role is now broader and complex
than ever before, covering such area as the environment and the financial sector, as well as more
traditional area such as monopolies. The design of regulation needs to fit the capability of state

regulatory agencies and the sophistication of markets, and give greater emphasis to personal
responsibility.
CLASSIFICATION OF FUNCTIONS OF STATE
Functions of state vary from basic minimum requirements to active participation in
several other sectors.

The basic functions include the pure public goods such as the provision of property
rights, macroeconomic stability, and control of infectious diseases, safe water, roads, and
protection of the destitute. In many countries the state is not even providing these. Recent
reforms have emphasized economic fundamentals. But social and institutional
fundamentals are equally important to avoid social disruption and ensure sustained

development.
Going beyond these basic services are the intermediate functions such as management of
externalities, regulation of monopolies and the provision of social insurance. Here too the
government cannot choose whether but only how best to intervene and government can
work in partnership with markets and civil society to ensure that these public goods are

provided.
States with strong capability can take on more-activist functions, dealing with the
problem of missing markets by helping coordination. East Asias experience has renewed
interest in the states role in promoting markets through active industrial and financial
policy.

Reinvigorating the states capability

Reinvigorating the states capability can be achieved through the following.

Rules and restraints: Mechanisms for enforcing the rule of law such as an independent

judiciary are critical foundations for sustainable development.

Competitive pressure: Competitive pressure can come from within the state
bureaucracy, through recruitment of civil servants on the basis of merit. It can come from
the domestic private sector, through contracting out for services and allowing private
providers to compete directly with public agencies. Or it can come from the international
marketplace, through trade and through the influence of global bond markets on fiscal

decisions.
Voice and partnership: the means to achieve transparency and openness in modern
society are many and varied business councils, interaction groups, and consumer

groups, to name a few. Institutional working arrangements with community groups can
contribute to greater state effectiveness by giving citizens a greater voice in the
formulation of governments policies. And partnerships between levels of government
and with international bodies can help in the provision of local and global public goods.
THE STATE, INSTITUTIONS AND ECONOMIC OUTCOMES
The state sets the formal rules-laws and regulations-that are part and parcel of a countrys
institutional environment. These formal rules along with informal rules of the broader society are
the institutions that mediate human behavior. But the state is not merely a referee, making and
enforcing the rules from the sidelines; It is also a player, indeed often a dominant player, in the
economic game. Everyday state agencies invest resources, direct credit, procure goods and
services, negotiate contracts; these actions have profound effects on transactions costs and on
economic activity and economic outcomes, especially in developing economies. Played well, the
states activities can accelerate development. Played badly, they will produce stagnation or in the
extreme economic and social disintegration. The state then in a unique position: not only must it
establish, through a social and political process, the formal rules by which all other organizations
must abide; as an organization itself. It too, must abide by those rules.
ECONOMIC ROLES OF GOVERNMENT
The government plays an important role in almost every national economy of the world.
Even in the countries described as capitalist economies or market economies a substantial share
of the nation products goes to satisfy public wants a substantial part of the private income
originates in the public budget and public tax and transfer payment significantly influence the
state of private income distribution.
In the predominantly private enterprise economies government interference is
necessitated by the fact, besides the socio-political ideological reason, if any that the market
mechanism alone cannot perform all economic function. Public policy needed to guide correct
and supplement it in certain respects. it is important to realize this facts since it implies that the
proper size of the public sector is, to a significant degree, a technical rather than ideological
issue.
Governments normally play four important roles in an economy, viz., regulation,
promotion, entrepreneurship, and planning.

As stated above, the extent and nature of these roles in a given situation depend on a
number of factors. Some salient features of these roles are outlined below
Regulatory Role
Government regulation of the business may cover a broad spectrum extending from entry
into business to the final results of a business. The reservation of industries to small scale, public
and co-operative sectors, licensing system etc., regulate the entry. Regulation of products mix,
promotional activities etc., amount to regulate of the conduct of business.
Government regulation of the economy may be broadly divided into direct control and
indirect controls.
Indirect controls are usually exercised through various fiscal and monetary incentives and
disincentives or penalties. Certain activities may be encouraged through monetary and fiscal
incentives and disincentives. For instance, high imports and fiscal and monetary incentives may
encourage the development of export-oriented industries.
The direct administrative or physical controls are more drastic in their effect. The
distinguishing characteristic of direct control is their discretionary nature. They can be applied
selectively from firm to firm and industry to industry, at the discretion of the state.
Promotional Role
The promotional role played by the government is very important in developed countries
as well as in the developing countries, where the infrastructural facilities for development are
inadequate and entrepreneurial activities are scare the promotional role of the government
assumes special significance. The state will have to assume direct responsibility to build up and
strength the necessary development infrastructures, such as power, transport, finance marketing,
institution for training and guidance and other promotional activities.
The promotional role of the state also encompasses the provision of the various fiscal,
monetary and other incentives, including measures to cover certain risks, for the development of
certain priority sector and actives.
Entrepreneurial Role
In many economies, the state also plays the role of an entrepreneur-establishing and
operating business enterprise and bearing the risk. A number of factor such as socio-political
ideologies; dearth of private

Entrepreneurship; neglect of certain sectors, like the unprofitable sectors, by the private
entrepreneurs; absence of or inadequate competition in certain segments and the resultant
exploitation of consumers, etc. have contributed to the growth of state owned enterprises in many
countries.
There was a tendency in many developing countries to assign a dominant place to the
public sector. Public sector dominance was usually established in capital-intensive projects like
steel, capital goods, petrochemicals and fertilizers for which investment requirements
Planning Role
Especially in the developing countries the state plays a very important role as a planner.
The important of planning to a less developed economy was often emphasized by Jawaharlal
Nehru, the chief architect of development planning in India. He rightly observed; whatever it
may be in other countries, in under-developed countries like ours which have to develop fairly
rapidly, the time element is important and the question is how to use our resources to the best
advantage. If our resources are abundant it will not matter how they are used. They will go into a
common pool of development. But where ones resources are limited, one has to see that they are
directed to the right purpose so as to build up whatever one is aiming at.
TRENDS IN POLITICAL / ECONOMIC PHILOSOPHIES / OUTLOOK
While there are not radical differences in the philosophies of major political parties in
some countries, the situation is quite different in some others. The government system in number
countries, including several countries which are making rapid economic progress and having
liberal policies towards foreign capital and technology is not very democratic. That does not
mean that they are not good to make business with. As a matter fact, in several such countries the
procedures are simpler and decisions are quicker than in some of the democratic countries.
GOVERNMENT AND LEGAL ENVIRONMENT
Some governments specify certain standards for the products (including packaging) to be
marketed in the country: some even prohibit the marketing of certain products. In most nations,
promotional activities are subject to various types of control. Several European countries restrain
the use of children in commercial advertisements. in number of countries, including India the
advertisement of alcoholic liquor is prohibited. Advertisement, including packaging, of cigarettes
must carry the statutory warning that cigarette smoking is injurious to health.

Similarly. Baby foods must not be promoted as a substitute for breast feeding. in
countries like Germany, products comparison advertisements and the use of superlatives like best
or excellent in advertisement is not allowed. in the united states. The federal trade commission is
empowered to require a company to provide sufficient evidence to substantiate the claim
concerning the quality, performance or comparative prices of its products.
There are a host of statutory controls on business in India. Although the controls have
been substantially brought down as a result of the liberalization, a number of controls still
prevail.
Many countries today have laws to regulate competition in public interest. Elimination or
unfair competition and dilution of monopoly power are the important objectives of these
regulations. Certain changes in government policies such as the industrial policy, fiscal policy,
tariff policy etc. may have profound impact on business. Some policy development creates
opportunities as well as threats. in other words, a development which brightens the prospects of
some enterprises may pose e threat to some others. For example, the industries policy
liberalizations in India have opened up new opportunities and threats. They have provided a lot
of opportunities to a large number of enterprises to diversify and to make their product mix
better. But they have also given rise to serious threat to many exiting products by way of
increased competition; many sellers markets have given way to buyers markets. Even products
which were seldom advertised have come to be promoted very heavily. This battle for the market
has provided a splendid opportunity for the advertising industry.
ECONOMIC ENVIRONMENT
ECONOMIC SYSTEM:
The scope of private business depends, to large extent, on the economic system which
indeed is rooted in political philosophy. At one end, there are the free enterprise/ market
economies or capitalist economies, and at the other end are the centrally planned economies or
communist countries. In between these two are the mixed economies. Within the mixed
economic system itself, there are wide variations. The freedom of private enterprise in the
greatest in the market economy, which is characterized by the following assumptions:
1. The factors of production (labor, land, capital) are privately owned, and production
occurs at the initiative of the private enterprise.

2. Income is received in monetary from by the sale of service of the factors of production
and from the profit of the private enterprise.
3. Members of the free market economy have free of choice in so far as consumption,
occupation, savings and investment are concerned.
4. The free market economy is not planned, controlled or regulated by the government. The
government satisfies community or collective wants, but does not compete with private
firms; nor does it tell the people where to work /or what to produce.
The completely free market economy, however, is an abstract system rather than a real one.
Today, even the so-called market economies are subject to a member of government regulations.
Countries like the United States, Japan, Australia, Canada and member countries of the EEC are
regarded as market economies.
The communist countries have, by and large, a centrally planned economic system. Under
the rule of communist or authoritarian socialist government, the state owns all the means of
production, determines the goals of production and controls the economy according to the central
master plan. There is hardly any consumer sovereignty in a centrally planned economy, unlike in
the free market economy. The consumption pattern in a centrally planned economy is dictated by
the state.
China, East Germany Soviet Union, Czechoslovakia, Hungary, Poland, etc., had centrally
planned economies. However, recently several of these countries have discarded communist
system and have moved towards market economy.
In between the capitalist system and the centrally planned system falls the system of the
mixed economy, under which both the private and public sectors co-exist, as in India. The extent
of state participation varies widely between the mixed economies. However, in many mixed
economies, the strategic and other nationally important industries are fully owned or dominated
by the state.
The economic system, thus, is a very important determinant of the scope of private business.
The economic system and the policy are, therefore, a very important external constraint on
business.
Business fortunes and strategies are influenced by the economic characteristics and
economic policy dimensions. The economic environment includes the structure nature of the
economy, the stage of development of the economy, economic resources, the level of income, the
distribution of income and asset, global economic linkages, economic policies etc.

Important economic factors are described below.

NATURE OF THE ECONOMY:
The general level of development for the economy has lot of implications business it has
significant bearing on the nature and size, demand, government policies affecting business etc.
Countries and even different regions within a country, show great differences in the level
and pattern of economic development.
A widely used method of classification of the economies is on the basis of the par capital
income. Accordingly, countries are broadly classified as low income, middle income and high
income economies.
Low Income Economies are economies with low level of per capita income. All economies with
per capita GNI (Gross National Income-new term for GNP) of $975 or less in 2008 are regarded
as low income economies. There were 43 low income economies in 2008.
Higher income economies are countries with very rich income per capita. Those with a per
capita GNI of $11,906 or above in 2008 fall in the category of high income economies. In 2008,
there were 67 high income economies. These are mainly two categories of high income
economies, namely, industrial economies and oil exporters.
Falling in between the low income economies and high income economies are the middle
income economies.
Middle income economies are subdivided into lower middle income and upper middle income
economies. In 2008, there were 100 middle income economies
Differences in the income levels between countries is not a true reflection of the purchasing
powers are living standard of people. Further, exchange rate changes would give a misleading
picture of the economic position of the country when the income is converted into dollar from
the national currency. For instance, if the national currency has depreciated against the dollars at
a rate higher than the GNI growth rate, when the GNI is converted into dollar, it will show the
decline even though the GNI has actually increased in term of the national currency. To
overcome such problems, it has become common to estimate the GNI and per capita income at
purchasing power parity too. For example, in 2008 the per capita income of India was estimated
at $1076; in PPP terms it was estimated at $2960. What is mean is that a bundle of goods which
costs $1076 in India will cost $2960 in USA. In other words; having $1076 in India is equivalent
to having $2960 in USA.

STRUCTURE OF THE ECONOMY

The structure of the economy factors such as contribution of different sectors like
primary (mostly agricultural) secondary (industrial) and tertiary (secondary) sectors , large ,
medium, small, and tiny sectors to the economy, and their linkages, integration with the world
economy etc.- are important to business because these factors indicate the prospects for different
types of business, certain factors which affect the business etc. for example, if an economy is
highly integrated with the global economy it will be quickly affected by developments in the
global economy.
Normally, as an economy develops the share of the primary sector in the GDP and
employment declines and those of the other sectors increase. After a certain stage, the share of
the manufacturing sector may also decline.
The developed economies are primarily service economics in the sense that the service
sector generates bulk of the employment and income. The contribution of services to GDP and
employment is substantially high in, particularly, the developed economics.

TABLE 4.2:CONTRIBUTION OF SERVICES TO VALUE ADDED AS PERCENTAGE OF GDP

Region/country

1980

1990

2008

World

56

60

69

High income economies

Low and middle income economies
India

59

64

42

73

46
39

53
42

53

Source: world bank, world development report,1999/2000 and 2010

The nature of each sector has business implications. For example, although india is one of
the largest producer of several agricultural product, because of the small and fragmented nature
of the land holdings, efficient collection and processing of the produce become difficult.
The land holding pattern also makes productivity improvements difficult. It also has
implications for the agricultural input business.
The tremendous growth of trade in services and, more recently, of electronic commerce,
is part of a new trade pattern exports of commercial services have been growing on every
continent (particularly Asia) throughout the 1990s and later. This change has its own special

significance, as services are frequently used in the production of goods and even other services.
Enhanced international competition in services means reductions in price and improvements in
quality that will enhance the competitiveness of downstream industries. Both industrial and
developing economics have much to gain by opening their markets. Developing countries would
derive large gains from an easing of barriers to agricultural products and to labor-intensive
construction and maritime services. Over the longer term, electronic business will loom large as
an area where expanding opportunities for trade require an expanding framework of rules.
ECONOMIC POLICIES
There are several economics policies which can have a very great impact on business.
Important economic policies are industrial policy, trade policy, foreign exchange policy,
monetary policy, fiscal policy and foreign and technology policy.
Some categories of business are favorably affected by government policy, some adversely
affected, while it is neutral in respect of others.
Similarly an industry that falls within the priority sector in terms of the government
policy may get a number of incentives and other positive support from the government, whereas
those industries which are regarded as inessential may have the odds against them.
Industrial policy:
Industrial policy can even define the scope and role of different sectors like private,
public, joint and cooperative, or large, medium and tiny. It may influence the location of
industrial undertakings, choice of technology, scale of operation, product mix and so on.
In India, until the liberalization ushered in 1991, the scope of private sector, particularly
of large enterprises, was very limited. The development of 17 of the most important industries
was reserved for the state. In the development of another 12 major industries, the state was to
play a dominant role. In the remaining industries, co-operative enterprises, joint sector
enterprises and small-scale units were to get preferential treatment over large entrepreneurs in the
private sector. Further, the production of a large number of items was reserved for the exclusive
manufacture of the small scale sector. Even in respect of industries which were open to the
private sector entry and growth were regulated by licensing and also by, in the case of certain
categories of large firms, the MRTP act. The government policy, thus limited the scope of private
business. However, the new policy ushered in July 1991 has wide opened all but a few industries
for the private sector, dramatically changing the business environment. In the pre-liberalization

era, the government policy was a severe constraint on the portfolio and growth strategies of
companies.
Trade policy:
The trade policy can significantly affect the fortunes of firms. For example a restrictive
import policy, or a policy protecting the home industries, may greatly help the import competing
industries, while a liberalization of the import policy may create difficulties for such industries.
Trade policy is often, integrated with the industrial policy. As part of the economic
liberalization and WTO compliance, India has very substantially liberalized imports. Domestic
firms now face increasing competition from imports. In other words, they face a growing
international competition in the domestic turf. This implies that in many cases Indian firms
which do not come up to the international standards- in quality, cost, marketing, after sale service
etc. will not be able to service. And a firm which effectively fights foreign competition in the
home market may be provoked to think why not compete with foreign firms in the foreign
markets.
Liberalization of imports facilitates global sourcing and this could many Indian firms to
become more competitive.
Foreign exchange policy:
Exchange rate policy and the policy in respect of cross-border movement of capital are
important for business. The abolition/liberalization of exchange controls all around the world
since the late 1970s has encouraged cross-border movement of capital.
Foreign investment and technology policy:
Until the late 1980s when the world wide trend towards liberalization set in foreign
capital

and

technology

were

under

severe

restrictions

in

many

developing

and

socialist/communist countries.
Restrictions on foreign capital and technology constrain not only foreign firms but also
the domestic firms because it may come in their way of acquiring the technology of their choice
from the best source. Restrictions on foreign capital may affect the growth plans of firms,
including establishment of joint ventures. India has restrictions on foreign investment by Indian
companies.
Huge investments in infrastructural and other vital sectors can significantly improve the
environment for industrial development, as in the case of china.

A liberal foreign investment and technology policy will increase domestic competition
and would put many domestic firms, which were shielded from foreign competition, in to
problems. At the same time it would benefit many domestic firms- by permitting global sourcing
of capital and technology, by increasing the quantity of domestic supply of many goods and
services etc.
Fiscal policy:
Governments strategy in respect of public expenditure and revenue can have significant
impact on the business. The pattern of public expenditure may affect the development of various
regions, sector and/or industries differently. Such is the case with the taxation policy.
Governments often use tax incentives or disincentives to encourage or discourage certain
activities. For examples when an industry suffers from recession, a reduction of taxes like excise
duty of sales tax may help improve the demand. A reduction of rates of direct taxes like personal
income tax and corporate tax may help increase, because of the resultant in the disposable
income, the spending in the economy leading to an increase in demand. Governments, central as
well as provincial, of many countries offer different fiscal incentives to woo industries.
Monetary policy:
The central bank, by its policy towards the cost availability of credit can significantly
influence the savings, investments and consumer spending in the economy. Depending on the
conditions of the economy and the general economic policy of the government, in the central
bank (called reserve bank in India) may adopt an expansionary or contractionary or neutral
monetary policy. For example, a one percentage point reduction in the cash reserve ratio or
statutory reserve ratio (SLR) will significantly increase the loadable funds with the commercial
banking system. An increase in these ratios will have the opposite effect. Monetary policy may
also be pressed in to action to influence the exchange rate of the currency.
ECONOMIC CONDITIONS
General economic condition affects business. Economic pass through periods of boom
and recession. A boom is characterized by high level of output, employment and rising demand
prices. A recession has the opposite of these characteristics.
If a region to a significant extent on any particular industry or sector, business I that
region would be significantly affected by fortunes of that industry. The economic and business
prospects in major oil exporting countries depend to a very great extent on the crude oil price.

The economic condition of a region may be linked to the prices of major crops of the region. For
example, because of the fall in the prices, the coconut farmers of kerala were estimated to have
lost about Rs.1500 crores between 1997 2000. Similarly, the rubber farmers lost an estimated
Rs.1500 crores during the 5 years period ended 2000. The price of several other commercial
crops also crahed. This situatuin has very adversely affected the general economic and business
conditions in the state.
A particular economic condition may be widespread- international or national- or may be
confined to a region. For example, during 1997-98 when several south east economies underwent
a crisis, it affected the business of even firms in a number of other countries. The Indian steel
exports to south east asia, for example, suffered a severe set back. This prompted the Indian steel
industry seriously consider the US and European markets and it was largely successful in its
export to these markets- in 1998-99 steel exports to the US surged by over 100 percent and to
Europe nearly 90 percent.
The current account and balance of payment positions of a country can significantly
influence certain economic policies and business environment. For example, a sustained current
account surplus may encourage the government to liberalize imports and capital movements.
Export and imports of a country are generally affected by a number of domestic and
international economic conditions. For example analysis of empirical data reveals that indias
export performance is affected by certain important factors. They include a set external factors, a
set of factors and the real exchange rate.
The external factors are:

The rate of growth of the economies of the importing countries.

The rate of growth of the world trade.
The rate of change in the price level in the importing country.

The internal factors are:

The rate of growth of the Indian economy.

The rate of change in the domestic price level.
The most favorable condition for the growth of the indian exports is a combination of the

high growth rates for all the three external factors, a high growth rate with price stability the
indian economy and fall in the real exchange rate for exports(RERx). If some of the above
conditions are satisfied and other conditions are not favorable, the export performance should be

expected to be determined by the relatives strengths of the favorable and unfavorable factors. We
will have the worst situation when the reverse of the ideal combination of conditions occurs.
The analysis of the impact of the interrelationship of the above mentioned variables on
indias exports for a period of nearly two decades by G.C. da costa has revealed the following.
1.

Good growth in the economies of the industrial countries has been associated with good
growth in indias exports. This has been very pronounced in those years characterized by
good growth in the world trade, sharp fall in the RERX and relative price stability in
india.
Low growth of recessionary conditions in the economies of the industrial countries, along

2.

with depressed world trade together with even moderate increases in the RERx did not
provide any competitive edge to the countrys exports- the volume of indias exports
broadly kept pace with the growth in the economies of the industrial countries.
In some years, even when the growth in the economies of the industrial countries was

3.

low,the country experienced good growth in the volume of exports because of the sharp
decline in the RERx.
During certain periods, despite modest growth in the industrial countries and in world

4.

trade, the volume of indias exports fell because of the rise in the RERx.
Besides import regulations, the important factors which determine the volume of
indias imports are:

The rate of growth of the Indian economy-high rate of growth, ceteris paribus, is

associated with rise in imports.

The relative price of imports (i.e., the relative change in the prices of imports and
domestic goods). An increase in the imports, ceteris paribus, is associated with a fall in
the relative price of imports.
From the above two factors, it can be inferred that the volume of imports tends be very

high when there is a conjecture of high rate of economic growth and a sharp fall in the relative
price of imports and vice versa.
There are, thus , a number of economic factors, many of which form a complex web,
which affect the business.
UNIT V
GLOBAL ENVIRONMENT

GATT

The General agreement on tariffs and trade (GATT) the predecessor of WTO, was born in
1948 as result of the international desire to liberalize trade.
The Breton woods conference of 1944,which had recommended the IMF and world bank
had also recommended the establishment of an international trade organization (ITO) Although
the IMF and world bank were established in 1946,the ITO charter was the never ratified, because
of objections that its enforcement provisions would interfere with the autonomy of domestic
policy making instead ,the GATT, which had been drawn up only as an interim agreement to fill
the gap until the ITO charter was ratified, became the framework for international trading system
since 1948,was at least in principle, guided by the rules and procedures agreed to by the
signatories to the GATT which was an agreement signed by the contracting nations which were
admitted on the basis of their willingness to accept the GATT disciplines.
The GATT was transformed into a world trade organization (WTO) with effect from
January, 1995. Thus, after about five decades, the original proposal of international trade
organization took shape as the WTO. The WTO, which is a more powerful body than the GATT,
has an enlarged role than the GATT.
Indian is one the founder members of the LMF, World Bank, GATT and the WTO.

Objectives
The preamble to the GATT mentioned the following as its important objectives.
1. Raising standard of living.
2. Ensuring full employment and a large and steadily volume of real income and effective
demand.
3. Developing full use of the resources of the world.
4. Expansion of production and international trade.
GATT embodied certain conventions and general principles governing international trade
among countries that adhere to the agreement. The rules or conventions of GATT required that:
1. Any proposed change in the tariff, or other type of commercial policy of a member
country should not be undertaken without consultation of other parties to the agreement.
2. The countries that adhere to GATT should work towards the reduction of tariffs and
others barriers to international trade, which should be negotiated within the framework of
GATT.
For the realization of its objectives, GATT adopted the following principles:
1. Non-discrimination:

The principles of non-discrimination require that no member country shall discriminate

between the members of GATT in the conduct of international trade. To ensure nondiscrimination the members of GATT agree to apply the principle of most favored nation (MFN)
to all import and export duties. This means that each nation shall be treated as well as the most
favored nation.As far as quantitative are permitted, they too, are to be administered without
favour,.
However, certain exceptions to this principle are allowed. For instance, GATT does not
prohibit economic to the trade of other parties. The GATT also permits the members to adopt
measures to counter dumping and export subsidies however, the application such measures shall
be limited to the offending countries.
2. Prohibition of quantitative restrictions:
GATT rules seek to prohibit quantitative restrictions as far possible and limit restrictions
trade to the less rigid tariffs. However, contain exceptions to these prohibitions are granted to
countries confronted with balance of payments difficulties and to developing countries.
Further import restrictions were allowed to apply to agricultural and fishery products if
domestic production of these articles was subject to equally restrictive production marketing
controls.
3. Consultation:
By providing a forum for continuing consultation, It sought to resolve disagreements through
consultation. So far eight rounds of trade negotiations were held under the auspices of the GATT.
Each round took several years. The Uruguay round, the latest one, took more than seven years to
conclude, as against the originally contemplated more than four years. This shows the
complexity of the issues involved in the trade negotiations.

An evaluation of GATT
The growing acceptances of GATT, despite its shortcomings, is evinced by the increase in
the number of the signatures, when the GATT was signed in1947, only 23 nations were party to it
increased to 99 by the time of the seventh round and 117 countries participated in the next, i.e.,
the Uruguay round. In April 2008, there were 151 members with several more countries
for;mally seeking accession to the WTO. The signatory countries account for about 90 per cent
of the international trade indicating the potential of the WTO bringing about an orderly
development of the international trade.
One the principal achievements of GATT were the established of a forum for continuing
consultations.Disputes that might otherwise have caused continuing hard feeling reprisals and
even diplomatic rupture have been brought to the conference table and compromised.

GATT could achieve considerable trade liberalization. There were of course, several
exceptions.
;Agricultural trade was clearly an exception to the liberalization. Far from becoming
freer, trade in agriculture became progressively more distorted by the support given to farmers
(which took the form of severe barriers to imports and subsidies to exports) in the industrial
nations.
Similarly, another exception was textiles; trade in textiles was restricted by the multifibre
arrangement (MFA). Under the MFA imports of textile items to a number of developed countries
were restricted by quotas.
Besides agriculture and textiles, two exceptions to the general trend of trade liberalization
gave been trade of developing countries and economic integration. Developing countries with
balance of payments problems have been generally exempted from the liberalization. Even the
Uruguay round gas granted such exemptions to developing countries.
Although the picture of trade liberalization has to be qualified with such exceptions, the
GATT achieved very commendable trade liberalization. The average level of tariffs on
manufactured products in industrials countries was brought down from about 40 percent in 1947
to nearly three percent after Uruguay round.
Indeed the period of 1950-1973 is conspicuous by the splendid result of progressive trade
liberalization. In the 275 years since 1720, this period witnessed the highest average annual
growth rates in output and international trade, these rate were substantially higher than for any
other period. indeed, the1950s and 1960s are described as the golden decades capitalism. The
output levels of companies using newer technologies in many cases were much larger than the
domestic markets could absorb. Expansion of markets to others countries enabled even
companies in other industries to increase their output. There was also a surge in international
investments.
The collapse of the Breton woods system in the early 1970s and oil crisis made matters
very difficult for many countries, both developing and as a result increased non-Tariff barriers
since then.
Further, the exports of developing countries gained significantly less from the GATT
rounds than did exports of the industrial nations. the trade liberalization gas been confined
mostly to goods of interest to the developed countries. In case of agricultural commodities not
only was that there was no \liberalization, but also there was an increase in protection.
Manufactured products of interest to developing countries like textiles and clothing, footwear

etc.have been subject to increase enjoy a more liberalized trading environment, the growing
NTBs have been severely affecting the exporting of developing countries ironically, the
developed countries are increasing the protectionism when the developing countries are
liberalizing. This is indeed a sad commentary on the GATT and other multilateral organization.
THE URUGUAY ROUND
Uruguay round(UR) is the name by which the eighth round of the multilateral trade
negotiations (MTNs) held under the auspices of the GATT is popularly known because it was
launched in Punta del ester in Uruguay , a developing country, in September 1986.
Because of the complexities of the issues involved and the conflicts of interest among it
participating countries, the Uruguay round could not be concluded in December 1990 as was
originally scheduled. When the negotiations dressed on, rather dunked, the then director general
of GATT, presented a draft act embodying what he thought was the result of the Uruguay round.
This came to be popularly known as the dunked draft. this was replaced by an enlarged and
modified final text which was approved by delegations from the member countries of the GATT
on 15th December 1993.this final act was signed by ministers of 125 governments on 15 th April
1994.the result of the Uruguay round are to be implemented within ten years since 1995.different
time periods were given for effecting the different agreements.
The first six rounds of MTNs concentrated almost exclusively on deducing tariffs, while
the seventh round (Tokyo round-1973) moved on to tackle non-tariff barriers (NTBs).the UR
sought to broaden the scope of MTNs far wider by including new areas such as:

Trade in services
Trade related aspects to intellectual property (TRIPs)
Trade related investment measure (TALMs)

Because of the inclusion of these new aspects in the GATT negotiations, the developing
countries had serious apprehensions, about outcome of the Uruguay round.
The Uruguay round took up three basic subjects for discussion:
1. Reducing specific trade barriers and improving market access.
2. Strengthening GATT disciplines.
3. Problems of liberalization of trade in services, trade related aspects of intellectual
property rights (TRIPs).
The most outstanding feature of the UR was the inclusion of the subjects in the 3 rd item
referred to above in the MTNs of GATT. The traditional concerns of the GATT were limited to

international trade in goods. The UR went much beyond goods to services, technology,
investment and information.
Some of the important features of the Uruguay round agreements are given below:
GATT AND WTO
Following the UR agreement GATT was converted from a provisional agreement, into a
formal international organization called world trade organization (WTO) with effect from
January results of the Uruguay round .it is directed by a ministerial conference that will meet at
least once every two years and its regular business is overseen by a general council.
The old GATT system allowed, under what was known as the grandfather clause
.existing domestic legislation to continue even if it violated a GATT agreement that a member
country gad accepted by being a signatory to GATT. The WTO, specially rules this out.
The situation, after the coming into effect of WTO may be described as the GATT is dead,long
live the GATT.

1. Under the old system, there were two GATTs(i) the agreement-i.e., the agreement
between contracting parties (governments) setting out the rules for conducting
international trade ;(ii)GATT the organization an international organization created to
facilitate discussions and administration related to the agreement (ad hoc, though,
continued to exist until the establishment of the WTO). GATT the organization ,ceased to
exist with the establishment of WTO; GATT the agreement, which always dealt with (and
still does) trade in goods ,continues to exist ,in amended form ,as part of the WTO
alongside two new agreements, viz., general agreements on trade in services(GATS) and
general agreement on trade related aspects of intellectual property rights (TRIPs). The old
text is now called GATT 1947 and the updated version is called GATT 1994 in short.

Function
The WTO has the following five specific functions;
1.

The WTO shall facilitate the implementation, administration and operation and further
the objectives of the multilateral trade agreements and shall also provide the framework

2.

for the implementation, administration and operation of plurilatral trade agreements.

The WTO shall provide the forum for negotiations among its members concerning their
multilateral trade relations in matters dealt with under the agreements.

3.

The WTO shall administer the understanding on rules and procedures governing the

4.

settlement of disputes.
The WTO shall administer the Trade review mechanism With a view to achieving
greater coherence in global economic policy making ,the WTO shall co operate, as

appropriate , with the IMF and IBRD and its affiliated agencies.
The general council will serve four main function:
1. To supervise on a regular basis the operations of the revised agreements and ;
8ministerial declarations relating to(a) goods (b) services (c)TRLPs;
2. To act as a dispute settlement body;
3. To serve as a trade review mechanism; and
4. To establish good council, services council and TRIPs council, as subsidiary
bodies.
To become a member of the WTO, a country must completely accept the result of the Uruguay
round.

Types of foreign investment

Broadly there are two types of foreign investment, namely, foreign direct investment
(FDI) and portfolio investment
FDI refers to investment in a foreign where the investor retains control over the
investment. It typically takes the form of starting a subsidiary, acquiring a stake in an existing
firm or starting a joint venture in the foreign country. Direct investment and management of this
firms concerned normally go together
If the investor has only a sort of property interest in investing the capital in buying
equities, bonds, or other securities abroad, it is referred to as portfolio investment. That is, in the
case of portfolio investments, in the investor uses his capital in order to get a return on it, but has
no much control over the use of the capital.
FDIS are governed by long term considerations because this investment cannot be easily
liquidated. Hence factor like long term political stability, government policy, industrial and
economic prospects etc influence the FDI decision, however, portfolio investments are
generally much more sensitive than FDIs. Direct investor has direct responsibility with the
promotion and management of the enterprise. Portfolio investor does not have such direct
involvement with the promotion and management.
Since the economic liberalization of 1991, there has been in the FDI and portfolio
investment in India.

There are mainly two routes of portfolio investment in India, viz., by foreign institutional
investor (FLLS) like mutual fund through global depository receipts (ADRs) and foreign
currency convertible bonds (FCCBs)
GDRs/
ADRs AND FCCBS are instrument issued by Indian companies in the foreign markets
for mobilizing foreign capital by facilitating portfolio investment by foreigners in Indian
securities. Since 1992, Indian companies, satisfying certain conditions, are allowed to access
foreign capital markets by euro issues.

Foreign investment
Foreign direct investment

portfolio

investment
1. Wholly owned subsidiary
2. Joint venture

1. Investment
2. Investment in GDRs,

FDRs, FCCB etc

3. Acquisition

Significance of foreign investment

Foreign capital and technology can play a very important role in the socio-economic
development of a nation. They have very significantly contributed to the development of the
developed countries. Foreign capital and technology have been playing a significant role in the
development of a number of developing countries. A classic example is china.
One of the way by which foreign capital helps accelerate pace of economic growth is by
facilitating essential imports required for carrying out development programmers, like capital
goods , know-how , raw material and other inputs and even consumer goods. The machinery,
created by large in investment may necessitate import of consumer goods. When the export
earnings are insufficient to finance such chital imports, foreign capital could help reduce the
foreign exchange gap.
Foreign investment may also health increase a countries export and reduce the import
requirements if such investment take place in export oriented and import competing
industries. In the early years of the present decade, nearly half of the Chinese export (which in
absolute terms was about three times the total export of India) were said to be the contribution of
the foreign funded enterprises

Following the analysis are Donald MacDougall and Paul streeten, gareld Meier observes
That, from the stand point of national economic benefit, the essence of the case for encouraging
an inflow of capital is that increase in real income resulting from the act of investment is greater
than the resultant increase in the income of the investor if the value added to output by foreign
capital is greater than the amount appropriated by investor, social returns exceed private returns.
As long as foreign investment raises productivity, and this increase is not wholly
appropriated by the investor, the greater product must be shared with others, and there must be
some direct benefits to others, and there must be some direct benefits to other income group as
mentioned below.
Domestic labor:
Domestic labor may get higher real wages because of the increase in productivity. There
might also be expansion of the employment opportunities.
Consumers:
If foreign investment is cost-reduction in a particular industry, consumers of the product
may gain through lower prices. If the investment is product-improving or productinnovating, consumers benefit from better quality products or new products.
Government:
The increase in production and foreign trade resulting from foreign capital might the
fiscal revenue of the government.
External economies:
Foreign capital may bring in a number of indirect gains through the realization of the
economies. For instance, if foreign investment is used for the development of
infrastructure, this could stimulate domestic investment in industrial and other sectors.
The changes in the composition of the capital flows and the sensational increase in the
magnitude of some of the flows, like FDI, have remarkably changed the balance of payments and
foreign exchange reserves position of serve countries. The debt creating flows as percentages of
total flows in the BOP of India averaged as much as 97 percent during seventh plan (1985-90)
but declined to less than 20 percent by mid 1990s. Eventually, India began to experience a
surplus on the Bop and a very remarkable improvement in the reserves position.

Foreign investment has assessed and is assisting the economic growth of many countries. As
a World Bank report points out, for the developing countries FDI has the following advantages
over the official development assistance (ODA).
1. FDI shifts the burden of risks of an investment from domestic to foreign investors.
2. Repayments are linked to profitability of the underlying investment, whereas under debt
financing the borrowed funds must be serviced regardless of the project costs.
3. Further, it has also been observed that FDI is the only capital inflow that has been strongly
associated with higher GDP growth since 1970.
FOREIGN PRIVATE INVESTMENT
Private foreign capital mostly takes the form of direct investment. Hence we deal here with
the direct foreign investment (private). The important advantages of foreign direct investment are
the following:
1. It helps increases the investment level and thereby the income and employment in the
host country.
2. Foreign investment may increases the tax revenue of the government
3. Direct foreign investment facilitates transfer of technology to the receipts country.
4. It may kindly a managerial revolution in the recipient country through professional
management and the employment of highly sophisticated management techniques.
5. Foreign capital may enable the country to increase its exports and reduce import
requirements.
6. foreign investments may stimulate domestic enterprise, to support their own operations,
the foreign investor may encourage and assist domestic suppliers and consuming
industries.
7. Foreign investment may also help increase competition and break domestic monopolies.
8. If foreign investment improves the quality and reduces the cost of inputs, that would
benefit the domestic industry.

NATURAL ENVIRONMENT
As watrick and woods observe,the natural environment ultimately is the source and support
of everything used by businesses (and almost any other human activity)-every raw material,
every energy sources, life sustaining factor, even every waste disposal site.

The natural environment determines what can be got done in a society and how institutions
can function. Resource availability is the fundamental factors in the development of business in
societies.
Climatic and weather conditions affect the location of certain industry like the cotton textile
industry. Topographical factors may affect the demand pattern in some cases, for example, in
hilly areas with a difficult terrain jeeps may be in greater demand than cars.
Weather and climatic factors affect the demand for certain type of products. For example, in
several regions where the temperature in very high in summer, there is good demand for desert
coolers; but they are not at allused in some of the states in india.in regions charatarised by very
cold climate in winter and very hot climate in summer both room heaters and air conditioners
may in goods demand in the respective season.
weather and climatic factors can affects the demand pattern for clothing ,building materials
and designs,foods,medicines etc. further,weather and climatic conditions may call modifications
to the product ,packaing,storage conditions etc.
Ecological factors have recently assumed great importance .the depletion of natural
resources, environmental pollution and the disturbance of the ecological balance have caused
great concern .government policies aimed at the preservation of environmental purity and
ecological balance, conservation of non-replenishable resources, etc., have resulted in additional
responsibilities and problems for business, and some of these have the effect of increasing the
cost of production and marketing.

TECHNOLOGICAL ENVIRONMENT
Technology is one of the important determinants of success of a firm as well as the
economic and social development of a nation.
Technology includes the tools-both machines (hard technology) and ways of thinking
(soft technology)-available to solve problems and promote progress between. Among and
between societies
According to the UNCTADS draft TOT code, technology should be described as
systematic knowledge for the manufacture of a product, for the application of a process or for
the rendering of a service and does not extend transactions involving mere sale or lease goods.
Technology includes not only knowledge or methods that are necessary to carry on or to
improve the existing production and distribution of goods and services, but also entrepreneurial

expertial and professional know-now. The latter two elements may often prove to be the
essential competitive advantage possessed by the technology owner. The MNCs are often in a
particularly advantageous position in this regard.
Technology is one of the eight factors considered by the world economic forum to
evaluate the global competitiveness of nations. The 1999 global competitiveness report of the
forum, which continued to increase its focus on information technology as a new sources of
competitiveness, observe that there are at least three aspects to this ,e-mails has greatly expended
the possibilities for interpersonal,inter-firm,and international communication .second, the
internet has allowed for much more extensive and rapid dissemination of information.third,the
emerging area of e-commerce offers a potentially huge increase in the customer

base for

companies and huge savings in marketing costs and search costs in finding low-cost suppliers.
Competitiveness in all of these areas is closely linked with the competitiveness of local
telephone infrastructure and with penetration of the computer culture in the local economy. The
report also observe that for a successful internet culture, the population needs to have computers,
telephones need to work, and the countrys telecommunications hardware needs to support high
bandwidth for internet traffic.

TECHNOLOGY S-CURVE
According to the commonly observed pattern in the development of technologies, the rate
of progress in a new technology follows an S shaped curve, with an initial exponential rate,
slowing to a linear rate, and turning off towards a natural limit.
As bets points out at first, all new basis inventions for a new technology show poor
performance, are awkward and dangerous to use, and are costly to produce. Yet the opportunities
for technical improvement begin as inventors and engineers seek ways of overcoming the
limitations of the original invention. There is usually a rapid flush of new ideas that provides
exponential increase in performance. Eventually, and rather soon, all the linear phase of
technology progress on the S-curve. Eventually, and rather soon, all the obvious ideas get tried.
Further progress in the new technology gets harder. Thus begins the inner phase of
technology progress on the S-curve.as person observes in due course the rate of improvement
slows down as it approaches its limit, which may be technological(e.g,some physical limit on
performance),economic(e.g., diminishing returns from further research and

development)or

social(e.g., production of undesirable by-products).at this point there will be considerable

economic and competitive benefits in changing to an alternative technology to which the limit
does not apply, and consequently in due course a new technology will emerge and be adopted.

DEMOGRAPHIC ENVIRONMENT
IMPORTANCE OF DEMOGRAPHIC ENVIRONMENT
It is conventionally said that management is men material machinery and money even if
all the other MS are excellent it would not be of use unless the men is the right one in terms of
quality potential motivation commitment etc.
Market is people in the sense that the demand depends on the people and their
characteristics the number income levels tastes and preferences belief attitudes and sentiments
and a host of other demographic factors.no wonder demography is an importance

basis of

market segmentation.
Importance demographic bases of market segmentation including the following.

Age structure
Gender
Income distribution
Family size
Occupation
Education
Social class
Religion
Race
Nationality

The demographic environment difference from country to country and from place to
place within the same country is region. Further it may change significantly over time.
PeterDrucker, who emphasizes the tremendous economic and business implications of
demographic changes, suggest that any strategy, that is any commitment of present resources to
the future expectations, has to start out with demographics.
Demographics factors such as size of the population, population growth rates, age
composition, ethnic composition, density of population, rural-urban distribution, family size,
nature of the family, income level etc. have very significant implications for business.
Population size

The size of the population is an important determinant of demand for many products.
There are countries with less than a lakh of people of one hand and those with over a thousand
million on other hand.
One of the important objectives of the Europeans Union was to bring about a single market that
compares, in terms of the number of consumers, to that of USA and Japan.
FALLING BIRTH RATE AND CHANGING STRUCTURE
There has been an explosive growth of the global population, particularly in the
developing countries. The universal trend now however is falling birth rates, although the total
population is still growing at over one percent annually. Developing countries are also
experiencing significant decline in the population growth rate .in development countries the fall
in the birth rate is so steep that the population size would shrink drastically. Because of the
decline birth rate population is really peaking in a number of countries. The collapse of
population size has serious has implication for business.
According To Ducker the Collapsing Birth Rates Will Have the Following.
1. For the next twenty or thirty years demographics will dominate the politics of all developed
countries. And they will inevitably be politics of great turbulence. Importance issues include the
Retirement and age and immigration.
2. For the next twenty or thirty years no developed countries is likely, therefore, to have stable
politics or stable government. Government instability is going to be the norm.
3. The final implication is that in all developed countries the productivity of all workers.
MIGRATION AND ETHINIC ASPECTS
While the population will be declining in many developing counties, which may also led
to labor shortages, population pressures will be mounting in developing nation many of which
are neighbor of the rich nations. As a consequence to prevent migration pressure, as druker
observers, is like preventing the law of gravity. The response to immigration will be different
between countries.
Already, immigration has brought about very remarkable ethnic changes in usa . A
number of localities are concentrated by immigration communities. Detroit claims to be Arab
capital of America. Miami used to be thought of as a Cuban enclave, but is becoming more
Haitian more Jamaican more all sorts of things.

INTERNATIONAL FINANCIAL INSTITUTIONS

One major source of financing is international non-profit agencies. There are several
regional development banks, such as Asian development bank, the African development bank
and fund, and the Caribbean development bank. The primary purpose of these agencies is to
finance productive development projects or to promote economic development in a particular
region. In general, both public and private entities are eligible to borrow money from such
agencies as long as private funds are not available at reasonable rates and terms. Although the
interest rate can vary from agency to agency, these loan rates are very attractive and very much
in demand.
One of all the international financial organisations, the most familiar is the World Bank,
formally known as the international bank for reconstruction and development (IBRD). The
World Bank has two affiliates that are legally and financially distinct entities, the international
development association (IDA) and the international finance corporation (IFC). All three
organizations have the same central goal: to promote economic and social progress in poor or
developing countries by helping to raise standards of living and productivity to the point at
which development becomes self-sustaining.
WORLD BANK
The World Bank is owned by the government of 178 countries that have subscribed to
providing its capital. Only countries that are members of the international monetary fund can
qualify for World Bank membership. The US, with 22.4 percent of the subscribed capital and
20.6 percent of the voting power, is the banks largest shareholder.
The IBRD obtains most of its funds through borrowing in the capital markets of the US,
Europe, Japan, and Middle East. The process is not unlike a private firms seeking debt financing
through the sale of securities. Such funds, in turn, are made available only to credit worthy
borrowers, mainly for those projects that have high real rates of economic return. The banks
decision is based on economic considerations only, and the political character of a member
country is irrelevant. As a result, the World Bank does not make loans in support of military or
political goals.
IBRD loans are usually repayable over fifteen to twenty years, with a grace period of three
to five years. Each loan must be made to, or be guaranteed by, the government concerned. The
interest rates that IBRD loans carry depend on the cost at which the bank raises funds in capital
markets.

INTERNATIONAL DEVELOPMENT ASSOCIATION (IDA)

Because very poor countries may have difficulty in borrowing on IBRD terms, the IDA was
established specially to assist such countries. IDA has 158 nations as members, with Eritrea and
Azerbaijan Republic being the latest. In practice, most of the IDA loans go to these countries that
barely exceed half of the specified annual per capita GNP, and most of these countries are
located in Africa south of the Sahara and in south Asia. These countries, though very poor, must
still have sufficient economic, financial and political stability to qualify for IDA loans.
Whereas the World Bank makes loans, the IDA provides credits. These credits are
made only to governments even though these governments routinely re-lend funds to their public
and private enterprises. The credit must repaid over fifty years, and there is a ten-year grace
period before the beginning of the payment of the principal.
INTERNATIONAL FINANCE CORPORATION (IFC)
Although the IDA shares the World Banks staff, the IFC has its own operating and legal staff.
Unlike the bank and the IDA, which have many operating aspects in common, the IFC works
closely with private investors. In addition to providing convertible debentures, under writing and
standby commitments, the IFC invest in commercial enterprises within developing countries and
is able to take equity positions. By functioning in this area, the IFC complements the work of the
World Bank by providing assistance in business areas that are impractical for the bank to operate.
As of 1996, the IFCs total membership has become 165 countries.
The IFC has become more active in helping companies in developing countries raise
financing through international offerings of investment funds and individual corporate securities.
Towards this goal, the international securities group (ISG) was established in 1989 to provide
investment banking services to corporate clients in developing countries.
MULTILATERAL INVESTMENT GUARANTEE AGENCY (MIGA)
The activities of the World Bank, IDA, and IFC are supplemented by those of a new affiliated
international organization- the multilateral investment guarantee agency (MIGA). Established in
1988, MIGA has a specialized mandate: to encourage equity investment and other direct

investment flows to developing countries through the mitigation of non-commercial investment

barriers. To encourage international corporate investment so that developing countries can attract
qualified investors.
INTERNATIONAL MONETORY FUND (IMF)
During the great depression of the 1930s, many countries resorted to competitive currency
devaluation and trade restrictions to maintain domestic income, resulting in lower trade and
employment for everyone. The IMF is a political intergovernmental monetary and financial
institution. As a pluralist international monetary organization, its multiple activities encompass
financing, regulatory, and promotional purposes. It acts as a source of balance of-payments
assistance-cum-adjustment to members, as a source and creator of international liquidity, as a
reserve depository and intermediary for members, as a trustee, and as a catalyst. The use of the
IMF resource is based on balance of payments needs, on equal and non-discriminatory treatment
of members, and on due regard for members domestic, social, and political system and policies.
OBJECTIVES OF IMF
1. To promote international co-operation among members on international monetary issues.
2. To promote exchange stability and orderly exchange arrangements while avoiding
competitive currency devaluation.
3. To foster a multilateral system of payments and transfer while eliminating exchange
restrictions.
4. To make financial resources available to members.
5. To seek reduction of payment imbalances.
The IMF has 180 members, with Brunei Darussalam being the latest. Each member has a
quota based on its subscription contribution to the fund. This quota determines the members
voting power and access to the IMFs financial resources.
Foreign Exchange Regulation Act (FERA)
Foreign exchange transactions were regulated in India by the Foreign Exchange
Regulation Act (FERA), 1973. This Act also sought to regulate certain aspects of the conduct of
business outside the country by Indian companies and in India by foreign companies.
The FERA was widely described as a draconian and obnoxious law. Following the
economic liberalization ushered in 1991, some amendments to the FERA were effected in 1993.

The main objective of FERA, framed against the background of severe foreign exchange
problem and the controlled economic regime, was conservation and proper utilization of the
foreign exchange resources of the country.
There was a lot demand for a substantial modification of FERA in the light of the
ongoing economic liberalization and improving foreign exchange reserves position. Accordingly,
a new act, the Foreign Exchange Management Act (FEMA), 1999, replaced the FERA.
Foreign Exchange Management Act (FEMA)
The FEMA, which came into effect from January 1, 2000, extends to the whole of India
and also applies to all branches, offices, and agencies outside India, owned or controlled by a
person resident in India.
Objectives
The objectives of FEMA are:
1. To facilitate external trade and payments.
2. To promote the orderly development and maintenance of foreign exchange market.
Dealing in Foreign Exchange etc.
Section 3 of FEMA imposes restriction on dealings in foreign exchange and foreign
security and payments to and receipts from any person outside India. Accordingly except as
provided in terms of the act, or with the general or special permission of the Reserve Bank, no
person shall1. deals in any foreign exchange or foreign security with any person other than an
authorised person;
2. make any payment to or for the credit of any person resident outside India in any manner;
3. receive otherwise through an authorised person, any payment by order or on behalf of
any person resident outside India in any manner.
Holding of Foreign Exchange etc.
Save as otherwise provided in this Act, no person resident in India shall acquire, hold,
own, possess or transfer any foreign exchange, foreign security or any immovable property
situated outside India.
Current Account Transactions

FEMA permits dealings in foreign exchange through authorized person for current
account transactions. However, the central government can impose reasonable restriction in
public interest.
Capital Account Transactions
Any person may sell or draw foreign exchange to or from an authorized person for a
capital account transactions permitted by the reserve bank in consultation with the central
government.
The reserve bank may, however, without prejudice to the generality of this, prohibit, restrict, or
regulate the following;
1. transfer or issue of any foreign security by a person resident in India;
2. transfer or issue of any security by a person resident outside India;
3. any borrowings or lending in foreign exchange in whatever form or by whatever name
called;
4. deposits between persons resident in India and persons resident outside India;
5. export, import or holding of currency or currency notes;
6. Transfer of immovable property outside India, other than a lease not exceeding five years
by a person resident in India.
The Reserve Bank may prohibit, or restrict, or regulate establishment in India of a
branch, office or other place of business by a person resident outside India, for carrying on any
activity relating to such branch, office or other place of business.
Export of Goods and Service
1. Every exporter of goods shall(a). furnish to the Reserve Bank or to such other authority a declaration as specified, containing
true and correct material particulars, including the amount representing the full export value or, if
the full export value of goods is not ascertained at the time of export, the value which the
exporter, having regard to the prevailing market conditions, expects to receive on the sale of the
goods in a market outside India;
(b). furnish to the Reserve Bank such other information as may be required by the Reserve Bank
for the purpose of ensuring the realization of the export proceeds by such exporter.
Realization and Repatriation of Foreign Exchange

Where any amount of foreign exchange is due or has accrued to any person, he shall take
all reasonable steps to realise and repatriate it to India with in the time and in the manner
prescribed by the RBI.
Contravention and Penalties
This provision is in total contrast to the respective provision in the erstwhile FERA
which provided for imprisonment and no limit on fine. Under FEMA, a person will be liable to
civil imprisonment only if he does not pay the fine within 90 days from the date of notice and
that too after formalities of show cause notice and personal hearing. If he does not respond to the
notice, there can be a warrant of arrest.
Administration of the Act
The FEMA has assigned an important role to the Reserve Bank of India in the
administration of this Act. The rules, regulations and norms pertaining to several sections of the
act are to be laid down by the RBI, in consultation with the Central Government.
The Act requires the Central Government to appoint as many officers of the Central
Government as Adjudicating Authorities for holding inquiries pertaining to contravention of the
Act. There is also a provision for appointing one or more Special Directors (Appeals) to hear
appeals against the order of the Adjudicating Authorities.
FERA V/s FEMA
An important difference between FERA and FEMA is that while in FEMA, only the specified
acts relating to foreign exchange are regulated, in FERA anything and everything that has to do
with foreign exchange was controlled. Also the aim of FEMA is facilitating trade as against that
of FERA, which was to prevent misuse. In other words, the theme of FERA was everything that
is specified is under control. While the theme of FEMA is everything other than what is
expressly covered is not controlled. Thus there is a lot of deregulation.