GLOBALISATION

Increased human mobility, capital flows, multinational organizations and technology transfers have made the world more interdependent. FEATURES: I) Capital Flows: a)FDI- Features International Production i) Capital: -Greenfield-New Ventures -Brownfield- Acquisition of old ventures ii) Technology iii) Management and control
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b) Portfolio Investment -Equity holding -Bonds c) Aid- Unilateral, Declining in importance

II) Organization of production- Raw materials from one country, design and R&D from another, marketed by another country III) Communication and transportation- Fast, uniform protocols and structures IV) Centralized controls: Parent-Subsidiary V) Global products: Rayban, Tommy Hilfiger, Nike, Mc. Donalds VI) Integration of Economies through: a. Common Laws b. Common culture c. Economic structure which is Industrial Urban

VII. Common problems: Environmental degradation, Global Economic Management VIII. International Organizations: -World Bank -IMF -WTO Global Economic Management: Because of the integration, the problems faced by one country are likely to get transferred globally. E.g. East-Asian Crisis (1997) Because of the above features, the North (rich countries) have been able to dominate world production. They have been able to take advantage of cheap labour in the South. They have control over international organisations (IMF, WTO, WB) and use them to their advantage. There have been major mergers by which the power of the MNCs has grown and they have become very powerful. We can see that MNCs sales have even exceeded the GDP of certain countries.

GDP/TOTAL SALES REVENUE OF MNCs IN BILLION $ (1997) COUNTRY/CORPORATION GM THAILAND NORWAY FORD MOTORS MITSUI SAUDI ARABIA MITSUBISHI POLAND ITOCHU SOUTH AFRICA SHELL GROUP GREECE WALMART MALAYSIA PHILLIPINES SALES/GDP 164 154 153 147 145 140 140 136 136 129 128 123 105 98 82

FOREIGN INVESTMENT
FDI
WHOLLY J.V. OWNED SUBSIDIARY ACQUISITION

PORTFOLIO
FII GDR, ADR, FCCB

DISTINGUISHING FEATURES OF FDI:

1. Long term interest 2. Interested in Management and Promotion Capital consists of equity, reinvested capital and intra-company loans
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Features of Portfolio Investment

1) 2) 3) 4) 5) a) b) c) d) Buying equity, bonds and securities abroad Short term interest No management or promotion More sensitive to fluctuations in economy Forms: FIIs : Foreign Institutional Investors GDR: Global Depository Receipt ADR: American Depository Receipt FCCB: Foreign Currency Convertible Bonds
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Ratio of world FDI to global gross domestic capital formation exceeds 14% in 2000 and was only 2% twenty years ago. World FDI stock to world GDP was 5% and increased to more than 16%. However only 10 countries receive 74% of global FDI flows. Only 10 developing countries receive 80% of the FDI flows to developing countries. Maximum FDI out of that going to developing countries has gone to East Asia, Pacific & Latin America. 49 least developed countries receive only 0.5% of FDI.
1991-92 DEVELOPED DEVELOPING EASTERN & CENTRAL EUROPE 61.2 31.2 2.2 1999-2000 80.0 17.9 2.0

Five stages of Globalisation

1. 2. 3. 4. 5. Domestic companies export to foreign markets through dealers and distributors. Second stage: Companies export on their own. Domestic company becomes an international company by undertaking production abroad. Replicates a foreign company in the foreign country/market. Finally it produces a global product. Components of Globalisation

Marketing

Production

Investment

Technology

FEATURES OF GLOBALIZATION: 1. The size of the company need not be too large. 2. The distinction of domestic markets remain. 3. Most of the foreign markets are markets in non-consumer goods. 4. Global business firms compete with each other. (Pepsi Vs Coke)
REASONS FOR GLOBALISATION OF MARKETS 1. Large scale industrialization enables mass production and economies of scale. 2. In order to reduce risk, the portfolio of countries are increased. 3. To maximise globalized profits. 4. Excess supply in domestic markets GLOBALIZATION OF PRODUCTION: Conditions in the foreign countries are more favourable, so companies prefer to locate business abroad.
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REASONS ARE : 1. Imposition of tariff barriers 2. Availability of high quality raw materials 3. Low price of raw materials and high transport cost 4. Human resources- Trained manpower 5. Liberal labour laws 6. Export platforms GLOBALIZATION OF INVESTMENT: 1. Foreign countries provide favourable conditions like automatic approval of FDI. 2. Growth of NICs has created a demand for new investments abroad (e.g. Asia, Africa, Latin America) 3. Companies have surplus funds 4. Problems of exporting and licensing may force foreign investment 5. Higher return or higher interest 6. Improved financial networks 7. Better conditions for repatriation of profits 8. Developing country MNCs 9. Better stock market conditions e.g. settlements

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Global sourcing of funds

Apart from an increase in foreign investment we must also look at the reason for global sourcing of funds. 1. World Bank provides funds for developmental projects in private and public sector. 2. International Finance Corporation provides a soft-loan window 3. IDA also provides loans cheaply 4. ADB (Asian Development Bank) regional banks 5. Foreign Mutual Funds are growing as an international source of funds

GLOBALIZATION OF TECHNOLOGY The growth of technology, especially information technology, communication and transportation and logistics has all led to globalisation of technology. REASONS: 1. The new technologies enable mass production which enables globalisation of production e.g. micro-chips, nano-technologies, biotechnology etc.
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2. Where MNCs are not able to reach, they go in for technology agreements. The MNCs receive royalty for use of their technology. 3. Joint ventures have the advantage of combining local market knowledge by the local partner and technology 4. There are also technical collaborations 5. Information technology has enabled e-commerce. 6. Internet and global communications has enabled greater control by parent company at a distance. This leads to quick decisions along with global strategic planning 7. Some businesses have emerged only because of technology e.g. credit cards 8. Lastly, technology has enabled BPO (Business Process Outsourcing) e.g. medical transcription
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ADVANTAGES AND DISADVANTAGES OF GLOBALIZATION

ADVANTAGES: 1. Free flow of good and services 2. Free flow of capital leads to increase in domestic capital formation 3. Increase in global trade leads to international division of labour, specialisation and higher per capita incomes 4. Gains from trade maximise global welfare 5. Availability of global products leads to better consumer choice 6. Spread of production facilities globally creates uniform development i.e. infrastructure as well as social development 7. Increased employment 8. Better wages and standards of living (MNCs pay better) 9. Cultural integration

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Disadvantages: 1. Globalisation suppresses domestic enterprise 2. Exploitation of human resources 3. High capital intensive technology and investment in new industry leads to massive labour displacement in older industries, leading to unemployment and underemployment 4. Decline in demand for domestic products e.g. khadi 5. Increase in income inequalities 6. Transfer of hazardous substances e.g. nuclear waste 7. Global pollution 8. Undermining of national soveriegnity 9. IMF conditionalities. Reduction in role of state leads to neglect of social sector e.g. education and health 10. Domination of world bodies (financial, trade and development) by developed countries

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METHODS OF GLOBALISATION: MODES OF ENTERING FOREIGN MARKETS

1. 2. 3. 4. 5. 6. 7. 8. Exporting directly Exporting indirectly Licensing/franchising Contract manufacturing Full manufacturing Joint Venture Merger and Acquisition Strategic Alliance

ESSENTIAL CONDITIONS FOR GLOBALISATION: 1. 2. 3. 4. Liberalisation of rules and procedures- Remove bureaucratic hurdles (licensing) Removal of tariffs and quotas Infrastructure needs to be developed Encourage competitiveness in quality, price , delivery, service etc
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6. Encourage R&D 7. Provide administrative and government support 8. Level playing field for MNCs 9.Development of money and capital markets 10. Better policies like repatriation of profits CHALLANGES OF GLOBALIZATION 1. 2. Greater efficiency is needed for survival. Most MNCs have been cutting down on flab, i.e. downsizing. This leads to problems of discontent and structural adjustment. New technologies and FDI have led to displacement of labour which leads to labour unrest and social problems. The challenge lies in rehabilitation. We need Workers Safety Net, Training and staff development. Competing with other developing countries for FDI is a challenge. Increasing income inequalities is a challenge. Wages in MNCs or BPOs are several times the salaries paid by local companies.
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3. 4.

5. Mega-mergers (Lipton-Brooke Bond) lead to monopoly power. This even undermine the local governments. 6. Political will to carry out domestic reforms.

POLICY OPTIONS:
With a view to minimising damage and maxsimising opportunities from globalisation, the UNDP-Human Development Report 1997, has given the following policy suggestions: 1. Manage trade and Capital flows carefully 2. Invest in the poor 3. Foster small enterprise 4. Manage new technology well 5. Have safety nets 6. Reduce poverty

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BOTTOM OF THE PYRAMID APPROACH The report also points out that the poorest countries need the following: 1. A more supportive macro-economic policy environment for poverty eradication 2. Better institutional environment for global trade. Ban on dumping of agriculture by MNCs. 3. MNCs should be made more globally responsible and accountable 4. Cut throat competition may lead to Race to the Bottom 5. International global environmental management body
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ECONOMIC LIBERALIZATION IN INDIA

NEW ECONOMIC POLICY 1991

The new economic policy has set in motion the process of liberalisation and global integration of the Indian Economy.
OBJECTIVES: To attain higher economic growth To reduce annual rate of inflation To improve the critical position of BOP and forex reserves To restructure the economy in terms of exchange rates, interest rate, employment and exit policy, competition policy, financial markets The beginning of globalisation took place in the 1980 by the following steps :
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1. 2. 3. 4.

1. Allowing MNCs to enter crucial sectors 2. Liberalising provisions of FERA 3. Import liberalisation 4. Devaluing of Rupee In 1991, IMF and World Bank initiated the process of liberalisation through three components: 1. 2. 3. Cutting down Fiscal deficit Liberalising the domestic economy by reducing restrictions on production, investment and prices. Relaxation of restrictions on the external sector

MEASURES TOWARDS GLOBALISATION

1. Removing restrictions on MNCs by first diluting and finally removing FERA. (Foreign Exchange Regulation Act). It has been replaced by FEMA (Foreign Exchange Management Act)

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2. Permitting JVs in India 3. Permitting JVs abroad by Indian companies 4. Reduction and elimination of import duties 5. Replacing licensing of imports with Tariffs 6. Removal of export subsidy 7. Replacing licensing of exports with duties 8. Lower tax on exports 9. SEZ (Special Economic Zones), EPZ 10. Automatic approval for investment by MNCs 11. Incentives to MNCS and NRIs to invest 12. FIIs to invest in capital markets 13. Indian companies allowed Euro issue and GDR 14. Freeing exchange controls 15. Full convertibility on current account 16. Created SAARC (South Asian Association for Regional Cooperation)

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