Unit – 4: International Business
Environment
International Business
International
business refers to business activities that take place across national
frontiers. Though many people use the terms international business and
international trade synonymously, the former is a much broader term.
International business involves not only trade in goods and services, but also
other operations such as production and marketing of goods and services in foreign
countries.
Reasons:
The primary reason for international business is that nations cannot
efficiently produce all that they require. Due to differences in resource
endowments and labour productivity, countries find it much more advantageous to
produce goods and services in which they have cost advantage and trade the
surplus in such goods and services with other nations in exchange of goods and
services which others can produce more efficiently.
Scope:
Scope of international business is quite wide. It includes not only merchandise
exports, but also trade in services, licensing and franchising as well as
foreign investments.
Benefits:
International business benefits both the nations and firms. Nations gain by way
of earning foreign exchange, more efficient use of domestic resources, greater
prospects of growth and creation of employment opportunities. The advantages to
the business firms include: prospects for higher profits, greater utilisation
of production capacities, way out to intense competition in domestic market and
improved business vision.
Modes
of entry: A firm desirous of entering into international business has several
options available to it. These range from exporting/importing to contract
manufacturing abroad, licensing and franchising, joint ventures and setting up
wholly owned subsidiaries abroad. Each entry mode has its own advantages and
disadvantages which the firm needs to take into account while deciding as to
which mode of entry it should prefer.
The important features of
international business are as follows:
a) Large
scale operation: In international business, all the operations are conducted on
a very huge scale. Production International Business and marketing activities
are conducted on a large scale. It first sells its goods in the local market.
Then the surplus goods are exported.
b) Integration
of economies: International business integration (combines) the economies of
many countries. This is because it uses finance from one country, labour from
another country, and infrastructure from another country. It designs the
product in one country, produces its part in many different countries and
assembles the product in another country. It sells the product in many
countries, i.e. in the international market.
c) Dominated
by developed countries and MNCs: International business is dominated by
developed countries and Japan dominated (fully control) foreign trade. This is
because they have large financial and other resources. They also have the best
technology and research and development (R & D). They have highly skilled
employees and managers because they give very high salaries and other benefits.
Therefore, they produce good quality goods and services at low prices. This
helps them to capture and dominate the world market.
d) Benefits
to participating countries: International business gives benefits to all
participating countries. However, the developed (rich) countries get the
maximum benefits. The developing (poor) countries also get benefits. They get
foreign capital and technology. They get rapid industrial development of the
developing countries. Therefore, developing countries open up their economies
through liberal economic policies.
e) Keen
competition: International business has to face keen (too much) competition in
the world market. The competition is between unequal partners i.e. developed
and developing countries. In this keen competition, developed countries and
their MNC s are in a favourable position because they produce superior quality
goods and services at very low prices. Developed countries also have many
contacts in the world market. So, developing countries find it very difficult
to face competition from developed countries.
f) Special
role of science and technology: International business gives a lot of
importance to science and technology. Science and Technology (S & T) help
the business to have large-scale production. Developed countries use high
technologies. Therefore, they dominate global business. International business
helps them to transfer such top high-end technologies to the developing
countries.
g) International
restrictions: International business faces many restrictions on the inflow and
outflow of capital, technology and goods. Many governments do not allow
international businesses to enter their countries. They have many trade block,
tariff barriers, foreign exchange restrictions, etc. All this is harmful to
international business.
h) Sensitive
nature: The international business is very sensitive in nature. Any changes in
the economic policies, technology, political environment, has a huge impact on
it. Therefore, international business must conduct marketing research to find
out and study these changes. They must adjust their business activities and
adapt accordingly to survive changes.
Problems of International business: The major problems faced are as follows:
1. Different currencies: Every country has its own currency. So importer has to make
payment in the currency of exporter’s country.
2. Legal Formalities: International business is subject to a large number of legal
formalities and restrictions.
3. Distance Barriers: Due to large distance between countries, it is difficult to
establish quick and personal contacts between traders from different countries.
4. Language Barrier: Due to different languages in different countries, it becomes
difficult for traders to understand the terms and conditions of the contract.
5. Difference in Laws: International business transactions are subject to laws, rule
and regulations of multiple countries. International business transactions are
subject to laws, rule and regulations of multiple countries.
6. Information Gap: It is difficult to obtain accurate information about foreign
markets and about the financial position of foreign merchants.
International vs Domestic business
Conducting
and managing international business operations is more complex than undertaking
domestic business. Differences in the nationality of parties involved,
relatively less mobility of factors of production, customer heterogeneity
across markets, variations in business practices and political systems, varied
business regulations and policies, use of different currencies are the key
aspects that differentiate international businesses from domestic business.
These, moreover, are the factors that make international business much more
complex and a difficult activity. Some of the differences in Domestic and
International business are given below:
|
DIFFERENCE
|
DOMESTIC
BUSINESS
|
INTERNATIONAL
BUSINESS
|
|
NATIONALITY
|
Employees,
suppliers, middleman, shareholders and partners are usually citizens of the
same country.
|
Employees,
suppliers, middleman, shareholders and partners are from different nations.
|
|
MOBILITY
|
Mobility
of factors of production is more within a country.
|
Mobility
of factors of production is relatively less.
|
|
RISKS
|
It is
subject to political system and risks of a single country.
|
It is
subject to political system and risks of different countries.
|
|
BUSINESS
POLICIES
|
Business
practices, taxation system and policies of a single country are applicable.
|
Business
practices, taxation system and policies vary considerably across countries.
|
|
Currency
|
Mainly
currency of domestic country is involved.
|
Currencies
of more than one country are involved in international business.
|
International Business Environment
The
international business environment can be defined as the environment in
different sovereign countries, with factors exogenous to the home environment
of the organization, influencing decision-making on resource use and
capabilities.
International business environment
refers to totality of all the factors viz. geographic, economic, financial,
socio-cultural, political, legal, technological and ecological which are
external to and beyond the control of individual business enterprises.
International business environment is more complex than the business
environment because international business environment consists of foreign and
global factors, which are external to domestic environment. A firm is generally
familiar with the factors operating at the national level but a firm has to be
aware of various factors operating in a country of trading partner. Thus,
international business environment is sum total of domestic, foreign and global
environments.
International business environment
consists of a number of micro-level and macro-level factors operating at
domestic level, foreign level and global level. Accordingly various factors
constituting business environment may be grouped as under:
(i) Domestic Environment
(ii) Foreign Environment
(iii) Global Environment
Elements
of International Business Environment
The home-based or the domestic export
expansion measures are necessarily related to the conditions prevailing in
possible markets. An Exporter has to overcome various constraints and adapt
plans and operations to suit foreign environmental conditions. The main
elements of foreign environment affecting marketing activities of a firm in a
foreign country consist of the following.
A) POLITICAL DIMENSION: Nations
greatly differ in their political environment. Govt. policies, regulations and
control mechanisms regarding the countries, foreign trade and commercial
relations with other countries or groups of countries. At least four factors
should be considered in deciding whether to do business in a particular
country. They are
1) Attitudes towards International
Buying: Some nations are very receptive,
indeed encouraging, to foreign firms, and some others are hostile. For e.g.:
Singapore, UAE and Mexico are attracting foreign investments by offering investment
incentives, removal of trade barriers, infrastructure services, etc.
2) Political Stability: A country's future and stability is another
important issue. Government changes hands sometimes violently. Even without a
change, a region may decide to respond to popular feeling. A foreign firm's
property may be seized; or its currency holdings blocked; or import quotas or
new duties may be imposed. When political stability is high one may go for
direct investments. But when instability is high, firms may prefer to export
rather than involve in direct investments. This will bring in foreign exchange
fast and currency convertibility is also rapid.
3) Monetary Regulations: Sellers want
to realise profits in a currency of value to them. In best situations, the
Importer pays in the seller's currency or in hard world currencies. In the
worst case they have to take the money out of the host country in the form of
relatively unmarketable products that they can sell elsewhere only at a loss.
Besides currency restrictions, a fluctuating exchange rate also creates high
risks for the exporter.
4) Government Bureaucracy: It is the
extent to which the Government in the host country runs an efficient system for
assisting foreign companies: efficient customs handling, adequate market
information, etc. The problem of foreign uncertainty is thus further
complicated by a frequently imposed "alien status", this increases
the difficulty of properly assessing and forecasting the dynamic international
business. The political environment offers the best example of the alien
status.
A foreign political environment can be
extremely critical; a shift in Government often means sudden changes in
attitudes that can result in expropriation, expulsion, or major restrictions in
operations. The fact is that a foreign company is foreign and thus always
subject to the political whim to a greater degree than a domestic firm.
B) CULTURAL ENVIRONMENT: The manner in
which people consume their priority of needs and the wants they attempt to
satisfy, and the manner in which they satisfy are functions of their culture
which moulds and dictates their style of living. This culture is the sum total
of knowledge, belief, art, morals, laws, customs and other capabilities
acquired by humans as members of the society. Since culture decides the style
of living, it is pertinent to study it especially in export marketing. e.g.
when a promotional message is written, symbols recognizable and meaningful to
the market (the culture) must be used. When designing a product, the style used
and other related marketing activities must be culturally acceptable.
C) ECONOMIC ENVIRONMENT: In
considering the international market, each Exporter must consider the importing
country's economy. Two economic characteristics reflect the country's
attractiveness as an export market. They are the country's industrial structure
and the country's income distribution by employment industrialization and socio
economic justices.
D) LEGAL ENVIRONMENT: The legal
dimension of international Business environment includes all laws and
regulations regarding product specification and standards, packaging and
labeling, copyright, trademark, patents, health and safety regulations
particularly in respect of foods and drugs. There are also controls in promotional
methods, price control, trade margin, mark-up, etc., These legal aspects of
marketing abroad have several implications which an exporting firm needs to
study closely.
Meaning of
Globalisation
Globalizations are
the outcome of the policies of liberalisation and privatisation. Globalisation
is generally understood to mean integration of the economy of the country with
the world economy, it is a complex phenomenon. It is an outcome of the set of various
policies that are aimed at transforming the world towards greater
interdependence and integration. It involves creation of networks and
activities transcending economic, social and geographical boundaries.
Globalisation
involves an increased level of interaction and interdependence among the
various nations of the global economy.
Physical geographical gap or political boundaries no longer remain
barriers for a business enterprise to serve a customer in a distant
geographical market.
In simple words, The term globalization can be
defined as the opening one's economy toward the world economy. It means to
integrate the domestic economy with world economy. The govt. of India under the
prime minister ship of P. V Narasimha introduced liberalisation, privatisation
and globalization during 1991 .Due to globalization the multinational
corporations have been very popular. These corporations transact their business
activities more than one countries.
Globalisation
and India
Indian economy had experienced major
policy changes in early 1990s. The new economic reform, popularly known
as, Liberalization,
Privatization and Globalization (LPG model) aimed at making the
Indian economy as fastest growing economy and globally competitive. The series
of reforms undertaken with respect to industrial sector, trade as well as
financial sector aimed at making the economy more efficient.
With the onset of reforms to
liberalize the Indian economy in July of 1991, a new chapter has dawned for
India and her billion plus population. This period of economic transition has
had a tremendous impact on the overall economic development of almost all major
sectors of the economy, and its effects over the last decade can hardly be
overlooked. Besides, it also marks the advent of the real integration of the
Indian economy into the global economy.
This era of reforms has also ushered
in a remarkable change in the Indian mindset, as it deviates from the
traditional values held since Independence in 1947, such as self reliance and
socialistic policies of economic development, which mainly due to the inward
looking restrictive form of governance, resulted in the isolation, overall
backwardness and inefficiency of the economy, amongst a host of other problems.
This, despite the fact that India has always had the potential to be on the
fast track to prosperity.
Benefits
of Globalisation
a) Increased Competition: One of the most
visible effects is the improved quality of products due to global competition.
Customer service and the ‘customer is the king’ approaches to production have
led to improved quality of products and services. As the domestic companies
have to fight out foreign competition, they are compelled to raise their
standards and customer satisfaction levels in order to survive in the market.
b) Employment: With globalisation,
companies are moving towards the developing countries and hence generated
employment for them. It has given an opportunity to invest in the emerging
markets and tap up the talent which is available there. In developing
countries, there is often a lack of capital which hinders the growth of
domestic companies and hence creates unemployment. In such cases, due to global
nature of the businesses, people of developing countries too can obtain gainful
employment opportunities.
c)
Investment
and Capital Flows: A lot of companies have directly invested in developing
countries like Brazil and India by starting production units. Companies which
perform well attract a lot of foreign investment and thus push up the reserve
of foreign exchange.
d) Spread of Technical Know-How: While it
is generally assumed that all the innovations happen in the Western world, the
know-how also comes into developing countries due to globalisation. Without it,
the knowledge of new inventions, medicines would remain cooped up in the
countries that came up with them and no one else would benefited. The spread of
know –how can also be expanded to include economic and political knowledge,
which too has spread far and wide.
e)
Spread
of Culture: Not all good practices were born in one civilization. The world
that we live in today is a result of several cultures coming together. People
of one culture, if receptive, tend to see the flaws in their culture and pick
up the culture which is more correct or in tune with the times. Societies have
become larger as they have welcomed people of other civilization and
backgrounds and created a whole new culture of their own. Cooking styles,
languages and customs have spread all due to globalization. The same can be
said about movies, musical styles and other art forms. They too have moved from
one country to another, leaving impression on a culture which has adopted them.
IMPACT
OF GLOBALIZATIN ON VARIOUS SECTOR OF INDIAN ECONOMY OR ROLE OF GLOBALISATION
1)
Impact of
Globalization on Agricultural Sector
Agricultural Sector is the mainstay of the rural Indian economy
around which socio-economic privileges and deprivations revolve and any change
in its structure is likely to have a corresponding impact on the existing
pattern of Social equity. The liberalization of India’s economy was adopted by
India in 1991. Facing a severe economic crisis, India approached the IMF for a
loan, and the IMF granted what is called a ‘structural adjustment’ loan, which
is a loan with certain conditions attached which relate to structural change in
the economy. Essentially, the reforms sought to gradually phase out government
control of the market (liberalization), privatize public sector organizations
(privatization), and reduce export subsidies and import barriers to enable free
trade Globalization has helped in:
Ø Raising
living standards,
Ø Alleviating
poverty,
Ø Assuring
food security,
Ø Generating
buoyant market for expansion of industry and services, and
Ø Making
substantial contribution to the national economic growth.
2)
Impact of
Globalization on Indian trade and industry:
Globalization
has its impact on India which is a developing country. The positive impact of
globalization can be analysed as follows:
1.
Access to Technology: Globalization has drastically,
improved the access to technology. Internet facility has enabled India to gain
access to knowledge and services from around the world. Use of Mobile telephone
has revolution used communication with other countries.
2.
Growth of international trade: Tariff barriers have been removed
which has resulted in the growth of trade among nations. Global trade has been
facilitated by GATT, WTO etc.
3.
Increase in production: Globalization has resulted in increase
in the production of a variety of goods. MNCs have established manufacturing
plants all over the world.
4.
Employment opportunities: Establishment of MNCs have resulted in
the increase of employment opportunities.
5.
Free flow of foreign capital: Globalization has encouraged free flow
of capital which has improved the economy of developing countries to some
extent. It has increased the capital formation.
6.
Products of superior quality: Products of superior quality are available in the
market due to increased competition, efficiency and productivity of the
businesses and this leads to increased
consumer satisfaction.
7.
Free flow of finance enable the banking and financial institutions in a country
to fulfill financial requirements through internet and electronic transfers easily and help businesses to
flourish.
3)
Impact on
Financial Sector
Reforms of the financial sector constitute the most important
component of India’s programme towards economic liberalization. The recent
economic liberalization measures have opened the door to foreign competitors to
enter into our domestic market. Innovation has become a must for survival.
Financial intermediaries have come out of their traditional approach and they
are ready to assume more credit risks. As a consequence, many innovations have
taken place in the global financial sectors which have its won impact on the
domestic sector also. The emergences of various financial institutions and
regulatory bodies have transformed the financial services sector from being a
conservative industry to a very dynamic one. In this process this sector is facing
a number of challenges. In this changed context, the financial services
industry in India has to play a very positive and dynamic role in the years to
come by offering many innovative products to suit the varied requirements of
the millions of prospective investors spread throughout the country. Reforms of
the financial sector constitute the most important component of India’s
programme towards economic liberalization.
Growth in financial services (comprising banking, insurance, real
estate and business services), after dipping to 5.6% in 2003-04 bounced back to
8.7% in 2004-05 and 10.9% in 2005-06 The momentum has been maintained with a
growth of 11.1% in 2006-07. Because of Globalization, the financial services
industry is in a period of transition. Market shifts, competition, and
technological developments are ushering in unprecedented changes in the global
financial services industry.
4)
Impact on
Export and Import
India’s Export and Import in the year 2001-02 was to the extent of
32,572 and 38,362 million respectively. Many Indian companies have started
becoming respectable players in the International scene. Agriculture exports
account for about 13 to 18% of total annual of annual export of the country. In
2000-01 Agricultural product valued at more than US $ 6 million were exported
from the country 23% of which was contributed by the marine products alone.
Marine products in recent years have emerged as the single largest contributor
to the total agricultural export from the country accounting for over one fifth
of the total agricultural exports. Cereals (mostly basmati price and
non-basmati rice), oil seeds, tea and coffee are the other prominent products
each of which accounts from nearly 5 to 10% of the country’s total agricultural
exports.
The implications of globalization for a national economy are many.
Globalization has intensified interdependence and competition between economies
in the world market. This is reflected in Interdependence in regard to trading
in goods and services and in movement of capital. As a result domestic economic
developments are not determined entirely by domestic policies and market
conditions. Rather, they are influenced by both domestic and international
policies and economic conditions. It is thus clear that a globalizing economy,
while formulating and evaluating its domestic policy cannot afford to ignore
the possible actions and reactions of policies and development in the rest of
the world. This constrained the policy option available to the government which
implies loss of policy autonomy to some extent, in decision-making at the
national level.
Negative effect of
globalization:
Negative effects of globalization on Indian industry have
been:
1. Rise in demand for labor and the rise in wage rates
leading to some increase in costs.
2. Weakening power of the trade unions over labor in emerging
industries and growth sectors like IT, entertainment, internet and mobile
services, airlines, banking, insurance, banking services.
3. Too much competition in the market leading to continuous
pressure on raising productivity, enhancing consumer service, improving product
quality, in order to survive.
4. Voluntary retirement for many public sector units.
5. Too many sales person chasing customers.
6. Too many cars on the road and traffic congestion.
7. Growth of consumerism.
8. Instability in profits due to too much choice among
customers.
9. Shortage power and infrastructure affecting industrial
expansion.
10. Closure of inefficient units supplying costly and shoddy
products and loss of jobs.
11. Two years of large increase in textile industry jobs
followed by large loss of jobs due to Rupee appreciation making Indian industry
uncompetitive.
12. Problems of dealing with uncertainty in the international
market in terms of demand, supply and prices.,
OBSTACLES
TO GLOBALIZATION
The Indian business suffers from many
disadvantages in respect of globalization of business. The important problems
are following:
a) Government Policy & Procedures:
Government policy procedure in India is among the most complex, confusing and cumbersome in the world. Even after
the much publicized liberalization, they do not present a very conducive
situation. Government policy and the bureaucratic culture in India in this
respect are not that encouraging.
b) High Cost: High cost of many vital input and
factors like raw material and intermediates, power, finance, infrastructure
facilities like port etc. tent reduce the international competitiveness of the
Indian business.
c)
Poor
Infrastructure: Infrastructure in India is very inadequate and
insufficient and they for very costly this is the serious problem affecting the
growth and competitiveness.
d)
Resistance
to Change: There are
several socio-political factors which resist change and this comes in the way
of modernization, rationalization and efficiency improvement. Technological
resist due to fear of unemployment. The extend labors employed by Indian
industry is alarming because of labors of production is low and this may come
in offsets the advantages of cheap labors.
e)
Poor
quality image: Due to various reasons, the quality of many Indian products is
poor. Even when the quality is good, the poor quality image, India has become a
handicap.
f) Supply problem: Due the
various reason like low production, infrastructure like power, port facilities.
g) Small Size: Because of the small size and the low
level of resources, in many cases Indian firms are not able to compete with the
giants of other counties. Even the largest
Indian companies are small compared to the multinational giants.
h) Limited R&D and marketing Research: Marketing
research and R&D in other areas are vital inputs for development of
international business. However, these are poor in Indian business. Expenditure
on R&D in Indian is less than one percentage of the GNC while it is two to
three percent in most of the developed counties. In 1994-95, Indian’s per
capital R&D expenditure was less than $3 when it was between $100 and $825
for most of the developed nation.
i)
Growing
competition: The competition is growing not only from the firm in the developed
countries but also from the developing country firms. Indeed, the growing
competition from the developing country firms is a serious challenge to
Indian’s International business.
j)
Trade
Barriers: Although the tariff
barriers to trade have been progressively reduced thanks to the GATT/WTO, the
non-tariff barriers have been increasing, particularly in the developed
counties.
International Economic Grouping
After the Second World War, when the entire economy of the
world was destroyed and a transformation was going on from the wartime economy
to peacetime economy, the world leaders have started to give thought on the
line of increasing the world trade. After the two world wars the countries of
the world erected tariff wall to reduce import. This ultimately resulted in
fall in trade. Secondly, the need was felt for an international institution
which will monitor and act as the regulator of the world trade. All these come
out in the form of General Agreement on Trade and Tariffs (GATT). Later on it
was replaced by world Trade Organization (WTO). At the regional level also
several groups emerges to promote cooperation and trade at the regional level.
Some of these are ASEAN and SAARC. After the World War II, in order to revive
the international monetary system a necessity was felt for an international
financial institution to support the economies which were damaged due to the
war and also to help the countries to run their economy efficiently. So, two
international financial institutions came out which are International Monetary
Fund and World Bank.
GATT / World Trade Organisation and its Impact on
Indian economy
The first half of the 20th century was marked by a
major worldwide economic depression that occurred between the two world wars
and that all but destroyed most of the industrialized nations. International
trade got a setback when after the First World War countries erected high
tariff walls and raised other tariff barriers to intolerable heights. All this
resulted in to the great depression. This was also one of the fundamental
reasons of the World War II.
After the Second World War leaders creates General Agreement
on Tariffs and Trade (GTTO), to avoid the repletion of the same. GATT was a
forum for the member countries to negotiate a reduction of tariffs and other
barriers to trade. Countries including India signed the GATT. The original
agreement provides a process to reduce tariffs and created an agency to serve
as a watchdog over world trade.
GATT came into existence with
effect from 1st January 1948 and remained
in force till December 1994. Various
rounds of negotiations have taken
place under the auspices of GATT to
reduce tariff and non-tariff barriers.
The last one, known as the Uruguay
Round, was the most comprehensive
one in terms of coverage of issues,
and also the lengthiest one from the
point of view of duration of negotiations
which lasted over a period of seven
years from 1986 to 1994.
One
of the key achievements of the Uruguay
Round of GATT negotiations was the
decision to set up a permanent institution
for looking after the promotion of
free and fair trade amongst nations.
Consequent to this decision, the
GATT was transformed into World
Trade Organisation (WTO) with effect
from 1st January 1995. The head quarters
of WTO are situated at Geneva, Switzerland.
Establishment of WTO, thus,
represents the implementation of the
original proposal of setting up of the ITO
as evolved almost five decades back.
Though,
WTO is a successor to GATT, it is a
much more powerful body than GATT.
It governs trade not only in goods,
but also in services and intellectual
property rights. Unlike GATT, the
WTO is a permanent organisation
created by an international treaty
ratified by the governments and legislatures
of member states. It is, moreover, a
member driven rule-based organisation
in the sense that all the decisions
are taken by the member governments
on the basis of a general consensus.
As the principal international body
concerned with solving trade
problems between countries and
providing a forum for multilateral
trade negotiations, it has a global
status similar to that of the IMF and
the World Bank. India is a founding member
of WTO. As on 11th December 2005,
there were 149 members in WTO.
Objectives
of WTO: WTO lays down the following objectives:
a) Relation
in the field of trade shall be conducted with a view to raising standards of
living, ensuring full employment and large and steadily growing volume of real
income and effective demand, and expanding the production and trade in goods
and services.
b) To allow
for the optimal use of the world’s resources in accordance with the objective
of sustainable development.
c) To make
positive efforts designed to ensure that developing countries especially the
least developed among them, secure a share in the growth in international
trade.
d) To achieve
these objectives by entering into reciprocal and mutually advantageous
arrangements directed towards substantial reduction of tariffs and other
barriers to trade and the elimination of discriminatory treatment in
international trade relations.
e) To develop
an integrated, more viable and durable multilateral trading system.
f) To ensure
linkages between trade policies, environment policies and sustainable
development.
Functions
of WTO: The following are the functions of the WTO:
a) It
facilitates the implementation, administration and operation of the objectives
of the Agreement and of the Multilateral Trade Agreements.
b) It
provides the framework for the implementation, administration and operation of
the multilateral Trade Agreements relating to trade in civil aircraft,
government procurement, trade in diary products and bovine meat.
c) It
provides the forum for negotiations among its members.
d) It
administers the Understanding on Rules and Procedures governing the Settlement
of Disputes of the Agreement.
e) It
cooperates with the IMF and the World Bank and its affiliated agencies with a
view to achieving greater coherence in global economic policy-making.
Implications
for India: After the Uruguay Round, India was one of the first 76 Governments
that became member of the WTO on its first day. Different views have been
expressed in support and against our country becoming a member of the WTO.
Favourable
Factors
a) Benefits
from reduction of tariffs on exports.
b) Improved
prospects for agricultural exports because the prices of agricultural products
in the world market will increase due to reduction in domestic subsidies and
barriers to trade.
c) Likely
increase in the exports of textiles and clothing due to the phasing out of MFA
by 2005.
d) Advantages
from greater security and predictability of the international trading system.
e) Compulsions
imposed on India to be competitive in the world market.
Unfavourable
Factors
a) Tariff
reductions on goods of export interest to India are very small.
b) Less
prospects of increase in agricultural exports due to the limited extent of
agricultural liberalisation.
c) There will
be hardly any liberalisation of our textile exports during the next 10 years.
d) India will
be under pressure to liberalize the services industries.
e) There will
be only marginal liberalisation to the movement of labour services in which it
is competitive.
f) Increased
outflows of foreign exchange due to commitments undertaken in the fields of
TRIPS, TRIMS and services.
g) Technological
dependence on foreign firms will increase.
h) Only a few
large firms or transnational corporations may benefit and smaller firms may
disappear.
IMF and Its Contribution in Indian Economy
Introduction
to IMF: The IMF was established on December 27, 1945 in Washington on the
recommendations of Bretton Woods Conference. But it started working on March 1,
1947. The fund has 185 member countries accounting for more than 80 per cent of
total world production and 90 per cent of world trade. The purpose of the Fund is to promote
international monetary cooperation, to facilitate the expansion and balanced
growth of international trade, to promote exchange stability and to prevent
unnecessary exchange depreciations, to remove all exchange controls and
restrictions and to establish multi-convertibility of all currencies and lastly
to help member countries with funds to correct maladjustments in their balance
of payments. The fund
of the IMF is SDRs 216.75 billion and to replenish its resources it borrows
from the world financial markets and member countries. IMF’s own fund is
contributed by member countries.
IMF and INDIA
IMF has played an importance role in
Indian economy. IMF had provided economic assistance from time to time to India
and has also provided appropriate consultancy in determination of various
policies in the country. India is the founder member of IMF. It played a
significant role in the formulation of Fund Policies. The Finance Minister is
ex-officio Governor in IMF Board of Governors. Till 1970, India was among the
first five nations having the highest quota with IMF and due to this status
India was allotted a permanent place in Executive Board of Directors.
India has taken loans in foreign
currencies from IMF or improving its balance of payments imbalances. India has
also taken technical consultancy for solving its internal economic problems.
The expert groups of the IMF have visited India on various occasions.
Objective of IMF: The objective
for which IMF was established has been described as following:
1)
Promote International Monetary Co-operation: The
main objective of the fund was to promote international monetary co-operation
through a permanent institution which provides that machinery for consultation
and collaboration on international monetary problems.
2)
Balanced Growth of International Trade: The one
of the main objective of the Fund was to facilities the expansion and balanced
growth of international trade and to contribute thereby to the promotion and
maintenance of high levels of employment and real income and to the development
productive resources of all members.
3)
Stability of Exchange Rates: Another important
objective of IMF was to promote exchange stability, to maintain orderly
exchange arrangements among members and to avoid competitive exchange
depreciation.
4)
Establishment of Multilateral trade and payment
system: Another objective of the establishment of IMF was to assist the
establishment of the multilateral system of payments in respect of current
transactions between members and in the elimination of foreign exchange
restrictions which hamper the growth of world trade.
5)
To develop confidence to member: Another
objective of IMF was to give confidence to members by making the funds,
resources available to them under adequate safeguards, thus providing with
opportunity to correct maladjustments in their balance of payments without
resorting to measures destructive of national or international prosperity.
6)
Removing Deficit of balance of Payments: Another
objective of the establishment of IMF was removal of the deficit of balance of
payments also. IMF makes arrangement of necessary loans from foreign exchange
reserves for removing the deficit of balance of payments.
In addition
to this India also got the following benefits of becoming the IMF members:
1. Independence of the Indian Rupee: Before the establishment of the IMF, the
Indian rupee was linked with the British Pound Sterling. But Indian rupee has
become independent after the establishment of IMF. Its value is expressed in
terms of gold. It is not determined by the Pound Sterling. It means that Indian
rupee is easily convertible into the currency of any other country.
2. Membership of the World Bank:
India has become a member of the World Bank also by virtue of its membership of
the Fund. As a result, India got several loan facilities from the World Bank
for the development purposes.
3. Availability of Foreign Currencies: The Government of India has been purchasing
foreign currencies from the Fund from time to time to meet the requirements of
development activities. The large amount of availability of foreign currencies
has greatly promoted the economic development of the country.
4. Reputation in International Circle: India is one of those six countries which
have occupied a special place in the Board of Directors of the Fund. Thus, India
had played a creditable role in determining the policies of the Fund. This has
increased India’s prestige in the international circles. India takes keen
interest in the formulation of Fund’s policies.
5. Guidance and Advice:
Being member of the Fund, India got the expert opinion from the Fund for
solving its economic problems. The attitude of the Fund towards India has
always remained sympathetic. The Fund has given valuable advice to the
Government of India with regard to the financing of the Five-Year Plans.
6. Timely Help:
India has received timely help from the Fund to eliminate the deficit on its
balance of payments. The Fund granted loans to meet the financial difficult is
arising out of the Indo-Pak conflict of 1965 and 1971. Thus, the fund has given
timely help to solve economic crisis.
7. Freedom from Sterling:
Indian rupee was convertible into other currencies through the medium of
sterling before becoming the member of the fund. With the fixation of paper
value of the rupee in gold, Indian currency is now freely convertible into any
other currency.
8. Sale and Purchase of Foreign Exchange: Fund has entrusted the sale and purchase of
foreign exchange worth more than Rs. 2 lakh to Reserve Bank of India. The
latter cannot enter into any transaction of foreign exchange that is of the
value of less than Rs. 2 lakh.
9. Economic Consultation:
In the financial management of Five- Year Plans, IMF has given valuable advice
to Government of India and to suggest measures for its economic development.
10. Help
during Emergency: India got a
large amount of financial assistance from the Fund to solve its economic crisis
arising due to natural calamities like flood, earthquakes, famines etc.
World
Bank and Its Impact on Indian Economy
Introduction: A need
arises to finance various projects in various countries to promote the
development of economically backward regions. The United States and other
countries have established a variety of development banks whose lending is
directed to investments that would not otherwise be funded by private capital.
The investments include dams, roads, communication systems, and other
infrastructural projects whose economic benefits cannot be computed and/or
captured by private investors, as well as projects, such as steel mills or
chemical plants, whose value lies not only in the economic terms but also,
significantly in the political and social advantages to the nation.
The
loans generally are medium-term to long-term and carry concessional rates. Even
though most lending is done directly to a government, this type of financing
has two implications for the private sector. First, the projects require goods
and services which corporations can produce. Secondly, by establishing an
infrastructure, new investment opportunities become available for multinational
corporations.
The
World Bank or the International Bank for Reconstruction and Development (IBRD)
was established in 1945 under the Bretton Woods Agreement of 1944. An
International Monetary and Financial Conference was held at Bretton Woods, New
Hampshire during July 1-22, 1944. The main purpose of the conference was
finalisation of the Articles of Association of IMF and establishment of an
institution for the reconstruction of the war shattered world economies. Thus,
the conference has given birth to World Bank or International Bank for
Reconstruction and Development (IBRD). World Bank was established to provide
long-term assistance for the reconstruction and development of the economies of
the member countries while IMF was established to provide short term assistance
to correct the balance of payment disequilibrium.
There are the four basic objectives of
the World Bank’s funding strategy:
a) To make
sure availability of funds in the market.
b) To provide
the funds at the lowest possible cost to the borrowers through appropriate
currency mix of its borrowing and opting to borrow when interest rates are
expected to rise.
c) To control
volatility in net income and overall loan changes.
d) To provide
an appropriate degree of maturity transformation between its lending and the
borrowing. Maturity transformation depicts the Bank’s capacity to lend for
longer period than it borrows.
Functions and objectives of World Bank
a) To assist
in the reconstruction and development of the territories of its members by
facilitating the investment of capital for productive purposes.
b) To promote
private foreign investment by means of guarantee of participation in loans and
other investments made by private investors and, when private capital is not
available on reasonable terms, to make loans for productive purposes out of its
own resources or from funds borrowed by it.
c) To promote
the long term balanced growth of international trade and the maintenance of
equilibrium in balance of payments by encouraging international investment for
the development of the productive resources of members.
d) To arrange
loans made or guaranteed by it in relation to international loans through other
channels so that more useful and urgent projects, large and small alike, will
be dealt first.
India and the World Bank
India
is the founder member of the Bank and held a permanent seat for number of years
on its Board of Executive Directors. India is one of the largest receivers of
assistance since 1949. Upto June 2002, cumulative lending’s of the World Bank
to India amounted to $ 26.69 billion in 187 loans. The total amount borrowed by
India from the World Bank and the IDA till June 2002 amounted to $ 58.54
billion in 434 loans. This amounted to 11.6 per cent of the total loans and
credits approved by the World Bank groups. During 2001-02, India received $ 893
million from the World Bank accounting for 11.22 per cent of its total loans.
India is helped by the World Bank in its planned economic development through
granting loans, conducting field surveys, sending study terms and missions and
through rendering expert advice. The Bank also provides training to Indian
personnel at EDI. It also helped India to solve its river water dispute with
Pakistan.
The
benefits desired by India from the World Bank are:
a) India has
received a lot of assistance from the World Bank for its development projects.
b) Aid India
Club was founded in 1950 by the efforts of the World Bank with a view to help
India. This club is now called India Development Forum. This Forum had decided
to give loans amounting to $ 600 crore to India for implementing its structural
adjustment.
c) The bank’s
role in solving the Indus water dispute between India and Pakistan has been
invaluable.
d) General
loans have also been granted by the World Bank to India, to be utilised as per
its own discretion.
e) As a
member of the World Bank, India has become the members of International Finance
Corporation, International Development Association and Multilateral Investment
Guarantee Agency also.
f) India has
received technical assistance from time to time from the World Bank for its
various projects. The Expert Team of the Bank has visited India and given
valuable suggestions also.
g) The
massive population of India has always created problems in the economic
development of the country. World Bank has been helping India in the population
control programmes and urban development. For this purpose loans amounting to $
495 crore have also been given to India.
h) World Bank
has been giving financial assistance to NGOs operating in India e.g. Leprosy
Elimination, Education Projects, Child development service projects etc.
On the other hand, critics argue that the World Bank have
endangered the economic freedom of India. The basic points of criticism are as
follows:
a) The World
Bank has laid a great deal of emphasis on measures of economic liberalisation
and more free play of market forces.
b) A lot of
stress has been laid on going very slow on the setting up of public sector
enterprises including financial intermediaries and encouraging private sector.
c) India’s
dependence on World Bank has been increasing which is adversely affecting its
economic freedom.
d) The
attitude of World Bank reflects the preference for free enterprise and a market
oriented economy. It shows dissatisfaction with the general performance of
economies which are based on planning and regulation. At different occasions
the Bank has tried to undermine the Significance of our Planning Commission.
e) The
devaluation of Indian rupee in 1966 and 1991 was done at the insistence of the
World Bank only.
India’s
main problem till now has been the government’s incapacity to act rightly,
firmly and effectively in time, on account of being more emotional to set
ideologies and compromising attitude to safeguard the political party’s interest
more than the national interest.
SAFTA
SAFTA
is an abbreviation for the South Asian Free Trade Area. It is a proposed free
trade agreement between the seven members of the SAARC group. These include
Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. The
ultimate aim of Safta will be to put in place a full-fledged South Asia
Economic Union on the lines of the EU. Among its aims are promoting and
enhancing mutual trade and economic cooperation by eliminating barriers in
trade, promoting conditions of fair competition in the free trade area,
ensuring equitable benefits to all and establishing a framework for further
regional cooperation to expand the mutual benefits of the agreement.
It
could lead to enhancement of foreign investment among Saarc nations. The
visible spurt in foreign investment within Asean countries and the increase in
investments by India in Sri Lanka and vice versa following the India-Sri Lanka
FTA bear testimony to the potential of such agreements in boosting investments.
The
agreement can be structured to ensure that such investments don’t harm the
domestic industries of member-nations. RTAs, like the proposed Safta, can also
catalyse beneficial industrial restructuring in member-countries through
cross-border corporate marriages and acquisitions.
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