Business, Government and the International Eonomy

Dimple Pandey

Business Environment
Business enterprises cannot function in isolation Open systems interact with their environment Business enterprises exist in and are surrounded by an environment the business or organisational environment Society and business enterprises are mutually dependent Business enterprises satisfy societal needs Relationship between society and business enterprises takes place in a changing environment

BUSINESS AS A SYSTEM
System will: Draw Input Process it Internally and

Releases output into environment

Business Draw Input Material , Energy , Information Process it Internally - Into different Material , energy and Information

Releases output into environment Tangible, Intangible and Information

Contd

Business & Environment Interface

Interaction of Business & its Surroundings I. 1) Micro environment of business. Suppliers Supply raw materials and other components (Inputs) Importance Reliable supply continuous supply for smooth functioning

Contd

Business & Environment Interface Micro environment of business.

2) CUSTOMERS

Different categories of customers i. ii. iii. Industrial customers Wholesale customers Retail customers

iv.
v.

Government customers
Foreign customers

Contd

Business & Environment Interface Micro environment of business.

3) Market intermediaries i. ii. iii. iv. Middlemen. Physical distribution Firms: (warehouses and transport firms) Marketing service agencies (Advertising agencies market research firms, media firms, consulting firms) Financial intermediaries

Contd

Business & Environment Interface Micro environment of business.

4. Competitors: The Threat of entry of new firms The Power of Buyers The Power of Suppliers The Power of Substitutes The Intensity of Rivalry among existing firms

Contd

Business & Environment Interface Micro environment of business.

Competitors: Economies of Scale Unit cost Inverse to units produced Measured by Minimum Efficient Scale Or Market share MES volume is necessary to compete at minimum cost. Strategy : Just in time & Lean manufacturing to counter economies of scale 1. The Threat of entry of new firm 1. Economies of scale 2. Capital Requirement 3. Access to Channel 4. Absolute cost advantage 5. Expected Retaliation 5. Government Policy 7. Differentiation

Capital requirement Internet / Knowledge based services less costly

Business & Environment Interface Micro environment of business.

Competitors: 1. The Threat of entry of new firm 1. Economies of scale 2. Capital Requirement 3. Access to Channel 4. Absolute cost advantage 5. Expected Retaliation 5. Government Policy 7. Differentiation Access to Channel Self help groups / Social networks New channels of distribution Absolute cost advantage Learning curve effect Cost advantage Expected Retaliation GSM Players like Airtel ,Spice retaliated entry of CMDA player Reliance Communication to operate in GSM field Government Policy Import of sugar, Edible oils, Steel , Liberation of Insurance & other sectors Differentiation Existing company Strong brand image, wide range of products to cover all segments

Business & Environment Interface Micro environment of business.

Competitors: Concentration of buyers Small no. of buyer + High Volume purchase High buyer power Coca-Cola cannot bargain with Malls Alternative source of supply More supply source high buyer power Bajaj Scooter Honda, Suzuki, TVS etc Component cost as a % of total cost High proportion of component/material cost to finished goods leads to looking for alternatives. Possibility of backward integration Buyers own supply chain more buyer power Co-opratives , Self help groups, MLM 2. The Power of Buyers: 1. Concentration of buyers 2. Alternative source of supply 3. Component cost as a percentage of total cost 4. Possibility of backward integration

Business & Environment Interface Micro environment of business.

Competitors: Concentration of Sellers Small no. of Sellers High seller power Like Monopoly & Oligopoly Switching Costs High switching cost to other seller source Seller power increase High-Tec & Specialised goods - SAP Brand Power High brand power High power Ariel , Rin - Supermarkets have to sell it Possibility of forward integration Sellers own distribution operation More power 3. The Power of Sellers: 1. Concentration of Sellers 2. Switching costs 3. Brand power 4. Possibility of forward integration 5. Dependence on customers Dependence on customers Not depending on High volume small no.of buyers more seller power

Business & Environment Interface Micro environment of business.

Competitors: 4. Threat of Substitution: Non-essential goods where there is the ultimate substitute of doing without That: 1. Relative Price & Performance of substitutes 2. Switching Costs 3.Buyers willingness to substitute Relative performance & Price of Substitutes Substitutes with same cost High threat Email replaced Post Offices Switching costs The Cheaper switching cost - High threat Pet foods , Fast foods , Malls Buyers Willingness to substitute Low-cost articles & infrequent purchase of articles little effort made to go for substitutes Match box Lighter

Business & Environment Interface Micro environment of business.

Competitors: 5. Competitive Rivalry: 1. Industry Growth 2.High Fixed costs 3. Volatile Demand 4.Product Differentiation 5. Extra Capacity in large increments 6. Balance of firms 7. High exit barriers Industry Growth: Rapid Growth Competition need not be intense Maturity Phase- Intense competition High fixed costs High Fixed cost High break even point In depression times Price war to maintain turnover 1990 UK & USA accused each of dumping Steel on Export market Volatile Demand May lead to intermittent Over-capacity Steel war -1990 Product Differentiation Homogeneous products More intense the rivalry - Steel Extra capacity in large increments Creates short term over capacity . Honda Nissan plant in UK

Business & Environment Interface Micro environment of business.

Competitors: 5. Competitive Rivalry: 1. Industry Growth 2.High Fixed costs 3. Volatile Demand 4.Product Differentiation 5. Extra Capacity in large increments 6. Balance of firms 7. High exit barriers Balance of firms If the no. of firms is large / similar size the rivalry will be intensive. Clear market leader can bring discipline High exit barriers High exit barriers Excess capacity to persist and rivalry to be intense

Business & Environment Interface Macro environment of business.

1. Demography: Quantitative aspects of population. Qualitative aspects of population. Drivers of Population Changes

Birth Rate No. of births per 1000 population 1. Population Growth Fertility Rate- Av. No. of birth per women 2. Drivers of Population Changes Death Rate - No. of deaths per 1000 3. Ethnicity of Population 4. Implications of Demographic ChangesMigration Country to Country movement Implication Consumer, Labour , Employment participation

Business & Environment Interface Macro environment of business.

2. Economic environment i. Economic conditions- GDP, Business Cycle, Unemployment, Inflation, Balance of Payment, Fiscal Policy, Monetary Policy, Exchange rate Policy, Interest Rate. Economic policies a) b) c) d) Budget Industrial policy Trade policy Agricultural policy

ii.

iii.

Economic system- Capitalistic, Socilalitic, Mixed

Contd

Business & Environment Interface Macro environment of business.

3.Political environment i. Legislature - Labour Laws like Factories Act, EPF Act, ESI Act, Industrial Disputes Act, Minimum Wages Act, Payment of Wages Act, etc MRTP Act, Law of Contracts, Companies act, IDRA Act, FERA, Import & Export Control act, Tax Laws

i.
ii.

Executive- Administrators
Judiciary - District, High Courts, Supreme Court, Tribunals

Contd

Business & Environment Interface Macro environment of business.

4. Socio cultural environment i. ii. iii. Attitude of people towards work and health. Role of family. Marriage.

iv.
v. vi. vii.

Religion.
Education Ethical issues Social responsibility of business

Contd

Business & Environment Interface Macro environment of business.

5. Natural environment i. ii. iii. iv. Natural resources. Weather and climatic conditions. Locational aspects. Nearness to port facilities.

Contd

Business & Environment Interface Macro environment of business.

6. Technological environment i. ii. Nature of technology Scope for innovation

Contd

Business & Environment Interface Macro environment of business.

7. International environment i. ii. iii. iv. v. Economic Political Legal Demography Technology

Contd

Business & Environment Interface

Uses of environment studies 1) 2) 3) 4) Awarness Policy decisions Demand forecasting Competitors strategies.

5)

To innovate

Business & Environment Interface

Techniques for environmental studies i. ii. Verbal and written information Search and scanning

iii. Forecasting and formal studie

Business & Environment Interface

Limitations of environmental analysis a) b) c) d) Unexpected events Future is not a guarantee Too much of information. Overcautions approach

Business Sectors
Primary Sector Agriculture, Mining Secondary sector - Manufacturing Industries Manufacturing activities Electricity Generation and Construction

Tertiary Sector Services industries

Trade , Commerce, Insurance, Banking,Repair, Transport

Classification of Business Based on Scope of Business

1. Business which Produce Goods: Two categories of Goods: a. Commodities Goods produced by Primary sector

- Will not undergo any processing

- Agriculture , Fisheries, Mining, b. Products - Goods produced by Secondary sector Conversion of Raw material into another form - Farms, Diaries, -Manufacturing Enterprises Machinery, Materials for -other business, Producing goods for consumption

Classification of Business Based on Scope of Business

2. Business which Produce Services: Transport , Telephone , Electric Light ,Hotels ,Entertainment 3. Business which Distribute Goods:

Wholesale merchants
Retail Merchants Importers & Exporters 4. Business which Facilitates Distribution of Goods: Warehouse, Auction Houses, Advertising, Financing 5. Business which Deals in Finance: Commercial Banks, Co-Operative Banks, Development Bankd, Insurance Stock Exchange

Classification of Business Based on the Nature of Activity

1.Extractive Industries: Extract goods from natural resources- Oil extraction, Farming, Fishing 2. Genetic Industries:

Produce goods by breeding- Poultries, Bio Tech

3. Manufacturing Industries: Process Raw materials into finished goods 4 Types 1. Basic Industries : Iron, Steel 2. Capital goods Industries : Machines 3. Intermediate Industries : Tyre , Tubes 4.Consumer goods Industries : Soap

4. Construction Industries
Canals, Dams, Road, Buildings, Road 5. Service & IT Industries

Classification of Business Based on Uses of Goods Produced

1. Basic Industries : Provide essential inputs to other industries Iron, Steel, Fertilizer, Chemicals 2. Capital goods Industries : Instrumental in producing goods and services Do not directly produce goods for consumption Capital intensive Machines, Tools, 3. Intermediate Goods Industries : Goods already had undergone manufacturing process but which forms input for industries for further processing Tyre , Tubes 4.Consumer goods Industries : For consumption Durable / Nondurable goods Durable Usage for more than 3 years Non-durable Usage within 3 years other

Classification of Business Based on Competitive Structure

1. Monopoly : Single Firm Industry Monopsony Single Buyer

Bilateral Monopoly single Buyer and Single seller

MRTP Act 2.Duopoly Two sellers 3. Oligopoly Only few firms holding 80 to 85 % market share 4.Monopolistic competition Large sellers & similar but not Substitute products Textile 5.Perfect competition Large sellers & Homogeneous & free entry , exit & no single firm has any

Business Motives & Objectives

Objective: The end actions Motive:

The desire which stimulate action

Motive Profit, Non-Profit Objective Supply Quality Products, Customer Satisfaction, Exploit labour, Tax evation

Business Motives & Objectives

Importance of Objectives 1. Justifies existance 2. Provide Direction 3. Help coordination 4.Provide standards for assesment & control 5. Help decentralisation

Business Motives & Objectives

I.

Economic Objectives a) b) c) d) Earning of adequate profit. Creation of customers Innovation Generation of employment

e)
f) g)

Control of inflation
Economic development Reduction of inequalities of income

Contd

Business Motives & Objectives

II.

Social Objectives a) b) c) d) Supply of goods and services. Good treatment of customers. Fair treatment of employees. Good working environment

e)
f) g)

Customer Counseling
Social responsibility. Pollution control.

Contd

Business Motives & Objectives

III.

National Objectives a) b) c) Implement of government laws. Payment of taxes. Democratic practices.

Contd

Definitions: Business Ethics

Rules of right and wrong behavior in business Foundation of the trust essential for commerce Sometimes arbitrary: Gaming Ethics Based on universal moral principles Business and society are mutually interdependent: Society depends on business for wealth creation while business depends on society for an environment wherein it can meet its obligation to create that wealth.

Social Responsibility

Social responsibility is the obligation of organizations management to make decisions and take actions that will enhance the welfare and interests of society as well as the organization. Social responsibility is therefore quite important to the society, organization and human It can be said that social responsibility is not fixed and has to be related to pressures at a particular point of time

It is related to the ethical responsibility and differentiates into different levels of social responsibilities, which is : 1) economic 2) legal 3) ethical and 4) discretionary responsibilities.

Responsibility can be divided into 4 groups of beneficiaries

Owners/shareholders Employees Customers/consumers Community

Responsibility to owners:
Resources available are used for the benefit of the owners/shareholders Stability of the enterprise Ensure that the company grows, so that the shareholder gains from increase in the market price of his shares

Responsibility to employees
Provide adequate monetary , psychological rewards as well as job security Selection of employees should be made fairly Providing educational opportunities & training to the employee at companys expense Working conditions should be safe & pleasant

Responsibility to consumers:
To provide prompt courteous & dependable service Provide adequate quality products at reasonable price

Responsibility to community

Should improve quality of life of the people in the community it is established

Corporate Culture Managements Responsibility

1. Corporate culture refers to the character of a companys internal work climate and personality.

2. In a strong-culture company, culturally-approved behaviors and ways of doing things are nurtured while culturally-disapproved behaviors and work practices are discouraged.

3. In adaptive cultures, there is a spirit of doing what is necessary to ensure long-term organizational success. 4. Adaptive cultures are exceptionally well suited to companies with fast-changing strategies and market. 5. The tighter the culture-strategy fit, the more the culture steers company personnel into displaying behaviors and adopting operating practices that lead to successful strategy execution.

6. It is in managements best interest to dedicate considerable effort to building a corporate culture that encourages behaviors and work practices conducive to good strategy. 7. A companys culture is grounded in and shaped by its core values and the bar it sets for ethical behavior. 8. A multinational company needs to build its corporate culture around values and operating practices that travel well across borders.

Governments public policy role

Public policy A plan of action undertaken by government officials to achieve some broad purpose affecting a substantial segment of a nations citizens. Public policy inputs shape a governments policy decisions and strategies to address problems. Public policy goals can be broad and high-minded or narrow and self-serving. Governments use public policy tools involving combinations of incentives and penalties to prompt citizens to act in ways that achieve policy goals. Public policy effects are the outcomes arising from government regulation.

Types of public policy

Fiscal policy Refers to patterns of government taxing and spending that are intended to stimulate or support the economy. Monetary policy Refers to policies that affect the supply, demand, and value of a nations currency. Social assistance policies Examples include health care and education.

Government regulation of business

Regulation The action of government to establish rules by which business or other groups must behave. It is a primary way of accomplishing public policy. Reasons for regulation Market failure Natural monopolies Ethical rationales

Types of regulation: Economic

Economic regulations Aim to modify the normal operation of the free market and the forces of supply and demand. Control prices or wages Allocate public resources Establish service territories Set the number of participants Ration resources

Types of regulation: Social

Social regulations Aimed at such important social goals as protecting consumers and the environment and providing workers with safe and healthy working conditions. Pollution laws Safety and health laws Job discrimination laws applicable to businesses Consumer protection laws that apply to all relevant businesses producing and selling consumer goods

Social regulation examples

Consumer Product Safety Commission sets strict rules for childrens toys. The Environmental Protection Agency sets limits on the amounts of sulfur dioxide that can be emitted into the air from the smokestacks of power plants. The National Highway Traffic Safety Administration requires new cars to be equipped with air bags, seatbelts, and other protective gear.

Constitution of India
Basic features: A basic document which lays down the structure of political system Constitution is headed by President of India It deals with Legislature, Executive & Judiciary It defines their power, demarcates their responsibility & regulates relationship with each other It is a written constitution

53

Constitution of India
Preamble: We, the people of India, having solemnly resolved to constitute India into a Sovereign, Socialistic, Secular, Democratic Republic and secure to all citizens Justice social, economical and political, Liberty of thought, expression, belief, faith & worship, Equality of status and opportunity and promote among them all,

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Constitution of India
FUNDAMENTAL RIGHTS: Fundamental Rights are incorporated in Articles 12 to 35, forming part III of the Constitution Some of the rights are available only to citizens of India while others are available to all the persons Rights guaranteed fall under following broad categories: Right to equality (Art 14) Prohibition of discrimination (Art 15) Abolition of untouchability (Art 17) Right to freedom protection of life and personal identity(Art 21) Right to freedom of speech, expression, movement (Art 19) Right against exploitation (Art 23 & 24)

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Constitution Directive Principlies

Directive Principles of State Policy embodied in 36 to 51) Part IV of the Constitution(Art

Contain the principles Fundamental in the governance of the country

56

Directive Principles of Constitution

State shall strive to promote welfare of people securing social, economic and political justice State shall strive to minimise inequalities in income State shall direct its policy towards securing the same Ownership & control of the material resources of the community are so distributed as best to subserve the common good

57

Directive Principles of Constitution

Operation of the economic system does not result in the concentration of wealth and means of production to the common detriment Securing living wage of worker, just and humane conditions of work, participation of workers in management Securing uniform civil code for the citizens throughout the territory of India

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Constitution Fundamental Duties

Article 51A Fundamental Duties of every citizen: To abide by the Constitution and respect its ideals and institutions, the National Flag & National Anthem To cherish and follow the noble ideals which inspired our national struggle for freedom To upheld and protect the sovereignty, unity and integrity of India To defend the country and render national service when called upon to do so

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Constitution Fundamental Duties

To promote harmony and the spirit of common brotherhood amongst all the people of India transcending religion, linguistic and regional or sectional diversities, to remove the practices derogatory to the dignity of women To value & preserve the rich heritage and our composite culture To protect & improve the natural environment including forests, lakes,rivers and wild lives & have compassion for living creatures

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Managing Ethics
Ethics are principles that explain what is good and right and what is bad and wrong and that prescribe a code of behavior based on these definitions. Business ethics provide standards or guidelines for the conduct and decision making of employees and managers. hics and social responsibility should be high-priority concerns of all members of an organization, not just managers and executives. s and social responsibility should be high-priority concerns of all members of an organization, not just managers and executives.

In the absence of a code of ethics, There is usually a lack of consensus about appropriate ethical behavior; and Different people use different ethical criteria to determine whether a practice or behavior is ethical or unethical. Business ethics are not the same things as laws.

People operate under different ethical value systems depending on their: Personal experiences Religious background Education Family background

Sources of Ethical Norms

Fellow Workers

Fellow Workers

Regions of Country

Family

Profession

The Individual
Conscience Friends Employer

The Law

Religious Beliefs

Society at Large

64

Making Ethical Judgments

Behavior or act that has been committed

compared with

Prevailing norms of acceptability

Value judgments and perceptions of the observer

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3 Models of Management Ethics

Three Types Of Management Ethics

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Three Approaches to Management Ethics

6-18

Management skills needed to make ethical decisions and deal with concerns of stakeholders:
Ethical decision making skills Ability to see beyond own self-interest Skills at analyzing stakeholder concerns Ability to be more proactive in dealing with stakeholder issues Ability to identify stakeholders, how they are affected by company policies, how they have been treated in the past, and how they can affect your ability to pursue business goals

Criteria for ethical decision making:

Utilitarianism A means of making decisions based on what is good for the greatest number of people. Individualism The degree to which a society values individual self-interest over group needs and goals. Individual self-interest should be promoted as long as it does not harm others.

Whistleblower policies should include the following key features:

The policy encourages reporting unethical conduct. Meaningful procedure to deal fairly with reported violations. Those who report violations are protected from retaliation. Alternative reporting procedures. Anonymous reporting to an ethics officer/committee. Feedback to employees on ethics violations. Top management support and involvement.

Eight steps to sound ethical decision making in business:

1. 2. 3. 4. 5. 6.

7.
8.

Gather the facts. Define the ethical issues. Identify the affected parties. Identify the consequences. Identify your obligations. Consider your character and integrity. Think creatively about potential actions. Check your gut feelings.

Globalisation

The Definition of Globalisation

Globalisation can be defined as the intensification of world-wide social relations which link distant localities in such a way that local happenings are shaped by events occurring many miles away and vice versa.

The Definition of Globalisation

Globalisation refers to all those processes by which the peoples of the world are incorporated into a single world society, global society.

WHAT IS GLOBALIZATION?
1) Whole world interconnected - interdependence of all parts of world 2) Intensification of world-wide phenomena 3) Trans-national relations - erosion of national boundaries 4) Domino effects - events have long-distance ramifications e.g. September 11

WHAT IS GLOBALIZATION?
5) Alteration of space - distances shortened - technological changes 6) Alteration of time - things happen quicker 7) Sense of globality / Global consciousness - experience all places as interdependent - the whole planet - the whole of humankind

The Definition of Globalisation

(Encyclopedia Wikipedia) More specifically, globalization refers to: An increase in international trade at a faster rate than the growth in the world economy Increase in international flow of capital including FDI Greater transborder data flow, using such technologies such as the Internet, Wikipedia, Communication Satellites and telephones Greater international cultural exchange, for example through the export of Hollywood and Bollywood movies

It is characterized by four types of change. 1. It involves a stretching of social, political and economic activities across frontiers, regions and continents. 2. It is marked by the intensification, or the growing magnitude, of interconnectedness and flows of trade, investment, finance, migration, culture, etc.

3. It can be linked to a speeding up of global interactions and processes, as the development of world-wide systems of transport and communication increases the velocity of the diffusion of ideas, goods, information, capital and people.

4. The growing extensity, intensity and velocity of global interactions can be associated with their deepening impact such that the effects of distant events can be highly significant elsewhere and specific local developments can come to have considerable global consequences. In this sense, the boundaries between domestic matters and global affairs become increasingly fluid.

GLOBALISATION
Mike Johnson (1995:14) "The global village exists. Whether we like it or not - whether we want to work that way or not we are in an age of practically instant communications from anywhere to anywhere. As E-mail, world phone cards, computerized call-backs and video conferencing have shown, the only thing you need to be an instant global player is a few thousand dollars. For a few thousand more you can buy a dish that will up-link you to a satellite and you can work from the center of Borneo if that is what takes your fancy.

Globalisation as increasing interdependence at the world level

The problem of air pollution, for example, is becoming increasingly difficult to escape, irrespective of material and political resources available. Not only individuals, but also individual states are incapable of stopping the growing number of intrusions from beyond their borders. "Acid rain" makes no distinctions as regards private property, local or state borders

The higher the level of globalisation, the narrower the scope for "escape alternatives". In this sense globalisation is a kind of totalitarianization of world space

Globalisation as diversification within territorial communities Globalisation takes place when there is a territorial redistribution of the diversity of the world as a whole. Thus, the higher the share of the overall global diversity, present or accessible within the territorial community, the higher the degree of globalisation.

Globalization of Economy
- free trade benefits all countries - poorer countries economies develop and citizens get richer - capitalism brings with it the benefits of consumerism democracy human rights - Global Village

Integration of Economies
The increasing reliance of economies on each other The opportunities to be able to buy and sell in any country in the world The opportunities for labour and capital to locate anywhere in the world The growth of global markets in finance
Stock Markets are now accessible from anywhere in the world!

Integration of Economies
Made possible by:
Technology Communication networks Internet access Growth of economic cooperation trading blocs (EU, NAFTA, etc.) Movement to free trade

Trade versus Aid?

Benefits of Trade:
Increased choice Greater potential for growth Increase international economies of scale Greater employment opportunities
Trade has led to massive increases in wealth for many countries.

Trade versus Aid?

Disadvantages of trade:
Increase in gap between the rich and the poor Dominance of global trade by the rich, northern hemisphere countries Lack of opportunities for the poor to be able to have access to markets Exploitation of workers and growers

How far does trade help children like these?

Corporate Expansion
Multi-national or trans-national corporations (MNCs or TNCs) businesses with a headquarters in one country but with business operations in a No matter where you go in the world, certain businesses will always have a presence. number of others.

Corporate Expansion
Characteristics:
Expanding revenue Lowering costs Sourcing raw materials Controlling key supplies Control of processing Global economies of scale

Controlling supplies may be one reason for global expansion.

Corporate Domination
Key Issues: Damage to the environment? Exploitation of labour? Monopoly power Economic degradation Non-renewable resources Damage to cultures

Other Issues:
Accountability of Global businesses? Increased gap between rich and poor fuels potential terrorist reaction Ethical responsibility of business? Efforts to remove trade barriers

There are plenty of people who believe that globalisation is a negative development, protests at the G8 summits, pollution, poverty

CULTURAL GLOBALIZATION

McArabia Kofta

MULTINATIONAL CORPORATIONS IN INDIA

MEANING
Multinational corporations (MNCs) are huge industrial organizations having a wide network of branches and subsidiaries spread over a number of countries. The two main characteristics of MNCs are their large size and the fact that their worldwide activities are centrally controlled by the parent companies.

POSITIVE ROLE OF MNCs

The first important contribution of MNCs is its role in filling the resource gap between targeted or desired investment and domestically mobilized savings An inflow of foreign capital can reduce or even remove the deficit in the balance of payments if the MNCs can generate a net positive flow of export earnings.. The third important role of MNCs is filling the gap between targeted governmental tax revenues and locally raised taxes. Fourthly, Multinationals not only provide financial resources but they also supply a package of needed resources including management experience, entrepreneurial abilities, and technological skills. Moreover, MNCs bring with them the most sophisticated technological knowledge about production processes while transferring modern machinery and equipment to capital poor LDCs.

POSITIVE ROLE OF MNCs(contd)

.Other Beneficial Roles: The MNCs also bring several other benefits to the host country. (a) The domestic labour may benefit in the form of higher real wages. (b) The consumers benefits by way of lower prices and better quality products. (c) Investments by MNCs will also induce more domestic investment. For example, ancillary units can be set up to feed the main industries of the MNCs (d) MNCs expenditures on research and development(R&D), although limited is bound to benefit the host country.

NEGATIVE ROLE OF MNCs

1 Although MNCs provide capital, they may lower domestic savings and

2 3

investment rates by stifling competition through exclusive production agreements with the host governments. MNCs often fail to reinvest much of their profits and also they may inhibit the expansion of indigenous firms. Although the initial impact of MNC investment is to improve the foreign exchange position of the recipient nation, its long-run impact may reduce foreign exchange earnings on both current and capital accounts While MNCs do contribute to public revenue in the form of corporate taxes, their contribution is considerably less than it should be as a result of liberal tax concessions, excessive investment allowances, subsidies and tariff protection provided by the host government.. The development of local skills may be inhibited by the MNCs by stifling the growth of indigenous entrepreneurship as a result of the MNCs dominance of local markets. In many situations MNC activities reinforce dualistic economic structures and widens income inequalities. They tend to promote the interests of some few modern-sector workers only. They also divert resources away from the production of consumer goods by producing luxurious goods demanded by the local elites.

NEGATIVE ROLE OF MNCs(contd)6

MNCs typically produce inappropriate products and stimulate inappropriate consumption patterns through advertising and their monopolistic market power. Production is done with capital-intensive technique which is not useful for labour surplus economies. This would aggravate the unemployment problem in the host country. 7. The behaviour pattern of MNCs reveals that they do not engage in R & D activities in underdeveloped countries. However, these LDCs have to bear the bulk of their costs. 8. MNCs often use their economic power to influence government policies in directions unfavorable to development. The host government has to provide them special economic and political concessions in the form of excessive protection, lower tax, subsidized inputs, cheap provision of factory sites. As a result, the private profits of MNCs may exceed social benefits. 9. Multinationals may damage the host countries by suppressing domestic entrepreneurship through their superior knowledge, worldwide contacts, and advertising skills. They drive out local competitors and inhibit the emergence of small-scale enterprises.

WHY ARE MULTINATIONAL COMPANIES IN INDIA?

Huge market potential of the country FDI attractiveness Labor competitiveness Macro economic stability

Introduction to GATT and WTO

GATT WTO