M.Com 2nd semBusiness EnvironmentGLOBAL ENVIRONMENTprepared by:Komala GResearch ScholarDepartment of commerceBUB

Meaning of global environment Why firms go global Route of globalization Active players in global business FDI, India’s experience WTO-benefits and problems for India Trading blocks Analysis of global environment Scanning, monitoring, forecasting, assessing,

global environment

Module-2 Global Environment

The process of integration of the world into huge market even political and geographical barrier becomes irrelevant. In other words the company commits itself heavily with several manufacturing locations around the world and offers products in several diversified industries.

Ex: Toyota, General Electrical, MC Donald, Suzuki, Uniliver, Shell, Sony, Ford ,IBM, Microsoft, City group, Intel, Ranbaxy, Philips etc

Meaning of Global Environment

Spread of; manufacturing, services, market, culture, life style, capital, technology and ideas across national boundaries around the world.

Also the integration of these geographically dispersed economic and social activities.

Huge impacts on people and nation. The whole world is affected by globalization.

Globalization

Globalization refers to the process of integration of the world into one huge market through cross border flow of products, factors and information.

Globalization

The globalization of Production The globalization of markets The globalization of investments The globalization of technology

Components of Globalization

Globalization of production

Globalization of markets

Globalization of investments

Globalization of technology

Conti………

Geographical market segmentation Large size business operation ex: shell, IBM Wider scope Inter-country comparative study Achieve high rate of profit Expanding the production capacity Available technology and managerial

competence

Nature of Globalization

a) Achieve high rate of profitb) Expanding of production capacityc) Severe competitiond) Limited home markete) Political stability v/s political instabilityf) Availability of technology and managerial

competency

Why firms go Global

g) High cost of transformationh) Nearness to raw materialsi) Availability of human resourcesj) Liberalizationk) Increase market sharel) Avoid tariffs and import quotas

Why firms go Global

International TradeExport Import

Foreign Direct Investment(FDI) International company MNCGlobal companyTransnational company

Other RoutesLicensingFranchising Joint ventureWholly owned subsidiariesMergers and acquisitions

Routes of Globalization

Transnational company Multinational company Global companies EX:General motor Ford motor Toyota Shell group Hitachi General electric

Active players in global business

Foreign direct investment (FDI) is a direct investment into production or business in a country by an individual or company of another country, either by buying a company in the target country or by expanding operations of an existing business in that country.

Foreign direct investment is in contrast to portfolio investment which is a passive investment in the securities of another country such as stocks and bonds.

Meaning of FDI

The Foreign Direct Investment means “cross border investment made by a resident in one economy  in an enterprise in another economy, with the objective of establishing a lasting interest  in  the investee economy”.  

FDI is also described as   “investment into the business of  a country by a company in another country”.  

Mostly the investment is into production  by either  buying a company in the target country or by expanding operations of an existing business in that country”.    Such investments can  take place  for many reasons,  including to take advantage of cheaper wages, special investment privileges  (e.g. tax exemptions) offered  by the country.

FDI

(a)    Domestic capital is inadequate for purpose of economic growth;

(b)   Foreign capital is usually essential, at least as a temporary measure, during the period when the capital market is in the process of development;

(c)    Foreign capital usually brings it with other scarce productive factors like technical know how,  business expertise and knowledge

Why Countries Seek FDI ?

(a)    Improves forex position of the country;(b)   Employment generation and increase in

production ;(c)    Help in capital formation by bringing fresh

capital;(d)   Helps in transfer of new technologies,

management skills, intellectual property(e)    Increases competition within the local market

and this brings higher efficiencies(f)    Helps in increasing exports;(g)   Increases tax revenues 

What are the major benefits of FDI :

(a)    Domestic companies fear that they may lose their ownership to overseas company

(b)   Small enterprises fear that they may not be able to compete with world class large companies and may ultimately be edged out of business;

(c)    Large giants of the world try to monopolise and take over the highly profitable sectors;

(d)   Such foreign companies invest more in machinery and intellectual property than in wages of the local people;

(e)    Government has less control over the functioning of such companies as they usually work as wholly owned subsidiary of an overseas company;

 

Why FDI is Opposed by Local People or Disadvantages of FDI :

An Indian company may receive Foreign Direct Investment under the two routes as given under:

i. Automatic RouteFDI is allowed under the automatic route without prior approval either of the Government or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time.

ii. Government RouteFDI in activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance.

What is the procedure for receiving Foreign Direct Investment in an Indian company? 

India is the 3rd largest economy of the world in terms of purchasing power parity and thus looks attractive to the world for FDI.   Even Government of India,  has been trying hard to do away with the FDI caps for majority of the sectors, but there are still critical areas like retailing and insurance where there is lot of opposition from local Indians / Indian companies.

Some of the major economic sectors where India can attract investment are as follows:-◦ Telecommunications◦ Apparels◦ Information Technology◦ Pharma◦ Auto parts◦ Jewelry◦ Chemicals

In last few years, certainly foreign investments have shown upward trends but the strict FDI policies have put hurdles in the growth in this sector. India is however set to become one of the major recipients of FDI in the Asia-Pacific region because of the economic reforms for increasing foreign investment and the deregulation of this important sector. India has technical expertise and skilled managers and a growing middle class market of more than 300 million and this represents an attractive market.

What is Scope of FDI in India?  Why World is looking towards India for Foreign Direct Investments :

FDI is prohibited under the Government Route as well as the Automatic Route in the following sectors:i) Atomic Energyii) Lottery Businessiii) Gambling and Bettingiv) Business of Chit Fundv) Nidhi Companyvi) Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under controlled conditions and services related to agro and allied sectors) and Plantations activities (other than Tea Plantations)vii) Housing and Real Estate business (except development of townships, construction of residen tial/commercial premises, roads or bridges to the extent specified in notificationviii) Trading in Transferable Development Rights (TDRs).ix) Manufacture of cigars , cheroots, cigarillos and cigarettes , of tobacco or of tobacco substitutes.

 

Name  the sectors where FDI is   NOT   allowed in India, both under the Automatic Route as well as under the Government Route? 

(a)    Foreign Investment Promotion Board (popularly known as FIPB) : The Board is responsible for expeditious clearance of FDI proposals and review of the implementation of cleared proposals.  It also undertake investment promotion activities and issue and review general and sectoral policy guidelines;

(b)   Secretariat for Industrial Assistance (SIA) : It acts as a gateway to industrial investment in India and assists the entrepreneurs and investors in setting  up projects.  SIA also liaison with other government bodies to ensure necessary clearances;

(c)    Foreign Investment Implementation Authority (FIIA) :  The authority works for quick implementation of FDI approvals and resolution of operational difficulties faced by foreign investors;

(d)   Investment Commission(e)    Project Approval Board(f)    Reserve Bank of India

Name the authorities Dealing With Foreign Investment:

India has made a decade of rapid economic gains and still has a large, young, and fast-growing population. In 2012, the country saw $25.5 billion in FDI inflows, with investors still anticipating enormous potential.

FDI-statistics

1. By incorporating a wholly owned subsidiary2. By acquiring shares in an associates3. Mergers or acquisitions4. Participating in an equity joint venture with

another

Methods of FDI

o Political stabilityo Government policyo Industrial policyo Economic policyo Rate of interesto Speculationo Cost of production

Factors Influences FDI

Expansion of employment opportunities Capital formation Domestic labour and wages increases Increases GDI Benefits to consumers and Industry Benefits to government BOP will change More export External economics

Advantages of FDI

Foreign Direct Investment Wholly owned subsidiary Joint venture Acquisitions

Port Folio Investment Investment by FI investors Global Depository Receipts(GDR) American Depository Receipts(ADR) Foreign Currency Convertibility

Types of Foreign Investment

FDI in India allowed 100% in single brand and 51% in multi brand retail sectors

Global Investors Meeting (GIM) Liberalize provisions relating to FDI or New Economic

Policy 1991 India creates fast track route to FDI Government changes the policy environment across the

economies which influence the FDI India introduce ADR’s and GDR’s India providing many infrastructural facilities to FDI In the Indian context overseas investment in joint

venture and wholly owned subsidiary have been recognized important channels for promoting global business

Recent Trends in FDI in India

Profits in domestic industrial fall Puts pressure on foreign exchange reserves Foreign firms reinforce dualistic socio-economic

structure and increases income equalities Stimulate inappropriate consumption patterns

through excessive advertising and monopolistic market power

Contribution of foreign firms to public revenues through corporate taxes is comparatively less

Disadvantages of FDI

Regional Trading Blocks are inter governmental associations that manage and promote trade activities for specific regions of the world

TRADING BLOCKSMeaning

Types of Trade Blocks

1. NAFTA - North American Free Trade Agreement2. EU - European Union3. EFTA - European Free Trade Agreement4. EC - European community5. CEFTA - Central European Free Trade Area6. FTAA - Free Trade Area of America7. LAFTA - Latin America Free Trade Agreement8. CC - Caribbean Community9. OECS - Organization of East Caribbean10. TRIPS - Trade Related Intellectual Property

Rights

LIST OF TRADE BLOCKS

11. TRIMS - Trade Related Investment Measures12. SAARC - South Asian Association of Regional

Co-operation13. ASEAN - Association of South East Asian

Nation14. APEC - Asian Pacific Economic Co-

operation15. BA - Bangkok Agreement16. GCC - Gulf Co-operation Council17. OPEC - Organization of petroleum

Exporting Countries 18. IMF - International Monetary Fund19. IBRD - International Bank for Restructure

and Development

TRADE BLOCKS

WTO was established on 1-1-1995 The WTO is the embodiment of Uruguay round

results and successor to the GATT (General Agreement on Trade and Tariffs)

No of Member Countries Stands at 151 INDIA is a founder member of WTO

World Trade Organization (WTO)

To reduce the restrictions on trade and service business

To raising the standards of diving To promote full employment To expand production and trade To optimum utilization of world resources To promote multilateral trade agreements To ensure sustainable development To secure better share of growth and developing

countries in world trade

Objectives of WTO

o Resolve the trade disputeso Administered and implementing multilateral and

plurilateral trade agreementso Act as a watch dog of international tradeo Act as a management consultant for world trade o (Like technical co-operation, training to member

countries) o Acting as a forum for multilateral trade

negotiationso Co-operation with other institutions like

IMF,IBRD,ILOo Overseeing national trade policieso Maintains trade related data base

Functions of WTO

1. Ministerial conferences2. General council

◦ Dispute settlement body council Council for trade in goods Council for trade in services Council for trade related aspects of intellectual property

◦ Trade policy review body committee Committee on trade and development Committee on BOP structure Committee on budget finance and development

◦ Director general Secretarial of WTO

Organizational Structure of WTO

(TRIPs) Trade Related Intellectual Property Rights [patent, copyrights, trademarks] as made stringent

Services sector is back in India EX: Insurance, banking, telecommunication, transportation is backward in India compare to other developed countries

Extension of intellectual property right to agriculture has negative affect to India

TRIMs agreement undernives any local or strategy of self reliant growth based local technology

Product patents in India will lead to hike in drug prices by MNC

Problems of WTO/ Disadvantages to INDIA

Thank you