BBA (1.4) B. Com. (1.

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Business Environment

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PAPER 1.5: BUSINESS ENVIRONMENT

Business environment Concept and significance Factors of environment and their influence on business social and cultural environment Impact of socio cultural factors on business Demographic trend-Structure and systems of Indian society-Caste and communal systems-Role of social groups in business development. Political environment and business-Relevance of political decisions to business Directive principles of state policy Center State relations. Economic environment and business- Role of economic systems in promoting business activities. Kinds of business sectors and their places in economic systems. Multinational corporations- Technological environment- Impact of technology on business-Choice of appropriate technology Social responsibilities of business. TEXT AND REFERENCE BOOKS 1. 2. 3. 4. 5. 6. 7. Essentials of business environment K. Aswathappa Business and society- Lokananthan and Lakshmi Rathan Economic environment of business M. Adikary. Business and Government - Francis cherunilam. Economic environment of Business Sampath mukerji. Business environment and public policy Rogene A Buchholz Indian Economy Ruddar Datt and K.P.N. Sundaram

CONTENTS
Sl. No.
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.

LESSONS

Pg.No.
4 8 11 14 17 20 22 25 28 31 33 37 46 49 51 53

Business Environment Concept and significance Factors of environment and their influence on business. Social and cultural environment Demographic trend Structure and systems of Indian society. Caste and communal systems. Political environment and business Directive Principles of State Policy Center State relations Economic environment and business Economic systems and business Business sectors and economic systems Multi-national corporations Technologies environment and business Choice of appropriate technology Social responsibilities of business.

LESSON 1
BUSINESS EVNIRONMENT CONCEPT AND SIGNIFICANCE
The social life of man lies mainly in his interaction with the environment. The people, the material resources, the climatic conditions or any other things around him constitute his environment. These are important and un avoidable factors to him. Similarly for a business unit, it is very much necessary to respond, understand and react with its environment for the survival in the market and business growth. Particularly the modern business world has become so dynamic and complex in nature. This is because its environment is changing day by day. Any lacuna in understanding these changes will result in failure and total withdrawal from the market due to the stiff competition. So, let us discuss the concept of business environment and highlight the significance of environment and its interrelation with business.

MEANING OF BUSINESS AND ENVIRONMENT

The term business is usually described as the organized efforts of an individual or a group in producing and / or exchanging goods and services to satisfy needs and wants of the people. But now this term encircles (other than production and exchange of products) study on consumer behaviors, brand positioning among competitive goods, sales promotion techniques market share and goodwill, innovations through product research and so, on. Therefore, the environment study becomes an integral part of business. Every business organization exists admits of its challenging competitors, changing consumer attitudes, technological changes, varying economic trends, political policies and controls and many other influencing factors. These surroundings are called as environment of business. In the words of Arthur K. Weimer, Business environment encompasses the climate or set of conditions-economic, social, political or institutional in which the business operations are on ducted According to Willliam F. Gluceck, the environment means the economic, governmental or legal, market or competitive, supplier, technological, geographic and social settings monitored by the business executives to determine opportunities and threats to their firms. The renowned marketing scholar, Philip Kotler explains the organizations environment as the set of interacting institutions and forces, that affect the organizations ability to serve its markets. From the above conceptual descriptions we can summarize the following points. 1. 2. 3. 4. 5. The surrounding conditions or forces of business are known as its environment. The social, political and economic settings of the society mainly constitute the business environment. The environment is dynamic and its changes influence the business decisions. Study on environment will reveal the opportumities available to a business. The threats or challenges could be predicted from environment, so that the firm can be prepared to meet them.

SIGNIFICANCE OF BUSINESS ENVIRONMENT

The business environment can be divided into internal and external environment or as the micro and macro environment. These classifications are not final and airtight. It is divided into many types as convenient to the analysts. The internal environment is the organizations internal climate such climate such as machineries, technical know-how, skills of workers, supplies of raw material etc. So, they are controllable factors. Whereas the external environment is uncontrollable. This includes political decisions, economic trend, socio-cultural factors, technological changes, competitive strategies and so on. These uncontrollable factors make the business so turbulent and multidimensional. Therefore failure to understand them may result in un-repairable losses. So, the external environment plays a significant role business decisions. Macro environment POLITICAL & LEGAL NATURAL & ECOLOGICAL WORKERS BUSINESS INVESTORS SUPPLIERS SOCIO CULTURAL INTER-MEDIARIES DEMOGRAPHIC ECONOMIC

CUSTOMERS TECHNOLOGICAL

COMPETITORS MICRO ENVIRONMENT INTERNATIONAL

The significance of the environmental factors can be clearly understood from the following advantages, which are the results of environmental analysis.

1.

DEMAND FORECASTING

A businessman can estimate the future demand for a product by analyzing demographic features, competitors market share, consumer behaviour and their purchasing power and the general economic and political conditions. This is the basic function before producing a product.

2.

PRODUCT FEATURE

The attitude and preferences of consumers differ based on their socio-cultural back ground. By studying this, the desired features in a product can be finalized. Without such product research the consumers may not be satisfied by that product.

3.

BRAND POSITIONING

Every competing brand is placed in a particular position in the market. This is done through pricing policy and distinct product features or quality. This position for a product is strategically planned to gain a particular market share after considering the competitors strategies. For example, NIRMA was priced one-forth price or SURF at the time of introduction and gained a major share.

4.

PROMOTION STRATEGY

For the sales promotion techniques the knowledge of cultural environment is essential. The advertisement themes, personal selling strategies and special campaigns require good response from the audience. Only if the attitudes and values of the people are understood the promotion efforts will e successful. Many marketers have corrected their strategies after knowing the response from consumers, and made effective. We can quote the examples of ad themes based on family relations, that is why they are popular among people of Indian social set-up.

5.

MEETING OUT THE COMPETITION

The manufacturer of a product of any nature has to keenly watch the major changes in science and technology. There are many avenues to improve the performance of his product and to reduce cost through new methods of production. He must at-least follow the competitors in this respect, failing which they will over take his product. Even a popular brand is often modified or improved to meet out the tastes of consumers. Usually innovations, that are the new concepts, new products or new methods of offering goods, gain greater preferences of consumers. Technology helps to create innovative products.

6.

FULFILLING LEGAL REQUIREMENT

There are many legislations passed in our country related to business units, and they should be observed. For example the Acts regarding Factory workers, consumer protection, social security, public welfare etc. are to be followed by businessmen. Todays business is encircled by a massive web of laws. That is why large firms employ legal experts as advisers. The failure to adhere legal provisions will be met with penalty.

7.

PLANNING THE INVESTMENT DECISION

The planning and policies of Government affect business in general. Some measures or programs of Government are directly related to specified sectors of industries. The industrial policy, tax policy, foreign trade policy and many controls on private business units are the important interventions of Government to business decisions. The public spending of the government also provides facilities for industrial and business development. By understanding all these aspects a businessman has to carefully decide the investment of the future production.

8.

ECONOMIC CONDITION AND COST ESTIMATES

The Standard of living of the people determines their purchasing power and consumption pattern. On the other side the cost of factors of production will determine prices of goods. Therefore, by 6

understanding the price trend and economic climate, a businessman can estimate his cost and fix prices. Now the international trade and global markets are also widening the business opportunities, and also opening up for global competition. So cost-wise and quality wise efficiency is the need of the hour. Thus by the above analysis we can conclude that the business units survive and grow by studying its environment. It interacts with its surroundings by utilizing various sections of people ad favorable conditions in the society. Also they contribute in turn, to the society by means of increasing the economic activities, and offering public welfare measures to show their social responsibility. So both are inter-dependent and we can say that business without society has no roots and society without business units has no fruits.

Lesson 2 FACTORS OF ENVIRONMENT AND THEIR INFLUENCE ON BUSINESS

The environment of business is classified in different ways. Philip Kotler divides it into Micro environment and macro environment as diagrammatically represented in the previous chapter. Here is another classification given in the following figure. ORGANIZATION ENVIRONMENT (MANUFACTURING, FINANCE, MARKETING ETC. ) TASK ENVIRONMENT (SUPPLIERS, CONSUMERS, INTERMEDIARIES ETC. ) COMPETITIVE ENVIRONMENT (MARKET SHARE, PRICING STRATEGIES, INNOVATION ETC.) PUBLIC ENVIRONMENT (MEDIA PUBLIC, INVESTORS, GOVT. LOCAL PUBLIC & OTHERS) MACRO ENVIRONMENT (NATURAL RESOURCES, ECONOMIC TREND, INTERNATIONAL, TRADE, SOCIAL EXPECTATIONS ETC) These environmental factors can simply be grouped into sicio-cultural environment, economic environment, political and legal environments, demographic, technological geographical or natural, competitive and international environments. This will help to discuss these factors one by one.

1.

SOCIO-CULTURAL ENVIRONMENT

A business can not exist without the contributions of society. To interact efficiently with the society, we have to know its cultural background and social practices. Because the behaviour and expectations of the surrounding people are determined by this environment. Our country follows traditional culture. It is transmitted through numerous generations to us. So we have different set of social systems and practices. The customs, habits, ceremonies, attitudes, values, beliefs, tastes and preferences etc., of or people are to be understood to take the right business decisions. The reactions of people while playing the roles of workers, consumers, suppliers and others are to be studied. Then only the positive relations with them could be developed by businessmen.

2.

ECONOMIC ENVIRONMENT.

It means the total climate that affect the human activities related to production of wealth. We know that the basic economic activity is producing and exchanging commodities to satisfy the people. The business process involves some inputs namely the factors of production. The cost and their availability are the important economic factors, which will finally determine price of commodities. 8

On the other side the output of business is the goods or services that reach consumers. Here also the economic phenomenon namely the purchasing power of people will determine the demand level. There are also some general economic conditions that affect volume of trade domestically and in foreign markets. Hence a businessman should analyze carefully the trend and changes in the economy, to know his opportunities and challenges.

3.

POLITICAL AND LEGAL ENVIRONMENT

This means and includes the various controls, programs and activities of the government. In the mixed economy like India the role of government is considerable in promoting industries and controlling private business enterprises. In the economic planning the sources of funds and its allocation to various sectors are decided by the govt. In the fiscal policy, government d3ecides the tax revenue, public expenditure and public debt. That is, it reallocates the funds of the society. Moreover, the industrial development, assistance for agriculture, employment generation, public welfare measures etc. are made by the government. All these activities affect business units directly or indirectly. The government as the regulatory organ of the society, takes a number of control measures on the business units. Such regulations include registration under the Acts, licensing, control on investment and location, control on prices and trade practices and so, on. Much legislation for the welfare of workers, consumers and the public. The governments policies on foreign exchanges, international trade, public sector industries, banking regulations public utility services etc. indicate that the political climate has numerous influences on business sector.

4.

TECHNOLOGICAL ENVIRONMENT

This factor may be considered as a part of economic environment. But its impact on business and industries is quite large. The technological changes helps business to grow by means of new and improved goods, reduction in cost and variety in goods. The term technology indicates macro level improvements in the method of production. A technological change in a country results in a total change of atmosphere in industry. For example, electronic industry, computer industry, space research and satellites, resulted in mushroom growth of industries and wide application of these facilities for the development of business. Therefore, every unit tries to cope up with the technological changes, other wise it can not produce improved goods to compete in the market. The consumers tastes and preferences are also changing fast. So, the scientific inventions, and the results of industrial research and development ( R & D ) are converted into innovative products and services. We have to remember here, that some countries that could imp[rove the technologies more effectively, have become economic giants in the world.

5.

NATURAL ENVIRONMENT

The natural resources are the gifts to a country by which economic activities could be developed. The minerals, materials and also the climate, coil conditions, rainfall etc., help in this progress. On the 9

other side, the people, especially the businessmen, should take care I preserving natural and ecological balance of the earth. There are many challenges to the natural environment, which will affect the society in the long run. For example, air, water and atmospheric pollution, soil erosion, holes in ozone layer, green house effect on sea levels, climatic disorders, acid-rains and so on. Finding solutions is not only the moral duty of the businessmen but also for their future business growth.

6.

COMPETITIVE AND GLOBAL ENVIRONMENT

To meet out the competition is the routine task for business. This is because the producers of goods and services become unlimited. Hence close watch on the competitive strategies on prices, improved products and promotion appeals will help a businessman to take right decisions. This is so important, as it is a question of survival and growth in the market. The globalization concept has opened up the market for international competition as well as opportunities. Now, our businessmen have to face the challenges from the multinational corporations (MNCs) and trans national corporations, other than the local competitors. The technology and resources of MNCs are very much improved and our businessmen should increase their ability up-to the international standard. The merit claimed for globalization is that our share in the world trade would increase due to multilateral agreements. For this, we have to increase our productivity. Also there is a danger of excess reliance of developing nations on the developed countries. Thus leading the competitors or following them is unavoidable for business, challenging with international standards will also become a part of this game in the near future.

10

LESSON 3 SOCIAL AND CULTURAL ENVIRONMENT

The social environment means the forces arising out of the structure and characteristics of the society. These forces vary from society to society. They are the results of interactions of the people. Ancient people started living as groups and they transmitted their experiences, beliefs and habits to their generations. This process resulted as culture. Particularly traditional countries has rich cultural heritage. It is reflected in the attitudes and behaviour of people. Hence the social forces arise out of the particular cultural background of the society and that is why they are called as socio cultural environment. The term culture is defined as the art of living applicable to a group of people. It is also described as the intellectual development made or the physical and mental training received in the course of ages. That is, culture is composed of teachings of our forefathers, passed through so many generations. E.B. Taylor defines culture as The complex whole of civilasation that includes knowledge, beliefs, art, morals, law, custom and other capabilities and habits acquired by man as a member of society. According to Francis Merill, it is the characteristically human product of social interaction and the total repertoire of human action, which is socially transmitted. Thus culture is not developed by an individual but by social inheritance. It is not static. It progresses or declines with or without contact with other cultures. By trial and error method the society earns experiences and better practices of other cultures are also adopted in the process of civilization, so culture becomes a composite package of experiences. Some countries like Egypt have been converted into a society of entirely new culture foregetting their ancient civilizations. In case of countries like India and China the cultural link continues without break. As we have discussed, socio-cultural forces of India are traditional and distinct. Let us see some of their characteristic features.

FEATURES OF INDIAN CULTURE

1. Indian cultural history is very ancient. A great civilization flourished in India when Rome and Greece did not exist, and when people in Europe were still in the hunting stage. The history of India dates back to many centuries before the birth of Christ. So our society has a traditional culture consuming the essence of good value from foreign cultures, when they migrated to India or invaded our lands. As descried by Jawaharlal Nehru this absorption and synthesis made India a unique mosaic of cultures. Our culture is remarkable for its spirit of tolerance. The geographical features, which helped the evolution of the composite culture of our country, also helped the development of sprit of tolerance. The existence of various types of people in the country created a spirit of tolerance of differences among them. So we uphold the noble principle of Unity in diversity we all are integrated in-spite of the varied physical features, different climates, and diversified racial, religious and linguistic differences. Role of Hindu religion in he development of our culture in noteworthy. Max Muller pointed out the feature of Indian Society as that there is an unbroken continuity between the most modern and the most ancient phases of Hindu thought extending over more than thousand years. In strict sense, the Hindu religion is the collection of cultural values of 11

2.

3.

4.

5.

6.

the society. It is not evolved by anyone as that of all other religions. Hence the Hindu religious principles and our cultural set-up were developed side by side. In Indian culture, there are plenty of moral and spiritual values. They speak the values of simple and self-contented life. They were preached through Vedas and epics, by the kings and saints and in the centers of learning like Nalanda, Banaras, Taxila, Madhura, Kanchi etc. There is an cultural uniformity found in the lives of different sects of people in our country. The philosophies, literatures, conventions, ceremonies, festivals of various parts of India reflect the same basic principles. Idols worship is common but in different forms. The moral and cultural values taught thro the stories and epics prevalent in our society are almost the same. The structure and characteristics of or social groups and family system are unique. The Aryan society was divided originally on the basis of division of labor such as Brahamnas, Kshatriyas, Vishyas and Sudras. Later it was made as by birth by selfish people and called as castes. Vast differences including untouchability were created among the caste groups subsequently. In the course of time many superstitious beliefs erupt into our culture. The joint family system, restrictions to women and male-domination, importance to marriages and ritual ceremonies, etc., become the distinct features of our socio-cultural system.

INFLUENCE OF SOCIO-CULTURAL FACTORS ON BUSINESS

Through the social and cultural aspects do not influence the business directly; many business policies and decisions are taken by thoroughly understanding the socio-cultural background of the people. This is because; based on the culture a particular group of people behave and react in a particular way. Here are some instances. a) In estimating the demand for a product the consumer behaviour and their consumption pattern are to be understood apart from their purchasing power. Some latent needs of people, if understood properly, can be converted into demand. For example some products sold in sachets get good response due to the convenience and low cost. The product features are designed by understanding the cultural background of consumers. The tastes and preference differ due to this aspect. For instances, products containing vegetable fats than animal fats are preferred by some groups, natural ingredients than chemical or artifical goods, are preferred by somebody, the foodstuffs also vary consumed by different groups. The sales promotion techniques based on the understanding of cultural values of people usually become successful. The appeals are selected best suited to the attitude of people. We could see a number or advertisements based on the affection and importance of family relationships. In developing human relations with workers, suppliers, middlemen and the public, it is necessary to understand the culture and mental make-ups of those people. For example workers in different regions behave differently. If this is understood conflicts with workers may be reduced. The trade practices and services are designed based on the customs and habits of the people. This includes holidays, (Fridays, instead of Sundays in Muslim areas) working hours, consumer service, sales retail-outlets, demonstrations etc. In introducing varieties, improvements and innovations in products, care should be taken to understand the social characteristics of people. Many products in cosmetics 12

b)

c)

d)

e) f)

g)

failed in Indian markets. We can also quote the hesitated acceptance of electric appliances and gas stoves in rural markets. The general attitude of people towards consumption, savigs and investment patterns also affect the overall business growth. Indian people usually dont prefer use and throw goods. They prefer investing in gold than in shares and bonds.

Thus, as a unit of the society, the business can not alienate itself from the society to gain and grow. Also the businessmen need to satisfy the expectations of the society.

13

LESSON 4 DEMOGRAPHIC TREND

The population of a country serves as the human resources in the economic development. Also people are the ends in economic activities. Therefore study of demography becomes necessary for the rulers, economists and businessmen. The term Demography means the study of population characteristics. It is mainly the physical phenomenon, whereas the culture is the psychological phenomenon. This stydy deals with structure and composition, distribution, rate of growth and other feature of population. It becomes so important in a populous country like India. We are the second largest in the world in population and we have to know the trend to plan for the future prospects and problems of the business.

CHARACTERISTICS OF DEMOGRAPHIC PATTERN IN INDIA

1. SIZE AND GROWTH OF POPULATION

Our country has 2.4% of the total land area of the world but has to support about 15% of the worlds population. At present our population is nearing 100 crores and it may overtake Chinas first place if we fail to control it. Its growth rate was around 1% annually till 1951. Then it increased to 2% in the recent decades. In 1911 the population was 251 million and we added 100 million in the next 40 years. From 1951 to 1991 this number increased by 500 million and reached 846 million, in 1991 (UN estimates it as 975.8 million in 1998) 2. BIRTH RATE AND DEATH RATE

The growth rate is the function of birth and death rate. The birth rate increased due to the early marriages and the long reproductive stage of the Indian couples. Whereas the death rate is controlled due to medical and health measures. The infant mortaility rate (death) has considerably been lowered. Decade 1901 10 1951 60 1981 90 Birth rate 49.2% 41.7% 32.5% Death rate 42.6% 22.8% 11.4%

The annual growth rate at present is slightly lower than 2.11% whereas in 1981 it was 2.46%. 3. SEX COMPOSITION

The ratio of male population is to female population is almost adverse to female in the average. But in Kerla and Dadra nagar Haveli the ration is in favour of female population. It is important for a businessman to know this ratio and the number of males and females to calculate demand of products suitable for the particular sex. 14

CENSUS YEAR 1901 1931 1961 1981 1991

No. FEMALES/1000 MALES 972 950 941 934 927

Steps are taken to check the maternal mortality (death of women during childbirth) and female infanticides to correct this trend adverse to females. 4. AGE STRUCTURE

More than half of the countrys population (49%) belongs to juvenile group i.e. below 19 years of age. The people of 20-30 years constitute 15% and middle aged are (30-50 years) about 30%. The aged people above 60 years are about 6%. So the working group constitutes about 45-46%. These data are useful in calculating demand. 5. LIFE EXPECTANCY

The average life span of the people in a country is known as the life expectancy. It was very low in India in 1901, just 21 years and substantially increased to 54.7 years in 1981. In the 1991 census this increased to 60 years. (It is 62.8 years as on 1994). This was achieved through increased medical facilities. However it is still very low compared to the advanced countries. 6. RURAL URBAN RATIO

Due to industrialization and urbanization the rural mass slowly migrate to towns seeking employment. This could be understood from the data tht shows; in 1971, 80:20 was the rural urban ration; in 1981 it was 76:24 and in 1991 it was 74:26. This information helps planning the marketing efforts for the towns and separately for villages. 7. DENSITY OF POPULATION

This is the number of persons living in on Sq. Km area. Naturally towns have more density than Villages. The average density in India in 1971 was 177 person per Sq. Km. compared to 1951 when it was 117 only. In the year 1981 it went upto 216 and in 1991 it is 267. In Ladakh (Jammu & Kashmir) the density of population is just 2 persons per sq. km. nd it is 1000 persons in Trivandrum. In 1991 census west Bengal has 767 persons, Kerala has 749, Pondchery has 1642, Chandigarh has 5632 and Delhi has 6352, Andaman has lowest of 34 and J&K has 76 persons per sq. km. Apart from the above factors the literacy level, standard of living, employment pattern etc., are analysed under study of demographic pattern. In 1991 census he General literacy level was 52.1%. Among males it was 63.8% and among females 39.1% only. In 1901-1931 literate was only 5% to 10%. 15

As per 1991 census 65% of population is engaged in agriculture and mining (In Advanced countries it is 2 to 5% only), 14% in factories and 21% in service sector. The large population provides a potential market for goods and the foreign companies are also interested to utilize this. But increasing population is a challenge to our government as it has to plan for the provision of employment, education, sanitation, housing and all other facilities. Therefore Government of India has developed a national population policy, which provides for Rising the age of marriage to 18 years for woman and 21 years for men. Raising the monitory compensation for permanent family planning measures. Increasing the propaganda to educate people. Leaving the compulsory sterilization to the option of Sttes and increasing group incentives to medical professionals and local bodies.

16

LESSON 5 STRUCTURE AND SYSTEMS OF INDIAN SOCIETY

Indian society possesses and organized civic life right from the days of the Indus valley culture to the present day. The early Indian society has various divisions and the harmonious functioning of these divisions was possible as the life of the people was governed by Dharmshastras, the work of great sages. But these codes of ethics later created wide discriminations among Aryans and non-Aryans. When the number of occupations in the society multiplied, and the castes were determined by birth the dominating and suppressed groups and treated as slaves [panchamas].These people did not have any civil right. The sudras among the Aryans society were also treated much inferior and they had to serve the other superior communities. The Aryan and non-aryan races mingled with each other and become a mixed group; also there are many foreign invaders and migrators mingled with these groups. Now no single race could be detected from our society. Buddhism, Jainism and Sikhism originated form India and had contributed many reforms in the Varnasrams Dharms. Many superstitious rituals and beliefs were seriously opposed by Buddha and Mahavira. The British rule in India, which lasted for about two countries also, provided its contributions in reforming Indian social systems. Like this our society have absorbed and assimilated the best available in other cultures.

CLASSIFICATIONS OF OUR SOCIETY

1. LINGUISTIC GROUPS Indian society is divided into many groups based on religions, castes and language. The linguistic study classifies the lingual groups into four based on the origins of presently spoken languages. They are 1. Indo-Aryan 2. Dravidian 3. Austro-Asiatic and 4. Tibeto-Burman. The four Dravidian languates are Tamil, Telugu, Malayalam and Kannadam. Sanskrit was the original Aryan language, which is not in vogue now. This language took the from of Hindi and then developed to many forms as Assamese, Bengali, Gujarathi, Marathi, Oriya, Punjabi, and Sindhi. The Urdu language was used by Muslim relers which is the mixed form of Persian, Arabic and Turkish. There are about 179 languages spoken in India and also 544 dialects [modified forms of a language but without grammar and literature. The following table shows the position of languages as in 1995. Mother tongue Hindi Gujarathi Malayalam Kannada Oriya Punjabi Assam Speakers [in millions] 437 41 35 44 32 95 22 Mother tongue Telugu Bengali Marathi Tamil Urdu Nepali Sindhi Speakers [in millions] 74 200 70 71 102 16 18

There are other languages like Kashmiri, Santali etc., spoken by more than four million speakers. 17

2. RELIGIOUS GROUPS Regarding the religious groups in India, the Hindu religion forms the majority. The religious tolerance is the peculiar feature of out society and that is why India could emerge as a secular state. All the religious groups co-operate with each other and live peacefully despite some religions conflicts. The major religions in India are given below with their share in the total population (as per 1991 census). Total Population Hindus Muslim Christians Sikhs Buddhists Jains Others 3. CASTE GROUPS 100.00 82.72 11.21 2.60 1.89 0.70 0.47 0.41

The other important class of the Indian society namely, the caste groups are discussed in detail in the following chapter. The people forming groups among themselves took part in he social and economic activities. We could see many examples for the business or occupation developed by a particular lingual, religious or caste group. This becomes possible by the mutual help and close co-ordination and control within the group members. This also acts as s means of social security. To quote some instances the Christian groups run man hospitals and educational institutions, the Muslim in leather processing and hardwares the Sourashtras in handloom and the Marwaris in pawnbroker business. SYSTEMS OF OUR SOCIETY The joint-family system, caste, system, marriage system, traditional occupation system and the religious oriented ethical system are considered as the most common social systems of India. They reflect our art of living, and our people attach more weightage in maintaining these systems and values. In the joint-family system our people find it more convenient in running agricultural farms or business and it is considered as prestige symbol in the society. The sons after marriage live with their parents and with their children or even their grand children. Mutual co-operation and patience provide mutual benefit in this system. But this system is weaning out now a days due to changed occupational structure. Marriage system and its related rituals and ceremonies are considered as important social aspects. High standards are prescribed for women and they have to be get married at the early stage. Their life is mostly dependent on men. Also our people are expected to give respect for elders, to follow spiritual ideas, to show nepotism [favour or preference] to their relatives, and to adhere fatherly 18

affection and respect to their employers. Traditional occupations took important role till the recent past. As this system was insisted by birth based on castes, people attach low dignity to manual labour. All these features of our social structure and systems interplay with each other to form our socialcultural set up. They are also modified from time to time along with economic and technological developments. This may be understood from improved status of women through education and employment, reservations for suppressed classes, reforms in ceremonies and so on. IMPACT OF SOCIAL SYSTEMS ON BUSINESS The peculiar social system of India has its impact on business as pointed out below. 1. 2. 3. 4. 5. 6. 7. The trade and employment opportunities re given to family members and own caste group members. This affects balanced economic development of the country. This may affect the productivity also, as the merit is not the main consideration. The seniors claim respect irrespective of their talents. Here the juniors are discouraged to contribute to business development. This is so significant in joint-families. The womens role in economic development is underestimated, while they constitute fifty percent of population. Their skills are yet to be utilized in many fields. Due to the impact of feudal setup the employers expect greater respect and intimacy from employees which is not suitable for the scientific management approach. The manual labourers are not respected and they are paid very low. This the result of Varnasrama Dharma. Hence many educated youth desitate to do physical works. People spend a lot of money on unproductive ceremonies. This takes the whole lot of their life-time savings. Hence, they could not spend on necessary & convenient goods and hesitate to invest their saving in business. The people are more sensitive than rational. So they get emotional easily and involve in inter-caste or inter-religious clashes. Out off superstitious beliefs the hesitate to get education and to know their role in economic development.

19

LESSON 6 CASTE AND COMMUNAL SYSTEMS

Caste ad communal systems are ancient and deeply rooted in Indian society. The communalism and casteism become the great hindrances to the democracy and economy of the country. Despite industrialization and urbanization these communal and caste systems play their role in or society esp., in marriages and diet habits. By this system people are closely knitted but their emotions are wrongly exploited by selfish politicians and communal leaders. Communal groups are based on religions. This is a dominant factor in minority religions. Some extremists in these groups develop communal clashes and tensions. Also in he majority religious groups, some may stimulate violence on minorities when they give up the traditional sprit of tolerance. Disparities among caste groups, untouchbility, and other anti-social and anti-human practices are spread by casteism. Caste is defined by Dr. Gokhale as Varna and Jati which mean complexion and birth. Invasions of foreign religions and spread of new religions within our country made the castes more regid. It gives some social security and at the same time was use3d by upper caste groups, to exploit lower groups. There are as many as 3000 castes in India. No other country has such micro classification. This helps to uphold traditional values and at the same time they develop social evils and superstitions, and hence affects development. THE ILL-EFFECTS OF CASTE SYSTEM INCLUDE 1. 2. 3. 4. 5. Caste prejudices and feuds which lead the society to disunity affect national integration. Caste decided by birth, decreases the human dignity and so it is undesirable. Caste system checks the free association with other groups and with foreigners. As a result people are reluctant to accept changes and modern knowledge. Un-touchability and exploitation are the chief evil effects of caste system. They are strictly anti-democratic. Communalism and casteism are unscientific practice. The clashes among people very much affect our country.

The role of caste system in business development could be observed from the Indian history. Though this role is not much suitable in the modern days the caste system was used in the following ways: 1. 2. 3. 4. Division of labour: A particular group in the society concentrated in the development of a particular occupation or trade. This helped smooth functioning of the society. Traditional training: The group members are trained from the child-hood in a particular trade. It gives social security and development of skills. Competition is avoided: The same group members are involved in similar lines of business. By maintaining trade secrets, unhealthy competitions are avoided. Sprit of cooperation: The business organization run by caste groups claim that it develops cooperation among members and a sense of belongingness-we can quote examples of trade or business developed by some caste groups. The Chettiars in banking, Nadars in groceries, Valayars in constructions, Aasaris in jewel making and so on.

20

CASTE SYSTEM IN MODERN SOCIETY It is claimed that the traditional caste system has been considerably altered on account of industrialization, urbanization, scientific education, information network, social awakening, new legislations and political regulation. However our rural social structure makes the caste system survive and it continued to prosper as long as there is lack of education and awareness among the masses. The influence of caste in politics is noticeable during the elections. The role of government and social service originations is to be enlarged to educate the evils of the caste system.

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LESSON 7 POLITICAL ENVIRONMENT AND BUSINESS

Political environment is one of the important and inevital forces for a business. It influences day today decisions and is mostly uncontrollable. Political environment means the set of activities of the government which include plans policies, programs and controls which directly or indirectly intervene the business. The government is the regulatory organ of the society. Therefore it interferes especially in a mixed economy like ours, in the business activities. It has to ensure optimum utilization of national resources, maintaining conducive and stable economic climate, promoting business and industries, controlling the administration ad trade practices of business and implementation of social welfare measures. Political environment is much related to legal environment also and they affect business as stated below. Every manager is encircled by massive web of laws, commission reports, official regulations and our decisions. Some of them are to protect labourers, consumers or general public. Some are to regulate contractual rights and property rights. Some others are to regulate management affairs, trade practices, utilization of foreign exchange reserves and so on. The managers are expected to know the legal restrictions and requirements connected with their actions. That is why they have legal experts close at their hands. They should know all the political regulations and should also predict future government actions. The managers could not control these political actions but they can represent and sometimes influence on government decisions (that is called lobbying). Political environment is very much important in out country. We follow socialistic pattern and mixed economy and for this the Govt. imposes many restrictions over the private sector. These controls affect the interest of private business people but on the other hand avoid concentration of economic power among few individuals and ensure equal distribution of wealth. Government regulation on private enterprises is exercised with a view to directin the economy maximum social good in this socialistic pattern of society. Our political setup allows private sector to attain repid economic growth and at the same time regulated it to reduce inequality of income and concentration of economic resources, in the society. Political intervention in private business in enforced in India in the following ways: 1. ECONOMIC CONTROL MEASURES The planning commission headed by the Prime Minister f India prepares Five Year Plans to utilize the resource allocation more effectively. The economic activities are also planned by the National Development council (NDC). The general economic conditions in he country are monitored by the government agencies. The Import ad Export policy of the Govt. is affecting the production and marketing decisions of he business units. Also the foreign investment in Indian business is allowed by our Govt., in this globalization era.

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2.

INDIRECT CONTROL MEASURES

The Govt., can indirectly stimulate or restrict business activities. For example, the Monetary policy determines the volume of money in circulation and the bank rate that will affect capital availability to business. The Fiscal policy, namely Taxation and public expenditure (Budget) and public debt, affects the level of business activities. Govt. may also provide financial and physical incentives or penalties t promote/control a business. Control on capital issues, stock exchange dealing and money/capital markets is another important measure to regulate business investment. The following categories denote various types of direct regulatory measures. 3. INDUSTRIAL REGULATIONS

The Industrial policy resolution of the Govt. is enforced to allow private business house into selected industries. It further regulates investment, location, size and expansion of industrial units. The Industrial Licensing policy is also an effective control for this purpose. (e.g. According to he present policy a new industry cannot be started in a city having a population of 5 lakhs or more. 4. CONTROL ON TRADE PRACTICES

The unfair trade practices of business are restricted by MRTP Act t protect public. The Foreign Exchange regulations Act Controls the utilization of foreign exchange reserves. There are many Acts for Prevention of Black-marketing, supplies of essential commodities, prevention of smuggling, Adulteration etc. 5. LABOUR LEGISLATIONS

The Gov. regulates business in order to safeguard the interests of workers also. For example the Factories Act, Industrial. Disputes Act, Workmen Compensation Act, ESI (Employees State Insurance) Act, etc. to promote working conditions, employer-employee relations and loabur welfare. 6. REGULATION OF COMPANY MANAGEMENT

The companies Act specially regulates he compulsory registration of companies, and the procedures and functioning of company management. This Act protects the rights of share holders and creditors. 7. PRICE AND DISTRIBUTION CONTROLS The government ensures maintenance of stable and reasonable prices for essential commodities through price ceilings, administered pricing (cement, steel etc.,) and dual pricing (sugar, rice) The government also procure some commodities (i.e. levy) and distribute them to the needy people (Public Distribution System) ad permit system helps either to move commodities to the scarce areas or to check unnecessary flow of commodities. 8. CONSUMER PROTECTION CONTROLS

Govt. ensures prevention of hoarding, adulteration and artificial scarcity by specific Acts. The Consumes Protection Act, and other legislations protect consumers from suppliers unfair practices. 23

The co-operative to realize their rights. Govt. also ensures that consumers are adequately informed about weight, contents, price, date of expiry etc. about the goods. 9. NATIONALIZATION

Govt. undertakes he management and ownership of business units when required to serve the public. For example banks were nationalized (14 banks in 1969 and 6 in 1980) to serve the public. LIC, Railways and a part of road transport were also nationalized. Many sick units were undertaken by Govt. to protect workers. The public sector business units serve for the public and create healthy competition with private sector and also fulfil social objectives of Govt. 10. CONTROL ON SPECIAL ACTIVITIES

The government is regulation to check some gambling activities on shares and commodities, forward contrasts etc. to protect the public from inflationary pressure. Form the above discussion we can understand the close relationship of political forces with the business units.

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LESSON 8 DIRECTIVE PRINCIPLES OF STATE POLICY

The constitution of India adopted in January 26, 1950 contains the Directive principles of state policy. The constitution in any country is known s the body of rules which allocates various powers of government has over the people. The Constitution of our country proclaims the sovereignty of the people in its preamble which says. We the people if India, having solemnly resolved to constitute India into a sovereign Socialist, Democratic Republic The constitution provides fundamental rights to the citizens and later the fundamental duties were also incorporated. Our constitution defines the composition and the powers of the cabinet, the parliament and the courts of law. For the functioning of the government and the legislature in making public policies, there are also some guidelines given in our constitution. They are known as Directive Principles of state policy. It shall be the duty of the government and legislators to apply these principles in making laws. More over they are the codes of conduct for the administrators while they discharge their responsibilities as agents of sovereign power of the nation. Although these directives or guidelines are not justifiable in the courts of law, the judiciary may interpret the law based on the sprit of these principles. The directive principles of state policy are provided in sixteen articles of the constitution from article 38 to 51. Those directions are significant to the socio-economics field and are given below. 1. 2. The State (rulers) shall strive to promote welfare of the people by securing and protecting as effectively as it may, a social order in which justice, social, economic and political shall inform all the institutions of the national life. The State shall in particular strive to minimize the in-equalities in income and endeavour to eliminate in-equalities in status, facilities and opportunities, not only among individuals but also amongst groups of people residing in different areas or engaged in different vocations. The state shall, in particular, direct its policy towards securingi. ii. iii. iv. v. That the citizens, men and women equally, have the right to an adequate means of livelihood. That the ownership and control of the material resource of the community are so distributed as best to subserve the common hood; That the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment; That there is equal pay for equal work for both men and women; That the health and strength of workers, men and women, and the tender age of children are not abused and that citizens are not forced by economic necessity to enter a vocation unsuited to their age or strength; and

3.

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vi.

Those children are given opportunities and facilities to develop in a healthy manner and in conditions of freedom and dignity and that childhood and youth are protected against moral and material abandonment (Article 39). The state shall secure that the operation of the legal system promotes justice, on a basis of equal opportunity, and shall, in particular provide for legal aid, by suitable legislation or schemes or in any other way, to ensure that opportunities for securing justice are not denied to any citizen by reason of economic or other disabilities (Article 39-A) The state shall take steps to organize village panchayats and endow them with such powers and authority as may be necessary to enable them to function as units of selfgovernments (Article 40) The state, within the limits of its economic capacity and development, make effective provision for securing the right to work, to education and to public assistance in cases of unemployment, old age, sickness and disablement, and in other cases of under served want (Article 41) The state shall make provision for securing just and humane conditions of work and for maternity relief (Article 42) The state shall endeavour to secure, y suitable legislation or economic organization or in any other way, to all workers, agricultural, industrial or otherwise, a living wage, conditions of work ensuring a decent standard of life and full enjoyment of leisure and social and cultural opportunities and, in particular, the State shall endeavour to promote cottage industries on an individual or co-operative basis in rural areas. The State shall take steps, by suitable legislation or in any other way, to secure the participation of workers in the management of undertakings, establishments or other orgnisations engaged I any industry. The state shall promote with special care the educational and economic interests of the weaker sections of the people, and in particular, of the Scheduled Castes and the Scheduled Tribes, and shall protect them from social injustice and all forms of exploitation. The state shall regard the raising of the level of nutrition and the standard of living of its people and the improvement of public health as among its primary duties and, in particular, the state shall endeavour to bring about prohibition of the consumption, except for medicinal purposes, of intoxicating drinks and of drugs which are injurious to health. The State shall endevavour to organize agriculture and animal jusbandry on modern and scientific lines and shall, in particular, take steps for preserving and improving the breeds, and prohibiting the slaughter of cows and calves and other milch and draught cattle. The state shall endeavour to protect and improve the environment and to safeguard the forest and wild life of the country. Added to article 38 a new clause contains a directive to strive minimize the in-equalities in status, facilities and opportunities. The 42 nd amendment directs the state to take steps for securing workers participation in management.

4.

5. 6.

7. 8.

9. 10.

11.

12. 13.

It is pointed out already that these directives cannot be inforced by courts like that of fundamental rights. But it is declared by he then P.M., Jawaharlal Nehru that the fundamental rights should subserve he directive principles. This is supported by the argument that the existence of men in the state comes first then there can be fundamental rights. There fore the directives are the ideological guidelines for any social and economic policy and legislations and they enshrine the basis for the realization of principals of which the states in India 26

stands. For instance some of the directives relate to the free and compulsory education for all children up to the age of fifteen; separation of the judiciary from the executive; protection of national monuments; promotion of equal opportunities; provision of legal aid; promotion of international peace and security an so on. The founding fathers of our constitution have anticipated all possible evils such as concentration of wealth and the means of production in hands of a few persons , gross inequalities of income, child labour, exploitation of weaker sections and consumption of intoxication drinks that might creep into the society. In Directive principles they have suggested the guidelines for correcting the evils. Thus these Directives provide ample scope for the regulatory role, the promotional role, the entrepreneurial role and the planning role of the government. That is why in 1954 it was amended and the objective of or socio-economic policy was described as the Socialistic pattern of society. This resulted in nationalization of Railways, industries, insurance and banks etc.

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LESSON 9 CENTER STATE RELATIONS

The constitution of a country provides for the government to exercise authority over a territory. For better control over the large territory it if constituted of smaller units. The relationship between the central government having jurisdiction over the territory and the smaller units namely states may be unitary or federal. In unitary form, the states are subordinates where as in federal form they are coordinates to the central government. Another form is confederation where the central is a subordinate to regional government. Our constitution provides for a federal system-the Central Government as the unifying force and the State Governments as its coordinates. The division of powers between these two forms are provided in the constitution and also decided by the tradition. At present we have twenty-five states and they are regionally divided based on languages spoken, for the sake of administrative convenience. The federal system involves the setting up of dual governments and division of powers. The strength and success of the system depends upon the maximum of cooperation and coordination between the two powers. Hence the Centre State relations assumed greater importance and discussion. Their relations reflect in the distribution of powers in the legislative, executive or administrative and financial spheres. These powers are provided in the constitution. 1. LEGISLATIVE RELATIONS BETWEEN THE UNION AND THE STATES

Our Constitution, under the system of Federation, provide for he division of powers, between he central and state governments. The other salient feature of our constitution is that it provides for setting up of a separate judiciary, the Supreme Court which interprets the constitution. The Constitution divides the subjects into three lists the union list, the state list and the concurrent list. The union list contains 97 topics including Defense, External Affairs, currency a coinage, post and telegraph, commutation, Railways, Insurance, war and peace, Banking, telephones, broadcasting, foreign loans etc., the union parliament has exclusive right to make laws on these subjects. The concurrent list contains 47 subjects for example power, civil procedures, criminal laws, economic and Social planning, Education, Marriage and Divorce, Newspapers and Press, Statistics and Registrations of births and deaths, Factories, Price Control, Legal Medical and other professions, food stuffs etc., for these subjects both Union Parliament and the State Legislative Assemblies can frame laws. But incase of contradiction of laws of these two systems, the laws of Parliament in final. The State list contains 66 subjects which are of regional importance. It includes police, local administration, Agriculture, Land revenue Jail Administration and so on. The stae legislatures can enact laws subject to the limitations of the constitution and the laws of parliament. Constitution provides that the President can declare Emergency in a state based on the reports of its Governor. The union government can enforce trade agreements with any other country; it can encroach upon state list when supported by two third of parliament members. Residuary powers are given to Union to all the subjects not included in any of the three lists. Thus the union is made stronger than the states. 28

2. ADMINISTRATIVE RELATIONS BETWEEN CENTRE AND STATES The President can appoint State Government with the consent of the Prime Minister, without consulting State Legislature. The Union can give directions to a State regarding the laws of parliament, the construction and maintenance of communications to be of national or military importance, and do on. Union Government by the law of Parliament may provide for the adjudication of any dispute relation to inter state rivers. For other inter-state disputes also the central government may establish InterState Councils on the public interest. The parliament is empowered to constitute an Inter-State Commission to ensuer freedom of trade \-but so for no such commission is constituted in India. The President will appoint Electon Commissioner to supervise elections in states. State High court Judges are also appointer by him. The Comptroller and Auditor General of India shall control financial accounts of the State. The Planning Commission was set up in 1950 as an extra-constitutional and non-statutory body to plan effective and balanced utilization of countrys resources. (This is criticized that it encroaches upon state autonomy). To support this body another council is fo0rmed namely, National Development Council. 3. FINANCIAL RELATIONS BETWEEN THE CENTER AND STATES Financial Sources are needed for he functioning of the States. The distribution of the sources of revenue between the Center and States is as follows : a) b) Taxes lived by the Union Govt. but collected and wholly retained by the State include: Stamp duties on Negotiable Instruments, latter of credit, insurance, transfer of shares and excise duty on medicine and toilet preparations containing alcohol. Taxes lived and collected by the Union but whose precedes are given over toe the States include: Estate duty and succession duty on property, other than agricultural land, terminal taxes on goods and passengers, taxes on railway fares and freights, taxes on newspapers and advertisements and so on. Taxes lived on and collected by the Center but whose proceeds are shared between the union and states include : the income tax alone; the ratio of sharing is decided by the President of India, considering the report of the Finance Commission. Taxes which are devised and collected by the union but whose proceeds may be distributed among the states as per the union law include : the excise duties, other than on medicine and toilet preparations.

c) d)

Grants-in-aid: other than the above distribution of revenue, Union also provides Grants-in-aid. For example, out of export duty on jute, grant-in-aid is given to states of Assam, Bihar, Orissa and West Bengal. The union may further provide financial assistance from Consolidated Fund of India. There is a control over States as to their borrowing powers A state can borrow only within India and cannot raise a new loan without the consent of central government.

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CONFLICTS BETWEEN CENTER AND STATES While the congress party was ruling at the center and some opposition parties took over power in the state governments some conflicts and issues in the center-state relations were raised by them. They include Govt. of Tamilnadu, West Bengal. Punjab Karnataka and Kerala and they demanded autonomy to states. The main issued were : i. Use of para military forces in the states by the center when it is not warranted by states. ii. Encroachment of center even in the state list matters. iii. Inadequate funds allotted by center and the encroachment of planning commission in states revenue. iv. Arbitrary use of article 356 by the Union Govt. on the state governments. There are number of instances for the center toppling the state governments without valid reasons. v. General complaints are also there on center on the matters of hostile attitude and political dishonesty on states development and share of foreign exchange to states, unequal and biased financial assistance and sanctioning power projects, development grants and so on. The cry for State autonomy increased during the non-congress governments at the center. The Srinagar conclave and Calcutta conclave of opposition parties ruling in states (non-congress parties) put forth eleven-point resolution at the center. The Sarkaria commission report in 1988 also have provided many measures to harmonize the center-state relations, include amendment of Article 356, proper selection of Governors to states by consulting ht estate cabinet, appointment and transfer of judges of high courts, grants and aid to states and so on. Accordingly, the Inter-State Council set up in 1990 is a milestone in improving the center-state relations. Yet, there are many improvements demanded by states and by the experts in this center-state relationship.

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LESSON 10 ECONOMIC ENVIRONMENT AND BUSINESS

Any external force is almost uncontrollable. This is true, particularly in case of economic environment. This affects business and also every section of the society. The business growth and economic development go hand by hand. Let us explore this relationship. The economic environment, as far as a business unit is concerned, means the price level of factors of productions and their availability, purchasing power of consumers ad the general forces that affect production and exchange activities. In short it is micro a well as micro economic factors related to business decisions. The economic conditions include nature and conditions in the national and international levels such as natural resources, income distribution among population, state of technology, Govt.s economic policy, entrepreneurial ability, level of import / export etc. Rapid changes are taking place in the technological sand economic environments. Adapting these changes is needed for the survival and growth of a firm. Analyzing the risks in production quantity and realizing he profit are rather difficult tasks of the economic conditions are not properly understood. In this process, getting consumers acceptance, winning competitive strategies and developing new products n terms of cost are the vital issues. Economy is a complex and dynamic environment and it affects various business decisions. In turn, the economic growth takes place when more and more business opportunities are effectively utilized in a society. That is the productivity and ability in technological adaptation of business units, which help economic development. ECONOMIC FACTORS AND BUSINESS 1. CAPITAL

Almost every kind of organization need capital in the form of machinery, building, inventories of goods, office equipments, tools of all kinds, and cash. Cash resources may be generated within an organization out f profits, but organized enterprises are usually dependent for capital requirements on various outside sources. 2. LABOUR

Another important element of the input side of the economic environment is the availability, quality and price of labour of all kinds. In some societies, untrained / unskilled labour may be plentiful, while highly trained labor is in short supply. Engineers may be scarce at one place and plenty at another. The price of labour is also an important factor. The rise of wages in the United States has often caused cost problems for the American producer who could sell in many foreign countries. In India, the ware rates are very low when compared toe h United States and the countries of Western Europe and Western Asia. Therefore, the price, quality and availability of labour affect the production very much.

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3.

PRICE LEVELS

The input side of an enterprise is clearly affected by price level changes. If prices go up rapidly, the problems created in the economic environment on both input and output sides are more. Inflation to some extent helps business but has highly disturb in effects on organizations when they are galloping. 4. PRODUCTIVITY

Productivity means the ratio of input and output. Productivity increases when input is decreased and output is increased. When productivity is high, the price can be low. Actually the reason that Japan and the United States are able to compete in the world market has been its productivity. However, productivity is partly dependent on the state of technology. Then technology improves, productivity also develops, that results in economic developments. 5. ENTREPRENEURS AND MANAGERS

Another major economic input is the availability of high quality entrepreneurs and managers. An entrepreneur is a person who sees business opportunity, obtains the needed capital, knows how to put together an operation successfully and has the willingness to take a personal risk of success or failure. The availability of intelligent and able managers has considerable effect on economy. This availability and that of entrepreneurs, is correlated with the social environment, particularly in the areas of education, and cultural development. 6. GOVERNMENT FISCAL POLICY

Likewise, another important element on the economic input side is the nature of government polici3es. These aspects of the political environment have their economic impacts on all kinds of organizations. Governments fiscal policy for example has impact on business and non-business operations, as the tax affects every segment of our society. It must be taken into consideration by managers that all he decisions, policies, programs and laws of government are influencing the business decision. 7. CUSTOMERS

On the output side of any enterprise, there are customers. Without customers, of course, a business cold not exist. To succeed in winning customers acceptance and in overcoming the forces of competition business units tend to keep prices, costs and profits low. The output of business (products/services) is directed to satisfy the consumers. The purchasing pattern of those consumers depends upon income level, standard of living, level of savings and buying capacity of money which are determined by the economic conciliations of the country. Thus, there are economic factors affecting both input and output side of business, moreover, the general economic planning, controls, foreign trade, foreign debt etc., are also have indirect influence on business units.

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LESSON 11 ECONOMIC SYSTEMS AND BUSINESS

The fundamental objective of economic system is to obtain the possible amount of human satisfaction to its member from the available resources. But there are differences in the method of achieving this satisfaction. the differences can be understood by examining the agencies which are permitted to own and utilize the productive resources; extent of individuals initiative permitted in the economic activity; and by examining the process of price determination. All these will determine the nature of economic system. The basic economic systems are known as 1. 2. 3. capitalist economic system communist economic system and mixed economic system

The institutional structure, the manner of functioning and the problems in each of the above economic systems are different. Let us discuss them. 1. CAPITALIST ECONOMIC SYSTEM

The capitalist economy represents a system of economic organization in which the instruments of production are owned by individuals and associations. They are used for making profit. Thus, the essence of the capitalist economy is the private ownership of capital and the owner to utilize it for various purposes. Other social aspects like freedom of religion, freedom of speech, free press, and democratic government are associative parts of capitalism. The chief characteristics of capitalist economy are a follows a) b) c) d) e) f) Individuals and associations behave with economic motive of maximizing profits with the least cost. They have e right to acquire, keep, use and dispose of the tangible and tangible properties. There exists, rights of inheritance, which acts as a strong incentive for the accumulation and conservation of wealth. Individuals and associations exercise their own initiative freely in utilizing their energies and resources. Producers, consumers and employees compete among themselves, as the resources ad opportunities are limited. Price, his invisible hand, plays a predominant roe in the flow of the factors and production and consumption.

CAPITALIST SYSTEM AND BUSINESS In a purely capitalist economy Government never interferes in the activities of businessmen. It offer very good environment for the development and growth of business. Individuals ability ad skills are suitably rewarded and it gives a good incentive to initiative and creativity of an individual. The 33

number of sellers and manufacturers are unlimited. The entry and exit of manufacturers and sellers are decided by he success or failure of their business. In basis economic decisions-what to produce, how much to produce, by what methods and for whomare made by producers through the price mechanism, and with the advantage of their freedom. They may make those decisions that will yield profit. But in practice, many controls, and compulsions are imposed in the capitalist economic of the modern world. The governments of capitalist economics restrict the freedom of individuals by way of taxes, restrictions on production of certain commodities etc. AN ILLUSTRATION AMERICAN ECONOMY The American economic system, although modified by forces like law, custom, practice, etc. consists of all he capitalist institutions described above. American people preserve capitalism as their form of economic organization. Every individual is free to utilize his services, income and other productive resources as he chooses. But this freedom is restricted by some social problems. Contrary to expectations that capitalism helps to maintain the level of full employment, unemployment to some extent has become a permanent feature of US economy. The Government ha to step in to solve this problem by creating additional employment opportunities in its own sector and regulate the activities of private enterprise. The American economic system has been criticized for three reasons, namely a) Inequality in the distribution of income and wealth, b) Growth of monopolistic tendencies, and c) Susceptibility of the economy to depression and inflation. 2. COMMUNIST ECONOMIC SYSTEM

This is a contrary system to the capitalist economy. In capitalism, working class is exploited by employers but communism in turn rests on the labor theory of value, and establishment of dictatorship of working class, communism is a revolutionary method of attaining Socialism which means common owner ship of all factors of production. According to Marxs labor theory of value, the exchange value of different commodities is determined not by conditions of demand and supply, but by the amount of abstract human labor contained in them. But the laborers are paid only the value of the means of their minimum livelihood. This is known as the Surplus valu8e of labor. The surplus value is appropriated by the capitalist who hires labor power. In other words, the capitalist extracts the full value of the labor, but the pays only the amount, which is just sufficient to keep the worker and his family alive. Further, this exploitation is intensified by introducing machinery and other improved processes. The chief economic features of full communism are as follows: 1. 2. It comprises entirely of workers except those who are physically and mentally incapacitated. The society owns in common the natural and man-made instruments of production. 34

3. 4. 5. 6. 7.

The society is classless The workers possess the entire product, which they have turned out as no surplus values being received by any individual. Each individual is motivated to perform his part according to his full ability. The increased productivity of society assures each member of getting what he needs. Private possessions in the form of capital or consumer goods are neither possible nor necessary.

COMMUNISM AND BUSINESS Individuals are not permitted to won profit-making private property or to engage in commercial private enterprise. But they are allowed to own durable consumer goods such as automobiles, horses, furniture, small tools and equipment, etc. So, there is no scope for private sector industries in a communist nation. All manufacturing industries are owned and managed directly by the Government except the producers cooperative which are significant only in respect of small scale consumers goods industries and handicrafts. AN ILLUSTRATION CHINESE ECONOMY In China, all manufacturing industries are owned and managed directly by the Government. But the producers cooperatives are exempted from this rule. The second important feature is economic planning. All major economic decisions regarding production and distribution are all determined by the Central Planning Authority. The prices of commodities and services are determined by the planning authority, and they are not left to the free play of market forces. Another important feature of this economy is the absence of competition as it is understood in capitalist economies. The Government has virtual monopoly in almost every sector of the economy. The state has guaranteed the right to a job. It ha also undertaken to promote the collective welfare of the society by providing free of charge medical, educational and other social security measures. 3. MIXED ECONOMIC SYSTEM

The wide disparities in the distribution of income and wealth in a capitalist economy had led to demand for more Government intervention. The people are of the opinion that capitalism might be able to establish the political democracy, but it cannot establish true democracy consisting of economic and social democracies. As such, movements in the name of democratic socialism have been started with a view to control the adverse effects of capitalism and without going for cent percent nationalization. The countries, which have implemented the principles of democratic socialism, have come to be known as having mixed economic system. The most important decision in the mixed economic system is planning. Every sector of the economy is planned with regard to the allotment of resources, targets, methods to be employed and period with in which the targets have to be achieved.

35

Another important feature is social security. In fact, in the countries having mixed economic system, efforts are being made to introduce a comprehensive scheme of social security measures to provide greater economic security to the individuals. MIXED ECONOMY AND BUSINESS In a country having mixed economic system as their way of life, there are two sectors in business, viz., private and public. Private sector consists of industrial undertakings, which are owned and managed by private individuals. Public sector consists of industrial undertakings, which are owned and managed by the Government. There is also Joint Sectors in which both the Govt. and private join their hands. However, Government will have its own control over the private sector industrial undertakings through many laws and directives. For example, industries in the private sector will not be allowed to grow, very large in size, which will hamper the growth of other small industrial undertakings in the same industry. It is only in the interest of the general industrial development of the nation, which would ultimately result in the equitable distribution of income and wealth. AN ILLUSTRATION INDIAN ECONOMY The fundamental objective of economic planning in India is raising living standards and opening up to the people new opportunities for a richer and more varied life. The objectives of economic planning have been given shape and color by the Industrial Policy Resolutions of 1948 and 1956. The underlying idea in the Industrial policy, 1948 was a desire to control the capitalistic form of industrial organization and to introduce a socialistic form of industrial frame work. The policy laid down that the distinction between the public and private sectors is one of relative emphasis and these two sectors are to be viewed as parts of single mechanism. However, private enterprise functions within the conditions created largely by the State. Government policy would influence private decisions through fiscal measures, licensing and, to the extent necessary through direct physical allocation so as to promote and facilitate the realization of the targets proposed in the national plans. It can be noted from the recent experience that phased program of nationalization is undertaken since independence. After Independence, many commercial banks, general insurance business, coal mines etc., were nationalized. Beside nationalization, the public sector has been enlarging its role in the economy. In the joint sector enterprises, controlling interest is usually with the Govt. Wealth Tax, gift tax, estate duty; curbing restrictive trade practices of Managing Agencies are prominent among the means used to contain inequalities in the economy. The above discussion of economic systems and their impact on business reveals that capitalist economic system and mixed economic system allow private business with a few restrictions and guidelines, whereas communist economic system does not permit any scope for them. The restrictions on the business in the capitalist economic system are much less in number than the mixed economic system.

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LESSON 12 BUSINESS SECTORS AND ECONOMIC SYSTEM

We have discussed, in the earlier chapters; the meaning of economic environment and the types of economics system can be easily identified by the extent of using the following business sectors in utilizing the economic resources; they are 1 2 3 Private sector Joint sector Public sector

the communist economy uses only the public sector business units whereas the capitalist economic system uses mostly the private sectors units ;the mixed economy; as the compromise of the above two systems ;used both private and public sectors and in addition joint sector business unit ;we can now analyze the nature and role of these sectors in economy; 1 PRIVATE SECTOR

The democratic countries like U.S.A. and west Germany; which adopt capitalist economic system; achieved remarkable economic development through the great efficiency of private sector; the mixed economies too believe and allow the private sectors accelerating economic growth; Private sector means the industries completely owned and managed by private individuals; they exploit the natural resources to produce the goods and services for the consumers stimulated by profit motive. The individual entrepreneurs who have to skill, interest, initiatives and ability to organize, start the private sector units. Mostly they get success because they efficiently and economically use the resources for increasing their profits and private property. Their decisions are influenced by competitions, price mechanism and marker economy. Role of profit sector in economic development: Most of the capitalist countries have reached economic advancement by the extensive use of private sector. The mixed economies like India retain selected industries with the public sector and let other business units in the hands of capitalists for improving economy. The recent Indian Govt. Policies aim at liberalizing controls on private sector to expedite economic growth. The private sector helps rapid economic development in the following ways : 1. 2. 3. As the private businessmen are mainly aimed at profits, they manage and use the resources in the most economic way. They efficiently control the cost of production and supply and fix lower prices. Since there is competition in most of the private business they are careful in giving quality products at competitive rates. They achieve this by the extensive use of efficiency and control. The survivals of the private units depend upon the consumers acceptance of their products. Therefore they find out exact needs, wants and tastes of consumers and try to satisfy them with modern Research and Development. Thus the consumers get variety of goods and services for their choice. Private sector functions with time bound programs and increases the turnover of capital. This leads to increased money circulation and in come levels in the society. 37

4.

5. 6.

7. 2.

Private sector uses efficient managers, staff and workers. They are assigned with clear targets and controlled by close supervision and fixed responsibility. The inefficient and weaker units are lost in the competitive market. Therefore the most efficient firms alone survive and expand rapidly. They invest money in good opportunities and utilize all the possible chances to convert into business transactions. Hence they stimulate economic activities to a great extent. The productivity is very high and the technological growth is fast in private sector which are essential for economic advancement.

JOINT SECTOR

MEANING OF JOINT SECTORS In simple terms, the joint sector is a form of partnership between the private sector and the Government. J.R.D. Tata defines a joint sector as one that is intended to be a form of partnership between the private sector and the Government in which state participation in capital will be not less than 26 per cent, the day-to-day management will normally be in the hands of the private sector exercised by a board of directors on which Government is adequately represented. ORIGIN OF JOINT SECTOR ENTERPRISES In pre-independence days, several industrial enterprises were set up in the princely states of Mysore and Hyderabad with public participation in equity. Soon after Independence, the Tatas pioneered government-private sector participation when they created Air India International jointly with the Government of India. But the seeds of the joint sector are to be found in the concept of the mixed economy envisaged by the Industrial Policy Resolution of 1956. Which classified all industries into three categories as follows? 1. Schedule A industries being the exclusive responsibility of the State; 2. Schedule B industries being progressively state owned; and 3. Schedule C industries left ordinarily for the initiative and enterprises of the private sector. Soon after the policy resolution of 1956, a number of companies floated by the Govt., of India in collaboration with the private sector by sharing management and control. Prominent examples are as follows: 1. 2. 3. 4. Cochin Refineries Limited Madras Refineries Limited Madras Fertilizers Limited, and Gujarat Fertilizers Company limited.

The Industrial Licensing Policy Inquiry Committee popularly known as Dutt Committee (1969) recommended the creation of the joint sector on the basis of the 1956 Resolution. Dutt Committee Report appeared in 1969, a number of State Governments have procured licenses for industrial projects for a wide range of products and have promoted companies with private participation in ownership and management.

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RATIONALE AND SCOPE OF THE JOINT SECTOR It is important to understand the objectives and the basis reasons for the development of the joint sector. They are stated below: 1. SOCIAL CONTROL OVER INDUSTRIES

The joint sector is expected to acquire a lot of anto-monopoly role and control the expansion of the leading industrial houses. Besides, the joint sector can be used to promote socio-economic objectives of the Government, such as maintenance of reasonable prices, regional dispersal of industries, development of exports etc. Joint sector could thus be viewed as a tool for social control over industry, without resort to outright nationalization. 2. FAILURE OF PRIVATE AND PUBLIC SECTORS

Both private a public sectors have shown certain limitations. Hence, a combination of the two sectors in the form of joint sector is advocated. It is recognized that the private sector has built up a reservoir of good technical and managerial talents. Only Government can contribute very huge financial resources to set up large industries. The problem can be solved if there is a joint sector. 3. ACCELERATION OF ECONOMIC GROWTH

Private investment is not coming in a big way in the basic and essential industries. By providing public support and patronage, the joint sector may encourage small and medium entrepreneurs, help them mobilize resources, to procure machinery and equipment and built up confidence to face the uncertainties of modern business. This will help accelerate economic growth of the country. 4. STATE-SPONSORED INDUSTRIALIZATION

The Government decides on the choice or projects, which are desirable from a social point of view, and persuades private parties to join hand. So the joint sector may be regarded as a part of the strategy of state-sponsored industrialization. 5. EXTENSION OF PUBLIC CONTROL

The joint sector will enable the Government to enter the highly profitable lines of industrial activity, reduce the dominant economic power of the large industrial houses and increase social control over industries. It is a form of partial nationalization. 6. MOBILIZATION OF TECHNO-MANAGERIAL RESOURCES

In the last few decades the private sector has expanded considerably. Just as the joint sector can be used to mobilize financial resources, it can be used to mobilize scarce human resources as well.

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PATTERN OF OWNERSHIP The nature of ownership pattern will depend upon whether the project is planner and initiated by the private sector partner, or government, weather the private sector partner is a leading industrial house with large financial as well as managerial resources, whether technologically the project is highly complex or not, whether it is highly profitable or not, etc. The Government may normally seek partnership with an established company or with a large business house, whenever substantial amount of capital and technological competence are required. PATTERN OF MANAGEMENT Management involves two major function : policy making and operational management. The role of policy making in the joint sector rests generally with the board of directors, while the day-to-day management rests with the managing director and his team of managers. There is considerable difference of opinion on the management pattern of the joint sector enterprises. There are three type of board of directs in the existing joint sector undertaking: 1. 2. 3. Enterprises with a majority of non-official directors. Enterprises with majority of Government nominated directors. Enterprises with directors in proportion to the equity ownership of the participants.

Those who believe in the efficiency and dynamism of private sector management advocate that the board of directors would consist of nominees in proportion to the equity ownership of the participants. Further they would like as Government ot exercise its influence on the policy-making role of management and leave the operational management to the private partner. GOVERNMENT POSITION ON THE JOINT SECTOR The joint sector concept was accepted by the Government of India, through its industrial licensing policy, 1970. The Government reiterated its position in its Industrial Policy decision of February, 1973. Four prints emerge here : 1. 2. 3. 4. Joint sector units would be created, but they have to conform to Governments social and economic objectives. The joint sector will be allowed in areas from which the private sector is excluded under the existing policy. The joint sector will be a promotional instrument in the case of new and medium entrepreneurs. In all the different kinds of joint sector units the Government will ensure for itself and effective role in guiding policies, management and operations.

The concept of the joint sector is a compromise between the alternative of total nationalization and free enterprise economy. The implementation of the joint sector will alone demonstrate whether the State can use this instrument to further the professed goals of social policy.

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3.

PUBLIC SECTOR

Though the scope of the state enterprise in the industrial economy of India was limited in the preIndependence period, it has increased very much in recent years. The philosophy and program of action for the public sector are incorporated in the well-known Industrial Policy Resolutions of 1948 and 1956. The Directive Principles of State Policy contained in the Constitution also require the State to ensure that the ownership and control of the material resources of the community are so distribute at best to sub serve the common good; that the operation of the economic system does not result in concentration of wealth and means of production to the common detriment. Hence, for achieving planned and rapid economic development, industries in which the scale of investment is more, where the investment is risky and uncertain and which are in the nature of basic and strategic importance have been assigned to the public sector. OBJECTIVES The objectives for which the public sector has come into existence in this country are of two type (I) the macro objectives and (II) the micro objectives. The macro objectives are those, which public enterprises are to pursue each in its limited way. These are: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. To promote rapid economic development by filling critical gaps in the industrial structure ; To provide basic infra-structural facilities for the growth of the economy; To undertake economic activity strategically important for the growth of the country. To achieve balanced regional development and dispersal of economic activity. To reduce disparities in income; To avoid concentration of economic power in a few hands; To exercise social control and regulation of long-term finances through public financial institutions; to control over sensitive areas; To attain self-reliance in different technologies; To enhance the employment opportunities; and To increase exports and earn foreign exchange.

There are also micro objectives the specific objectives for the functioning of individual public enterprises. GROWTH OF PUBLIC SECTOR IN INDIA The growth in public sector investment over the years has not only widened the scope for increasing employment and industrial output, but has laid greater stress on social welfare industrial activity. Investment in the public sector in India is very large in magnitude. Investments are made for creating the basis-infra-structure and also for running industrial concerns. Public sector undertaking include a varied range of activities like mining and metallurgy, electrical goods, machine tools chemicals, petroleum and oils, aviation and shipping, industrial financing etc. The total investment as on 31st March, 1975 was at about Rs. 7261 cores in 129 undertakings besides 41

an amount of about Rs. 10,000 cores in departmental undertakings such as railways, posts and telegraphs, overseas communication service and Kolar gold mines. The following table gives an idea of growth in public sector investment. Date April 1951 April 1956 April 1966 April 1972 April 1975 April 1980 81 April 1981 - 82 No. of enterprises 6 21 74 101 129 157 160 Investments (Rs. In cores) 29 81 2415 5052 7261 24817 29180

Bakaro Steel Limited is the biggest company not only in the public sector, but in the country as a whole and accounts for a accounts for a total investment of Rs. 1046 cores. Hindustan Steel Ltd. Comes next with an investment of Rs. 1025. PARLIAMENTARY CONTROL The working of the public sector is subjected to Parliamentary control. The public sector is accountable to the Parliament. In view of the sizable investment in the public sector enterprises, the Parliament has greater duty and responsibility to see that the communitys funds are better realized. PROBLEM OF PRICING IN PUBLIC SECTOR COMPANIES The Price policy of a public corporation extends to (i) make neither a loss nor a profit after meeting all capital charges; and (ii) the prices it charges for different services should correspond to relative costs. It should be agreed that there cant be only uniform pricing policy for all public sector enterprises. Arriving at an uniform price policy for all public enterprises is neither practicable nor desirable. But at the same time, it is necessary that public sector undertakings should adopt sound practice4s of business management. A public enterprise, even if it is departmentally run, should be treated as a separate entity. These enterprises should be required by statute to set aside adequate provisions for depreciation. Most of the public enterprises are seen in public utilities or producer goods industries, which yield a lower return than in consumer goods industry. Theses public enterprises adopt a deliberate policy of lower prices. The supply of electricity at low prices to industrial concerns, and supply of water for irrigation at no profit no - loss basis and cheap credit by Industrial Finance Corporation may be cited as examples of such policy. While formulation the price policy, any public undertaking should keep in mind the following principles: 1. Prices should be fixed so as to enable the undertaking to recover the full cost of production and also a reasonable return on the capital employed. 42

2. 3. 4. 5.

In the public utilities and services, importance to be given to output than to return on investment: the former being extended up to a level at which marginal cost is equal to price. Prices should be such, which equate demand and supply. The price structure should lead to most economical use of all scarce resources. The enterprises should aim at making substantial amount of contribution to provide for development out of their own earnings.

Some public enterprises hold the monopoly of the product or service Simply because they are in a monopoly position they cant increase the prices of such commodities or services as the burden would fall on the consumers who are already contributing by way of direct taxes. MANAGERIAL PROBLEMS IN PUBLIC SECTOR The productive efficiency of public undertakings will depend substantially on the ability of those who are concerned with the management of these undertakings. By and large, the manager of a government undertaking has to face the same set of problems that the manager of comparable private unit has. Many committees and commissions have stressed the need to select the right men to run the public sector undertakings. Public companies have brought the rules, procedures, and methods of work and even attitudes of mind from their parent organization, i.e., civil services. Most of the public sector units are suffering from shortage of professional managers. The staff and chief executives for the public company have been drawn from the Administrative service, but their abilities are dependent on their background experience and managerial culture. We cannot blame these officers. Perhaps their preconditioning as professional public servants make them more willing to try to work within the old procedures rather than strive to get them changed. Managers in the public enterprises should be given clear commercial targets to be achieved in timebound programs. After this they must be given the freedom of action, and must be judged by their performance alone. In Yugoslavia, where public sector occupies almost the entire industrial scene, the manager is given the necessary freedom to prove his worth. A similar managerial autonomy can be introduced in India as well. The use of the personnel in management is not to the optimum because of either worng placement or inadequate utilization. In several units at an enormous cost they are put on the jobs which have nothing to do with their specialization. As a result of this, talents are being wasted, or optimum use is not being made of them. Another obstacle to development of the personality of each public undertaking is its close relationship with the parent ministry or undertaking. As the undertaking is responsible to the parliament, everyone in the parliament begins to think it is the ministry or the department, which has to manage the undertaking. In most cases, the public enterprises are denied the autonomy, which they need for efficient management. Interference of the Ministers even in the day to day affairs of the undertakings have been reported. To ensure proper management of the concerns in the public sector, some changes have to be implemented. Professional managers should be appointed on all managerial cadres. For sophisticated positions, recruitment should not e confined to local people only. To Check the flight of talented personnel salary structure and other monetary incentives need be revised. Promotions should strictly 43

be on the basis of merit and not seniority. Politicians should not interfere in all the matters of the undertakings. Within the enterprise the divisional objectives and department. They should be assigned to the divisional or departmental executives for implementation. Such managerial process will lead to greater accountability of the individuals who are entrusted with specific responsibilities. It finally results in improved management performance. ARGUMENTS FOR THE PUBLIC SECTOR The following are the arguments put forward by the supporters of public sector. 1. SERVICES MOTIVE

The main idea behind the setting up to public companies is to serve public, the maximum extent. If the key industries are given in the hands of the private people, they will exploit the resource to their own advantages. Ultimately, the public will suffer. 2. QUALITY OF THE PRODUCT

Government can invest huge amounts of money in Research and Development Projects and thus the quality of the products can be improved. 3. FAIR TREATMENT OF THE WORKERS

In the Government Industries, Workers are paid good wages and they are provided with good working conditions unlike the private sector industries. 4. PRICING POLICY

Public sector enterprises fix the prices for their commodities reasonably low unlike the private sector industries. It is due to their policy of service motive. 5. ASSETS OF THE PEOPLE

Government companies are the assets of the nation. The real owners of the Government companies are people. When these assets grow, naturally the properties of the common people also grow. 6. SOCIALISTIC PATTERN OF SOCIETY

The Socialistic Pattern of society underlines the need for public sector industries. To achieve this objective, it is necessary that public sector enterprise show growth in number and size. 7. SELFISH PRIVATE SECTORS

Limitations and Abuses of private Sector itself has been an important reason for the need to encourage public sector. ARGUMENTS AGAINST PUBLIC SECTOR The following are the arguments put forward against public sector. 44

1. Lacks Personal Care: The officers of the government companies do not have much interest in their work because there is no on to effectively supervise them. This not the case in private sector. 2. Inefficiency: In government enterprises, incentives are not provided to those who are efficient in their work, promotion is awarded on the basis of seniority and not by merit. 3. Mismanagement: The government enterprises, lacks in time-bound managerial goals and the funds are misused. They lack responsibility and accountability. 4. Underutilization of capacity: the public sector does not make full use of its capacity. It results in low production and high cost. The government is very much conscious of the shortcomings of public enterprises. Some actions have already been taken. It is needed to have a cost-conscious and serious thought about the improvement of the working of the public sector enterprises.

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LESSON 13 MULTINATIONAL CORPORATIONS

The present day is marked as the period of evolving global markets. Most of the developing countries have opened their doors for this change with red carpets spread for foreign investment. Since 1990s the globalization concept is accepted under the package of new economic policy Globalization means allowing free trade among world countries, giving out restrictions. In this liberal foreign trade scenario the multinational corporations play a dominant role. CONCEPT OF MULTINATIONAL CORPORATIONS (MNCS) Any business corporation in which ownership management, production and marketing extend over several national jurisdictions is called a multinational Corporation. The term MNC is used to identify an enterprise, which controls assets-factories, mines, sales and other offices in two or more countries. The multinational corporations are also called Trans national corporations (TNCs) or Cosmocorps. The total value of the individual assets and turn-over of MNCs run into billions. Prod. Raymon Venven says MNC is one whose total sales turnover is over 100 million dollars MNCs have three basic characteristics: i) international operations ii) collective transfer of resources and iii) ownership with control over the economic activities of the foreign affiliates. ORIGIN OF MNCS Inflow of foreign private capital in the colonies by Imperial Powers was and usual practice. Originally many joint-stock companies like East-India company established their trade in number of countries crossing continents. But later their object was not only trade but also to establish their rule over the territories which very much helped their trade. Now the style of MNCs is different it is to meet the local demand where the investment is made by their advanced technology and resources and by widening markets to make profits. The MNCs grow by research and development and by effectively competing with local products. The growth of MNCs was rapid during 1920s and after 1990s. In the later phase, USA ventures began to dominate among MNCs. The other MNCs mostly belong to U.K. France Germany, followed by Japan. Among these countries, the top MNCs of USA alone occupies more than 50 percent share in 1970s. IMPORTANCE OF MNCS The MNCs create internationalization of production by transforming htge raw materials produced in one group of countries with the labour and plant facilities in other to manufacture goods and sell them in different markets. The fruits of science in the form of instant communication, quick transport, computers, modern managerial techniques etc., have been helping MNCs and also the hosing countries to derive some benefits. The functioning of MNCs develop new jobs, new wealth and higher standard of living in less developed nations. They facilitated speedy flow of capital with technology. The economic and social conditions of hosting countries are also improved, by the operation of MNCs

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By signing the GATT (General Agreement on Tariffs and Trade), India agreed to introduct Liberalization, privatization and Globalization in her economic policy. Consequently the MNCs are welcomed to shoulder our economic growth by their major investment projects. This include power projects major infrastructure industries like transport, communication & banking and large manufacturing units. Hence our economic activities are geared up and out domestic business units will enter into competition with MNCs by increasing productivity. The importance of MNCs can also be understood from the following advantages of MNCs. ADVANTAGES OF MNCS 1. The less developed countries are industrially and technologically backward. They cant afford for Research and Development (R&D) activities. Therefore when MNCs are allowed they can invest their large resources in R&D, which will help for the economic growth of developing nations. The MNCs with their brain and muscle can save the backward countries from destruction, by transferring technology management skills, innovations and capital resources. This will create more and more industries and employment opportunities in backward economies. MNCs internationalize production and marketing functions. They utilize cheaper raw materials, labour and facilities of some countries and market in many other countries. Thus the world trade and global economic activities are stimulated. MNCs promote exports of developing countries and increase inflow of foreign exchange, when they invest and establish large industries and increase volume of output through improved technology. Also they plough back their profits in the host countries which will again increase production. The efficiency of domestic business units is increased by the competition from MNCs. The inefficient units are driven out. By the Survival of the fittest concept every unit is forced to increase its efficiency. This will improve the quality of economy and lead to progress. The social and economic conditions of less developed countries are improved by MNCs. They develop entire infrastructure and also social amenities like schools, hospitals, housing etc., for the conduct of their business.

2.

3. 4.

5.

6.

DISADVANTAGES OF MNCS The weaknesses of MNCs or the evil effects of allowing them in less developed economies are discussed below; and the criticism of ruthless exploitation of MNCs and their effort to establish economic imperialism, can not be neglected. 1. 2. 3. Inspite of specific agreements on payment of royalties, dividends etc. the MNCs acquire enormous power in host countries, which they use to ensure a free out flow of funds across international borders. The MNCs use their oligopolistic power only a few competitors) in maximizing their profits and repatriate them to their home countries. The ooutflow of foreign exchange by way of their profits is ever increasing in ratio of inflow by way of foreign investment. The MNCs try to corrupt the workers through higher wages and incentives and the officials and rules of host countries by bribery commission, lobbying etc. 47

4. 5. 6. 7.

8.

MNCs develop their economic dominance on host countries and also force their own culture spoiling home cultures and brings down the moral values. The governments of host countries can not check the activities of the MNCs especially their malpractices in tax evasion, misuse of foreign exchange, corrupting the local public, cut-throat competition advertisement wars and so on. MNCs do not create large employments in practice. With advanced technology and automation they utilize little labour force. Also when the small and medium industries are thrown out by the competition of MNCs the unemployment become still vigorous. In actual practice, the less developed nations realized that MNCs hesitate to transfer advance technology needed for the host country and to train, local personnel. Also they interfere in national and political affairs and even they influence and change the political powers of the local governments to their favour. MNCs drain off developing countries n the long run by way of monopolistic position and profits. It is criticized that MNCs are the new form of exploiting tools of Imperial powers. The top MNCs at present have sales turnovers more than the total GDPs (Gross Domestic Products) of some developing countries.

MULTINATIONAL IN INDIA India had better experiences with MNCs. They have started dominating in tobacco, toiletries, pharmaceutical, cosmetics, foodstuffs, petrochemicals and many other manufacturing industries. The governments policy on MNCs is not clear. MNCs in India helped in capital t\fromation and in increasing efficiency of competing firms. But they repatriated large profits (Rs 634 crores from 1965 to 1970). They did not show interest in increasing our exports. They have imported on fifth of total exports. They want to make use of our wide markets and make huge profits. They never show their true balance sheets and they do not develop R & D here, as expected. The MNCs produce goods of less needed technology like vanaspathi, toothpaste, shampoo, soaps etc; they hesitate to invest in basic industries, which require long gestation period. In our country, the affiliates of multinationals like Bata, Pfizer, Siemens, Union carbide, Phillips India, Hindustan lever, Colgate Palmolive, Dunlop etc., enjoy a highly protected market with high profitability. At present, India have become much depending on MNCs and cannot restrict or control foreign capital. We have the necessity of protecting home industries while admitting MNCs, to protect our employment, self-reliance and economic growth. This will be a tough task for our government in the full form of globalization in the days to come.

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LESSON 14 TECHNOLOGICAL ENVIRONMENT AND BUSINESS:

The modern society is living in an age of science and technology. Science is the body of knowledge and technology is the application of knowledge in production. Basically technology refers to the knowledge of how to do things, so the term know how is also used. A technological change is usually defined as that results in a shift in the overall production function. Technology is a macro level term used to denote the considerable changes in business activities and in the economy to advance to the next phase. Examples for technological changes are invention of steam engines, and electrically operated engines that resulted in industrial revolution; the electronic field and now the computers that help the business activities to grow in a galloping speed. So, the technology includes technical advancements, applications of inventions and innovative ideas. It takes the form of new methods and procedures in productions function, entirely a new product or improved product features drastic cut n production cost and so on, Technology very much influences the growth of business and industries and ultimately economic development. It also influences the society. Let us discuss the impacts of technology one by one. IMPACT OF TECHNOLOGY ON SOCIETY 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Technology improves the standard of living by means of increased employment and personal income. It breaks joint family system through the easy mobility of labour. Due to technological development more industrial employment emerged and the rural population migrated to towns. The hold on religions gets relaxed by the spared of technology. The mode of living changed and many religious and superstitious beliefs vanished. People adopt rational approach in continuing their socal practices and their outlook has broadened. Women get employment and due to their earning capacity their status, and independent ness increased. Materialism occupied the place of personal and moral values i.e. people become money minded and even they could not spare much time for the brought up of their children. Technology has widened the gap between the poor and rich and results in unemployment, which is dangerous for the labour oriented countries like India. Technology leads to rapid urban development, which results in congestion, pollution and ecological problems. It results in excess dependence of developing countries on advanced countries for the import of technology. Social, religious and cultural reforms took place quickly due to the wide contacts of the people in work place and outside.

IMPACT OF TECHNOLOGY ON BUSINESS 1. Technology facilitates large scale production, which economizes cost and improves quality. Therefore the profit will be higher. 49

2. 3. 4. 5. 6.

Adoption of technology is necessary to meet or win competitive price and quality. When a firm fails to adopt improved technologies it may be driven out from market. It increases the efficiency of labourers through division of labour and specialization. Sometimes it may result in many employer-employee disputes and wastage of energies. This is due to the resistance to technological change by the working class. Technological improvements help to improve the process, techniques and use of materials. This reduces the time and energy of workers therefore their performance increases. It is possible by modern technology for the business people to offer variety of goods that could effectively satisfy the consumer needs.

IMPACT OF TECHNOLOGY ON ECONOMIC DEVELOPMENT 1. Technology is inevitable for the economic progress of any country. By the use of technological improvements, rapid industrialization and industrial output is possible: it increases national income. 2. Due to the expanding industrial employment opportunities the individual income and the standard of living increases, which is the indication of economic progress. 3. It develops the quantity and quality of skilled labourers which is the potential factor for economic progress. 4. It reduces the preponderance of agriculture and develops industrial sector. Normally the agricultural productivity is affected by natural calamities and excess use of labour input. Whereas industrial productivity could be increased by technology, and economic progress could be fastly achieved. 5. By improving technological applications a variety of new products could be offered to consumers. By this a number of new business units could also emerge. 6. By developing indigenous technology through research and development, import of foreign technology could be reduced. This will reduce the use of foreign exchange reserves, so the economy can prosper. IMPORTANCE OF TECHNOLOGY TODAY Joseph Schumpeter the renowned economist enlights the contribution of technology. He said that industrial growth depends upon technological innovations and the ability to translate technology into profits. By using modern technology, new and useful good and services are introduced and this facilitates the progress of business in the dynamic world. Based on the broad phases of technology civilization have been classified into five societies: 1) 2) 3) 4) 5) Nomadic society Agricultural society Industrial society Service society and Knowledge society.

In the first three stages manual labour was used as the primary skill. In services society, the service industries like retailing, banking, insurance, health care etc., use the manual, skilled and intellectual labour. In knowledge society, knowledge and information as the new form of technology, play a vital role in serving the human wants. That if why the computers and the information technology is occupying a greater attention of business world today. 50

LESSON 15 CHOICE OF APPROPRIATE TECHNOLOGY

Todays business in any country as we have already discussed, is to compete in the world level. It is actually, competition through technology. So, every country should develop its own technology or atlas it should import from other countries for using in its production and economic growth. Normally the underdeveloped economies for their industrial growth require import of technology from the developed countries; They can not wait till their domestic technology is developed as rapid promotion of industries is inevitable. Our country imports technology in the form of improved machines, process, techniques, products and skills. In this process the importing countries have to be careful in choosing the right technology. CHOICE OF TECHNOLOGY Choosing a technology is a critical decision. When we have to import a technology it should be a relevant one to the domestic climate. Foreign technology is a double-edged knife, unless we are careful it may retard our economic development. An unfit technology, when imported also causes a great foreign exchange burden. FACTORS TO BE CONSIDERED IN CHOOSING THE APPROPRIATE TECHNOLOGY 1. POPULATION

The proposed technology is to be foully analyzed with relevance to the social and industrial needs of the country. Such technology should develop industries without affecting employment opportunities especially in a populous country like ours. 2. ABILITY Technical readiness of the country to accept the new technology is to be considered. If our technical personnel are not skilled enough to use the technology properly, it will not cause the expected development. 3. FOREIGN EXCHANGE CRISES

Import of technology is a question of using the scarce foreign exchange reserves. It should not be chosen based on kick-backs or narrow focused decisions. Also the out-dated technologies may be cleverly sold by some advanced countries, for example some medicines that were banned for pollution are exported by them. 4. SELF RELIANCE

Choice should be made such that the technology does not make our country highly dependant on some advanced countries. This will lead to exploitation of our resources through unscrupulous terms and conditions of developed nations. Slowly our self-reliance may be corded, by their domination.

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5.

RESOURCE AVAILABILITY

The proposed technology should be aimed to utilize surplus resources within the country, and not the scarce resources. It may be avoided if the raw materials are also to be imported. 6. DEVELOPMENT STAGE

The appropriate technology may be chosen by analyzing the stage of domestic technology level. Too much of advanced technology may not be suitable for a primitive or intermediated level of technology climate. The importing country should be in a position to put into the effective use of technology, for expediting economic development. 7. POLLUTION

The technology that causes pollution may be carefully avoided. The developing nations usually fail to think in the long run to preserve natural and ecological balance of the country. Apart from choosing the right technology developing country should try to substitute the import of technology by way fo research and development. Continuous import will ruin the economic self-reliance. So, very much cautious approach is needed to choose the right technology keeping in mind the selfish motive of the exporters and the specific needs of importing counties.

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LESSON 16 SOCIAL RESPONSIBILITY OF BUSINESS

There was a time when making of profit by the business unit was the sole objective. It is now generally agreed that business should reformulate its objectives in such a way that social goals are put on a par with economic goals. Some people may not realize the need for social involvement of business. Today the operations of business enterprises affect a wide spectrum. The resources they make use are not limited to their own of the proprieties but also to the contributions of shareholders, suppliers, employees, local community and the society at large. These groups are also affected by the way an enterprise functions. George Goyder rightly points out that industry today can no longer be regarded as a private arrangement for enriching shareholders it need to embrace many interests which go to make up industry in a common purpose. Gandhiji had also stressed this view in his trusteeship concept of business managers. Also, nationalization of business by government is possible under our constitution. For example, banks, railways, insurance etc., were nationalized to serve better the community. So prevention is better than cure and the business units may volunteer to solve social problems. MANAGEMENT EDUCATION Spreading of business management education and the development of professional managerial class has created a climate of socially responsive business units. They realize the need to serve workers, consumers and the local public. The co-operate with government measures. So this responsibility has become an accepted management philosophy. MORAL STANDARDS Teachings of the ideals of moral values and ethical standards among businessmen have increased the importance of social involvement. Because when in a society the problems and disorders are increasing a business unit cant just exist. For example in the great depression all business units had to be closed due to social problems. Then only the businessmen started requesting the government to intervene in business and industrial activities to control economic fluctuations. Business units are the creations of the society; through the government regulations and the laws of the parliament they are given the rights and good climate to continue their operations. The Business enterprises therefore have to function by keeping in mind the interests of society while at the same time they should justify themselves on economic performance. In other words, they have to consider the interest of the consumers, shareholders, employees, employees, government and society, while they try to earn profit. Further, as the business is an organ of society, it is required to discharge its social obligations to the various interest groups of the society. Let us now see the obligations in detail : 1. OBLIGATIONS TO CONSUMERS A business enterprise has the basic responsibility to wards the consumers while offerings the products. The responsibilities of the business towards the consumer may be listed as (1) reasonable quality products, (2) fair and just process (3) good after sales service (4) Avoiding misleading advertisements (5) Avoiding adulteration, hoarding black-marketing and other unfair practices and (6) keeping un consumers long run welfare by giving consumer education, avoiding unwholesome products etc.. 53

2. OBLIGATIONS TO WORKERS Responsibilities of business enterprise towards workers are as follows : 1. 2. 3. 4. 5. The workers must be given security of service along with fair wages. Workers must be given equal opportunities for growth and development There must be good schemes for employee welfare, health and safety and also social security measures. There must be profit-sharing schemes. Opportunities must be provided to the workers to participate in management.

3. OBLIGATIONS TO SHAREHOLDERS The shareholders are the persons who provide the funds to the business enterprise and hence the management has some responsibilities to the shareholders. The business should be managed efficiently so as to provide a fair return on the investments and to ensure business growth to the shareholders. Further the business enterprise should supply to its shareholders accurate and comprehensive reports and accounts about its working. 4. OBLIGATIONS TO SOCIETY

The business enterprise should produce wholesome goods and maintain economic well being of the society. The gains of the improved production of the enterprise should be shared by all the constituents of the society, viz. management, shareholders, workers, consumers and further, the enterprise should take the responsibility for providing amenities in the locality where it is located. It must behave as a good citizen and must not cause damage to law and order of the community. It should take measures to remove effluents, fouling the air and conditions of slum, congestion, ecological imbalance and other evils. 5. OBLIGATIONS TO GOVERNMENT Business community should extend full support to the government in implementing its policies and programmers. It should help the Government in the equitable distribution of commodities which are in scare supply in controlling prices and inflationary trend in the country. It should also respect Governments social welfare measures. Business community should submit all the documents to the Government as required by law. Business should pay all taxes in time. The foregoing discussion of the social responsibilities of business indicates that a business unit has social obligations to the various segments of society. The businges community must strive to provide the greatest possible service to the masses of the society. Business enterprise being an unit of society will have to justify the expectation of the community. Otherwise, the community may try to replace it by some alternatie institution. Hence the business community, in its own interest of survival, has to recognist and implement the concept of social responsibility.

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BUSINESS ENVIRONMENT MODEL QUESTION PAPER

Time : 3 hours Max. Marks : 100 (5 X 8 = 40 Marks) SECTION A Answer any FIVE of the following question: 1. Explain the meaning and importance of business environment. 2. Define culture. What are the feature of Indian culture? 3. What are the evils of caste system? 4. Write examples for the intervention in business, by political polices and programs. 5. What do you mean by Directive Principles of State Policy? Explain its nature. 6. What are the merits and demerits of capitalist economic system? 7. Describe the objectives of public sector in India. 8. Explain the importance of choosing the appropriate technology. SECTION B ( 4 X 15 = 60 Marks) Answer any FOUR of the following question: 9. Account for the various environmental factors and explain their impact on business. 10. What are the features of demographic trend? 11. Explain the important provisions of Directive Principles of State policy. 12. Evaluate the issues in Center-State relations. 13. Describe the different economic systems and the role of business units in each system. 14. What are the relevance of multinational corporations in our new economic policy? 15. Explain the different responsibilities of business to the society.

BUSINESS ENVIRONMENT QUESTION PAPER - MAY 2004

1 2 3 4 5 6 7 8 Attempt any five (8 Marks each) Mention the External and Internal factors influencing the Business Environment? How a demographic variable affects the Business Environment? Business and Communal system- Comment? Explain about the significant role of political factors influencing the Business Environment? Discuss about the economic environment role in business environment? Highlights the mature and scope of multinational companies (MNC's) Technology Environment and its impact on Business Environment? Explain? How a Business Manager can maintain the social responsible? Attempt any four (15 Marks each) Discuss about the environment influences factors for a business? Social environment- Comment? Directive principles of state policy - it role in business Discuss? Business Economy is a major contributor to the National Economy- Comment?] Technology Environment and its impact on Business- Comment? Technology Obsolence will bring down the economy growth. Do you agree or disagree? Substantiate with suitable illustrations? How a legislation governs the business social responsibility ? Mention some laws.?

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