Business Environment

BBA IV Semester
Navraj Bhusal

Business Environment (BBA IV semester) - Nepalese Perspectives When was Nepal became a membership of WTO?-23rd April 2004 What are the current changes you see in Nepalese business environment? a. b. c. d. e. f. g. h. i. j. k. l. m. n. o. p. Money laundering policy is in acted Syndicate system dissolve ( but cannot controlled fully) Banks starts to reduce interest rate ( adequate liquidity) Sideways movement of Stock Market.(Still confidence on stock market is not improving) Scarcity of fertilizers. Foods in most of the tarai and hilly areas. More concerned on road transport.(Help to flourish air transport) DRP (Duty refund procedure) is in jeopardy. Student unions forced to change the name of some school ( even the bus was burned in Dharan) Only 1/3 rd budget was approved. Because of acting government, it cannot take any major decisions. One of the largest Hydro power company show willingness to spend on Seti, but still there is a problems related to environmental issues and compensation for land. Insecurity Labour unions are motivated by political interest rather than organizational interest. Local industry are bombarded by MNCs ( brighter toothpaste , mayalu shop, puja shop are on continuous pressure) Fear of New MNCs in financial and other services sectors.

Which business is flourishing these days in Nepal? Why?-boutique, organic food, sea food, hair salon(especially Korean and Japanese style), Dairy products, Solar electric, aluminum frame, health club, etc.

Nepal is ranked 151 out of 187 countries on the human development index. From 2010, even service sector MNCs can established their organization in Nepal.

BBA (IV semester) Business Environment Unit 1-Introduction: Meaning: - The term Business Environment is composed of two words Business and Environment. In simple terms, the state in which a person remains busy is known as Business. The word Business in its economic sense means human activities like production, extraction or purchase or sales of goods that are performed for earning profits. On the other hand, the word Environment refers to the aspects of surroundings. Therefore, Business Environment may be defined as a set of conditions Social, Legal, Economical, Political or Institutional that are uncontrollable in nature and affects the functioning of organization. Business Environment has two components: 1. Internal Environment 2. External Environment Internal Environment: It includes 5 Ms i.e. man, material, money, machinery and management, usually within the control of business. Business can make changes in these factors according to the change in the functioning of enterprise. External Environment: Those factors which are beyond the control of business enterprise are included in external environment. These factors are: Government and Legal factors, GeoPhysical Factors, Political Factors, Socio Cultural Factors, Demo-Graphical factors etc .It is of two Types: 1. Micro/Operating Environment 2. Macro/General Environment Micro/Operating Environment: The environment which is close to business and affects its capacity to work is known as Micro or Operating Environment. It consists of Suppliers, Customers, Market Intermediaries, Competitors and Public. (1) Suppliers: They are the persons who supply raw material and required components to the company. They must be reliable and business must have multiple suppliers i.e. they should not depend upon only one supplier. (2) Customers: - Customers are regarded as the king of the market. Success of every business depends upon the level of their customers satisfaction. Types of Customers: (i) Wholesalers (ii) Retailers (iii) Industries (iv) Government and Other Institutions (v) Foreigners (3) Market Intermediaries: - They work as a link between business and final consumers. Types:(i) Middleman 2

(ii) Marketing Agencies (iii) Financial Intermediaries (iv)Physical Intermediaries (4) Competitors: - Every move of the competitors affects the business. Business has to adjust itself according to the strategies of the Competitors. (5) Public: - Any group who has actual interest in business enterprise is termed as public e.g. media and local public. They may be the users or non-users of the product. Macro/General Environment: It includes factors that create opportunities and threats to business units. Following are the elements of Macro Environment: (1) Economic Environment: - It is very complex and dynamic in nature that keeps on changing with the change in policies or political situations. It has three elements: (i) Economic Conditions of Public (ii) Economic Policies of the country (iii)Economic System (iv)Other Economic Factors: Infrastructural Facilities, Banking, Insurance companies, money markets, capital markets etc. (2) Non-Economic Environment: - Following are included in non-economic environment:(i) Political Environment: - It affects different business units extensively. Components: (a) Political Belief of Government (b) Political Strength of the Country (c) Relation with other countries (d) Defense and Military Policies (e) Centre State Relationship in the Country (f) Thinking Opposition Parties towards Business Unit (ii) Socio-Cultural Environment: - Influence exercised by social and cultural factors, not within the control of business, is known as Socio-Cultural Environment. These factors include: attitude of people to work, family system, caste system, religion, education, marriage etc. (iii) Technological Environment: - A systematic application of scientific knowledge to practical task is known as technology. Everyday there has been vast changes in products, services, lifestyles and living conditions, these changes must be analyzed by every business unit and should adapt these changes. (iv) Natural Environment: - It includes natural resources, weather, climatic conditions, port facilities, topographical factors such as soil, sea, rivers, rainfall etc. Every business unit must look for these factors before choosing the location for their business.

(v) Demographic Environment :- It is a study of perspective of population i.e. its size, standard of living, growth rate, age-sex composition, family size, income level (upper level, middle level and lower level), education level etc. Every business unit must see these features of population and recognize their various needs and produce accordingly. (vi) International Environment: - It is particularly important for industries directly depending on import or exports. The factors that affect the business are: Globalization, Liberalization, foreign business policies, cultural exchange. Characteristics:1. Business environment is compound in nature. 2. Business environment is constantly changing process. 3. Business environment is different for different business units. 4. It has both long term and short term impact. 5. Unlimited influence of external environment factors. 6. It is very uncertain. 7. Inter-related components. 8. It includes both internal and external environment. Environment-Business Relations: Business is the product of the technological, political-legal, economic, social cultural, global and natural factors amidst which it functions. Three features are common to this web of relationship between business and its environment. There is symbolic relationship between business and its environment and among the environmental factors. In other words, business is influenced by its environment and in turn, to certain degree, it will influence the external forces. Similarly, political-legal environment influences economic environment and vice versa. The same relationship between other environment factors too. These environmental forces are dynamic. They keep on changing as years roll by, so does business. The third feature is that a particular business firm, by itself, may not be in a position to change its environment. But along with other firms, business will be in a position to mould the environment in its favor.

Importance of Environmental Study: The benefits of environmental study are as follows; Development of broad strategies and long-term policies of the firm. Development of action plans to deal with technological advancements. To foresee the impact of socio-economic changes at the national and international levels on the firms stability. Analysis of competitors strategies and formulation of effective counter measures. To keep oneself dynamic. Environmental Analysis Process: Environment analysis is managerial decision-making based on the assessment of opportunities and threats in the environment. The steps in environmental analysis are: 1. Scanning: It involves information gathering for assessing the nature of the environment in terms of uncertainly, complexity and dynamics. It includes: a. Identifies early signs of future environmental changes. They are indicated by trends and events. b. Detects changes already underway. They are happening. 2. Monitoring: It involves tracking environmental trends and events. It is auditing of environment. The likely impact of envrioemtnal influences on business performance is identified. 3. Forecasting: This step forecast what is likely to happen. It lay out of path for anticipate changes. This step provides: a. Key forces at work in the environment. They can be political-legal, economic, social, cultural, and technological. b. Understanding of the nature of key influences and drivers of change. c. Projection of future alternatives paths available. 4. Assessment: This step identifies key opportunities and threats. The competitive position of business analyzed in terms of how the organization stands in relation to other organizations competing for some resource of customers. a. Opportunities are a favorable condition which creates risks and weakens the competitive position. b. Threat is an unfavorable condition which strengths, organizations competitive position of the organization. Environmental analysis identifies competitive position of a business organization. Factors affection the competitive positions are: 1. Competitors: current and positional competitive and their objective and strategies.

2. Strategic groups: other firms in the industry following similar competitive approaches. 3. Market factors: customer need market segment, market power, market share and growth. 4. Market attractiveness: The degree of market attractiveness for the product. Tools and Techniques in Environmental Analysis 1. Environmental Scanning Environmental scanning is the process that seeks information about events and relationships in a firms environment, the knowledge of which help top management chart the firms future. Environmental scanning entails partitioning the external environment into sectors, namely, cultural, economic, political, technological, and so on. This helps establish a firms information needs within those sectors. Data are usually collected by monitoring and forecasting changes in important variables identified in each sector. That data are then transformed into consolidated information, which is integrated into the firms strategic planning process (Georgantzas and Acar 1995). Environmental scanning is used to gather information from the environment. These information are used to craft a strategic plan that will help an organization achieve and maintain a competitive advantage. In order to be successful, the organization must align its strategies and plans with the information gathered from the environmental scanning. 2. SWOT Analysis SWOT (Strengths and Weaknesses, and Opportunities and Threats) is a basic analytical tool in management that has become popular in recent years. SWOT analysis is often used by strategic planners and top management in developing competitive strategies. It is typically used to decide corporate strategies and to make product or market level analyses (Reddy 1994). SWOT is a widely used thinking framework for identifying Strengths, Weaknesses, Opportunities and Threats. It enables key factors to be visibly recorded as a high-level summary of a business. SWOT analysis is a summary that is simple but powerful. The technique is commonly used by consultants to document the key factors arising from the review of a particular project or business. The use of SWOT enables an assessment to be made of the overall internal state of a business and the direction in which it is heading, through looking at its Strengths and Weaknesses. It also enables a judgment to be made about aspects of the external business environment, which can affect the performance of the business, through looking at the Opportunities and Threats it faces in the wider world (Elkin 1998). The SWOT analysis on its own is not a strategy. It is merely a tool that helps an organization in making informed decisions. The SWOT analysis is primarily used to identify and analyze the strengths and weaknesses of the 6

organization, as well as the opportunities and threats exposed by the information collected of the external environment. The SWOT analysis is a simple yet useful tool in analyzing both the internal and external environments of the organization. SWOT analysis together with other tools such as PEST (Political, Economic, Social, and Technological) analysis can be used as a basis for the analysis of business and environmental factors 3. PEST Analysis A PEST analysis looks at the Political, Economic, Social and Technological drivers of a particular industry. PEST is external factors that must be analyzed and understood in order for an organization to succeed. The PEST analysis focuses on the external forces that affect the organization. It is most useful when used together with other tools such as the SWOT analysis. a. Political Factors may have direct or indirect impact on the organizations operation. Decisions made by the government may have an effect on the business. The political arena has a big influence on how organizations operate, the purchasing power of the customers and other businesses. b. Economic Factors the organization is affected by economic factors. Economy also affects the purchasing power and behavior of the consumers. c. Sociological Factors include the demography, lifestyle, cultural aspects of the consumers. These factors have a big influence on the consumer needs and wants. Sociological factors also affect the size of potential markets. d. Technological Factors technological change plays an important role in shaping how organizations operate. Technological factors are important in gaining competitive advantage. Technological innovations can improve production efficiency, quality and speed. New technology is changing how organizations operate. 4. Porters Five Forces Analysis Porter identified the five forces model of competitive strategy. He identified the five forces as:
a. b. c. d. e.

The threat of new entrants and the appearance of new competitors The degree of rivalry among existing competitors in the market The bargaining power of buyers The bargaining power of suppliers The threat of substitute products or services which could shrink the market

The strength of each of these forces varies from industry to industry, but taken together they determine long-term profitability. They help shape the process firms can charge, the costs they must pay for resources and the level of investment that will be needed to compete. The threat of new entrants limits market share and profit; powerful buyers or suppliers, using their superior bargaining power, can drive down prices or push costs up, eroding margins and so on (Witzel 2003). The five factors affect the strategy of the organization. It is important to analyze and study these five forces to be able to craft a successful strategy. To be successful, the organization must respond effectively to the pressures of these five forces. Relation between business environment and strategic management of the business: Competitive strategy refers to a company's short-term and long-term strategies to gain market share against its competitors. Small businesses must compete not only against their peers but also against larger companies, which usually have more resources and name recognition. A company's internal operations must be flexible enough to allow it to adapt rapidly to changes in the external environment. Process SWOT analysis examines strengths, weaknesses, opportunities and threats. It is often used to develop a competitive strategy. It begins with the defining of short-term and long-term objectives. For example, a bakery may want to dominate its local market in the next five years and become a major supplier to restaurants and grocery stores over the long term. The next step is to understand internal capabilities and its external challenges. Competitive strategy bridges the gap between where a company is and where it wants to go. A company might need to increase advertising, change product lines or expand facilities before it can gain an advantage over competitors. An essential element of maintaining the advantage is focus on the customer's needs in all aspects of business operations and strategy. External A company's external environment consists of threats and opportunities. Threats refer to circumstances that could negatively influence sales and profits. Continuing with the bakery example, the entry of a big-box grocery store next door could force the owner to change his product mix and prices to retain existing customers and attract new customers. External opportunities refer to events that could positively influence sales. The entry of a big-box store could be a positive because it will attract hundreds of customers to the neighborhood every day. Internal Internal strategies could be a source of competitive strength or weakness. For example, small businesses usually cannot compete on cost with their larger competitors, which have negotiating power with suppliers. However, small businesses can offer personalized service and niche products that larger competitors may not carry, thus retaining some existing customers and possibly attracting new ones. Human resources could also be a source of strength or weakness. For example, a start-up technology company may not be able to offer high salaries to attract 8

experienced engineers, but it can offer the promise of working on leading-edge technologies and more decision-making responsibilities. A large company can offer financial security, but its hierarchical management structure could stifle creativity.

Considerations Porter's five-force model is another useful framework for analyzing the competitive environment. The five forces are the bargaining power of customers, the bargaining power of suppliers, and the threat of new competition, changing consumer preferences, and competitive rivalry in the industry. Bargaining power refers to the ability to influence prices paid or received. New competition or changing preferences can affect sales and profits, while a very competitive market usually limits a company's ability to raise prices or increase margins.

Unit 2- Political and Legal Environment The political legal dimension of the general environment refers to government regulation of business and the relationship between business and government. This dimension is important for three basic reasons: a. The legal system partially defines what an organization can do and cannot do. b. Pro- or anti-business sentiment in government influences business activity. c. Political stability has ramifications (implications) for planning. No business wants to set up shop in another country unless trade relationships with that country are relatively well defined and stable. (Griffen, 2009) For systematic study of political system, a business firm should, first of all, analyze the national constitution, major political parties, form or structure of government, the mechanisms designed to guide a transition of power from one leader to the next, key power blocks, and the extent of popular support. The political system is concerned with the: (1) the direction and administration of the state, (2) the government and (3) the regulation of social relationships. 1. A state is an association of people formed for specific common purpose, with a clearly defined territory, and system of laws and an organized government. 2. A government involves making and implementing laws, representing the state and routine public affairs management. 3. The social relationships in aggregate forms are integrated and regulated by the state and its government for national harmony, peace and well-being, development and human rights. A major challenge of the political system is to bring together people of different backgrounds and allow them to work together to govern themselves. (Worthington and Britton,1977) Political and Legal Factors: 1. Constitution: A constitution is a set of fundamental principles or established precedents according to which a state or other organization is governed. These rules together make up, i.e. constitute, what the entity is. When these principles are written down into a single collection or set of legal documents, those documents may be said to comprise a written constitution. After the historic peace agreement between the Maoist and government (2006), along with the election of constitutional assembly (2007), interim constitution was adopted transferring the executive power of the king to the prime minister and established 601 seats Constituent Assembly.(Federal Democratic Republic Nepal) The Interim Constitution, 2007 policies are: a. Raising the standard of living of the general public through emphasis on education, health, housing and employment of the people of all regions and distribution of investment of economic resources for balanced development in various geographic regions of the country. b. Protection of environment including wildlife, forest and vegetation. 10

c. Participation and representation will be ensured of Madheshi, Janaaties, Dalits, women, indigenous and ethnic communities, and people from all classes and groups in all apparatuses of an inclusive basis. d. Arrangement to safeguard the right and interests of children and gradual arrangement for the free education. e. Promotion of the interests of the economically and socially backward groups and communities by making special provision with regard to their education health and employment. f. Creation of conditions for the acceleration of the speed of rural development through active participation of the rural population g. Making use of the national economic and other resources in the interest of the nation through social justice and equitable distribution of benefits to the weaker section of the society. 2. Political system and parties Political system directly affects the business organizations. Nepal has been practicing republican democracy as a result of peoples movement of 2006. There are various political parties in Nepal. The political economic thoughts of political parties directly affect the economic system of a country. United Nepal Communist Party (Maoist), Nepali Congress, Nepal Commits Party (UML), Madhesi Jana Adhikar Forum are the biggest parties of Nepal. These all parties are adopting mixed economic policy even when they are different political ideologies. 3. Administrative policy Administrative policy is an important element of political legal environment. As the administrative policy of a country affects the whole industrial sector, the manager should always be well informed about administrative policy and lead the industry accordingly. Government of Nepal has adopted the policy to strengthen organization, make effective the instruction and training programs, bring co-ordination among different organization, enable participation of all administrative levels through decentralization and delegation of power, simplify decision making process, activate the role of Administrative Court, implement special and rigid policy for corruption control, organize high level manpower and further strengthen regular monitoring system. The administration becomes strong and healthy through such policies.
4. Legal provision The other element of political-legal environment is legal provision. Legal provision directly affects business organization. If the legal provisions are favorable, the business organizations are positively affected and if they are unfavorable the business organizations are negatively affected. Different laws and regulations are enforced to regularizes and control the business organizations. According to the legal provision, the cottage industries need not to pay excise duty and income tax and the industries such as cigarette, beer, bidi, plastics, vegetable ghee, electric ( except wiring ), power oriented, agriculture, mineral etc should pay excise duty and income tax only after five years from the commencement of production. The Export and import control Act, Nepal Act, Private Firm Registration Act, Partnership Act, Company Act, Patent Design and Trademark Act, Nepal Mine Act, Hotel Management and Liquor Sales Control Act, Bonus Act, Black Marketing and Social Crime Punishment Act, Tourism Act, Mediation Act, Check Post Act, Income Tax Act, Excise Duty Act, Property Tax Act, Sales Tax Act, Contract Act, Value Added Tax Act, Labor Act, Foreign Investment and Technology Act, Industrial Business Act etc, are the

11

concerned subjects for the managers of any business organization. So, they should be well informed about such Acts.

Current changes on political scenario of Nepal 1. Prime Minister Baburam Bhattari dissolves parliament on May 2012 and calls elections for November after politicians miss a final deadline to agree on a new constitution. Mr Bhattari remains in charge of a caretaker government. 2. Only 1/3 rd of total budget was approved for forth coming activities. 3. The people of different sections and communities of the society have been forwarding their list of demand. Various groups have started fresh agitations to pressure the government into fulfilling their demands. 4. The different segments of the society are organizing themselves nationally around for issues-reparation (compensation), reservation, national minority rights, and preferential treatment to mainstream. 5. The cases of abduction, forced extortion, killings, threatening have mounted. 6. The number of illegal armed groups is increasing everyday raising concerns that these groups are to be mobilized to influence the politics. 7. Sister organizations of some political parties have resorted to violence to push their political agendas. 8. The human rights situation is deteriorating in the country; human right defender, civil servants, businessmen, and journalists have been attacked, killed and abducted. 9. Mass rallies, bandhs, burning of vehicle, and road blockades with targeted violence are now very common. 10. Laws and order situation is very critical throughout the country.

12

Unit 3 Social-Cultural Environment What?

Social Cultural Environment is defined as a set of beliefs, customs, practices, and behavior that exists within a population or society. (Business Dictionary) In other words it refers, to the immediate physical and social setting in which people live or in which something happens or develops. It includes the culture that the individual was educated or lives in, and people and institution with whom they interact. (Wikipedia) **Society: It is the set of relation among people, including their social status and roles. **Culture: It is the sum total of mankinds knowledge, beliefs, art, morals, laws, and customs and any other capabilities and habits acquired by human beings as member of society. (P.R Panta, 2011) **Dimensions of Culture: (Hofstede, 1970) 1) Power distance: The degree to which people accept inequality in power among institutions organizations and people. High power distance means that people accept inequality in power among institutions, organizations and people. Low power distance means that people expect equality in power. Countries that value high power distance are Malaysia, the Philippines and Panama; Countries that value low power distance are Denmark, Austria and Israel. 2) Uncertainty avoidance: High uncertainty avoidance means that members of a society feel uncomfortable with uncertainty and ambiguity and thus support beliefs that promise certainty and conformity. Low uncertainty avoidance means that people have high tolerance for the unstructured, the unclear and the unpredictable. High uncertainty avoidance countries include Greece, Portugal, and Uruguay. Countries with low uncertainty avoidance values are Singapore and Jamaica 3) Individualism and collectivism: Individualism reflects a value for a loosely knit (to be joined closely together) social framework. In a tightly knit social framework , individuals look after one another and organizations protect their members interest. Countries with individualist values include the United States, Canada, Great Britain and Australia. Countries with collectivist values are Guatemala, Ecuador, Japan and China. 4) Masculinity / femininity: Masculinity stands for preference for achievement. Heroism, assertiveness, work centrality (with resultant high stress) and material success. Femininity reflects the values of relationships, cooperation, group decision making and quality of life. Societies with strong masculine values are Japan, Austria, Mexico, and Germany. Countries with feminine values are Sweden, Norway, Denmark and France. Both men and women subscribe to the dominant value in masculine and feminine cultures. 5) Long term orientation: A greater concern for the future and high value on thrift (using resource carefully) and perseverance (persistence on doing something). 13

6) Short term: a concern with the past and present and a high value on meeting social obligations. Geert Hofstede and his colleagues later identified a fifth dimension of long term orientation versus short term orientation. The long term orientation found in China and other Asian countries includes a greater concern for the future and highly values thrift and perseverance. A short term orientation found in Russia and West Africa is more concerned with the past and the present and places a high value on tradition and meeting social obligations. Researchers have continued to explore and expand on Hofstedes findings. For example in the last 25 years more than 1,400 articles and numerous books have been published on individualism and collectivism alone.

Why to study socio-cultural environment?

1. Business Organization is a social system. 2. Business Organization is established in a society to fulfill the demand of the society. 3. Business cannot run in isolation, there need people as owner, as a consumer, as a employees, as a regulator etc. 4. The strategy formulated by the organizations on each levels of hierarchy need to address the stakeholders expectations. 5. Sometimes, even the business can act as the change agent by promoting convenient products to people to improve their life styles. E.g. use of cooking gas, soap, mobile, computer etc.

Components:
1. Attitude: (evaluative statement) The opinion, feeling, judgment that anyone expresses on something. Attitude includes things such as individual freedom, democracy, truth and honesty, justice, love and marriage etc. Attitude towards work is important as it determines motivation, morale, job satisfaction, productivity etc. Nepalese perspective: Attitude towards blue collar jobs is negative, which create great distinction between white and blue collar workers and office employees. This leads to overabundance of liberal arts and business graduates and lack of toolmakers, carpenters and welders, even when the employment opportunities are better for the latter. Achievement orientation is lacking in the Nepalese society. Lack of opportunities and capabilities had been largely responsible for such attitude. Mostly people are driven by material culture. Thus, knowledge building culture is shadowed by money making culture.

14

Young generation is showing willingness to take risk in new venture rather than being employed in others organization.

2. Religion and Religious Groups Religious beliefs, convictions, customs, rituals and festivals differ from one group to another. Religion often imposes constraints on the role of individual in society. Business firms can suffer heavy losses by ignoring religious sentiments of customers, employees and others. Religious groups exert considerable influence on activities of the business groups. Thus, business must recognize and respect religious sentiments. Nepalese Perspectives: A Hindu society is divided into four Varnas-Brahmins, Kshatriyas, Vaishyas and Sudras and consider higher to lower respectively. - There is still existence of discrimination based on caste system. - Some Islamic societies limit job opportunities for women. Similarly, as a religious requirement, the Muslims go for fasting from morning to evening, during the month of Ramadan. - Negative demand for beef product in Nepal. - In the Interim Constitution, Nepal is considered as a secular state. 3. Language Language is the means through which people communicate, exchange ideas, view, opinion to each others. Language is considered as a mirror of a culture. It provides access to local society. Marketing plans become costlier and more complex due to huge diversity in language. Nepalese Perspectives Nepali language is considered as a national language and 46.61 percent of total population speaks this language (CBS, 2008). - There are 38 registered languages which are spoken in whole nation. 4. Education: Education in its broadest, general sense is the means through which the aims and habits of a group of people sustain from one generation to the next. In other words, education is the formal process by which society deliberately transmits its accumulated knowledge, skills, customs and values from one generation to another.(Wikipedia) The education environment in any country influences virtually every aspects of managerial and industrial life. 15

Countries rich in educational facilities vastly attract high wage industries. By investing in education, a country can attract Brain-Power industries. The level of literacy determines the nature of advertising packaging, quality of marketing research and distribution system. The market potential of a country depends on education.

Nepalese Perspectives: The literacy rate of Nepal has reached to 69 percent in 2010.Similarly, the literacy rate among the 6-14 years group reach to 87 percent. - In 2011, the number of school was 7559 with an enrollment student of about 0.81 millions. - Lack of qualified manpower and infrastructure development hinder the quality of the educational institution in Nepal. - Five universities (T.U., K.U., Nepal Sanskrit University, Pokhara University, Purbanchal University) are currently in operation in Nepal. 5. Social Institution A social institution may be defined as an organizational system which functions to satisfy basic social needs by providing an ordered framework linking the individual to the larger culture. E.g. family, marriage, government, religion etc. Family System: Joint family system is prevalent in Nepal. However due to globalization, migration, and change in attitude of living, joint family is being split into smaller units of nuclear family. This change in family structure increases the demand of flats, vehicles, catering services (packed lunches), baby sitters etc .In addition; it also increases the demand of old-age homes, child care center, etc. Marriage: Marriage is one of the basic elements of culture and peoples attitude towards marriage influences culture a lot. It is a social event that concerns the whole society. Since, marriage is a family affair in Nepal. The marriage season is a big opportunity for business. E.g. demand for jewellery, kitchen ware, Honeymoon package, household furniture, vehicles etc is huge during marriage seasons. 6. Class Structure: Social class structure is a set of concepts in the social sciences in which people are grouped into a set of hierarchical social categories. E.g. upper class, middle class, lower class. The upper class is the social class composed of those who are wealthy, well born, or both. The middle class are the broad group of people in contemporary society who fall socioeconomically between lower class and upper class. The lower class (Occasionally described as working class) is those employed in low-paying wage jobs with very little economic security. 16

In Nepal However, there are four class structure, upper class, middle class, lower middle class and poor. 7. Business Culture (etiquette): It is a code of behavior that clearly defines the expectations for social behavior according to contemporary conventional norms within the society, social class or group.(way of doing business) Business etiquette can vary significantly in different countries, which is invariably related to their culture. For example: A notable difference between Chinese and Western business etiquette is conflict handling. Chinese businesses prefer to look upon relationship management to avoid conflicts stemmed from a culture that heavily relies on Guanxi. While the west leaves resolution of conflict to the interpretations of law through contracts and lawyers. In Nepal, Majority of private sector business firms are owned by family owners. The interest of these owners is on profit and family. They look for the family interests to make business decisions rather professionalism of their management practices. Their interests are more on capital accumulation rather than expansion of business and professional activities

a. Explain the impact of social cultural environment in business organization. b. Explain the components of social cultural environment.

17

Unit 4 Social Responsibility of Business: (We prosper by helping society prosper) We make a living by what we get, but we make a life by what we give. (Winston Churchill) The International Organisation for Standardization (ISO) states: In the wake of increasing globalization, we have become increasingly conscious not only of what we buy, but also how the goods and services we buy have been produced. Environmentally harmful production, child labor, dangerous working environments and other inhumane conditions are examples of issues being brought into the open. All companies and organizations aiming at long-term profitability and credibility are starting to realize that they must act in accordance with norms of right and wrong. What? Social Responsibility: It is an obligation that an organization, group or individual has to act to benefit society at large. Social Responsibility is a duty every individual or organization has to perform so as to maintain a balance between the economy and the eco-system. It is applied, not only the business organization but also to everyone whos any action impacts the environment. (Wikipedia) In other words, Being Socially Responsible means that people and organizations must behave ethically and with sensitivity toward social, cultural, economic and environmental issues. Striving for social responsibility helps individuals, organizations and governments have a positive impact on development, business and society with a positive contribution to bottom-line results. Corporate Social Responsibility (CSR): It is a form of corporate self-regulation integrated into a business model.CSR policy functions as a built-in, self-regulating mechanism whereby a business monitors and ensures its active compliance with the spirit of the law, ethical standards and international norms. The goal of CSR is to embrace responsibility for the companys actions and encourage a positive impact through its activities on the environment, consumers, employees, communities, stakeholders and all other members of the public sphere who may also be considered as stakeholders. (Wikipedia) In other words, Corporate Social Responsibility (CSR) is defined as the way companies integrate social, environmental, and economic concerns into their values and operations in a transparent and accountable manner. Every firm or company desires long-term profitability and sustainable growth. So, to achieve these goals, several strategies are formulated and implemented and tries to motivate the potential customer towards the firms product and services. In the present context, the welfare and right issues of the individual, groups and society are increasing. Even these issues challenge the existence of the firm or company. Thus, the organization must act proactively to address the social issues inside and outside the organization and maintain CSR, for perpetual growth and long term profitability. 18

Arguments for and against social responsibility: Organization operates in the society. It takes inputs from the society, process it and delivers output to the society. So there is always give and take relationship between organization and society. Thus, in the process of executing several activities in an organization, organization must consider social aspects (human aspects) inside and outside the organization. In the present scenario, responsibility towards society is a big challenge for an organization for sustainable development and long-term profitability. Even, most of the organizations are inclined toward social responsibility, but still there is existence of arguments for and against social responsibility. Arguments in favour of social responsibility 1. To increase reputation of society: Businessman sells the goods to the customers and customers are the social person .If organization is responsible towards society, it can increase its reputation in society. This is the one of most important argument that after providing good quality of goods at lower price and providing other free facilities to customers organization can grow its business. 2. Business legal obligations: Several laws are formulated and implemented in Nepal to reduce population, remove labour discrimination, payment of tax etc. So organization must follow these rules and regulations to prevent from inescapable government penalties. These obligations make the organization to look positively towards society and motivate to work for the welfare of society. 4. Business has useful resource With a pool of resources, such as capital, labour and expertise, business is in a better position to tackle social problems and work for social goals. 5. Better Environment from business Social responsibility helps to maintain good understanding between individuals, groups and units of an organization. Thus, it facilitate better environment in the business. Good facilities help to reduce labor absenteeism, labour turnover, labour crime etc. Argument against Social responsibility 1. Cost of social work Business has limited resources. So, if it is used in social work then business activities may increase business's expenses and affects the business adversely. 2. Organization is not expert in social work: Societal behavioral knowledge is required to maintain social responsibility. However, it may lack in organization and mislead the organizational functions. 3. Social responsibility is not legal responsibility: Since, social responsibility is a voluntary participation in the welfare of the society. So there is not legal responsibility of an organization to act in it. 19

5. Ignore Business Aim: It is the duty of Govt. to do social activities. If an organization inclined more in the social activities rather than organizational activities organization cannot achieve its goals. Approaches to Social Responsibility

Obstructionist Approach

Defensive (Obligation) Approach

Accommodative (Responsive) Approach

Proactive (Contribution) Approach

Low degree of Social Responsibility

High degree of Social Responsibility

1. Social Obstruction: The organization which performs as low as possible social responsibility. And sometimes even crosses the ethical boundaries. E.g. adulteration in products. 2. Defensive or Social Obligation: The organization which only performs that much social responsibility which is bound by laws. E.g. writing warning in cigarette packets. 3. Accommodative or Social Response: The organization which performs those activities which are legal and ethical. Such as providing toothpaste and toothbrush in dental camp, collecting blood for Nepal Red cross Society etc. 4. Proactive or Social Contribution: Organization itself participates actively in the development and welfare of the society. E.g. Building hospitals, schools, conducting skill development program etc. Areas of Social Responsibility: 1. Organizational Stakeholder: Consumer, Creditors, suppliers, local community, employees, and government are the stakeholder of the organization. Thus, to have a good relation with them, the organization should produce qualitative products, provide reasonable salaries to employees compare to competitors, no discriminations between the employees, pay taxes etc. 2. The natural environment: There is globally high concern on natural resources depletion. Protection of water, soil and air from pollutants are the global issues which the organization should deeply consider while taking corporate decisions. 3. General Social Welfare: For the perpetual growth and existence, organization should have good relation with society. This relation can be strengthened by contributing in charities, establishing health care centers in remote areas, providing jobs etc.

20

Social Audit: What? Social Audit is a tool to measure, evaluate and report the social performance (activities that affect the general welfare of the society) of an organization. It evaluates effectiveness in achieving social responsibility goal. In other words, a social audit is a way of measuring, understanding, reporting and ultimately improving an organizations social and ethical performance. A social audit helps to narrow gaps between vision/goal and reality, between efficiency and effectiveness. It is a technique to understand, measurement, verify, report on and to improve the social performance of the organization. Social audit is a formal and thorough analysis of the effectiveness of a firms social performance. (Griffen, 1998) Objectives of Social Audit: 1. Assessing the physical and financial gaps between needs and resources available for local development. 2. Creating awareness among beneficiaries and providers of local social and productive services. 3. Increasing efficacy and effectiveness of local development programs. 4. Scrutiny of various policy decisions, keeping in view stakeholder interests and priorities, particularly of rural poor. 5. Estimation of the opportunity cost for stakeholders of not getting timely access to public services. Advantages of social audit: a. b. c. d. e. f. Trains the community on participatory local planning. Encourages local democracy Encourages community participation. Benefits disadvantaged groups. Promotes collective decision making and sharing responsibilities. Develop human resources and social capital.

Problems of Social Audit: a. Lack of generally accepted social norms and standards as in financial audit. b. Result and outcome of social performance are difficult to measure. c. Social audit is expensive and takes time to be conducted.

21

Models of Social Audit: Following are the models of social audits: 1. Inventory Model: Under this model, all social activities undertaken by the organization are listed. However, the impacts of social activities are not assessed by the auditor. In addition, cost and benefits of the social activities are also not disclosed. 2. Costing Model: Under this model along with the social activities undertaken, cost is also audited. This model considers the cost, however ignores the benefit. In addition, assessment of social performance and social impact is not one by the auditor. 3. Program Management Model: This model assesses the achievement of financial and a physical target of each social activity .It also facilitates comparison of various social programs. However, this model also does not assess the impact of social activities. 4. Cost Benefit Model: Under this model, both the costs and benefits of social activities to the business organization and to the society is assessed. Social activities are broken down identifiable components. Scales are developed to measure the costs and benefits of each component. Methods/Procedures of Social Audit :( From Agrawal G.Ms Book) The method of social audit consists of following steps: 1. The social auditor is appointed. It starts with a meeting between the officers of organization and social auditor. Agreement is reached on the following aspects. a. Type of audit: Legal, Government requirement or organizational initiative. b. Scope of Social Audit: This should specify which stakeholder should be included. c. Objectives of audit: They should be clear and specific. d. Data source: Primary or secondary sources. e. Time frame: Time needed to conduct the audit. f. Report Format: Format for reporting social audit. 2. Relevant Policies and statements relating to social performance programs are provided to the auditor. They deal with nature, goals, resource, and performance.etc. 3. Social audit plan is prepared as to ; a. Who is to be interviewed: Sampling method to be sued for selecting employees, public etc. b. Question to be asked: For information to be gathered, a checklist is prepared. c. Time and place of contact. d. Methods for calculating social costs and benefits. 4. Major components and indicators of social performance are identified. They can be related to responsibilities toward; consumer, investors, employees, community, government etc. 5. The social audit plan is implemented. 6. Social audit report is prepare and presented to management. Corporate accountability: We protect human rights, public health and the environment from corporate greed and abuse around the world (Corporate Accountability International) 22

Corporate accountability is defined as the obligation of an organization to account for its activities, accept responsibility to them, and to disclose the results in a transparent manner. It also includes the responsibility for money or other entrusted property. Steps in corporate accountability :( Chipscholz, 2011) Accountability steps include:

See it: In order to see what needs to be done, you must take responsibility for reality. Since reality is frequently changing, you need to stay alert and be flexible. Theres no hiding behind what used to work. You see something, and rise to a new challenge. That means obtaining the perspectives of others and candidly asking for and offering feedback. You are courageous and relentless in the pursuit of acknowledging reality. Own it: You accept being personally invested in outcomes. You are willing to take risks and learn from successes and failures. You align your work with whats needed for the company. You link where you are and what youve done with where you want to be and what youre going to do. Solve it: There are always obstacles that get in the way of achieving results, but you apply persistent effort and when thwarted, find another way. You must keep asking, Wh at else can I do so this gets resolved? This step requires overcoming cross-functional boundaries, limitations, and no responses. Do it: The natural culmination of persistence with the first three steps is just do it. You must focus on top priorities, overcome obstacles, do what you say you will, and avoid blaming others. A key element in getting things done is how well you can sustain an environment of trust for all participants, even those who are unwilling to help.

Consumerism: Consumerism is defined as a modern movement for the protection of the consumer against useless, inferior, or dangerous products, misleading advertising, unfair price etc . (consumerist movement) In other words, it is also defined as social and economic order that encourages the purchase of goods and services in ever greater amount. Consumer Rights: Consumer Protection Act,1998 a. The right to information. a. Right to safety for health, life and b. The right to choose. property. c. The right to safety. b. Right to be informed. d. The right to quality. c. Right to choose for the best of e. The right to be heard. satisfaction. f. The right to be protest. d. Right to be heard. e. Right to redress (to correct something that is wrong or unfair) and 23

compensation. f. Right to consumer education. The legal framework governing the field of consumer protection in Nepal includes: Black Market and Some Other Social Crime Punishment Act 1997. Food Act 1996 Consumer Protection Act 1998 Nepal Standardization Act 1980

24

Unit-5 Technological Environment

Technology is the making, modification, usage, and knowledge of tools, machines, techniques, crafts, systems, methods of organization, in order to solve a problem, improve a preexisting solution to a problem, achieve a goal or perform a specific function. It can also refer to the collection of such tools, machinery, modifications, arrangements and procedures
Source: http://www.exporthelp.co.za

In other words, Technology can be defined as the method or technique for converting inputs to outputs in accomplishing a specific task. Thus, the terms 'method' and 'technique' refer not only to the knowledge but also to the skills and the means for accomplishing a task. Technological innovation, then, refers to the increase in knowledge, the improvement in skills, or the discovery of a new or improved means that extends people's ability to achieve a given task. High technology has become like a force of nature. It transforms the economy, schools, consumer habits, and the very character of modern life. Investors pour money into it; parents urge their children to study it; communities vie to attract its factories; decorators adopt it as a style; politicians push it as a panacea (care-all). (Source: Science Digest Magazine) Technology can be classified in several ways. For example, blueprints, machinery, equipment and other capital goods are sometimes referred to as hard technology while soft technology includes management know-how, finance, marketing and administrative techniques. When a relatively primitive technology is used in the production process, the technology is usually referred to as labour-intensive. A highly advanced technology, on the other hand, is generally termed capital-intensive. Changes in the technological environment have had some of the most dramatic effects on business. A company may be thoroughly committed to a particular type of technology, and may have made major investments in equipment and training only to see a new, more innovative and cost-effective technology emerge. Indeed, the managing director of multinational organisation manufacturing heavy machinery once said that the hardest part of his job had nothing to do with unions, pay or products, but with whether or not to spend money on the latest technologically improved equipment. Computer technology has had an enormous impact on education and health care, to name but two areas affected. The advancements in medical technology, for example, have contributed to longevity in many societies. In addition, the introduction of robots in many factories has reduced the need for labour, and the use of hard-disks and microcomputers has become commonplace in many homes and businesses.

25

Unfortunately, there is a negative side to technological progress. The introduction of nuclear weapons, for example, has made the destruction of the human race a frightening possibility. In addition, factories using modern technologies have polluted both air and water and contributed to various environmental and health-related problems. Technology is a critical factor in economic development. Because of the advances of international communication, the increasing economic interdependence of nations, and the serious scarcity of vital natural resources, the transfer of technology has become an important preoccupation of both industrialized and developing countries. For many industrialised countries, the changes in the technological environment over the last 30 years have been immense particularly in such areas as chemicals, drugs, and electronics. It is vital that organisations stay abreast of these changes - not only because this will allow them to incorporate new and innovative designs into their products, but also because it will give them a firmer base from which to anticipate and counteract competition from other organisations. When the Gillette company developed a superior stainless steel razor blade, it feared that such a superior product might mean fewer replacements and sales. Thus, the company decided not to market it. Instead, Gillette sold the technology to Wilkinson, a British garden tool manufacturer, thinking that Wilkinson would use the technology only in the production of garden tools. When Wilkinson Sword Blades were introduced and sold quickly, Gillette understood the magnitude of its mistake. The transfer of technology is essential for attaining a high level of industrial capability and competitiveness. Multinational corporations are playing an increasingly important role in technology transfer because they invest abroad to expand production, marketing and research activities. There is also a growing consciousness amongst governments of the need to increase technology transfer to the developing countries to help stabilise their economic and social conditions. In spite of the many differences in social, political, cultural, geographic and economic conditions, there are some common characteristics in the technological environments of developing countries. The most common technology transfer from industrialised to developing countries has been in agriculture and health care. As a result of improved health care systems, infant mortality rates have been cut while the incidence of once common diseases such as malaria and typhoid has been reduced in Latin America, south-east Asia and Africa (although the incidents of the AIDS virus has increased alarmingly). Similarly, agricultural technology has increased agricultural productivity in Brazil, India and elsewhere. However, in most developing countries, technology has made little impact on the productive systems, income distribution and living conditions of the majority of the population. Technology transfer is a complex, time-consuming and costly process, and the successful implementation of such a process demands continuous communication and co-operation between the parties involved. Furthermore, technology transfer cannot be effective if it experiences conflict with the economic and social needs of the recipient country. 26

The agricultural development of north-eastern Brazil, for example, was largely financed by international banks and financial organisations in the 1960's. Much of this region had been inhabited by Brazilian aborigines but it was owned by a small number of wealthy landowners. The introduction of large-scale mechanical agricultural technology in areas of the tropical rain forest of the Amazon has caused serious environmental damage such as erosion of tropical topsoil and the destruction of the natural environment of numerous birds and animals, and has displaced a large number of the local inhabitants of the forests. Technology transfer may become a serious source of conflict between donor and recipient countries. The recipient country may feel that the donor is trying to dominate it through technology, capital and production. Dependence on foreign technology can be viewed as a serious threat to economic independence. Countries that export technology may experience different problems. For the seller of technology, the technology transfer can result in unemployment in the home country and future loss of technological superiority. For example, Japan transferred modern steel production technology to South Korea in the early 1970's. As labour and production costs in Japan increased, the Korean steel industry began to take over a significant portion of the previously Japanese-controlled international market. Some Japanese executives are now complaining that the cost of technology transfer has been much greater than the income received through the sale of technology. Technology can be transferred from person to person, industry to industry and government to government, although the government of any country generally plays the most important role in facilitating or impeding the transfer process. Contacts amongst students from different countries are also a means of technology transfer as are journals, books, technical and professional publications, trade magazines and product pamphlets. Furthermore, multinational corporations play an important role in technology transfer by transferring information and technology from the parent company to subsidiaries in other countries, training foreign employees, etc. The future development of the international business environment depends on numerous factors, including the political and economic environment, the development of technology, population growth, energy availability and natural resource depletion. It can be expected that the gap between the rich and the poor countries will increase and that living conditions in many poor countries will deteriorate even more. The rich countries will be obliged to extend technology, food and financial assistance to the poor countries and people in the advanced countries will be engaged to an increasing extend. (Source: N F Matsuura, International Business)

Business Technology Relation

Technology is the backbone of running any successful business in the modern society. The kind of business setup we have today requires an entrepreneur to take note of the ever evolving technology and keep pace. Many business men would be sincerely surprised at the degree of impact modern technology can make in their business. There is a relationship between a successful business today and technology. As a matter of fact, technology in this day and age is what determines the swift running of a business. It is the speed 27

in which we retrieve information, the manner in which we organize our clients data and system of record keeping in our business. The tool of technology acts as a leverage for the business. It has changed the manner in which we do things within our income generating zones. There are three root causes why some small business owners do not infuse modern technology into their businesses. They may think their business is too small and hence they do not understand how it is related to their success. The second probable cause is that they may not be aware of where to turn to for help in setting up a technologically updated business. On the same note they may lack the knowledge of how to run a business using modern technology. Finally many assume that the venture of infusing technological equipment and systems in the business is very costly. The ability of a business to have people process and technology integrated together is equivalent to its ability to rise into a high performing business. Those who understand this relationship especially when running a small business have an extra advantage. They are milestones ahead of competitors who are not aware of this.

Factors of Technological Environment

Factors of technological environment includes the followings 1. Level of Technology: a. Labour based Technology b. Capital based technology 2. Pace of Technological Changes: Technological changes influences organization in the following ways. a. It can make existing industries obsolete. b. It can rejuvenate (revitalize) the existing industries through product improvement or cost reduction. c. It can create entirely new industries. d. It can increase government regulation. 3. Technological Transfer: Technology transfer implies technology imported from technologically advanced foreign countries. Technology transfer can be through: a. Globalization (MNCs) b. Projects (Turnkey Projects:- ready for immediate use or operation) c. Trade( sale of equipment by the manufacturer) d. Training assistance (Bilateral and multilateral donors provide technical assistance) 4. Research and Development (RD): RD is the essence of innovation. - Customer except new products of superior quality which are safe, comfortable and environment friendly.

28

Status of Industrial Technology in Nepal

The status of industrial technology can be assessed by analyzing the followings: 1. a. b. c. d. e. f. The system of Research and Development (RD): Research is dominated by universities and government research agencies. Less relation with industrial sector. Mostly organizations are depended on imported technology. Little awareness on importance of RD. However, agriculture sector, such as Fishery, Cultivation, Irrigation etc are using new and improved technology in accessible areas. Government is also promoting new technology development on agriculture, other industries by providing the facilities of tax credit on imported technology, training and development programs, credit availability etc. The export as the indicator of Technology: Export performance of Nepal is weak and most of the products exported are raw and semi processed items. Carpets, garments and some leather products are exported as a finished product. Government is trying to enhance exports by exempting the tax on export income, providing the place to establish the factory etc. The skill base for technology: Relative enrollment figure at various level of education also indicate the technology status of the nation. Gross enrollment ration is 45% in secondary education. Female enrollment is very poor. Enrollment in higher education is 9%. Technical education enrollment is 19% of total enrollment in higher education. The pattern of technology transfer: FDI, joint ventures, turnkey projects, licensing, contract manufacturing and franchising are the means of technology transfer. The scale of operation, the nature of production process, the relative cost of labor and the cost of adopting the technology determines the technology transfer rate. Percent change in FDI is declining on compared to the other SAARC nation. Technology transfer is very low. Government policies fail to attract FDI in Nation.

2. a. b. c. 3. a. b. c. d. e. 4. a. b. c. d. e.

Science and Technology policy

Introduction: One can trace the institutionalization of modern science and technology in Nepal from about 1800 A.D. A few examples of modern science and technology institutions are: White Clover 29

(Trifolium repens) in 1853, the first S&T institution; the Agriculture Office, in 1924; the Civil Medical School for "Compounders" and Dressers in 1934; Technical Training School for SubOverseers in 1942); and the Forest Training Centre for Rangers in 1942 (see Sharma 1981). Nepal imported or established a number of modern science and technology projects such as a railway line, a jute mill and a ropeway line and a suspension bridge. The Pharping hydropower station built in 1911 was one of the first plants in the South Asian region. The first College imparting science was begun in 1919. After 1950, Nepal embarked on the path of modernization. Following the development plan of 1956, the Nepal Government took the initiative to develop infrastructure for S&T activities. The departments of Irrigation, Hydrology and Meteorology, Mines and Geology, Survey and Medicinal Plants were among the first government S&T institutions to be established. Many of these institutions were established within the Ministry of Forestry. The Ministry has promoted the establishment of some other pioneering organizations such as the Royal Drugs Research Laboratories, Royal Drugs Limited, the National Herbarium and Plant Tissue Culture Laboratory, the Forest Research and Survey Centre, the Central Food Research Laboratory, the Herbs Processing and Production Limited and the Department of Drug Administration. However, the activities of these institutions were limited to routine works and the provision of support services for their own sectoral development activities. Science and Technology policy was adopted by Nepal in 1989 for the overall development of scientific creativity. The policy gave priority on; 1. To use science and technology as a powerful means to increase production and productivity of the country. 2. To create an environment for the maximum utilization of knowledge and skill of science and technology available in regional and international arena by promoting mutual cooperation with the bilateral, multilateral, regional and international organizations. 3. To promote participation of private sector in the development of science and technology. 4. To develop and mobilize skilled human resources. 5. To extend the development of technology to the rural levels. 6. To create a conducive environment to maintain high morale of the scientist and technologists and minimize the brain drain. Strategies formulated to address technology policy are as follows: a. Ensuring maximum utilization of available resources. b. Developing and adopting appropriate technology through the mobilization of private sector. c. Developing of a mechanism to conduct research and development activities. d. Contributing in the social-economic development of people through the development of knowledge and skills in the science and technology sector. 30

e. Encouraging universities, concerned institutions and individuals in scientific researches.

Information Technology policy 2009 of Nepal

1. 2. 3. 4. To declare information technology sectors a prioritized sector. To follow a single-door system for the development of information technology. To prioritize research and development of information technology. To create conducive (favorable) environment that will attract investment in the private sector, keeping in view the private sector's role in the development of information technology. 5. To provide internet facilities to all Village Development committees of the country in phases. 6. To render assistance to educational institutions and encourage native and foreign training as a necessity of fulfilling the requirement of qualified manpower in various fields pertaining to information technology. 7. To computerize the records of each governmental office and build websites for them for the flow of information. 8. To increase the use of computers in the private sector. 9. To develop physical and virtual information technology park in various places with the private sector's participation for the development of information technology. 10. To use information technology to promote e-commerce, e-education, e-health, among others, and to transfer technology in rural areas. 11. To establish National Information Technology Centre. 12. To establish a national level fund by mobilizing the resources obtained from Nepal Government, donor agencies, and private sectors so as to contribute to research and development of information technology and other activities pertaining to it. 13. To establish venture capital funds with the joint participation of public and private sectors. 14. To include computer education in the curriculum from the school level and broaden its scope. 15. To establish Nepal in the global market through the use of information technology. 16. To draft necessary laws that provides legal sanctions to the use of information technology. IT policy particularly deals with subjects like Intellectual property Rights, domestic preferential treatment, e-trade, e-commerce, VOIP, security and data protection wireless networks, broadband data network and free and open source software. It also aims to increase access to village community, particularly to weaker sections of the society, encourage IT related industryacademia collaboration and minimize the negative effects of e-waste. 31

Electronic Transaction Act 2007: This act makes legal provisions for authentication and regulation for the recognition, true-ship, integrity and reliability of creation, production, processing, storage, and communication and dissemination system of electronic records by making reliable and secured to the transactions carried out by means of electronic data interchange and other means of electronic communication. The act makes provisions for controlling of unauthorized use or illegally changes in any electronic record.

Indigenous Technology
Technologies employed by the native inhabitants of a country and which constitute an important part of its cultural heritage and should therefore be protected against exploitation by industrialized countries; the problem of indigenous knowledge has been discussed during the Rio Conference but it does not receive much protection under the Biodiversity Convention. Article 8 mandates that parties "respect, preserve and maintain knowledge, innovations and practices of indigenous and local communities embodying traditional life styles... and promote their wider application with the approval and involvement of holders of such knowledge, innovations and practices and encourage the equitable sharing of benefits arising from them".

32

Unit-6 Economic Environment

Meaning of Economic Environment:- Those Economic factors which have their affect on the working of the business is known as economic environment. It includes system, policies and nature of an economy, trade cycles, economic resources, level of income, distribution of income and wealth etc. Economic environment is very dynamic and complex in nature. It does not remain the same. It keeps on changing from time to time with the changes in an economy like change in Govt. policies, political situations. Elements of Economic Environment:- It has mainly five main components:1. Economic Conditions 2. Economic System 3. Economic Policies 4. International Economic Environment 5. Economic Legislations Economic Conditions:- Economic Policies of a business unit are largely affected by the economic conditions of an economy. Any improvement in the economic conditions such as standard of living, purchasing power of public, demand and supply, distribution of income etc. largely affects the size of the market. Business cycle is another economic condition that is very important for a business unit. Business Cycle has 5 different stages viz. (i) Prosperity, (ii) Boom, (iii) Decline, (iv) Depression, (v) Recovery. Following are mainly included in Economic Conditions of a country:1. Stages of Business Cycle 2. 4. 5. National Income, Per Capita Income and Distribution of Income Demand and Supply Trends Inflation Rate in the Economy

3. Rate of Capital Formation

6. Industrial Growth Rate, Exports Growth Rate 7. 8. 9. 33 Interest Rate prevailing in the Economy Trends in Industrial Sickness Efficiency of Public and Private Sectors

10. Growth of Primary and Secondary Capital Markets 11. Size of Market

Economic Systems: - An Economic System of a nation or a country may be defined as a framework of rules, goals and incentives that controls economic relations among people in a society. It also helps in providing framework for answering the basic economic questions. Different countries of a world have different economic systems and the prevailing economic system in a country affect the business units to a large extent. Economic conditions of a nation can be of any one of the following type:1. Capitalism (Free Market Economy):- The economic system in which business units or factors of production are privately owned and governed is called Capitalism. The profit earning is the sole aim of the business units. Government of that country does not interfere in the economic activities of the country. It is also known as free market economy. All the decisions relating to the economic activities are privately taken. Examples of Capitalistic Economy: England, Japan, America etc. 2. Socialism (Centrally Planned Economy):- Under socialism economic system, all the economic activities of the country are controlled and regulated by the Government in the interest of the public. The first country to adopt this concept was Soviet Russia. The two main forms of Socialism are: (a) Democratic Socialism:- All the economic activities are controlled and regulated by the government but the people have the freedom of choice of occupation and consumption. (b) Totalitarian Socialism:- This form is also known as Communism. Under this, people are obliged to work under the directions of Government.

34

Socialist economy Countries 3. Mixed Economy:- The economic system in which both public and private sectors co-exist is known as Mixed Economy. Some factors of production are privately owned and some are owned by Government. There exists freedom of choice of occupation and consumption. Both private and public sectors play key roles in the development of the country. Economic Policies:- Government frames economic policies. Economic Policies affects the different business units in different ways. It may or may not have favorable effect on a business unit. The Government may grant subsidies to one business or decrease the rates of excise or custom duty or the government may increase the rates of custom duty and excise duty, tax rates for another business. All the business enterprises frame their policies keeping in view the prevailing economic policies. Important economic policies of a country are as follows:1. Monetary Policy:- The policy formulated by the central bank of a country to control the supply and the cost of money (rate of interest), in order to attain some specified objectives is known as Monetary Policy. 2. Fiscal Policy:- It may be termed as budgetary policy. It is related with the income and expenditure of a country. Fiscal Policy works as an instrument in economic and social growth of a country. It is framed by the government of a country and it deals with taxation, government expenditure, borrowings, deficit financing and management of public debts in an economy.

35

3. Foreign Trade Policy:- It also affects the different business units differently. E.g. if restrictive import policy has been adopted by the government then it will prevent the domestic business units from foreign competition and if the liberal import policy has been adopted by the government then it will affect the domestic products in other way. 4. Foreign Investment Policy:- The policy related to the investment by the foreigners in a country is known as Foreign Investment Policy. If the government has adopted liberal investment policy then it will lead to more inflow of foreign capital in the country which ultimately results in more industrialization and growth in the country. 5. Industrial Policy:- Industrial policy of a country promotes and regulates the industrialization in the country. It is framed by government. The government from time to time issues principals and guidelines under the industrial policy of the country. Global/International Economic Environment:- The role of international economic environment is increasing day by day. If any business enterprise is involved in foreign trade, then it is influenced by not only its own country economic environment but also the economic environment of the country from/to which it is importing or exporting goods. There are various rules and guidelines for these trades which are issued by many organizations like World Bank, WTO, United Nations etc. Economic Legislations:- Besides the above policies, Governments of different countries frame various legislations which regulates and control the business.

Economic Systems
The way a countrys resources are owned and the way that country takes decisions as to what to produce, how much to produce and how to distribute what has been produced determine the type of economic system that particular country practices. 1. MARKET ECONOMY (also called FREE ENTERPRISE ECONOMIES or CAPITALIST ECONOMY) 2. CENTRALLY PLANNED or CONTROLLED ECONOMY 3. MIXED ECONOMY

1. Market Economy
e.g. USA, Japan Private firms or individuals own means of production. They make choices about:

2. Centrally Planned Economy

e.g. Cuba, China, North Korea etc. State (government) owns all means of production. Individuals are not permitted to

36

o What to produce o How to produce o For whom to produce - What to produce is answered by consumers according their demand for goods & services - How to produce is answered by the businessmen. They will choose the production method, which reduces their costs to reach the higher profit. - For whom to produce firms produce goods & services which consumers are willing and able to buy. Role of government 1. To pass laws to protect businessmen & consumers 2. To issue money 3. To provide certain services police 4. To prevent firms from dominating The market and to restrict the power Of trade unions 5. Repair and maintain state properties Advantages: - Goods and services go where they are most in demand and free market responds quickly to peoples wants + wide variety of G&S - No need for an overriding authority to determine allocation of goods and services - Producers and consumers are free to make changes to suit their aims - Competition and the opportunity to make large profits, greater efficiency, innovation Disadvantages: - It mis-allocates resources(to those with more $) - It creates inequality of incomes - It is not competent in providing certain services - It leads to inefficiency (market imperfection) - It can encourage the consumption of harmful goods - drugs

own any property. Government + government planners makes choices about What, How and For whom to produce. - What to produce is answered by government planners, they make assumptions about consumers` needs and the mix of goods and services - How to produce is answered by the gov. planners according the input-output analysis.

- For whom to produce for consumers through state outlets. Prices cant change without state instructions. (Restrictions) Role of government 1. Government make the most economic decisions with those on top of the hierarchy giving economic commands to those further down the ladder. 2. Government plans, organizes and coordinates the whole production process in most industries. 3. Government is the employer of most workers and tells them how to do their jobs. Advantages: - There is more equal distribution of wealth and income - Production is for need rather than profit. - Long-term plans can be made taking into account a range of future needs such as population changes and the environment.

Disadvantages: - Vast bureaucracies employing supervisors, coordinators - People are poorly motivated - Planners often get things wrong shortages of surpluses of some goods - Poor standard of living

There are no pure free market economies or pure command economies. Because of: - Command economies are impossible to regulate all markets - Free market economies cant provide public goods (defense) and cant provide merit goods in sufficient quantity.

37

3. MIXED ECONOMY
All Western European countries The balance between state provision (government planning) and free market provision is more or less equal. The government decides the degree of mixing. They will decide how much business activity there will be in the private sector and the public sector. In the countries, where the government plays important - major economic role the social provision will tend to be greater, taxed higher and distribution of wealth and income more equal. (Sweden) Whereas in countries where the private sector plays the most important economic role, social provision is lower with fewer free goods and services, also taxes will be lower and the distribution of wealth and income less equal.(GB) Some resources are allocated by the government and the rest by the market system. Most decisions are taken in the market place but the government plays an important role in modifying the functioning market. Role of government - Sets laws and rules that regulate economic life - intervention to control or regulate markets - Provide certain services e.g. education, police, defense healthcare - Regulate business to ensure that there is fair competition in the private sector - Restricts the consuming harmful goods by making them illegal or placing high taxes on them - Planning gives the government the power to give G&S, or money to the poorer people PUBLIC SECTOR is responsible for the supply of public goods & services and merit goods. These goods are provided free when used and are paid by taxes e.g. roads, healthcare, street lighting The central or local government makes decisions regarding resource allocation in the public sector. In public sector, the state owns a significant proportion of production factors. PRIVATE SECTOR firms in response to the demand or consumers needs and wants make production decisions In the private sector individuals are allowed to own the factor of production. Businesses are set up in this system by individuals to supply a wide variety of goods and services. Competition exists between these firms.

THE ROLE OF GOVERNMENT IN A MARKET (MIXED) ECONOMY There are various opinions of various economic thoughts about the role of government interventions. Governments are generally argued to have four main macroeconomic goals: - To maintain full employment - To ensure price stability - To achieve high level of economic growth - To keep exports and imports in balance

Dimensions of Economy
Concept: Nation economy is determined by the GDP, agriculture and manufacturing activities, income levels, population density, natural resources, distribution of income, the magnitude of service sector,

38

openness of the economy, degree of urbanization etc. The dimensions of economic environment are as follows: 1. The Economic Dimension 2. The Socio-economic Dimension 3. The Industrial and Agricultural Dimension 4. The Economic Development Dimension 1. The Economic Dimension: It includes gross national product, per capita income, personal consumption and expenditure, personal ownership of goods, inflation rates, private investment, unit labor cost and level of employment. Status: The economic survey 2012 has explained the current state of the economy and highlighted the major limitation and challenges facing the Nepalese Economy. 1. The growth rate of global output has decreased in 2011 compared to 2010. The world economy that grew by 5.3 percent in 2010 got contained to a growth of 3.9 percent only in 2011, which was lower than 4.5 percent, IMF had projected for the year. Especially, the European debt crisis; natural disaster in Japan; recession in European real estate business; the slowed down economic growth rates in countries like China and India; Decreased economic growth in large countries like Brazil and Mexico can be attributed for decline in the world economic growth. Likewise, rise in unemployment rate in USA and Europe also helped in slowing down the world economic growth. IMF has projected the world GDP to grow by 3.5 percent and 4.1 percent in 2012 and 2013 respectively. Economic growth rate of developed and emerging economies for the year 2012 is estimated at 1.4 percent and 5.7 percent respectively. 2. Growth rate of Nepals neighboring countries especially that of South Asian nations, has also slowed down in comparison to 2010. Average growth rate of South Asian countries that was 7.3 percent in 2010 got contained to 5.8 percent in 2011. IMF has estimated to remain the economic growth rate at the same level in 2012 also. Only the two South Asian countries namely Maldives and Sri Lanka maintained higher growth rate in 2012. India and China, that had attained double digit growth rates of 10.6 and 10.4 percent respectively in 2010 also registered lower growth rate of 7.2 and 9.2 percent respectively in 2011. IMF has estimated to further slow down the growth rate to 6.9 percent and 8.2 percent for these two countries respectively in 2012. 3. According to preliminary estimates Nepals economy in FY 2011/12 will grow at 4.56 percent at price prices and 4.63 at current prices against earlier estimated 5.0 percent, which is the highest in three years. Growth rates in FY 2009/10 and 2010/11 at base prices were just 4.3 and 3.9 respectively. Increased agricultural production and accompanied by growth in service sector outputs has been the major reason for such growth rate. However, reasons like energy crisis, sluggish agricultural credit expansion, and lengthened political transition are attributable for failing to achieve the growth in industrial outputs as desired. Total GDP is estimated to reach Rs.1.558 trillion with an increase of 13.8 percent compared to the previous fiscal year. (* growth rate is lower than previous estimate of 5% but higher than previous 3 years)

39

4. Agricultural GDP in FY 2011/12 is estimated to grow by 4.93 percent compared to 4.51 percent growth in the previous fiscal year. Agriculture and forestry, and fisheries sub-sectors are estimated to grow at the rate of 4.86 percent and 8.84 percent in this period. Production of food crops, which play vital role in the growth of agriculture sector, recorded a notable growth in this year. Production of major food crops in this year totaled 9,459,594 MT with a growth of 9.9 percent. Area under major food crops in the current fiscal year totaled 3,484,395 ha, which is higher by 0.46 percent from the previous year. (* Agriculture GDP is grown, and expected to grow in this period) 5. Growth rate of non-agriculture sector is estimated at 4.27 in this fiscal year, which was 3.4 percent in FY 2010/11 whereas this sectors growth rate in FY 2009/10 stood at 5.39 percent. Growth rates of construction and manufacturing sub-sectors have decreased while that of other sub-sectors has increased in this fiscal year. Among those sub-sectors recording positive growth are: mining and quarrying 5 percent; industrial outputs 1.3 percent; electricity, gas and water 7.4 percent; wholesale and retail trade 3.8 percent; hotel and restaurant 8.3 percent; transport, warehousing, and communications 6.8 percent; financial intermediation 3.5 percent; real estate and professional activities 3.0 percent; Public administration and defense 5.6 percent; education 5.0 percent; health and social works 5.5 percent; and other community, social, and personal service related activities 9.1. At the same time, growth rate of the construction sub-sector is estimated to grow negatively by 0.1 percent. [*Growth on construction and manufacturing sub-sectors have decreased but on sub sector such as mining, quarrying (stone and sand),electricity, gas and water etc were increased. However, expectation of negative growth of construction and manufacturing] 6. Gradual structural change can be observed in the Nepalese economy. A trend of decreasing contribution of agriculture and industry sectors and increasing that of services sector to GDP is clearly visible. On sectoral basis, contributions of primary (sector of economy making direct use of natural resources: agriculture, forestry, fishing, mining and extraction of oil and gas), secondary (sector of economy producing manufactured and other processed goods) and tertiary (sector of economy producing services) sectors to GDP are estimated at 35.68, 14.02 and 50.31 percents respectively. Such contribution of primary and secondary sectors is less by 1.75 and 0.27 percentage points as compared to the previous fiscal year. Contribution of the tertiary sector, however, has increased by 2.03 percent in comparison to the previous fiscal year. Increase in outputs of all components of the tertiary sector has led to increased contribution of this sector to GDP. Likewise, classification of GDP into two sectors namely, agriculture and non-agriculture shows contribution of agriculture sector to GDP has decreased while that of non-agriculture has increased a little. Contribution of agriculture, forestry, and fisheries to GDP is estimated at 35.1 percent, while remaining 64.9 percent to be shared by the non-agriculture sector. Such shares in FY 2010/11 were 36.9 and 63.1 percent respectively. (*contribution from agriculture and industry sector is decreasing and service sector is increasing) 7. The share of consumption on GDP has decreased from 91.4 percent in the previous fiscal year to 90.0 in the current fiscal year. The shares of private and government consumption on GDP are 78.1 percent 10.2 respectively. Of the total consumption expenditure, shares of the

40

private sector, government and not for profit institutions is found to be 86.4 percent, 11.4 percent and 1.9 percent respectively. Of the total consumption, share of food grain consumption is 62.7 percent and that of services is 11.0 percent. [*consumption (factor of production) is decreased] 8. The share of investment in GDP is seen to have increased in FY 2011/12. Such share, which stood at 32.5 percent in the previous fiscal year, is estimated to reach 32.8 percent in this year. Out of this, the share of gross capital formation is 19.6 percent. The private sector has contributed 77.97 percent of the total capital formation while the government sector shared the rest 22.03 percent. The share of savings on GDP has increased in the current fiscal year. The share of gross domestic saving has reached 9.8 percent while that of gross national saving has reached 36.6 percent. In the current fiscal year Gross Domestic Savings is estimated to total Rs. 155.0 billion while Gross National Savings is estimated at Rs.571.0 billion. (* investment on GDP is increased) 9. In this fiscal year, there has been 17.2 percent growth in National Disposable Income at current prices. Based on the data for the first eight months of the current fiscal year, per capita GDP of a Nepali has reached Rs. 57,726.0 or US$ 735.00. Likewise, based on Gross National Income, per capita income of a Nepali has reached Rs. 58274 or US$ 742.00. Such a rise in income is attributable to increased remittance income and the growth in the agriculture and services sectors output. (* increase in disposable income) *Disposable income= personal income-personal taxes *Discretionary income=personal income-personal taxes- necessities. 10. The share of trade deficit on GDP is on the rise. The share of exports in GDP in the current fiscal year has reached 9.8 percent while that of imports stood at 32.6 percent. Despite marginal decline in the previous fiscal years trade deficit of 23.9 percent to 22.8 percent this year, it is still quite high. * The trend of trade deficit is increasing 11. Total government expenditure in 2010/11 grew by 13.7 percent reaching 295.36 billion. Such expenditure is estimated to grow by 23.8 percent in the current FY 2011/12 reaching 365.72 billion. Of this total, share of recurrent and capital expenditure is estimated at Rs. 256.86 billion and 62.90 billion with the remaining Rs. 45.94 billion shared by fiscal arrangement. Revenue mobilization in the current fiscal year is estimated to grow by 20.5 percent totaling Rs. 240.81 billion. This total comprise of Rs.205.22 as tax revenue and the remaining Rs.35.59 billion as non-tax revenue. * Total government expenditure is increasing; similarly revenue mobilization will grow in this year. 12. The ratio of total outstanding debt to GDP has increased. For instance, such ratio was 30.3 in the first eight months if FY 2010/11 has gone up to 32.7 percent in the same period of FY

41

2011/12. The ratio of foreign debt to GDP has also increased from the previous years 19.0 percent to 19.8 percent in this year and the ratio of internal debt has also increased from 11.3 to 12.9 in the same period. * The ratio of outstanding debt is increased (internal and foreign debt are increased) 13. In this fiscal year, monetary inflation could be contained to some extent. The point to point based overall urban consumer price index at mid-March of FY 2010/11 was 10.7 percent, which has been contained to 7.0 percent in the same period of FY 2011/12. In this month, price inflation rate on food items on point to point basis has been 4.2 percent while that on non-food items by 9.4 percent. Such rate in the previous fiscal year stood at 17.3 percent and 5.4 percent respectively. It shows of some success achieved in containing the price rise of food grains. *overall inflationary pressure is rising however government is successful in decreasing the degree of inflationary pressure. However there is still no success to decrease the price of daily consumable good. 14. Broad money supply during first eight months of this fiscal year increased by 12.2 percent as a result of notable growth in net foreign assets. Narrow money supply expanded by 6.4 percent in the same period. In this period, net foreign asset (after adjusting foreign exchange profit/loss) grew by Rs. 79.90 billion, while internal debt increased by 3.4 percent.
* Money supply is increasing.

15. Commercial banks in the first eight months of this current fiscal year collected deposits totaling 92.90 billion during first eight months of FY 2011/12 thereby raising the level of total deposits in commercial banks to Rs. 772.50 billion at mid-March 2012. Total Credit flow amount of commercial banks reached Rs.598.50 billion by mid-March with additional credit flow of 54.30 billion during the same period. * Deposits in commercial bank is also raising. 16. The state of the Share Market has not been satisfactory in this fiscal year. NEPSE Index, which is a health indicator of the Share Market, has been sliding throughout first eight months of the current fiscal year. NEPSE Index, that was at 362.85 points in the beginning of fiscal year, came down to 313.92 by mid-March 2012. Similarly, market capitalization also slipped from 337.57 billion in the beginning of fiscal year to Rs. 323, 48 billion in the same period. The transaction amount, however, has improved by 23.5 percent reaching Rs. 5.28 billion in this period. * The performance of share market is not seems to be satisfactory. However, the transaction amount is improving gradually. 17. Exports during the first eight months of the current fiscal year rose by 14.1 percent reaching Rs. 48.56 billion, and at the same time imports also rose by 16.6 percent totaling 295.24 billion. Rates of growth in export and import in the previous fiscal year were 5.9 and 1.3 percent respectively. As such, total trade deficit at Mid-March of 2012 totaled Rs. 246.68 billion with an increase of 17.1 percent in this period, compared to just 0.3 percent growth occurred in the same period of the previous fiscal year. Rise in imports, price rise of

42

petroleum (POL) products, and exchange rate depreciation of Nepalese currency against US Dollar have been the major causes behind such rise in trade deficit. * Export and import are increased but rate of increased in export is far lower than import, which increased the trade deficit. 18. Balance of Payment situation in the current fiscal year, however, has been satisfactory. Balance of Payment (BOP) surplus totaled Rs. 79.90 billion due to the growth in remittance income and increased fund reimbursements from the donor community, which is the highest surplus as of yet. There was BOP deficit in the same period of the previous fiscal year stood at Rs.11.29 billion. Remittance income of the private sector in the current fiscal year grew by 34.7 percent as against the previous years 12.3 percent in the previous year thereby totaling 217.76 billion. Such income in the corresponding period of the previous year was Rs. 161.61 billion. * Balance of payment is in satisfactory level because of the increased in remittance income. However this should not consider as a long-term solution for positive BOP. 19. Foreign exchange reserve in the first eight months of FY 2011/12 grew significantly reaching Rs.368.10 billion, of which Nepal Rastra Bank holds Rs. 305.02 billion while remaining commercial banks hold the remaining Rs. 63.08 billion. Such reserve at the same period of the previous fiscal year was Rs. 272.15 billion. Based on imports in first eight months of the current fiscal year, this reserve can sustain import of goods for next 10.1 months and import of goods and services for 9 months. * Foreign exchange reserve in increased significantly. This is because of high remittance income. 20. The Nepal Living Standard Survey (NLSS III, made public in FY 2011/12 shows 25.2 percent population below the poverty line. According to the same survey, the Gini Index, which depicts income inequality, coming down to 0.33 percent meaning that there has been a decline in income inequality. * Income inequality is declining. 21. In comparison to the previous fiscal year, industrial index in the current fiscal year 2011/12 rose sharply from 2.82 touching 105.42. Indices of Soybean oil, rice, animal feed, sugar, liquor, soft drink, cigarette, jute goods, plywood, lube oil, paints, medicine, cement, galvanized pipe, aluminum goods, electricity cables, have improved. At the same time, industrial indices of vegetable ghee, mustard oil, biscuit, noodles, processed tea, cotton fabrics, woolen carpet, processed leather, paper and paper goods, rosin, plastic goods, cottage metal goods have declined. * Industrial production index is increased significantly 22. Tourist arrival in Nepal grew by 22.1 percent in 2011 as compared to 2010 reaching their number to 736,215. Average duration of their stay, which was 12.67 days in 2010, has increased to 13.12 days in 2011. Income from the tourism sector totaled Rs. 28.63 billion with per tourist per day spending has reached US$39.90. Contribution of tourism sector to GDP has been 1.8 percent while this sector has provided direct employment to 120,000 people.

43

* Tourist arrival has increased, and its contribution on GDP is also increased 23. Energy consumption of the country in FY 2010/11 totaled 10,155 Tons of Oil Equivalent (ToE) with an increase of 2.8 percent over its previous fiscal year. Such consumption by the first eight months of the current fiscal year has reached 8,203 TOE, which is an increase of 24.8 percent over the same period of the previous fiscal year. Of the total energy consumed in FY 2010/11, shares of traditional, commercial, and renewable sources of energy stood at 83.7 percent, 15.6 percent and 0.07 percent respectively. Shares of these sources in the first eight months of the current fiscal year have been 86.5 percent, 12.8 percent, and 0.7 percent respectively. * Increase in energy consumption. 24. Electricity generation at the end of FY 2010/11 totaled 697.8 Megawatt MW), while electricity generation by Mid-March of 2011/12 has reached 705.6 MW. During this period 1,987 Kilometers (Km) of transmission lines have been constructed while 95,816 Km distribution lines have been constructed. Total electricity supply accounts for 3,858 Giga Watt Hours (GWH) including thermal generation, Import from India, and electricity generated in the public sector. Electricity supply in the previous fiscal year totaled 3,689 GWH. * Electricity generation is also increased by 7 megawatt. Slow improvement in electricity generation and alternative sources for electricity generation is a major problem in Nepal. 25. Consumption of POL products during the first eight months of FY 2011/12 increased by 2.2 percent compared to the corresponding period of the previous fiscal year totaling 645,876 Kiloliter (KL), while that of Liquefied Petroleum Gas (LPG) increased by 13 percent reaching a total of 113,693 MT. Shares of consumption of POL products excluding LPG during this period stood at 63.8 for diesel, 4.4 for kerosene, 20.2 for petrol, and 11.6 for aviation fuel. *Consumption of Petroleum product is increased. 26. With construction of 15 Km black topping, 45 Km graveled, and 185 Km of earthen roads, length of the above-mentioned individual category of roads in the country by Mid-March of 2012 stands at 9,917 Km, 5,715, and 7,822 Km respectively. The numbers of vehicles plying on these roads have reached 1,280,690.Another 8.6 percent vehicles have been added during the by the first eight months of this fiscal year. * The increase in vehicles is significant. 27. The number of telephone customers by the end of the first eight months of the current fiscal year totaled 15,516,904. Of this, more than 83 percent are mobile phone users. There are six different telephone service providers. During this period, out of 400 FM stations licensed, 341 FM stations are operating. Likewise, 6,181 newspapers and magazines are published. * Improvement in communication sectors. 28. The education sector has made notable achievements. In this education calendar, net enrolment rate in the primary levels has reached 95.1 percent, on basic it is 86.6 percent, and in secondary education it is 30.6 percent. Such enrolment rates in the previous year were 94.5

44

percent, 86.0 percent and 27.1 percent respectively. In education session of FY 2011/12, the numbers of students studying in the Primary schools are 4,782,885; 1,812,680 in Lower Secondary schools; and 848,569 in Secondary schools. On education front, numbers of schools have also grown with 33,881 Primary, 13,791 Lower Secondary, and 8,233 Secondary Schools. * Significant improvement in education sector 29. Of the major targets of Millennium Development Goals (MDGs), targets in the health sector have made tremendous achievements. For instance, infant mortality rate that was 43 per thousand live births in 1996 has come down to 9; and maternal mortality rate has dropped from 539 to 229. By the first eight months FY 2011/12, inpatients numbering 224,354 received treatments; 1,846,507 people received outpatient services; and 442,531 received emergency services. By Mid-March of 2012, Hospitals 105, health posts 2,175 Ayurved hospitals and clinics 293, sub-health posts 2,292, rural hospitals with 15 beds 7, and 21 others totaling 4,393 health institutions are providing health services to the people. * Significant improvement in health sectors. 2. Socio-Economic Dimension: It consist of population, labour force composition, employment trends, migration and foreign employment, labour market issues ,poverty situation, human development etc. a.Population: Poverty: According to Nepal Living Standard Survey (NLSS), 2009/10, people having an average annual income of Rs. 19,261 are defined as people below the poverty line and on this basis, 25.16 percent of the total population is found below poverty line. During the FY 1995/96, 41.76 percent of the total population was below poverty line and this figure stood at 30.05 percent in 2003/04, and 25.16 percent in current fiscal year which can be viewed as optimistic progress in poverty alleviation initiatives. Factors like increase in literacy rate rise in the wage rate in agriculture and nonagriculture sectors, development of commercial vegetable farming, growing urbanization, growth in number of economically active human resource and inflow of remittance have been the major attributes to such decline in poverty. Nepal has made impressive progress in reducing poverty. It is reduced by 11 percentage point between 1996 and 2004 (from 42 to 31) and 6 percentage point (from 31 to 25) between 2005 and 2009 and reached to about 25.4 percent. Despite this very positive national trend, the disparities between rural and urban areas still persist at the national level. The urban poverty was only 10 percent while the rural one was 35 percent in 2004; it has decreased to 8 percent and 22 percent respectively in 2009. In this way the gap between these two areas is narrowing down than before but it is still wide. From regional perspectives, poverty in the Mid-Western Region is high and the disparity between better off regions in terms of poverty reduction like Eastern Region and Kathmandu valley shows a widening gap between the rich and the poor. In 2004 poverty in the Mid-Western Region was 44.8 percent while in the Central Region and in Kathmandu Valley it was 27.1 percent and 3.3percent respectively. In 2009 these figures have come down to 37.4 percent in the Mid-Western and 22.3percent and 1.9 percent in the Central Region and Kathmandu Valley respectively. Over 80 percent people still live in rural areas and

45

subsistence agriculture is their main source of living. The contribution of agriculture to GDP in 2008 is only 33 percent. The main source of income in the rural areas is remittance, which is 18 percent of total GDP. According to the Nepal Labor Force Survey, 2008, of the total 4.83 million households in Nepal 1.45 million (about 30 percent) households receive remittances. It has made significant support at the rural level as most of this remittance income goes to rural areas making a major source of livelihood improvement reducing poverty and hunger. As per the Nepal Living Standard Survey (NLSS) 2010/11, 56 percent families in Nepal have received remittance income in one year. The average household remittance receipt is estimated at Rs. 80,436 at current prices. Calculation of average remittance receipt per person comes out to Rs. 9,245. Of the numbers receiving such remittance, 58 percent is from within the country, 19 percent from India, and 23 percent from other countries. The number of families receiving remittance has been rising since last 15 years. The first survey showed that only 23 percent families had received remittance while the recent third survey showed 56 percent are receiving remittance. The share of remittance in total income of families is on increase. The share of remittance to household income in 1995/96 was 27 percent, which has gone up to 31 percent by FY 2010/11. Change has occurred in the remittance structure by sources as well. For instance, the share of remittance received from India has come down to 11 percent with a decline of 24 points in the last 15 years, whereas the share of remittance received from countries other than India has increased to 69 percent from 22 percent in the same period. Income Distribution: Gini Coefficient* in NLSS-1 1994/95 was 0.34 which rose to 0.41 in second survey 2003/04. Though FY 2003/04 witnessed some decline in poverty, inequality was found to have increased further. However, in third survey 2009/10, this has dropped to 0.32. Gini coefficient in urban area which was measured at 0.43 during first survey increased to 0.44 in second survey and fell to 0.35 in third survey. Likewise, Gini coefficient in rural area, which was 0.31 in the first survey, rose to 0.35 in the second survey dropping back to 0.31 in the third survey. [* The Gini coefficient measures the inequality among values of a frequency distribution (for example levels of income). A Gini coefficient of zero expresses perfect equality where all values are the same (for example, where everyone has an exactly equal income). A Gini coefficient of one (100 on the percentile scale) expresses maximal inequality among values (for example where only one person has all the income)] b.Employment Trends:
SN Description 1. Employed population 2. Unemployed Population 3. Labour Force participation Rate 4. Inactive population Rate 5. Unemployment Rate 6. Employment Rate 7. Household Engaged in Agriculture Sector 8. Population Engaged in Non-Agriculture Sector 9. Fully employed population 10. Underused Labour Population Rate` Source: NLSS, 2010/11and NLFS 2008 Percent 78.3 1.8 80.1 19.9 2.2 97.8 76.3 23.7 70 30

46

According the table above, 19.9 percent of Nepals total population is economically inactive and the rest 80.1 percent are economically active which can be defined by labour force participation rate. Of the total economically active population, 78.3 percent are employed while the rest 1.8 percent are unemployed. As per the findings of NLSS, 2010/11, the employment rate is 97.8 percent while the unemployment rate is only 2.2 percent. Likewise, the family household engaged in agriculture sector is 76.3 percent while that of non-agriculture sector is found to be 23.7 percent. According to Nepal Labour Force Survey, 2008 report, fully employed population is 70 percent while underutilized rate is 30 percent. Foreign Employment: Nepali youth groups are attracted to foreign employment due to dearth of adequate employment opportunity in the country. The number of Nepali workers going for foreign employment is growing every year. According to various reports, large numbers of Nepali workers have gone for foreign employment without securing government permission as well. Based on the official and unofficial records as of now, more than 3 million people have gone for foreign employment. The foreign employment has supported in bringing economic prosperity in rural Nepal and reducing poverty. The contribution of foreign employment to reducing unemployment situation and poverty and enhancing Nepalese economy should be considered significant. The Foreign Employment Act, 2008 has already been issued and enacted for promoting the business of foreign employment while safeguarding the rights and interests of workers and foreign employment entrepreneurs by making it a safe, well managed, and dignified profession. As per the information from the Department of Foreign Employment, a total of 58,710 Nepali workers are found to have gone to different countries for foreign employment by second trimester of FY 2011/12. Large number of people is estimated to have gone to third countries via India through unauthorized means taking advantage of open boarder with India. A separate Foreign Employment Department was established on 31 December 2008 which has been carrying out foreign employment related activities. An Employment Permit System (EPS), Korea Section is established in the Department while a separate Japan International Trading Corporation Organization (JITCO) unit has been formed in fiscal year 2009/10, for sending workers to Japan. A total of 250,663 workers have gone for foreign employment until the second trimester of the current fiscal year. Of this total number, 14,343 are female and 235,829 are male while this number stood at 354,716 until the end of previous fiscal year of which 344,310 are male and 10,416 are female. Of the total 2,358,710 Nepali workers going for foreign employment, Malaysia happens to be the first destination providing foreign employment to 742,363 (32 percent) Nepali workers followed by Qatar with 661,555 (28 percent), Saudi Arab with 478,716 (20 percent), and UAE with 301,072 (13 percent). Likewise, 55,222 (2 percent) are in Kuwait, 28,723 (1 percent) in Bahrain, 17, 674 (1 percent) in South Korea and 57089 (3 percent) in other countries. c.Human Development Indicator: Human Development Index Health Education Income 47 Rank157/182 Life Expectancy at birth(years)68.8 Education index(Expected and mean year of schooling) 0.356 GNI per capita in PPP terms(constant 2005 international $)1,160

Inequality Poverty Gender Sustainability Demography Source: UNDP 2011

Inequality-adjusted HDI 0.301 Multidimensional Poverty index( % )0.350 Gender Inequality Index 0.558 Adjusted net saving (% of GNI) 29.1 Population, total both sexes (thousands)30,485.8

3. Agricultural and Industrial Dimension Agriculture: Contribution of agriculture sector to Gross Domestic P roduct (GDP) during the peoples movement-II in 2005/06 was close to 35 percent. Though various programs were implemented to increase agricultural production in subsequent years, the contribution of this sector to GDP just remained between 32 percent and 36 percent. As per the preliminary estimates, contribution of agriculture to GDP during the current fiscal year 2011/12 will be 35.68 percent against the revised estimate of 37.47 percent in the previous fiscal year. In the current fiscal year, GDP is expected to rise by 4.56 percent at constant prices of FY 2000/01, while the growth rate of agriculture sector is expected to remain slightly higher than this with 4.93 percent. Agricultural production in this fiscal year is estimated to increase marginally higher by 0.46 percent than that of the previous fiscal year. Agriculture sector plays a critical role in the Nepalese economy as this sector still contributes more than one third to Nepals GDP, and more than two -third of its population depend on it for their employment and livelihood. Lack of adequate knowledge, skill, technology and entrepreneurship to transform the prevailing traditional farming to commercial farming system not only contained farmers to subsistence farming but also they are suffered by the under employment and disguised unemployment problems. Factors like easy access to irrigation facility on agricultural lands, improved seed and seedlings, chemical fertilizers, pesticides, agricultural loans, advance farming technology, and farmers access to technology and knowledge play vital role in mitigating this problem and enhancing agricultural production. But according to statistics of the previous years, addition of irrigation facility, supply of agricultural credit, chemical fertilizers, improved seeds and seedlings has not been satisfactory. Due to severe fluctuations on availability of such inputs make farmers remain reluctant to take risk due to the uncertainty on the availability and accessibility of these inputs and this has direct impact on agricultural production. Industry: Industry sector plays crucial role in overall economic development of the country. Industrial policies and programs are focused on improving the investment environment thereby attracting investments both of domestic private sector and foreign as well, enhancing industrial production and productivity, creating more employment opportunities, substituting imports by increasing export oriented industries and improving countrys balance of payment situation by promoting export and reducing trade deficit. An Investment Board has been established under the chairmanship of honorable Prime Minister with objectives of delivering prompt and easy services so as to attract big investors of industrial and other sectors. The fiscal year 2012/13 has been declared The Investment Year. However, the target of industrial growth as set by the 48

periodic plans could not be achieved due to the prolonged political instability in the country, energy crisis and problems encountered occasionally in the industry sector. Industrial output is expected to rise in FY 2011/12 in comparison to the previous fiscal year 2010/11. Production of the most of the food items, beverages, tobacco products, shoes and timber and timber products is expected to increase. On the food group, production of noodles is estimated to rise by 2,142 MT in the current fiscal year 2011/12. Likewise, juice (and squash) production is estimated to increase by 1,979,000 litres, sugar by 9,533 MT and tea by 816 MT. On the beverage group, production of soft drinks is estimated to rise by 309,000 litres, beer production by 77,000 litres and liquor production by 256,000 litres. Similarly, on the tobacco group, production of cigarettes, shoes among the processed leather group, plastic goods, cement, iron goods and strawboard on wood and wood-based products are expected to rise. The overall Index of major industrial productions rose by 2.8 percent and reaching 105.42 in the current fiscal year 2011/12 as compared to the previous fiscal year. Among the major industrial productions, this fiscal year witnessed growth in the indices of industrial products like soybean oil, rice, animal feeds, sugar, liquors, soft drinks, cigarettes, jute products, plywood, lube-oil, paints, medicines, cement, galvanized pipes, aluminium goods, electric wires and cables. While, the current fiscal year saw some declines in industrial indices of products like vegetable ghee, mustard oil, biscuits, noodles, processed tea, threads, cotton fabrics, woollen carpets, processed leathers, papers and paper products, rosin, plastic goods, domestic metal goods. Foreign Investment: With a view to creating investment climate for nations industrial development, Bilateral Investment Promotion and Protection Agreement (BIPPA) and a new Agreement on Double Taxation Avoidance Agreement (DTAA) for promoting Indian investment have been reached between Nepal and India. Likewise, preparations are underway for reaching BIPPA with other 6 countries. In a process of formulating investment friendly policy for enhancing foreign investment in the industrial sector, a policy on new Foreign Investment and Technology Transfer is in approval stage. By the end of FY 2010/11, a total of 2,108 industries from 70 countries have received approval for foreign investment employing 155,432 individuals of which, 33.8 percent are production oriented industries, 30.8 percent are service industries and 26.6 percent are tourism industries. Of the total individuals employed by these industries, 50.4 percent are in production industries, 20.7 percent in service and 16 percent in tourism industry. Tourism: Analyzing the number of tourists visited Nepal, their growth rates and the length of stay, the number of tourists visiting Nepal during the period (January 2011 to January 2012) has increased by 22.1 percent. The number of tourists increased from 602,867 to 736,215 tourists as compared to its figure during the period between January 2010 and January 2011. The average length of stay per tourist during the review period (2011-12) has been 13.12 days against the figure of 12.67 days during the succeeding review period (2010/11) Foreign exchange earnings during FY 2010/11 grew by Rs. 494 million reaching Rs. 28.63 billion as compared to its previous fiscal year. In the first eight months of the current FY 2011/12, foreign exchange amounting Rs 24.61 billion was earned. This amount is 45.5 percent of foreign exchange earned from the total commodity exports, 23 percent of foreign exchange

49

earned from the total service exports and 5 percent of the total foreign exchange earned during the period. 4.Economic Development Dimension: Several plans and policies focused to enhance economic sectors are also considered as one of the dimension of economy. These policies guide the future course of action of any business organization. For example: increase investment by the government in the agricultural sector would mean greater supply of seeds, equipment, fertilizers, and pesticides and so on. This means greater opportunity for the business sector. Major strategies of 3- year interim plan (2010-2013) are as follows:
1. To achieve employment centric, poverty alleviation oriented, sustainable and broad-based economic growth with the joint efforts of the government, private and community/cooperatives sectors. Emphasis will be given to enhance employment with the joint efforts of the government, private and community/cooperative in all the sectors of the economy to create internal and external employment opportunities for increasing population of the country and to improve living standard of the people living below the poverty line. Moreover, economic growth rate will be made sustainable, broad-based and poverty alleviation-oriented by giving priority to the development of more employment generating sectors. To achieve economic growth, agriculture, tourism, industry and trade sectors will be taken as prime sectors 2. To develop physical infrastructure to support both the future federal structure of the nation and regional economic development. Decision to adopt decentralized governance system with federal structure has already been made by transferring existing centralized unitary governance system in the country. Therefore, while developing physical infrastructure support to economic growth of probable states and promoting regional balance will also be considered. 3. To emphasize on inclusive and equitable development to achieve sustainable peace. Inclusive and equitable development strategy will be adopted to uplift the living standard of the excluded groups, Dalit, Madhesi, Adibasi/Janajati, women, people with disability and remote geographical areas and poor people of the various regions of the country from the prevailing discriminatory practices in the society. Strategy will be adopted to create necessary environment for investment in the country emphasizing on inclusive and equitable development and supporting lasting peace in economic terms. 4. To contribute to socioeconomic and social services. Strategies will be adopted to speed up the development momentum by strengthening economic and social services that needs to be provided to the people of the country by the government, private, cooperative and nongovernmental organizations and through transformation of existing economic and social situation. 5. To make development works result-oriented through ensuring governance and effective service delivery. Strategies will be adopted to make development result-oriented by emphasizing people's participation, transparency, accountability and creation of corruption free situation through the establishment of values of rule-based state to ensure good governance in the nation as well as improving effectiveness of service delivery of the government and the private sector. 6. To strengthen economic growth and stability by developing private and community/ cooperative sectors and mainstreaming industrialization, trade and service sector in the national development endeavors. Special attention will be given in the development of private and community/cooperative sectors in the country. With the support of these sectors industrialization, trade and service sector will be mainstreamed in the national development endeavors. Similarly, trade deficits will be reduced by developing exportable goods and services having comparative advantage and the opportunities created by the bilateral, regional and multilateral trading systems will be utilized to an optimum level. To this end, emphasis will be accorded to industrialization, maximum mobilization and use of internal and external resources,

50

development of private, community and cooperative sectors and promotion of exportable goods and services with the private, community, cooperative and public sector partnership. Quantative Targets of 3-year Interim Plan Indicator Economic growth rate (%) Agricultural Sector growth rate (%) Non-agricultural Sector growth rate (%) Population living below poverty line (%) Employment growth rate (%) Situation in FY 2009/10 4.4 3.3 5.1 25.4 3.0 Three Year Plans Target 5.5 3.9 6.4 21 3.6

Major challenges of Nepalese Economy

1. The economic growth rate of the country, a major indicator of economic development, has not been encouraging. The economic growth rate of country that averaged 3.51 percent over a decade has registered growth of 4.56 percent in the current fiscal year. Achieving the doubledigit economic growth rate and creating a platform so as to make the nation economically prosperous has been a major challenge. 2. The poverty appears to be one of the countrys major problems. One fourth of its total population still lives below the national poverty line. In this context, there lies a big challenge of reducing the poverty through poverty alleviation oriented programs to make the people economically and socially prosperous. 3. Agricultural production could not be increased as expected despite the fact the agriculture sector occupies one third space in countrys GDP and provides employment opportunities to two third of its populace. Attention needs to be paid towards land management, enhancement of irrigation facility, and easy availability of chemical fertilizers, agricultural tools and improved seeds and seedlings, extension of agriculture credit facility, and marketing of agricultural produces in order to ensure the availability of essentiality of agricultural inputs. 4. The status of Industry sector has not been satisfactory. Though this sector was expected to grow in the post conflict situation, this could not be achieved due to lack of adequate investment, political transition and uneasy industrial relation. Hence, creating investment friendly environment for the industry sector by identifying both the domestic and foreign sources of investment and bringing policy, institutional and infrastructural improvements have been a challenge. Producing adequate human resource for this sector so as to facilitate the marketing of industrial outputs are also found to be equally important. 5. Foreign investments could not be attracted as desired despite appropriate policies in place. Though the country has entered into Bilateral Investment Promotion and Protection Agreement (BIPPA) and Double Taxation Avoidance Agreement (DTAA) with some countries for the promotion of investment, investment has not been made as projected. Even the private sector has not come forward openly for such investment. Hence, special effort has to be made to attract both the foreign as well as private sector investors.

51

6. Energy crisis has been the largest obstacle for countrys economic development. Despite countrys huge water resource, all the economic and social activities have shrunk due to unavailability of adequate energy required to carry out such activities. Hence, enhancing investment through expeditious identification of appropriate electricity generation projects and easing policies while removing other difficulties related to such projects have remained as another challenges. 7. The country has not been able to generate enough employment opportunities for the labor force entering the labor market every year. This has increased unemployment rate in the country on one hand, while millions of youth are flying oversees for foreign employment on the other. Hence, providing employment opportunities to the available human resource is a big challenge. 8. The number of foreign employment seekers is surging up every year and the income from remittance is also growing at the same time. However, investment environment could not be created by converting such remitted amount into the capital. Therefore, it is necessary to make it a solid source of investment to mobilize in productive sectors. 9. The expenditure capacity of government agencies has not increased. The synchronization between budget allocation and expenditures is lacking. Efforts on increasing capital expenditure have not been successful. Hence, there is an urgent need to increase capital expenditures to expedite development works. 10. The task for prioritizing government expenditures has not been fully achieved. Though a number of projects/programs are in implementation, the consolidated and coordinated results from these projects could be obtained. Hence, urgency is sought to develop result oriented expenditure system by prioritizing the government expenditure and make public expenditure management effective. 11. Inflation rate is still high though its increasing trend could be curbed by a little. The pressure on price of imported goods was exerted due to the deflation of Nepalese currency against US Dollar during the current fiscal year. Containing the price within certain limit by raising export of domestically produced goods is another challenge. 12. The price hike of petroleum products in international market has affected the domestic inflation of the country. Emphasis should be given to the energy management thereby reducing high dependence over such petroleum products. Likewise, attention should be paid to the imports and distribution of petroleum products. 13. The increasing liquidity with commercial banks, lack of identification of new areas of investment, wide gap between lending and deposits have posed a great challenge. Hence, they have to be managed immediately. 14. Attention should be paid to quality improvement along with the growing number of banks and financial institutions. Increasing rural peoples access to financial and insurance institutions has been another challenge. It is therefore, imperative to enhance institutional governance of banks and financial institutions and insurance companies. 15. The state of the capital market is still weak and investors are not fully confident either. Though there have been some progress felt in the peace process in the later days of midApril, 2012, and the policy measures taken by the government in this regard have somehow

52

helped improve the peace process, the situation is not yet fully promising. Hence, it is important to take additional initiatives in this regard. 16. Foreign trade deficit of Nepal is ever growing. Low production of export oriented goods and higher imports of consumable goods due to the rise in per capita income and change in consumption pattern of the people have been attributing factors to persistent trade deficit as such. To reduce this, production has to be increased while promotion of goods and services that are of comparative and competitive advantage should be emphasized. 17. Though the entire Nepal possesses potential for tourist destination, the country has not been able to develop this sector properly as desired. Despite the increasing number of tourist influx as a result of marking the year 2011 as Nepal Tourism Year, contribution of this sector to GDP has not yet been appreciating. Hence, it is imperative to develop tourism infrastructures and increase the number of quality tourists. Managing the national flag carrier airline has remained another challenge. 18. Proportionate development of physical infrastructures across the country could not be attained. All district headquarters are yet to have access to road transport facility. Other infrastructures are concentrated more on cities rather than on villages. Hence, it is necessary to put emphasis on the proportionate development of physical infrastructures. 19. Though social development indicators have been improving since last few years, it still cannot be claimed as fully satisfactory. Investments on health and education sectors need to be increased, while peoples access to quality education and health services should be enhanced. The task to extend social security to all service recipients in a judicious manner has remained a challenge. 20. Enhancing productivity of Public Enterprises (PEs) is of utmost importance. Disputes within and outside PEs, lack of coordination, and weaknesses pertaining to production and distribution of goods and services have been the major problems of PEs. For the remedy of these problems, increasing productivity of PEs through overall restructuring of their economic, infrastructural and operational procedures has been the major challenge. 21. Though almost all aggregate economic indices have remained positive, Nepalese economy has not been able to attain dynamism as expected owing to the fact that construction sector remained weak coupled with the vulnerable capital market and real estate business. There is a challenge to make the economy dynamic by developing coordination of this sector with other sectors. 22. Public service delivery could not be enhanced as expected due to the prolonged political instability, flourishing lawlessness culture, and weak governance. It is imperative to deliver service in a simple, easy and comfortable manner through capacity enhancement of service delivery agencies. 23. Hurdles in smooth project implementation, closure (Bandhs) and strikes like problems have delayed in achieving the expected results from projects. Problems as such can only be resolved through political consensus since these problems prevail mostly at time of political volatility.

53

24. To conclude, the prevailing political transition needs to end soon to smoothly carry forward economic agenda of the country collectively by coming all parties together has been a fundamental challenge.

54

Unit 7 International and Regional Environment

The concept of Globalization: "Globalization" is a fairly new term. Professor Theodore Levitt, a marketing professor at the Harvard Business School, apparently first employed it in a 1983 article in the Harvard Business Review. Defined broadly, globalization is the process of integrating nations and peoples politically, economically, and culturallyinto a larger community. Globalization refers to the increasing unification of the world's economic order through reduction of such barriers to international trade as tariffs, export fees, and import quotas. The goal is to increase material wealth, goods, and services through an international division of labor by efficiencies catalyzed by international relations, specialization and competition. It describes the process by which regional economies, societies, and cultures have become integrated through communication, transportation, and trade. The term is most closely associated with the term economic globalization: the integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, the spread of technology, and military presence. Economic Globalization: International Flows

55

History of Globalization Globalization is not new. For thousands of years people have been trading goods and travelling across great distances. During the Middle Ages, merchants travelled along the Silk Road, which connected Europe and China. The modern age of globalization started with the Industrial Revolution at the end of the 18th century. New machines were able to produce cheaper goods. Trains and steam-powered boats transported products farther and faster. Since 1980, globalization has been moving at a faster pace. Today it is easier for companies to work in other countries. The Internet gives them the chance of reaching more customers around the world. Tele workers work for firms that may be far away. However, there is a growing debate over globalization. Governments are in favour of globalization because the economy can grow. Other people are not so sure that there are only advantages. Here are some arguments from both sides: Good sides

Globalization lets countries do what they can do best. If, for example, you buy cheap steel from another country you dont have to make your own steel. You can focus on computers or other things. Globalization gives you a larger market. You can sell more goods and make more money. You can create more jobs. Consumers also profit from globalization. Products become cheaper and you can get new goods more quickly.

Bad sides

Globalization causes unemployment in industrialized countries because firms move their factories to places where they can get cheaper workers. Globalization may lead to more environmental problems. A company may want to build factories in other countries because environmental laws are not as strict as they are at home. Poor countries in the Third World may have to cut down more trees so that they can sell wood to richer countries. Globalization can lead to financial problems. In the 1970s and 80s countries like Mexico, Thailand, Indonesia or Brazil got a lot of money from investors who hoped they could build up new businesses there. These new companies often didnt work, so they had to close down and investors pulled out their money. Some of the poorest countries in the world, especially in Africa, may get even poorer. Their population is not as educated as in developed countries and they dont have the new technology that we do. Human, animal and plant diseases can spread more quickly through globalization.

56

Nature or dimensions of Globalization: 1. 2. 3. 4. Economic Globalization Cultural Globalization Political Globalization Environmental Globalization

The Concept of Liberalization: Liberalization (or liberalisation) refers to a relaxation of previous government restrictions, usually in areas of social or economic policy. In some contexts this process or concept is often, but not always, referred to as deregulation. According to World Bank Liberalization means freeing prices, trade and entry to markets from state controls while stabilizing the economy Similarly, According to L.Balcerowicz and A. Belb Liberalization policy eliminates legal or bureaucratic restrictions on economic activity, including price controls, quantitative restriction on foreign trade, limits on foreign exchange convertibility, rationing and command mechanisms and barriers to setting up and developing private firms. Markets cannot do their work in an environment of high inflation and macro-economic uncertainty. Hence, stabilization i.e. controlling excessive budget deficits and inflation is essential complement to liberalization. In a liberalized economy the role of government is to create conditions conducive to the growth of market or to be market friendly. The government does not directly control the prices like prices of goods and services, rate of interest, wages, rent etc. which are determined by market forces. People are free to run business and trade. Likewise people are free to enter the market and produce the goods on competitive basis. Liberalization may take place in two fronts-liberalization of domestic sector and liberalization of external sector. Reform in taxes, liberalization of interest rates, privatization, and removal of the barriers to entry are the examples of liberalization of the domestic sector. On the other hand, removal of control on foreign exchange, liberalization of foreign trade, removal in inflow of foreign direct investment is the examples of liberalization of the external sector. Policy reforms in Nepal: 1. Liberalization in Domestic Sector: The reform in domestic sector can be explained under two headings. a) Reform in financial sectors: i. Freedom to open commercial banks. ii. Freedom to open financial institutions. iii. Interest Rate deregulation 57

iv. Establishment of Credit Information Bureau v. Improvement in the operation of monetary policy vi. Reform in capital market. b) Reform in Productive sector: i. Privatization of public enterprises ii. Entry of private sectors in education ,health, agriculture and infrastructure development iii. Reform in tax and subsidy 2. Liberalization of external sector: a. End of quantitative restriction b. Reform in exchange rate system c. Operation of deposit account in convertible currency d. Loan on convertible currency e. Commercial Policy f. Reform in Taxation The concept of Privatization: Privatization is the process of transferring ownership of a business, enterprise, agency, public service or public property from the public sector (a government) to the private sector, either to a business that operate for a profit or to a non-profit organization. The term can also mean government outsourcing of services or functions to private firms, e.g. revenue collection, law enforcement, and prison management. Privatization is considered as the first step in creating the environment for entrepreneurial freedom. According to World Bank; Privatization is broadly define a s increased private sector participation in the management and ownership of activities and assets controlled and owned by government. According to Mary Shirley:Privatization is broadly defined to include not only the sale of state assets, but also privatizing the management of state activities through contracts and leases, and contracting out activities that were previously done by the state. Objective of Privatization: a. Reduce budget deficit. b. Reduce mobilization c. Increase in efficiency d. Increase competition e. Fulfillment of social objectives. f. Development of domestic capital market. Privatization of Public Enterprises in Nepal: The declared policy of government (i.e. On Industrial Policy 1992, government clearly mentioned that the public enterprises other than public utilities, defense and essential enterprises would be privatized) on privatization is increasing participation of the private sector to make the national economy still more liberal and dynamic. 58

The objectives of Privatization in Nepal are as follows: a. Reducing fiscal and administrative burden of the government. b. Increasing production by increasing efficiency of the public enterprises. c. Increasing peoples participation in industry and business. d. Making available capital to the government for alternative uses. e. Accelerating the rate of economic growth of the country. Problems: The privatization in Nepal has not been able to proceed in the pace as desired by the government. The problems of privatization are similar to those faced by other developing countries. The main problems are: a. Lack of peoples habit on industrial investment. b. Less development of the capital market. c. Lack of adequate fund with the individual to purchase large industry and also the lack of managerial and technical skill. d. Foreign investors not being attracted due to the small sizes of the domestic market. e. The private sector not being attracted due to the inadequate availability of infrastructure like transport, telecommunication and electricity. f. Opposition by the staffs and workers for the fear of losing employment. g. Political opposition due to the possibility of concentration of wealth and unequal distribution of income and wealth. h. The private sector being only interested in Profitable areas. WTO (World Trade Organization): Concept: An international organization dealing with the global rules of trade between nations. Its main function is to ensure that trade flows as smoothly, predictably, and freely as possible. Independent multilateral agency administering world trade agreements. WTO, headquartered in Geneva, Switzerland, resulted from the Uruguay round of General Agreement on Trade and Tariffs (GATT) concluded in 1995. WTO's tasks include fostering trade relations among its members, resolving disputes, and serving as a forum for future multilateral trade negotiations. An international organization that administers trade agreements among nations, handles trade disputes, and provides technical assistance and training for developing countries. It was established in 1995, based on the General Agreement on Tariffs and Trade. Critics of the WTO contend that the organization hurts developing countries and weakens health and environmental safety standards in order to promote the interests of large corporations. Functions: Among the various functions of the WTO, these are regarded by analysts as the most important: It oversees the implementation, administration and operation of the covered agreements. It provides a forum for negotiations and for settling disputes.

59

It is the WTO's duty to review and propagate the national trade policies, and to ensure the coherence and transparency of trade policies through surveillance in global economic policy-making. The assistance of developing, least-developed and low-income countries in transition to adjust to WTO rules and disciplines through technical cooperation and training. Regular assessments of the global trade picture in its annual publications and research reports on specific topics are produced by the organization. Finally, the WTO cooperates closely with the two other components of the Bretton Woods system, the IMF and the World Bank.

Benefits of the WTO Trading System: a. A system based on rules rather than power. b. Freer trade cuts the cost of living. c. The system helps promote peace. d. The system allows dispute to be handled constructively. e. It gives consumers more choice and a broader range of qualities to choose from. f. Trade raises incomes. g. Trade stimulates economic growth and that can be good news for employment. h. The basic principle makes the system economically efficient and they cut costs. i. The system shields government from narrow interests. j. The system encourages good governance.

Nepals Accession Process to the WTO Process Application for accession Working Party establishment Converted into WTO Working Party Submission of Memorandum on Foreign Trade Regime Clarification on Memorandum on Foreign Trade Regime First Meeting of Working Party Tariff Offers Service Offers Second Meeting of Working Party Third Meeting of Working Party WTOs 5th Ministerial Conference, Cancun, Mexico, approved the accession package Nepal government notified the WTO that the process of ratification and acceptance of the Protocol of Accession had been completed Entry into to enforce the Protocol with Nepal becoming the 147th member of WTO
Source: Nepal Rastra Bank

Date May 1989 1989 GATT Working Party December 1995 July 1998 June 1999 and June 2000 May 2000 July 2000 July 2000 September 2002 August 2003 September 2003 March 2004

April 2004

60

Some commitments of Nepal after accession in WTO. Services - As a result of the negotiation, Nepal agreed broad commitments in 11 services sectors, revealing its clear belief in the benefits of liberalization as an engine for future growth and prosperity. Tariffs - Nepal accepted an average tariff binding of 42% in agricultural products and around 24% in industrial goods. The majority of the import items fall in the customs duty range of 1020%. The maximum tariff rate of 130% applied to cars and jeeps will be reduced as specified in the goods schedule. A minimum tariff rate up to 5% applied for daily consumption items.

Major Commitments made by Nepal in the Process of accession to WTO Commitments Deadline Agricultural tariffs (final offer 42 percent) 31/12/2006 Industrial tariffs - (final offer 24 percent) 31/12/2013 Full implementation of Trade-related Intellectual Property Rights (TRIPS) Agreement 31/12/2006 Full implementation of Sanitary and Phytosanitary (SPS) Agreement 31/12/2006 Full implementation of Technical Barriers to Trade (TBT) Agreement 31/12/2006 Full implementation of Customs Valuation Agreement 31/12/2006 Restriction on exports subsidy on agriculture Accession date Not to impose new Trade Related Investment Measures(TRIMS) Accession date Zero tariff on Information Technology (IT) products 31/12/2008 Complete phasing out of Other Duties and Charges (ODCs) 31/12/2013 Liberalization of 11 services sectors and 70 sub-sectors Accession date
Source: WTO (2003)
Challenges to Nepal: Since Nepal will have to open its domestic market such as the sectors of banking and finance, insurance, telecommunication, etc., there will be a real difficulty to compete with the foreigners. Some of the institutions that are now surviving in the absence of tough competition may be unable to compete in the open and competitive environment. Lack of trained and highly skilled manpower, Nepal may suffer severally not only to compete but also to adapt high-tech production and services process. Also in the WTO regime, the unemployment may further deteriorate due to economic restructuring and

61

closer of monopolist and inefficient governme nts enterprises resulting in further gap between haves and have-nots. The potential revenue loss with the fulfillment of WTO commitments estimated by the current study is Rs. 5588 million (about 25% of the import duty) which is based on the assumptions that the effective applied tariff rates of the base year (2004/05) would continue and other duties and charges (ODCs) would be completely eliminated. Such estimation is based on the import trade weighted tariff rates which is slightly higher than that of the Sauves (2005) estimation of US$ 55 million/ Rs. 4322.4 million and Custom Departments, Ministry of Finance preliminary estimates of Rs. 3795.3 million both of which accounts about 25 percent of the total custom duty.

Benefits to Nepal: Among others, Nepal can be benefited with the membership of WTO through (i) enhancing discipline of policy makers to maintain policy credibility for the fulfillment of WTO commitments; (ii) complying discipline on the part of the trading partners accessing their markets for Nepal and trans-shipment rights; and (iii) ensuring reform and institutional improvements as per WTO-requirements. Being a member of WTO, Nepal can enjoy the Most favored Nation (MFN) status in which the import tariff imposed by the member countries be substantially reduced. Nepal, in the case of dispute, can settle under the dispute settlement mechanism for a fair trade within WTO member countries. Also as a least developing country, Nepal enjoys the Generalized System of Preferences (GSP) through which industrialized higher income countries grant preferential access to their markets. Nepal has an unchallenging scenic beauty with a long history of landscapes, ancient cultural tradition, heritage and hospitability of the people. Nepal can penetrate to more markets for its products by improving quality as well as competitiveness allocating its resources to more efficient and highly productive sectors.

Most Favored Nation (MFN): In international economic relations and international politics, "most favored nation" (MFN) is a status or level of treatment accorded by one state to another in international trade. The term means the country which is the recipient of this treatment must, nominally, receive equal trade advantages as the "most favored nation" by the country granting such treatment. (Trade advantages include low tariffs or high import quotas.) In effect, a country that has been accorded MFN status may not be treated less advantageously than any other country with MFN status by the promising country. There is a debate in legal circles whether MFN clauses in bilateral investment treaties include only substantive rules or also procedural protections. 62

The members of the World Trade Organization (WTO) agree to accord MFN status to each other. Exceptions allow for preferential treatment of developing countries, regional free trade areas and customs unions. Together with the principle of national treatment, MFN is one of the cornerstones of WTO trade law. "Most favored nation" relationships extend reciprocal bilateral relationships following both GATT and WTO norms of reciprocity and non-discrimination. In bilateral reciprocal relationships a particular privilege granted by one party only extends to other parties who reciprocate that privilege, while in a multilateral reciprocal relationship the same privilege would be extended to the group that negotiated a particular privilege. The non-discriminatory component of the GATT/WTO applies a reciprocally negotiated privilege to all members of the GATT/WTO without respect to their status in negotiating the privilege. ( Source:Wikipedia) Benefits:

Trade experts consider MFN clauses to have the following benefits:

A country that grants MFN on imports will have its imports provided by the most efficient supplier. This may not be the case if tariffs differ by country. MFN allows smaller countries, in particular, to participate in the advantages that larger countries often grant to each other, whereas on their own, smaller countries would often not be powerful enough to negotiate such advantages by themselves. Granting MFN has domestic benefits: having one set of tariffs for all countries simplifies the rules and makes them more transparent. It also lessens the frustrating problem of having to establish rules of origin to determine which country a product (that may contain parts from all over the world) must be attributed to for customs purposes. MFN restrains domestic special interests from obtaining protectionist measures. For example, butter producers in country A may not be able to lobby for high tariffs on butter to prevent cheap imports from developing country B, because, as the higher tariffs would apply to every country, the interests of A's principal ally C might get impaired.

As MFN clauses promote non-discrimination among countries, they also tend to promote the objective of free trade in general. ( Source:Wikipedia) South Asian Preferential Trading Arrangement (SAPTA) In December 1991, the Sixth Summit held in Colombo approved the establishment of an InterGovernmental Group (IGG) to formulate an agreement to establish a SAARC Preferential Trading Arrangement (SAPTA) by 1997. Given the consensus within SAARC, the Agreement on SAPTA was signed on 11 April 1993 and entered into force on 7 December 1995 well in advance of the date stipulated by the Colombo Summit. The Agreement reflected the desire of the Member States to promote and sustain mutual trade and economic cooperation within the SAARC region through the exchange of concessions.

63

The basic principles underlying SAPTA are: a. overall reciprocity and mutuality of advantages so as to benefit equitably all Contracting States, taking into account their respective level of economic and industrial development, the pattern of their external trade, and trade and tariff policies and systems; b. negotiation of tariff reform step by step, improved and extended in successive stages through periodic reviews; c. recognition of the special needs of the Least Developed Contracting States and agreement on concrete preferential measures in their favour; and d. inclusion of all products, manufactures and commodities in their raw, semi-processed and processed forms. Four rounds of trade negotiations have been concluded under SAPTA covering over 5000 commodities. Each Round contributed to an incremental trend in the product coverage and the deepening of tariff concessions over previous Rounds. South Asian Free Trade Area (SAFTA) The Agreement on the South Asian Free Trade Area is an agreement reached at the 12th SAARC summit at Islamabad, capital of Pakistan on 6 January 2004. It creates a framework for the creation of a free trade area covering 1.4 billion people in India, Pakistan, Nepal, Sri Lanka, Bangladesh, Bhutan and the Maldives. The seven foreign ministers of the region signed a framework agreement on SAFTA with zero customs duty on the trade of practically all products in the region by end 2016. The new agreement i.e. SAFTA, came into being on 1 January 2006 and will be operational following the ratification of the agreement by the seven governments. SAFTA requires the developing countries in South Asia that is, India, Pakistan and Sri Lanka, to bring their duties down to 20 percent in the first phase of the two year period ending in 2007. In the final five year phase ending 2012, the 20 percent duty will be reduced to zero in a series of annual cuts. The least developed nations in South Asia consisting of Nepal, Bhutan, Bangladesh and Maldives have an additional three years to reduce tariffs to zero. India and Pakistan ratified the treaty in 2009, whereas Afghanistan as the 8th member state of the SAARC ratified the SAFTA protocol on the 4th of May 2011. The objective of the agreement is to promote good competition in the free trade area and to provide equitable benefits to all the countries involved in the contracts. It aimed to benefit the people of the country by bringing transparency and integrity among the nations. SAFTA was also formed in order to increase the level of trade and economic cooperation among the SAARC nations by reducing the tariff and barriers and also to provide special preference to the Least Developed Countries (LDCs) among the SAARC nations.

64

The impacts of SAFTA on Nepals Economy: Positive Effects 1. The tariff and non-tariff concessions negotiated and exchanged amongst member states shall be incorporated in the national schedules of concessions. 2. Member countries can focus on development, production and trading of products that provide them sustainable comparative advantages. For example, Nepal and Bhutan can focus in tourism and hydropower, Bangladesh can focus on natural gas and fisheries. 3. SAFTA will help SARRC members to present strong voice regarding their common problems in multilateral agreements. 4. Free trade will increase peoples movement between countries. 5. Being a LDC, Nepal further receive following privilege; a. Duty free access, exclusive tariff preference or deeper tariff preference for export product. b. Special consideration of export from LDC member states in the application of safe guard measures. Negative Effect or limitation 1. The region is not cohesive in the same sense that it has diversity in socio-political and economic conditions. Similarly, there is also vast difference among countries in their size, location and infrastructure. 2. SAARC countries import products from non-member countries though the product is sufficiently produced in the region. This indicates weaker trade links among SAARC countries. 3. There are political consideration and geographical disadvantages for some countries ,which are responsible for affecting intra-regional trading.(The case of India and Pakistan) 4. Informal trade in the boarders of the countries has been increasing .the has adversely affected the formal flow of trade between the countries. 5. There is a greater flow of primary commodities within the region. The capital and technology that are required to process these commodities are lacking in the region .Hence, the intra-regional flow of capital and technology is very limited. 6. Transit is another issue for increasing trade with SAARC. There is several transit problems for Nepal and Bhutan. Free trade within the region cannot flourish unless these transit problems are removed. Nepal suffers from high transport costs as it is at a disadvantaged geographical position. 7. Intra-regional movement of people is also equally important for promoting trade and investment. There are many formalities and entry problems at the borders, which make the free intra-regional movement of people difficult. 65

Bay of Bengal Initiative for Multi-Sectoral and Technical Economic Cooperation (BIMSTEC) BIMSTEC is an international organisation involving a group of countries in South Asia and South East Asia. The member countries of this group are: Bangladesh, India, Myanmar, Sri Lanka, Thailand, Bhutan and Nepal. On 6 June 1997, a new sub-regional grouping was formed in Bangkok and given the name BIST-EC (Bangladesh, India, Sri Lanka, and Thailand Economic Cooperation). Myanmar attended the inaugural June Meeting as an observer and joined the organization as a full member at a Special Ministerial Meeting held in Bangkok on 22 December 1997, upon which the name of the grouping was changed to BIMST-EC. Nepal was granted observer status by the second Ministerial Meeting in Dhaka in December 1998. Subsequently, full membership has been granted to Nepal and Bhutan in 2004. In the first Summit on 31 July 2004, leaders of the group agreed that the name of the grouping should be known as BIMSTEC or the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation. BIMSTEC Priority sectors: BIMSTEC has thirteen priority sectors cover all areas of cooperation. Six priority sectors of cooperation were identified at the 2nd Ministerial Meeting in Dhaka on 19 November 1998. They include the followings:

Trade and Investment, led by Bangladesh Transport and Communication, led by India Energy, led by Myanmar Tourism, led by India Technology, led by Sri Lanka Fisheries, led by Thailand

After the 8th Ministerial Meeting in Dhaka on 18 19 December 2005, a number of new areas of cooperation emerged. The number of priority sectors of cooperation increased from 6 to 13. The 7 new sectors were discussed in the 1st BIMSTEC Summit and there has been various activities to enhance those co-operations ever since. The sectors are as follows,

Agriculture, led by Myanmar Public Health, led by Thailand Poverty Alleviation, led by Nepal Counter-Terrorism and Transnational Crime, led by India Environment and Natural Disaster Management, led by India Culture, led by Bhutan People to People contact, led by Thailand

66

According to Bangkok Declaration on the Establishment of BIMSTEC, the aims and purposes are: 1. To create an enabling environment for rapid economic development, accelerate social progress in the sub-region. 2. To promote active collaboration and mutual assistance on matters of common interest. 3. To provide assistance to each other in the form of training and research facilities. 4. To cooperate more effectively in joint efforts that are supportive of and complementary to national development plans of member states. 5. To maintain close and beneficial cooperation with existing international and regional organizations. 6. To cooperate in projects that can be dealt with most productively on a sub regional basis and which make best use of available synergies. Difference between SAFTA and BIMSTEC SAFTA 1.SAFTA includes only trade in goods 2. SAFTAs aim is to bring down the tariff to a 0-5 percent level. BIMSTEC 1. BIMSTEC covers both trade in goods and services. 2. BIMSTEC aims for total elimination of tariffs.

*Pakistan and Maldives are not the members of BIMSTEC and Thailand and Myanmar are not the part of SAFTA. This composition of memberships would create conflicting obligation.

67

Business Environment BBA IVth Semester Full Marks: 80 Pass Marks: 28

Candidates are required to give their answer in their own words as far as practicable. The figures in the margin indicate full marks. Group A (Long Answer Questions) Attempt any TWO questions 1. Define business environment and explain the facets of business environment.[4+12] 2. What are the elements of political environment? Explain the techniques to analyze the political risk.[8+8] 3. Explain the concept of LPG. Describe the impact of LPG on Nepalese economy.[8+8] Group B (Short Answer Questions) Answer any SIX questions 1. 2. 3. 4. 5. 6. 7. 8. Explain the characteristics of business environment.[8] How business environment and strategy interrelated? Explain.[8] Discuss the problems and constraints of managing technology in Nepalese industries.[8] Which economic system do you think is suitable for any nation? Explain with appropriate reasons.[8] What is WTO? What are the impacts of WTO on Nepalese economy after Nepals membership to it?[2+6] Mention the emerging social-cultural changes in Nepal and its impact on business.[8] What is intellectual property? Why do companies concern with intellectual property issues?[2+6] Write short notes on: (Any Two) [4+4] a. CSR b. MFN c. SAFTA

68