UNIT III - ELEMENTS OF BUSINESS ACTIVITY

PRODUCTION Production means application of processes. (Technology) to the raw material to add the use and economic values to arrive at desired product by the best method, with out sacrificing the desired quality. We have three ways of Production, they are: (i) Production by Disintegration: By separating the contents of Crude oil or a mixture the desired products are produced. For example the crude oil is disintegrated into various fuel oils. Similarly salt production is also an example for product produced by disintegrated. We can use Mechanical or Chemical or both technologies to get the desired product, so that it will have desired use value. (ii) Production by Integration: In this type of Production various Components of the products are assembled together to get the desired product. In this process, Physical and Chemical Properties of the materials used may change. The examples are: Assembly of Two wheelers, four wheelers and so on. (iii) Production by Service: Here the Chemical and Mechanical Properties of materials are improved without any physical change. The example for this is Heat Treatment of metals. In real world, a combination of above methods is used. In general production is the use of any process or procedure designed to transform a set of input elements into a set of output elements, which have use value and economic value. DEFINITION OF PRODUCTION MANAGEMENT It may be defined as: (i) The performance of the management activities with regards to selecting, designing, operating, Controlling and updating production system. (ii) It is the processes of effectively planning, coordinating and controlling the production that is the operations of that part of an enterprise, it means to say that production and operations Management is responsible for the actual transformation of raw materials into finished products. (iii) Production management is a function of Management, related to planning, coordinating and controlling the resources required for production to produce specified product by specified methods, by optimal utilization of resources. (iv) Production management is defined as management function which plans, organizes, coordinates, directs and controls the material supply and processing activities of an enterprise, so that specified products are produced by specified methods to meet an approved sales programme. These activities are being carried out in such a manner that Labour, Plant and Capital available are used to the best advantage of the organization. OBJECTIVE OF PRODUCTION MANAGEMENT The objective of Production Management is to produce the desired product or specified product by specified methods so that the optimal utilization of available resources is met with. Hence the production management is responsible to produce the desired product, which has marketability at the cheapest price by proper planning, the manpower, material and processes. Production management must see that it will deliver right goods of right quantity at right place and at right price. When the above objective is achieved, we say that we have effective Production Management system.

SCOPE OF PRODUCTION MANAGEMENT: In fact, we apply Principles of Management; and functions of Management in our day-to-day life. We all know, from morning till night, we plan our activities; we coordinate available resources and control our activities to achieve certain goals. So also any organization must follow the Principles of Management for its survival and growth. The same is applicable to production Management also. Reading and learning Production Management will enable one to be capable of solving the problems of the organization, may be an Educational Institution, Production Shop, Hospital, Departmental shop or even a barber shop. The problems a manager face in various organizations are more or less similar to that of Production department but smaller in magnitude. Hence the knowledge of Production Management will help any professional Manager to tackle the problems of his business easily. For example: The Production Management consists of Planning, selection of materials, planning of processes, Routing, Scheduling and controlling the activities etc., Take the example of an Educational Institution/University. Here also selection of raw students, Planning of the Course Work, Educating the students and conducting the examination. Therefore this knowledge will enable one to apply the principles of Production Management to any field of life without restriction. Here, we have to remember that the above is also applicable to the management of a service organization and the management of a Project. Here it is better to distinguish between product, Service and Project, so as to help the reader to know on which particular aspect of Production Management to put much emphasis, in managing a service organization or a project. (i) Product: Manufacturing system often produces standardized products in large volumes. The plant and machinery have a finite capacity. The facilities constitute fixed costs, which are allocated to the products produced. Variable costs, such as, labour cost and materials costs. While manufacturing the product use value and economic values are added to the product. Hence the product is a store of values added during manufacture. Because the input costs and output costs are measurable, the productivity can be measured with certain degree of accuracy. Product can be transported to the markets and stored physically until it is sold. (ii) Service: Service system present more uncertainty with respect to capacity and costs. Services are produced and consumed in the presence of the customer. We cannot store the service physically. Because of this the service organizations, such as Hotels, Hospitals, Transport Organizations and many other service organizations the capacity must be sufficiently or consciously managed to accommodate a highly variable demand. Sometimes services like legal practice and medical practice involve Professional or intellectual judgments, which cannot be easily standardized. Because of this the calculation of cost and productivity is difficult. (iii) Project: Project system does not produce standardized products. The Plant, Machinery, Men and Materials are often brought to project site and the project is completed. The project is of big size and remains in the site itself after completion. As the costs can be calculated and allocated to the project with considerable accuracy, Productivity can be measured. Once the project is completed, all the resources are removed from site.

TYPES OF PRODUCTION SYSTEMS The organization of manufacturing systems, also planning and control of production greatly depends on type of product type of the product line. Basic principles that guide the formation of planning policy and its execution may be the same for all the manufacturing concerns. But emphasis on a particular aspect of production management in fulfilling of specific requirement of the plant and the management approach to the problems of inventory, machine selection, machine setting, tooling, routing, scheduling, loading, follow up and general control will differ depending on the type of production system. Three main factors generally determine this aspect are : (i) Type of production i.e., quantities of finished products and regularity of manufacture. For example whether Job production or Batch Production or Continuous Production. (ii) Size of the Plant i.e., Small Industry, Medium sized Industry or Large Industry. (iii) Type of Production: In general there are three classifications in types of Production system. They are discussed below. (a) Job Production: In this system Products are manufactured to meet the requirements of a specific order. The quality involved is small and the manufacturing of the product will take place as per the specifications given by the customer. This system may be further classified as. (i) The Job produced only once: Here the customer visit the firm and book his order. After the completion of the product, he takes delivery of the product and leaves the firm. He may not visit the firm to book the order for the same product. The firm has to plan for material, process and manpower only after receiving the order from the customer. The firms have no scope for pre-planning the production of the product. (ii) The job produced at irregular intervals: Here the customer visits the firm to place orders for the same type of the product at irregular intervals. The firm will not have any idea of customers visit here also planning for materials, process and manpower will start only after taking the order from the customer. In case the firm maintains the record of the Jobs Produced by it, it can refer to the previous plans, when the customer arrives at the firm to book the order. (iii) The Jobs Produced periodically at regular intervals: In this system, the customer arrives at the firm to place orders for the same type of product at regular intervals. Here firm knows very well that the customer visits at regular intervals, it can plan for materials, and process and manpower and have them in a master file. As soon as the customer visits and books the order, the firm can start production. If the volume of the

order is considerably large and the number of regularly visiting customers are large in number, the Job Production system slowly transform into Batch Production system. (b) Batch Production: Batch Production is the manufacture of number of identical products either to meet the specific order or to satisfy the demand. When the Production of plant and equipment is terminated, the plant and equipment can be used for producing similar products. This system also can be classified under three categories. (i) A batch produced only once: Here customer places order with the firm for the product of his specification. The size of the order is greater than that of job production order. The firm has to plan for the resources after taking the order from the customer. (ii) A Batch produced at irregular intervals as per Customer order or when the need arises: As the frequency is irregular, the firm can maintain a file of its detailed plans and it can refer to its previous files and start production. (iii) A Batch Produced periodically at known Intervals: Here the firm either receives order from the customer at regular intervals or it may produce the product to satisfy the demand. It can have well designed file of its plans, material requirement and instructions for the ready reference. It can also purchase materials required in bulk in advance. As the frequency of regular orders goes on increasing the Batch Production system becomes Mass Production System. Here also, incase the demand for a particular product ceases, the plant and machinery can be used for producing other products with slight modification in layout or in machinery and equipment. (c) Continuous Production: Continuous Production system is the specialized manufacture of identical products on which the machinery and equipment is fully engaged. The continuous production is normally associated with large quantities and with high rate of demand. Hence the advantage of automatic production is taken. This system is classified as (i) Mass Production: Here same type of product is produced to meet the demand of an assembly line or the market. This system needs good planning for material, process, maintenance of machines and instruction to operators. A purchase of materials in bulk quantities is advisable. (ii) Flow Production: The difference between Mass and Flow Production is the type of product and its relation to the plant. In Mass Production identical products are produced in large numbers. If the demand falls or ceases, the machinery and equipment, after slight modification be used for manufacturing products of similar nature. In flow production, the plant and equipment is designed for a specified product. Hence if the demand falls for the product or ceases, the plant cannot be used for manufacturing other products. It is to be scraped. The examples for the above discussed production system are (i) Job Production Shop: Tailors shop; cycle and vehicles repair shops, Job typing shops, small Workshops. (ii) Batch Production Shop: Tyre Production Shops, Readymade dress companies, Cosmetic manufacturing companies...etc. (iii) Mass Production Shops: Components of industrial products, (iv) Flow Production: Cement Factory, Sugar factory, Oil refineries...etc.,

FINANCE-SOURCES OF FINANCE BUSINESS FINANCE: Every business requires some amount of money to start and run the business. Whether it is a small business or large, manufacturing or trading or transportation business, money is an essential requirement for every activity. Money required for any activity is known as finance. So the term business finance refers to the money required for business purposes and the ways by which it is raised. Thus, it involves procurement and utilization of funds so that business firms will be able to carry out their operations effectively and efficiently. Every business needs funds mainly for the following purposes: 1. To purchase fixed assets: Every type of business needs some fixed assets like land and building, furniture, machinery etc. A large amount of money is required for purchase of these assets. 2. To meet day-to-day expenses: After establishment of a business, funds are needed to carry out day-to-day operations e.g., purchase of raw materials, payment of rent and taxes, telephone and electricity bills, wages and salaries, etc. 3. To fund business growth: Growth of business may include expansion of existing line of business as well as adding new lines. To finance such growth, one needs more funds. 4. To bridge the time gap between production and sales: The amount spent on production is realized only when sales are made. Normally, there is a time gap between production and sales and also between sales and realization of cash. Hence during this interval, expenses continue to be incurred, for which funds are required. 5. To meet contingencies: Funds are always required to meet the ups and downs of business and for some unforeseen problems. Suppose, a manufacturer anticipates shortage of raw materials after a period, then he would like to stock the raw materials in large quantity. But he will be able to do so only if sufficient money is available with him. 6. To avail of business opportunities: Funds are also required to avail of business opportunities. Suppose a company wants to submit a tender for which some amount of money is required to be deposited along with the application. In case of no availability of funds it would not be possible for the company to submit the tender. Take another example. When a stockist offers special discount on large amount of purchase of any particular material then a manufacturer can avail of such offer, only if he has adequate funds to buy it. IMPORTANCE OF BUSINESS FINANCE Finance is the most important requirement of every business and it is considered as lifeline of the business. Inadequate finance poses many problems and may bring an end to the life of the business. The importance of finance has considerably increased in modern days due to following reasons in addition to the usual need: (a) Need for Large Scale Operation: Now-a-days business activities are generally undertaken on a large scale. The products of any country are now freely and easily available in other countries. The entire world has become a big market. So to survive in the business world the businessman has to expand the horizon of his activities and function on large scale. This expansion of business always demands more funds. (b) Use of Modern Technology: Use of latest technology in the process of production as well as distribution has become imperative for every business now a-days. To meet the competition, production process now demands use of modern machinery, equipments and tools. Hence, there is a greater need for finance to meet the challenge of the worlds markets successfully.

(c) Promotion of sales: In this era of competition lot of money is to be spent on activities for promoting sales. This involves advertisement, personal selling, use of sales promotional schemes, providing after sales service and free home delivery, etc. which need huge amount of funds. TYPES OF BUSINESS FINANCE The type and amount of funds required usually differs from one business to another. For instance, if the size of business is large, the amount of funds required will also be large. Likewise, the financial requirements are more in manufacturing business as compared to trading business. The business need funds for longer period to be invested in fixed assets like land and building, machinery etc. Sometimes, the business also needs fund to be invested in shorter period. So based on the period for which the funds are required, the business finance is classified into three categories. (a) Short-term Finance; (b) Medium-term Finance; and (c) Long-term Finance; Let us now learn about each of them in detail. SHORT-TERM FINANCE Funds required to meet day-to-day expenses are known as short-term finance. This is required for purchase of raw materials, payment of wages, rent, insurance, electricity and water bills, etc. The short-term finance is required for a period of one year or less. This financial requirement for short period is also known as working capital requirement or circulating capital requirement. It may be noted that a part of the working capital requirement is of a long-term nature, as certain minimum amount of funds are always kept to meet the requirement of stock and regular day-to-day expenses. MEDIUM-TERM FINANCE Medium-term finance is utilized for all such purposes where investments are required for more than one year but less than five years. Amount required to fund modernization and renovation, special promotional programmes etc. fall in this category. LONG-TERM FINANCE The amount of funds required by a business for more than five years is called long-term finance. Generally this type of finance is required for the purchase of fixed assets like land and building, plant and machinery furniture etc. The long term finance is also known as fixed capital as such need in fact is, of a permanent nature. Every organization need different types of finance i.e., long term, medium-term as well as shortterm. But the combinations in which these are used differ from one business to another. For example, steel industry requires more long-term finance to be invested in land and building and machinery as compared to the manufacturing of leather goods or plastic buckets. Similarly, for manufacturing hosiery items, requirement of short-term finance would be more than that of long-term finance.

SOURCES OF FINANCE There are two main categories of sources from which the businessmen can get the required funds for their business. These are: (1) Internal source; and (2) External source. You know that to start a business the businessman either invests his own money or borrows from outsiders or uses both the sources. When the businessman invests his own money (called owners capital), and retains a part of the profits earned in the business it constitute the internal sources of finance. It is an integral part of every business organization and it is cost effective. But, this source has its own limitations. Hence the business houses have to resort to the external sources of finance. The various external sources from where businessmen can get the finance include, friends and relatives, banks and other financial institutions, moneylenders, capital market, manufacturers and producers, customers, foreign financial institutions and agencies, etc. It is observed that the scope of raising funds also depends upon the nature and form of business organization. For example, a sole proprietorship form of business organization has very limited sources from which it can arrange funds for the business. These are: (a) Own Savings (b) Friends and Relatives (c) Moneylenders (d) Commercial Banks (e) Finance Companies (f) Manufactures and Suppliers (g) Retained Profits The same sources of financing are also available in case of partnership firms. In both sole proprietorship and partnership form of business organisation, long term capital is generally provided by the owners themselves by way of investing their own savings and retaining a part of the profits generated by the business and the rest of the above sources are mostly used for their short-term financial needs. However, in case of companies, the following are the usual sources of finance. (a) Capital Market (b) Financial Institutions (c) Public Deposits (d) Commercial Banks (e) Leasing Companies (f) Investment Trusts (g) Retained Profits.

UNIT IV - HUMAN RESOURCES

HUMAN RESOURCE MANAGEMENT: Human resource (or personnel) management, in the sense of getting things done through people. It's an essential part of every manager's responsibilities, but many organizations find it advantageous to establish a specialist division to provide an expert service dedicated to ensuring that the human resource function is performed efficiently. "People are our most valuable asset" is a clich which no member of any senior management team would disagree with. Yet, the reality for many organizations is that their people remain

under valued under trained under utilized poorly motivated, and consequently perform well below their true capability

The rate of change facing organizations has never been greater and organizations must absorb and manage change at a much faster rate than in the past. In order to implement a successful business strategy to face this challenge, organizations, large or small, must ensure that they have the right people capable of delivering the strategy. The market place for talented, skilled people is competitive and expensive. Taking on new staff can be disruptive to existing employees. Also, it takes time to develop 'cultural awareness', product/ process/ organization knowledge and experience for new staff members. As organizations vary in size, aims, functions, complexity, construction, the physical nature of their product, and appeal as employers, so do the contributions of human resource management. But, in most the ultimate aim of the function is to: "ensure that at all times the business is correctly staffed by the right number of people with the skills relevant to the business needs", that is, neither overstaffed nor understaffed in total or in respect of any one discipline or work grade. FUNCTIONAL OVERVIEW AND STRATEGY FOR HRM These issues motivate a well thought out human resource management strategy, with the precision and detail of say a marketing strategy. Failure in not having a carefully crafted human resources management strategy, can and probably will lead to failures in the business process itself. These sets of resources are offered to promote thought, stimulate discussion, diagnose the organizational environment and develop a sound human resource management strategy for your organization. We begin by looking at the seven distinguishable functions human resource management provide to secure the achievement of the objective defined above.

FUNCTION 1: MANPOWER PLANNING The penalties for not being correctly staffed are costly.

Understaffing loses the business economies of scale and specialization, orders, customers and profits. Overstaffing is wasteful and expensive, if sustained, and it is costly to eliminate because of modern legislation in respect of redundancy payments, consultation, minimum periods of notice, etc. Very importantly, overstaffing reduces the competitive efficiency of the business.

Planning staff levels requires that an assessment of present and future needs of the organization be compared with present resources and future predicted resources. Appropriate steps then be planned to bring demand and supply into balance. Thus the first step is to take a 'satellite picture' of the existing workforce profile (numbers, skills, ages, flexibility, gender, experience, forecast capabilities, character, potential, etc. of existing employees) and then to adjust this for 1, 3 and 10 years ahead by amendments for normal turnover, planned staff movements, retirements, etc, in line with the business plan for the corresponding time frames. The result should be a series of crude supply situations as would be the outcome of present planning if left unmodified. (This, clearly, requires a great deal of information accretion, classification and statistical analysis as a subsidiary aspect of personnel management.) What future demands will be is only influenced in part by the forecast of the personnel manager, whose main task may well be to scrutinize and modify the crude predictions of other managers. Future staffing needs will derive from:

Sales and production forecasts The effects of technological change on task needs Variations in the efficiency, productivity, flexibility of labor as a result of training, work study, organizational change, new motivations, etc. Changes in employment practices (e.g. use of subcontractors or agency staffs, hiving-off tasks, buying in, substitution, etc.) Variations, which respond to new legislation, e.g. payroll taxes or their abolition, new health and safety requirements Changes in Government policies (investment incentives, regional or trade grants, etc.)

What should emerge from this 'blue sky gazing' is a 'thought out' and logical staffing demand schedule for varying dates in the future which can then be compared with the crude supply schedules. The comparisons will then indicate what steps must be taken to achieve a balance. That, in turn, will involve the further planning of such recruitment, training, retraining, labor reductions (early retirement/redundancy) or changes in workforce utilization as will

bring supply and demand into equilibrium, not just as a oneoff but as a continuing workforce planning exercise the inputs to which will need constant varying to reflect 'actual' as against predicted experience on the supply side and changes in production actually achieved as against forecast on the demand side. FUNCTION 2: RECRUITMENT AND SELECTION OF EMPLOYEES Recruitment of staff should be preceded by: An analysis of the job to be done (i.e. an analytical study of the tasks to be performed to determine their essential factors) written into a job description so that the selectors know what physical and mental characteristics applicants must possess, what qualities and attitudes are desirable and what characteristics are a decided disadvantage;

In the case of replacement staff a critical questioning of the need to recruit at all (replacement should rarely be an automatic process). Effectively, selection is 'buying' an employee (the price being the wage or salary multiplied by probable years of service) hence bad buys can be very expensive. For that reason some firms (and some firms for particular jobs) use external expert consultants for recruitment and selection. Equally some small organizations exist to 'head hunt', i.e. to attract staff with high reputations from existing employers to the recruiting employer. However, the 'cost' of poor selection is such that, even for the mundane day-to-day jobs, those who recruit and select should be well trained to judge the suitability of applicants.

The main sources of recruitment are:

Internal promotion and internal introductions (at times desirable for morale purposes) Careers officers (and careers masters at schools) University appointment boards Agencies for the unemployed Advertising (often via agents for specialist posts) or the use of other local media (e.g. commercial radio)

Where the organization does its own printed advertising it is useful if it has some identifying logo as its trade mark for rapid attraction and it must take care not to offend the sex, race, etc. antidiscrimination legislation either directly or indirectly. The form on which the applicant is to apply (personal appearance, letter of application, completion of a form) will vary according to the posts vacant and numbers to be recruited. It is very desirable in many jobs that claim about experience and statements about qualifications are thoroughly checked and that applicants unfailingly complete a health questionnaire (the latter is not necessarily injurious to the applicants chance of being appointed as firms are required to employ a percentage of disabled people). Before letters of appointment are sent any doubts about medical fitness or capacity (in employments where hygiene considerations are dominant) should be resolved by

requiring applicants to attend a medical examination. This is especially so where, as for example in the case of apprentices, the recruitment is for a contractual period or involves the firm in training costs. Interviewing can be carried out by individuals (e.g. supervisor or departmental manager), by panels of interviewers or in the form of sequential interviews by different experts and can vary from a five minute 'chat' to a process of several days. Ultimately personal skills in judgment are probably the most important, but techniques to aid judgment include selection testing for:

Aptitudes (particularly useful for school leavers) Attainments General intelligence

(All of these need skilled testing and assessment.) In more senior posts other techniques are:

Leaderless groups Command exercises Group problem solving

(These are some common techniques - professional selection organizations often use other techniques to aid in selection.) Training in interviewing and in appraising candidates is clearly essential to good recruitment. Largely the former consists of teaching interviewers how to draw out the interviewee and the latter how to rate the candidates. For consistency (and as an aid to checking that) rating often consists of scoring candidates for experience, knowledge, physical/mental capabilities, intellectual levels, motivation, prospective potential, leadership abilities etc. (according to the needs of the post). Application of the normal curve of distribution to scoring eliminates freak judgments. FUNCTION 3: EMPLOYEE MOTIVATION To retain good staff and to encourage them to give of their best while at work requires attention to the financial and psychological and even physiological rewards offered by the organization as a continuous exercise. Basic financial rewards and conditions of service (e.g. working hours per week) are determined externally (by national bargaining or government minimum wage legislation) in many occupations but as much as 50 per cent of the gross pay of manual workers is often the result of local negotiations and details (e.g. which particular hours shall be worked) of conditions of service are often more important than the basics. Hence there is scope for financial and other motivations to be used at local levels. As staffing needs will vary with the productivity of the workforce (and the industrial peace achieved) so good personnel policies are desirable. The latter can depend upon

other factors (like environment, welfare, employee benefits, etc.) but unless the wage packet is accepted as 'fair and just' there will be no motivation. Hence while the technicalities of payment and other systems may be the concern of others, the outcome of them is a matter of great concern to human resource management. Increasingly the influences of behavioral science discoveries are becoming important not merely because of the widely-acknowledged limitations of money as a motivator, but because of the changing mix and nature of tasks (e.g. more service and professional jobs and far fewer unskilled and repetitive production jobs). The former demand better-educated, mobile and multi-skilled employees much more likely to be influenced by things like job satisfaction, involvement, participation, etc. than the economically dependent employees of yesteryear. Hence human resource management must act as a source of information about and a source of inspiration for the application of the findings of behavioral science. It may be a matter of drawing the attention of senior managers to what is being achieved elsewhere and the gradual education of middle managers to new points of view on job design, work organization and worker autonomy. FUNCTION 4: EMPLOYEE EVALUATION An organization needs constantly to take stock of its workforce and to assess its performance in existing jobs for three reasons:

To improve organizational performance via improving the performance of individual contributors (should be an automatic process in the case of good managers, but (about annually) two key questions should be posed: o What has been done to improve the performance of a person last year? o And what can be done to improve his or her performance in the year to come?). To identify potential, i.e. to recognize existing talent and to use that to fill vacancies higher in the organization or to transfer individuals into jobs where better use can be made of their abilities or developing skills. To provide an equitable method of linking payment to performance where there are no numerical criteria (often this salary performance review takes place about three months later and is kept quite separate from 1. and 2. but is based on the same assessment).

On-the-spot managers and supervisors, not HR staffs, carry out evaluations. The personnel role is usually that of:

Advising top management of the principles and objectives of an evaluation system and designing it for particular organizations and environments. Developing systems appropriately in consultation with managers, supervisors and staff representatives. Securing the involvement and cooperation of appraisers and those to be appraised.

Assistance in the setting of objective standards of evaluation / assessment, for example: o Defining targets for achievement; o Explaining how to quantify and agree objectives; o Introducing self-assessment; o Eliminating complexity and duplication. Publicizing the purposes of the exercise and explaining to staff how the system will be used. Organizing and establishing the necessary training of managers and supervisors who will carry out the actual evaluations/ appraisals. Not only training in principles and procedures but also in the human relations skills necessary. (Lack of confidence in their own ability to handle situations of poor performance is the main weakness of assessors.) Monitoring the scheme - ensuring it does not fall into disuse, following up on training/job exchange etc. recommendations, reminding managers of their responsibilities.

Full-scale periodic reviews should be a standard feature of schemes since resistance to evaluation / appraisal schemes is common and the temptation to water down or render schemes ineffectual is ever present (managers resent the time taken if nothing else). Basically an evaluation / appraisal scheme is a formalization of what is done in a more casual manner anyway (e.g. if there is a vacancy, discussion about internal moves and internal attempts to put square pegs into 'squarer holes' are both the results of casual evaluation). Most managers approve merit payment and that too calls for evaluation. Made a standard routine task, it aids the development of talent, warns the inefficient or uncaring and can be an effective form of motivation. FUNCTION 5: INDUSTRIAL RELATIONS Good industrial relations, while a recognizable and legitimate objective for an organization, are difficult to define since a good system of industrial relations involves complex relationships between: (a) Workers (and their informal and formal groups, i. e. trade union, organizations and their representatives); (b) Employers (and their managers and formal organizations like trade and professional associations); (c) The government and legislation and government agencies l and 'independent' agencies like the Advisory Conciliation and Arbitration Service. Oversimplified, work is a matter of managers giving instructions and workers following them - but (and even under slavery we recognize that different 'managing' produces very different results) the variety of 'forms' which have evolved to regulate the conduct of parties (i.e. laws, custom and practice, observances, agreements) makes the giving and receipt of instructions far from simple. Two types of 'rule' have evolved:

'Substantive', determining basic pay and conditions of service (what rewards workers should receive); 'Procedural,' determining how workers should be treated and methods and procedures.

Determining these rules are many common sense matters like:

Financial, policy and market constraints on the parties (e.g. some unions do not have the finance to support industrial action, some have policies not to strike, some employers are more vulnerable than others to industrial action, some will not make changes unless worker agreement is made first, and rewards always ultimately reflect what the market will bear); The technology of production (the effect of a strike in newspaper production is immediate -it may be months before becoming effective in shipbuilding); The distribution of power within the community - that tends to vary over time and with economic conditions workers (or unions) dominating in times of full employment and employers in times of recession.

Broadly in the Western style economies the parties (workers and employers) are free to make their own agreements and rules. This is called 'voluntarism'. But it does not mean there is total noninterference by the government. That is necessary to:

Protect the weak (hence minimum wage); Outlaw discrimination (race or sex); Determine minimum standards of safety, health, hygiene and even important conditions of service; To try to prevent the abuse of power by either party.

FUNCTION 6: PROVISION OF EMPLOYEE SERVICES Attention to the mental and physical well-being of employees is normal in many organizations as a means of keeping good staff and attracting others. The forms this welfare can take are many and varied, from loans to the needy to counseling in respect of personal problems. Among the activities regarded as normal are:

Schemes for occupational sick pay, extended sick leave and access to the firm's medical adviser; Schemes for bereavement or other special leave; The rehabilitation of injured/unfit/ disabled employees and temporary or permanent move to lighter work; The maintenance of disablement statistics and registers (there are complicated legal requirements in respect of quotas of disabled workers and a need for 'certificates' where quota are not fulfilled and recruitment must take place); Provision of financial and other support for sports, social, hobbies, activities of many kinds which are work related;

Provision of canteens and other catering facilities; Possibly assistance with financial and other aid to employees in difficulty (supervision, maybe, of an employee managed benevolent fund or scheme); Provision of information handbooks, Running of pre-retirement courses and similar fringe activities; Care for the welfare aspects of health and safety legislation and provision of firstaid training.

The location of the health and safety function within the organization varies. Commonly a split of responsibilities exists under which 'production' or 'engineering' management cares for the provision of safe systems of work and safe places and machines etc., but HRM is responsible for administration, training and education in awareness and understanding of the law, and for the alerting of all levels to new requirements. FUNCTION 7: EMPLOYEE EDUCATION, TRAINING AND DEVELOPMENT In general, education is 'mind preparation' and is carried out remote from the actual work area, training is the systematic development of the attitude, knowledge, skill pattern required by a person to perform a given task or job adequately and development is 'the growth of the individual in terms of ability, understanding and awareness'. Within an organization all three are necessary in order to:

Develop workers to undertake higher-grade tasks; Provide the conventional training of new and young workers (e.g. as apprentices, clerks, etc.); Raise efficiency and standards of performance; Meet legislative requirements (e.g. health and safety); Inform people (induction training, pre-retirement courses, etc.);

From time to time meet special needs arising from technical, legislative, and knowledge need changes. Meeting these needs is achieved via the 'training loop'. The diagnosis of other than conventional needs is complex and often depends upon the intuition or personal experience of managers and needs revealed by deficiencies. Sources of inspiration include:

Common sense - it is often obvious that new machines, work systems, task requirements and changes in job content will require workers to be prepared; Shortcomings revealed by statistics of output per head, performance indices, unit costs, etc. and behavioral failures revealed by absentee figures, lateness, sickness etc. records; Recommendations of government and industry training organizations; Inspiration and innovations of individual managers and supervisors; Forecasts and predictions about staffing needs; Inspirations prompted by the technical press, training journals, reports of the experience of others; The suggestions made by specialist (e.g. education and training officers, safety engineers, work-study staff and management services personnel).

Designing training is far more than devising courses; it can include activities such as:

Learning from observation of trained workers; Receiving coaching from seniors; Discovery as the result of working party, project team membership or attendance at meetings; Job swaps within and without the organization; Undertaking planned reading, or follow from the use of selfteaching texts and video tapes; Learning via involvement in research, report writing and visiting other works or organizations.

So far as group training is concerned in addition to formal courses there are:

Lectures and talks by senior or specialist managers; Discussion group (conference and meeting) activities; Briefing by senior staffs; Role-playing exercises and simulation of actual conditions; Video and computer teaching activities; Case studies (and discussion) tests, quizzes, panel 'games', group forums, observation exercises and inspection and reporting techniques.

Evaluation of the effectiveness of training is done to ensure that it is cost effective, to identify needs to modify or extend what is being provided, to reveal new needs and redefine priorities and most of all to ensure that the objectives of the training are being met. The latter may not be easy to ascertain where results cannot be measured mathematically. In the case of attitude and behavioral changes sought, leadership abilities, drive and ambition fostered, etc., achievement is a matter of the judgment of senior staffs. Exact validation might be impossible but unless on the whole the judgments are favorable the cooperation of managers in identifying needs, releasing personnel and assisting in training ventures will cease. In making their judgments senior managers will question whether the efforts expended have produced:

More effective, efficient, flexible employees; Faster results in making newcomers knowledgeable and effective than would follow from experience; More effective or efficient use of machinery, equipment and work procedures; Fewer requirements to implement redundancy (by retraining); Fewer accidents both personal and to property; Improvements in the qualifications of staff and their ability to take on tougher roles; Better employee loyalty to the organization with more willingness to innovate and accept change.

MEANING OF STAFFING Staffing refers to the managerial function of employing and developing human resources for carrying out the various managerial and non-managerial activities in an organisation. This involves determining the manpower requirement, and the methods of recruiting, selecting, training and developing the people for various positions created in the organisation. IMPORTANCE OF STAFFING (a) It helps in getting right people for the right job at the right time. The function of staffing enables the manager to find out as to how many workers are required and with what qualifications and experience. (b) Staffing contributes to improved organizational productivity. Through proper selection the organisation gets quality workers, and through proper training the performances level of the workers can be improved. (c) It helps in providing job satisfaction to the employees keeping their morale high. With proper training and development programmes their efficiency improves and they feel assured of their career advancements. (d) Staffing maintains harmony in the organisation. Through proper staffing, individuals are not just recruited and selected but their performance is regularly appraised and promotions made on merit. For all these, certain rules are made and are duly communicated to all concerned. This fosters harmony and peace in the organisation. PROCESS OF STAFFING The various steps involved in the process of staffing are as follows. (a) Manpower Planning (b) Job Analysis (c) Recruitment (d) Selection (e) Placement (f) Induction (g) Training and Development (h) Performance Appraisal (i) Compensation (J) Promotion and Transfer. MANPOWER PLANNING Manpower planning refers to the process of estimating the manpower requirement of an organisation. While estimating the manpower requirement, the management generally keeps in mind the available infrastructure including the technology, production schedule, market fluctuation, demand forecasts, governments policies and so on. JOB ANALYSIS In the context of recruitment, one must be conversant with another important aspect of manpower planning viz, job analysis, which is a pre-requisite for any recruitment exercise. The job analysis helps in determining the qualifications, skills and experience required for various categories of employees. It involves: (i) Identification of each job in terms of duties and responsibilities, (called job description) and (ii) Determining the abilities and skills that are required for performing the job (called job specification). These two aspects of job analysis (job description and job specification) are useful in recruitment and selection of employees so as to find the right person for the job.

RECRUITMENT The term recruitment is often used to signify employment. It is true that normally when we say we have recruited such and such persons; it signifies that we have employed them. But as a part of staffing function, the term recruitment has limited scope. It just refers to one of the initial steps in employment of people i.e., searching for suitable candidates for the various job positions to be filled up from time to time in the organisation. Thus, recruitment is the process of finding and attracting suitable applicants for employment. SOURCES OF RECRUITMENT (A) Internal Sources: In any business, existing employees expect that they will have chances of promotion and will be considered for higher positions before outsiders are considered. Managers therefore may promote and transfer some of the existing employees to fill the vacant positions. The advantage of internal recruitment is that it is easier for managers to fill vacancies as they are conversant with the abilities and skills of their subordinates and have records of their performances. Employees also feel happy as their work performance is recognized by management through promotion. However, there is one major drawback of recruitment through internal sources i.e., the organisation is deprived of the benefit of inducting fresh blood into its system. (B) External Sources: All vacancies cannot be filled up from within the organisation. Existing employees may lack the required skill, initiative and qualification needed for the jobs involved. Hence managers have to recruit some persons from outside the organisation. Not only that the external recruitment provides a wide choice from among a large number of external candidates from which employees may be recruited. The workers and office employees at the lower level are often recruited from outside the organisation. The various external sources of recruitment are as follows: (a) Media Advertisements: You must have seen advertisements in newspapers about vacancies in organizations. The advertisement contains details about the job, its nature, the qualification required to do the job, how to apply, etc. This is a very popular medium of advertising. The job advertisements are also given in magazines, specialized employment magazines like Employment News, Rozgar Samachar, etc. Now-a-days we also commonly find such advertisements in various electronic media like television and Internet. Such advertisements normally get a very good response from the prospective candidates. (b) Employment Exchanges: In India, employment exchanges have been set up by the government for bringing together job-seekers and employers who are looking for employees. Those who are in search of employment get themselves registered with the local Employment Exchanges which keep a record of all such persons in detail who require help in finding jobs. The employer informs about the vacancies to the nearest Employment Exchange. The Employment Exchange, in turn, identifies the names of the qualified employment seekers already registered with it, and forwards them to the employer for consideration. Thus, if you are seeking a job after passing the senior secondary examination, it would be better if you get yourself registered with an Employment Exchange. It may forward your name to the prospective employers keeping in view the suitability of the job as per your qualifications. (c) Educational Institutions: Now-a-days, companies/big organizations maintain a close liaison with the universities, vocational institutes and management institute for recruitment of their staff. As and when the need arises, the companies send one or more of their senior executives to the institutions of repute imparting such

professional/technical education to students. These executives take the interview of the interested candidates and select the suitable candidates as per their requirement. This process is popularly known as campus interview and is found to be an effective source of recruitment of managers, engineers, technicians etc. for many companies on a regular basis. (d) Unsolicited Application: Those looking for jobs often apply on their own initiative. They assume that certain vacancies are likely to arise, and apply without references to any job advertisement. Managers keep a record of such applications and contact the suitable candidates when they need them. (e) Recruitment at the Factory gate: This is found mainly in case of factory workers to be recruited on daily wages. Such workers gather in the morning at the factory gate to serve as casual workers. Very often existing regular employees go on leave, and their vacancies are filled up by recruitment at the factory gate. These casual workers having served in the factory for some time may be considered for regular employment at some stage. (f) Referrals: Quite often the management gets references about interested workers from different sources like workers unions, previous employees, existing employees, clients of the organisation etc. These sources are important because their recommendations are made by people who are associated with the organisation and are fully conversant with its requirements. Sometimes we also receive recommendations from our friends and relatives to employ persons known to them. But one should be very much cautious while considering such recommendations. (g) Private Employment Agencies: In urban areas, number private organizations have started functioning as employment agencies. These agencies register with them the names of the individuals who are seeking employment and try to arrange job interviews for such candidates. Companies often get in touch with such agencies to provide them the details of suitable candidates for various jobs. SELECTION When an adequate number of applications/names of interested candidates have been collected through the recruitment exercises the selection process starts. Selection refers to the process of choosing the most suitable person from among the list of interested candidates. It involves going through the qualification and experience of all candidates and matching them with the expectation for the job so as to decide on the most suitable ones for the job. The entire process goes through a number of steps which may be called as selection procedure. SELECTION PROCEDURE As stated above, the selection procedure consists of a number of steps in logical order to identify the candidates who are to be finally appointed. These steps are: (a) Screening the applications (b) Holding tests (c) Selection interview (d) Checking references (e) Medical examination of the candidates (f) Issue of appointment letter (a) Screening the Applications After receiving the applications from the candidates through recruitment process, the same must be examined to decide which ones deserve to be considered and followed up. Screening exercise involves checking the contents of the applications so as the ascertain whether or not the minimum eligibility conditions in respect of age, experience, qualifications and skills are fulfilled by the candidates who have applied for the job. Screening is usually done by a senior officer of the company or by a screening

committee. The purpose of screening is to prepare a list of eligible candidates who are to be evaluated further. Candidates not eligible are thereby excluded from further consideration. (b) Holding Tests After screening the applications, eligible candidates are asked to appear for selection tests. These tests are made to discover and measure the skill and abilities of the candidates in terms of the requirements of the job. Passing the test by a candidate does not mean that he will be employed. It implies that all those who have passed the test are qualified for further processing and those who have failed are not to be considered (c) Selection Interview Interview is the most important part of the selection procedure. It serves as a means of checking the information given in the application form and making an overall assessment of the candidates suitability for the job. In an interview, the candidate has a face-to-face interaction with the employer or representatives of the employer, where they try to judge the ability of the candidate. (d) Checking of References In addition to the requisite educational qualification, skill and experience, it is expected that the candidates who are to be considered for employment must have other qualities like balanced temperament, honesty, loyalty, etc. These qualities cannot be judged on the basis of any test. Therefore, information is obtained and verified from the heads of educational institutions where the candidates have studied, or from the persons whose names are given by the candidates as referee, or from their previous employers. (e) Medical Examination Candidates finally selected for the job are asked to undergo medical examination to see whether the selected candidates are physically fit for the job. A proper medical examination ensures higher standard of health of the employees and their physical fitness which, in turn, reduces the labour turnover, absenteeism and accidents. (f) Issue of Appointment Letter Candidates finally selected are offered to join the organisation for which a formal appointment letter is issued containing the nature of job, the remuneration, pay scale, and other terms and conditions relating to employment. Usually a reasonable time is given to the candidates to join the organisation. DIFFERENCE BETWEEN SELECTION AND RECRUITMENT We have noted recruitment and selection are the two essential components of the staffing process. While the recruitment helps in attracting suitable candidates, selection helps in finding out the candidates who meet the requirements of the job. These are closely inter-connected activities. However, recruitment and selection differ in certain respects. While the recruitment refers to the process of attracting good applicants for jobs, selection identifies the most suitable amongst the applicants. In the recruitment process, the effort is to attract the candidates as many as possible and it is regarded as a positive process. But, selection is a negative process as it involves rejection of many candidates. Recruitment involves decisions as regard to the sources of potential candidates. Selection is made through different steps in the procedure adopted. Recruitment helps the manager to attract good candidates, the selection leads to making the right choice.

PLACEMENT If the selected candidate decides to join the organisation, he/she has to report to the concerned authority and formally joins the organisation by giving his consent in writing. Then he/she is placed to perform specific job. Thus, placement refers to selected candidates joining the positions in the organisation for which they have been selected. The appointment of every candidate is followed by a record of particulars of employment. Such records is properly maintained and described as employment record. It serves a useful purpose on many occasions like selection of employees for training, promotion, increments etc. INDUCTION Induction is the process of introducing new employees to the organisation. The new employees should know under whom and with whom he/she is to work, get acquainted and adjusted to the work environment, get a general idea about the rules and regulations, working conditions etc. Usually the immediate supervisor of the new employee introduces him to his work environment. A proper induction programme is likely to reduce his anxiety on how to cope with the work and how to become part of the organisation and helps in development of a favorable attitude towards the organisation and the job. TRAINING AND DEVELOPMENT Helping the employees to improve their knowledge and skill so as to be able to perform their tasks more efficiently is known as training. It is an organized activity for increasing the knowledge and skills of people for a specific purpose. The term development refers to the process of not only building up the skill and abilities for specific purpose but also the overall competence of employees to undertake more difficult and challenging tasks. It is generally used with reference to the training of managers and executives. Training is necessary for new employees as well as the existing employees for improving their performance at work. For new employees, training is necessary to help them get acquainted with the method of operation and skill requirement of the job. For existing employees, training at periodical intervals is helpful for learning better ways of doing the work, and also as and when they have to undertake new jobs. Thus, training helps employees to improve their knowledge and skill and make them perform their tasks more efficiently. METHODS OF TRAINING There are different methods of giving training to the employees which can be divided into two broad categories. (1) On-the-Job methods, and (2) Off-the-Job methods. 1. On-the-Job methods: In these methods, the employees learn about their jobs while doing the work duly assisted by their supervisors or seniors. These methods encourage self-learning through practice. Job instruction or coaching, while working as an assistant to a senior, understudy positions, temporary promotions are some of the common methods of on-the-job training. 2. Off-the-Job methods: These methods involve training employees away from the work place so that experts may conduct the training and employees are free from immediate pressure of completing the jobs at hand. Lectures with demonstration, conferences, case discussions, video shows and films are some of the common methods used as off-the-job training methods. Then, there is another off the job method of training called vestibule

training. The vestibule training refers to the training in specially designed workshops in which an attempt is made to duplicate as closely as possible the actual condition of the work place. In such workshops a large number of employees can be trained in a relatively short period of time. PERFORMANCE APPRAISAL In simple words, performance appraisal means judging the performance of employees. Specifically, it means judging the relative abilities of employees at work in a systematic manner. This enables managers to identify employees who are performing the assigned work satisfactorily, and those who are not able to do so, and why. To be fair, performance appraisal needs to be carried out using the same methods and keeping in view uniform standards of work. Generally it is the responsibility of supervisors to carry out performance appraisal of their subordinates, and report it to their own superiors. He may also have to identify the causes of the performance especially if it has fallen short of the expected performance. COMPENSATION Compensation is one of the most important factors influencing relations between management and the workers. No organisation can attract and retain qualified employees without offering them a fair compensation. The term compensation refers to a wide range of financial and non financial rewards to the employees for services rendered to the organisation. It includes wages, salaries, allowances and other benefits which an employer pays to his employees in consideration for their services. Compensation may be divided into two categories: (a) Base/primary compensation. (b) Supplementary compensation. Base or primary compensation is a fixed amount paid every month to an employee. It includes wages, salary and allowances paid to an employee irrespective of his performance. Supplementary compensation refers to the compensation paid to the employees to motivate them to work more efficiently. It is also known as incentive compensation. The incentives may be monetary or non-monetary. The monetary incentives include bonus, commission sales, or profit sharing plans. The non-monetary incentives, on the other hand, include cordial relations with the supervisor, assignment of challenging jobs, recognition etc. Such incentives help the employees to sustain interest in the job and motivate them to work hard. They also provide job satisfaction PROMOTION AND TRANSFER When an employee is assigned a job involving greater responsibilities, more pay, higher status and prestige than his/her present job, it is known as promotion. Thus, promotion refers to the advancement of an employee to a higher level or position. The main purpose of promotion is to make fuller use of the abilities of a person and also increase his job satisfaction. The basis of promotion may be seniority in service or merit, that is, superior abilities of the employees or it may be seniority and merit, that is, a merit being the same, one who is senior, is considered for promotion. When the performance of an employee is not satisfactory and it cannot be improved, he may be assigned a job of lower rank carrying lower status and pay. This is known as demotion.

Transfer refers to a type of job change where any employee is assigned a different job of the same rank and pay, or when an employee is assigned a similar job in another unit of the firm. Thus, transfer does not usually involve any increase in pay or a superior status. It may be done simply to enable the employee to gain wider experience, or to give him greater job satisfaction, or to balance the requirements of staff in different units. MEANING OF WAGE EMPLOYMENT In wage employment, there are always two parties and the employee gets wage or salary from the employer for his work. Wage is normally an assured amount (which is agreed upon by both the parties) given to the employee on a daily or weekly basis for his work. Similarly, salary is also a mutually agreed upon assured amount given to the employee by the employer for his work on a monthly basis. CHARACTERISTICS OF WAGE EMPLOYMENT Following are the characteristics of wage employment 1. Two parties: In case of wage employment there are always two parties involved. One is known as the employee and the other as the employer. 2. Contractual nature: Wage employment is always contractual in nature. It is basically an agreement between two parties whereby one party works for the other under specific terms and conditions and the later party has to pay the former any mutually agreed upon wage or salary in return of his work. The whole employment relationship can be terminated by either party by giving a notice to the other party just like a contract. 3. Employer-Employee relationship: The relationship between the two parties in wage employment is an employer-employee relationship. This is unlike a master servant, father-son or teacher-pupil relationship. Here both the parties are interdependent and interrelated. One cannot exist without the other. Both operate under some pre-determined and mutually agreed upon rules and regulations concerning their work relationship. 4. Remuneration: Remuneration is the return or reward that the employee receives from the employer for his work. This is one of the important characteristics of wage employment as this remuneration is determined and accepted by both the parties. This remuneration is known as wage or salary. 5. Terms and conditions of employment: In case of wage employment the nature of work, working conditions, rules concerning work relationships etc. are decided in advance. Both the party abides to these terms and conditions of employment. IMPORTANCE OF WAGE EMPLOYMENT Wage employment provides a regular and steady income for the individual to earn his livelihood and to sustain his family. In this section let us discuss its importance. 1. Wage employment not only assures a regular and steady income but also ensures various other benefits like medical facilities, housing facility, travel concessions, loans and advances, insurance, old age benefits like pension, gratuity etc. 2. Wage employment is a must in almost every sphere to carry out several tasks. Even self-employment generates wage employment, although not immediately but when it expands. For example, suppose you start a shop at your locality and run it alone. When the business grows, it may not be possible to manage everything alone. Then you may think of employing another to assist you, thereby creating wage employment.

3. Wage employment can be made as a career and individuals can excel in their respective fields. For example, to be a renowned scientist it is not required to own the entire laboratory. Rather any one can start the career as an employee of a big laboratory. 4. Wage employment involves much less risk than self-employment. There is no need to invest in land, building etc. for wage employment. 5. Everyone is not capable of being self-employed by starting a business or profession. Wage employment is normally undertaken as a vocation by majority. STATUTORY BENEFITS Some benefits are guaranteed to employees under labour laws. These are called statutory benefits. In some cases, these are applicable to NGOs also. Minimum Wages The Minimum Wages Act, 1948 is not applicable to NGOs by themselves. However, if their workers are engaged in certain activities, then the Act becomes applicable to those workers. There is no threshold limit for number of employees as in the case of PF Act. These activities include agriculture, farming, dairy, horticulture, forestry and other farm operations. Apart from this, in some states, the Act is applicable to workers engaged in schools, hospitals, pharmacies, etc. In Bihar and Jharkhand, the Act is also applicable to all religious and social institutions as also Khadi and village industries. If an employee is covered by the Minimum Wages Act, then the minimum notified wages must be paid to him or her. These vary from one region to another and from one job to another. There is no exemption or proportional reduction in wages for employees who work for a limited number of hours, such as teachers at an NFE centre. If a lower payment is made, then the employer can be fined or imprisoned. Provident Fund Provident Fund is an emergency fund, set aside for use by employees. The fund is compulsory in some cases. Others can also start their own fund, if they so desire. Compulsory Provident Fund Provident Fund is compulsory for those NGOs where 20 or more employees are working in a specified activity. This includes certain types of manufacturing as also some non-factory activities Examples include: Printing, including screen printing Medical and pharmaceuticals, including ayurvedic medicines Agarbatti, Textiles, coir or leather items Bottling or canning of fruits and vegetables. Who is an employee? Any person who receives wages for work is an employee. Renaming wages as honorarium does not change things. The relationship of employee and employer is important for this purpose8. Part-time employees are also covered9 under PF. However, casual labour and people employed for short durations are not counted. Total Provident Fund contribution comes to 21.16% of the salary amount. Of this, 10% is contributed by the employee from his / her salary, another 10% by the employer11, and the balance 1.16% is contributed by the Government. The total collection of 20% should be deposited with the PF Commissioner every month. The Fund

is administered by the PF Commissioner. Currently, its investments are valued at about Rs.10.27 kharabs. Voluntary Provident Fund If Provident Fund Act does not apply to you, you can still provide this benefit to the workers. This can be done by depositing the desired amount in a Public Provident Fund account in the name of each worker. This account is normally opened in a Post Office or State Bank of India. In such a case, there is no requirement of a fixed percentage or amount that you must contribute. You can therefore decide and fix this amount internally. However, it is best to make the contribution regularly, at least on an annual basis. Pension If Provident Fund Act is applicable to your organisation, then there is no need to provide separately for pension. This is because more than half the amount of monthly contributions to PF is taken to a Pension Fund by the Government. However, other NGOs must seriously consider the question of pension for old and retired employees. An amount of about 10% of salary invested each year would be sufficient to provide lifelong pension to a worker after retirement. This can be done by taking out a superannuation policy with an insurance company on behalf of the employees. Gratuity Gratuity originally started as a voluntary payment to workers at the time of retirement. However, once the Payment of Gratuity Act, 1972 was passed, it became compulsory for commercial em-ployers to pay gratuity. In 1997, the Act was extended to NGOs as well. If an NGO employs 10 or more workers, then payment of gratuity is compulsory. The payment is made on termination of employment, if the employee has completed five years of service. However, if the employee dies before completing five years, gratuity is payable. Gratuity is calculated on the basis of a formula:

For this purpose, salary includes dearness allowance, but does not include HRA or other benefits. NGOs required to pay gratuity must take out an insurance policy with LIC or another insurer. Premiums for this policy are paid annually. When gratuity is paid to an employee, the insurer pays back the amount in that employees account. Maximum amount payable to a worker under the Act is limited to Rs.3, 50,000.

UNIT V FOREIGN TRADE AND BANKING

EXTERNAL TRADE MEANING The countries having excess production of certain items find it beneficial to sell them to some other countries and buy items in which they are deficient from others. It is also observed that some countries attain specialization in production of certain products by virtue of adopting advanced technology while others find it difficult or expensive to produce it in their own country. They prefer to buy those products from the former. Thus, uneven distribution of natural resources and specialization attained in production of certain items give rise to exchange of goods and services between different countries. Such exchange is termed as External Trade. It is also known as Foreign Trade or International Trade. TYPES OF EXTERNAL TRADE On the basis of sale and purchase of goods and services, external trade can be divided into three kinds. They are: (a) Import trade (b) Export trade (c) Entrepot trade Let us discuss details about them. (a) Import trade When the business firm of a country purchases goods from the firm of another country, it is called Import trade. For example, when India Govt. purchases petroleum products, electronic goods, gold, machineries, etc., from other countries it is termed as import trade. (b) Export trade When the firm of a country sells goods to a firm of another country, it is called Export trade. For example, the sale of iron and steel, tea, coffee, coal, etc. by Indian companies to other countries is known as its export trade. (c) Entrepot trade When the firm of a country imports goods for the purpose of exporting the same to the firms of some other country with or without making any change, it is known as entrepot trade or re-export trade for that country. For example, if an Indian company imports rubber from Thailand and exports it to Japan then it is called Entrepot trade for India. Now you must be thinking, why India comes between Thailand and Japan. Why doesnt Japan directly imports rubber from Thailand? Let us see what could be the possible reasons for this. A country cannot import goods directly from others because of the following reasons: The exporting country may not have any accessible trade routes connecting the importing country; or The goods imported may require processing or finishing before exporting. And these facilities may be lacking in the exporting or importing countries; There may not be any trade agreement between both the countries. IMPORTANCE OF EXTERNAL TRADE External Trade is an important indicator of economic condition of a nation. Both importing and exporting countries are benefited by external trade. While exporting country earns more foreign exchange by exporting its surplus, the importing country at the same time gets the opportunity to use better products and raise the standard of living of its people. Let us discuss in details about the importance of external trade.

(a) Promotes specialisation External trade promotes specialisation. When there is expansion in the demand for a particular commodity, its producer is encouraged to specialize in its production. For example, there is demand of Japanese electronic goods all over the world. The result is that Japans efficacy in this field has developed enormously. Similarly our country has specialized in tea, coffee and sugar production. (b) Improves standard of living On account of import trade, a country can consume goods, which it does not produce. On the other hand, it earns foreign exchange through export trade. The import and export trade thus, help in raising standard of living of a country. (c) Enhances competition External trade enhances competition, which compels the domestic firms to improve technology of production, production process and quality of the products. It ultimately benefits the consumers in getting better quality products at competitive prices. It also provides a large variety of goods. (d) Generates employment opportunities External trade facilitates the growth of agricultural, commercial as well as industrial activities, which in turn generates more and more employment opportunities for the people. (e) Price equalization External trade leads to equalisation of prices of goods and commodities in the world. Whenever the prices of commodities tend to rise because of short supply it can be checked by importing more goods. Similarly when the prices of products decline because of availability of excessive item, the country may export that surplus to others. (f) International relation External trade brings the people of two different countries to come closer and to understand the need and requirement of each other. They also participate in various trade and cultural exhibitions. All these activities promote harmonious and cordial relationship among the nations. (g) Economic growth Economic growth of every country depends to a large extend on the volume of external trade. If a country specialises in any product, it needs to produce more to meet the worldwide demand. So by producing and exporting more goods and services it can accelerate the economic growth of the country. (h) Proper utilisation of natural resources External trade is a means through which the natural resources of various countries can be properly utilised. For example, a country may be rich in minerals but due to lack of technological advancement it is not able to extract those minerals from the earth. So it can import modern equipments and machineries from advanced countries and make proper utilisation of those natural resources. DIFFICULTIES FACED IN EXTERNAL TRADE The various difficulties, which are faced by the buyers and sellers engaged in external trade are described below. (a) Distance: External trade involves transport of goods over long distances, except for neighbouring countries. Distance between various countries makes it difficult to establish quick and close trade contact between the importers and exporters.

(b) Greater risk: In external trade goods are exposed to greater degree of risk. Risk in transit of goods is more because of long distance. Goods are transported by ship, which may sink due to storm or collide with submerged rocks. The ships or goods may also be captured by the enemies. These risks may be covered through marine insurance, but that increases the cost of goods. (c) Difficulties of transport and communication: Long distances incidental to external trade create difficulties of proper and quick means of transport and communication. Though modern means of communication have solved this problem, it is quite costly and can not be used for securing all sorts of information. Loading and unloading of goods often takes long time and also involves large expenses which increase the cost of goods. (d) Restrictions: External trade is subject to various restrictions by way of customs, tariff, quotas and exchange regulations, which restrict the scope of external trade. (e) Lack of personal touch: In external trade, the transactions are made with unknown persons through correspondence and other means of communication. There is no direct contact between the buyer and seller. So the risk of dispute and bad debts are always there. (f) Study of foreign markets: Markets for different products have their own characteristics as regards demand, intensity of competition, buyers preferences, etc. Thus, an extensive study of foreign markets is required for success in external trade. This is not easily possible from an individual exporters or importers point of view. (g) Cost: Both import and export of goods involve very costly operations due to high cost of transport, insurance, intermediaries and cost of formalities to be completed. (i) Change in rules and regulations: Every country has framed its own rules and regulations for its external trade, to protect its economic and political interest. These rules change from time to time. So the traders find it difficult to acquaint themselves with the rules and regulations and procedures followed by different countries. PROCEDURE FOR EXPORT TRADE The procedure generally adopted for exporting goods to a foreign country is as follows: 1. Receipt of enquiry and sending quotations: The importer of goods first sends an enquiry to different exporters requesting them to send information about price, quality, terms of payment etc. In reply to the enquiry, the exporters then send the quotation mentioning details about the products, price, quality, mode of delivery, terms and conditions if any. 2. Receipt of an indent or export order: If the prospective importer finds the terms and conditions acceptable, then he places an order for export of goods which is known as indent. An indent contains a description of the goods ordered, price to be paid, terms and conditions of delivery, packing of goods and other details. On receipt of indent if the exporter finds it satisfactory, then he forwards his acceptance to export the goods. 3. Credit Enquiry: The exporter must ensure that there is no risk of default in payment. He should verify the credit worthiness of the importer. For this purpose he may ask the importer to send a letter of credit, bank guarantee or any other guarantee. 4. Obtaining export license: Each and every country has its own import and export policy for free goods and restricted goods. An exporter in India has to complete various formalities and apply for export license to the appropriate authority. If the authority is satisfied it will issue the export license. To get an export license, the exporter must have (i) an IEC number (ii) RCMC from appropriate export promotion council and (iii)

Registration with Export Credit and Guarantee Corporation (ECGC). The registration with ECGC safeguards against risk of non-payments. 5. Production or Procurement of goods: The exporter has to produce the goods or buy them from the market. The goods must be in accordance with the instructions given in the indent regarding the quality, quantity, price, etc. 6. Pre-shipment Inspection: To ensure that only good quality products are exported from our country, the Government of India has made compulsory pre-shipment inspection of goods by certain authorized agencies. 7. Excise Clearance: In India, manufactured products are subject to excise duty under the Central Excise Act. Therefore excise clearance certificate is a must for the goods to be exported. It may be noted here that the Government of India has exempted excise duty in many cases if the goods are manufactured exclusively for the purpose of export. 8. Packing and marking of the goods: Packing should be done strictly according to the instructions given in the indent. If loss arises due to defective packing, the exporter may have to bear it. If necessary, grading should be done before packing. The packages should be properly marked according to instructions, if any, so that they may be easily recognized. 9. Appointment of forwarding agent: Packed goods may be despatched to the port directly by the exporter or through a forwarding agent. If the goods are stored in any location, the exporter may appoint a forwarding agent who will perform all the formalities on behalf of the exporter before shipping the goods. The forwarding agent will charge commission for this work. 10. Despatch of goods by rail/road: The exporter has to despatch the goods by rail/ road to the port town. He will send the R/R (railway receipt) to the forwarding agent along with other instructions. The agent will take delivery of the goods and complete other formalities before shipping them to the importer. 11. Formalities to be completed by Forwarding agent: (a) Obtaining the custom permit: The agent has to apply to the custom office giving full details of the goods and also their destination in order to receive the custom permit. If goods are duty free then custom permit is given immediately, otherwise it will be necessary to complete other formalities. (b) Obtaining shipping order: The agent has to secure adequate space in the ship for loading of goods. For this purpose he has to sign an agreement with the shipping company for issue of the shipping order which will enable him to put the goods in the ship. (c) Completion of shipping bill and payment of export duty: The Agent has to fill in three copies of shipping bill and submit them to the custom-house. On the basis of the bill, duty is calculated by the custom authority. The agent has to make payment of the duty and get the original and third copy of the Shipping Bill from the custom authority. (d) Payment of dock dues: The agent has to make arrangement for carrying the goods to the dock. For this purpose, two copies of properly completed Dock Challan are submitted to the dock authorities along with one copy each of shipping bill and shipping order. After dock charges are received, the dock authorities retain one copy of dock challan and return the duly signed second copy to the agent. (e) Customs verification before loading of goods: As soon as the ship touches the port, the dock authorities start loading the goods on it. Before the goods are actually loaded, custom officials verify them to know if there is anything on which duty remains to be

paid or which is not mentioned in the shipping bill. The captain or his assistant (mate) will receive goods only when shipping order has been produced before him. (f) Mates receipt: The captain or mate will issue a receipt known as mates receipt after the goods have been loaded. This receipt contains particulars like quantity of goods, number of packets, condition of packing, etc. (g) Bill of lading: The forwarding agent has to present the mates receipt at the office of the shipping company and in exchange will get a document known as Bill of Lading. He has to fill in three blank forms of bills of lading giving details regarding the goods, destination, name of the ship, date and place of loading and name and address of the person to whom delivery is to be made. If the freight is paid in advance the bill of lading is marked freight paid. Otherwise it is marked freight forward which means freight will be paid at the port of destination. (h) Insurance of cargo: As a safeguard against marine risks, it is necessary to insure the goods. Insurance must be done strictly according to the instructions, if any, of the importer as given in the indent. If there is no instruction, the exporter himself should insure the goods. The insurance policy is sent to the importer along with the bill of lading and other documents. (i) Advice to the exporter: The agent then informs the exporter about the shipment of goods and other related matters. He will send the bill of lading, insurance policy, shipping bill etc. to the exporter along with a statement showing his expenses and remuneration. 12. Preparation of export invoice and consular invoice: Having received the advice from the forwarding agent, the exporter prepares an export invoice known as foreign invoice. This invoice states the quantity of goods sent and amount due from the importer. Custom regulations of many countries require consular invoice for the purpose of easy clearance of goods at the port of destination in the importing country. If it is required by the importer then the exporter has to arrange for such a document also. 13. Securing Payment: There are two alternative methods by which payment can be received by the exporter. (a) Letter of credit: The exporter can get immediate payment on the strength of the letter of credit which is issued by the importers bank in favor of the exporter. The exporter has to draw the bill in order to get the payment from the local branch of the bank (in home country), which has issued the letter of credit on behalf of the importer. (b) Letter of hypothecation: If the exporter wants to receive payment immediately, he can get the bill (accepted by the importer) discounted with his bank. But for this purpose, he has to give a letter of hypothecation to his bank. Letter of hypothecation is a letter addressed to a bank attached with the bill of exchange which is accepted by the importer. Through his letter of hypothecation, the exporter authorizes the bank to sell the goods in case of dishonor of the bill by the importer so that the bank can realize the amount advanced by it to the exporter. PROCEDURE FOR IMPORT TRADE The steps involved in importing goods are discussed below: 1. Trade enquiry: It is a written request by the importer to the exporters for supply of relevant information regarding the price, quality, quantity and various terms and conditions of export etc. In response to the trade inquiry of the importer, the exporter prepares the quotation and sends it to the importer.

2. Obtaining import licence: An importer cannot import goods without having a valid licence from the Import Licensing Authority. In India it is compulsory to get the IEC number from the DGFT. 3. Obtaining foreign exchange: As foreign exchange transactions are controlled by Reserve Bank of India, the importer has to submit an application along with necessary documents to the Exchange Control department of RBI. After scrutinizing the application, the Reserve Bank of India will sanction the release of foreign exchange. 4. Placing the Indent or order: Indent is the purchase order to the exporter by an importer for specified goods. The indent may be sent directly to the manufacturer of goods or to the exporting agent. 5. Sending letter of credit: Generally, the parties in external trade are not very well known to each other. So the exporter wants to be sure of the credit-worthiness of the importer. Usually, the exporter asks the importer to send a letter of credit. An importer can get a letter of credit issued as per terms and conditions of his banker and send it to the exporter. It ensures payment of bill of exchange drawn by the exporter upto the amount specified in the letter of credit. 6. Procuring the shipping documents: The importer will arrange to obtain necessary documents such as bill of lading, shipping bill, etc., after receiving the advice letter from the exporter. The documents are procured to take delivery of the goods. He has to go to the exporters bank to make payment in order to get the necessary documents for taking delivery of the goods. 7. Appointment of clearing agent: The importer may take delivery on his own or appoint an agent known as clearing agent, to take delivery of the goods. The importer sends necessary documents to his agent to clear the goods. The clearing agent charges commission for his services for clearing the goods. 8. Formalities to be completed by the clearing agent (a) Endorsement for delivery: When the ship arrives at the port, the clearing agent approaches the concerned shipping company and gets the bill of lading endorsed in his own name from the shipping company. If the freight has not been paid by the exporter, it will have to be paid before endorsement of the bill of lading. (b) Bill of entry: The agent has to fill in and submit three copies of the bill of entry to the custom authority. The custom authority will calculate the duty and receive the same from the clearing agent. (c) Payment of dock charges: The agent has to complete and file two copies of port Trust receipt and three copies of Bill of entry to the landing and shipping dues office. After receiving the dock charges, the dock authority will return one copy of Port Trust receipt and two copies of the Bill of entry to the agent. Then the agent has to submit this copy along with two copies of Bill of entry to the custom office. If customs duty is to be paid, he will make the payment and take delivery of the goods. (d) Despatch of goods by Rail/Road: The clearing agent has to arrange carriage of the goods to the railway station or the transport authority after taking the delivery from the dock authority. He will despatch the goods by rail/road to his principal and get the railway receipt/carrier receipt. (e) Advice to the importer: The clearing agent has to write a letter of advice to the importer after despatch of goods. In this letter of advice, information regarding arrival of goods and their despatch by rail/road are specified. He has to enclose with it the railway receipt/carrier receipt and a statement of his expenses and charges.

9. Delivery of goods from Railway/Transport Authority: The importer can take delivery of the goods from the railway or transport authority and carry them to his godown. GLOBALIZATION: THE PROCESS OF GLOBALIZATION: Globalization involves the creation of linkages or interconnections between nations. It is usually understood as a process in which barriers (physical, political, economic, cultural) separating different regions of the world are reduced or removed, thereby stimulating exchanges in goods, services, money, and people. Removal of these barriers is called liberalization. As these exchanges grow, nations, and the businesses involved, become increasingly integrated and interdependent. Globalization promotes mutual reliance between countries. Globalization can have many advantages for business such as new markets, a wider choice of suppliers for goods and services, lower prices, cheaper locations for investment, and less costly labour. It can also carry dangers because dependence on foreign suppliers and markets leaves businesses vulnerable to events in foreign economies and markets outside their control. Take the examples of Spain and Italy and their dependence on foreign countries for their energy supplies: they illustrate how important the interlinkages brought about by globalization can be, and what can happen when things go wrong. Since the 1980s, natural gas has become increasingly important in Spain as a source of energy. Spain itself produces an insignificant amount of oil and coal. As a result it depends on foreign suppliers for 99% of its natural gas requirements which is growing by 15% per annum. Three quarters of its gas supply comes from three African countries, Algeria, Nigeria, and Libya. These countries are potentially unstable both politically and economically. This leaves Spains power stations and four million Spanish consumers very vulnerable to any instability with their African suppliers THE INDICATORS OF GLOBALIZATION There are three main economic and financial indicators of globalization, these are: International trade in goods and services The transfer of money capital from one country to another The movement of people across national borders. Of the three, international trade and foreign investment are the most important. Each of the three indicators will be examined in turn. International Trade: Discussed in the previous chapter. FINANCIAL FLOWS FOREIGN INDIRECT INVESTMENT: The second main driver is the transfer of money capital across borders. This can take two forms. The first, Foreign Indirect Investment (FII, or Portfolio Investment), occurs where money is used to purchase financial assets in another country. These assets could comprise foreign stocks, bonds issued by governments or companies, or even currency. Thus, UK financial institutions such as HBOS and Barclays often purchase bonds or company shares quoted on foreign stock exchanges such as New York or Tokyo. Purchasers buy them for the financial return they generate. FOREIGN DIRECT INVESTMENT The second form of capital movement is Foreign Direct Investment (FDI). FDI occurs when a firm establishes, acquires, or increases production facilities in a foreign country. MNCs are responsible for foreign direct investment and the massive increase

that has occurred in FDI in the last 50 years. The distinguishing feature between FII and FDI is that MNCs not only own the physical assets but also wish to exercise managerial control over them. Countries can receive inflows of investment but they can also be sources of investment. The major recipients of FDI are the developed countries, mainly because of their large and affluent markets. In 2006, rich countries received around 60% of FDI inflows whilst they accounted for the vast majoritybetween 80 and 90% of the outflows. FDI grew spectacularly in the 1990s but declined steeply after 2000 due to weak growth of the world economy. The decline was halted in 2003/04. By 2006 it was once again approaching the peak of US$1.4 trillion reached in 2000. In 2006 rich countries received just over 60% of FDI inflows with the USA being the most favored location, particularly for firms from Western Europe and Asia. Developing economies accounted for the remaining 40%with China, Hong Kong, and Singapore being the largest recipients. MIGRATION The globalization of markets has not been paralleled by the liberalization of labour flows. While globalization has led to the dismantling of barriers to trade in goods, services, and capital, barriers to cross-border labour movements are not falling as fast. Nevertheless, migration between developing and developed countries has continued. Flows of migrants are greatest to two triad members, North America and Europe while Asia, Latin America, and Africa are major sources. The US population includes 38 million people born abroad. That is the official figure, however the US authorities estimate that some 5 million people are living in the USA without permission, and the number is growing by more than quarter of a million each year. According to the UN, the number of migrants (people currently residing for more than a year in a country other than where they were born) lies between 185 and 192 million which is around 3% of the worlds population. This meant that the migrant population had more than doubled in 25 years. Europe had most migrants with 56 million; Asia had 50 million, and Northern America 41 million. Almost one of every 10 persons living in the more developed regions is a migrant. In contrast, only one of every 70 persons in developing countries is a migrant. This increase in numbers has occurred despite the fact that during the last 30 years of the 20th century migration had become steadily more difficult particularly for people in developing countries wanting to enter Europe. MULTI NATIONAL COMPANY (MNC): INTRODUCTION TO MULTINATIONALS A multinational corporation can be defined as one having a subsidiary or a branch or a place of business in two or more countries or operates in two or more countries or territories. Therefore, a multinational can be called so by virtue of its physical presence in two or more countries or by virtue of geographical scope of its operations in two or more countries. Multinationals are sometimes also referred to as transnational corporations. The term multinational is more of an American term whereas the term transnational is European. Conservatively counted there are about 63,000 multinational corporations in the World. Among the Fortune 500, all major multinational corporations are American, Japanese or European, such as Nike, Coca-Cola, Wal-Mart, AOL, Toshiba, Honda and BMW. On one side, they create jobs and wealth and improve technology in countries that are in need of such development and on the other hand, they may have undue political

influence over governments, exploit developing nations and create a loss of jobs in their own home countries. Very large multinationals have budgets that exceed those of many countries. They can be seen as a power in global politics. Multinationals often make use of outsourcing as a strategy to produce certain goods for them. MULTINATIONAL COMPANY (MNC) A company or corporation that has manufacturing or trading interests in two or more countries. It may take the form of a holding company based in one country with subsidiary companies in other countries. A large scale business enterprise having their branches or collaborations with whole or majority ownership of interests in a number of countries. Also called a multinational enterprise (MNE), a company that has facilities, such as those for production and marketing, in various countries other than its country of origin. A large scale business enterprise having their branches or collaborations with whole or majority ownership of interests in a number of countries. Multinational corporation Corporation that has operations and offices in more than one country. Transnational Corporation (TNC) Alternative term for a multinational company. An enterprise consisting of commercial entities in more than one state that are linked by ownership or otherwise. Transnational corporations operate in such a way that they exercise a uniform, cohesive, and common policy in order to further their economic interests. This policy can allow them to wield significant influence over the activities of those states in which they carry out their commercial activities, i.e. by exerting pressure over the direction of domestic policy of the host states. Transnational or multinational corporations (TNC or MNC) Large corporations that play a key role in globalizing the economy and exploiting and making best use of pools of cheap labour and natural resources in developing countries to increase their GDP. MODES OF OPERATION IN INDIA A multinational corporation is a large firm with its head office in one country and several business units operating overseas. The head office implies the prime operation base of the company. Thereafter to expand its operations, the multinational looks for markets in other countries. To gain competitive advantage as also to capture sizable market share in the foreign markets the multinational may opt for various strategies. It could go in for forward integration or backward integration depending upon its core competencies and competitiveness in the respective sector. One other option that is available as well as beneficial is to acquire similar firms in other countries i.e., acquire similar units. Due to mergers, multinationals can save vital time on setting up their own plant and facilities and that too right from scratch. In other words, it gets access to a readymade plant or facility in the foreign market. Some types of mergers that a multinational can opt for are as under: Vertical Corporations - These are corporations that have purchased the component businesses that make their product. For example, if Apple Computers bought Intel (the chip manufacturer), a plastics company (for the cases) a shipping company, a CD Rom maker, etc, and they would be limiting their costs by purchasing the companies that they used to purchase component products from. Horizontal Corporations - These are corporations that have purchased competing companies in an attempt to eliminate the competition and gain market share. It would be like IBM purchasing Compaq, Dell and Gateway. The FTC (Federal Trade Commission)

watches this very carefully to ensure that anti trust laws are not violated. Some horizontal mergers may be illegal and are halted. Conglomerates - This is when one company buys other companies that are unrelated to their core business in an attempt to diversify. Corporations may become conglomerates after becoming very large through mergers and acquisitions of a variety of businesses. Diversification is one of the main reasons for conglomerate mergers. By having component businesses each making unrelated products, the overall sales and profits will be protected. For example, isolated economic events, such as bad weather or the sudden change of consumer tastes, may affect some product lines at some point, but not all at one time. One classic conglomerate is ITC which at one point owned international long distance phone service (their original core business), the Sheraton Hotel chain, a large insurance company, a defence contractor and others. MULTINATIONALS: ADVANTAGES AND DISADVANTAGES

INDIAN MULTINATIONALS When some major Indian business houses established Greenfield manufacturing joint ventures abroad, but most of them, with the exception of the AV Birla group, did not do very well. The Birla groups own ventures abroad were as much the result of business opportunity there, as of the frustration with the denial of industrial licenses in India. The situation has, of course, changed dramatically over the last decade. India Inc. is flying high. Not only over the Indian sky. Many Indian firms have slowly and surely embarked on the global path and lead to the emergence of Indian multinational companies.

With each passing day Indian businesses are acquiring companies abroad becoming World-popular suppliers and are recruiting staff cutting across nationalities. While Asian Paints is painting the World red, Tata is rolling out Indicas from Birmingham and Sundram Fasteners nails home the fact that the Indian company is an entity to be reckoned with. The economic reforms that began in the early 1990s brought many large multinational companies to India. A major challenge for these corporations was to manage the interface of global corporate culture and Indias powerful, traditional and widely varying cultural practices. MULTI NATIONAL ENTERPRISE (MNE): THE THEORY OF THE MULTINATIONAL FIRM Although MNEs have existed for a very long time, scholars first attempted to understand the nature and drivers of their cross-border activities during the 1950s. The credit for providing the first comprehensive analysis of the MNE and of foreign direct investment goes to economist Stephen Hymer, who in his doctoral dissertation observed that the control of the foreign enterprise is desired in order to remove competition between that foreign enterprise and enterprises in other countries or the control is desired in order to appropriate fully the returns on certain skills and abilities. His key insight was that the multinational firm possesses certain kinds of proprietary advantages that set it apart from purely domestic firms, thus helping it overcome the liability of foreignness. Multinational firms exist because certain economic conditions and proprietary advantages make it advisable and possible for them to profitably undertake production of a good or service in a foreign location. It is important to distinguish between vertical and horizontal foreign expansion in order to fully understand the basic economic principles that underlie the activities of MNEs in general and the novelty of the new MNEs in particular.
Vertical Expansion

Vertical expansion occurs when the firm locates assets or employees in a foreign country with the purpose of securing the production of a raw material, component, or input (backward vertical expansion) or the distribution and sale of a good or service (forward vertical expansion). The necessary condition for a firm to engage in vertical expansion is the presence of a comparative advantage in the foreign location. The advantage typically has to do with the prices or productivities of production factors such as capital, labor, or land. For instance, a clothing firm may consider production in a foreign location due to lower labor costs. It is important, though, to realize that the mere existence of a comparative advantage in a foreign location does not mean that the firm ought to vertically expand. The necessary condition of lower factor costs or higher factor productivity, or both, is not sufficient. After all, the firm could benefit from the comparative advantage in the foreign location simply by asking a local producer to become its supplier. The sufficient condition justifying a vertical foreign investment refers to the possible reasons encouraging the firm to undertake foreign production by itself rather than relying on others to do the job. The two main reasons are uncertainty about the supply and asset specificity. If uncertainty is high, the firm would prefer to integrate backward into the foreign location to make sure that the supply chain functions smoothly, and that delivery timetables are met. Asset specificity is high when the firm and the foreign supplier need to develop joint assets in order for the supply operation to take place. In that situation the firm would prefer to expand backward in order to avoid the

hold-up problem, that is, opportunistic behavior on the part of the foreign supplier trying to extract rents from the firm. These necessary and sufficient conditions also apply in the case of forward vertical expansion into a foreign location. Uncertainty and asset specificity with, say, a foreign distributor would compel the firm to take things into its own hands and invest in the foreign location in order to make sure that the goods or services reach the buyer in the appropriate way and at a reasonable cost.
Horizontal Expansion

Horizontal expansion occurs when the firm sets up a plant or service delivery facility in a foreign location with the goal of selling in that market, and without abandoning production of the good or service in the home country. The decision to engage in horizontal expansion is driven by forces different than those for vertical expansion. Production of a good or service in a foreign market is desirable in the presence of protectionist barriers, high transportation costs, unfavorable currency exchange rate shifts, or requirements for local adaptation to the peculiarities of local demand that make exporting from the home country unfeasible or unprofitable. As in the case of vertical expansion, these obstacles are a necessary condition for horizontal expansion, but not a sufficient one. The firm should ponder the relative merits of licensing a local producer in the foreign market or establishing an alliance against those of committing to a foreign investment. The sufficient condition for setting up a proprietary plant or service facility has to do with the possession of intangible assets brands, technology, know-how, and other firm-specific skills that make licensing a risky option because the licensee might appropriate, damage, or otherwise misuse the firms assets. Scholars in the field of international management have also acknowledged that firms in possession of the requisite competitive advantages do not become MNEs overnight, but in a gradual way, following different stages. ENTER THENEWMULTINATIONALS The early students of the phenomenon of MNEs from developing, newly industrialized, emerging, or upper-middle-income countries focused their attention on both the vertical and the horizontal investments undertaken by these firms, but they were especially struck by the latter. Vertical investments, after all, are easily understood in terms of the desire to reduce uncertainty and minimize opportunism when assets are dedicated or specific to the supply or the downstream activity, whether the MNE comes from a developed country or not. The horizontal investments of the new MNEs, however, are harder to explain because they are supposed to be driven by the possession of intangible assets, and firms from developing countries were simply assumed not to possess them, or at least not to possess the same kinds of intangible assets as the classic MNEs from the rich countries. This paradox becomes more evident with the second wave of FDI from the developing world, the one starting in the late 1980s. In contrast with the first wave of FDI from emerging countries that took place in the 1960s and 70s, the new MNEs of the 1980s and 90s aimed at becoming world leaders in their respective industries, not just marginal players. In addition, the new MNEs do not come only from emerging countries. Some firms, labeled as born-globals or born-again born-globals, have emerged from developed countries following accelerated paths of internationalization that challenge the conventional view of international expansion.

INTRODUCTORY IDEA ABOUT COMMERCIAL BANKS MEANING OF BANK: Bank is a lawful organisation, which accepts deposits that can be withdrawn on demand. It also lends money to individuals and business houses that need it. Banks also render many other useful services like collection of bills, payment of foreign bills, safekeeping of jewellery and other valuable items, certifying the credit-worthiness of business, and so on. Banks accept deposits from the general public as well as from the business community. Any one who saves money for future can deposit his savings in a bank. Businessmen have income from sales out of which they have to make payment for expenses. They can keep their earnings from sales safely deposited in banks to meet their expenses from time to time. Banks give two assurances to the depositors a. Safety of deposit, and b. Withdrawal of deposit, whenever needed ROLE OF BANKING Banks provide funds for business as well as personal needs of individuals. They play a significant role in the economy of a nation. Let us know about the role of banking. It encourages savings habit amongst people and thereby makes funds available for productive use. It acts as an intermediary between people having surplus money and those requiring money for various business activities. It facilitates business transactions through receipts and payments by cheques instead of currency. It provides loans and advances to businessmen for short term and long-term purposes. It also facilitates import export transactions. It helps in national development by providing credit to farmers, small-scale industries and self-employed people as well as to large business houses which lead to balanced economic development in the country. It helps in raising the standard of living of people in general by providing loans for purchase of consumer durable goods, houses, automobiles, etc. TYPES OF BANKS There are various types of banks which operate in our country to meet the financial requirements of different categories of people engaged in agriculture, business, profession, etc. On the basis of functions, the banking institutions in India may be divided into the following types:

A) CENTRAL BANK A bank which is entrusted with the functions of guiding and regulating the banking system of a country is known as its Central bank. Such a bank does not deal with the general public. It acts essentially as Governments banker; maintain deposit accounts of all other banks and advances money to other banks, when needed. The Central Bank provides guidance to other banks whenever they face any problem. It is therefore known as the bankers bank. The Reserve Bank of India is the central bank of our country. The Central Bank maintains record of Government revenue and expenditure under various heads. It also advises the Government on monetary and credit policies and decides on the interest rates for bank deposits and bank loans. In addition, foreign exchange rates are also determined by the central bank. Another important function of the Central Bank is the issuance of currency notes, regulating their circulation in the country by different methods. No other bank than the Central Bank can issue currency. B) COMMERCIAL BANKS Commercial Banks are banking institutions that accept deposits and grant shortterm loans and advances to their customers. In addition to giving short-term loans, commercial banks also give medium-term and long-term loan to business enterprises. Now-a-days some of the commercial banks are also providing housing loan on a longterm basis to individuals. There are also many other functions of commercial banks, which are discussed later in this lesson. Types of Commercial banks: Commercial banks are of three types i.e., Public sector banks, Private sector banks and foreign banks. (i) Public Sector Banks: These are banks where majority stake is held by the Government of India or Reserve Bank of India. Examples of public sector banks are: State Bank of India, Corporation Bank, Bank of Boroda and Dena Bank, etc. (ii) Private Sectors Banks: In case of private sector banks majority of share capital of the bank is held by private individuals. These banks are registered as companies with limited liability. For example: The Jammu and Kashmir Bank Ltd., Bank of Rajasthan Ltd., Development Credit Bank Ltd, Lord Krishna Bank Ltd., Bharat Overseas Bank Ltd., Global Trust Bank, Vysya Bank, etc. (iii) Foreign Banks: These banks are registered and have their headquarters in a foreign country but operate their branches in our country. Some of the foreign banks operating in our country are Hong Kong and Shanghai Banking Corporation (HSBC), Citibank, American Express Bank, Standard & Chartered Bank, Grindlays Bank, etc. The number of foreign banks operating in our country has increased since the financial sector reforms of 1991. C) DEVELOPMENT BANKS Business often requires medium and long-term capital for purchase of machinery and equipment, for using latest technology, or for expansion and modernization. Such financial assistance is provided by Development Banks. They also undertake other development measures like subscribing to the shares and debentures issued by companies, in case of under subscription of the issue by the public. Industrial Finance Corporation of India (IFCI) and State Financial Corporations (SFCs) are examples of development banks in India. D) CO-OPERATIVE BANKS People who come together to jointly serve their common interest often form a co operative society under the Co-operative Societies Act. When a co-operative society

engages itself in banking business it is called a Co-operative Bank. The society has to obtain a licence from the Reserve Bank of India before starting banking business. Any co-operative bank as a society is to function under the overall supervision of the Registrar, Co-operative Societies of the State. As regards banking business, the society must follow the guidelines set and issued by the Reserve Bank of India. E) SPECIALISED BANKS There are some banks, which cater to the requirements and provide overall support for setting up business in specific areas of activity. EXIM Bank, SIDBI and NABARD are examples of such banks. They engage themselves in some specific area or activity and thus, are called specialized banks. Let us know about them. (1) Export Import Bank of India (EXIM Bank): If you want to set up a business for exporting products abroad or importing products from foreign countries for sale in our country, EXIM bank can provide you the required support and assistance. The bank grants loans to exporters and importers and also provides information about the international market. It gives guidance about the opportunities for export or import, the risks involved in it and the competition to be faced, etc. (2) Small Industries Development Bank of India (SIDBI): If you want to establish a Small-scale business unit or industry, loan on easy terms can be available through SIDBI. It also finances modernization of small-scale industrial units, use of new technology and market activities. The aim and focus of SIDBI is to promote, finance and develop smallscale industries. (3) National Bank for Agricultural and Rural Development (NABARD): It is a central or apex institution for financing agricultural and rural sectors. If a person is engaged in agriculture or other activities like handloom weaving, fishing, etc. NABARD can provide credit, both short-term and long-term, through regional rural banks. It provides financial assistance, especially, to co-operative credit, in the field of agriculture, small-scale industries, cottage and village industries handicrafts and allied economic activities in rural areas. FUNCTIONS OF COMMERCIAL BANKS The functions of commercial banks are of two types. (A) Primary functions; and (B) Secondary functions. Let us discuss details about these functions. (I) PRIMARY FUNCTIONS The primary functions of a commercial bank include: a) Accepting deposits; and b) Granting loans and advances. (a) Accepting deposits The most important activity of a commercial bank is to mobilize deposits from the public. People who have surplus income and savings find it convenient to deposit the amounts with banks. Depending upon the nature of deposits, funds deposited with bank also earn interest. Thus, deposits with the bank grow along with the interest earned. If the rate of interest is higher, public are motivated to deposit more funds with the bank. There is also safety of funds deposited with the bank. (b) Grant of loans and advances The second important function of a commercial bank is to grant loans and advances. Such loans and advances are given to members of the public and to the

business community at a higher rate of interest than allowed by banks on various deposit accounts. The rate of interest charged on loans and advances varies according to the purpose and period of loan and also the mode of repayment. i) Loans A loan is granted for a specific time period. Generally commercial banks provide short-term loans. But term loans, i.e., loans for more than a year may also be granted. The borrower may be given the entire amount in lump sum or in installments. Loans are generally granted against the security of certain assets. A loan is normally repaid in installments. However, it may also be repaid in lump sum. ii) Advances An advance is a credit facility provided by the bank to its customers. It differs from loan in the sense that loans may be granted for longer period, but advances are normally granted for a short period of time. Further the purpose of granting advances is to meet the day-to-day requirements of business. The rate of interest charged on advances varies from bank to bank. Interest is charged only on the amount withdrawn and not on the sanctioned amount. TYPES OF ADVANCES Banks grant short-term financial assistance by way of cash credit, overdraft and bill discounting. Let us learn about these. (a) Cash Credit Cash credit is an arrangement whereby the bank allows the borrower to draw amount up to a specified limit. The amount is credited to the account of the customer. The customer can withdraw this amount as and when he requires. Interest is charged on the amount actually withdrawn. Cash Credit is granted as per terms and conditions agreed with the customers. (b) Overdraft Overdraft is also a credit facility granted by bank. A customer who has a current account with the bank is allowed to withdraw more than the amount of credit balance in his account. It is a temporary arrangement. Overdraft facility with a specified limit may be allowed either on the security of assets, or on personal security, or both. c) Discounting of Bills Banks provide short-term finance by discounting bills that is, making payment of the amount before the due date of the bills after deducting a certain rate of discount. The party gets the funds without waiting for the date of maturity of the bills. In case any bill is dishonored on the due date, the bank can recover the amount from the customer. II) SECONDARY FUNCTIONS In addition to the primary functions of accepting deposits and lending money, banks perform a number of other functions, which are called secondary functions. These are as follows. Issuing letters of credit, travellers cheque, etc. Undertaking safe custody of valuables, important document and securities by providing safe deposit vaults or lockers. Providing customers with facilities of foreign exchange dealings. Transferring money from one account to another; and from one branch to another branch of the bank through cheque, pay order, demand draft. Standing guarantee on behalf of its customers, for making payment for purchase of goods, machinery, vehicles etc. Collecting and supplying business information.

Providing reports on the credit worthiness of customers. Providing consumer finance for individuals by way of loans on easy terms for purchase of consumer durables like televisions, refrigerators, etc. Educational loans to students at reasonable rate of interest for higher studies, especially for professional courses.

INSURANCE:
DEFINITION OF INSURANCE: Insurance is a contract between the insurer and insured whereby the insurer undertakes to pay the insured a fixed amount, in exchange for a fixed sum (premium), on the happening of a certain event (like at a certain age or on death), or compensate the actual loss when it takes place, due to the risk insured. IMPORTANCE OF INSURANCE Insurance plays a significant role particularly in view of the large-scale production and distribution of goods in national and international market. It is an aid to both trading and industrial enterprises, which involve huge investments in properties and plants as well as inventories of raw materials, components and finished goods. The members of business community feel secured by means of insurance as they get assurance that by contributing a token amount they will be compensated against a loss that may take place in future. From the national economic point of view, insurance enables savings of individuals to accumulate with the insurance companies by way of premium received. These funds are invested in securities issued by big companies as well as Government. Individuals who insure their lives to cover the risks of old age and death are induced to save a part of their current income, which is by itself of great importance. Insurance is also a source of employment for the people. The people get employed directly in its offices spread over the country and it also provides opportunities to the people to earn their livelihood by working as agent of the insurance companies. TYPES OF INSURANCE Insurance, which is based on a contract, may be broadly classified into the following types. (i) Life Insurance (ii) Fire Insurance (iii)Marine Insurance, and (iv)Other types such as burglary insurance, motor vehicle insurance, etc. Until recently Life Insurance Corporation of India (LIC) and General Insurance Corporation with its subsidiaries happened to be the only organizations engaged in life and general insurance business in India. Now a number of other private companies have entered this service sector. Let us consider the salient feature of each of these types. (I) LIFE INSURANCE A contract of life insurance (also known as life assurance) is a contract whereby the insurer undertakes to pay a certain sum either on the death of the insured or on the expiry of a certain number of years. In return, the insured agrees to pay an amount as premium either in a lump sum or in periodical installments, annually or half-yearly. The risk insured against in this case is certain to happen. Hence, life insurance is also referred to as life assurance. The written form of contract is known as life insurance policy. It provides for the payment of a fixed sum to the insured either on a fixed date or on the happening of an event, which is certain. Businessmen can provide for life insurance of all

their employees by way of group insurance. It also develops loyalty among employees and can be used as a security for raising loans. There are two basic types of life assurance policies (a) Whole-life policy, and (b) Endowment Policy. A whole life policy runs for the whole life of the insured and premium is payable all along. The sum assured becomes due for payment to the heirs of the insured only after his death. An endowment policy on the other hand, runs for a limited period or up to a certain age of the insured. The sum assured becomes due for payment at the end of the specified period or on the death of the insured, if it occurs earlier. (II) FIRE INSURANCE A contract of fire insurance is a contract whereby the insurer, on payment of premium by the insured, undertakes to compensate the insured for the loss or damage suffered by reason of certain defined subject matter being damaged or destroyed by fire. It is a contract of indemnity, that is, the insured cannot claim anything more than the value of property lost or damaged by fire or the amount of policy, whichever is lower. The claim for loss by fire is payable subject to two conditions, viz; (a) there must have been actual fire; and (b) fire must have been accidental, not intentional; the cause of fire being immaterial. The basic principle applied with regard to claim is the principle of indemnity. The insured is entitled to be compensated for the amount of actual loss suffered subject to a maximum amount for which he had taken the policy. He cannot make a profit through insurance. For example, if a person takes a fire insurance policy of Rs. 20,000/- on certain goods. Out of these, goods worth Rs 15,000/- are destroyed by fire. The insured can only claim an amount to the extent of loss i.e., Rs. 15,000/- (and not Rs. 20, 000/-) for the damage from the insurance company.

(iii) Marine Insurance

Marine insurance is an agreement (contract) by which the insurance company (also known as underwriter) agrees to indemnify the owner of a ship or cargo against risks, which are incidental to marine adventures. It also includes insurance of the risk of loss of freight due on the cargo. Marine insurance that covers the risk of loss of cargo by storm known as cargo insurance. The owner of the ship may insure it against loss on account of perils of the sea. When the ship is the subject matter of insurance, it is known as hull insurance. Further, where freight is payable by the owner of cargo on safe delivery at the port of destination, the shipping company may insure the risk of loss of freight if the cargo is damaged or lost. Such a marine insurance is known as freight insurance. All marine insurance contracts are contracts of indemnity. The followings are the different types of marine insurance policies (a) Time Policy This policy insures the subject matter for specified period of time, usually for one year. It is generally used for hull insurance or for cargo when small quantities are insured. (b) Voyage Policy - This is intended for a particular voyage, without any consideration for time. It is used mostly for cargo insurance. (c) Mixed Policy Under this policy the subject matter (hull, for example) is insured on a particular voyage for a specified period of time. Thus, a ship may be insured for a voyage between Mumbai and Colombo for a period of 6 months under a mixed policy. (d) Floating Policy - Under this policy, a cargo policy may be taken for a round sum and whenever some cargo is shipped the insurance company declares its value and the total value of the policy is reduced by that amount. Such shipments may continue until the total value of the policy is exhausted.

(IV) OTHER TYPES OF INSURANCE Apart from life, fire and marine insurance, general insurance companies can insure a variety of other risks through different policies. Some of these risks and the different policies are outlined below. (a) Motor vehicles Insurance: Insurance of all types of motor vehicles- passenger cars, vans, commercial vehicles, motor cycles, scooters, etc., covers the risks of damage of the vehicle by accident or loss by theft, as also risks of liability arising out of injury or death of third party involved in an accident. Third party risk insurance is compulsory under the Motor Vehicles Act. (b) Burglary Insurance: Under this insurance the insurance company undertakes to indemnify the insured against losses from burglary i.e., loss of moveable goods by robbery and theft by breaking the house. (c) Fidelity Insurance: As a protection against the risks of loss on account of embezzlement or defalcation of cash or misappropriation of goods by employees, businessmen may get policies issued covering the risks of loss on account of fraud and dishonesty on the part of employees handling cash or in charge of stores. This is called fidelity insurance policy. The employees may also be required to sign a fidelity guarantee Bond. PRINCIPLES OF INSURANCE There are certain principles that may apply to the contracts of insurance between insurer and insured, which are as follows. i. Utmost goods faith Insurance contracts are the contract of mutual trust and confidence. Both parties to the contract i.e., the insurer and the insured must disclose all relevant information to each other. For example, while entering into a contract of life insurance, the insured must declare to the insurance company if he is suffering from any disease that may be life threatening. ii. Insurable interest It means financial or pecuniary interest in the subject matter of insurance. A person has insurable interest in the property or life insured if he stands to gain from its existence or loose financially from its damage or destruction. In case of life insurance, a person taking the policy must have insurable interest at the time of taking the policy. For example, a man can take life insurance policy on the name of his wife and if later they get divorced this will not affect the insurance contract because the man had insurable interest in the life of his wife at the time of entering into the contract. In case of marine insurance insurable interest must exist at the time of loss or damage to the property. In contract of fire insurance, it must exist both at the time of taking the policy as well as at the time of loss or damage to the property. iii. Indemnity The word indemnity means to restore someone to the same position that he/she was in before the event concerned took place. This principle is applicable to the fire and marine insurance. It is not applicable to life insurance, because the loss of life cannot be restored. The purpose of this principle is that the insured is not allowed to make any profit from the insurance contract on the happening of the event that is insured against. Compensation is paid on the basis of amount of actual loss or the sum insured, which ever is less.

iv. Contribution The same subject matter may be insured with more than one insurer. In such a case, the insurance claim to be paid to the insured must be shared or contributed by all insurers. v. Subrogation In the contract of insurance subrogation means that after the insurer has compensated the insured, the insurer gets all the rights of the insured with regard to the subject matter of the insurance. For example, suppose goods worth Rs. 20,000/- are partially destroyed by fire and the insurance company pays the compensation to the insured, then the insurance company can take even these partially destroyed goods and sell them in the market. vi. Mitigation In case of a mishap the insured must take all possible steps to reduce or mitigate the loss or damage to the subject matter of insurance. This principle ensures that the insured does not become negligent about the safety of the subject matter after taking an insurance policy. The insured is expected to act in a manner as if the subject matter has not been insured. vii. Causa-proxima (nearest cause) According to this principle the insured can claim compensation for a loss only if it caused by the risk insured against. The risk insured should be nearest cause (not a remote cause) for the loss. Then only the insurance company is liable to pay the compensation. For example a ship carrying orange was insured against losses arising form accident. The ship reached the port safely and there was a delay in unloading the oranges from the ship. As a result the oranges got spoilt. The insurer did not pay any compensation for the loss because the proximate cause of loss was delay in unloading and not any accident during voyage.