Ibm Scribd

INTERNATIONAL BUSINESS MANAGEMENT
UNIT I
INTRODUCTION TO INTERNATIONAL BUSINESS
Topic 1.1: Introduction (Importance-Eo!ution-Route"-#or!d in $enera!%
1.1.1 Introduction: Political boundaries of nations, states or reions are no loner t!e fetters for business in t!e
lobal econo"ic #aradi"$ T!ere is a #aradi" s!ift in t!e %a& businesses are done no%$ A #roduct is seldo"
co"#letel& #roduced in one countr& nor consu"ed in t!e sa"e countr&$ On t!e ot!er !and, its desin,
fabrication, asse"blin, sta"#in, etc are done in different countries and t!en "ar'eted %orld o(er$ T!us
#roduction and consu"#tion are loball& s#read for "ost #roducts$ T!at is t!e international as#ect of business
%e are concerned %it!$ A(ailable data suest t!at Multinational )o"#anies *MN)s+ or Multinational
Enter#rises *MNEs+ are (astl& res#onsible for t!e ro%t! of cross,border or international #roduction and
"ar'etin$
Econo"ics, trade and finance 'no% no national borders$ B& t!eir nature t!ese are not confinable t!rou! "an,
"ade fetters for lon ti"e$ Econo"ics, trade and finance are trul& international, "ultinational, lobal and
transnational$ -e see t!e continents of t!e %orld and so"e nations are di(ided b& %aters$ But, beneat! t!e
de#t!s of e(en t!e dee#est Pacific Ocean, land "ass unifies continents and nations$ So, eora#!ical di(isions
based on #olitical as#ects are "an,"ade$ But t!e nature unifies$ And t!is a##lies to lobal econo"&, of %!ic!
lobal trade and lobal finance are interal #arts$
Pandit .a%a!arlal Ne!ru obser(ed t!at, /0istor& toda& !as ceased to be t!e !istor& of t!is countr& or t!at$ It !as
beco"e t!e !istor& of "an'ind1 because %e are all tied u# toet!er in a co""on fate2$ -!at a##lies to !istor&
is a##licable to econo"& and business as %ell$ Toda&2s econo"& !as in fact ceased to be econo"& of t!is or
t!at nation, but !as beco"e lobal econo"&$ Si"ilarl& business acti(ities !a(e to be concei(ed, desined and
e3ecuted %it! a lobal #ers#ecti(e$ T!ere is t!at "uc! of interation$ T!us business !as si"#l& beco"e
international or lobal business$ International or lobal business !as beco"e a lare and ro%in c!un' of total
%orld business$ Global e(ents and co"#etition affect al"ost all business fir"s 1 lare and s"all, because "ost
fir"s sell out#uts to and secure su##lies fro" rest of t!e %orld$
International business is a ter" used to collecti(el& describe t!e o#erations of fir"s %it! interests in se(eral
countries$ Si"#l&, it is business be&ond national or continental borders b& fir"s$ 4ou !ear (er& often ter"s
suc! as International co"#etition, Multinational cor#oration, Transnational deals, Globali5ation, Multi,
do"estic business "odels, -orld%ide sales, d&na"ics of Global Mar'et #lace and so on dail&$ All t!ese
ca#ture one or ot!er issues concernin international business$ 4ou 'no% international business is t!e "ost
co"#etiti(e %it! "ountin uncertainties$ Success in international business re6uires "ore business acu"en t!an
"anain a do"estic fir"$ Of course o##ortunities abound in t!e borderless %orld$ So also t!e t!reats %ield an
inti"idatin future$ 7ir"s "ust be able to rea# t!e o##ortunities %!ile abl& neotiatin %it! t!e attendin
t!reats$ 7ir"s "ust not onl& deal %it! eneral business functions and (alues, but also understand and %or' fro"
a lobal #ers#ecti(e t!at adds "ulti#le (ariables suc! as di(erent eo,#olitical d&na"ics, "ulti,cultural
nuances, (olatile,financial conditions, different ti"e 5ones, and (ast s#atial,distance issues to t!e international
business "anae"ent e6uation$ 8eftness and foresi!tedness are "uc! needed for doin business across t!e
lobe$
1.1.&. Scope o' Internationa! Bu"ine"": 8oin business internationall& or loball& needs certain decisions
ta'en in strateic "anner$ On t!e basis of t!e s&llabus of t!is course, t!ese decision areas are #ut into four
classes confor"in to t!e four #arara#!s of t!e s&llabus$
(ir"t and 'oremo"t) deci"ion as to for"s of International Business is needed$ -!ile "an& alternati(e for"s are
a(ailable, t!e c!oice of best is not t!at eas& and t!is is not a one,ti"e decision as for" of orani5ation !as to
c!ane as business en(iron"ent9scale9 e"#!asis c!anes$ Structural desins of "ultinational enter#rises,
a##roac!es to steer and ste%ard t!e", t!e desin and use of infor"ation s&ste"s, contours of #erfor"ance and
t!eir "easure"ent, etc constitute t!e strateic, tactical and o#erational issues of international business fir"s$
Second deci"ion relatin to res#ondin to lobali5ation and t!e en(iron"ental c!anes is needed$ )auses,
issues and concerns of lobali5ation of %orld econo"ies and t!e trend, ter"s and #atterns of international trade
and in(est"ent !a(e to be studied as t!e #re"ises for ri!t decision$ Besides, t!ere need to be stud& and
e(aluation of Trade Policies 9 Procedures, In(est"ent Policies 9 Procedures and )o"#etition Policies 9
Procedures of nation states, trade bloc's and ot!er areates b& international business fir"s to incor#orate
c!anes in t!e "odels of business follo%ed b& t!e"$ Also, stud& and e(aluation of Econo"ic, Ecoloical,
Natural, )li"atic, Educational, Political, Infrastructure, Tec!noloical, Leal, Securit&, Social and )ultural
En(iron"ent of nation states, or bloc's of nations in so"e for" of econo"ic interation suc! as trade bloc's9
co""on "ar'et9 custo"s union9 "onetar& union9 co""on currenc& are needed to continuall& ada#t to
c!anin needs$ Trade and In(est"ents bet%een inter,reion and intra,reional "e"bers also need e(aluation
for #ro#er business initiati(es b& international fir"s in t!e co"#etiti(e %orld$
T*ird deci"ion relates to forein e3c!ane "anae"ent and lobal finance$ Ad!erin to t!e s&ste" of
e3c!ane rate and forein e3c!ane reser(e "anae"ent b& nation states or t!eir areates, res#onses b&
fir"s doin business loball& as forein e3c!ane rates c!ane, o#tions on deft !andlin of e3c!ane e3#osures
and ris', etc "a'e a (aluable c!un' of o#erations of international business fir"s$ T!ese in(ol(e co"#licated
decisions re6uirin best brains co""itted to sound decision "a'in$ Issues and i"#lications of si5e and t&#es
of in(est"ent across t!e lobe !a(e to be dee#l& studied b& international business fir"s$ Partici#atin in t!e
international financial "ar'et, co""ittin to direct in(est"ent in e6uit& and #ortfolio in(est"ent o##ortunities
loball&, "anain t!e resultin ris' etc are i"#ortant decision areas$
(ourt* deci"ion relates to conflict resolution$ )onflicts result %it!in and outside$ Manain cross cultural
conflicts %it!in t!e fir" and transfor"in t!e fir" into a lobal fir" is a for"idable tas'$ )onflicts %it!in co,
#artners of t!e fir" suc! as su##l& c!ain #artici#ants and alliance #artners and co,in(estors need a"icable
decisions %it! %in,%in orientation$ )onflicts %it! t!e e3ternal forces 9 sta'e!olders 9 co"#etitor fir"s9
o(ern"ents of ot!er countries9 ot!er trade bloc's, etc need different !andlin$ Resolution of t!e sa"e t!rou!
neotiations and %it!in t!e fra"e%or's of #re(ailin international 9 reional aencies is an i"#ortant as#ect of
international business$
7or t!e -orld Econo"ic 7oru" annual "eetin, u# to :;<< #oliticians, business leaders and !eads of
international orani5ations bean arri(in in t!e S%iss cit& of 8a(os on Tuesda& ::nd .anuar& :<<= to discuss
lobal econo"ic issues$ India is re#resented b& leadin industrial fiures and decision,"a'ers led b& t!e
Industr& Minister Sri >a"al Nat! and 7inance Minister Sri P$ )!ida"bara"$ A total of :? !eads of state or
o(ern"ent and @@A cabinet "inisters includin US Secretar& of State )ondolee55a Rice, .a#anese Pri"e
Minister 4asuo 7a'uda and )!ina2s (ice,#re"ier BenPei&an are to attend$ Bill Gates of Microsoft, Sir 0o%ard
Striner, !ead of Son& )or#oration, and E Ne(ille Isdell, !ead of )oca )ola are a"on t!e business leaders
sc!eduled to #artici#ate$ T!e !i! #rofile "eetin, s!o%s t!e econo"& is beco"in lobali5ed
1.1.+ Internationa! Bu"ine"" ,De'inition) $ro-t*) Cau"e" . /attern"0
In our li(es %e constantl& co"e across oods and ser(ices of transnational co"#anies *TN)s+, %!ic! !a(e ot
into different s#!eres of our li(es$ E(en a c!ild 'no%s suc! leaders of business as Mc8onalds, Microsoft, Son&,
Adidas, No'ia, Sa"sun, To&ota, etc$ 0o% "an& auto"obile na"es or "obile !andset na"es can &ou recallC I
can do a do5en of t!e auto"obiles and !alf,a,do5en of "obile !andset na"es$ All of t!e" are #roducts of so
called "ultinational co"#anies$ All t!ese co"#anies are in international or lobal business, t!at is, business
across nations 9 continents as aainst confinin to Dust one nation$ No% let us 6uote so"e definitions$
a% De'inition" On T*e Ba"i" O' Action" And Actor"
T!ere are t%o %a&s of loo'in at t!e ter" /international business2$ One is t!e /action2 and t!e ot!er is t!e
/actor2$ As an /action2, /international business2 refers to t!e t&#es, #rocess, scale, o(ernance and ot!er as#ects
of carr&in out international business$ As referrin to actor, t!e ter" /international business2 refers to /t!e entit&
carr&in out t!e international business2$
.o!n 8 8aniels and Lee 0 Radebau! in t!eir boo', /International Business2, define international business as,
/all co""ercial transactions, #ri(ate and o(ern"ental,bet%een t%o or "ore countries$ Pri(ate co"#anies
underta'e suc! transactions for #rofitE o(ern"ents "a& or "a& not do t!e sa"e in t!eir transactions$ T!ese
transactions include sales, in(est"ents and trans#ortation2$
T!e Internet Public Librar& *IPL+ defines International Business as, /doin business in international "ar'ets,
and business infor"ation s#ecific to (arious countries or eora#!ic reions of t!e %orld2$ A reat #art of
international business is international trade %!ic! is defined as, /T!e business of bu&in and sellin
co""odities 9 ser(ices 9 in(est"ents be&ond national borders2$
Accordin to 0arcourt Brace F )o"#an&, Orlando, 7lorida, /International business consists of transactions t!at
are de(ised and carried out across national borders to satisf& t!e obDecti(es of indi(iduals and orani5ations2$
T!ese definitions see t!e ter" /international business2 as an /action2$ T!e ne3t one loo's at t!e ter" as referrin
to t!e /actor2$
Accordin to International Business .ournal, /International business is a co""ercial enter#rise t!at #erfor"s
econo"ical acti(it& be&ond t!e bounds of its location, !as branc!es in t%o or "ore forein countries and "a'es
use of econo"ic, cultural, #olitical, leal and ot!er differences bet%een countries2$
1.1.1 $ro-t* in Internationa! Bu"ine"" t*rou2* 3u!tinationa! corporation"
-orld In(est"ent Re#ort @GG? #ut t!at t!ere %ere H;<<< MN)s %it! :=<,<<< affiliates in @GGI$ In :<<@, t!e
-orld In(est"ent Re#ort #ut t!at t!ere %ere IA<<< MN)s %it! =::,<<< affiliates$ @:J of t!ese affiliates %ere
in t!e de(elo#ed countries$ )!ina !osts about HHJ affiliates, co"#ared to India2s #ittance of <$@IJ$ In India of
t!e @< to# ;<< co"#anies b& "ar'et (alue, about ?; %ere MN)s #resent in India include t!e Le(er, t!e IT),
t!e )astro, t!e )olate,Pal"oli(e, t!e Nestle, t!e Sie"ens, t!e Ponds, t!e ABB, t!e Inersoll Rand, t!e P!ili#s,
t!e MI)O, t!e Gla3o, t!e Rec'itt and )ol"an, t!e Procter F Ga"ble, t!e S"it!'line,Beec!a", etc$ T!us
MN)s !a(e been ro%in in stature and s#read all o(er$
In :<<I, t!e MN)s nu"bered at least so"e ?=,<<< #arent co"#anies %it! at least ?=<,<<< forein affiliates
accordin to United Nations )onference on Trade and 8e(elo#"ent2s *UN)TA8+ re#ort$ Of t!ese, about
;=,<<< #arent TN)s %ere based in de(elo#ed countries and about :<,<<< in de(elo#in and transition
econo"ies *@=,;<< in de(elo#in countries and @,I;< in transition econo"ies+$ T!e nu"ber of TN)s fro"
de(elo#in and transition econo"ies !as increased "ore t!an t!ose fro" de(elo#ed countries o(er t!e #ast @;
&ears: H,<<< in t!e for"er and A@,<<< in t!e latter in @GG:$ Reardin forein affiliates, in :<<I t!ere %ere
:I<,<<< located in de(elo#ed countries, H<?,<<< in de(elo#in countries, and @@@,<<< in t!e transition
econo"ies$ )!ina continues to !ost t!e larest nu"ber of forein affiliates, accountin for one t!ird of all
forein affiliates of TN)s %orld%ide$ Gi(en its s"all s!are in lobal in%ard stoc' *onl& :J in :<<I+, t!is
i"#lies t!at "an& forein affiliates in )!ina are (er& s"all, or are Doint (entures %it! do"estic enter#rises$
UN)TA8s Transnational Inde3 s!o%s t!at in :<<H *t!e latest &ear for %!ic! t!e inde3 %as co"#iled+, t!e
i"#ortance of international #roduction rose in "ost !ost econo"ies *de(elo#ed and de(elo#in as %ell as
transition+, reflectin t!e rise of 78I flo%s t!at &ear$ T!e transnationali5ation of t!e larest TN)s %orld%ide
!as also increased$
1.1.4 #*5 (irm" $o Internationa!6
Se(eral factors underlie t!e ro%t! of international business$ T!ese could be #ut as: 7acilitators, 8ri(ers,
Attractions and )o"#ulsions$ Table @$@ lists t!e"$ E3#lanation follo%s later$
TABLE 1.1 (aci!itator") Drier") Attraction" . Compu!"ion" o' Internationa! Bu"ine""
7A)ILITATORS 8RIKERS ATTRA)TORS )OMPULSION
i$ 7actor Mobilit&
ii$ Econo"ic refor"s
iii$ O#enin u# of
co""and econo"ics
i($ Bretton %oods
s&ste"s9-TO rei"e
($ )o""unication and
trans#ortation
tec!nolo&
i$innate ro%t!, i"#etus
or t!e ure of MN)2s
ii$ constant searc! for
ro%t! in forein
"ar'ets
iii$ Manae"ent culture
of MN)2s
i$ Access to ra%
"aterials
ii$ Lo% cost
#ossibilities
iii$ En!anced
#ossibilit&
i$ Li"itations of
do"estic "ar'ets
ii$ Need for ris'
"ini"i5ation b&
di(ersification
a. (aci!itator" o' Internationa! Bu"ine""
T!e facilitators include, increasin factor "obilit&, econo"ic refor"s, o#enin u# of co""and econo"ics, t!e
Bretton -oods s&ste" 9 -TO rei"e and de(elo#"ents in co""unication and trans#ortation tec!nolo&
s#!eres$
7irst, factor mobility is t!e "ost i"#ortant of all factors t!at !as contributed to ro%t! of international business$
8urin t!e ti"e of t!e reat econo"ists li'e Ada" S"it!, 8a(id Ricardo and t!eir reat fol', cross,border
"o(e"ent of oods onl& on t!e #rinci#le of co"#arati(e cost ad(antae %as en(isaed$ )ross,border
"o(e"ent of factors of #roduction %as not en(isaed$ No% ca#ital, tec!nolo&, brands, labour "anae"ent
and intellectual #ro#ert& Dust "o(e fro" an&%!ere to an&%!ere$ Per!a#s international understandin and
econo"ic cor#oration !a(e #a(ed t!e %a& for %orld,%ide flo% of factors of #roduction$ Tec!nical
collaborations, o(erseas Dob "ar'et e3#ansion and o(erseas "anae"ent consultanc& are all on t!e increase$
MN)s #la& a (ital role in t!is factor "obilit& contributin to t!e ro%t!$ As a result of factor "obilit&, instead
of oods bein traded across national borders, #roduction #lants are set u# in t!e identified "ar'et t!e"sel(es
b& t!e MN)s resultin in ro%in international business$
Second, the economic reforms underta'en in t!e "ost of t!e de(elo#in and under de(elo#ed econo"ics are
anot!er cause for t!e ro%t! of international business$ Go(ern"ents of "ost of t!ese countries !a(in beco"e
(e3ed %it! reressed #erfor"ance of t!eir #ublic sector and t!eir bureaucrac& and conse6uent %aste of #recious
resources resultin #oor G8P ro%t! fuellin #o(ert& and une"#lo&"ent, in order to ta'e t!eir econo"ies on
t!e ro%t! #at! !a(e started e"bar'in on #rora""e of econo"ic refor"s$ Globali5ation, as a #art of suc!
refor"s #rocess, !as o#ened t!eir econo"ies to international #la&ers on an e6ual footin %it! do"estic
o#erators$ 7or e3a"#le, e(er since t!e refor"s #rocess !as been introduced in India "an& MN)s !a(e started
o#enin u# t!eir /units2 in t!e countr&$ 7ord Motors, 0&undai Motors, Pe#si, )oca,)ola, Microsoft, IBM,
)oentri3 etc !a(e set t!eir foot in India$ E3istin "ultinationals !a(e en!anced t!eir sta'e in t!e countr& and
so"e are #uttin u# @<<J subsidiaries$ 7or e3a"#le Unile(er !as #ut u# Unile(er India P(t$ Ltd$, to #roduce a
c!e"ical used to "a'e soa#, PFG !as #ut u# PFG 0o"e Products P(t$ Ltd$ To "ar'et deterents, Gillette !as
#ut u# -il'inson India P(t$ Ltd$ To c!anneli5e in(est"ents into ot!er co"#anies, ABB !as #ut u# ABB
0ousin )o"#an& to #u"# in(est"ents into ne% (entures, R!one Poulene !as #ut u# R!one Poulene *India+ to
introduce #!ar"aceutical #roducts in >e& t!era#eutic areas, 0e%lett Pac'ard !as #ut u# 0e%lett Pac'ard
*India+ to de(elo# and e3#ort soft%are, Unis&s !as #ut u# Unis&s*India+ Ltd to de(elo# and e3#ort soft%are,
)adbur& Sc!%e##ers !as #ut u# )S Be(eraes India P(t$ Ltd to "ar'et a rane of soft drin's, 8anone !as #ut
u# 8anone India Ltd to enter into brand licensin aree"ents, -arner La"bert !as #ut u# -arner La"bert Ltd
to brin in a rane in #!ar"a and !ealt! care #roducts and GE) !as #ut u# GE) of India Ltd to o(ersee t!e
rou#2s e3#andin Indian o#erations$ @<<J o%ners!i# %ill enable t!e #arent to retain #ro#rietar& control o(er
tec!noloies and #roducts$ Besides bac'%ard interation to ain econo"ics and s!ed disecono"ies of scale is
#ossible$
T*ird, opening up of command economies is anot!er factor be!ind, recent ro%t! in international business$
)!ina, Russia, etc are no loner co""and econo"ies$ Socialis" and co""unis" !a(e i(en bi %elco"e to
ca#italis" in t!eir (er& #lace of oriin and ro%t!$ T!e co""unist countries !a(e o#ened u# t!eir econo"ies to
co"#etition$ Since@G=;, Russia introduced 7pere"troi8a9 or restructurin "easures, t!ou! t!e colla#se of
#olitical structure t!ere in t!e late @G=<s to earl& @GG<s !ad !a"#ered t!e transition to "ar'et econo"&
resultin in econo"ic disru#tion$ -estern and "ultilateral aid to Russia to su##ort budet and currenc&
stabili5ation is bein e3tended$ 8urin @GG: and @GGA a total of L :$A billion aid flo%ed into Russia$
Pri(ati5ation is bein acceleratin follo%ed in Russia$
As of Marc! @GGH, "ore t!an I<J of industrial %or'force %as e"#lo&ed in #ri(ati5ed enter#rises and "ore
t!an @:<<< enter#rises %ere #ri(ati5ed b& .une @GGH$ Si"ilar e3ercises are bein introduced in t!e erst%!ile
USSR states called as )IS nations$ A loical e3tension of t!is #ri(ati5ation #rora""e is t!e entr& of MN)s
into t!ese lands$ Since t!e da%n of t!e t!ird "illenniu", Russia and t!e )IS nations are s"artl& rebuildin t!eir
econo"ies$
)!ina is s#ortin e3cellentl& in o#enin u# its econo"&, as is borne out b& forein in(est"ent statistics$ T!e
)!inese refor"s #rocess !as been introduced in to#,do%n orderl& fas!ion since @G=<$ Bet%een @G=< and :<<?
annual rise in industrial out#ut %as o(er @<J$ 7orein in(est"ent rose sinificantl&$ And "an& MN)s !a(e #ut
u# t!eir #lants in )!ina$ So"e !a(e !astened to !a(e t!eir #lants t!ere, as t!e& did not %ant to la be!ind
#otential co"#etitors$ )!ina !as been ettin forein direct in(est"ent to t!e tune of L o(er ?<billion annuall&
in t!e recent &ears$
(ourt*, t!e Bretton Woods organizations and WTO 1 t!e -orld Ban' and International Monetar& 7und and
t!eir subsidiaries li'e t!e International 8e(elo#"ent Association, International 7inance )or#oration,
Multilateral In(est"ent Guarantee Aenc& and ot!er "ultilateral bodies es#eciall& t!e -orld Trade
Orani5ation *-TO+ enerall& insist on "e"ber countries to o#en t!eir econo"ies$ T!is #a(es t!e %a& for
ro%t! of international business (astl& t!rou! t!e MN)s$
(i't*, developments in communication and transportation technology s#!eres facilitated t!e ro%t! of
international business is abl&$ Sea"less co""unication, real,ti"e co""unication, containeri5ation, t!ird,#art&
loistics, life c&cle loistics, su##l&,c!ain "anae"ent, etc enabled internationali5ation of businesses$
b. Drier" o' Internationa! Bu"ine""
T!e dri(ers of international business include t!e innate ro%t! i"#etus or ure of t!e MN)s, constant searc!
for ro%t! t!rou! forein "ar'ets, t!e "anae"ent culture of MN)s, etc$
7irst, MN)s enerall& !a(e t!e innate growth impetus %it! t!e" t!at enines t!e s#read international business$
T!e& al%a&s loo' u#on ro%t! o##ortunities an&%!ere in t!e lobe and tr& to sei5e t!e"$ Strateic alliance,
Doint (entures, %!oll& o%ned subsidiaries, "erers on ac6uisition, franc!isin, etc are t!e di(erse strateies t!e&
ado#t to e3#and t!eir o#eration loball&$ T!e "oti(es for suc! e3#ansion are: *i+ securin su##lies of "inerals,
ener& and scarce ra% "aterials *e$$ all oil, "ineral and "etal co"#anies+, *ii+ increasin sales (olu"e and
(alue so as to raise "ar'et s!are and %it! t!at en!ancin earnins, *iii+ le(erain t!eir tec!noloical ad(ances
or brand su#eriorit& leadin to lobal de"and "et t!rou! o(erseas in(est"ent and *i(+ a(ailabilit& of c!ea#er
factors o(erseas and usin t!e sa"e b& eora#!icall& s#readin t!eir o#erations$ MN)s !a(e tec!nolo& and
co"#etiti(e ede$ -it! t!ese t!e& easil& establis! brand i"ae$ Global s#read is (er& si"#le for t!e" unless
nation,states are (ociferousl& aainst t!e entr& of MN)s$ Liberali5ation and refor"s #rocess ado#ted in t!e
t!ird %orld nations !a(e o#ened out (ast ro%t! o##ortunities for MN)s$ 0o%e(er t!e essential ele"ent is t!e
ure of MN)s to see' out, underta'e and interate "anufacturin, "ar'etin, RF8 and finance o##ortunities
on a lobal scale rat!er t!an on do"estic le(el$
Second, t!ere are MN)s %!o al%a&s !a(e a constant eye on foreign markets resultin in e3#andin
international business$ IBM, Kol's%aen, Unile(er, )oco,)ola, N$K$P!ili#s, Siner, Son&, To&ota, Microsoft,
General Motors, E33on, etc co"e in t!is cateor&$ Oriinall& A"erican fir"s bou!t #lant and e6ui#"ent in
t!e -estern Euro#e$ T!is !a##ened till @GI<s$ Later -estern Euro#e fir"s o#ened s!o#s in t!e USA$ B& @G=<s,
.a#anese ac6uired fir"s in t!e Euro#e and A"erica$ No% t!ere is ca"#in of MN)s in t!e E"erin -orld
Mar'ets li'e India, )!ina, Me3ico, T!ailand, etc$ Percei(ed9 actual restrictions on i"#orts led to MN)s o#enin
u# factories in t!e forein lands$ India and )!ina are a reat attraction as "ar'et for "ost MN)s at #resent$
T!ere is a classic difference bet%een US and .a#anese MN)s in "ar'et ca#turin$ US MN)s loo' at t!e u#,end
of t!e "ar'et, %!ile .a#anese MN)s loo' at t!e unattended lo%,end$ Lo%,end "ar'et !as lot of ro%t!
#otential and t!is i(es scale econo"ies$ -it! accu"ulated resource, %ide "ar'et and #ro(en #rocess
tec!nolo&, .a#anese MN)s are a t!reat to t!e US MN)s$
Ker& recentl& Indian companies are on a s!o##in s#ree ac6uirin o(erseas entities$ Tata Steel, t!e reno%ned
Indian #ri(ate sector steel fir", ac6uired )orus, t!e Euro#e2s second larest steel #roducer %it! re(enues in
:<<; of GBP G$: billion, and crude steel #roduction of @=$: "illion tons #ri"aril& in U$>$ and Net!erlands$
)orus !as H@,@<< e"#lo&ees in o(er H< countries and sales offices and ser(ice centres %orld%ide$ )o"binin
international e3#ertise %it! local custo"er ser(ice, t!e )orus brand re#resents 6ualit& and strent!$ T!e
Ac6uisition of )orus b& Tata Steel is consistent %it! Tata Steel2s stated obDecti(e of ro%t! and lobali5ation$
Gro%t! at Tata Steel !as been focused to%ards ne%, !i!er end,"ar'ets and a "ore so#!isticated custo"er
base$ Mittal Steel of India ac6uired Arcelor of Austria$ ArcelorMittal is t!e %orld2s nu"ber one steel co"#an&,
%it! A:<,<<< e"#lo&ees in "ore t!an I< countries$ ArcelorMittal brins toet!er t!e %orld2s nu"ber one and
nu"ber t%o steel co"#anies, Arcelor and Mittal Steel$
T!ird, ro%t! of international business is (er& "uc! influenced b& t!e management culture of MN!s$ MN)s
enerall& ada#t to local conditions and t!e relations!i# bet%een #arent and subsidiaries is t!at of Mcoordinated
federationN$ 8ecisions on in(est"ent financin and "ar'et are locali5ed$ But .a#anese MN)s do centrali5e
decisions$ T!e East,-est difference is t!us found$ But t!e underl&in si"ilarit& is t!e bias for action$ )or#orate
strateic #lannin is an essential #ac'ae of MN)s "anae"ent #ractice %!ereb& t!e MN)s scan and #lan for
en!anced interation and coordination of t!eir lobal acti(ities$ And subsidiar& le(el strateic #lan is directed at
locali5in t!e lobal strate& accordin to t!e #eculiarities of t!e local conditions$ Microsoft )or#oration allo%s
its Euro#ean subsidiaries to de(elo# local strateies to "eet local "ar'et needs$ T!is t&#e of autono"ous
ado#tion to fast c!anin local business en(iron"ent !as been t!e "ain reason for t!e s#atial s#read of MN)s$
T!e autono"& enDo&ed b& subsidiaries is not to turn into d&sfunctional anarc!&, for t!e be!a(ior of indi(idual
"anaers is %ell s!a#ed t!rou! s!ared (ision of, identification %it! and bindin co""it"ent to t!e lobal
strate& of t!e MN)s$ 0ence t!e ro%t! of MN)s$
c. Attraction" O' Internationa! Bu"ine""
T!e attractions of international business include access to ra% "aterials, sales ro%t!, lo% cost #ossibilities and
en!anced #rofitabilit&$
7irst, initiall& "ost MN)s %ere s#readin t!eir %ins loball& Dust to tap raw materials a(ailable else%!ere for
su##ortin #roduction at t!e #atent #lant$ Britis!, 8utc! and 7renc! East India co"#anies are classic e3a"#les
of MN)s of t!e ra%,"aterial see'in t&#e$ No% instead of ta##in ra% "aterials, t!e MN)s set u# #lants
%!ere factor "ar'ets are fa(ourable$ T!eir searc! for ro%t! is ne(er in%ard,see'in but al%a&s out%ard,
oriented$ T!at is t!eir culture and t!is led to ro%t! in international business$
Second, t!e attraction of international business is increased sales growth$ To#,line ro%t! is indis#ensable for
all round #erfor"ance i"#ro(e"ents$ Global "ar'ets #ro(ide t!e o##ortunit& for t!e sa"e$ Geora#!ical
"ar'et ro%t! le(eraes on e3istin brand and tec!nolo&$ T!e ro%t! is t!erefore c!ea#er and !ence !el#s in
containin t!e "iddle,lines *read as costs+ and strent!enin t!e botto",line *t!at is, #rofits+$
T!ird, MN)s are dri(en b& cost"minimization possibilities$ T!e& set u# #lants at #laces %!ere lo%,cost
#roduction #ossibilities are reat$ 0on >on, Tai%an, )!ina, India, Me3ico and Ireland, are #referred b&
MN)s for settin u# electronic industrial units for t!ere is cost efficienc&$ )!ina, bein a c!ea#,labour countr&,
MN)s !a(e started floodin into )!ina$ IBM and 7ord, outsource #roduction of #arts to lo%,%ae countries
suc! as Me3ico and b& establis!in asse"bl& #lants and RF8 centres in Euro#e and .a#an$
7ourt!, international business e3#ansion leads to enhanced profitability$ MN)s are enerall& !i!l& #rofitable$
Profit boo'in facilitates ro%t! di(ersification, "oderni5ation and RF8 co"#etiti(eness$ Actuall& MN)s
boo' #rofits b& bein fle3ible, ada#table and 6uic' in action$ In toda&2s !ead,on co"#etition, t!e "ost
i"#ortant factor for ro%t! is s#eed$ Abilit& to desin, de(elo# and distribute #roducts9ser(ices in s!ort,s#an of
ti"e !olds t!e 'e& to success$ T!is is %!at Bill #ates would call as Business $ %peed of Thought$ T!e
"anaerial culture of MN)s facilitates 6uic' action and ro%t! flo%s t!ereb&$
d. Compu!"ion" 'or Internationa! Bu"ine""
T!e co"#ellin reasons for fir"s oin lobal business are li"itations of do"estic "ar'et and need for ris'
"ini"i5ation b& di(ersification$
7irst, t!e limitations of domestic market are a "aDor co"#ellin factor for business to o lobal$ 0o%e(er bi
t!e do"estic "ar'et, it is but a fraction of %orld "ar'et$ T!ere is a li"it for ro%t!$ 7urt!er, %!en &our
co"#etitor is out,sourcin ro%t!, &ou cannot et confined to do"estic "ar'et$ Tastin t!e forein "ar'et is a
test of &our strent!s as %ell$
Second, businesses !a(e lon bac' reali5ed t!e need for risk"minimizing$ T!reats fro" olio#olistic
co"#etitors are al%a&s t!ere$ 7urt!er countr&,ris' is al%a&s t!ere$ Meetin bot! t!e ris's is facilitated b&
eora#!ical s#read$ B& bein close to "ar'et, better orientation is easil& facilitated$ Global eora#!ical
s#read is ris',"ini"i5in strate&$ And t!ere is ro%t!$ .a#anese co"#etition affects t!e A"erican Auto
Industr&$ So, A"erican Auto fir"s o out to t!e t!ird %orld in searc! of strateic alliance #artners!i#$
1.1.:. /attern" o' Internationa!i;ation
T!e #atterns of internationali5ation are of different s!ades$ T!e sa"e is de#icted in table @$: in ter"s of I"#etus
for internationali5ation, Nu"ber of forein countries landed in, Res#onsibilit& for forein o#erations, Mode of
forein o#eration, O#erational Si"ilarit& bet%een 7 F 8 *forein F do"estic+ and Basic Business Strate&$
TABLE 1.& /attern" o' Internationa!i;ation
(actor" o'
di''erence
LE<ELS O( INTERNATIONLISATION
@<<J
8o"estic
Lo% le(el Mediu" le(el 0i! le(el
I"#etus of
internationali5ation
None Passi(e res#onses
to #ro#osals
Acti(e res#onse
to #ro#osals
Acti(e searc! for
o##ortunities
No: of forein
countries landed in
None @ or : A to @< O @< or "an&
Res#onsibilities of
forein o#erations
None Kested %it!
o(erseas #artners
S!ared %it!
o(erseas #artners
7ull& self !andled
b& fir"
Mode of forein
o#erations
None Li"ited to e3#ort
and i"#ort
Li"ited to
e3#orts and
i"#orts
7orein o#erations
and co(er financin
too
O#erational
si"ilarit& to 7F8
Not
a##licable
Puite si"ilar Muc! si"ilar Moderatel&
dissi"ilar
Basic business
strateies
Locali5ed Et!nocentric Et!nocentric9
Reio centric
Pol& centric or Geo
centric
Source: Based on International Business by John D Daniels and Lee H Radebaugh.
Topic 1. &: TRADE AND IN<EST3ENT (LO#S
Trade and in(est"ent flo%s across t!e !e"is#!eres or a"on t!e countries !a(e been (er& co""on of late$
Global trade in oods and ser(ices are on t!e rise$ In(est"ent flo%s across t!e nations are furt!er !i!er$
1.&.1 Concept" o' Trade and Ine"tment (!o-"
Trade flo% refers to flo% of oods and ser(ices across t!e lobe t!rou! co""ercial transactions$ In s!ort,
i"#orts and e3#orts are t!e routes of trade flo% and constitute$ In fact trade flo% results in international trade$
Trade flo% across t!e lobe !as been #resent t!rou!out "uc! of !istor&, t!ou! its econo"ic, social, and
#olitical i"#ortance !as been on t!e rise in recent ti"es$ Industriali5ation, ad(anced trans#ortation,
lobali5ation, "ultinational cor#orations and outsourcin are all !a(in a "aDor i"#act on trade flo%$
Increasin trade flo% is basic to lobali5ation$ Trade flo% is a "aDor source of econo"ic re(enue for an& nation
t!at is considered a %orld #o%er$ -it!out trade flo%, nations %ould be li"ited to t!e oods found 9 #roduced
%it!in t!eir o%n borders$ A %orld %it!out suc! e3c!anes is called a %orld of autarc!&$ It cannot be t!e best at
all$ Trade flo% facilitates specialized production& but universal consumption$
Investment flow is t!e flo% of ca#ital across t!e lobe$ In a %a& it is e3#ort and i"#ort of ca#ital or finance$
)a#ital ric! countries 9 fir"s e3#ort ca#ital in fa(our of ca#ital needin countries 9 fir"s$ 8irect and Portfolio
in(est"ents flo%s, E6uit& and 8ebt ca#ital flo%s, Multilateral and Bilateral ca#ital flo%s, Pri(ate and
Go(ern"ent ca#ital flo%s, Institutional and Personal ca#ital flo%s, etc are t!e (aried for"s
1.&.& Cau"e" o' Trade and Ine"tment (!o-"
4ou "a& note t!at t!e sa"e factors t!at s#ur fir"s to o lobal are b& and lare t!e reasons for trade and
in(est"ent flo%s as %ell$ So"e of t!ose and ot!er factors are #resented no%$
i$ Di''erence in (actor Endo-ment": Trade and in(est"ent flo%s are influenced b& difference in factor
endo%"ents$ T!e %orld is 'no%n for t!e s'e%ed distribution of factors of resources$ 0ence #roduction
ca#abilities, #ossibilities and scales differ across t!e nations$ E(entuall&, oods flo% across nations$ No%ada&s,
resources t!e"sel(es flo% loball&$
ii Co"t Adanta2e: Trade and in(est"ent flo%s are oaded b& cost ad(antae$ )ost leaders!i# is %!at
international fir"s ai" at in a %orld of t!innin do%n "arins$ Trade in oods is t!e cause and effect of
co"#arati(e cost benefits$ E(en resources flo% across nations to co"#le"ent anot!er resource t!at is c!ea#er in
t!e destination nation$
Result is t!e reduction in o(erall cost$ Tec!nolo& resources are flo%in into )!ina and India, so as to
co"#li"ent t!e c!ea#er !u"an resources a(ailable t!erein$
iii$ /attern" o' Specia!i;ation: Trade and in(est"ent flo%s are triered b& #atterns of s#eciali5ation$
)ountries s#eciali5e$ So"e es#eciall&, Ger"an&, .a#an, U> and USA are ood "anufacturin "ac!ine tools
and e6ui#"ent, so"e li'e t!e USA, .a#an, >orea and Ger"an& are ood in Auto"obiles, so"e li'e t!e USA,
Sina#ore and India are ood in IT and IT enabled ser(ices, so"e li'e t!e USA and 7rance are ood in
Aircrafts, so"e li'e 8en"ar' and U> and USA are ood in food #roducts, so"e li'e S%it5erland, India are
ood in #!ar"aceutical oods etc$ S#eciali5ation s#ells need for trade flo%s$
i( /ro'it 'rom E=c*an2e: Trade and in(est"ent flo%s are "oti(ated b& #rofit fro" e3c!ane$ Milton 7ried"an
%ould sa& t!e sole #ur#ose of businesses is "a'in #rofit b& ser(in t!e societ&$ Profit sources are "an&E one is
international e3c!ane$ Tiru##ur in Ta"ilnadu ained international re#utation as a #roduction !ub of read&,to,
%ear ar"ents because it ained t!rou! international e3c!anes$ E3#ort sales uarantee "ore #rofit #er unit
sale t!an co"#arable do"estic sale$
( Dier"i'ication o' Source" . 3ar8et" 'or /*5"ica! . (inancia! /roduct" and Ri"8: Trade and in(est"ent
flo%s are #ro#elled b& t!e need for di(ersification of sourcin and "ar'ets bot! for #!&sical and financial
#roducts$ Multi#le sources and "ar'ets bot! for in#uts and out#uts and bot! for #!&sical and financial in#uts
are essential to %ard off uncertainties of su##l& c!ain and consu"er #atronae$
(i E=p!oitation o' Natura! Re"ource": In(est"ent and trade flo%s are dri(en b& #rofit,see'in transnational
cor#orations t!at are interested in t!e e3#loitation of natural resources$ T!is #attern of trade and in(est"ent
leads to a !i! ro%t!, t!ou! t!at is subDect to t!e (icissitudes of ter"s,of,trade and ris',return as#ects of
forein in(est"ents$ O(er ti"e, t!e econo"ic base of so"e countries e(en et s!ifted fro" #ri"ar& oods
#roducers to "anufacturin entities, #ri"ar& oods #roducers to ser(ice #ro(iders, or fro" "anufacturin
entities to ser(ices$ T!is leads to sinificant forein in(est"ent and trade in t!e secondar& and tertiar& sectors$
(ii$ /o!ic5 >U? turn To-ard" 3ar8eti;ation @5 3an5 Economie": Since t!e later #art of t!e :<t! centur&,
c!ane fro" t!e /in%ard,loo'in i"#ort,substitution oriented de(elo#"ent fra"e%or'2 to t!e /out%ard,loo'in
e3#ort,led ro%t! oriented de(elo#"ent fra"e%or'2, alon %it! structural adDust"ent #rora""es li'e
econo"ic liberali5ation, #ri(ati5ation and lobali5ation *LPG+ !as been ta'in #lace leadin to increased
o#enin and refor" of "an& national and reional econo"ies$ T!e "ar'et,o#enin #olicies, includin trade
liberali5ation, "acroecono"ic refor"s *suc! as t!e non,directed "onetar& #olicies, fiscal #rudence and fle3ible
e3c!ane rates in so"e countries+, and #ri(ati5ation !a(e led to sinificant de#endence on trade and in(est"ent
inflo%s as trusted %a&s to econo"ic de(elo#"ent$
(iii Common 3ar8et A Currenc5 A Econom5: At t!e sub,reional le(el, t!e #olic& of )o""on Mar'et 9
)urrenc& 9 Econo"& !as facilitated intra,reional trade and in(est"ent$ T!is !as been "anifested in t!e
de(elo#"ent of reional fir"s and a nu"ber of "erers and ac6uisitions to confront e3ternal co"#etition$
Strateies in areas suc! as tec!nolo& ada#tation, "ar'etin and !u"an resource de(elo#"ent to de(elo#
co"#etiti(e ad(antae are also side b& side ta'en u# so as to o#ti"i5e beneficial effects of trade and in(est"ent
flo%s across t!e lobe$
i3 Bi!atera! Trade A Ine"tment and Economic Re!ation"*ip: )ountries also ste# u# bilateral trade and
in(est"ent flo%s substantiall&, ta'in due note of t!e increasinl& di(erse and considerabl& lare nature of t!e
bilateral trade and econo"ic relations!i#$ )ountries %ant to coalesce in econo"ic #aradi" so t!at "utual
understandin and ro%t! result$
3 Ena@!in2 3u!ti!atera!i"m a!on2 -it* Re2iona! /!ura!i"m: 7inall&, "ultilateralis" in t!e for" of GATT F
-TO and -orld Ban' F Multilateral In(est"ent Guarantee Aenc& *MIGA+ besides ot!ers, co,e3istin %it!
reional #luralis" in t!e for" of reional trade bloc's and aree"ents bet%een trade bloc's
1.&.+ Trend in Trade (!o-"
Trade flo%s refer to trade in "erc!andi5e and ser(ices across t!e lobe$ Trade in "erc!andi5e refers to bot!
e3#ort and i"#ort of co""odities, oods, #roducts, e6ui#"ents #lants, and "ac!iner&$ T!at is all (isible ite"s$
Trade in ser(ice refers to bot! e3#ort and i"#ort of ser(ices, or in(isibles li'e insurance, loistics, consultanc&,
tec!nolo&, etc$ t!e trend in t!ese e3#orts and i"#orts is dealt in t!is section$
Table @$A i(es old and recent statistics on lobal trade flo%s 1 "erc!andi5e e3#orts$ Global e3#orts of
"erc!andi5e !ad been a #altr& L ;G billion in @GH= and L =H bn in @G;A, recordin a si"#le ro%t! of =$:J #er
annu"$ Bet%een @G;A and @GIA t!e si"#le annual ro%t! %as =$I J$ Bet%een @GIA and @G?A, t!e ro%t! %as
:?J #$a$ In t!e ne3t A decennials #eriods *@G?A ,=A, @G=A ,GA and @GGA ,:<A+ t!e annual ro%t! rates %ere,
res#ecti(el&, ::J, @<J and @<J$ In :<<A t!e lobal "erc!andi5e e3#orts recorded a fiure of L ?A?@ billion
and in t!e recent &ear :<<I it stood at L @@?=A bn$ Bet%een :<<A and :<<I, t!e annual a(erae si"#le ro%t!
J %as :<$ T!e #eriod @G?A ,=A recorded t!e !i!est ro%t! rate follo%ed b& t!e recent #eriod, :<<A,<I$
Ta@!e 1.+: #or!d merc*andi"e e=port" @5 Re2ion and Se!ected econom5
Anot!er i"#ortant trend obser(ed is t!at t!e s!are of Nort! A"erica, co"#risin, t!e USA, )anada and Me3ico
in %orld "erc!andi5e e3#orts d%indled steadil& fro" :=$@J in @GH=, to :H$=J in @G;A, to @G$GJ in @GIA, to
@?$AJ in @G?A and to @I$=J in @G=A$ In @GGA it rose to @=$<J, onl& to fell do%n to @;$=J in :<<A and furt!er
do%n to @H$:J in :<<I$ 8urin t!e sa"e #eriod, a si"ilar fate %as s!ared b& t!e Sout! and )entral A"ericas,
and t!e Africa$ But t!e Euro#e recorded a ro%in s!are u#to @G?A, and t!en a decline, t!ou! its #osition in
:< s!o%ed
a de#letin #erfor"ance$ T!e Asian s!are al"ost doubled fro" @HJ in @GH= to :?$=J in :<<I$ )!ina2s s!are in
t!e last @$; decades %as re"ar'able, t!ou! .a#an s!o%ed so"e s!a'iness$ India is &et to reain its lorious
#ast, t!ou! absolute fiures are ood$
Table @$H i(es old and recent statistics on lobal trade flo%s 1 "erc!andi5e i"#orts$ Global e3#orts of
"erc!andi5e !ad been a #altr& LI: billion in @GH= and L =; bn in @G;A, recordin a si"#le ro%t! of =J #er
annu"$ Bet%een @G;A and @GIA t!e si"#le annual ro%t! %as G$A J$ Bet%een @GIA and @G?A, t!e ro%t! %as
:I$AJ #$a$ In t!e ne3t A decennials #eriods * @G?A ,=A, @G=A ,GA and @GGA ,:<A+ t!e annual ro%t! rates %ere,
res#ecti(el&, :@$IJ, @<J and @<$AJ$ In :<<A t!e lobal "erc!andi5e i"#orts recorded a fiure of L ?I;<
billion and in t!e recent &ear :<<I it stood at L @:@@A bn$ Bet%een, :<<A F :<<I, t!e annual a(erae si"#le
ro%t! %as @G$HJ$ T!e #eriod @G?A,=A recorded t!e !i!est ro%t!, follo%ed b& t!e recent #eriod, :<<A,<I$
Ta@!e 1.1: #or!d merc*andi"e import" @5 Re2ion and Se!ected economie"
Anot!er i"#ortant trend obser(ed is t!at t!e s!are of Nort! A"erica, co"#risin, t!e USA, )anada and Me3ico
in %orld "erc!andi5e i"#orts sli!tl& increased fro" @=$;J in @GH=, to :<$;J in @G;A, to @I$@J in @GIA, to
@?$:J in @G?A and to @=$;J in @G=A to :@$;J in @GGA and to ::$IJ in :<<A$ It sli!tl& fell do%n to :@J in
:<<I$ 8urin t!e sa"e #eriod, a si"ilar fate %as s!ared b& t!e Sout! and )entral A"ericas, and t!e Africa$ But
t!e Euro#e recorded a ro%in s!are u#to @G?A, and t!en a decline$ Its #osition in :< and 7rance s!o%ed a declinin
i"#orts s!are$ T!e Asian s!are al"ost doubled fro" @A$GJ in @GH= to :;J in :<<I$ )!ina2s s!are in t!e last
@$; decades %as re"ar'able, t!ou! .a#an s!o%ed so"e #ea's and trou!s$
1.&.1 Trend in Ine"tment (!o-"
7orein in(est"ents "ean in(est"ents be&ond borders$ Of late in(est"ent flo% is beco"in increasinl&
borderless$ Searc! for in(est"ent o##ortunities an&%!ere across t!e lobe is t!e order of t!e da&$ So also searc!
for funds$ Territor&,free de"and for finance b& fir"s, o(ern"ents or indi(iduals and in(est"ent of t!e sa"e
b& fir"s, o(ern"ents or indi(iduals are t!e t!rusts of t!e %orld no%$Peter 8ruc'er said, to "aintain
substantial "ar'et standin on an i"#ortant area, a business concern re6uires #!&sical #resence as a #roducer in
t!at area too$ Suc! #resence in(ariabl& leads to in(est"ent in o(erseas areas$
)o"#etencies ained t!rou! trade le(eraed t!rou! 78I: Global trade o(erned b& t!e s&ste" of
co"#arati(e costs, leads to lobal in(est"ents as %ell since in(est"ent follo%s trade to le(erae co"#etencies
ained t!rou! trade$ T!e earl& t%entiet! centur& sa% t!e ro%t! of nationalist forces first on t!e #olitical #lane
and t!en on t!e econo"ic,finance,trade #lanes as %ell$ -!ile nationalist feelins are fine in t!e #olitical arena,
t!e sa"e are not so in t!e econo"ic,finance,trade conte3ts in (ie% of econo"ic interde#endence of nations$
And t!is %as reali5ed in t!e last 6uarter of t!e :<t! centur& and t!at lob list feelins, re#lacin t!e nationalist
feelins on econo"ic,finance,trade #lanes e"ered al"ost all o(er t!e %orld, includin )!ina, So(iet Union
and #ro"inent East Euro#ean nations, %!ic! %ere core co""unist ideolo& dri(en econo"ies and also t!e
"id,#at! econo"ies li'e India$ T!is is t!e re,da%n of t!e leac& of Ada" S"it!, t!e reatest #olitical
econo"ist of t!e @=t! centur& %!o ad(ocated free trade and !ence lobal in(est"ent$
7orein 8irect In(est"ent *78I+ is in(est"ent in business %!ic! in(ol(es substantial o%ners!i# and control,
entre#reneurial ris's, tec!nolo& and "anae"ent transfer and !osts of i"#lications for t!e !ost countr& and
t!e fir" concerned$ 78I t&#icall& ta'es t!e for" of startin a subsidiar&, ac6uirin a sta'e in an e3istin fir" or
startin a Doint (enture in t!e forein countr&$ 8irect in(est"ent and "anae"ent of t!e fir"s concerned
nor"all& o toet!er$ If t!e in(estor !as onl& a sort of #ro#ert& interest in in(estin t!e ca#ital in bu&in
e6uities, bonds, or ot!er securities abroad, it is referred to as forein #ortfolio in(est"ent$ T!at is, in t!e case of
#ortfolio in(est"ents, t!e in(estor uses ca#ital in order to et a return on it, but !as not "uc! control o(er t!e
use of t!e ca#ital$ 0are %e focus on 78I$ Table @$; i(es t!e trend in 78I flo%s$
Ta@!e 1.4: Se!ected Indicator" o' (DI ((i2. in @i!!ion US B%
Global 78I inflo% %as a feeble fiure of L;G bn in @G=: accountin for rou!l& <$; J of t!e t!en Global G8P
*GG8P+ of L @:<<: bn$ T!e fiure rose to L:<: bn in @GG< accountin for rou!l& <$G J of t!e GG8P of L
::<I< bn$ B& :<<; t!e 78I flo%s reac!ed LGHI bn or :$@ J of GG8P and in :<<I t!e fiure touc!ed L@A<I bn
or :$?J of GG8P$
A reater #art of 78I flo%s is accounted b& cross,border Merers and Ac6uisitions *MFA+$ T!e u#%ard trend
in forein direct in(est"ent *78I+ t!at bean in :<<H accelerated furt!er in :<<I$ 78I flo%s increased in all t!e
"aDor countr& rou#s, na"el&, de(elo#ed countries, de(elo#in countries and t!e transition econo"ies of
Sout!,East Euro#e and t!e )o""on%ealt! of de#endent States *)IS+ but at (ar&in rates$ Accordin to t!e
UN)TA8, t!e sustained ro%t! of 78I and related international #roduction #ri"aril& reflected t!e stron
econo"ic #erfor"ance and increasin #rofits of "an& countries in t!e %orld, furt!er liberali5ation of t!eir
#olicies, and ot!er s#ecific factors suc! as currenc& "o(e"ents, stoc' e3c!ane and financial "ar'et
de(elo#"ents and !i! co""odit& #rices$ Increases in cross,border "erers and ac6uisitions *MFAs+, fuelled
substantiall& b& Pri(ate E6uit& 7unds, also added to 78I ro%t!$ 78I %as at its #ea' in :<<< %it! L@,H@@
billion$
(DI '!o-" to dee!oped and Dee!opin2 #or!d": 78I inflo%s in :<<I %ere A=J !i!er t!an in :<<;,
a##roac!in t!e #ea' of L@,H@@ billion reac!ed in :<<<$ Alt!ou! 78I flo%s to all t!ree "aDor countr& rou#s
rose, t!e& (aried reatl& a"on reions and countries$ 78I flo%s to de(elo#ed countries in :<indo", %!ic! !ad led in :<<;$ T!e
Euro#ean Union *EU+ re"ained t!e larest !ost reion, %it! H@J of total 78I inflo%s$ 78I inflo%s to
de(elo#in countries and econo"ies in transition rose b& :@J and I=J, res#ecti(el&, to ne% record le(els for
t!e"$ UN)TA8 fiures sa& t!at t!e 8e(elo#in Asia retained its stron attraction for in(estors, accountin for
"ore t!an t%o t!irds of t!e total inflo%s to all de(elo#in countries in :<<I$
(DI in'!o-" A'rica: In Africa, 78I inflo%s e3ceeded t!eir #re(ious record set in :<<;$ 0i! #rices and
buo&ant lobal de"and for co""odities %ere aain 'e& factors$ T!e oil industr& attracted in(est"ent fro"
TN)s based in bot! de(elo#ed and de(elo#in countries$ )ross,border MFAs in t!e e3tracti(e industries rose
fi(e,fold to LH$= billion$ As in #re(ious &ears, accordin to UN)TA8, "ost of t!e inflo%s %ere concentrated in
-est, Nort! and )entral Africa$ 0o%e(er, inflo%s re"ained s"all in lo%,inco"e econo"ies %it! fe%
endo%"ents of natural resources$
(DI in'!o-" Latin America and t*e Cari@@ean: Inflo%s into Latin A"erica and t!e )aribbean rose b& @@J
in :<<I$ 0o%e(er, if t!e offs!ore financial centres are e3cluded, t!e& re"ained al"ost unc!aned o(er t!e
#re(ious &ear$ 78I inflo%s Me3ico, Bra5il: Me3ico %as t!e larest reci#ient follo%ed b& Bra5il$ -!ile inflo%s
to Me3ico %ere si"ilar to :<<;, t!ose to Bra5il rose b& :;J$
(DI in'!o-" Andean $roup: Andean Grou# is a trade orani5ation in Li"a, Peru$ In @GIG, Boli(ia, )!ile,
)olo"bia, Ecuador, and Peru establis!ed t!e rou#$ In @G?A, Kene5uela Doined$ )!ile 6uit in @G?I, as did Peru
in @GG:$ T!e rou# created a free trade area called t!e Andean Pact in @GG:$ In t!e Andean rou# of countries,
t!e co""odit& #rice boo" induced a "ore restricti(e reulator& en(iron"ent o(ernin TN) #artici#ation in
t!e e3tracti(e industries$ T!e #ossibilit& of additional reulator& c!anes and of t!eir s#read to "ore countries
"a& !a(e raised uncertaint& a"on in(estors in t!e #ri"ar& sector, resultin in lo%er 78I flo%s to so"e
countries in t!e reion$ In addition, !i! co""odit& #rices and resultin i"#ro(e"ents in current,account
balances led to an a##reciation of t!e currencies of so"e "ineral,ric! countries in t!e reion, #otentiall&
!ar"in t!e #ros#ects for 78I in ot!er e3#ort,oriented acti(ities$
(DI in'!o-" to Sout*) Ea"t and Sout*-Ea"t A"ia and Oceania: 78I inflo%s to Sout!, East and Sout!,East
Asia and Oceania "aintained t!eir u#%ard trend, reac!in a ne% !i! in :<on and Sina#ore retained t!eir #ositions as t!e t!ree larest reci#ients of 78I in t!e
reion$ Out%ard 78I fro" t!e reion sured, dri(en b& t!e ra#id rise in 78I fro" all t!e Asian sub,reions and
"aDor econo"ies$ 78I inflo%s to Oceania re"ained s"all, at less t!an LH<< "illion$
(DI '!o- to #e"t A"ia: In -est Asia, 78I flo%s bot! in%ard and out%ard, "aintained t!eir u#%ard trend in
:<<I$ Tur'e& and t!e oil,ric! Gulf States continued to attract t!e "ost 78I inflo%s, ac!ie(in record le(els in
:<u%ait, accounted for "ost of t!e
rise in out%ard 78I fro" t!e reion$ )ross,border MFAs continued to be t!e "ain "ode of out%ard 78I,
#articularl& b& State,o%ned enter#rises$ T!e reions closer ties %it! econo"ies in ot!er #arts of Asia and Africa
su##ort its ener&,related 78I$
(DI in'!o-" Sout*-Ea"t Europe and t*e CIS: 78I inflo%s to t!e @G countries of Sout!,East Euro#e and t!e
)IS e3#anded sinificantl& in :<<I, for t!e si3t! consecuti(e &ear, and t!e& "ore t!an doubled in t!e reions
larest !ost countr&, t!e Russian 7ederation$ T!e continued rise in 78I flo%s across reions larel& reflects
stron econo"ic ro%t! and !i! #erfor"ance in "an& #arts of t!e %orld$
(actor" 'ue!!in2 up t*e (DI '!o-": A"on t!e different factors, cro""-@order 3.A, %!ic! account for a
lare s!are of 78I flo%s, is a reat factor$ T!e nu"ber of reen,field and e3#ansion in(est"ent #roDects
increased b& @AJ to @@,=<< #roDects, notabl& in de(elo#in countries and in t!e ser(ices sector$ In :<<I, 78I
inflo%s accounted for !alf of all net ca#ital flo%s to de(elo#in countries$ T!us, as in recent &ears, 78I flo%s
continued to be t!e "ost i"#ortant and stable source of e3ternal financin for de(elo#in countries$ Mobili5in
international resources for de(elo#"ent, includin 78I, %as set out as one of t!e obDecti(es in t!e Monterre&
)onsensus$
Global 78I flo%s also rose as a result of a -ea8enin2 do!!ar in &CC:$ T!e United States attracted lare inflo%s
fro" bot! t!e euro area and .a#an$ O(erall, !o%e(er, t!e a"ounts in :<<I *as %ell as :<<;+ %ere not "uc!
!i!er t!an t!ose of t!e @GG<s$ T!e s!ar# a##reciation of t!e euro in recent &ears !as not led to as stron
increase in 78I outflo%s fro" t!e euro area into t!e United States and .a#an, #ossibl& suestin t!at TN)s
fro" t!e countries in t!e euro area are reactin less to e3c!ane rate c!anes t!an in t!e #ast$ T!is is #robabl&
because t!e& !a(e alread& reac!ed a relati(el& !i! deree of internationali5ation, %!ic! "a'es t!eir #rofits
less (ulnerable to e3c!ane rate c!anes (is,Q,(is #articular !ost countries$
Moreo(er, TN) strateies are no% influenced b& ot!er "ecu!ar dee!opment"$ 7or e3a"#le, t!e creation of t!e
euro area !as #ro"oted reater reional interation and concentration of econo"ic acti(it& %it!in t!e EU and
led to increased intra,EU 78I flo%s to t!e co""on currenc& area as %ell as to t!e United >indo" and t!e EU
accession countries$
Increa"ed corporate pro'it" and *i2*er "toc8 a!ue", also #artl& e3#lain risin lobal 78I flo%s$ 7or
e3a"#le, t!e #rofits,to,sales ratio of t!e United States to# ;<< fir"s %as t!e !i!est for t!e #ast t%o decades, in
:<indo", for e3a"#le, t!e net rate of return of #ri(ate non,
financial cor#orations in :<indo", National Statistics Office, :<<?+$
Profits earned abroad b& forein affiliates %ere also !i!$ Inco"e on 78I *i$e$ re#atriated #rofits and rein(ested
earnins as recorded in !ost countries balance of #a&"ents+ rose anot!er :GJ in :<<I, follo%in a @IJ rise in
:<<;$ In t!e GA countries for %!ic! data on all t!ree co"#onents of 78I, na"el& e6uit& in(est"ents, rein(ested
earnins and ot!er ca#ital *essentiall& intra,co"#an& loans+ %ere a(ailable, rein(ested earnins in :<<I$
TO/IC 1.+ ECONO3IC TDEORIES
International trade and international in(est"ent #atterns and trends are sou!t to be e3#lained in ter"s of
t!eories$ T!e causes, effect and courses of international trade and in(est"ent are (isuali5ed in t!e t!eories$
T!ere "an& t!eories, because t!e intricacies and d&na"ics of trade and in(est"ent cannot be ca#tured b& an&
one t!eor& for it is too difficult for fe% "inds to stud& t!e "inds of "an& -e !a(e "an& t!eories of trade and
in(est"ent$
1.+.1 T*eorie" o' Internationa! Trade
T!eor& of "ercantilis", t!eor& of neo,"ercantilis", absolute cost ad(antae t!eor&, co"#arati(e cost
ad(antae t!eor&, 0ec'sc!er,O!lin T!eor& of factor #ro#ortion, )ountr& si"ilarit& t!eor&, International
Product life )&cle t!eor&, )ountr& Si5e t!eor&, Inde#endence, interde#endence,de#endence t!eor&, Strateic
Ri(alr& t!eor&, Porter2s )o"#etiti(e Ad(antae t!eor&, etc are dealt$
1.+.1.1 T*eor5 o' 3ercanti!i"m
T!e "ercantilists #ro#osed t!eor& of "ercantilis"$ T!e& %ere a rou# of econo"ists %!o #receded Ada"
S"it!$ T!e foundations of econo"ic t!ou!t bet%een @;<< and @=<< %ere based on "ercantilis"$ Mercantilists
belie(ed t!at t!e %orld !ad a finite store of %ealt!E t!erefore, %!en one countr& ot "ore, ot!er countries !ad
less$ Mercantilists restricted i"#orts and encouraed or subsidi5ed e3#orts as a conscious #olic& to "a'e t!eir
citi5ens better off$ Mercantilists Duded t!e success of trade b& t!e si5e of t!e trade balance$
Mercantilis" %as a si3teent!,centur& econo"ic #!iloso#!& t!at "aintained t!at a countr&2s %ealt! %as
"easured b& its !oldins of old and sil(er$ T!is re6uired t!at t!e countries to "a3i"i5e e3#orts and "ini"i5e
i"#orts$ T!e loic %as trans#arent to si3teent!,centur& #olic& "a'ers t!at if foreiners bou!t "ore oods
fro" us t!an %e bou!t fro" t!e", t!en t!e foreiners !ad to #a& us t!e difference in old and sil(er, enablin
us to a"ass "ore treasure$ -it! t!at treasure %e could e3#and t!e nation2s lobal influence$
Politicall&, "ercantilis" is #o#ular %it! "an& "anufactures and t!eir %or'ers$ E3#ort,oriented "anufacturers
fa(oured "ercantilist trade #olicies, suc! as t!ose i(in subsidies or ta3 rebates, %!ic! sti"ulated t!eir sales to
forein bu&ers$ 8o"estic "anufacturers t!reatened b& forein i"#orts endorsed "ercantilist trade #olicies, suc!
as t!ose i"#osin tariffs or 6uotas, %!ic! #rotected t!e" fro" forein co"#etition accordin to Ma!one&,
Tri, Griffin, F Pusta&$
Mercatilists #ressed for fa(ourable balance of trade *BOT+ or balance of #a&"ents *BOP+ as aainst t!e
unfa(ourable one$ In a %a& it is ood because &our currenc& a##reciates %it! "ountin sur#lus on t!e fore3
front, and t!e countr& can attract "ore forein ca#ital infusion furt!er strent!enin t!e countr&2s econo"&,
infrastructure, etc$ Ma& be toda& )!ina and .a#an %it! enor"ous fa(ourable BOT and BOP et all t!e benefits
en(isaed b& "ercantilists$
But t!e #roble" is can a countr& stic' to continuousl& enor"ous fa(ourable BOT and BOP fore(erC If e(er&
countr& (ies for t!e sa"e, t!ere %ill onl& be autarc!&$ Besides, "ost "e"bers of societ& %ere !urt b&
"ercantilist #olicies of #a"#ered e3#orters and #enali5ed i"#orters$ Go(ern"ent subsidies of e3#orts for
selected industries %ere #aid for b& ta3#a&ers$ T!is is distortion of trade and interference in efficient allocation
of resources$ Actuall& t!ose countries %!ic! #ursued a #olic& of i"#ort,restriction in t!e end re% less$
E3a"#le India, until "id @GG<s$ T!ose t!at ran !ea(& deficits re% %ell$ E3a"#le USA, till recentl&$
E(aluation: Mercantilist %riters !a(e been lauded and critici5ed in t!e literature on forein trade at least since
0u"e2s Political 8iscourses in @?;:$ Mercantilists !a(e been critici5ed for e(er&t!in fro" t!eir (ie%s
reardin t!e ains fro" trade to t!eir self,#ro"otion of t!e "erc!ant2s role in societ& as bein i"#ortant$
Mercantilist %riters assu"ed t!at t!e econo"& %ill enerall& o#erate at a #ace t!at lea(es resources 1land and
labor 1 idle, but in realit& t!e econo"& naturall& tends to full e"#lo&"ent$ T!is is a Mfla%N in t!e loical
foundation of "ercantilist t!ou!t$ T!e rei"e of -TO !as "o(ed t!e %orld a%a& fro" "ercantilis" b&
#ressin for free trade %it! reduced #rotectionis"$
1.+.1.& T*eor5 o' Neo-3ercanti!i"m
Mercantilis" is still in (oue$ Mercantilist #olicies are #oliticall& attracti(e to so"e fir"s and t!eir %or'ers, as
"ercantilis" benefits certain "e"bers of societ&$ Modern su##orters of t!ese #olicies are 'no%n as neo,
"ercantilists, or #rotectionists$ T!e neo,"ercantilists %ant !i!er #roduction t!rou! full e"#lo&"ent and t!at
e(er& industr& #roduces an e3#ortable sur#lus leadin to fa(ourable BOT$ )onsciousl& or ot!er%ise, e(er&
countr& is concerned about increasin e3#ort earnins$ T!e "erits of surin fore3 sur#lus built t!rou! e3#orts
s#ea's %ell of a countr&2s ca#abilit& to cater to %orld2s needs 6ualitati(el&, 6uantitati(el& and in (aried
#roduct9ser(ice ranes$ Ri!t no% )!ina, .a#an, Sina#ore, >orea and Tai%an !a(e t!e rarit& of reat e3#ort
sur#lus$ -e cannot sa& t!e& are neo,"ercantilists, but t!e& !a(e !ue e3#ort sur#lus$ E(er& countr& does %!at
is #ossible to "eet t!is end$ But t!e "odern trade e"#!asis is /E3#ort "ore and I"#ort "ore2$
1.+.1.+ T*eor5 o' A@"o!ute Co"t Adanta2e
Ada" S"it! %as t!e first to co"e u# %it! t!e t!eor& of absolute ad(antae$ T!eor& of Absolute )ost
Ad(antae suests t!at a countr& s!ould #roduce and e3#ort t!ose oods and ser(ices for %!ic! it is "ore
efficient t!an ot!er countries and !ence !as absolute cost ad(antae, and i"#ort t!ose oods and ser(ices for
%!ic! ot!er countries are "ore efficient t!an it and !ence enDo& absolute cost ad(antae o(er it$
Accordin to Ada" S"it!, "ercantilis"2s basic #roble" is t!at it confuses t!e ac6uisition of old and sil(er
%it! t!e ac6uisition of %ealt!$ In !is celebrated boo', /An In6uir& into t!e Nature and )auses of t!e -ealt! of
Nations2 *@??I+, Ada" S"it! attac'ed t!e intellectual basis of "ercantilis" and de"onstrated t!at
"ercantilis" actuall& %ea'ens a countr&$ S"it! "aintained t!at a countr&2s true %ealt! is "easured b& t!e
%ealt! of all its citi5ens, not Dust t!at of its "onarc! *Ma!one&, Tri, Griffin, F Pusta&, @GG=+$
Sources of Ad(antaes: T!e sources of ad(antae could be "an& and di(erse$ Natural ad(antae because of
endo%"ents of natural resources li'e, oil F as, "inerals and "etals, (alle&s and "ountains, %aters and
beac!es, cli"ate and eco,s&ste", etc is a reat ad(antae$ T!e "iddle,east2s "eteoric rise is attributed to t!e oil
F as de#osits$ Touris" #otentials are "ostl& nature,"ade$ Gold de#osits in Sout! Africa are one of t!e causes
of t!e countr&2s ric!ness$ )ountries %it! lare de#osits of Uraniu" %ill rule t!e %orld in course of ti"e
because of t!e "ulti#le a##lications of t!e resource in #eace and disturbance$ But natural resource based
ad(antae is finite$ Ac6uired Ad(antae is deri(ed fro" education, 'no%lede, s'ills, tec!nolo&, inno(ation
and RF8 ca#abilities$ Toda&, t!e ac6uired ad(antaes co""and "ore res#ects because of its infiniteness$ All
t!e de(elo#ed countries in t!e %orld o%e t!eir ro%t! to ac6uired ad(antae rat!er t!an natural ad(antae$ To
!arness t!e natural resource effecti(el&, tec!nolo& is needed, %!ic! is an ac6uired ad(antae$ Production
#ossibilities are en!anced %it! "ore ac6uired ad(antaes, t!an %it! natural ad(antaes$
Mec!anis" of t!e t!eor&: A countr& is said to be "ore efficient t!an anot!er countr&, if it can #roduce "ore
out#ut *oods+ for a i(en 6uantit& of in#uts, suc! as labour or ca#ital in#uts$ An e3a"#le is t!at t!ere are onl&
t%o countries, India and USA$ T!e& bot! #roduce Buses and )ars$ -it! @ unit of labour F ca#ital "i3, India
can #roduce I Buses or : )ars, %!ere as USA %it! t!e sa"e @ in#ut,"i3 can #roduce : Buses or ; )ars$
Econo"ists use t!e ter" absolute ad(antae %!en co"#arin t!e efficienc& of one #erson, fir" or nation %it!
t!at of anot!er$ T!e #roducer t!at re6uires a s"aller 6uantit& of in#uts to #roduce a #roduct or "ore units of
out#ut #er i(en in#ut le(el, is said to !a(e an absolute ad(antae in #roducin t!at ood$ -it! trade, countries
can s#eciali5e on t!e lines of indi(idual efficiencies and t!at total out#ut of bot! t!e #roducts %ill be "ore,
co"#ared to total out#ut obtainable %!en countries do not trade and s#eciali5e$
Production le(el %it!out trade or t!e #osition of Autarc!&: -it!out trade bot! %ill #roduce bot! t!e oods$ Sa&
out of t!eir @<< units of labour F )a#ital "i3, eac!, ;<J is de(oted for Buses and t!e ot!er ;<J for )ars$
T!en, India %ould !a(e #roduced, A<< buses * I 3 ;<+ and @<< cars * : 3 ;<+ and USA #roduced @<< buses *: 3
;<+ and :;< cars *; 3;<+$ Total #roduction of buses b& bot! t!e countries R A<< busesS @<< buses R H<< buses$
Total #roduction of cars b& bot! t!e countries R @<<cars S :;< cars R A;< cars$
Production le(el %it! trade: India !as an absolute ad(antae o(er USA, %!en #roducin Buses, and USA !as an
absolute ad(antae o(er India, %!en #roducin )ars$ T!is suests t!at India s!ould concentrate on Buses and
e3#ort so"e of its Buses to USA, and USA s!ould concentrate on )ars and e3#ort so"e of its )ars to India$
Table @$I i(es t!e #osition$
Ta@!e 1.: A@"o!ute Co"t Adanta2e
-it! total s#eciali5ation alon t!e lines of absolute ad(antae, India can #roduce I 3 @<< R I<< buses and USA
can #roduce ; 3 @<< R ;<< cars$ See t!e out#ut s"artl& rises b& a bi "arin of :<< buses and @;< cars %it!
trade aainst t!e #osition autarc!&$
No% let us assu"e t!at bot! countries !a(e @<< units of labour
3erit" o' t*e T*eor5: T!ere e"eres s#eciali5ation in lines of #roduction across t!e countries$ S#eciali5ation
!as its ad(antaes of 6ualit& en!ance"ents, inno(ation, cost "ini"i5ation and so on$ -it! t!e %ell earned
e3#ort re(enue, i"#orts can be funded$ T!ere is societal ad(antae$
Limitation" o' t*e t*eor5: T!e "ain #lan' of t!e t!eor&, t!at is, s#eciali5ation co"es under t!e lens of
scrutin&$ S#eciali5ation !as its doses of de"erits$ 7or strateic reasons countries don2t %ant s#eciali5ation$ T!e
absolute ad(antae t!eor& re6uires t!at to effect trade bet%een countries, one countr& is to be su#erior in one
#roduct and t!e ot!er in a different #roduct$ -!at about a situation, "ostl& t!is is t!e realit&, %!en one countr&
is su#erior to ot!er in #roduction of bot! t!e #roductsC -ill t!ere be no trade bet%een countriesC
1.+.1.1 T*eor5 o' Comparatie Co"t Adanta2e
8a(id Ricardo, t!e earl& nineteent!,centur& Britis! econo"ist sol(ed t!e #roble" of t!e t!eor& of absolute cost
ad(antae, b& de(elo#in t!e t!eor& of co"#arati(e cost ad(antae$ T!e t!eor& of co"#arati(e cost ad(antae,
states t!at a countr& s!ould #roduce and e3#ort t!ose oods and ser(ices for %!ic! it is relati(el& "ore efficient
t!an are ot!er countries and i"#ort t!ose oods and ser(ices for %!ic! ot!er countries are relati(el& "ore
efficient t!an it$
Mec!anis" of t!e t!eor&: Absolute cost ad(antae suests t!at no trade %ould occur if one countr& !as an
absolute ad(antae o(er bot! #roducts$ T!e differences bet%een absolute and co"#arati(e cost ad(antae
t!eories are subtle$ Absolute ad(antae loo's at absolute efficienc& differences, co"#arati(e ad(antae loo's at
relati(e efficienc& differences$ Ta'e India and USA aain as e3a"#les, t!is ti"e India is better t!an USA at
#roducin bot! #roducts Buses and )ars$ India #roduces I Buses for e(er& H )ars, and USA #roduces : Buses
for e(er& A )ars$
Absolute ad(antae %ould suest t!at no trade s!ould occur, because India is "ore efficient t!an USA in
#roducin bot! oods$ T!e t!eor& of co"#arati(e ad(antae, suests t!at trade s!ould still occur$ India !as
ad(antaes in bot!, but co"#arati(el& "ore ad(antae t!an USA in #roduction of Buses *@$; Buses for e(er&
)ar or <$I? )ar for e(er& Bus+$ USA !as disad(antae in bot!, but co"#arati(el& less disad(antae in t!e
#roduction of )ars *@$= )ars for e(er& Bus or <$;I Bus for e(er& )ar+$
Production le(el %it!out trade or t!e #osition of Autarc!&: -it!out trade bot! %ill #roduce bot! t!e oods$ Sa&
out of t!eir @<< units of Labour F )a#ital "i3, eac!, A;J is de(oted for Buses and t!e ot!er I;J for )ars$
T!en, India %ould !a(e #roduced, AG< buses * I 3 I;+ and @H< cars * H 3 A;+ and USA #roduced @A< buses *: 3
I;+ and @:I cars *A$I 3A;+$ Total #roduction of buses b& bot! t!e countries R AG< busesS @A< buses R ;:<
buses$ Total #roduction of cars b& bot! t!e countries R @H< cars S @:I cars R :II cars$
Econo"ists use t!e ter" co"#arati(e cost ad(antae %!en describin t!e o##ortunit& cost of t%o #roducers$
T!e #roducer %!o !as t!e s"aller o##ortunit& cost of #roducin a ood is said to !a(e a co"#arati(e cost
ad(antae in #roducin t!at ood$
Table @$? e3#lains t!e co"#arati(e cost ad(antae t!eor&, t!e su#eriorit& of one countr& *India+ o(er t!e ot!er
*t!e USA+ in bot! t!e #roducts, t!e o##ortunit& cost of Buses o(er cars and t!at of car o(er Buses and t!e
resultin lines of s#eciali5ation and e(entual lines of e3#ort$
Ta@!e 1.E Comparatie Co"t Adanta2e
/roduction !ee! -it* trade: India !as co"#arati(el& "ore ad(antae o(er USA, %!en #roducin Buses
aainst )ars, and USA !as co"#arati(el& less dis,ad(antae o(er India, %!en #roducin )ars as aainst Buses$
T!is suests t!at India s!ould concentrate on Buses and e3#ort so"e of its Buses to USA, and USA s!ould
concentrate on )ars and e3#ort so"e of its )ars to India$ -it! t!is total s#eciali5ation alon t!e lines of
absolute ad(antae, India can #roduce I 3 @<< R I<< buses and USA can #roduce A$I 3 @<< R AI< cars$ See
%it! s#eciali5ation, t!e out#ut of buses s"artl& rises b& a bi "arin of =< buses, and out#ut of cars rises b& GH
cars as aainst t!e #osition autarc!&$ So it #a&s to s#eciali5e on t!e lines of co"#arati(e costs and trade$
3erit" o' t*e t*eor5: 7ree trade is t!e onl& %a& to ac!ie(e efficient #roduction of oods and ser(ices$ It is !o%
#roducers are able to find t!e lo%est cost "et!od of #roduction in a lobal econo"&$ In t!e lon run, consu"ers
in bot! countries %ill be better off %it! trade t!an %it!out trade$ All t!e ad(antaes of s#eciali5ation and free
trade are t!e fa(ourable #oints of t!e t!eor&.
Limitation" o' t*e t*eor5: 7irst li"itation is t!at t!e assu"#tion of full e"#lo&"ent$ 'ack of validity of the
assumption of full employment is one li"itation$ -it! !ue une"#lo&"ent of !u"an resources in "ost
de(elo#in and underde(elo#ed countries, t!e (alidit& of t!e t!eor& stands 6uestionable$ T!is "a& force t!e" to
enter into areas of #roduction not efficient to enter u#on$ Second, t!ere !as to be econo"ic di(ersification,
rat!er t!an s#eciali5ation for t!e reasons of ris' di(ersification$ T!e demerits of specialization are a drain on t!e
soundness of t!e t!eor&$ T!ird, une(ual sharing of benefits of trade is t!e ne3t dra%bac'$ T!e benefits fro"
trade "ust be e6uitabl& s!ared bet%een countries, but not$ T!e barainin #o%er of nations counts "uc! !ere$
Generall& ter"s of trade are al%a&s aainst t!e #oor countries$ 0ence t!e& are #oorT 7ourt!, fla% in
co"#arati(e cost ad(antae t!eor& is t!at it assu"es t!at all t!e factors of #roduction sta& %it!in one countr&$
T!e t!eor& assu"es t!at %!en e3#ort de"and fa(ors one #roduct o(er anot!er, businesses easil& c!ane fro"
#roducin one #roduct to #roducin anot!er$ But, factor "ar'ets toda& are international for ca#ital and not for
land or labor: )a#ital can cross national boundaries easil& %!ile labor cannot$ -!en ca#ital crosses national
boundaries, t!en #roduction is "o(ed to t!e lo%er cost countr&E e"#lo&"ent increases in t!e forein countr&
instead of "o(in to anot!er business %it!in t!e sa"e countr&$
E"#lo&"ent and %elfare in t!e !i!er cost countr& is reducedE consu"ers and #roducers in t!e !i!er cost
countr& suffer$ T!is is e3actl& %!at !a##ens %it! out,sourcin, #lant relocation in fa(our of c!ea#,labour
countries li'e India and )!ina$ 7urt!er, trade reduces consu"er and #roducer %elfare in at least one countr&
%!en one or "ore of t!e factors of #roduction are able to cross national boundaries and ot!ers cannot$ Land is
absolutel& i""obile and labor is "ostl& i""obileE #er!a#s it is ti"e to reconi5e t!at t!is t!eor& does not !a(e
uni(ersal a##lication$ 7ift! dra%bac' is t!e trans#ortation cost$ E3,factor& cost is not to be t!e basis, rat!er
deli(ered cost s!ould be t!e basis of co"#arati(e cost$ 7inall&, t!e t!eor& deals %it! #roducts and not ser(ices$
T!e e3clusion of ser(ices, %!en ser(ices are "ore traded across borders, is a li"itation of t!e t!eor&$
E(aluation of t!e t!eor&: It "ust be noted t!at t!e t!eories of absolute and co"#arati(e cost ad(antaes are onl&
#in#ointin t!e broad contours of econo"ic acti(ities and do not t!rust @<<J s#eciali5ation on eac! nation$
1.+.1.4 Dec8"c*er-O*!in T*eor5 o' (actor /roportion
0ec'sc!er,O!lin T!eor& %as first de(elo#ed b& Eli 0ec'sc!er *@=?G,@G;:+ in @G@G$ Later it %as tuned b&
fello% S%edis! econo"ist Bertil O!lin *@=GG,@G?G+ in @GAA$ T!e 0ec'sc!er,O!lin trade t!eor& is a t!eor& to
e3#lain t!e e3istence and #attern of international trade based on a co"#arati(e cost ad(antae bet%een
countries #roducin different oods$ 0ec'sc!er and O!lin state t!at t!is ad(antae e3ists because of t!e relati(e
resource endo%"ents of t!e countries tradin$
3ec*ani"m o' t*e t*eor5: T!e 0ec'sc!er,O!lin t!eor& #resents t!at international trade occurs because of t!e
differences in t!e su##l& of #roduction factors$ T!ose oods t!at re6uire a lare a"ount of t!e abundant factor,
t!us t!e less costl& factor, %ill !a(e lo%er #roduction costs, enablin t!e" to be sold for less in international
"ar'ets$ )ountries suc! as Australia %it! relati(el& lare a"ounts of land do e3#ort land intensi(e #roducts
*e, rain and cattle+ %!ereas a countr& li'e India or )!ina %it! abundant labour %ould e3#ort labor intensi(e
#roducts li'e call,centres, to&s, te3tiles and t!e li'e$
7actor #ro#ortion decides t!e #roduct to be e3#orted$ If labour is abundant in reard to ca#ital, labour intensi(e
oods %ill be c!ea#er and %ould be e3#orted and if ca#ital is abundant in relation labour, ca#ital intensi(e
#roducts %ould be e3#orted$ Si"ilarl&, if land is abundant in reard to labour, land,intensi(e #roducts li'e
%!eat or %ool %ould be c!ea#er to #roduce and e3#ort and if labour is abundant in reard to land, labour
intensi(e #roducts li'e to&s or !andi,crafts %ould be c!ea#er to #roduce and e3#ort$ 0o% is t!e abundance of
one or t!e ot!er factor deter"inedC T!is is establis!ed eit!er t!rou! relati(e #rices or relati(e ratio of #!&sical
6uantities$ In t!e #rice route, t!rou! iso6uants and factor #rice ratios, t!e abundant resource is identified$ Stee#
slo#e or s!allo% slo#e of #rice lines decides %!ic! resource is abundant in %!ic! countr&$ T!rou! #!&sical
6uantit& route, if t!e ine6ualit&, >A9LA U >B9LB !olds countr& A is ca#ital ric! and B is labour ric! and (ice
(ersa$
Merits of t!e 0ec'sc!er,O!lin t!eor&: )ost ad(antae t!eories of Ada" S"it! and Ricardo did not tell t!e
#roducts in %!ic! countries %ill !a(e cost ad(antae$ T!eir assu"#tion %as t!at t!e "ar'et "ec!anis" %ill
direct t!e #roducers c!oosin t!e #roducts in %!ic! t!e& %ould e3cel$ But "ar'et isn2t free al%a&s or efficient$
T!is #roble" is sou!t to be ans%ered b& 0ec'sc!er,O!lin$ Product t!at de#ends on abundant resource %ill be
c!ea#er$
Li"itations of t!e 0ec'sc!er,O!lin t!eor&: 7irst li"itation arises fro" t!e assu"#tions of t!e t!eor&$ One
assu"#tion is t!at t!e #rices of t!e factor de#ended onl& on t!e factor endo%"ent or its su##l& in relation to
de"and$ T!is is !o%e(er untrue as factor prices are not set in a perfect market$ T!ere are suc! factors to
consider suc! as leislated "ini"u" %aes and benefits force t!e cost of labor to rise to a #oint reater t!an t!e
(alue of t!e #roduct t!an "an& %or'ers can #roduce$ Second !imitation is t!at, when a product can be
produced by either capital or labour, t!e t!eor& could not for%ard t!e %a& direction of trade and co"#osition
of trade can ta'e #lace$ In )anada ca#ital intensi(e "et!od is follo%ed for %!eat culti(ation and in India labour
intensi(e "et!od is follo%ed for t!e sa"e$ -ill India or )anada e3#ort %!eatC T!e ans%er de#ends on cost
contours in res#ecti(e conte3ts$ T*ird !imitation is t!at how to ascertain factor endowmentsC In ter"s of #rice
ratios or in ter"s of #!&sical 6uantit&C (ourt* !imitation is t!at li'e ot!er earlier t!eorists, 0ec'sc!er,O!lin,
also assumed factor immobility$ T!at is not at true no%$ 7inall&, %!at is efficient productionC Is it sa"e as
c!ea#er #roductionC No$ Mone& cost and real cost are al%a&s different$ A countr& des#ite !a(in a resource in
abundant, "a& not be releasin t!e sa"e for full e3#loitation %it! t!e intention of #reser(in it for future
re6uire"ent$
Leontie' parado= and Dec8"c*er-O*!in t*eor5:
Man& econo"ists atte"#ted to dis#ro(e t!e 0ec'sc!er,O!lin t!eor&$ T!e Russian,born A"erican econo"ist
-assil& Leontief *@G<I,@GGG+ in @G;H e3a"ined US forein trade and found t!at US e3#orts %ere "ore labor
intensi(e and i"#orts %ere "ore ca#ital intensi(e *t!e Leontief #arado3+, t!ou! USA is ca#ital ric! and labour
deficient countr&$ T!is #arado3, !o%e(er, failed to e"#iricall& (alidate t!e countr& based 0ec'sc!ler,O!lin
t!eor&$ Because it is not t!e #!&sical 6uantit&, but t!e ca#abilit& 6uantit& of t!e factors in 6uestions t!at counts
in realit&$ A"erican labour is "ore ca#ableE !ence A"erica2s e3#ort "i!t !a(e been labour intensi(e #roducts$
E(aluation: One i"#ortant conclusion of 0ec'sc!er,O!lin %as t!at international trade is but a s#ecial for" of
inter,reional trade and t!at t!e "&t!s t!at o %it! international trade are si"#l& deflated$ T!e t!eor& sets t!e
basic tenets of international trade in s#ecific #roducts as suc!$
1.+.1.: Countr5 "imi!arit5 t*eor5
)ountr& si"ilarit& t!eor& %as de(elo#ed b& a S-edi"* economi"t named Ste''an Linder$ )ountr& si"ilarit&
refers to %!atC Is it si"ilarit& of location or culture or #olitical9 econo"ic interests or tec!noloical ca#abilit&
*t!at is ac6uired ad(antae+ or natural ad(antae or lac' of itC Traditional t!eories s#ea' of difference in
de"and or su##l& conditions or bot! as a necessar& condition for trade bet%een countries$ T!at is, t!e
traditional t!eories are built u#on differences$ But t!e si"ilarit& t!eor& is built of identical features of nations in
trade$ = out of to# @< tradin #artners of t!e USA are de(elo#ed econo"ies$ Globall& @@ out of @: larest
#la&ers in %orld trade are de(elo#ed nations$
Dee!oped countrie" trade more -it* dee!oped countrie": Products of a de(elo#ed countr& "atc! de"and
and user conditions of anot!er de(elo#ed countr& onl&$ 0ence t!e si"ilarit& in de(elo#"ent #ace decides trade
bet%een countries$ T!e reasonin is t!at a de(elo#ed countr& introduces a ne% #roduct and si"ilarl& de(elo#ed
countries find t!e #roduct 6uite useful and !ence o for t!e sa"e$ T!is is because needs beco"e "ore or less
co""on in countries %it! si"ilar le(els of de(elo#"ent$ T!e industriali5ed countries #roduce "oreE !ence
#eo#le2s s#end #o%er is !i!E t!e #o%er is a##ortioned bet%een do"estic and forein oods, bot! of course
caterin to si"ilar need satisfaction$
Countrie" in "ame cu!tura! mi!ieu trade more amon2"t t*em"e!e":
)ountries in sa"e cultural "ilieu %ill !a(e si"ilar de"ands as for as cultural #roducts9ser(ices li'e fa"il&
functions, rites, rituals, entertain"ents, reliious cere"onies and so on$ )ross countr& offerins are "ore$
)ountries %it! no si"ilarit& eit!er b& cultural, tec!noloical or ot!er basis "a& not trade$ -!ile countries in t!e
nort!ern !e"is#!ere trade intensi(el& inter se, countries in t!e sout!ern !e"is#!ere do not trade intensi(el&$
T!e #ointed out reason is t!at no !istoric ties a"onst t!e countries$ Per!a#s t!e traders do not %ant to taste
ne% s!ores$
Countrie" in "imi!ar 2eo-'eature" trade inter "e more:
)ountries in si"ilar eo,features li'e ecoloical or cli"atic factors %ill "utuall& cater to cross border de"ands$
A 'ind of cross,border "ono#olistic co"#etition e"eres %it! fir"s (&in for cross,countr& "ar'et s!are %it!
t!e t!rust on #roduct differentiation$
Countrie" -it* "imi!ar po!itica! and economic intere"t" trade more inter "e:
Trade bet%een countries %it! si"ilar #olitical and econo"ic interests is "ore co""on t!an bet%een countries
t!at differ$ )uba and US are in t!e sa"e continent, but due to #olitical ideoloical differences t!e& scarcel&
trade for o(er ; decades$ )uba is a ood source of su##l& of suar$ But US #refers not to taste )uban suar$ EU
countries a"onst t!e"sel(es #ulled do%n all #rotectionist i"#edi"ents to trade and intra,reional trade is
!i!est, because t!e& !a(e si"ilar eo,features$
Intra-indu"tr5 trade a@etted @5 "imi!arit5 'actor:
Si"ilarl& #laced countries2 ca#abilities as %ell as needs !a##en to be si"ilar$ So, 6uite a lot of intra,industr&
trade a"on t!ese si"ilarl& #laced countries !a##ens$ US e3#orts ood lot of road (e!icles and i"#orts "uc!
road (e!icles as %ell too$ Needs are sa"e across t!e nations$ Offerins are also sa"e across t!e nations, but
#roduct differentiation is built t!rou! to# ear #ro"otion$ Intra industr& trade !a##ens because of s!eer
dis#ersed desire for forein brands$ Intra industr& trade accounts for a##ro3i"atel& H< #er cent of %orld trade$
Steffan Linder belie(ed t!at international trade of "anufactured oods occurred bet%een countries at t!e sa"e
stae of econo"ic de(elo#"ent t!at s!ared t!e sa"e consu"er #references$ T!erefore t!e countr& si"ilarit&
t!eor& consists of t!e (alue t!at "ost trade in "anufactured oods s!ould be bet%een nations %it! si"ilar #er
ca#ita inco"e, and t!at intra industr& trade in "anufactured oods s!ould be co""on$
1.+.1.E Internationa! /roduct Li'e C5c!e T*eor5 (I/LC%
A ne% #roduct #roresses t!rou! a se6uence of staes fro" /introduction2 to /ro%t!2, to /"aturit&2 and
finall& to /decline2 stae$ T!is se6uence is 'no%n as t!e #roduct life c&cle *PL)+ Eac! stae de#icts a different
"ar'etin situation re6uirin different "ar'etin strate& and t!e "ar'etin "i3$ As a #relude to IPL), PL) as
suc! is briefl& #resented$ But in t!e end &ou %ill find t!at PL) and IPL) are not t!at si"ilar to !a(e near
si"ilar na"es$
Product Life )&cle *PL)+ indicates t!at #roducts !a(e four t!ins in co""on: *i+ t!e& !a(e a li"ited lifes#anE
*ii+ t!eir sales #ass t!rou! a nu"ber of distinct staes, eac! of %!ic! !as different c!aracteristics, c!allenes,
and o##ortunitiesE *iii+ t!eir #rofits are not static but increase and decrease t!rou! t!ese staesE and *i(+ t!e
financial, !u"an resource, "anufacturin, "ar'etin and #urc!asin strateies t!at #roducts re6uire at eac!
stae in t!e life c&cle (aries *>otler and >eller, :<<I+$ PL) !as four staes na"el& introduction, ro%t!,
"aturit& and decline$ T!e "ar'etin "i3 (ariables distinctl& (ar& in t!ese staes$ T!e sa"e is #resented belo%$
Introduction Sta2e:
In t!e stae, t!e fir" see's to build #roduct a%areness and de(elo# a "ar'et for t!e #roduct$ Mar'et
cr&stalli5ation ta'es #lace no% t!rou! #roduct brandin and 6ualit& definition$ Intellectual #ro#ert& #rotection
suc! as #atents and trade"ar's are obtained$ Penetration #ricin to build "ar'et s!are ra#idl&, or !i! s'i"
#ricin to reco(er de(elo#"ent costs is follo%ed de#endin on "ar'et, co"#etiti(e and cost conditions$
8istribution is selecti(e until consu"ers s!o% acce#tance of t!e #roduct$ Pro"otion is ai"ed at inno(ators and
earl& ado#ters$ Mar'etin co""unications see's to build #roduct a%areness and to educate #otential consu"ers
about t!e #roduct$ T!e #roduct is said to be a 6uestion "ar' or #roble" c!ild$
$ro-t* Sta2e:
Successful introduction launc!es t!e #roduct into t!e ro%t! orbit$ 8urin t!e ro%t! stae, #rofit ro%t! rate
outs"arts sales ro%t! rateE bot! rates outs"art t!e res#ecti(e fiures of t!e introduction stae$ T!e fir" see's
to build brand #reference and increase "ar'et s!are$ Product 6ualit& is "aintained and add, on features and
su##ort ser(ices are added$ Pricin is eit!er "aintained or s"all c!ane "a& be initiated de#endin on
co"#etition$ -ider distribution is follo%ed de"and increases and custo"ers acce#t t!e #roduct$ Pro"otion is
ai"ed at a broader audience$ T!e #roduct is said to be a star$
3aturit5 Sta2e:
At "aturit&, t!e stron ro%t! in sales di"inis!esE a little later sales #ea's, but rate of ro%t! in sales reac!es
#lateau$$ )o"#etition a##ears %it! si"ilar #roducts$ T!e #ri"ar& obDecti(e at t!is #oint is to defend "ar'et
s!are %!ile "a3i"i5in #rofit$ Product en!ance"ent, brand e3tension, etc are tried to differentiate t!e #roduct
fro" t!at of co"#etitors$ Pricin lo%erin is resorted to %ard off ne% co"#etitors and counter t!e e3istin
co"#etition fro" ainin furt!er round$ Intensi(e distribution and incenti(es to c!annel #artners "a& be
offered to #us! t!e #roducts to custo"ers$ Pro"otion e"#!asi5es (alue for "one&, ser(ice net%or' and brand
and #roduct distinctions$ T!e #roduct is referred to as a co%$
Dec!ine Sta2e:
T!e !a& da&s are o(er$ As sales decline, t!e fir" !as se(eral o#tions$ ReDu(enate t!e #roduct, b& addin ne%
features and findin ne% uses$ T!e #rice "a& be "aintained %it! t!e ne% features #ac'ed into$ If all t!is does
not %or', !ar(est t!e #roduct or di(est b& dis#osin off t!e facilities$ 8iscontinue t!e #roduct, li6uidatin
re"ainin in(entor& or sellin it to anot!er fir" t!at is %illin to continue t!e #roduct$ In t!is conte3t t!e
#roduct is referred to as /do2 to be s!o%n t!e door out$
1.+.1.F T*e Internationa! product !i'e c5c!e t*eor5:
8e(elo#ed in t!e late @GI<s b& Ra5mond <ernon and !is associates, #articularl&, Louis -ells is a sinificant
contribution to international trade$ Kernon2s !&#ot!esis %as an atte"#t to ad(ance t!e trade t!eor& be&ond t!e
static fra"e%or' of t!e co"#arati(e ad(antae of 8a(id Ricardo and ot!er classical econo"ists$ It e3#lored
!it!erto inored or une3#lained areas of international trade t!eor& suc! as ti"in of inno(ation, effects of scale
econo"ies and t!e role of uncertaint& and inorance in trade #atterns$ Ra&"ond Kernon, atte"#tin to e3#lain
#atterns of international trade, obser(ed a circular #!eno"enon in t!e co"#osition of trade bet%een countries in
t!e %orld "ar'et$ Ad(anced countries, %!ic! !a(e t!e abilit& and co"#etence to inno(ate as %ell as !i!,
inco"e le(els and "ass consu"#tion beco"e initial e3#orters of oods$ 0o%e(er, t!e& lose t!eir e3#orts
initiall& to de(elo#in countries and subse6uentl& to less de(elo#ed countries and e(entuall& beco"e i"#orters
of t!ese oods$ T!e t!eor& enerall& a##lies to establis!ed co"#anies in industriali5ed countries %!o e3#and
t!eir #roduct rane$
T!e t!eor& is bro'en u# into fi(e "aDor staes na"el& Release, E3#ort, 7orein Production, 7orein
)o"#etition in e3#ort "ar'et and I"#ort )o"#etition in 0o"e Mar'et$ T!ese staes of t!e IPL) are dealt
no%$
)elease in the home market: As co"#etition tends to be fierce, #roducers are forced to searc! constantl& for
better %a&s to satisf& t!eir custo"er needs$ T!e core ele"ents in ne% #roduct desin are ained fro" custo"er
feedbac' fro" #re(ious "odels$ Once t!e #roduct enters t!e do"estic "ar'et and beins to create a #ositi(e
re#utation, t!e de"and increases and !ence %e co"e to an end of t!e first stae of t!e IPL)$
*+port to the foreign markets, As t!e #roduct recei(es #ositi(e custo"er res#onse, t!e international de"and
for t!e #roduct beins$ T!e "anufacturer beins e3#ortin to increase its "ar'et s!are$ An e3a"#le of t!is %as
t!e #ersonal co"#uter *P)+ cra5e of t!e earl& =<2s$ In @G=;, ;;,<<< P)s %ere sold in t!e United States, b& @G=H
t!e industr& !ad e3#erienced a @AI,fold increase to ? "illion P)s *Ric!ter,Butter&, @GG=+$
-roduce in the foreign markets: As de"and increases %it! t!e ne% lobal "ar'et, it beco"es econo"icall&
feasible to bein local #roduction in (arious nations$ B& s!arin tec!nolo& on t!e "anufacturin of t!e
#roduct, t!e co"#an& !as lost an ad(antae$ T!e end of t!is stae sinifies t!e !i!est #oint in t!e International
Product Life )&cle T!eor&$
.oreign ompetition in e+ports markets: T!is is a t!reatenin stae for t!e co"#an&$ Local "anufactures !a(e
ained e3#erience in #roducin and sellin t!eir #roduct, !ence t!eir costs !a(e fallen$ As t!e& !a(e saturated
t!eir initial "ar'et, t!e& "a& bein to loo' else%!ere *ie$ ot!er nations+ to #ro"ote t!eir #roduct$ T!e reason
t!at t!is is t!reatenin for our co"#an& is t!at t!is ot!er nation "a& !a(e a co"#etiti(e ad(antae and t!is
#laces stress on our "ar'et s!are$
Import ompetition in the /ome Market: If t!e co"#etitors !a(e a co"#etiti(e ad(antae, or t!e& reac! t!e
econo"ies of scale needed, t!e& %ill enter t!e oriinal !o"e "ar'et$ At t!is stae t!e co"#etitors %ill !a(e a
6ualit& #roduct %!ic! %ill be able to undersell t!e oriinal "anufactures$ E(entuall& t!e& %ill be #us!ed out
fro" t!e "ar'et and i"#orts %ill su##l& t!e !o"e nation$ E(entuall&, as t!e #roduct2s tec!nolo& beco"es
"ore reno%ned, de(elo#in nations %ill enter t!e "ar'et$ T!is %ill bein t!e International Product Life )&cle
aain, as t!ese nations !a(e a co"#etiti(e ede %it! t!eir lo% labour costs$ /-it! future inno(ations and ne%
#roducts and ser(ices t!e e(entualit& is t!at it2s (alue and !ence its #rice is li'el& to di"inis!2$
Merits of the I-' theory: T!e IPL) t!eor& %ell ca#tures t!e staes of co"#etition t!at a #roduct faces as it
ta'es its lobal soDourn$ Initiall& it s"as!es e(er&one, but in t!e later staes it ets eded out e(en in its !o"e
turf$
Demerit" o' t*e I/LC t*eor5:
T!e IPL) t!eor& does !a(e its disad(antaes$ Per!a#s t!e "ost reconi5able is t!e assu"#tion t!at #roducts are
released initiall& in t!e do"estic "ar'ets$ Man& lobalised co"#anies tend to release t!eir ne% #roduct lines
internationall&, not do"esticall&E !ence t!is t!eor& cannot be a##lied to "an& of toda&2s #roducts$ It see"s t!e
an ideal alternati(e na"e to t!e t!eor& is International )o"#etiti(e Life )&cle *I)L)+$
1.+.1.F Trade T*eor5 o' Countr5 Si;e
)ountr& si5e !as so"e definite relation to international trade as to %!at is traded, !o% "uc! is traded and so on$
T!e classical t!eories do not o into countr&,b&,countr& differences in si5e to deal %it! t!e lines of
s#eciali5ation$ -!en a s"all and bi countr& are in(ol(ed, t!e s"all countr& "a& be #us!ed into s#eciali5ation,
but not t!e bi one for all its need for t!e ot!er #roduct can2t be #roduced b& t!e ot!er s"all countr&, nor t!at
s"all countr& ta'e all e3#ort sur#lus of t!e bi nation resultin fro" s#eciali5ation$ T!us a ne3us e3ists bet%een
lobal trade and countr& si5e$
Kastness of )ountr& si5e and Kariet& of Resources o toet!er: Si5e of a countr& is "easured b& t!e
eora#!ical s#ace !ere$ Bi countries !a(e (ast s#ace and !ence "ore and di(erse resources$ -it! t!at t!e&
could be self reliant$ )onsiderin t!eir si5e, t!eir e3#orts and i"#orts are less as aainst t!ose of s"all countries
%it! fe%er resources$ Bi countries li'e India, )!ina, Bra5il, etc i"#ort "uc! less #ortion of t!eir consu"#tion
and e3#ort "uc! less #ortion of t!eir #roduction as aainst s"all countries li'e t!e Net!erlands, Iceland,
Uruua&, Sina#ore, Tai%an, 8ubai or O"an$ Muc! of t!is situation is e3#lained b& t!e fact (ast countries
!a(e di(erse resources and s"all ones !a(e fe%er$
0astness of country size and /igh transport cost go together& reducing global trade:
)ost ad(antae t!eories con(enientl& inored trans#ort cost to international "ar'ets$ 7or s"all countries in
trade relations, trans#ort cost to international borders and fro" t!ere to international "ar'ets is lo%er$ 7or bi
countries in trade relations, trans#ort cost to international borders and fro" t!ere to international "ar'ets is
!i!er$ 7or "ost #roduction and "ar'et locations in US, t!e a(erae distance to an& "ar'et or #roduction
locations in Me3ico or )anada is "ore t!an @<< "iles$ 7or "ost #roduction and "ar'et locations in t!e
Net!erlands, t!e a(erae distance to "ost of its o(erseas "ar'et or source locations is less t!an @<< "iles$
Net!erland #refers to !a(e "ore international trade as t!e trans#ort cost is lo%er.
0astness of *conomy and International Trade go together,
Instead of #!&sical s#ace, si5e can be "easured b& t!e G8P and Per,ca#ita inco"e$ Nor"all& bi ones tend to
trade "ore internationall&, because t!e& can cater to international consu"ers as t!e& !a(e tec!nolo& and can
i"#ort "ore as %ell as t!e& lon #oc'ets to #a& for t!e sa"e as %ell$
'ong"production runs and international trade go together:
Products %it! loner #roduction runs are enerall& #roduced in fe%er countries9locations t!an t!ose %it!
s!orter #roduction runs, %!ic! are #roduced in "an& countries9locations$ T!e for"er need to be traded loball&,
%!ile t!e later ets consu"ed %it!in t!e do"estic "ar'et$ Steel is loball& traded "ore because of its loner
#roduction run, %!ile soft,drin's are Dust do"esticall& traded as t!ese !a(e s!orter #roduction run$ Usuall&
#roducts %it! lon,#roduction runs are fa(oured b& (ast econo"ies$
1.+.1.G Trade T*eor5 o' Tec*no!o25 $ap
Tec!nolo& a# t!eor& (ie%s tec!noloical as&""etries as i"#ortant lon run deter"inants of trade flo%s$
Moreo(er, it also ca#tures interactions bet%een trade flo%s and c!anes in lon run ro%t! #atterns and le(els
of e"#lo&"ent$
A "odel of tec!nolo& a# %as first %ritten b& 1osiah Tucker in t!e "id,@?<<s$ Tuc'er %as t!e first %riter to
#osit a Mfor"alN "odel %!ic! "ade use of d&na"ic ains fro" trade in accountin for t!e e(olution of trade
#atterns$ In ot!er %ords, Tuc'er de(elo#ed cu"ulati(e causation "odel of trade in %!ic! t!e ains #ro(ided b&
s#eciali5ation fro" trade create ne% o##ortunities for furt!er ro%t! and trade.
Tuc'er %as #rofoundl& interested in t!e relations!i# bet%een t!e ro%t! of #oor countries and t!at of ric! ones
suc! as, !is !o"eland, Enland$ S#ecificall&, se(eral %riters !ad e3#ressed concern t!at Enland2s e3#ort
"ar'ets %ould be ta'en o(er b& #oorer countries t!at could #roduce oods c!ea#er because of t!eir lo%er
%aes and ot!er costs$ Tuc'er res#onded %it! an increasin returns aru"ent t!at de"onstrated t!e cost
ad(antaes of ric!er countries in t!e #roduction of t!e "ost co"#le3 co""odities:
T!e ric! countr& not onl& !as t!e best tools and tec!noloies, but also t!e Msu#erior S'ill and >no%lede
*ac6uired b& lon 0abit and E3#erience+ for in(entin and "a'in of "ore$N Moreo(er, t!e ric! countr& need
not rel& onl& on t!e MeniusN of its o%n "anufacturers and far"ers to "aintain t!is #ace of inno(ation$ T!e
!i! %aes, easier access to ca#ital, and reater /E3ertion of Genius, Industr&, and A"bition2 %ill cause t!e
best and bri!test of t!e #oor countries to e"irate to t!e ric! ones, drainin t!e /7lo%er of its Vt!e #oor
countriesW in!abitants2$ T!is brain drain o#ens /larer co"#etencies2, creates "ore e"#lo&"ent for t!e nati(es,
!el#s and i"#ro(es old "anufactures, and sets u# ne% onesE t!us i"#o(eris!in co"#etitors, and t!e sa"e ti"e
enric!in tec!$ su#erior2$
T!e tec!nolo& a# t!eor& of trade tells t!at a countr& t!at is co"#etiti(e in t!e #roduction of t!e co"#le3
oods %ill rule t!e lobal trade and ac!ie(e !i!er le(el of econo"ic de(elo#"ent$ Poor countries #roduce
si"#le co""odities c!ea#l&, %!ile t!e "ore co"#le3 co""odities are c!ea#er in t!e ric! countries$ T!ird
%orld countries because of t!eir tec!noloical bac'%ardness are eit!er #ri"ar& oods e3#orters or Dust
e3#orters of ores, %!ile de(elo#ed countries trade in to# end electronic oods, #!ar"aceuticals, destructi(e
"issiles, etc$
1.+.1.1C Trade T*eor5 o' Independence) Interdependence and Dependence
Inde#endence 1 Interde#endence 1 8e#endence T!eor& of Trade tries to read trade #atterns and #olicies of
countries based on t!eir deree of inde#endence or de#endence or interde#endence on rest of t!e %orld$ See t!is
is a continuu": Inde#endence 1 Interde#endence 1 8e#endence$ T!e #olar e3tre"es are Inde#endence at one
#ole and 8e#endence at t!e ot!er$ Independence stops trade& while dependence boosts trade2
Independence,
Inde#endence is bein self,reliant$ -ell one cannot be self,reliant$ 4et one countr& "a& c!oose to be
inde#endent and t!e cost of suc! obstinac& is self,denial of life2s lu3uries, co"forts and necessities t!at can be
afforded %it!out difficult&$ It "a& be a o(ern"ent #olic& to re"ain inde#endent$ T!is austerit& could cost t!e
countr& !ea(il&$ 0ence o(ern"ents #lan inde#endence sans difficult& for citi5ens$ 7e% countries in t!e %orld
"aintain a (ast reser(e of essential "inerals and e(en don2t touc! o%n oil fields, so t!at in future if forein
su##lies are cut for %!ate(er reason t!ese built9une3#lored stoc's could be used$ T!us a #olic& of inde#endence
!urts lobal trade #atterns for t!e #resent and t!e future$
Interdependence:
Interde#endence is t!e "iddle of t!e continuu"$ 7rance and Ger"an& are "utuall& de#endent on eac! ot!er
al"ost to sa"e e3tent$ T!is le(el of interde#endence leads to "ore intra,industr& trade or "ore a#tl& ca#ti(e
trades a"onst rou# concerns *MN)s and Affiliates+ in different countries$ Too "uc! "utual de#endence is
also not ood %!en so"et!in !a##ens disru#tin &our su##l& line$
Dependence:
8e#endence is bein in a state of forced relations!i#$ 0ere, trade relations!i#$ -it! s'e%ed resource
endo%"ents, countries de#end on fe% #roducts for e3#orts, fe% countries to trade %it! and so on$ T!ird %orld
countries because of t!eir tec!noloical bac'%ardness are eit!er #ri"ar& oods e3#orters or Dust e3#orters of
ores$ Sultanate of O"an de#ends too "uc! on one #roduct, Oil and Gas, as its #ri"e e3#ort re(enue source$ Of
course e"erin econo"ies de#end on fe% #roducts and fe% "ar'ets for t!eir e3#orts and i"#orts as %ell$
A"on t!e de(elo#ed nations, one nation t!at "a'es "aDor #ortion of its e3#ort re(enue *U:;J+ fro" a
#ri"ar& #roduct, fis!, is Iceland$ Aain one de(elo#ed countr&, )anada, de#ends so "uc! on one countr&, t!e
USA, for o(er ;<J of its e3#orts$ Si"ilarl&, Me3ico de#ends on t!e USA for o(er I<J of its forein trade$ But
t!e USA2s de#endence on Me3ico for trade is Dust @<J$ So, USA2s #olic& on trade %ill affect Me3ico, but
Me3ico2s #olic& %ill not affect t!e USA$ T!at is t!e disad(antae of too "uc! de#endence$
1.+.1.11 /orter9" T*eor5 o' Nationa! Competitie Adanta2eA/orter9" Diamond
Mic!ael Porter2s boo', /T!e )o"#etiti(e Ad(antae of Nations2, #ublis!ed in @GG<, based on a stud& of @<<
fir"s in @< de(elo#ed nations %as a land"ar' %or' on cor#orate strate& "a'in on t!e co"#etiti(e s#!ere$
Porter de(elo#s a ne% t!eor& of !o% nations, states, and reions co"#ete and t!eir sources of econo"ic
#ros#erit&$
0o% S%it5erland, a nation %it! fe% natural resources, is a %orld leader in t!e #roduction of c!ocolatesC 0o%
.a#an, a countr& %!ose econo"& %as in s!a"bles after -orld -ar II, is no% a lobal leader in "a'in lo%
cost, "ass,#roduced, 6ualit&, !i!,tec!nolo& #roductsC Nu"ber of factors oes be&ond natural resources$
So"e of t!e" are: a si5eable de"and fro" so#!isticated consu"ers, an educated and s'illed %or'force, intense
co"#etition in t!e industr&, and t!e e3istence of related and su##ortin su##liers, o(ern"ent #olicies and
de"and conditions$
7irst, Porter arues t!at co"#anies s!ould be /#artici#atin in national "ar'ets %it! t!e stronest ri(als and
"ost de"andin custo"ers, in order to build /international co"#etiti(eness2$ As a co"#an& faces "ore
co"#etition, it stri(es to "a'e t!e"sel(es "ore efficient in order to !a(e an ede o(er t!eir co"#etitors and
"a3i"i5e #rofits$ 4es, co"#etition is t!e dri(in force of enine of success$ T!e factors "ost i"#ortant to
co"#etiti(e ad(antae in "ost industries, are not in!erited but are created %it!in a nation, t!rou! #rocesses
t!at differ %idel& across nations and a"on industries$ -!en a ne% fir" e"eres in one countr&, do"estic
su##liers start co"#etin for business$ T!us t!rou! t!is co"#etition, 6ualit& is bound to increase and #rices
%ill decrease %!ic! in turn reinforces and i(es t!e industr& a co"#etiti(e ad(antae in t!e international
"ar'et$ T!e #attern of co"#etition at !o"e also !as a #rofound role to #la& in t!e #rocess of inno(ation and t!e
ulti"ate #ros#ects for international success$ A fir"2s strate& and co"#etition in do"estic "ar'et s!a#es its
#erfor"ance in t!e international "ar'et$ In so"e cases strateies used in t!e do"estic "ar'et can be a##lied
internationall& %it! little or no "odifications$ 0o%e(er, so"eti"es it is not so eas&$
1.+.1.1& $!o@a! Strate2ic Ria!r5 T*eor5
T!e Global Strateic Ri(alr& t!eor& %as de(elo#ed in t!e @G=<s as a "eans to /e3a"ine t!e i"#act on trade
flo%s arisin fro" lobal strateic ri(alr& bet%een Multi National )or#orations$2 It e3#lores t!e notion t!at in
order to sta& (iable, fir"s s!ould e3#loit t!eir co"#etiti(e ad(antae loball& and tr& to 'ee# it sustainable$
T!ere are "an& %a&s in %!ic! a fir" can !old a co"#etiti(e ad(antae, t!ese includeE O%nin intellectual
#ro#ert& ri!ts, In(estin in researc! and de(elo#"ent, Ac!ie(in econo"ies of scale or sco#e, E3#loitin t!e
e3#erience or learnin cur(e, 7orin strateic alliances and Strateic "erers and ac6uisitions$
O-nin2 inte!!ectua! propert5 ri2*t": Intellectual #ro#ert& la%s confer a bundle of e3clusi(e ri!ts in relation
to t!e #articular for" or "anner in %!ic! ideas or infor"ation are e3#ressed or "anifested, and not in relation
to t!e ideas or conce#ts t!e"sel(es$ T!e ter" Mintellectual #ro#ert&N denotes t!e s#ecific leal ri!ts %!ic!
aut!ors, in(entors and ot!er IP !olders "a& !old and e3ercise, and not t!e intellectual %or' itself$ O%nin
intellectual #ro#ert& ri!ts boosts one2s %ort!$ T!o"as Al(a Edison, nic'na"ed as, MT!e -i5ard of Menlo
Par',N !ad a"a5in in(enti(e talent$ O(er !is lifeti"e, "ore t!an @,A<< #atents %ere issued in !is na"e, far
"ore t!an !a(e been credited to an& ot!er indi(idual in A"erican !istor&$ Patents are t!ere for cra5& in(entions
as %ell li'e t!is one: A de(ice for #rotectin t!e ears of ani"als, es#eciall& lon,!aired dos, fro" beco"in
soiled b& t!e ani"al2s food %!ile t!e ani"al is eatin$ O', &our #et "i!t loo' better %it!out dirt& !air, but it2s
oin to loo' #rett& du"b %earin t!is t!inT A#art Do'e, t!e essence is t!at fir"s %it! "ore #atents co"#etes
effecti(el& and edes out t!e s"aller co"#etitors$ Table @$= i(es t!e #atents issued b& US Patents F
Trade"ar' Office to to# @< Patentees in :<<H$ -orld IT leader, IBM is on t!e to#$ T!e ne3t is Matsus!ita
Electric Industrial )o$, Ltd$, %it! @A<< #atents less t!an IBM$ It is t!is difference %!ic! %or's as strateic
ri(alr&$
Ine"tin2 in re"earc* and dee!opment:
In(est"ent in researc! and de(elo#"ent is t!e surest %a& to reac! t!e to# of in(ention, inno(ation and #atent
o%ners!i#$ T!o"as Al(a Edison said, Genius R @ #ercent ins#iration S GG #ercent #ers#iration$ 0e encouraed
all #eo#le to offer !ard %or'$ RF8 is #ers#iration %it! flas! of ins#iration$ To e3cel ri(als, RF8 ca#abilit& is
needed$ A"erican fir"s 'no% t!is (er& %ell$ A"erican fir"s s#end around L:<< billion on RF8 annuall&,
"uc! of it on co"#utin and co""unications$ Microsoft, for e3a"#le, s#ent around LI$I billion last &ear,
:<<IE IBM and Intel s#ent about LI billion eac!E and )isco S&ste"s and 0e%lett,Pac'ard *0P+ s#ent around LH
billion eac!$ Most of t!is "one& %ent into "a'in s"all incre"ental i"#ro(e"ents and ettin ne% ideas to
"ar'et fast$ IBM, GE and MS are leaders in t!eir c!osen field because of t!eir RF8 co""it"ents$
Ta@!e: 1.F
No. o' /atent" i""ued @5 US /atent" . Trademar8 O''ice to top 1C /atentee"
Source: -ebsite of US Patents F Trade"ar' Office
IBM, %orld leader in IT, !as ei!t laboratories on t!ree continents, eac! %it! its o%n #ersonalit& and e3#ertise$
At its Buric! Researc! Laborator& around A<< scientists re#resentin o(er :< nationalities concentrate on areas
suc! as "icroelectronics, nanotec!nolo& and co"#uter securit&$ Researc!ers are Duded on t!e basis of #atents
and #a#ers$ IBM 'no%s it "ust add intellectual #ro#ert& to its offerins$
Startin %it! !is in(ention of t!e li!t bulb, T!o"as Edison inited General Electic2s *GE+ s#irit of inno(ation
and disco(er&$ B& @G?= itself GE %as first to reac! ;<,<<<t! #atent$ GE !as "ore t!an A,<<< of t!e best and
bri!test researc!ers s#read out at four "ulti,disci#linar& facilities around t!e %orld$ 0ead6uartered in
Nis'a&una, Ne% 4or', it also !as facilities in Banalore, IndiaE S!an!ai, )!inaE and Munic!, Ger"an&$ It is
deli(erin t!e inno(ations and brea't!rou!s t!at are dri(in ro%t! for GE2s businesses and re(olutioni5in
"ar'ets$ It belie(es in, /i"ainations R inno(ations2$ Inno(ations co"e fro" "ost unli'el& sources often$ A
sea,s!ell can !el# lo%er ener& costE a butterfl& can !el# en!ance securit& in sub%a& stationsE a lotus leaf can
!el# reduce dela&s in air#orts$ 0o%C T!rou! nano,tec!nolo&E t!at is t!e unli'el& source$ T!at is %!at RF8
can do, GE !as learnt$
Microsoft Researc! !ouses H<< researc!ers in Red"ond, -as!inton$ It boasts anot!er A<< around t!e %orld$
Nearl& all of its budet is s#ent on co""erciall& orientated #roDects$ In t!e real %orld, it is not Dust a bi /82
and a bi /R2Xit2s a continuu"$ T!e co"#an& #erfor"s basic researc!$ But Microsoft also %or's %it! its
#roduct tea"s to "o(e t!ose tec!noloies into its #roducts$ Microsoft !as a tea" of a do5en #eo#le %!ose sole
res#onsibilit& is to !andle tec!nolo& transfer$ So"eti"es researc!ers "o(e fro" t!e laboratories to %or' %it!
#roduct tea"s$ T!us t!ese successful co"#anies in(est in RF8 to ro% strateic in a %orld full of ri(als (&in
to out%it ot!ers$
Ac*iein2 economie" o' "ca!e or "cope:
Ac!ie(in econo"ies of scale or sco#e is in fact le(erain &our e3istin strent!s$ Scale econo"ies !el#
reduce cost, #ass t!e benefit to consu"ers and e3#and "ar'et s!are$ It is (er& i"#ortant t!at &our ca#acit& is
full& utili5ed$ To use its e3cess ca#acit& of #rintin and distribution, T!e 0indu rou# of )!ennai launc!ed a
Business dail&, T!e 0indu Business Line in @GGH$ Toda& it is a reat success$ T!e launc! is a ood e3a"#le of
/Ac!ie(in Econo"ies of Scale and Sco#e2 t!at fe% ri(als can "atc!$
E=p!oitin2 t*e Learnin2 Cure:
Learnin cur(e refers to a relations!i# bet%een t!e duration of learnin or e3#erience and t!e resultin
#roress$ A coniti(e #s&c!oloical conce#t, Learnin )ur(e, o(er ti"e t!e #!rase !as ac6uired a broader
inter#retation, and e3#ressions suc! as Me3#erience cur(eN, Mi"#ro(e"ent cur(eN, Mcost i"#ro(e"ent cur(eN,
M#roress cur(eN9N#roress functionN, Mstartu# cur(eN, and Mefficienc& cur(eN are often used interc!aneabl&,
de#endin on t!e conte3t$ Businesses t!at use learnin cur(e e3cel %ell as t!e& learn to cut cost and add (alue
faster t!an ot!er and outs"art co"#etitors$ A co"#an& can reduce o(erall unit cost b& :< to A<J eac! ti"e it
doubles out#ut, if learnin cur(e effect %or's %ell$ So, if t!e first unit costs L @<<<, t!e ne3t costs L ?<< to L
=<<, t!e fourt! unit costs L HG< to L IH< and so on$ A !ost of factors, li'e rectanle, !&#erbolic fall in fi3ed cost
of #roduction #er unit, rise in de3terit& le(els and nuances of !andlin s!o# floor issues, 6uantit& discounts on
#urc!ase o%in to lare (olu"e orders, etc !el# reduce cost #er unit$ Suc! cost ad(antaes %ould t!reaten ne%
entrants$ So cost leaders!i# results fro" learnin cur(e effect %!ic! could be a strateic ad(antae$
Strate2ic A!!iance:
A Strateic Alliance is a for"al relations!i# for"ed bet%een t%o or "ore #arties, usuall& t!ose in t!e sa"e
business line *i+ as !ori5ontals co"#etin %it! eac! ot!er in t!e sa"e or different eora#!ies or *ii+ as (erticals
ser(in eac! ot!er in co"#le"entar& "ode, to #ursue a co""on oal or "eet a critical business need %!ile
re"ainin inde#endent orani5ations$ One alliance #artner "i!t brin #roducts, distribution c!annels or
"anufacturin ca#abilit& and t!e ot!er #roDect fundin, ca#ital e6ui#"ent, 'no%lede, e3#ertise, or intellectual
#ro#ert&$ T!e alliance2s e"#!asis is /s&ner&2 and /co"#etiti(e ad(antae2$ A ood e3a"#le of strateic
alliance, is t!e alliance bet%een Pantas and Britis! Air%a&s$ Pantas is t!e larest #ri(ate airline in Australia
and !as solid air route t!rou!out t!e Asia Pacific reion, li'e%ise Britis! air%a&s !ad stron net%or' %it!in
Euro#e, Nort! Atlantics, and Nort! A"erica$ B& for"in an alliance in @GGA, bot! co"#anies strateicall&
#ositioned t!e"sel(es to !a(e a stron %orld%ide net%or'$ Microsoft and Nortel announced a strateic alliance
based on a s!ared (ision for unified co""unications in :<<I$ B& enain t!e co"#anies at t!e tec!nolo&,
"ar'etin and business le(els, t!e alliance %ill allo% bot! co"#anies to dri(e ne% ro%t! o##ortunities and
!as t!e #otential to ulti"atel& transfor" businesses co""unications, reducin costs and co"#le3it& and
i"#ro(in #roducti(it& for custo"ers$
3er2er" and AcHui"ition":
T!e strate& of Merers and Ac6uisitions, s%ee#in t!rou! t!e cor#orate, refers to deals in(ol(in bu&in,
sellin and co"binin of different co"#anies t!at can for" a ne% co"#an& to us!er in a fast trac' collecti(e
ro%t!$ Merer is a tool used b& co"#anies for t!e #ur#ose of e3#andin t!eir o#erations often ai"in at an
increase of t!eir lon ter" #rofitabilit&$ An ac6uisition, also 'no%n as a ta'eo(er, is t!e bu&in of one co"#an&
*t!e /taret2+ b& anot!er$ An ac6uisition "a& be friendl& or !ostile$ A s"aller fir" "a& also ac6uire a larer or
loner establis!ed co"#an& and 'ee# its na"e for t!e co"bined entit&$ T!is is 'no%n as a re(erse ta'eo(er$
Globall&, "erers totaled a record LH$A= trillion in :<<?, u# :@ #ercent fro" :<<I$ 8es#ite a s!ar# decline in
deal,"a'in at "id,&ear, "erer (olu"e in :<<? !it a record L@$;? trillion in t!e United States, u# ;$; #ercent
fro" t!e #re(ious &ear, accordin to researc! fir" T!o"son 7inancial$ But, for t!e first ti"e in fi(e &ears, U$S$
laed deal,"a'in in Euro#e, %!ere "erers totaled L@$?= trillion$ In fact, 4ear :<<? sa% t!e biest bu&out
fren5& since :<<<, as H: 7ORTUNE @,<<< cor#orations %ere ac6uired$ Biest of all deals %as t!e ATFT2s
ac6uisition of Bellsout! at L @<@$= billion, follo%ed b& )ono'oP!ili#2s ac6uisition of Burlinton Resources at L
A;$< billion, follo%ed b& Boston Scientific2s ac6uisition of Guidant at L :;$@ billion and so on$ T!ese H: deals
alone added u# to L A?; bn$
1.+.& T*eorie" o' Internationa! Ine"tment"
International in(est"ents "ean in(est"ents be&ond borders$ International in(est"ents refer to in(est"ents b&
entities of a nation in nations ot!er t!an t!eir o%n$ 7orein in(est"ents in(ol(e e3#ort of ca#ital$ T!e
o##ortunit& for International in(est"ents is directl& e"anatin fro" econo"ic refor"ist #olicies ado#ted b&
"ost of t!e countries of t!e %orld includin centrall& #lanned and co""and econo"ies$ Liberali5ation,
Pri(ati5ation and Globali5ation *LPG+ are (iorousl& #ursued b& t!e countries i(in an u#,t!rust on
in(est"ent o##ortunities$
Broadl& t!ere are t%o t&#es of forein in(est"ent, na"el&, forein direct in(est"ent *78I+ and forein
#ortfolio in(est"ent *7PI+$ 78I refers to in(est"ent in a forein countr& %!ere t!e in(estor retains control o(er
t!e in(est"ent$ It t&#icall& ta'es t!e for" of startin a subsidiar&, ac6uirin a sta'e in an e3istin fir" or
startin a Doint (enture in t!e forein countr&$ 8irect in(est"ent and "anae"ent of t!e fir"s concerned
nor"all& o toet!er$ If t!e in(estor !as onl& a sort of #ro#ert& interest in in(estin t!e ca#ital in bu&in
e6uities, bonds, or ot!er securities abroad, it is referred to as #ortfolio in(est"ent$ T!at is, in t!e case of
#ortfolio in(est"ents, t!e in(estor uses ca#ital in order to et a return on it, but !as not "uc! control o(er t!e
use of t!e ca#ital$
78Is are o(erned b& lon,ter" considerations because t!ese in(est"ents cannot be easil& li6uidated$ 0ence,
factors li'e lon,ter" #olitical stabilit&, o(ern"ent #olic&, industrial and econo"ic #ros#ects, etc$, influence
t!e 78I decision$ 0o%e(er, #ortfolio in(est"ents, %!ic! can be li6uidated fairl& easil&, are influenced b& s!ort,
ter" ains$ Portfolio in(est"ents are enerall& "uc! "ore sensiti(e t!an 78Is to s!ort ter" uncertainties$
7orein in(est"ent and forein trade are related$ I< , ?< J of %orld trade is directl& or indirectl& connected to
78I$ ;< J of %orld trade is eit!er %it!in t!e sa"e orani5ational entit& *intra,fir" trade+ or bet%een #arties
%!ic! enae in co,o#erati(e relations!i#$
1.+.&.1 T5pe" o' t*eorie" o' Internationa! ine"tment
T!e t!eories of international in(est"ent see' to e3#lain t!e reasons for international in(est"ent$ T!eories of
international in(est"ent can essentiall& be di(ided into t%o cateories: Micro *industrial orani5ation+ t!eories
and Macro *cost of ca#ital+ t!eories$
T!e micro economic orientations differed bet%een t!e earlier and subse6uent literatures$ T!e earl& literature
t!at e3#lains international in(est"ent in "icro econo"ic ter"s focuses on "ar'et i"#erfections, and t!e desire
of "ultinational enter#rises to e3#and t!eir "ono#olistic #o%er$ Subse6uent literature centered "ore on fir",
s#ecific ad(antaes o%in to #roduct su#eriorit& or cost ad(antaes, ste""in fro" econo"ies of scale, "ulti,
#lants econo"ies and ad(anced tec!nolo&, or su#erior "ar'etin and distribution$ Accordin to t!is (ie%,
"ultinationals find it c!ea#er to e3#and directl& in a forein countr& rat!er t!an t!rou! trade in cases %!ere
t!e ad(antaes associated %it! cost or #roduct are based on internal, indi(isible assets based on 'no%lede and
tec!nolo&$ Alternati(e e3#lanations for international in(est"ent !a(e focused on reulator& restrictions,
includin tariffs and 6uotas t!at eit!er encourae or discourae cross,border ac6uisitions, de#endin on %!et!er
one considers !ori5ontal or (ertical interations$
Studies e3a"inin t!e macro economic effects of e3c!ane rate on international in(est"ent centered on t!e
#ositi(e effects of an e3c!ane rate de#reciation of t!e !ost countr& on international in(est"ent in,flo%s,
because it lo%ers t!e cost of #roduction and in(est"ent in t!e !ost countries, raisin t!e #rofitabilit& of forein
direct in(est"ent$ T!e %ealt! effect is anot!er c!annel t!rou! %!ic! a de#reciation of t!e real e3c!ane rate
could raise international in(est"ent$ B& raisin t!e relati(e %ealt! of forein fir"s, a de#reciation of t!e real
e3c!ane rate could "a'e it easier for t!ose fir"s to use retained #rofits to finance in(est"ent abroad and to
#ost a collateral in borro%in fro" do"estic lenders in t!e !ost countr&.
1.+.&.& Speci'ic t*eorie" o' Internationa! ine"tment
No% certain s#ecific t!eories of international in(est"ents be considered$
i T*eor5 o' Capita! 3oement": T!e earliest t!eoreticians, %!o assu"ed, in t!e classical tradition, t!e
e3istence of a #erfectl& co"#etiti(e "ar'et, considered forein in(est"ents as a for" of factor "o(e"ent to
ta'e ad(antae of t!e differential #rofit$ T!e (alidit& of t!is t!eor& is clear fro" t!e obser(ation of t!e noted
econo"ist )!arles >indleberer t!at under #erfect co"#etition, forein direct in(est"ent %ould not occur and
t!at %ould be unli'el& to occur in a %orld %!ere in t!e conditions %ere e(en a##ro3i"atel& co"#etiti(e$
ii 3ar8et Imper'ection" T*eor5: One of t!e "ar'et i"#erfections a##roac! to t!e e3#lanation of t!e forein
in(est"ents is t!e Mono#olistic Ad(antae T!eor& #ro#ounded b& Ste#!en in @GI<$ Accordin to t!is t!eor&,
forein direct in(est"ent occurred larel& in olio#olistic industries rat!er t!an in industries o#eratin under
near #erfect condition$ 0&"er suested t!at t!e decision of a fir" to in(est in forein "ar'ets %as based on
certain ad(antaes t!e fir" #ossessed o(er t!e local fir"s *in t!e forein countr&+ suc! as econo"ics of sale,
Su#erior tec!nolo& or s'ills in t!e fields of "anae"ent, #roduction, "ar'etin and finance$ >indleberer also
arued t!at "ar'et i"#erfections %ere t!e basis of forein in(est"ent$ T!e Mar'et I"#erfections T!eor& does
not ans%er se(eral 6uestions related to t!e forein in(est"ent$ 7or e3a"#le, %!& does a fir" #refer forein
in(est"ent to ot!er alternati(e "ar'et entr& "odes li'e e3#ortin, licensin, franc!isin etc$C
iii. Internationa!i;ation T*eor5: Accordin to t!e Internationali5ation T!eor&, %!ic! is an e3tension of t!e
Mar'et I"#erfection T!eor&, forein in(est"ent results fro" t!e decision of a fir" to internali5e a su#erior
'no%lede *i$e$, 'no%lede %it!in t!e fir" to "aintain t!e co"#etiti(e ede+C 7or e3a"#le, if a fir" decides to
e3ternali5e its 'no%!o% b& licensin a forein fir", t!e fir" *t!e licensor+ does not "a'e an& forein
in(est"ent in t!is res#ect but, on t!e ot!er !and, if t!e fir" decides to internali5e it "a& in(est in #roduction
facilities$Met!ods of Internali5ation include for"al %a&s li'e #atents and co#& ri!ts and infor"al %a&s li'e
secrec& and fa"il& net%or's$
i. Appropria@i!it5 T*eor5: Accordin to A##ro#riabilit& T!eor&, affir" s!ould be able to a##ro#riate *to
'ee# for its e3clusi(e use+ t!e benefits resultin fro" a tec!nolo& it !as enerated$ If t!is condition is not
satisfied, t!e fir" %ould not be able to t!e cost of tec!nolo& eneration and, t!erefore, %ould !a(e no
incenti(e for researc! and de(elo#"ent$ MN)s tend to s#eciali5e in de(elo#in ne% tec!noloies %!ic! are
trans"itted efficientl& t!rou! t!eir internal c!annels$ It is ob(ious t!at t!e A##ro#riabilit& T!eor& is si"ilar to
internali5ation t!eor& in ter"s of creatin an internal "ar'et *internal c!annel+ for e3#loitin t!e fir"2s s#ecific
ad(antaes$
. Location Speci'ic Adanta2e T*eor5: T!e Location S#ecific Ad(antae T!eor& suests t!at forein
in(est"ent is #ulled b& certain location s#ecific ad(antae$ Accordin to 0ood and 4oun, t!ere are four
factors %!ic! are #ertinent to t!e Location S#ecific T!eor&$ T!e& are: Labour costs, Mar'etin factors *li'e
"ar'et si5e, "ar'et ro%t!, state of de(elo#"ent and local co"#etition+, Trade barriers and Go(ern"ent
#olic&$ T!e abo(e factors !a(e, of course, (er& i"#ortant bearin on forein in(est"ent$ 0o%e(er, t!ere are
also ot!er factors li'e cultural factors %!ic! influence forein in(est"ent$ 7urt!er, it is t!e total cost, and not
labour cost alone, t!at is i"#ortant$
i. Internationa! /roduct Li'e C5c!e T*eor5: Accordin to t!e Product Life )&cle T!eor& de(elo#ed b&
Ra&"ond Kernon and Le%is T$ -ells, t!e #roduction of a #roduct s!ifts to different cateories of countries
t!rou! t!e different staes of t!e #roduct life c&cle$ Accordin to t!is t!eor& a ne% #roduct is first
"anufactured and "ar'eted in a de(elo#ed countr& li'e U$S$ *because of fa(ourable factors li'e lare do"estic
"ar'et, entre#reneurs!i# and ease of orani5in #roduction+$ It is t!en e3#orted to ot!er de(elo#ed "ar'ets$ As
co"#etition increases in t!ese "ar'ets, "anufacturin facilities are establis!ed t!ere to cater to t!ese "ar'ets
and also e3#ort to t!e de(elo#in countries$ As t!e #roduct beco"es standardi5ed and co"#etition furt!er
intensifies, "anufacturin facilities are establis!ed in de(elo#in countries to lo%er #roduction costs and due to
ot!er reasons$ )o"#etition in forein "ar'ets !eats u#$ Later t!e de(elo#ed countr& "ar'ets "a& also be
ser(iced b& e3#orts fro" t!e #roduction units in t!e de(elo#in countries and t!at i"#ort co"#etition in t!e
!o"e "ar'et t!reats t!e "ar'et s!are t!erein$
ii. E!ectric T*eor5: .o!n 8unnin *@GGA+ !as atte"#ted to for"ulate a eneral t!eor& of international
#roduction b& co"binin t!e #ostulates of so"e of t!e ot!er t!eories$ It is enerall& acce#ted t!at 8unnin2s
o%ners!i#1location1internali5ation *OLI+ fra"e%or' *o%ners!i#,s#ecific ad(antaes, locational factors, and
internali5ation+ is "ost useful in anal&5in and e3#lainin 78I$ Accordin to 8unnin, forein in(est"ent b&
MN)s, results fro" t!ree co"#arati(e ad(antaes %!ic! t!e& enDo&, (i5, 7ir" s#ecific ad(antaes,
Internationali5ation ad(antaes and Location s#ecific ad(antaes$
7ir" s#ecific ad(antaes results fro" t!e tanible and intanible resources !eld e3clusi(el&, at least
te"#oraril&, b& t!e fir" and %!ic! #ro(ide t!e fir" a co"#arati(e ad(antae o(er ot!er fir"s$ T!e 7ir"
s#ecific ad(antaes %ould not result in forein in(est"ents unless t!e fir" internali5es t!ese ad(antaes$ E(en
%!en a fir" internali5es its e3clusi(e resources it "a& be able to ser(e a forein "ar'et %it!out forein
in(est"ent, for e3a"#le b& e3#ortin$ T!erefore, for t!e #roduction to ta'e #lace in t!e forein countr& t!ere
s!ould be so"e location s#ecific ad(antaes$
One i"#ortant deficienc& of t!e Electric T!eor& is t!at it does not e3#lain t!e forein in(est"ent for
ac6uisitions %!ic! !a(e beco"e a (er& i"#ortant route to internationali5ation$ T!e #re(alence of net%or'in in
inter,fir" and intra,fir" trade de"onstrated b& t!e 0on >on e3#erience does not under"ine t!e OLI
fra"e%or' in an& sinificant %a&$ Indeed, net%or'in is a for" of internali5in t!e cross,border "ar'et in
inter"ediate #roducts to "ini"i5e transaction costs$ )o"#lete internali5ation occurs in suc! cases as t!e
#arent1affiliate relations!i# and t!e inter,affiliate relations!i# in t!e sa"e rou#$ Inter,fir" net%or'in is
so"et!in of reater interest because it re#resents onl& #artial internali5ation$
iii. O!i2opo!i"tic Reaction T*eor5: Accordin to t!e t!eor& of Olio#olistic Reaction and Multinational
Enter#rises, %!en one fir", es#eciall& t!e leader in olio#olistic industr&, entered a "ar'et, ot!er fir"s in t!e
industr& follo%ed as a defensi(e strate&, i$e$, to defend t!eir "ar'et s!are fro" bein ta'en a%a& b& t!e initial
in(estor %it! t!e ad(antae of local #roduction$ Gra!a" noted t!at t!ere %as a tendenc& for across ad(antae
b& Euro#ean and A"erican fir"s in certain olio#olistic industries$ -!en A"erican fir"s in(ested in Euro#e,
t!e Euro#ean fir"s to forein fir"s retaliated b& in(estin in A"erica and (ice (ersa, t!is %as "ostl& a
retaliator& strate&$ T!ere are also ot!er reasons for in(est"ent li'e follo%in t!e custo"er *for e3a"#le,
.a#anese and Euro#ean in(est"ent in Silicon Kalle&$+
1.1 (OR3S O( INTERNATIONAL BUSINESS (re'erence 'or unit + 'ir"t topic%
International business can ta'e different for"s$ T!e c!oice of for" is (er& i"#ortant$ T!e desire to be close t!e
"ar'et, t!e need for /do it &ourself2, tariff barriers, ris' di(ersification and increased #otential to reac! ot!er
nei!bourin "ar'ets in due course %ill "a'e a fir" c!oose o%ners!i# for"s$ In t!e absence of t!ese
re6uire"ents, non,o%ners!i# for"s "a& be follo%ed$ Table @$G i(es a brief s'etc! of t!e sa"e$ And t!ese are
e3#lained briefl& belo%$
Ta@!e 1.G Internationa! Bu"ine"" (orm"
1.1.1 Non-o-ner"*ip 'orm"
Non,o%ners!i# for"s in(ol(e doin international business %it!out o%ners!i# interests in t!e forein countries
concerned$ T!ese are *a+ Merc!andi5e e3#ort, i"#ort F counter trade, *b+ Ser(ice E3#ort and I"#ort, *c+
Licensin and 7ranc!isin, *d+ )ontract Manufacturin, *e+ Manae"ent contracts and *f+ Turn'e& )ontracts$
T!ese for"s are less ris'& as #ull out is eas& in ti"es need$
a2 Merchandize *+porting& Importing and counter trade: In econo"ics, e3c!ane of #!&sicall& tanible oods
bet%een countries, in(ol(in t!e e3#ort, i"#ort, and re,e3#ort of oods at (arious staes of #roduction is
referred to trade in "erc!andi5e or tanible or (isible ite"s$ T!e section of t!e balance of #a&"ents *BOP+
dealin %it! t!is is called /balance on trade2$ Merc!andi5e trade is distinuis!ed fro" in(isible trade, %!ic!
in(ol(es t!e e3#ort and i"#ort of #!&sicall& intanible ite"s suc! as ser(ices *co(erin recei#ts and #a&"ents
arisin fro" acti(ities suc! as custo"er ser(ice or s!i##in, inco"e fro" forein in(est"ents, etc+$
E3#ortin and i"#ortin are t!e basic and funda"ental li"bs of international business b& a fir"$ T!ese are t!e
"ost traditional "ode of enterin t!e international "ar'et$ Resultin international trade !as been ro%in "uc!
faster t!an t!e %orld out#ut resultin in reater %orld econo"ic interation$
i.. E=portin2 is t!e a##ro#riate strate& %!en one or "ore of t!e follo%in conditions #re(ail$
T!e (olu"e of forein business is not lare enou! to Dustif& o(erseas #roduction$
)ost of #roduction in t!e forein "ar'et is !i!
T!e forein "ar'et is c!aracteri5ed b& #roduction bottlenec's li'e infrastructural #roble"s, #roble"s
%it! "aterials su##lies etc$
T!ere are #olitical or ot!er ris's of in(est"ent in t!e forein countr&$
T!e co"#an& !as no #er"anent interest in t!e forein "ar'et concerned or t!at t!ere is no uarantee of
t!e "ar'et a(ailable for a lon #eriod$
7orein in(est"ent is not fa(oured b& t!e forein countr& concerned$
Licensin or contract "anufacturin is not a better alternati(e$ Strateic ad(antaes of e3#ortin: Usin
e3cess ca#acit&, cost reduction, ris' s#readin, !i!er to# and botto" lines, le(erain brad e6uit&
o(erseas, e3#lorin #ossibilities for #roduction o(erseas, endearin t!e o(erseas en(iron"ent #rior to
bi scale launc!in, etc i"#ortant ad(antaes of e3#ortin$
ii. Importin2 is fa(oured rat!er t!an !o"e #roduction %!en t!e follo%in conditions e3ist:
T!e (olu"e of do"estic re6uire"ent is not lare enou! to Dustif& !o"e #roduction$
)ost of #roduction in t!e !o"e "ar'et is !i!$
T!e !o"e "ar'et is c!aracteri5ed b& #roduction bottlenec's li'e infrastructural #roble"s, #roble"s
%it! "aterials su##lies etc$
T!e co"#an& !as #er"anent interest in t!e forein "ar'et concerned or t!at t!ere is a #ossibilit&
o(erseas #roduction "a& be resorted to soon$
7orein in(est"ent is fa(oured b& t!e forein countr& concerned %it! ta3 brea's and ot!er so#s$
Strateic ad(antaes of i"#ortin: Better 6ualit& su##lies9co"#onents9#roducts, co"#le"entin !o"e
#roduction9#roduct rane, ta'in u# i"#ort co"#etition in t!e !o"e "ar'et t!rou! cost,effecti(e or
6ualit& en!anced i"#orts, s#readin ris's of su##l& concerns i"#ortant ad(antaes of i"#ortin.
iii. Counter trade: )ounter trade is used as a strate& to increase e3#orts, #articularl& b& t!e de(elo#in
countries$ )ounter trade !as been successfull& used b& a nu"ber of co"#anies as an entr& strate&$ 7or
e3a"#le, Pe#si )o ained entr& to t!e USSR b& e"#lo&in t!is strate&$ )ounter trade is a for" of international
trade in %!ic! certain e3#ort and i"#ort transactions are directl& lin'ed %it! eac! ot!er and in %!ic! i"#ort of
oods are #aid for b& e3#ort of oods, instead of "one& #a&"ents$In t!e "odern econo"ies, "ost transactions
in(ol(e "onetar& #a&"ents and recei#ts, eit!er i""ediate or deferred$ As aainst t!is, Mcounter trade refers to a
(ariet& of uncon(entional international trade #ractices %!ic! lin' e3c!ane of oods , directl& or indirectl& , in
an atte"#t to dis#ense %it! currenc& transactionsN$
a. Serice E=port and Import
Most "anufacturin fir"s indule in ser(ice i"#orts %!en t!e& !ire a forein caro s!i# to e3#ort t!eir oods
abroad or to brin !o"e an i"#orted "ac!iner& or a load of ra% "aterials$ Si"ilarl& insurance ser(ice on
e3#ort or i"#ort caro et e3#orted or i"#orted de#endin on %!et!er do"estic or forein insurer is in(ol(ed$
-!en a fir" sends its e3ecuti(es abroad for conference or trade neotiation, ser(ice i"#orts are in(ol(ed %!en
forein airlines9!otels are used$ -!en a fir" brins e3ecuti(e #ersonnel fro" abroad for conference or trade
neotiation to !o"e countr&, ser(ice e3#orts are in(ol(ed %!en foreiners use do"estic airlines 9 !otels are
used$ T!us touris", trans#ortation, insurance, ban'in, education, consultanc&, etc in(ol(e ser(ice e3#orts and
i"#orts de#endin on %!et!er forein e3c!ane is ulti"atel& earned b& t!e fir" or s#ent$ No%ada&s
"anufacturin fir"s t!e"sel(es !a(e t!eir financial9insurance subsidiaries and t!at t!eir (isible trade
transactions i(e rise to in(isible trade actions as %ell$
c. Licen"in2 and (ranc*i"in2
Licensin and 7ranc!isin, %!ic! in(ol(e "ini"al co""it"ent of resources and effort on t!e #art of t!e
international "ar'eter, are eas& %a&s of enterin t!e forein "ar'ets$ Under international licensin, a fir" in
one countr& *t!e licensor+ #er"its a for" in anot!er countr& *t!e licensee+ to use its intellectual #ro#ert& *suc!
as #atents, trade "ar's, co#&ri!ts, tec!nolo&, tec!nical 'no%,!o%, "ar'etin s'ill or so"e ot!er s#ecific
s'ill+$ T!e "onetar& benefit to t!e licensor is t!e ro&alt& or fees %!ic! licensee #a&s$ In "an& countries, suc!
fees or ro&alties are reulated b& t!e o(ern"entE it does not e3ceed fi(e #er cent of t!e sales in "an&
de(elo#in countries$ A licensin aree"ent "a& also be one of cross licensin, %!erein t!ere is a "utual
e3c!ane of 'no%lede and9or #atents$ In cross<licensin, a cas! #a&"ent "a& or "a& not be in(ol(ed$
d. Contract 3anu'acturin2
Under contract "anufacturin, a co"#an& doin international "ar'etin contracts %it! fir"s in forein
countries to "anufacture or asse"ble t!e #roducts %!ile retainin t!e res#onsibilit& of "ar'etin t!e #roduct$
T!is is a co""on #ractice in international business$ )ontract "anufacturin !as t!e follo%in ad(antaes$
T!e co"#an& does not !a(e to co""it resource for settin u# #roduction facilities$
It frees t!e co"#an& fro" t!e ris's of in(estin in forein countries$
If idle #roduction ca#acit& is readil& a(ailable in t!e forein countr&, it enables t!e "ar'eter to et
started i""ediatel&$
e. 3ana2ement Contractin2
Under t!e "anae"ent contract, t!e fir" #ro(idin t!e "anae"ent 'no%,!o% "a& not !a(e an& e6uit& sta'e
in t!e enter#rise bein "anaed$ In s!ort, in a "anae"ent contract t!e su##lier brins toet!er a #ac'ae of
s'ills t!at %ill #ro(ide an interated ser(ice to t!e client %it!out incurrin t!e ris' and benefit of o%ners!i#$
T!us, as >otler obser(es, "anae"ent contractin is a lo%,ris' "et!od of ettin into a forein "ar'et and it
starts &ieldin inco"e ri!t fro" t!e beinnin$ T!e arrane"ent is es#eciall& attracti(e if t!e contractin fir"
is i(en an o#tion to #urc!ase so"e s!ares in t!e "anaed co"#an& %it!in a stated #eriod$ Manae"ent
contract could, so"eti"es, brin in additional benefits for t!e "anain co"#an&$ It "a& obtain t!e business of
e3#ortin or sellin ot!er%ise of t!e #roducts of t!e "anaed co"#an& or su##l&in t!e in#uts re6uired b& t!e
"anaed co"#an&.
'. Turn8e5 Contract"
Turn'e& contracts "ean t!at t!e contractor %ill do all t!e %or' needed to fi3 u# a %or'in net%or' for &ou$ All
&ou !a(e to do is /o#en t!e door2 or /Turn t!e 'e&2 and ste# into a %or'in s&ste"$ Turn'e& contracts are
co""on in international business in t!e su##l&, erection and co""issionin of #lants, as in t!e case of oil
refineries, steel "ills, ce"ent and fertili5er #lants etcE construction #roDects and franc!isin aree"ents$ MA
turn'e& o#eration is an aree"ent b& t!e seller to su##l& a bu&er %it! a facilit& full& e6ui##ed and read& to be
o#erated b& t!e bu&er2s #ersonnel, %!o %ill be trained b& t!e seller$ T!e ter" is so"eti"es used in fast , food
franc!isin %!en a franc!iser arees to select a stone site, build t!e store, e6ui# it, train t!e franc!isee and
e"#lo&ees and so"eti"es arrane for t!e financinN$ Turn'e& #roDect contractin fir"s !a(e ric! e3#erience in
t!e field, #ro(ide co"#lete solution 1 fro" la&,outin to !andin o(er to #roduction and are t!e sinle source
res#onsibilit&$ In 8ec :<<?, Ericsson !as sined turn'e& contracts as t!e total solution #ro(ider and #ri"e
interator of Metro#olitan Area Net%or's *MAN+ to su##ort t!e launc! of se(en diital cities across Greece$
Under t!e aree"ents Ericsson %ill su##l& and install fiber o#tic teleco""unications net%or's in t!e
"unici#alities of Arinio, )!ania, Er"ou#olis, Iera#etra, Ira'lio, >o5ani and Ret!&"no$ T!e net%or's %ill
initiall& lin' "unici#al buildins, suc! as t!e eneral !os#ital, to%n !all, sc!ools and uni(ersities$
1.1.& O-ner"*ip or (orei2n Direct ine"tment" 'orm"
O%ners!i# for" in(ol(e%!en t!e fir" decides to o%n #roduction9distribution facilit& in t!e forein land$
E(entuall& forein in(est"ent ets in(ol(ed$ T!ere are "an& alternati(es li'e %!oll& o%ned subsidiaries, .Ks,
Strateic alliances, MFA, etc$$
a. #*o!!5 O-ned 3anu'acturin2 (aci!itie":
)o"#anies %it! lon ter" and substantial interest in t!e forein "ar'et nor"all& establis! full& o%ned
"anufacturin facilities t!ere$ As 8ruc'er #oints out, Mit is si"#l& not #ossible to "aintain substantial "ar'et
standin in an i"#ortant area unless one !as a #!&sical #resence of a #roducerN$ A nu"ber of factors li'e trade
barriers, differences in t!e #roduction and ot!er costs, o(ern"ent #olicies, etc$, encourae t!e establis!"ent of
#roduction facilities in t!e forein "ar'ets$
b$ Asse"bl& O#erations:
As Miracle and Albau" #oint out, a "anufacturer %!o %ants "an& of t!e ad(antaes t!at are associated %it!
o(erseas "anufacturin facilities and &et does not %ant to o t!at far "a& find it desirable to establis! o(erseas
asse"bl& facilities in selected "ar'ets$ In a sense, t!e establis!"ent of an asse"bl& o#eration re#resents a cross
bet%een e3#ortin and o(erseas "anufacturin$ R7 Micro 8e(ices, Inc$ !as establis!ed an asse"bl& facilit& at
its BeiDin, )!ina, location to #ro(ide internal "odule #ac'ain ca#abilities$ T!e ne% facilit& is e3#ected to
!el# strea"line R7M82s "anufacturin su##l& c!ain and contribute directl& to t!e co"#an&2s onoin ross
"arin i"#ro(e"ent #lan$ R7M8 e3#ects to lo%er its o(erall "anufacturin cost structure, #ro(ide for
uaranteed asse"bl& ca#acit& and enable c&cle ti"e reductions$ )&cle ti"e reductions %ill be dri(en b& bot!
reduced ti"e in transit to t!ird,#art& su##liers as %ell as en!anced #ro3i"it& to !andset #roduction, %!ic! is
increasinl& located in Asia$ Additionall&, b& !ousin its ne% asse"bl& o#erations in its e3istin BeiDin
facilit&, R7M8 sinificantl& strent!ens its #osition as a one,sto# s!o# for se"iconductor asse"bl&, test and
ta#e and reel$
@. Ioint <enture:
.oint (enture is a (er& co""on strate& of enterin t!e forein "ar'et$ In t!e %idest sense, an& for" of
association %!ic! i"#lies collaboration for "ore t!an a transitor& #eriod is a Doint (enture *#ure tradin
o#erations are not included in t!is conce#t+$ T!ere are different t&#es of Doint (entures$ T!ese are as follo%s:
.oint (entures b& ado#tion: Ac6uisition of #art of t!e e6uit& in a forein entre#reneurial co"#an&,
%!ereb& t!e forein co"#an& beco"es ado#ted unit of t!e Doint (enturer alon %it! t!e #ro"oter$
.oint (entures b& rebirt!: -!en t!e forein #artner transfers tec!nolo& to an ailin do"estic business
and ta'es e6uit& sta'e in t!e re(i(ed business$
.oint (entures b& #rocreation: A truel& ne% (enture is born out of a "arriae bet%een t!e tec!nical
and9or "ar'et,'no% !o% of t!e #artners$
.oint (entures t!rou! fa"il& ties: T!is occurs %!en su##liers Doin toet!er %it! eac! ot!er or %!en a
"anufacturer ta'es an e6uit& #osition in a su##lier business$
.oint (entures are ood as t!ese in(ol(e strent!s of t!e #artners "inled and "anified and s&neries e"anate$
.oint (entures lead to s&neries dri(en t!rou! core,co"#etencies$ T!ere are tec!nical, financial, #roduction,
"ar'etin and "anaerial s&neries to dri(e fro" Doint (entures$ Multinational co"#anies enter forein
countries t!rou! Doint (enture %!en a .K is (iable, i$e$, t!e local fir"2s #rofits under a .K al%a&s e3ceed t!e
corres#ondin le(els under direct 78I$ 0o%e(er, %!en #rotection of IPRs *intellectual #ro#ert& ri!ts+ is
i"#ortant, 78I "a& be #referred to a .K$ T!is is one of t!e reasons %!en IT and P!ar"a MN)s enter t!ird
%orlds %it! #oor #rotection of IPRs, t!e& ta'e a %!oll& o%ned subsidiar& rat!er t!an a .K$ Strent!enin t!e
IPR rei"e ser(es as a #riorit& to induce a .K and %it! it tec!nolo& transfer$ But so"eti"es, t!e !ost
o(ern"ent "a& #ress for .K instead a 78I$ In t!e @G=<s and @GG<s, Doint (entures %ere re6uired b& t!e
)!inese o(ern"ent$ But no% t!ere are no restrictions for "ost sectors of t!e "anufacturin industr&, !e said$
c. T*ird Countr5 Location:
T!ird countr& location is so"eti"es used as an entr& strate&$ -!en t!ere are no co""ercial transactions
bet%een t%o nations because of #olitical reasons or %!en direct transactions bet%een t%o nations are difficult
due to #olitical reasons or t!e li'e, a fir" in one of t!ese nations %!ic! %ants to enter t!e ot!er "ar'et %ill
!a(e to o#erate fro" a t!ird countr& base$ 7or e3a"#le, Tai%anese entre#reneurs found it eas& to enter Peo#le
of Re#ublic of )!ina t!rou! bases in 0on >on$
d. 3er2er" . AcHui"ition":
Merers F Ac6uisitions *M F A+ !a(e been a (er& i"#ortant "ar'et entr& strate& as %ell as e3#ansion
strate&$ A nu"ber of Indian co"#anies !a(e also used t!is entr& strate&$ Merers F ac6uisitions !a(e certain
s#ecific ad(antaes$ It #ro(ides instant access to "ar'ets and distribution net%or'$ As one of t!e "ost difficult
areas in international "ar'etin is t!e distribution, t!is is often a (er& i"#ortant consideration for M F A$
Anot!er i"#ortant obDecti(e of M and A is to obtain access to ne% tec!nolo& or a #atent ri!t$ M and A also
!as t!e ad(antae of reducin t!e co"#etition$
e. Strate2ic A!!iance:
Strateic alliance !as been beco"in "ore and "ore #o#ular in international business$ T!is strate& see's to
en!ance t!e lon ter" co"#etiti(e ad(antae of t!e fir" b& for"in alliance %it! its co"#etitors, e3istin or
#otential in critical areas, instead of co"#etin %it! eac! ot!er$ MT!e oals are to le(erae critical ca#abilities,
increase t!e flo% of inno(ation and increase fle3ibilit& in res#ondin to "ar'et and tec!noloical c!anesN$
Strateic alliance is also so"eti"es used as a "ar'et entr& strate&$ 7or e3a"#le, a fir" "a& enter a forein
"ar'et b& for"in an alliance %it! a fir" in t!e forein "ar'et for "ar'etin or distributin t!e for"er2s
#roducts$ A U$S$ #!ar"aceutical fir" "a& use t!e sales #ro"otion and distribution infrastructure of a .a#anese
#!ar"aceutical fir" to sell its #roducts in .a#an$ In return, t!e .a#anese fir" can use t!e sa"e strate& for t!e
sale of its #roducts in t!e U$S$ "ar'et$ Strateic alliance, "ore t!an an entr& strate&, is a co"#etiti(e strate&$
1.4 INDIA9S TRADE /OLICJ
Trade #olic& contains uidelines for action$ Trade #olic& is t!e official #ronounce"ent released b& t!e
Go(ern"ents of res#ecti(e nations #eriodicall& containin t!e #riorities, assistances, concessions, #references,
etc for e3#orters and i"#orters, nor"s and eliibilities for a(ailin t!e concessions and assistances, reulations
and rules, #rocedures and docu"ents, etc$ In India, trade #olic& is released once in ; &ears, %it! annual
su##le"ents$ Trade #olic& rei"es !a(e national #riorities in "ind, but of late -TO re6uire"ents, Reional
Trade bloc re6uire"ents, etc need to be accounted for$
1.4.1 A2encie" in t*e 'ormu!ation and imp!ementation Trade po!ic5
Trade #olic& for"ulation and i"#le"entation re"ains %it! t!e 8e#art"ent of )o""erce, in t!e Ministr& of
)o""erce and Industr&, in consultation %it! ot!er 'e& "inistries suc! as t!e Ministr& of 7inance, Ministr& of
Ariculture, as %ell as "inistries relatin to ser(ices, and t!e Reser(e Ban' of India$ Trade #olic& is for"ulated
and drafted in consultation %it! State and Union territor& o(ern"ents, industr& and far"ers2 associations,
trade bodies, researc! and acade"ic institutions, and ot!er sta'e!olders$
T!e #olicies are announced for a fi(e,&ear #eriod, alon %it! annual re(ie%s, in t!e 7orein Trade Polic&
*#re(iousl& 'no%n as t!e E3#ort,I"#ort Polic&+, %!ic! is acco"#anied b& t!e 0andboo' of Procedures$ T!e
7orein Trade Polic& and Procedures are i"#le"ented b& t!e 8irectorate General of 7orein Trade *8G7T+,
%!ile ad(ice on tariff and related issues is #ro(ided b& t!e Tariff )o""ission, bot! based in t!e Ministr& of
)o""erce and Industr&$
Ot!er 'e& de#art"ents of t!e Ministr& of )o""erce and Industr& include t!e 8irectorate General of Anti,
du"#in and Allied 8uties, %!ic! deals %it! in(estiations and reco""ends action to be ta'en on anti,
du"#in and counter(ailin "easuresE and t!e 8irectorate General of )o""ercial Intellience and Statistics
*8G)IFS+, res#onsible for collectin, co"#ilin, and disse"inatin data on trade$ )o!erence and consistenc&
bet%een trade and ot!er econo"ic #olicies is "aintained t!rou! inter,"inisterial consultations #rior
to an& 'e& )abinet decisions on #olic&$
T!e 8e#art"ent of )o""erce also deals %it! trade #olic& relatin to #lantation cro#s *tea, coffee, rubber,
carda"o", and tobacco+, s#ecial econo"ic 5ones, and e3#ort #ro"otion and credit uarantee sc!e"es t!rou!
a nu"ber of autono"ous bodies and state,o%ned enter#rises *SOEs+$ T!e SOEs are t!e State Tradin
)or#oration of India *ST)+, ST)L Li"ited, MMT) li"ited, PE) Li"ited, E3#ort )redit Guarantee
)or#oration of India Li"ited *E)G)+, and t!e India Trade Pro"otion Orani5ation *ITPO+$ T!e
ST), ST)L, and MMT) are also in(ol(ed in state,tradin acti(ities$
E3#orts !a(e been a "aDor #olic& focus in recent &ears and t!e 8e#art"ent of )o""erce is assisted in t!is
function b& se(eral ad(isor& bodies$ T!ese include t!e Board of Trade, reconstituted in :<<; to "aintain
dialoue %it! traders and industr& to #ro"ote e3#orts, and t!e E3#ort Pro"otion Board to #ro(ide #olic& and
infrastructural su##ort for increasin e3#orts$ T!e Go(ern"ent also, fro" ti"e to ti"e, sets u# ad !oc rou#s
for ad(ice, includin on trade and related #olicies$ 8ialoue is also "aintained directl& %it! industr&, t!rou!
for e3a"#le, t!e )!a"bers of )o""erce, includin t!e )onfederation of Indian Industr& *)II+, t!e 7ederation
of Indian )!a"bers of )o""erce and industr& *7I))I+ and t!e Associated )!a"bers of )o""erce
*ASSO)0AM+$ T!e Internet is also increasinl& used for solicitin sta'e!olders2 (ie%s and co""ents %!en
for"ulatin la%s or #olicies$
Alt!ou! India does not !a(e an inde#endent aut!orit& to re(ie% o(ern"ent #olic&, #olic& is e3a"ined on a
reular basis t!rou! "ec!anis"s suc! as #arlia"entar& co""ittees$ T!e )o"#troller and Auditor General
*)AG+ of India, %!o is a##ointed b& t!e President and is inde#endent of bot! t!e E3ecuti(e and Leislati(e
branc!es of o(ern"ent, audits o(ern"ent accounts bot! at t!e central and state le(els, includin t!ose of
#ublic sector enter#rises and indi(idual o(ern"ent #rora""es$ T!e )AG audits include a re#ort on %!et!er
o(ern"ent #rora""es !a(e ac!ie(ed t!eir obDecti(es and #ro(ided t!e intended benefits$ T!e re#orts are
#resented to t!e President *or t!e President2s re#resentati(e in a State+ and t!en referred to #arlia"entar&
co""ittees suc! as t!e Public Accounts )o""ittee *PA)+ or t!e )o""ittee on Public Underta'ins *)PU+
%!o #resent t!eir findins and reco""endations to Parlia"ent$ Go(ern"ent #olicies are also anal&sed b&
tas'forces and co""ittees establis!ed on an ad !oc basis$
1.4.& Trade /o!ic5 O@Kectie"
Trade #olic& is not as an end in itself, but is a tool to furt!er econo"ic ro%t! and de(elo#"ent$ T!e 7orein
Trade Polic& ai"s to double India2s s!are of lobal "erc!andise trade b& :<<G, o(er t!e :<<H le(el, and to use
trade to enerate e"#lo&"ent$ -!ile e3#orts are a 'e& oal, t!e 7orein Trade Polic& ac'no%ledes t!e
i"#ortance of facilitatin i"#orts re6uired to sti"ulate t!e econo"& and calls for a si"#lification of i"#ort
#rocedures and reduction of i"#ort barriers, and co!erence and consistenc& bet%een trade and ot!er econo"ic
#olicies$
Ne(ert!eless, e3#orts continue to be a 'e& focus$ T!e Go(ern"ent in its Mediu",ter" E3#ort Strate&, issued
in .anuar& :<<:, tareted co"#ound annual e3#ort ro%t! of al"ost @:J o(er :<<:,<?, in order to ac!ie(e @J
of %orld e3#orts b& :<<I,<?$ T!e E3#ort Strate& called for, inter alia, furt!er rationali5ation of tariffs, ta3
rebates, reducin transaction costs, i"#ro(in e3#ort infrastructure, e3#andin free,trade aree"ents, and
en!ancin t!e use of e3#ort #ro"otion #rora""es to increase e3#orts furt!er$ T!e oal of doublin India2s
s!are of lobal "erc!andise trade b& :<<G is to be ac!ie(ed, inter alia, t!rou! furt!er liberali5ation of controls
and si"#lification of e3#ort #rocedures, and b& Mneutrali5in t!e incidence of all le(ies and duties on in#uts
used in e3#ort #roducts based on t!e funda"ental #rinci#le t!at duties and le(ies s!ould not be e3#ortedN$
To i"#le"ent t!is #olic&, t!ere are a nu"ber of dut&,neutrali5in sc!e"es$ In addition to "easures suc! as t!e
e3#ort #ro"otion ca#ital oods sc!e"e, e3#ort,oriented units, tec!nolo& #ar's, free,trade 5ones and dut&
dra%bac', ne% sc!e"es !a(e been added$ T!ese include sectoral initiati(es in ariculture and (illae industries,
!andicrafts and !andloo"s, e"s and De%eller&, and leat!er and foot%ear$ B& reducin i"#ort barriers, t!rou!
i"#ro(ed and faster custo"s clearance and reduced or no i"#ort duties, it is li'el& t!at t!ese sc!e"es are
facilitatin e3#orts of t!e tareted #roducts$ 0o%e(er, dut& forone fro" e3#ort #ro"otion sc!e"es in :<<H,<;
%as esti"ated at o(er Rs A;H billion, suestin t!at t!eir cost is !i!$ T!e ne% sc!e"es add to t!e alread&
co"#le3 net%or' of "easures, %!ic!, accordin to a re#ort b& t!e Plannin )o""ission, resulted in
Mad"inistrati(e difficulties in "onitorinN$
1.4.+ Trade A2reement"
Trade aree"ents #resent t!e ri!ts, res#onsibilities, #ri(ilees, rie(ance s&ste"s, etc of #arties to t!e trade
aree"ent$ T!ese could be "ultilateral *as %it! -TO+, reional *as %it! reional trade blocs+, bilateral *%it!
t!e t%o #artici#atin countries+$ Trade #olic& of countries actuall& "ust reflect t!e aree"ents reac!ed under
trade #olic&$
1.4.+.1 #or!d Trade Or2ani;ation
India is an oriinal Me"ber of t!e -TO and #ro(ides M7N treat"ent to all Me"bers and ot!er countries$ It !as
acce#ted t!e 7ourt! and 7ift! Protocols and is a Me"ber of t!e Infor"ation Tec!nolo& Aree"ent$ It is not a
#art& to t!e -TO Go(ern"ent Procure"ent Aree"ent *GPA+$ Li'e all Me"bers, India is re6uired to "a'e
reular notifications on its trade,related la%s and "easures$
India is an acti(e Me"ber of t!e -TO$ In t!e current neotiations, it !as sub"itted #ro#osals relatin to, inter
alia, ariculture, non,ariculture "ar'et access *NAMA+, ser(ices, dis#utes, co"#etition #olic&, trade
facilitation, rules, TRIPS, and s#ecial and differential treat"ent$ A nu"ber of t!ese #ro#osals %ere "ade Dointl&
%it! ot!er Me"bers and in "an& instances %it! de(elo#in countries, includin t!e G,:<, G,AA, and NAMA@@
rou#s$ India2s #osition #rior to t!e launc! of t!e 8o!a Round of neotiations #laced e"#!asis on securin t!e
obDecti(es outlined in t!e "andated neotiations and t!e i"#le"entation issues raised b& a nu"ber of
de(elo#in countries$ At t!e Ministerial )onference in )ancun, in Se#te"ber :<<A, and in 0on >on, )!ina
in 8ece"ber :<<;, India stressed t!e need to address aricultural subsidies in ric! countries and tariff and non,
tariff barriers "aintained b& t!ese countries on #roducts of e3#ort interest to de(elo#in countries$ India
belie(es t!at t!e interests of its I;< "illion rural #oor, %!o are de#endent on ariculture for a li(eli!ood, cannot
be Deo#ardi5ed$ It is t!erefore e"#!asi5in s#ecial and differential treat"ent t!rou! #ro#ortionatel& lo%er
o(erall bound tariff reduction co""it"ents b& de(elo#in countries, cou#led %it! a s#ecial safeuard
"ec!anis" and a list of s#ecial #roducts (ital to ensurin li(eli!oods and food securit& of far"ers in de(elo#in
countries$
-it! reard to NAMA, *NAMA #roducts include fis! and fis!er& #roducts, %ood and forestr& #roducts,
electronics, "anufactures, auto"oti(e #roducts, "ac!iner&, te3tiles, clot!in, leat!er, c!e"ical #roducts, and
"inin #roducts+ India, alon %it! its coalition #artners, belie(es t!at: #roress "ust be "ade on ac!ie(in a
fair, balanced, and de(elo#"ent,oriented set of "odalities based on t!e "andated #rinci#les of #lacin
de(elo#"ent concerns at t!e !eart of t!e neotiationsE ensurin less t!an full reci#rocit& in reduction
co""it"ents for de(elo#in countriesE ac!ie(in a co"#arable le(el of a"bition %it! reard to aricultural
"ar'et accessE and a##ro#riate fle3ibilities to "anae adDust"ent costs and address de(elo#"ent needs$ On
ser(ices, India see's increased "ar'et access es#eciall& t!rou! liberali5ation of #rofessional ser(ices trade in
"odes @ and H, %!ile securin a balance in t!e outco"e of co""it"ents across all "odes and sectors and t!e
neotiations on do"estic reulations$ India e"#!asi5es t!at "eaninful and effecti(e s#ecial and differential
treat"ent "ust be interal to t!e neotiations in accordance %it! t!e "andate, and t!at issues of #articular
concern to de(elo#in countries s!ould be addressed$
Since :<<:, India brou!t co"#laints %it! reard to Me"bers2 anti,du"#in and counter(ailin "easures,
rules of oriin, and tariff #references to de(elo#in countries in t!e -TO$ It !as also been in(ol(ed in fi(e
cases as defendant co(erin issues relatin to t!e auto"oti(e sector, i"#ort restrictions, and anti,du"#in
"easures *Table AII$:+$ In addition, India !as been in(ol(ed as t!ird #art& in @I cases brou!t to t!e 8SB since
:<<:$
T!e o(ern"ent, in #articular, needs to focus on t!e ser(ices sector$ T!is is an area of d&na"ic co"#arati(e
ad(antae$ India need to ensure it !as a clear strate& for e3#ansion of trade in !ealt!care, education and
touris", in addition to IT and ITeS$ India needs to see' in(ol(e"ent of t!e #ri(ate sector in strate&
for"ulation$ In conDunction %it! t!e abo(e trade #olic& "easures, co"#le"entar& #olicies suc! as a "odern
infrastructure net%or' *es#eciall& air#orts and #orts+, reliable access to %ater and electricit&, fle3ible labour
la%s and de,reser(ation for t!e s"all,scale sector need to be in #lace$ 7inall&, focus on "aintainin sound
"acroecono"ic #olicies, %it! an e"#!asis on reducin t!e o(erall fiscal deficit is needed$
1.4.+.& Re2iona! trade a2reement"
Alt!ou! India !as been a fir" su##orter of "ultilateral liberali5ation, it !as also sou!t out reional trade
aree"ents in recent &ears$ -!ile India continues to attac! #ri"ac& to t!e "ultilateral tradin s&ste" to
i"#ro(e li(in standards, it belie(es t!at RTAs are buildin bloc's t!at su##le"ent t!e ains fro" "ultilateral
trade liberali5ation$ Since sinin t!e Ban'o' Aree"ent in @G?;, India !as sined aree"ents "ainl& %it!
ot!er de(elo#in countries *suc! as t!e GSTP+ and %it!in t!e reion *SA7TA+, and %it! so"e of its
nei!bours$ )urrent neotiations include strent!enin reional ties, for e3a"#le, t!rou! t!e Sout! Asian
Association for Reional )oo#eration and t!e BIMST,E), but India is also see'in to de(elo# ties %it! ot!er
reional rou#ins, suc! as ASEAN and MER)OSUR$ Recent trade aree"ents, includin %it! Sina#ore, o
be&ond neotiations on oods, to include ser(ices and in(est"ent$
i. Sout* A"ian A""ociation 'or Re2iona! Co-operation (SAARC%
T!e SAAR), an aree"ent for reional coo#eration a"on Banlades!, B!utan, India, Maldi(es, Ne#al,
Pa'istan, and Sri Lan'a, %as establis!ed at t!e first SAAR) Su""it in 8!a'a on ? = 8ece"ber @G=;$ In A#ril
@GGA, t!e "e"bers of SAAR) sined t!e SAAR) Preferential Tradin Arrane"ent *SAPTA+, %!ic! #ro(ided
li"ited #referential "ar'et access$ T!e Aree"ent on a Sout! Asia 7ree Trade Area *SA7TA+ %as sined
durin t!e @:t! SAAR) Su""it, !eld in Isla"abad, on H,I .anuar& :<<H$ T!e #references e3c!aned under
SAPTA %ill continue to be a(ailable to SAPTA "e"bers until t!e tariff liberali5ation under SA7TA is
co"#lete *:<<= for non,L8) "e"ber #references for L8)s and :<@: for L8) "e"bers+$ 7ollo%in t!ree
rounds of SAPTA neotiations, in %!ic! India offered tariff concessions at t!e 0S si3,diit le(el on :,;?I lines,
additional concessions %ere i(en on AIH 0S si3,diit le(el lines in t!e fourt! round$ S#ecial concessions are
ranted for least de(elo#ed countr& "e"bers *Banlades!, B!utan, Maldi(es, and Ne#al+$ Tariff reductions
under t!e SA7TA are e3#ected to be #!ased in b& :<<= for non,L8) "e"ber #references for L8)s *includin
India+ and b& :<@: for L8) "e"bers of SA7TA$ SA7TA "e"bers !a(e also e3cluded certain #roducts fro"
tariff reductions: India !as notified ?HH i"#orts fro" L8) "e"bers and =I; fro" non,L8) "e"bers$ Tariff
reduction under SA7TA ca"e effecti(e on @,?,:<<I$
ii. A"ia /aci'ic Trade A2reement
T!e Asia Pacific Trade Aree"ent *APTA+, oriinall& 'no%n as t!e Ban'o' Aree"ent, %as sined on A@
.ul& @G?; b& Banlades!, India, Lao P8R, Re#ublic of >orea, P!ili##ines, Sri Lan'a, and T!ailandE )!ina
acceded to t!e Aree"ent in A#ril :<<@$ T!e APTA entered into force on @ Se#te"ber :<<I under an
a"end"ent to t!e oriinal aree"ent$ India offers tariff #references on so"e ;?< tariff lines at t!e si3,diit
le(el, and an additional H= tariff lines to L8) "e"bers$
iii. BI3ST-EC
T!e Ba& of Benal Initiati(e for Multi,sectoral, Tec!nical and Econo"ic )oo#eration *BIMST,E)+, oriinall&
'no%n as BIST,E) %as sined on I .une @GG? b& Banlades!, India, Sri Lan'a, and T!ailandE M&an"ar Doined
t!e aree"ent in @GG?, and Ne#al and B!utan Doined in :<<H$ In 7ebruar& :<<H, BIMST,E) "e"bers sined a
7ra"e%or' Aree"ent to for" a free,trade area b& :<@:$ Alt!ou! t!is aree"ent #ro(ides for neotiations to
be concluded on oods b& 8ece"ber :<<;, and on ser(ices and in(est"ent b& :<<?, t!ese deadlines !a(e not
been "et due to t!e co"#le3it& of issues in(ol(ed and econo"ic and #olitical de(elo#"ents in "e"ber states$
i. A2reement -it* Sri Lan8a
India sined a free,trade aree"ent %it! Sri Lan'a on := 8ece"ber @GG=, %!ic! entered into effect on @ Marc!
:<<<$ Under t!e 7TA India reduce tariffs in #!ases, and eli"inate t!e" co"#letel& in Marc! :<<A, e3ce#t for a
neati(e list co"#risin H:G ite"s includin ar"ents, #lastics and rubber, alco!olic s#irits, and coconut oil$
India also "aintains tariff 6uotas on tea and ar"ents under t!e 7TA$ T!e tariff 6uota for tea is currentl& @;
"illion ' #er &ear, at a #referential rate of ;<J of t!e M7N dut&$ T!e tariff 6uota for ar"ents is = "illion
#ieces #er &ear, of %!ic! I "illion s!ould be "anufactured usin fabrics of Indian oriin and enter at 5ero rates
of dut&E t!e re"ainin t%o "illion #ieces recei(e a "arin of #reference of ?;J of t!e M7N rate$ In addition,
i"#orts of tea "a& onl& enter t!rou! t!e #orts of >oc!i and >ol'ata, %!ile ar"ents "a& be i"#orted onl&
t!rou! t!e #orts of )!ennai, Mu"bai, and .a%a!arlal Ne!ru Port, Mu"bai$ 7urt!er"ore, accordin to a Public
Notice issued b& t!e 8irectorate General of 7orein Trade on :@ No(e"ber :<<I, i"#orts of (anas#ati,
includin ba'er& s!ortenin and "ararine, are subDect to an Mo(erall 6uantitati(e li"itN of :;<,<<< tonnes #er
&ear under t!e Indo1Sri Lan'a 7ree Trade Aree"ent$ T!e aree"ent also !as #ro(isions for t!e use of
antidu"#in and safeuard "easures as %ell as #ro(isional sus#ension of #references in case of balance of
#a&"ents difficulties$
India and Sri Lan'a are currentl& neotiatin a )o"#re!ensi(e Econo"ic Partners!i# Aree"ent *)EPA+,
%!ic! %ould include trade in ser(ices and econo"ic coo#eration in ot!er areas$ Accordin to t!e aut!orities, no
date !as been set for co"#letion of t!e neotiations$
. Compre*en"ie Economic Cooperation A2reement -it* Sin2apore (CECA%
T!e )E)A %as sined on :G .une :<<; and beca"e effecti(e on @ Auust :<<;$ T!e aree"ent %as t!e first
sined b& India t!at co(ered not onl& oods, but also ser(ices and in(est"ent$ Tariff concessions are to be
#!ased in bet%een @ Auust :<<; and @ A#ril :<<G *Table II$@+$ Products e3cluded fro" co""it"ents,
includin aricultural #roducts, alco!olic be(eraes, "inerals, c!e"icals, rubber #roducts, and te3tiles and
clot!in #roducts *I,;;@ tariff lines or o(er !alf of t!e tariff+, %ill re"ain subDect to M7N duties$ )urrentl&,
India offers tariff #references at t!e 0S ei!t diit le(el on so"e ;,@@@ lines, alt!ou! t!e M7N tariff on se(eral
of t!ese lines is alread& 5ero, i"#l&in t!at #references are effecti(el& offered on onl& H,==H tariff lines$
India2s co""it"ents on financial ser(ices o be&ond its co""it"ents in t!e GATS, includin co""it"ents in
life insurance ser(ices, additional co""it"ents in non,life insurance, co""ercial #resence for t!ree ban's
fro" Sina#ore includin u# to @; branc!es o(er four &ears, subDect to certain li"itations and !i!er e6uit&
li"its in local ban's$ In t!e in(est"ent c!a#ter, co""it"ents %ere "ade to #rotect in(est"ent, includin
t!rou! s#ecific co""it"ents on e3#ro#riation and co"#ensation for an& e3#ro#riation$ T!e )E)A also
e3e"#ts in(est"ent fro" Sina#ore fro" ca#ital ains ta3ation$
i. (rame-or8 A2reement 'or E"ta@!i"*in2 a (ree Trade Area -it* T*ai!and
T!e 7ra"e%or' Aree"ent for establis!in a 7ree Trade Area %as sined b& India and T!ailand on G October
:<<A$ Alt!ou! t!e te3t of t!e aree"ent co(ers trade in oods, ser(ices and in(est"ent, s#ecific co""it"ents
%ere "ade onl& %it! reard to trade in oods$ An earl& !ar(est sc!e"e includes #!ased tariff eli"ination for =:
#roducts at t!e 0S si3,diit le(el, b& @ Se#te"ber :<<I$
ii. Ot*er re2iona! trade arran2ement"
)onsultations bet%een India and ASEAN Econo"ic Ministers %ere !eld on @; Se#te"ber :<<: %!en it %as
decided to establis! an ASEAN1India Econo"ic Lin'aes Tas' 7orce *AIELT7+ to #re#are a draft 7ra"e%or'
Aree"ent to en!ance bilateral trade$ T!e first ASEAN1India Su""it %as !eld on ; No(e"ber :<<: in
)a"bodia, %!ere India co""itted, inter alia, to #ro(ide s#ecial and differential treat"ent to ASEAN "e"bers
based on t!eir le(el of de(elo#"ent, and to alinin its #ea' tariffs to East Asian le(els b& :<<;$
T!e 7ra"e%or' Aree"ent on )o"#re!ensi(e Econo"ic )o,o#eration %as sined b& India and ASEAN !eads
of state on = October :<<A$ T!e aree"ent includes trade in oods, ser(ices, and in(est"ent$ T!e earl& !ar(est
#rora""e, includin e3c!ane of tariff concessions, %as e3#ected to co""ence on @ .anuar& :<<?$ )loser
trade and in(est"ent ties are also sou!t %it! t!e Euro#ean Union and t!e United States, t!rou! t!e India1EU
Strateic Partners!i# sined on ? Se#te"ber :<<; and t!e US1India Trade Polic& 7oru", %!ic! !eld its first
"eetin on @: No(e"ber :<<;$ Under t!e for"er, a 0i! Le(el Trade Grou# %as establis!ed to e3#lore %a&s
to dee#en trade and in(est"ent relations and re#orted to t!e ne3t su""it "eetin in October :<<I to neotiate
a broad,based trade and in(est"ent aree"ent$ T!e first "eetin of t!e US1 India Trade Polic& 7oru"
discussed tariffs and non,tariff barriers to trade, ariculture, in(est"ent, ser(ices, intellectual #ro#ert&, and t!e
8o!a Round$ It areed to establis! focus rou#s on ariculture, tariffs and non tariff barriers, ser(ices,
in(est"ent, and inno(ation and creati(it&$ T!e "eetins of t!e Trade Polic& 7oru" are !eld at reular inter(als
se(eral ti"es durin a &ear$
India is e3#lorin t!e #ossibilit& of establis!in a )o"#re!ensi(e Econo"ic )oo#eration Aree"ent %it! t!e
Sout!ern African )usto"s Union *Bots%ana, Lesot!o, Na"ibia, Sout! Africa, and S%a5iland+, and !as sined
#referential aree"ents %it! Af!anistan *I Marc! :<<A+, MER)OSUR *@G Marc! :<<;+, and )!ile *= Marc!
:<<I+$
India2s co""it"ents under t!e PTA %it! Af!anistan include A= tariff lines at t!e 0S si3,diit le(el, %it!
#references ranin fro" ;<J to @<<J of t!e M7N tariff rate$ T!e PTA !as been in o#eration since @A Ma&
:<<A$ A 7ra"e%or' Aree"ent to Pro"ote Econo"ic )o,o#eration, %!ic! ai"s to identif& t!e #otential for
coo#eration in trade in oods and ser(ices, in(est"ent, and ot!er areas, %as sined %it! MER)OSUR on :;
.anuar& :<<H$ As a first ste#, India !as offered co""it"ents on H;< tariff lines at t!e 0S ei!t diit le(el, %it!
#references ranin fro" @<J to @<<J of t!e M7N rate$ Under a 7ra"e%or' Aree"ent to Pro"ote Econo"ic
)o,o#eration sined %it! )!ile, on :< .anuar& :<<;, India2s offer includes @?= tariff lines at t!e 0S ei!t,diit
le(el, %it! #references ranin fro" @<J to ;<J of t!e M7N rate$ In #arallel, a "eetin of t!e Doint stud&
rou# %as !eld durin t!e #referential trade aree"ent neotiations in No(e"ber :<<; to e3#lore t!e #ossible
ne3t ste#s$ T!e PTAs %it! MER)OSUR and )!ile are not &et in force$
T!e bilateral aree"ent %it! Ne#al %as e3tended u# to ; Marc! :<<?, a##arentl& %it!out c!ane$ India2s free,
trade aree"ent %it! B!utan, conducted in local currenc&, %as e3tended on :G .ul& :<<I for ten &ears, %!ile its
bilateral trade coo#eration aree"ent %it! Banlades! %as e3tended for t!ree &ears, fro" @ A#ril :<<I$ India
also "aintains transit aree"ents %it! Banlades! and Ne#al$
India is neotiatin a nu"ber of trade aree"ents includin %it! t!e Re#ublic of >orea, Mauritius, and t!e Gulf
)oo#eration )ouncil, and !as also set u# Doint stud& rou#s to e3#lore t!e feasibilit& of co"#re!ensi(e
econo"ic coo#eration aree"ents %it! )!ina, .a#an, Indonesia, Mala&sia, Australia, and t!e Russian
7ederation$
iii. Ot*er trade arran2ement"
India is a #artici#ant in t!e Global S&ste" of Trade Preferences *GSTP+ a"on de(elo#in countries$ Under t!e
GSTP, %!ic! entered into force in India on @G A#ril @G=G, India offers tariff #references for a li"ited nu"ber of
#roducts$ T%o rounds of neotiations !a(e been co"#leted and a t!ird is e3#ected to be co"#leted b& :<<?$ It
a##ears also t!at India is considerin i(in dut&,free and 6uota,free "ar'et access to least de(elo#ed
countries, but no furt!er details are a(ailable$ Under t!e Generali5ed S&ste" of Preferences *GSP+, India
recei(es #referential access to t!e "ar'ets of Bularia, )anada, t!e Euro#ean )o""unities, .a#an, Ne%
Bealand, Nor%a&, Russian 7ederation, Tur'e&, S%it5erland, and t!e United States$
1.4.+.& (orei2n Ine"tment Re2ime
India !as continued to liberali5e its forein in(est"ent rei"e raduall&$ Procedures for a##l&in for and
obtainin 78I a##ro(al are essentiall& unc!anedE t!e "ain c!anes in #olic& !a(e been to t!e entr& route and a
rela3ation in e6uit& restrictions in a nu"ber of sectors$ 78I #olic& is for"ulated b& t!e 8e#art"ent of Industrial
Polic& F Pro"otion *8IPP+ in t!e Ministr& of )o""erce and Industr&$ T!e In(est"ent Pro"otion 8es' and
t!e 7orein In(est"ent I"#le"entation Aut!orit&, under t!e Secretariat for Industrial Assistance *SIA+ in t!e
8IPP, are concerned %it! in(est"ent #ro"otion and facilitatin i"#le"entation of a##ro(als$ T!e 7orein
In(est"ent Pro"otion Board *7IPB+, based in t!e Ministr& of 7inance, is res#onsible for rantin a##ro(al for
78I in sectors9acti(ities %!ere #rior o(ern"ent a##ro(al is re6uired$
A Ma& :<<: re#ort on refor"in t!e in(est"ent a##ro(al and i"#le"entation #rocedures concluded t!at,
des#ite econo"ic liberali5ation, 78I !ad not entered India to t!e deree e3#ectedE and t!is %as due to se(eral
constraints, includin in t!e co"#le3it& of #rocedural re6uire"ents of se(eral la%s and reulations, as %ell as
trans#arenc& in t!e a##ro(al #rocedures$ In res#onse, t!e 7orein In(est"ent I"#le"entation Aut!orit& *7IIA+
%as establis!ed in Auust @GGI$ T!e 7IIA, %!ic! is based in t!e 8IPP, #ro(ides assistance to forein in(estors
encounterin a##ro(al or o#erational difficulties$ T!e 7IIA is assisted b& a 7ast Trac' Aut!orit& in eac! sector,
and includes re#resentati(es across t!e Go(ern"ent, includin state o(ern"ents, and aencies in(ol(ed in t!e
#articular #roDect$ India also continues to strea"line forein in(est"ent reulations, and reduce or re"o(e
e6uit& restrictions$ In t!e latest "o(e to rationali5e #olic& furt!er, in 7ebruar& :<<I e6uit& restrictions %ere
lifted in se(eral acti(ities, includin bre%in and distillation of alco!olE "anufacturin acti(ities in #roducts
subDect to industrial licensin %it!in :; '" of lare citiesE and in sensiti(e sectors suc! as t!e "anufacture of
e3#losi(es and !a5ardous c!e"icals, and MreenfieldN air#orts, %!ere in(est"ent !as been #er"itted under t!e
auto"atic route subDect to sectoral reulations and, %!ere a##licable, an industrial licence under t!e Industries
*8e(elo#"ent and Reulation+ Act$
1.4.+.+ Le2i"!ation and approa! procedure"
Alt!ou! t!ere is no s#ecific 78I leislation, 78I #olic& is incor#orated in t!e 7orein E3c!ane Manae"ent
*Transfer or Issue of Securit& b& a Person Resident Outside India+ Reulations, :<<<, notified under t!e 7orein
E3c!ane Manae"ent Act, @GGG$ 7orein in(est"ent is at #resent #er"itted u# to (ar&in le(els of e6uit& in
"ost sectors, but it is #ro!ibited in: retail tradin *e3ce#t sinle brand #roduct retailin+E ato"ic ener&E lotter&
businessE and a"blin and bettin$
T!ere are t%o routes for 78I$ 78I u# to @<<J "a& ta'e #lace t!rou! t!e auto"atic route, re6uirin onl& a
notification to t!e reional office of t!e Reser(e Ban' of India *RBI+ %it!in A< da&s of recei#t of t!e in(est"ent
and %it!in A< da&s of issuin s!ares to forein in(estors$ T!e auto"atic route is #er"itted for all acti(ities
e3ce#t: in(est"ent in t%o industries subDect to co"#ulsor& industrial licensin *"anufacture of ciars and
ciarettes of tobacco #roducts, and defence,related ite"s+E e6uit& in(est"ent abo(e :HJ for "anufacture of
ite"s reser(ed for t!e s"all,scale sectorE %!ere t!e forein #artner !as an e3istin (enture in India in t!e sa"e
field on @: .anuar& :<<; *e3ce#t %!ere in(est"ent is b& a (enture ca#ital fund reistered %it! t!e Securities
and E3c!ane Board of India *SEBI+E %!ere in(est"ent b& eit!er #art& is less t!an AJ in t!e e3istin Doint
(entureE and if t!e e3istin Doint (enture is defunct or sic'+E and in(est"ent in certain sectors, as s#ecified,
abo(e t!e o(erall #er"itted forein e6uit& ceilins$
In suc! cases, #rior a##ro(al is re6uired b& t!e Go(ern"ent$ Pro#osals are considered b& t!e 7IPB in t!e
Ministr& of 7inance, 8e#art"ent of Econo"ic Affairs *8EA+$ A##lications see'in 7IPB a##ro(al are recei(ed
in t!e 8EA, e3ce#t for in(est"ent #ro#osals b& non,resident Indians, for sinle brand #roduct retailin or in an
e3#ort,oriented unit, %!ic! are recei(ed and #rocessed b& t!e 8IPP$ In(est"ents in an Indian co"#an& under
t!e Portfolio In(est"ent Sc!e"e are not co(ered b& t!e 78I #olic& and re6uire #rior a##ro(al fro" t!e
Securities and E3c!ane Board of India *SEBI+, %!ile forein in(estors settin u# branc!es, liaison or #roDect
offices %ould be co(ered b& t!e #ro(isions of t!e 7orein E3c!ane Manae"ent *Establis!"ent of a
branc!9liaison office or #roDect office in India+ Reulations :<<<, under t!e 7orein E3c!ane Manae"ent Act
*7EMA+$
7orein in(est"ent #ro#osals "ust be acco"#anied b& details of all in(estorsE e3istin or #ro#osed acti(itiesE
details of t!e #roDect, includin cost, #ro#osed e"#lo&"ent, and e3#orts and forein e3c!ane re6uire"entsE
and financial details of t!e co"#an&, suc! as #aid u# ca#ital, #ercentae !eld b& forein or non,resident
in(estors, and an& s!ares to be issued or alread& issued$ 7IPB decisions "ust nor"all& be "ade and
co""unicated to t!e in(estors %it!in H,I %ee's unless additional infor"ation on t!e #ro#osal is re6uired$
Accordin to t!e aut!orities, nor"all& t!ese deadlines are "et on G<J of #ro#osals, #ro(ided infor"ation is
co"#lete$ T!e 7IPB %or's %it!in establis!ed uidelines, considerin, inter alia, %!et!er t!e #roDect "eets
certain nor"s suc! as (alue added or e3#ort earnins *for e3#ort,oriented units or t!e s"all,scale sector+, and
%!et!er it in(ol(es tec!nical collaboration, alon %it! t!e nature of t!e tec!nolo& to be transferred$ A##ro(al
b& t!e 7IPB is subDect to clearance bein obtained under rele(ant national and state la%s and reulations$ Once
a##ro(al !as been ranted, t!e in(estor "ust obtain clearance fro" ot!er central or state o(ern"ent aencies,
includin t!ose res#onsible for forein e3c!ane, #ollution control and en(iron"ental clearance as %ell as land
ac6uisition, #o%er, etc$ T!e nu"ber of clearances re6uired fro" indi(idual aencies, and t!e ti"e ta'en for
eac!, %ere a"on t!e "aDor bottlenec's identified b& t!e )o""ittee to e3a"ine in(est"ent #rocedures and
i"#le"entation in Se#te"ber :<<@$ To address t!is #roble", se(eral states !a(e establis!ed sinle,%indo%
a##ro(al s&ste"s for in(est"ent #ro#osals "ade %it!in t!e state$ 7urt!er, sectoral uidelines are re(ie%ed to
strea"line t!e" and render t!e" "ore trans#arent$
1.4.+.1 Incentie"
-!ile no incenti(es are tareted s#ecificall& at forein in(estors, bot! central and state o(ern"ents #ro(ide
in(est"ent incenti(es for do"estic and forein in(estors$ T!e )entral Go(ern"ent2s incenti(es include a @<<J
ta3 e3e"#tion on #rofits for infrastructure de(elo#"ent and o#erationE a ta3 e3e"#tion for e3#orts for a #eriod
of ten &earsE a ta3 e3e"#tion for t!e first fi(e &ears and a ;<J e3e"#tion for t!e ne3t fi(e &ears, for in(estor in
t!e S#ecial Econo"ic Bones$ T!ere are also ca#ital in(est"ent subsidies for ne% industrial units and for
e3#ansion of t!ese units in t!e nort!,eastern reion and states t!at are co(ered b& a s#ecial #ac'ae sc!e"e,
introduced in .anuar& :<<AE t!e incenti(es include a subsid& of @;J of in(est"ent in #lant and "ac!iner&, u#
to a "a3i"u" of Rs A "illion for all ne% units and for e3#ansion of e3istin units$ Si"ilar sc!e"es also e3ist
for t!e state of .a""u and >as!"ir$ State o(ern"ents offer in(est"ent incenti(es "ainl& in t!e for" of
e3e"#tions on t!e #a&"ent of c!ares for electricit&, reistration fees, and sta"# dut&, as %ell as reser(ation of
land, inter alia, for e3#ort,oriented units and forein in(estors$
1.: EL/ORT /RO3OTION
E3#ort #ro"otion !as been one of t!e "ain #lan's of forein trade #olic& of "ost countries$ -it! increasin
e3#ort earnins, t!e benefits of en!anced do"estic e"#lo&"ent, risin re(enues to co"#anies and o(ern"ent,
rise in standard of li(in, e3#andin o(erseas o#erations funded b& e3#ort sur#lus, a##reciation of do"estic
currenc&, raisin fore3 reser(e, no #ressure to borro% fro" %orld "ar'ets 1 institutional or ot!er%ise, an
ac'no%lede"ent of ca#abilities of do"estic #eo#le and fir"s, etc e"anate$ Also, in t!e %orld of risin oil
#rices, countries %it! no or far less oil reser(es !a(e to de#end on e3#orts to #a& for risin oil i"#ort bills$ T!us
e3#orts benefit a nation in "an& %a&s, but t!e %orld "ar'et is co"#etiti(e, because e(er& fir"9countr& %ants
to e3#ort "ore$ To !a(e t!e ede o(er ot!ers in t!e lobal "ar'et, o(ern"ents #ro(ide so"e #ro"otional
"easures to fir"s to increase t!eir e3#ort co"#etiti(eness$ T!ese "easures are: 7inancial, 7iscal, 7acilitati(e,
7a(ours and 7elicitatin$
1.:.1 (inancia! Serice" 'or E=porter"
E3#orters are i(en #riorit& finance at concessional ter"s of lendin b& financial and ban'in institutions under
a 'ind of directi(e lendin$ E(en s#ecialist financial institutions are created to e3clusi(el& cater to e3#ort fir"s$
)o""ercial ban's and t!e s#ecial E3#ort,I"#ort Ban' of India, in s!ort, EY,IM Ban', ser(e t!e e3#ortin
co""unit& b& #ro(idin credit finance to e3#orters$ T!e EYIM ban' functions as t!e #rinci#al financial
institution for coordinatin t!e %or'in of institutions enaed in financin e3#ort and i"#ort of oods and
ser(ices %it! a (ie% to #ro"otin t!e countr&2s international trade$ Anot!er facilit& is credit uarantee$
a$ )redit b& EY,IM ban', )o""ercial Ban's and E)G) for e3#orters Pre,s!i#"ent credit, Post S!i#"ent
credit, Su##lier2s )redit, )redit for ProDect E3#orters, )redit for E3#orters of )onsultanc& and Tec!noloical
Ser(ices, and Guarantee facilities are different assistances offered b& EY,IM ban', )o""ercial Ban's, E3#ort
)redit and Guarantee cor#oration, etc$
Pre,s!i#"ent )redit facilit&, in Indian Ru#ees and forein currenc&, #ro(ides access to finance at t!e
"anufacturin stae , enablin e3#orters to #urc!ase ra% "aterials and ot!er in#uts$ Su##lier2s )redit facilit&
enables e3#orters to e3tend ter" credit to i"#orters *o(erseas+ of eliible oods at t!e #ost,s!i#"ent stae$
)redit facilit& for ProDect e3#orters to "eet ru#ee e3#enditure on o(erseas #roDect e3#ort contracts on
"obili5ation 9 ac6uisition of "aterials, #ersonnel and e6ui#"ent etc is also offered$ )redit facilit& to e3#orters
of consultanc& and tec!nolo& ser(ices, so t!at t!e& can, in turn, e3tend ter" credit to o(erseas i"#orters is also
#ro(ided$ EY,IM ban' offers Rediscountin 7acilit& to co""ercial ban's, enablin t!e" to rediscount e3#ort
bills of t!eir SME custo"ers, %it! usance not e3ceedin G< da&s$ EY,IM ban' also offers Refinance of
Su##lier2s )redit, enablin co""ercial ban's to offer credit to e3#orters of eliible oods, %!o in turn e3tend
t!e" credit o(er @=< da&s to i"#orters o(erseas$ )o"#anies e3ecutin contracts %it!in India, but %!ic! are
cateori5ed as 8ee"ed E3#orts in t!e 7orein Trade Polic& of India or contracts secured under international
co"#etiti(e biddin or contracts under %!ic! #a&"ents are recei(ed in forein currenc&, can a(ail of credit
under 7inance for 8ee"ed E3#orts facilit&, ai"ed at !el#in t!e" "eet cas! flo% deficits$ O(erseas bu&ers can
a(ail of Bu&er2s )redit, for i"#ort of eliible oods fro" India on deferred #a&"ent ter"s$ S#ecial sc!e"es are
a(ailable for S"all and Mediu" enter#rises *SMEs+, rural rass,root enter#rises and Ari,e3#orters$
@. (undin2 'or E=portin2 Companie"
EY,IM ban', ter" lendin financial institutions and co""ercial ban's #ro(ide ter" 7inance under different
sc!e"es: E6uit& Partici#ation, ProDect 7inance, E6ui#"ent 7inance, I"#ort of Tec!nolo& F Related Ser(ices,
8o"estic Ac6uisitions of businesses9co"#anies9brands and E3#ort Product 8e(elo#"ent9 Researc! F
8e(elo#"ent$ Under General )or#orate 7inance -or'in )a#ital 7inance *7or E3#ortin )o"#anies+ -or'in
)a#ital Ter" Loans VO : &earsW, Lon Ter" -or'in )a#ital Vu#to ; &earsW, E3#ort Bills 8iscountin,
-are!ousin 7inance, E3#ort Lines of )redit, E3#ort Pac'in )redit and )as! 7lo% financin are e3tended$
Letter of )redit facilit& is also e3tended to i"#orters$
7undin for o(erseas ac6uisition: T!e sc!e"es for financin Indian )o"#an&2s e6uit& #artici#ation in t!e
o(erseas .oint Kenture *.K+9 -!oll& O%ned Subsidiar& *-OS+, Ter" F -or'in )a#ital to t!e o(erseas .K 9
-OS, 7inance *for e6uit&9debt co"#onent+ for ac6uisition of o(erseas businesses 9 co"#anies includin
le(eraed bu&,outs includin structured financin o#tions and 8irect E6uit& are a(ailable %it! E3i" Ban',
selected co""ercial ban's and ter" lendin financial institutions$
c. Line o' Credit
Line of credit is a facilit& %!ere a forein institution, enerall& o(ern"ent or o(ern"ent o%ned, is #ro(ided
finance %!ic! in turn e3tends t!e funds to a do"estic institution t!at ta'es desinated %or's or #roDects in t!e
forein countr& concerned$ T!is is a tri#artite arrane"ent, of %!ic! one is t!e Indian financin institution, t!e
second is an Indian fir" carr&in out a #roDect o(ersea and t!e t!ird is t!e forein o(ern"ent or financin
aenc&$
d. E=port Credit $uarantee "erice
A#art #ro(idin finance for e3#orters, insurance aainst ris' of default on t!e #art of i"#orters is a (er& reat
need$ To #ro(ide t!is uarantee, E3#ort )redit Guarantee )or#oration of India *E)G)+ %as establis!ed in t!e
&ear @G;? b& t!e Go(ern"ent of India to strent!en t!e e3#ort #ro"otion dri(e b& co(erin t!e ris' of
e3#ortin on credit$ E)G) is t!e fift! larest credit insurer of t!e %orld in ter"s of co(erae of national
e3#orts$ It #ro(ides a rane of credit ris' insurance co(ers to e3#orters aainst loss in e3#ort of oods and
ser(ices$ Offers uarantees to ban's and financial institutions to enable e3#orters to obtain better facilities fro"
t!e"$ Pro(ides O(erseas In(est"ent Insurance to Indian co"#anies in(estin in Doint (entures abroad in t!e
for" of e6uit& or loan
1.:.& (aci!itatin2 Serice" 'or E=porter"
T!ere are scores of institutions t!at render (aried ser(ices to e3#orters$ T!ere are E3#ort Pro"otion )ouncils
for "aDor #roduct rou#s, )o""odit& Boards for selected #lantation and ot!er cro#s, Trade Aut!orities for fe%
#roduct classes t!at render a rane of ser(ices for #roduct9ser(ice9co""odit& ite"s t!at t!e& are res#onsible$
a. Serice" e=tended
E3#loration of o(erseas "ar'et, Identification of ite"s %it! e3#ort #otential, Mar'et sur(e& and u#,to,date
"ar'et intellience, )ontact %it! #rotecti(e bu&ers to interest t!e" in t!e e3#orters2 #roducts, Pro(idin t!e
e3#ort co"#an&2s #rofile to o(erseas bu&ers and (ice,(ersa, Ad(ice on international "ar'etin, 8is#la& of
selected #roduct rou#s, Arrane"ent for su##l& of indienous and i"#orted ra% "aterials for e3#ort
#roduction, Resol(in s!i##in and trans#ort #roble"s, Ad(ice on e3#ort finance ban'in and insurance,
E3tensi(e #ublicit& in India and abroad, Partici#ation in Trade 7airs and E3!ibitions abroad, 8e#utation of
trade deleations, stud& tea"s and sales tea"s to forein "ar'ets, Orani5in Bu&er,Seller Meets in India and
abroad, )aterin to ot!er de(elo#"ental needs, )ollectin, collatin and disse"inatin %orld "ar'et
intellience, U#datin t!e infor"ation on lobal trends in fas!ion F desin, #roduct de(elo#"ent and
ada#tation, 8isse"ination of infor"ation of co""ercial and tec!noloical nature t!rou! se"inars, ne%s
bulletins and "aa5ines, Orani5in #artici#ation of Indian e3#orters in international fairs and bu&er,seller
"eets, Orani5in (isits of bu&ers2 deleations fro" different countries, Liaisin %it! (arious international
orani5ations dealin %it! trade infor"ation, Leadin trade deleations to #otential "ar'ets loball&,
7or"ulatin Inter,State trade )ouncil to enae State Go(ern"ents in #ro(idin an enablin en(iron"ent for
#ro"otion of international trade, etc$
@. (aci!itatin2 In"titution": E=port /romotion Counci!" and Aut*oritie"
Aricultural and Processed 7ood Products E3#ort 8e(elo#"ent Aut!orit&,
Marine Products E3#orts 8e(elo#"ent Aut!orit&,
A##arel E3#ort Pro"otion )ouncil,
Buildin Materials and Tec!nolo& Pro"otion )ouncil,
)ar#et E3#ort Pro"otion )ouncil,
)as!e% E3#ort Pro"otion )ouncil of India,
)!e"icals F Allied Products E3#ort Pro"otion )ouncil,
)ouncil for Leat!er E3#orts, i3$ )otton Te3tiles E3#ort Pro"otion )ouncil,
Electronics F )o"#uter Soft%are E3#ort Pro"otion )ouncil,
Enineerin E3#ort Pro"otion )ouncil,
E3#ort Pro"otion )ouncil for 0andicrafts,
Ge" and .e%eller& E3#ort Pro"otion )ouncil,
0andloo" E3#ort Pro"otion )ouncil,
Sil' E3#ort Pro"otion )ouncil,
S&nt!etic F Ra&on Te3tile E3#ort Pro"otion )ouncil,
-ool F -oolens E3#ort Pro"otion )ouncil,
.ute Manufactures 8e(elo#"ent )ouncil,
Plastics and Linoleu"s E3#ort Pro"otion )ouncil,
Po%er loo" 8e(elo#"ent F E3#ort Pro"otion )ouncil,
)otton Te3tile E3#ort Pro"otion )ouncil,
S!ellac E3#ort Pro"otion )ouncil, and
S#orts Goods E3#ort Pro"otion )ouncil.
c. (aci!itatin2 In"titution":
)o""odit& Boards and Ot!er Aencies
Asia Pacific Te3tile )lot!in 7oru",
)entral Sil' Board, )oconut 8e(elo#"ent Board,
)oir Board,
7ederation of Indian E3#ort Orani5ations *7IEO, India Trade Pro"otion Orani5ation, Indian Institute
of 7orein Trade,
National Aricultural )oo#erati(e Mar'etin 7ederation of India Li"ited *NA7E8+,
National 8air& 8e(elo#"ent Board,
National 0orticulture Board, National Oilseeds and Keetable Oils 8e(elo#"ent Board,
National Medicinal Plants Board,
Patent 7acilitatin )entre, etc$
1.:.+ (i"ca! Conce""ion 'or E=porter"
7iscal concessions are in t!e for" of ta3 concession on #rofit fro" e3#ort business, i"#ort dut& concession on
i"#orts for su##ortin e3#ort acti(ities, e3cise dut& concession for e3#ort acti(ities, e3e"#tion fro" certain
le(ies on e3#orts, etc$
E3#ort cess on e3#ort of all aricultural and #lantation co""odities le(ied under (arious )o""odit&
Board Acts %as %ai(ed$
No safeuard and antidu"#in dut& to be le(ied on in#uts under ad(ance license for dee"ed e3#ort
su##lies "ade to I)B *International )o"#etiti(e Biddin+ #roDects$
EP)G Sc!e"e %ill facilitate t!e "oderni5ation of retail sector b& allo%in concessional dut& i"#orts$
7or t!is t!e retailer s!ould !a(e a "ini"u" co(ered s!o##in area of @<<< s6uare "eters$
8ut& free i"#ort of in#uts based on t!e #ast e3#ort #erfor"ance, i"#ort of "ono fila"ent lon line
s&ste" for tuna fis!in at concessional dut& and establis!es a self re"o(al for clearance of %aste of
#eris!able co""odities$
Entitle"ent of dut& free i"#orts of sa"#les en!anced to Rs$ A la'!s for e"s$$
EOUs can clai" IT e3e"#tion %it!in a #eriod of @: "ont!s fro" t!e date of e3#orts$
All actions b& Inco"e Ta3 aut!orit& on 8EPB benefits !a(e been sto##ed b& Pri"e Minister %it!
i""ediate effect$ T!e "atter is to be decided at econo"ic ad(isor& council !eaded b& Pri"e Minister in
t!e ne3t A< da&s
E3#ort obliation for s#ecified #roDects s!all be calculated based on concessional dut& #er"itted to
t!e"$ T!is %ould i"#ro(e t!e (iabilit& of suc! #roDects$ An EP)G license can also be issued for i"#ort
of ca#ital oods for su##l& to #roDects notified b& t!e )entral Board of E3cise and )usto"s under
S$No$HH@ of )usto"s E3e"#tion Notification No$:@9:<<: dated <@,<A,:<<: %!erein t!e basic custo"s
dut& on i"#orts is @<J %it! a )K8 of @IJ$T!e e3#ort obliation for suc! EP)G licenses %ould be
ei!t ti"es t!e dut& sa(ed$
T!e dut& sa(ed %ould be t!e difference bet%een t!e effecti(e dut& under t!e aforesaid )usto"s
Notification and t!e concessional dut& under t!e EP)G Sc!e"e$
7iscal Relief to EOUs:
a$EOUs s!all be e3e"#ted fro" Ser(ice Ta3 in #ro#ortion to t!eir e3#orted oods and ser(ices$
b$EOUs s!all be #er"itted to retain @<<J of e3#ort earnins in EE7) accounts$
c$ Inco"e Ta3 benefits on #lant and "ac!iner& s!all be e3tended to 8TA units %!ic! con(ert to
EOUs.
1.:.1 (aour" 'or E=porter"
i$ Reali5in t!at reat #otential and o##ortunities e3ist in t!e "anufacturin sector, Annual su##le"ent
introduces a nu"ber of "easures to en!ance t!e co"#etiti(eness of "anufacturin sector$
ii$ To #ro"ote accelerated e3#ort #erfor"ance, balance e3#ort obliation %ill be %ai(ed for t!e e3#orters
co"#letin ?;J of t!eir e3#ort obliation in !alf t!e #rescribed e3#ort obliation #eriod$
iii$Reduced e3#ort obliation and en!anced ti"e a(ailable for e3#orts under t!e EP)G Sc!e"e for t!e
i"#orts "ade b& t!e ariculture sector$
i($ Reduced obliation at si3 ti"es t!e dut& sa(ed a"ount as aainst t!e nor"al ei!t ti"es for i"#orts
"ade b& t!e SSI sectors under t!e EP)G Sc!e"e$
($ E3#ort of #oultr& and dair& #roducts and t!eir (alue added #roducts facilitated b&
(i$ rantin t!e" dut& credit Z ;J of t!e 7OB (alue of t!e e3#orts under t!e Kis!es! >ris!i U#aD 4oDna$
(ii$ Su##l& of old of <$GG; and abo(e #urit& allo%ed for release for e3#ort #ur#oses$
(iii$ 7or units de,bondin fro" EOU2s, a si"#lified #rocedure is bein %or'ed out$ Si"ilarl&, ca#ital
oods can be transferred to ot!er units b& si"#l& inti"atin )entral E3cise F 8e(elo#"ent
)o""issioner$
i3$ Reducin conestion at t!e "aDor #orts$ T!e facilit& for e3#ort obliation disc!are in ru#ee #a&"ent
under t!e EP)G !as been e3tended to t!e "inor #orts, I)8s and )7S also$
3$ Sinle co""on a##lication for" called Aa&aat Nir&aat 7or" introduced reducin t!e si5e of t!e for"
b& "ore t!an I<J$
xi. T!ree cateories of ad(ance licenses "ered into a sinle cateor& , Annual ad(ance license, %!ic! %as
a(ailable onl& to status !olders, %ill no% be a(ailable to all t!e e3#orters %it! so"e e3#ort
#erfor"ance$
3ii$ E3#ort obliation e3tension for fi(e &ears under ad(ance license based on BI7R re!abilitation
#ac'ae$
3iii$ Ban' uarantee t!res!old reduced for units in Ari e3#ort 5ones and establis!ed ser(ice #ro(iders
and a cateor& of "anufacturer e3#orters$
3i($ Si"#lified clubbin nor"s under t!e ad(ance license and EP)G Sc!e"e %ill !el# e3#orters in
reulari5in t!eir cases$
3($ )!artered Enineer )ertificate in lieu of )entral E3cise )ertificate for non,e3cisable units and
t!ose i"#ortin s#ares %ill be acce#ted as installation certificate$ T!is %ill reduce t!e transaction
ti"e$
3(i$ I"#orts "ade under Ser(ed fro" India Sc!e"e can be transferable %it!in t!e rou# co"#anies and
"anaed !otels$ T!e #ro(ision %ill allo% bul' sourcin and better utili5ation of t!e entitle"ent$
3(ii$ Go(ern"ent !as decided to de(elo# a trade"ar' for 0andloo" on lines si"ilar to /-ool"ar'2 and
/Sil'"ar'2$ T!is %ill enable !andloo" #roducts to de(elo# a nic!e "ar'et %it! t!e distinct identit&$
3(iii$ All E3#ort Pro"otion )ouncil s!all o#en a se#arate )ell to in(ol(e and encourae &out! and
%o"en entre#reneurs in e3#ort effort$
3i3$ Minister of )o""erce and Industr& in(ited Suestions on a #ro#osal to c!ane t!e na"es of
E3#ort Pro"otion )ouncils to /Trade Pro"otion )ouncil$
33$ Tec!noloical u# radation under EP)G sc!e"e !as been facilitated and incenti(i5ed$
33i$ Transfer of ca#ital oods to rou# co"#anies and "anaed !otels no% #er"itted under EP)G$
33ii$ In case of "o(able ca#ital oods in t!e ser(ice sector, t!e re6uire"ent of installation certificate
fro" )entral E3cise !as been done a%a& %it!$
33iii$ -!en )a#ital Goods are i"#orted for #re9#ost 1 #roduction or license is ta'en for i"#ort of s#ares,
t!e license !older s!all fulfill t!e e3#ort obliation b& e3#ort of #roducts "anufactured fro" t!e
#lant9#roDect to %!ic! t!e #re9#ost,#roduction ca#ital oods9s#ares are related$
33i($ T!e aro units in t!e ari e3#ort 5ones %ould also !a(e t!e facilit& of "o(in t!e ca#ital ood*s+
i"#orted under t!e EP)G %it!in t!e ari e3#ort 5one$ Ser(ice #ro(ider in Ari e3#ort 5one s!all
!a(e t!e facilit& to "o(e or s!ift t!e ca#ital oods %it!in t!e 5one #ro(ided !e "aintains accurate
record of suc! "o(e"ents$ 0o%e(er, suc! e6ui#"ents s!all not be sold or leased b& t!e license
!older$
xxv. Star E3#ort 0ouses s!all be eliible for a nu"ber of #ri(ilees includin fast,trac' clearance
#rocedures, e3e"#tion fro" furnis!in of Ban' Guarantee, eliibilit& for consideration under
Taret Plus Sc!e"e etc$
==i. (aour" to EOU"
I"#ort of ca#ital oods s!all be on self,certification basis for EOUs$
7or EOUs enaed in Te3tiles F Gar"ents "anufacture lefto(er "aterials and
fabrics u#to :J of )I7 (alue of 6uantit& of i"#ort s!all be allo%ed to be dis#osed
of on #a&"ent of dut& on transaction (alue onl&$
Mini"u" in(est"ent criteria s!all not a##l& to Brass 0ard%are and 0and,"ade
De%eller& EOUs *t!is facilit& alread& e3ists for 0andicrafts, Ariculture, 7loriculture,
A6uaculture, Ani"al 0usbandr&, IT and Ser(ices+$
==ii. (aour" to (ree Trade and #are*ou"in2 Mone
A ne% sc!e"e to establis! 7ree Trade and -are!ousin Bone !as been introduced to
create trade 1 related infrastructure to facilitate t!e i"#ort and e3#ort of oods and
ser(ices %it! freedo" to carr& out trade transactions in free currenc&$ T!is is ai"ed at
"a'in India into a lobal tradin,!ub$
b$ 78I %ould be #er"itted u# to @<<J in t!e de(elo#"ent and establis!"ent of t!e 5ones
and t!eir infrastructural facilities$
c$ Eac! 5one %ould !a(e "ini"u" outla& of Rs$@<< crs and ; la'! s6$"ts$ built u# area$
Units in t!e 7T-Bs %ould 6ualif& for all ot!er benefits as a##licable for SEB units$
33(iii$ Common (aci!itie" Centre
Go(ern"ent s!all #ro"ote t!e establis!"ent of )o""on 7acilit& )entres for use b& !o"e,
based ser(ice #ro(iders, #articularl& in areas li'e Enineerin F Arc!itectural desin, Multi,
"edia o#erations, soft%are de(elo#ers etc$, in State and 8istrict,le(el to%ns, to dra% in a
(ast "ultitude of !o"e,based #rofessionals into t!e ser(ices e3#ort arena$
33i3$ /rocedura! Simp!i'ication . Rationa!i;ation 3ea"ure"
o All e3#orters %it! "ini"u" turno(er of Rs$ ; crores and ood trac' record s!all be
e3e"#t fro" furnis!in Ban' Guarantee in an& of t!e sc!e"es, so as to reduce t!eir
transactional costs$
o b$ All oods and ser(ices e3#orted, includin t!ose fro" 8TA units s!all be e3e"#t
fro" Ser(ice Ta3$
o c$ Kalidit& of all licenses9entitle"ents issued under (arious sc!e"es !as been
increased to a unifor" :H "ont!s$
o Nu"ber of returns and for"s to be filed !a(e been reduced$ T!is #rocess s!all be
continued in consultation %it! )usto"s F E3cise$
o En!anced deleation of #o%ers to Bonal and Reional Offices of 8G7T for s#eed&
and less cu"berso"e dis#osal of "atters$
o Ti"e bound introduction of Electronic 8ata Interface *E8I+ for e3#ort transactions$
?;J of all e3#ort transactions to be on E8I %it!in si3 "ont!s$
333$ (aci!itie" at /ra2ati 3aidan
o In order to s!o%case our industrial and trade #ro%ess to its best ad(antae and le(erae
e3istin facilities, Praati Maidan %ill be transfor"ed into a %orld,class co"#le3$
o b$ T!ere s!all be state,of,t!e,art, en(iron"entall&,controlled, (isitor friendl& e3!ibition
areas and "arts$
o c$ A !ue )on(ention )entre to acco""odate @<,<<< deleates %it! fle3ible !all s#aces,
auditoria and "eetin roo"s %it! !i!,tec! e6ui#"ent, as %ell as "ultile(el car #ar'in
for G,<<< (e!icles %ill be de(elo#ed %it!in t!e en(elo#e of Praati Maidan$
333i$ Le2a! Aid (inancia! a""i"tance -ou!d @e proided to de"erin2 e=porter"
on t!e reco""endation of E3#ort Pro"otion )ouncils, for "eetin t!e costs of leal e3#enses
connected %it! trade 1 related "atters$
333ii$ $rieance Redre""a! :A ne% "ec!anis" for rie(ance redressal !as been for"ulated and #ut
into #lace b& a Go(ern"ent Resolution to facilitate s#eed& redressal of
rie(ances of trade and industr&
333iii$ Nua!it5 /o!ic5
o 8G7T s!all be a business,dri(en, trans#arent, cor#orate oriented orani5ation$
o b$ E3#orters can file diitall& sined a##lications and use Electronic 7und Transfer
Mec!anis" for #a&in a##lication fees$
o c$ All 8G7T Offices s!all be connected (ia a central ser(er "a'in a##lication
#rocessin faster$ 8G7T 0ead Puarters !as obtained ISO G<<< certification b&
standardi5in and auto"atin #rocedures$
333i($ Bio Tec*no!o25 /ar8": Biotec!nolo& Par's to be set u# %!ic! %ould be ranted all facilities of
@<<J EOUs$
333($ Co-AcceptanceAAa!i"ation: )o,acce#tance9A(alisation is introduced as e6ui(alent to
irre(ocable letter of credit to #ro(ide %ider fle3ibilit& in financial
instru"ent for e3#ort transaction$
333(i$ Reampin2 Board" o' Trade: T!e Boards of Trade s!all be re(a"#ed and i(en a clear and
d&na"ic role$ An e"inent #erson or e3#ert on trade #olic& s!all be
no"inated as President of t!e Board of Trade, %!ic! s!all !a(e a
Secretariat and se#arate Budet 0ead, and %ill be ser(iced
b& t!e 8e#art"ent of )o""erce$
333(ii$ #e@ c*at: T!e Office of t!e 8irector General of 7orein Trade !as o#ened a
c!at %indo% on its %ebsite: *!tt#:99dft$del!i$nic$in+ for interactin %it! t!e trade
and industr& to re#l& to 6ueries on t!e 7orein trade Polic&$ T!is %eb based
interface %ould*!tt#:99dft$del!i$nic$in+ for interactin %it! t!e trade and industr& to
re#l& to 6ueries on t!e 7orein trade Polic&$ T!is %eb based interface %ould be !eld
fro" A$<< #$"$ to ;$<< #$" on t!e second -ednesda& of e(er& "ont!$
1.:.4 (aci!itatie Encoura2ement" to E=porter"
a$ Taret Plus
A ne% sc!e"e to accelerate ro%t! of e3#orts called MTaret PlusN !as been introduced$ E3#orters %!o !a(e
ac!ie(ed a 6uantu" ro%t! in e3#orts %ould be entitled to dut& free credit based on incre"ental e3#orts
substantiall& !i!er t!an t!e eneral actual e3#ort taret fi3ed$*Since t!e taret fi3ed for :<<H,<; is @IJ, t!e
lo%er li"it of #erfor"ance for 6ualif&in for re%ards is #eed at :<J for t!e current &ear+$ Re%ards %ill be
ranted based on a tiered a##roac!$ 7or incre"ental ro%t! of o(er :<J, :;J and @<<J, t!e dut& free credits
%ould be ;J, @<J and @;J of 7OB (alue of incre"ental e3#orts$
b$ Ne% Status !older )ateori5ation:
T!e Sc!e"e of status !olders continues but t!e cateori5ation of status !olders fro" E3#ort 0ouse, Tradin
0ouse, Star Tradin 0ouse and Su#er Star Tradin 0ouse !as been c!aned to one Star E3#ort 0ouse, t%o Star
E3#ort 0ouse, t!ree Star E3#ort 0ouse, four Star E3#ort 0ouse and fi(e Star E3#ort 0ouse$ Star E3#ort 0ouses
s!all be eliible for a nu"ber of #ri(ilees includin fast,trac' clearance #rocedures, e3e"#tion fro"
furnis!in of Ban' Guarantee, eliibilit& for consideration under Taret Plus Sc!e"e etc$ T!e re(ised t!res!old
li"it for t!e reconition !as also been lo%ered as can be seen fro" t!e table @$@< belo%$
Ta@!e 1.1C: Cumu!atie /er'ormance in /reiou" + Jear" 'or Star Dou"e Statu"
Units in S"all Scale Industr&9Tin& Sector9)ottae Sector, Units reistered %it! >KI)s9>KIBs, Units located in
Nort! Eastern States, Si''i" and . F >$ , units e3#ortin !andloo" 9 !andicrafts 9 !and 'notted or sil' car#ets,
e3#orters e3#ortin to )ountries in Latin A"erica9)IS9sub,Sa!aran Africa as listed in A##endi3 1 @?), units
!a(in ISO G<<< *series+ 9 ISO @H<<< *series+ 9 -0OGMP 9 0A))P 9 SEI)MM le(el,II and abo(e status
ranted b& select aencies, e3#orts of ser(ices and e3#orts of aro #roducts s!all be entitled for double
%ei!tae of e3#ort "ade for rant of Star E3#ort 0ouse status$
1.E. EL/ORT DOCU3ENTS AND /ROCEDURES
E3#ort business in(ol(es 6uite a lot of docu"ents and #rocedures$ All t!ese are #rescribed in t!e trade #olic&
#ronounce"ents of s#ecified aut!orit& in eac! countr&$ A ood 'no%lede of t!is is essential to ensure t!at t!e
business oes un!indered and benefits a(ailed and cost "ini"i5ed$
1.E.1 E=port Document"
E3#ort docu"ents are "ore or less co""on loball&, because t!is is a lobal business and t!erefore
standardi5ation of docu"ents is od for tradin #artners$ 0o%e(er, docu"ents sli!tl& differ de#endin u#on
t!e "ode of e3#ort, b& s!i#, b& land or b& #ost$ T!ese are dealt no% fro" t!e Indian #ers#ecti(e$
1.E.1.1 Document" common!5 needed 'or E=port @5 S*ip
)ertain docu"entation ta'es #lace %!ile e3#ortin$ S#ecial docu"ents "a& be re6uired de#endin on t!e t&#e
of #roduct or destination$ )ertain e3#ort #roducts "a& re6uire a 6ualit& control ins#ection certificate fro" t!e
desinated Ins#ection Aenc&$ So"e food and #!ar"aceutical #roduct "a& re6uire a !ealt! or sanitar&
certificate for e3#ort$
T!e follo%in docu"ents are co""onl& used in e3#ortin, but s#ecific re6uire"ents (ar& b& destination and
#roduct$
o S!i##er2s E3#ort 8eclarationE
o S!i##in Bill9 Bill of E3#ortE
o )o""ercial in(oiceE
o )ertificate of OriinE
o Bill of LadinE
o Te"#orar& I"#ort )ertificate 9 ATA )ARNETE
o Insurance certificateE E3#ort Pac'in ListE
o I"#ort LicenseE
o )onsular In(oiceE
o Ins#ection )ertificationE
o 8oc' Recei#t and -are!ouse Recei#tE
o 8estination )ontrol State"ent.
i S*ipper9" E=port Dec!aration: T!e S!i##er2s E3#ort 8eclaration is t!e "ost co""on of all e3#ort
docu"ents$ It can be electronicall& filed$
ii S*ippin2 Bi!!A Bi!! o' E=port: S!i##in Bill9 Bill of E3#ort is t!e "ain docu"ent re6uired b& t!e )usto"s
Aut!orit& for allo%in s!i#"ent$ Usuall& t!e S!i##in Bill is of four t&#es and t!e "aDor distinction lies %it!
reard to t!e oods bein subDect to certain conditions %!ic! are:
o E3#ort dut&9 cessE
o 7ree of dut&9 cessE
o Entitle"ent of dut& dra%bac'E
o Entitle"ent of credit of dut& under 8EPB
o Sc!e"eE Re,e3#ort of i"#orted oods
iii. Document" reHuired 'or t*e proce""in2 o' t*e S*ippin2 Bi!!:
GR for"s *in du#licate+ for s!i#"ent to all t!e countries$
7our co#ies of t!e #ac'in list "entionin t!e contents, 6uantit&, ross and net %ei!t of eac! #ac'ae$
7our co#ies of in(oices %!ic! contains all rele(ant #articulars li'e nu"ber of
#ac'aes, 6uantit&, unit rate, total f$o$b$9 c$i$f$ (alue, correct F full descri#tion of oods etc$
)ontract, L9), Purc!ase Order of t!e o(erseas bu&er$
ARH *bot! oriinal and du#licate+ and in(oice Ins#ection9 E3a"ination )ertificate$
(ormat" o' S*ippin2 Bi!!:
o -!ite S!i##in Bill in tri#licate for e3#ort of dut& free of oods$
o Green S!i##in Bill in 6uadru#licate for t!e e3#ort of oods %!ic! are under clai" for dut&
dra%bac'$
o 4ello% S!i##in Bill in tri#licate for t!e e3#ort of dutiable oods$
o Blue S!i##in Bill in ? co#ies for e3#orts under t!e 8EPB sc!e"e$
o )o""ercial in(oice: A bill for t!e oods fro" t!e seller to t!e bu&er$ T!ese in(oices are often
used b& o(ern"ents to deter"ine t!e true (alue of oods %!en assessin custo"s duties$
Go(ern"ents t!at use t!e co""ercial in(oice to control i"#orts %ill often s#ecif& its for",
content, nu"ber of co#ies, lanuae to be used, and ot!er c!aracteristics$
i Certi'icate o' Ori2in: T!e )ertificate of Oriin is onl& re6uired b& so"e countries$ In "an& cases, a
state"ent of oriin #rinted on co"#an& letter!ead %ill suffice$ S#ecial certificates are needed for countries %it!
%!ic! t!e 7ree Trade Aree"ents are entered$
Bi!! o' Ladin2: Bill of Ladin is a contract bet%een t!e o%ner of t!e oods and t!e carrier *as %it! do"estic
s!i#"ents+$ 7or (essels, t!ere are t%o t&#es: a strai!t bill of ladin %!ic! is non,neotiable and a neotiable or
s!i##er2s order bill of ladin$ T!e latter can be bou!t, sold, or traded %!ile t!e oods are in transit$ T!e
custo"er usuall& needs an oriinal as #roof of o%ners!i# to ta'e #ossession of t!e oods
i Temporar5 Import Certi'icate A ATA CARNET: An ATA )arnet *also 'no%n as, MMerc!andise
Pass#ortN+ is a docu"ent t!at facilitates t!e te"#orar& i"#ortation of #roducts into forein countries b&
eli"inatin tariffs and (alue,added ta3es *KAT+ or t!e #ostin of a securit& de#osit nor"all& re6uired at t!e
ti"e of i"#ortation$
ii. In"urance certi'icate: Insurance certificate is used to assure t!e consinee t!at insurance %ill co(er t!e loss
of or da"ae to t!e caro durin transit$ T!ese can be obtained fro" &our frei!t for%arder$
iii. E=port /ac8in2 Li"t: E3#ort Pac'in List is considerabl& "ore detailed and infor"ati(e t!an a standard
do"estic #ac'in list$ It ite"i5es t!e "aterial in eac! indi(idual #ac'ae and indicates t!e t&#e of #ac'ae,
suc! as a bo3, crate, dru", or carton$ Bot! co""ercial stationers and frei!t for%arders carr& #ac'in list
for"s$
i= Import Licen"e: I"#ort licenses are t!e res#onsibilit& of t!e i"#orter$ Includin a co#& %it! t!e rest of &our
docu"entation, !o%e(er, can so"eti"es !el# a(oid #roble"s %it! custo"s in t!e destination countr&$
= Con"u!ar Inoice: )onsular In(oice is re6uired in so"e countries, it describes t!e s!i#"ent of oods and
s!o%s infor"ation suc! as t!e consinor, consinee, and (alue of t!e s!i#"ent$ If re6uired, co#ies are a(ailable
fro" t!e destination countr&2s E"bass& or )onsulate in t!e countr&$
3i$ Air#a5 Bi!!": Air frei!t s!i#"ents are !andled b& air %a&bills, %!ic! can ne(er
be "ade in neotiable for"$
3ii$ In"pection Certi'ication: Ins#ection )ertification is re6uired b& so"e #urc!asers and countries in order to
attest to t!e s#ecifications of t!e oods s!i##ed$ T!is is usuall& #erfor"ed b& a t!ird #art& and often obtained
fro" inde#endent testin orani5ations$
3iii$ Doc8 Receipt and #are*ou"e Receipt: 8oc' Recei#t and -are!ouse Recei#t is used to transfer
accountabilit& %!en t!e e3#ort ite" is "o(ed b& t!e do"estic carrier to t!e #ort of e"bar'ation and left %it!
t!e s!i# line for e3#ort$
3i($ De"tination Contro! Statement: 8estination )ontrol State"ent a##ears on t!e co""ercial in(oice, and
ocean or air %a&bill of ladin to notif& t!e carrier and all forein #arties t!at t!e ite" can be e3#orted onl& to
certain destinations$
1.E.1.& Document" ReHuired 'or E=port" @5 Land
7or t!e oods %!ic! are cleared b& Land )usto"s, Bill of E3#ort *also of H t&#es
,%!ite, reen, &ello% F #in'+ is re6uired instead of S!i##in Bill$ Besides, ot!er docu"ents as abo(e are
needed$
1.E.1.+ Document" ReHuired 'or E=port" @5 /o"t
8ocu"ents re6uired for e3#ort b& #ost #arcel de#end on t!e t&#e of #roduct or destination$ )ertain e3#ort
#roducts "a& re6uire a 6ualit& control ins#ection certificate fro" t!e desinated Ins#ection Aenc&$ So"e food
and #!ar"aceutical #roduct "a& re6uire a !ealt! or sanitar& certificate for e3#ort$
Cu"tom" Dec!aration (orm: )usto"s 8eclaration 7or" is #rescribed b& t!e Uni(ersal Postal Union *UPU+
and international a#e3 bod& coordinatin acti(ities of national #ostal ad"inistration$ It is 'no%n b& t!e code
nu"ber )P:9 )PA and to be #re#ared in 6uadru#licate, sined b& t!e sender$
Di"patc* Note or C/&: 8is#atc! Note or )P: is filled b& t!e sender to s#ecif& t!e action to be ta'en b& t!e
#ostal de#art"ent at t!e destination in case t!e address is non,traceable or t!e #arcel is refused to be acce#ted$
/re"cription" o' minimum and ma=imum parce! "i;e": Mini"u" si5e: Total surface area not less t!an @H<
"" Y G< ""$ Ma3i"u" si5e: Lent!%ise not o(er @$<; "$Measure"ent of an& ot!er side of circu"ference
<$G "$9 :$<< "$ Ma3i"u" %ei!t: @< ' usuall&, :< ' for so"e destinations$
Commercia! inoice: )o""ercial in(oice is issued b& t!e seller for t!e full reali5able a"ount of oods as #er
trade ter"$
Con"u!ar Inoice: )onsular In(oice is "ainl& needed for t!e countries li'e >en&a, Uanda, Tan5ania,
Mauritius, Ne% Bealand, Bur"a, Ira6, Australia, 7iDi, )&#rus, Nieria, G!ana, Ban5ibar etc$ It is #re#ared in t!e
#rescribed for"at and is sined9 certified b& t!e counsel of t!e i"#ortin countr& located in t!e countr& of
e3#ort$
Cu"tom" Inoice: )usto"s In(oice is "ainl& needed for t!e countries li'e USA, )anada, etc$ It is #re#ared on
a s#ecial for" bein #resented b& t!e )usto"s aut!orities of t!e i"#ortin countr&$ It facilitates entr& of oods
in t!e i"#ortin countr& at #referential tariff rate$
Le2a!i;ed Inoice: Leali5ed In(oice s!o%s t!e seller2s enuineness before t!e a##ro#riate consulate9 c!a"ber
of co""erce9 e"bass&$ It do not !a(e an& #rescribed for"$
Certi'ied Inoice: )ertified In(oice is re6uired %!en t!e e3#orter needs to certif& on t!e in(oice t!at t!e oods
are of a #articular oriin or "anufactured9 #ac'ed at a #articular #lace and in accordance %it! s#ecific contract$
Si!t 8raft and Usance 8raft are a(ailable for t!is$ Si!t 8raft is re6uired %!en t!e e3#orter e3#ects i""ediate
#a&"ent and Usance 8raft is re6uired for credit deli(er&$
/ac8in2 Li"t: Pac'in List s!o%s t!e details of oods contained in eac! #arcel9 s!i#"ent$
Certi'icate o' In"pection: )ertificate of Ins#ection s!o%s t!at oods !a(e been ins#ected before s!i#"ent$
B!ac8 Li"t Certi'icate: Blac' List )ertificate is re6uired for countries %!ic! !a(e strained #olitical relation$ It
certifies t!at t!e s!i# or t!e aircraft carr&in t!e oods !as not touc!ed t!ose countr&*s+$
#ei2*t Note: -ei!t Note is re6uired to confir" t!e #ac'ets or bales or ot!er for" are of a sti#ulated %ei!t$
3anu'acturer9"A Supp!ier9" Nua!it5 In"pection Certi'icate: Manufacturer2s Pualit& Ins#ection )ertificate is
re6uired in addition to t!e )ertificate of Oriin for fe% countries to s!o% t!at t!e oods s!i##ed !a(e actuall&
been "anufactured and are a(ailable$
Certi'icate o' C*emica! Ana!5"i": )ertificate of )!e"ical Anal&sis is re6uired to ensure t!e 6ualit& and rade
of certain ite"s suc! as "etallic ores, #i"ents, etc$
Certi'icate o' S*ipment: )ertificate of S!i#"ent sinifies t!at a certain lot of oods !a(e been s!i##ed$
Dea!t*A <eterinar5A Sanitar5 Certi'ication: 0ealt!9 Keterinar&9 Sanitar& )ertification is re6uired for e3#ort of
foodstuffs, "arine #roducts, !ides, li(estoc' etc$
Certi'icate o' Conditionin2: )ertificate of )onditionin is issued b& t!e co"#etent office to certif& co"#liance
of !u"idit& factor, dr& %ei!t, etc$
AntiHuit5 3ea"urement: Anti6uit& Measure"ent is issued b& Arc!aeoloical Sur(e& of India in case of
anti6ues$
Tran""*ipment Bi!!: Transs!i#"ent Bill is used for oods i"#orted into a custo"s #ort9 air#ort intended for
transs!i#"ent$
S*ippin2 Order: S!i##in Order is issued b& t!e S!i##in *)onference+ Line %!ic! inti"ates t!e e3#orter
about t!e reser(ation of s#ace of s!i#"ent of caro t!rou! t!e s#ecific (essel fro" a s#ecified #ort and on a
s#ecified date$
CartA Lorr5 Tic8et: )art9 Lorr& Tic'et is #re#ared for ad"ittance of t!e caro t!rou! t!e #ort ate and
includes t!e s!i##er2s na"e, cart9 lorr& No$, "ar's on #ac'aes, 6uantit&, etc$
S*ut Out Adice: S!ut Out Ad(ice is a state"ent of #ac'aes %!ic! are s!ut out b& a s!i# and is #re#ared b&
t!e concerned s!ed and is sent to t!e e3#orter$
S*ort S*ipment (orm: S!ort S!i#"ent 7or" is an a##lication to t!e custo"s aut!orities at #ort %!ic! ad(ises
s!ort s!i#"ent of oods and re6uired for clai"in t!e return$
S*ippin2 Adice: S!i##in Ad(ice is #re#ared in alined docu"ent to be used to infor" t!e o(erseas custo"er
about t!e s!i#"ent of oods$
@$?$@$H$ I"#ort docu"ents
An i"#orter s!all sub"it to custo"s aut!orities i"#ort docu"ents before i"#orted oods are re"o(ed fro"
storae at t!e trans#orter, #laced in a bonded %are!ouse or re"o(ed fro" a bonded %are!ouse or a free 5one
for dis#osal do"esticall&E t!e docu"ents s!all be sub"itted to custo"s no later t!an A "ont!s fro" t!e date of
arri(al of t!e (essel %!ic! trans#orted t!e oods to t!e countr&$
I"#ort docu"ents s!all be sub"itted to t!e director of custo"s in t!e custo"s district %!ere t!e oods are
unloaded fro" t!e (essel, unless t!e oods are trans#orted undeclared to anot!er custo"s district and
arrane"ents are "ade for custo"s treat"ent t!ere$
i$ 8ocu"ents t!at s!all be sub"itted
T!e follo%in docu"ents s!all be sub"itted %it! an i"#ort declaration, as far as
a##licable:
a Commercia! Inoice : T!e )o""ercial in(oice s!all contain t!e follo%in infor"ation:
[ Na"e and address of t!e seller *consinor+,
[ Na"e and address of t!e bu&er *consinee+
[ Place and date of issue,
[ -!en t!e sale too' #lace,
[ Nu"ber of #ieces, t&#e of #ac'in, %ei!t, "ar's and nu"bers,
[ T!e oods contained in a consin"ent, t&#e, "a'e and 6uantit& *nu"ber, %ei!t or
"easure"ents, as t!e case "a& be+,
[ T!e sellin #rice of indi(idual articles and t!e currenc& in %!ic! t!e #rice is s#ecified, ter"s of #a&"ent,
#a&"ent conditions and deli(er& conditions, discounts and ot!er deductions and t!e reasons for rantin suc!
discounts or "a'in suc! deductions$
b Bi!! o' !adin2: or a trans#ort docu"ent issued in connection %it! t!e trans#ort of t!e oodsE !o%e(er %!en
t!ere is sub"itted a bill co(erin frei!t c!ares or a notice fro" t!e trans#orter to t!e consinee concernin a
consin"ent of oods, and t!ese docu"ents contain t!e sa"e infor"ation as s#ecified in reular bills of ladin,
a bill of ladin need not be sub"itted unless s#eciall& re6uested$
c Bi!! coerin2 'rei2*t c*ar2e"
d Certi'icate o' ori2in %!en #referential custo"s treat"ent is re6uested in accordance %it! international
aree"ents to %!ic! Iceland is a #art&, unless a declaration of oriin !as been entered on t!e in(oice,
e Ot*er document" concernin t!e i"#orted oods %!ic! are of rele(ance to t!eir custo"s treat"ent, e$$
i"#ort license %!en re6uired, a confir"ation of an aut!ori5ation for s#ecial custo"s treat"ent %!en suc! is t!e
case, or ot!er certificates re6uired in s#ecial circu"stances$
An oriinal or a co#& of t!e docu"ents listed abo(e "a& be sub"itted to custo"s$ An i"#orter "a& sub"it
suc! i"#ort docu"ents %!ic! !e !as recei(ed in ot!er for"s t!an in %ritin, for e3a"#le b& co"#uter "edia or
teleco""unications$ If custo"s aut!orities dee" it necessar&, t!e& can al%a&s sti#ulate t!at an i"#orter "ust
sub"it an oriinal of t!e afore"entioned docu"ents$
1.E.&. E=port /rocedure"
T!ere are leal and o#erational #rocedures in(ol(ed$ Leal #rocedures are a bit cu"berso"e$ T!e o#erational
#rocedures are reardin one2s #re#aredness to reac! lobal "ar'ets %it! one2s #roduction, "ar'etin and
ot!er business oriented o#erational s'ills$
1.E.&.1 Le2a! procedure"
Obtainin I"#ort,E3#ort )ode Nu"ber, License 9 certificate 9 #er"ission for e3#ort of restricted ite"s, E3#ort
of ite"s reser(ed for SSIs b& non,SSIs, 7urnis!in of e3#ort returns in non,#!&sical for", etc$ are so"e
i"#ortant leal #rocedures to be follo%ed$
a. O@tainin2 Import-E=port Code Num@er and RC3C
Obtainin I"#ort,E3#ort code nu"ber is t!e first leal ste# in(ol(ed in e3#ortin$
T!is is to be obtained fro" t!e 8irector General 7orein Trade *8G7T+$
Alication !or I"# $u%ber: A##lication for rant of IE) nu"ber s!all be "ade b& Reistered90ead Office of
t!e a##licant to t!e Reional Aut!orit& under %!ose Durisdiction, t!e Reistered office of co"#an& and 0ead
office in case of ot!ers, falls in t!e /Aa&aat Nir&aat 7or"2 and s!all be acco"#anied b& docu"ents #rescribed
t!erein$ In case of STPI9 E0TP9 BTP units, Reional Offices of t!e 8G7T !a(in Durisdiction o(er district in
%!ic! t!e Reistered9 0ead Office of t!e STPI is located s!all issue or a"end t!e IE)s$ Onl& one IE) %ould be
issued aainst a sinle PAN nu"ber$ An& #ro#rietor can !a(e onl& one IE) nu"ber and in case t!ere are
"oret!an one IE)s allotted to a #ro#rietor, t!e sa"e "a& be surrendered to t!e Reional Office for
cancellation$
I"# &or%at and State%ents: T!e Reional Aut!orit& concerned s!all issue an IE) nu"ber in t!e for"at$$ A
co#& of suc! IE) nu"ber s!all be endorsed to t!e concerned ban'er *as #er details i(en in t!e IE) a##lication
for"+$ A consolidated state"ent of IE) nu"bers issued b& Reional Aut!orit& s!all be sent to t!e offices of t!e
E3c!ane )ontrol 8e#art"ent of t!e RBI$
'alidity o! I"# $u%ber: An IE) nu"ber allotted to an a##licant s!all be (alid for all
branc!es9di(isions9units9factories as indicated in t!e for"at of IE)$ -!ere an IE) Nu"ber is lost or "is#laced,
t!e issuin aut!orit& "a& consider re6uests for rant of a du#licate co#& of IE) nu"ber, if acco"#anied b& an
affida(it$
(btaining R#)#: An e3#orter desirin to obtain a Reistration,cu",Me"bers!i# )ertificate *R)M)+ s!all
declare !is "ain line of business in t!e a##lication, %!ic! s!all be "ade to t!e E3#ort Pro"otion )ouncil
*EP)+ relatin to t!at line of business$ 0o%e(er, a status !older !as t!e o#tion to obtain R)M) fro" 7ederation
of Indian E3#orters Orani5ation *7IEO+$ Not%it!standin an&t!in stated abo(e, e3#orters of 8rus F
P!ar"aceuticals s!all obtain R)M) fro" P!ar"e3cil onl&$ 7urt!er, e3#orters of "inor forest #roduce and t!eir
(alue added #roducts s!all obtain R)M) fro" S!ellac E3#ort Pro"otion )ouncil$ T!e ser(ice e3#orters
*e3ce#t soft%are ser(ice e3#orters+ s!all be re6uired to obtain R)M) fro" 7IEO$ In res#ect of e3#orters !a(in
t!eir !ead office9 reistered office in t!e State of Orissa, R)M) "a& be obtained fro" 7IEO office in
B!u(anes!%ar irres#ecti(e of t!e #roduct bein e3#orted b& t!e"$
In order to i(e #ro#er uidance and encourae"ent to t!e Ser(ices Sector, an e3clusi(e E3#ort Pro"otion
)ouncil for Ser(ices s!all be set u#$ In addition, an e3#orter !as t!e o#tion to obtain an R)M) fro" 7IEO or
an& ot!er rele(ant EP) if t!e #roducts e3#orted b& !i" relate to t!ose EP)s$ In case an e3#orter desires to et
reistration as a "anufacturer e3#orter, !e s!all furnis! e(idence to t!at effect$ Pros#ecti(e9#otential e3#orters
"a& also, on a##lication, reister and beco"e an associate "e"ber of an e3#ort #ro"otion council$ T!e
e3#orter s!all furnis! 6uarterl& returns9 details of !is e3#orts of different co""odities to t!e concerned
reisterin aut!orit&$ T!is %ill be in addition to an& ot!er returns as "a& be #rescribed b& t!e reisterin
aut!orit&$ 0o%e(er, status !olders s!all also send 6uarterl& returns to 7IEO in t!e for"at s#ecified b& 7IEO$
@. Licen"eAcerti'icateApermi""ion 'or e=port o' re"tricted item"
An a##lication for rant of a license9certificate9#er"ission for i"#ort or e3#ort of ite"s "entioned as restricted
in IT) *0S+ "a& be "ade in t!e for" rele(ant and to t!e s#ecified Reional aut!orities$ An Inter,Ministerial
-or'in Grou# in 8G7T s!all consider a##lications for e3#ort of S#ecial )!e"icals, Oranis"s, Materials,
E6ui#"ent and Tec!noloies *S)OMET+ as #er s#ecified uidelines and case b& case$
"*I) &acilitation #o%%ittee: Restricted ite" license9certificate9#er"ission "a& be ranted b& t!e 8irector
General of 7orein Trade or an& ot!er Reional Aut!orit& aut!ori5ed b& !i" in t!is be!alf$ T!e
8G7T9Reional Aut!orit& "a& ta'e t!e assistance and ad(ice of a 7acilitation )o""ittee$ T!e 7acilitation
)o""ittee %ill consist of re#resentati(es of Tec!nical Aut!orities and 8e#art"ents9 Ministries concerned$
c. Identit5 Card"
To facilitate collection of license9 certificate9 Aut!ori5ation9#er"issions and ot!er docu"ents fro" 8G7T 0ead
Puarters and Reional Aut!orities, identit& cards "a& be issued to t!e #ro#rietor9 #artners9 directors and t!e
aut!ori5ed e"#lo&ees*not "ore t!an t!ree+, of t!e i"#orters and e3#orters$ 0o%e(er in case of li"ited
co"#anies, t!e 0ead of t!e Reional Office "a& a##ro(e t!e allot"ent of "ore t!an t!ree identit& cards #er
co"#an&$
d. E=port o' item" re"ered 'or SSI" @5 non-SSI" and (ree o' co"t e=port":
E3#ort of ite"s reser(ed for SSIs b& non,SSIs: Units ot!er t!an s"all scale industrial units *SSIs+ are #er"itted
to e3#and or create ne% ca#acities in res#ect of ite"s reser(ed for t!e s"all scale sector, subDect to t!e
condition t!at t!e& obtain an Industrial license under t!e Industries *8e(elo#"ent and Reulation+,Act, @G;@$ It
is a condition of suc! license t!at t!e "anufacturer s!all underta'e e3#ort obliation as "a& be s#ecified b& t!e
Ministr& of Industr& and t!e licensee is re6uired to furnis! a Leal Underta'in to t!e 8irectorate General of
7orein Trade in t!is be!alf$ T!e 8irectorate General of 7orein Trade s!all "onitor t!e e3#ort obliation$
&ree o! cost e+orts: T!e star e3#ort !ouse status !olders s!all be entitled to e3#ort freel& e3#ortable ite"s on
free of cost basis for e3#ort #ro"otion subDect to an annual li"it of Rs$@< la'! or :J of t!e a(erae annual
e3#ort reali5ation durin t!e #recedin t!ree licensin &ears %!ic!e(er is !i!er$
e. E=port /a5ment Rea!i;ation
Ad(ance Pa&"ent: In case, #a&"ent is recei(ed in ad(ance and e3#ort9 dee"ed e3#orts ta'es #lace
subse6uentl&, t!e a##lication for a license9certificate9 Aut!ori5ation9 #er"ission s!all be filed %it!in s#ecific
#eriod follo%in t!e "ont! durin %!ic! t!e e3#orts9dee"ed e3#orts are "ade, unless ot!er%ise s#ecified$
,ay%ent through "#-# co.er: In cases %!ere t!e e3#ort !as been co"#leted but t!e #a&"ent !as not been
reali5ed fro" t!e bu&er, suc! e3#orts s!all be ta'en into account for t!e #ur#ose of benefits under t!e E)G)
Polic& #ro(ided t!e #a&"ent !as been reali5ed b& t!e Indian e3#orter t!rou! E)G) co(er$
,ay%ent through -eneral Insurance #o.er: In cases %!ere e3#orts !a(e been "ade and #a&"ent reali5ed
t!rou! t!e General Insurance )o(er on account of transit loss or ot!er circu"stances, t!e a"ount of t!e
insurance co(er #aid %ould be treated as #a&"ent reali5ed on account of e3#orts under t!e (arious e3#ort
#ro"otion sc!e"es$
E3#orter in direct neotiation: In cases %!ere t!e e3#orter directl& neotiates t!e docu"ent *not t!rou! t!e
aut!ori5ed dealer+ %it! t!e #er"ission of t!e RBI, !e is re6uired to sub"it t!e follo%in docu"ents for a(ailin
of t!e benefits under t!e e3#ort #ro"otion sc!e"es:
a$ Per"ission fro" RBI allo%in direct neotiation of docu"ents *!o%e(er t!is is not re6uired for status
!olders %!o !a(e been ranted a eneral #er"ission+,
b$ )o#& of t!e 7orein In%ard Re"ittance )ertificate *7IR)+ as #er 7or" @<,0 of t!e Inco"e Ta3 de#art"ent
in lieu of t!e BR) and
c$ State"ent i(in details of t!e s!i##in bills9 in(oice aainst %!ic! t!e 7IR) %as issued$
(!!setting "+ort ,roceeds:
SubDect to t!e s#ecific a##ro(al of t!e Reser(e Ban' of India, an& #a&able, or e6uit& in(est"ent "ade b& a
licensee9 Aut!ori5ation !older under an& e3#ort #ro"otion sc!e"e, can be used to offset recei#ts of !is e3#ort
#roceeds$ In suc! cases, t!e offsettin %ould be e6ual to t!e reali5ation of t!e e3#ort #roceeds and t!e e3#orter
%ould !a(e to sub"it additional docu"ents to t!is as#ect as "a& be fi3ed$
'. Nua!it5 Certi'ication
It !as been a constant endea(or to #ro"ote 6ualit& standards in t!e e3#ort #roduct 9 units "anufacturin t!e
e3#ort #roduct$ One of t!e salient features incor#orated in t!e 7orein Trade Polic& for t!e #ro"otion of 6ualit&
standards is t!e rant of Star E3#ort 0ouse status on ac!ie(e"ent of a lo%er t!res!old li"it for units !a(in
ISO, G<<< *series+, ISO,@H<<< *Series+ or 0A))P certification or -0OGMP or SEI )MM le(el,: F abo(e
status9certification$
$ E3#ort b& #ost and e3#orts b& sa"#les
E3#ort b& #ost: In case of e3#ort b& #ost, t!e e3#orter s!all sub"it t!e follo%in docu"ents in lieu of
docu"ents #rescribed for e3#ort b& sea9air$
a$ Ban' )ertificate of E3#ort and Reali5ation as #rescribed
b$ Rele(ant #ostal recei#t$
c$ In(oice dul& attested b& t!e )usto"s$
E3#orts b& sa"#le: E3#orts of bona,fide trade and tec!nical sa"#les of freel& e3#ortable ite" s!all be allo%ed
%it!out an& li"it$
*. Account"
T!e star e3#ort status !older s!all "aintain true and #ro#er accounts of its e3#orts and i"#orts based on %!ic!
suc! reconition !as been ranted and t!e e3#orts and i"#orts "ade durin t!e (alidit& #eriod of suc!
reconition certificate$ T!e record s!all be "aintained for a "ini"u" #eriod of t!ree &ears fro" t!e e3#ir& of
t!e (alidit& of suc! certificate$ T!ese accounts s!all be "ade a(ailable for ins#ection to t!e reional aut!orit& or
an& aut!orit& no"inated b& t!e 8irector General of 7orein Trade$
i. (urni"*in2 o' e-e=port return" . E!ectronic Data Interc*an2e (EDI%
7urnis!in of e3#ort returns in non,#!&sical for", t!at is electronic for", is allo%ed no%$ All t!e e3#ort returns
"ade in non, #!&sical for" b& usin co""unication lin's includin !i! s#eed data co""unication lin's,
internet, tele#!one line or an& ot!er c!annel %!ic! do not in(ol(e t!e )usto"s aut!orities !as to be
co"#ulsoril& re#orted on 6uarterl& basis to t!e Electronic and Soft%are E3#ort Pro"otion )ouncil in t!e
#rescribed for"at$ Electronic 8ata Interc!ane *E8I+ facilit& is e3tended to all e3#orters$ T!e facilit& of
electronic filin of a##lications s!all be a(ailable to all e3#orters$ Under t!is sc!e"e, an e3#orter %ould be able
to file !is a##lication on t!e 8G7T %ebsite at !tt#:99 dft$o($in$ T!e a##lication %ill t!en be #rocessed in
accordance %it! t!e #re(alent rules and reulations$ T!e a##licant %ill !a(e to (isit t!e concerned office to
!and,o(er t!e !ard co#& of t!e a##lication alon %it! t!e re6uisite docu"ents includin t!e a##lication fee$
T!e aut!ori5ation9license s!all be issued on recei#t of t!e !ard co#ies of t!e docu"ents as "entioned abo(e
after due scrutin& as #rescribed$ Aut!ori5ation 9license issued usin 8G7T Electronic A##lication S&ste" s!all
be trans"itted electronicall& to t!e )usto"s t!rou! E8I Mode$ T!is s!all also ob(iate t!e need for (erification
of aut!ori5ations 9licenses before allo%in clearance$
K. <i"*e"* Ori"*i and $ram Ud5o2 JoKana
T!e a##lication for rant of credit under Kis!es! >ris!i and Gra" Ud&o 4oDana for e3#ort "ade fro"
<@$<H$:<<I on%ards s!all be "ade to t!e reional aut!orit& concerned in t!e Aa&aat Nir&aat 7or" alon %it!
t!e docu"ents #rescribed t!erein$ T!e a##licant "a& file one or "ore a##lications subDect to t!e condition t!at
eac! a##lication s!all contain not "ore t!an :; s!i##in bills$ All t!e s!i##in bills in an& one a##lication "ust
relate to e3#orts "ade fro" one )usto"s 0ouse onl&$ T!is #rocedure %ill e6uall& a##l& to t!e e3#orts "ade
fro" <@$<H$:<<; till A@$<A$:<ris!i U#aD 4oDana$
T!e a##lication for obtainin credit s!all be filed %it!in a #eriod of t%el(e "ont!s fro" t!e date of e3#orts or
%it!in si3 "ont!s fro" t!e date of reali5ation or %it!in t!ree "ont!s fro" t!e date of #rintin9 release of
s!i##in bill, %!ic!e(er is later, in res#ect of s!i#"ents for %!ic! t!e clai" !a(e been filed$ T!e a##lication in
t!e /Aa&aat Nir&aat 7or"2 s!all be acco"#anied b& E3#ort Pro"otion co#& of t!e s!i##in bill and ban'
reali5ation certificate$ 7or direct as %ell as t!ird #art& e3#orts, t!e E3#ort docu"ents, (i5$, E3#ort Order,
In(oice, GR for", Ban' Reali5ation )ertificate s!ould be in t!e na"e of a##licant onl&$ In cases %!ere t!e
a##licant a##lies for t!e credit entitle"ent certificate after reali5ation or s!i#"ents are "ade aainst irre(ocable
letter of credit or bill of e3c!ane is unconditionall& A(alied9 )o,Acce#ted9 Guaranteed b& a ban' and t!e sa"e
is confir"ed b& t!e e3#orters ban' and certified b& t!e ban' in t!e rele(ant Ban' certificate of e3#ort and
Reali5ation, t!e credit entitle"ent certificate s!all be issued %it! transferable endorse"ent$ In ot!er cases, t!e
credit entitle"ent certificate s!all be initiall& issued %it! non,transferable endorse"ent$ U#on reali5ation of
e3#ort #roceeds, suc! credit entitle"ent certificates can be endorsed as transferable, if t!e a##licant so desires$
1.E.&.& Operationa! procedure"
In order to be successful in e3#ortin one "ust full& researc! e3#ort "ar'ets$ No one s!ould e(er tr& to tac'le
e(er& "ar'et at once$ Man& ent!usiastic #ersons bitten b& t!e e3#ort bu, fail because t!e& bite off "ore t!an
t!e& can c!e%$ O(erseas desin and #roduct re6uire"ents "ust be carefull& considered$ Al%a&s sell as close to
t!e "ar'et as #ossible$ T!e fe%er inter"ediaries one !as t!e better, because e(er& inter"ediar& needs so"e
#ercentae for !is s!are in !is business, %!ic! "eans less #rofit for t!e e3#orter and !i!er #rices for t!e
custo"er$ All oods for e3#ort "ust be efficientl& #roduced$ T!e& "ust be #roduced %it! due reard to t!e
needs of e3#ort "ar'ets$ It is no use tr&in to sell %indo%s %!ic! o#en out%ards in a countr& %!ere,
traditionall&, %indo%s o#en in%ards$
T!e ris' of failure in e3#ort "ar'ets can be "ini"i5ed b& intellient use of researc!$ Before co""ittin to a
lare,scale o#eration o(erseas, tr& out on a s"all scale$ Use a sa"#le test, and an& "ista'es can t!en be
corrected %it!out "uc! !ar" !a(in been done$ -!ile t!e test ca"#ain "a& a##ear to cost "ore initiall&,
re"e"ber t!at so"e of t!e cost %ill be re#aid b& sales, so t!at test "ar'etin often turns out to be c!ea#er$
Ma'in effecti(e business corres#ondence, Selectin t!e "ar'ets, Selectin #ros#ecti(e bu&ers, Selectin
c!annels of distribution ,Neotiatin %it! #ros#ecti(e bu&ers, Processin an e3#ort order, Enterin into e3#ort
contract, E3#ort #ricin and costin and Understandin ris's in international trade are needed for success$
1.F (OREL 3ANA$E3ENT
7orein e3c!ane "anae"ent is a talented %or'$ T!e %orld2s best brains are at it$ 7orein e3c!ane
"anae"ent is a reat d&na"ic tas' of MN)s and t!ose in(ol(e t!e"sel(es in international business$ It is said,
in fore3 dealins, lon ter" "eans, not loner t!an @< "inutes$ T!at is, transactions !a(e to be e3ecuted (er&
6uic'l& in order to boo' ains or a(oid losses$ Lest, best brains else%!ere seal t!e deal$ Before %e et dee#er
into fore3 "anae"ent, certain funda"ental conce#ts need to be learnt$
1.F.1 Ba"ic" and 3acro A"pect" o' (ore=
7orein e3c!ane: /7orein e3c!ane2 as a noun refers to stoc' of forein "one& an entit& is !a(in$ It includes
forein currencies and forein currenc& deno"inated assets !eld b& an entit&$ 7orein e3c!ane is t!e "onetar&
clai"s t!at t!e national entities and indi(iduals of a countr& !a(e o(er t!e rest of t!e %orld$ 7orein e3c!ane is
a (ital instru"ent in t!e lobali5ed econo"&$ 7orein e3c!ane as an action refers to t!e si"ultaneous
transaction of one currenc& for anot!er$
ISO )urrenc& )odes for unifor" identification: In a lobal trade %!en coded are used for different currencies,
standardi5ation is needed in codes$ ISO released )urrenc& )odes and so"e codes and t!e currencies are: US8 R
US 8ollar, EUR R Euro, .P4 R .a#anese 4en, GBP R Britis! Pound, )07 R S%iss 7ranc, )A8 R )anadian
8ollar, AU8 RAustralian 8ollar, NB8 R Ne% Bealand 8ollar, INR RIndian Ru#ee and so on$ Besides,
)ertain )urrenc& Pairs !a(e been coded as follo%s: EUR9US8 R MEuroNE US89.P4 R M8ollar 4enNE GBP9US8
R M)ableN or MSterlinNE US89)07 R MS%iss&NE US89)A8 R M8ollar )anadaN E AU89US8 R MAussie 8ollarNE
and NB89US8 R M>i%iN$
E3c!ane Rate: E3c!ane Rate is t!e (alue of one currenc& e3#ressed in ter"s of anot!er$ T!e e3c!ane rate
*a$'$a t!e forein,e3c!ane rate, fore3 rate or 7Y rate+ bet%een t%o currencies s#ecifies !o% "uc! one
currenc& is %ort! in ter"s of t!e ot!er$ 7or e3a"#le an e3c!ane rate of AG Indian ru#ees *INR+ to t!e United
States dollar *US8+ "eans t!at a su" of Rs AG is %ort! t!e sa"e as US8 @$
8&na"ics of 7Y rates: 7ore3 rates d&na"icall& c!ane, round t!e da&, round t!e %ee', round t!e &ear$ It is t!e
"ar'et %it!out !olida&s$ As fore3 rates c!ane, t!e (alue of transactions c!ane resultin in c!anes in
e3#ected9reali5ed re(enues or ains, e3#enses or losses, assets and liabilities and net %ort!$
E3c!ane rate fluctuation lead to Bric'bats and Bou6uets: T!e te3tile e3#orters, es#eciall& t!e Tiru#ur ar"ent
e3#orters %ere seriousl& affected as t!e Ru#ee started ainin aainst t!e reenbac' * t!at is t!e US 8ollar+ and
t!at Go(ern"ent !ad to co"e to t!eir rescue %it! so"e fiscal relief #ac'aes$ Indian IT co"#anies and ot!er
e3#orters in t!e countr& also !a(e t!is #roble", but t!e& %ere not t!at "uc! affected to "a'e a bi cr&$ But
Indian i"#orters are #rett& !a##& as US 8ollar is c!ea#er and t!at t!e i"#orts are c!ea#er$ T!at is %!at fore3
rate "o(e"ent can do, bric'bat one rou# and bou6uet t!e ot!er$ -!en does it !itC -!en does it !el#C -!o"
does it !itC -!o" does it !el#C T!ese are not #recisel& #redictable$ 0ence are t!e need for dee# anal&sis and
ti"el& action9reaction as sins and sinals$ So, international business co""unit& is %edded to stud&in t!e
"ec!anics of fore3 rate deter"ination, t!e trend in t!e rates, %a&s of #rotectin aainst ris's, %a&s of "a'in a
#rofit benefittin fro" rate c!anes, and so on$ T!e efforts are al%a&s at a(oidin Bric'bats and sei5in
Bou6uets$
1.F.1.1 (ore= 3ar8et-t*e Bi22e"t . t*e OTC T5pe
7ore3 "ar'et is b& far t!e larest "ar'et in t!e %orld, in ter"s of traded (alue$ It includes tradin bet%een lare
ban's, central ban's, currenc& s#eculators, "ultinational cor#orations, o(ern"ents, and ot!er financial
"ar'ets and institutions$ 7orein e3c!ane "ar'et is an O(er,t!e,counter *OT)+ "ar'et %!ere bro'ers9dealers
neotiate directl& %it! one anot!er$ T!ere is no central e3c!ane or clearin !ouse$ Ban's t!rou!out t!e %orld
#artici#ate$ As t!e Asian tradin session ends, t!e Euro#ean session beins, t!en t!e US session, and t!en t!e
Asian bein in t!eir turns$ Traders can react to ne%s %!en it brea's, rat!er t!an %aitin for t!e "ar'et to o#en$
T!e a(erae dail& trade !a##enin in t!e fore3 "ar'ets across t!e lobe e3ceeded USL@$G in :<<H$ T!e :<<?
Triennial )entral Ban' Sur(e& of 7orein E3c!ane and 8eri(ati(es Mar'et Acti(it& sur(e& b& t!e Ban' for
International Settle"ents s!o%s an un#recedented rise in acti(it& in traditional forein e3c!ane "ar'ets
co"#ared to :<<H$ A(erae dail& turno(er rose to LA$: trillion in A#ril :<<?, an increase of ?@J at current
e3c!ane rates and I;J at constant e3c!ane rates$ T!is increase %as "uc! stroner t!an t!e one obser(ed
bet%een :<<@ and :<<H$ Table @ @@ i(es t!e lobal fore3 "ar'et dail& a(erae turno(er$
Ta@!e 1. 11 $!o@a! (ore= 3ar8et Dai!5 Aera2e" Turnoer - in Apri!) in USD @i!!ion"
MaDor -orld 7ore3 Mar'et )entres and To# Traders: T!e biest eora#!ic tradin centre is t!e U>,
#ri"aril& London$ T!e U> e3tended its leadin s!are of lobal forein e3c!ane tradin to AHJ in A#ril :<<?
fro" A@J in A#ril :<<H accordin to t!e ne% edition of I7SL2s 7orein E3c!ane re#ort$ T%ice as "an&
dollars are traded on t!e forein e3c!ane "ar'et in t!e U> t!an in t!e US, and "ore t!an t%ice as "an& Euros
are traded in t!e U> t!an in all t!e euro,area countries co"bined$ 7orein o%ned institutions accounted for
around ?<J of forein e3c!ane tradin in London in A#ril :<<?$ Ot!er lare centres, Ne% 4or', To'&o,
Ger"an&, and Sina#ore, sa% a decline in t!eir s!ares durin t!is #eriod, t!e US fro" @G$:J to @I$IJ, To'&o
fro" =$AJ to I$<J and Ger"an& fro" H$GJ to :$;J$ Table @$@: i(es t!e To# @< fore3 dealers as of Ma&
:<<I$
Ta@!e 1.1&: Top 1C Currenc5 Trader"P o' oera!! o!ume) 3a5 &CC:
Sources: -i'i#edia$
1.F.1.& T5pe" o' (orei2n E=c*an2e 3ar8et
7ore3 "ar'et !as se(eral for"s, si5es and so on$ Table @$@A i(es an account of t!e t&#es$
Ta@!e 1.1+ T5pe" o' (orei2n E=c*an2e 3ar8et
i Inter-@an8 mar8et: 8ealins bet%een ban's %!o are aut!ori5ed dealers in forein e3c!ane Used to be lare
in si5e$ About ?<< ban's %orld%ide act as "ar'et "a'ers in 7orein e3c!ane$ Non,ban' dealers account for
about :<J of t!e "ar'et$ International co""ercial ban's co""unicate %it! one anot!er instantl& and securel&
%it!: *a+ S-I7T: Societ& for -orld%ide Interban' 7inancial Teleco""unications$ *b+ )0IPS: )learin 0ouse
Inter,ban' Pa&"ents S&ste" *c+ E)0O: E3c!ane )learin 0ouse Li"ited, t!e first lobal clearin!ouse for
settlin inter,ban' 7OREY transactions$
ii 3erc*ant dea!" mar8et: 8ealins bet%een aut!ori5ed dealers and ot!ers business entities$ T!is is enerall&
retail "ar'et or client "ar'et, as it is alternati(el& called$
iii #*o!e"a!e mar8et: Lare scale forein e3c!ane dealins es#eciall& interban' deals and so"e deals
in(ol(in lare cor#orations$
i Retai! mar8et: S"all forein e3c!ane deals in(ol(in less t!an, sa& L@<<<<$
O(er t!e counter "ar'et: In o(er t!e counter t!e dealers or #arties directl& settle accounts$ No clearin !ouse
is in(ol(ed$
i E=c*an2e mar8et: 7orein e3c!ane dealins are done in an e3c!ane and settle"ents are t!rou! t!e
clearin !ouse of t!e e3c!ane$
ii Tran"action mar8et: 7orein e3c!ane deals re#resentin trade or financial transactions$
iii Ded2in2 mar8et: 7orein e3c!ane deals t!at are done to co(er ris' of e3#osure in currencies
i= Specu!ation: O#en deals t!at in(ol(e ta'in #osition in t!e e3c!ane to "a'e #rofit %!en e3#ected #rice
"o(e"ent "ateriali5es$
= Spot 3ar8et: S#ot "ar'et is "ar'et for deli(er& nor"all& t%o da&s after t!e deal$ Su##ose on :,@,:<<= &ou
bu& L@<<,<<< in t!e s#ot "ar'et$ It is to be deli(ered on H,@,:<<=$ If H,@,:<<= !a##ens to be a ban'in !olida&,
&ou %ill et deli(er& t!e ne3tda&, %!ic! is ;,@,:<<=$ 4ou don2t #refer t!is$ T!en &ou s!ould boo' t!e contract
on /to"2 basis on :,@,:<<= so t!at &ou can ta'e deli(er& on A,@,:<<= itself$
=i (or-ard 3ar8et: 7or%ard "ar'et is a "ar'et for future deli(er&, but rate or #rice is #redeter"ined$
7or%ard "ar'et is used b& i"#orters to bu& for%ard fore3 needed in future and b& e3#orters to sell for%ard t!e
fore3 recei(able in future$ S#eculators use for%ard "ar'et to s#eculate$ If s#eculators e3#ect a #articular
currenc& to de#reciate t!e& %ill sell for%ard t!at currenc&$ If t!eir e3#ectation is a##reciation of a currenc&,
t!e& %ill bu& for%ard t!e currenc&$
3elivery date 3etermination: Su##ose on ;,@,:<<= &ou bu& L@<<,<<< t%o "ont!s for%ard$ -!at is t!e
deli(er& dateC T!e deli(er& date is fi3ed addin t%o calendar "ont!s to deli(er& date of a s#ot deal boo'ed on
t!e sa"e date, t!at is ;,@,:<<=$ T!e s#ot deli(er& date is ?,@,:<<=$ Addin : calendar "ont!s to t!is, t!e
for%ard deli(er& date is ?,A,:<<=$ If ?,A,:<<= !a##ens to be !olida&, t!e ne3t da& !a##ens to be t!e deli(er&
date$
A#art #lain for%ard bu&in and for%ard sellin contracts, t!ere are o#tion for%ard contracts and rollo(er
for%ard contracts$ In o#tion for%ard contracts, t!e client !as ti"e o#tion to s#read t!e e3ercise of !is contract
o(er a certain #eriod$ Roll o(er for%ard contracts in(ol(e rollin o(er of t!e for%ard contracts aain and aain
for furt!er #eriods$
=ii. Ar@itra2e 3ar8et: Si"ultaneous bu&in *or sellin+ in one "ar'et and sellin *or bu&in+ of t!e sa"e in
anot!er "ar'et to #rofit out of #rice differences is arbitrae$ Arbitrae is done %it!out in(est"ent and a ris',
less #rofit is boo'ed$ T!ere are sinle #oint, "ulti#oint, co(ered and unco(ered arbitraes$
Sin2!e point ar@itra2e: Su##ose t!e bid,as' rates i(en b& t%o ban's are as follo%s:
T!ere is arbitrae o##ortunit& !ere$ Bu& L fro" Ban' B at \ <$?<=: and sell t!e sa"e at \ <$?<=I and "a'e a
ris',less #rofit *\ <$?<=I , \ <$?<=:+ of \ <$ <<<H #er L$ T!is is sinle #oint arbitrae, as "ere bu&in and
sellin of t!e sa"e currenc& is in(ol(ed$
Multi"point arbitrage: A c!ain of bu&in and sellin of different currencies at different "ar'ets in order to
"a'e a #rofit is called "ulti,#oint arbitrae$
=iii. Option" 3ar8et: An O#tions contract in(ol(es one #erson 'no%n as o#tion %riter or o#tion seller i(in
anot!er called o#tion bu&er or o#tion !older t!e ri!t to bu& *in call option+, or ri!t to sell *in put option+ or
ri!t to bu& or sell *in call and put option+ an underl&in asset at a s#ecified #rice #er unit called t!e stri'e or
e3ercise #rice for deli(er& on or before a certain da& *in the case of 4merican option+ or on a certain da& *in
the case of *uropean option+, for an u#front co""ission or o#tion #re"iu" or o#tion #rice$ T!e deter"ination
of o#tion price or commission or premium is t!e "ain tas' of t!e o#tions "ar'et$ Se(eral (ariables are
in(ol(ed !ere$ A t!eore" i(en b& Black"%holes on Option -ricing ot t!e No@!e /ri;e in t!e @GG<s$ T!e
hicago Board of Options Trade 5BOT6 is a #re"ier institution in o#tions dealins$
=i. (uture" 3ar8et: 7utures contract is si"ilar to for%ards, but is e3c!ane done and standardi5ed in "ost
as#ects$ 7a"ous forein e3c!ane futures "ar'ets are: t!e London International 7inancial 7utures E3c!ane
*LI77E+, To'&o International 7inancial 7utures E3c!ane *TI77E+, Sina#ore International 7inancial 7utures
E3c!ane *SI77E+, etc$ 7utures "ar'et can be used for !edin as %ell as s#eculation$ O#en #osition
s#eculation and s#read strate& s#eculation are a(ailable$ Under s#read s#eculation inter,co""odit& and intra,
co""odit& S#eculation strateies e3ist$ S#read s#eculation li"its loss and of course #rofits too$ O#en #osition
is ris'ier and !ence "a& re%ard s"artl&$
=. S-ap" 3ar8et: S%a# deals in(ol(e te"#orar& e3c!ane, %it! aree"ent to re(erse bac' to oriinal
situation$ Te"#orar& e3c!anes could be, li'e: *i+ Bu&in in t!e s#ot and sellin in t!e for%ard "ar'et, *ii+
E3c!anin a fi3ed return asset for a floatin return asset and so on$$ T!ere are assets s%a#s, liabilities s%a#,
currenc& s%a#s, interest rate s%a#, etc$
1.F.&. T5pe" o' (ore= Rate"
T!ere is a cluster of rates in use in fore3 "ar'et$ 8irect and Indirect rates, S#ot rate and for%ard rate, bu&in
rate and sellin rate, sinle rate, fi3ed rate, floatin rate, fle3ible rate, cable or T$T$ *Telera#!ic Transfer+ rate,
!a(ala rate, official rate, "ar'et rate, futures rate etc$
i. Direct and Indirect Rate"
8irect rate e3#resses units of !o"e currenc& #er unit of forein currenc&$ In India, Rs$9L or Rs$9[ or Rs9] or so is
t!e st&le of i(in 6uotation no% ado#ted$ T!is is direct 6uotation, as nu"erator currenc& is do"estic$ Indirect
rate e3#resses units of forein currenc& #er unit of !o"e currenc&$ T!is st&le is ado#ted in U>$ But %!en t!e
t%o currencies co"#ared are forein currencies, t!e direct and indirect 6uote conce#t does not e3ist$ T!e
understandin re6uired is t!e i(en rate is units of t!e nu"erator currenc& e3c!anin for @ unit of t!e
deno"inator currenc&$ T!is is true %!et!er it is direct or indirect 6uote$ T!is is t!e "at!e"atical loic$ T!is
loic is follo%ed t!rou!out our discussion$
ii. Bid and A"8 Rate"
-!en &ou call for a fore3 6uotation fro" a fore3 dealer, !e i(es t%o rates, t!e first one at %!ic! t!e dealers
#urc!ases and t!e second one at %!ic! !e sells$ E$$ S#ot rates: \9L R <$H=@;= 9 <$H=A;<$ T!e dealer is #re#ared
to bu& L at \ <$H=@;= #er L and sell L at \<$H=A;< #er L$ T!e bu&in rate is called /bid2 rate and t!e sellin rate
is called /offer2 or /as'2 rate$ T!e bu&in rate is less t!an t!e sellin rate$ It !as to be$ T!e difference is called
bid,as' s#read and it is t!e ross inco"e for t!e dealer for offerin t!e currenc& e3c!ane ser(ices$ T!e s#read
R <$H=A;< , H=@;=R <$<<@G:$ T!e s#read is also influenced b& fluctuations in t!e "ar'et$ 0i!er t!e
fluctuations, !i!er is t!e s#read and (ice (ersa$
A #ractice in t!e e3c!ane "ar'et is to i(e bid rate full& and as to t!e as' rate #art of t!e 6uotation t!e #ractice
is to i(e onl& fro" t!e deci"al #oint difference bet%een bid and as' rates e3ists$ Read t!e e3c!ane rate i(en
abo(e: \9 L R <$H=@;= 9 <$H=A;<$ T!e as' rate (aries fro" t!e t!ird deci"al #oint on%ardsE so t!e follo%in
6uote st&le is follo%ed: \9L R <$H=@;= 9 A;<$ But t!is "eans : \9L R <$H=@;=9 <$H=A;<$ t!e bid,as' difference is
lo%er for !ot currencies t!at are acti(el& traded$ Bet%een, [ and L, t!e bid,as' s#read used to o as lo% as
<$<<<A dollar #er [$
iii. Spot and (or-ard Rate"
S#ot "ar'et in forein e3c!ane refers to bu&in and sellin fore3, %it! #a&"ents and deli(er& ta'in #lace
nor"all& in : da&s after$ 8eli(er& sooner or later t!an t!is usual : da&s can be arraned, !o%e(er$ S#ot %it!
sa"e da& settle"ent is called /cas! or read& "ar'et2 and ne3t da& settle"ent is called Mto" "ar'etN, t!e ter"
Mto"N "eans to"orro%$
T!e s#ot rates for nor"al s#ot *i$e$, deli(er& : tradin da&s later+, for /to"2 and for /sa"e da&2 %on2t be sa"e$
T!e bid,as' s#read %ill be increasin fro" nor"al s#ot to /to"2 and furt!er increase fro" /to"2 to /sa"e da&2
"ar'ets$ Ma& be t!e /to"2 6uote could be: <$H=@;< 9 <$H=A;= and t!e s#read is <$H=A;= , <$H=@;<R <$<<:<=$
T!e sa"e da& 6uote could be: <$H=@H; 9 <$H=AI; and t!e s#read is R <$H=AI; , <$H=@H;R <$<<::<$
7or%ard "ar'et in forein e3c!ane refers to transactions %!ic! are #erfor"ed at a future s#ecified #eriod, but
t!e rates are settled at t!e ti"e t!e contracts are "ade$ T!e essence of a for%ard transaction is t!at a rate of
e3c!ane is fi3ed no% to %ard off "ar'et uncertainties$ Bot! #a&"ent and deli(er& %ill ta'e #lace at t!e future
date$ T!e relations!i# bet%een s#ot and for%ard rate, t!e deter"inants of discount9#re"iu" of for%ard rate
aainst t!e s#ot rate and rele(ant ot!er #oints are areas of discussion$
i. 3odi'ied Conention" in Huotin2 (ore= rate" . I2nored 3at*ematica! conention
No% a "odified con(ention of forein e3c!ane rate 6uotation is in (oue$ 4ou "a& et a 6uotation: L 9\ R
<$H=:; "eanin t!at @L R \<$H=:;$ )orres#ondinl&, \ 9 L R :$<?:;, "eans one unit of t!e first currenc&, i$e$,
t!e \, is e6ual to :$<?:; unit of t!e second said currenc&, na"el&, US L$ Is t!is not "at!e"aticall& unsoundC
Mat!e"aticall& %!en %e %rite a fraction t!e deno"inator is nor"all& one unit and its e6ui(alent nu"erical
unit2s (alue is found$ T!at is L 9\ R <$H=:; is undoubtedl& %ron$ Ma& be it is %anted to #ut as: L9\ <$H=:;, but
erroneousl& #ut as L 9\ R <$H=:;$ A /92 cannot be e6ual to /R2$
i. TT Rate"
7ore3 "ar'et is not e3actl& a #lace and t!at t!ere is no #!&sical "eetin, but "eetin is affected b& "ail or o(er
#!one$
. Inter-@an8 and 3erc*ant Rate" or Nuotation"
T!e bid,as' rates i(en b& a ban'er "eant for anot!er ban'er are inter,ban' 6uotations$ Interban' 6uotations
are "eant for deals a"onst ban'ers$ 7or "erc!ant clients *e3#orters, i"#orters, tourists, etc$+ t!e rates i(en
b& a ban'er are different and t!ese are called as "erc!ant rates$ T!ese are obtained fro" inter,ban' 6uotations
after adDust"ents for e3c!ane "arin$
Merc!ant TT bu&in rate R Inter ban' bid rate , E3c!ane Marin
Merc!ant TT sellin rate R Inter Ban' as' rate S E3c!ane "arin
*E3c!ane "arin is t!e "arin ta'en o(er b& t!e ban'er$ Marin is subtracted %!en t!e ban'er bu&s t!e fore3$
It is added to t!e inter,ban' as' rate %!en t!e ban'er sells t!e fore3 to "erc!ants or retail custo"ers$ T!e rate
of "arin is fi3ed enerall& b& fore3 dealers association+$ Merc!ant 6uotations !a(e larer s#read t!an inter,
ban' 6uotations$
vi2 %ingle and Multiple )ates
Sinle rate refers to t!e #ractice of ado#tin Dust one rate bet%een t%o currencies$ A rate for e3#orts, ot!er for
i"#orts, ot!er for transactions %it! #referred area, etc$ if ado#ted b& a countr&, t!at situation is 'no%n as
"ulti#le rates$
vii2 .i+ed& .le+ible and .loating )ates
7i3ed rate refers to t!at rate %!ic! is fi3ed in ter"s of old or is #eed to anot!er currenc& %!ic! !as a fi3ed
(alue in ter"s of old$ 7le3ible rate "eans t!e e3c!ane rate is fi3ed o(er a s!ort #eriod, but allo%s t!e sa"e to
(ar& in t!e lon ter" in (ie% of t!e c!anes and s!ifts in de"and and su##l&$ 7loatin rate refers to t!e /natural
#rice2 of one currenc& in ter"s of anot!er as conditioned b& t!e free #la& of "ar'et forces$ T!e rate is allo%ed
to freel& float at all ti"es$ T!e rate of e3c!ane bet%een t%o currencies ado#tin floatin rate s&ste" fluctuates
fro" da& to da& or e(en "inute, due to c!anes in de"and and su##l&$ But t!ose "o(e"ents ta'e #lace around
a rate %!ic! "a& be called t!e /nor"al rate2 or t!e #ar of e3c!ane or t!e true rate$
viii2 ross )ates,
T!e e3c!ane rate bet%een : i(en currencies "a& be obtained fro" t!e rates of t!ese t%o currencies e3#ressed
in ter"s of a t!ird currenc&$ T!e resultin rate is called t!e cross rate$ -!en t%o currencies are not strai!t
a%a& related b& a 6uotation, but eac! is 6uoted to anot!er currenc&, t!rou! crossin t!e t%o a(ailable
6uotations, t!e 6uotation for earlier unrelated currencies can be obtained$ T!e 6uote t!us ot is )ross Rate$
Sa5: @ \R Rs$ =I$I< and @ L R Rs$ H<$:;$ -e "a& %rite t!ese as follo%s: Rs$ =I$I<9\ and Rs$ H<$:;9L$ To et,
t!e (alue of US dollar in ter"s of Pound sterlin *\+, %e need to find t!e (alue of \9L$ -e !a(e to note
Mat!e"aticall&: \9L R \9Re$ 3 Re$9L R @9=I$I< 3 H<$:; R <$HIH=$
E=amp!e 1:
)urrenc& \ and currenc& [ are not strai!ta%a& related, but bot! \ and [
are 6uoted in ter"s of L$ Let \9L R <$H=:; and [9LR<$=:I@$ 7ind t!e (alue of \9[$
So!ution: \9[ R *\9L + 3 *L9[+ R *\9L + 3 @9 *[9L+ R <$H=:; 3 @9 *<$=:I@+
R <$H=:; 3 @$:@<; R <$;=H@$
E=amp!e &:
Su##ose t!e 6uotations are i(en in bid,as' for"$ Let L9[ be @$@:H;9 @$@:=; and L9\ be @$?@H;9@$?@G;$ 7ind t!e
bid,as' for [9\$
So!ution:
-e need [9\$ Mat!e"aticall& [9\ R [9L 3 L9\$ Usin t!is, %e et t!e bid and as' 6uotes as belo%$
Bid 6uote for [9\ R Bid [9L 3 Bid L9\$ -e !a(e Bid L9\, but not Bid [9L$
But, Bid [9L R @9As'L9[$ So, Bid for [9\ R V@9As'L9[$W 3 VBid L9\ W R V@9@$@:=;W 3 @$?@H; R @$;@GA$
As' for [9\ R As' [9L 3 As' L9\$ -e !a(e As' L9\, but not As' [9L$
But, As' [9LR @9Bid L9[$ So, As' for [9\ R V@9BidL9[W 3 VAs' L9\W R V@9@$@:H;W 3 @$?@G; R @$;:G@$
So, [9\ bid, as' 6uote is R @$;@GA9@$;:G@$
E=amp!e +:
Su##ose t!e 6uotations are i(en in bid,as' for"$ L9[ R @$@:H;9@$@:=; and [9\R @$;@GA9@$;:G@$ 7ind t!e bid,as'
for L9\$
So!ution:
Bid rate for L9\ R Bid L9[ 3 Bid [ 9\$ -e !a(e bot! Bid L9[ and Bid [ 9 \ R @$@:H; 3 @$;@GA R @$?<=;
As' rate for L9\ R As' L9[ 3 As' [ 9\$ -e !a(e bot! As' L9[ and As' [ 9\
R @$@:=; 3 @$;:G@ R @$?:;I
i+2 Other )ates,
Bu&in rate and sellin rates refer to t!e rate at %!ic! a dealer in fore3 is %illin to bu& t!e fore3 and sell t!e
fore3$ In t!eor&, t!ere s!ould not be difference in t!ese rates$ But in #ractice, t!e sellin rate is !i!er t!an t!e
bu&in rate$ T!e fore3 dealer, %!ile bu&in t!e fore3 #a& less ru#ees, but de"ands "ore ru#ees %!en !e sells
t!e fore3$
After adDustin for o#eratin e3#enses, t!e dealer boo's a #rofit t!rou! t!e /bu&2 and /sell2 rates differences$
Transactions in e3c!ane "ar'et consist of #urc!ases and sales of currenc& bet%een dealers and custo"ers and
bet%een dealers and dealers$ T!e dealers bu& fore3 in t!e for" of bills, drafts and credits %it! forein ban's,
fro" custo"ers to enable t!e" to recei(e #a&"ents fro" abroad$ T!e resultin accu"ulated currenc& balances
%it! dealers are dis#osed of b& sellin instru"ents to custo"ers %!o need fore3 to "a'e #a&"ents to
foreiners$ T!e sellin #rice for a currenc& 6uoted b& t!e dealer *a ban'+ is sli!tl& !i!er t!an t!e #urc!ase
#rice to i(e t!e ban' s"all #rofit in t!e business$ Eac! dealer i(es a t%o,%a& 6uote in fore3$
1.F.+. E=c*an2e Rate Determination
8eter"ination of t!e e3c!ane rate is as si"#le as t!e deter"ination of #rice of an& co""odit& or #roduct or
ser(ice$ Onl& t!in, !ere t!e co""odit& itself is one currenc&, so #rice of one currenc& in ter"s of anot!er is
re6uired$ But t!e ca(eat is deter"ination of #rice of an& co""odit&9#roduct9ser(ice is not t!at si"#le$ T!e
deter"inants of t!e e3c!ane rate are too "an& to consider$ 4et certain "acro (ariables %ould ca#ture t!e
sa"e$
1.F.+.1 Determinant" o' E=c*an2e Rate
T!ere are "an& factors %!ic! could be broadl& #ut as econo"ic, #olitical and #s&c!oloical factors$ T!e rate
also de#ends on t!e e3c!ane rate s&ste" follo%ed$ T!ese are e3#lained belo%$
A. ELCDAN$E RATE SJSTE3 (ERS%
E3c!ane rate s&ste" refers to t!e asse"blae of institutions, in(est"ents and t!eir inter#la& on e3c!ane rate
be!a(iour$ Traditionall& t!ere are t%o e3tre"e s&ste"s at t!e #oles, na"el& fi3ed rate s&ste" and floatin rate
s&ste" and in bet%een di(erse co"binations e3ist$ T!ese s&ste"s are diara""aticall& #resented in fiure @
and discussed belo%$
(i2 1 E=c*an2e Rate S5"tem (ERS%
(i=ed or /e22ed E=c*an2e Rate S5"tem:
Pein "eans fi3in$ Under currenc& #ein, t!e e3ternal (alue of a currenc& is fi3ed, t!at is #eed at
certain (alues ado#tin one standard or ot!er$ Gold standard, #urc!asin #o%er #arit& and IM7 #ein s&ste"
or ot!er for"s of currenc& #ein$ T!e #eed rates re"ain fi3ed for a ti"e, until re,fi3ed or re,#eed$
Currenc5 /e22in2 Under t*e I3( C*arter -it* USD:
After t!e Gold standard and #urc!asin #o%er standard, currenc& under t!e IM7 c!arter resulted %!ic!
re6uired e(er& "e"ber,countr& to fi3 and "aintain t!e #ar (alue of its currenc& in ter"s of old or
dollar$ T!is s&ste" of fi3ed e3c!ane ca"e to be 'no%n as #eed e3c!ane rates or #ar (alues$ T!e
sc!e"es #ro(ided t!at:
[ Eac! "e"ber countr& s!ould declare t!e e3ternal (alue of its currenc& in ter"s of old and US dollar$
T!is %as 'no%n as t!e /#ar (alue2 of t!e currenc& #rice$
[ T!e (alue of US dollars is fi3ed at US8 A; #er ounce of t!e old$ T!e USA co""itted itself to con(ert
dollars into old at t!e abo(e official #rice$
[ 7ollo%in t!e abo(e, t!e "onetar& reser(es of "e"ber,countries ca"e to consist of old and US
dollars$ T!us US dollar ot t!e #osition of a reser(e asset$
[ Eac! countr& areed to "aintain t!e "ar'et (alue of its currenc& %it!in a "arin of @J of t!e #ar (alue$
-!ere t!e (ariation in t!e "ar'et %as "ore t!an t!e #er"itted le(el, t!e countr& s!ould ta'e ste#s to
de(alue t!e currenc& to correct t!e #osition$
[ Me"bers %ere free to de(alue t!eir currencies$ But, if t!e e(aluation e3ceeded
@<J of t!e #ar (alue, a##ro(al of t!e IM7 s!ould be obtained$ T!e IM7 "i!t a##ro(e it or ad(ise a
lo%er rate$ 0o%e(er, it !ad no #o%er to reDect t!e #ro#osal$
[ T!e IM7 ranted s!ort,ter" financial assistance to its "e"bers to tide o(er t!eir te"#orar& balance of
#a&"ents #roble"s$ 7or c!ronic #roble"s t!e "e"bers %ere e3#ected to use #er"anent solutions li'e
de(aluation$ T!is s&ste" %as 'no%n as adDustable #eed e3c!ane rate %it! a band of :J$ T!e s&ste"
%or'ed till @G?@$
Currenc5 /e22in2 Under t*e I3( C*arter -it* SDR:
In t!e on,oin searc! for a trul& international currenc&, S#ecial 8ra%in Ri!ts, *S8Rs+ t!e currenc& of IM7
e"ered #us!in do%n bot! old and t!e reenbac', i$e$, t!e dollar in t!e late @G?<s$
Bas'et Pein of currenc&: Bas'et #ein in(ol(es t!e do"estic currenc& is #eed to a bas'et of currencies$
-!en no international currenc& is stron and stead&, bas'et #ein is resorted to$
To su##ort fi3ed e3c!ane rate s&ste" a %eb of e3c!ane control "easures are needed$ T!ese include:
E3c!ane control "easures ado#ted include: Inter(ention, E3c!ane restrictions, Bloc'ed Accounts, Multi#le
E3c!ane rates, E3c!ane clearin aree"ents, Pa&"ent aree"ents and Gold #olic&$
ii 3ana2ed (!oat":
In A#ril @G?=, second A"end"ent to t!e IM72s Articles of Aree"ent ca"e into effect and %it! t!at "e"ber
countries %ere free to c!oose o%n e3c!ane rate s&ste"$ But "e"ber countries s!ould ensure order and
stabilit& in e3c!ane rate s&ste"$ IM7 !as sur(eillance or %atc!do role o(er t!e e3c!ane rate #olicies of
countries, but are subDect to reulations to 'ee# t!e "o(e"ents %it!in li"its$
Under t!e s&ste", so"e currencies are #eed to certain currenc&, so"e are #eed to t!e S8R, so"e are
#eed to a bas'et of currencies and so"e are subDect to "utual inter(ention and so"e are #artiall& floatin and
#artiall& #eed *i$e$, dual e3c!ane
rate s&ste"+$
iii (ree (!oat:
US8, 4en and PS beca"e free floatin since @G?=$ Under free floatin e3c!ane rates are deter"ined b&
de"and and su##l&$ )entral ban's do inter(ene, but at "ar'et deter"ined rates onl&$ Ru#ee !as beco"e a free
floatin currenc& #artiall& in @GG: and near,full& on current account in @GGA$ In a freel& floatin rate s&ste"
"ar'et forces decide t!e rate$ Most nations no% ado#t t!is s&ste" no%$ T!ere is no under (aluation or
o(er(aluation$ E3#orters and i"#orters et and #a&, as t!e case "a& be, t!e "ar'et (alue and t!e s&ste" is
e6uall& #oised in res#ect of bot!, unli'e fi3ed ERS %!ere %it! o(er(aluation of do"estic currenc& e3#orters
benefit and %it! under (aluation t!e i"#orters benefit$ 7loatin ERS is an o#en,door #olic& and t!is attracts
"ore flo% of forein ca#ital and t!at do"estic econo"& is #oised for ro%t!$
7loatin ERS does not strain do"estic econo"& or fiscal #olicies "uc! as t!e e3c!ane rate ets suitabl&
altered$ T!e Go(ern"ent does not feel t!e #ressure of "aintainin an unsustainable o(er(alued 9 under(alued
#osition of do"estic currenc&$ But fluctuations in rates %ill be t!ere e(er& ti"e$ T!e "ar'et "a& o
!a#!a5ardl& (olatile abetted b& s#eculation, ca#ital fli!t at %ill, currenc& contaion effect and so on$
B. $D/ O( COUNTRIES:
E3c!ane rate trend "ust reflect t!e trend in t!e econo"ic ro%t! of t!e countries and t!at G8P si5e, t!e
ro%t! in t!at, etc influence e3c!ane rate$ Generall&, t!e "ore !ealt!& and robust a countr&2s econo"&, t!e
better its currenc& %ill #erfor"$
C. $O<ERN3ENT BUD$ET DE(ICITS OR SUR/LUSES:
T!e "ar'et usuall& reacts neati(el& to %idenin o(ern"ent budet deficits, and #ositi(el& to narro%in
budet deficits$ T!e i"#act is reflected in t!e (alue of a countr&2s currenc&$
D. BALANCE O( TRADE LE<ELS AND TRENDS:
T!e trade flo% bet%een countries illustrates t!e de"and for oods and ser(ices, %!ic! in turn indicates de"and
for a countr&2s currenc& to conduct trade$ Sur#luses and deficits in trade of oods and ser(ices reflect t!e
co"#etiti(eness of a nation2s econo"&$ 7or e3a"#le, trade deficits "a& !a(e a neati(e i"#act on a nation2s
currenc&$
E. IN(LATION LE<ELS AND TRENDS:
T&#icall&, a currenc& %ill lose (alue if t!ere is a !i! le(el of inflation in t!e countr& or if inflation le(els are
#ercei(ed to be risin$ T!is is because inflation erodes #urc!asin #o%er, t!us de"and, for t!at #articular
currenc&$
(. /OLITICAL CONDITIONS
Internal, reional, and international #olitical conditions and e(ents can !a(e a #rofound effect on currenc&
"ar'ets$ 7or instance, #olitical u#!ea(al and instabilit& can !a(e a neati(e i"#act on a nation2s econo"&$ T!e
rise of a #olitical faction t!at is #ercei(ed to be fiscall& res#onsible can !a(e t!e #ositi(e effect$ Also, e(ents in
one countr& in a reion "a& s#ur #ositi(e or neati(e interest in a nei!borin countr& and, in t!e #rocess,
affect its currenc&$
$. 3AROET /SJCDOLO$J
Mar'et #s&c!olo& influences t!e forein e3c!ane "ar'et in a (ariet& of %a&s: Unsettlin international e(ents
can lead to a Mfli!t to 6ualit&N , %it! in(estors see'in a Msafe !a(enN$ T!ere is t!e tendenc& for t!e #rice of a
currenc& to reflect t!e i"#act of a #articular action before it occurs and, %!en t!e antici#ated e(ent co"es to
#ass, react in e3actl& t!e o##osite direction$ T!is "a& also be referred to as a "ar'et bein Mo(ersoldN or
Mo(erbou!tN situations$
1.F.+.& ELCDAN$E RATE DETER3INATION 3ODELS
7lo% "odels and asset "odels are used in e3c!ane rate deter"ination$ T!ese are
dealt !ere$
a. (!o- mode!
T!e flo% "odel of e3c!ane rate deter"ination si"#l& is based on de"and and su##l& of fore3$ 8e"and for
forein e3c!ane ta'es #lace %!ene(er a countr& i"#orts oods and ser(ices, #eo#le of a countr& underta'e
(isits to ot!er countries, citi5ens of a countr& re"it "one& abroad and %!ate(er #ur#ose, business units set u#
forein subsidiaries and so on$ In all t!ese cases t!e nation concerned bu&s rele(ant and re6uired forein
e3c!ane, in e3c!ane of its o%n currenc&, or dra%s fro" forein e3c!ane reser(es built$ So t!e de"and side
includes i"#orters, citi5ens underta'in out%ard tra(el, re"ittances aainst forein ser(ices obtained, out%ard
forein debt ser(icin, e3#ort of ca#ital for o(erseas in(est"ent, bu&in of fore3 b& "onetar& aut!orit& as an
inter(ention strate&, etc$
On t!e ot!er !and, %!en a countr& e3#orts oods and ser(ices to anot!er countr&, %!en #eo#le of ot!er
countries (isit t!e countr&, %!en citi5ens of t!e countr& settled abroad re"it "one& !o"e%ards, %!en forein
citi5ens, fir"s and institutions in(est in t!e countr& and %!en t!e countr& or its business co""unit& raises
funds fro" abroad, t!e countr&2s currenc& is brou!t b& ot!ers, i(in forein e3c!ane, in e3c!ane, inflo% of
forein e3c!ane ta'es #lace$ So t!e su##l& side includes e3#orters, forein citi5ens underta'in in%ard tra(el,
re"ittances aainst forein ser(ices #ro(ided, in%ard forein debt ser(icin, inflo% of ca#ital in t!e for" of
forein direct in(est"ent, #ortfolio in(est"ent, release of fore3 fro" fore3 reser(e b& t!e "onetar& aut!orit&,
etc$
@. Current Account 3onetar5 mode!
T!e "odel assu"es t!at: T!ere is onl& one asset t!at is "one&$ 8o"estic "one& is !eld b& residents of t!e
countr& and forein "one& b& foreiners onl&$ PPP t!eor& !olds ood$ T!ere is stable de"and for "one& in
eac! countr&$ 8e"and for "one& de#ends on real inco"e and no"inal interest rate$ 7orein real inco"e and
no"inal interest rate are e3ternal (ariables not influenced b& do"estic factors$ 7ull& fle3ible e3c!ane rate
s&ste" is follo%ed 'ee#in t!e e3c!ane rate in continuous e6uilibriu"$ With these assumptions the
e6uilibriu" e3c!ane rate in /direct 6uote for":
7S9Q 8 R S (m-m% T U (5-5% R V (i-i%
-!ere /S2, t!e e3c!ane rate$ A !i!er /S2 "eans forein currenc& a##reciates and lo%er /S2 "eans it
de#reciates
' is a constant, ^ is reression coefficient attac!ed to *"!,"f+ ,"! is do"estic "one& su##l&, "f forein
"one& su##l&, _ is reression coefficient attac!ed to *&!,&f+, ! is real do"estic inco"e ,&f is real forein
inco"e , is reression coefficient attac!ed to *i!,if+, is no"inal do"estic interest rate, ! if is no"inal forein
interest rate$
f *"!,"f+ U <, do"estic "one& su##l& e3ceeds forein "one& su##l& and t!is leads to increase in S , t!at
"eans do"estic currenc& de#reciates or forein currenc& a##reciates, because t!e reression is #ositi(e
coefficient$ If *&!,&f+ U <, do"estic real inco"e e3ceeds forein real inco"e and t!is leads to decrease in S ,
t!at "eans do"estic currenc& a##reciates or forein currenc& de#reciates, because t!e reression is a neati(e
coefficient$
If *i!,if+U <, do"estic no"inal interest rate e3ceeds forein no"inal interest rate and t!is leads to increase in S ,
t!at "eans do"estic currenc& de#reciates or forein currenc& a##reciates, because t!e reression is #ositi(e
coefficient$
c. Capita! Account mode!
T!e ca#ital account "odel assu"es t!at: PPP t!eor& !olds ood$ T!ere is stable de"and for "one& in eac!
countr&$ 8e"and for "one& de#ends on real inco"e and no"inal interest rate$ 7orein real inco"e and no"inal
interest rate are e3ternal (ariables not influenced b& do"estic factors$ Unco(ered interest #arit& t!eor& !olds
ood and 7is!er o#en condition e3ists$ E3#ected c!ane in e3c!ane rate de#ends on #ercei(ed de#artures fro"
lon,ter" e6uilibriu" e3c!ane rate$$
-it! t!ese assu"#tions t!e e6uilibriu" e3c!ane rate in /direct 6uote for":
7S9Q 8 R S (3-3% T U(J-J% R V (I-I% R W ( X-X%
-!ere /S2, t!e e3c!ane rate$ A !i!er S "eans forein currenc& a##reciates and lo%er
S "eans it de#reciates$
[ ' is a constant,
[ ^ is reression coefficient attac!ed to *"!,"f+
[ "! is do"estic "one& su##l&
[ "f forein "one& su##l&
[ _ is reression coefficient attac!ed to *&!,&f+
[ &! is real do"estic inco"e
[ &f is real forein inco"e
[ ` is reression coefficient attac!ed to *i!,if+
[ i! no"inal do"estic interest rate
[ if is no"inal forein interest rate
[ a is reression coefficient attac!ed to * b!,bf+
[ bis do"estic inflation
[ bf do"estic inflation$
If *M!,Mf+ U <, lon,ter" do"estic "one& su##l& e3ceeds lon,ter" forein "one& su##l& and t!is leads to
increase in S , t!at "eans do"estic currenc& de#reciates or forein currenc& a##reciates, because t!e reression
is #ositi(e coefficient$$
If *&!,&f+ U <, lon,ter" do"estic real inco"e e3ceeds lon,ter" forein real inco"e and t!is leads to decrease
in S , t!at "eans do"estic currenc& a##reciates or forein currenc& de#reciates, because t!e reression is a
neati(e coefficient$
If *i!,if+U <, lon,ter" do"estic no"inal interest rate e3ceeds lon,ter" forein no"inal interest rate and t!is
leads to increase in S , t!at "eans do"estic currenc& de#reciates or forein currenc& a##reciates, because t!e
reression is #ositi(e coefficient$
If *b!,bf+U <, lon,ter" do"estic inflation rate e3ceeds lon,ter" forein inflation rate and t!is leads to increase
in S , t!at "eans do"estic currenc& de#reciates or forein currenc& a##reciates, because t!e reression is
#ositi(e coefficient$
1.F.1 E=c*an2e Rate T*eorie"
E3c!ane rate t!eories reason out t!e fore3 rate deter"ination$ T!e& !el# t!e #rocess of deter"inin e3c!ane
rate bet%een currencies$ T!e e3c!ane is o(erned b& certain #ara"eters$ 8e#endin on t!e #ara"eters used,
different e3c!ane rate t!eories !a(e been de(elo#ed$ T!ere are Mint Parit&, Purc!asin Po%er Parit& and
Interest Rate Parit& t!eories$
1.1C.1.1 3int /arit5 T*eor5
Under t!e Gold Standard or "int #arit& arrane"ent, rate of e3c!ane is deter"ined b& reference to t!e old
contents of t!e t%o currencies, as eac! currenc& is e3#ressed in ter"s of %ei!t of old$ Gold standard
#re(ailed u#to @GA@$ No% it is not in #ractice$ To understand t!e "et!od, let us ta'e an i"ainar& e3a"#le$ Let
Re @ R <$<<@ ra" of old and US dollar *US8+ @ R <$<H ra" of old$ T!en t!e rate of e3c!ane bet%een
t!ese t%o currencies under t!e Gold Standard %ill be : T!e rate of e3c!ane is also 'no%n as t!e "int #ar of
e3c!ane, for at t!e Indian "int Re @ %ill be R <$<<@ ra" of old and at t!e US "int L @ R <$<H ra" of old$$
T!e actual e3c!ane rate in t!e fore3 "ar'et %ill not be, !o%e(er, US8 @ R <$H<, but sli!tl& different due to
ban' co""ission$ But ban' co""ission cannot e3ceed certain li"its as "erc!ants can e3#ort or i"#ort old to
settle international #a&"ents incurrin e3#enses of s!i##in and insurance %!en t!e co""ission c!ared is felt
to be !i!$ Su##ose ban's c!are @<J co""ission and t!at to et US8 @, a "erc!ant !as to #art %it! Rs$ H<
#lus @<J R Rs$HH$ Instead, t!e "erc!ant can bu& <$<H< ra" of old e6ui(alent to one US8 and e3#ort t!e
sa"e incurrin sa&, Rs$ : as for%ardin and insurance cost of t!e <$<H ra" of old to t!e A"erican su##lier of
oods$ T!e effecti(e e3c!ane rate co"es to US8 @RRs$ H< S Rs$ : R Rs$ H:$ So ban's cannot c!are Rs HH a
dollar, but co"e do%n to Rs$ H:$ Si"ilarl&, it can be s!o%n t!at a ban' cannot offer less t!an Rs A= a dollar *Rs
H< 1 Rs$ :+ %!en t!e ban' bu&s dollars$ T!us t!e actual e3c!ane rate is c Rs$: about t!e "int #arit& of US8 @
R Rs$ H<$
1.8.4.2 Purchasing Power Parity Theory
T!ere is anot!er #o#ular t!eor& of e3c!ane rate based on #urc!asin #o%er #arities of currencies$ Under t!e
#urc!asin #o%er #arit& "et!od, ado#ted %!en #a#er currencies are used, e3ternal (alue of a currenc& is
deter"ined on t!e basis of its internal (alue$ As t!ere is no old con(ertibilit& o#tion, a case %it! Gold
standard, currencies !a(e to be (alued on t!e basis of t!eir res#ecti(e internal (alue eit!er b& reference to
#articular co""odit& or bas'et of co""odities$
Sa&, a bale of cotton is sold for Rs$ :<,<<< in India %!ile t!e sa"e is US8 ;<< in USA$ T!en, Rs$ :<<<< R US8
;<< or Rs$ H< R US8 @$ If, t!e #rice of cotton rises in India, t!e (alue of Ru#ee falls aainst US8, if t!ere is no
s&"#at!etic rise in #rice of cotton in USA$ But basin currencies2 e3ternal (alue on t!e basis of #rice of a
sinle co""odit& or bas'et of co""odities internationall& traded is not ood, for onl& #art #urc!asin #o%er is
considered$ So, e3c!ane rate co"#utation and adDust"ent based on #rice inde3 nu"bers V)PI, -PI, )LPI, etcW
is considered$ Su##ose in :<<I US8 @ R Rs$ HH and t!e #rice indices in bot! USA and India R @<<$ B& :<<? t!e
inde3 nu"ber of Indian #rices, sa& !as beco"e @<;, %!ile t!at of USA is @@<$ T!en :<<? e3c!ane rate %ill be:
US8 @ R @<;9 @@< Y Rs$ HH R Rs$ H: and Re$ @ R @;<9:=< 3 @9HH R US8 @9H: or <$<:A=$
Purc!asin Po%er Parit& *PPP+ %as first stated in a riorous "anner in @G@= b& t!e S%edis! econo"ist Gusta(
)assel, %!o used it as t!e basis for reco""endin a ne% set of official e3c!ane rates at t!e end of -orld -ar
I t!at %ould allo% for t!e resu"#tion of nor"al trade relations$ Since t!en, PPP !as been %idel& used b&
)entral ban's as a uide to establis!in ne% #ar (alues for t!eir currencies %!en t!e old ones %ere clearl& in
dise6uilibriu"$
In its absolute (ersion, #urc!asin #o%er #arit& states t!at t!e e6uilibriu" e3c!ane
rate bet%een do"estic and forein currencies e6uals t!e ratio bet%een do"estic and forein #rice le(els$ T!us,
if eo is t!e current e6uilibriu" e3c!ane rate *i$e$ in e6uilibriu", one unit of forein currenc& e6uals eo units of
t!e !o"e currenc&+$ P! t!e !o"e countr& #rice le(el, and P t!e forein #rice le(el, t!en e R P 9 P or P e R P$ In
ot!er %ords, a unit of !o"ecurrenc& *0)+ s!ould !a(e t!e sa"e #urc!asin #o%er around t!e %orld$
T!is t!eor& is based on t!e la% of one #riceE i$e$ it rests on t!e assu"#tion t!at free trade %ill e6uali5e t!e #rice
of an& ood in all countries , ot!er%ise, arbitrae o##ortunities %ould e3ist$ 0o%e(er, t!e t!eor& inores t!e
effects of trans#ortation costs, tariffs, 6uotas and ot!er restrictions, and #roduct differentiation$
T!e relati(e (ersion is used "ore co""onl& no%$ 7orein #rice %ould indicate t!e necessar& adDust"ent in t!e
e3c!ane rate bet%een an& #air of currencies$ 7or"all&, if P!*t+ and Pf*t+ are t!e !o"e and forein #rice le(els,
res#ecti(el&, and et is t!e 0) (alue of one unit for forein currencies all at ti"e t, t!en: et 9 eo R *P!,,t9P+9
*Pf,t9P+, %!ere, *P!,o+ *Pf,o+ and eo are t!e base #eriod e6uilibriu"
!,,of,,o #rice le(els and e3c!ane rate, res#ecti(el& and *P+ *P,+ and eare e6uilibriu" #rice !,tftt le(els and
e3c!ane rate, at #eriod /t2$
T!is e6uation can be stated in ter"s of relati(e inflation rates usin t!e follo%in transfor"ation$ Let i and i be
t!e *antici#ated+ #rice le(el increases *rates of inflation+ !,tf,tbet%een ti"e < and ti"e t for t!e !o"e countr&
and t!e forein countr&, res#ecti(el&E i$e$ P9PR @ S i and P9PR @ S i$ So, VeeWV@ S i W9 V@ S i$W T!en, V*e , e+9!,t!,o
!,tf,tf,o f,tt 9 o R !,tf,t $ to eoW is t!e relati(e *antici#ated+ e3c!ane rate c!ane bet%een < and t, and t!is s!ould
e6ual: V i , iW 9 V@S iW%!ic! ist!e relati(e #rice le(el c!ane fro" ti"e /<2 to ti"e /t2$ !,tf,t$ f,t,
7or e3a"#le, if t!e current US #rice le(el is at @@: %!ile t!e U> #rice le(el is at
@<?, relati(e to base #rice le(els of @<< t!en, accordin to PPP, t!e dollar (alue of t!e Pound Sterlin s!ould
!a(e a##reciated b& a##ro3i"atel& H$I?J V*<$@: , <$<?+9@$<? R <$<HI?W$ On t!e ot!er !and, if t!e U> #rice
le(el no% e6uals @@G, t!en t!e Pound Sterlin s!ould !a(e de#reciated b& a##ro3i"atel& ;$==J V*<$@: ,
<$@G+9@$@G R ,<$<;==W in t!e interi"$ A si"#lified Vine3actW (ersion of t!is for"ula is: *e , e +9eR V i , iW 9 V@ S
iW$too !,tf,t$ f,t$ That is& the inflation differential between times 78! and 7t! should e(ual the per cent change in
e+change rate for that same time period2
Purc!asin #o%er #arit& bears an i"#ortant "essae$ .ust as t!e #rice of oods in one &ear cannot be
"eaninfull& co"#ared to t!e #rice of oods in anot!er &ear %it!out adDustin for interi" inflation, so
e3c!ane rate c!anes "a& indicate not!in "ore t!an t!e realit& t!at countries !a(e different inflation rates$ In
fact, accordin to #urc!asin #o%er #arit& t!is s!ould be case$ If so, t!en e3c!ane rate "o(e"ents Dust cancel
out c!ane in t!e forein #rice le(el relati(e to t!e do"estic #rice le(el$ T!ese offsettin "o(e"ents s!ould
!a(e no effects on t!e relati(e co"#etiti(e #ositions of do"estic fir"s and t!eir forein co"#etitors$ T!us
c!anes in no"inal rates are off,settin nature of effects of inflation$ If currenc& c!anes affect relati(e
co"#etiti(eness, t!e focus "ust be not on no"inal e3c!ane rate c!anes but instead on c!anes in t!e real
#urc!asin #o%er of one currenc& relati(e to anot!er$ T!e real e3c!ane rate is different fro" no"inal
e3c!ane rate$
PPP ra#!ic #resentation
T!e relations!i# bet%een t!e current s#ot and e3#ected future s#ot rate and inflation rates can be s!o%n
ra#!icall&, as in 7i :$ Plot on t!e !ori5ontal a3is t!e inflation differential in fa(or of t!e !o"e countr&, i$e$ b!
1 bf , T!e (ertical a3is #lots t!e #ercentae difference bet%een future s#ot o(er current s#ot on t!e forein
currenc& relati(e to t!e !o"e currenc&$
Fig 2 PPP Theory
[ b! ,bf R Inflation differential *in J+ in fa(or of t!e !o"e countr&$
[ VS, S W 9 SR Rate of c!ane in e3#ected future s#ot rate o(er current s#ot rate tS@ tt
T!e #urc!asin #o%er #arit& line Doins t!ose #oints for %!ic! t!e future s#ot e3c!ane rate is in e6uilibriu"
%it! t!e inflation differential$ 7or e3a"#le, if t!e inflation differential in fa(or of t!e !o"e countr& is :J, t!en
t!e forein currenc& "ust o at a future s#ot %!ic! is :J "ore t!an current s#ot rate$
1.F.1.+ Intere"t Rate /arit5 T*eor5
Interest rate #arit& t!eor& tries to brin out t!e relations!i# bet%een s#ot and for%ard e3c!ane rates$ T!e
currenc& of t!e countr& %it! a lo%er interest rate s!ould be at a for%ard #re"iu" in ter"s of t!e currenc& of t!e
!i!er interest rate countr&$ More s#ecificall&, in an efficient "ar'et %it! no transactions costs, t!e interest
differential s!ould be *a##ro3i"atel&+ e6ual to t!e for%ard differential$ Mat!e"atics of t!e T!eore":
79S R *@ S n$i*!++9*@ S n$i+ %!ere ,
/n2*f+ R dn2 #eriod for%ard rate of a forein currenc& i(en in direct 6uotation for"
[ S R s#ot rate i(en in direct 6uotation for"
[ /n2 R #eriod in &ears
[ i*!+ R interest rate in !o"e countr& #er annu"
[ i*f+ R interest rate in forein countr& #er annu"
T!e one #eriod, i$e$, one &ear for%ard rate is i(en b& : 79S R *@ S i+9*@ S i+
T!en, 7,S9S R *@ S i , @ , i+9*@ S i+ R V i , i W9 V*@ S iW R Vi , iW A##ro3i"atel&$
T!at is, rate of for%ard #re"iu" or discount, relati(e to current s#ot is a##ro3i"atel& e6uals t!e difference in
interest rates in t!e t%o countries$
Su##ose US interest rate is IJ and in Indian Interest Rate is =J #$a$ If MSN R Rs$ H<9L, @ &ear for%ard L rate is
i(en b& 79S R 79H< R *@ S *<$<=++9*@ S *<$<I+ R *@ S <$<=+9*@ S <$<I+ R V@$<=9@$<IW 3 H< R Rs$ H<$?;9L
Si3 "ont! for%ard rate is obtained as follo%s:
79S R 79HI$; R *@ S *@9:+*<$<=++9*@ S *@9:+*<$<I++ R V@$<I9@$<AW 3 H< R H<$AG

Intere"t rate parit5 2rap*ic pre"entation:
T!e relations!i# bet%een t!e s#ot and for%ard rates and interest rates can be s!o%n ra#!icall&, as in 7i A$
Plot on t!e !ori5ontal a3is t!e interest differential in fa(or of t!e !o"e countr&, i$e$ i!,if$ T!e (ertical a3is #lots
t!e #ercentae for%ard discount *neati(e+ or #re"iu" *#ositi(e+ on t!e forein currenc& relati(e to t!e !o"e
currenc&$ T!e interest #arit& line Doins t!ose #oints for %!ic! t!e for%ard e3c!ane rate is in e6uilibriu" %it!
t!e interest differential$ 7or e3a"#le, if t!e interest differential in fa(or of t!e !o"e countr& is :J, t!en t!e
forein currenc& "ust o at a :J #re"iu" o(er s#ot rate$
(i2 +: IR/ pre"entation
[ (ih if) = Interest rate differential (in %) in favor of the home country.
[ V7,SW9S R Rate of c!ane in for%ard rate o(er current s#ot rate$
1.F.4 (or-ard Rate Computation
E3c!ane rate co"#utation is a sort of arit!"etic %ort! an e3#osure$ T!e sa"e is
dealt no%$
1.F.4.1 (or-ard rate computation @a"ed on Intere"t Rate /arit5
7or%ard rate 6uotation, t!e rate 6uoted is for deli(er& at a future date, %!ic! is usuall& @, :, A, H, I or @: "ont!s
later$ T!e for%ard rate "a& be at a #re"iu" or discount to t!e s#ot rate$ Pre"iu" rate, i$e$, for%ard rate is
!i!er t!an t!e s#ot rate, i"#lies t!at t!e forein currenc& is to a##reciate in (alue in t!e future$ T!is "a& be
due to e3#ected ti!tened su##l& of GBP in future o(er t!e #resent scenario in relation to res#ecti(e de"and$
Sa&, \ is e3#ected to a##reciate aainst Ru#ee and !ence #re"iu" 6uotes are #re(ailin$ On t!e ot!er !and if it
is e3#ected to de#reciate for%ard discounts s!all be 6uoted$ T!e #ercentae of annuali5ed discount or #re"iu"
in a for%ard 6uote, in relation to t!e s#ot rate, is co"#uted b& t!e follo%in:
If t!e s#ot rate is !i!er t!an for%ard rate, *S U 7+ t!ere if for%ard discount and if t!e for%ard rate is !i!er
t!an t!e s#ot rate *7 U S+, t!ere is for%ard #re"iu" rate$ A"on ot!ers, t!e interest rate factors affect t!e
for%ard rate of forein e3c!ane$ Interest rate differences in t!e t%o countries affect for%ard rates$ It is !eld
t!at t!e ratio of t!e for%ard and s#ot e3c!ane rates %ill be e6ual to t!e forein and do"estic interest rates$
Ta'in ru#ees and dollar:
Besides t!e interest factor, e3#ectation as to s#ot rate in t!e future is li'el& to cause difference bet%een current
s#ot and current for%ard rates$
As t!e for%ard rate and s#ot rate are related b& t!e interest rates in t!e t%o
countries of t!e currencies in(ol(ed b& t!e abo(e e6uation, %e can forecast for%ard rate$
7n R S* @S r !+ 9 *@Sr f +,
[ -!ere 7n is n, "ont!s2 for%ard rate in units of !o"e currenc& #er unit of forein currenc& *direct 6uote+
[ S is s#ot rate in units of !o"e currenc& #er unit of forein currenc& *direct 6uote+
[ r ! is !o"e countr& interest rate for t!e #eriod for%ard and
[ r f is forein countr& interest rate for t!e #eriod$
Let \9L R <$H=:;, interest rate in U> is @:J and interest rate in USA IJ #er annu"$ To et I "ont!s for%ard
rate, first %e !a(e to ta'e si3 "ont!s2 interest rates for t!e t%o currencies and t!ese are IJ and AJ
res#ecti(el&$
T!en 7R <$H=:;*@S IJ+ 9 *@SAJ+ R <$H=:;* @ $<I+ 9 *@S$<A + R nRI9@:R<$; <$HGII$
One L in t!e for%ard "ar'et oes at a !i!er (alue, na"el& <$HGII t!an in t!e s#ot "ar'et, na"el& <$H=:;$ -e
sa& t!e for%ard L oes at a #re"iu"$ )on(ersel&, t!e currenc& \ oes at a discount aainst L$ -!ere t!e
no"inal interest is !i!er, t!at countr&2s currenc& %ill o at a discount in t!e for%ard "ar'et$ T!is is t!e t!eor&
of interest rate #arit&$
1.F.4.& Computation o' 'or-ard premium or di"count
One L in t!e for%ard "ar'et, as #er our e3a"#le L@R <$HGII \, as aainst <$H=:; in t!e s#ot$ T!e #ercentae of
#re"iu" on L is co"#uted usin t!e for"ula:
Pre"iu" *in J+ R *7or%ard rate ,S#ot rate+ 3 @<< 9 S#ot rate$
R *<$HGII , <$H=:;+ 3 @<< 9 <$H=:;
R *<$ <@H@+ 3 @<< 9 <$H=:; R :$G::J$* Rou!l& AJ, e6ual to difference in t!e !alf,&earl& interest rates of t!e
t%o currencies$+
T!e Annuali5ed #re"iu" R 0alf,&earl& #re"iu" 3 : R :$G::J 3:R ;$=HHJ$
T!e for"ula for annuali5ed #re"iu" *in J+R e* 7n ,S+9Sf 3 *@:9n+ 3 @<<, %!ere
7 R for%ard rate, S R s#ot rate , n R nu"ber of "ont!s for%ard$
4ou 'no% t!e U> )urrenc& \ is at a discount$ But %e can2t sa& t!e #ercentae de#reciation of t!e currenc& is
e6ual to #ercentae of a##reciation of t!e L aainst \$ To co"#ute t!e discount on \, first %e !a(e to co"#ute
s#ot and for%ard rates for \ in ter"s of L, t!at is, t!e L9\$ S#ot L9\R In(erse of S#ot \9L R @9<$H=:;R :$<?:; and
7or%ard L9 \ R In(erse of for%ard \9L R@9<$HGIIR :$<@A?$ \ ets less L in t!e for%ard "ar'et t!an in t!e s#ot
"ar'et$ 0ence it is at a discount$
T!e #ercentae of discount of \ aainst L R *7or%ard rate , S#ot rate+ 3 @<< 9 S#ot rate R V*:$<@A? , :$<?:;+ 9
:$<?:;W3 @<< R V*, <$ <;==+ 9 :$<?:;W 3 @<< R , :$=A?J$
T!e "inus sin indicates discount$ T!e annuali5ed discount J R : 3 , :$=A?J R ;$ I?HJ$
4ou can see t!at t!e #re"iu" #ercentae of L is not e6ual to t!e discount #ercentae on \$
So far %e dealt %it! cases of sinle rates onl&$ In t!e bid,as' for" also %e can co"#ute for%ard rates se#aratel&
first for /bid2 and t!en for t!e /as'2 and #resent t!en #resent a for%ard 6uotation in /bid,as'2 for"$
1.1C.4.+ (or-ard Rate Huotation" -it* 'or-ard or "-ap point" 2ien
T!e for%ard #oints or s%a# #oints are deci"al #oints, to be read %it! t!e s#ot rate, indicatin t!e #re"iu" or
discount #oints in t!e for%ard "ar'ets of different ti"es$
E3a"#le @: Su##ose t!e current S#ot rate in t!e bid,as' for" \9L R <$H=@;= 9
<$H=A;<$
7or%ard or s%a# #oints:
[ @ "ont! : @:;9@;<
[ : "ont!s : @@<9@:<
[ A "ont!s : @:<9@<;
[ I "ont!s : =<9?<$
-e can co"#ute for%ard 6uotations %it! t!e !el# of t!e abo(e details$ 7irst %e !a(e to decide %!et!er L is at a
#re"iu" or at discount$ 7ro" t!e for%ard or s%a# #oints %e et t!e clues$ T!e s%a# #oints !a(e t%o nu"bers,
%!ic! re#resent deci"al #oints, se#arated b& a slas!$
If t!e nu"ber before t!e slas! is lo%er t!an t!e nu"ber after t!e slas!, t!e deno"inator currenc& in 6uestion is
at a #re"iu" aainst t!e nu"erator currenc& in t!e for%ard "ar'et and if t!e nu"ber before t!e slas! is !i!er
t!an t!e nu"ber after t!e slas!, t!e currenc& in 6uestion is at a discount$ T!e #re"iu" #oints are added to t!e
s#ot rate on t!e res#ecti(e sides and discount #oints deducted fro" s#ot rate on res#ecti(e sides$
T!ese for%ard rates are called outri!t for%ard 6uotations$
@ Mont! 7or%ard rate: T!e s%a# #oints indicate L is at #re"iu"$ So add t!e" to s#ot rate$
@ Mont! 7or%ard rate: \9L R <$H=@;= S <$<<@:; 9 <$H=A;< S <$<<@;< R <$H=:?A9 <$H=;<<$
: Mont! 7or%ard rate: T!e s%a# #oints indicate L is at #re"iu"$ So add t!e" to s#ot rate$
: Mont! 7or%ard rate: \9L R <$H=@;= S <$<<@@< 9 <$H=A;< S <$<<@:< R <$H=:;=9 <$H=H?<
A Mont! 7or%ard rate: T!e s%a# #oints indicate L is at discount $ So deduct t!e" fro" s#ot rate$
A Mont! 7or%ard rate: \9L R <$H=@;= , <$<<@:< 9 <$H=A;< , <$<<@<; R <$H=<A=9 <$H=:H;$
I Mont! 7or%ard rate: T!e s%a# #oints indicate L is at discount So deduct t!e" fro" s#ot rate$
I Mont! 7or%ard rate: \9L R <$H=@;= , <$<<<=< 9 <$H=A;< , <$<<<?< R <$H=<?=9 <$H=:=<$
But 'ee# in "ind %!en deductin t!e s%a# #oints %!en t!e currenc& oes at a discount, in an& case t!e as' rate
cannot be less t!an bid rate$ S!ould a situation e"ere suc! t!at /as'2 is less t!an /bid2, it onl& indicates t!e
s%a# #oints are incorrect$
1.F.: (ore= Ri"8
7luctuation in e3c!ane rate leads to ris'$ 7ore3 rates fluctuate, so"eti"es %idel&$ T!ere used to be o(er,
s!ootin as %ell, %!ic! is too "uc! c!ane in a s!ort ti"e due to #anic "ar'et reaction to certain rate sensiti(e
!a##enin$
7ore3 rates, in ter"s of Ru#ee aainst "aDor %orld currencies are i(en in table @$@H and &ou could see t!e
fluctuations &ear after &ear$ T!e da&,to,da& rate fluctuations are t!e real t!ins t!at %orr& "ar'et #artici#ants$
Ru#ee !ad been de#reciatin for a (er& lon ti"e$ 7ro" about Rs$ = #er US8, in t!e @G=<,=@, t!e rate reac!ed
as !i! as o(er Rs$ HG #er US8 in :<<H, but t!en t!e rate started its do%n "o(e"ent since t!en and no% in
.anuar& :<<=, t!e rate is Rs$ AG #er US8$ T!ere is so"et!in li'e a fall of abo(e :<J in US8 aainst INR$

Ta@!e 1. 11 E=c*an2e Rate Rupee" per unit o' 'orei2n currenc5
Source RBI Bulletins
7orein e3c!ane ris' is defined as, / t!e (ariance of t!e real do"estic currenc& (alue of assets, liabilities or
o#eratin inco"e attributed to unantici#ated c!anes in e3c!ane rates2$ In ot!er %ords, ris' is a "easure of t!e
e3tent of (ariabilit& in t!e (alues of assets etc$ due to unantici#ated c!anes in e3c!ane rates$All fore3
e3#osures need not necessaril& lead to fore3 ris', because co"#ensatin "o(e"ents in e3c!ane rates %it!
different currencies "i!t offset loss in deal fro" ain in t!e ot!er$ 7urt!er to 6ualif& as fore3 ris', onl& t!e
effect of unantici#ated c!anes in e3c!ane rates on t!e do"estic currenc& (alues of assets, liabilities, etc is to
be considered$
1.F.:.1 T5pe" o' (ore= Ri"8"
7ore3 ris's are of t!ree t&#es$ T!ese are:
i Accountin or Translation Ris'
ii Transaction ris'
iii O#eratin ris'$
i. TRANSLATION OR ACCOUNTIN$ RISO
Translation ris' is a "easure of (ariation of !o"e currenc& (alue of assets and liabilities a##earin in balance
s!eet deno"inated in forein currenc&$ It is also called as balance s!eet or accountin ris'$ It is also referred to
as accountin ris'$ It arises %!ile consolidation of accounts *financial state"ents+ in(ol(in forein currenc&
deno"inated assets and liabilities is #re#ared$ 7ir"s !a(in forein subsidiaries, re6uire #re#arin t!e rou#s
financial state"ents$ T!ese financial state"ents !a(e to be #re#ared in ter"s of t!e !o"e currenc&$ 0ence t!e
assets and liabilities and inco"es, and, e3#enses of t!e forein subsidiaries o#eratin in different countries !a(e
to be translated into #arent co"#an&2s currenc& at t!e a##ro#riate rate of e3c!ane a##licable to t!e forein
subsidiaries2 account$
T!e translation of forein currenc& #rofit and loss account "a& be done eit!er at t!e a(erae e3c!ane rate for
t!e accountin &ear or at t!e closin rate #re(ailin at t!e end of t!e accountin &ear$ T!e consolidated #rofit
%ould naturall& (ar& %it! c!anes in t!e a(erae or closin rates$
Balance s!eet ris' !as t%o as#ects$ T!e first is t!e case of ite"s in t!e forein subsidiar&2s balance s!eet, %!ic!
are translated at t!e rate #re(ailin on t!e date of ac6uisition or subse6uent re(aluation *!istorical e3c!ane
rate+$ Suc! assets and liabilities are not e3#osed as t!e translated !o"e currenc& (alue cannot (ar& %it! c!anes
in e3c!ane rates$ In t!e second case so"e ite"s "a& be translated at t!e closin e3c!ane rate, %!en t!ese
ite"s in t!e forein subsidiar&2s currenc& are translated into t!e #arent co"#an&2s currenc&, t!ere %ill be
(ariations %!ene(er t!e e3c!ane rate (aries$ All forein currenc& ite"s %!ic! are consolidated at currentl&
#re(ailin rates are subDect to translation ris'$
Translation ris' does not create fres! cas! flo%s, but records ite"s of balance s!eet and #rofit and loss account
at a##ro#riate e3c!ane rates and as a result t!ere "a& be net increase in (alue and t!is is credited to E3c!ane
7luctuation Reser(e a9c and s!o%n on t!e liabilities side of t!e balance s!eet$ If t!ere is net s!rin'ae in (alue,
t!e sa"e is debited to E3c!ane 7luctuation Loss a9c and s!o%n on assets side of t!e balance s!eet are adDusted
aainst ot!er reser(es ad sur#lus account$
ii. TRANSACTION RISO
Transaction Ris' is t!e "easure of (ariation of !o"e currenc& (alue of recei(ables and #a&ables deno"inated2
in forein currencies due to unantici#ated c!anes in e3c!ane rate$ Transactions %!ic! i(e rise to fore3
recei(ables or #a&ables in future create transaction e3#osure$ A US fir" !as e3#orted to U>, oods (alued at @
"illion n U> #ound, #a&able A "ont!s fro" no%$ In t!e t!ree "ont!s #eriod, fluctuations in US 8ollar (alue of
U> Pound e3#oses t!e US fir" to transaction e3#osure$ Si"ilar %ill be t!e #osition of an US i"#orter %!o !as
to effect a #a&"ent of @ "n U> Pound, t%o "ont!s !ence$ An Indian fir" !as to ser(ice a debt of ; "n US
8ollar loan fro" -E, re#a&able o(er of @< se"i,annual install"ents at t!e rate of L<$; "n eac! ti"e$ T!ere is
transaction e3#osure$ Si"ilarl& debt ser(icin recei(able b& an Indian fir" deno"inated sa& in 4en leads to
transaction e3#osure$
Transaction E3#osure arises out of trade released and9or ca#ital related cas! inflo%s
and9or cas! outflo%s$
Managing Transaction )isk
Transaction ris' arises fro" e3ecuted contracts resultin in fore3 #a&ables or recei(ables in t!e future$ T!e
do"estic currenc& (alue of t!ese #a&ables or recei(ables at current e3c!ane rate and at future e3c!ane rate is
e3#ected to be at (ariance, resultin in transaction ris'$ $
T!e ris' can be !eded usin internal strateies or e3ternal *t!at is "ar'et related+ strateies$ Internal strateies
refer to strateies t!at are internal to t!e fir" and its affiliates$ T!ese are M!o"e2 arrane"ents$ T!e counter
#art& to t!e transactions "a& be in(ol(ed$
But t!ird #arties are ne(er in(ol(ed$ E3ternal strateies are fore3 "ar'et related or "one& "ar'et related or
bot!$
42 Internal %trategies of Managing Transaction )isk
T!e internal strateies are t!ose t!at effected %it!out recourse to t!e fore3 or ot!er "ar'ets$ It is %it!in t!e fir"
or bet%een t!e business fir"s in(ol(ed$ T!e different internal strateies are: i$ Ris' NettinE ii$ Ris' S!iftinE
iii$ Ris' S!arinE i($ Ris' Off,settin and ($ Pricin
Nettin in(ol(es "atc!in fore3 recei(ables in a currenc& %it! fore3 #a&ables in t!at currenc&$ Bot! currenc&
and ti"e "atc!in are needed$ Su##ose an US fir" !as 4en @< "n recei(able fro" and 4en ? "n #a&able to
sa"e counter #art&, bot! !a(in G< da&s to "ature$ T!ese t%o transactions can be netted and t!e e3#osure
reduces to 4en A "n$ T!ere are bilateral and "ultilateral nettin$ T!e abo(e one is bilateral nettin$ Multilateral
nettin in(ol(es a fir" !a(in fore3 #a&ables %it! a #art& nettin t!e sa"e aainst fore3 recei(able due fro"
anot!er #art&$ Nettin in eneral in(ol(es, counter adDustin a lon #osition in a currenc& to a s!ort #osition in
t!e sa"e currenc&$
Ris' s!iftin Let General Electric of US su##l& turbine blades to Luft!ansa of Ger"an (alued at Euro :; "n$
T!e #a&"ent is due in G< da&s$ )urrent s#ot is Euro @ R US8 @$@$ GE fears Euro to de#reciate t%o "ont!s
!ence and t!at is dollar reali5ation u#on con(ersion of t!e Euro recei(able %ill be "ust s"aller t!an t!e US8
:?$; "n no% #ossible$ So, GE %ants to s!ift t!e e3#osure to Luft!ansa, t!is is #ossible if Luft!ansa arees to
in(oicin t!e deal in US 8ollar, in %!ic! case t!e fore3 ris' is s!ifted to Luft!ansa$ Luft!ansa !as to "anae
t!e ris' b& itself %!ic! !as no% assu"ed t!e ris'$
)isk %haring %uppose IBM and British airways are involved in a transaction2
IBM is su##l&in fli!t "anae"ent s&ste" to Britis! air%a&s, (alued at L @I< "n #a&able A "ont!s fro"
no%$ IBM and Britis! air%a&s are areein to s!are e3c!ane ris'$ )usto"i5ed !ede is brou!t into t!e
transaction %!ereb& ris' of e3c!ane rate fluctuation be&ond certain le(el, eit!er %a&, is "utuall& s!ared$ Since
IBM in(oices in US8, fluctuation in rate u#to certain rane, eit!er %a&, is to be borne b& Britis! air%a&s$ T!is
rane, around a base rate, sa& L@ R \ <$?; is called neutral rane$ At t!e base rate, t!e \ (alue of t!e transaction
is @:< "n dollar$ Let t!e neutral rane be @L R <$?: to <$?= \$ T!at is, if L de#reciates u#to \ <$?:9L or
a##reciates u#to <$?= t!e Britis! air%a&s ta'es u# t!e ris' on its #art$ -it!in t!e neutral 5one, Britis! air%a&s
%ill #a& t!e oriinal dollar (alue of t!e contract na"el& @I< "n L and its \ cost %ill (ar& bet%een \ *L @I< "n
3 <$?:+ and \ *L @I< "n 3 <$?=+ or bet%een \ @@;$: "n and \ @:H$= "n$ If t!e \ , L rate /breac!es t!e neutral
5one, t!e ris' is to be Dointl& s!are$
Su##ose, \ de#reciates to <$=, t!en t!e e3c!ane loss abo(e t!e u##er bound is e6uall& s!ared$ So, t!e adDusted
rate co"es to \ <$?; S *<$;9:+ R \ <$??;9L$ So t!e (alue of contract is arri(ed at as follo%s: Base rate (alue of
t!e contract in \9Effecti(e adDusted rate is e6ual to \ @:< "n 9<$??;R L @;H$=A=? "n$ If t!e \ a##reciates
be&ond t!e lo%er bound, to sa& \ <$I=9L t!en Britis! air%a&s cannot et t!e full benefit of \2s a##reciation$ T!e
ain be&ond \ <$?:9L is s!ared %it! IBM$ And t!e adDusted rate co"es to \ <$I= S <$<H9: R \ <$?<9L$ T!e
adDusted dollar (alue of t!e contract is R \ @:< "n 9 <$? R L @?@$H:=I "n$
)isk Off"%etting, Off,settin of ris' "eans e3#osure in one currenc& is adDusted aainst e3#osure in anot!er
currenc&$ Off,settin is different fro" nettin, %!ere e3#osure in one currenc& onl& is in(ol(ed, %!en e3#ort
and i"#ort are in t!e sa"e currenc& area and netted aainst eac! ot!er$ In contrast, off,settin in(ol(es
e3#osures in t%o different currencies$ Su##ose a Sina#ore 7ir" e3#orts to 4en area and also to US dollar area$
Since &en and dollar "o(e in o##osite direction, e3c!ane loss *ain+ in &en reali5ation is off,set to an e3tent b&
e3c!ane ain *loss+ in dollar reali5ation$ 0ere currencies are o##osite to one anot!er, but transactions are of
t!e sa"e t&#e$
)onsider anot!er case$ 0ere currencies are #arallel$ T!at is, t!e& sin' *i$e$ de#reciate aainst a t!ird currenc&+ or
sail *i$e$ a##reciation+ toet!er$ [ and ] are #arallel$ Sa&, GM of US e3#orts to Ger"an& and i"#orts fro"
.a#an$ T!e transactions are o##osite in nature$ If t!ere is e3c!ane ain in t!e e3#orts, t!ere %ill be e3c!ane
loss in t!e i"#orts and (ice,(ersa$
Pricin To co(er transaction ris', #rice escalation "a& be ado#ted as a "easure
of dealin %it! e3#osure$ If e3c!ane loss is e3#ected a "arinal !i'e in #rice can be done to ta'e care of t!e
loss$ But co"#etiti(e factors need to be considered$
Alternati(el& c!oice of currenc& of in(oice "a& be a ris' "anae"ent tool$ In(oice, if "ade in stroner
currencies, t!e e3#orter can "ini"i5e e3c!ane loss$ In(oice, if "ade in %ea'er currencies, t!e i"#orter can
"ini"i5e e3c!ane loss$
B2 *+ternal %trategies of Managing Transaction *+posure
E3ternal strateies, in(ol(e loo'in be&ond t!e counter#art& to a transaction for dealin %it! transaction
reser(e$ E3ternal strateies in(ol(e usin "one& "ar'et and fore3 "ar'et tools dealin %it! t!e ris'$
a2 Money market hedge
Mone& "ar'et !edin tools are :
[ i 8iscountin of forein currenc& deno"inated bills,
[ ii 7actorin e3#ort recei(ables,
[ iii )urrenc& o(erdrafts,
[ i( borro%, con(ert and in(est$
i23iscounting .oreign urrency 3enominated Bills )eceivable:
8iscountin is used in cases %!ere t!e e3#ort recei(ables are settled t!rou! bills of e3c!ane$ T!e s&ste"
enables t!e reci#ient to recei(e cas! #rior to t!e settle"ent date itself$ T!e discount re#resents t!e cost for t!e
facilit& e3tended b& t!e ban' discountin t!e bill$ It enables t!e e3#orter to uard !i"self fro" ,losses arisin
out of an ad(erse c!ane in,t!e forein e3c!ane rate$ T!ere are t%o o#tions before t!e e3#orter %!ile
considerin bill discountin$ T!e first, is to et t!e bill discounted t!rou! a ban' in t!e i"#orter2s countr&$ T!e
forein currenc& so obtained can be re#atriated at t!e s#ot rate #re(ailin t!en$ T!e second o#tion is to discount
it at t!e !o"e countr& of t!e e3#orter itself, in %!ic! case t!e settle"ent is recei(ed in t!e !o"e currenc& itself$
ii2.actoring *+port )eceivables,
7actorin is done %!en e3#ort recei(ables are settled on o#en account$ T!e, recei(ables are used as collateral
ban' financin$ Suc! an arrane"ent enerall& i(es #rotection aainst forein e3c!ane rate ris's$ Undue
(ariations are ta'en care of t!rou! a##ro#riate adDust"ents in t!e factorin aree"ent$ T!e e3#orter sells !is
$e3#ort recei(ables to a$ factor *usuall& a co""ercial ban', or a s#eciali5ed $factorin institution+ in e3c!ane
for !o"e currenc&$ 7actorin costs are enerall& !i! as t!e credit ris's, cost of financin, and e3c!ane rate
ris' co(er !a(e all to be incor#orated in it$ $But benefits accrue in t!e for" of easier access to e3#ort finance,
and reduction of credit collection costs$
iii2 urrency Overdrafts:
O(erdrafts in Eurocurrencies are a(ailable fro" "aDor ban's$ B& far t!e currencies "ost sou!t after are t!e US
dollar and t!e Ger"an "ar'$ T!e tec!ni6ue is es#eciall& useful %!en a co"#an& !as nu"erous transactions
in(ol(in s"all a"ounts deno"inated in forein currenc&, eac! !a(in no certain date of #a&"ent$ T!e use of
t!e tec!ni6ue is restricted because of e3c!ane control$ T!e control #re(ents residents fro" "aintainin ban'
accounts in forein currencies$
T!e co"#an& interested in o(erdraft arrane"ent !as to "aintain an a"ount e6ual to t!e o(erdraft in forein
currenc& recei(ables$ T!e forein currenc& recei(ables "aintained are in t!e sa"e currenc& as t!e o(erdraft$ As
and %!en t!e recei(ables are li6uidated t!at #ortion of t!e o(erdraft "a& be reduced$ In suc! cases t!e sales
"ade in t!at currenc& s!ould be reduced$ T!e burden of "a'in nu"erous adDust"ents in t!e o(erdraft a"ount
outstandin as #a&"ents are recei(ed, "a'es t!is "et!od less attracti(e$
iv2 Borrow& convert and invest:
So"eti"es t!e co"#an& "a& #refer to sell t!e forein currenc& recei#ts recei(ed aainst forein recei(ables in
t!e s#ot "ar'et$ T!is reduces t!e burden of "a'in nu"erous adDust"ents in t!e o(erdraft a"ount outstandin
as #a&"ents are recei(ed$
[ Su##ose t!at on .anuar& @, General Electric is a%arded a contract to su##l& turbine blades to Britis!
air%a&s$ On 8ece"ber A@ of t!at &ear, GE %ill recei(e #a&"ent of \ :; "illion for t!ese blades$ It can
use a "one& "ar'et !ede, %!ic! %ould in(ol(e borro%in \ :; "illion for one &ear, con(ertin it into
dollars and in(estin t!e #roceeds in a securit& t!at "atured on 8ece"ber A@$
[ Su##ose Pound sterlin and US dollar interest rates are ?$;J and ;J res#ecti(el&$ After one &ear GE
%ill recei(e \ :; "n$ Let it borro% no% a certain a"ount of \, %!ic! toet!er %it! interest %ill a"ount
to \ :; "n in one &ear$ T!is is usin a "one& "ar'et !ede$
[ General Electric %ill borro% \ :A$:;;= "illion for one &ear, *i$e$, \ :; "n9@$<?;+$ GE con(erts it into L
H@$::;I "illion in t!e o#en "ar'et *at t!e s#ot rate of L@$??:?9\+, and in(ests t!e LH@$::;I "illion for
one &ear$ On 8ece"ber A@, GE %ill recei(e @$<; Y L H@$::;I "illion R L HA$:=I== "illion fro" its
dollar in(est"ent$ \ :; "illion it recei(es fro" Britis! Air%a&s is #assed to t!e lender to "eet #rinci#al
and interest$ T!us t!e e3#osure is !eded$
B. (OREL 3AROET DED$E
7ore3 Mar'et$ 0ede in(ol(es usin
i O#tions "ar'et
ii 7utures "ar'et
iii 7or%ard "ar'et
i( S%a# "ar'et
i$ 0edin T!rou! O#tions Mar'et: Bu&in a )all o#tion in fore3 can be used b& an i"#orter or borro%er to
!ede !is #a&ables aainst e3c!ane rate fluc&uations$ T!is is done onl& if is felt t!at t!e forein currenc& is an
a##reciation "ode$ Bu&in a Put o#tion can be used b& an e3#orter or lender to !ede recei(ables$ T!is is done
onl& %!en t!e forein currenc& is a de#reciatin "ode$
Illustration 9, Buying a all2
It is no% Auust$ Su##ose a US i"#orter !as to #a& in No(e"ber I:$; "illion &en
to a .a#anese su##lier$ T!e current L94en R L<$<<??AG$ A 8ece"ber call o#tion in &en is a(ailable at a stri'e of
L<$<<?=, #er &en$ T!e #re"iu" is L <$<<<@<=9&en$ T!e bro'erae fee #er contract is L:<$ 4en o#tions contract
si5e is I$:; "n &en$
T!e US i"#orter !as to o for @< contracts to !ede I:$; "n &en e3#osure$ T!e effecti(e cost #er &en under t!e
call o#tion R Stri'e #rice S Pre"iu" S Bro'erae R
L<$<<?= S L <$<<<@<= S LV:<9I,:;<,<<<W R L<$<<?G@@:$
If t!e outloo' for t!e &en b& No(e"ber is t!at it %ill ne(er e3ceed L<$<<?G@@: #er &en, t!ere is no need to
!ede at all$ But if fluctuations in t!e "ar'et is so !i!, it is ood to o for !edin$ Let t!e fir" o for
!edin$
B& No(, t!e &en !as, sa& a##reciated to L<$<<=<$ T!en, t!e !edin !as reall& sa(ed fir" L;;;<E i$e$, *L<$<<=,
L<$ <<?G@@:+ 3 I:,;<<,<<< RL;;;<$
If t!e &en !ad de#reciated belo% L<$<<?G@@: #er &en, t!e o#tion contract oes a %aste$ But, t!e 8ec call o#tion
"i!t still !a(e so"e #re"iu" in t!e "ar'et and t!at b& %ritin a call t!e fir" can earn an inco"e$ But t!at
inco"e s!ould be reater t!an t!e bro'erae co""ission$ 4ou 'no% t!e bro'erae co""ission at L:< #er
I$:;"n &en, co"es to an a"ount of L<$<<<<<A:$ So, if t!e call #re"iu" is reater t!an L<$<<<<<A:, t!e fir"
"a& o %ritin calls$ But t!e fir" is ta'in u# an obliation$
Illustration : , Buying a -ut
It is no% Auust$ Su##ose a US e3#orter !as to recei(e in No(e"ber I:$; "illion &en fro" a .a#anese bu&er$
T!e current L94en R L<$<<??AG$ A 8ece"ber #ut o#tion in &en is a(ailable at a stri'e of L<$<<?=, #er &en$ T!e
#re"iu" is L <$<<<@<=9&en$ T!e bro'erae fee #er contract is L:<$ 4en o#tions contract si5e is I$:; "n &en$
T!e US i"#orter !as to o for @< #ut contracts to !ede I:$; "n &en e3#osure$ T!e effecti(e cost #er &en under
t!e #ut o#tion R Stri'e #rice S Pre"iu" S Bro'erae R L<$<<?= S L <$<<<@<= S LV:<9I,:;<,<<<W R L<$<<?G@@:$
If t!e outloo' for t!e &en b& No(e"ber is t!at &en %ill a##reciate be&ond L<$<<?G@@: #er &en, t!ere is no need
to !ede at all$ But if fluctuations in t!e "ar'et are !i!, it is ood to o for !edin$ Let t!e fir" o for
!edin$
B& No(, t!e &en !as, sa& de#reciated to L<$<<?=$ T!en, t!e !edin !as reall& sa(ed fir" LIG;<E i$e$, *L<$
<<?G@@:, L<$<<?=+ 3 I:,;<<,<<< RLIG;<$
If t!e &en !ad a##reciated abo(e L<$<<?G@@: #er &en, t!e o#tion contract oes a %aste$ But, t!e 8ec #ut o#tion
"i!t still !a(e so"e #re"iu" in t!e "ar'et and t!at b& %ritin a #ut t!e fir" can earn an inco"e$ But t!at
inco"e s!ould be reater t!an t!e bro'erae co""ission$ 4ou 'no% t!e bro'erae co""ission at L:< #er
I$:;"n &en, co"es to an a"ount of L<$<<<<<A:$ So, if t!e #ut #re"iu" is reater t!an L<$<<<<<A:, it "a& o
for %ritin #uts$ But t!e fir" is ta'in u# an obliation$
overed all writing,
An e3#orter %it! substantial fore3 inflo% in t!e future can %rite calls on t!ese inflo%s$ T!is is called co(ered
call %ritin$
ii2 /edging through .utures Market, 7utures contract can be used to !ede$ Bu&in futures can !el# !edin
s!ot #osition in fore3, %!ile sellin futures can !el# !ede lon #osition in fore3$ I"#orters and e3#orters,
in(estors and borro%ers, bidders for lobal contracts and ot!ers can co(er t!eir e3#osure t!rou! fore3 futures$
I"#orters borro%ers and bidders for lobal contracts o for futures bu&in$ E3#orters, in(estors and ot!ers can
co(er t!eir e3#osure t!rou! sellin fore3 futures$
I!!u"tration 1: Se# A: A U> fir" o%es L :,:;,<<< due on 8ec ;$ Present rates are: L9PS S#ot: @$=:;< ,
8ece"ber 7utures: @$=<<< ,A Mont! L9PS for%ard rate: @$I=;<
Since t!e #ound sterlin is losin, t!e U> fir" decides to !ede$ It sells t%o sterlin futures$ T!e L (alue of t!e
deal is: L *I:;<< 3 : 3 @$=+ RR :,:;,<<<$ T!is is e6ual to t!e #a&able$ Nor"all& suc! #erfect e6uali5ation is
i"#ossible leadin to less t!an #erfect !ede$ If on 8ec @ t!e rates are, sa&: S#ot L9PS @$?<=<, 8ec$ 7utures
@$?<<<$ 0ere t!e PS !as de#reciated$
T!e U> fir" can bu& L :, :;,<<< in t!e s#ot "ar'et$ T!e PS cost is PS @,A@,?AA$ 0ad t!e PS not de#reciated,
t!e PS cost of t!e L :, :;,<<< #a&able %ould be PS @,:A,:==$ So, t!e loss is PS =HH;$
T!e fir" s!ould bu& : sterlin futures to s6uare u# t!e earlier s!ort sellin$ T!e #rofit is L *I:;<<+*@$= , @$?+*:+
R L @:;<<$ T!e PS e6ui(alent at 8ec A s#ot rate is PS ?A;A$ A loss of PS @<G: !as resulted$ After %e add
transaction cost of PS :<<, t!e total loss is PS @:G:$ T!e total PS outla& is PS @,A@,?AA S @:G: R PS @,AA,<:;$
T!is %or's out to L9PS rate of: :,:;,<<<9@,AA,<:; R @$I$G@H$ T!is is better t!an t!e for ,A "ont!s for%ard rate
obtainin at Se#te"ber$
If on 8ec @ t!e rates are, sa&: S#ot @$G<<< 8ece"ber futures rate at @$G:;<$ 0ere t!e PS !as a##reciated$
Bu& L in t!e s#ot s#endin PS :, :;,<<<9@$G R PS @,@=,H:@$ T!e ain in t!e s#ot deals, %ill be PS @,:A,:== ,
@,@=,H:@ R PS H=I?$ In t!e futures t!e dollar loss is L I:;<<
*@$G:;< , @$=<<<+ *:+ R L @;I:;$ At 8ec Ard s#ot, t!e loss co"es to PS G@G@$ T!e net #osition is a loss of PS
HA:H$ After transaction cost t!e loss is PS H;:H$ T!e effecti(e L9PS rate is: :,:;, OOO9 *@@=H:@ S H;:H+ R @$=A$
T!is is "uc! better t!an t!e for%ard rate$
7or%ards act t!e sa"e %a& as futures$ But, for%ards are "ostl& custo"i5ed and o(er t!e counter, %!ile futures
are standardi5ed and e3c!ane run$
A recei(able in a fore3 can be s%a##ed b& in(ol(in in a s#ot #urc!ase s%a##in to a for%ard sale contract$,
So, an e3#orter can o for t!is$ A fore3 #a&able can be !eded t!rou! a s#ot sale s%a##ed to a for%ard
#urc!ase$
iii2 /edging Through .orward Market: T!is is si"ilar to futures "ar'et !ede$ But contracts are not
standardi5ed$ 0ence can be tailor "ade$ But, "ar'et "a& not be as efficient as t!e futures "ar'et$ So bi
o#erators can fleece s"all o#erators$
I!!u"tration 1$
It is no% Auust$ Su##ose a US i"#orter !as to #a& in No(e"ber I:$; "illion &en to a .a#anese su##lier$ T!e
current L94en R L<$<<??AG$ T!e for%ard "ar'et i(es a &en for L<$<<?G, all inclusi(e cost, deli(er& No(e"ber$
A 8ece"ber call o#tion in &en is a(ailable at a stri'e of L<$<<?=, #er &en$ T!e #re"iu" is L <$<<<@<=9&en$ T!e
bro'erae fee #er contract is L:<$ 4en o#tions contract si5e is I$:; "n &en$ 0o% t!e fir" can !edeC
Solution: )o"#arison of )all o#tion 7or%ard bu&in$
)all o#tion "ar'et: T!e effecti(e cost #er &en under t!e call o#tion R Stri'e #rice S
Pre"iu" S Bro'erae R L<$<<?= S L <$<<<@<= S LV:<9 I,:;<,<<<W R L<$<<?G@@:$
7or%ard "ar'et: T!e for%ard &en is #riced L<$<<?G$ T!e for%ard "ar'et is c!ea#er$
But, t!e #ossible benefit of fall in &en in t!e future cannot be a(ailed as for%ard "ar'et creates "utual
obliation, unli'e a call o#tion %it! ri!t, not obliation to bu&$ But &ou !a(e to foro t!e o#tion #re"iu" #aid$
So a "anaerial decision in fa(or eit!er t!e call or for%ard bu&in is to be "ade$
iv2 /edging Through %W4-%
MS-APN literall& "eans e3c!ane or barter$ In t!e forein e3c!ane conte3t s%a# "eans si"ultaneous bu&in
and sellin of sa"e a"ount of forein currenc& for different settle"ent *"aturit&+ dates$ A S%a# deal in(ol(es:
i si"ultaneous #urc!ase of s#ot and sale of for%ard or (ice,(ersaE or
ii si"ultaneous #urc!ase and sale of bot! for%ard but for different "aturit& dates$
a$ Need for S-AP deals: In forein e3c!ane "ar'et, s%a# deals are underta'en for different reasons$ So"e of
t!e cases are described belo%:
Ban's enter into for%ard #urc!ase9sale contracts %it! custo"ers but "a& not be,in a #osition to find a
suitable9"atc!in co(er deal in t!e "ar'et$ But, a ban' %!ic! !as entered into a for%ard contract %it! a
custo"er cannot sta& idle due to non,a(ailabilit& of "atc!in deal as !e runs e3c!ane ris'$ 0ence, t!e ban'
%ill co(er itself in t!e "ar'et b& bu&in9sellin s#ot i""ediatel& and co(er t!e e3c!ane ris'$ But t!is %ill lead
to "is"atc! in currenc& flo% and to correct t!e "is"atc! it %ill underta'e a s%a# transaction$
In case a ban' !as bou!t for%ard : "ont!s fro" a custo"er and could not stri'e "atc!in for%ard sale deal in
t!e inter,ban' "ar'et, it %ill sell s#ot and s6uare its #osition$ Later, to correct t!e "is"atc! in cas! flo% it %ill
underta'e t!e follo%in s%a# MBu& s#otE Sell t%o "ont!s for%ardN$
-!en a ban'er enters into a for%ard contract %it! a custo"er !e co(ers !i"self in t!e inter,ban' "ar'et to
a(oid e3c!ane ris'$ T!is co(er deal results in an obliation for t!e ban' to deli(er to9ta'e deli(er& of forein
e3c!ane on due date in t!e inter,ban' "ar'et$ So"eti"es t!e custo"er "a& fail to deli(er9ta'e deli(er& on due
date or t!e custo"er "a& deli(er9ta'e deli(er& before or after due date$ But, still ban' !as to fulfill its obliation
in t!e inter,ban' "ar'et %!ic! "a& necessitate a s%a# deal$
E=amp!e: Ban' enters into a for%ard #urc!ase contract %it! a custo"er for US dollar @ "illion deli(er& A#ril
A<, On t!e date of enterin t!e for%ard #urc!ase contract ban' %ould !a(e co(ered itself in t!e "ar'et b&
sellin for%ard (alue A#ril A<$ If t!e custo"er a##roac!es t!e ban' on Marc! A< %it! a re6uest for earl&
deli(er&, ban' %ill accede to suc! re6uest after underta'in t!e follo%in s%a#$ MSell s#otE bu& for%ard @
"ont!N$
Ban's underta'e s%a# transactions %it! a (ie% to benefit fro" interest rate arbitrae$ Interest bet%een t%o
currencies in its #urest for" consists of borro%in one currenc& and con(ertin into t!e ot!er one, #lacin t!e
#roceeds in an in(est"ent for t!e #eriod of !ede and t!e borro%in$ In suc! cases, no net e3c!ane #osition is
created and is 'no%n as co(ered interest arbitraes$ Ban's underta'e s%a# transactions for t!e $#ur#ose of
fundin t!eir Nostro accounts$ Ban's in antici#ation t!at for%ard #re"iu"9discount %ill c!ane in t!eir fa(or,
build s%a# #osition for%ard aainst for%ard$
@. Currenc5 S#A/
In @G=@, t!e -orld Ban' %as loo'in for S%iss franc borro%ins as #art of its o(erall fundin o#erations$
0o%e(er, at t!at #oint of ti"e, t!e -orld ban' !ad "ade se(eral S%iss franc issues in t!e co"#arati(el& s"all
S%iss "ar'et in t!e recent #ast and it %as feared t!at anot!er si"ilar "aDor issue %ould !a(e re6uired t!e
-orld Ban' to #a& a !i!er cou#on rate in order to "a'e it attracti(e to S%iss in(estors$ At t!e sa"e ti"e,
IBM, t!e iant co"#uter co"#an&, %as loo'in for a dollar issue and !ad not accessed t!e S%iss franc "ar'et
for 6uite so"e ti"e$ Gi(en t!is, an IBM issue in t!e S%iss franc "ar'et %as c!ea#er t!an a -orld Ban'
flotation$ -!at %as done, t!erefore, %as t!at MIBM %ent in for a S%iss franc issue and t!e -orld Ban' floated
a dollar debt$ T!e liabilities %ere s%a##ed and t!e co"#arati(e ad(antae of IBM in t!e S%iss "ar'et s#lit
bet%een t!e t%o institutions so t!at, after t!e s%a#, bot! recei(ed t!e 'ind of debt t!e& needed at a c!ea#er cost
t!an ot!er%ise$
Anot!er e3a"#le t!at %ould t!ro% li!t on t!e econo"ics of currenc& s%a#s in(ol(es t!e 0ousin
8e(elo#"ent 7inance )or#oration Li"ited *08P)+$ Under U$S la%, a$ !ousin finance co"#an& fro" a
de(elo#in countr& is eliible to raise floatin rate dollar debt in t!e US do"estic "ar'et, %it! t!e uarantee of
t!e U$S$: Aenc& for International 8e(elo#"ent *USAI8+$
As is %ell 'no%n, 087) lends lon,ter" fi3ed rate ru#ees to !ouse bu&ers$ T!us, its re6uire"ents of funds are
for lon ter" fi3ed rate ru#ees$ On t!e ot!er !and, it !as access to c!ea# floatin rate dollars , it %ould be
a##reciated t!at t!e uarantee of t!e U$S Go(ern"ent %ould ensure t!at 0eft2s dollar borro%ins are at (er&
fine rates$ In t!is scenario, 087) !as raised se(eral floatin rate dollar loans and s%a##ed t!e" %it! Indian
ban's and financial institutions for fi3ed rate ru#ees$ In t!e #rocess, t!e counter#arties !a(e secured floatin
rate dollars at a rate t!e& %ould not !a(e been able to raise on t!eir o%nE si"ultaneousl& 087) !as access to
fi3ed rate ru#ees it %ould ot!er%ise not !a(e ot$
c2 urrency %W4- rate
Let us see a s%a# transaction %it! t!e follo%in,rates in Marc!$
S#ot US 8ollar @ R Rs$HI$;< , HI$I< : "ont!s for%ard R Rs$H< , ;< #aise
IOB sells to SBI US dollar @ "illion deli(er& : "ont!s$ T!is is an outri!t for%ard sale deal for IOB and t!e
transaction %ill be #ut t!rou! b& SBI at "ar'et : "ont!s for%ard bu&in rate of US dollar @ R Rs$HI$G<$ IOB
"a& bu& SPOT US dollar @ "illion fro" anot!er ban' sa& )anara Ban' and t!e transaction %ill be effected b&
)anara ban' at t!e "ar'et s#ot sellin rate of US dollar @ R Rs$HI$I<$ T!e t%o transactions ofIOB are t%o
different deals %it! t%o different ban's and are se#arate contracts$
On t!e contrar&, in t!e abo(e, if IOB c!ooses to Doin t!e transactions %it! one ban' sa& eit!er SBI or )anara
Ban', t!en it beco"es a$ s%a# transaction$ In a s%a# deal, bot! #urc!ase and sale are done %it! t!e sa"e ban'
and t!e& constitute : les of t!e sa"e contract$
In t!e abo(e e3a"#le let us #resu"e t!at IOB a##roac!es SBI to 6uote a s%a# rate for s#ot to : "ont!s
for%ard$ SBI %ill 6uote t!e s%a# rate as H< , ;< #aise #er US dollar$ 0ere, SBI t!e "ar'et,"a'er is sellin s#ot
and bu&in : "ont!s for%ard and !ence it %ill 6uote lesser of t!e t%o #re"iu" i$e$ <$H< #aise as its s%a# rate
and t!e s%a# %ill be done at a s%a# difference of <$H< #aise$
7ro" t!e abo(e illustration, one can fiure out t!at in a s%a# deal t!e rate 6uoted is not e3c!ane, rate but is
onl& e3c!ane rate differential$
It is t!e difference %!ic! bu&er9seller !as to #a&9recei(e t!e s%a##in s#ot aainst for%ard or for%ard aainst
for%ard$ 0ence, as s%a# is done at for%ard differentials, s#ot rate is i""aterial$ But s#ot rate decides t!e total
(alue in ru#ees %!ic! eit!er of t!e ban' %ill !a(e to de#lo& till recei#t of for%ard #roceeds on t!e due date and
t!e ban's ta'e eit!er s#ot bu&in or s#ot sellin or a(erae of ,t!e t%o as s#ot rate for underta'in a s%a#
transaction$
d. Intere"t Rate S-ap
T!ere are t%o t&#es of interest rate s%a#s: Sinle currenc& interest rate s%a# and )ross,)urrenc& interest rate
s%a#$ Sinle currenc& interest rate s%a#: Sinle currenc& interest rate s%a# is also called MPlain (anillaN s%a#$
7i3ed,for,floatin s%a#s, fi3ed,to,fi3ed s%a#s and floatin,to,floatin s%a#s are t!ese$ Often t!ese Dust called
interest rate s%a#s$ In all t!ese cases on a notional #rinci#al interest is #aid b& one #art& to t!e ot!er at a fi3ed
interest rate and recei(ed in turn at a floatin rate in t!e case of 7i3ed,for,floatin s%a#s$
T!e fi3ed interest rate "a& be: Treasur& Bill rate S certain basis #oints$ Sa& t!e treasur& bill rate for ; &ear
tenure is H$;J$ Sa& t!at @:< basis #oints are furt!er needed$ So, t!e fi3ed rate %or's out to: H$;J S @:<b#$ As
@<<b# R@J, t!e rate beco"es: H,;J S @$:JR ;$?J$
T!e floatin interest rate "a& be: LIBOR *London interban' offered rate+ or NIBOR *Ne% 4or' interban'
offered rate+ of t!e i(en tenure, !ere ; &ear tenure$
e. Ded2in2 -it* intere"t rate "-ap"
A fir" %!ic! !as a liabilit& in fi3ed rate "ar'et can !ede itself, in case of fallin interest rate, b& loc'in %it!
a fi3ed,floatin interest rate s%a#, b& recei(in fi3ed rate interest and #a&in at floatin rate$ So, t!e benefit of
fallin interest rate is obtained$
A fir" %!ic! !as a liabilit& in floatin rate "ar'et can !ede itself, in case of increasin interest rate, b&
loc'in %it! a fi3ed,floatin interest rate s%a#, b& recei(in floatin rate interest and #a&in at fi3ed rate$ So,
to t!e e3tent t!ere is floatin #a&"ent, t!ere is floatin recei#t and t!at t!e #roble" risin interest rate is
effecti(el& dealt$
Illustration:
)onsider t!is e3a"#le of a M#lain (anillaN interest rate s%a#$ Ban' A is a AAA,rated international ban' located
in t!e U$>$ and %is!es to raise L@<,<<<,<<< to finance floatin,rate Eurodollar loans$ Ban' A is considerin
issuin ;&ear fi3ed,rate Eurodollar bonds at @< #ercent$
7ir" B is a BBB,rated U$S$ co"#an&$ It needs L@<,<<<,<<< to finance an in(est"ent %it! a fi(e,&ear econo"ic
life$ It is considerin issuin ;,&ear fi3ed,rate Eurodollar bonds at @@$?; #ercent$ It %ould "a'e "ore sense to
for t!e AAA rated ban' to issue floatin,rate notes at LIBOR to finance floatin,rate Eurodollar loans$
It %ould "a'e "ore sense for fir" B to raise t!e "one& b& issuin ;,&ear floatin,rate notes at LIBOR S g
#ercent$ But 7ir" B %ould #refer to borro% at a fi3ed rate$ T!rou! a s%a# arrane"ent bot! can benefit$
0o%C
So!ution:
.i+ed )ate Market .loating )ate Market
AAA rated ban': @<$<<J LIBOR
BBB rated fir" @@$?;J LIBOR S <$;J
8ifference: @$?;J <$; J$
T!e difference arri(ed at abo(e is called credit 6ualit& s#read or in s!ort 6ualit& s#read as t!e difference arises
due to difference in t!e credit 6ualit& of t!e entities$ In bot! t!e "ar'ets, t!e fir" is at a disad(antae$ But it !as
less dis,ad(antae in t!e floatin "ar'et$
So let t!e fir" raise fund in t!e floatin interest rate "ar'et, at LIBOR S <$;J$ Let t!e ban' raise fund in t!e
fi3ed interest rate "ar'et, at @<J$ T!e o(erall ain is t!e difference bet%een 6ualit& s#read$ T!e 6ualit& s#read
differential R @$?;J ,<$; J$R @$:;J$ T!is ain could be s!ared a"on t!e s%a# ban'er %!o does t!e s%a#
arrane"ent, t!e ban' and t!e fir"$ Su##ose, t!e co""ission for s%a# ban'er is <$:;J$ T!e re"ainin ain
@J sa& is s!ared <$IJ for t!e ban' and <$HJ for t!e fir"$
As a result, t!e ban'2s effecti(e cost of raisin t!e fund is: LIBOR 1 <$IJ$ T!e fir"2s effecti(e cost of raisin
t!e fund is: @@$?;J , <$HJ R @@$A;J$
Note: T!e su" of t%o effecti(e costs "ust e6ual t!e s%a# ban'2s co""ission #lus t!e su" of actual costs of
borro%in$ Su" of t%o effecti(e costs R LIBOR 1 <$IJ S @@$A;J R LIBOR S @<$?;J$ S%a# ban'2s
co""ission #lus t!e su" of actual costs of borro%in R <$:;J S @<J S LIBOR S <$;J R LIBOR S @<$?;J$
iii2 O-*)4TIN# O) *ONOMI )I%;
In t!e case of transaction ris' t!e o#erations #ertainin to cas! flo% are all e3ecuted$ Onl& t!e financial
e3c!ane !as to be i(en effect$ In o#eratin ris', t!e "anufacturin tradin and financial transactions
acti(ities, are to fulfill an e3#ort of obliation$ T!e #rices of in#uts "i!t e3c!ane$ O#erational uncertainties
in #roduction "a& ta'e #lace$ 4et t!e e3#ort #rice and obliation %!ic! are alread& freed cannot be c!aned,
e(en if t!ere is cost escalation$ All t!ese c!ane t!e cost side of t!e o#eration$ T!e re(enue side of t!e
o#eration, %!ic! is t!e a"ount of e3#ort earnins recei(able, is also subDect to c!ane in e3c!ane (alue$ T!e
e3#ected !o"e currenc& (alue of #rofit fro" t!e #articular o#eration c!anes$ 0ence t!e o#eratin ris' is$
%eriousness of economic or operating risk:
E3c!ane rate c!anes "a& affect t!e fir"2s co"#etiti(e #osition b& alterin o#eratin cas! flo%s ad(ersel&$
T!is is called co"#etition effect$ T!ere is also %!at is called as con(ersion effect$ T!e con(ersion effect is t!at
a i(en o#eratin cas! flo%s in ter"s of a forein currenc& %ill be con(erted into !i!er or lo%er dollar *!o"e
currenc&+ a"ounts as t!e e3c!ane rate c!anes$
3eterminants, Main deter"inants of a fir"2s o#eratin ris' are:
[ i t!e structure of t!e "ar'ets in %!ic! t!e fir" ets in#uts, and sells its #roducts,
[ ii t!e le(el of fluctuations in e3c!ane rates and uncertaint& o(er t!ere
[ iii t!e fir"2s abilit& to "itiate t!e effect of e3c!ane rate c!anes b& adDustin its "ar'ets, #roduct
"i3, and sourcin *o#eratin !edes+ and
[ i( t!e fir"2s abilit& to "itiate t!e effect of e3c!ane rate c!anes b& so"e financial !edin$
General Motors e3#orts cars to U> but t!e stron dollar aainst t!e Sterlin !urts sales of GM cars in U>$ In
t!e U> "ar'et, GM faces co"#etition fro" t!e Italian and 7renc! car "a'ers, suc! as 7iat and Renault, %!ose
currencies re"ain stable relati(e to t!e Sterlin$ T!en GM can "aintain its "ar'et s!are in U> b& resortin to:
*i+ locatin #roduction facilities in U> and source in#uts locall& and *ii+ locatin #roduction facilities, sa&, in
Me3ico %!ere #roduction costs are lo% and e3#ort to U> fro" Me3ico$
%e(uence of risks:
O#eratin ris's cul"inates into transaction ris', %!ic! in turn ends in transaction ris'$ O#eration ris' is t!e
startin #oint$ As a fir" decides to effect an e3#ort deal, it !as to bid for t!e sa"e$ If t!e bid is %on, e3ecution
of %or' is in(ol(ed$ )!anes in do"estic and forein inflation le(els in t!e course of #roduction, t!e c!anes in
relati(e attracti(eness of different "ar'ets to %!ic! t!e fir" can e3#ort, c!anes in labor, "aterial and o(er!ead
costs of e3ecution of t!e e3#ort order, etc$, affect t!e cost of e3ecution of t!e order$ T!us t!e o#eratin $ris'
ta'es #lace$ Once t!e s!i#"ent is done, a fore3 recei(able #osition is built$ E3c!ane rate c!anes c!ane t!e
(alue of e3#ort earnins u#on con(ersion, i(in rise to transaction ris'$ Translation ris' is in(ol(ed %!en
forein currenc& desinated assets and liabilities are con(erted into !o"e currenc&$
A$ Internal Strateies or O#erational 0edin of O#eratin ris': T!e internal strateies for dealin %it!
o#eratin ris' include:
i 7inancial Manae"ent
ii Production Manae"ent
iii Mar'etin Manae"ent$
T!ese are ot!er%ise called o#erational !edes$ O#erational !edin is costl&, ti"e,consu"in, and not easil&
re(ersible$ 7or instance, establis!in "ulti#le "anufacturin sites can be effecti(e in "anain e3c!ane ris'
ris', but it can be costl& because t!e fir" "a& not be able to ta'e ad(antae of t!e econo"& of scale$ Si"ilarl&,
a fir" can reduce its currenc& ris' b& di(ersif&in across different business lines$ But suc! conlo"erate
e3#ansion "a& be too costl& as a "eans of !edin e3c!ane ris'$ In(est"ent in a different line of business
"ust be "ade based on its o%n "erit$ T!e strateies are tabulated belo% in table @;$
Ta@!e 14: Interna! Operatin2 Strate2ie" 'or Dea!in2 -it* Operatin2 ri"8
A brief e3#lanation of t!ese internal o#eratin strateies follo%s no%$
i2 .inancing"mi+ to negotiate with operating risk
T!e role of financial "anae"ent, based on t!e definition of !edin introduced at t!e beinnin of t!is
c!a#ter, is to structure t!e fir"2s liabilities in suc! a %a& t!at, durin t!e ti"e t!e strateic o#erational
adDust"ents are under%a&, t!e reduction in asset earnins is "atc!ed b& a corres#ondin decrease in t!e cost of
ser(icin t!e liabilities$
7or e3a"#le, a fir" t!at !as de(elo#ed a si5eable e3#ort "ar'et s!ould !old a #ortion of its liabilities in t!e
currenc& of t!at countr&$ T!e #ortion to be !eld in t!e forein currenc& de#ends on t!e si5e of t!e loss in
#rofitabilit& in association %it! a i(en e3c!ane rate c!ane$
ii2 -roduction related strategies to deal with operating risk
T!ere are four strateies a(ailable$ T!ese are in#ut,"i3, #lant location, relocation of #roduction and cost
cuttin$
[ Input-mi=: Global sourcin is a reat strate& to deal %it! o#eratin ris'$ In a sur(e& of @;:
"anufacturin co"#anies %orld o(er, t!e Mac!iner& and Allied Products Institute, a researc! fir",
found t!at ??J of t!e" !ad increased t!eir lobal sourcin since t!e rise of t!e dollar, %!ic! rises dollar
cost$ T!is is as it s!ould be$ T!e #rinci#al effect of a real e3c!ane rate c!ane is to c!ane t!e #rice of
do"esticall& #roduced oods relati(e to forein oods$ A %ell,"anaed fir" s!ould be searc!in
constantl& for %a&s to substitute bet%een do"estic and i"#orted in#uts, de#endin on t!e relati(e #rices
in(ol(ed and t!e deree of substitution #ossible$
[ /!ant Location: A fir" %it!out forein facilities e3#ortin to a co"#etiti(e "ar'et, %!ose currenc& !as
de(alued aainst currenc& of t!e e3#ortin fir"2scountr& %ill find its #rofit to decline$ It can o for
outsourcin fro" t!e e3#ort "ar'et itself but it "a& find t!at sourcin co"#onents abroad is insufficient
to "aintain unit #rofitabilit&$ To strent!en itself t!e fir" "a& !a(e to locate ne% #lants abroad$ T!ird,
countr& #lant locations are also a (iable alternati(e in "an& cases,, de#endin es#eciall& on t!e labor
intensit& of #roduction or t!e #roDections for furt!er "onetar& realin"ents$
[ Re!ocation o' production: Multinational fir"s %it! %orld%ide #roduction s&ste"s can allocate
#roduction a"on t!eir se(eral #lants in line %it! t!e c!anin costs of #roduction$ T!e "anae"ent of
a "ultinational cor#oration s!ould consider t!e o#tion of increasin #roduction in a$ nation %!ere
currenc& !as de(alued, and decreasin #roduction in a countr& %!ere t!ere !as been a re(aluation$ Of
course, t!e t!eoretical abilit& to s!ift #roduction is "ore li"ited in realit&$ T!e li"itations de#end on
"an& factors, not t!e least of %!ic! is t!e #o%er of t!e local labor unions in(ol(ed$ A strate& of
#roduction s!iftin #resu##oses t!at t!e fir" !as alread& created a #ortfolio of #lants %orld%ide$
[ Co"t Cuttin2: )ost su#re"ac& is t!e reatest of all co"#etiti(e edes$ Man& co"#anies %orld o(er
assaulted b& forein co"#etition !a(e "ade earnest efforts to i"#ro(e t!eir #roducti(it&,b& closin
inefficient #lants, auto"atin !ea(il&, and neotiatin %ae and benefit cutbac's and so on$ Man& !a(e
also started #rora"s to !ei!ten #roducti(it& and i"#ro(e #roduct 6ualit& t!rou! e"#lo&ee
"oti(ation$
iii2 Marketing Management
O#eratin ris' can be neotiated abl& t!rou! "ar'etin "anae"ent strateies as %ell$ T!ese are: "ar'et
selection, #roduct strate&, #ricin strate& and #ro"otion strate&$
Mar'et Selection: I"#act of e3c!ane rate fluctuations on o#eratin #rofit can be dealt t!rou! ri!t "i3 of
"ar'ets$ MaDor strateic o#erations for an e3#orter are t!e "ar'ets in %!ic! to sell and t!e relati(e "ar'etin
su##ort to de(ote to eac! "ar'et$ Mar'etin "anae"ent "ust ta'e into account its econo"ic ris' and
selecti(it&, adDust t!e "ar'etin su##ort, on a nation,b&,nation basis, to "a3i"i5e lon,ter" #rofit$ 7ro" t!e
#ers#ecti(e of non,US co"#anies, t!e stron U$S$ dollar is a olden o##ortunit& to ain "ar'et s!are at t!e
e3#ense of t!eir U$S ri(als$
It is also necessar&,to consider t!e issue of "ar'et se"entation %it!in indi(idual countries$ A fir" t!at sells
differentiated #roducts to "ore affluent custo"ers "a& not be !ar"ed as "uc! b& forein currenc& de(aluation$
On t!e ot!er !and, follo%in a de#reciation of t!e !o"e currenc& a fir" t!at sells #ri"aril& to u##er,inco"e
rou#s "a& find it no% easier to #enetrate "ass "ar'ets abroad$
Mar'et selection and "ar'et se"entation #ro(ide t!e basic #ara"eters %it!in %!ic! a co"#an& "a& adDust its
"ar'etin "i3 o(er ti"e$
,roduct Strategies: Product #ortfolio, #roduct introduction, #roduct %it!dra%als, etc$, are certain #roduct
strateies to deal %it! o#eratin ris'$
E3c!ane rate fluctuations "a& affect t!e ti"in of t!e introduction of ne% #roducts$ A fir" "ust de(ise a
strate& for ne% #roduct introduction as a function of its relati(e ris' in different "ar'ets$ T!e #eriod after a
!o"e currenc& de(aluation or forein currenc& re(aluation "a& be t!e ideal ti"e to introduce a ne% #roduct
o(erseas$
Si"ilarl&, #roduct deletion decisions, as #roducts beco"e obsolete or fall into consu"er disfa(or, "a& be
influenced b& e3c!ane ris' considerations$ 7ir"s "i!t sto# #roducin t!ese oods if a !o"e currenc&
re(aluation or forein currenc& de(aluation to li'el&$
,ricing Strategies: A fir" sellin o(erseas s!ould follo% t!e standard econo"ic #ro#osition of settin t!e #rice
t!at "a3i"i5es !o"e currenc& #rofits *b& e6uatin "arinal re(enues and /"arinal costs+$ In "a'in t!is
deter"ination, !o%e(er, #rofits s!ould be translated usin t!e for%ard e3c!ane rate t!at reflects t!e true
e3#ected !o"e currenc& (alue of t!e recei#ts u#on collection$ In t!e %a'e of forein currenc& de(aluation, a
fir" sellin in t!at "ar'et s!ould consider o##ortunities to increase t!e forein currenc& #rices of its #roducts$
,ro%otion Strategy: Pro"otional strate& s!ould si"ilarl& ta'e into account antici#ated e3c!ane rate c!anes$
A 'e& issue in an& "ar'etin #rora" is t!e si5e of t!e #ro"otional budet for ad(ertisin, #ersonal sellin,
and "erc!andisin$ Pro"otional decisions s!ould e3#licitl& build in e3c!ane rates, es#eciall& in allocatin
budets a"on countries$
A fir" e3#ortin its #roducts after a do"estic de(aluation "a& %ell find t!at t!e return #er dollar e3#enditure
on ad(ertisin or sellin is increased as a function of t!e #roduct2s i"#ro(ed #rice #ositionin$ T!e e3#orter
"a& also find it !as i"#ro(ed its abilit& in M#us!N t!e #roduct based on t!e o#tion of reater distribution
"arins or consu"er dealin$
Overall onsiderations in /edging
7ore3 ris's lead to fluctuations in (aluation of fir"s$ So, !edin aainst t!ese ris's is a %a& of dealin %it! t!e
ris's$
T!e follo%in 6uestions arise:
[ i Is !edin of e(er& ris' a "ust
[ ii -!at are alternati(e !edin tools
[ iii -!at are t!e costs of !edin toolsC
[ i( Is t!e costs of !edin %ort! t!e benefit of t!e sa"eC
A brief ans%ers to t!ese 6uestions are i(en belo%:
7irst of all, !edin e(er& ris' is not a "ust$ All fore3 ris's "a& not sinificantl& affect a fir"2s (aluation onl&
t!ose t!at !a(e t!e #otentials of affectin fir"2s (aluation need !edin$
Second, se(eral alternati(e !edin tools are a(ailable$ Rest of t!e sections of t!e lesson deals %it! t!ese tools$
T!ird, !edin in(ol(es a cost$ Transaction cost is in(ol(ed$ Besides, o##ortunit& to rea# ains fro" o#en
#ositions, i$e$ un,!eded #ositions, is lost$
7ourt!, t!e benefit, of !edin is beatin uncertaint&$ T!e re%ards of certaint& are$ to be "atc!ed aainst cost of
!edin$ T!e "anae"ent #!iloso#!& as to !edin, abilit& to forecast fore3 "ar'et trends, etc$, co"es into
#la& !ere$
--END OF UNIT1--
UNIT II
&.1 INTRODUCTION
E(er& entit&, be it a business or a !u"an, institution or an indi(idual, !as to function %it!in certain #ara"eters
laid around it b& e3ternal forces$ A #erson2s brou!t u# is influenced b& t!e nature and e3tent of #arental care
and concern e3tended to !i", b& t!e (alues and custo"s of t!e societ& around !i", t!e educational
o##ortunities a(ailable to !i" in !is #lace and so on$ Si"ilarl& a business orani5ation is also a #roduct of its
surroundins$ International business is influenced b& international en(iron"ent$
-!ere a business is located influences its fortune, irres#ecti(e of %!at it deals in$ T!e M%!ereN is not "ere a
eora#!ical do"ain, but inclusi(e of t!e leislati(e fra"e%or' relatin to t!at #lace, t!e #olitical situations
#ertainin to t!at #lace, t!e culture and societal factors of t!e #eo#le *li(in in or (isitin t!e area, t!e
de"ora#!ic features of t!e #eo#le li(in in or (isitin t!e area+, t!e le(el of tec!noloical ad(ances of t!at
area, t!e ecoloical and natural settin or ot!er%ise of t!e area and so on$ T!ese di(erse factors t!at surround
#!&sicall& or ot!er%ise, a business are called Men(iron"ental factorsN$ T!e en(iron"ental factors, force and
condition influence businesses di(ersel&$
En(iron"ent i(es strent!s and o##ortunities, i"#oses conditions, introduces c!allenes, #ro(ides resources
and %ields t!reats and also &ields to t!e business$
En(iron"ental !as se(eral co"#onents li'e Political en(iron"ent, financial en(iron"ent, econo"ic
en(iron"ent, socio,cultural en(iron"ent, tec!noloical en(iron"ent, ecoloical en(iron"ent, internal
en(iron"ent, e3ternal en(iron"ent, etc$
An international business fir" "ust stud&:
i$ t!e s#ecific factors and as#ects of t!e #articular en(iron"entE
ii$ t!e nature and e3tent of i"#act of t!e en(iron"ental factors on t!e businessE
iii$ %a&s to "a3i"i5e #ositi(e i"#acts and "ini"i5e neati(e i"#acts
i($ a(enues of "a'in t!e business unit "ulti,cultural
($ t!e "easures b& %!ic! t!e o##ortunities offered b& t!e en(iron"ent can be rea#edE
(i$ t!e "eans b& %!ic! t!e t!reats #osed b& t!e en(iron"ent "irated or "ini"i5ed$
&.& LEARNIN$ OBIECTI<ES
[ To #resent t!e conce#t of lobali5ation of econo"ies of nations and t!e "icro or business le(el and
"acro or national le(el lobali5ation$
[ To discuss t!e causes, concerns and issues in econo"ic lobali5ation$
[ To #ro(ide an account of t!e econo"ic en(iron"ental factors t!at influence lobali5ation
[ To #resent t!e en(iron"ental sinificance of Macro Econo"ic Areates and Monetar& factors
[ To elucidate t!e influence of E3ternal Sector (ariables and t!e 7iscal 7actors in lobali5ation
[ To ascertain !o% t!e different Econo"ic sectors and Infrastructure as econo"ic (ariables i"#act
lobali5ation
[ To anal&5e t!e sinificance of factor endo%"ents, tec!nolo& and #o#ulation as econo"ic (ariables in
influencin international business$
[ To #resent !o% t!e businesses t!e"sel(es influence international business en(iron"ent$
[ To deliberate t!e #olitical ideoloies and #olitico,econo"ic s&ste"s as international business
en(iron"ental forces
[ To #ro(ide an account of t!e factors affectin t!e functionin and t!e "aturit& of #olitical #arties9#eo#le
and t!eir rele(ance in lobal business en(iron"ent
[ To elucidate t!e conce#t, t&#es, "easures and "et!ods of dealin of9%it! #olitical ris' t!at "i!t affect
a business or businesses in eneral$
[ To !i!li!t t!e #olitico,leal en(iron"ent of India$
[ To en6uire into t!e constructs and conce#ts of culture as international en(iron"ent factors
[ To e3#lain t!e cultural di"ensions li'e, Reliion, Social Stratifications, Reion,
[ Lanuae, )o""unication St&les, Attitudes F Perce#tion of Peo#le, etc as cultural factors$
[ To discuss t!e cultural #olic& alternati(es a(ailable to an international business fir"
[ To #resent t!e conce#t and t&#es of orani5ational culture
[ To discuss t!e conce#t of reional trade bloc's and inter,reion and intra reion trade$
&.+ $LOBALIMATION O( BUSINESS
T!e IM7 defines lobali5ation as Mt!e ro%in econo"ic interde#endence of countries %orld%ide t!rou!
increasin (olu"e and (ariet& of cross border transactions in oods and ser(ices and of international ca#ital
flo%s, and also t!rou! t!e "ore ra#id and %ides#read diffusion of tec!nolo&N$ In !is Manae"ent )!allenes
for t!e :@st )entur&, Peter 8ruc'er %rites t!at, all institutions !a(e to "a'e lobal co"#etiti(eness a strateic
oal$ No institution, %!et!er a business, a uni(ersit& or a !os#ital, can !o#e to sur(i(e, let alone to succeed,
unless it "easures u# to t!e standards set b& t!e leaders in its field, an& #lace in t!e %orld$
Globali5ation is not a ne% #!eno"enon$ T!e #eriod @=?< to @G@A e3#erienced a ro%in trend to%ard
lobali5ation$ It ot #unctuated b& t!e -orld -ars I and II$ T!e ne% #!ase of lobali5ation %!ic! started
around t!e "id,:<t! centur& beca"e (er& %ides#read, "ore #ronounced and o(erc!arin since t!e late @G=<s
b& at!erin "ore "o"entu" fro" t!e #olitical and econo"ic c!anes t!at s%e#t across t!e co""unist
countries, t!e econo"ic refor"s in ot!er countries, t!e latest "ultilateral trade aree"ent %!ic! see's to
substantiall& liberali5e international trade and in(est"ent and t!e tec!noloical and co""unication re(olutions$
-orld econo"& is "ar'ed b& interation and standardi5ed #roducts$ )oca )ola, Nissan and Marlboro
*ciarettes+ are e3a"#les of #roducts %!ic! ser(e nearl& e(er& "ar'et$ T!ere !a(e been four "aDor c!anes:
ca#ital "o(e"ents rat!er t!an trade !a(e beco"e t!e dri(in force of t!e lobal econo"&E #roduction !as
beco"e Muncou#ledN fro" e"#lo&"ent, t!an's to tec!nolo&E #ri"ar& #roducts !a(e beco"e Muncou#ledN
fro" t!e industrial econo"& and, t!e %orld econo"& is in control 1 not b& indi(idual nations, des#ite t!e lare
%orld econo"ic s!are of t!e USA and .a#an$ T!e focus of all nations !as s!ifted fro" do"estic to t!e %orld
econo"& as t!e c!ief econo"ic unit$ T!is is t!e reatest sin of lobal econo"&$
&.+.1 Lee!" o' $!o@a!i;ation
-e "a& consider lobali5ation at t%o le(els, (i5, at t!e "acro le(el *i$e$, lobali5ation of t!e %orld econo"&+
and at t!e "icro le(el *i$e$, lobali5ation of t!e business and t!e fir"+$ Globali5ation of t!e %orld econo"& is
ac!ie(ed, 6uite ob(iousl&, b& lobali5in t!e national econo"ies$ Globali5ation of fir" and business is
ac!ie(ed t!rou! s#read of subsidiaries and Doint (entures across t!e lobe$ Globali5ation of t!e econo"ies and
lobali5ation of business are (er& "uc! interde#endent$
&.+.1.1 $!o@a!i;ation o' #or!d Econom5
T!e econo"ies of nations are e"erin as a lobal econo"&$ A lobal econo"& is one %!ic! transcends t!e
national borders un!indered b& artificial restrictions li'e o(ern"ent restrictions on trade and factor
"o(e"ents$ Globali5ation is a #rocess of de(elo#"ent of t!e %orld into a sinle interated econo"ic unit$ T!e
lobal econo"& is different fro" t!e international econo"&$ T!e international econo"& is c!aracteri5ed b& t!e
e3istence of different national econo"ies, t!e econo"ic relations bet%een t!e" bein reulated b& t!e national
o(ern"ents$ T!e lobal econo"& is a borderless econo"& c!aracteri5ed b& free flo% of trade and factors of
#roduction across national borders$
Accordin2 to /eter (. Druc8er) t*e 2!o@a! econom5 i" c*aracteri;ed) inter a!ia) @5 t*e 'o!!o-in2 'eature":
i T!e lobal econo"& is s!a#ed "ainl& b& "one& flo%s rat!er t!an b& trade in oods and ser(ices$ T!ese
"one& flo%s !a(e t!eir o%n d&na"ics$ T!e "onetar& and fiscal #olicies of so(erein o(ern"ents increasinl&
react to e(ents in t!e international "one& and ca#ital "ar'ets rat!er t!an acti(el& s!a#e t!e"$
ii In t!e lobal econo"& "anae"ent !as e"ered as t!e decisi(e factor of #roduction and t!e traditional
factors of #roduction, land and labor, !a(e increasinl& beco"e secondar&$ Mone& and ca#ital "ar'ets too !a(e
been increasinl& beco"in lobal and uni(ersall& obtainable$
iii In t!e lobal econo"& t!e oal is "ar'et "a3i"i5ation and not #rofit "a3i"i5ation$ 4es, "ar'et s!are is to#
in t!e aenda of MN)s, e(en at a cost of #rofitabilit&$
i( Trade, %!ic! increasinl& follo%s in(est"ent, is beco"in a function of in(est"ent$ Trade in oods and
ser(ices is %orld%ide toda&$
(
T!e decision "a'in #o%er is s!iftin fro" t!e national state to t!e reion *i$e$,t!e reional bloc's li'e t!e
Euro#ean )o""unit&, Nort! A"erican 7ree Trade Aree"ent, etc$+
(i T!ere is a enuine , and al"ost autono"ous , %orld econo"& of "one&, credit and in(est"ent flo%s$ It is
orani5ed b& infor"ation %!ic! no loner 'no%s national boundaries$
7inall&, t!ere is a ro%in #er(asi(eness of t!e transnational cor#orations %!ic! see t!e entire %orld as a sinle
"ar'et for #roduction and "ar'etin of oods and ser(ices$
T!ere are, t!us, "an& factors %!ic! tend to #ro"ote t!e lobali5ation of t!e %orld econo"&$ T!e "ultilateral
trade neotiations under t!e aus#ices of -TO !a(e been liberali5in trade and in(est"ent$
1.+.1.& $!o@a!i;ation o' Bu"ine""
Globali5ation in its true sense is a %a& of cor#orate life necessitated, facilitated and nouris!ed b& business
#ractices cuttin across borders of t!e %orld econo"ies and de(elo#ed b& cor#orate strateies$ Globali5ation is
an attitude of "ind , it is a "ind,set %!ic! (ie%s t!e entire %orld as a sinle "ar'et so t!at t!e cor#orate
strate& is based on t!e d&na"ics of t!e lobal business en(iron"ent$
&.+.&. Cau"e" o' $!o@a!i;ation
Globali5ation is not a t%entiet!,centur& #!eno"enon$ Globali5ation of econo"ic acti(it& !as been closel&
lin'ed %it! t!e de(elo#"ent and establis!"ent of e"#ires %orld%ide t!rou! international trade since t!e
si3teent! centur&$ Loo'in bac' o(er t!e last t!ree centuries, it %ould be nearl& i"#ossible to se#arate t!e
#olitical and econo"ic 1 in #articular, international trade 1 !istories of -estern nations$
i2 #lobal thinking
)o"#anies %!ic! !a(e ado#ted a lobal outloo' sto# Mt!in'in of t!e"sel(es as national "ar'eters %!o
(enture abroadN and start Mt!in'in of t!e"sel(es as lobal "ar'etersN$ T!e to# "anae"ent and staff are
in(ol(ed in t!e #lannin of %orld,%ide "anufacturin facilities, "ar'etin #olicies, financial flo%s and
loistical s&ste"s$ T!e lobal o#eratin units re#ort directl& to t!e c!ief e3ecuti(e or e3ecuti(e co""ittee, not
to t!e !ead of an international di(ision$ E3ecuti(es are trained in %orld,%ide o#erations, not Dust do"estic or
international$ Manae"ent is recruited fro" "an& countries, co"#onents and su##lies are #urc!ased %!ere
t!e& can be obtained at t!e least cost, and in(est"ents are "ade %!ere t!e antici#ated returns are t!e reatestN,
accordin to P!ili# >otler$
ii2 Multilateral .inancial 4rrangements
Multilateral financial arrane"ents are intended to render "utual financial assistances a"onst nations$ Nations
are not e6uall& endo%ed %it! resources$ Nations are not enDo&in sa"e fate all t!e ti"e$ T!ere "a& be u#s and
do%ns$ At ti"es of need, nations need su##ortin !ands$ -!en t!e e3c!ane crisis !it t!e Sout! East Asian
nations, durin @GG?G=, t!e& needed so#$ -!en t!e se(ere eart!6ua'e !it t!e GuDarat State of India, t!e nation
needed su##ort to rebuild t!e affected fortunes$ T!ese are recent e3a"#les$ In t!e @GH<s, t!e II -orld -ar
ra(aed econo"ies needed assistances$ T!en ca"e into bein, t!e -orld Ban' and International Monetar& 7und
b& t!e collecti(e action of t!e %orld nations$ Later International 8e(elo#"ent Association, International
7inance )or#oration, Asian 8e(elo#"ent Ban', African 8e(elo#"ent Ban', etc$, ca"e into bein$ All are t!e
results of collecti(e decisions of t!e "e"ber nations to for" and benefit fro" t!ese orani5ations$ T!ese
institutions !el# ca#ital transfer fro" ca#ital ric! countries to ca#ital #oor countries$ Multinational financial
institutions, referred to abo(e, are created b& %orld nations, for nations and of nations$ T!ese institutions are
i(en birt! to b& t!e nations$ T!ese are "eant for t!e "e"ber nations$ T!e resources of t!ese institutions
collecti(el& belon to t!ese "e"ber nations$
Multilateral finance is larel& debt ca#ital, rat!er t!an e6uit& t&#e$ Multilateral finance is enerall& #ro(ided to
o(ern"ent or 6uasi,o(ern"ent institutions %!ic! "a& be #assed later b& t!e" to #ri(ate sector orani5ations$
Multilateral finance carries a concessional rat!er t!an co""ercial rate of interest$ Multilateral finance routed
t!rou! o(ern"ental bodies enerall& is used to fund social and basic infrastructural #roDects$ As debt ca#ital
assistances t!ere are, debt ser(icin obliation (ested on t!e o(ern"ent$ Generall& a loner initial "oratoriu"
#eriod and loner re#a&"ent #eriod are t!e order$ To ensure t!at funds are used effecti(el&, conditionalities are
added as strins to t!e fund #ro(ided$
-orld Ban' and International 8e(elo#"ent Association #ro(ide assistances for sectoral de(elo#"ent co(erin
ariculture, ener&, en(iron"ent, education, !ealt! F nutrition, social sector, financial institution de(elo#"ent,
tele,co""unication, trans#ortation, urban de(elo#"ent, %ater F se%erae, #ublic sector "anae"ent etc$
International Monetar& 7und #ro(ides assistances for "eetin balance of #a&"ents #roble"s, for structural
adDust"ents re6uire"ents, #o(ert& reduction, ro%t! facilitation etc$ T!ese ca#ital flo%s lead to lobali5ation$
iii. (orei2n /riate Capita!
7orein Pri(ate )a#ital is ca#ital contributed b& forein citi5ens, forein co"#anies, "ultinational cor#orations
and t!e li'e$ T!e #resent era is t!e era of lobal #ri(ate ca#ital$ Global #ri(ate ca#ital flo%s into lobal "ar'ets
in searc! of better in(est"ent o##ortunities$ Portfolio di(ersifications and o##ortunit& sei5in are t!e causes$
Pri(ate ca#ital is no% trusted as a "eans of encourain in(est"ents stoc' in t!ird %orld countries$ T!ird %orld
countries, in t!e #ast, de#ended on "ultilateral ca#ital$ But t!e& failed to "a'e effecti(e use of t!e ca#ital,
%!ic! resulted in "ountin e3ternal debt$ And debt ser(icin beca"e a #roble"$ And "ore conditions added
for subse6uent borro%ins "ade t!e countries reali5e t!e #olic& foll& b& stic'in to "ultilateral ca#ital$ T!e&
sa% t!e reat o##ortunit& in t!e #ri(ate ca#ital "ar'et$ T!e success of t!e Asian econo"ies, Sout! A"erican
econo"ies, 'indled t!e interest of ot!er t!ird %orld nations to taste t!e nectar of #ri(ate ca#ital$ In #ri(ate
ca#ital, debt ser(icin need is not t!ere for t!e o(ern"ent$ It is an issue bet%een t!e financier and borro%er in
#ri(ate e6uit& ca#ital, e(en t!is need is not t!ere$ Global #ri(ate ca#ital co"es %it! tec!nolo&, "ar'etin,
"anae"ent and ot!er s'ills$ )a#ital flo%s into sectors %!ic! !a(e #otentials of ro%t!$ T!ese !el#
lobali5ation$
i. Empire Bui!din2
E"#ire buildin in t!e last t!ree centuries %as closel& connected %it! t!e de(elo#"ent, of, and atte"#ts to
"ono#oli5e, international trade$ T!e S#aniards and Portuuese %on trade routes fro" t!e Mediterranean #o%ers
in t!e fourteent! to t!e si3teent! centuriesE subse6uentl&, t!ese routes %ere %on o(er and "ono#oli5ed b& t!e
Britis!, t!e 8utc! and t!e 7renc!$ MaDor areas of t!e %orld t!at started out as Mecono"icN colonies *and
"ono#olies car(ed out a"on t!e t!ree tradin #o%ers+ subse6uentl& beca"e #olitical colonies *includin
Nort! A"erica+$ Nu"erous %ars %ere fou!t in Euro#e and else%!ere o(er international tradin ri!ts, trade
routes, and "aintenance of tradin "ono#olies$ 8urin t!ese acti(ities and t!e #re(alent #!iloso#!& of #olitical
econo"& in t!ose da&s %as M"ercantilis"N 1 t!at is, t!e #!iloso#!& t!at, fro" t!e stand#oint of a nation2s
%elfare, it is better to e3#ort t!an to i"#ort$
. Indu"tria! Reo!ution
B& t!e late ei!teent! centur&, #ro#elled b& t!e Industrial Re(olution, Britain !ad beco"e t!e undis#uted %orld
econo"ic #o%er$ Econo"ic !istorians !a(e attributed a co"bination of factors, suc! as t!e tec!nical #roress
and inno(ations in te3tiles, coal, iron and steel, t!e !arnessin of stea", t!e dis#lace"ent of aricultural
%or's#ace to "eet t!e needs of a fast,e3#andin industrial base, t!e Protestant et!ic, ric!es #lundered fro"
colonies, and so fort!, as a"on t!e reasons %!& Britain beca"e t!e %orld2s first industrial countr&$ 7or
instance, b& t!e "id,nineteent! centur&, Britain accounted for about H<J of t!e %orld e3#ort of "anufacturers$
i. $ro-t* o' 3NC"
Globali5ation (ia t!e de(elo#"ent and s#read of t!e MN)s t!rou! direct forein in(est"ent is a "ore recent
#!eno"enon$ T!e earliest MN)s %ere "ainl& Euro#ean fir"s, settin u# "anufacturin facilities in t!e
colonies to e3tract #ri"ar& resources for con(ersion to finis!ed oods bac' !o"e$ 0o%e(er, b& t!e "id,
nineteent! centur&, "an& US fir"s bean to lobali5e 1 for e3a"#le, Siner Se%in Mac!ines set u# a Doint
(enture in 7rance in @=;;, -estin 0ouse, %!ic! set u# a #lant in Paris in @=?=, and >oda' set u# a #lant in
London in @==G$ T!e e3#ansion of US fir"s %as furt!ered after -orld -ar II %!en bot! Euro#ean and
.a#anese industrial infrastructure %as larel& destro&ed b& t!e %ar$ Resource transfers for rebuildin t!ese
econo"ies t!rou! #rora"s suc! as t!e MMars!all #lanN a(e US fir"s t!e abilit& to consolidate t!eir #osition
e(en "ore fir"l&$ .a#anese fir"s %ere relati(el& late entrants into t!e %orld of MN)s$ Alt!ou! t!e& %ere
"aDor e3#orters #rior to -orld -ar II, "ost did not bein to set u# subsidiaries abroad until %ell into t!e
second !alf of t!is centur&$
T!e #rocess of lobali5ation #ro#elled b& t!e MN)S as an orani5ational fro" !ad bro'en freeE it !ad ac6uired
a life of its o%n and beco"e irre(ersible$ In ter"s of its abilit& to "o(e 'no%lede, #eo#le, ca#ital, oods and
ser(ice, and tec!nolo& access borders, t!e #rocess of lobali5ation, led b& MN)s, !ad done far be&ond t!e
reac! of an& national so(erein o(ern"ent or international aree"ent$ To borro% a #!rase fro" sc!olar of
international business, Ra&"ond Kernon, t!e MN)s !ad reac!ed a le(el of "aturit& and influence %orld%ide
%!ereb& it could 'ee# Mso(ereint& at ba&N$
Until recentl&, nearl& all "aDor "ultinationals %ere eit!er A"erican, .a#anese or -estern Euro#ean, suc! as
Ni'e, )oca,)ola, -al,Mart, AOL, Tos!iba, 0onda and BM-$ No%, t!e e"erin econo"ies are addin !o"e
ro%n MN)s into t!e scene$ -it! t!e de(elo#"ent of a trul& lobal econo"& b& t!e @GG<s, o#inion %it!
res#ect to t!e "ultinational cor#orations in !o"e and !ost countries (aried considerabl&$ Multinationals !a(e
often been (ie%ed abroad as #ur(e&ors of tec!nolo& and business efficiencies and as bearers of #roducts
"eetin an insatiable a##etite for A"erican oods$ But a "ore neati(e i"ae also de(elo#ed$ T!e ro%in
co"#etiti(eness of t!e ne% %orld econo"& and a !ei!tened e"#!asis on cost efficiencies, Dob reductions,
retoolin, and relocation led to co"#laints in !o"e and !ost nations about declinin "ar'et s!ares and lost Dobs$
T!e transnational c!aracter of t!e "ultinationals #ro(ed ir'so"e to t!e Go(ern"ent officials %!o sensed a loss
of t!eir so(ereint& because of t!e abilit& of t!ese cor#orations to "o(e t!eir o#erations, transactions, and
#rofits u#strea" or do%nstrea" as t!eir self,interests dictated$ B& t!e beinnin of t!e t%ent&,first centur&
"ore and "ore of t!e national econo"ies %ere do"inated b& a relati(el& fe% "ultinational iants$ Transfers of
tec!nolo& %ere anot!er issue #ittin MN)s and !ost and !o"e o(ern"ents aainst one anot!er, as t!e&
Doc'e&ed to "aintain or ain control of tec!noloical brea't!rou!s for reasons of national securit& and #rofits$
8es#ite, t!e Durisdictional dis#utes, cultural differences, nontariff barriers to trade, international aree"ents
a"on t!e "ultinational cor#orations, and conflictin #olitical aendas on suc! "atters of #rinci#le as t!e
en(iron"ent, ener&, !u"an ri!ts, accessibilit& to #ro#er "edical treat"ent and !i!,cost #!ar"aceuticals,
s%eats!o#s, and c!ild labor la%s, MN)s are allo#in t!eir clout o(er t!e econo"& of t!e %orld$
ii. Internationa! A2reement"
Alonside t!e de(elo#"ent of t!e MN)s t!rou! direct in(est"ent abroad, t!e nu"erous international
aree"ents and institutions t!at %ere set u# after -orld -ar II acted as furt!er catal&sts to t!e #rocess of
lobali5ation$ Suc! institutions included t!e international fi3ed,e3c!ane rate "onetar& arrane"ent under t!e
Bretton -oods Aree"ent, t!e International Monetar& 7und *IM7+, t!e -orld Ban', t!e General Aree"ent on
Tariffs and Trade *GATT+, t!e -orld court and -TO$ Alt!ou! t!ese institutions re#resented t!e outco"e of
(oluntar& acce#tance of %orld%ide aree"ents a"on "e"ber countries, t!e& see"inl& #ro(ided t!e basis for
a "ore stable %orld%ide en(iron"ent in %!ic! MN)s could conduct t!eir business$
&.+.+ I""ue" and Concern" o' $!o@a!i;ation
Issues and concerns of lobali5ation are: c!ane, efficienc&, stabilit&, de(elo#"ent, sustenance and e6uit&$
T!ese are elaborated belo%:
i. C*an2e: T!e lobali5ation #rocess e"#!asi5ed c!ane,c!ane fro" inefficienc& to efficienc&E c!ane fro"
bureaucratic dela& to business li'e s#eedE c!ane fro" structural riidit& to de(elo#"ental fle3ibilit&E c!ane
fro" rules,fra"e to #rofit orientationE c!ane fro" o(ern"ental inter(ention to "ar'et deter"inationE c!ane
fro" #lural la&ers of decision to de,la&ered decision #rocessE c!ane fro" in%ard,loo'in #olic& to out%ard,
loo'in #olic&E c!ane fro" i"#ort,substitution to e3#ort "a3i"i5ationE c!ane fro" insulated econo"& to a
co"#etiti(e econo"&E c!ane fro" local resource de#endence to access to lobal resourceE c!ane fro"
o(ern"ent o%ners!i# to #ri(ate *#eo#le+ o%ners!i#, c!ane fro" centrali5ation to decentrali5ationE c!ane
fro" !i! ta3ation to lo% ta3ation and so on$
ii. E''icienc5: Efficienc& is t!e ratio of out#ut to in#ut$ 0i!er t!is ratio, reater is efficienc&$ Efficienc& dri(e
is (er& i"#ortant in toda&2s conte3t of li"ited lobal resources, but unli"ited lobal needs$ So, lobal resources
"ust be efficientl& used$ Efficienc& beco"es t!e dri(in force of industr&, trade, institutions and fir"s$ )a#ital
efficienc&, labour efficienc& and "anaerial efficienc& lead to o#erati(e efficienc& resultin in cost efficienc&$
)ost efficienc& !el#s rea#in "ar'et efficienc& leadin to #rofit efficienc&$ -it! #rofit efficienc&
de(elo#"ental efficienc& ta'es #lace, for %it! #rofit "oderni5ation, e3#ansion and di(ersification are #ossible
leadin to efficienc&$
iii. Sta@i!it5: Stabilit& of econo"ies is one of t!e concerns of lobali5ation$ Econo"ies "ust be able to stand on
sound footin$ E(er& econo"& "ust !a(e econo"ic, #olitical and social stabilities$ In ot!er %ords, t!e crises of
t!e Me3ican t&#e or t!e Sout! East Asian t&#e s!ould not occur or recur$ T!is needs effecti(e "anae"ent of
lobali5ation$ 7iscal stabilit&, structural stabilit&, "acro,econo"ic stabilit&, financial stabilit&, etc are certain
for"s of stabilit&$ Globali5ation #rocess s!ould address t!ese, if t!e latter !as to be in t!e aenda of all
countries$
i. Dee!opment: One of t!e concerns of lobali5ation is lobal de(elo#"ent$ No% a basic 6uestion arises$
-!at is de(elo#"entC 8e(elo#"ent is ro%t! #lus c!ane$ Gro%t! in national9lobal inco"e, in
national9lobal sa(ins, in national9lobal in(est"ent, in e"#lo&"ent, in e3#orts, fore3 reser(e, in return on
in(est"ent in #ublic sector, in infrastructural facilities and so on constitute one as#ect of de(elo#"ent$ T!e
ot!er is #ositi(e c!ane in co"#osition of ross lobal #roduct, in e3#orts, in i"#orts, in #ublic and #ri(ate
sector, c!ane in o(ern"ent finances, c!ane in ta3 base, ta3 structure and ta3 le(el, c!ane in tec!nolo& and
e"#lo&"ent #attern and so on constitute anot!er as#ect of de(elo#"ent$ T!is de(elo#"ent is sou!t to be
ac!ie(ed %it! local and lobal resources, %it! lobal trade and tec!nolo&, %it! less o(ern"ent inter(ention
and "ore #eo#le #artici#ation, %it! "ore #ri(ate sector role and less #ublic sector distortion, %it! "ore
trans#arent #olic& and less control, %it! reduced ta3 and increased o##ortunit& and so fort!$ T!e de(elo#"ent
oal is to be ac!ie(ed %it! #eo#le na"el& t!e sa(ers, in(estors, ban'ers, business persons, trading
co""unit&, "anaers, %or'ers and of course %it! res#ondin bureaucrats$ In ot!er %ords, de(elo#"ent oal
s!ould be "ade to# on t!e aenda for action of #eo#le$
. Su"tenance: Sustained de(elo#"ent is "uc! "ore i"#ortant t!an 6uic',fi3 de(elo#"ent$ Sustainable
de(elo#"ent ensures balance on all resources , #!&sical and !u"an$ T!ere is no o(er,e3#loitation of an&
resource$ Globali5ation s!ould ensure t!is$ Ot!er%ise, lobali5ation "i!t lead to colla#se of econo"ies$
i. EHuit5: E6uit& refers to fairness$ In t!e econo"ic lobali5ation conte3t, e6uit& refers to e6uit& in s!arin t!e
re%ards of lobali5ation across countries, sectors, business units and all sta'e,!olders$ Usuall& t!e lobali5ation
#rocess is tilted in fa(our of t!e %est and t!e non,#ri"ar& sectors and aainst t!e less de(elo#ed and #ri"ar&
sector$ T!is issue "ust be seriousl& addressed sooner t!an later so t!at lobali5ation #rocess oes at t!e ri!t
#ace$
&.1 BUSINESS EN<IRON3ENT O( INDIA ECONO3IC EN<IRON3ENT
-i'i#edia defines, en(iron"ent as /t!e e3ternal conditions, resources, sti"uli etc$ %it! %!ic! an oranis"
*fir", countr&, etc+ interacts2$ 7ro" a business fir"2s #oint of (ie%, t!ese e3ternal factors *conditions,
resources, sti"uli etc+ are t!e so called MuncontrollableN, unli'e t!e McontrollableN factors of strate&, #olic&,
ad"inistration, etc$ T!ese /uncontrollable2 factors include econo"ic, socio cultural, leal, tec!noloical,
consu"er interests, co"#etiti(e and #olitical factors to na"e but a fe%$ 7ailure to account for t!ese factors can
lead to dire conse6uences to business$ T!e failure b& t!e US car "a'ers to ta'e account of t!e consu"er tastes,
tec!noloical c!anes and de"and s!ift to 6ualit& co"#act cars %it! added electronic de(ices fro" .a#an, led
to a drastic inroad of .a#anese cars into t!e USA in t!e @G=<s or so$ So"e of t!ese /uncontrollable2 factors can
be s!a#ed b& t!e o(ern"ent for t!e ad(antae of t!e businesses$ Suc! of t!ose o(ern"ents %!ic! !a(e
continuousl& and ca#abl& done t!is !a(e attracted "ore business in(est"ent in t!eir territories$ Go(ern"ent2s
#olic& to%ards business i"#actin t!e econo"& is an i"#ortant factor t!at "ost o(ern"ents !a(e been 6uic'
to "end to facilitate businesses$ Political factors e(en condition t!e Go(ern"ent for" and s!a#e and its
functionin and t!at econo"ic, social and ot!er #olicies of o(ern"ent are influenced$ And culture as a factor
of influence e(en t!e #olitical en(iron"ent$
T!us econo"ic, #olitical and cultural en(iron"ent factors are i"#ortant$
Until @GG@, a !i!l& reulated business en(iron"ent, a #er(asi(e license s&ste" and !i! tariff barriers
c!aracteri5ed t!e Indian econo"&$ S%ee#in refor"s, introduced in @GG@ and continued b& successi(e
o(ern"ents, !a(e radicall& c!aned t!e course of t!e Indian econo"&$ T!is is so des#ite t!e end of sinle
#art& o(ern"ent at t!e center and entr& of coalition o(ern"ents$ Refor"s aenda oes un!indered t!ou!
so"e slo% #edalin does e3ist due to t!e dictates of coalition o(ern"ents$ Toda&, t!e ne% s#irit of econo"ic
liberali5ation, #ri(ati5ation and lobali5ation, is stirrin India, brinin s%ee#in c!anes in its %a'e and
unleas!in t!e (ast #otential of t!e Indian econo"&$ T!e Go(ern"ent2s #olicies are no% relati(el& si"#le,
trans#arent and eared to%ards #ro"otin do"estic and forein #ri(ate in(est"ent$ T!ere e3ists a stron
#olitical consensus on t!e econo"ic #olicies at t!e central and state o(ern"ent le(els$ T!is auurs %ell for t!e
continuation and #roressi(e strent!enin of in(estor friendl& #olicies t!at !a(e created a sea of o##ortunities
for do"estic and forein in(estors #articularl& in al"ost all sectors of t!e econo"&$ E(en so"e defense sectors
are o#en to lobal co"#etition$ Indian industries !a(e tre"endousl& res#onded to t!e ne% order of e3tended
lobal and do"estic co"#etition of late$ T!e& !a(e started e"erin as confident lobal #la&ers s!eddin t!eir
initial and earlier "ind set of diffidence$
India, t!e %orld2s larest de"ocrac&, is t!e Ht! larest %orld econo"& in ter"s of #urc!asin #o%er #arit&$
India2s endurin constitutional, #olitical, econo"ic, financial, Dudicial and leal institutions, rooted in t!e
#rinci#les of de"ocrac& and Dustice, ensure a trans#arent #redictable and secure en(iron"ent for do"estic and
forein businesses and "ultilateral, bilateral and #ri(ate in(est"ents$ T!e e3istence of an inde#endent Dudiciar&,
stron leal and accountin s&ste", a free and (ibrant #ress, reser(oir of !i!l& s'illed "an#o%er, and t!e use
of Enlis! as t!e #rinci#al lanuae of business and ad"inistration are so"e of t!e "ost attracti(e features of
t!e Indian business en(iron"ent$ India2s ric!ness and di(ersit& of culture, eora#!ic and cli"atic conditions,
natural and "ineral resources, "atc!ed onl& b& fe% ot!er countries in t!e %orld, add furt!er feat!ers to !er
cro%n$ -it! t!ese #relude let us et into s#ecific en(iron"ental factors$
&.1 ECONO3IC EN<IRON3ENT O( INDIA
Econo"ic en(iron"ent refers to t!e state and co"#osition of internal and e3ternal econo"ic factors t!at
condition an entit&2s ca#acit& to interact %it! its outer %orld$ T!e econo"ic en(iron"ent is constituted b& t!e
factors as listed in table @$
&.1.1 3acro Economic A22re2ate"
Si5e and Gro%t! in Gross 8o"estic Product, Sectoral G8P, in Per,ca#ita Inco"e, 8is#osable Inco"e, Marinal
Pro#ensit& to )onsu"e, etc$
a. $ro"" Dome"tic /roduct ($D/% o' Indian Econom5:
India !as Doined t!e elite club of @: countries %it! a trillion dollar econo"&$ T!e continuin rall& in ru#ee
aainst t!e US dollar is a "at!e"atical, if not a real factor, contributin to india beco"in a trillion dollar
econo"&$ T!e countr&2s G8P crossed t!e trillion,dollar "ar' for t!e first ti"e in !istor& %!en ru#ee
a##reciated to belo% H@,le(el aainst t!e US reenbac' &esterda&, S%iss In(est"ent Ban' )redit Suisse said in
a re#ort #ublis!ed on A#ril :I, :<<?$ )ountries li'e t!e US, .a#an, Ger"an&, )!ina, U>, 7rance, Ital&, S#ain,
)anada, Bra5il and Russia !a(e all breac!ed trillion,dollar G8P le(el in t!e #ast$ T!e ban' #ut t!e countr&2s
G8P at around Rs H@,<<,<<< )rs, %!ic! translates to sli!tl& "ore t!an one trillion dollar at t!e current
currenc& le(el of Rs H<$?I #er dollar * @<<,<<< )rs R @ trillion+$ T!e Purc!asin Po%er Parit& based G8P is at
least ; ti"es !i!er t!an t!e re#orted G8P and t!at India2s real G8P in PPP ter"s is o(er L; trillions.
Ta@!e 1 Economic Enironmenta! (actor"
India !as lifted itself fro" t!e lon,#eriod slo%est ro%t! rate of A$;J )AGR in Gross 8o"estic Product
*G8P+ e(er since it ot to%ed to t!e LPG "antra$ In t!e i""ediate after"at! of LPG t!e )AGR cloc'ed about
?J$ And in t!e last A to H &ears endin :<<?,<=, t!e )AGR cloc'ed GJ$ Kiorous ro%t! %it! stron
"acroecono"ic funda"entals !as c!aracteri5ed de(elo#"ents in t!e Indian econo"& durin :<<H,<; to :<<?,
<=$ Gro%t! of G$< #er cent and G$: #ercent in :<<;,<I and :<<I,<?, res#ecti(el&, b& "ost accounts, sur#assed
e3#ectations$
@. /er-capita income
Indian econo"& "a& !a(e ro%n at t!e fastest #ace in nearl& t%o decades, but #er,ca#ita inco"e of a #erson is
still less t!an Rs :,;<< a "ont! * :<<I,<?+$ T!e o(er G J G8P ro%t! durin :<<I,<?, fastest since @G==,=G
and second,fastest since t!e countr& ac!ie(ed inde#endence, !as translated into a #er ca#ita inco"e of Rs
:G,A=: a &ear or Rs :,HH=$; a "ont!$ T!is translates into about L?;< #er annu" or L IA #er "ont! <r L: #er
da&$ T!is is e6ui(alent to t!e inco"e of a #erson ran'ed at ;<,H@@,IGIt! #osition in t!e %orld, accordin to
GlobalRic!est, a researc! orani5ation on lobal finances$ T!is is too lo% to a countr& to et 6ualified as a
de(elo#ed nation$ But t!e PPP based #er ca#ita inco"e is o(er LH,<<< dollar a &ear$ India !ouses t!e "ost
nu"ber of billionaires in Asia,AI, a!ead of t!e econo"ic #o%er!ouse, .a#an, accordin to 7orbes "aa5ine$
T!ese billionaires toet!er control a %ealt! of Rs =,I<,<<< )rs or L :@; billion$ T!is s#ea's u# t!e s'e%ed
distribution of inco"e in t!e countr&, unli'e in .a#an$
A countr& %it! !i!er G8P i"#lies "ore business o##ortunities$ A countr& %it!
"ore inco"e in PPP ter"s furt!er i"#lies #otential for risin business inco"e$
&.1.& 3one5) Sain2") Capita! . Ine"tment
Monetar& #olic&, National Sa(ins F In(est"ent, 7orein )a#ital Inflo% and )a#ital
Outflo%, Mone& and )a#ital Mar'et Institutions and Efficienc&, Incre"ental )a#ital Out#ut Ratio *I)OR+,
Interest and Inflation le(els, Li6uidit&, Ris' and Return factors, etc$
a. 3onetar5 po!ic5
Monetar& #olic& atte"#ts at au"entin and stabili5in t!e econo"& b& "a'in credit a(ailable and b&
controllin interest rates and t!e su##l& of "one&$ T!e Monetar& #olic& of a countr& !as a sinificant effect on
t!e econo"&$ Mone& su##l& in t!e econo"& is reulated and "aintained at a certain desired le(el to ensure
ac!ie(in t!e set of econo"ic oals li'e full e"#lo&"ent, desired ro%t! rate in econo"&, #rice le(el, inflation,
e3c!ane rate etc$ An increase in "one& su##l& leads to decline in currenc& (alue, bot! internal and e3ternal$
@. Nationa! Sain2"
India sa(es "ore of late to !el# fundin !er in(est"ent needs$ Gross 8o"estic Sa(ins rose fro" :H$=J in
@GGG,:<<< to A:$HJ in :<<<;,<I, a s#ectacular rise of =J #oint, %!ic! !el#s fundin ro%t!, as #er table :$
Public sector sa(ins !a(e entered t!e #ositi(e 5one after fairl&$
c. Nationa! Ine"tment"
A notable feature of t!e current econo"ic ro%t! #!ase is t!e s!ar# rise in t!e rate of in(est"ent in t!e
econo"&$ In(est"ent, in eneral bein a for%ard loo'in (ariable, reflects a !i! deree of business o#ti"is"$
T!e re(i(al in ross do"estic ca#ital for"ation *G8)7+ t!at co""enced in :<<:,<A !as been follo%ed b& a
s!ar# rise in t!e rate of in(est"ent in t!e econo"& for four consecuti(e &ears$ T!e esti"ates of G8)7 for :<<H,
<; %as A@$;J of G8P as #er t!e )entral Statistical Orani5ation *)SO+$ T!e rate of G8)7 for :<<;,<I as #er
t!e 6uic' esti"ates released b& )SO is AA$= #er cent$ T!is s!ar# increase in t!e in(est"ent rate !as sustained
t!e industrial #erfor"ance and reinforces t!e outloo' for ro%t!$ T!e countr&2s stoc' "ar'et ca#itali5ation !as
risen to LGHH billion, %!ic! is closin fast on t!e trillion dollar le(el$
Ta@!e & Sain2" and ine"tment ((i2ure" in P to $D/%
d. Intere"t and In'!ation rate":
T!e interest rate in a countr& !as a reat influence on t!e e3c!ane rate of a currenc&$ A countr& %!ic! is
!a(in !i! real interest rate attracts forein ca#ital and in(est"ent %!ic! flo% due to !i!er return$ T!ere are
t%o t&#es of interest rate, no"inal and real$ 0i! real interest rate %ill attract "ore in(est"ent rat!er t!an
consu"#tion$ Price rise is referred to as inflation$ T!ere %ere #eriods of double diit inflation in India Dust so"e
@$; decades ao, but toda& t!e "onetar& #olic& is "anaed to brin inflation under ;J, t!ou! t!e lon,run
obDecti(e is AJ$ T!ere is a relation bet%een interest rate and inflation$ Real interest rate R No"inal interest rate
1 Inflation rate$ A !i!er inflation reduces real interest rate %!ic! dri(es a%a& in(est"ent$
e. ICOR
Incre"ental )a#ital Out#ut Ratio is i"#ortant factor indicatin efficienc& of ca#ital$ Per unit rise in out#ut
le(el, !o% "uc! in(est"ent is neededC A lo%er fiure is ood$ India needs A$; units of ca#ital to #roduce one
e3tra unit of oods and ser(ices$ 0i!er G8P ro%t! re6uires I)OR of :$; to A$
&.1.+ E=terna! Sector
E3ternal sector refers to t!e countr&2s forein trade, forein in(est"ent, forein "an,#o%er and ot!er
interactions %it! rest of t!e %orld$ 0o% does a countr& "anae its e3ternal econo"ic relations and net%or'sC
T!is !as reat i"#lications not onl& for t!e countr& but also for t!e business fir"s in t!e countr& and t!ose t!at
%ant to enter t!e countr&$ E3#orts, I"#orts, BOT, BO), BOP *Balance on Trade, )urrent a9c and
Pa&"ents+, 7orein 8ebt, 8ebt Ser(icin, 78I, 7PI, Non,Resident In(est"ent98e#osits9
Interests, 7ore3 Reser(e, 7ore3 Rate, Incenti(es and Pro"otion, etc are t!e ele"ents$
a. (orei2n trade
7orein trade sector is doin %ell of late in India$ In t!e balance on trade t!e countr& suffers neati(e balance as
t!e countr& i"#orts !ue 6uantu" of oil at stee#l& risin #rices$ E3#orts re% fast, but i"#orts re% e(en
faster, reflectin in #art t!e onoin in(est"ent boo" and t!e !i! international #etroleu" #rice$ 7or :<<?,<=,
India2s e3#orts are e3#ected to be L @I< bn and i"#orts L ::;bn, %it! &a%nin neati(e balance on trade of t!e
order of LI;bn %!ic! is to be co"#ensated b& in(isible sur#lus includin NRI re"ittances$ Researc! s!o%ed
t!at India recei(ed t!e !i!est re"ittance loball& of L:A billion follo%ed b& )!ina at L:@ billion in :<<I$ T!e
US and Saudi Arabia are t!e larest sources of re"ittances fro" %or'ers to de(elo#in countries$ Out of t!e
L:A billion, t!at ca"e into India, an esti"ated L=,G billion co"es fro" t!e US, and t!e ne3t !i!est is t!e Gulf$
India accounts for o(er :< #er cent of re"ittances into de(elo#in countries$ Indians li(in o(erseas nu"ber
around :< "illion$
-!ile #etroleu",oil,lubricants *POL+ i"#orts continued to ro% ra#idl&, t!e non,POL trade balance, after
re"ainin in sur#lus till :<<A,<H, !as turned neati(e since :<<H,<;$ India2s e3#orts *in US dollar ter"s and
custo"s basis+ !a(e been ro%in at a !i! rate of "ore t!an :< #er cent since :<<:,<A$ Buo&anc& of e3#orts
%as dri(en b& t!e resurence in t!e "anufacturin sector and sustained de"and fro" "aDor tradin #artners$
@. E=c*an2e Rate
Ru#ee is a##reciatin aainst t!e US dollar in t!e @,: &ears$ Indian Ru#ees #er US dollar 1Rs H<$;< *:<<?+E
H;$A *:<<I+, HH$@<@ *:<<;+, H;$A@? *:<<H+, HI$;=A *:<<A+, H=$I@ *:<<:+$
c. (orei2n direct ine"tment ((DI%
)u"ulati(e 78I flo%s into India fro" Au @GG@ to auust :<<? a"ounted to USL I@,<?A "n as i(en in table
A$ Of t!is, in t!e first ; "ont!s of :<<?,<= *t!at is A#ril :<<? to Auust :<<?+ t!e inflo% %as LI,HH; "n$ T!e
Union Go(ern"ent !as introduced (arious financial incenti(es for in(est"ents in core and infrastructure sectors
as also !i! #riorit& industries suc! as infor"ation tec!nolo& and t!rou! s#ecific sc!e"es suc! as Gro%t!
)entre Sc!e"es, Electronic 0ard%are Tec!nolo& Par' *E0TP+, t!e Trans#ort Subsid& Sc!e"es, t!e Ne%
Industrial Polic& for t!e Nort! Eastern States, Soft%are Tec!nolo& Par' *STP+, E3#ort Pro"otion Bones
*EPBs+, S#ecial Econo"ic Bones *SEBs+, etc$
Ta@!e + Cumu!atie (DI '!o-" into India- Au2 1GG1 to Au2u"t &CCE ((i2ure" in B mn.%
Source: Econo"ic Sur(e&, Go(t$ of India :<<?,<=
7orein direct in(est"ent is freel& allo%ed in al"ost all sectors includin t!e ser(ices sector$ Kirtuall& 78I for
all ite"s 9 acti(ities can be brou!t in t!rou! t!e auto"atic route under #o%ers deleated to t!e Reser(e Ban'
of India *RBI+, and for re"ainin ite"s 9 acti(ities t!rou! Go(ern"ent a##ro(al$ Go(ern"ent a##ro(als are
accorded on t!e reco""endation of t!e 7orein In(est"ent Pro"otion Board *7IPB+$
i. Sector" -*ere 1CC percent (DI /ermitted
So"e of t!e i"#ortant sectors %!ere @<< #ercent forein o%ners!i# is #er"itted are i(en in t!e follo%in
#arara#!s:
Non" 4utomatic )oute where #overnment 4pproval is re(uired
[ Air#orts
[ B:B e,co""erce
[ Tradin co"#anies %it!in notified #olic&
[ 8rus and #!ar"aceuticals not fallin on t!e auto"atic route
[ Interated to%ns!i# de(elo#"ent
[ ISPs %it! out ate%a&s, electronic "ail and (oice "ail
[ )ourier ser(ices ot!er t!an distribution of letters
Most "anufacturin acti(ities ot!er t!an t!ose, %!ic! attract co"#ulsor& licensin
9 sectoral e6uit&, ca# or are reser(ed e3clusi(el& in s"all scale industries$
Non"banking financial services2
[ Infrastructure suc! as roads and !i!%a&s, #orts and !arbours, electricit& eneration trans"ission and
distribution, "ass ra#id transit s&ste"s, LNG #roDects, etc$
[ 8rus and #!ar"aceuticals t!at does not attract co"#ulsor& licensin and in(ol(e reco"binant 8NA
tec!nolo&$
[ 0otels and touris"
[ 7ood #rocessin
[ Electronic !ard%are
[ Soft%are de(elo#"ent
[ 7il" industr&
[ 0os#itals
[ Pri(ate oil refineries
[ Pollution control and "anae"ent
[ E3#loration and "inin of "inerals ot!er t!an dia"onds and #recious stones
[ Manae"ent consultanc&
[ Kenture ca#ital funds 9 co"#anies
ii. EOUA E/M 'or "ettin2 up indu"tr5
T!e E3#ort Processin Bones set u# as encla(es se#arated fro" t!e 8o"estic
Tariff Area *8TA+ b& fiscal barriers, are intended to #ro(ide an internationall& co"#etiti(e dut& free
en(iron"ent for e3#ort #roduction at lo% cost$ T!is enables t!e #roducts to be co"#etiti(e bot! 6ualit& and
#rice,%ise in t!e international "ar'et$ India !as se(en E3#ort Processin Bones *EPBs+, functionin at >andla
*GuDarat+, Mu"bai *Ma!aras!tra+, Noida *UP+, Madras *Ta"il Nadu+, )oc!in *>erala +, 7alta *-est Benal+
and Kisa'!a#atna" *And!ra Prades!+$
988 < *+port Oriented =nits 5*O=s6, T!e sc!e"e for @<< J E3#ort Oriented Units
*EOUs+ %as introduced in @G=< for eneratin #roduction ca#acit& for e3#orts$ Under t!is sc!e"e, t!e units are
eliible to #rocure t!e "ac!iner&, ra% "aterials, co"#onents, consu"ables, etcE fro" indienous 9 i"#orted
sources, free of e3cise 9 custo" dut&$ T!e units are re6uired to e3#ort t!eir entire #roduct and ac!ie(e a
"ini"u" #rescribed N7EP *Net forein e3c!ane as a #ercentae of e3#orts+ as #er E3i" #olic& for s#ecified
sectors$ EOUs can "a'e sale in t!e 8TA, e3ce#t for so"e s#ecified cateories$ T!e 8TA sale entitle"ent is ;<
#er cent of t!e 7OB (alue of e3#orts and t!is is on #a&"ent of a##licable duties and subDect to t!e fulfill"ent of
#rescribed "ini"u" N7EP$
*+port -rocessing >one 5*->+: T!e de(elo#"ent )o""issioner of concerned E3#ort Processin Bone *EPB+
is t!e aut!ori5ed aenc& to allo% 8TA sale of #roduction as #er #ro(ision of E3#ort I"#ort #olic& in force$
Under @<< J E3#ort Oriented Unit *EOU+ Sc!e"e, t!e entre#reneur can c!oose t!e location in accordance %it!
t!e location #olic& of t!e Go(ern"ent and t!e #re"ises, %!ere t!e "anufacturin acti(it& is to be carried out,
are custo" bonded$ 8e(elo#"ent )o""issioners of t!e E3#ort Processin Bones 9 S#ecial Econo"ic Bones
!a(e been #o%ers to a##ro(e fres! a##lication and also #ost,a##ro(al a"end"ents as s#ecified in t!e EYIM
#olic&$
It !as been decided t!at EOUs need not obtain se#arate industrial licence for t!e "anufacture of ite"s reser(ed
for SSI sector, irres#ecti(e of t!e in(est"ent, in #lant and "ac!iner&$ Units underta'in to e3#ort t!eir entire
#roduction of oods and ser(ices "a& be set u# under t!e E3#ort Oriented Unit *EOU+ Sc!e"es$ Suc! units
"a& be enaed in "anufacture, ser(ices, re#air, re"a'in, reconditionin, reenineerin, etc$
2.4.4. Fiscal Factors
Ta3ation S&ste", Ta3 Re(enues, Budetar&, 7iscal and Re(enue 8eficits, Ta3 Buo&anc&, Ta3 )o"#liance, etc
co"e in t!is arena$
a. Fiscal olicy
7iscal #olic& refers to t!e o(erall effect of t!e budet outco"e on econo"ic acti(it&$ T!e fiscal #olic& ado#ted b
a Go(ern"ent !as an i"#act on t!e #ace and field of de(elo#"ent, t!e e3c!ane rate, t!e u#lift of
infrastructure, t!e de(elo#"ent of social infrastructure and so on$ 7iscal #olic& refers to o(ern"ent #olic& t!at
atte"#ts to influence t!e direction of t!e econo"& t!rou! c!anes in o(ern"ent s#endin or ta3es$ T!e t%o
"ain instru"ents of fiscal #olic& are o(ern"ent s#endin and ta3ation$
T!ree stances of fiscal #olic& are Neutral, E3#ansionar& and )ontracti(e$ A neutral stance of fiscal #olic&
i"#lies a balanced budet %!ere Go(ern"ent s#endin R Ta3 re(enue *G R T+$An e3#ansionar& stance of fiscal
#olic& in(ol(es a situation %!ere, Go(ern"ent s#endin UTa3 re(enue *G U T+$ A net increase in o(ern"ent
s#endin t!rou! a rise in o(ern"ent s#endin or a fall in ta3ation re(enue or a co"bination of t!e t%o
leadin to budet deficit$ T!is is underta'en to 'ic' u# !i!er ro%t! t!rou! "ulti#lier effect on t!e econo"&$
E3#ansionar& fiscal #olic& is usuall& associated %it! a budet deficit and t!is increases o(ern"ent borro%in
or deficit financin *borro%in fro" t!e central ban' of t!e countr&+ and as a result interest rate or inflation
rises$ )ontracti(e fiscal #olic& %it! Go(ern"ent s#endin O Ta3 re(enue *G O T+ occurs %!en net o(ern"ent
s#endin is reduced eit!er t!rou! !i!er ta3ation re(enue or reduced o(ern"ent s#endin or a co"bination
of t!e t%o$ T!is %ould lead to a sur#lus in t!e budet$
)!anes in t!e le(el and co"#osition of ta3ation and o(ern"ent s#endin can i"#act t!e econo"&$ 7iscal
#olic& is used b& Indian o(ern"ents is essentiall& >e&nesian t&#e t!at increases t!e le(el of areate de"and
in t!e econo"&, in an effort to ac!ie(e econo"ic obDecti(es of #rice stabilit&, full e"#lo&"ent and econo"ic
ro%t!$ Go(ern"ent s#endin and ta3 #olic& are t!e best %a&s to sti"ulate areate de"and$ Indian
Go(ern"ent as a #olic& !as been ado#tin deficit budetin for a (er& lon ti"e$ It !as #aid itself in ter"s of
ro%t!, resource transfer to t!e %ea'er sections of t!e societ&, reional de(elo#"ent and so on$ Of course
occasional bouts of inflation and de#reciation of internal and e3ternal (alue of Ru#ee !ad !a##ened$
@. Tar2eted 'i"ca! de'icit
To !a(e a c!ec', it no% tarets fiscal deficit$ Indian o(ern"ent 'ee#s its fiscal deficit tareted$ 7iscal deficit
!as been on a declinin trend since :<<A after t!e #assae of t!e 7iscal Res#onsibilit& and Budet Manae"ent
Act *7RBMA+ in t!at &ear$ T!e 7RBMA "andates t!e central o(ern"ent *centre+ to reduce its fiscal deficit to
AJ of G8P and to co"#letel& eli"inate t!e re(enue deficit *t!e difference bet%een current e3#enditures and
re(enues+ b& :<<=,:<<G$ Si"ilarl&, :H of t!e :G states !a(e also enacted si"ilar obliations ,fiscal deficits of
AJ of G8P and 5ero re(enue deficit b& :<<=,:<<G$ T!e centre and states are %ell on t!eir %a& to fulfillin t!eir
7RBMA tarets on fiscal deficits$ 7or :<<?<=, t!e fiscal deficit tareted to A$AJ %!ic! is a re"ar'able$ T!e
5ero re(enue deficit taret !o%e(er, see"s a lon %a& a%a&, it is e3#ected t!e re(enue deficit *R8+ to be about
:J$ T!ou! declinin, t!e consolidated fiscal deficit in India re"ains !i! b& international standards$ Indeed,
t!e actual deficit is !i!er t!an ac'no%leded due to so"e liabilities of t!e o(ern"ent %!ic! are not treated as
debt in t!e budet nu"bers, t!e "ost i"#ortant of %!ic! are oil bonds %!ic! add a furt!er <$?J of G8P to t!e
deficit$ T!us, t!e o(ern"ent re"ains a bi borro%er in do"estic "ar'ets, i"#actin sinificantl& on
areated de"and and interest rates$
India2s ta3 structure is s'e%ed to%ards indirect ta3es suc! as custo"s and e3cise duties$ E(en t!ou! t!eir s!are
is declinin, indirect ta3es as a #ro#ortion of total ta3es in India re"ains !i! b& international standards$ Gi(en
t!e current buo&anc& in direct ta3es, %!ic! !as increased b& about H<J in :<<I,:<<?,it is belie(ed t!at a
furt!er reduction in t!e #ro#ortion of indirect ta3es is desirable$
T!e e3#enditure co"#osition of t!e o(ern"ent is biased to%ards current rat!er t!an ca#ital e3#enditures$ Too
"uc! oes into subsidies and interest #a&"ents, and too little into social s#endin on !ealt! and education or on
infrastructure$ T!is "ust c!ane for t!e better$
&.1.4. 3aKor Economic Sector"
T!e fi(e "aDor econo"ic sectors co"#rise t!e econo"& of an& nation$ T!eir ro%t! #atterns describe t!e
econo"ic en(iron"ent$ T!e& !a(e (aried rele(ance to G8P contribution$
a. /rimar5 "ector
T!e u#,and,do%n #attern in #ri"ar& sector ro%t! rate continued$ Its s!are in
G8P fell fro" I@J in t!e earl& @G;@ to Dust @IJ in :<<?$ After an annual a(erae of A$< #er cent in t!e first
fi(e &ears of t!e ne% "illenniu" startin :<<@,<:, ro%t! of ariculture %as at I$< #ercent in :<<;,<I and onl&
:$? #er cent in :<<I,<?$ Lo% in(est"ent, i"balance in fertili5er use, lo% seeds re#lace"ent rate, erratic
"onsoon %it! its !a(ocs, lo% &ield, etc cast do%n ariculture G8P$
@. Secondar5 "ector
T!e secondar& sector or "anufacturin sector records a ro%t! of :GJ in
:<<?$ MaDor industries include: te3tiles, c!e"icals, food #rocessin, steel, trans#ortation e6ui#"ent, ce"ent,
"inin, #etroleu", "ac!iner&, etc$ Entrenc!"ent of t!e !i!er ro%t! trends, #articularl& in "anufacturin
sector, !as boosted senti"ents, bot! %it!in t!e countr& and abroad resultin furt!er ca#acit& buildin %it!
do"estic and forein ca#ital$
T!e o(erall "acroecono"ic funda"entals are robust, #articularl& %it! tanible #roress to%ards fiscal
consolidation and a stron balance of #a&"ents #osition -it! an u#sure in in(est"ent, t!e outloo' is distinctl&
u#beat$ T!ere %ere distinct sins of sustained i"#ro(e"ents on t!e "anufacturin front as %ell$
c. Tertiar5 or Serice" "ector
Tertiar& or Ser(ices sector "aintained its (iorous ro%t! #erfor"ance and its s!are in G8P %as an e"#!atic
;;J in :<<?$ Ser(ices sector ro%t! !as continued to be broad,based$ A"on t!e t!ree sub,sectors of ser(ices,
/trade, !otels, trans#ort and co""unication ser(ices2 !as continued to boost t!e sector b& ro%in at double,
diit rates for t!e fourt! successi(e &ear$ I"#ressi(e #roress in infor"ation tec!nolo& *IT+ and IT,enabled
ser(ices, bot! rail and road traffic, and fast addition to e3istin stoc' of tele#!one connections, #articularl&
"obiles, #la&ed a 'e& role in suc! ro%t!$ Gro%t! in financial ser(ices *co"#risin ban'in, insurance, real
estate and business ser(ices+, after di##in to ;$I #ercent in :<<A,<H bounced bac' to =$?#ercent in :<<H,<; and
@<$G #er cent in :<<;,<I$ T!e "o"entu" !as been "aintained %it! a ro%t! of @@$@ #er cent in :<<I,<?
d. Nuaternar5 Sector
T!e 6uaternar& sector of t!e econo"& consists of intellectual acti(ities$ Acti(ities associated %it! t!is sector
include Go(ern"ent, culture, libraries, scientific researc!, education, and infor"ation tec!nolo&$ T!is sector is
included in t!e abo(e tertiar& sector in India and India2s current strent! is !er 6uaternar& sector %!ic! fuels !er
econo"ic ro%t!, es#eciall& scientific researc!, education, and infor"ation tec!nolo&$
e. Nuinar5 Sector
Puinar& sector is also included in t!e abo(e tertiar& sector in India$ T!e 6uinar& sector includes t!e !i!est
le(els of decision "a'in in a societ& or econo"&$ T!is sector %ould include t!e to# e3ecuti(es or officials in
suc! fields as o(ern"ent, science, uni(ersities, non#rofit, !ealt!care, culture, and t!e "edia$ India can boast of
a reat 'no%lede t!in' tan' At t!e !el" of affairs$
&.1.: In'ra"tructure
Si5e, )o"#osition, Efficienc& and Polic& for de(elo#"ent of )o""unication, Educational, 7inancial, Po%er,
Trans#ort, Tec!noloical and ot!er infrastructure fall in t!is arena$
a. Emp*a"i" 'or dee!opment
T!e i"#ortance of infrastructure for sustained econo"ic de(elo#"ent is %ell reconi5ed in India$ A(ailabilit&
of ade6uate, efficient and affordable infrastructural facilities, bot! econo"ic and social, constitutes t!e core of
de(elo#"ent strate& and efforts$ T!e ne% econo"ic #olicies ai"ed at ste##in u# econo"ic ro%t!,
i"#ro(in "ar'et efficienc& and co"#etiti(eness, and interatin t!e Indian econo"& %it! lobal "ar'ets !a(e
alread& #laced a !ea(& de"and on all t&#es of urban infrastructure ser(ices$
@. /u@!ic "ector dominance and e''icienc5 pro@!em
T!e #ublic sector !as traditionall& been do"inant in infrastructure and t!at !as contracted ro%t! in t!e
infrastructure sector$ T!e infrastructure inefficienc&, due to lac' of co"#etition for o(er a lon #eriod of ti"e,
adds to cost of #roduct9ser(ice a clear ;J$ So"e t!ri(e on t!eir inefficienc&T T!is is no ood and s!ould not
continue in future$ A #olic& c!ane is needed$
c. /*5"ica! in'ra"tructure
To sustain t!e near double diit ro%t! in t!e econo"& no% in :<<?, India needs to de(elo# sound #!&sical
infrastructure$ P!&sical infrastructure co(ers trans#ortation, #o%er and co""unication and t!eir bac'%ard and
for%ard lin'aes$ 0i!,end infrastructure co(erin s'illed, 6ualified and sociall& contented laborE (isible and
reliable su##l& c!ainsE #ro"#t and accurate infor"ation for decision "a'inE efficient #rocess and u#dated
tec!nolo& can be i(en to t!e o#erations of "anufacturin and ser(ices$
d. Socia! in'ra"tructure
Social infrastructure includin %ater su##l&, sanitation, se%ae dis#osal, education and !ealt!, %!ic! are in t!e
nature of #ri"ar& ser(ices, !as a direct i"#act on t!e 6ualit& of life$ In t!e absence of infrastructure ser(ices,
enter#rises and users are forced to see' !i!er cost alternati(es %!ic! i"#act #rofits and #roduction le(els
ad(ersel&$
e. Demand Y Supp!5
T!e de"and for infrastructure ser(ices !as increased ra#idl& after industrial liberali5ation of t!e Indian
econo"&$ T!e (isible sins of s!ortfalls in ca#acit& and inefficiencies include increasinl& conested roads,
#o%er failures, lon,%aitin lists for installation of tele#!ones and s!ortaes of drin'in %ater illustrate t!e
%idenin a# bet%een de"and and su##l& of infrastructure and also raises 6uestions concernin t!e
sustainabilit& of econo"ic ro%t! in future$ )learl&, t!ere is a %ide a# bet%een t!e #otential de"and for
infrastructure for !i! ro%t! and t!e a(ailable su##l&$ Infrastructural bottlenec's re"ain t!e biest stu"blin
bloc' of industrial #roress in t!e countr&$
'. Ine"tment in In'ra"tructure
In(est"ent in infrastructure sector !as ained "o"entu" since, :<<:,<A and is e3#eriencin i"#ressi(e ro%t!
across (arious se"ents$ 0o%e(er, t!e current in(est"ent in t!is sector ta#s onl& a fraction of t!e tre"endous
#otential for infrastructure de(elo#"ent o##ortunit& e3istin in India$ 7or :<<I to :<@<, an in(est"ent of
LAA<bn is needed in t!e infrastructure sector in t!e countr&$ Because of t!e lon estation #eriod, and "an&
social i"#lications, t!e infrastructure sector co"#ares unfa(orabl& %it! "anufacturin and "an& ot!er sectors$
7or t!is, s#ecific #olicies in t!is area are needed to "a'e infrastructure attracti(e$
2. /u@!ic) /riate and (orei2n /articipation:
In(est"ent Infrastructure is one area %!ere t!ere is a need for #ri(ate sector and forein in(est"ent to co"e in
in addition to #ublic sector2s contribution$ T!is is t!e c!allene #laced before t!e econo"&, i$e$ before t!e
#ublic and #ri(ate sector and forein in(estors$ T!is can also be seen as an o##ortunit& for a %idenin "ar'et
and en!anced #roduction$ Go(ern"ent of India is ta'in initiati(es to o#en u# infrastructure de(elo#"ent to
#ri(ate sector #artici#ation in order to boost ro%t! and de(elo#"ent$
*. A!ternatie -a5" o' meetin2 t*e increa"in2 in'ra"tructura! need":
T!ere !as been a stead& increase in t!e urban #o#ulation on account of ra#id industriali5ation, natural ro%t!
and "iration fro" rural areas$ T!is !as #ro"#ted t!e %or'in out of alternati(e %a&s of "eetin t!e increasin
trans#ort de"and i(en t!e constraints of land and ca#ital, and t!e need to control ener& consu"#tion,
#ollution and accidents$ Econo"ic ro%t! is #o%ered b& t!e #o%er sector %!ic! needs non,con(entional
a##roac!es$ T!e o#tion see"s to be nuclear ener&$ T!is re6uires forein collaboration$ A non,sus#ectin
#artner is needed$ Political su##ort is also needed$
i. Opportunitie" in Operation" 3ana2ement 'or In'ra"tructura! Dee!opment
O#erations Manae"ent !as A "aDor as#ects na"el&E Pualit&, )ost and Ti"e i$e to #roduce and deli(er #roduct
and ser(ices at t!e ri!t ti"e %it! t!e ri!t 6ualit& and ri!t cost$ T!ese obDecti(es can onl& be ac!ie(ed %!en
all t!e #la&ers in(ol(ed fro" e3traction to consu"#tion %or' in a s&nc!roni5ed %a&$ Infrastructure #la&s a
"aDor role in order to acco"#lis! t!e OM obDecti(es$ T!ese can be ac!ie(ed b& follo%in:
&.1.E Re"ource Endo-ment" and Emp!o5ment t*ereo'
Si5e, )o"#osition, Efficienc& and Polic& for de(elo#"ent of 7actors of Production, Le(els of E"#lo&"ent,
E"#lo&abilit& and Mobilit& co"e in t!is arena $A countr&2s resource endo%"ent and t!e !arnessin of t!e
sa"e constitute an i"#ortant econo"ic di"ension$ Natural Resources and !u"an Resources are t!e t%in
endo%"ents t!at influence t!e econo"ic en(iron"ent decisi(el&$ T!e ulf countries are %ell,off because of
t!eir natural resource endo%"ents$ India and c!ina are in t!e li"e li!t because of t!eir !u"an resources$
a2 Natural )esources,
Land, %ater and "inerals resources and en(iron"ental issues co"e in t!is section$ Total Area of t!e countr& is
A,:=?,;G< s6 '"$
i. Land area
T!e land area of India is :,G?A,@G< s6 '" %!ic! is sli!tl& "ore t!an one,t!ird t!e si5e of t!e US$ T!e land
boundar& line lent! is @H,@<A '" and coastal boundar& line lent! is ?,<<< '"$ Mineral resources include: coal
*fourt!,larest reser(es in t!e %orld+, iron ore, "ananese, "ica, bau3ite, titaniu" ore, c!ro"ite, natural as,
dia"onds, #etroleu", li"estone$ Pro(en Oil , Reser(es: I billion bbl and natural as reser(es: @$@ trillion cubic
"etres$ Arable land is H=$=AJ of total landE Irriated land is ;I< t!ousand s6 '"$ MaDor ariculture9allied
#roduces include rice, %!eat, oilseed, cotton, Dute, tea, suarcane, #otatoesE cattle, buffalo, s!ee#, oats, #oultr&E
fis!$ Natural !a5ards are: drou!tsE flas! floods, as %ell as %ides#read and destructi(e floodin fro"
"onsoonal rainsE se(ere t!understor"sE eart!6ua'es$
ii. #ater re"ource"
India !as a total %ater surface area of A@H,H<< '"h and recei(es an a(erae annual rainfall of @,@<< ""$
Irriation accounts for G:J of t!e %ater utili5ation, and co"#rised A=< '"h in @G?H, and is e3#ected to rise to
@,<;< '"h b& :<:;, %it! t!e balance accounted for b& industrial and do"estic consu"ers$ India2s inland %ater
resources co"#risin ri(ers, canals, #onds and la'es and "arine resources co"#risin t!e east and %est coasts
of t!e Indian ocean and ot!er ulfs and ba&s #ro(ide e"#lo&"ent to nearl& I "illion #eo#le in t!e fis!eries
sector$ India is t!e si3t! larest #roducer of fis! in t!e %orld and second larest in inland fis! #roduction
iii. 3inera! Re"ource"
India !as a lare nu"ber of econo"icall& useful "inerals and t!e& constitute one,6uarter of t!e %orld2s 'no%n
"ineral resources$ About t%o,t!irds of its iron de#ositslies in a belt alon Orissa and Bi!ar border$ India !as t!e
%orld2s larest de#osits of coal in .!aria and Bo'aro in Bi!ar and RaniunD in -est Benal and Ne&(eli in
Ta"ilnadu$ Ne3t to Russia, India !as t!e larest su##l& of Mananese in Mad!&a Prades!, Ma!arastra and
Bi!ar,Orissa area$ )!ro"ite de#osits are found in Bi!ar, Orissa, And!ra and M&sore and >arnata'a$ Bau3ite
de#osits are found in %estern Bi!ar, sout!%est >as!"ir, )entral Ta"ilnadu, and #arts of >erala, U$P,
Ma!arastra and >arnata'a$ India also #roduces t!ird 6uarters of t!e %orld2s "ica$ Mica is found in Bi!ar,
And!ra and RaDast!an$ G&#su" reser(es are in Ta"ilnadu and RaDast!an$ Nic'el ore is found in Bi!ar and
Orissa$ )o##er ore bearin areas are in And!ra, Bi!ar, RaDast!an, Si''!i" and >arnata'a$
Petroleu" de#osits are found in Assa" and GuDarat$ Natural Gas found in Ta"ilnadu, And!ra, GuDarat and so
on India also #ossesses t!e all,too (aluable nuclear uraniu" as %ell as so"e (arieties of rare eart!s$
i. Current Enironment i""ue"
)urrent En(iron"ent issues of India include :deforestationE soil erosionE o(erra5inE desertificationE air
#ollution fro" industrial effluents and (e!icle e"issionsE %ater #ollution fro" ra% se%ae and runoff of
aricultural #esticidesE ta# %ater is not #otable t!rou!out t!e countr&E !ue and ro%in #o#ulation is
o(erstrainin natural resources$ To #rotect t!e current concerns, India !as entered into a nu"ber of lobal
accords on en(iron"ent #rotection li'e: Antarctic,En(iron"ental Protocol, Antarctic,Marine Li(in Resources,
Antarctic Treat&, Biodi(ersit&, )li"ate )!ane, )li"ate )!ane,>&oto Protocol, 8esertification, Endanered
S#ecies, En(iron"ental Modification, 0a5ardous -astes, La% of t!e Sea, O5one La&er Protection, S!i#
Pollution$
@. Duman Re"ource"
Po#ulation, :nd larest in t!e %orld, is @,@:G,=II,@;H *.ul& :<<?+, %it! annual ro%t! of @$I<IJ$ Is India2s
#o#ulation an assetC 4es, #er!a#s, #ro(ided t!e !eads are not Dust 6uantit&, but full of 6ualit&$ T!e education
and cultural ric!ness counts "uc!$
i. A2e "tructure
T!e ae structure: <,@H &ears R A@$=J *"ale @== "illion and fe"ale @?@ "illion+E
@;,IH &ears R IA$@J *"ale AI? "illion and fe"ale AHI "illion$+ and I; &ears and o(er:
;$@J *"ale :? "illion and fe"ale A< "illion+ T!e Median ae of total #o#ulation is :H$= &ears of "ales is :H$;
&ears and fe"ale is :;$: &ears$ T!e "edian ae is lo%er t!an "ost de(elo#ed countries indicatin t!at India is a
reser(oir of !u"an resource for t!e %orld in t!e co"in decades$
ii. La@or 'orce
India2s labour force is ;@< "illion or rou!l& ;<J of total #o#ulation$ Industr& ta'es @:J and ser(ices :=J of
%or'in #o#ulation$ T!e countr& !as to release t!e !ue %or'in #o#ulace %it! ariculture accountin for I<J$
-!en t!at is ac!ie(ed, t!e countr&2s %ort! %ill rise i""ensel&$
iii. S8e-ed Income di"tri@ution
T!ere is a "ar'ed s'e%ed Inco"e distribution$ T!e lo%est stratu" consistin of @<J of #o#ulation ets onl&
A$IJ of inco"e and !i!est stratu" @<J ets A:J of national inco"e$ To ac!ie(e fair distribution of inco"e
(ast and 6ualit& education, tec!nolo& and ood o(ernance are needed$ Besides, !i! "obilit& of #o#ulation is
also needed$ Indian #o#ulation is !i!l& "obile fro" India to rest of t!e %orld$ -!en t!at can ta'e #lace
"obilit& %it!in t!e countr& is no #roble"$ More i"#ortant t!an t!e nu"ber is t!e intellectual ailit& of t!e
#o#ulation$
&.1.F Tec*no!o25
T!e difference bet%een de(elo#ed and de(elo#in %orld nations is "ore in tec!nolo&, %!ic! is of course t!e
cause and effect of !u"an intellectual ca#ital$ Intellectual ca#ital "ust translate into tec!noloical 'no%,!o%
and 'no%,%!&$ T!e /triu"#!2 of t!e countries in t!e -est and Nort! !e"is#!eres of t!e %orld, is due to t!eir
tec!nolo& dri(en "indset t!at endo%ed t!e" t!e %ealt! of "odern %orld "aterial artifacts$ India !as started
tastin t!e tec!nolo& route to triu"#!, but #ace !as to be #ut into$ O(er H;<,<<< tec!nical raduates e(er& &ear
are #roduced in India$
a. Tec*no!o25 - t*e Brain /o-er
Tec!nolo& in(ol(es t!e use of Brain Po%er "ore t!an 0and Po%er$ 0ence Tec!nolo& is called t!e in(isible
!and$ Tec!nolo& is t!e use of Science instead of !abitual T!u"b rules$ Tec!nolo& catal&ses "ore and
consu"es less$ Tec!nolo& eradicates !u"an druder& and #laces !u"ans dinified$ Tec!nolo& eneri5es,
endures, en!ances, enables and !ence ent!uses and enli!tens$ Tec!nolo& enlares efficienc&, effecti(eness
and e3cellence$ Tec!nolo& eDects cost, %astes, #ain and constraints$ Tec!nolo& edicts su#eriorit& t!rou!
co"#etence, (italit& t!rou! e"#o%er"ent, resourcefulness t!rou! %isdo" and enric!"ent t!rou! e3#anded
o##ortunit&$ Table H i(es tec!nolo& features in a nut s!ell$
Ta@!e 1 Tec*no!o25 (eature"
@.(arm Tec*no!o25
Before -orld -ar l, %ell o(er !alf of t!e #o#ulation %as re6uired to #roduce t!e needed food and fiber, %!ile
less t!an H J on t!e far" toda& is suffice$ T!at is %!at tec!nolo& can do$ T!is is one side of t!e stor&, t!at of
t!e de(elo#ed nations$ -!at about IndiaC See t!e far" #roducti(it& le(el of India and t!e %orld and t!e %orld2s
best, i(en in table ;$ -!& t!is laC -!at is t!e #roble" , Is it t!e s&ste"C Are in#uts fault&C T!e soil is
deraded due to unscru#ulous a##lication of c!e"ical fertili5ers$ T!ere is lobal %ar"in$ 7or e(er& @ deree
rise in te"#erature %!eat &ield reduces b& A@; > #er !ectare$ Irriation #roble"s are al%a&s t!e "ain cul#rit$
0on2ble Pri"e Minister, 8r$Man"o!an Sin! !as called for a Second Green Re(olution to u#rade far"
#roducti(it& to so"e res#ectable le(el$ It %ould be a#t to o for a Second Generation Green Re(olution %it!
e"#!asis on sustainabilit& and e6uit&$ 4ou !a(e /#recision far"in2, %it! science #la&in a reat ede in t!e
far"s$ 4ield tri#les and costs co"e to a t!ird$ Oranic far"in is (ital for !u"an li(es %it! re#orted ?;J cro#s
!a(in to3ic residues$ Scientific far"in %it! eneticall& "odified seeds, ste",cell researc!es, tissue culture,
clonin of ani"als9birds, !i! &ield (arieties, #est and drou!t9da"# resistant cro#s, etc are clearl& t!e need$
Ta@!e 4 Jie!d Compari"on- Se!ected commoditie"T&CC1-C4 - 3etric ton"A *ectare
Source: Econo"ic Sur(e&, Go(t$ of India 1 :<<I,<?
7ar" Researc! is fore"ost i"#ortance$ Bio,tec!nolo& needs a #us!$ It is said t!at after IT, it BT t!at is oin
to rule t!e %orld$ Geneticall& "odified seeds, eneticall& "odified birds and ani"als li'e anti,cancer c!ic'ens
!a(e beco"e a realit&$ T!is is a tantali5in (ista$ At t!e far" le(el, Mar'etin Tec!nolo&, 7ar" s'ill
de(elo#"ent, )redit deli(er& tec!nolo&, etc need attention$
c. 3anu'acturin2 tec*no!o25
Manufacturin sector !as stanated all o(er t!e %orld$ But it !as to stand u#$ T!e first :< &ears of
Liberali5ation, Pri(ati5ation and Globali5ation *LPG+, @G=H,:<<H, !ad been #ainful transition for t!e
"anufacturin sector in India$ But silentl& t!e sector built on its resilience$ T!e !all "ar' of "odern
"anufacturin "antra is, "ass custo"i5ation, #roduction and o#eratin cost reduction, (alue enineerin, ease
of o#eration, artificial 'no%lede, aest!etic and artistic d&na"ics, a"bience in t!e a"bit, functional e3cellence,
etc$ All t!ese in(ol(e fine and !ard tec!noloies$ T!ese are to be coa3ed %it! "anaerial strateies li'e
fle3ibilit&, strateic alliance, ac6uisition, "erer, s!eddin e3cess fat, etc$
Toda&, brea',e(en le(el of businesses !as co"e do%n drasticall&$ 7or Tata Motors, t!e BEP is A;J no%,
co"#ared to I<J fe% &ears ao$ Not t!at t!e business !as one labour intensi(e$ T!e& !a(e beco"e "ore tec!,
intensi(e %!ic! s!ould !a(e raised t!e BEP le(el$ But t!e contrar& !as resulted$ 0o%C Tec!nolo& cuts cost,
includin fi3ed cost$ Mc>inse& sa&s t!at it is #ossible for a 7ortune ;<< #la&er to "anufacture a si"ilar #roduct
in India at ?<J cost of a US,"a'e$ Tata Motors2 costs are H<J less t!an t!e cost of a car of US,"a'e$ T!e
e3#erienced industrial rou#s li'e t!e Mittals, Tatas, Birlas, A"banis, Ruias, S!rira"s, etc !a(e t!eir core
co"#etence and can2t sto##ed fro" oin lobal$ 0a(in "et lobal co"#etition in Indian soil for %ell about :
decades, t!e& !a(e e"bar'ed on outbound Dourne&s to "eet t!eir co"#etitors in t!eir o%n soil$ And t!at
o(erseas MFA deals e3ecuted b& Indian fir"s are on t!e !&#er,ro%t! trac'$ -it!out confident of one2s tec!,
base no one %ould (enture out$ T!at is t!e "anufacturin ,tec!noloical,ede India rides on no%$ A< &ears ao
%e %ere li'e A<B)$ @; &ears ao, %e %ere @;A8$ Toda& %e are state of art$ To"orro% %e "ust be :< &ears
a!ead of ot!ers$ Ma'e t!e future !a##en toda&$
T!e "anufacturin sector "ust dri(e on t!e I,Bi"a 6ualit& to attain lobal leaders!i#$ T!e con(erence of
tec!nolo& co"es !and&$ Tec!nolo& can be e"bedded in e(er& sector 1 ari, bio, co"#utin, diits,
electricit&, and so on$ T!ere is "odular tec!nolo& as %ell %!ic! si"#l& "a'es scalabilit& si"#le 1 re"o(e old,
fit t!e ne%$ T!at2s all$
d. Nano-tec*no!o25
Nanotec!nolo& is a 'e& to "aintainin lead in industrial #roducti(it&, "anufacturin e3cellence in t!e era of
lobali5ation$ Re(itali5ation of t!e "anufacturin base t!rou! nanotec!nolo& could end u# in econo"ic
o##ortunit& co"in u# %it! t!e ideas t!at "a& be i"#le"ented in "anufacturin #lants$ U# to :<<I, all (ie%ed
t!e United States as t!e %orld leader in nanotec!nolo&, %it! U$S$2s o(erall annual nano RF8 effort at LA
billion, Mone,t!ird of t!e a##ro3i"atel& LG billion in total %orld%ide s#endin b& t!e #ublic and #ri(ate
sectors$N Additionall&, t!e U$S$ Mleads in t!e nu"ber of start,u# co"#anies based on nanotec!nolo& and in
researc! out#ut as "easured b& #atents and #ublicationsN$
On t!e basis of #urc!asin,#o%er #arit&, :<<H o(ern"ent s#endin on nano RF8 in t!e U$S$ %as at L;$H: #er
ca#ita, Sout! >orea L;$I:, .a#an LI$A<, and Tai%an LG$H<$ T!e L@A< "illion in esti"ated o(ern"ent s#endin
on nanotec! last &ear in )!ina e6ualed LI@@ "illion at #urc!asin,#o%er #arit&, or A= #ercent of U$S$
e3#enditure$ )!ina led t!e %orld in researc! #a#ers on nanotec!nolo&, #resentin @H #ercent "ore t!an t!e
U$S in :<<H$ And %!ile t!e U$S$, accordin to t!e Nano Business Alliance2s database, accounted for I@A of
@,@?; co"#anies %orld%ide t!at are Min(ol(ed %it! nanotec!nolo&,N )!ina no% !as al"ost =<< suc!
co"#anies, about A<J "ore t!an %!at t!e US is !a(in$ India !as to 'ee# its tab on nano tec!nolo&$
Manetite at nano,si5e !as an affinit& to bind to arsenic salts$ As suc! usin t!e nano,si5e "anetite, t!e arsenic
residues in t!e underround %ater can be e3tracted out, "a'in t!e %ater #otable as %ell ood for irriation$
T!us a #ressin #roble" of Banlades! %ater su##l& ser(ice is to be sol(ed$ Nano,solution, to a "ea #roble",
t!is is indeed$
e. Technology o! the In!o-"er#ice "ector an$ Other-ser#ice sector%
Tec!nolo& !as befriended t!e ser(ice sector "ore t!an t!e "anufacturin sector$
Of t!is, t!at section t!at can use infor"ation as an in#ut or as t!e in#ut !a(e benefited enor"ousl&$ Infor"ation
#rocessin, retrie(al, dis#la&, transfer, storae, diitali5ation, ra#!ics, etc !a(e beco"e sea"less t!rou!
satellite co""unication %orld o(er$ T!e con(erence of tec!nolo&, AG and HG are "a'in t!ins e(en "ore
fantas&$ 4our !andset "obile can beco"e a "obile TK, real #ersonal co"#uter or #al",to#, and so on$
Tec!nolo& is s&non&"ous %it! s#eed and (ersatilit&$ T!e sa"e is "ade #ossible$ S#eed is beco"in
increasinl& !i!er and !i!er$
Puantu" co"#uters are a ne% #ossibilit& %!ic! can read and co"#ute faster$ A con(entional co"#uter reads
t!e binar& diits, < and @ as < and @ onl&$ But a 6uantu" co"#uter can read t!e basic data unit, t!e 6uantu" bit
or /6ubit2 si"ultaneousl& as < or @$ So t%o /6ubits2 can si"ultaneousl& ta'e (alues < to A, %!ereas a
con(entional co"#uter can read t!is eit!er as <, @, : or A$ Kersatilit& is e(er&da& ta'in ne% bla5e and bloo"$
e,tic'etin, e,ban'in, e,ad(ertise"ent, e,fund,transfer, e,conferencin, e,tradin, e,s!o##in, e,desinin and
!ence e,/e(er&t!in2 are t!e order of t!e da&$ T!ere is enor"ous business o##ortunit&$ And e(er&t!in at
e3#onentiall& reducin cost and e3#onentiall& increasin features and benefits$ -orld !as s!run'$ 0o"es !a(e
turned offices$ Offices !a(e one "obile$ T!us oes t!e info,%orld or (ideo,%orld or audio,%orld$ T!e b&tes of
diitali5ed infor"ation %e enerate in our e,"ails, #!otos, (ideos, %eb,#aes, instant "essaes, #!one calls
and ot!er diitali5ed contents are at least A ti"es re#licated$ In :<<H all t!is "ade u# @I@ billion iab&tes R
@I@ E3ab&te$ T!at is e6ual to @: sta'es of boo's eac! reac!in t!e Sun fro" t!e Eart!$ In :<@< t!e si5e %ill
scale u# to G== E3ab&te or roundin to about @ 5ettab&tes$ But t!en t!e a(ailable storae is uessti"ated at I<<
E3ab&te onl&$ Better %e eli"inate so"e ood data as %ell$ Else e(er& one "ust !a(e "an& flas! dri(es$ T!e
ot!er se"ent of ser(ice industr& is beco"in increasinl& ITES$ As suc! t!ere is efficienc& en!ance"ent$
7li!ts, )ars, 7uel stations, Trains, Po%er #lants, -ater treatin #lants, etc are all beco"in IT enabled
ser(ices$
'. R.D E=penditure
>ee#in an ede in RF8 is critical, because t!e econo"ic ad(antae to be deri(ed fro" tec!nolo& beins and
ends %it! intellectual #ro#ert& *IP+$ )ountries t!at s#end close to : J of G8P or "ore on RF 8 are !i!li!ted
in table I$ 4ou 'no% t!ese are Iceland, Benelu3, Tai%an, )anada, Israel, Nor%a&, .a#an, >orea, US, U>,
Sina#ore, Austria, Australia, 8en"ar', 7rance and 7inlandE t!ese are t!e tec!nolo& e3#orters$ 0ence t!e
lesson for ot!er nations too$ >no%lede needs 'e& in#uts$ No s!ort,cut$
So"e co"#anies are in(estin far a!ead of de"and in order to attain "anufacturin do"inance in basic nano,
"aterials$ More t!an #rotectin IP, creatin "ore intellectual ca#ital is needed$ )ountries s!ould see' Mto !a(e
an unre"ittin, relentless flo% of no(el ideas t!at ta'e ti"e and 'ee# us continuall& t%o, t!ree, fi(e &ears a!ead
of %!at ot!er%ise can be attainedN$ 4es, tec!nolo& is bein a!ead$ Until no% t!e IT tec!nolo& enabled India
to be a!ead$ No% t!e turn is for nano,tec!nolo&$ T!e !i!li!ted countries2 s#end le(el in RF8 is on t!e
!i!er side is i(en in table I$ And t!e& are t!e tec!nolo& "asters too, ob(iousl&$ T!e de(elo#in %orld "ust
i(e to# class #riorit& for first class tec!nolo& education$
To triu"#!, tec!nolo& is t!e trusted route$ Tec!nolo& de(elo#"ent is in t!e !ands of t!e &out!$ T!e &out!2s
scientific acu"en and RF8 #ursuits decide t!ins$ India is a countr& %it! !ue tec!nicall& s'illed &out!$ It
"ust "a'e !a##en t!e #o%er of tec!nolo& for t!e benefit of t!e !u"anit& and t!e %orld
Ta@!e : Di''erent Countrie"9 R.D Spendin2 P o' $D/
&'#erage !or 2((2-2((4)
Source : )o"#iled fro" UN)TA8 Re#orts$
&.1.G /opu!ation
Econo"& is "ade u# or "arred b& t!e #o#ulation$ T!e si5e, co"#osition, attitude, a#titude, abilities, be!a(iour,
co""it"ent, c!aracter, dedication, deftness, et!ics, efficienc&, effecti(eness, e3cellence, faculties,
in(enti(eness, inno(ation 6uotient, "oti(ation, #erse(erance, scientific #ursuits, %isdo" and 5eal, etc can "a'e
or brea' a countr&$ Of course ood leaders can c!annel t!e !u"an resources in constructi(e %a&s$
Si5e: India2s #o#ulation is a##ro3i"atel& @$@AI billion #eo#le as of Se#te"ber @, :<<? based on inter#olatin
and co"#risin a##ro3i"atel& one,si3t! of t!e %orld2s #o#ulation$ Table ? i(es t!e #o#ulation data$ T!e
%orld loo's at t!e India #o#ulation as a reser(oir of s'ills as %ell as !ue "ar'et for oods and ser(ices$ T!at is
t!e econo"ic sinificance of (ast #o#ulation$ But "ere nu"ber is no reat t!in$ Accordin to Po#ulation
Reference Bureau India %ill be t!e firstX#ossibl& t!e onl&Xcountr& e(er to !a(e : billion #eo#le b& :@<<$
Muc! de#ends on t!e course of e(ents in eac! of India A; States and Union territories$ Under t!e t%o scenarios
#re#ared for t!is stud&, India2s #o#ulation %ould near t!e @$= billion "ar' b& :<;< and "a& e(en e3ceed :
billion b& :@<< unless fertilit& rates decline "ore ra#idl& in India2s larest and #oorest States li'e UP, MP,
Bi!ar, Orissa, etc$ T%o nort!ern states, Bi!ar and Uttar Prades!, %it! about GA "illion and @== "illion #eo#le,
res#ecti(el&, in :<<? are alread& larer t!an "ost of t!e %orld2s countriesT$ Bot! states currentl& !a(e a T7R of
about H$A c!ildren #er %o"an$ It is necessar& to ensure t!at #o#ulation bo"b doesn2t e3#lode in India$ United
Nations #roDected t!at India %ill !a(e a larer #o#ulation t!an )!ina b& t!e &ear :<H;, %it! @,;<@ "illion for
India and @,HGI billion for )!ina$
Ta@!e E Tota! /opu!ation o' India (/opu!ation (i2ure" in 3i!!ion"%
Sources: Econo"ic Sur(e&, Go(t$ of IndiaE a$ United NationsE b$ Po#ulation
Reference Bureau, -as!inton, 8)
3i=: India !as "ore t!an t%o t!ousand et!nic rou#s, and e(er& "aDor reliion is re#resented$ 7urt!er
co"#le3it& is lent b& t!e reat (ariation t!at occurs across t!is #o#ulation on social #ara"eters suc! as inco"e,
co""unit&, caste, lanuae, education and so on$ Reliious "i3: 0indu =:$;J, Musli" @@$HJ, )!ristian
:$A@J, Budd!ists <$=J, Si'! @$GAJ, .ains <$H@J, ot!ers or not stated <$?IJ *:<<@ )ensus+$ Onl& t!e continent
of Africa e3ceeds t!e linuistic, cultural and enetic di(ersit& of India$ T!ere is strent! in di(ersit&, so lon as
di(ersit& does not create di(ision$ But di(isions are bein created b& t!e #aroc!ial ele"ents$ All t!ese !a(e
econo"ic conse6uences$ Educated #o#ulace fluent in Enlis!: T!e ad(ent of t!e diital ae, and t!e lare
nu"ber of &oun and educated #o#ulace fluent in Enlis!, is raduall& transfor"in India as an i"#ortant /bac'
office2 destination for lobal co"#anies for t!e outsourcin of t!eir custo"er ser(ices and tec!nical su##ort$
India is a "aDor e3#orter of !i!l&,s'illed %or'ers in soft%are and financial ser(ices, and soft%are enineerin$
Ot!er sectors li'e "anufacturin, #!ar"aceuticals, biotec!nolo&, nanotec!nolo&, teleco""unication,
s!i#buildin, a(iation and touris" are attractin t!e &out!$
S8i!! dee!opment o' t*e Rura! Jout*: Alt!ou! India occu#ies onl& :$HJ of t!e %orld2s land area, it
su##orts o(er @?$;J of t!e %orld2s #o#ulation$ Suc! !ue #ressure on land "a'es land, es#eciall& urban, t!e
costliest asset$ ?:J of t!e #eo#le li(e in "ore t!an ;I<,<<< (illaes, and t!e re"ainin :=J li(e in "ore t!an
:<<< to%ns and cities$ Indian econo"& "ust be stron enou! in t!e rural areas as %ell as in t!e urban areas$
Rural infrastructure is t!erefore of (ital sinificance and t!at #ublic,#ri(ate #artici#ation is needed$ It is in t!is
conte3t, Pro(idin Urban infrastructure in Rural Areas *PURA+ beca"e a t!rust #ro#osition of t!e for"er
President of t!e countr&, 8r$AP. Abdul >ala"$ T!ere is a clear di(ide bet%een t!e rural and urban &out! in
ter"s of educational and tec!noloical e3#osures t!at contracts t!e rural &out!2s ro%t! #ros#ects$ To end t!is,
education and tec!nolo& e3#osures of t!e rural &out! "ust be on #ar %it! t!at of t!eir urban 'it! and 'in$ T!is
needs to be done to ensure t!at t!e %!ole of &out! in t!e countr& beco"es %ell 'no%ledeable, outstandin
s'illed and e3cellentl& e"#lo&able$ T!ere are Dobs and t!ere is une"#lo&"ent$ T!is is a #arado3 due to less
e"#lo&abilit& of (ast of t!e &out! resources$ )ertain states !a(e created e3cellent educational o##ortunities in
rural areas and t!at t!e rural &out! are brou!t to t!e "ainstrea" of !i!,tec! education$
&.1.1C Bu"ine"" and Indu"tria! unit"
Econo"ic en(iron"ent is "ade u# b& t!e business and industrial units, bi, "ediu" and s"all because t!e& are
t!e #la&ers in t!e econo"& "a'in u# t!e de(elo#"ents !a##enin$
a. Indu"trie"
T!ere are certain "aDor and traditional industries t!at "a'e u# t!e countr&2s econo"ic en(iron"ent$
i. Te=ti!e Indu"tr5: Te3tile Industr& is a traditional and an e3#ort oriented industr& %it! lare, "ediu" and
s"all enter#rises concentrated in selected states li'e GuDarat, Ta"il Nadu, etc$ t!e industr& !as a !i!
i"#ortance as it !as been renderin t!e "ost basic needs of #eo#le and i"#ro(in 6ualit& of life$
ii. Indian Retai! Indu"tr5: Indian Retail Industr& !as been %aitin for t!e boo" since a lon ti"e$ T!e
ince#tion countr&2s retail industr& dates bac' to ti"es %!en retail stores %ere found in t!e (illae fairs, "elas or
in t!e %ee'l& "ar'ets$ No% orani5ed retail is e"erin as a bi business$ It !as raised a #olitical contro(ers&
in t!e countr& as t!e s"all retail fir"s alleedl& face e3tinction %it! t!e entr& of bi ones$
iii. So't-are Indu"tr5: Soft%are Industr& is t!e /a"bassador2 of India in lobal settin$ India2s #ride is
recreated in t!e co"it& of nations b& t!e industr&$ Tec!nical &oun #eo#le and Enlis!,s#ea'in scientific
#rofessionals !a(e brou!t tre"endous success in India2s soft%are industr& %!ic! !as been "aDor earner of
fore3 for t!e nation$ $
i. Cement Indu"tr5: )e"ent Industr& re#resents India2s construction and infrastructure industries$ Presentl&
t!e )e"ent Industr& in India is based on "odern and en(iron"ent,friendl& dr& #rocess tec!nolo&$
. Stee! Indu"tr5: Steel Industr& !as lobal #la&ers %!o !a(e "ar'ed a sta"# in t!e lobal MFA "ar'et b&
t!eir ac6uisitions in :<<I,<?$ -orld%ide stron de"and for steel #articularl& in )!ina !as benefited t!e Indian
steel Industr&$
(i$ Automo@i!e Indu"tr5: Auto"obile Industr& is %!ere lobali5ation !as brou!t intense co"#letion
benefittin t!e consu"ers b& (ariet& and 6ualit&$ Easier a(ailabilit& of finance and discounts offered b& t!e
dealers and "anufacturers !a(e resulted a stron ro%t! of t!e Indian auto"obile industr&$
(ii$ IT Industr&: Indian IT Industr& !as built (aluable brand e6uit& in t!e lobal "ar'ets$ 7ind an o(er(ie% on
t!e IT Industr&$ Bot! Indian and MN) IT "aDors are !irin bi ti"e, e3#ressin t!eir confidence in t!e Indian
econo"& and outsourcin9off,s!orin ro%t! stor&$ T!e nu"bers s#ea' for t!e"sel(es$ Accenture e3#ects to
reac! A;,<<< b& t!e end of Marc! :<<=, a ;: #er cent increase o(er last &ear$ IBM alread& !as ;A,<<< #eo#le in
India, a :A #er cent increase o(er t!e #re(ious &ear$ B& t!e end of Marc! :<<=, Tata )onsultanc& Ser(ices #lans
to add A<,<<< e"#lo&ees, ta'in its total !eadcount to @@A,;<<$ US,based )a#e"ini #lans to e"#lo& H<,<<<
#rofessionals b& :<@<$ T!is s#ea's of t!e lo%in business en(iron"ent in India$
iii. Sa!t Indu"tr5: Salt Industr& in India is %ell de(elo#ed$ India is #resentl& t!e t!ird larest #roducer of salt
in t!e %orld$
i=. (inance Indu"tr5: India is one of t!e fastest ro%in econo"ies in t!e %orld$ Ado#tion of ne% econo"ic
#olicies in t!e countr& !as i(en i""ense o##ortunities to de(elo# t!e countr&$ 7inancial sector is one %!ic!
!as benefitted fro" co"#etition #ro#elled b& liberali5ation and lobali5ation$ T!e financial "ar'et refor"s,
co(erin ban'in, insurance and stoc',"ar'ets !a(e led s#ectacular success in India$
@. Bu"ine"" unit"
T!ere are "an& co"#anies #roducin t!e oods and ser(ices, e"#lo&in t!e (ast !u"an resources, !arnessin
t!e natural and ot!er resources, co""ittin in(est"ents for fosterin de(elo#"ent, e3#ortin and i"#ortin
oods and ser(ices t!us li'in t!e national econo"& %it! t!e lobal econo"&, co"#etin %it! one anot!er to
set lobal and national benc! "ar's and so on$ T!ere are ?G,<<< co"#anies in IndiaE of %!ic! around @,H<< are
o(ern"ent co"#anies, %!ile @?,<<< are #ublicl& listed$ T!e si5e, structure and stature of t!e business units are
t!erefore a factor of en(iron"ent$
i. $!o@a! "ca!e Indian companie"
Indian co"#anies are no% ac6uirin lobal stature$ T!ere are 7ortune ;<< co"#anies as %ell as 7orbes ;<<$
T!irteen Indian co"#anies *Asian Paints, Britannia Industries, 8r Redd& Labs *8RL+, 087) Ban', I)I)I
Ban', Indo Gulf, Infos&s Tec!noloies, Maste', Polaris Soft%are, Rolta India, Sat&a" )o"#uter, Kisualsoft
and Bee Telefil"s+ are a"on t!e :<< best co"#anies, fro" a"on :<,<<< co"#anies %orld%ide, outside t!e
US %it! re(enues of less t!an L@ billion, accordin to a ratin done b& 7orbes$
Table = i(es t!e list of Indian co"#anies t!at !a(e found #lace in t!e 7orbes list, :<<I$
Ta@!e F (or@e" Li"t o' Indian Companie" in $!o@a! Lea2ue
ii. A"ia9" Bi2 companie"
India is aain !o"e to "ore 7orbes2 7abulous ;<, of t!e best of Asia,Pacific2s biest listed co"#anies, t!an
an& ot!er countr& %it! @: Indian fir"s "a'in t!e cut, includin its Bi 7our infor"ation tec!nolo&
outsourcers$ India2s do5en a"on /T!e 7ab ;<2 co"#rised B!arat 0ea(& Electricals, B!arti Airtel, Grasi"
Industries, 087) Ban', I)I)I,Ban', Infos&s Tec!noloies, Larsen F Toubro, Reliance Industries, Sat&a"
)o"#uter Ser(ices, Tata )onsultanc& Ser(ices, Tata Steel and -i#ro$ T!is is %!at 7orbes !ad sa& about t!e"$
)o"#anies suc! as I)I)I Ban', 087) Ban' and B!arti Airtel are ro%in fast b& reac!in out to India2s rural
custo"ers$ Ot!ers, suc! as Grasi", Larsen F Toubro and Reliance, are s!orin u# t!e countr&2s infrastructure
at a furious #ace$
iii. Leader" in t*e 2!o@e or nationa! !ee!"
T!ere are so"e co"#anies in India %!ic! are eit!er lobal leaders or national leaders in t!eir c!osen business
arena$ T!e& set t!e lobal or national #attern in "atters of su##l& conditions and !ence influence de"and
#attern,
0ero 0onda Motors Li"ited, based in 8el!i, India, is t!e %orld2s larest "anufacturer of "otorc&cles$
Asian Paints, establis!ed in @GH:, is India2s larest #aint co"#an& and t!e t!ird larest #aint co"#an& in
Asia$
B!arat 7ore is t!e %orld2s second larest forin co"#an&$ T!e co"#an& is based in Pune, India and
!as G "anufacturin #lants in India, Ger"an&, S%eden, United States, Scotland, United >indo" and
"ainland )!ina$
Biocon is India2s biest biotec!nolo& enter#rise$ Establis!ed in @G?=, t!e co"#an& toda& is an
interated biotec!nolo& enter#rise focused on t!e de(elo#"ent of Bio #!ar"aceuticals$
Gen#act is India2s t!e biest BPO co"#an& in India !ead6uartered in Guraon$
It o#erates fro" India, )!ina, P!ili##ines, Ro"ania, 0unar&, Poland, Me3ico and USA$ )urrentl& it is
#ro(idin ser(ices in := lanuaes on :HY? basis$ It2s ser(ices co(er areas li'e 7inancial Ser(ices, Sales
and Mar'etin, Anal&tics, Su##l& c!ain, )ollections, )usto"er Ser(ices, Infor"ation tec!nolo& and
Learnin and )ontent Manae"ent$
.et Air%a&s *India+ Ltd$ is t!e biest sinle do"estic air,s!are flier based in Mu"bai, India, o#eratin
do"estic and international ser(ices$
Maruti Su5u'i India Li"ited is a #ublicl& listed auto"a'er in India$ It is a leadin four,%!eeler
auto"obile "anufacturer in Sout! Asia and India2s biest$
Ranba3& Laboratories Li"ited is an Indian co"#an& incor#orated in @GI@$ It is India2s larest
#!ar"aceutical co"#an&$
T!e Ra&"ond Grou# is one of India2s larest clot!in and a##arel co"#anies$
Tata )onsultanc& Ser(ices Li"ited is Asia2s larest and one of t!e %orld2s larest #ro(iders of
infor"ation tec!nolo&, consultin, ser(ices and business,#rocess outsourcin %!ic! co""enced
o#erations in @GI=$ As of :<<?, it !as t!e larest nu"ber of e"#lo&ees a"on t!e Indian IT co"#anies
%it! strent! of o(er @<I,<<<$
Tata Tea Li"ited, also 'no%n as Tata,Tetle&, is t!e %orld2s second larest "anufacturer and distributor
of tea
-i#ro Tec!noloies is t!e No$@ #ro(ider of interated business, tec!nolo& and #rocess solutions on a
lobal deli(er& #latfor"$ -i#ro is t!e -orld2s first )MMi Le(el ; certified soft%are ser(ices co"#an&
and t!e first outside USA to recei(e t!e IEEE Soft%are Process A%ard$
Infos&s Tec!noloies Ltd is lobal leader in t!e Mne3t enerationN of IT and consultin$ Infos&s defines
desins and deli(ers tec!nolo&,enabled business solutions to Global :<<< co"#anies$ It #ioneered t!e
Global 8eli(er& Model *G8M+, leadin to t!e rise of offs!ore outsourcin$ Infos&s !as a lobal
foot#rint %it! offices in :A countries and de(elo#"ent centers in India, )!ina, Australia, t!e U>,
)anada and .a#an$ Infos&s !as o(er =<,;<< e"#lo&ees co(erin II nationalities$
c. Bu"ine"" Dou"e" in India
Traditionall& t!e Tatas and t!e Birlas !a(e been t!e "ost res#ected cor#orates of India$ 0o%e(er, t!e rise of
Reliance and InfoTec! co"#anies li'e -i#ro and Infos&s, !as left t!e" be!ind$
i T*e Tata":
T!e Tata Grou# of co"#anies includes so"e of t!e "ost outstandin co"#anies of India, li'e T)S, Tata Steel,
Tata Motors, Tata Econo"ic )onsultanc& Ser(ices, Tata Teleser(ices, Tata Po%er, Titan, Tata Tea, Tata T8
Asset Manae"ent, Trent, Indian 0otels, Tata Tea, Tata 7inancial Ser(ices, Tata Pualit& Manae"ent Ser(ices
and Tata Tec!noloies are al"ost India2s -!o2s -!o C Altoet!er it !as =< co"#anies in se(en sectors$
Materials, c!e"icals, ener&, and enineerin #roducts are #roduct,dri(enE enineerin ser(ices, auto"oti(e,
co""unications and IT, ser(ices and consu"er oods brand,dri(en$ Tata is no% out,sourcin ro%t! t!rou!
o(erseas "erers and ac6uisitions *MFA+$T!e Tata Grou# too belie(es in t!e trustees!i# conce#t of
"anae"ent$ T!ese co"#anies !a(e s#onsored and #ro"oted a nu"ber of #ublic institutions in t!e fields of
science, tec!nolo&, "edicine, social ser(ice, rural %elfare and t!e #erfor"in arts$ T!at is t!e lin' bet%een
business, econo"&, societ& and o(ern"ent$
T*e Adit5a Bir!a $roup
is one of India2s larest business !ouses$ It o%ns co"#anies li'e 0indalco, Grasi" and Indian Ra&on$ T!e
Grou#2s o#erations s#an H< co"#anies o(er @= countries, %!ic! include ,T!ailand, Mala&sia, Indonesia, E&#t,
)anada, Australia and )!ina$ T!e Adit&a Birla Grou# is a do"inant #la&er in all its areas of o#erations:
Alu"inu", )o##er, )e"ent, Kiscose Sta#le 7ibre, )arbon Blac', Kiscose 7ila"ent 4arn, 7ertili5ers,
Insulators, S#one Iron, )!e"icals, Branded A##arels, as, #al" oil, Insurance and Asset Manae"ent,
Soft%are and Teleco"$ T!e Grou# !as strateic Doint (entures %it! lobal "aDors suc! as Sun Life *)anada+,
ATFT *USA+, t!e Tata Grou# and NG> Insulators *.a#an+, and !as (entured into t!e BPO sector %it! t!e
ac6uisition of Trans-or's, a leadin ITES9BPO co"#an&$ T!e Adit&a Birla Grou# too belie(es in t!e
trustees!i# conce#t of "anae"ent$ Part of t!e Grou#2s #rofits is #lou!ed bac' into "eaninful %elfare,dri(en
initiati(es t!at "a'e a 6ualitati(e difference to t!e li(es of "arinali5ed #eo#le$ T!ese acti(ities are carried out
under t!e aeis of t!e Adit&a Birla )entre for )o""unit& Initiati(es and Rural 8e(elo#"ent, %!ic! is
s#ear!eaded b& Mrs$ RaDas!ree Birla$
iii Re!iance $roup-
India2s larest business !ouse: T!e Reliance Grou# founded b& 8!irub!ai 0$ A"bani *@GA:,:<<:+ is India2s
larest business !ouse no% lead b& t!e t%o sons of t!e founder, Anil A"bani and Mu'es! A"bani$ 7ounded as
a te3tile "ill in @GII, Reliance continued to be a te3tile co"#an& until earl& @G=<s$ 0o%e(er, sei5in t!e
o##ortunities e"anatin fro" t!e ro%in Indian econo"& as %ell as t!e o#enin u# of t!e reulation,dri(en
sectors of t!e econo"& suc! as #etroc!e"icals, #lastics etc$, Reliance #ursued t!e #olic& of bac'%ard
interation fro" te3tiles as %ell as di(ersification fro" t!e earl& @G=<s on%ards to set u# %orld,scale facilities
for "anufacturin #ol&ester and te3tile inter"ediates, #lastics and #ol&"er inter"ediates, deterent
inter"ediates etc$ T!e rou#2s acti(ities s#an e3#loration and #roduction *EFP+ of oil and as, refinin and
"ar'etin, #etroc!e"icals *#ol&ester, #ol&"ers, and inter"ediates+, te3tiles, financial ser(ices and insurance,
#o%er, teleco" and infoco" initiati(es$ T!e Reliance Grou# )o"#anies include: Reliance Industries Li"ited,
Reliance )a#ital Li"ited, Reliance Industrial Infrastructure Li"ited, Reliance Teleco" Li"ited, Reliance
Infoco" Li"ited, Reliance General Insurance )o"#an& Li"ited, Indian Petroc!e"icals )or#oration Ltd$ and
BSES Li"ited$ Reliance enDo&s a #ree"inent #osition in India2s econo"& %it! rou# re(enues of nearl& A$; #er
cent of India2s G8P$ T!e rou#2s leaders!i# #osition in India is also reflected in its all round contribution to t!e
national econo"&$ T!e Reliance rou# alone contributes:
; #er cent of India2s total e3#orts
@< #er cent of t!e Go(ern"ent of India2s indirect ta3 re(enues
RIL alone accounts for:
A< #er cent of t!e total #rofits of t!e #ri(ate sector in India
@< #er cent of t!e #rofits of t!e entire cor#orate sector in India
? #er cent of t!e total "ar'et ca#itali5ation in India
-ei!tae of @; #er cent in t!e BSE Sense3
-ei!tae of @: #er cent in t!e Nift& Inde3
One out of e(er& four in(estors in India is a Reliance s!are!older$
-it! loball& co"#etiti(e ca#ital and o#eratin cost #ositions, Reliance Grou# do"inates t!e ra#idl& ro%in
Indian "ar'et deri(in o(er =<J of its re(enues fro" t!e do"estic "ar'et$ Reliance e3#orts its #roducts to
o(er @<< countries, includin t!e "ost 6ualit& conscious custo"ers in t!e US and Euro#e$ Reliance !as set u#
ne% e3#ort offices in )!ina, UAE, Kietna", Tur'e& and Indonesia$
i $odreK 2roup:
T!e GodreD Grou# is one of t!e larest industrial #o%er,!ouses in India, in(ol(ed in businesses includin
A##liances, #recision e6ui#"ent, "ac!ine tools, furniture, office e6ui#"ent, food,#rocessin, securit&,
"aterials !andlin and industrial storae solutions, construction and infor"ation tec!nolo&$ T!e GodreD rou#
can be broadl& di(ided into t%o "aDor !oldin co"#anies, %or'in inde#endentl&: i$ GodreD Industries Ltd$F ii$
GodreD F Bo&ce Mf$$
3ur2uppa $roup:
T!e Murua##a Grou#, !ead6uartered in )!ennai, India, is a L : $: billion *Rs =,;<< crore+ %ort! conlo"erate
%it! interests in enineerin, abrasi(es, sanitar&,%are, fertili5ers, finance, bio,#roducts and #lantations$ It !as
:G co"#anies under its u"brella, of %!ic! ei!t are listed and acti(el& traded on t!e National Stoc' E3c!ane
and t!e Bo"ba& Stoc' E3c!ane$
i E""ar $roup:
Essar Grou# is an India,based di(ersified cor#oration %it! interests in teleco""unications, s!i##in, steel,
construction, #o%er and oil$ T!e rou# !as an esti"ated "ar'et (alue of USL @; billion and !as an annual
re(enue of USL :$: billion$ MaDor Essar brand na"es include Kodafone Essar, Essar Refiner& and Essar Steel$
Essar Steel #urc!ased )anada,based Alo"a Steel and United States,based Minnesota Steel After t!e
ac6uisition of t!ese fir"s, Essar Steel beca"e India2s fourt! larest steel "anufacturer after Tata Steel, Steel
Aut!orit& of India Li"ited and .indal Steel$
ii Adani $roup:
A!"edabad, India based Adani Grou# is a leadin tradin and e3#ort co"#an& of India %it! re(enues of LA$;
billion$ T!e core business of t!e rou# is )o""odities Tradin, Edible oil Manufacturin, Mundra #ort
o#erations and distribution of Natural Gas$ T!ere are ?co"#anies under t!e rou#
iii #adia $roup: #adia $roup
is one of t!e oldest conlo"erates of cor#orate India$ T!e -adia rou# no% consists of t!ree inde#endentl&
listed co"#anies on t!e Bo"ba& Stoc' E3c!ane *BSE+$ T!ese include: Bo"ba& 8&ein, Britannia Industries
andGo Air X A ne% lo% cost airline o#eratin fro" Mu"bai$
i= <ideocon $roup:
Kideocon rou# is an industrial conlo"erate %it! interests all o(er t!e %orld and based in India$ T!e rou#
!as @? "anufacturin sites in India and #lants in )!ina, Poland, Ital& and Me3ico$ It is also t!e t!ird larest
#icture tube "anufacturer in t!e %orld$
= T<S $roup:
TKS Grou# of co"#anies are enaed in t!e "anufacturin of al"ost all 'inds of auto"oti(e co"#onents, t%o
%!eelers and a fe% ot!er industrial #roducts$
T!e& are also into t!e financial ser(ices sector$ T!e turno(er of t!e entire rou# %as close to LA billion in :<<?$
T%o co"#anies of t!e rou# Sundara" )la&ton and Sundara" Bra'e Linins, are t!e onl& in India to et t!e
#restiious 8e"in Pri5e for TPM$
a. NI(TJ
SFP )NY Nift& is t!e leadin stoc' inde3 ca#turin ;< lare co"#anies, re#resentin :; sectors, on t!e
National Stoc' E3c!ane of India$ As of .ul& :<<?, t!e stoc's in t!e SFP )NY Nift& re#resented %ell o(er
;<J of t!e total "ar'et ca#itali5ation of all stoc's in India2s stoc' e3c!anes$ A loo' into t!e ;< co"#anies *in
al#!abetic order+ %ould "a'e us learn at least ;<J b& (alue of t!e cor#orate sector in India$ T!e list of t!e ;<
co"#anies is i(en in table G$
Ta@!e G NI(TJ 4C CO3/ANIES (NIFTY, Website, 17-1-2008.)
&.4 BUSINESS EN<IRON3ENT O( INDIA : /OLITICAL EN<IRON3ENT
Political factors constitute an i"#ortant en(iron"ent factor$ Actuall& #olitics and econo"ics are inter,related as
one influences t!e ot!er$ T!at %as t!e reason for earl& %riters of Econo"ics #referred to ca#tion t!eir %or' as
Political Econo"&$ Political s&ste", #olitical #arties in #o%er, #olitical #arties in t!e o##osition, #olitical
"aturit& of t!e #arties, nu"ber of #olitical #arties, #olitical a%areness of #eo#le, #olitical stabilit& and t!e li'e
!a(e reat i"#act on t!e business en(iron"ent in a countr&$ T!e econo"ic #olicies #ursued b& a Go(ern"ent
are to a reat e3tent t!e b&,#roduct of #olitical en(iron"ent t!at i"#acts businesses (er& often$
&.4.1 Ba"ic /o!itica! Ideo!o2ie"
Political ideolo& refers to, /t!e bod& of ideas, t!eories, ai"s and "eans to e3ecute t!e ideas, ada#t t!e t!eories
and fulfill t!e ai"s t!at constitute a socio,#olitical #rora""e for action2$ 8e#endin on t!e "i3 of different
/ideas, t!eories, ai"s and "eans2, t!ere e3ists Pluralis", 8e"ocrac& and Totalitarianis" as alternati(e
ideoloies$
a. /!ura!i"m
in(ol(es coe3istence of different /ideas, t!eories, ai"s and "eans2$ Pluralis" "a& be e3istin due to lac' of
con(erence because t!e #olit& is "ade of different interest rou#s based on et!nicit&, lanuae, reliion, race
and so on and no one rou# is do"inant enou! to o(errule t!e rest$ )ontrar& to #o#ular belief t!at e3istence of
too "an& ideoloies of different et!nic rou#s "i!t brea' t!e #olit& into disarra& and lead to e(entual
disinteration, suc! disinteration !adn2t !a##ened$ -estern nations %it! ca#italistic orientations !a(e t!is
st&le$ T!e best e3a"#le is t!e USA$ Indi(iduals !a(e ci(il liberties and #olitical ri!ts$ )i(il liberties are
"easured in ter"s of freedo" of #ress, e6ualit& of all indi(iduals in t!e e&e of la%, #ersonal social freedo"s
and freedo" fro" e3tre"e for"s o(ern"ent indifference or interference$
Political ri!ts enDo&ed de#end on t!e deree of fair and co"#etiti(e elections, t!e abilit& of #eo#le to endo%
t!eir elected re#resentati(e %it! real #o%er, t!e abilit& of #eo#le to float #olitical #arties or co"#etiti(e and
co"#etent #olitical rou#ins to (oice t!eir ideoloies and e3istence of safeuards on t!e ri!ts of "inorities$
@. Tota!itariani"m
in(ol(es, /onl& one idea, t!eor&, ai" and "eans2$ No alternati(e ideolo& is allo%ed to co,e3ist$ T!ere is lac' of
tolerance$ T!e best e3a"#le is )!ina$ 7or"er USSR %as an e3a"#le$ But t!ere used to be t!e tendenc& to brea'
a%a&$ And t!at !a##ened %it! t!e USSR brea'in u# into #resent Russia and o(er do5en countries$ Of course,
countries do unite e(en under totalitarian s&ste" do as it !a##ened %it! Tai%an, Sina#ore and 0on >on
ettin attac!ed to "ainland )!ina late @GG<s$ )!ina could ensure econo"ic ro%t!, but USSR couldn2t$
#eo#le %ant de(elo#"ent ulti"atel&$ As lon as t!is core ai" is fulfilled, t!e& stand u# toet!er$ Indi(iduals
!a(e no ci(il and #olitical freedo"$ T!ere could be fascis" or co""unist rei"es$ About :;J of countries are
still totalitarian$
c. Democrac5
in(ol(es, a "i3 of #luralis" and totalitarianis"$ T!ere used to be indi(idual freedo" %it! c!ec's and balances$
T!e deree of #olitical ri!ts and ci(il liberties enDo&ed !o%e(er (ar&$ )ertain ri!ts allo%ed, certain restricted
and certain denied too$ India falls in t!is cateor&$ It is t!e larest de"ocrac& in t!e %orld in t!eor&$ ?;J of
countries !a(e de"ocracies of so"e order$ Of t!e", @9Ard are "ore #luralistic, @9Ard are so"e ;<:;< t&#e and
re"ainin @9Ard are "ore totalitarian$
&.4.& /o!itico- economic S5"tem
Political s&ste" refers to t!e set of factors relatin to #olitical institutions, t!e #olitical #arties and t!eir
ideoloies, t!e for" of state o(ernance and t!e role of t!e state and its functionaries (is,a,(is, t!e role of
indi(iduals and t!eir orani5ations$ E(er& countr& !as a #olitical s&ste" of its o%n$
T!ere are different for"s of #olitical s&ste"$ )a#italis", )ron& ca#italis", -elfare
ca#italis", Socialis", )o""unis" and Mi3ed econo"& are t!e different s&ste"s$ A brief
su""ar& of eac! of t!e for"s is #resented belo%$
a. Capita!i"m
)a#italis" is a #olitico,econo"ic s&ste" %!erein, #ri(ate o%ners!i# and initiati(e, indi(idual freedo" to
#roduce, e3c!ane, consu"e and distribute, "ar'et "ec!anis" and consu"er so(ereint& and li"ited role of
o(ern"ent are found$ In s!ort ca#italis" "a& be called as /free enter#rise econo"&2 %!ere state control on
businesses is not e3istin or "ini"u"$
T!e ca#italist #olitical s&ste" is #ro,#ri(ate businesses$ )o"#etiti(e efficienc& is re%arded in t!e "ar'et$
Businesses flouris! t!rou! efficienc&, inno(ation and ser(in t!e consu"ers$ Businesses are directed b&
"ar'et "ec!anis", least influenced b& o(ern"ental factors$ -!ate(er influence fro" Go(ern"ent is #ro,
do"estic business$ T!e %estern econo"ies li'e t!e USA, )anada, -estern Euro#e, etc$ !a(e ca#italist #olitical
s&ste"$ Since efficienc& is re%arded, !i!er le(els of #erfor"ance are ac!ie(ed$ T!ese econo"ies enerall& do
(er& %ell, t!e& attract forein in(est"ent, t!e& introduce latest tec!noloies, #atent #rotection is of !i! order
and so on$ )ron& ca#italis" is a #eDorati(e ter" describin an alleedl& ca#italist econo"& in %!ic! success in
business de#ends on close relations!i#s bet%een business"en and o(ern"ent officials$ It "a& be e3!ibited b&
fa(oritis" in t!e distribution of leal #er"its, o(ern"ent rants, s#ecial ta3 brea's, and so fort!$
@. Cron5 capita!i"m
)ron& ca#italis" is e(idenced b& #olitician oriented9o%ned9controlled business %orld$ Self,ser(in friends!i#s
and fa"il& ties bet%een business"en and t!e o(ern"ent influences t!e econo"& and societ&$ T!is t&#e of
ca#italis" benefits t!e #olitical o%ners and not t!e consu"ers$ A (ariant of t!is for" in(ol(es /collusion a"on
"ar'et #la&ers2$ -!ile #er!a#s li!tl& co"#etin aainst eac! ot!er, t!e& %ill #resent a unified front to t!e
o(ern"ent in re6uestin subsidies or aid *so"eti"e called a trade association or industr& trade rou#+$ T!is is
"ar'ed b& entr& %alls for ne% co"ers, #re(entin co"#etition$ Anot!er (ariant of cron& ca#italis" encouraes
businesses to sta& in t!e ood races of #olitical officials$ )onnections %it! #olitical bi%is and lobb&ists are
"ore i"#ortant t!an actual co"#etition as suc! in t!is for" of ca#italis"$ )orru#t o(ern"ents "a& fa(or one
set of business o%ners %!o !a(e close ties to t!e o(ern"ent o(er ot!ers, based on racial, reliious, or et!nic
fa(oritis"$ In s"aller countries t!is is "ore #o#ular$ Anti,ca#italists call it a natural conse6uence of collusion
bet%een t!ose "anain #o%er and trade, eit!er b& co""on control or t!rou! /deals2$ Since businesses "a'e
"one& and "one& leads to #olitical #o%er, business %ill ine(itabl& use t!eir #o%er to influence o(ern"ents$
c. #e!'are Capita!i"m
)a#italis" !as certain li"itations suc! as nelect of certain business not &ieldin ood #rofits or t!ose
in(ol(in reater ris'$ Indi(idual /ood2 "a& not areate to collecti(e /ood2$ So, so"e state role is needed$
0erein t!e o(ern"ent inter(enes and fills u# t!e a#s to ensure "a3i"u" social ad(antae$ Go(ern"ent
su##le"ents and does not substitute #ri(ate entre#reneurs!i#$ T!e c!aracters of ca#italis" are a##licable to t!is
s&ste" in total subDect to t!e abo(e referred to (ariation$ Go(ern"ent relations!i# %it! t!e business ta'es t!e
sa"e #attern as in t!e case of ca#italis", e3ce#t t!at o(ern"ent inter(enes in a s"all %a& to ensure social
%elfare of #eo#le at lare$
d. Socia!i"m
Socialistic #olitical s&ste" is c!aracteri5ed b& state o%ners!i# of #roduction, e3c!ane and distribution$ T!e
"ain features of t!is s&ste" are: i+ Go(ern"ent o%ners!i# and9or control of factors of #roduction, ii+
Go(ern"ent direction of #roduction, e3c!ane and distribution, iii+ )entral Plannin of resource "obili5ation,
allocation, #ricin etc$ i(+ Restriction #ri(ate businesses, (+ restriction on indi(idual freedo" and initiati(e, (i+
o(ern"ent interference in inco"e distribution, (ii+ o(ern"ent direction on #!&sical distribution and #ricin
of #roducts, (iii+ consu"er is not t!e 'in, onl& t!e state is all #o%erful and so on$
In a socialist #olitical s&ste" businesses are run and9 or closel& controlled b& t!e state$ Businesses are run b&
bureaucrats and not b& #eo#le %it! business acu"en$ Businesses are distanced fro" #rofit oal$ State #olic&
deter"ines %!ic! industr& to be de(elo#ed and %!ic! is not to be de(elo#ed$ Pri(ate initiati(e is not nurtured,
so"eti"es is e(en curbed$ Business is do"inated b& t!e o(ern"ent bodies$
e. Communi"m
A co""unist #olitical s&ste" is not!in but @<<J state control of all !u"an acti(ities$ It is also 'no%n as state
ca#italis"$ Production, e3c!ane, consu"#tion and distribution are all state controlled$ T!e difference bet%een
socialis" and co""unis" is t!at in co""unis", consu"#tion is also state controlled$ Businesses are run
al"ost li'e o(ern"ent de#art"ents$ T!e do"inant en(iron"ent of business is, trul&, t!e o(ern"ent factor$
'. 3i=ed Econom5
Mi3ed econo"& is said to be t!e /olden "ean2 of ca#italis" and socialis"$ Side
b& side #ublic and #ri(ate o%ners!i# e3ist$ T!is s&ste" is in (oue in India$ T!e features of ca#italis" and
socialis" are Dointl& #resent in t!is s&ste"$
Pri(ate initiati(e, freedo" of enter#rise, consu"er so(ereint&, indi(idual sa(in and in(est"ent, #rofit
orientation and "ar'et "ec!anis" are all t!ere$ But it is not entirel& free of o(ern"ent control$ State initiati(e,
state enter#rise, state in(est"ent, social obDecti(es li'e e6ual distribution, balanced de(elo#"ent of all reions,
concessions and #ri(ilees for t!e less #ri(ileed, reser(ations for t!e benefit of %ea'er sections, etc are found$
&.4.+ (unctionin2 o' /o!itica! /artie" T
In #o%er and in t!e o##osition T!e #olitical #arties in #o%er influence t!e business en(iron"ent to a reat
e3tent, irres#ecti(e of #olitical s&ste"$ T!e influence can be #ro,business or anti,business$ A #ro business
#olitical #art& in #o%er can (est t!e business co""unit& an en(iron"ent of ro%t!, co"#etition and concern$
Anti,business #art& in #o%er %ould %ield a t!reat of inti"idation$ T!e interit& of t!e #olitical leaders and t!eir
'it! and 'in is a reat factor to rec'on %it!$ Besides, t!e real #o%er %it!in t!e #olitical #art& in #o%er counts$
No% businesses t!e"sel(es identif& %it! one or ot!er #art& and %!o ets re%ards de#end %!ose #erson are in
#o%er$ -!en t!ere !a##ens a coalition o(ern"ent, not Dust one sinle #olitical #art& dictates ter"s for t!e
businesses$ T!ere are "ulti#le concerns$ Businesses strule to #lease too "an& #olitical leaders$
Parties in o##osition and t!eir leaders !a(e t!e role to 6uestion o(ern"ent2s decisions in t!e
#arlia"ent9leislature$ No%,a,da&s, t!e& e3!ibit t!eir #o%er in orani5in stri'es and stallin conduct of
business in t!e #arlia"ent or leislature on s"aller issues$ In a "ulti,#art& s&ste", %it! coalition o(ern"ents
runnin t!e o(ern"ent in(ol(es lot of co"#ro"ises des#ite t!eir co""on "ini"u" #rora""e$ T!e lea(es
t!e business co""unit& disillusioned$
&.4.1 /o!itica! maturit5 o' t*e partie" and peop!e and /o!itica! Sta@i!it5
Political "aturit& of #arties in(ol(es res#ectin t!e (erdictE t!e rulin #art& "ust not be (indicti(eE t!e
o##osition #arties "ust not be s#iteful$ Of late t!ese (alues are i(en u# in t!e air$ Incident free #olitical rallies,
absence of !oolianis", ter"inoloical #leasance in referrin to indi(idual "e"bers, issue based e3#ression of
(ie% #oints, freedo" to elected "e"bers to e3#ress t!eir (ie%s irres#ecti(e of #art& affiliation, etc are t!e
!all"ar's of #olitical "aturit&$ I"#artialit& of #olice s&ste" and #olitical non,inter(ention in its action are real
test of #olitical "aturit&$ T!ese are far to e3#ect$ An air of uneasiness #re(ails %!ic! suffocates businesses$
O##ortunistic ideoloies are follo%ed for s!ort,ter" electoral ains$ T!at is no "aturit&$ T!e lesser t!e nu"ber
of #arties, "ore t!e #olitical "aturit& of #eo#le and t!e better t!e o(ernance %ould be$ T!e de(elo#ed %orld
nations !a(e fe%er #olitical #arties, %!ile less de(elo#ed countries !a(e too "an& #olitical outfits$ In India
t!ere is no deart! of #olitical #arties, %!ic! is but a sin of #olitical i""aturit& of #eo#le$ -!ile do5ens of
#arties e3ist, onl& about : do5en #arties !a(e H or "ore elected Lo' S!aba "e"bers in t!e recent :<<H
elections$ Businesses suffer "ore uncertaint& %it! "ore nu"ber of #olitical #arties, because t!e #olic&
en(iron"ent beco"es s!a'&$
Political stabilit& is a crucial factor$ T!e #olitical s&ste", t!e nu"ber of #arties, ideoloies of #arties,
ani"osities a"onst different #arties, leaders!i# c!aracters of #olitical #arties, t!e co""it"ent of #arties
ta'in #o%er to !onour co""it"ents "ade b& #re(ious o(ern"ents, etc influence #olitical stabilit&$ Political
stabilit& also "eans consistenc& in #olitical decisions, "uc! needed for ins#irin confidence in t!e "inds of
business co""unit&, bot! national and international$ Lac' of #olitical stabilit& is an indication of e3cessi(e ris'
businesses suffer$
&.4.4 Re!ation"*ip @et-een t*e State and t*e Bu"ine""e"
T!ere could be #olitical instabilit& and &et it "a& not transfor" into #olitical ris' for businesses$ T!is is so
%!en t!e State res#ects t!e business enter#rises concerned$ Barrin a fe% cases in "ost countries, toda&
businesses !a(e ood relations!i# %it! t!e Go(ern"ent due to LPG #olic& #ursued %idel&$ Multilateral
In(est"ent Guarantee Aenc& *MIGA+, bilateral aree"ents to #rotect "utual in(est"ent interests, etc ensure
t!at ood relations!i# #re(ails bet%een t!e State and t!e MN)s$
T!e %orld is beco"in a less,#olari5ed$ )ountries c!oose businesses across t!e lobe for business relations!i#
based on "erits of efficienc& rat!er t!an #olitical s&ste" follo%ed$ T!e USA, sees India as an econo"ic
o##ortunit&$ So, #olitical and strateic alliances are on t!e rise$ India is also in ood relations!i# %it! .a#an, t!e
Euro#ean Union, Russia, Re#ublic of )!ina and so on$ So, business interests de(elo# across t!e lobe
&.4.: /OLITICAL RISO: T5pe") 3ea"urement and Dand!in2
Political en(iron"ent could in(ol(e a ris' to businesses, do"estic and forein$
Suc! ris' is called #olitical ris'$ Political ris' is t!at #erce#tion b& t!e businesses t!at t!eir interests %ill et
deteriorated %!en certain #olitical u#!ea(al !a##ens$ Political ris' can occur in bot! de"ocracies as %ell as in
t!e totalitarian set u#s as %ell$
a. T5pe" o' /o!itica! Ri"8"
Political Ris's are of different t&#es$ T!ere are "icro and "acro #olitical ris's$
Micro #olitical ris' is t!e one t!at affects a #articular fir" or class of fir"s$ Usuall& fir"s o%ned b& one class
of business"en, sa&, t!e foreiners fro" certain countr&, a #articular business fa"il& or reion9state$ Micro ris'
can be !eded$ T!is !a##ens e(en toda&$ Macro #olitical ris' affects all$ T!ere is no s#arrin of an& business,
an& nationalit&, an& trade or industr&$ )uba too',o(er all forein #ro#ert& %it!out e3ce#tion b& nationalit& or
industr& or #ast be!a(ior$ Macro ris' cannot be !eded, but it is bit rare no%$ Political ris' can arise because of
!ostilit& bet%een t!e fir" and t!e Go(ern"ent,
!ostilit& bet%een t!e fir" and o##osition #olitical #arties9social interest rou#s,
#olitical instabilit& t!reatenin #eace and tran6uilit&,
c!ane in #olic& en(iron"ent
ser(ice inefficienc& of t!e fir" and forced closure under e3ecuti(e orders of t!e
bureaucrac&$
.orms of political risk, Below are listed some specific forms of political risk2
i$ Ta'e,o(er of #ro#ert& %it! or %it!out co"#ensation b& t!e o(ern"entE
ii$ O#erational restrictions t!at i"#ede t!e fir"2s abilit& to ta'e certain actions li'e e3#ansion, introduction of
ne% lines of business or increasin t!e s!are,!oldin
or di(ersification b& eora#!& or #roduct #ortfolioE
iii$ Social bo&cotts of #roducts b& t!e residents or sections of residentsE
i($ 8estruction of #ro#ert& or disru#tion of sales b& t!e aitatin rou#s or #ressure bodiesE
($ 0ac'in of %ebsitesE
(i$ Inti"idatin #ro#aanda o(er t!e "edia, to raise public hate toards the firm.
/o!itica! ri"8 i" a 'unction o':
Probabilit& t!at a i(en #olitical e(ent %ill affect a #articular business unit or its #articular #roDect and
T!e "anitude of i"#act of t!e e(ent$ A #olitical de"and, sa&, to !alt 78I or a #roDect or to confiscate a
business or nationali5e a business unit, is t!e e(ent t!at causes #olitical ris'$ -!at is t!e #robabilit& t!at
all #arties %ill Dointl& asse"ble and #rotestC -!at is t!e li'el& i"#act of t!is on t!e #roDect or a business
unitC Ans%ers to t!ese 6uestions ans%er t!e rele(ance of #olitical ris'$ Political ris' can be and !a(e to
be 6uantified$
o 7actors to be considered include:
o t!e countr&2s #olitical and o(ern"ent s&ste"E
o trac' record of #olitical #arties and t!eir relati(e strent!E
o t!e deree of interation into t!e %orld s&ste"E
o t!e !ost countr&2s et!nic and reliious stabilit&E Reional securit&E and
o 'e& econo"ic indicators$
E(en if all #arties s!o% solidarit&, t!e Go(t$ in #o%er can contain t!eir rebellion usin constitutional and
leal "easures$ It "ust !a(e t!e #o%er and %illinness to do$ T!e rele(ance of #olitical e(ent to a business
unit or to a #articular #roDect of a business fir" is to be "easured$ T!e e(ent "a& affect o%ners!i# ri!ts,
access to in#ut9 out#ut "ar'ets and so on$ T!e e3tent of i"#act "i!t be (ar&in bet%een fir"s bet%een or
#roDects or bet%een reions$ So, scenario of i"#act "ust be e(ol(ed and e(aluated$ Usuall& o#ti"istic *less
destabili5in+, #essi"istic and "ost,li'el& le(els of i"#act be studied$
@. 3ea"urin2 /o!itica! Ri"8
T!e e3tre"e for" of #olitical ris' is e3#ro#riation or state confiscation$ -!at %ill be t!e #roDect %ort! if
%it!dra%al is "ade ri!t no% fearin e3#ro#riation or state confiscation and %!en a %ait and see #olic& is
follo%edC 4ou !a(e to esti"ate t!e cas! flo%s under t%o scenario *e3#ro#riation !a##ens and does not !a##en+
for t!e t%o alternati(es *e3it ri!t no% and %ait a %!ile+$ A !&#ot!etical case is #resented belo%$ T!e cas! flo%
ri!t no% obtainable b& #ullin out is L :;I"n %!et!er e3#ro#riation !a##ens or not$ If %aited for a &ear t!e
esti"ated cas! flo% %!en e3#ro#riation !a##ens is L :<<"n and %!en e3#ro#riation does not !a##en it is L
I<<$ T!e fear of losin L;I"n due to e3#ro#riation and benefit of ettin e3tra L AHH"n %!en t!e feared
e3#ro#riation does not !a##en #uts t!e fir" in a dile""a$ Let cost of ca#ital or "ini"u" re6uired return be
::J$ 8etails are table @<$
Ta@!e 1C Ea!uation o' A!ternatie" under E=propriation
!": !ash "lo
To sol(e t!e issue, &ou need to esti"ate t!e #robabilit& of e3#ro#riation !a##enin$
Let it be /#2$ T!en 'no%n our cost of ca#ital, %e can esti"ate t!e "ini"u" (alue of /#2 for a #ull,out ri!t
no%$ T!en #resent (alue of cas! flo% under %ait and see course beco"es: VeL:<<# S I<<*@,#+f 9 @$::W "n$ B&
settin t!e e3#ected cas! flo%s under t!e t%o courses of action, e3it ,ri!t ,no% and %ait,a,&ear e6ual, t!e
"ini"u" (alue of /#2 can be found$
Sol(e for /#2 in: L:;I"n R VeL:<<# S I<<*@,#+f 9 @$::W "n $
L:;I"n 3 @$:: R L:<<# S LI<< 1 LI<<#
LA@:$A:"n R LI<<"n 1 LH<<#$ "n
LH<<# "nR L :?@$I= "n or #R <$?
7ro" t!e abo(e, if t!e c!ance for e3#ro#riation is ?<J, it is i""aterial %!et!er &ou #ull out ri!t no% or later$
If t!e #robabilit& is "ore t!an ?<J #ullin out ri!t no% is a better course$ If it is less t!an ?<J t!ere is no
need to e3it ri!t no%$ So, t!e #roble" no% beco"es t!e esti"ation of #robabilit& of t!e e3#ro#riation
!a##eninT
c. (ormu!atin2 and Imp!ementin2 Strate2ie" to Dea! -it* /o!itica! Ri"8
T!e follo%in course of action, suested b& .o!n 8 8aniels and Lee 0 Radebau! %ill !el# in dealin %it!
#olitical ris'$ Identif& t!e issueE 8efine t!e #olitical as#ect of t!e issueE E Assess t!e #otential #olitical action b&
ot!er fir"s and t!e s#ecial,interest rou#sE Identif& i"#ortant indi(iduals or institutionsE 7or"ulate strateiesE
8eter"ine t!e i"#act of i"#le"entationE Select t!e "ost #ro"isin strate&E Educate t!e i"#le"enters and
t!en i"#le"ent$ T!ese are G briefed belo%$
i. Identi'5 t*e i""ue: T!e #roble" "a& be bo&cott, t!reat of confiscation, da"ae to #ro#ert&, i"#osition
of counter(ailin dut& or ne% labour standards or so$
ii. De'ine t*e po!itica! and ot*er a"pect" o' t*e i""ue: Is t!e concern of t!e Go(ern"ent or #olitical rou#
serious one or Dust "ini"alC Is t!ere an& !idden force or !idden aendaC
iii. #a" t*ere an5 pa"t up*eaa! !i8e t*i"C -!at %as t!e outco"e t!enC -!at %ould be t!e #olitical
fallout if t!e o(ern"ent sides %it! t!e fir" or sits o##ositeC Is t!ere a #ossibilit& to settle t!e issue
outside #oliticsC Ans%ers to t!ese 6uestion ans%er t!e issue$
iv. A""e"" t*e potentia! po!itica! action @5 ot*er 'irm" and t*e "pecia!-intere"t 2roup": %!o are all ot!er
#arties li'e us affectedC -!at are t!eir reactionsC -ill t!e& a#t for a coalition of all to "ount
#ressureC 0o% stron are t!e s#ecial interest rou#s in #uttin a united face to tone do%n t!e issueC
v. Identi'5 important indiidua!" or in"titution": -!o are t!e indi(iduals * Public Leaders, Politicians,
Elected Re#resentati(es, Reulator& Institutional 0eads+C -!at are t!e institutions in(ol(ed and
%!at are t!eir barainin #o%ersC
vi. (ormu!ate "trate2ie": -!at are t!e 'e& obDecti(es and "inor obDecti(es of t!e fir" in res#ondin to t!e
issueC -!at are t!e strateiesC To cedeC To su#ersedeC To recedeC 0o% to brea' t!e iceC 0o% to
establis! contactC 0o% to "a'e t!e offers of conciliation and reconciliationC E(ol(e alternati(e
strateies for dealin %it! affected and arie(ed$ E(ol(e alternati(e strateies for dealin %it!
t!ose in t!e front,line of confrontation$
vii. Determine t*e impact o' imp!ementation: -!at %ill be t!e outco"e of cedinC -!at %ill be t!e
outco"e of su#ersedinC -!at %ill be t!e outco"e of recedinC 7inancial, )or#orate I"ae, and
Relational i"#acts need to be addressed$
viii. Se!ect t*e mo"t promi"in2 "trate25: A clear e(aluation of t!e o(erall costs and benefits of
strateies need to be "ade on 7inancial, )or#orate I"ae, and Relational i"#acts$ Order and c!oose
t!e ri!t strate& set$
ix. Educate t*e imp!ementer" and t*en imp!ement: Educatin t!e core tea" "e"bers on all as#ects t!e
strateic res#onse to t!e issue on !and is needed$ T!en o a!ead %it! t!e i"#le"entation$
d. Dand!in2 /o!itica! Ri"8 Z Political ris' !andlin !as to be addressed at
Pre,in(est"ent #lannin #!ase,
Post,in(est"ent o#eratin #!ase and
Post e3#ro#riation #!ase$ T!ese are dealt belo%
i. Dand!in2 po!itica! ri"8 in t*e pre-ine"tment p!annin2 p*a"e
To deal %it! #olitical ris', at #re,in(est"ent le(el, a business concern can t!in' of
Aoidance: A(oidance in(ol(es not co""ittin t!e resources in t!e #roDect$ T!is is easiest but not reflecti(e of
true business class$ 0o%e(er certain #oliticall& !i! ris'& states9nations9 reions !a(e to be a(oided, because
one cannot lose in(est"ent itself in t!e !o#e of "a'in a return on in(est"ent$
In"urance: Insurance in(ol(es ta'in insurance co(er for #eo#le and #ro#ert& of t!e business concern or
#roDect in t!e !ostile countr&$ In de(elo#ed nations #olitical ris' insurance #olicies are a(ailable %!ic! t!e
MN)s can bu& to co(er in(est"ents in ris'& countries$ T!ird %orld countries also !a(e o(erseas business ris'
insurance outfits$ Policies t!at #ro(ide for a "a3i"u" insured a"ount and a current insured a"ount are
a(ailable$ Pre"iu" is #a&able on t!e current insured a"ount at usual rates and on t!e difference bet%een
"a3i"u" and current insurance a"ounts, called standb& insurance le(el, a no"inal rate of #re"iu" is c!ared$
Ne2otiatin2 t*e Enironment: A business concern and t!e Go(ern"ent neotiate on t!e ri!ts and
res#onsibilities of bot! and abide b& t!e /concession2 aree"ent reac!ed$
But ne% rulers "a& re#udiate /concession2 aree"ent areed to b& t!e #ast ruler$ Suc! re#udiation !a##ens in
de"ocratic countries as %ell$
Structurin2 t*e Ine"tment: T!e in(est"ent in t!e #roDect in t!e !ost countr& can be structured in suc! %a&
t!at !ost o(ern"ent inter(ention costs t!e Go(ern"ent e3c!e6uer !ea(il&$ T!is is ac!ie(ed b& adDustin
#roduction, trans#ortation e3#ort,tec!nolo& transfer and financial #olicies$ T!e forein #roDect "a& be Dust an
asse"blin unit or a Dust a #art "anufacturer$
/atentin2: T!e MN) can reister its #atent enerall& and "a'e for !ost countries difficult to infrine #atent
ri!ts or trade "ar' ri!ts$
ii. Dand!in2 po!itica! ri"8 in t*e po"t-ine"tment operatin2 p*a"e
After in(est"ent is "ade, t!rou! o#eratin #olicies, #olitical ris' can be "anaed$ T!e alternati(es are: S!ort
ter" #rofit "a3i"i5ation, )!anin t!e B)R of e3#ro#riation, 8e(elo#in local sta'e !olders and Ada#tation$
S*ort-term /ro'it 3a=imi;ation #olic& in(ol(es stressin t!at in(est"ent "ade
is 6uic'l& #aid bac'$ On findin t!e #olitical en(iron"ent !ot, t!e fir" can o for a #olic& of 6uic' reali5ation
b& a(oidin furt!er co""it"ents in t!e #roDect$ A #osture suc! as t!is itself "a& alter t!e !ost o(ern"ent2s
attitude as ca#ital fli!ts are unaffordable in t!ese da&s of lobali5ation$ Shorter ,aybac/ ,eriod: Accordin to
t!is "et!od, #roDects %it! s!orter #a&bac' #eriod are nor"all& #referred to t!ose %it! loner #a&bac' #eriod$
0he &inite1hori2on )ethod: T!is "et!od is si"ilar to #a&bac' "et!od a##lied under t!e condition of certaint&$
In t!is "et!od, a ter"inal date is fi3ed$ In t!e decision "a'in, onl& t!e e3#ected returns or ain #rior to t!e
ter"inal date are considered$
C*an2in2 t*e Bene'itACo"t Ratio (BCR% #olic& in(ol(es t!e fir" ado#tin a #ro,!ost countr&, increased
benefit and decreased cost #olic&$ Policies suc! as establis!in local RF8 facilities, e3#ort,t!rust, tec!nolo&
transfer etc$, %ill !el# t!e MN) bu&in #eace %it! ad(ersaries$
Dee!opin2 !oca! "ta8e *o!din2 po!ic5 ino!e", t!e fir" concerned creatin a custo"er base, a local in(estor
base, su##l&,c!ain base, etc so t!at e3#ro#riation9confiscation %ill be resented to b& local custo"ers, in(estors
and c!annel #artners$ It "ust be noted %!ile @<<J subsidiaries face nationali5ation t!reats, Doint,(enture do not
suffer suc! t!reats$
Adaptation po!ic5 in(ol(es ada#tin o#eratin #olicies to t!e dictates of t!e #olitical boss$ If e3#ro#riation is
#ressed, t!e MN) can o#t for "anae"ent contracts or franc!isin so t!at o#erational as#ects are not !andled
b& t!e MN)$
iii. Dand!in2 po!itica! ri"8 in t*e po"t-e=propriation p*a"e
In t!e #ost,e3#ro#riation #!ase, da"ae control and benefit !ar(estin e3ercises need to be #ursued$
Neotiation, Po%er le(erain, Leal recourse and Surrender are t!e o#tions$
Ne2otiation: After t!e e3#ro#riation9confiscation, continued contacts and neotiation %it! t!e Go(t$
!el# in !ar(estin "ore benefits$
/o-er Leera2in2 in(ol(es t!e fir" a##l&in #o%er on t!e o(ern"ent t!rou! di#lo"atic c!annels,
trade bodies, etc for s#eed& !ar(estin$
Le2a! Recour"e in(ol(es resortin to leal re"edies to reco(er t!e (alue of #ro#ert& t!at are
confiscated$ T!is is a lon,dra%n,cut re"edial course$
Surrender po!ic5 in(ol(es i(in u# t!e abo(e referred to courses and areein to sal(ae t!e
in(est"ent
&.4.E /o!itica! Enironment in India
Let us first deal %it! t!e #olitical structure and t!en ta'e u# #re(ailin business,#olitical alin"ent in India$
A./OLITICAL STRUCTURE O( INDIA
India is t!e larest de"ocrac& of t!e %orld %it! @$@: billion #eo#le, follo%in "i3ed econo"& %it! ealitarian
oal$ It is a Union of t%ent&,ei!t States and se(en centrall& ad"inistered Union Territories, in s!ort, Dust,
Union Territories$ Peo#le enDo& #olitical and ci(il ri!ts$ India is federated state or union of states %it! t%o
"aDor le(els of ad"inistrati(e Go(ern"ents (i5$, )entral or Union Go(ern"ents and Go(ern"ents at t!e State
or Union Territor& le(el$ T!ere is #arlia"entar& for" of Go(ern"ent$ T!e Parlia"ent leislates and reulates$
T!e Ministr& is e3ecuti(e$ T!e Dudicial as#ect is ta'en care of b& inde#endent )ourt$ All t!ese A, leislati(e,
e3ecuti(e and Dudicial #o%ers are (ested %it! t!e res#ecti(e institutions b& t!e President, t!ou! t!e office of
President is !a(in "ostl& notional #o%er, but "uc! res#ected$
i. State" and Union Territorie":
T!e States include: And!ra Prades!, Arunac!al Prades!, Assa", Bi!ar, )!!attisar!, Goa, GuDarat, 0ar&ana,
0i"ac!al Prades!, .a""u F >as!"ir, .!ar'!and, >arnata'a, >erala, Mad!&a Prades!, Ma!aras!tra, Mani#ur,
Me!ala&a, Mi5ora", Naaland, Orissa, PunDab, RaDast!an, Si''i", Ta"il Nadu, Tri#ura, Uttar Prades!,
Uttaranc!al and -est Benal$ T!e centrall& ad"inistered Union Territories include: Anda"an and Nicobar
Islands, )!andiar!, 8a"an F 8iu, 8adra F Naar 0a(eli, La's!ad%ee#, 8el!i and Pondic!err&$
ii$ (undamenta! Ri2*t":
Peo#le !a(e bot! #olitical and ci(il ri!ts$ T!ere are funda"ental ri!ts t!at "ust be safe,uarded b& t!e
Go(ern"ent to e(er& citi5en$ T!e 7unda"ental Ri!ts of e(er& Indian citi5en include t!e freedo" of s#eec!,
e3#ression, belief, asse"bl& and association, "iration, and c!oice of occu#ation or trade$ T!ese ri!ts also
#rotect e(er& Indian fro" discri"ination on rounds of race, reliion, creed or se3, and are enforceable in courts
of la%$
iii. Directie /rincip!e" o' State /o!ic5:
T!ere are also, 8irecti(e Princi#les of State Polic&, %!ic! are t!ou! non Dusticeable, but ne(ert!eless t!e
uidin #rinci#les of o(ernance to ensure establis!"ent of an ealitarian societ& en(isioned in t!e constitution$
Businesses !a(e to function %it!in t!e )onstitutional a"bit and also ensure t!at t!eir actions lead to #ursuance
of establis!"ent of ealitarian societ& as en(isioned in t!e )onstitution$ T!e earlier, #re,@GG<, econo"ic #olic&
%as "ore state,centered %it! "uc! e"#!asis on #ublic sector businesses and it could not us!er in !i!
econo"ic ro%t!$ A #olic& /U2 turn %as done in @GG@ %it! e"#!asis on liberali5ation, #ri(ati5ation and
lobali5ation *LPG+$
i. (ederated Union:
India is a dual #olit& %it! a sinle citi5ens!i# and a sinle Dudiciar&$ It is orani5ed into A< federati(e States and
I centrall& ad"inistered Union Territories$ T!e ca#ital of t!e Union Go(ern"ent is situated at Ne% 8el!i$ T!e
States and t!e Union Territories !a(e t!eir o%n se#arate ca#itals or !ead6uarters$
. Li"t" o' area" o' dee!opmenta! re"pon"i@i!it5 o' t*e Centre) "tate"AUT" and @ot* Centre and
State"AUT":
Under t!e )onstitution, t!ree lists de"arcate t!e areas of Durisdiction of t!e union and t!e states:
t!e union list,
t!e state list and t!e
concurrent list$
T*e union !i"t, for %!ic! t!e union #arlia"ent !as e3clusi(e #o%er to "a'e la%s, contains "atters of
i"#ortance to all of India, suc! as defense, forein affairs, citi5ens!i#, railroads, #ostal and telera#! ser(ices,
custo"s duties, and ta3ation of inco"e$ T!e central o(ern"ent o#ened t!e econo"ic acti(ities in t!e union list
under its control to #ri(ate and forein co"#etition$ It %as a reat success$
T*e "tate !i"t, for %!ic! t!e state leislatures !a(e e3clusi(e aut!orit& to "a'e la%s, includes local la%
enforce"ent, local o(ern"ent, land, and ariculture$ No% t!e state o(ern"ents are in co"#etition to o#en t!e
econo"ic acti(ities under t!eir control to #ri(ate and forein ca#ital and co"#etition$ T!e sout!ern states of
>arnata'a, Ta"il Nadu and And!ra are 6uite successful$ T!is triered t!e states of GuDarat and Ma!arastra$
T*e concurrent !i"t co(ers suc! "atters as labor %elfare, social securit& and #rice controls, o(er %!ic! bot!
t!e union and t!e state leislatures !a(e leislati(e aut!orit&$
i. /ar!iamentar5 'orm o' 2oernment:
India !as a #arlia"entar& for" of o(ern"ent based on uni(ersal adult franc!ise and #atterned "ore on t!e
U$>$ #arlia"entar& s&ste" t!an on t!e U$S$ leislati(e s&ste"$ T!e central leislature, %!ic! is called
Parlia"ent, is bica"eral$ It is !eaded b& t!e President and consists of t!e t%o !ouses, t!e RaD&a Sab!a *)ouncil
of States 1 "e"bers elected b& electoral,collee consistin of state leislators+ and t!e Lo' Sab!a *0ouse of
Peo#le 1 "e"bers elected directl& b& #eo#le+$ T!e Lo' Sab!a, %!ose nor"al ter" is fi(e &ears, consists of
"e"bers directl& elected on t!e basis of adult suffrae$ Elections to t!e RaD&a Sab!a are indirect$ All leislation
re6uires t!e consent of bot! !ouses of Parlia"ent, but t!e Lo' Sab!a is t!e "ore #o%erful, and its %ill #re(ails
in t!e case of "one& bills and financial leislation$
ii. Union E=ecutie:
T!e union e3ecuti(e branc! consists of t!e President, t!e Kice,President and t!e )ouncil of Ministers$ T!e
President and t!e Kice,President are elected indirectl& for fi(e,&ear ter"s b& a se#arate electoral collee$ T!e
President, %!o is t!e constitutional !ead of t!e union e3ecuti(e, in(ites t!e leader of t!e "aDorit& or t!e
coalition of #arties co""andin a #arlia"entar& "aDorit& to for" t!e )ouncil of Ministers *cabinet+$ Real
e3ecuti(e #o%er is (ested in t!e )ouncil of Ministers, %it! t!e Pri"e Minister at its !ead$ Alt!ou! t!e Pri"e
Minister is a##ointed b& t!e
President and t!e )ouncil of Ministers !olds office at t!e President2s #leasure, t!e
)ouncil is res#onsible to t!e Lo' Sab!a$
iii. S5"tem" o' $oernment o' t*e State":
T!e s&ste"s of o(ern"ent of t!e states closel& rese"ble t!at of t!e union$ A state e3ecuti(e branc! consists of
t!e Go(ernor, %!o is a##ointed b& t!e President, and t!e )ouncil of Minister, %it! )!ief Minister at its !ead$
So"e state leislatures are bica"eral, #atterned after t!e t%o !ouses of Parlia"ent$
i=. Le2a! Enironment:
Political en(iron"ent and leal en(iron"ent are t%o sides of t!e sa"e coin$ 0ence t!e sa"e is also dealt !ere$
Source" o' !a-: T!e "ain sources of la% in India are t!e )onstitution, statutes *leislation+, custo"ar& la%, and
case la%$ T!e statutes are enacted b& Parlia"ent, State leislatures and Union territor& leislatures$
Iudicia! S5"tem:
A uni6ue feature of t!e India )onstitution is t!e Dudicial s&ste"$ A sinle interated s&ste" of courts
ad"inisters bot! union and state la%s$ T!e Su#re"e )ourt of India, seated in Ne% 8el!i, is t!e !i!est bod& in
t!e entire Dudicial s&ste"$ Eac! state or a rou# of states !as 0i! )ourt under %!ic! t!ere is a !ierarc!& of
subordinate courts$ In certain states, !i! court branc!es also e3ist$ T!e )!ief .ustice of India and t!e ot!er
Dudes of t!e Su#re"e )ourt are a##ointed b& t!e President$ T!e Su#re"e )ourt !as oriinal, a##ellate and
ad(isor& Durisdictions$ Its oriinal Durisdiction e3tends to t!e enforce"ent of funda"ental ri!ts i(en b& t!e
)onstitution and to an& dis#ute a"on states and t!e Go(ern"ent of India$ T!e decisions of t!e Su#re"e )ourt
are bindin on all courts %it!in t!e territor& of India$ At t!e state le(el t!ere are 0i! )ourts in t!e state
ca#itals, 8istrict courts at district le(els, lo%er courts at "unici#al le(els and so on$
Bu"ine"" and Iudicia! "5"tem re!ation"*ip:
Businesses need t!eir interests %ell #rotected b& t!e courts %it! la%s #rotectin #atents, 6uic' dis#osal of
insol(enc& clai"s, and increased trans#arenc& in o(ernance$ 8ela& in ettin Dustice deli(ered due to "ountin
ba lo of cases #endin dis#osal, "a'e businesses lose t!eir confidence in t!e leal s&ste", because Dustice
dela&ed is Dustice denied$
x. (inancia! "5"tem:
T!e 7inancial s&ste" is t!e #reser(e of t!e union o(ern"ent %it! res#onsibilit& for "onetar& #olic&, currenc&
and fore3 "anae"ent, fiscal #rudence and #olic& for forein econo"ic interactions$ No% t!ere is a lare
"easure of freedo" to reulator& bodies li'e t!e Reser(e Ban' of India *RBI+, Securities and E3c!ane Board
of India *SEBI+, etc, increased "ar'et "ec!anis", !i!er deree of fiscal restraint and so on$ All t!is auured
%ell for business enter#rises$
B. BUSINESS-/OLITICAL ALI$N3ENT IN INDIA
Business,Political Alin"ent in India is 6uite friendl&, "atured, tolerant and efficient too$ But, t!ere are
#roble" areas too$
Ne- Economic /o!ic5: T!e ne% econo"ic #olic& follo%ed since @GG@ is s!ared b& its "an& #olitical #arties$
Most of t!e "aDor #olitical #arties !a(e been 6uic' to e"brace free "ar'et enter#rise, %!ic! !as car(ed "ore
s#ace for #ri(ate enter#rise in t!e #lace of #ublic sector, "ore role for lobali5ed co"#etition, and "ore
facilitati(e role for o(ern"ent$
T!is !as led to !i!er econo"ic ro%t!$ It !as attracted a nu"ber of MN)s, includin General Electric,
0&undai, No'ia, Sie"ens, General Motors, 0e%lett,Pac'ard, IBM, .o!nson F .o!nson, and Microsoft, to na"e
a fe% to establis! t!eir outfits in India$$ Besides, Indian co"#anies !a(e ro%n to international re#utation li'e
t!e Infos&s, -i#ro, T)S, Tata steel, Mittal Steel, )entur& Mills, etc$ More 78I, 7PI and NRI ca#ital !a(e flo%n
into India$ T!e econo"& !as built fore3 reser(es of o(er L :;< billion in Dust a s#an of @I &ears fro" al"ost nil
reser(e in @GG@$
3ora! "upport in Internationa! dea!": Moral su##ort in International deals is e3tended b& t!e Go(ern"ent to
businesses$ T!is !a##ened %!en a US fir", Ricetec, tried to #atent Basu"ati Rice in a si"ilar na"e called,
/tec!"ati rice2$ Also %!en La3"i Mittal too' o(er t!e Arcelor and %!en Ratan Tata too' o(er )orus, t!e
Go(ern"ent su##orted "orall& t!e ta'e,o(er deals %!en racist issues are raised b& so"e$
Bud2etar5 Con"u!tation and Conce""ion": Before annual budets are #re#ared t!e Go(t$ in(ites suestions
fro" t!e businesses co""unit& not onl& to address t!eir rie(ances but also to et inno(ati(e ideas on
o(ern"ental #rora""es$ 7urt!er, at ti"es of enuine !ards!i# o(ern"ent bails out businesses$ -!en t!e
te3tile businesses suffered due to a##reciation of Ru#ee aainst t!e US L, t!e o(ern"ent ca"e %it! so"e ta3
and financial so#s and concessions$
$ood re!ation"*ip @et-een $ot. and trade @odie": Good relations!i# bet%een Go(t$ and trade bodies li'e
t!e )onfederation of Indian Industries *)II+, 7ederation of Indian )!a"bers of )o""erce and Industr&
*7I))I+, Association of )!a"bers of )o""erce and Industr& *ASSO)0AM+ and so on, besides s#ecific
industr& bodies$
T!ere are also Go(ern"ent outfits de(oted to #ro"ote e3#orts for "ost e3#ort intensi(e industries li'e t!e
E3#ort )ouncils, )o""odit& Boards etc$ T!us t!e business interests are %ell #la&ed b& t!e Go(ern"ent itself$
Also, t!e Go(ern"ents of se(eral States and UTs (ie %it! eac! ot!er to attract "ore in(est"ents into t!eir
eora#!&$ T!at is t!e reason se(eral to# ran'in business rou# leaders are e(en no"inated as Me"bers of
Parlia"ent$ T!at is t!e #innacle of o(ern"ent,business relations!i# in t!e countr&$
De!a5 in di"po"a! o' !e2a! ca"e": T!ere are "an& cases #endin dis#osal b& t!e courts, t!an's to slo% #roress
in !earin, increased litiant attitude of #eo#le and absence of alternati(e "eans of Dustice$ So"e see' to court
re"ed&, not in t!e real intension of ettin a court (erdict, but Dust to dela& decisions$ So, cases "ount and t!ere
is inordinate dela& in ettin Dustice$ 8ela&ed Dustice is denied Dustice$ Businesses could not see' leal re"ed&
as t!ere is dela&$ A enuine need oes unfulfilled$
Corruption: 8o t!e #olitical #arties side %it! t!e corru#t9inefficientC 8o so"e a"a5e %ealt! dis#ro#ortionate
to t!eir 'no%n sources of inco"eC Are t!ere rent see'ersC Are t!ere e3tra,constitutional #o%er centres t!at do
t!ins t!e& %ant at %illC 8o t!e bureaucrats decide and e3ecute routine and s#ecial actions in a (eiled course
alsoC 8o t!ins !a##en in (ei'ed less trans#arent %a&C T!e ans%er to all t!e 6uestions is /4es2$ T!at is t!e
reason t!at in t!e corru#tion #erce#tion inde3, India is not co"in clean, des#ite !er able #eo#le %!o are
astonis!inl& intellectuall& su#erior$ In :<<; out of @;= countries India ca"e in t!e G:nd #lace %it! a score of
:$G *@< R cleanest+ and in :<<? out of @?= countries India ca"e ?:nd %it! )PI score of A$;$ T!ere is
i"#ro(e"ent, but A$; out of @< is not #ass "ar'TT All t!is increases cost of doin business in India, and t!at
re6uired return e3ceeds be&ond "ost #roDects2 innate abilit&$ Businesses are concerned %it! t!is$
&.: BUSINESS EN<IRON3ENT O( INDIA: CULTURAL EN<IRON3ENT
)ulture enerall& refers to #atterns of !u"an acti(it& and t!e s&"bolic structures t!at i(e suc! acti(ities
sinificance and i"#ortance$ 8ifferent definitions of McultureN reflect different t!eoretical bases for
understandin, or criteria for e(aluatin, !u"an acti(it&$
&.:.1
De'inition) 3ani'e"tation) E=c*an2e" . UniHuene"") #e"t . Ea"t and A-arene""
a. Cu!ture De'ined
)ulture can be defined as all t!e be!a(iors, %a&s of life, arts, beliefs and institutions of a #o#ulation t!at are
#assed do%n fro" eneration to eneration$ )ulture !as been called, /t!e %a& of life for an entire societ&2$ As
suc!, it includes codes of "anners, dress, lanuae, reliion, rituals, nor"s of be!a(ior suc! as la% and
"oralit&, and s&ste"s of belief as %ell as t!e arts, astrono"&, "atri"on& and so on$ T!ere are cultural
#atterns, differences, d&na"ics, s!oc's and resilience$ Ed%ard Burnett Ta&lor *@=G@+ described culture as /t!at
co"#le3 %!ole %!ic! includes 'no%lede, belief, art, "orals, la%, custo", and an& ot!er ca#abilities and
!abits ac6uired b& "an as a "e"ber of societ&2$ More recentl&, t!e United Nations Educational, Scientific and
)ultural Orani5ation *UNES)O+ described culture, /as t!e set of distincti(e s#iritual, "aterial, intellectual and
e"otional features of societ& or a social rou#, and t!at it enco"#asses, in addition to art and literature,
lifest&les, %a&s of li(in toet!er, (alue s&ste"s, traditions and beliefs2$
I "ust refer to so"e beliefs !ere$ T!ere is a !and& e3a"#le, t!e A"erican 8rea"$ T!e A"erican 8rea" is a
belief, !eld b& "an& in t!e United States t!at t!rou! !ard %or', courae, and self,deter"ination, reardless of
social class, a #erson can ain a better life$ T!is notion is rooted in t!e belief t!at t!e United States is a /cit&
u#on a !ill, a li!t unto t!e nations2 %!ic! %ere (alues !eld b& "an& earl& Euro#ean settlers and "aintained b&
subse6uent enerations$ )ulture is #rescri#ti(e and s!ared$ )ulture #rescribes acce#table beliefs, be!a(ior and
attitude$ S"o'in in #ublic #laces once, acce#table, no% !as beco"e unacce#table$ )ulture is s!ared b& t!e
"e"bers so t!at its #rescri#ti(e as#ect can be reinforced$
)ulture is learned$ No one is born eneticall& %it! t!is or t!at culture$ It is learnt b& obser(ation, indoctrination
and e3#osure$ If one learns one2s co""unit&/s culture t!at is enculturation or sociali5ation$ If one does learn
t!e culture of ot!er co""unit& or race %!ic! is acculturation$
@. Cu!ture 3ani'e"t" in action" and "u@t!e -a5"
Manifestation of culture "a& be t!rou! actions or t!rou! subtle "eans$ )ulture is "anifested in "usic,
literature, #aintin and scul#ture, t!eater and fil" and ot!er t!ins$ So"e #eo#le identif& culture in ter"s of
consu"#tion and consu"er oods *as in !i! culture, lo% culture, fol' culture, or #o#ular culture+$ But
ant!ro#oloists understand McultureN to refer not onl& to consu"#tion oods, but to t!e eneral #rocesses %!ic!
#roduce suc! oods and i(e t!e" "eanin, and to t!e social relations!i#s and #ractices in %!ic! suc! obDects
and #rocesses beco"e e"bedded$ 7or t!e", culture t!us includes tec!nolo&, art, science, as %ell as "oral
s&ste"s$ )ulture defines funda"ental beliefs and (alues about indi(idual and rou# be!a(ior in i(en conte3ts$
It s!o%s %a&s in %!ic! #eo#le interact and co""unicate %it! ot!ers *&oun, old, nei!bours, ot!ers of
different race9reliion9 reion and straners+, de(elo# and "aintain relations!i#s, c!oose t!eir life st&les
includin dress, friends and life #artner, decide on a(ocations, ris' le(els of a(ocations and so on$
T!e "anifestation of culture "a& be t!rou! subtler %a&s too$ Subtle "eans are t!ose t!at are not articulated
ob(iousl& but obser(ed delicatel&, intricatel& and t!rou! finer une3#ressed senti"ents$ )onte3tual silence
co""unicates "ore t!an con(ersational "essaes or #ictorial #resentations$ )ulture is t!us !as subDecti(e
as#ects$
)ulture is cu"ulati(e as it adds ne%er nuances as t!e %orld order c!anes and ne% "aterial artifacts e"ere$
Eac! eneration adds so"et!in to its culture$ )ulture t!us endures$ In t!e #rocess a culture "a& loo' totall&
transfor"ed o(er a "illenniu" or so$ T!is is cultural ada#tation or c!ane$ )ulture is d&na"ic$ No culture can
re"ain static, because en(iron"ent c!anes$ T!rou! d&na"ic c!aracter onl&, can a culture re"ain endured and
e3#andin$
c. Cu!tura! E=c*an2e" and UniHuene"":
Borderin nations9reions tend to !a(e so"e cultural "i3tures$ Man& reional cultures !a(e been influenced b&
contact %it! ot!ers, suc! as b& coloni5ation, trade, "iration, "ass "edia and reliion$ India did not lose !er
cultural identit& des#ite bein under different rules for centuries b& di(erse reliious lineae$
T!at is Indian culture2s uni6ueness$ Nor"all&, if &ou !a(e &our o%n culture, t!ere is less need for follo%in
ot!er2s culture$ But, African culture, es#eciall& Sub,Sa!aran African culture !as been s!a#ed b& Euro#ean
colonialis", and, es#eciall& in Nort! Africa, b& Arab and Isla"ic culture$ T!is is /Acculturation2 %!ic! "eans
re#lace"ent of t!e traits of one culture %it! t!ose of anot!er, suc! !as !a##ened to certain Nati(e A"erican
tribes and to "an& indienous #eo#les across t!e lobe durin t!e #rocess of coloni5ation$ T!is "a& also be
called /trans,culturation2 0u"anit& is in a lobal /acceleratin culture c!ane #eriod2, dri(en b& t!e e3#ansion
of international co""erce, t!e "ass "edia, and abo(e all, t!e !u"an #o#ulation e3#losion, a"on ot!er
factors$ )ulture c!ane is co"#le3 and !as far,ranin effects$ India, in t!e ad(ent of t!is centur&, reflects a
(er& #ro"isin i"ae for t!e future$ It is not onl& one of t!e "ost lucrati(e reions in t!e %orld for forein
in(est"ents but also an e"erin #o%er in t!e lobal econo"&$ In suc! a business scenario, t!e one t!in t!at
t!e Indian #rofessionals need to o#en t!eir "inds to is /-or'in in a Multi 1 )ultural En(iron"ent2$ India !as
no difficult& in t!is as "ost of !er #rofessionals !a(e studied9%or'ed in o(erseas en(iron"ent$
)ultural s!oc' is a situation of straneness or unacce#tabilit& or frustration felt b& one rou# or one #erson in
t!e "aterial, social, #olitical, tec!noloical, s#iritual or econo"ic s#!eres of life in a different eora#!ical or
#olitical rei"e %it!in or outside its9 !is nati(e land$ T!e da&s of lobali5ation in(ol(e reat cultural s!oc's$
Eatin !abits of one culture is a reat s!oc' for ot!er cultures$ E3a"#le: )!inese eat fis! sto"ac!s, .a#anese
eat uncoo'ed seafood, Ira6is eat salt dried locusts, 7renc! eat snails, and A"ericans eat beef an a(erae of @<<
#ounds a &ear$ 7ro" ot!er2s #erce#tion t!ese eatin !abits are cultural s!oc's$ But in due course of ti"e, due to
assi"ilation and acculturation cultural s!oc' recedes$ Later %!en t!e rou# or #ersons encounters its9!is o%n
culture it9!e "a& find a re(erse cultural s!oc'T
T!ere e3ist !i! culture and lo% culture$ T!e culture of t!e aristocrats is called /!i! culture2 %!ic! in(ol(es
e3#ressi(e or cons#icuous consu"#tion$ Pos! bunalo%s, la(is! life st&le and so on e3!ibit t!e %ealt! of
#eo#le$ 0i! culture stresses refine"ent and so#!istication of life st&le %!ic! is considered b& ot!ers as
corru#tin and unnatural de(elo#"ents t!at obscure and distort #eo#le2s essential nature$ Lo% culture refers to
t!e "ass culture or #o#ular culture t!ri(in on oods and acti(ities #roduced for, and consu"ed b& t!e "asses$
Lo% culture is need based consu"#tion for su##ortin a subsistence li(in closel& alinin %it! t!e natural
en(iron"ent$ Indienous #eo#le li(in aut!entic unble"is!ed li(es, unco"#licated and uncorru#ted are
#roDected as /noble sa(aes2$ A #erson of lo% culture %ill find a cultural s!oc' in a !i! culture en(iron"ent
and (ice (ersa$ Suc! scenarios are e3#loited in fil"s %it! "an& fil"s #ortra&in t!e !ero fro" a lo% culture
and !eroine fro" a !i! culture$ Initiall& culture s!oc' is "utuall& e3!ibited b& t!e", before reconciliation or
reinforce"ent of t!e s!oc'$
T!ere are /ci(ili5ed2 and /#ri"iti(e2 or /tribal2 cultures as %ell$ T!e ci(ili5ed culture is a culture of "odern
societ& %it! "easured ri!ts and co""ensurate res#onsibilities$ T!e tribal culture is de(oid of !u"an dinit&$
It is instinct based$ T!is classification is based on %!at #eo#le reall& do rat!er on %!at t!e& #rofess to do$ T!at
%a&, tribes "a& be "ore ci(ili5ed and t!e so called ci(ili5ed "a& be "ore /tribal2 in t!eir act$ A tribal %ill find
cultural s!oc' in t!e ot!er culture and (ice (ersa$
d. #e"tern Cu!ture and Orienta! cu!ture:
-estern culture is so"eti"es referred to as Euro#ean culture$ T!is is "ost easil& seen in t!e s#read of t!e
Enlis! lanuae and to a lesser e3tent, a fe% ot!er Euro#ean lanuaes$ 8o"inant influences include ancient
Greece, ancient Ro"e, and )!ristianit&, alt!ou! reliion !as declined in Euro#e$ In t!e -est, efficienc&,
ad!erin to deadlines and a !ost of ot!er si"ilar !abits are considered nor"al and are e3#ected$ Indi(idualit&
and aressi(eness are considered as (irtues$ Eastern or Oriental culture is "ore s#iritual (alue oriented$ -or'
is %ors!i#$ Grou# and collecti(is", des#ite !ierarc!ies, are (alued$ Indi(idualit& and aressi(eness can often
be inter#reted as a sin of disres#ectT Oriental culture is used to a s&ste" of !ierarc!& in t!e %or',#laceE senior
colleaues are obe&ed and res#ected$ T!e educated !a(e learnt to ada#t to t!e %estern culture, of course$ T!at is
t!eir reat abilit& to conte3tual cultural ada#tabilit&$
e. Bu"ine"" A-arene"" o' cu!ture":
Businesses need to be a%are of t!e culture of #eo#le t!e& interact %it! to be successful$ -it!in a countr& t!ere
used to be cultural differences across different societies and across reions as is t!e case in India$ T!ere %ill
also be cultural stereot&#e as found in t!e totalitarian Middle,east nations$ Understandin t!ose differences as
%ell as uni6ueness and ada#tin to t!e" is t!e 'e& business success$ 0ence is t!e sinificance of stud&in
cultural en(iron"ent$ T!e difficult& in understandin culture is sa"e cultural s&"bol "a& "ean e3actl&
o##osite "eanin in t%o cultural rou#s$ 7or instance a #al" #osture %it! t!e t!u"b in union %it! t!e indicator
finer and ot!er finers raised full& "eans /fineness2 in USA, /fineness2 or e(en /oneness %it! t!e God2 in
India, and /5ero or %ort!less2 in 7rance$ In Ger"an& it is used to tell a fello% lunatic, in .a#an it "eans /"one&
or e3c!ane2 and in Ger"an& it "eans /so"e obscenit&2$
&.:.& Cu!tura! (actor"
India is a culturall& di(erse9co"#le3 countr&$ T!e cultural "osaic is "ade u# b& a "i3 of se(eral factors in
different #ro#ortions$ T!e Nation, Reliion, Social Stratifications *suc! as Race, )o""unit&, )aste or Tribe+,
Reion, Lanuae, )o""unication St&les, Attitudes of Peo#le *suc! as "oti(ations, relations!i# #references,
ris' #references, etc$+, Perce#tion, Obtainin and Processin of Infor"ation b& Peo#le and ot!er cultural
factors$
Lare societies often !a(e subcultures, or rou#s of #eo#le %it! distinct sets of be!a(ior and beliefs t!at
differentiate t!e" fro" a larer culture of %!ic! t!e& are a #art$ T!e subculture "a& be distincti(e because of
certain de"ora#!ics li'e ae, race, et!nicit&, class, ender or lanuae$ T!e 6ualities t!at deter"ine a
subculture as distinct "a& be aest!etic, reliious, occu#ational, #olitical, se3ual or linuistic a co"bination of
t!ese factors$
a2 The Nation
A nation as suc! "a& "ean a #articular culture$ India for lon ti"e %as seen as a countr& of /#roletarian, &es,
"en and sna'e,c!ar"ers2$ T!is !as no% c!aned into a countr& of /#rofessionals, &eo"en doers and strateic
t!in'ers2$ Indians are no% rearded as Enlis!,s#ea'in soft,"annered !i! ac!ie(ers %it! #rofessional and
business acu"en$
Aressi(eness can often be inter#reted as a sin of disres#ect in India and "a& lead to a co"#lete lac' of
co""unication and "oti(ation on t!e #art of t!e Indians$ One needs to ta'e t!e ti"e to et to 'no% t!e" as
indi(iduals in order to de(elo# #rofessional trust$
Indians are ood !osts and indule in #ersonal tal' often$ All t!is is (er& "uc! a #art of business$ One is
e3#ected to acce#t t!e in(itation racefull&$ Ta'in a si"#le bou6uet of flo%ers %ould definitel& be a %elco"e
esture$ Indians res#ect #eo#le %!o (alue t!eir fa"il&$ T!e& %ill allo% fa"il& to ta'e #riorit& o(er %or',
%!ene(er necessar&$ As Indians are used to a s&ste" of !ierarc!& in t!e %or',#lace, senior colleaues are
obe&ed and res#ected$ At t!e sa"e ti"e, /talents are res#ected b& t!e talents2$ Educated Indians !a(e learnt to
ada#t to t!e %estern "et!ods of "onitorin one2s o%n %or' and co"#letin it on sc!edule
@. Re!i2ion
Reliion is interal to a culture$ T!e 8ictionar& of P!iloso#!& and Reliion defines reliion, / as an institution
%it! a reconi5ed bod& of co""unicants %!o at!er toet!er reularl& for %ors!i#, and acce#t a set of
doctrines offerin so"e "eans of relatin t!e indi(idual to %!at is ta'en to be t!e ulti"ate nature of realit&2$
Reliion often codifies be!a(ior, suc! as /t!e @< )o""and"ents of )!ristianit&2 or t!e /fi(e #rece#ts of
Budd!is"2 or t!e /; ti"es #ra&er a da&2 b& t!e Isla"$ So"eti"es it is in(ol(ed %it! o(ern"ent$ It influences
arts and arc!itecture$ Reliious s&"bols are %ors!i##ed and re(ered "uc!$
7esti(als, rites and rituals, cere"onies and functions and #!iloso#!ies of business are based in reliions$ Lot of
business fortunes surround t!ese reliious (ariables$
i .estivals, T!e )!ristianit& celebrates )!rist"as, Ne% 4ear and Good 7rida& in "e"orable %a&s$ T!e
Musli"s celebrate Ra"ad!an, B!a'rid and Mu!arru"$ T!e 0indus !a(e celebrations e(er& "ont!$ 8ee#a(ali,
8asara, Ra"na(a"i, >ris!na .a&ant!i and San'arant!i9Ponal are reat festi(als$ Besides t!ese, t!ere used to
be %!ole lot of local festi(als, es#eciall& for t!e 0indus li'e sanctification of ne% te"#les, #eriodical re,
sanctification of old te"#les, t!e earl& "ornin #ra&ers durin t!e Gt! "ont! of solar s&ste", etc$ Purc!ase
decisions of #ersonal and fa"il& %ares includin orna"ents coincide t!ese festi(al da&s$ E(en business
decisions li'e startin ne% (entures or e3#ansion are fir"ed u# on t!ese festi(als$ Businesses in India boo'
"ore sales durin festi(al da&s$
ii )ites and rituals, Reliious rites and rituals li'e co"#ulsor& ; ti"es #ra&er a da& b& t!e Musli"s, Sunda&
c!urc! #ra&er b& t!e )!ristians and %ee'l& fasts on s#ecific da&s, reliious #ilri"ae on foot, etc b& t!e
0indus abound$ All t!is "a'es t!e #eo#le "o(in out, al"s i(in, etc$ t!ese !a(e so"e business i"#lications
boostin certain trades and businesses$
iii Ceremonie" and 'unction": )ere"onies abound$ On i"#ortant "ilestones in one2s life li'e attainin
#ubert&, on t!e e(e of beco"in first,ti"e #arents, etc$ and anni(ersaries of sort li'e birt! and "arriae for t!e
ali(e, and deat! anni(ersaries of one2s #arents all in(ol(e cere"onies$ 7unctions li'e "arriae, !ouse %ar"in,
etc are occasions %!en bi #arties are arraned and ood s!o% of one2s econo"ic strent! is e3!ibited$ All
t!ese !a(e reat i"#lications, es#eciall& for te3tile, orna"ents, rocer& and ot!er businesses$
i Re!i2iou" /*i!o"op*ie" impactin2 @u"ine"": T!e Musli"s don2t c!are or ta'e interest on loans i(en as it
is forbidden$ T!at is t!e reason a ne% ban'in called Isla"ic Ban'in is de(elo#in no%, e3tendin to
insurance as %ell$ A"on t!e 0indus, t!ere are sections t!at are #ure (eetarians$
c. Socia! Strati'ication *Race 9 )o""unit& 9 )aste 9 Profession9 Reion+
)ultural rou#s e3ist based on affiliations$ T!e affiliations "i!t be /ascribed2 or /ac6uired2 "e"bers!i#$ T!e
/ascribed2 "e"bers!i# is based on /birt!2 li'e ender affiliation, ae, caste, race, nationalit& and t!e li'e$ T!e
/ac6uired2 "e"bers!i# is earned b& one2s education, #rofession, reliion, #olitical affiliation, life st&les, and t!e
li'e$
i )ace, Race is an /ascribed2 cultural factor$ Raciall& Indians belon to t!e Ar&an and 8ra(idian races$ T!e
8ra(idian race !as been little slo% to ta'e to business and !ad been tillers for lon ti"e and t!at !ad reduced
t!eir %ealt! base$ No% t!ere is a c!ane$ T!e sout! India is do"inated b& t!e 8ra(idian race and t!e nort! b&
t!e Ar&an$ But t!e 8ra(idian race !as been subDuated b& t!e Ar&an race$ 4et 8ra(idian race !as learnt t!e art
of o(ernance$ 7or an outsider, t!e racial differences are rat!er subtler t!an out%ardl& "anifest$
ii Communitie": T!ere are nu"erous co""unities %it! lot of et!nic s&"bols %!ic! are !eld so dear to t!eir
!earts$ T!ere are #roletarians, traders, business #eo#le, tribal, educators, financers, no"ads and so on$ )ertain
co""unities are s"art in business acu"en and ta'e to entre#reneurs!i# rat!er t!an bein #roletarian$ T!e
Bani&as of GuDarat, t!e )!ettiars 9Nadars of Ta"ilnadu, t!e Bra!"ins, Saits of RaDast!an9 Ma!arastra, t!e Nairs
of >erala, etc are 'no%n to be !a(in !i!er entre#reneurial nuances$ T!us t!e& !a##en to be t!e business
co""unit& %it! "ore %ealt! accu"ulated o(er centuries of business$ )ertain co""unities i(e i"#ortance to
education, "aterial and9or s#iritual$
T!e Go(ern"ent !as classified t!e co""unities for better taretin its de(elo#"ent sc!e"es$ Accordinl&
t!ere are: Sc!eduled )asts9Tribe, Bac'%ard )o""unit& and 7or%ard$ T!ere are educational and Dob
reser(ations for t!e Sc!eduled )asts9Tribe and Bac'%ard )o""unities$ T!ese reser(ations !a(e lot of business
i"#lications for t!e o##ortunities of education are ta'en to t!e less #ri(ileed and t!at businesses !a(e "ore
educated #eo#le to recruit$ O##onents of reser(ation %ould arue t!at reser(ations #er se reduce t!e 6ualit& of
education and Dob #erfor"ance because to an e3tent t!e "eritocratic is denied c!ances of education and
#lace"ent$
iii Ca"te "5"tem: )aste s&ste" is an /ascribed2 cultural factor$ It is ra"#ant t!at restricts "atri"onial e3c!anes
%it!in t!e castes onl&$ T!is !as beco"e a (ote ban' no%,ada&s and t!e (olu"inous castes !a(e "ore elected
re#resentati(es t!an t!e s"aller castes$ T!ere are caste associations and caste based u#!ea(als in certain #oc'ets
t!at tend to affect #eace and business interests$
i /ro'e""ion: Profession is an ac6uired cultural factor$ Accountants F Auditors, In(est"ent consultants,
P!&sicians, Enineers, Professors, Soft,%are e3#erts, Arc!itects, Ban'ers, Politicians, etc are certain
#rofessional rou#s$ Life st&les, social status, "oti(ations, etc differ a"onst #rofessions$
e. Re2ion
India is fairl& a bi countr&, t!ou! onl& one ti"e 5one is follo%ed$ T!e nort!ern states reel under cold and !ot
for I "ont!s %!ile t!e sout! used to !a(e nor"al te"#erature$ T!is (ariation s#ea's t!at t!e countr& is not
s"all, t!ou! onl& :$HJ of %orld land "ass it !as$ T!ere are different reions$ T!ere (ariations in reional
de(elo#"ents as %ell$ T!e central, central east, nort! east and e3tre"e nort!,%est are less de(elo#ed$ Political
factors, insurenc& #roble"s, lac' of o##ortunities for education, #oor infrastructure because of t!e terrain
features, etc co"bine to "a'e t!ese reions less de(elo#ed$ Lesser t!e de(elo#"ent, "ore are t!e e3#loitation
of t!e #roletarian and %ea'er t!e o(ernance$ In t!e %a& fello% !u"an are treated, #articularl& %o"en, cultural
ric!ness differs$ T!e inde3 of safet& to #erson and to "odest& of %o"en is not t!at !i! in t!e insurent
inflicted reions of t!e countr&$ T!en, t!e& stand lo% on cultural ric!ness$ 7urt!er a !ue order (icious c&cle,
t!at is difficult to brea', #re(ails$ T!is !as business i"#lications$ 4ou can ta'e it eit!er %a&E less or "ore
o##ortunities$ Less, because of t!e fact, t!at t!e su##ortin structure is non,e3istent$ More, because of
une3#loited resources abound$ 7ortunatel& or unfortunatel&, "ore of "ineral resources, oil, iron ore, coal, etc
abound in t!ese areas$ -it! #olitical culture, t!e reions can be "ade as ood as ot!er reions of t!e countr&$
T!ere e"ere "ore business o##ortunities$
!. Lan2ua2e
Lanuaes abound$ T!ere are reall& too "an& lanuaes and too "an& cultural #atterns too$ T!e de"arcation of
states ot!er t!an t!ose in t!e 0indi,belt, are lanuae based$ It is sacred co% and a local #olitician can si"#l&
#u"# in 9 blo% !ot (eno"ous #assions on lanuae (eil s!ould !e %ant to score so"et!in o(er so"eone, b&
si"#l& lin'in so"e fri(olous issue to t!e lanuae$ Lanuae !as lot of business i"#lications$
S!ould infor"ation broc!ures and ad(ertise"ent "essaes be in as "an& lanuaes or si"#l& a fe% or Dust one$
-it! u"#teen lanuaes an& sound %ill !a(e so"e "eanin, ood or bad, in so"e lanuae or t!e ot!er$ So,
e(en na"in brands "ust be carefull& done, lest t!e brand "a& !it a dead,end$ E(en %it!in t!e sa"e lanuae a
%ord "a& con(e& different "eanins for #eo#le fro" different countries s#ea'in t!e sa"e lanuae$ Note, at
least H<<< %ords in Enlis! !a(e different "eanins in Enland and in t!e USA$ 7or instance t!e %ord,
/turno(er2 in USA "eanin sales, !o%e(er "eans /redundanc&2 in t!e U>$ )ultural nuances are e3!ibited
t!rou! c!oice %ords in an& lanuae$ An alien business #erson "a& not 'no% t!is$ /4ou2 and /4our
E3cellenc&2 effecti(el& "eans /&ou2, but t!e latter is full of #ac'ed res#ects$ Arabic lanuae !as "ore t!an
I<<< %ords to describe ca"els, t!eir bodies and e6ui#"ents "eant to deal %it! t!e ca"els$ Arab culture is
inti"atel& related %it! t!e ca"els and t!at t!e lanuae is also "ade ric!er in ter"inoloical e3actness %!en
referrin to ca"els$ Sans'rit is 'no%n for s#ecial sounds t!at no ot!er lanuae !as and t!at best suited to offer
obeisance to God in r!&t!"ic %a(elent!s of a##ro#riate order$
2.Attitude"
of Peo#le *Moti(ations, Relations!i# and Ris' Preferences, etc+ )ulture is reflected b& #eo#le b& t!eir attitudes$
Moti(ation, relations!i# and ris' #references are certain cultural (ariables$
i Motivations, Moti(ations to%ards %or' and leisure, "aterialis" and s#iritualis", education and earnins,
#o%er and res#onsibilit&, %o"en and do%ntrodden, success and re%ard, 6ualit& and 6uantit&, ends and "eans,
aed and infir", #arents and c!ildren, "asters and sub,ordinates, !a(es and !a(e,nots, 6uic' "one& and !ard,
earned "one&, etc reflect cultural tendencies of #eo#le$ In t!e -est "ore "oti(ation is found in fa(our of
leisure, "aterialis", earnins, #o%er, re%ard, 6uantit& and ends$ Moti(ations c!ane as t!e& ac!ie(e econo"ic
ains$ Peo#le are "oti(ated to %or' if re%ards for success are "ore certain$ In India %e sa& t!e %or',
s#iritualis", education, res#onsibilit&, success, 6ualit&, "eans and !ard,earned "one& are #referred t!e "ost$
)oncern for %o"en Fdo%ntrodden, aed F infir" and sub,ordinates, lo(e for #arents and c!ildren and res#ects
for "asters is s#ontaneous$
ii )elationship preferences: Relations!i# #references refer to t!e 'ind of interactions one %ould #refer to !a(e
%it! su#eriors, #eers and sub,ordinates, t!e 'ind of orientation one !as 1 indi(idualis" or collecti(is" and t!e
li'e$ If t!e #o%er distance is "ore one %ould li'e to !a(e less interaction %it! t!e su#erior$ In t!e Euro#ean
culture t!e #o%er distance is less t!an in t!e Asian cultures$ A Euro#ean "anaer %!en transferred to an Asian
#osition, s!e %ould dialoue %it! !er subordinates$ And t!e subordinates "i!t not li'e t!is as t!e& are used to
#o%er distance and "ini"al direct interaction %it! t!e boss$ T!e& interact a"on t!e"sel(es "ore, an&%a&$
Peers enerall& interact "ore, %!en not in #ercei(ed t!reat of bein o(er,ta'en b& ot!ers of t!e rou#$ In
countries li'e USA, )anada, U>, Australia and t!e Net!erlands t!e score for indi(idualis" is "ore$ T!e Latin
A"erican countries and t!e Asian countries li'e India and .a#an !a(e !i! scores on collecti(is"$ >ins!i#
based collecti(is" #re(ail in )!ina and Me3ico$
iii Ri"8 pre'erence": Ris' #references in(ol(e oin t!e e3tra "ile, b& t!e unc!artered %aters$ In countries
%!ere t!e #reference for uncertaint& a(oidance is "ore, su#eriors !a(e to la& do%n clear,cut nor"s of be!a(ior$
Portual, Greece, Uruua&, Beliu", etc !a(e less tolerance for uncertaint&$ Most %est,Euro#ean countries
!a(e !i! tolerance for uncertaint&$ India is a countr& of uncertaint&E t!erefore &ou #refer or not uncertainties
are t!ere to ta'e$ 0ence t!ere are onl& accidental entre#reneurs unli'e in t!e Euro#e %!ere entre#reneurs b&
c!oice abound$
*. /erception) O@tainin2 and /roce""in2 o' In'ormation @5 /eop!e
Peo#le of different cultures #ercei(e, obtain and #rocess infor"ation differentl&$
i -erception of information: Perce#tion is based on t!e sensual in#uts$ 7or so"e cultures, due to #artl& enetic
factors, t!e sensual in#uts are (er& #recise enou! to #ercei(e t!e subtler ele"ents of t!e obDects$ 7or t!e
#roletarians a red is red, but for t!e #rofessional red "a& "ean cri"son red, blood red, c!illi red, %a3 red,
to"ato red and so on$ T!e cue is sa"e, but t!e #erce#tions differ based on e3#osure and linuistic abilities of
e3#ressi(e (ariations$ Arabic lanuae !as "ore t!an I<<< %ords to describe ca"els, t!eir bodies and
e6ui#"ents "eant to deal %it! t!e ca"els$ So, Arabic s#ea'ers %ill !a(e "ore e3#ressi(e #o%er o(er ot!er
lanuae s#ea'ers$ A #erson used to find fault %ill sa& a lass is !alf,e"#t&, %!ile ot!er #erson loo'in t!e
#ositi(e side %ill sa&, t!e lass is !alf full$ T!e cue is sa"e, but #erce#tion is different, based cultural
#ersonalit& differences$ T!ere are bot! 'inds of Indians$
ii Obtaining information: Obtainin infor"ation "a& differ across cultures$ T%o 'inds
of cultures e3ist, lo% conte3t and !i! conte3t$ T!e lo% conte3t culture #laces (alue
on t!e core issues, direct issues and blac' F %!ile infor"ation$ T!e !i! conte3t
culture #laces e"#!asis on #eri#!eral, indirect and intuiti(e F inferred infor"ation$
T!e !i! conte3t culture #eo#le don2t trust t!e lo% conte3t culture as bein "ore
transaction oriented t!an relations!i# oriented$
iii -rocessing of Information: Processin of Infor"ation (aries across cultures$ E(en
tele#!one directories "a& be al#!abeti5ed differentl&$ In USA t!e orderin is based on last na"e, %!ile in
Iceland it is first na"e based$ Aain, %!en dealin %it! custo"ers, in India better &ou finis! t!e deal %it! t!e
first co"er, before a ne3t #erson is entertained e(en for t!e sa"e 'ind of transaction$ T!is is "onoc!ronic
#rocessin$ If t!e second #erson is also si"ultaneousl& entertained, t!e first #erson t!in's !e is sli!ted a%a&
and t!e business #art& is not interested in t!e deal$ T!is is so in t!e nort!ern Euro#e as %ell and t!e USA$ But,
in sout!ern Euro#e,#ol&c!ronic #rocessin is order, %!ere "an& custo"ers are si"ultaneousl& attended to$
&.:.+ Approac*e" to Cu!tura! Comp!e=itie" @5 Bu"ine""e"
Et!nocentris", Reio,centris", Pol&,centris" and Geo,centris" are t!e different a##roac!es to c!oose fro"$
8e#endin on t!e le(el of international "ar'et #enetration, different a##roac!es "a& be ado#ted$
a. Et*nocentri"m
Et!nocentris" in(ol(es no cultural ada#tation e(en %!en &ou deal %it! aliens in !o"e countr& or in t!e forein
countries$ Ma& be &ou deal "ore %it! "ore of &our o%n et!nic rou#s and t!at it does not %arrant ada#tation or
&ou feel confident t!at &ou s!ould not lose &our cultural identit& or &ou feel t!at ot!ers %ill ada#t to &our
culture %!ic! &ou feel (er& su#erior$ T!e #roduct "a& not need ada#tation, but t!e co""unication "i!t need
ada#tation$ Stic'in to et!nocentris" s!ould not !a(e an& o##ortunit& cost of foreone re(enue$ 0otel
Sara(anaba(an and "an& ot!er sout! Indian et!nic restaurants function in forein countries, es#eciall& in t!e
Gulf, U>, USA and Sout! East Asian nations$ T!eir a##roac! is #urel& et!nocentric, because Idl& or Idia##a"
or Kada cannot be c!aned %!et!er sold in Madras or Mala&sia or Muscat or Madrid$ T!is is uni,culturalis" or
"onoculturalis"$
@. Re2io-centri"m
Reio,centris" in(ol(es cultural ada#tation based on t!e reions ser(ed$ -oolen dresses in Nort! India !a(e to
ser(e t!e t%in #ur#ose of st&le and %ar"t!,i(in, as aainst in Sout! India %!ere it is enou! it tac'les cold$
E3otic "odels of %ool %ears costin fe% t!ousand ru#ees are sold in t!e nort!, but co"in do%n sout! onl&
"odels costin fe% !undred ru#ees are enerall& offered$ So, reio,centric a##roac! is needed$
In t!e Gulf reion !o"es "ust necessaril& !a(e #ro(ision for air,conditionin, unli'e in India$ In Oot& !o"es
need not !a(e #ro(ision for air,conditioners or e(en fans$ But, roo" !eaters "ust be #ro(ided for$ In 8el!i and
t!e nort! india it %ould be ood if !o"es are fitted %it! bot! air,conditioners as %ell as roo",!eaters$
T!erefore, arc!itects "ust desin accordinl& and #ro(ide for electric #oints$ T!is is se"i,deree
"ulticulturalis"$
c. /o!5-centri"m
Pol&,centris" in(ol(es cultural ada#tation based on re6uire"ent in a i(en conte3t e(en %it!in a reion9nation$
One,for" of #ol&centris" is identif&in %it! t!e local culture in entiret&$ T!is is a !i!l& locali5ed for"at$
-orld,%ide obDecti(es "a& et sacrificed at t!e altar of fulfill"ent of locali5ed oals$ Anot!er for" is e(er&
outlet is #ol&centric in its offerin$
Muc! #luralis" or ada#tation is follo%ed$ 0i!,star !otels !a(e different cuisine to deli!t e(er& taste bud$
T!is "a& be costlier, but %orld,%ide as %ell as locali5ed obDecti(es et reali5ed$ In due course, t!e local culture
"a& start e3#eriencin ot!er o#tions and t!is "a& reduce too "uc! of (arieties$ T!is is full deree
"ulticulturalis"$
d. $eo-centri"m
Geo,centris" in(ol(es co""on offerin to t!e %!ole %orld as t!e %!ole %orld is treated as one culture$ Stron
brand strent! and su#erior cor#orate i"ae "a'e co"#anies follo% t!is a##roac!$ Pe#si or )o'e follo%s t!is$
Si"ilarl&, co"#uter fir"s offer sa"e "odels all o(er t!e %orld$ T!is reduces cost due to scale ad(antaes$
Mobile !andset co"#anies do t!is$ It "ust be noted t!at t!e& !a(e a rane of offerin, but it is sa"e for all
"ar'ets$ T!is is #er!a#s /acculturation2, t!at is a neation of culture as suc!$
To culture is to culti(ate or to ro%$ )ulture !as di"ensions of refine"ent, continuous i"#ro(e"ent,
trans"ission do%n to enerations$ Orani5ational culture is culti(atin t!e set of (alues and nor"s for conducts
%it!in and outside t!e orani5ation, refinin t!ese conducts, i"#ro(in u#on t!ese conducts and trans"ittin
t!ese to t!e enerations do%n$
&.:.1 Or2ani;ation cu!ture
Orani5ation culture is t!e su" total of beliefs, st&les, articulations, (alues and s&"bols t!at #ortra& an
orani5ations reason and "eans for e3istence$ It is "ade,u# of sub,cultures$
Leaders!i# culture, structural culture, %or' culture, rou#9di(ision culture, #roduct culture, "ar'et culture,
co"#etiti(e culture, relations!i# culture, o#enness culture, futuristic culture, d&na"ic culture, #ro,acti(e
culture, reacti(e culture and so on, are sub,cultures$
'eadership culture refers to t!e 'ind of leaders, t!eir (ision and "ission, t!eir st&le and decision,"a'in
abilities, t!eir abilit& to deleate and ot t!ins done, etc$ Transactional leaders and transfor"ational leaders,
#ro,acti(e leaders and reacti(e leaders, etc$ are certain culture "odels$
%tructural culture desins nature of flo% of aut!orit&9res#onsibilit&$ Riid F 7le3ible cultures and Tall F 7lat
cultures are t!e alternati(es rele(ant !ere$ Riid and tall cultures are "ore "ec!anistic and bureaucraticE %!ile
t!e ot!er t%o are oranic and d&na"ic$
Work culture refers to t!e 'ind of co""it"ent to %or'$ /-or' is -ors!i#2 is t!e ri!t culture$ -or'
resent"ent is not ood$ T!ere are 6ualit&, 6uantit&, ti"e, s#ace and ot!er considerations too$
#roup? individualized cultures refer to tendenc& of #eo#le to alin %it! t!e rou# or re"ainin "ore
inde#endent$ Grou# culture in(ol(in reater alin"ent leads to reater co!esi(eness and !ence to reater
e3cellence$ Indi(iduali5ed culture fosters creati(it& and leaders!i# de(elo#"ent$
-roduct culture refers to le(el of co""it"ent to offer su#erior #roducts9 ser(ices, ne% and inno(ati(e
#roducts, #roducts benc!,"ar'ed aainst bests and t!e li'e to consu"ers$
Market culture concerns %it! co""it"ent to "ar'et orientation$ )onsu"ers constitute t!e "ar'et$ A consu"er
centric a##roac! e3#lains %!at "ar'et culture is$
Openness culture refers to le(el of trans#arenc& in t!e dealins of t!e orani5ation$
.uturistic culture refers to co""it"ent to loo' for%ard, introducin c!anes, inno(atin for t!e to"orro%,
and so on$
D5namic cu!ture refers to co""it"ent to re"ain acti(e$ S!eddin status,6uois" and #ro#ellin for c!ane
and ro%t! c!aracteri5e d&na"ic culture$
ompetitive culture refers to co""it"ent to be co"#etiti(e and fosterin rat!er t!an curtailin co"#etition$
/Li(e and let li(e2 c!aracteri5e sound co"#etiti(e culture$
Re!ation"*ip cu!ture refers to "aintainin lon,ter" relations!i# %it! sta'e!olders be t!e& consu"ers,
su##liers, e"#lo&ees, etc$
-ro"active culture is oriented to%ards findin ne% o##ortunities for ro%t! and %or'in u#on suc! ne%
o##ortunities$
)eactive culture is res#ondin to c!anes in en(iron"ent$ /Better late t!an ne(er2 t&#e of orientation$
Intrapreneurial culture is co""itted to !arness entre#reneurial instincts of e"#lo&ees, roo"in suc!
entre#reneurial s'ills to !i!er le(els so t!at t!e& branc! out and beco"e o%n business #ro"oters t!e"sel(es$
Masculine culture in(ol(es "ore aressi(eness in dealins$ 7e"inine culture is "ore adDust"ent oriented$
&.E. RE$IONAL TRADE BLOCOS
LPG #olic& is bein follo%ed b& "ost countries of t!e %orld %it! a reional fla(our, %it! sout!,sout!, nort!,
nort! collaborations$ Reions !a(e been recordin ood success too$ Trade blocs are (er& co""on$ Nort!,
Sout!, Nort!,Nort!, Sout!,Sout! coalitions e3ist$ Nort! denotes t!e %ell de(elo#ed countries and sout! denotes
t!e less de(elo#ed countries$ Trade bet%een t!ese !e"is#!erical di(isions can be called as inter,reional trade$
Besides, t!ere are "an& ot!er reional blocs and trade a"on t!e "e"bers of t!e bloc is called trade %it!in a
bloc' or intra,reional trade$
&.E.1 Trade @!oc"
T!ere are "an& trade blocs for"ed b& nei!borin countries$ Trade blocs e3ist side
b& side -TO, %!ic! is but a "ea bloc of o(er @;< countries$ Initiall& -TO felt little odd %!en countries
entered into reional trade aree"ents$ No%, conflicts aren2t found bet%een trade blocs and -TO$
a2 auses for emergence of trade blocs
T!e incenti(es for suc! reional rou#ins are:
i$ Goods !a(e to be trans#orted for s!orter distance onl& to international bordersE
ii$ Mar'et conditions li'e consu"er tastes and #references tend to be si"ilar and t!at #roduct acce#tance is
al"ost certainE
iii$ T!e countries because of t!eir #ro3i"it& "a& !a(e sa"e lineae, !istor&, #roble"s, #ros#ects and
interestsE i($ Trade relations!i# is a stron strateic relations!i# as %ell and t!at friendl&
understandin %ould e"ere as b&,#roduct$
b2 Notable regional trade associations
Notable reional trade associations are as belo%:
i NA(TA*Nort! Atlantic 7ree Trade Aree"ent+ for"ed in @G== %it! USA, )anada and Me3ico as "e"bers
ii EU *Euro#ean Union+ %it! @; countries *oriinall&+ (i5, Beliu", 7rance, Ger"an&, Ital&, Lu3e"bour,
Net!erlands, Enland, S#ain, Portual, Ireland, 7inland, Austria, S%eden, 8en"ar' and Greece as "e"bers,
and no% %it! anot!er @< "ore countries alsoE
iii LA(TA *Latin A"erican 7ree Trade Area+ establis!ed in @GI@ %it! Arentina, Bra5il, Me3ico, )!ile, Peru,
Uruua&, Paraua&, )olo"bia and E6uator as "e"bers,
i( ANMCERTA *Australia Ne% Bealand )loser Econo"ic Relations Trade Aree"ent+ %it! Australia and
Ne% Bealand as "e"bers created in @G==,
( $CC *t!e Gulf )o,o#eration )ouncil+ consistin of ulf countries as "e"bers,
(i CEEAS *Econo"ic )o""unit& of )entral African States+,
(ii CARICO3 *)aribbean )o""on Mar'et+ %it! countries in Latin A"erica as "e"bers,
(iii ASEAN *Association of Sout! East Nations+ %it! "e"bers!i# of Indonesia, Mala&sia, P!ili##ines,
Sina#ore, T!ailand and Brunei,
i3 SAARC *Sout! Asian Association of Reional )or#oration+ %it! India, Banlades!, Ne#al, B!utan, Sri
Lan'a, Maldi(es and Pa'istan as "e"bers,
3 SADCC *Sout! African 8e(elo#"ent )oordination )onference+ %it! "e"bers of Sub,Sa!aran countries are
so"e reional blocs$ 0ere reion "eans areation of countries$
A notable colla#se of an RTA !as also !a##ened and t!at is t!e case of t!e )ouncil for Mutual Econo"ic
Assistance *)OME)ON+ %it! t!e disa##earance of t!e co""unist bloc in Eastern Euro#e$
T!ese blocs are of (arious for", #o%er, influence and success$ ASEAN is a collaboration of industr& and
ariculture$ T!e EU, NA7TA and t!e Pacific Ri" Union %ill #ose t!e reatest #o%er blocs in future$ Man&
de(elo#in countries !a(e entered into tradin blocs as a reaction aainst loss of access to de(elo#ed countr&
"ar'ets or as a base to build econo"ic interation and "ar'ets$ Of t!ese blocs, t!e EU, NA7TA and ASEAN
are (er& i"#ortant$
c. Aim" o' Trade B!oc"
T!e reional bloc's ai" for free trade a"on "e"bers of t!e reional bloc, co""on e3ternal co""ercial
*tariff and 6uota+ #olicies for "e"ber countries, free "obilit& of factors %it!in t!e bloc, !ar"oni5ed econo"ic
#olicies for "e"bers of t!e bloc and a su#ranational orani5ational structure for econo"ic #olic& for"ulation,
i"#le"entation and control a"onst t!e "e"bers of t!e bloc$
7ro" free trade area *7TA+, to custo"s union *)U+ to co""on "ar'et *)M+, to econo"ic union *EU+ and to
total econo"ic interation *%it! co""on currenc& as in t!e case of EU %it! Euro as t!e currenc& for t!e @:
countries of EU since @GGG+ are t!e staes of successi(e econo"ic interation of countries in t!e bloc$
&.E.& Inter-re2ion Trade amon2 Re2iona! $roup" and Intra-re2ion Trade o' Re2iona! $roup"
Inter,reion trade a"on t!e reional rou#s refers to trade bet%een t%o or "ore reional rou#s li'e trade
bet%een a "e"ber countr& of NA7TA and a "e"ber countr& of EU, sa& bet%een t!e USA and Ger"an&$
Trade bet%een India of t!e SAAR) bloc and T!ailand of t!e ASEAN bloc or trade bet%een Sultanate of O"an
of t!e G)) bloc and Arentina of t!e LA7TA are furt!er e3a"#les$ Trade bet%een Me3ico of t!e
Nort! A"erica and 8ubai of t!e of t!e Middle east or trade bet%een Bra5il of Sout! A"erica and 7rance of t!e
Euro#e reion are e3a"#les$ Unifor" la% and #rocedures, reional s#eciali5ation on t!e basis of resource
endo%"ents, etc i(e a boost to interreional trade$
Inter,reional trade !as ro%n since t!e e"erence of econo"ic blocs or reions, because it is eas& to #us!
trade a"on blocs or reions t!an a"on indi(idual countries$ In t!e case of trade bet%een countries %it!out
an& reional blocs or ot!er areation, neotiations %it! eac! and e(er& countr& are needed #er!a#s for e(er&
"aDor #roduct or ser(ice class$ T!at is a reat irritation and ti"e consu"in #rocess and #olitical relations
bet%een t!e countries in 6uestion %ei! "uc! t!e #ace and de#t! of trade$ But in t!e case of countries co"in
t!rou! a trade bloc to trade %it! countries of ot!er trade bloc, i(en t!at t!e blocs are alread& !a(in
aree"ents on trade, indi(idual countries2 #olitical relation do not co"e as !urdle, for trade is o(erned b&
aree"ent bet%een t!e t%o blocs$
Trade %it!in a bloc' or reion or intra,reion trade refers to trade bet%een "e"bers of a #articular bloc$ Trade
bet%een )anada and USA bot! "e"bers of NA7TA and Nort! A"erica, bet%een Ger"an& and Beliu" bot!
in Euro#e and Me"bers of EU and t!e li'e co"e in t!e intra,reion trade$ Intra,reion trade is also #oised for
ro%t! because under trade bloc aree"ent, indi(idual countries need not neotiate inter se, as t!e collecti(e
aree"ent ter"s %ill ta'e care of trade bet%een "e"ber countries$ Absence of tariff barrier is a reat ad(antae
for intra,reion trade$ In case of co""on currenc& e3c!ane ris' also does not arise$ Besides, in(est"ent flo%
%ill rise u# leadin to trade in #roducers2 oods li'e ca#ital e6ui#"ent, #lant, "ac!iner&, ra% "aterials, etc$
rat!er t!an consu"ers2 oods$
Table @@ i(es data reardin eora#!ical reion based inter,reional trade and intra,reional trade in
"erc!andise oods for :<<I in #ercent ter"s$
North 4merica!s trade %it! Nort! A"erica, t!at is intra,reion trade a"ounted to A=$HJ its total lobal trade$
T!e inter,reional trade accounted for I@$IJ %it! Sout! F )entral A"erica accountin for ;$?J, Euro#e
accountin for @=$AJ, )IS countries for @J, Africa for A$HJ, Middle East for A$@J and Asia accountin for
A<$@J of Nort! A"erica2s lobal trade$ It is e(ident t!at Nort! A"erica2s sinle "aDor tradin #artner is Nort!
A"erica itself$ Ma& be t!is is due to t!e NA7TA$ Ne3t, co"es t!e Asian reion %it! A<$@J$ Nort! A"erica is
!a(in balanced trade %it! "ost reions$
%outh @ entral 4merica!s intra,reional trade is :G$;J of its total lobal trade, balance ?<$;J is inter,
reional trade$ Pro3i"it& %it! t!e Nort! A"erica !as "ade t!e
sa"e its sinle larest inter,reional trade #artner %it! :=$HJ s!are, follo%ed b& Asia %it! @=$HJ of t!e
reion2s lobal trade$
T!e CIS countries !a(e less intra,reional trade of :?$?J and a"onst t!e interreional trade #artners Euro#e
is sinle larest #artner %it! H=$?J of t!e countries2 collecti(e trade$
A (er& #eculiar #icture is seen as to t!e *urope as t!e reion2s intra,reional trade is !i!est at ?@$AJ of its
lobal trade$ Euro#e reion is (astl& de(elo#ed one and t!at intra,trade is "ore$ Asia is its sinle larest inter,
reional trade #artner accountin for @@$=J of its lobal trade$
4frica!s intra,reional trade is t!e lo%est at @@$IJ of t!e reions lobal trade$ Euro#e and Asia are "aDor inter,
reional trade #artners$
Middle"east region!s intra,reion trade is @=$=J$ Euro#e and Asia are "aDor inter,reional trade #artners %it!
AA$=J and :G$:J s!are of t!e reion2s lobal trade$
A"ia is !a(in second larest, ne3t onl& to Euro#e, intra,reion trade accountin for ;?$?J due to si"ilarit& in
culture of "e"bers$ A"on t!e inter,reional trade #artners, Nort! A"erica, Euro#e and Middle East are
al"ost e6ual #artners %it! t!e s!are !o(erin bet%een @@and @AJ$
Ta@!e 11- P S*are o' Re2iona! Trade (!o-" in #or!d 3erc*andi"e E=port") &CC:
UNIT III
$LOBAL STRATE$IC 3ANA$E3ENT
+.1 INTRODUCTION
An i"#ortant strea" of literature on "ultinational enter#rises *MNEs+ relates to !o% t!e& orani5e and "anae
%orld%ide o#erations, for t!is !as i"#lications on t!eir strateic control, s!ared co""unication, and
#erfor"ance 6ualit&$ Global Business Manae"ent is beco"in "ore and "ore strateic toda& %!ic! in effect
in(ol(es effecti(e alinin %it! t!e lobal en(iron"ent in a "ore #roacti(e "anner$ Global en(iron"ent
#ro(ides e3tended o##ortunities and also reat t!reats$ MNEs dri(en b& ro%t! instincts e3#loit o##ortunities
and o(erco"e t!reats$ Ri!t alliance %it! t!e en(iron"ent !el#s e3#loitin o##ortunities and o(erco"in
t!reats$ Needless to sa& t!e MNEs "ust 'ee# t!eir !ouses strent!ened and co""itted to t!e lobal a"bition$
7or"ulation of strateies and i"#le"entation of t!e sa"e %!ic! constitute t!e core functions of strateic
"anae"ent, re6uire effecti(e orani5ation structures, %it! e"bedded s&ste"s of #ro,acti(e control, s"art
infor"ation s&ste"s, e3cellin #erfor"ance "easure"ent "ec!anis"s and for%ard loo'in e(aluation sc!e"e$
Global strateic "anae"ent in(ol(es !a(in all t!ese and "ore so as to be able
to in a #osition to e3#loit t!e e3tended o##ortunities and face t!e t!reats as "a& !a##en$
T!e ter" strate& refers to t!e art or 'nac' of co""andin and "aneu(erin resources, includin
orani5ational desin, control s&ste" and e(aluation "ec!anis", to attain a decisi(e ad(antae o(er t!e
co"#etitors for t!e fruitful e3#loitation of o##ortunities #ro(ided b& t!e en(iron"ent and9or 'ee#in at ba&
certain t!reats %ielded b& t!e en(iron"ent$
Globali5ation is a c!ane in t!e business en(iron"ent %it! ne% found o##ortunities and e3#ected and
une3#ected t!reats$ 7or instance, businesses no% can ta# forein ca#ital resources and "ar'et and ac6uire fir"s
o(erseas %!ic! are all o##ortunities$ At t!e sa"e ti"e t!ere builds u# lobal co"#etition, ta'e o(er #ossibilities
and contaion ris's %!ic! are all t!reats$ MNEs "a'e strateic res#onses to t!e c!anin en(iron"ent$
Accordin to Ric'& Griffin, strate& !as essentiall& four basic areas, na"el&: Sco#e,
Resource, Uni6ueness and S&ner&$
Scope o' a "trate25 defines its functional, eora#!ical, #roduct9ser(ice and relational do"ains$ 7unctional
do"ains refer to "ar'etin, #roduction etc o##ortunities$ Geora#!ical do"ains are concerned %it! "ar'ets
ser(ed and sourced$ Product do"ains define #roduct9 ser(ice lines and rane$ Relational do"ains deal %it! t!e
internal and e3ternal affiliations and t!e strent!s of bonds$ Sco#e of a strate& t!us #rescribes t!e le(el of
s#read of t!e s#an of acti(ities of t!e orani5ation$
Re"ource" o' a "trate25 refer to %!at and !o% "uc! of resources t!e orani5ation %ill e"#lo& across (arious
areas$ Orani5ational resources, financial resources, !u"an and tec!noloical resources co"e !ere$ )!oice "i3
of do"estic F forein, o%ned F ac6uired and so on be in(ol(ed
UniHuene"" o' a "trate25 refers to t!e distincti(e co"#etence of t!e orani5ation on
t!e strent! of %!ic! t!e strate& is built to attain le(erae o(er its co"#etitors as %ell as ot!er strateic
alternati(es$ )lose to consu"ers t!rou! o%n retail establis!"ent, s#eed of action, tec!noloical ede, etc$ "a&
be t!e distinct ad(antaes$
S5ner25 flo%s t!en$ S&ner& is cascadin effect of collated strent!s t!at s%ee#s all t!reats and &ields co#ious
ains$ T!e ad(antae of bein a s&ste" is t!e s&ner&$ S!ould t!ere be no s&ner&, t!ere need be no s&ste"$
T!e sco#e, resources and uni6ueness of t!e strate& s!ould i(e s&neristic result$ -!ile desinin a strate&
t!e "anae"ent "ust see t!at all t!e four constituents of a strate& are #resent$
Strate2ic 3i=
T!e strateic "i3 !as t!ree le(els$ At t!e to# is cor#orate strate&, at one le(el belo% is t!e business strate&
and at t!e botto" is t!e functional strate&$ T!is is t!e !ierarc!& of strateies$
Corporate "trate25 is about t!e course c!arted for t!e %!ole of t!e orani5ation$ It deals %it! t!e /%!at2
as#ect$ It is also 'no%n as t!e /rand2 strate&$ )or#orate strate& de#ends on t!e cor#orate oal$ And cor#orate
oals could rane fro" on t!e one end, a curtail"ent oal to on t!e ot!er a di(ersification oal, %it! status,6uo
and ro%t! oals in bet%een$ T!e curtail"ent oal calls for a retrenc!"ent strate&$ It is a bold atte"#t to do
a%a& %it! e3cess fat, units t!at are causin entro#&, di(isions t!at are not #ro,s&neretic and functions t!at
!a(e lost strateic sinificance$ In a %a& it is about turnaround or do%nsi5e of an orani5ation$ T!e status,6uo
oal calls for a stabilit& strate&$
0ere t!e orani5ation is #rett& !a##& %it! t!e #resent$ It neit!er %ants to add on a fe% %ins nor s!ed so"e
feat!ers$ It is a consolidation,oriented oal$ 0ence, it is ado#ted after retrenc!"ent or after !ectic ro%t! #!ase
or so$ Mature co"#anies ado#t t!is strate&, %!erein scale ad(ances are atte"#ted t!rou! "ore eora#!ical
co(erae$ T!ere is /eora#!ical2 s#read and rise in "ar'et s!are$ Mar'et co(erae is bein "astered !ere$
7inall&, bac'%ard and for%ard e3#ansion oals co"e %it! a di(ersification strate&$
Related and unrelated di(ersifications are #ossible$ It s!ould be noted t!at co"#etiti(e distincti(eness and
s&ner& are not lost$ It is 6uite #ossible %it! unrelated di(ersification strateic "anae"ent "a& call for
di(ision of t!e business into strateic business units *SBUs+, eac! %it! o%n "ission, (ision and strateic
initiati(es$ T!en %it! res#ect to eac! suc! SBU, suitable cor#orate le(el strate& "a& !a(e to be dra%n u#$
)or#orate le(el strateic alternati(es for /stars2, /cas! co%s2, /6uestion "ar's2 and /dos2 "a& !a(e to be
for"ulated$ In for"ulatin cor#orate strate&, in,de#t! en(iron"ental anal&sis and orani5ational anal&sis need
to be "ade to 'no% !o% t!e strent!s and %ea'nesses of t!e orani5ation can be "atc!ed %it! t!e
o##ortunities and t!reats of t!e en(iron"ent$
7Bu"ine"" "trate2ie"9 are concerned %it! t!e /!o%2$ 0o% s!ould t!e orani5ation a##roac! its alinin %it! t!e
en(iron"entC T!ere are four a##roac!es !ere$ Griffin #uts u# t!e" as follo%s$ 8efender, Reactor, Anal&5er and
Pros#ector strateies are t!ese$ T!ese strateic alternati(es e"ere fro" certaint&,uncertaint& conditions of t!e
en(iron"ent and t!e fir"2s res#onse$ 8efender strate& is of t!e "ost unassu"in for"$ It is #ro,status,6uo$
T!e fir" is satisfied %it! t!e #resent$ T!is is suitable in a certaint& en(iron"ent$ T!e fir" #er!a#s !as a narro%
nic!e "ar'et$ T!e fir" !as no bi a"bitions$ But %!en discontinuous c!anes ta'e #lace in t!e en(iron"ent,
t!e fir" ado#tin defender strate& "i!t !a(e no territor& to defend$ It can, !o%e(er, %or' if distinct and core
co"#etences are t!e bases on %!ic! t!e fir"2s #lans and actions are founded$
Ana!5;er "trate25 is one %!ere t!e fir" is not silent, but steadil& "odif&in its course in tune %it! t!e
c!anin en(iron"ent and co"#etitors2 strateies$ It suits t!e ris',t&#e en(iron"ent, %!ere, %!ic! %a& t!e
en(iron"ent is c!anin, can be 'no%n b& ado#tin #robabilistic forecastin "odels$
Ne% #roducts and "ar'ets are scouted for in a "oderate %a&$ Laards are entl& i(en u#, %!ile cas!,co%s
recei(e t!e full t!rust$ A "i3 of di(ersification, e3#ansion and retrenc!"ent oals are t!us found !ere$
Pros#ector strate& loo's out for ne% o##ortunities and learns about t!e sa"e$ In an uncertain en(iron"ent
discontinuous c!anes are t!e realit&$ So #ros#ector strate& suits suc! en(iron"ent$ E3ce#tional abilit& to i(e
u# old custo"s and i"bibe ne% cultures is t!e bac',bone of t!e #ros#ector strate&$
7inall& t!e Reactor "trate25 !as found fa(our %it! a fe%$ It is ill,concei(ed one and as suc! is not tuned to
en(iron"ent$ No o##ortunit& is rea#ed but 6uite a nu"ber of t!reats are faced$ In t!e end, instead of
strent!enin strent!s, %ea'nesses et strent!ened$ A (iscous c&cle #er!a#s results !ere to t!e detri"ent of
t!e fir"$
(unctiona! "trate2ie" address t!e o#erati(e functional areas li'e #roduction, "ar'etin, finance, #ersonnel and
RF8$ Production strate& addresses c!oice of #lant, location, scale of #roduction, etc$ Mar'etin strate& deals
%it! t!e ? Ps 1 #roduct, #lace, #rice, #ro"otion, #!&sical e(idence, #eo#le and #ublic relations$ 7inance
strate& o(erns ca#ital structure, assets #ortfolio, ris',return trade,off, %or'in ca#ital "anae"ent, etc$
Personnel strate& is concerned %it! recruit"ent, selection, co"#ensation, de(elo#"ent and se#aration of
!u"an resources$ And RF8 strate& deals %it! RF8 base, su##ort, co"#etiti(eness, etc$ 7unctional strateies
are "ore action,#ac'ed$ T!ese s!ould be clear,cut and address (er& s#ecificall& t!e /!o% "uc!2 as#ect$
Structure) Contro!) In'ormation) /er'ormance . Ea!uation
Strate25 imp!ementation calls for an orani5ation structure, control "ec!anis"s, infor"ation s&ste",
#erfor"ance "easure"ent and e(aluation s&ste"s$
Or2ani;ationa! "tructure i(es t!e fra"e%or' or lines of co""unication, aut!orit&, res#onsibilit& and
accountabilit&$ Orani5ational structure s#ecifies t!e fir"2s re#ortin relations!i#s, #rocedures, controls and
aut!orit& and decision #rocesses$ It is a critical co"#onent of effecti(e strate& i"#le"entation #rocess$
Orani5ational structure #ro(ides for s#eciali5ation and interfaces a"on s#eciali5ations for collaborati(e
s&neris" and co"#etiti(e d&na"is"$ 7or MNEs decidin t!e orani5ation structure is (er& i"#ortant because
it cannot be t!e sa"e for all units and at t!e sa"e ti"e cannot be Dust one desin
for all$ -!ate(er t!e desin, it "ust be oranic enou! to ada#t to situations$ T!e structure "ust !a(e stabilit&
to facilitate da& to da& acti(ities to o on consistentl& and fle3ibilit& to facilitate ta'in ad(antae of
o##ortunities t!at en(iron"ent t!ro%s u#$
Contro! mec*ani"m addresses t!e s&ste"s in #lace to ensure t!at t!e "issions and oals are reali5ed as
#lanned$ 7or MNEs t!ere are s#ecial #roble"s in control because of di(ersit& of locations and cultural and
en(iron"ental differences$ So"e 'ind of loose,ti!t #!eno"ena are needed$
In'ormation "5"tem #ro(ides connecti(it& %it! all outside, inclusi(eness %it! all inside and certaint& to all
concerned$ A real ti"e, reliable infor"ation s&ste" %or's for t!e best of all$ Infor"ation s&ste" de#ends on t!e
structural #attern and control "ec!anis" follo%ed$
7or MNEs %it! di(erse eo,settins ratins of e3ecuti(es need to be fool #roof$ T!is calls for !olistic
#erfor"ance "easure"ent$ -!at is #erfor"anceC -!at are t!e t!rust functional 9 strateic areas for %!ic!
#erfor"ance "easure"ent is neededC -!at are t!e #ara"eters of #erfor"ance for eac! of t!e functional 9
strateic areasC 0o% is #erfor"ance "easuredC -!at are t!e adDust"ents in #erfor"ance #ara"eters called for
conte3tual (ariations across different eo,settins of MNEsC T!ere "ust be strateic #ur#ose in #erfor"ance
"easure"ent too$
7inall& t!e e(aluation s&ste" co"es$ E(aluation in(ol(es adDudin #erfor"ance as outstandin or ood or bad
based on certain benc!"ar's or standards or tarets or budets$ T!ere are #roble"s of c!oice of one or t!e ot!er
standard9benc!"ar' for MNEs due to eo,differencesC But an effecti(e9acce#table e(aluation is called for$
7or"ulation and i"#le"entation of different le(els of strateies are lin'ed$ )or#orate strateies are for"ulated
and i"#le"ented first$ T!is leads to for"ulation and i"#le"entation of business strateies$ T!en follo% t!e
for"ulation and i"#le"entation of functional strateies$ T!e Board of 8irectors and )EO for"ulate cor#orate
strate&, %it! i"#le"entation res#onsibilit& restin on t!e )EO$ T!e )EO and functional !eads for"ulate t!e
business strateies, %it! i"#le"entation res#onsibilit& restin on t!e functional !eads$
7unctional !eads %it! o%n de#uties and ot!ers for"ulate res#ecti(e functional strateies, %it! i"#le"entation
res#onsibilit& restin on t!e functional9di(isional de#uties$ Lin',#ins are t!us in(ol(ed fro" one le(el u# to t!e
ne3t do%n in t!e ladder to ensure continuit& and s&ner&$
+.&. LEARNIN$ OBIECTI<ES
[ To e3#lain t!e conce#t and contents of lobal strateic "anae"ent
[ To #resent t!e ne3us a"on Structure, )ontrol, Infor"ation and Perfor"ance E(aluation
[ To #resent t!e conce#t of, and issues in orani5ational structural *OS+ desins of MNEs
[ To deliberate on t!e basic #atterns of Orani5ational Structures *OSs+ of MNEs
[ To #resent t!e features and assess t!e suitabilit& of different traditional OSs suc! as Product OS,
7unctional OS, Area OS, Matri3 OS, ProDect OS, etc$
[ To e3a"ine OS Trends balancin o##ortunities for lobali5ation and locali5ation
[ To #resent e(ol(in OS li'e Net,%or'ed OS, S#in,offs F Lead Subsidiar&
Orani5ations
[ To #resent t!e issues in Location of 8ecision Ma'in Po%er in MNEs 1 Pressures for lobali5ation Ks
locali5ation F )a#abilities of #arent and local "anaers
[ To discuss t!e A##roac!es to and as#ects of )ontrol
[ To e3#lain General )ontrol Mec!anis"s
[ To discuss )ontrol in S#ecial Situations
[ To #resent Re6uisites of )ontrols in MNE2s conte3t
[ To e3a"ine t!e Structure and )ontrol Interface
[ To i(e an o(er(ie% of t!e role of Infor"ation s&ste"s
[ To e3#lain t!e 8i(erse for"s of Infor"ation s&ste"s 1 BI, Metadata, MIS, ERP, E)M
[ To discuss t!e Paradi" s!ift fro" #roduct orientation to 'no%lede orientation
[ To #resent t!e o##ortunities and c!allenes MNE2s Infor"ation S&ste"s
[ To elucidate t!e )once#t and Mec!anics of Perfor"ance Measure"ent
[ To discuss Karious 7inancial Perfor"ance Indicators
[ To discuss Karious Non,financial Perfor"ance Indicators
[ To discuss Karious >e& #erfor"ance indicators
[ To #resent t!e )once#t and T&#es of Perfor"ance E(aluation
[ To discuss t!e E(aluation Process: E(aluation acti(ities and 8i"ensions
[ To e3a"ine t!e di(erse Need for or a##lication areas of E(aluation
[ To discuss features, t&#es and uses of Benc!"ar' S&ste" of E(aluation
[ To discuss features, t&#es and uses of Budetar& S&ste" of E(aluation
[ To discuss features, t&#es and uses of Standard )ostin S&ste" E(aluation
[ To discuss features, t&#es and uses of Balanced Score )ard S&ste" of E(aluation
+.+ STRUCTURAL DESI$NS O( 3NES
-!ile it is beco"in true t!at for" "ust follo% function, t!ere are so"e traditional9 classical orani5ational
structures t!at are follo%edE besides ne% structures are e3#eri"ented %it!$ MNEs are !a(in %ide o#tions, for
different eo,locations "a& suit9dictate different structures$ 0o% "uc! (ariet&C 0o% "uc! unifor"it&C Kariet&
in %!ic! as#ectsC Uni6ueness in %!ic! as#ectsC -!ere (ariet&C -!ere unifor"it&C 0o% is t!e balance !it
u#onC T!ese are certain issues t!at #ro# u# ri!t !ere$ Structural desins are i"#ortant for MNEs for t!e& affect
s&neries, cost, control, res#onsi(eness, co"#etiti(e strent!, etc$ co"#anies c!ane structures to ain "ore
and "itiate disad(antaes$ 7or instance, No'ia is earin u# for t!e future b& alterin its co"#an& structure
startin .anuar& :<<=$ T!is initiati(e ai"s for /reater effecti(eness, s#eed u# ti"e to "ar'et for ne% #roducts,
and increase t!e efficienc& of its "ar'etin and #roduction efforts2$
+.+.1 Concept and I""ue" in Structura! De"i2n o' 3NE"
Accordin to Bartlett and G!os!al, MNEs are re#resented b& units s#read t!rou!out t!e %orld t!at need to be
coordinated or interated in so"e for" and to so"e deree$ T!e differentiation and interation of units needs to
be done %it! so"e attention #aid to bein loball& co"#etiti(e, efficient, res#onsi(e and fle3ible to local needs
and conditions and bein able to transfer t!eir learnin across units$ In essence, MNEs are fir"s t!at need to be
lobal and local *"ulti,do"estic+ at t!e sa"e ti"e$ T!ere are, !o%e(er, (ar&in le(els of /lobalness2 and
/localness2 t!at MNEs need to ac!ie(e t!rou! a##ro#riate orani5ation structure.
Or2ani;ationa! "tructure is a re#resentation of t!e for"al re#ortin relations!i#s %it!in an orani5ation and
its affiliatin entities$ Orani5ational structure refers to t!e %a& t!at an orani5ation arranes #eo#le and Dobs so
t!at its %or' can be #erfor"ed and its oals can be "et Orani5ational structure, accordin to Ste#!en P$
Robbins is a co"#osite ter" co(erin t!ree i"#ortant as#ects na"el&, differentiation, for"ali5ation and
centrali5ation$
Di''erentiation: If %e ta'e differentiation alone, t!ere are t!ree di"ensions, t!e !ori5ontal, t!e (ertical and t!e
s#atial$ 0ori5ontal differentiation arises due to differences in orientation, nature, tas's, s'ills of t!e
orani5ational constituents$ Kertical differentiation refers to t!e de#t! of t!e structure and t!e nu"ber of
!ierarc!al le(els$
S#atial differentiation refers to t!e eora#!ical s#read of an orani5ation$ A "ulti,location, "ulti,nation
orani5ation li'e an MNE !as all t!e t!ree differentiation$ -it! "ore locations and distances a"on t!e",
s#atial differentiation increases$ -!ate(er t!e t&#e of differentiation be, differentiation as a structural factor
influences orani5ational st&le, culture, cli"ate, decision orientation, etc$ Greater t!e differentiation, reater is
t!e co"#le3it& 1 co"#le3it& in co""unication, conduct, coordination and control of orani5ational functions$
T!is co"#le3it& co"#licates flo% of %or' and relations!i#s$ Si5e and differentiation o toet!erE Tas' (ariet&
and differentiation o toet!erE so do differentiation and co"#le3it&$
Is t!ere a %a& outC Matri3 orani5ation is suested$ But it is branded as /loicalness2 b& T!o"as . Peters and
Robert 0 -ater"an .r$, as e(er&t!in is !oo'ed to e(er&t!in else$ T!ese aut!ors 6uote fro" t!e e3#eriences of
best,run co"#anies in A"erica t!at si"#le for" is t!e one t!at a(oids co"#le3it& and !ence #ositi(el&
contributes to orani5ational functionin$ It is a "atter of con(entional %isdo" t!at si"#licit& ets off %ell
%!ate(er t!e situation is$ T!e MNE, .o!nson F .o!nson, USA !as #ro(ed to t!e %orld t!at si5e is not t!e factor
t!at needs e3tre"el& differentiated structure$ 0a(e autono"ous units$ Instill t!e (alue &ou c!eris! a"on t!ose
units and let t!e" !a(e o#erational freedo"$ T!is results in a"icable relations and a ood #erfor"ance too$
)o"#le3 structures, "atri3 or ot!er%ise, c!ares t!e cli"ate %it! "ore !eat, t!an li!t$
(orma!i;ation: T!e second structural as#ect is for"ali5ation %!ic! refers to t!e ad!erence to set rules and
#rocedures$ Actuall&, for"ali5ation tries to reduce t!e co"#le3it& and confusion resultin fro" differentiation
referred to abo(e, b& #rescribin intended be!a(iour on t!e #art of constituents$ T!is !el#s in 'no%in and
foreseein be!a(iour of eac! b& all and t!ereb& !el#s to tonin u# one2s o%n be!a(iour$ So, for"ali5ation
brins about understandin, a factor t!at #ositi(el& affects orani5ational functionin$ But, t!e #oint is t!at all
orani5ational functions cannot be for"ali5edE nor suc! for"ali5ation is desirable$ O(er,done for"ali5ation
"a'es t!e orani5ation "ore "ec!anic9 co"#art"entali5ed and less oranic or social$ So, reater t!e dose of
for"ali5ation, lesser t!e deree of ada#tabilit& to t!e e"erin business order of e3tended co"#etition$
Orani5ational e(ents are di(erse and t!erefore re6uire (ar&in aut!orit&, #ractice, #rocedure and all, %!ereas
for"ali5ation de#ri(es all t!ese and forces onl& riidit&$ Is t!ere a solutionC 4es$ Instead of s#ecific rules and
#rocedures, t!e structure s!ould de(elo# alternati(e a##roac!es fro" %!ic! one can c!oose t!e ri!t one or
de(elo# a "i3 as circu"stances %arrant$ T!is sort of structural #attern i(es bot! direction and freedo" and
t!us creates a conenial cli"ate for t!e functionaries$
Centra!i;ation: )entrali5ation, na"el& t!e deree to %!ic! decision "a'in is concentrated at a sinle or
relati(el& a fe% #oints, is anot!er as#ect of structure$ In a ti!t,centrali5ed orani5ation "ore is t!e deree of
concentration of decision,"a'in aut!orit&$ -!at is t!e effect of t!isC 8ecisions are ta'en at #oints re"ote to
t!eir #oints of e3ecution$ T!e e3ecuti(es at t!e tas' #oints !a(e to loo' u# for orders and directions$ In t!is sort
of situations, t!e functionaries are reduced to "ere "edia to carr&out t!ins, t!e& !a(in not!in to do %it! an&
as#ect of t!e t!ins carried out$ A situational ada#tation "a& be needed, but t!ere is no %a&$ A 'ind of
/"ilitari5ation or rei"ental s&ndro"e2 results e(entuall&$ In course of ti"e, a detac!"ent sense %ould #re(ail
in t!e %!ole of orani5ation$ To" Peters and -ater"an .r$ in t!eir celebrated boo', /In searc! of E3cellence2,
#oint out t!at "ost of t!e best co"#anies reall& do (ie% t!e"sel(es as an e3tended fa"il&$
7a"il& "eans attac!"ent, e6uit& etc$ )entrali5ation s#ells detac!"ent and !ierarc!&$ T!e for"er breeds lo(e,
beloninness and an endurin conenial relations!i#, %!ile t!e latter leads to distrust or bureaucrac& or
a#at!&$ Al(in Toffler also ri!tl& %rites in !is boo', /T!ird -a(e2, brea' t!e codes of %!ic! one is
/centrali5ation2$ )an %e do a%a& %it! centrali5ation altoet!erC But t!at is not t!e solution or intention$ -e
!a(e to use it in a##ro#riate "easures$
8ifferentiation) for"ali5ation and centrali5ation all no doubt i(e s!a#e, orderliness and unifor"it& to
orani5ations$ But t!ese are not all t!at al%a&s %anted$ An o(er dose of an& or all of t!ese structural factors
"a'e t!e structure riid, "ere #!&sical creations de(oid of d&na"is"$ If t!at results, orani5ations lose t!eir
c!ar", t!eir s&neristic effect and t!eir !u"an side$ -!at can "anaers do about t!isC Manaers enerall&
in!erit a certain structure fro" #redecessors$ If t!e& find t!at t!e structure is riid t!e sa"e !as to be loosened
and if it is too loose it "ust be ti!tened a little$ So, t!ere is no eit!er or dictu"E nor 8e,structurali5ationE it is a
6uestion of !o% "uc! differentiation, for"ali5ation and centrali5ation$
Specia!t5 o' 3NE": MNEs !a(e all t!e (arieties in t!e %orld$ T!e& can ado#t (aried #atternsE but be%are of
falterin on t!e #erfor"ance benc!"ar's or intended le(el of control$ MNEs tr& to set u# orani5ational
structures %it! strateic intent in "ind$ T!e strateic intent is effecti(e alliance %it! t!e en(iron"ent or
unfoldin situations$ T!e structure de#ends on "an& factors, includin
T!e deree of "ulti,do"estic, lobal F transnational #olicies e"#lo&ed, location F t&#e of forein facilities
and e3tent of intended i"#act of lobal o#erations on total cor#orate #erfor"ance influence structural
di(ersities, uni6ueness and nuances$ T!e for" of o#eration *out,sourcin or off,sourcin or ot!er%ise+,
structure *%!oll& o%ned 9 .K 9 strateic alliance or ot!er%ise+, and location of o#erational units in s#ecific
locations at !o"e and abroad %ill affect to#,line, botto",line, "id,lines li'e ta3es and e3#enses and control
t!ereon$
0ence, t!e sinificance of orani5ational structure on t!e fulfill"ent of cor#orate obDecti(es of MNEs in
#articular$ No% certain "aDor traditional and e"erin orani5ational structural #atterns of lobal o#erations of
MNEs "a& be dealt$
Traditionall&, orani5ations are structured alon "an& factors, includin !istor&, oranic ro%t!, strate&,
o#erational desin, #roduct di(ersit&, loistics, "ar'etin, client base, su##lier base and so fort!$ E(en t!ese are
classified as: Mec!anistic and Oranic structures$
Mec!anistic structures include centrali5ed control and aut!orit&, clearl& defined tas's, (ertical co""unication
lin's, obedience to su#er(isors, riidit& and infle3ibilit&$ T!e structures (ar& fro" (ertical or tall structures %it!
"ulti#le !ierarc!ies to flat structures %it! fe% la&ers$ Oranic structures in(ol(e decentrali5ation of aut!orit&,
tas's loosel& defined, !ori5ontal co""unications, reater indi(idual aut!orit&, fle3ibilit& and ada#tabilit&$ T!e
structures (ar& fro" loose structures to structure,free for"s as %ell$ Structure a#art, essentiall& %!at is
i"#ortant is lines of co""unication, s&ste"s of coordination "ec!anis"s of control and sc!e"es of e(aluation
%!ic! facilitate tanible #roression of ideas fro" #roble" to solution in e(er& do"ain$ T!ere "ust be sc!e"es
of #er"eabilit& facilitatin flo% of creati(e ideas fro" tea"s %or'in outside but lin'ed into t!e orani5ation$
Ba"ic "tructura! option"
Bet%een centrali5ation and decentrali5ation, bet%een differentiation and unification and bet%een for"ali5ation
and in,for"ali5ation, %e !a(e certain broad c!oices$ At one end of t!e continuu" &ou !a(e centrali5ation,
unification and for"ali5ation *total structured for"+ and t!e on t!e ot!er &ou !a(e decentrali5ation,
differentiation and in,for"ali5ation *total de,structured for"+$ In bet%een t!ese #olar (ersions, %e !a(e "ore
structured for"s, "oderatel& structured for"s and less structured for"s$ Table A$@ belo% i(es t!e features of
t!e different #atterns$
Ta@!e +.1: /attern" o' Or2ani;ation o' 3NE9"
+.+.& Traditiona! A!ternatie Structura! De"i2n" O' 3ne"
T!e traditional structures of MNEs include: Global 8i(ision Structure, Global 7unctional 8i(ision Structure,
Global Product 8i(ision Structure, Global Geora#!ic *Area+ 8i(ision Structure and Global )lient t&#e$ A
di(ision is a business unit !a(in a clear set of tas's, custo"ers and co"#etitors$ A di(ision can be
inde#endentl& #lanned for %it!in t!e orani5ation %it! #rofit and loss res#onsibilit& or de#endent on t!e
!ead6uarters for directions %it! no direct #rofit and loss res#onsibilit&$
In t!e case of /#lobal 3ivision %tructure! forein subsidiaries or .Ks of an MNE re#orts to and et directions
fro" a s#ecific de#art"ent or di(ision of #arent institution desinated as t!e /Global di(ision or de#art"ent$ A
Uni(ersit& "i!t !a(e a di(ision for forein students to ta'e care of forein students2 enroll"ent, (isa,
interation, and raduation$
In t!e case of /#lobal .unctional 3ivision %tructure! forein affiliates of an MNE re#ort to and et directions
fro" different de#art"ents or di(isions of #arent based on t!e s#eciali5ation b& function li'e 7inance, RF8,
Production, Personnel and Mar'etin$
In t!e case of /#lobal -roduct 3ivision %tructure2 forein affiliatin entities of an MNE re#ort to and et
directions fro" different de#art"ents or di(isions of #arent based on t!e s#eciali5ation b& #roduct lines li'e
)onsu"er a##liances, P!ar"a #roducts, #!oto oods, and industrial #roducts or so$
In t!e case of /#lobal #eographic 54rea6 3ivision %tructure! forein affiliatin entities of an MNE re#ort to
and et directions fro" different de#art"ents or di(isions of #arent based on t!e s#eciali5ation b& eora#!ic
area suc! as Euro#e, Middle,east, 7ar,east, Nort! A"erica or so$
In t!e case of 7#lobal lient 3ivision %tructure! forein entities of an MNE re#ort to and et directions fro"
different de#art"ents or di(isions of #arent based on t!e s#eciali5ation b& client t&#e li'e institutional, bi
retailers * !&#er "ar'ets, 8e#art"ental store etc+ and bul' consu"ers loball&$ Most MNEs basicall& use one of
t!ese structures$ Note t!at no structure is %it!out dra%bac's$
+.+.&.1 $!o@a! Dii"ion Structure
Global 8i(ision Structure of an MNE in(ol(es (estin t!e res#onsibilit& for total "anae"ent of lobal
business acti(ities %it! one desinated di(ision or de#art"ent called Global 8i(ision$ Globall& s#eciali5ed
#ersonnel are #laced in c!are of t!e di(ision to !andle t!e di(erse "atters as e3#ort9i"#ort neotiations,
e3#ort9i"#ort docu"entation, forein,e3c!ane transactions, relations %it! forein o(ern"ents, forein
subsidiaries2 #ersonnel "anae"ent, forein "ar'et #ro"otion, etc$ Most MN)s in t!eir initial staes of
lobali5ation e"#lo&ed t!e /Global 8i(ision Structure2 co(erin certain reions of t!e %orld to su#er(ise t!e
functions in t!ose reions$ But conflicts could arise bet%een t!e functional !eads and t!e !eads of t!e lobal
di(ision$ 7i$ A$@ i(es a si"#le "odel of Global 8i(ision Structure$
Randall S$ Sc!uler, Peter .$ 8o%lin, 0elen 8e )ieri in t!eir researc! #a#er in .ournal of Manae"ent,
Su""er, @GGA, obser(ed t!atin t!e case of t!e Global di(ision structure *desin+ t!e MNE basicall& adds on a
unit to deal %it! lobal business concerns$ T!e oriinal orani5ation structure is left intact$ T!e lobal di(ision
beco"es a unit t!at "irrors t!e do"estic businesses of t!e MNE abroad$ T!e 'e& business decisions are "ade at
t!e lobal !ead6uarters, t&#icall& also t!e !ead6uarters of t!e MNE$ >no%lede is also de(elo#ed at t!e center
and dis#ersed %!ere needed$
a. I""ue" in $!o@a! Dii"ion Structure:
Is t!e structure loball& co"#etiti(e, efficient, res#onsi(e and fle3ible to local needs and conditionsC As t!e
le(el of o#eration is "ini"al, t!e 6uestion of lobal co"#etiti(eness is too bi to address$ T!e structure is
efficient as t!e !ead6uarters is in full ri# of t!e functionin of t!e affiliates$ Res#onsi(eness and fle3ibilit& to
local needs and conditions "a& be onl& "ini"all& facilitated in t!is t&#e of o#eration, but local co""it"ents
are also "ini"al$ )onse6uentl&, lobal !u"an resource decisions "a& be #ri"aril& associated %it! selectin
t!e !ead of lobal o#eration and t!en t!e e3#atriate %!o "a& be sent abroad to o#erate t!e lobal location$ Of
course "ore !u"an resource issues do arise for t!e e3#atriate in c!are of t!is location, but t!e& tend to be
"odest co"#ared %it! si"ilar issues faced b& MNEs selectin a lobal for" of orani5ation$

(i2ure +.1 $!o@a! Dii"ion Structure
a.3erit" o' $!o@a! Dii"ion Structure:
Global 8i(ision Structure #re(ents du#lication of efforts in "ore t!an one #lace in t!e orani5ation in t!e
disc!are of acti(ities reardin forein affiliates$ Besides, %!en forein business is not of bi scale, t!is
orani5ational for" creates a lare enou! critical "ass of acti(ities so t!at #ersonnel %it!in t!e di(ision can
%ield #o%er %it!in t!e orani5ation to #us! for lobal e3#ansion$ In t!e initial staes of forein e3#osure t!is
for" i(es t!e MNE an o##ortunit& for strateic focus t!rou! concerted close,line "anae"ent in(ol(in
dedicated efficient #ersonnel$

@. Demerit" o' $!o@a! Dii"ion Structure: T!e lobal di(ision !as to de#end on ot!er do"estic di(isions of
t!e #arent for #roducts9ser(ices, #ersonnel, tec!nolo&, and ot!er resources for t!e #ro"otion of t!e forein
acti(ities$ T!e do"estic di(ision "anaers "a& not coo#erate %it! t!e lobal di(ision #ersonnel due to s!eer
eois" or due to t!e fact t!at t!e& are usuall& not e(aluated on t!e basis of #erfor"ance of t!e forein acti(ities
but onl& on t!e basis of ac!ie(e"ents of t!eir do"estic di(isions$ 0ence t!e& "a& %it!!old t!eir best resources
fro" t!e lobal di(ision to i"#ro(e t!eir o%n #erfor"ances$
c. Suita@i!it5 o' $!o@a! Dii"ion Structure:
T!is structure is #robabl& best suited for "ulti,do"estic strateies, %!ere t!ere is little interation and
standardi5ation bet%een do"estic and forein o#erations$ T!at is t!e lobal di(ision is inde#endent of do"estic
di(isions in "ost decision areas$ Global 8i(ision Structure is #o#ular a"on U$S$ MNEs, but not %it! t!e
Euro#ean MNEs$ T!e reason is not due to cultural differences bet%een USA and Euro#e$ USA !as a (ast
do"estic "ar'et, reducin t!e si5e of forein "ar'et for "ost MNEs, not %arrantin functional or #roduct
s#eciali5ations$ 0ence t!e all,in,one lobal di(ision is suffice$ In t!e case of Euro#e an& sinle Euro#ean nation
offers onl& a s"all do"estic "ar'et$ -it! bi forein "ar'et, t!e all,in,one lobal di(ision is not t!e best for"$
-it! t!e EU co""on "ar'et %it! t!e co""on currenc& Euro, t!e scenario "a& c!ane$
+.+.&.& $!o@a! (unctiona! Dii"ion Structure
An orani5ation based on functions is t!e traditional and t!e "ost loical$ /7unctional di(ision structures2
in(ol(e rou#in toet!er functionall& li'e,acti(ities alon functional lines li'e "ar'etin, RF8, #roduction,
etc and #lace t!e" under s#ecialist classes of #ersonnel$ 7unctional !eads of forein affiliates co""unicate to
and et co""unication fro" sa"e functional s#ecialists at t!e #arent concern$ Mar'etin #eo#le of t!e forein
affiliate re#ort to "ar'etin #eo#le of t!e #arent or t!eir order$ 7inance #eo#le of t!e forein affiliate re#ort to
finance #eo#le of t!e #arent or t!eir order and so on$ But a fir" offerin "an& #roduct lines %ill find t!is
structure less successful$ 7i$ A$: i(es a si"#le "odel of Global 7unctional 8i(ision Structure$
a2 %uitability of #lobal .unctional 3ivision structure: Global 7unctional di(isions are suitable %!en
#roduct9ser(ice rane offered b& bot! t!e #arent and t!e subsidiaries are fe% resultin in undifferentiated
#roduction and "ar'etin "et!ods a"on t!e"$ 7or auto"obile fir"s, oil refinin fir"s, etc t!is structure suits
%ell$ 0ori5ontall& interated "ultinational enter#rises li'e Mc8onalds 9 Pe#si %!ic! #roduce t!e sa"e or
si"ilar #roducts follo% t!is structure and t!eir establis!"ents located in different countries re#ort on functional
structural lines$
7or di(ersified entities offerin different #roducts9ser(ices t!is structure beco"es cu"berso"e or less suited$
-estin!ouse %!ic! #roduces "ore t!an =,<<< different #roducts in suc! di(erse areas as real estate, finance,
nuclear fuel, tele(ision #roduction, electronics s&ste"s, and soft drin' bottlin, it is difficult to i"aine t!at t!e
#roduction !ead 'no%s intricacies of #roduction of all t!e #roducts$ Oil and "ineral e3traction co"#anies, suc!
as E33on use t!is structure, %!ic! is ideal %!en #roducts and #roduction "et!ods are basicall& undifferentiated
a"on countries$ Under t!is structure, coordination is left to to# "anae"ent, %it! functional !eads #ursuin
t!eir res#onsibilities %it! tunnel (ision orientation, unless ot!er%ise ad(ised b& to# "anae"ent$
b2 Merits of the #lobal .unctional 3ivision %tructure,
So"e ad(antaes of t!e functional structure are:
T!e structure is si"#le and clear, "a'in co""unication lines distinct and direct
Reduces o(er!ead
Pro(ides clearl& "ar'ed career #at!s for !irin and #ro"otion
E"#lo&ees %or' alonside colleaues %!o s!are si"ilar interests
T!is structure is suited for lobali5ed fir"s, #ro(idin furt!er s&neries of s#eciali5ation$
(i2ure +.& $!o@a! (unctiona! Dii"ion Structure
c. Demerit" o' t*e $!o@a! (unctiona! Dii"ion Structure:
So"e disad(antaes of t!e functional structure are as follo%s:
i$ )oordination of functional tas's is difficult
ii$ Little re%ard for coo#eration %it! ot!er rou#s, "a'in coordination difficult to ac!ie(e
iii$ Pro(ides sco#e for different functional !eads to diso%n *#ass t!e buc'+ #roDect failures
+.+.&.+ $!o@a! $eo2rap*ic (Re2ion A Nation A Area% Dii"ion Structure
-it! lare forein o#erations t!at are not do"inated b& a sinle countr& or area includin t!e !ead6uarters, but
%ell s#read out eora#!icall& MNEs use eora#!ic di(isions$ Global Geora#!ic *Reion 9 Nation 9 Area+
8i(ision Structure is "ore co""on to Euro#ean MNEs, suc! as Nestle$ Nestle uses t!is structure because no
one reion do"inates its o#erations$
a. 3erit" o' $!o@a! $eo2rap*ic (Re2ion A Nation A Area% Dii"ion Structure
T!e structure is useful %!en "a3i"u" econo"ies in #roduction can be ained on a reional rat!er t!an a lobal
basis because of "ar'et si5e or t!e #roduction tec!noloies for t!e industr&$ A lobal eora#!ic structure #uts
"anaers closer to t!e scene of o#erations t!an are "anaers at central !ead6uarters$ Reional "anaers are
%ell #ositioned to be res#onsi(e to local situations suc! as t!e needs of reional custo"ers and to fluctuations in
resources$ T!us reional di(isions are often able to find solutions to reion,s#ecific #roble"s and to use
a(ailable resources "ore effecti(el& t!an are "anaers at cor#orate !ead6uarters$ T!is structure facilitates
tea"%or'$ Peo#le are so"eti"es able to #ool t!eir s'ills and 'no%lede and brainstor" ne% ideas for #roducts
or i"#ro(ed custo"er ser(ice$ T!is structure facilitates decision "a'in as di(isions de(elo# a co""on
identit& and a##roac! to sol(in #roble"s$ T!is increases co!esi(eness and t!e result is i"#ro(ed decision
"a'in$
(i2ure +.+ $!o@a! $eo2rap*ic Dii"ion Structure
@. Demerit" o' $!o@a! $eo2rap*ic (Re2ion A Nation A Area% Dii"ion Structure
A dra%bac' is #ossible costl& du#lication of %or' a"on areas$ 7or e3a"#le, 7ord abandoned its eora#!ic
structure in fa(or of a #roduct di(ision structure because of costl& desin du#lication bet%een Euro#e and Nort!
A"erica$
c. Suita@i!it5 o' $!o@a! $eo2rap*ic (Re2ion A Nation A Area% Dii"ion Structure:
An orani5ation facin t!e #roble" of controllin its acti(ities on a national or lobal le(el is li'el& to use a
eora#!ic structure and rou# functions into reional di(isions to ser(ice custo"ers in different eora#!ic
areas$ Eac! eora#!ic di(ision !as access to a full set of t!e functions it needs to #ro(ide its oods and
ser(ices$
+.+.&.1 $!o@a! /roduct Dii"ion Structure
Global Product di(ision structure contains t!e functions necessar& to t!e s#ecific oods or ser(ices a
#roduct9ser(ice di(ision #roduces$ T!e #arental orani5ation !as !ead6uarters di(isions for different "aDor
#roduct cateories %it! res#ecti(e resources, !u"an and ot!ers$ O(erseas subsidiaries #roducin a #articular
#roduct or class of #roduct !a(e to re#ort to !ead6uarters di(ision res#onsible for t!at #roduct or class of
#roducts$ Global Product 8i(ision Structure locates "anufacturin and (alue creation acti(ities in a##ro#riate
lobal locations to increase res#onsi(eness to co"#etiti(e o##ortunities, efficienc&, 6ualit&, or inno(ation$
Global #roduct di(isions are res#onsible for Global Product 8esin and o#erate in di(isional, cluster, or !oldin
co"#an& for"ats$ Global Product di(isions !a(e little in co""on$ T!e& are !i!l& inde#endent of eac! ot!er$
7i$ A$H i(es a si"#le "odel of 7unctional 8i(ision Structure$
Microsoft ado#ts t!e lobal #roduct di(ision$ Until :<<; it !ad ? #roduct rou# di(isions$ No%, it rationali5ed
its oriinal ? business rou#s into A core di(isions na"el&:
)icroso!t ,lat!or% ,roducts and Ser.ices Di.ision co(ers t!e -indo%s )lient,
MSN and Ser(er and Tool rou#s$
)icroso!t Business Di.ision co(ers t!e Infor"ation -or'er and Microsoft Business Solutions rou#$
)icroso!t "ntertain%ent and De.ices Di.ision co(ers t!e Mobile and E"bedded 8e(ices and 0o"e and
Entertain"ent rou#s$
7ord ado#ts t!is structure, abandonin its eora#!ic structure$ Toda& "ost of t!e "ultinational enter#rises %it!
t!eir di(erse ac6uisitions %orld,%ide !a(e di(erse #roduct #ortfolios$ T!e& "ostl& ado#t #roduct structure as
t!at offers certain reat s&neries$
a. 3erit" o' $!o@a! /roduct Structure
Global (ision is articulated effecti(el& because of e3#osure to di(erse consu"#tion conditions %orld,%ide to
dra% insi!ts for ne% #roducts$ Product di(ision structure increases t!e s#eciali5ation of %or' suc! t!at t!e
nu"ber of si"ilar #roducts can be increased$ T!e structure !el#s in e3#ansion into ne% "ar'ets and #roduction
of totall& ne% 'inds of #roducts$ Resource le(erae is anot!er ad(antae$ T!is is es#eciall& true of intellectual
resource$ )o""itted RF8 for different #roduct lines #ossible and ne% #ers#ecti(es is s!ared %it! all units of
t!e #roduct class$ Kertical 'no%lede s!arin %it!in t!e #roduct di(ision is in!erent in t!is orani5ational
#attern$ Strateic focus is a reat ad(antae, because e(er& #roduct line concentrates on its do"ain %it! focused
attention rat!er t!an scatted concerns$ Ot!er ad(antaes abound$ Si"#licit&, accountabilit&, standard #roduct
introductions, en!anced s#eed and decision 6ualit&, self,contained #roduct de(elo#"ent and introduction,
de(elo#"ent of talent, lo% interference fro" ot!er di(isions are ot!er ad(antaes$
(i2ure +.1 $!o@a! /roduct Dii"ion Structure
@. Demerit" o' $!o@a! /roduct Structure
0ori5ontal 'no%lede s!arin across different #roduct lines is cons#icuousl& absent$ It is too difficult to
orani5e co""unication across di(isions$ T!ere is no for"al "eans b& %!ic! one #roduct di(ision can learn
fro" anot!er2s lobal e3#erience$ T!ere are du#licated functions a"on t!e #roduct di(isions$ 8ifferent
subsidiaries fro" different #roduct di(isions %it!in t!e sa"e forein countr& %ill re#ort to different rou#s at
!ead6uarters$ T!ere is little coo#eration bet%een di(isions$ It is costl& to "aintain across t!e lobe$ 8ue to scale
differences of different #roduct lines in different eora#!ies, it "a& beco"e necessar& to club #roduct lines in
a "ar'et, but t!at is not #ossible because at t!e !ead6uarters t!e #roduct lines are under different #roduct
structures$ S&ner& is lost %it!in countries if different subsidiaries don2t co""unicate %it! eac! ot!er or to a
co""on "anaer$ 7or instance, at one ti"e in -estin!ouse, one subsidiar& %as borro%in funds locall& at an
e3orbitant rate, %!ile anot!er in t!e sa"e countr& !ad e3cess cas!$
c. Suita@i!it5 o' 2!o@a! product "tructure
MNEs %it! (astl& di(ersified #roduct9ser(ice #ortfolio o for #roduct orani5ation structures$ -estin!ouse
%it! "ore t!an =,<<< different #roducts in di(erse areas ado#ts t!is structure$ T!e #roduct di(ision structure is
%ell,suited for a lobal strate& because bot! t!e forein and do"estic o#erations for a i(en #roduct re#ort to
t!e sa"e "anaer %!ic! !el#s in ac!ie(in s&neries b& s!arin infor"ation on t!e successes and failures of
eac!, s!arin resources 1 !u"an or ot!er%ise, and s!arin core co"#etencies$ A"erican MNEs use t!is
structure %ell "ore t!an t!e Euro#ean MNEs$
+.+.&.4 $!o@a! /roKect Team Structure
A #roDect di(ision unli'e a #roduct9functional9eora#!ic di(ision !as a fi3ed ti"e fra"e of %or'$ Once t!e
#roDect e3ecution is o(er, t!at #articular di(ision ceases to e3ist$ An MNE "i!t be a #roDect concern ta'in u#
#roDect e3ecutions loball&$ As an& #roDect in(ol(es %or's %it! "an& re6uire"ents t!at are not confined to one
or "ore of t!e functions, an orani5ation structure t!at is #roDect based is follo%ed$ T!e #roDect e3ecution
re6uires coo#erati(e efforts of "ar'etin, #roduction, enineerin, and ot!ers as a##ro#riateE as %ell as
assistance fro" t!e accountin leal and contractin staffs$ Usuall& a d&na"ic and ca#able #erson fro" t!e
u##er le(els of "iddle "anae"ent is selected to ta'e res#onsibilit& for t!is uni6ue acti(it&$ T!e #roDect is
orani5ed around t!is #roDect "anaer, and t!en a fe% s#eciali5ed assistants are #ro(ided and a #roDect tea" is
for"ed$ T!e #roDect "anaer e3ercises direct and autono"ous control o(er t!e (arious disci#line rou#s and is
res#onsible for t!e coordination and "onitorin of t!e effort of t!e tea"$ Since "ost "aDor orani5ational
functions %ill be affected b& t!is tea", it is t&#icall& re"o(ed fro" t!e functional orani5ation2s structure$
A #roDect orani5ation is needed %!en "ulti#le #roDects are in(ol(ed, eac! "anaed b& distinct #roDect tea"s$
Global ProDect tea" structure consists of autono"ous #roDect tea"s %it! inde#endent res#onsibilit& for
i"#le"entation of t!e #roDects on !and$ T!ere could be different #roDect tea"s to ta'e u# different #roDects$
ProDect tea"s are asse"bled for #roDects under t!e action of t!e fir"$ 7iure A$; i(es t!e #roDect orani5ation
structure of an MNE "anaed b& #roDect orani5ation$
T!e construction tea"s , Air#orts, Sea#orts, Multi#le3es, To%ns!i#s and 8a"s9 Brides and #o%er #roDect
tea"s 1 Nuclear, -ind, 0&dro, T!er"al and Tidal, are inde#endent entities$ Eac! %ill !a(e to be su##orted b&
functional di(isions na"el& Procure"ent 9 7abrication, 7inance, Mar'etin, Personnel, RF8 and Loistics on
t!e one !and and eora#!ic !eads of Nort! A"erica, Sout! F )entral A"erica, Euro#e, Asia F Australia and
Africa$ Besides, t!e eora#!ic !eads and functional di(isions interact$
(i2ure +.4 $!o@a! /roduct Dii"ion Structure
a. 3erit" o' /roKect Or2ani;ation
A #roDect orani5ation !as certain "erits o(er ot!er for"s of orani5ation structure$
T!ese are:
i$ Good at res#ondin %ell to i""ediate #roDect needsE
ii$ 7le3ibilit&E
iii$ Res#onsibilit& for success of #roDect clearl& fi3edE
i($ Releases to# "anae"ent fro" "icro"anain o#erations, so t!at t!e "anae"ent can focus on t!e
o(erall co"#an& strate& rat!er t!an detailed nuts and boltsE
($ S#eciali5ation benefit flo%s t!rou!out t!e orani5ation$
@. Demerit" o' proKect team "tructure"
A #roDect orani5ation !as certain de"erits o(er ot!er for"s of orani5ation structure$ T!ese are: T!e actual
orani5ational #o%er and aut!orit& of t!e tea" "anaer "a& be a delicate issue$ T!ere in(ol(es reater
ad"inistrati(e o(er!ead$ In,rou# *t!ose %it! t!e #roDect res#onsibilit&+ Ks$ Out,rou# *t!ose %it! t!e
functional 9 eora#!ic res#onsibilit&+ "entalit& "a& de(elo#$
A.+.&.: $!o@a! 3atri= Dii"ion Structure
A "atri3 structure in(ol(es !ori5ontal, (ertical and diaonal flo%s of res#onsibilities$ Mat!e"aticall&
arrane"ent of an&t!in b& ro%s and colu"ns is called "atri3 structure$ In a "atri3 orani5ation t!e #roducts
or #roDects "a& be t!e colu"n ele"ent, %!ile t!e !ori5ontal or ro% ele"ents "i!t be t!e functional lines of
#roduction, "ar'etin, etc$ T!ird di"ensionall&, t!e eora#!ic res#onsibilities "i!t run$ Matri3 structure is a
co"bination of t%o or "ore different structures$ 0ence it is ta'en u# as a last ite" of our #resentation !ere$
T!us in a lobal "atri3 orani5ation structure a forein subsidiar& re#orts to "ore t!an one rou#, na"el&
#roduct9#roDect, functional or eora#!ic$ 7i$ A$I i(es t!e Matri3 structure of an MNE$
(i2ure +.: $!o@a! 3atri= Dii"ion Structure
Lare "ultinational cor#orations t!at use a "atri3 structure "ost co""onl& co"bine #roduct rou#s %it!
eora#!ic units$ Product "anaers !a(e lobal res#onsibilit& for t!e de(elo#"ent, "anufacturin, and
distribution of t!eir o%n #roduct or ser(ice line, %!ile "anaers of eora#!ic reions !a(e res#onsibilit& for
t!e success of t!e business in t!eir reions$
Eac! rou# s!ares res#onsibilit& o(er forein o#erations$ A"onst t!e rou#s "ore interde#endence leadin to
e3c!ane of infor"ation and e3c!ane of resources %it! eac! ot!er ta'es #lace$ In t!at conte3t, #roduct,rou#
"anaers co"#ete a"onst t!e"sel(es to ensure t!at RF8 #ersonnel res#onsible to a functional rou#, suc! as
#roduction, also de(elo# tec!noloies for #roduct rou#s$ T!ese #roduct,rou# "anaers also "ust co"#ete to
ensure t!at eora#!ic,rou# "anaers e"#!asi5e t!eir lines sufficientl&$ Not onl& do #roduct rou#s co"#eteE
functional and eora#!ic rou#s also "ust co"#ete a"on t!e"sel(es to obtain resources !eld b& ot!ers in t!e
"atri3$ T!e a"ount of resources for de(elo#"ent of electronics #roducts in Me3ico de#ends #artl& on t!e
co"#etition bet%een t!e A"erica,Africa rou# and t!e Euro#e and Australasia rou# and #artl& on t!e
co"#etition bet%een t!e electronics rou# and t!e #o%er s&ste"s rou# for resources$ T!e Global Matri3
Structure contains si"ultaneous, intersectin differentiation bases, %it! e"#lo&ees re#ortin to functional and
#roduct "anaers si"ultaneousl&$ T!e orani5ation2s to# "anae"ent "ust ta'e #articular care to establis!
#ro#er #rocedures for t!e de(elo#"ent of #roDects and to 'ee# co""unication c!annels clear so t!at #otential
conflicts do not arise and !inder orani5ational functionin$
Pe#si)o is orani5ed b& #roduct lines,soft drin's and snac's,%!ic! %ould see" to i"#l& t!at eac! #roduct line
is interated loball&$ 0o%e(er, eac! line !as its o%n lobal di(ision, %!ic! se#arates it fro" do"estic
o#erations$ T!us a lobal "atri3 structure is follo%ed$
a. 3erit" o' $!o@a! 3atri= Or2ani;ation
One ad(antae of a "atri3 structure is t!at it facilitates t!e use of !i!l& s#eciali5ed staff and e6ui#"ent$ Rat!er
t!an du#licatin functions as %ould be done in a si"#le #roduct de#art"ent structure, resources are s!ared as
needed$ In so"e cases, !i!l& s#eciali5ed staff "a& di(ide t!eir ti"e a"on "ore t!an one #roDect$ In addition,
"aintainin functional de#art"ents #ro"otes functional e3#ertise, %!ile at t!e sa"e ti"e %or'in in #roDect
rou#s %it! e3#erts fro" ot!er functions fosters cross,fertili5ation of ideas$
@. Demerit" o' $!o@a! 3atri= Or2ani;ation
T!e disad(antaes of a "atri3 orani5ation arise fro" t!e dual9"ulti#le re#ortin structure$ Po%er strules
bet%een t!e functional and #roduct "anaers or bet%een t!e #roduct and area "anaers can #re(ent successful
i"#le"entation of "atri3 structural arrane"ents$ Anot!er dra%bac' relates to rou#s2co"#etition for scarce
resources and dis#la& of t!eir #referred o#eratin "et!ods$ U##er "anae"ent "a& fa(or a s#ecific e3ecuti(e
or rou# and as ot!ers in t!e orani5ation see t!is occurrin, t!e& "a& #ercei(e t!at t!e locus of #o%er lies %it!
a certain indi(idual or rou#$ )onse6uentl&, ot!er rou# "anaers "a& t!in' t!at #us!in t!eir o%n rou#2s
uni6ue needs is futile, t!us eli"inatin t!e cross fertili5ation of (ie%#oints t!at a "atri3 is su##osed to brin$
A su#erior "a& nelect control of subordinates because of assu"in %ronl& t!at so"eone else is o(erseein
t!e"$ Sa&, "anaers in t!e A"erica,Africa rou# "i!t not #a& close attention to da&,to,da& Me3ican
electronics o#erations because t!e& assu"e t!at "anaers in t!e electronics di(ision are doin t!is$ Mean%!ile,
"anaers in t!e electronics di(ision "a& %ronl& assu"e t!at "anaers in t!e A"erica,Africa rou# are
o(erseein t!e electronics o#eration in Me3ico closel&$
T!is 'ind of false assu"#tion t!at so"eone else %as !andlin t!e res#onsibilit& %as a factor in t!e loss of
control and t!e de"ise of Barins Ban', oldest "erc!ant ban' in London %it! %!ic! e(en t!e Britis! Pueen
'e#t !er accounts, in @GG;$ Barins 7utures Sina#ore /s *subsidiar& of t!e Barins Ban', London+ "anae"ent
structure t!rou! @GG; enabled Leeson, t!e account !ead as %ell as floor !ead for tradin, indulin in rec'less
s#eculation %it!out su#er(ision fro" London !ead6uarters$ Leeson %as not onl& t!e floor "anaer for Barins2
tradin on t!e Sina#ore International Monetar& E3c!ane, !e %as also t!e !ead of settle"ent o#erations,
c!ared %it! ensurin accurate accountin for t!e unit$ Nor"all& t!e #ositions %ould !a(e been !eld b& t%o
different e"#lo&ees$ As tradin floor "anaer, Leeson re#orted to an office *!ead of settle"ent o#erations+
inside Barins Ban' %!ic! !e !i"self !eld, %!ic! s!ort,circuited nor"al accountin and auditin safeuards
7or t!ese reasons, so"e co"#anies t!at ado#ted dual,re#ortin s&ste"s !a(e one bac' to con(entional
structures %it! clear lines of res#onsibilit&, includin 8o% )!e"ical, 8iital E6ui#"ent, and )itiban'$
+.+.&.E Structure tend" and Trend"
T!ou! orani5ational structures tend to de#ict certain 'ind of riidit&, structure tends to c!ane and ne% trends
e"ere$
3i=ed Nature o' Structure"
Because of ro%t! d&na"ics, co"#anies c!ane t!eir orani5ational structures$ Si"#lified orani5ational
structures et re#laced b& co"#le3 or "i3ed structures$ Until orani5ational re,structurin is "ade, ne%
ac6uisitions "i!t re#ort to !ead6uarters$
)ircu"stances #re(ailin in a #articular countr&, #roduct, or function "i!t necessitate se#arate !andlin until a
re,structurin is effected, a#art fro" t!e o(erall structure$ T!e structure of @<<J subsidiaries is different fro"
t!at of .Ks$ @<<J subsidiaries enable a dee#er net%or' of co""unications$ O(erall structure "a& be
inco"#lete and less re(ealin$ Pe#si)o is orani5ed b& #roduct lines, na"el& soft drin's and snac's$ T!is
%ould see" to i"#l& t!at eac! #roduct line is interated loball&$ 0o%e(er, eac! line !as its o%n lobal
di(ision, %!ic! se#arates it fro" do"estic o#erations$
Structure" eo!e to "uit 2ro-t* and need
A co"#an& t!at onl& e3#orts can afford Dust %it! an e3#ort de#art"ent attac!ed to a #roduct or functional
di(ision$ 4ou "a& note de#art"ents are sub,di(isional$ But if lobal o#erations continue to ro% and off,s!ore
#roduction is felt needed e3#ort de#art"ent "a& no loner be sufficient$ A lobal di(ision re#laces t!e
de#art"ent$ In due course lobal di(ision i(es %a& for eora#!ic di(isions$ Later %it! sustained ro%t!,
eora#!ic di(isions oes off, "atri3 structures co"e u#$ 7i$ A$? i(es t!e c!ane fro" lobal di(ision to ot!er
for"s as MNEs ro% in si5e, stature, co"#le3it& and t!e li'e$ T!e need and o##ortunities for bein lobali5ed
and locali5ed are t!e t%o o##osite forces$ Ulti"atel& a "atured MNE %ill blosso" into a TN)$ T!ere are t%o
alternati(e routes$ 7ro" o(ertl& locali5ed structures it "a& #ull itself u# to beco"e a TN) structured$ Else, fro"
an o(ertl& lobali5ed structure it "a& bend itself do%n a little to beco"e a TN) structured as de#icted in t!e
fi$ A$?$ T!ere is t!e olden "ean route t!at tra(erses in u#%ard slo#e diaonall& ta'in Matri3 structure, MN)
structure, Global co"#an& structure and finall& TN) structure$
(i2 +.E: Structure" -it* Need and Opportunitie" 'or $!o@a!i;ation and Loca!i;ation
+.+.+ Eo!in2 A!ternatie Structura! De"i2n" O' 3ne"
As co"#anies ro% in si5e, #roduct lines, and de#endence on forein o#erations, co"#lications of
co""unication, res#onsibilit& and control beco"e "ore co"#le3$ So, ne% structures continue to e(ol(e to deal
%it! t!is co"#le3it&$ Proctor F Ga"ble *PFG+ restructured its o#erations in @GGG$ T!e "antra is, /T!in'
loball& and Act locall&2$ PFG for"ed a uni6ue conce#t of /Global business Product Units2 *GBUs+ and ; suc!
units %ere establis!ed$ -it! t!e ; GBUs PFG %ants to build its lobal brand e6uit& as #art of its /lobal
strateic t!in'in2$ At t!e sa"e ti"e ? Mar'et 8e(elo#"ent Orani5ations alon t!e lines of "aDor reions of
t!e %orld %ere "ade to facilitate fle3ibilit& in t!e s#!ere of local actions$ T!us it /t!in's lobal, acts local2$
T!ere are nu"erous cases li'e t!is$ But fe% eneral for"s are alone dealt !ere$
+.+.+.1 Net-or8 Or2ani;ation"
Prof$ 0$K$ Perl "utter "ade out in @GIG t!at MNEs ado#ted orani5ational structures t!at fell in a continuu" of
et!nocentric to #ol&centric "odels and !e ad(ocated t!e eocentric "ind,set$ T!e @G=<s %itnessed e3tensi(e
discussions of net%or',based MN) "odels es#eciall& b& Pra!alad and 8o5 in @G=?, Bartlett and G!os!al in
@G=G and -!ite and Po&nter in @GG<, buildin on Perl "utter2s eocentric "odel$ Net%or',based "odels !a(e
been c!aracteri5ed as reflectin an interated %orld%ide strate& t!rou! loball& distributed but
interde#endent resources and acti(ities$
T!e %orld is "ade u# of interde#endence unli"ited$ In suc! a %orld %e all build a net%or' alliances or
relations!i#s$ MNEs "ust decide %!at #roducts, functions, and eora#!ic areas t!e& %ant to !andle
t!e"sel(es and %!at t!e& %is! to outsource$ As to tas's !andled b& t!e" t!e MNEs can !a(e clear su#erior,
subordinate relations!i#s, 'no%n as !ierarc!ies$ In dealins %it! ot!ers t!e su#erior,subordinate line is not
clear$ Instead of line relations!i# a net%or' relations!i# e"anates$ T!e location of control in a net%or' alliance
is a"biuous and is 'no%n as a /!eterarc!&2$ -!en s!ared o%ners!i#9res#onsibilit& e3ists suc! as in a Doint
(enture or strateic alliance, t!ere is usuall& a !ierarc!ical relations!i#$
)ornin Incor#orated, a lobal cor#oration %it! "anufacturin facilities around t!e %orld, is reliant u#on a (ast
net%or' of su##liers$ It (alues t!ese relations!i#s as t!ese are critical to its success$ )ornin ensures t!at e(er&
as#ect of its o#erations is conducted %it! res#ect for t!e la%s, custo"s and cultures of t!e reions %e ser(e$
T!us )ornin is a ood e3a"#le of a !eterarc!&$ 7urt!er !alf of its earnins co"e fro" alliances, #articularl&
Doint (entures$ )ornin "anae"ent cannot dictate %!at its alliance #artners "ust do$ Instead, it ser(es as a
bro'er, conflict neotiator, and facilitator for t!e"$
Man& .a#anese co"#anies are 'no%n for t!eir net,%or's or %!at is called in t!eir (ernacular as 'eiretsus$ A
'eiretsu is a co""on feature of .a#anese cor#orate o(ernance and refers to a collaborati(e rou# of interated
co"#anies %it! e3tensi(e s!are )ross !oldins, #ersonnel s%a#s and strateic co,o#eration$
Mitsubis!i Grou# of )o"#anies, or Mitsubis!i )o"#anies is a .a#anese conlo"erate consistin of a rane of
autono"ous businesses %!ic! s!are t!e Mitsubis!i brand, trade"ar' and leac&$ T!e Mitsubis!i rou# of
co"#anies for"s a loose entit&, t!e Mitsubis!i >eiretsu$ T!e to# :; co"#anies are also "e"bers of t!e
Mitsubis!i >in2&M'ai, or M7rida& )lubN, and "eet "ont!l&$ Mitsubis!i Mitsubis!i )or#oration, >irin Bre%er&,
Mitsubis!i Electric, Mitsubis!i 7uso, Mitsubis!i Motors, Ni##on 4usen, Ni##on Oil, To'io Marine and 7ire
Insurance, Ni'on, 0ino Motors net%or's in %!ic! eac! co"#an& o%ns a s"all #ercentae of ot!er co"#anies
in t!e net%or'$ T!ere are lon,ter" stron #ersonal relations!i#s a"on !i!,le(el "anaers in t!e different
co"#anies, and t!e sa"e directors often ser(e on "ore t!an one board$ So"eti"es 'eiretsus are (ertical, suc!
as t!at bet%een To&ota and its #arts su##liers$ So"eti"es t!e& are !ori5ontal$ Manaers can e3c!ane
infor"ation t!at is useful to "ore t!an one co"#an&, under%rite eac! ot!er2s financin, and ain "ore clout
%!en lobb&in for o(ern"ental leislation$
+.+.+.& Spin-O'' Or2ani;ation"
A s#in,off *or s#inoff+ is a ne% orani5ation or entit& for"ed b& a s#lit fro" a larer one$ In a #ure s#in,off, a
#arent co"#an& distributes @<<J of its o%ners!i# interests in a subsidiar& o#eration as a di(idend to its e3istin
s!are!olders$ )ar(ed out or #artial s#in,off is one %!ere t!e #arent cor#oration sells to t!e #ublic an interest of
less t!an :<J in t!e ne% subsidiar& in a reistered initial #ublic offerin for cas! #roceeds$ Often, an IPO in
%!ic! t!e #arent co"#an& retains a "aDorit& interest in t!e ne% co"#an& "a& be a #relude to a s#in,off of t!e
re"ainin interests to e3istin s!are!olders$ )o"#anies utili5e a #artial s#in,off strate& for a nu"ber of
reasons$
Ne% #roduct de(elo#"ent t!rou! s#in,off: One obDecti(e of s#in,off co"#an& for"ation is /ne% #roduct2
de(elo#"ent$ Ne% #roduct c!a"#ions endea(or to de(elo# ne% #roducts or ser(ices$ T!ese ne% #roducts or
ser(ices nor"all& do not fit in t!e e3istin co"#etencies$ Parent co"#anies create /s#in off2 co"#anies
e3clusi(el& to e3#loit t!e #otentials of t!ese ne% #roducts or ser(ices !oldin substantial, if not %!ole
o%ners!i#$ At t!e sa"e ti"e ne% learnin e"anatin fro" t!e s#in,off s ets #ercolated into t!e MNEs as suc!$
.o!nson F .o!nson, Ra&c!e", and T!er"o Electron !a(e s#un off co"#anies t!at subse6uentl& !a(e o#erated
al"ost inde#endentl&$ T!e s#in,offs differ fro" #roduct structures, because t!e& are inde#endent and !a(e to
satisf& t!eir stoc'!olders, includin t!e #arent MNEs$ .a#anese MNEs !a(e !istoricall& used s#in,offs$ Note
t!at t!e To&ota Motors is actuall& a s#in,off of t!e Todota Auto"ated Loo",%or's$
Ne% co"#an& de(elo#"ent t!rou! s#in,off: Industrial Tec!nolo& Researc! Institute *ITRI+ of Tai%an since
@G?G until :<<< created a nu"ber of s#in,off co"#anies$ RF8 #rora"s at ITRI t!at !a(e ro%n into si5able
businesses are s#un off as inde#endent co"#anies$ T!e first suc! s#in,off co"#an&, United Microelectronics
)or#oration, %as created in @G?G to seed t!e ro%t! of I) industr& in Tai%an$ Since t!en, fi(e ot!er co"#anies
!a(e been s#un off fro" ITRI: Tai%an Se"iconductor Manufacturin )o"#an&, E(erreen Su#er Allo&
)or#oration, Tai%an Mas' )or#oration, Kanuard International Se"iconductor )or#oration, and Ne% 7ait!
Tec!nolo& )or#oration$ T!e s#in, off #rora" is an efficient %a& for ITRI to transfer researc! results to t!e
industrial sector for #roduction and ser(ices$ T&#ical cases in %!ic! a s#in,off co"#an& "a& be founded are
described belo%$ Occasionall& ITRI de(elo#s tec!noloies %it! t!e #otential to enerate sinificant ro%t! in
do"estic #roduction, but %!ic! cannot be transferred to t!e #ri(ate sector, for eit!er t!e rele(ant industr& does
not e3ist or e3istin "anufacturers are unable to a##l& t!e tec!noloies efficientl& and #rofitabl&$ In suc! cases,
ITRI %ill s#in off an inde#endent co"#an& to utili5e t!e ne% tec!noloies$ T!e obDecti(e of s#in,off co"#anies
is to enerate ne% do"estic industries$ T!ese businesses re6uire "assi(e infusions of ca#ital and "an#o%er,
"ost of %!ic! are su##lied b& ITRI %it! su##ort fro" outside in(estors$ S#in,off co"#anies are created onl&
%!en t!e& are unli'el& to "ono#oli5e an i"#ortant tec!nolo& or i"#ede ot!er fir"s2 a##lication of t!e
tec!nolo&$
Gro%in co""ercial researc! and intellectual #ro#ert& t!rou! s#in,off: In U> s#in off co"#anies see' to
establis! lin' %it! educational institutions to !arness (irin 'no%lede$ Lin's bet%een s#in,off co"#anies and
!i!er education are flouris!in$ T!e nu"ber of s#in,off co"#anies %it! lin's to !i!er education institutions
*0EIs+ is on t!e rise, %it! ro%in co""ercial researc! and intellectual #ro#ert& inco"e underscorin !i!er
education2s 'e& role in t!e econo"&$
+.+.+.+ Lead Su@"idiar5 Or2ani;ation"
A subsidiar&2s ca#abilit& could be its s'ill in de(elo#in and "anufacturin a #roduct line better t!an a
!ead6uarters2 di(ision$ Suc! a subsidiar& is referred to as Lead Subsidiar&$ Subsidiaries t!at ta'e on a "ore
de"andin leaders!i# role in a reion, and in t!e #arent2s lobal net%or', can add considerabl& "ore (alue to
t!e #arent fir" %orld%ide$ An MN)2s leadin subsidiaries can "a'e t!is !a##en$ Leadin subsidiaries can ta'e
on lobal and reional res#onsibilities for RF8, "anufacturin, #roduct "anae"ent, and 'e& "ar'etin
functions$ )ertain co"#anies !a(e "o(ed t!e !ead6uarters of certain di(isions to forein countries, because
t!e& felt t!at co"#etenc& for cuttin ede inno(ations and #roducts could as %ell oriinate fro" subsidiaries$
Pratt F -!itne& is a #ioneer in fli!t and in tec!nolo& %!ic! "ade it #ossible to fl& around t!e %orld in %ide,
bodied co"fort$ O(er t!e &ears, it !as #atented !undreds of inno(ations, fro" !eat,resistant coatins to
aerod&na"ic blades 1 tec!noloies t!at "a'e air tra(el "ore cost effecti(e, "ore co"fortable and "ore
de#endable$ Toda&, Pratt F -!itne& enines #o%er nearl& !alf of t!e %orld2s co""ercial fleet$ E(er& fe%
seconds 1 "ore t!an :<,<<< ti"es a da& 1 a Pratt F -!itne&,#o%ered airliner ta'es fli!t so"e%!ere in t!e
%orld$ 0ead6uartered in East 0artford, )onnecticut, USA Pratt F -!itne& created a lead subsidiar&, Pratt F
-!itne& )anada %!ic! "anaes a critical line of enines for PF- %orld%ide$ Si"ilarl& ATFT "o(ed its
corded tele#!one di(ision fro" t!e United States to 7rance, Sie"ens "o(ed its air,traffic "anae"ent di(ision
fro" Ger"an& to t!e United >indo", 0&undai s!ifted its #ersonal co"#uter di(ision fro" >orea to t!e
United States, Panasonic in S#ain !andles 'e& as#ects of #an,Euro#ean strate& and t!e 7innis! co"#an& No'ia
built its ca#abilities for a teleco""unications #roduct in t!e United >indo"$ Alt!ou! t!ese di(isional
!ead6uarters are still accountable to cor#orate !ead6uarters, ot!er lobal o#erations, includin t!ose in t!e
!o"e countr&, "ust re#ort to t!e"$
+.+.1 Location o' Deci"ion 3a8in2 /o-er in 3ne"
-!ere does t!e decision "a'in #o%er restsC Is t!e decision #o%er (ested %it! t!e #arent2s !ead6uarters or
%it! t!e subsidiar&C 8ecisions "ade at t!e forein,subsidiar& le(el "a& be considered decentrali5ed, %!ile
t!ose "ade abo(e t!e forein,subsidiar& le(el, t!at is t!e #arent le(el, are considered centrali5ed$ T!e location
of decision "a'in #o%er "a& (ar& %it!in t!e sa"e co"#an& o(er ti"e as %ell as b& #roduct, function, and
countr&$ In addition, actual decision "a'in is seldo" as one,sided as it "a& a##ear$ A "anaer %!o !as
decision,"a'in aut!orit& "a& consult ot!er "anaers before e3ercisin t!at aut!orit&$
)entrali5ed decision "a'in is a lobal strate& %!ile decentrali5ed decision "a'in is a "ulti,do"estic
strate&$ A co"bination of t!e t%o is called a transnational strate&$ T!e reason for c!oosin one o(er t!e ot!er
is #artl& a function of co"#anies2 attitudes$ 7or e3a"#le, an et!nocentric attitude %ould influence a co"#an& to
de(elo# co"#etencies, suc! as 'no%lede and tec!nolo&, in its !o"e countr& and control !o% t!e& are
transferred aboard$ A #ol&centric attitude %ould cause t!e co"#an& to deleate decisions to forein subsidiaries
because !ead6uarters #ersonnel belie(e onl& #eo#le on t!e s#ot 'no% best %!at to do$ Multi,do"estic attitude
encouraes t!is$ A reion,centric attitude %ould #er"it "ore o#enness to ca#abilities eit!er at !o"e or abroad
and be conduci(e to a transnational strate&$ A eocentric attitude %ould be conduci(e to a lobal strate&
%!ere core decisions lie %it! t!e !ead6uarters$
Accordin to .o!n 8 8aniels and Lee 0 Radebau!, co"#anies c!oose t!e locus of decision #o%er based on a
co"bination of t!ree trade,off2s:
Balancin #ressures for lobal interation (ersus #ressures for local res#onsi(eness
Balancin t!e ca#abilities of !ead6uarters (ersus subsidiar& #ersonnel
Balancin t!e e3#edienc& (ersus t!e 6ualit& of decisions
T!ese are dealt belo%$
+.+.1.1 /re""ure" 'or $!o@a! Inte2ration <" Loca! Re"pon"iene""
Pressure for lobal interation leads to centrali5ed decision structure and #ressure for res#onsi(eness to local
conditions leads to decentrali5ed decision "a'in$ T!e factors t!at influence are: Resource transference,
Standardi5ation, S&ste"atic dealins %it! sta'e!olders, Transnational strate& and Ad,!oc strate&$ T!ese are
dealt no%$
a. Re"ource Tran"'erence
Resource transference decisions are centrali5ed$ A co"#an& "a& %ant to "o(e its resources,ca#ital, #ersonnel,
or tec!nolo&,fro" its facilities in one countr& to its facilities in anot!er %!ere t!e #roDected return is !i!er
and conse6uentl& i"#ro(in t!e MNE2s lobal or o(erall #erfor"ance$ T!is sa(es cost, biases and ti"e in
decision "a'in$ A centrali5ed info,#ool %it! t!e #arent sa(es cost$ 8ecision a%a& fro" t!e subsidiaries a(oids
biases$ Ti"el& decisions are #ossible as (ested interests aren2t bu&in ti"e to #us! t!rou! t!eir !idden aenda$
Ro&al 8utc!9S!ell centrali5ed financial control of U$S$ o#erations t!at %ere once !andled autono"ousl& b& its
subsidiar&, S!ell Oil, in t!e United States for t!e reason of biases b& t!e subsidiar& to retain t!e control %it!
itself$ If a subsidiar& is not #art of a co"#an&2s interated o#eration, because it o#erates in a !i!l& #rotected
"ar'et, t!ere is little need for centrali5ed control$ Anot!er centrali5ed decision in resource transference "a&
concern Durisdiction o(er e3#orts$ If a co"#an& !as "anufacturin facilities in t!e United States and Ger"an&,
%!ic! facilit& %ill e3#ort to Sout! A"ericaC A centrali5ed decision a(oids costl& #rice co"#etition bet%een t!e
subsidiaries and considers ot!er (ital factors li'e #roduction costs, trans#ortation costs, ta3 rates, forein,
e3c!ane controls, #roduction ca#acit& and so on$
@. Standardi;ation
Kariet& costs !i! for "undane acti(ities, %!ile unifor"it& reduces cost$ -orld%ide unifor"it& of an MNE2s
#roducts, #urc!ases, "et!ods, and #olicies reduces its lobal costs substantiall&$ If an MNE standardi5es
"ac!iner& in its #roduction #rocess, cost sa(in arises fro" 6uantit& discounts on #urc!ases, consolidation of
"ec!anics2 trainin, "aintenance of "anuals, and carr&in of s#are #arts in(entories$ Product unifor"it& i(es
a co"#an& reater RF8 t!rust, fle3ibilit& in fillin orders %!en su##l& #roble"s arise, ad(ertisin and so on$
But t!ere are situations %!ere standardi5ation is not needed li'e GE2s Det enines re6uire no local ada#tation$
T!ere are situations %!ere ada#tation is needed li'e food #roducts of Nestle or Mc8onalds$ Proble"s arise onl&
%!en %anted ada#tation9 standardi5ation could not be #ro(ided or %!en un%anted ada#tation9standardi5ation is
t!rust u#on$
c. S5"tematic Dea!in2" -it* Sta8e*o!der"
Sta'e!olders abound t!ese da&s for businesses$ )o"#anies deal %it! o(ern"ent officials, e"#lo&ees,
su##liers, consu"ers, en(iron"entalists, consu"er acti(ists and t!e eneral #ublic 7a(orin one rou# is
disli'ed b& ot!ers if t!e sa"e or si"ilar fa(or is not e3tended to t!e" also$ Si"ilarl& co"#anies "a& face a
dile""a if t!e& can2t afford concessions in one countr& offered offerin t!e sa"e in ot!er countr&$ T!an's to
increased "obilit& of #eo#le$ A ood or bad e3#erience %it! a #roduct in one countr& "a& e(entuall& affect
sales else%!ere$ E(en #ricin and #roduct decisions in one countr& can affect de"and in ot!er countries$ If
#rices differ substantiall& a"on countries, consu"ers "a& e(en find t!at t!e& can i"#ort "ore c!ea#l& t!an
t!e& can bu& locall&$ )entrali5ed decision "a'in is necessar& to ensure t!at o#erations in different countries
o#erate to%ard ac!ie(in lobal obDecti(es$ Global co"#etition also leads to centrali5ed decision$ A user MNE
reco""ends its subsidiaries to #lace orders %it! #articular su##lier %it! %!o" deals are su#erior$ T!us
centrali5ed decision "a'in !a##ens$ 0o%e(er, in so"e cases t!e subsidiar& "a& be t!e best #lace to "a'e
decisions about t!e custo"er or co"#etitor$ -!en IBM2s to# "anae"ent feared t!at its erodin .a#anese
"ar'et s!are %ould s#ill into ot!er "ar'ets because .a#anese co"#etitors %ould !a(e resources and confidence
to fi!t IBM else%!ere, it a(e its .a#anese subsidiar& decision,"a'in #o%er$ T!e subsidiar& increased its
"anufacturin ca#acit& substantiall&, and it de(elo#ed ne% #roducts s#ecific to t!e .a#anese "ar'et$
d. Tran"nationa! Strate25
T!e #!ar"aceutical co"#anies !a(e a stron need for interation, t!at is centrali5ation, because t!e& de#end on
t!e sale of undifferentiated #roducts for %!ic! scale of #roduction is i"#ortant to co(er t!e !i! cost of #roduct
de(elo#"ent$ T!is is t!eir eo,centric for"$ But, ne(ert!eless, co"#anies need !i! local res#onsi(eness due to
different #urc!ase and distribution reulator& scenario in different countries$ )o"#anies !a(e establis!ed
(arious #ractices to i"#ro(e t!e flo% of infor"ation$ ABB !as a so#!isticated infor"ation retrie(al s&ste" t!at
disse"inates infor"ation about @,A<< entities in its federation of co"#anies to eac! of t!ese entities$ At AM2s
Euro#ean o#erations t!e co"#an& !as i(en incenti(es for countr& subsidiaries to %or' toet!er on 'e&
accounts$ 7ord is lin'in its desin rou#s in Nort! A"erica and Euro#e t!rou! (ideoconferencin and
co"#uter net%or's in t!e de(elo#"ent of ne% auto"obile desins$ T!ese are centrali5ed decisions %it!
reional fla(or$
e. Ad Doc Strate25
)o"#anies t!at ain little fro" lobal interation, and also !a(e little need to ada#t to local conditions "a&
eit!er centrali5e or decentrali5e, de#endin on suc! factors as t!e e3#erience and co"#etenc& of t!e #ersonnel
at !ead6uarters co"#ared to subsidiaries$
+.+.1.& Capa@i!itie" o' DeadHuarter" <" Su@"idiar5 /er"onne!
T!e decision to centrali5e or decentrali5e also de#ends u#on "anae"ent2s #erce#tion of t!e co"#etence of
cor#orate (ersus local "anaers$ 8ecision #o%er "ust (est %it! co"#etence$ Of course as co"#etence le(el
c!anes, locus of decision #o%er also c!anes$
Traditionall& so"e decisions are reser(ed for cor#orate "anae"ent to t!e c!arin of so"e local "anaers %!o
#ercei(e t!eir do"ain !as been eroded$ If local "anaers are not allo%ed to #artici#ate in de(elo#in lobal
strateies, t!e& distance t!e"sel(es fro" i"#le"entin lobal strateic decisions$ But t!ere are "an& %a&s in
%!ic! subsidiaries can !a(e autono"& o(er certain acti(ities, suc! as de(elo#in a s#ecific #roduct or
tec!nolo& or conductin certain "ar'et testin$ Euro#ean scientists %or'in at Pfi5er2s s"all U$>$ laborator&
!a(e been res#onsible for "an& of Pfi5er2s disco(eries$
+.+.1.+ Deci"ion E=pedienc5 and Nua!it5
4ou %ant 6uic' decision or ood decisionC Puic' decision is referred to e3#edient decision and ood decision
is called 6ualit& decision$ So"eti"es, a #oor decision is better t!an a ood one t!at co"es too late, #ro(ided no
cascadin #roble" ta'es #lace$
T!e #roble" %it! centrali5ed decision "a'in is t!e ti"e and e3#ense des#ite better decision #ossibilit& %it!
cor#orate "anaers$ 0o% "uc! can %e lose t!rou! a bad decisionC T!e reater t!e #otential loss and t!e "ore
i"#ortant t!e issue, t!e !i!er in t!e orani5ation t!e le(el of decision "a'in usuall& is$ In t!e case of
"ar'etin decisions, local autono"& is t!ere for ad(ertisin, #ricin, and distribution, but not for #roduct
desin$
+.1. Compari"on" o' Di''erent "trate2ie"

3u!tinationa! Strate25 Internationa! Strate25 $!o@a! Strate2ie"
>e& assets, res#onsibilities and
decisions are !i!l& decentrali5ed
T!rou! so"e assets, resources and
res#onsibilities are decentrali5ed,
occasional control fro"
!ead6uarters results in so"e deree
of centrali5ation
Strateic assets, resources,
res#onsibilities and decisions are
!i!l& centrali5ed
T!e relations!i# bet%een
!ead6uarters and subsidiaries is
infor"al
T!e relations!i# is for"al and t!e
subsidiaries o#erations are closel&
"onitored
T!e relations!i# of #arent
subsidiar& is !i!l& for"al and
"anae"ent control s&ste"s are
used for close ad"inistration of t!e
s&ste"
O(erseas o#erations are rearded as
inde#endent business units instead
of interal #art of t!e orani5ation
O(erseas subsidiaries are
considered re#licas of t!e #arent
co"#an& in t!e !o"e countr&
O(erseas o#erations are treated as
distribution outlets to lobal
"ar'ets
E3: P!illi#s, Unile(er E3: PFG, >ellos, IBM Te3as instru"ents, Motorala
UNIT I<
CONTROL O( 3ULTINATIONAL ENTER/RISES
1.1. A//ROACDES TO CONTROL
)ontrol "eans, MSo"e sort of s&ste"atic effort to co"#are current #erfor"ance to a #redeter"ined #lan of
obDecti(e, #resu"abl& in order to ta'e an& re"edial action re6uiredN$ T!is is a (er& eneral definition of t!e
ter"$ 0o%e(er, as a "anae"ent function, it !as been defined as Mt!e #rocess b& %!ic! "anaers assure t!at
resources are obtained and used effecti(el& and efficientl& in t!e acco"#lis!"ent of t!e orani5ation2s oalsN$
)ontrollin is tool for ac!ie(in orani5ational oals and acti(ities$ )ontrol is "anae"ent2s #lannin,
i"#le"entation, e(aluation, and correction of #erfor"ance to ensure t!at t!e orani5ation "eets its obDecti(es
in t!e s!ort, "ediu" and lon ter"s$ In t!e case of MNEs, t!e to# "anae"ent2s tou!est c!allene is to
balance t!e co"#an&2s lobal needs %it! its need to ada#t to countr&,le(el differences$
Accordin to 0enr& 7a&ol, /)ontrol of an underta'in consists of seein t!at e(er&t!in is bein carried out in
accordance %it! t!e #lan %!ic! !as been ado#ted, t!e orders %!ic! !a(e been i(en, and t!e #rinci#les %!ic!
!a(e been laid do%n$ Its obDect is to #oint out "ista'es in order t!at t!e& "a& be rectified and #re(ented fro"
recurrin2$
Accordin to E7L Breac!, /)ontrol is c!ec'in current #erfor"ance aainst #redeter"ined standards contained
in t!e #lans, %it! a (ie% to ensure ade6uate #roress and satisfactor& #erfor"ance$2
Accordin to 0arold >oont5 and O28onnel, /)ontrollin is t!e "easure"ent and correction of #erfor"ance in
order to "a'e sure t!at enter#rise2s obDecti(es and t!e #lans de(ised to attain t!e" are acco"#lis!ed$2
7ro" t!ese definitions, it could be deduced t!at control, one of t!e "anaerial functions li'e #lannin,
orani5in, etc$ is an i"#ortant function because it !el#s ensurin t!at t!e #lanned oals are attained t!rou! a
s&ste" of c!ec's, "onitorin, correcti(e actions and for%ard t!in'in so t!at errors are re"o(ed, and correcti(e
actions ta'en ti"el& so t!at de(iation fro" standards are "ini"i5ed, if not eli"inated$ )ontrol in "anae"ent
"eans settin standards, "easurin actual #erfor"ance and ta'in correcti(e action$ T!us, control co"#rises
t!ese t!ree "ain acti(ities$
Accordin to "odern conce#ts, attributed to Peter 7erdinand 8ruc'er, /)ontrol is a foreseein action and better
is self,directed to be "ore effecti(e2$ Self control is t!e best control, because infor"ed self is %ell a%are of its
deficiencies and also "easures to %ard off t!e sa"e$
Plannin and controllin o toet!er$ Plannin is a #rocess b& %!ic! an orani5ation2s obDecti(es and t!e
"et!ods to ac!ie(e t!e obDecti(es are establis!ed, and controllin is a #rocess %!ic! "easures and "onitors t!e
actual #erfor"ance confor" to #lanned obDecti(es of t!e orani5ation$ T!us, #lannin and control are often
referred to as /Sia"ese T%ins2 of "anae"ent$
A control s&ste" is necessar& in an& orani5ation in %!ic! t!e acti(ities of different di(isions, de#art"ents,
sections, and so on need to be coordinated and controlled$ Most control s&ste"s are #ost,action,oriented or
feed,bac' control t&#e and conse6uentl& are inefficient or fail$ 7or e3a"#le, t!ere is little an e"#lo&ee can do
toda& to correct t!e results of actions co"#leted t%o %ee's ao$
Steerin control or feed,for%ard control s&ste", on t!e ot!er !and, is future,oriented and #redict adDust"ents to
be "ade to #ut bac' on re"edial course before t!e outco"e drifts fro" #lanned sc!e"e$
In bet%een t!ere is a s&ste" of control called /concurrent or real ti"e control, %!ic! "a'e correcti(e courses
"ade continuousl& as e3ecutions !a##en$ But, t!ere is no for%ard stretc! to #redict #ossible "is!a#s in t!e later
#!ases, due to current actions and !a(in a #lan to sto# suc! "is!a#s fro" !a##enin$
)ontrol Process: )ontrol Process in(ol(es establis!"ent of standards or tarets of #erfor"ance, "easure"ent
of actual #erfor"ance, and co"#arison of actual #erfor"ance %it! standards, e3a"inin t!e causes for an&
de(iations in #erfor"ance and ta'in correcti(e actions$ 7i$ A$= i(es a #icture of control #rocess$
(i2. +.F Contro! /roce""
1.1.& Di''icu!tie" in E''ectin2 contro! in t*e ca"e o' 3NE"
T!ere are se(eral factors t!at "a'e control of MNE #arent and t!e subsidiaries difficult$ T!is is essentiall& due
to t!e eora#!ical s#read of acti(ities and actors$
Di"tance: MNEs and t!eir subsidiaries are se(ered not onl& b& distance, but also culture, le(els of de(elo#"ent,
ti"e 5one and et!ical standards$ Et!ical differences e3!ibit in t!e corru#tion,li'e t!ins t!at is #re(ailin "ore
in less de(elo#ed nations$ 8es#ite (ideoconferencin, internet connecti(it&, (oice,"ails, e,"ail and fa3
trans"issions, face,to,face or (oice,to,(oice contact still !olds reater i"#act$ T!ese increase t!e #ossibilit& of
co""unication a#s and barriers in trans,national co""unications$
Dier"it5: MNEs because of t!eir eo,s#read !a(e to ada#t$ T!e deree of ada#tation and as#ects of ada#tation
"i!t (ar& countr& to countr& %!ere it o#erates$ .ust ta'e boo's$ McGra% 0ill international editions used to be
"ulti,color, "ostl& !ard,bound, costlier and 6ualit& #a#er in(ol(ed$ Its Indian edition, Tata,McGra% 0ill
editions used to be blac' F %!ite color, #a#er,bound, ine3#ensi(e and less,6ualit& #a#er in(ol(ed$ 4ou cannot
i(e t!e ine3#ensi(e edition to t!e 0ar(ard learners$ 8e#endin on "ar'et features, #roduct, #a&"ent,
distribution, #ro"otion, etc need to be ada#ted$ T!ere is al%a&s t!e #roble" of Ada#tation Ks Standardi5ation$
Un-contro!!a@!e: In a lobal s#read of acti(ities, %it! reional ada#tations, #erfor"ance standards are also
#lural$ E"#lo&ees2 and subsidiaries2 #erfor"ance cannot be unifor"l& co"#ared$ O(erseas #olitico,leal
en(iron"ent and o(ern"ent reulations o(er %!ic! t!e co"#an& !as no s!ort,ter" influence dictate different
&ardstic's of #erfor"ance$ Effecti(e correcti(e action beco"es "ini"al$
8eree of certaint&: )ontrol i"#lies settin oals and de(elo#in #lans to "eet t!ose oals$ T!is is said easier
t!an done$ It is "ore so in uncertain business conditions or %it! i"#recise 'no%lede about t!e econo"&,
#olit& or so$ T!ese factors i"#ede #lannin, es#eciall& lon,rane #lannin "a'in controls i"#ossible$
1.1.+ T5pe" o' Contro! in $!o@a!i;ation
T!ere are (arious "et!ods of classification of "anae"ent control$ B& le(els of control !ere it is "eant
%!et!er t!e #arent 9 cor#orate le(el "anaers or subsidiar&9countr&,le(el "anaers are in(ol(ed$ T!e for"er
"i!t be called !i!er le(el and t!e later lo%er le(el control$
8e#endin on t!e s#!ere of focus %e !a(e /Strateic control and O#erational control2$ In t!e MNE2s conte3t,
strateic control is t!e res#onsibilit& of #arent and o#erational control is t!e #reser(e of t!e subsidiar&$
Anot!er %a& #uts /"anae"ent control, tactical control and transactional control2 as t!e A le(els of control
res#ecti(el& carried out b& t!e cor#orate to# "anae"ent, collecti(el& b& cor#orate F subsidiar& "anae"ent
and subsidiar& "anae"ent in t!e case of MNEs$ Of course, %!et!er an MNE2s structure is et!no,centric, eo,
centric, "ulti,do"estic9#ol&,centric or reion,centric is anot!er factor t!at influences t!e e3act distribution of
res#onsibilit&$
T!e for%ard loo'in infor"ation is #ro(ided b& strateic control s&ste"s$ It is /e3ternal res#onse2 oriented$ It
i(es "anaers ti"el& /6uantitati(e and 6ualitati(e2 infor"ation t!e& need to /dri(e into t!e future2 %it!
confidence and success$ In d&na"ic and uncertain business en(iron"ent %it! e3tended co"#etiti(e
c!allenest!is s&ste" functions %ell$ Sensin and res#ondin to c!ane, 8etectin c!anes in assu"#tions and
)o#in %it! a d&na"ic en(iron"ent are t!e s#ecific issues in strateic control$ O#erational control is /internal
res#onse2 oriented to ensure tarets are ac!ie(ed$ Manaers use #erfor"ance "easure"ent and o#erational
control "easures to ensure fulfill"ent of tarets$
T!e do"ains of /Manae"ent control, tactical control and transactional control2 res#ecti(el& co(er /Goals F
strate&2, /S#eed F r!&t!" to tune %it! field realit&2 and /s#ecific actions2$
Manae"ent controls 'ee# a co"#an&2s Goals or Strate& on trac'$ Strateic control ada#ts an orani5ation
o(er ti"e to forces in its en(iron"ent, suc! as c!anes in societ&, ad(ances in tec!nolo&, de(elo#"ent of t!e
econo"&, and s!ifts in #olic&$ MNE "anaers "ust 'no% t!at, alt!ou! cost and inno(ation are i"#ortant, t!e
co"#an&2s "aDor co"#etiti(e ad(antae lies in t!e "ar'etin of differentiated9undifferentiated consu"er
#roducts$ As suc!, it is better subsidiar&2s "anaers concentrate on "ar'etin,suc! as brandin, ad(ertisin,
and distribution,rat!er %!ile cor#orate "anaers concentrate on ca#acit& buildin t!rou! ac6uirin ca#ital or
business units or #ursuin RF8$ )or#orate "anaers "ust !a(e a clear,cut understandin of co"#etiti(e entr&
strateies$ T!e& s!ould loo' to ac6uire first,in ad(antaes or co"#anies %it! an establis!ed brand and
sinificant "ar'et s!are$ )or#orate "anaers allocate resources to e"#!asi5e t!ose #roduct and eora#!ic
"ar'ets in %!ic! t!e& #refer to ro% "ore ra#idl&$ It %ould be al"ost inconcei(able for a subsidiar& "anaer
to launc! a ne% #roduct in !is area or build a #lant t!ere %it!out considerable scrutin& and a##ro(al fro"
cor#orate "anae"ent in t!e !ead6uarters$ But it is needed t!at countr&,le(el "anaers adDust to s#ecific
en(iron"ental and co"#etiti(e conditions in t!eir countries of o#eration$ At t!e sa"e ti"e, t!e subsidiaries
s!are infor"ation, fi3ed costs fro" ne% #roduct de(elo#"ent, and s#illo(er ad(antaes, %!ic! "a'e it easier
for t!e #arent to sell to lobal distributors$ Nestle does t!is e3actl&$
Tactical controls in(ol(e control %it! field realit& in "ind %!ile actin %it!in a set of #olic& and budetar&
allocations$ T!e& cannot co"#ro"ise on 'e& results, but de#endin on t!e e3iencies follo% a different #riorit&
fro" t!e #lanned one$ Tactical controls are budetar& control, aut!orit&9res#onsibilit& c!anes, #rocure"ent
control, #roduction control etc$ S#eed of e3ecution, balancin di(erse clai"s and t!e li'e in(ol(e$ Sensiti(it& to
t!e situation rat!er t!an strict ad!erence to rules and #rocedures, "a'in na(iational c!anes as circu"stances
%arrant, etc are in(ol(ed$ T!e cor#orate and subsidiar& le(el "anaers collecti(el& do t!is, t!ou! t!e role of
subsidiar& le(el is "ore$
Transactional controls deal %it! indi(idual tas's and #rocesses %it!in t!e en(elo#e of a(ailable resources$
-!ile #ri"aril& ai"ed at ensurin t!at t!ese indi(idual efforts are efficient, o#erational control also "a#s t!ese
to t!e o(erall control oals$ In(entor& control, action aainst delin6uent custo"ers, #rocure"ent #rocedures, etc
co"e !ere$ T!ese are t!e #reser(e of t!e subsidiar& "anaers$
1.1.1 $enera! Contro! 3ec*ani"m"
-e s!all no% "o(e to t!e subDect of t!e "ec!anis"s t!at MNEs use to !el# ensure t!at control is i"#le"ented$
)or#orate culture, )oordinatin "et!ods, Re#ortin and Kisits are certain "ec!anis"s of control in t!e conte3t
of MNEs$
a. Corporate Cu!ture:
E(er& co"#an& !as certain co""on (alues t!at its e"#lo&ees s!are, e3#ect fello% "e"bers to follo%$
)or#orate culture is a for" of i"#licit control "ec!anis" t!at !el#s enforce t!e co"#an&2s e3#licit control
"ec!anis"s$ E"#lo&ees confor" to co"#an& traditions of %or' co""it"ent, interactions %it! custo"ers and
so on$ T!ese are un%ritten, infor"al, but "ore effecti(e$
But MNEs !a(e "ore difficult& rel&in on a cor#orate culture for control because cultural bac'round of
e"#lo&ees differs, e3#osure le(el (aries, nor"s differ and so on$ To o(erco"e t!is MNEs #ro"ote %orld%ide
cor#orate culture %it! t!e ai" of con(e&in a s!ared understandin of lobal oals and nor"s for reac!in
t!ose oals, alon %it! t!e transference of Mbest #racticesN fro" one countr& to anot!er$ Nestle "o(es
"anae"ent trainees around Euro#e so t!at t!e& learn to react li'e Euro#eans rat!er t!an li'e an& s#ecific
nationalit&$ Matsus!ita brins forein e"#lo&ees to .a#an, #artl& to train t!e" in t!e co"#an& culture but
#ri"aril& to et .a#anese e"#lo&ees to e(ol(e to%ard a "ore lobal culture$ )or#orate culture "ust be diffused
t!rou!out t!e orani5ation t!rou! co""unications, interactions, transfers and co""e"orati(e e(ents$
@. Coordinatin2 3et*od": T!e #ur#ose of controls is ensurin t!at oals are o#ti"all& ac!ie(ed$ An& %antin
in t!is reard "a& be due to non,coordinatin attitude of so"e #eo#le, at so"e #laces$ So, ensurin
coordination ensures oal ac!ie(e"ent, t!e oal of control "ec!anis"s$ So"e of t!e "ec!anis"s of
coordination are:
8e(elo#in "ulti,culture tea"s for buildin scenarios on !o% t!e future "a& e(ol(e$
8e(elo#in t!e attitude to listen to different (ie%,#oints a"on t!e cor#orate
#ersonnel
Transferrin and rotatin orani5ation #eo#le across nations and cultures
>ee#in #ro3i"it& bet%een lobal and do"estic #ersonnel
Establis!in liaisons a"on subsidiaries %it!in t!e sa"e countr&9reion
8e(elo#in tea"s fro" different countries to %or' on cross national s#ecial #roDects
Placin forein #ersonnel on t!e board of directors and to#,le(el co""ittees
Gi(in credit to all concerned for business resultin fro" coo#erati(e efforts
Lin'in re%ard s&ste"s to bot! lobal and local #erfor"ance
c. Report": T!e basis of control is infor"ation$ T!e source of infor"ation is re#ortin s&ste"s$ )ontrol needs
ti"el&, u#,to,date and accurate re#orts$ Re#orts "ust be fre6uent and #ur#oseful to assure "eetin t!e MNE2s
obDecti(es$ Parent concern uses re#orts to e(aluate t!e #erfor"ance of subsidiar& to re%ard and rectif&, if need
be$
-ritten re#orts are "ore i"#ortant in a lobal settin t!an in a do"estic conte3t because #ersonal contacts are
fe% and far bet%een$ Re#orts %it! si"ilar for"ats, for do"estic and lobal, and for #arent and subsidiar&
facilitates better co"#arison$ T!e #eriodicit& of re#orts counts "uc!$ T!ese da&s "an& a re#orts on a sinle da&
is 6uite #ossibleE &et at least one re#ort a da& is essential so t!at t!e !ead6uarters 'no%s t!e !a##enins %it! all
subsidiaries$ MNEs #lace "ore e"#!asis on e(aluatin t!e subsidiar& rat!er t!an t!e subsidiar& "anaer,
alt!ou! t!e subsidiar&2s #rofitabilit& is an i"#ortant inredient in t!e "anaerial e(aluation$
d. <i"it" to Su@"idiarie": Kisits to subsidiaries b& !ead6uarters #eo#le "a'e %onders for t!eir "oti(ational,
directi(e, strateic and sinalin effects$ It is better "e"bers of t!e cor#orate staff s#end "uc! ti"e (isitin
subsidiaries for on t!e s#ot assess"ent of round realities %!ic! !a(e reat i"#lications for control$ 0o%e(er
cor#orate #ersonnel (isits to subsidiaries "ust not be of t!e boondoles t&#e$ 7urt!er, if (isits result because of
u#sets o(er subsidiar&2s #erfor"ance, subsidiar&2s "anaers "a& beco"e concealin and9or defensi(e$
1.1.4 Contro! in Specia! Situation"
T!e s#ecial situations considered !ere are /Merers F Ac6uisitions, S!ared o%ners!i# F .Ks, and )!anes in
strateies2$ S#ecial situation %arrants s#ecial controls$ Let us no% discuss eac! of t!ese$
a. 3er2er" . AcHui"ition":
E3#ansion t!rou! "erers and ac6uisition can create so"e s#ecific control #roble"s li'e du#lication, re&
areas, blac',bo3es and boondoles or so$ Nestli2s ac6uisitions in U$S$ resulted in o(erla##in eora#!ic
res#onsibilities and "ar'ets as %ell as ne% lines of business %it! %!ic! cor#orate "anae"ent !ad no
e3#erience$ 7urt!er "et!ods of #erfor"ance a##raisal, 'e& #erfor"ance areas, etc "i!t (ar& bet%een ac6uired
and ac6uirin co"#anies$ 7or e3a"#le, U$S$ e3ecuti(es tend to focus "ore on #rofitabilit& t!an on "ar'et
#otential, %!ereas t!e o##osite is true in >orean co"#anies$ -!en a U$S$ co"#an& ac6uires a >orean
co"#an&, it "ust co""unicate and i"#le"ent ne% #erfor"ance standards e"#!asi5in botto",line ro%t!,
rat!er t!an t!e to#,line ro%t!$ Still anot!er #roble" is t!at e3istin "anae"ent in an ac6uired fir"
accusto"ed to considerable autono"& "a& disli'e centrali5ed control and "a& resort to non,coo#eration or
resist c!anes$
@. S*ared O-ner"*ipAI<": 4es it !a##ens %it! s!ared o%ners!i# or Doint (entures t!at one "aDor sta'e !older
does not acce#t t!e (ie%s of anot!er "aDor sta'e !older$ In late :<<H, %!en Su5u'i Motor )or#oration *SM)+
unilaterall& decided to in(est Rs @,<<< )rore in t!e Indian auto"obile sector, t!e Indian Go(ern"ent
su""oned its Doint (enture #artner in Maruti Ud&o Li"ited, t!e SM), to e3#lain its /"is,understandin of t!e
understandin arri(ed %!en t!e .K %as for"ed$ O%ners!i# s!arin li"its t!e fle3ibilit& of cor#orate decision
"a'in$ T!is %as so"et!in %!ic! !a##ened to Tata2s #re(ious bid to ac6uire fla(oured %ater business of US,
based Glaceau, %!ic! %as ulti"atel& sna##ed u# b& )oca,)ola$ Tatas, %!o in(ested LI?? "illion in
Auust2<I, !ad "ade a neat #rofit *close to @<< #er cent in one &ear+ fro" t!is deal$ Glaceau %as ac6uired b&
)o'e for an enter#rise (alue of about LH$@ billion$ Last October, 8ubai 0oldin , an in(est"ent fir" of t!e
8ubai o(ern"ent, !ad t!reatened to co"e out %it! a counter o#en offer for Orient,E3#ress 0otels if t!e Tata
rou# ac6uires a sinificant sta'e in t!e !otel c!ain$ T!is !ad co"e after Tatas bou!t @< #er cent in Orient
E3#ress in Se#te"ber2<?$ 8ubai 0oldin !as a sinificant s!are!oldin of Orient,E3#ress$ It !ad also earlier
"ade an offer to bu& all s!ares of t!e co"#an& %!ic! %as aain reDected b& Orient E3#ress$ Orient,E3#ress !as
t%o classes of stoc' %it! differential (otin ri!ts$ T!e structure enables it to o##ose an& !ostile ta'eo(er$
Nestle s!ares o%ners!i# %it! )oca,)ola in a Doint (enture for t!e #roduction and sale of canned coffee and tea
drin's, and Nestle !as less autono"& for t!is o#eration t!an for t!ose it o%ns %!oll& because )oca,)ola !as an
e6ual (oice in decision "a'in$ Ne(ert!eless, t!ere are ad"inistrati(e "ec!anis"s to ain control e(en %it! a
"inorit& e6uit& interest$ 4et it beco"es difficult to et t!e" to coo#erate for t!e success of t!e Doint (enture$
c. C*an2e" in Strate2ie"
Most recent c!anes in strateic "anae"ent !a(e in(ol(ed "o(e"ents fro" "ulti,do"estic to transnational
or lobal o#erations$ )itiban' "o(ed fro" a "ulti,do"estic to a reional strate& %it!in Euro#e, it needed to
introduce interde#endence a"on o#erations and collect results not onl& on a countr&,b&,countr& basis, but also
b& #roduct and custo"er$ In addition to t!e #ractical #roble"s of c!anin s&ste"s, t!ere are !u"an resource
#roble"s as %ell$ Man& U$S$ co"#anies o%ned (er& inde#endent o#erations for decades in t!e United
>indo", 7rance, and Ger"an&$ An& lobal or reional interation %ill !urt "anaers %!o fear losses t!rou!
a c!aned strate& and t!erefore continue to uard t!eir autono"& and functional s#ecialties and "aintain
e3istin alleiances$
1.1.: ReHui"ite" o' Contro! in 3NE9" conte=t
T!e control #rocess of MNEs consists of I co"#onent ste#s$ T!ese are:
i$ Strateic PlanninE
ii$ Orani5ational structure
iii$ Location of decision "a'in
i($ )ontrol "ec!anis"s
($ Structure and )ontrol Interface and
(i$ )ontrol in t!e Globali5ation Process$
T!ese are dealt %it! !ere
1.1.:.1 Strate2ic /!annin2
Plannin and control o toet!er$ Plannin is an essential ele"ent of "anaerial control$ Plannin "ust
interate a co"#an&2s obDecti(es and ca#abilities %it! its internal and e3ternal en(iron"ents$ T!is is a d&na"ic
%orld, %!ere settins c!ane, #ositions c!ane, roles c!ane, o##ortunities c!ane, c!allenes c!ane and so
on$ T!is is so "ore in a lobal conte3t$ So an MNE "ust do a continuin reassess"ent of its obDecti(es and
ca#abilities$ T!e first ste# of #lannin #rocess is to de(elo# a lon,rane strateic intent, an obDecti(e t!at 'ee#s
toet!er and orani5ation and also builds its lobal co"#etiti(e (iabilit&$
Gar& 0a"el and )$>$ Pra!alad in t!eir boo', /)o"#etin for t!e future2 define /strateic intent2 as /an
a"bitious and co"#ellin drea" t!at eneri5es and #ro(ides t!e e"otional and intellectual ener& for t!e
Dourne& of t!e co"#an& to t!e future2$ If strateic arc!itecture t!at is a !i!,le(el blue#rint for t!e de#lo&"ent
of ne% functionalities, t!e ac6uisition of ne% co"#etencies or t!e "iration of e3istin co"#etencies, and t!e
reconfiurin of t!e interface %it! custo"ers, is t!e brain, strateic intent is t!e !eart$ It s!ould con(e& a sense
of stretc! for %!ic! current resources and ca#abilities are not sufficient for t!e tas'$
0a"el and Pra!alad #ro(ided t!e follo%in t!ree attributes of strateic intent: Sense of direction, Sense of
disco(er&, and Sense of destin&$ Strateic intent i"#lies a #articular #oint of (ie% about t!e lon,ter" "ar'et
or co"#etiti(e #osition t!at a fir" !o#es to build o(er t!e co"in decade or so$ T!at unif&in and #ersonali5in
(ie% #oint is sense of direction$A strateic intent is differentiatedE it i"#lies a co"#etiti(el& uni6ue #oint of
(ie% about t!e future$ It !olds out to e"#lo&ees t!e #ro"ise of e3#lorin ne% co"#etiti(e territor& %!ic! is
%!at t!e Sense of disco(er& is about$ Strateic intent !as an e"otional ede to itE it is a oal t!at e"#lo&ees
#ercei(e as in!erentl& %ort!%!ile$ T!is is Sense of destin&$
A t&#ical Strateic Intent Process consists of t!ree i"#ortant ste#s:
i. Set t*e Strate2ic Intent in ter"s of Sense of direction, Sense of disco(er&, and Sense of destin&$ Set t!e
)!allenes,find a##ro#riate c!allenes and co""unicate t!e" to t!e entire %or'force$ T!ese
c!allenes are t!e "eans to et into t!e Strateic Intent$ *7or e3a"#le: Su##ose t!e Strateic Intent
of Tata Motors is: MMarutiN$ A strateic c!allene could be: )o"e u# %it! s"all cars at a taret
#rice of Rs @,<<,<<<$ E"#o%er t!e Strateic Intent: T!e tas' of To# Manae"ent !ere is to /ca#ture
t!e %isdo" of t!e ant!ill2 to c!allene t!e traditional do%n%ard co""unication st&le to an u#%ard
co""unication strea" of ne% ideas co"in fro" all t!e orani5ation$ T!e strateic intent "a&
enco"#ass %!et!er and %!ere a co"#an& %ants to be a leader, suc! as do"inatin its do"estic
"ar'et, do"inatin a reional or lobal "ar'et, or attainin #rofit results %it!out bein t!e "ar'et
leader$
ii. Ana!5"i" o' interna! re"ource" is t!e second ste# in #lannin$ T!e "ost successful co"#anies loball&
are t!ose t!at find t!e ri!t fit bet%een %!at t!e& need and %!at t!e& are ood at$ A s"all co"#an&
%it! uni6ue #roduct ca#abilities "a& !a(e to collaborate %it! anot!er co"#an&, b& licensin forein
#roduction rat!er t!an o%nin facilities abroad$ It "ust control its forein o#erations t!rou! a
contract %it! t!e licensee t!at sti#ulates sales tarets, #roduct c!aracteristics, and so on$
iii. Oera!! rationa!e 'or 2!o@a! actiitie" is t!e t!ird ste#$ Manaers "ust e3a"ine t!ese acti(ities in
conDunction %it! t!e "eans of co"#etin, lo% #rices or #roduct differentiation or so$
iv. Loca! ana!5"i" o' eac* countr5 i" t*e 1t* "tep$ )!anes in local stabilit& and "ar'et ro%t! influenced
"ost MNEs to #lace "ore e"#!asis on e"erin econo"ies, es#eciall& t!e BRI) *Bra5il, Russia,
India and c!ina+ rou# countries$
v. Se!ection o' a!ternatie" i" "tep 4 %!ic! deter"ines t!e e3tent to %!ic! a co"#an& follo%s a lobal,
transnational, or "ulti,do"estic strate&$ T!ese alternati(es, accordin to .o!n 8 8aniels and Lee 0
Radebau!, include:
'ocation of value"added functions: T!e c!oice of %!ere to locate eac! of t!e functions t!at co"#rises
t!e entire (alue,added c!ain, fro" researc! to #roduction to after,sales ser(icin$
'ocation of sales targets: T!e allocation of sales a"on countries and t!e le(el of acti(it& in eac!,
#articularl& in ter"s of "ar'et s!are$
'evel of involvement: T!e c!oice of o#eratin t!rou! %!oll& o%ned facilities, #artiall& o%ned
facilities, or contract arrane"ents and %!et!er t!e c!oice
(aries a"on countries$
-roduct?services strategy: T!e e3tent to %!ic! a %orld%ide business offers t!e
sa"e or different #roducts in different countries$
Marketing: T!e e3tent to %!ic! a co"#an& uses t!e sa"e brand na"es, ad(ertisin, and ot!er
"ar'etin ele"ents in different countries$
ompetitive moves, T!e e3tent to %!ic! a co"#an& "a'es co"#etiti(e "o(es in indi(idual countries as
#art of a lobal co"#etiti(e strate&$
(actor moement and "tart-up "trate25: T!e c!oice as to %!et!er #roduction factors are ac6uired
locall& or brou!t in b& t!e co"#an& and %!et!er t!e o#eration beins t!rou! an ac6uisition or start,
u#$
)ank alternatives& the Ath step is$ Manaers "ust ran' alternati(es so t!e& can easil& add or delete
strateies as resource a(ailabilit& c!anes$ -!en re"ittin di(idends fro" one of its forein subsidiaries
bac' to itself is t!%arted b& a forein o(ern"ent #arent2s "anae"ent "ust decide a"on alternati(es
for financin itself and for in(est"ent for t!e subsidiar&$
T!e last ste# is /set s#ecific obDecti(es for eac! subsidiar&2$ T!ese #ro(ide %a&s to "easure bot!
de(iations fro" t!e #lan and conditions t!at "a& cause suc! de(iations$ T!rou! ti"el& e(aluation, t!e
co"#an& can ta'e correcti(e actions$ T!ere "ust be a constant loo# fro" ste# I to ste# : to ensure t!e
co"#an& is "a'in ti"el& decisions$
-e "ust "a'e a distinction bet%een o#eratin #lans and strateic #lans$ Strateic #lans are loner ter" and
si"ilar to ste# A$ T!e& outline "aDor co""it"ents, suc! as %!at businesses t!e co"#an& %ill be in and %!ere,
and are less subDect to ree(aluation$ O#eratin #lans for"ulate s!ort,ter" obDecti(es and t!e "eans to carr&
t!e" out$ Alt!ou! in#ut for a strateic #lan "a& co"e fro" all #arts of t!e orani5ation, onl& u##er,le(el
"anae"ent can #lan c!anes in lobal #olicies because t!e& can see all t!e co"#an&2s %orld%ide acti(ities$
Uncertaint& and Plannin: T!e "ore uncertaint& t!ere is, t!e !arder it is to #lan, but e(en "ore is t!e need for
#lannin$ )onditions in t!e lobal s#!ere are "ore uncertain t!an t!ose in t!e do"estic s#!ere and t!is needs
"ore #lannin t!rust$
1.1.:.& Or2ani;ationa! "tructure
7ro" a"on different structural #atterns, co"#an& !as to c!oose one$ Bet%een centrali5ation and
decentrali5ation, bet%een differentiation and unification and bet%een for"ali5ation and in,for"ali5ation, t!ere
are certain broad c!oices$ At one end of t!e continuu" &ou !a(e centrali5ation, unification and for"ali5ation
*total structured for"+ and t!e on t!e ot!er &ou !a(e decentrali5ation, differentiation and in,for"ali5ation *total
de,structured for"+$ In bet%een t!ese #olar alternati(es, %e !a(e "ore structured for"s, "oderatel& structured
for"s and less structured for"s$ Refer Table @ for details$
Because of ro%t! d&na"ics, co"#anies c!ane t!eir orani5ational structures$ Si"#lified orani5ational
structures et re#laced b& co"#le3 or "i3ed structures$ Until orani5ational re,structurin is "ade, ne%
ac6uisitions "i!t re#ort to !ead6uarters$ )ircu"stances #re(ailin in a #articular countr&, #roduct, or function
"i!t necessitate se#arate !andlin until a re,structurin is effected, a#art fro" t!e o(erall structure$ T!e
structure of @<<J subsidiaries is different fro" t!at of .Ks$ @<<J subsidiaries enable a dee#er net%or' of
co""unications$ O(erall structure "a& be inco"#lete and less re(ealin$
Pe#si)o is orani5ed b& #roduct lines, na"el& soft drin's and snac's$ T!is %ould see" to i"#l& t!at eac!
#roduct line is interated loball&$ 0o%e(er, eac! line !as its o%n lobal di(ision, %!ic! se#arates it fro"
do"estic o#erations$ Refer 7iures A$@ to A$? for details$
1.1.:.+ Location o' deci"ion ma8in2
-!ere does t!e decision "a'in #o%er restsC Is t!e decision #o%er (ested %it! t!e #arent2s !ead6uarters or
%it! t!e subsidiar&C 8ecisions "ade at t!e forein,subsidiar& le(el "a& be considered decentrali5ed, %!ile
t!ose "ade abo(e t!e forein,subsidiar& le(el t!at is t!e #arent le(el, are considered centrali5ed$ T!e location
of decision "a'in #o%er "a& (ar& %it!in t!e sa"e co"#an& o(er ti"e as %ell as b& #roduct, function, and
countr&$ In addition, actual decision "a'in is seldo" as one,sided as it "a& a##ear$ A "anaer %!o !as
decision,"a'in aut!orit& "a& consult ot!er "anaers before e3ercisin t!at aut!orit&$
)entrali5ed decision "a'in is a lobal strate& %!ile decentrali5ed decision "a'in is a "ulti,do"estic
strate&$ A co"bination of t!e t%o is called a transnational strate&$
T!e reason for c!oosin one o(er t!e ot!er is #artl& a function of co"#anies2 attitudes$ 7or e3a"#le, an
et!nocentric attitude %ould influence a co"#an& to de(elo# co"#etencies, suc! as 'no%lede and tec!nolo&,
in its !o"e countr& and control !o% t!e& are transferred aboard$ A #ol&centric attitude %ould cause t!e
co"#an& to deleate decisions to forein subsidiaries because !ead6uarters #ersonnel belie(e onl& #eo#le on
t!e s#ot 'no% best %!at to do$ Multi,do"estic attitude encouraes t!is$ A reion,centric attitude %ould #er"it
"ore o#enness to ca#abilities eit!er at !o"e or abroad and be conduci(e to a transnational strate&$ A
eocentric attitude %ould be conduci(e to a lobal strate& %!ere core decisions lie %it! t!e !ead6uarters$
Accordin to .o!n 8 8aniels and Lee 0 Radebau!, co"#anies c!oose t!e locus of decision #o%er based on a
co"bination of t!ree trade,off2s:
i$ Balancin #ressures for lobal interation (ersus #ressures for local res#onsi(eness
ii$ Balancin t!e ca#abilities of !ead6uarters (ersus subsidiar& #ersonnel
iii$ Balancin t!e e3#edienc& (ersus t!e 6ualit& of decisions
1.1.:.1. Contro! 3ec*ani"m"
T!ere are s#ecial and eneral control "ec!anis"s$ )or#orate culture, )oordinatin "et!ods, Re#ortin and
Kisits are certain eneral "ec!anis"s of control in t!e conte3t of MNEs$ )or#orate culture is a for" of i"#licit
control "ec!anis" t!at !el#s enforce t!e co"#an&2s e3#licit control "ec!anis"s$ E"#lo&ees confor" to
co"#an& traditions of %or' co""it"ent, interactions %it! custo"ers and so on$ T!ese are un%ritten, infor"al,
but "ore effecti(e$ T!e #ur#ose of controls lies in ensurin t!at oals are o#ti"all& ac!ie(ed$
)oordination ensures oal ac!ie(e"ent$ T!e basis of control is infor"ation$ T!e source of infor"ation is
re#ortin s&ste"s$ )ontrol needs ti"el&, u#,to,date and accurate re#orts$
Re#orts "ust be fre6uent and #ur#oseful to assure "eetin t!e MNE2s obDecti(es$ Parent concern uses re#orts
to e(aluate t!e #erfor"ance of subsidiar& to re%ard and rectif&, if need be$ Kisits to subsidiaries b&
!ead6uarters #eo#le "a'e %onders for t!eir "oti(ational, directi(e, strateic and sinalin effects$ S#ecial
control situations refer to /Merers F Ac6uisitions, S!ared o%ners!i# F .Ks, and )!anes in strateies2$
S#ecial situation %arrants s#ecial controls$ Let us no% discuss eac! of t!ese$ *All t!ese are alread& dealt+
1.1.:.4 Structure and Contro! Inter'ace
T!e for" of forein o#erations and i"#ortance of forein o#erations influence controls$
a. (orm o' 'orei2n operation and contro!:
Branc!, .K, @<<J subsidiar&, etc are alternati(e for"s$ Eac! for" in(ol(es (ar&in deree of controls b& t!e
#arent$ A forein branc! is a forein o#eration not leall& se#arate fro" t!e #arent co"#an& and t!e #arent is
@<<J res#onsible for t!e branc!2s actions$ Branc!es are usuall& subDect to less #ublic disclosure because t!e&
are co(ered b& ti!t cor#orate restrictions$ A subsidiar& is leall&
a se#arate co"#an&, %!et!er t!e #arent s!are!oldin is @<<J or ot!er%ise$ 7orein subsidiaries are #ut to lot
"ore screenin because t!e #arent2s controls are too subtle to see ordinaril&$ .Ks are a for" re6uirin s!ared
controls a"on t!e sta'e!olders$
@. E=tent o' importance o' 2!o@a! operation:
T!e "ore i"#ortant t!e forein o#erations are to total cor#orate #erfor"ance, t!e !i!er t!e cor#orate le(el to
%!ic! t!ose units s!ould re#ort$ T!e orani5ational structure or re#ortin s&ste" t!erefore s!ould c!ane o(er
ti"e to #arallel t!e co"#an&2s increased in(ol(e"ent in forein acti(ities$
1.1.:.: Contro! in ariou" "ta2e" o' $!o@a!i;ation /roce""
T!ere are (arious factors t!at influence !o% "uc! control a co"#an& needs at different staes of lobali5ation$
In t!e initial staes forein o#erations, t!e si5e and co"#le3it& of o#erations are s"all and t!e #arent
"anae"ent ta'es care$ -!en )IS)O %as a s"all U$S$ "anufacturer of net%or'in ear #arent "anae"ent
!el#ed it to ain contracts %it! .a#an2s Ni##on Telera#! F Tele#!one$ 0o%e(er, as a co"#an&2s o#erations
ro% abroad, at later staes of lobal o#eration "ore decentrali5ed structure could e"ere$
T!e #arent "anae"ent de(elo#s a forein "anae"ent rou# t!at is ca#able of o#eratin "ore inde#endentl&
of !ead6uarters in t!e o(erseas "ar'ets$
In due course, #arent "anaers "a& no loner be able to deal effecti(el& %it! lobal business o#erations
because t!e subsidiaries !a(e entered so "an& different forein "ar'etsE t!us forein o#erations tend to beco"e
"ore decentrali5ed$ T!is creates a dile""a to allo% decentrali5ation to re"ain or recentrali5e$ But as forein
o#erations continue to ro%, #eo#le %it! forein e3#erience "o(e into !ead6uarters #ositions, and !ead6uarters
can afford staff s#ecialists to deal %it! t!e co"#an&2s "ulti#le lobal o#erations$ At t!at #oint, recentrali5ation
beco"es feasible$ Orani5ational "ec!anis"s, suc! as Doint co""ittees and t!e #lanned s!arin of infor"ation
are useful to ensure acti(ities of subsidiaries and #arent co"#le"ent eac! ot!er$ Structure and )ontrol Interface
1.& ROLE O( IN(OR3ATION SJSTE3S
In t!is 'no%lede led %orld, infor"ation is t!e reat in#ut into decision #rocess of "anaers$ Infor"ation R
8ata S Rele(ance$ Addin rele(ance to data is %!at is called
as data #rocessin$ To !a(e t!is infor"ation &ou need a s&ste" and t!at is infor"ation s&ste"$ A s&ste" is a
rou# of interde#endent ite"s t!at interact reularl& to #erfor" a tas'$ S&ste" is a set of interactin or
interde#endent entities for"in an interated %!ole$ A s&ste" is desined to %or' as a co!erent entit&$ A
s&ste" !as boundar& and en(iron"ent$ An o#en s&ste" usuall& interacts %it! so"e entities in t!eir
en(iron"ent$ A closed s&ste" is isolated fro" its en(iron"ent$ Infor"ation s&ste" !as in#ut, #rocess and
out#ut ele"ents$ O#en s&ste" dra%s data fro" t!e en(iron"ent, #rocesses t!e sa"e into useful infor"ation to
"anae"ent$ )losed infor"ation s&ste" restricts itself to #redeter"ined data onl& as in#ut, #rocess t!e sa"e as
set to #rocess and i(es out#ut in standard for"at re#orts$ T!e essence of s&ste" is s&ner&, t!at co"bined
out#ut is "ore (alued t!an t!e su" of (alues of out#uts of indi(idual interactin ele"ents or sub,s&ste"s of t!e
s&ste"$
Infor"ation , t!e "ost (aluable asset: T!e "ost (aluable of all assets of co"#anies toda&, infor"ation ran's
first$ Infor"ation is in(isible and is re#resented in #eo#le, e3#erience, 'no%,!o%, inno(ations *#atents,
co#&ri!ts, trade secrets+, and for a "ar'et o#erator to be able to co"#ete, t!e fir" "ust !a(e a stron
infor"ation infrastructure, at t!e !eart of %!ic!, lies t!e infor"ation tec!nolo& infrastructure$ T!us, t!e stud&
of infor"ation s&ste"s focuses on %!& and !o% tec!nolo& can be #ut into best use to ser(e t!e infor"ation
flo% %it!in an orani5ation$
In'ormation S5"tem: An Infor"ation S&ste" *IS+ is t!e /s&ste" of #ersons, data records and acti(ities t!at
#rocess t!e data into infor"ation in a i(en orani5ation, includin "anual #rocesses or auto"ated or
co"#uteri5ed #rocesses2$ T!e ter" infor"ation s&ste" includes, and not e6ual to co"#uter,based infor"ation
s&ste"s$ )o"#uters are t!e Infor"ation tec!noloies co"#onent of an Infor"ation S&ste"$ A co"#uter based
infor"ation s&ste" is a tec!noloicall& i"#le"ented "ediu" for recordin, storin, and disse"inatin
linuistic e3#ressions as %ell as for dra%in conclusions fro" suc! e3#ressions$ T!ere are alternati(e
tec!noloies of #rocessin data, includin "anual #rocessin of data$
In'ormation proce""in2 "5"tem: An infor"ation #rocessor or infor"ation #rocessin s&ste", as its na"e
suests, is a s&ste" %!ic! ta'es infor"ation in one for" and #rocesses *transfor"s+ it into anot!er for", e$$
to statistics, b& an alorit!"ic #rocess$ An infor"ation #rocessin s&ste" is "ade u# of four basic #arts, or sub,
s&ste"s as i(en if fiure H$:$
Unier"a!it5 o' in'ormation "5"tem:
T!e %orld of !u"ans9ani"als9#lants9#lanets9inani"ate t!ins is full of instances %!ic! are in fact e3a"#les of
infor"ation s&ste"s$ An& obDect "a& be considered an infor"ation #rocessor if it recei(es infor"ation fro"
anot!er obDect and in so"e "anner c!anes t!e infor"ation before trans"ittin it$ T!is broadl& defined ter"
can be used to describe e(er& c!ane %!ic! occurs in t!e uni(erse$ E(en a fallin roc' could be considered an
infor"ation #rocessor due to t!e follo%in obser(able facts:
(i2ure 1.& In'ormation /roce""in2 S5"tem -it* "u@-"5"tem"
7irst, infor"ation in t!e for" of ra(itational force fro" t!e eart! ser(es as in#ut to t!e s&ste" %!ic! is t!e
roc'$ At a #articular instant t!e roc' is at a s#ecific distance fro" t!e surface of t!e eart! tra(elin at a s#ecific
s#eed$ Bot! t!e current distance and s#eed #ro#erties are also for"s of infor"ation %!ic! for t!at instant onl&
"a& be considered MstoredN in t!e roc'$
In t!e ne3t instant, t!e distance of t!e roc' fro" t!e eart! !as c!aned due to its "otion under t!e influence of
t!e eart!2s ra(it&$ An& ti"e t!e #ro#erties of an obDect c!ane a #rocess !as occurred "eanin t!at a #rocessor
of so"e 'ind is at %or'$ In addition, t!e roc'2s ne% #osition and increased s#eed is obser(ed b& us as it falls$
T!ese c!anin #ro#erties of t!e roc' are its /out#ut2$ It could be arued t!at in t!is e3a"#le bot! t!e roc' and
t!e eart! are t!e infor"ation #rocessin s&ste" bein obser(ed since bot! obDects are c!anin t!e #ro#erties of
eac! ot!er o(er ti"e$ If infor"ation is not bein #rocessed no c!ane %ould occur at all$
In infor"ation #rocessin, a 8ata Processor or 8ata Processin Unit or 8ata
Processin S&ste" is a s&ste" %!ic! #rocesses data %!ic! !as been ca#tured and encoded in a for"at
reconi5able b& t!e data #rocessin s&ste" or !as been created and stored b& anot!er unit of an infor"ation
#rocessin s&ste"$
1.&.1. Dier"e 'orm" o' In'ormation "5"tem"
Toda& infor"ation s&ste" !as di(ersit&$ 8i(erse for"s of infor"ation s&ste" e3ist$ 8e#endin on one2s need
s&ste"s are selected$
a. Bu"ine"" in'ormatic": Bio,infor"atics and eo,infor"atics are 6uite 'no%n to us$
T!ere is also t!e Business infor"atics*BI+$BI is a disci#line co"binin infor"ation tec!nolo& *IT+ 1 or
infor"atics 1 %it! "anae"ent conce#ts$ T!e BI disci#line %as created in Ger"an&$ T!e ter" Business
Infor"atics is no% co""on in )entral Euro#e$ BI !as stron s&neristic effects fro" trul& interatin business
ad"inistration conce#ts and co"#uter science tec!nolo& into one field$ Business Infor"atics *BI+ s!o%s
nu"erous si"ilarities %it! Infor"ation S&ste"s *IS+$ T!ere are differences bet%een Business Infor"atics and
Infor"ation S&ste"s as %ell: Business Infor"atics includes infor"ation tec!nolo&, li'e t!e rele(ant as#ects of
a##lied co"#uter science, to a "uc! larer e3tent co"#ared to Infor"ation S&ste"s$
Business Infor"atics !as sinificant constructi(e features "eanin t!at a "aDor focus is on t!e de(elo#"ent of
solutions for business #roble"s rat!er t!an si"#l& describin t!e"$ On t!e ot!er !and, infor"ation s&ste"s
stronl& focus on e3#lainin e"#irical #!eno"ena of t!e real %orld$ IS !as often been called an /e3#lanation,
oriented2 a##roac! in contrast to t!e /solution,oriented2 BI a##roac!$ IS researc!ers tr& to e3#lain %!& t!ins in
t!e real %orld are t!e %a& t!e& are and conduct a lot of e"#irical sur(e&s %!ereas a BI researc!er tries to
de(elo# IT solutions for #roble"s t!e& !a(e obser(ed or assu"ed$ Acade"ics in BI, for e3a"#le, are often fond
of a##l&in ne% tec!noloies to business #roble"s and doin feasibilit& studies b& buildin soft%are
#rotot&#es$ T!e #ace of scientific and tec!noloical #roress in BI is 6uite faster t!an in t!e case of IS$
@. 3etadata: Metadata are data about data$ Metadata are infor"ation about infor"ation$
In an& #articular conte3t, "etadata c!aracteri5es t!e data it describes, not t!e entit& described b& t!at data$ In
t!e conte3t of a ca"era, %!ere t!e data is t!e #!otora#!ic i"ae, "etadata %ould t&#icall& include t!e date t!e
#!otora#! %as ta'en and details of t!e ca"era settins$ On a #ortable "usic #la&er suc! as an iPod, t!e albu"
na"es, son titles and albu" art e"bedded in t!e "usic files are used to enerate t!e artist and son listins,
and so on are "etadata$ In t!e conte3t of an infor"ation s&ste", %!ere t!e data is t!e content of t!e co"#uter
files, "etadata about an indi(idual data ite" %ould t&#icall& include t!e na"e of t!e field and its lent!$
Metadata about a collection of data ite"s, a co"#uter file, "i!t t&#icall& include t!e na"e of t!e file, t!e t&#e
of file and t!e na"e of t!e data ad"inistrator$ Business decision "a'in needs "etadata because t!e conte3tual
in#uts #ro(ide (aluable infor"ation about t!e decision situations$
7unda"entall&, "etadata are /t!e data t!at describe t!e structure and %or'ins of an orani5ation2s use of
infor"ation, and %!ic! describe t!e s&ste"s it uses to "anae t!at infor"ation2$ To do a "odel of "etadata is
to do an /Enter#rise "odel2 of t!e infor"ation tec!nolo& industr& itself$
c. 3ana2ement In'ormation S5"tem" (3IS%: One branc! of Infor"ation S&ste" is
Manae"ent Infor"ation S&ste"s *MIS+$ Business co"#uters %ere once used for t!e #ractical business of
co"#utin t!e #a&roll and 'ee#in trac' of accounts #a&able and recei(able$ As a##lications %ere de(elo#ed
#ro(idin "anaers %it! infor"ation about sales, in(entories, and ot!er data t!at %ould !el# in "anain t!e
enter#rise, t!e ter" /MIS2 ained #ro"inence$ Toda&, t!e ter" is used broadl& in a nu"ber of conte3ts and
includes *but is not li"ited to+ decision su##ort s&ste"s, resource and #eo#le "anae"ent a##lications, #roDect
"anae"ent, and database retrie(al a##lications$ MIS is t!e disci#line co(erin t!e a##lication of 'no%lede,
%are, soft,%are, fine,%are, !ard,%are, and tec!no,%are to sol(e business #roble"s$ Manae"ent Infor"ation
S&ste"s anal&5e ot!er infor"ation s&ste"s a##lied in o#erational acti(ities in t!e orani5ation$ MIS is
co""onl& used to refer to t!e rou# of infor"ation "anae"ent "et!ods tied to t!e auto"ation or su##ort of
!u"an decision "a'in li'e 8ecision Su##ort S&ste"s *8SS+, E3#ert s&ste"s *ES+, and E3ecuti(e infor"ation
s&ste"s *EIS+, etc$
d. Enterpri"e Re"ource /!annin2 (ER/%: Toda& Enter#rise Resource Plannin *ERP+ s&ste"s rule t!e
business infor"ation %orld atte"#tin to interate all data and #rocesses of an orani5ation into a unified
s&ste"$ A t&#ical ERP s&ste" %ill use "ulti#le co"#onents of co"#uter soft%are and !ard%are to ac!ie(e t!e
interation$ A 'e& inredient of "ost ERP s&ste"s is t!e use of a unified database to store data for t!e (arious
s&ste" "odules$ ERP e(ol(ed fro" Manufacturin Resource Plannin *or MRP:+, %!ic! in turn e(ol(ed fro"
Material Re6uire"ent Plannin *MRP+$ Around @G=<, fre6uent c!anes in sales forecasts, entailin continual
readDust"ents in #roduction, as %ell as t!e unsuitabilit& of t!e #ara"eters fi3ed b& t!e s&ste", led t!e e(olution
of MRP *:+ fro" MRP and later MRP*:+ e(ol(ed into t!e eneric conce#t Enter#rise Resource Plannin *ERP+$
T!e introduction of an ERP s&ste" to re#lace t%o or "ore inde#endent a##lications eli"inates t!e need for
e3ternal interfaces #re(iousl& re6uired bet%een s&ste"s, and #ro(ides additional benefits t!at rane fro"
standardi5ation and lo%er "aintenance *one s&ste" instead of t%o or "ore+ to easier and9or reater re#ortin
ca#abilities *as all data is t&#icall& 'e#t in one database+$ E3a"#les of "odules in an ERP %!ic! for"erl&
%ould !a(e been stand,alone a##lications include:
)anu!acturing,
Suly #hain,
&inancials,
#usto%er Relationshi )anage%ent 3#R)4,
Hu%an Resources,
5arehouse )anage%ent and
Decision Suort Syste%.
Idea!!5) ER/ de!ier" a "in2!e data@a"e t*at contain" a!! data 'or t*e "o't-are modu!e") -*ic* -ou!d
inc!ude:
3anu'acturin2:
"ngineering,
Bills o! )aterial,
Scheduling,
#aacity,
5or/!lo6
)anage%ent,
7uality #ontrol,
#ost )anage%ent,
)anu!acturing ,rocess,
)anu!acturing
,ro8ects,
)anu!acturing &lo6.
Suly #hain )anage%ent:
In.entory, (rder "ntry,
,urchasing,
,roduct #on!iguration,
Suly #hain ,lanning,
Sulier Scheduling,
Insection o! goods,
#lai% ,rocessing,
#o%%ission #alculation.
(inancia!":
-eneral Ledger,
#ash )anage%ent,
Accounts ,ayable,
Accounts Recei.able,
&i+ed Assets.
/roKect":
)ostin,
Billin,
Ti"e and E3#ense,
Acti(it& Manae"ent$
Duman Re"ource":
Hu%an Resources,
,ayroll, 0raining,
0i%e 9 Attendance,
Roster, Bene!its.
Cu"tomer Re!ation"*ip 3ana2ement:
Sales and )ar/eting,
#o%%issions, Ser.ice,
#usto%er #ontact
#all #enter suort$
ERP s&ste"s sa% a lare boost in sales in t!e @GG<s as co"#anies faced t!e 4:> #roble" in t!eir leac&
s&ste"s$ Man& co"#anies too' t!is o##ortunit& to re#lace t!eir leac& infor"ation s&ste"s %it! ERP s&ste"s$
ERPs are not /bac' office s&ste"s2 indicatin t!at custo"ers and t!e eneral #ublic are not directl& in(ol(ed$
ERPs are cross,functional and enter#rise %ide$ All functional de#art"ents t!at are in(ol(ed in o#erations or
#roduction are interated in one s&ste"$ In addition to "anufacturin, %are!ousin, loistics, and infor"ation
tec!nolo&, t!is %ould include accountin, !u"an resources, "ar'etin, and strateic "anae"ent$
SAP is a lobal soft%are co"#an& !ead6uartered in Ger"an& %!ic! #ioneered SAP, %!ic! stands for S&ste"s
A##lications and Products$ T!ere are o(er @<<,I<< SAP installations ser(in "ore t!an H@,:<< co"#anies in
"ore t!an :; industries in "ore t!an @:< countries in "id :<<?$ SAP R9A and SAP ERP are t%o (ersions of t!e
ERP soft%are #roduct of SAPAG, t!e Ger"an Outfit$ SAP ERP is t!e one of fi(e "aDor enter#rise a##lications
t!at "a'es u# SAP2s Business Suite$ T!e four ot!er a##lications are: )usto"er Relations!i# Manae"ent
*)RM+ , !el#s co"#anies ac6uire and retain custo"ers, ain dee# "ar'etin and custo"er insi!t, and alin
orani5ation on custo"er,focused strateies$ Product Lifec&cle Manae"ent *PLM+ , !el#s "anufacturers %it!
a sinle source of all #roduct,related infor"ation necessar& for collaboratin %it! business #artners and
su##ortin #roduct line$ Su##l& )!ain Manae"ent *S)M+ , !el#s co"#anies en!ance o#erational fle3ibilit&
across lobal enter#rises and #ro(ide real,ti"e (isibilit& for custo"ers and su##liers$ Su##lier Relations!i#
Manae"ent *SRM+ , custo"ers can collaborate closel& %it! su##liers and interate sourcin #rocesses %it!
a##lications t!rou!out t!e enter#rise to en!ance trans#arenc& and lo%er costs$
-!ile its oriinal #roducts %ere t&#icall& used b& 7ortune ;<< co"#anies, SAP is no% also acti(el& taretin
s"all and "ediu" si5ed enter#rises *SME+ %it! its SAP Business One and SAP Business All,in,One$
e. Enterpri"e Content 3ana2ement (EC3%:
Enter#rise content "anae"ent *E)M+ is t!e tec!noloies used to ca#ture, store, #reser(e and deli(er content
and docu"ents and content related to orani5ational #rocesses$ E)M tools and strateies allo% t!e "anae"ent
of an orani5ation2s unstructured infor"ation, %!ere(er t!at infor"ation e3ists$
E)M is a ne% #roble" do"ain and !as e"#lo&ed t!e tec!noloies and strateies of *diital+ content
"anae"ent to address business #rocess issues, suc! as records and auditin, 'no%lede s!arin,
#ersonali5ation and standardi5ation of content, and so on$ Generall& s#ea'in E)M sol(es all of t!e #roble"s
related to t!e use and #reser(ation of infor"ation %it!in an orani5ation, in all of its for"s X not Dust its %eb,
oriented face to t!e outside %orld$ T!erefore, "ost solutions focus on /business to e"#lo&ee2 *B:E+ s&ste"s$
0o%e(er, as t!e solutions !a(e e(ol(ed, ne% co"#onents to content "anae"ent !a(e arisen$ 7or e3a"#le, as
unstructured content is c!ec'ed in and out of an E)M s&ste", eac! use can #otentiall& enric! t!e content2s
#rofile, to so"e e3tent auto"aticall&, so t!at t!e s&ste" "i!t raduall& ac6uire or MlearnN ne% filterin,
routin and searc! #at!%a&s, cor#orate ta3ono"ies and se"antic net%or's, %!ic! in turn assist in "a'in
better retention,rule decisions, deter"inin %!ic! records or docu"ents to 'ee#, and %!ic! to discard, and
%!en$ Suc! issues beco"e all t!e "ore i"#ortant, as e"ail and instant "essain are increasinl& e"#lo&ed in
t!e decision,"a'in #rocesses in an orani5ation$
T!us, E)M refers to solutions t!at concentrate on #ro(idin in,!ouse infor"ation, usuall& usin internet
tec!noloies$ T!e solutions tend to #ro(ide intranet ser(ices to e"#lo&ees *B:E+, but also include enter#rise
#ortals for /business to business2 *B:B+, /business to o(ern"ent2 *B:G+, or /o(ern"ent to business2 *G:B+,
etc$ T!is cateor& includes "ost of t!e for"er docu"ent "anae"ent rou#%are and %or'flo% solutions t!at
!a(e not &et full& con(erted t!eir arc!itecture, but #ro(ide a %eb interface to t!eir a##lications$ 8iital Asset
Manae"ent *8AM+ is as %ell a for" of E)M t!at is concerned %it! content stored usin diital e,tec!nolo&$
T!e tec!nolo& co"#onents t!at co"#rise E)M toda& are t!e descendants of t!e electronic docu"ent
"anae"ent s&ste"s *E8MS+ soft%are #roducts t!at %ere first released in t!e late @G=<s and earl& @GG<s$ T!e
oriinal E8MS #roducts %ere de(elo#ed as standalone tec!noloies$ )ertain (ersions of E8MS included
)OL89ERM, %!ic! are tec!noloies for t!e auto"atic #rocessin of structured entr& data$ )OL8 stands for
)o"#uter Out#ut to Laser 8is' and is still in use alt!ou! laser dis's !a(e not been on t!e "ar'et for &ears$
T!e acron&" ERM !ere stands for Enter#rise Re#ort Manae"ent$ In bot!, su##lied out#ut data are #rocessed
on e3istin structure infor"ation in a %a& t!at it can be inde3ed inde#endentl& of t!e oriination s&ste", and
sent to a storae co"#onent t!at can be d&na"ic *Store+ or an arc!i(e *Preser(e+$
Amon2 t*e "peci'ic @ene'it" o' ED3S and EC3 -ere t*e 'o!!o-in2:
Reduction of #a#er !andlin and error,#rone "anual #rocesses
Reduction of #a#er storae
Reduction of lost docu"ents
7aster access to infor"ation
Online access to infor"ation t!at %as for"erl& a(ailable onl& on #a#er or "icrofil"$
I"#ro(ed control o(er docu"ents and docu"ent,oriented #rocesses
Strea"linin of ti"e,consu"in business #rocesses
Securit& o(er docu"ent access and "odification
Pro(ide reliable and accurate audit trail
I"#ro(ed trac'in F "onitorin, %it! abilit& to trac' bottlenec's F "odif& t!e s&ste"$
More recentl&, t!e E)M "ar'et !as seen t!e entr& of Microsoft and Oracle )or#oration, t%o of t!e larest and
"ost #er(asi(e #ro(iders of soft%are, at t!e (alue end of t!e "ar'et$ T!ese t%o soft%are co"#anies loo' to
#ro(ide soft%are solutions %it! t!e basic E)M functionalit& t!at %ill address t!e functional re6uire"ents
co""onl& re6uired b& t!e "aDorit& of orani5ations$ T!e result is li'el& to be a stratification of t!e current
E)M "ar'et, based on t!e le(el of content ser(ices t!at different orani5ations re6uire$
T!e lobal #ro(ider of Enter#rise )ontent Manae"ent *E)M+ solutions, SAP )or#oration is t!e "ar'et leader
in SAP docu"ent and data arc!i(in and "anae"ent$ Its tareted solutions enable one to create, access,
"anae, and securel& arc!i(e all SAP content,bot! data and docu"ents to address strinent re6uire"ents for
ris' reduction, o#erational efficienc& and IT consolidation$ More t!an :,<<<,<<< usersXo(er :,:<< installations
X%orld%ide !a(e ac!ie(ed e3ce#tional (alue of o%ners!i# b& i"#ro(in t!eir critical business #rocesses %it!
Li(elin' E)M , Suite for SAP Solutions$
T!e a##lication #roducts are:
Li(elin' E)M ,Accounts Pa&able Solutions auto"ates t!e in(oice #rocess to ensure "ini"u" #rocess
ti"e, "a3i"u" efficienc&, and o#ti"al allocation of resources$
Li(elin' E)M ,)usto"er Infor"ation Manae"ent i"#ro(es custo"er relations and strea"lines
custo"er ser(ice and sales #rocesses b& #ro(idin eas& access to consolidated custo"er infor"ation
fro" SAPj and non,SAP sources directl& in Microsoft Outloo'$
Li(elin' E)M ,8ata Arc!i(in Solutions #ro(ides secure, lon,ter" arc!i(in of data fro" SAP
a##lications, offloadin aed data to reduce storae costs and i"#ro(e #erfor"ance, %!ile #ro(idin
sea"less access to arc!i(ed data$
Li(elin' E)M ,8ocu"ent Arc!i(in Solutions #ro(ides secure, lon,ter" arc!i(in of
docu"ents and data fro" SAP a##lications, offloadin aed content to reduce storae
costs and i"#ro(e #erfor"ance, %!ile #ro(idin sea"less access to arc!i(ed content$
Li(elin' E)M ,8ocu"ent Manae"ent Solutions #ro(ides data and docu"ent arc!i(in for SAP
a##lications to reduce storae costs and i"#ro(e s&ste" #erfor"ance$
In addition, it #ro(ides consolidated (ie%s of related content fro" "ulti#le SAP and non,SAP
a##lications, interatin content into t!e conte3t of business #rocesses$
Li(elin' E)M ,E"#lo&ee Infor"ation Manae"ent #ro(ides 0R de#art"ents %it! a co"#lete solution
based on E)M: all #rinted docu"ents fro" e"#lo&ees and Dob a##licants, "aster data and internal
#ersonnel docu"ents are i""ediatel& a(ailable fro" t!e electronic #ersonnel file$
Li(elin' E)M ,S!ared 8ocu"ent Access #ro(ides &our custo"ers, #artners and e"#lo&ees %it! a
#ersonali5ed o(er(ie% of all docu"ents related to a s#ecific business #rocess$
Li(elin' E)M , Su##lier Infor"ation Manae"ent !el#s i"#ro(e #rocure"ent #rocesses %it! a AI<k
(ie% of su##lier infor"ation
Li(elin' E)M ,Kendor In(oice Manae"ent Solutions is a #re#ac'aed co"#osite a##lication t!at
%or's %it! ERP s&ste"s to strea"line Accounts Pa&able *AP+ o#erations, b& o#ti"i5in and
si"#lif&in t!e #rocess of creatin, "anain, "onitorin and routin #urc!ase orders and in(oices for
AP #ersonnel and (endors$
O#en Te3t )ontract Manae"ent SAP is a co"#osite a##lication %!ic! o#erates and #ro(ides central storae
and access to contract infor"ation, "a'in #rocesses easier and "ore efficient$
O#en Te3t E3tended E)M Solutions is a co"#lete E)M a##lication t!at allo%s content,centric business
#rocesses, co"#le"entin &our SAP Business Suite a##lications2 abilit& to "anae transaction,centric
#rocesses$
T!ere are "an&, "an& co"#anies in t!e cor#orate %orld %!ose in#ut, #rocess and out#ut are all infor"ation,
infor"ation and infor"ation onl&$ T!e& are t!e cor#orate leaders as %ell$ T!e& are t!e soft, and !ard,%are
co"#anies$ T!e& de(ice to enerate #rocess and use infor"ation$ T!eir nu"ber, (alue and ro%t! s#ea' about
t!e role infor"ation in business decision "a'in$
+.4.& /aradi2m "*i't 'rom product orientation to 8no-!ed2e orientation
In t!e #ost,industrial era or t!e infor"ation ae, t!e focus of co"#anies !as s!ifted fro" bein #roduct oriented
to 'no%lede oriented, in a sense t!at "ar'et o#erators toda& co"#ete on #rocess and inno(ation rat!er t!an
#roduct$ Infor"ation S&ste"s !as a nu"ber of different areas of %or':
i$ Infor"ation S&ste"s Strate&
ii$ Infor"ation S&ste"s Manae"ent
iii$ Infor"ation S&ste"s 8e(elo#"ent
Eac! of %!ic! branc!es out into a nu"ber of sub disci#lines, t!at o(erla# %it! ot!er science and "anaerial
disci#lines suc! as co"#uter science, #ure and enineerin sciences, social and be!a(ioral sciences, and
business "anae"ent$
i. In'ormation S5"tem" Strate25:
T!e function of a IS strate& accordin to -ilson *@G=G+, /to brin toet!er t!e business ai"s of t!e co"#an&,
an understandin of t!e infor"ation needed to su##ort t!ose ai"s, and t!e i"#le"entation of co"#uter s&ste"s
to #ro(ide t!at infor"ation$ It is a #lan for t!e de(elo#"ent of s&ste"s to%ards so"e future (ision of t!e role of
infor"ation s&ste"s in t!e orani5ation$2 Re#onen *@GGA+ #uts IS strate& as, /so"et!in %!ic! is essentiall& a
#lannin #rocess in t!e "inds of t!e decision "a'ers, users and de(elo#ers of t!e s&ste"s$ It is su##orted %it!
%ritten re#orts and #lans, but t!e& are of secondar& i"#ortance$2
Infor"ation S&ste"s Manae"ent: Infor"ation s&ste"s "anae"ent co(ers Business
S&ste"s Anal&sisE )o""unications S&ste" 8esinE 8atabasesE E,business F E,co""erceE
Enineerin Manae"ent: Enter#rise Resource Manae"ent *ERP+E Manae"ent of
S#ecific Areas: Enter#rise Resource Manae"ent *ERP+E Manae"ent of ITE O#eratin
S&ste"sE O#erations Manae"entE Production Enineerin: O#erations Researc!E Industrial Enineerin F
Manufacturin: O#erations Researc!E Manufacturin Enineerin: O#erations Researc!E Real,Ti"e S&ste"sE
S&ste"s F )o"#uter Arc!itecture of 8atabasesE S&ste"s F )o"#uter EnineerinE S&ste"s Interation and so
on$ Infor"ation s&ste"s "anae"ent %ill be able to:
A##l& a##ro#riate #roble",sol(in "et!odoloies to anal&5e and sol(e #roble"s$
A##l& standard s&ste"s #ractices to #lan, i"#le"ent, "anae, and e(aluate IS$
)o""unicate effecti(el& usin oral, %ritten, and "ulti"edia tec!ni6ues$
Manae c!ane in t!e d&na"ic and lobal en(iron"ents of auto"ated s&ste"s$
Use tec!nolo& to researc! infor"ation needed to #roduce infor"ed decisions
Identif& relations!i#s bet%een #rora""in lanuaes and infor"ation s&ste"s$
8e"onstrate s'ills in s&ste"s anal&sis a##ro#riate to t!e MIS #roDects$
8e"onstrate s'ills in t!e desin, creation, "aintenance, and re#ortin functions of database s&ste"s and
database s&ste"s "anae"ent$
Use a s&ste"s a##roac! to select !ard%are and soft%are for an orani5ation$
E(aluate et!ical issues related to infor"ation s&ste"s, %or' #roducti(it&, and !u"an factors$
Infor"ation S&ste"s 8e(elo#"ent: T!ere are se(eral "odels of de(elo#"ent of infor"ation s&ste"s$
a$ #ater'a!! 3ode!ALinear SeHuentia! 3ode! is t!e classic (ie% of s&ste" de(elo#"ent$
It is seen as a Dourne& do%n a ri(er %it! t!e end of eac! #!ase bein a %aterfall$ T!e -aterfall Model consists
of t!e follo%in ste#s: S&ste" )once#tuali5ation, S&ste"s Anal&sis, S&ste" 8esin, )odin and Testin$ In
recent &ears it !as co"e under attac', due to its riid desin and infle3ible #rocedure$
b$ Iteratie Dee!opment: T!e iterati(e "odel addresses "an& of t!e #roble"s associated %it! t!e -aterfall
"odel$ It does #resent ne% c!allenes$ T!e user co""unit& needs to be acti(el& in(ol(ed t!rou!out t!e
#roDect$ -!ile t!is in(ol(e"ent is #ositi(e for t!e #roDect, it is de"andin on t!e ti"e of t!e staff and can add
#roDect dela&$ T!e iterati(e "odel can lead to /sco#e cree#2 since user feedbac' follo%in eac! #!ase "a& lead
to increased custo"er de"ands$
c$ Spira! 3ode!: S#iral de(elo#"ent is a fa"il& of soft%are de(elo#"ent #rocesses c!aracteri5ed b& re#eatedl&
iteratin a set of ele"ental de(elo#"ent #rocesses and "anain ris'$ T!e s#iral "odel %as desined to include
t!e best features fro" t!e %aterfall and #rotot&#in "odels, and introduces a ne% co"#onent , ris',assess"ent$
T!e ter" Ms#iralN is used to describe t!e #rocess t!at is follo%ed as t!e de(elo#"ent of t!e s&ste" ta'es #lace$
Si"ilar to t!e #rotot&#in, an initial (ersion of t!e s&ste" is de(elo#ed, and t!en re#etiti(el& "odified based on
in#ut recei(ed fro" custo"er e(aluations$ Unli'e t!e #rotot&#in "odel, !o%e(er, t!e de(elo#"ent of eac!
(ersion of t!e s&ste" is carefull& desined usin t!e ste#s in(ol(ed in t!e %aterfall "odel$
d$ RAD 3ode!: Ra#id A##lication 8e(elo#"ent *RA8+ "odel is a linear se6uential soft%are de(elo#"ent
#rocess "odel$ It e"#!asi5es an e3tre"el& s!ort de(elo#"ent c&cle$ T!e RA8 "odel is a /!i!,s#eed2
ado#tion of t!e linear se6uential "odel in %!ic! ra#id de(elo#"ent is ac!ie(ed b& usin a co"#onent,based
construction a##roac!$ Business "odelin, 8ata "odelin, Process "odelin, A##lication eneration are its
co"#onents$
1.&.& 3NE"9 In'ormation "5"tem
Parent cor#orate "anae"ent of MNEs re6uires infor"ation to #lan, to i"#le"ent and to control not onl& t!eir
o%n actions but also of t!eir subsidiaries all o(er t!e %orld$ A sea"less infor"ation s&ste" is %!at t!e& need$
a. In'ormation needed: T*e in'ormation reHuired mi2*t inc!ude:
Infor"ation enerated for centrali5ed coordination, suc! as subsidiar& cas! balances and needs so t!at
!ead6uarters can "o(e funds effecti(el&
Infor"ation on e3ternal conditions, suc! as anal&ses of local #olitical and econo"ic conditions, so t!at
!ead6uarters can #lan %!ere to e3#and and constrict o#erations
Infor"ation for feedbac' fro" #arent to subsidiaries, suc! as RF8 brea't!rou!s, so t!at subsidiaries
can co"#ete "ore effecti(el&
Infor"ation t!at subsidiaries can s!are so t!at t!e& can learn fro" eac! ot!er and be "oti(ated to
#erfor" as %ell as ot!er subsidiaries
Infor"ation for e3ternal re#ortin needs, suc! as to sta'e!olders and ta3 aut!orities
Infor"ation for scoutin and scannin of business o##ortunities around t!e %orld and t!e co"#etiti(e
factors
Infor"ation on e"erin tec!nolo& trends, includin t!ose in t!e field of infor"ation #rocessin and
s&ste"s
Infor"ation for sur(eillance of "aDor co"#etitors, ta'eo(er t&coons, etc$ 7or MNEs t!e need for
infor"ation is necessaril& is (er& "uc!$
@. /ro@!em" in "ecurin2 in'ormation: )o"#anies face t!ree #roble"s in ac6uirin infor"ation, t!ese are: t!e
cost of infor"ation, dela& in infor"ation, and irrele(ance in infor"ation$
In t!e %orld of co""erce, (alue,cost #arit& is i"#ortant to be concerned %it!$ T!e (alue of infor"ation "ust
e3ceed cost of infor"ation substantiall&$ Internet access #ro(ides (aluable infor"ation for a (er& s"all cost for
t!e eneral users of internet$ Is it t!e sa"e for businesses as %ellC It "a& not be so$ Businesses "ust de(elo#
s&ste"s t!at #ro(ide (er& (aluable infor"ation at (er& c!ea# "one& cost$
Ti"el& infor"ation is t!e trusted infor"ation$ Toda&2s ne%s#a#er is to"orro%2s -aste #a#er$ True$ But in t!e
co"#etiti(e %orld &ou cannot afford :H !ours to et fres! ne%s$ Real ti"e infor"ation is %!at is needed$
Ti"el& infor"ation transcendin ti"e,5ones is needed$ T!is is "ore so for MNEs %!ic! o#erate in different
ti"e 5ones$
Infor"ation "ust be rele(ant$ An&t!in irrele(ant is no infor"ationE it "a& be data$ 7or e3a"#le, "uc! of t!e
infor"ation t!at is useful to a subsidiar&, suc! as %!o" to contact to clear ite"s at custo"s, is irrele(ant to
!ead6uarters and s!ould not be trans"itted$ To co#e, co"#anies s!ould #eriodicall& ree(aluate t!e infor"ation
sources t!e& use$
c$ O##ortunities in t!e infor"ation %orld: T!e infor"ation tec!nolo& co"#anies li'e t!e Microsoft, 8ell,
0e%lett,Pac'ard, IBM, No(ell, Oracle )or#oration, Red 0at, Sun Micros&ste"s, SAP cor#oration, -i#ro,
T)S, Infos&s, etc$ %or' to cater to t!e infor"ation needs of cor#orate %orld and all ot!ers$ T!e& #ro(ide t!e
!ard, soft and fine %ares to 'ee# on feedin t!e %orld2s t!irst for infor"ation :H 3 ?$ -it! e3#andin lobal
teleco""unications and co"#uter lin's,es#eciall& t!e -orld -ide -eb and e,"ail, "anaers t!rou!out t!e
%orld can s!are infor"ation 6uic'er and easier t!an e(er before$ On t!e one !and, t!is tec!nolo& "a& #er"it
"ore centrali5ation, because cor#orate "anae"ent can "ore easil& e3a"ine t!e lobal conditions and
#erfor"ance$ On t!e ot!er !and, "anaers in forein locations "a& beco"e "ore autono"ous because t!e&
!a(e "ore infor"ation at t!eir dis#osal$ But real ti"e, secured access to infor"ation in all business do"ains is
#ossible$
1.+. /ER(OR3ANCE 3EASURE3ENT AND 3ECDNANICS
MNEs need to "easure #erfor"ance of all its orani5ational #artici#ants9ele"ents and subsidiaries$ Efficac& of
orani5ational control de#ends on efficient "easure"ent of #erfor"ance$ T!e basic 6uestion t!at arises no% is:
-!at are to be "easuredC Man& t!ins need to be "easured and are "easured too$ But certain t!ins are su#er,
ordinate and co(er !olistic #erfor"ance$ A ri!t selection of a rane of #erfor"ance "easures %!ic! are
a##ro#riate to a #articular co"#an&9conte3t is needed$ T!is selection ou!t to be "ade in t!e li!t of t!e
co"#an&2s strateic intentions %!ic! %ill !a(e been for"ed to suit t!e co"#etiti(e en(iron"ent in %!ic! it
o#erates and t!e 'ind of business t!at it is$
7or e3a"#le, if tec!nical leaders!i# and #roduct inno(ation are to be t!e 'e& source of a "anufacturin
co"#an&2s co"#etiti(e ad(antae, t!en it s!ould be "easurin its #erfor"ance in t!is area relati(e to its
co"#etitors$ But if a ser(ice co"#an& decides to differentiate itself in t!e "ar'et#lace on t!e basis of 6ualit& of
ser(ice, t!en, a"onst ot!er t!ins, it s!ould be "onitorin and controllin t!e desired le(el of ser(ice 6ualit&$
-!et!er t!e co"#an& is in t!e "anufacturin or t!e ser(ice sector, in c!oosin an a##ro#riate rane of
#erfor"ance "easures it %ill be necessar& !o%e(er to balance t!e", to "a'e sure t!at one di"ension or set of
di"ensions of #erfor"ance is not stressed to t!e detri"ent of ot!ers$ T!e "i3 c!osen %ill in al"ost e(er&
instance be different$ -!ile "ost co"#anies %ill tend to orani5e t!eir accountin s&ste"s usin co""on
accountin #rinci#les, t!e& %ill differ %idel& in t!e c!oice, or #otential c!oice, of #erfor"ance indicators$
1.+.1 3ec*anic" o' /er'ormance 3ea"urement
Mec!anics of #erfor"ance "easure"ent deal %it! t!e tec!nicalities and #rocedure of #erfor"ance
"easure"ent$ T!e "easure"ent #rocess to be used "ust be clear,cut, una"biuous and useful$ 8escri#tion of
"easure"ent "ust con(e& %!at is "easured and %!at not "easured$ Units of "easure"ent "ust tell t!e basic
unit of "easures$
1.+.1.1 T*e tec*nica!itie" and procedure
T!e tec!nicalities and #rocedure of "easure"ent of #erfor"ance include t!e follo%in$
Unit of "easure of #erfor"ance
Perfor"ance di"ension F Perfor"ance t!rust
7inancial and non,financial e"#!asis
Sinle Ks Multi#le indicators
Entit& %!ose #erfor"ance is to be "easured
Ti"e fra"e of "easure"ent
Process of "easure"ent
Periodicit& of "easure"ent
Personnel in(ol(ed in "easure"ent and
AdDust"ents "ade in "easure"ents$
a. Unit o' 3ea"ure o' /er'ormance:
-!at is t!e unit of #erfor"ance "easure"entC Is it a "onetar& (alueC Is it a ratioC Is it a countC Is it t!e c!ane
or rate of c!ane or t!e areateC 7inancial #erfor"ance is enerall& "easured in dollar or ru#ee or ot!er
currenc& ter"s$ Ratios e3#ress relati(e #erfor"ance, e3#ressin one #erfor"ance (ariable in ter"s of anot!er$
Non,financial #erfor"ance can be "easured b& counts as %ell as ratios$ )ertain co"#le3 units of "easure"ent
are also needed in t&#ical cases, li'e #assener,'ilo"eter re(enue, ton,'ilo"eter,cost, #rofit #er e"#lo&ee !our
to #roduction #er e"#lo&ee !our, rate of ro%t! in "ar'et s!are to ro%t! rate in #rofit, etc$
@. /er'ormance Dimen"ion . /er'ormance T*ru"t:
Aut!ors fro" differin "anae"ent disci#lines tend to cateori5e (arious #erfor"ance di"ensions and t!rusts
as are a(ailable in Table H$:$ )o"#etiti(e ad(antae and 7inancial #erfor"ance are outco"e #erfor"ance
di"ensions$ 7le3ibilit&, Inno(ation, etc are contributin #erfor"ance di"ensions$
Ta@!e 1.&: /er'ormance Dimen"ion . /er'ormance T*ru"t
Anot!er %a& of cateori5in t!ese sets of di"ension, as i(en in Table H$A is to refer to t!e" eit!er as u#strea"
or as do%nstrea" di"ensions$
Ta@!e 1.+ Up"tream Determinant" and Do-n"tream Re"u!t"
Source: Perfor"ance Measure"ent in Ser(ice Businesses, Lin 7it5erald, Robert .o!nson, et al$
I"#ro(ed 6ualit& of ser(ice is an u#strea" di"ension leadin to better financial #erfor"ance %!ic! is a
do%nstrea" di"ension$ Non,financial 6uantitati(e #erfor"ance "easures of interest include res#onse ti"e,
reliabilit&, a(ailabilit&, safet&, securit&, sur(i(abilit&, correctness, ti"eliness, and efficienc&$ 7inancial "etrics
include returns, re(enues, costs, ains, etc$
c. (inancia! ". Non-(inancia!:
In "an& co"#anies in t!e U>, as in t!e USA, t!e fa"iliar "easure is /t!e botto" line2, t!at is t!e /net
earnins2$ 7inancial indicators re"ain t!e funda"ental "anae"ent tool and could be said to reflect t!e ca#ital
"ar'et2s obsession %it! #rofitabilit& as al"ost t!e sole indicator of cor#orate #erfor"ance$ O##onents to
financial indicators based a##roac! suest t!at "&o#ic focus on financials encouraes "anae"ent to ta'e a
nu"ber of actions t!at are s!ort ter" at t!e e3#ense of in(estin for t!e lon ter"$ It results in suc! action as
cuttin bac' on R F 8 re(enue e3#enditure in an effort to "ini"i5e t!e i"#act on t!e e3#ense side of t!e
current &ear2s P F L Account or callin for infor"ation on #rofits at too fre6uent inter(als so as to be sure t!at
tarets are bein "et$ T!ese actions "i!t actuall& Deo#ardi5e t!e co"#an&2s o(erall #erfor"ance rat!er t!an
i"#ro(e it$ T!e o##onents of Mt!e botto",line sc!oolN state t!at because of t!e #re,e"inence of "one&
"easure"ent in t!e co""ercial %orld, t!e infor"ation deri(ed fro" t!e "an& staes #recedin t!e #re#aration
of t!e annual accounts, suc! as budets, standard costs, actual costs and (ariances, are actuall& Dust a one
di"ensional (ie% of cor#orate acti(it&$
E3ecuti(es s!ould reali5e t!e i"#ortance of t!e non,financial t&#e of #erfor"ance "easure"ent$ Researc! in
su##ort of t!is a##roac! !as co"e u# %it! ne% dictu"s for t!e %or'#lace : Mt!e less &ou understand t!e
business, t!e "ore &ou rel& on accountin nu"bersN and Mt!e nearer &ou et to o#erations, t!e "ore non,
financial #erfor"ance indicators &ou reali5e could be (aluable aids to better "anae"entNE or Mra#!s and bars
carr& "uc! "ore #unc! t!an nu"bers for t!e non,financial "anaerN$ Not e(er& as#ect of cor#orate acti(it&
can be e3#ressed in ter"s of "one& and t!at if "anaers ai" for e3cellence in t!eir o%n as#ects of t!e
business, t!en t!e co"#an&2s botto" line %ill ta'e care of itself$
d. Sin2!e <" 3u!tip!e indicator":
E3ecuti(es tend to a(oid usin "ulti#le indicators because t!e& are difficult to desin and so"eti"es difficult to
relate, one to anot!er$ E3ecuti(es !a(e a stron #reference for sinle indicators of #erfor"ance %!ic! are %ell
tried and %!ic! #roduce ostensibl& una"biuous sinals$ But t!e ne% sc!ool la&s reat e"#!asis on t!e fact
t!at "ulti#le indicators are "ade necessar& b& t!e s!eer co"#le3it& of cor#orate acti(it&$ 0ead6uarters s!ould
e(aluate subsidiaries and t!eir "anaers on a nu"ber of indicators rat!er t!an rel&in too !ea(il& on one$
7inancial criteria tend to do"inate t!e e(aluation of forein o#erations and t!eir "anaers$ Budet co"#ared
%it! #rofit and budet co"#ared %it! sales (alue, "ar'et,s!are increase, 6ualit& control, and "anaers2
relations!i# %it! !ost o(ern"ents are so"e rele(ant "easures$
e$ Entit5 -*o"e per'ormance i" to @e mea"ured:
T!e entit& %!ose #erfor"ance is "easured "atters$ Indi(idual #erfor"ance or rou# #erfor"ance, di(isional
#erfor"ance or se"ent #erfor"ance, #arent #erfor"ance or subsidiar& #erfor"ance, eac! needs different
a##roac!$ E(en in t!e sa"e cateor&, sa& indi(idual #erfor"ance, #erfor"ance "easure of o#erati(e staff
"e"ber differs fro" t!at off su#er(isor& #erson and fro" "anaerial #erson$ -!en subsidiar&2s #erfor"ance
is "easured lot of adDust"ents are called for, lest t!ere results under,assess"ent or o(er,assess"ent$
f$ Time 'rame o' mea"urement:
Perfor"ance "easure"ent "ust co(er fairl& loner #eriod so t!at seasonal #ulls and #ressures, i"#act of
certain bootin and bustin influencers and at t!e sa"e rele(ant !istor& is co(ered$ Too lon a #eriod "a'es no
sense, es#eciall& in t!e case of "ar'et (aluation of subsidiar&$ -!at is "easured and ti"e fra"e are rele(ant,
because cas!,flo% li'e t!ins are "easured on da&,to,da& basis, %!ile "ar'et s!are "a& be "easured on a
6uarterl& basis$
2. /roce"" o' mea"urement:
Process of "easure"ent in(ol(es accu"ulation of !a##enin on t!e #erfor"ance di"ension to be "easured
o(er t!e ti"e fra"e of "easure"ent$ Meanti"e, t!e tool of "easure"ent 1 a &ardstic', a c!ec' list of
#erfor"ance or a 6uestionnaire or %or',s!eet or tri# s!eet or record of !a##enins in ter"s of t!e #rescribed
unit of "easure"ent, is 'e#t read&$ T!e entit& %!ose #erfor"ance is to be "easured is assessed b& t!e
a##lication of t!e tool concerned$ T!e "easure"ent "a& be on,t!e,Dob or off,t!e Dob, on,line or off t!e line,
#rora""ed or non,#rora""ed, #artici#ator& or non #artici#ator& and so on$ It "i!t in(ol(e clinical,t&#e
obser(ation of e(er& "inute ele"ents or s'etc!& #erusal of broad contours, fillin u# of structured
6uestionnaire or "ec!anical tic'in of c!ec',list and so on$ It "i!t in(ol(e oral or %ritten re#ort or on t!e s#ot
(isual o(ersi!t of !a##enins and so on$
*. /eriodicit5 o' mea"urement:
Perfor"ance "easure"ent "a& be "ore fre6uent or less fre6uent$ More fre6uenc& "easure"ent facilitates
effecti(e control, t!ou! t!ere "a& be inter(ention in %or' flo%$ >e& #erfor"ance areas re6uire "ore fre6uent
"easure"ent$
i. /er"onne! ino!ed in mea"urement:
8ecision as to e"#lo&in e3ternal or internal #ersonnel and decision as to e"#lo&in su#erior and subordinate
in #erfor"ance a##raisal indi(idual concerned are in(ol(ed$ E3ternal #eo#le in(ol(ed in assessin #erfor"ance
are su##osed to ensure obDecti(it&$ T!e a##raisal fir" c!osen "ust be totall& inde#endent$ 0a(in one2s bro'er,
inter"ediar&, or consultant #erfor" t!e a##raisal is not t!e best c!oice$ If t!e co"#an& is (alued b& an&one
close to, or %or'in for t!e o%ner, "ost bu&ers feel t!at t!e (alue is biased$ If financin is necessar&, "ost
ban's %ill re6uire an inde#endent t!ird #art& a##raiser$ But e3ternal e(aluators "a& not be !a(in all t!e
o##ortunit& to assess #ersons or de#art"ents, because t!e& %ould o b& records onl&$ T!ere %ould be un,
recorded but i"#ortant ac!ie(e"ents or ot!er%ise t!at o une(aluated$ Internal #eo#le %!en used for
#erfor"ance a##raisal, t!eir (ested interests and #ersonal biases %ould !a(e t!eir colorin of t!e a##raisal
#rocess$ Nor"all& a##raisal is b& su#eriors, but su#eriors "a& not 'no% t!e round realities$ T!e in(ol(e"ent
of subordinates in a##raisin t!e #erfor"ance of t!eir boss is ainin round$ A consensus "ust be establis!ed
before t!e sc!e"e is #ut into o#eration$
K. AdKu"tment" made in mea"urement":
Perfor"ance a##raisal needs lot of adDust"ents$ )onte3tual, )o"#etiti(e, )onstituent, )annibalis",
)ontributi(e, )oncessional and )ontent factors need adDust"ent$ T!e #erfor"ance a##raisal of a ne%
subsidiar& in an un,e3#lored territor& needs conte3tual adDust"ent$ T!e #erfor"ance a##raisal of a subsidiar&
facin tou!est co"#etition fro" t!e arc! ri(al needs adDust"ent$ A subsidiar& %it! #roble"s of cultural,"i3
needs adDust"ents$ A subsidiar& t!at cannibali5es #arent2s re(enue needs adDust"ent$ 7or concessions and
friendl& contributions recei(ed b& subsidiar& fro" %!ate(er sources, adDust"ents are called$ 7inall&, one s!ould
loo' be&ond t!e nu"bers %!ile a##raisin$ T!at is content factor adDust"ent$
1.+.1.& Attri@ute" o' "ound mea"urement mec*anic"
T!ere are at least t!ree "aDor attributes e3#ected of an& ood "easure"ent "ec!anics$
T!ese are: Reliabilit&, Kalidit& and ObDecti(it&$ Eac! c!aracteristic is e3a"ined in detail$
T!e conce#t of reliabilit& is e3a"ined for its t%o "aDor co"#onents (i5$ internal consistenc& and te"#oral
stabilit&$ T!e different co"#onents of (alidit& (i5$ content (alidit&, construct (alidit& and criterion related
(alidit& are discussed$ T!en a discussion of t!e conce#t of obDecti(it& is atte"#ted$
a. Re!ia@i!it5
Reliabilit& of a "easure"ent "ec!anis" refers to t!e de#endabilit& or consistenc& of t!e "easures #ro(ided b&
it$ It refers to Mt!e accurac& of t!e data in t!e sense of t!eir stabilit&, re#eatabilit&, or #recisionN T!ere are t%o
%a&s of loo'in at de#endabilit&$ One is co"#arabilit& of "easures #ro(ided b& different #arts of t!e sa"e test$
Second is co"#arabilit& of "easures #ro(ided b& t!e test on different occasions$ In bot! t!e #rocedures, %e
#roduce t%o sets of "easures %!ic! can be correlated to #ro(ide an esti"ate of reliabilit&$
Compara@i!it5 o' mea"ure" proided @5 di''erent part" o' a mea"urement "5"tem:
T!is #rocedure is based on t!e rationale t!at different #arts of t!e "easure"ent "ec!anis" *different ite"s+
s!ould "a'e co"#arable esti"ates of #erfor"ance of an entit&$ Let us illustrate t!is %it! an e3a"#le$ Su##ose
/Ite" @, sa& cas!,flo% of a subsidiar&N s!o%s t!at t!e fir" is a (er& su#erior ac!ie(er$ Nor"all& /Ite" H, sa&
"ar'et (alue addition2 s!ould also "a'e t!e sa"e assess"ent, su#erior #erfor"ance, of t!e fir", if t!e
"easure"ent "ec!anis" is a satisfactor& "easure of ac!ie(e"ent$ If for so"e reason /Ite" H2 "a'es a #oor
esti"ate of t!e fir"2s abilit& *su##ose /Ite" H2 assesses t!e fir" as one of inferior ac!ie(e"ent+, t!en bot! t!e
ite"s, @ and H, %ill be loo'ed u#on %it! disbelief$ T!e "et!od used for esti"atin reliabilit& usin t!is
aru"ent is called t!e /S#lit,0alf Met!od2$ A narration of t!is "et!od is called MOdd l E(en "et!odN$ T!is
for" of reliabilit& is called Internal )onsistenc&$
Compara@i!it5 o' 3ea"ure" proided @5 a mea"urement "5"tem on di''erent occa"ion":
T!is "et!od of assessin reliabilit& is based on t!e rationale t!at a ood "easure"ent s&ste" "ust i(e al"ost
t!e sa"e "easure"ent %!en a##lied on t!e sa"e entit& on different occasions$ Su##ose a test of e"otional
intellience of t!e c!ief of t!e o(erseas subsidiar& s!o%s !is EIP *e"otional intellience 6uotient+ as = on a @,
@< scale, %!ic! stands for su#erior EI$ But su##ose %e used t!e test on t!e sa"e #erson after one "ont!and
found t!at !is IP as re(ealed b& t!e test as I *%!ic! indicates Dust an a(erae #erfor"ance+, t!e "easures
#ro(ided b& t!e test are not de#endable$ Ideall&, t!e t%o scores "ust be t!e sa"e$ But %!en %e ta'e into
consideration t!e inaccuracies %!ic! enter into "ental "easure"ent *factors li'e "aturation, forettin, (ar&in
test conditions etc$+, %e are %illin to ad"it s"all differences$ An& %a& %e %ill be satisfied %it! t!e test onl& if
t!e test #ro(ides co"#arable "easures fro" ti"e to ti"e$ T!is for" of reliabilit& is also called te"#oral
stabilit&$
@. <a!idit5
Kalidit& refers to t!e abilit& of a "easure"ent tool to "easure %!at it is su##osed to "easure$ Kalidit& is
defined as /t!e e3tent to %!ic! t!e #rocedure actuall& acco"#lis!es %!at it see's to acco"#lis! or "easure
%!at it see's to "easure2$ Kalidit& !as been classified "ainl& into t!ree for"s , na"el&, content, construct and
criteria$
Content <a!idit5:
T!e contents of t!e "easure"ent tool "ust ade6uatel& and co"#re!ensi(el& co(er t!e "aDor ele"ents d of t!e
#erfor"ance di"ension t!at is "easured$ 7or instance, "easure"ent of 2intanibles2 of a fir" "ust co(er its
ood%ill, brand e6uit&, cor#orate o(ernance, cor#orate social res#onsibilit&, en(iron"ental concerns,
c!eris!ed (alues, and so on$ A (er& si"#le e3a"#le %ould be: t!e 6uestion #a#er as a "easure"ent tool of
student learnin, "ust co(er t!e %!ole s&llabus and not fe% areas onl&$
Con"truct <a!idit5:
)onstruct (alidit& "easures t!e loical or t!e underl&in factor t!at e3#lain a #erfor"ance$ Perfor"ance is
"easured t!rou! #erfor"ance boosters li'e abilit&, be!a(ior and co""it"ent$ 7ro" t!ese #erfor"ance le(el
can be constructed$ Alternati(el&, %e can establis! t!is t&#e of (alidit& b& loicall& anal&5in t!e contents of
t!e "easure"ent &ardstic'$
Criterion re!ated <a!idit5:
)riterion (alidit& "a'es use of t!e statistical co"#arison of t!e #erfor"ance scores of a fir" %it! so"e
inde#endent criterion$ Reasonable aree"ent bet%een t!e t%o "easures is inter#reted as e(idence of t!is t&#e
of (alidit&$ T!e e3ternal "easure for co"#arison is ter"ed t!e criterion for (alidation$ T!e e3ternal criterion is
Dustified on t!e basis of so"e loical connection %!ic! s!ould e3ist bet%een t!e test and criterion$ 7or e3a"#le
fir"s %it! !i!er #rofitabilit& "ust also co"e ood on t!e e3ternal criterion factor na"el&, !i!er "ar'et
(aluation as %ell$
c. O@Kectiit5
T!e e3tent to %!ic! a "easure is a function of t!e trait "easured, is referred to as obDecti(it&$ T!is is e3act
o##osite of t!e ter" called subDecti(it&$ A subDecti(e "easure is one in %!ic! t!e !u"an bein %!o "a'es t!e
"easure"ent #er"its !is o%n (alues, Dud"ents and #reDudices to enter into t!e "easure"ent$ E3a"#les of
subDecti(e Dud"ents are "an&$
So"e tec!ni6ues of "easure"ent are "ore li'el& to be subDecti(e$ Inter(ie%s, for e3a"#le, can &ield results
%!ic! are not co"#letel& obDecti(e, unless ade6uate #recautions are ta'en to "a'e t!e" obDecti(e$ T!e
be!a(ior, a##earance, (oice, etc of a #erson "a& "a'e t!e e(aluator to "ar' t!e #erson !i! or lo%, t!ou! t!e
#erson is neit!er !i! nor lo%, but a(erae$
ObDecti(it& in "easure"ent is no% ensured b& #ro(idin standard "easure"ent tool, (eilin t!e identit& of t!e
#erson9entit& assessed, standardi5ed conditions for scorin and inter#retin "easure"ent scores and s#ecific
directions usin t!e scores, etc$ Man& of t!e #recautions ta'en for attainin reliabilit& of "easure"ent %ill (er&
often be of !el# in ensurin obDecti(it&$
1.+.& Indicator" o' /er'ormance
Perfor"ance is ac!ie(e"ent or fulfill"ent of tas's i(en and oals assined %it!in #rescribed conditions$
Perfor"ance of co"#anies can be "easured t!rou! di(erse indicators$ T!ere are financial and non,financial
indicators$ T!ese are dealt !ere$
1.+.&.1 (inancia! /er'ormance Indicator"
7inancial #erfor"ance of t!e MNEs "atter "ost$ T!e /"one& "easure"ent2 conce#t of accountin e"#!asi5es
"easure"ent of business #erfor"ance and assets and liabilities in "onetar& ter"s ta'in /"one& units2 as t!e
co""on deno"inator, des#ite its deficiencies$ T!e trend, relati(e si5e and fluctuations of to#, "iddle and
botto" lines of t!e inco"e state"ent, t!e 6ualit&, uni6ueness, (alue and fluctuations in t!e (alue of assets, t!e
cost and (ariations in cost and fle3ibilit& of liabilities, t!e return on in(est"ent and ris' associated %it! t!e
return are so"e of t!e i"#ortant financial side (ariables or factors of enter#rises$ T!e different financial
"easures of #erfor"ance are dealt no%$
i. Top !ine per'ormance
T!e to# line refers to sales re(enue$ T!e o(erall si5e, t!e #roduct co"#osition, t!e reional s!are, t!e seasonal
distribution and trend t!ereof are i"#ortant financial "easures of #erfor"ance$ T!ese "easures in a %a&
re#resent t!e co"#an&2s co"#etiti(e strent! tested in t!e "ar'et #lace$ Re(enue ro%t! "a& be dri(en b&
(alue addition, b& u#%ard #rice re(ision and b& 6uantit& rise$ T!e first and last are better "eans, t!an t!e
"iddle one in a co"#etiti(e "ar'et$ T!e #roduct line co"#osition of sales re(enue, t!e countr&,%ise s!are of
sales re(enue, t!e subsidiar&,%ise s!are of sales re(enue, t!e seasonal s#read, t!e o(erall "ar'et s!are, "ar'et
s!are b& reions, #roducts F seasons, t!e #lace of subsidiaries in t!eir res#ecti(e national9reional "ar'ets and
trend in t!ese are i"#ortant "easures of #erfor"ance$
ii. 3idd!e !ine per'ormance
Middle lines refer to cost factors$ -!at is t!e #ri"e costC -!at is t!e 7actor& costC
-!at is t!e Production costC -!at is t!e Mar'etin costC -!at is t!e Labour costC -!at is t!e O(er!ead costC
-!at is t!e Pro"otion costC -!at is t!e )ost of salesC -!at is t!e si5eC -!at is t!e trendC 0o% do %e
co"#are %it! our co"#etitorsC
In M)itirou#2s Enter#rise Mar'etin E3#enses: T!e Middle LineN a co"#arison of
t!e co"#an&2s enter#rise "ar'etin cost #er dollar *)P8+ of re(enue %it! four co"#etitors re(ealed t!at t!e
)iti re#orted t!e lo%est of t!e" all: Dust L<$:A in Ma&, :<<?$ Moran Stanle& *MS+ %as t!e runner,u# %it! a
)P8 of L<$:I in Ma&, :<<?$ O(er t!e ten "ost recent re#ortin #eriods t!e )P8 nu"bers for )itirou# and
Moran Stanle& dro##ed dra"aticall& fro" L<$AG and L<$IA to L<$:A and L<$:I res#ecti(el&$ A reater fall %as
re#orted b& Moran Stanle& *MS+$ In t!e sa"e re#ortin #eriods .$ P$ Moran2s *.PM+
fell fro" L<$I; to L<$A:E Gold"an Sac!s *GS+ declined fro" L<$H@ to L<$A@E and Merrill L&nc! *MER+ %ent
fro" L<$;< to L<$A<$ A lot of belt ti!tenin %as oin on in t!is strateic rou#$ )ost control and reduction b&
%aste reduction and risin #roducti(it& #erfor"ance rat!er t!an b& reducin co"#ensation to e"#lo&ees are
"ost #referred$
In t!e sa"e #ost I found t!at )itirou#2s H<J s!are of re(enues in Marc!, :<<; %as al"ost double t!at of .PM
/s %ea' second #lace :@J s!are of re(enues$ I s#eculated t!ere "a& be scale econo"ies in )iti2s enter#rise
"ar'etin cost #er dollar$
iii. Bottom !ine per'ormance
Net inco"e is infor"all& called t!e botto" line because it is t&#icall& found on t!e last line of a co"#an&2s
inco"e state"ent$ Net inco"e is e6ual to t!e inco"e t!at a fir" !as after subtractin all costs and all e3#enses
fro" t!e total re(enue$ Net inco"e can be distributed a"on !olders of co""on stoc' as a di(idend or !eld b&
t!e fir" as retained earnins$ !e ite"s deducted %ill t&#icall& include ta3 e3#ense, financin e3#ense *interest
e3#ense+, and "inorit& interest$ Li'e%ise, #referred stoc' di(idends %ill be subtracted too, t!ou! t!e& are not
an e3#ense$ -!en t!e to# line is tall enou! and "iddle lines aren2t "ea si5e, botto" line balloons$
i. Sen"itiit5 ana!5"i"
Sensiti(it& of to# line %it! reard to c!ane in #rice9#roduct "i39#ro"otion cost and t!e li'e need to be studied$
Si"ilarl&, sensiti(it& of "iddle lines %it! reard to c!ane in in#ut #rice9#roduct "i39outsourcin or in,
sourcin and t!e li'e need to be done$ Sensiti(it& of botto" line %it! reard to c!ane in bot! to# and "iddle
lines and ot!er e3ternal factors need to be "ade for "onitorin botto" line #erfor"ance and effect strateic
c!ane$ T!is is not be an annual e3ercise, rat!er fortni!tl&, if not %ee'l&$
. Ca"* '!o- per'ormance
)as! flo% R Net Inco"e S 8e#reciation S Non,cas! ot!er o#eratin e3#enses S
Non,o#eratin e3#enses 1 Non,cas! o#eratin inco"e 1 Non,o#eratin inco"es$ Assu"in t!at t!e last H are
insinificant or "utuall& off,settin, )as! flo% R Net Inco"e S 8e#reciation$ )as! flo% "ust be sufficient for
debt ser(icin, if an& and !el# fundin ro%t!$
i. Brea8 Een /oint and 3ar2in o' Sa'et5 (3OS%
T!e no,#rofit 1 no loss #oint "ust be lo%er, resultin in !i!er "arin of safet&$ -!at is t!e trend in t!e BEP
ca#acit&C And in MOSC 8o%ntrend in t!e for"er and u#trend in t!e later do %ell for businesses$
ii. /ro'ita@i!it5 3ea"ure":
Return of total assets and Return on e6uit& are i"#ortant "easures$ ROAR Return on Assets R Net Inco"e after
Ta3, but before Interest 9 Total assets$ ROER Return on E6uit& R Net Inco"e after Ta3 9 Total E6uit&$ ROE is
t!e ratio of net inco"e after ta3 to total e6uit& or s!are!olders2 fund %!ic! is e6ual to #aid u# ca#ital,
contributed ca#ital in e3cess of ca#ital or a'a, s!are #re"iu" or sur#lus and free reser(es re#resentin
undistributed #rofits$ Needless to add !i!er (alues "ean better #erfor"ance$
iii. Leera2e @ene'it
Le(erae "eans ettin an ad(antae$ In financial "anae"ent, t%o t&#es of le(eraes are used, (i5$, o#eratin
le(erae and financial le(erae$ O#eratin le(erae "eans usin fi3ed o#eratin cost to en!ance earnins
before interest and ta3es *EBIT+ for a i(en c!ane in t!e )ontribution, *)+ %!ic! is t!e e3cess of sellin #rice
o(er (ariable cost #er unit$
T!e 8eree of O#eratin Le(erae *8OL+ R Rate of c!ane in EBIT 9 Rate of c!ane in
/)2$ R *MEBIT9 EBIT+ 9 *M) 9 )+ R ) 9 EBIT * since, M) RNEBIT+
)o"#anies %!ic! can increase EBIT b& "ore #ercentae for a s"all c!ane in 6uantit& sold are in a better
#osition$ 0i!er 8OL "eans, for a s"all c!ane in contribution, t!at is 6uantit& sold, a "anified c!ane in
EBIT %ould result and (ice (ersa$
7inancial le(erae studies t!e rate of c!ane in earnin #er s!are *EPS+ to t!at of EBIT$ 8eree of 7inancial
Le(erae *87L+ R EBIT 9 *EBIT , I+$ A !i!er 87L "eans,
EPS c!anes "ore t!an #ro#ortionatel& for a i(en c!ane in t!e EBIT$ 8OL and 87L %!en "ulti#lied %e et
deree of total le(erae *8TL+$
7or ro%in fir"s !i!er le(erae effects !el# "uc! in boostin t!e ROA and ROE$
i=. Ri"8 !ee!
Ris' refers to fluctuations in return$ It is t!e uncertaint& associated %it! a benefit$ Usin standard de(iation or
(ariance of returns or t!e co(ariance of t!e returns of an in(est"ent and t!at of t!e "ar'et return, ris' can be
"easured$ 0i! ris' in(est"ents need to be a(oided, unless "atc!in !i! return is a(ailable$
=. /a5@ac8 /eriod (/B/%
Pa&bac' #eriod refers to t!e nu"ber of &ears one !as to %ait to et bac' t!e ca#ital
in(ested in a (enture in t!e beinnin$ 7or t!is %e !a(e to et t!e cas! flo% fro" business$
If t!e cas! flo% is unifor" &ear after &ear, t!e for"ula for cas! flo% is : Oriinal In(est"ent 9 Annual )as!
7lo%$ If t!e cas! flo% is not unifor", t!e follo%in for"ula is used to find t!e PBP:
n
M )7 1 I R <
t
tR@
%!ere /t2 R ti"e #eriod (ar&in fro" to @ to n, I R Initial in(est"ent, )7t R cas! flo% at ti"e /t2 and t R ti"e
"easured in &ears$ S!orter #a&bac' #eriod is #referred "ost in t!e %orld of co"#etition, tec!noloical c!anes
and uncertainties of "ar'et conditions$
3i$ Net Present Kalue *NPK+
Net #resent (alue is co"#uted i(en t!e oriinal in(est"ent, annual cas! flo%s *PAT S 8e#reciation+ and
re6uired rate of return, %!ic! is e6ual to t!e cost of ca#ital$ Gi(en t!ese, NPK is calculated as follo%s:
n
NPK R , I S [ )7t 9 *@ S'+t
t R@
-!ere, I R Oriinal or initial in(est"ent, )7t R annual cas! flo%s
> R cost of ca#ital and t R ti"e "easured in &ears$
Needles to add, !i!er NPK is t!e #referred one$
=ii. Interna! Rate o' Return (IRR%
Internal Rate of Return *IRR+ is t!e (alue of M'N in t!e e6uation, , I S V[)7t 9 *@ S'+t W R <$ In ot!er %ords, IRR
is t!at (alue of M'N for %!ic! areated discounted (alue of cas! flo%s fro" t!e #roDect is e6ual to oriinal
in(est"ent in t!e #roDect$ -!en "anuall& co"#uted, M'N i$e$, IRR is ot t!rou! trial and error and if need be,
ado#tin a sort of inter#olation$ Su##ose for a #articular (alue of ', , I S [ )7t 9 *@ S'+t U< , %e !a(e to use a
!i!er d'2 in our ne3t trial and if t!e (alue is O <, a lo%er d'2 !as to e"#lo&ed ne3t ti"e$ T!en &ou can
inter#olate ' fro" t!e t%o (alues of /'2 e"#lo&ed t!us far$ T!e inter#olated (alue of d'2 is t!e IRR$ 0i!er IRR
is #referred$
=iii. LiHuidit5 per'ormance -Current ratio
)urrent ratio "easures t!e abilit& of a fir" to #a& off s!ort,ter" liabilities as and %!en t!ese "ature for
re#a&"ent$ )urrent ratio R )urrent assets 9 current liabilities$$ )urrent assets s!ould be "ore t!an current
liabilities$ T!e acce#table ratio is :E %e "a& allo% a rane of @<J and t!at it s!ould be bet%een @$= and :$:$
T!e ratio be&ond :$: %ill indicate t!at eit!er t!e in(entories are stoc'ed unnecessaril& or t!e #roducts #roduced
are not sold$ T!e current ratio %ill indicate t!e necessit& for #ro#er in(entor& control$
=i. So!enc5 per'ormance- De@t "erice coera2e ratio (DSCR+
T!e ratio indicates t!e ca#acit& of t!e unit to re#a& t!e ter" loan liabilities and interest t!ereon$ T!is ratio
indicates t!e cas! eneration for t!e re#a&"ent of ter" liabilities and balance left for t!e co"#an&2s use$
Re#a&"ent of ter" loan %it!out eneratin sufficient cas! %ill lead to reduction in t!e %or'in ca#ital, ti!t
li6uidit& #osition and furt!er deterioration in t!e %or'in of t!e unit$ T!e acce#table ratio s!ould not be less
t!an A$ T!e for"ula calculation of t!e 8S)R is i(en belo%$
8S)RR *Profit after ta3 S 8e#reciation S Interest on Loans+ 9 V*Pa&"ent of ter"
loans+ 9*@ 1TR+ S Interest on loansW, %!ere TR is t!e ta3 rate$ Since re#a&"ent install"ent of debt !as to be "et
out of #ost ta3 #rofits, an adDust"ent is done %it! t!e ta3 rate$
=. Economic <a!ue Added
A "odern "easure of business #erfor"ance is "a3i"i5ation of econo"ic (alue added
*EKA+$ EKA R NOPAT , ))), %!ere, EKA is econo"ic (alue added, NOPAT is net o#eratin earnins after
ta3 but before interest and di(idend and ))) is cost of co"bined ca#ital$ ))) R Interest #aid on debt ca#ital
#lus fair re"uneration on e6uit&$ EKA is, si"#l& #ut, e3cess of #rofit o(er all e3#enses, includin e3#enses
to%ards fair re"uneration #aid9#a&able on e6uit& fund as %ell$
=i. #ea!t* 3a=imi;ation
-ealt! "a3i"i5ation "eans "a3i"i5ation of net,%ort! of t!e institution, i$e$, t!e "ar'et (aluation of t!e
institution$ T!is is considered to be su#erior and %!oleso"e, as all di(erse #erfor"ance ulti"atel& leads to
%ealt! "a3i"i5ation$
=ii. A""et" turnoer per'ormance
Assets turno(er #erfor"ance "easures t!e sales creatin effect of assets$ T&#icall& cost of sales di(ided b& total
assets, called as total assets turno(er ratio is %idel& considered a solid %a& of "easurin acti(eness of a
business in ter"s of sales creation$
=iii. AdKu"ted N/< 'or 3NE Su@"idiar5
In t!e case of rou# co"#anies or MN)s, t!e #roDect cas! flo% differs fro" #arent2s cas! flo% *areate of
#arent2s o%n cas! flo% and t!at of subsidiaries #ut toet!er+$ Si"#le lateral su""ation cannot be "ade Dust li'e
t!at$ AdDust"ents are called for$ 7urt!er Dust one discount rate cannot be a##lied$
a. /roKect ca"* '!o-
Nor"all& #roDect cas! flo% anal&sis is si"#l& based on t!e total in(est"ent needed, its o#eratin results
resultin in sales, (ariable cost, fi3ed cost, de#reciation, ta3es, %or'in ca#ital needed in t!e beinnin and
retrie(ed at t!e end, t!e sal(ae (alue of t!e #roDect2s fi3ed assets, etc$ T!e co"#utation of #roDect cas! flo%
%ill not consider an& adDust"ents for s&neries *additional sales ac!ie(ed b& t!e #arent due to t!e establis!"ent
of t!e subsidiar&+ obtained b& t!e rou# or t!e cannibalis" *lost sales because of t!e for"ation of t!e
subsidiar&+ suffered, difference bet%een "ar'et #rice and transfer #rice c!ared for internal transactions, ta3es
#aid or sa(ed b& t!e #arent on ro&alties, "anae"ent fees, etc recei(ed fro" subsidiar&, e3c!ane rate
fluctuations, and so on$ As a result a #roDect2s e(aluation is de(oid of realit&$
@. /arent9" Ca"* (!o-
T!e #roDect cas! flo% is not to be laterall& added to t!e #arent2s cas! flo% to arri(e at co"bined cas! flo%,
because t!e #arent suffers cannibalis" or enDo&s s&ner& due to t!e subsidiar&, ta3 incidences on recei#ts fro"
and #a&"ents to t!e subsidiar& and so on$
T!erefore, ProDect cas! flo% /[Parent2s cas! flo%$ So a #roDect assessed %it!out adDust"ents for t!e factors
causin difference bet%een #roDect and #arent cas! flo% %ill not re(eal t!e correct #icture of t!e real %ort! of
t!e #roDect$ T!erefore adDust"ents are called for$
c. AdKu"tment" Ca!!ed 'or
A #roDect2s cas! flo% differs fro" a #arent2s incre"ental cas! flo%$ Se(eral factors stand be!ind t!is de(iation
as "entioned abo(e$ 0ence adDust"ents of #roDect2s cas! flo% for t!ese factors are called for$ So"e of t!e
factors for %!ic! adDust"ents are re6uired are as under:
Canni@a!i"m (actor:
An Indian fir" !as been su##l&in soft%are for a US co"#utin co"#an&$ No% t!e Indian fir" is floatin its
US subsidiar&$ T!e cas! flo% of t!e US subsidiar& of t!e Indian fir" needs adDust"ent for t!e re#laced e3#ort
earnins of t!e Indian #arent fir"$ T!e ne% US subsidiar& eats a%a& its Indian #arent2s e3#ort earnins$
T!is is t!e cannibalis" factor$ T!e US subsidiar&2s cas! flo% "ust be reduced b& t!e lost e3#ort earnins of its
#arent$
S5ner25 (actor:
T!e ne% US subsidiar& of t!e Indian #arent, b& its !i! standards and contacts %orld o(er, enabled t!e Indian
#arent to e3#ort to Euro#e and .a#anese "ar'ets$
T!ese e3#orts are ot!er%ise i"#ossible to !a(e been clic'ed$ T!is is t!e s&ner& factor, %!ic! is o##osite to
cannibalis" factor$ T!e US subsidiar&2s cas! flo% "ust be inflated$
Opportunit5 Co"t (actor: Sa&, t!e Indian #arent ac6uired lon ao #ro#ert& for L :< "n in US, %!ere t!e
subsidiar& no% is carr&in its o#erations$ Presentl& "ar'et (alue of t!e #ro#ert& is L @<< "n, t!ou! boo' (alue
is onl& L :< "n$ T!e o##ortunit& cost of t!e #ro#ert&, na"el& its "ar'et (alue, "ust be considered for
e(aluation of t!e subsidiar&$ T!e ca#ital outla& of t!e #roDect "ust be based on t!e "ar'et (alue of t!e #ro#ert&
used b& it$
Re!ea"e o' B!oc8ed (actor":
Su##ose, US ta3 aut!orities !ad i(en a ta3 credit, bein refund of e3cess #ro#ert& ta3 #aid on t!e #ro#ert&,
a"ountin to L : "n$ T!e "one& cannot be re#atriated in India$ But can be used for in(est"ent in US onl&$
Since t!e co""issionin of t!e US subsidiar& !as i(en an o##ortunit& to acti(ate t!e bloc'ed fund,%!ic! is
ot!er%ise sun' fund, t!e initial cost of t!e US subsidiar& can be reduced b& t!e e3tent t!e released le(el of
bloc'ed funds$
Intere"t (ree or Conce""iona! Loan: Su##ose t!e US Go(t$ i(es a L I< "n loan re#a&able L :< "n #$a$ o(er
ne3t A &ears, for t!e #ur#ose of t!e Indian #arent, in a##reciation of t!e US subsidiar&2s strateic i"#ortance to
US econo"&, free of interest$ T!e e3cess of L I< "n o(er t!e #resent (alue of debt re#a&"ents affected at end
of &ear @, &ear : and &ear A, is a benefit accruin to t!e #arent$ But, t!e subsidiar& "ust be i(en credit, in turn,
b& t!e #arent$
Tran"'er /ricin2:
Transfer #ricin refers to #ricin #roduct9ser(ice sales9#urc!ases %it!in rou# concerns$ S!ould transfer #ricin
be at cost or at a #rofit, is a debatable issue$ If intra concern transfers are "ade at cost, t!ou! it "a& be
obDecti(e it conceals t!e efficienc& of bot! t!e transferor and transferee$ If intra,concern transfers are to be
"ade at a #rofit t!e 6uestion of reasonable #rofit is to decided and t!ere is no consensus as to %!at reasonable
#rofit #ercentae is$ T!e affiliates of an MN)s are closel& interated$ As suc!, t!e& can easil& "ani#ulate trade
for "a3i"i5ation of t!e lobal after,ta3 #rofit, b& reducin rou# ta3 outo$ T!e& do it b& "eans of under,
in(oiced or o(er,in(oiced /transfer #ricin2$ MN)s use transfer #ricin to reduce ta3 b& s!iftin #rofit fro"
!i!,ta3 5one to lo%,ta3 5one, to reduce dut& le(& b& si"ilar s!iftin and to a(oid e3c!ane controls$ Su##ose
t!e Indian #arent reduces its cor#orate ta3 liabilit& t!rou! transfer #ricin "ec!anis"$ T!e ta3 sa(ed
b& t!e #arent !as to be used to inflate t!e cas! flo% of t!e US subsidiar& #roDect$
Di"count rate":
-e !a(e Dust seen t!at different cas! flo%s e"anate fro" t!e forein subsidiar&$ All t!ese cas! flo%s carr&
different ris' le(els associated$ So to discount t!e" to t!eir #resent (alues different discount rates "ust be used$
T!us one discount rate %ould not do$
No pena!t5 or re-ard: MNEs s!ould e(aluate subsidiar& "anaers se#aratel& fro" t!eir subsidiar&2s
#erfor"ance so as not to #enali5e or re%ard t!e" for conditions be&ond t!eir control$ 7or e3a"#le, t!e MNE
#arent "a& decide not to e3#and furt!er in a countr& because of its slo% ro%t! and ris'& econo"ic and
#olitical en(iron"ent and still re%ard t!at countr&2s "anaers for doin a ood Dob under ad(erse conditions$
1.+.&.& Non-'inancia! indicator"
Manufacturin and #roduction, Sales and "ar'etin, Peo#le, Researc! and 8e(elo#"ent and En(iron"ent are
t!e factors$ Loo'in at eac! of t!ese areas in turn, t!e follo%in non,e3!austi(e list of #erfor"ance "easures is
rele(ant$ No one indicator s!ould be o(er e"#!asi5ed and no one indicator s!ould rein su#re"e for lon in t!e
cor#orate consciousness of e3ecuti(es or "anae"ent urus$
i. 3anu'acturin2 and /roduction Non-'inancia! /er'ormance Indicator":
T!e s!eer (olu"e, (ariet& and co"#le3it& of "anaerial issues surroundin t!e #roduction #rocess "a'e t!is
area of cor#orate acti(it& a #articularl& ric! one for non,financial indicators$ Perfor"ance indicators can be
de(ised for all o#erational areas$ Non,financial indicators, de#endin on t!e e3act nature of t!e #roduction
#rocess, "i!t include:
ii. Sa!e" and 3ar8etin2 Non-'inancia! /er'ormance Indicator"
Sales and Mar'etin area !as nu"ber of non,financial "easures$ T!ese are as belo%:
iii. /eop!e: Non-'inancia! /er'ormance Indicator"
Non,finance #erfor"ance anal&ses related to t!e #ersonnel are as follo%s$
i($ Re"earc* and Dee!opment (R.D% Non-'inancia! Indicator"
Non,finance #erfor"ance anal&ses a##lied to RF8 are as follo%s$
. Enironment: Non-'inancia! Indicator"
Non,finance #erfor"ance anal&ses as to En(iron"ent are as follo%s$
Alt!ou! se(eral a##roac!es to desinin and i"#le"entin a s&ste" to #ro(ide Non financial #erfor"ance
"easures !a(e been #ro#osed, t!e #roble" of interatin Non financial "easures %it! financial "easures
effecti(el& still re"ains an o#en 6uestion$
1.+.&.+ Oe5 per'ormance indicator" (O/I"%
Accordin to eac! #ers#ecti(e of t!e Balanced Score )ard t!ere are a nu"ber of >PIs$ Table A$H i(es a list of
#ers#ecti(e,%ise #erfor"ance indicators$
Ta@!e 1.1 BSC /er"pectie--i"e Oe5 per'ormance indicator"
Industr& s#ecific >PIs are establis!ed t!rou! case studies$
1.+.&.1 Leadin2 and !a22in2 per'ormance indicator"
T!ere are leadin and lain #erfor"ance indicators$ T!e leadin indicators are futuristic or #ros#ecti(e %!ile
lain indicators are !istorical or retros#ecti(e$
Most traditional "easures li'e ROI, Assets turno(er, etc are lain$ Peter 7 8ruc'er2s "essae t!at a
traditional "easure is not ade6uate for business e(aluation is (er& a#t$ A #ri"ar& reason %!& traditional
"easures fail to "eet ne% business needs is t!at "ost "easures are lain indicators$ T!e e"#!asis of
accountin "easures !as been on !istorical state"ents of financial #erfor"ance$ T!e& are t!e result of
"anae"ent #erfor"ance, not t!e cause of itE i$e$, t!e& are better at "easurin t!e conse6uence of &esterda&2s
decisions but unli'el& to #ro(ide useful indicators for future success$ As a result, t!e& easil& conflict %it! ne%
strateies and current co"#etiti(e business realities$
To a"eliorate t!is Maccountin laN situation, researc!ers !a(e fre6uentl& atte"#ted to #ro(ide ne% "easurin
#rocedures$ T!e ne% "easures s!ould broaden t!e basis of non financial #erfor"ance "easure"ent$ It "ust
trul& #redict lon,ter" strateic success$ E3ternal #erfor"ance relati(e to co"#etitors, suc! as "ar'et s!are, is
an i"#ortant "easure$ In addition, t!e recent rise of lobal co"#etiti(eness re,e"#!asi5es t!e #ri"ac& of
o#erational, i$e$, non financial #erfor"ance$ 0o%e(er, t!ese non financial "easures are t&#icall& 6ualitati(e$
And t!ese are #redicti(e or futuristic or #ros#ecti(e or leadin$
1.1 Ea!uation and Ea!uation S5"tem"
)once#t of #erfor"ance e(aluation, t&#es of e(aluation and need for e(aluation are dealt in t!is section$
Besides, e(aluation s&ste"s li'e budetar& s&ste", benc!"ar's s&ste", standard costin s&ste" etc are
described$ Also t!e conce#ts of Balanced Score )ard and AI<,deree a##raisal are #resented$
1.1.1 Concept o' Ea!uation
E(aluation is t!e anal&sis and co"#arison of actual #roress (is,Q,(is #rior #lans$ E(aluation is oriented to%ard
i"#ro(in #lans for future i"#le"entation to ensure i"#ro(ed #erfor"ance$ E(aluation is #art of a continuin
"anae"ent #rocess consistin of #lannin, i"#le"entation, and e(aluation$ Ideall& eac! of t!ese ste#s follo%s
t!e ot!er in a continuous c&cle until successful co"#letion of t!e acti(it&$
E(aluation in(ol(es co"#arison of actual #erfor"ance aainst benc!"ar's or standards of #erfor"ance to
establis! t!e e3tent of fulfill"ent of oals and identif& a#s in #erfor"ance to suest re"edial courses for
ensurin t!at in t!e end all ends %ell, t!at is fulfill"ent le(el is @<<J$ T!e oals (ar& de#endin on t!e
situation, #artici#ants and issues$
E(aluation is t!e s&ste"atic and obDecti(e assess"ent of t!e rele(ance, efficienc&, effecti(eness, sustainabilit&,
and i"#act of de(elo#"ent inter(entions or #rora"s$
E(aluation is t!e assess"ent of !o% %ell a #roDect9acti(it& ac!ie(ed its obDecti(es$
Nor"ati(e e(aluation is a Dud"ent as to %!et!er so"et!in is ood or bad in so"e res#ects, a (alue Dud"ent$
8escri#ti(e e(aluation Dust re#orts: -!at is %!atC 0o% !as so"et!in !a##enedC -!& !as so"et!in
!a##enedC Prescri#ti(e e(aluation #rescribes future courses of action for i"#ro(ed #erfor"ance or eli"ination
of #oor #erfor"ance$
E(aluation "a& be #ost action e(aluation and continuous or onoin e(aluation durin i"#le"entation$ Post
action e(aluation is feed,bac' oriented$ Onoin e(aluation is e(aluation durin i"#le"entation$ It is referred
to as /re(ie%2 and is lin'ed closel& %it! "onitorin or assess"ent of t!e #roDect2s success in "eetin its
intended outco"es$
1.1.& T5pe" o' Ea!uation
T!ere are 6ualitati(e and 6uantitati(e e(aluation s&ste"s$ T!ere are for"ati(e and su""ati(e e(aluations$
T!ese are #resented no%$
a$ Nua!itatie ea!uation is an assess"ent #rocess t!at ans%ers t!e 6uestion, /0o% %ell did %e doC2 T!e areas
of focus of 6ualitati(e e(aluation include:
)ontent, 6ualit&, and rele(ance of a #rora"E
Attitudes and ac!ie(e"ents of t!e #artici#antsE
Pualit& of resources e"#lo&ed and en(iron"ent ado#tedE
Efficienc& of strateies and acti(itiesE
Social )osts in relation to %!at %as ac!ie(ed and
Social Benefits
b$ Nuantitatie ea!uation is an assess"ent #rocess t!at ans%ers t!e 6uestion, /0o% "uc! did %e doC2 T!e
areas of focus of 6ualitati(e e(aluation include: Nu"bers of offerins, a"ount of ood and bad outco"es,
econo"ic costs, econo"ic benefits and so on$
c$ (ormatie ea!uation is a #rocess of onoin feedbac' on #erfor"ance re(ie%$ T!e #ur#oses are to identif&
as#ects of #erfor"ance t!at need to i"#ro(e and to offer correcti(e suestions$ Be enerous %it! for"ati(e
e(aluation$ S!are &our obser(ations and #erce#tions %it! all$ 7or"ati(e e(aluation need not "a'e a Dud"ent$
-!en i(in for"ati(e feedbac', offer so"e alternati(es$ 7or"ati(e e(aluation is needed if safet& concerns
arise$
d$ Summatie ea!uation is a #rocess of onoin feedbac' on #erfor"ance re(ie% %it! t!e #ur#ose of
identif&in larer #atterns and trends in #erfor"ance and Dud"ent aainst criteria to obtain #erfor"ance
ratins$ Table H$; belo% co"#ares for"ati(e and su""ati(e e(aluation accordin to t!e 'ind of
infor"ation #ro(ided and t!e ti"in$
Ta@!e 1.4 Compari"on o' (ormatie and Summatie Ea!uation
S&ste"atic collection of infor"ation about t!e acti(ities, c!aracteristics and outco"es of #rora" is needed to
"a'e Dud"ents about t!e #rora", i"#ro(e #rora" effecti(eness and9or infor" decisions about future
#rora""in$ E(aluation !as se(eral distinuis!in c!aracteristics relatin to focus, "et!odolo& and function$
E(aluation *i+ assesses t!e effecti(eness of an onoin #rora" in ac!ie(in its obDecti(es and *ii+ relies on t!e
standards of #roDect desin to distinuis! a #rora"2s effects fro" t!ose of ot!er contributin factors to
#erfor"ance$
1.:.+.+ Ea!uation proce"":
E(aluation acti(ities and 8i"ensions Accordin to A"erican E(aluation Association e(aluation in(ol(es
/assessin t!e strent!s and %ea'nesses of #rora"s, #olicies, #ersonnel, #roducts, and orani5ations to
i"#ro(e t!eir effecti(eness2$ E(aluation is t!e s&ste"atic collection and anal&sis of data needed to "a'e
decisions$
0ere are Dust so"e of t!e e(aluation acti(ities t!at are alread& li'el& to be incor#orated into "an& #rora"s or
t!at can be added easil&:
Pin#ointin t!e ser(ices or outco"es neededE t!eir le(elsE t!eir 6ualit& standards$
Establis!in #rora" obDecti(es and decidin t!e #articular e(idence t!at %ill de"onstrate t!at t!e
obDecti(es !a(e been "et$ A 'e& to successful e(aluation is a set of clear, "easurable, and realistic
#rora" obDecti(es$ If obDecti(es are unrealisticall& o#ti"istic or are not "easurable, t!e #rora" "a&
not be able to de"onstrate t!at it !as been successful e(en if it !as done a ood Dob
8e(elo#in or selectin fro" a"on alternati(e a##roac!es for "easurin #erfor"ance
Trac'in #rora" obDecti(es for e3a"#le, settin u# a s&ste" t!at s!o%s %!o ets ser(ices, !o% "uc!
ser(ice is deli(ered, !o% #artici#ants rate t!e ser(ices t!e& recei(e, and %!ic! a##roac!es are "ost
readil& ado#ted b& staff
8eter"inin t!e e3tent to %!ic! a #articular a##roac! is bein i"#le"ented fait!full& b& #artici#ants$
T!e 8i"ensions of e(aluation include #rocess, outco"e, and i"#act e(aluation$
/roce"" Ea!uation" describe and assess t!e s&ste" of functionin of a unit or a #erson$
T!e s&ste" of #lannin, orani5in, directin, e3ecutin, controllin and re#ortin are assessed$ E3a"inin t!e
i"#le"entation of acti(ities is an i"#ortant for" of #rocess e(aluation$ I"#le"entation anal&sis docu"ents
%!at actuall& trans#ires in a unit and !o% closel& it reflects t!e oals$
Outcome Ea!uation" stud& t!e i""ediate or direct effects of t!e #rora" on #artici#ants$ 7or e3a"#le, %!en
a @<,session #rora" ai"ed at 6ualit& c!ec'in of s&ste" in#uts is co"#leted, can t!e #artici#ants de"onstrate
t!e s'ills successfull&C T!e sco#e of an outco"e e(aluation can e3tend be&ond 'no%lede or attitudes,
!o%e(er, to e3a"ine t!e i""ediate be!a(ioral effects of #rora"s$
Impact Ea!uation" loo' be&ond t!e i""ediate results of #olicies, instruction, or ser(ices to identif& loner,
ter" as %ell as unintended #rora" effects$ It "a& also e3a"ine %!at !a##ens %!en se(eral #rora"s o#erate
in unison$ 7or e3a"#le, an i"#act e(aluation "i!t e3a"ine %!et!er a #rora"2s i""ediate #ositi(e effects on
be!a(ior %ere sustained o(er ti"e$
Reardless of t!e 'ind of e(aluation, all e(aluations use data collected in a s&ste"atic "anner$ T!ese data "a&
be 6uantitati(e suc! as counts of #rora" #artici#ants, a"ounts of counselin or ot!er ser(ices recei(ed, or
incidence of a s#ecific be!a(ior$ T!e& "a& be 6ualitati(e or 6uantitati(e$ Successful e(aluations often blend
6uantitati(e and 6ualitati(e data collection$
+.:.+.1 Need 'or Ea!uation
E(aluations ser(e "an& #ur#oses$ Before assessin a #rora", it is critical to consider %!o is "ost li'el& to
need and use t!e infor"ation t!at %ill be obtained and for %!at #ur#oses$ Listed belo% are so"e of t!e "ost
co""on reasons to conduct e(aluations$ T!ese reasons cut across t!e t!ree di"ensions of e(aluation Dust
"entioned$ T!e deree to %!ic! t!e #ers#ecti(es of t!e "ost i"#ortant #otential users are incor#orated into an
e(aluation desin %ill deter"ine t!e usefulness of t!e effort$
Ea!uation 'or Oera!! 3ana2ement: An e(aluation for o(erall "anae"ent "onitors t!e routines of
o#erations$ It can #ro(ide t!e staff "e"bers or ad"inistrators %it! infor"ation on suc! ite"s as #artici#ant
c!aracteristics, acti(ities, allocation of staff resources, #rora" costs, etc$ Anal&5in infor"ation of t!is t&#e
can !el# t!e staff "e"bers to "a'e s!ort,ter" corrections ensurin, for e3a"#le, t!at #lanned acti(ities are
conducted in a ti"el& "anner$ T!is anal&sis can also !el# staff "e"bers to #lan future direction suc! as
deter"inin resource needs for t!e co"in &ear$ O#erations data are i"#ortant for res#ondin to infor"ation
re6uests fro" constituents, suc! as boards of directors or di(isional !eads$ Also, descri#ti(e #rora" data are
one of t!e bases u#on %!ic! assess"ents of #rora" outco"e are built$
Ea!uation 'or Sta5in2 on Trac8: E(aluation can !el# to ensure t!at enter#rise acti(ities continue to reflect its
#lans and oals$ 8ata collection for o(erall "anae"ent "a& be si"ilar to data collection for sta&in on trac',
but "ore infor"ation "i!t also be needed$ T!is t&#e of e(aluation can !el# to strent!en ser(ice deli(er& and
to "aintain t!e connection bet%een enter#rise oals, obDecti(es, and ser(ices$ 8ela&s are foreseen and
correcti(e actions ta'en to re"ain on strea" and sc!edule$
Ea!uation 'or E''icienc5: E(aluation can !el# to strea"line ser(ice deli(er& or to en!ance coordination
a"on (arious co"#onents, lo%erin t!e cost of ser(ice$ Increased efficienc& enables t!e fir" to reac! and
ser(e "ore "ar'ets, offer "ore ser(ices, or taret ser(ices to t!ose %!ose needs are reatest$ E(aluation for
efficienc& "i!t focus on identif&in t!e areas in %!ic! t!e fir" is "ost successful in order to ca#itali5e u#on
t!e"$ Also, it "i!t identif& %ea'nesses or du#lication in order to "a'e i"#ro(e"ents, eli"inate so"e
ser(ices, or refer #artici#ants to ser(ices else%!ere$ E(aluations of bot! #rocess and outco"es are used to
deter"ine efficienc&$
Ea!uation 'or Accounta@i!it5:
-!en it co"es to e(aluation for accountabilit&, t!e users of t!e e(aluation results li'el& %ill co"e fro" outside
of #rora" o#erations: #arent fir", fundin aencies, elected officials, or ot!er #olic&"a'ers$ Be it a #rocess or
an outco"e e(aluation, t!e "et!ods used in accountabilit& e(aluation "ust be scientificall& defensible, and able
to stand u# to reater scrutin& t!an "et!ods used in e(aluations t!at are intended #ri"aril& for Min,!ouseN use$
E(aluation for 8e(elo#"ent and 8isse"ination: E(aluatin ne% a##roac!es9acti(ities is (er& i"#ortant to
enter#rise de(elo#"ent in an& field$ 8e(elo#ers of ne% a##roac!es9 acti(ities need to conduct "et!odical
e(aluations of t!eir efforts before "a'in clai"s to #otential users$ Riorous e(aluation of loner,ter"
outco"es is a #rere6uisite to assertin t!at a ne% a##roac!9acti(it& is effecti(e$ 8isse"inatin t!e ne%
a##roac!es9acti(ities orani5ation,%ide %ill s#read t!e benefits %ider$
1.1.4 Ea!uation S5"tem"
-e ensure e(aluation is based on business needs and #rora" obDecti(es$ -e desin an e(aluation #rocess, t!en
de(elo# and conduct sur(e&s, focus rou#s and inter(ie%s to at!er bot! 6uantitati(e and 6ualitati(e
infor"ation$ -e anal&5e results, se#aratin t!e i"#act of trainin fro" ot!er influences in t!e %or'
en(iron"ent$ And %e #roduce clear, concise re#orts %it! realistic reco""endations$
i. Benc*mar8 S5"tem
Benc!"ar'in also /best #ractice benc!"ar'in2 or /#rocess benc!"ar'in2 is a #rocess used in strateic
"anae"ent, in %!ic! orani5ations e(aluate (arious as#ects of t!eir #rocesses in relation to industr& best
#ractice9best 6ualit&, usuall& %it!in t!eir o%n sector$ Best Practice is t!at tec!ni6ue, "et!od, #rocess, acti(it&,
incenti(e or re%ard considered "ore effecti(e at deli(erin a #articular outco"e t!an an& ot!er tec!ni6ue,
"et!od, #rocess, etc$ T!is t!en allo%s orani5ations to de(elo# #lans on !o% to ado#t suc! best #ractice,
usuall& %it! t!e ai" of increasin so"e as#ect of #erfor"ance$
Benc!"ar'in is often a continuous #rocess in %!ic! orani5ations continuall& see' to c!allene t!eir
#ractices$ Grou#s of co"#anies and MNEs establis! rou# benc! "ar's called as )ollaborati(e benc!"ar'in$
Benc*mar8in2 proce"":
T!ere is no sinle benc!"ar'in #rocess t!at !as been uni(ersall& ado#ted$ T!e "ost #ro"inent "et!odolo& is
t!e @: stae "et!odolo& b& Robert )a"#, t!e aut!or of t!e first boo' on benc!"ar'in in @G=G$
T!e t%el(e stae "et!odolo& consisted of:
i$ Select subDect a!ead
ii$ t!e #rocess
iii$ Identif& #otential #artners
i($ Identif& data sources
($ )ollect data and select #artners
(i$ 8eter"ine t!e a#
(ii$ Establis! #rocess differences
(iii$ Taret future #erfor"ance
i3$ )o""unicate
3$ AdDust oal
3i$ I"#le"ent
3ii$ Re(ie%9recalibrate$
Ta'e t!e leadin ede #ractices and de(elo# i"#le"entation #lans %!ic! include identification of s#ecific
o##ortunities, fundin t!e #roDect and sellin t!e ideas to t!e orani5ation for t!e #ur#ose of ainin
de"onstrated (alue fro" t!e #rocess$
Tec*nica! @enc*mar8in2 or /roduct Benc*mar8in2:
Tec!nical benc!"ar'in #rocess is #articularl& %ell de(elo#ed %it!in t!e auto"oti(e industr&, /Auto"oti(e
Benc!"ar'in2 %!ere b& a##l&in t!e best tec!noloies a(ailable %orld%ide class #roduct offerins
continuall& !it t!e "ar'ets$
/roce"" @enc*mar8in2:
Process benc!"ar'in is t!e initiatin fir" focuses its obser(ation and in(estiation of business #rocesses %it!
a oal of identif&in and obser(in t!e best #ractices fro" one or "ore benc!"ar' fir"s$ Acti(it& anal&sis %ill
be re6uired %!ere t!e obDecti(e is to benc!"ar' cost and efficienc&$
(inancia! @enc*mar8in2:
7inancial benc!"ar'in #erfor"s a financial anal&sis and co"#arin t!e results in an effort to assess one2s
o(erall co"#etiti(eness$
/er'ormance @enc*mar8in2:
Perfor"ance benc!"ar'in allo%s t!e initiator fir" to assess t!eir co"#etiti(e #osition b& co"#arin #roducts
and ser(ices %it! t!ose of taret fir"s$
Strate2ic @enc*mar8in2:
Strateic benc!"ar'in in(ol(es obser(in !o% ot!ers, includin t!ose in ot!er sectors9industries co"#ete$
(unctiona! @enc*mar8in2:
7unctional benc!"ar'in a co"#an& %ill focus its benc!"ar'in on a sinle function in order to i"#ro(e t!e
o#eration of t!at #articular function$ Sales benc!"ar'in is a functional benc!"ar'in, %!ic! in(ol(es
co"#arin a co"#an&2s sales force aainst ot!er co"#anies or aainst industr& #erfor"ance$ T!e #ur#ose is to
identif& o##ortunities to i"#ro(e #erfor"ance and to focus t!e efforts of a sales orani5ation$
Adanta2e" o' @enc*mar8in2: Benc!"ar'in is a #o%erful "anae"ent tool because it o(erco"es /#aradi"
blindness2$ /Paradi" Blindness2 is t!e t!in'in t!at, 2t!e %a& %e do it is t!e best because t!is is t!e %a& %e2(e
al%a&s done it2$ Benc!"ar'in o#ens orani5ations to ne% "et!ods, ideas and tools to i"#ro(e t!eir
effecti(eness$ It !el#s crac' t!rou! resistance to c!ane b& de"onstratin ot!er "et!ods of sol(in #roble"s
t!an t!e one currentl& e"#lo&ed, and de"onstratin t!at t!e& %or', because t!e& are bein used b& ot!ers$
ii. Bud2etar5 S5"tem
Budetar& S&ste" is a #lannin and controllin tool$ As suc! it !el#s in e(aluation as %ell, because, t!e tarets
are a(ailable in t!e budet$ T!e actual t!en s!all be %ei!ed aainst t!e budet and #erfor"ance can be rated$
Budets and budetar& control constitute budetar& s&ste"
Bud2et:
A budet is a detailed #lan of o#erations for so"e s#ecific future #eriod$ It is an esti"ate of costs and benefits
of #rora"s to be underta'en and #olicies t!ereto #re#ared in ad(ance of t!e #eriod to %!ic! it is a##lied$
Budet acts as a business baro"eter as it is a co"#lete #rora" of acti(ities of t!e business for t!e #eriod
co(ered$ Accordin to Gordon and S!illin la%, /budet is a #redeter"ined detailed #lan of action de(elo#ed
and distributed as a uide to current o#erations and as a #artial basis for t!e subse6uent e(aluation of
#erfor"ance2$ T!e Institute of )ost and Manae"ent Accountants, Enland, defines a budet as /a financial
and9or 6uantitati(e state"ent, #re#ared #rior to a defined #eriod of ti"e, of t!e #olic& to be #ursued durin t!at
#eriod for t!e #ur#ose of attainin a i(en obDecti(e2$ T!us, t!e follo%in are t!e essentials of a budet:
[ It is #re#ared in ad(ance and it is a #lan of actions for t!e feature$
[ It is related to a future #eriod and is based on obDecti(es to be attained$
[ It is a state"ent e3#ressed in "onetar& and9or #!&sical units #re#ared for t!e i"#le"entation of #olic&
for"ulated b& t!e "anae"ent$
8ifferent t&#es of budets are #re#ared b& concerns for different #ur#oses$ A sales budet is #re#ared for t!e
#ur#ose of forecastin sales for a future #eriod and on its basis ot!er budets are #re#ared$ An o#eratin cost
budet is #re#ared for forecastin t!e o#eratin costs$
T!e Master Budet e"bodies #lans , for t!e re(enues and ains and ot!er inco"es, for o#eratin, "ar'etin
and ot!er e3#enses, for cas! and ca#ital re6uire"ents besides forecastin t!e #rofit or loss$
Bud2etar5 Contro!:
-!en budet is used for control, it is budetar& control$ T!e Institute of )ost and Manae"ent Accountants,
Enland defines budetar& control as Mt!e establis!"ent of budets relatin to t!e res#onsibilities of e3ecuti(es
to t!e re6uire"ents of a #olic&, and t!e continuous co"#arison of actual %it! budeted results, eit!er to secure
b& indi(idual action t!e obDecti(e of t!at #olic& or to #ro(ide a basis for its re(isionN$ Accordin to .$A$Scott,
Mit is t!e s&ste" of "anae"ent control and accountin in %!ic! all o#erations are forecast and so far as
#ossible #lanned a!ead and t!e actual results co"#ared %it! t!e forecast and #lanned onesN$ T!us, budetar&
control in(ol(es t!e follo%in:
[ Establis!"ent of budets$
[ )ontinuous co"#arison of actual %it! budets for ac!ie(e"ent of tarets and #lacin t!e res#onsibilit&
for failure to ac!ie(e t!e budet fiures$
[ Re(ision of budets in t!e li!t of c!aned circu"stances
T!e difference bet%een budets, budetin and budetar& control can be sited$
Budets are t!e indi(idual obDecti(es of a de#art"ent, etc$ Budetin "a& be said to be t!e act of buildin
budets$ Budetar& control e"braces all and in addition includes t!e science of #lannin t!e budets t!e"sel(es
and t!e utili5ation of suc! budets to effect an o(erall "anae"ent tool for t!e business #lannin and control$
Budetar& control !as beco"e an essential tool of "anae"ent for controllin costs and "a3i"i5in #rofits$ It
"a& be concei(ed as one of t!e su#re"e e3a"#les of rationalit& in "anae"ent$
Adanta2e" o' Bud2etar5 Contro!:
T!e follo%in are so"e of t!e "ost sinificant ad(antaes of budetin:
[ Budetin co"#els "anae"ent to #lan for t!e future$ T!e budetin #rocess forces
[ "anae"ent to loo' a!ead and beco"e "ore effecti(e and efficient in ad"inisterin
O#erations$ It instills into "anaers t!e !abit of e(aluatin carefull& t!eir #roble"s and related (ariables
before "a'in an& decisions$
[ Budetin !el#s to coordinate, interate, and balance t!e efforts of (arious de#art"ents in t!e li!t of
t!e o(erall obDecti(es of t!e enter#rise$ T!is results in oal conruenc& and !ar"on& a"on t!e
de#art"ents$
[ Budetin facilities control b& #ro(idin definite e3#ectations in t!e #lannin #!ase %!ic! can be used
as a fra"e of reference for Dudin t!e subse6uent #erfor"ance$ Undoubtedl&, budeted #erfor"ance is
"ore rele(ant standard for co"#arison t!an #ast #erfor"ance since #ast #erfor"ance is bases on
!istorical factors %!ic! are constantl& c!anin$
[ Budetin i"#ro(es t!e 6ualit& of co""unication$ T!e enter#rise2s obDecti(es, budet oals, #lans,
aut!orit& and res#onsibilit& and #rocedures to i"#le"ent #lans are clearl& %ritten and co""unicated
t!rou! budets to all indi(iduals in t!e enter#rise$ T!is results in better understandin and !ar"onious
relations a"on "anaers and subordinates$
[ Budetin !el#s to o#ti"i5e t!e use of t!e fir"2s resources, bot! ca#ital and !u"an$ It aids in directin
t!e total efforts of t!e fir" into t!e "ost
[ Budetin "easures efficienc& and t!ereb& enables self,e(aluation b& t!e "anae"ent, it also indicates
t!e #roress "ade in attainin t!e enter#rise2s obDecti(es$
Mero Ba"e Bud2etin2 (MBB%: Bero Base Budetin is a ne% tec!ni6ue desined to re(itali5e budetin$ T!is
tec!ni6ue %as first used b& t!e U$S$ 8e#art"ent of Ariculture as lon bac' as in @GI@$ Te3as Instru"ents, a
"ultinational co"#an&, #ioneered its use in t!e #ri(ate sectors$ It %as Peter A$P&!rr %!o desined its loical
basic fra"e%or' in @G?< and successfull& de(elo#ed, i"#le"ented and #o#ulari5ed its %ider use in t!e #ri(ate
sectors$ 0e is, t!erefore, ri!tl& ter"ed as t!e M7at!er of Bero Base BudetinN$ T!e tec!ni6ue ained furt!er
"o"entu" in U$S$A$ %!en t!e President of U$S$A$ Mr$ )arter, in @G?G, issued a "andate as'in for use of BBB
tec!ni6ue t!rou!out t!e federal o(ern"ent aencies$ T!us, BBB re#laced to con(entional budetin
tec!ni6ue at t!e federal o(ern"ent le(el$ T!e tec!ni6ue is no% also ainin tre"endous foot!old in "an&
co""on%ealt! countries, #articularl& in )anada$ Institute of )!artered Accountants of India and t!e Institute of
)osts and -or's Accountants of India !a(e ad(ocated BBB tec!ni6ue$$
Bero base budetin *or re(ie%+, as t!e ter" suests, e3a"ines a #rora" of function or res#onsibilit& fro"
Mscratc!N$ T!e re(ie%er #roceeds on t!e assu"#tion t!at not!in is to be allo%ed$ T!e "anaer #ro#osin t!e
acti(it& !as, t!erefore, to #ro(e t!at t!e acti(it& is essential and t!e (arious a"ounts as'ed for are reasonable
ta'in into account t!e (olu"e of acti(it&$ T!us BBB "eans %ritin on a clean slate$ Bero,base budetin
#ro(ides t!e orani5ation %it! a s&ste"atic %a& to e(aluate different o#erations and #rora"s underta'en b&
t!e "anae"ent$ It enables "anae"ent to allocate resources accordin to #riorit& of t!e #rora"s$ It lin's
budets %it! t!e cor#orate obDecti(es$ Not!in %ill si"#l& be allo%ed onl& because it %as bein done in t!e
#ast, if it does not !el# in ac!ie(in t!e oals of t!e enter#rise$ It can be used for introduction and
i"#le"entation of t!e s&ste" of M"anae"ent b& obDecti(esN$ T!us, it can not onl& be used for fulfill"ent of
t!e obDecti(es of traditional budetin but it can also be used for a (ariet& of ot!er #ur#oses$
iii. "tan$ar$ *osting "yste+
#tandard costing is techni$ue of cost planning and control, based on scientific
analysis of elements of cost in terms of standard input % output norms and standard
rates % price per unit of input. &he folloing process is involved in setting and
practicing std. cost.
[ Establis! standard cost, co"#onent,%ise, for eac! out#ut
[ Measure t!e actual cost, co"#onent,%ise, for eac! out#ut
[ T!eir co"#arison %it! t!e actual costs and t!e "easure"ent of (ariances$
[ T!e location of res#onsibilit& for t!e (ariances and t!e correcti(e action to be ta'en$
[ T!e anal&sis of (ariances for ascertainin t!e reasons for t!e sa"e$
Establis!"ent of a Standard )ostin S&ste": T!e installation of Standard )ostin
S&ste" in a "anufacturin concern in(ol(es t!e follo%in ste#s:
[ Standardi5ation of functions i$e$, all acti(ities s!ould be standardi5ed and t!e tec!nical #rocesses of
o#erations s!ould also be susce#tible to #lannin$
[ Establis!"ent of )ost )entre
[ )lassification of Accounts i$e$, t!e different accounts can be codified and different s&"bol "a& be used
to facilitate s#eed& collection, anal&sis and re#ortin$
[ Settin u# of Standards: Standards "a& be basic *lon #eriod+ and current *s!ort #eriod+$
7ro" t!e #oint of (ie% of efficienc& le(el, t!e& %ill fall into t!ree broad cateories:
*a+ Strict idealE
*b+ Attainable or e3#ected9actual and
*c+ Loose$
T!e standard s!ould be realistic and attainable$ Unrealistic standards #ro(o'e resent"ent and de#ress
#erfor"ance$ Loose standard leads t!e "anae"ent to indule in self,conratulation$ Nor"all&, a #eriod of one
&ear is "ore realistic, as it coincides %it! t!e budet #eriod and t!e nor"al accountin #eriod$
%etting of %tandard osts: Standard )osts s!ould be deter"ined for eac! ele"ent of cost se#aratel& and
accuratel&$ Li'e a budet co""ittee in bi institutions, t!ere s!ould be a standards co""ittee or Standards
8i(ision %!ic! %ill be (ested %it! t!e %or' of settin standard costs$ T!e Standards )o""ittee enerall&
consists of all functional !eads li'e #rora" "anaer, #ersonal "anaer, etc$ Standard )osts: 7or an& i(en
#rora" or unit t!e follo%in standards "ust be deter"ined:
[ Standard "aterial costs
[ Standard labour costs
[ Standard direct costs
[ Standard (ariable o(er!ead costs
[ Standard fi3ed o(er!ead costs
[ Standard sellin #rices and #rofit
T!e standard direct "aterial cost is found b& "ulti#l&in t!e 6uantit& of "aterials to be #urc!ased %it! t!e rate
of a #rice at %!ic! t!e& are a(ailable$
8eter"ination of Standard Labour cost in(ol(es fi3ation of
[ standard labour rades
[ standard labour ti"es i$e$, standard !ours t!rou! MTi"e, Motion and 7atiue Stud&N %it! t!e !el# of
%or' stud& enineers and *c+ standard %ae rates based on ti"e rate, #iece rate and #re"iu" #lans$
Standard 8irect *e3#enses+ cost is an& e3#enditure *ot!er t!an direct "aterial and direct labour+ %!ic! is
directl& to be incurred on a s#ecific cost unit$ It is c!ared directl& to t!e #articular cost standard *account+
concerned$
Standard O(er!ead costs are classified as "anufacturin, ad"inistration$ sellin and distribution o(er!eads$
T!e& are also classified as fi3ed, (ariable and se"i,(ariable so t!at correct esti"ate for eac! class "a& be
#re#ared for t!e budet #eriod$ Standard o(er!ead rate is deter"ined on t!e basis of #ast records and future
trend of #rices$
8eter"ination of Standard 0our: Ti"e factor is co""on to all t!e o#erations$ So if standard costin /Standard
!our2 is a##lied to t!e 6uantit& of %or' or out#ut %!ic! s!ould be #erfor"ed in one !our$ A standard !our "a&
be defined as an !our %!ic! "easures t!e a"ount of %or' t!at s!ould be #erfor"ed in one !our under standard
conditions$ It !as a #ractical ad(antae in t!e "easure"ent of /Efficienc& Ratio2 and /Acti(it& Ratio2$
E''icienc5 ratio: Efficienc& ratio is t!e nu"ber of standard !ours e6ui(alent to t!e %or' #roduced, e3#ressed as
a #ercentae of t!e actual !ours s#ent in #roducin t!at %or'$
Standard !ours for actual #roduction
Efficienc& Ratio R XXXXXXXXXXXXXXXXXXXXXXX 3 @<<
Actual !ours for action #roduction
Actiit5 Ratio:
Acti(it& Ratio is t!e nu"ber of standard !ours e6ui(alent to t!e %or' #roduced, e3#ressed as a #ercentae of
budeted standard !ours$
Standard !ours for actual #roduction
Acti(it& Ratio R XXXXXXXXXXXXXXXXXXXXXXXXX3 @<<
Standard !ours for budeted #roduction
1.1.+.1 Ba!anced Score Card (BSC%: A Ne- Ea!uation S5"tem
T!e balanced score card *BS)+ !as beco"e a %idel& acce#ted #erfor"ance "easure"ent tool$ It %as de(elo#ed
and first used at Analo 8e(ices in @G=?$ B& focusin not onl& on financial outco"es but also on t!e custo"ers,
#rocesses and co"#etiti(e ca#abilities t!e balanced scorecard !el#s to #ro(ide a "ore co"#re!ensi(e (ie% of a
business %!ic! in turn !el#s orani5ations to act in t!eir best lon,ter" interests leadin to better o(erall
#erfor"ance$ T!e strateic "anae"ent s&ste" !el#s "anaers focus on #erfor"ance "etrics %!ile balancin
financial obDecti(es %it! custo"er, #rocess and e"#lo&ee #ers#ecti(es$ BS) "easures are often indicators of
future #erfor"ance$ Robert S$ >a#lan and 8a(id P$ Norton %or'ed on #ro#aatin t!e a##lication of BS) since
@GG<s$ >a#lan F Norton t!e"sel(es re(isited t!e scorecard %it! t!e benefit of a decade2s e3#erience since t!e
oriinal article$
T!e BS) is a #erfor"ance "easure"ent fra"e%or', %it! si"ilar #rinci#les as Manae"ent b& ObDecti(es$ It is
#laced alonside a##roac!es suc! as Acti(it& Based )ostin and Total Pualit& Manae"ent$ T!e Balanced
Scorecard #ro(ides "anaers %it! t!e instru"entation t!e& need to na(iate to future co"#etiti(e success$
T!e earliest Balanced Scorecards co"#rised si"#le tables bro'en into four sections:
,t&#icall& t!ese /#ers#ecti(es2 %ere labeled M7inancialN, M)usto"erN, MInternal Business ProcessesN, and
MLearnin F Gro%t!N$ 8esinin t!e Balanced Scorecard re6uired selectin fi(e or si3 ood "easures for eac!
#ers#ecti(e$ In t!e "id @GG<s an i"#ro(ed desin "et!od e"ered$ In t!e ne% "et!od, selection of "easures
%as based on a set of /strateic obDecti(es2 #lotted on a /strateic lin'ae "odel2 or /strate& "a#2$ -it! t!is
"odified a##roac!, t!e strateic obDecti(es are t&#icall& distributed across a si"ilar set of /#ers#ecti(es2 as is
found in t!e earlier desins, but t!e desin 6uestion beco"es sli!tl& "ore abstract$ Manaers !a(e to identif&
t!e fi(e or si3 oals t!e& !a(e %it!in eac! of t!e #ers#ecti(es, and t!en de"onstrate so"e inter,lin'in bet%een
t!e" b& #lottin causal lin's on t!e diara"$ 0a(in reac!ed so"e consensus about t!e obDecti(es and !o%
t!e& inter,relate, t!e Balanced Scorecard2s "easures are c!osen b& #ic'in suitable "easures for eac! obDecti(e$
T!is t&#e of a##roac! #ro(ides reater conte3tual Dustification for t!e "easures c!osen, and is enerall& easier
for "anaers to %or' t!rou!$ T!is st&le of Balanced Scorecard !as been t!e "ost co""on t&#e for t!e last ten
&ears or so$ Since t!e late @GG<s, (arious alternati(es to t!e Balanced Scorecard !a(e e"ered e3a"#les bein
T!e Perfor"ance Pris", Results Based Manae"ent and T!ird Generation Balanced Scorecard for e3a"#le$
Balanced Scorecard is a #erfor"ance "anae"ent tool, alt!ou! it !el#s focus "anaers2 attention on strateic
issues and t!e "anae"ent of t!e i"#le"entation of strate&$
It is i"#ortant to re"e"ber t!at Balanced Scorecard itself !as no role in t!e for"ation of strate&$ Balanced
Scorecard can co"fortabl& co,e3ist %it! strateic #lannin s&ste"s and ot!er tools$
>a#lan and Norton found t!at co"#anies are usin t!e scorecard to:
[ 8ri(e strate& e3ecution
[ )larif& strate& and "a'e strate& o#erational
[ Identif& and alin strateic initiati(es
[ Lin' budet %it! strate&
[ Alin t!e orani5ation %it! strate&
[ )onduct #eriodic strateic #erfor"ance re(ie%s to learn about and i"#ro(e strate&$
Balanced scorecards !a(e been i"#le"ented b& o(ern"ent aencies, "ilitar& units, cor#orate units and
cor#orations as a %!ole, non#rofits, and sc!oolsE "an& sa"#le scorecards can be found (ia -eb searc!es,
t!ou! ada#tin one orani5ation2s scorecard to anot!er is enerall& not ad(ised b& t!eorists, %!o belie(e t!at
"uc! of t!e benefit of t!e scorecard co"es fro" t!e i"#le"entation "et!od$
1.1.1.1 Compari"on BSC -it* App!ied In'ormation Economic"
A criticis" of balanced scorecard is t!at t!e scores are not based on an& #ro(en econo"ic or financial t!eor&
and !a(e no basis in t!e decision sciences$ T!e #rocess is entirel& subDecti(e and "a'es no #ro(ision to assess
6uantities li'e ris' and econo"ic (alue in a %a& t!at is actuariall& or econo"icall& %ell,founded$ T!e Balanced
scorecard does not #ro(ide a botto" line score or a unified (ie% %it! clear reco""endationsE it is si"#l& a list
of "etrics$ Positi(e res#onses fro" users of balanced scorecard "a& "erel& be a t&#e of #lacebo effect$ T!ere
are no e"#irical studies lin'in t!e use of balanced scorecard to better decision "a'in or i"#ro(ed financial
#erfor"ance of co"#anies$
A##lied Infor"ation Econo"ics *AIE+ !as been researc!ed as an alternati(e to Balanced Scorecards$ In :<<<,
t!e 7ederal )IO )ouncil co""issioned a stud& to co"#are t!e t%o "et!ods b& fundin studies side,b&,side
#roDects in t%o different aencies$ T!e 8e#t$ of Keterans Affairs used AIE and t!e US 8e#t$ of Ariculture
a##lied balanced scorecard$ T!e resultin re#ort found t!at %!ile AIE %as "uc! "ore so#!isticated, AIE
actuall& too' sli!tl& less ti"e to utili5e$ AIE %as also "ore li'el& to enerate findins t!at %ere ne%s%ort!& to
t!e orani5ation %!ile t!e users of balanced scorecard felt it si"#l& docu"ented t!eir in#uts and offered no
ot!er #articular insi!t$ 0o%e(er, balanced scorecard is still "uc! "ore %idel& used t!an AIE$
1.1.1.& T*e 'our per"pectie" o' BSC
T!e rou#in of #erfor"ance "easures in eneral cateories *#ers#ecti(es+ is seen to aid in t!e at!erin and
selection of t!e a##ro#riate #erfor"ance "easures for t!e enter#rise$
7our eneral #ers#ecti(es !a(e been #ro#osed b& t!e BS)$ T!ese are:
The financial perspective e3a"ines if t!e co"#an&2s i"#le"entation and e3ecution of its strate& are
contributin to t!e botto",line i"#ro(e"ent of t!e co"#an&$ It re#resents t!e lon,ter" strateic obDecti(es of
t!e orani5ation and t!us it incor#orates t!e tanible outco"es of t!e strate& in traditional financial ter"s$
So"e of t!e "ost co""on financial "easures t!at are incor#orated in t!e financial #ers#ecti(e are EKA,
re(enue ro%t!, costs, #rofit "arins, cas! flo%, net o#eratin inco"e etc$
The customer perspective defines t!e (alue #ro#osition t!at t!e orani5ation %ill a##l& in order to satisf&
custo"ers and t!us enerate "ore sales to t!e "ost desired *i$e$ t!e "ost #rofitable+ custo"er rou#s$ T!e
"easures t!at are selected for t!e custo"er #ers#ecti(e s!ould "easure bot! t!e (alue t!at is deli(ered to t!e
custo"er *(alue #osition+ %!ic! "a& in(ol(e ti"e, 6ualit&, #erfor"ance and ser(ice and cost and t!e outco"es
t!at co"e as a result of t!is (alue #ro#osition *e$$, custo"er satisfaction, "ar'et s!are+$ T!e (alue #ro#osition
can be centered on one of t!e t!ree: o#erational e3cellence, custo"er inti"ac& or #roduct leaders!i#$
The internal process perspective is concerned %it! t!e #rocesses t!at create and deli(er t!e custo"er (alue
#ro#osition$ It focuses on all t!e acti(ities and 'e& #rocesses re6uired in order for t!e co"#an& to e3cel at
#ro(idin t!e (alue e3#ected b& t!e custo"ers bot! #roducti(el& and efficientl&$ T!e clusters for t!e internal
#rocess #ers#ecti(e are o#erations "anae"ent *b& i"#ro(in asset utili5ation, su##l& c!ain "anae"ent, etc+,
custo"er "anae"ent *b& e3#andin and dee#enin relations+, inno(ation *b& ne% #roducts and ser(ices+ and
reulator& F social *b& establis!in ood relations %it! t!e e3ternal sta'e!olders+$
The learning and growth perspective focuses on t!e intanible assets of an orani5ation, "ainl& on t!e !u"an
s'ills and orani5ational ca#abilities t!at are re6uired to su##ort t!e (alue,creatin internal #rocesses$ T!e
learnin and ro%t! #ers#ecti(e is concerned %it! t!e Dobs *!u"an ca#ital+, t!e s&ste"s *infor"ation ca#ital+,
and t!e cli"ate *orani5ation ca#ital+ of t!e enter#rise$ T!ese t!ree factors relate to %!at >a#lan and Norton
clai" is t!e infrastructure t!at is re6uired for ac!ie(in a"bitious obDecti(es in t!e ot!er t!ree #ers#ecti(es$
T!is of course %ill be in t!e lon ter", since an i"#ro(e"ent in t!e learnin and ro%t! #ers#ecti(e %ill
re6uire certain e3#enditures t!at "a& decrease s!ort,ter" financial results, %!ilst contributin to lon,ter"
success$
3NE" apprai"a! o' Do"t Countr5 3ana2er" (DC3"%:
MN)s #rofoundl& affect t!e #rocess of lobali5ation #rinci#all& t!rou! t!eir subsidiaries, %!ic!, t!erefore,
#laces an i""ense de#endence on t!e subsidiar&$ T!e "anaers of subsidiaries, co""onl& called !ost countr&
"anaers *0)Ms+, are res#onsible for t!e #erfor"ance of t!e subsidiar& and t!e i"#le"entation of strateicall&
critical tas's, suc! as t!e "anae"ent of a nu"ber of staff and t!e ac!ie(e"ent of t!e re(enue and #rofitabilit&
tarets of t!e subsidiar&$ T!e 0)M "ust be able to "anae t!ese tas's %it!in t!e obDecti(es and uidelines
!anded do%n b& t!e MN)$ T!us, t!e MN)2s control of t!e subsidiar& and its 0)M are a central interatin
function in t!e MN)$ -!ere a subordinate and su#er(isor are eora#!icall& distant, reular feedbac' !as been
found to be i"#erati(e$
Infor"ation as&""etr& and oal inconruence (itiatin 0)Ms2 PAs: T!ese "ec!anis"s enable t!e MN) to
continuousl& e(aluate and i"#ro(e indi(idual, subsidiar& unit and cor#orate #erfor"ance aainst clearl&
defined, #reset obDecti(es t!at are directl& lin'ed to co"#an& strate&$ T!us, an effecti(e PA creates a
"ec!anis" t!at can ensure t!e 0)M and t!eir o(erseas subsidiaries are actin in accordance %it! t!e #arent
MN)2s interests$ -!ile t!ere is %ide reconition of t!e i"#ortance of PAs, "ost MN)s !a(e not effecti(el&
"anaed t!eir international a##raisals$ It !as been arued t!at "is"anae"ent of international PAs is #ri"aril&
due to infor"ation as&""etr& and oal inconruence bet%een t!e #arent co"#an& and its subsidiaries$
UNIT ,
CON(LICT IN INTERNATIONAL BUSINESS AND NE$OTIATIONS
4.1 INTRODUCTION
)onflict is /8isaree"ent t!rou! %!ic! t!e #arties in(ol(ed #ercei(e a t!reat to t!eir needs, interests or
concerns2$ )onflict is a state of discord caused b& t!e actual or #ercei(ed o##osition of needs, (alues and
interests$ )onflict tends to be acco"#anied b& sinificant le(els of "isunderstandin t!at e3aerate t!e
#ercei(ed disaree"ent considerabl& o(er actual disaree"ent$ It is a situation in %!ic! #eo#le #ercei(e a t!reat
*#!&sical, e"otional, #o%er, status, etc$+ to t!eir %ell,bein$ )onflicts contain substanti(e, #rocedural, and
#s&c!oloical di"ensions to be neotiated$
4.1.1 Con'!ict T5pe") Nature) 3ode") 3ani'e"tation" .Succe""ie p*a"e"
)onflict T&#es, Nature, Modes, Manifestations F Successi(e #!ases of conflicts are dealt !ere$
a. Con'!ict T5pe"
T!ere are se(eral t&#es of conflicts$ )onflict as a conce#t can !el# e3#lain "an& as#ects of social life, suc! as
social disaree"ent, conflicts of interests, conflict of roles, fi!t for su#re"ac& bet%een indi(iduals, rou#s, or
orani5ations, fa"il& conflict, etc$
In #olitical ter"s, MconflictN can refer to %ars, re(olutions or ot!er strules, %!ic! "a& in(ol(e t!e use of
force as in t!e ter" ar"ed conflict$ -it!out #ro#er social arrane"ent or resolution, conflicts in social settins
can result in stress or tensions a"on sta'e!olders$
Internal and e3ternal conflicts: In t!e #ersonal s#!ere, a conflict can be internal *%it!in oneself+ or e3ternal
*bet%een t%o or "ore indi(iduals+$ In t!e orani5ational s#!ere, a conflict can be internal *%it!in t!e
orani5ation+ or e3ternal *bet%een t%o or "ore orani5ations+$ In t!e national s#!ere, a conflict can be internal
*%it!in one nation+ or e3ternal *bet%een t%o or "ore nations+$
)onflicts /nested2 in conflicts, it is said$ 7or e3a"#le, conflict %it!in a %or' tea" "a& be t!e reflection of a
broader conflict in t!e orani5ation as a %!ole$A conflict is "ore t!an a "ere disaree"ent$
Professional )onflict: Go(ern"ental and MNEs2 business neotiators "a& start %it! "utual "istrust due to
!istoric ani"osit& or to differences in t!eir #rofessional status$ T!e MNE #eo#le "a& co"e ar"ed %it!
business and econo"ic data t!at o(ern"ental officials don2t full& understand, and t!e officials "a& counter
%it! so(ereint& considerations t!at are nearl& inco"#re!ensible to t!e business#eo#le$ It "a& ta'e
considerable ti"e before eac! side understands and a##reciates t!e ot!er2s #oint of (ie%$ Until t!en t!e created
conflicts can da"ae ood%ill$
Con'!ict e=i"t" in di''erent "*ade") "e2ment" and "i;e".
Intra#ersonal conflict
Inter#ersonal conflict,
E"otional conflict,
Grou# conflict,
Orani5ational conflict,
)o""unit& conflict,
Intra,state conflict
International conflict,
En(iron"ental resources conflict,
Ideoloical conflict,
8i#lo"atic conflict,
Econo"ic conflict,
Militar& conflict,
Reliious conflict,
-or'#lace conflict,
@. Nature o' con'!ict
(unctiona! <" D5"'unctiona! Con'!ict": )onflict could be functional %!en conflict e3#oses t!e s&ste"
deficienc& and t!e sa"e is rectified before an& cascadin catastro#!es result$ Absence of conflict does not "ean
e(er&t!in is fine$ T!is "a& conceal "ore rat!er t!an re(eal t!e realit&$ 8&sfunctional conflicts are disru#ti(e,
da"ain and destructi(e$ T!e "ore difficult t&#e of conflict is %!en (alues are t!e root cause$ It is "ore li'el&
t!at a conflict o(er facts, or assu"#tions, %ill be resol(ed t!an one o(er (alues$
Competition) Co-operation and Con'!ict": One s!ould not confuse t!e distinction bet%een t!e #resence and
absence of conflict %it! t!e difference bet%een co"#etition and co,o#eration$ E(en %!en conflict e3ists, #arties
aree to coo#erate to resol(e t!e sa"e$ E(en %!en coo#erati(e culture e3ists, t!ere "a& be conflict bet%een
#arties on certain as#ects of relations!i# t!at "a& reac! a flas! #oint$ A clas! of interests, (alues, actions or
directions often s#ar's a conflict$
Socia!) Et*nic and Racia! di''erence" and con'!ict": Social, Et!nic and Racial differences are t!e cause and
effect of conflicts alon suc! lines leadin to (irtual non,coo#eration, and so"eti"es illeal ar"ed
e3tra(aan5as$ Man& conflicts !a(e a su##osedl& racial or et!nic basis$ T!ese %ould include suc! conflicts as
t!e Bosnian,)roatian conflict, t!e conflicts in R%anda, in t!e Sri Lan' etc$ In t!e end t!e national fabric is torn
and all interests are affected$ Businesses are "uc! affected$
Tran"'ormin2 con'!ict into a productie !earnin2 e=perience: If #rocedures for identif&in conflicts li'el& to
arise, as %ell as s&ste"s t!at can constructi(el& "anae conflicts are a(ailable, it "a& be able to disco(er ne%
o##ortunities to transfor" conflict into a #roducti(e learnin e3#erience$ )reati(e #roble",sol(in strateies
are essential to #ositi(e a##roac!es to conflict "anae"ent$ )onflict is necessar& in life$ )onflict adds
e3cite"ent and sus#ense t!at 'indle creati(it& to e(ol(e %or'able solutions$
-est and East ne(er t!ou "eet: In -estern societ&, #ractitioners usuall& suest t!at atte"#ts to find "utuall&
beneficial solutions lead to t!e "ost satisfactor& outco"es, but t!is "a& not !old true for "an& Asian societies$
c. 3ode" o' Con'!ict
Orani5ational conflict %it!in t!e MNE li'e %or'#lace conflict, conflict bet%een t!e MNE and outer societies,
conflict bet%een t!e MNE and state9o(ern"ent of t!e !ost nation, non,tareted conflict li'e ci(il %ars, class
%ars, #olitical u#!ea(als t!at affect businesses #articularl& forein, di#lo"atic #roble"s bet%een countries t!at
s#ill o(er to businesses, e3ternal aression or internal disturbances or terrorist actions t!at affect forein
businesses, etc are i"#ortant t&#es of conflicts$ )oncerted action aainst a fir" suc! as econo"ic e"baro,
trade bloc'ade or co""unicati(e tirade b& rou#s of nations or b& bilateral or "ultilateral bodies also are for"s
of conflict$ Business conflicts li'e unDust un fa(our in lobal contracts a%ard or order #lace"ent, insufficient
#rotection to #ro#ert& 9 #arent 9 #eo#le 9 co#&,ri!ts etc also are conflicts or #otential conflicts$ O(er#rotecti(e
!o"e labour la%s, under,#rotecti(e business interests due to %ea' la%s o(ernin financial i"#ro#riet&, etc are
conflict #otent candidates$ Reliious,based conflicts de#ictin one or ot!er business rou#, do"estic or forein,
anti,reliious !a(e serious re#ercussions$
d. 3ani'e"tation" o' con'!ict"
)onflict can "anifest in di(erse for"s suc! as /social disaree"ent2, /fi!t o(er o%ners!i# interests2, bet%een
indi(iduals, rou#s, or orani5ations or countries or rou#s of countries of so"et!in, unDust or Dust aression
beco"in (andalistic (olition and so on$ In #olitical life, conflict "anifests in %ars, re(olutions or ot!er
strules, %!ic! "a& in(ol(e t!e use of force as in t!e ter" ar"ed conflict$
In t!e conte3t of t!is course, conflict "eans conflict bet%een t!e #arent9subsidiar& and t!e !ost countr&
ele"ents *"a& be o(ern"ent, local business rou#s, social interest rou#s, #olitical rou#s, en(iron"ental
rou#s, consu"er rou#s or so+$ )onflict e3ists M%!en t%o or "ore #arties, %it! #ercei(ed inco"#atible oals,
see' to under"ine eac! ot!er2s oal,see'in ca#abilit&N$
e. Succe""ie p*a"e" in con'!ict"
Se(eral t!eorists detect successi(e #!ases in t!e de(elo#"ent of conflicts$ Often a rou# finds itself in conflict
o(er facts, oals, "et!ods or (alues$ It is critical t!at it #ro#erl& identifies t!e t&#e of conflict it is e3#eriencin
if it !o#es to "anae t!e conflict t!rou! to resolution$ 7or e3a"#le, a rou# %ill often treat an assu"#tion as
a fact$ It is "ore li'el& t!at a conflict o(er facts, or assu"#tions, %ill be resol(ed$
4.1.& D5pot*e"e" concernin2 con'!ict"
T!eorists sa& #arties can conce#tuali5e res#onses to conflicts accordin to a t%o,di"ensional sc!e"e, na"el&,
concern for one2s o%n outco"es and concern for t!e outco"es of t!e ot!er #art&$ T!is sc!e"e leads to t!e
follo%in !&#ot!eses:
[ 0i! concern for outco"es of bot! leads to "utuall& beneficial solutions$
[ )oncern for one2s o%n outco"es onl& leads to atte"#ts to /%in2 t!e conflict$
[ Lo% concern for t!e o%n interest onl& leads to allo%in t!e ot!er to /%in2 t!e conflict$
[ Lo% concern for bot! side2s outco"es leads to atte"#ts to a(oid t!e conflict$
4.1.+ Oe5 term" in Con'!ict Scenario
Actors are indi(iduals, rou#s or institutions %!o contribute to conflict, or are affected b& conflict in a #ositi(e
or neati(e "anner or are enaed in dealin %it! conflict or associated in all or an& of t!ese$
)onflict sensiti(it& refers to t!e abilit& of an& orani5ation to: understand t!e conte3t in %!ic! it o#eratesE
understand t!e interaction bet%een its o%n acti(ities and t!e conte3tE and act u#on t!e understandin of t!is
interaction, in order to a(oid neati(e i"#acts and "a3i"i5e #ositi(e i"#acts$
)onte3t refers to t!e #olitical, econo"ic and social o#eratin en(iron"ent, %!ic! ranes fro" t!e #roDect le(el
to t!e "acro le(el *e$$ co""unit&, district9#ro(ince, reion*s+, countr& and nei!bourin countries+$
8e(elo#"ent refers to lon,ter" efforts ai"ed at brinin i"#ro(e"ents in t!e econo"ic, #olitical and social
status, en(iron"ental stabilit& and t!e 6ualit& of life of all se"ents of t!e #o#ulation$
I"#acts, #ositi(e or neati(e, describe an interaction in ter"s of its contribution to e3acerbatin or "itiatin
(iolence or t!e #otential for (iolence$
Peace,buildin is t!ose "easures desined to consolidate #eaceful relations and strent!en (iable #olitical,
socio,econo"ic and cultural institutions ca#able of "ediatin conflict, and to strent!en ot!er "ec!anis"s t!at
%ill eit!er create or su##ort t!e necessar& conditions for sustained #eace$
4.1.1 3NE" and Con'!ict
MNEs li(e %it! lobal conflict$ Kiolent conflict is a #ersistent feature of t!e international landsca#e and
#resents a serious c!allene for forein businesses in(estin in unstable societies t!rou!out t!e %orld,
es#eciall& #arts of Africa, Asia and Latin A"erica$ T!ere is a lare bod& of e(idence t!at s!o%s t!at
in(est"ents in unstable areas interact %it! t!e d&na"ics of (iolent conflict at bot! local and national le(els$
So"e co"#anies !a(e res#onded %it! acti(e enae"ent in t!e debate on business and conflict$
Multi,sta'e!older #rocesses suc! as t!e >i"berle& Process )ertification Sc!e"e, t!e E3tracti(e Industr&
Trans#arenc& Initiati(e *EITI+, t!e UN Global )o"#act and t!e Koluntar& Princi#les on Securit& and 0u"an
Ri!ts *KPs+ see' out s!ared solutions to #roble"s$ Since t!e @G=<s, #olitical ris' anal&sis and en(iron"ental
and social i"#act *ESIA+ standards !a(e been in a state of e(olution, co"#le"ented b& increasinl&
so#!isticated understandins of t!e a##ro#riate relations!i# bet%een business and !ost societies, and of
/cor#orate social res#onsibilit&2 *)SR+$
Con'!ict ri"8
)onflict ris' is t!e ris' t!at a #roDect2s de(elo#"ent, construction or o#erations "a& be ad(ersel& affected b&
t!e outbrea' of (iolent conflict$ It can be a "aDor t!reat to a #roDect2s credit%ort!iness$ 8e"onstrations and
bloc'ades b& local co""unities, sabotae of #roDect installations or facilities, 'idna##in or assault to staff,
outbrea' of (iolent clas!es bet%een ar"ed rou#s, de"andin of #a&"ents b& ar"ed rou#s to #roDect
s#onsors, etc$ are all of t!e e3#ressions of (iolence$ T!ese can i"#ose direct costs to an in(est"ent, includin
re#utational and e(en leal c!allenes arisin fro" #ro3i"it& to t!ese factors$
3NE proKect" are t*e cau"e or tri22er" o' con'!ict"
No #roDect located in a conflict,#rone area %ill be neutral$ T!at is, Dust as a #roDect "a& be ad(ersel& affected b&
(iolent conflict at t!e #roDect or national itself %ill !a(e an i"#act on t!e conflict conte3t %it!in %!ic! it is
located$ T!e #roDect and its conte3t t!us "ust be understood to !a(e a t%o,%a& relations!i#$ E(en %!ere
conflict a##ears to be eora#!icall& far fro" a #roDect, it is #ossible t!at in(est"ents, in conte3ts %!ere
resources are scarce, %ill soon beco"e #art of t!e conflict d&na"ic and beco"in a source of !ei!tened
co"#etition locall&$ 8ecisions t!at s#onsors ta'e reardin #roDect location, desin and "anae"ent !a(e t!e
#otential to i"#act and distort conflict le(els and d&na"ics t!ereof$ 8ecisions on t!e distribution of
e"#lo&"ent o##ortunities, securit& arrane"ents, relations!i#s %it! #olitical actors, en(iron"ental usae and
i"#act, location of installation, and e(en social in(est"ent and co""unit& relations acti(ities often #ro(ide t!e
trier %!ic! s#ar's #re,e3istin structural and #ro3i"ate conflict factors into (iolence, to t!e detri"ent of t!e
#roDect itself$ Understandin #re,e3istin tensions, and !o% a #roDect "a& i"#act u#on t!e", is t!us central to
i"#ro(ed conflict ris' assess"ent$
4.1.4. Con'!ict a cau"e o' concern to 3NE") 3u!ti!atera! @odie" and 2!o@a! ine"tor"
Kiolent conflict is of concern to in(estors$ It can also occur at "ore locali5ed le(els, and at t!e sa"e ti"e
al%a&s !as t!e #otential to escalate$ Bet%een @GG< and :<<I nu"ber of ar"ed conflicts rose s!ar#l&$ T!ere
%ere o(er :<< ar"ed conflicts, about @?< of %!ic! %ere larel&, #ri"aril& or e3clusi(el& internal conflicts
-!ile so"e of t!e conflicts t!at eru#ted in t!e earl& @GG<s !a(e ostensibl& been /ended2 %it! #eace aree"ents$
T!e incidence of inter,state (iolent conflict o(erall !as continued to increase$ Most countries co"in out of
(iolent conflict re(ert to %ar %it!in fi(e &ears, it is researc!ed$ Peace aree"ents do not necessaril& alter t!e
factors t!at led to conflict in t!e first #lace$
Toda&2s landsca#e of #ersistent (iolent conflict t!rou!out "uc! of t!e de(elo#in %orld is co"#licated b& t!e
securit& t!reat #osed b& terroris"$ Al Paeda2s attac's in t!e United States in :<<@ brou!t terroris" to t!e
forefront of #olitical leaders2 aendas t!rou!out t!e %orld, leadin to US,led "ilitar& ca"#ains in
Af!anistan and Ira6 as %ell as increasinl& stron leislati(e "easures to su##ort t!e /%ar on terror2$
Globali5ation !as not brou!t a balanced increase in access to econo"ic, #olitical and social o##ortunities in all
countries$ Terroris" "a& be s&"#to"atic of a %ide rane of social, econo"ic and #olitical stresses e3#erienced
in different #arts of t!e %orld$ Ta'in account of root causes and conductin "eaninful anal&sis of conflict
d&na"ics on t!e #art of all actors enaed in eit!er de(elo#"ent,oriented or #ri(ate sector acti(ities in
de(elo#in countries beco"es all t!e "ore #ertinent in toda&2s %orld$
In addition, #roDect financiers978I #ro(iders are #articularl& e3#osed to conflict ris' due to t!e non,
recourse9li"ited recourse nature of t!e financin structure "eanin t!at loans and bonds are re#aid based on t!e
re(enues enerated b& t!e #roDect itself$ )reditors do not !a(e /recourse2 to t!e #roDect s#onsors if t!e #roDect is
not successful or if difficulties in debt re#a&"ent are encountered$ 0ence, #roDect financiers need to be
es#eciall& concerned about "anain t!eir e3#osure to conflict,related credit ris's$ Business interru#tions can
lead to #roDect do%nti"e$ Leal inDunctions can lead to e3#ensi(e dela&s$ Larer co"#ensation #ac'aes can
create cost,o(erruns$
4.1.: Importance o' "tud5 o' con'!ict" 'or 3NE"
MNEs are co""ittin billions of dollars in in(est"ent all o(er t!e %orld$ T!e& !a(e e3#ort and i"#ort trades$
Millions of #eo#le %or' in forein countries in different MNEs$ T!ese are t!e sta'es MNEs !a(e$
7irst, since t!e @G=<s t!ere !as been increased interest in #roDect finance 9 78I, #articularl& in e"erin "ar'et
countries in Latin A"erica and Asia$ ProDect finance 9 78I is no% co""onl& used to fund in(est"ents in
de(elo#in countries to increase return and s#read out ris'$ Indeed, #roDect finance 9 78I is "ore li'el& to be
used %!ere t!ere is !i! #olitical ris' in t!e !ost countr&$ Often t!rou! #roDect finance 9 78I s&ndicates %!ic!
%ill include international lendin orani5ations suc! as I7), IBR8, MIGA or e3#ort credit aencies, ris' of
da"ae to #roDect 9 78I, default on loans is reduced$ Often t!ese s&ndicates %!ic! offer #olitical influence to
deter !ost o(ern"ents fro" "a'in decisions t!at %ill ad(ersel& affect t!e #roDect finance 9 78I$ 7urt!er, for
e3a"#le, a financier t!at "a& nor"all& li"it its e3#osure in Peru "i!t consider financin t!e )a"isea Gas
8e(elo#"ent ProDect, %!ic! is based in Peru but %!ose ris's are "itiated b& #roDect finance loan co(enants$
T!e s!arin of ris' b& nu"erous #arties to a #roDect finance 9 78I deal lo%ers t!e e3#osure to ris' of an
indi(idual financier$ 8e(elo#in countr& o(ern"ents can also find #roDect finance deals a##ealin, in t!at t!e&
facilitate t!e entr& of bi forein in(estors$ T!is can #ro(ide o##ortunities for a(oidin "ore #ublic debt %!ilst
at t!e sa"e
4.1.E Co"t" o' con'!ict on proKect"
T!e cost of conflict is co"#osed of : 8irect )ost : 7ees of la%&ers and ot!er #rofessionalsE Producti(it&
)ost:Kalue of lost ti"e, di"inis!ed ca#acit& and t!e o##ortunit& cost of %!at t!ose in(ol(ed %ould ot!er%ise
be #roducinE )ontinuit& )ost: Loss of onoin relations!i#s includin t!e Mco""unit&N t!e& e"bod&E
E"otional )ost: T!e #ain of focusin on and bein !eld !ostae b& our e"otions$
T!ere are nu"erous recent e3a"#les of #roDects t!at !a(e incurred direct and indirect costs as a result of
conflict$ 7or instance, in :<<@ attac's on )olo"bia2s )amo Li"nn,)o(emas oil #i#eline b& insurent rou#s
resulted in a direct loss of earnins of a##ro3i"atel& US L;<< "illion in t!at &ear alone$ Si"ilarl&, uerilla
rou#s o##osed to forein co"#anies !a(e routinel& sabotaed t!e Ocensa #i#eline in )olo"bia, %it! state
securit& forces bein accused of serious !u"an ri!ts abuses in atte"#tin to secure t!e #i#eline$ T!e attac's
t!e"sel(es !a(e led to o#erational dela&s and re#utational da"ae to #roDect s#onsor Britis! Petroleu"$
Enron2s 8ab!ol #o%er #lant in India faced a series of construction dela&s as a result of (e!e"ent local
o##osition, de"onstrations and t!e filin of a leal inDunction b& affected #o#ulations %!o belie(ed t!e #lant
%as bein built in a %a& t!at (iolated t!eir ri!ts$
-!ile #roDect s#onsors %ill introduce a rane of "easures to reduce t!e ris' of dela&s, #roDect ris' assess"ent
and "itiation "a& not include a t!orou! anal&sis of t%o,%a& conflict ris' i"#acts, and as suc! t!e ris' of
dela&s caused b& conflict "a& not be ade6uatel& dealt %it!$ Table @ su""ari5es so"e #otential direct and
indirect costs of conflict to #roDects t!rou!out (arious #roDect staes$
Ta@!e 4. 1 /otentia! Direct and Indirect Co"t" on /roKect" due to Con'!ict
.ust as conflict can i"#ose a rane of direct and indirect costs on a #roDect t!rou!out t!e #roDect life,c&cle, so
too %ill #roDects !a(e an i"#act on t!e local en(iron"ental, econo"ic, #olitical and social conte3t in %!ic!
t!e& are de(elo#ed$ 7or e3a"#le, at t!e #roDect le(el, a natural resource e3traction #roDect %ill !a(e an i"#act
on local land,use$
T!e #roDect "a& re6uire t!e resettle"ent of local co""unities %!ic! "a& be a source of resent"ent and #rotest
aainst t!e #roDect b& t!ose co""unities$ In addition, resettle"ent "a& !a(e a secondar& conflict i"#act of
#uttin strains on relations bet%een relocated and !ost co""unities 1 and co"#ensation #ro(ided to resettled
co""unities %ill not necessaril& sol(e t!e #roble"$ Rat!er, t!e #a&"ent of cas! co"#ensation %ould "ean an
influ3 of "one& into t!e local subsistence econo"& %!ic!, in turn, "a& lead to co"#ensated indi(iduals
beco"in t!e tarets of e3tortion$ T!e #roDect s#onsor "a& face de"ands for increased co"#ensation fro" bot!
resettled co""unities and ot!er actors$
At t!e "acro,le(el le(el, t!e s#onsor2s acti(ities %ill also interact %it! so"e of t!e structural correlates of
conflict outlined abo(e$ 7or instance, a #roDect s#onsor "a& #a& fees, ta3es or s!ares #roduction re(enues %it!
t!e national o(ern"ent of an underde(elo#ed countr& %it! a trac' record of corru#tion$ If t!at o(ern"ent
does not ensure t!e econo"ic benefits of t!e #roDect are e6uall& distributed, a #ercei(ed inade6uate s!are of
re(enue to t!e #roDect localit& can increase alienation and tensions$ -!ere t!e o(ern"ent is o(erl& de#endent
on t!e #roDect, t!is "a& also lead to an increased state securit& #resence in t!e #roDect2s (icinit&, as %ell as a
cla"#do%n on dissent$
4.1.F Re"o!ution o' Con'!ict"
)onflicts "ust be resol(ed$ )ontinuance of conflicts is not ood for an& one$
Unresol(ed conflicts ulti"atel& "a& escalate into "aDor catastro#!e %it! disastrous conse6uences$ Unresol(ed
conflicts at t!e indi(idual le(el "a& lead to reat stress and brea' of t!e #ersonE at t!e orani5ational le(el "a&
lead to brea' of co""unication and e(entuall& t!e orani5ation itselfE at t!e national le(el #er"anent da"ae
to t!e national fabric and e(en disinteration of t!e nation$ E(en t!e once "i!t& USSR %as no e3ce#tion$
T!e case of Africa is %orr&in$ T!e (arious (iolent conflicts t!at !a(e afflicted Africa for t!e #ast centur& !a(e
e3acted an incalculable toll on t!e continent2s societies, #olities, and econo"ies, robbin t!e" of t!eir
de(elo#"ental #otential and de"ocratic #ossibilities$
T!e causes of t!e conflicts are as co"#licated as t!e c!allenes of resol(in t!e" are difficult$ 4et efforts at
resolution of conflicts are needed$ Neotiation is i"#ortant to resol(e conflicts$ Before t!at t!e fuellin causes
"ust be identified and c!ec'ed$ T!e de(elo#"ent #roDects so"eti"es lead to conflicts and t!e sa"e "ust be
resol(ed$ It is !ere t!e MNEs and "ultilateral de(elo#"ent ban'ers co"e in t!e #icture as leaders of suc!
#roDects$ 8ue dilience b& t!e" %ill do %ell$ Besides t!e %orld le(el bodies can !el# contain conflicts
le(erain t!eir ric! e3#erience in suc! actions$
H$:$ LEARNING OB.E)TIKES
[ To #resent )onflict T&#es, Nature, Modes of conflict, Manifestations of conflict
and t!e Successi(e #!ases of conflict
[ To #resent t!e 0&#ot!eses and >e& ter"s in )onflict Scenario
[ To brin out t!e ne3us bet%een MNEs and )onflicts
[ To e3a"ine !o% is )onflict a cause of concern to MNEs and lobal in(estors
[ To e3#lain t!e i"#ortance of stud& of )onflicts for MNEs
[ To discuss t!e direct and indirect costs of )onflict
[ To #resent t!e )auses of Orani5ational )onflicts
[ To #resent t!e causes of ProDect Related )onflicts
[ To e3#lain t!e causes of Kiolent )onflicts
[ To discuss t!e )auses and triers of )onflicts
[ To e3#lain T!o"as,>il"ann )onflict Mode for dealin %it! Orani5ational )onflicts *A(oidance,
)ollaboration, )o"#ro"ise, )o"#etition and Acco""odation
[ To #resent )onflict Resolution "et!ods for ProDect Related )onflict suc! as Political Ris' Insurance,
)o(enants and -arranties, Political U"brella, En!anced
8ue 8ilience, Encourain better conflict ris' "anae"ent b& #roDect s#onsors and Encourain better
conflict ris' "anae"ent b& #roDect s#onsors t!e"sel(es$
[ To #resent t!e Sco#e of Neotiations bet%een Go(ern"ent and MNEs
[ To discuss t!e Neotiation Process in International Business
[ To e3#lain t!e )ultural and Lanuae 7actors Affectin Neotiations
[ To i(e t!e role of International 7inance )or#oration *I7)+ in )onflict Resolution
[ To i(e t!e role of Multilateral In(est"ent Guarantee Aenc& *MIGA+
[ To i(e t!e role of International )!a"ber of )o""erce
[ To i(e t!e role of International )entre for Settle"ent of In(est"ent 8is#utes
[ To i(e t!e role of -orld Trade Orani5ation
[ To elucidate "easures t!at M8Bs, R8Bs, E)As and ot!ers can follo% for conflict resolution
4.+ (ACTORS CAUSIN$ CON(LICT
T!e factors causin conflict are di(erent$ T!e factors differ for orani5ational conflicts, #roDect conflicts and
so on$
4.+.1 Cau"e" o' Or2ani;ationa! Con'!ict"
46%tructural factors cause orani5ational conflict$ Structural factors nor"all& i"#ose riidit& %!ile businesses
need d&na"ic adDust"ent$ Personnel %!o could not tend or "end t!e orani5ation, but re6uired to s!o%
tareted results see conflict bet%een res#onsibilit& and aut!orit&$ T!is is an orani5ational conflict$
%pecialization of functions in orani5ations leads to conflict because enerall& t!e e3#erts in fields fail to
aree$ It is usual for /n2 e3#erts to co"e %it! /nS@2 (ie%s$ 0ence t!e conflict t!at blo%s$ Tec!nical
orani5ations !a(e t!is #roble"$
Interdependence amongst organizational divisions?departments is t!e order of t!e da& and conflicts de(elo#
bet%een de#art"ents because one de#art"ent is eit!er let!aric in its co""it"ent or it is o(er,s"art and ot!ers
could not find !o"e$ As none can o#erate %it!out t!e ot!er, conflict arises$ T!is is an orani5ational conflict$
%haring ommon )esources such as a facility leads to conflict because one #erson9 di(ision o(er dra%s and
t!e de#ri(ed ot!ers disaree to #ull toet!er$ T!is is an orani5ational or social conflict$ T!ere are societies
clai"in sta'e in t!e sa"e resource 1 land, %ater, te"#le, etc$ interstate %ater dis#utes and conflicts are
co""on in Sout! India$ In so"e (illaes sta'es to access te"#les #ose conflicts$
Goal 8ifferences suc! as one #erson %ants to #us! #roduction and ot!ers %ant RF8 to rise, leadin to conflict$
T!is is an orani5ational conflict$ T!e #arent orani5ation and subsidiar& "a& see different o##ortunities and
conflict "utuall&$
4uthority relationships "a& lead t!e boss and e"#lo&ees beneat! !i"9!er do not see in t!e sa"e inclination,
es#eciall& %!en t!e boss clai"s /boss is al%a&s ri!t2, conflict arises$ T!is is an orani5ational conflict$
%tatus Inconsistencies suc! as e3cessi(e9scant& #o%er, #o%er %it!out sincerit&, and too "uc! #oliticall&
c!ared at"os#!ere cause conflict$ T!is is an orani5ational$
Inconsistencies in asset endowments cause conflict$ Ma& be it is class conflict t!e co""unists leaders #roDect$
1urisdictional 4mbiguities %!o %ill re#ort9disci#line %!o lead to conflict in issuin and recei(in
co""unications$ T!is is a 'ind of intra,orani5ation conflict$
-ersonal .actors like perversion& misunderstanding& selfishness, etc of #eo#le lead to conflict of o#inions and
actions t!ereafter$ T!is !a##ens at !o"e 9 office 9 #ri(ate or social or official at!erins$
-ersonality clash %!ere t%o e6uall& #laced #ersons or !eads do not si"#l& acce#t one anot!er, leads to
conflict$
-erception differences %!ere t!e sensiti(it& or understandin of #eo#le on certain #!eno"ena differs, lead to
conflict$
<a!ue" and Et*ic" can cause conflicts$ 8ifferin co""it"ent le(els to, or inter#retation of Kalues and Et!ics
of #eo#le "a& lead to conflict$ E(entuall& /"eans,ends2 tussle eru#t$
ommunication barriers result in no co""unication, "issile,li'e co""unication or "isleadin
co""unication$ E(entuall& so"e%!at lon,ter" conflicts for"$
ultural 3ifferences, )ulture tells #eo#le %!at e"otions ou!t to be e3#ressed in #articular situations and
%!at e"otions are to be felt$ )ultures differ$ T!ese differences li'e lac' of tolerance for di(ersit& result in
conflict of cultures$ One suests rituals si"#l& not acce#table to ot!ers$ )onflicts cree#$
*motion causes result in conflicts$ )onflict in(ol(es e"otion because so"et!in /triers2 it$ T!e e(ents
trierin conflict are e(ents t!at elicit e"otion$ So"e !old t!e (ie% t!at /)onflict is e"otionall& defined and
dri(en2, and /does not e3ist in t!e absence of e"otion2$
)onflict is e"otionall& defined and is e"otionall& (alenced$ E"otion le(els durin conflict can be intense or
less intense$ T!e intensit& le(els "a& be indicati(e of t!e i"#ortance and "eanin of t!e conflict issues for eac!
#art&$ -!ere a##licable, t!ere are "an& co"#onents to t!e e"otions t!at are intert%ined %it! conflict$ T!ere
are be!a(ioral, #!&sioloical and coniti(e co"#onents$
B% Be*aiora!: T!e %a& e"otional e3#erience ets e3#ressed %!ic! can be (erbal or non(erbal and intentional
or un,intentional$
c+ /*5"io!o2ica!:
T!e bodil& e3#erience of e"otion$ T!e %a& e"otions "a'e us feel in co"#arison to our identit&$ )oniti(e:
T!e "ental #rocess of Massessin or a##raisinN an e(ent to re(eal its rele(anc& to oneself$
T!ese t!ree co"#onents collecti(el& constitute /e"otional e3#erience2 deter"ined b& cultural (alues, beliefs,
and #ractices2$ T!e e"otion,conflict relations!i# is not acce#table to t!e Econo"ists$
Scarcit& leads to conflict, accordin to Econo"ists$ T!is is not acce#table to Ps&c!oloists$ It can be said,
scarcit& of e"otional balance is t!e cause of conflictT 8e#ri(ation, econo"ic or e"otional, leads t!e conflict$ In
t!e circu"stance of econo"ic de#ri(ation e"otional disturbances are rational as %ell$ T!us subDect of conflict is
#urel& rational and related to de#ri(ation$
Moral stance leads to conflict$ -!en an e(ent occurs it can be inter#reted as "oral or i""oral$ .udin
so"et!in as i""oral "a& lead to conflict$
Identit& or indi(idualit& issues "a& lead to conflict$ E"otions and Identit& are a #art of conflict$ -!en a #erson
'no%s t!eir (alues, beliefs, and "orals t!e& are able to deter"ine %!et!er t!e conflict is #ersonal, rele(ant, and
"oral$ Identit& related conflicts are #otentiall& "ore destructi(e$ )onflict is relational$ )onflict is relational in
t!e sense t!at e"otional co""unication con(e&s relational definitions t!at i"#act conflict$ >e& relational
ele"ents are #o%er and social status$
Societies %it! %ea' institutions %itness "ore conflicts: Kiolent conflict is "ore co""on in societies %it! %ea'
institutions and c!ronic #o(ert&$ Of t!e A: countries in t!e lo% !u"an de(elo#"ent section of t!e 08I table, ::
!a(e e3#erienced conflicts at so"e #oint since @GG< and fi(e of t!ese e3#erienced !u"an de(elo#"ent
re(ersals o(er t!e decade *UN8P :<<;+$ 7urt!er"ore, conflict i(es rise to c!ain reactions t!at #er#etuate and
e3tend econo"ic losses: a slo%in econo"&, %ea' rule of la%, corru#tion and an uncertain securit& settin
re#resent #o%erful disincenti(es for in(est"ent
1.+.& Cau"e" o' /roKect Re!ated Con'!ict"
Lare infrastructure #roDects and conflicts: Second, lare infrastructure #roDects and conflicts o toet!er$
Multilateral ProDect finance is a %idel& used "et!od for financin lare infrastructure #roDects and certain t&#es
of natural resource e3traction acti(ities li'e #o%er #lants, oil and as #i#elines and !&droelectric da"s, for
e3a"#le$ T!ese acti(ities are often lin'ed to conflicts at local and national le(els due to t!eir strateic
sinificance, t!eir lare en(iron"ental, social and re(enue /foot#rint2, and t!e need to #rotect suc! assets %it!
securit& forces$ Lare #roDects "a& re6uire resettle"ent, alienate co""unities fro" t!eir land, or ot!er%ise
affect socio,cultural rou#s %!ose needs are not addressed b& t!e o(ern"ent or t!e #roDect$ In addition, natural
resource e3traction #roDects are enerall& associated %it! t!e #!eno"enon 'no%n as t!e /resource curse2, %!ic!
describes t!e structural lin' t!at !as been de"onstrated to e3ist bet%een de#endence on natural resources and
underde(elo#"ent or conflict$ So #roDect finance often occurs in t!e conte3t of de(elo#in countries and
sociall&9en(iron"entall& sensiti(e lare #roDects$
ProDect loans9ad(isin9#ro"otion for contro(ersial #roDects and conflicts: ProDect finance dra%s a clear line of
res#onsibilit& connectin financiers %it! t!e social i"#acts caused b& #articular #roDects$ 7or e3a"#le, a ban'
t!at arranes a #roDect loan for a contro(ersial da" can run t!e ris' of bein !eld #ublicl& accountable for
ca#itali5in t!at #roDect and for t!e conflict t!at "i!t ensue at t!e ti"e of deli(erin #roDects$
)a#ital fli!t and "one& launderin and conflicts: E(er& corru#t dictator t!at !as transferred "one& offs!ore
for #ersonal enric!"ent !as done so %it! t!e aid of corres#ondent and9or #ri(ate ban'in ser(ices$ Suc! rand,
scale corru#tion often correlates %it! (iolent conflict$ A US ban' %as un'no%inl& in(ol(ed in a case %it! a
for"er )!ilean dictator$
7inancial ad(isin and conflicts: 7inancial ad(isin is an i"#ortant ser(ice offered to so(erein o(ern"ents,
but so"eti"es t!is ad(ice is e"#lo&ed for dubious ends$ T!is !a##ened in Pa#ua Ne% Guinea a decade ao in
@GG? and a London based financial ser(ice #ro(ider %as un'no%inl& in(ol(ed in t!is$
So(erein loans9bonds9boo',runners and conflicts: 7inanciers #ro(ide loans to so(erein o(ern"ents t!at "a&
enae in !u"an ri!ts abuses or %ar,"onerin acti(ities$ A#art!eid Sout! Africa used a U>,based ban' to
fund suc! acti(ities$ Guate"ala2s lin's to !u"an ri!ts abuses and #olitical re#ression %as inad(ertentl&
facilitated b& so(erein bond offerins b& t%o international in(est"ent ban'er based in Ne% 4or', US$
7inancin state,o%ned enter#rises and conflicts: Accordin to t!e NGO Global -itness, /"uc! of t!e "one&
fro" loans fro" lobal ban'ers es#eciall& fro" S%iss ostensibl& ot for fundin an Anolan state,o%ned oil
co"#an& %as used to #urc!ase %ea#ons$
Trade facilities indirectl& used to %ar,#ur#oses and conflicts: Merc!ant ban's #ro(ided trade facilities t!at
enabled o(ern"ents to i"#ort %ea#ons, co""unications e6ui#"ent, and ot!er articles of %ars$ 7inanciers
"a& also su##ort t!e "anufacture of t!ese ite"s$
E3#ort credits and su##ort of ar"s sales and conflicts: A sinificant #ro#ortion of e3#ort credit uarantees
a%arded b& ban's in su##ort of t!e defense industr& to reconi5ed so(erein o(ern"ents and in line %it!
international reulation !as sli##ed into fault& !ands$
Con'!ict commoditie" and con'!ict":
Ti"ber, cobalt, tin, dia"onds, old and oil "a& enerate !ard currenc& for t&rannical rei"es, ci(il %ar or
(iolent conflict, as !as been t!e case in so"e African countries suc! as Liberia and Anola$ Lin's bet%een
international financial "ar'ets and conflict co""odities are %ell docu"ented$ Terrorist orani5ations !a(e
started "a'in "one& t!rou! t!e in(est"ent "ar'ets, it is re#orted, e(en in de(elo#ed countries$
Do"t $oernment" a2ain"t t*e 3NE proKect":
0ost Go(ern"ents are aainst t!e MNE #roDects in so"e countries no% and "ost countries A decades ao$
-!en t!e .anata Part& ca"e to #o%er in India durin @G?? at t!e national le(el follo%in t!e E"erenc&,
Industr& Minister Geore 7ernandes forced t!e e3it of )oca,)ola fro" t!e countr&$ So"eti"es "aDor #olitical
#arties out of #o%er and in atte"#t to catc! on to #o%er,ladder Dust cr& foul aainst MNE #roDects or s!un out,
sourcin to a t!ird countr& so"e lo% end Dobs t!rou! subsidiaries of co"#anies of t!eir countries$ T!e& can
%!i# #ublic outcr& b& si"#l& fuellin #assion aainst MNEs or t!eir outfits$
4.+.+ Cau"e" 'or <io!ent Con'!ict"
Kiolent conflicts occur %!en t%o or "ore #arties belie(e t!eir interests to be inco"#atible, e3#ress !ostile
attitudes, or ta'e actions t!at da"ae t!e ot!er2s abilit& to #ursue its interest$ )onflict is a d&na"ic #rocess %it!
co"#le3 causes, and "a& ta'e differin for"s and runs t!rou! (arious staes of escalation and de,escalation$
It can turn into (iolence$ /Kiolence2 is often used interc!aneabl& %it! /conflict,2 but (iolence is onl& one
"eans a"on "an& t!at #arties c!oose to address a i(en conflict$ )onflict beco"es (iolent %!en #arties no
loner see' to attain t!eir oals #eacefull&, but instead resort to (iolence in one for" or anot!er$ -!en (iolence
eru#ts, it sinifies a #rofound brea'do%n in social relations!i#s t!at is li'el& to !a(e lon,ter" and far,reac!in
destructi(e /)onflict2 is also so"eti"es erroneousl& confused %it! "acro,#olitical (iolence bet%een effects$
Social, Et!nic and Racial differences and conflicts: Social, Et!nic and Racial differences lead to conflict alon
suc! lines leadin to (irtual non,coo#eration, and so"eti"es ar"ed e3tra(aan5as$ Man& conflicts !a(e a
su##osedl& racial or et!nic basis$ T!ese %ould include suc! conflicts as t!e Bosnian,)roatian conflict, t!e
conflicts in R%anda, in t!e Sri Lan' etc$ In t!e end t!e national fabric is torn all interests are affected$
Businesses are "uc! affected$
Poor Go(ernance, -ea'est Econo"ies, Po(ert& and 0i!est )orru#tion: Poor Go(ernance, -ea'est
Econo"ies, Po(ert& and 0i!est )orru#tion are "aDor causes of (iolent conflicts$ So"e of t!e African
countries suffer t!is ris'$
4.+.1. Cau"e" and tri22er" o' Con'!ict"
)onflict is so"eti"es (ie%ed in t!e cor#orate %orld as a se#arate /issue2 t!at can be addressed in isolation fro"
ot!er /issues2 suc! as !u"an ri!ts, t!e en(iron"ent or sustainable de(elo#"ent$ 0o%e(er, conflict is a cross,
cuttin t!e"e or conte3t 1 a (iolent "anifestation of tensions t!at "a& !a(e arisen for a (ariet& of reasons *e$$
!u"an ri!ts abuses, en(iron"ental scarcit& or deradation, unDust o(ernance, econo"ic insecurit&+$ Researc!
institutions, international orani5ations and ot!ers !a(e "ade atte"#ts at "odelin indi(idual ris' factors t!at
lead to t!e brea' out of (iolent conflict$ To bein to understand conflict, and !o% infrastructure, resource
e3traction and ot!er #roDects "a& interact %it! conflict, it is useful to structure t!in'in about (iolent conflict in
ter"s of structural and #ro3i"ate causes, and triers$ Table : i(es t!e details of t&#es of causes and triers
of conflict$
Table ;$:: T&#es of )auses of conflict
Source: International,Alert Orani5ation,-eb,#ublications
Relations!i# bet%een correlates of conflict and conflict: It s!ould not be assu"ed t!at (iolent conflict is
ine(itable %!ere t!e correlates listed abo(e are #resent in a #articular countr&$ E6uall&, a conflict "a& brea' out
%!ere so"e or "ost of t!ese correlates do not e3ist$ 0o%e(er, a ood o(er(ie% of a countr&2s conflict
correlates and !ence it /conflict conte3t2 can assist in understandin t!e o(erall le(el of conflict ris'$
4.1 CON(LICT RESOLUTION ACTIONS
)onflicts "ust be resol(ed at t!e earliest before t!e& assu"e #ro#ortions$ T!ere are be!a(ioural and
ad"inistrati(e "easures$ T!e be!a(ioural "easures deal %it! orani5ational conflicts, %!ile ad"inistrati(e
"easures address #roDect related conflicts$ )onflict resolution actions for orani5ational conflicts and #roDect
related conflicts are dealt in t!is section$
4.1.1 T*oma"-Oi!mann Con'!ict 3ode 'or dea!in2 -it* Or2ani;ationa! Con'!ict"
Orani5ational )onflicts are resol(ed "ostl& t!rou! be!a(ioral "easures$ T!o"as,
>il"ann )onflict Mode Instru"ent is one of t!e tools used to assess an indi(idual2s be!a(ior in conflict
situations$ Researc! !as s!o%n t!at t!ere are fi(e basic st&les or "odes for !andlin conflict$ T!e T!o"as
>il"ann )onflict Mode Instru"ent #ro(ides a #rofile of indi(iduals and tea"s t!at indicates t!e a"ut of
conflict,!andlin s'ills %!ic! one uses in t!e 'inds of conflict situations one faces$ 7i(e basic %a&s of
addressin conflict, na"el& A(oidance, )ollaboration, )o"#ro"ise, )o"#etition and Acco""odation %ere
identified b& T!o"as and >il"an$ T!is is suited for orani5ational conflicts$
a$ Aoidance:
A(oid or #ost#one conflict b& inorin it, c!anin t!e subDect, etc$ A(oidance can be useful as a te"#orar&
"easure to bu& ti"e or as an e3#edient "eans of dealin %it! (er& "inor, non,recurrin conflicts$ In "ore
se(ere cases, conflict a(oidance can in(ol(e se(erin a relations!i# or lea(in a rou#$ If %e a(oid discussin
t!e conflict at all, bot! #arties "a& re"ain clueless about t!e real underl&in issues and concerns, onl& to be
dealin %it! t!e" in t!e future$ A(oidin is a co""on res#onse to t!e neati(e #erce#tion of conflict$ MPer!a#s
if %e don2t brin it u#, it %ill blo% o(er,N %e sa& to oursel(es$ But, enerall&, all t!at !a##ens is t!at feelins
et #ent u#, (ie%s o une3#ressed, and t!e conflict festers until it beco"es too bi to inore$ Li'e a cancer t!at
"a& %ell !a(e been cured if treated earl&, t!e conflict ro%s and s#reads until it 'ills t!e relations!i#$ Because
needs and concerns o une3#ressed, #eo#le are often confused, %onderin %!at %ent %ron in a relations!i#$
@. Co!!a@oration:
-or' toet!er to find a "utuall& beneficial solution$ -!ile t!e T!o"as >il"an rid (ie%s collaboration as t!e
onl& %in,%in solution to conflict, collaboration can also be ti"e,intensi(e and ina##ro#riate %!en t!ere is not
enou! trust, res#ect or co""unication a"on #artici#ants for collaboration to occur$ )ollaboratin is t!e
#oolin of indi(idual needs and oals to%ard a co""on oal$ )ollaboration re6uires asserti(e co""unication
and coo#eration in order to ac!ie(e a better solution t!an eit!er indi(idual could !a(e ac!ie(ed alone$ It offers
t!e c!ance for consensus, t!e interation of needs, and t!e #otential to e3ceed t!e Mbudet of #ossibilitiesN t!at
#re(iousl& li"ited our (ie%s of t!e conflict$ It brins ne% ti"e, ener&, and ideas to resol(e t!e dis#ute
"eaninfull&$ If %e collaborate, %e "a& not ain a better solution t!an a co"#ro"ise "i!t !a(e &ielded, but
%e are "ore li'el& to feel better about our c!ances for future understandin and ood%ill$
c. Compromi"e:
7ind a "iddle round in %!ic! eac! #art& is #artiall& satisfied$ )o"#ro"isin is an a##roac! to conflict in
%!ic! #eo#le ain and i(e in a series of tradeoffs$ -!ile satisfactor&, co"#ro"ise is enerall& not satisf&in$
-e eac! re"ain s!a#ed b& our indi(idual #erce#tions of our needs and don2t necessaril& understand t!e ot!er
side (er& %ell$ -e often retain a lac' of trust and a(oid ris',ta'in$ If %e co"#ro"ise, %e "a& feel O> about
t!e outco"e, but still !arbor resent"ents in t!e future$
d. Competition:
Assert one2s (ie%#oint at t!e #otential e3#ense of anot!er$ It can be useful %!en ac!ie(in one2s obDecti(es
out%ei!s one2s concern for t!e relations!i#$
)o"#etin is a st&le in %!ic! one2s o%n needs are ad(ocated o(er t!e needs of ot!ers$ It relies on an aressi(e
st&le of co""unication, lo% reard for future relations!i#s, and t!e e3ercise of coerci(e #o%er$ T!ose usin a
co"#etiti(e st&le tend to see' control o(er a discussion, in bot! substance and round rules$ T!e& fear t!at loss
of suc! control %ill result in solutions t!at fail to "eet t!eir needs$ )o"#etin tends to result in res#onses t!at
increase t!e le(el of t!reat$ If %e use a co"#etin st&le, %e "i!t force t!e ot!ers to acce#t /our2solution, but
t!is acce#tance "a& be acco"#anied b& fear and resent"ent$
e. Accommodation:
Surrender one2s o%n needs and %is!es to acco""odate t!e ot!er #art&$ Acco""odatin, also 'no%n as
s"oot!in, is t!e o##osite of co"#etin$ Persons usin t!is st&le &ield t!eir needs to t!ose of ot!ers, tr&in to
be di#lo"atic$ T!e& tend to allo% t!e needs of t!e rou# to o(er%!el" t!eir o%n, %!ic! "a& not e(er be stated,
as #reser(in t!e relations!i# is seen as "ost i"#ortant$ If %e acco""odate, t!e relations!i# "a& #roceed
s"oot!l&, but %e "a& build u# frustrations t!at our needs are oin un"et$
Table A i(es t!e "a##in of conflict resolution "easures in ter"s of !i!,lo% co"binations of satisf&in o%n
needs Ks Satisf&in ot!er2s needs$
Ta@!e + Con'!ict Re"o!ution 3ea"ure" 3apped
4.1.& /roKect Re!ated Con'!ict Re"o!ution
ProDect Related )onflict Resolution "easures are ad"inistrati(e in nature$ In order to "itiate t!e rane of
conflicts facin #roDects in ris'& e"erin "ar'ets, financial institutions !a(e access to a (ariet& of "itiation
strateies, includin insistin on substantial co""it"ents fro" s#onsors in t!e for" of e6uit& to ensure t!e
#roDect is ade6uatel& co(ered$ T!e (er& use of #roDect finance itself is a ris' "itiation tool as it allo%s ris's to
be s!ared a"onst t!e nu"erous #arties to a transaction$ 0o%e(er, in eneral, /softer2 non,co""ercial ris's
suc! as en(iron"ental and social ris's are usuall& considered "itiated t!rou!
/En(iron"ental and Social I"#act Assess"ents2 *ESIAs+ and t!e inclusion of co(enants in lendin aree"ents
t!at re6uire ad!erence to en(iron"ental "anae"ent #lans$ Political ris's are, in turn, enerall& "itiated b&
transferrin t!e ris' to insurers$
4.1.&.1 /o!itica! Ri"8 In"urance (/RI%
Political ris' insurance *PRI+ traditionall& #ro(ides in(est"ents %it! co(er for e3#ro#riation, currenc&
incon(ertibilit& or non,transfer and #olitical (iolence co(erin #!&sical da"ae to an asset as a result of
#oliticall& "oti(ated stri'es, riots, ci(il co""otion, terroris", sabotae, %ar, and9or ci(il %ar$ )o(erae for
business interru#tion and conse6uent loss of #rofit and co"#ensation for defaults caused b& #olitical (iolence is
also #ro(ided b& PRI$
S#onsors and lenders %ill often transfer #olitical ris' to insurers$ Actuall&, #olitical ris' insurance is a #re,
re6uisite for lendin set do%n b& ban's$
Pros and )ons of PRI: PRI #re"iu"s are !i!, co(erae ca#acit& in t!e insurance "ar'et is li"ited, and co(er
#ro(ided is enerall& bound to be restricti(e$ PRI %ill t&#icall& co(er s#ecified e(ents and reasons for #roDect
losses rat!er t!an offerin a co"#re!ensi(e #olic&$ Unforeseen #roble"s can t!erefore lea(e #roDect de(elo#ers
and financiers e3#osed to losses$ PRI tends to focus on #ri"aril& co(erin #olitical ris's t!at e"anate fro"
national o(ern"ents *suc! as currenc& incon(ertibilit&+ and as suc! can o(erloo' conflict ris's faced b&
#roDects t!at "a& e"ere fro" t!e structural and #ro3i"ate causes of conflict outlined abo(e, suc! as #oor
o(ernance and corru#tion, or et!no,nationalist tensions$
T!e #ro(ision of PRI "a& create a "oral !a5ard %!ereb& t!e #ro(ision of PRI itself "a& result in s#onsors not
!a(in an incenti(e to ta'e ste#s necessar& to a(oid e3acerbatin conflict in t!e #roDect2s s#!ere of influence$
T!at is, t!e #resence of PRI "a& #er(ersel& #ro"ote a lac' of consideration of #otential conflict i"#acts of t!e
t%o,%a& relations!i# bet%een a #roDect and t!e surroundin conflict conte3t$ T!is bein so, it is in t!e interests
of #roDect s#onsors, lenders and insurance #ro(iders to alin insurance %it! i"#ro(ed conflict,ris' "itiation
and "anae"ent #ractices at #roDect le(el$ PRI does not co(er "an& of t!e sub,state ris's t!at #roDects in
conflict,#rone areas are li'el& to face$
/RI @5 3I$A, A criti6ue: Multilateral In(est"ent Guarantee Aenc& *MIGA+, a PRI #ro(ider, !as been
critici5ed for failin to consider t!e interconnections bet%een different co"#onents of #olitical ris', and
assessin %!et!er a client2s business acti(ities %ill ara(ate t!ese ris's: /)i(il unrest or (iolent #rotest "a& in
e3tre"e cases "anifest itself in attac's on #roDect #ersonnel or acts of sabotae$ Alternati(el&, it can trier
abuses of t!e ri!ts of #roDect affected #eo#le$ Suc! e(ents can !a(e #rofound i"#acts on t!e co""unities in
t!e (icinit& of #roDects and on t!e re#utation of a #roDect o#erator, %it! #otential ri##le effects for t!e #ro(iders
of finance or insurance$ T!is also !olds true for en(iron"ental !a5ards or incidents, %!ic! can cause
en(iron"ental, re#utational and financial da"aes2$ T!e #ro(ision of PRI !as been critici5ed b& NGOs for
benefitin onl& t!e #roDect co"#anies %!o "a& suffer losses as a result of #olitical e(ents, and not t!e !ost
co""unities %!ic! "a& also be ad(ersel& affected, #otentiall& as a result of conflict e3acerbated b& t!e #roDect
itself$
Recentl&, MIGA2s su##ort of a "inin #roDect in conflict,ridden 8e"ocratic Re#ublic of )ono *8R)+ !as
e3#osed t!e %ea'nesses in its a##roac!$ Si"ilarl&, as PRI "a& be seen #urel& as a tool to #rotect a #roDect2s
creditors, PRI #ro(iders are also critici5ed for failin to encourae #roDect s#onsors to ad!ere to basic social and
en(iron"ental safeuards$
4.1.&.&. Coenant" and #arrantie"
Non,co""ercial ris's *includin en(iron"ental and social ris's+ "a& be "itiated t!rou! t!e inclusion of
restricti(e co(enants and %arranties into credit and insurance aree"ents re6uirin t!e #roDect co"#an& to
ensure ris's are "anaed a##ro#riatel& at t!e #roDect le(el$ T!ese include re6uire"ents t!at en(iron"ental
"anae"ent #lans and co""unit& su##ort "ec!anis"s be i"#le"ented$
Pros and )ons: Li"ited infor"ation is in t!e #ublic arena on t!e t&#e of co(enants and %arranties used b&
financial institution$ In #articular, because of t!e confidential and deal,s#ecific nature of co""ercial
aree"ents, it is unclear !o% effecti(e suc! %arranties are in ensurin s#onsor co"#liance %it! international
best #ractice in en(iron"ental and social ris' "anae"ent$ T!ere is #artl& a lac' of s&ste"atic assess"ent of
conflict ris' as %ell$
Monitorin and co"#liance are i"#ortant issues to consider in t!e conte3t of co(enants and %arranties$ -!ile
#roDect lenders %ill e"#lo& inde#endent consultants to conduct co"#liance,oriented due dilience tests of t!e
#roDect #rior to releasin funds to t!e #roDect$ But t!ese are in,effecti(e$ T!e En(iron"ental and Social Re(ie%
Procedures *ESRP+ follo%ed b& MIGA re6uire t!e institution2s clients to #ro(ide %arranties and assurances t!at
en(iron"ental and social issues %ill be "anaed effecti(el&$ MIGA does not s&ste"aticall& assess client
ca#acit& to ad!ere to suc! %arranties$
4.1.&.+ /o!itica! Um@re!!a"
T!e /#olitical u"brella2 conce#t ensures t!at !ost o(ern"ents %ill be far less li'el& to ta'e certain actions suc!
as e3#ro#riation of forein in(estor assets, e3acerbate (iolent conflicts and riots t!at %ould disru#t forein
business$ T!e in(ol(e"ent of I7) or an& ot!er M8B in a #roDect en!ances t!e /sta"# of a##ro(al2 of #roDects$
7or instance, t!e #roDect s#onsors of t!e )!ad,)a"eroon #i#eline acti(el& sou!t t!e in(ol(e"ent of I7) and
ot!er M8Bs to "itiate t!e !i! #olitical ris's of de(elo#in t!e #roDect t!rou! t%o underde(elo#ed, conflict,
#rone countries$
Pros and )ons: M8B in(ol(e"ent and an e3tensi(e en(iron"ental i"#act assess"ent "a& lo%er t!e ris's
facin t!e #roDects$ But enerall& no co"#re!ensi(e conflict ris' i"#act assess"ent is conducted$ T!e /#olitical
u"brella2 offered b& M8Bs t!rou! t!eir s&ndication #rora"s is "eant to encourae #ri(ate sector
in(ol(e"ent inris'ier "ar'ets, but is no uarantee t!at #roDects co(ered b& t!e u"brella %ill be conflict,ris'
free$
M8Bs !a(e considerable influence in de(elo#in countries, and t!e "aDorit& of M8Bs do consider a rane of
social, en(iron"ental and #olitical issues as a #art of due dilience$ Onl& %!en M8Bs finance #roDects t!at
#ro(ide conflict,sensiti(e, sustainable contributions in ris'ier "ar'ets, in line %it! co""it"ents to #ro"otin
#eaceful "ar'ets, t!e #olitical #rotection offered b& t!e #resence of a "ultilateral aenc& %ill be assured$
4.1.&.1 En*anced Due Di!i2ence
)onflict ris' and i"#act assess"ent "ust be "ade a #art of standard due dilience #rocedures$ B& assessin t!e
t%o,%a& relations!i# bet%een a #roDect and t!e conte3t in %!ic! it is de(elo#ed, #roDect financiers %ill be in a
better #osition to understand t!e nature of conflict ris' t!at "a& affect$
8ue dilience "a& be en!anced in se(eral %a&s$ T!ese are #laced under A !eads, na"el&, )ountr& Assess"ent ,
0u"an Ri!ts and /No,o2 )riteria$
a. Compre*en"ie Countr5 A""e""ment:
A co"#re!ensi(e )ountr& Assess"ent %ill sol(e "ost of t!e conflicts related to #roDect i"#le"entation b&
MNEs$ T!e )ountr& Assess"ent s!ould co(er t!e follo%in, a#art ot!ers$
i. $oernance i""ue":
Is t!e countr& an autocrac& or de"ocrac&C If t!e countr& a /de"ocrac&,2 !as t!ere been an& (iolence been
associated %it! election or #olitical #art& acti(ities or #roble"s related to t!e credibilit& of election results in
t!e last fi(e &earsC -!ere is t!e countr& ran'ed on corru#tion inde3esC 0as t!ere been #olitical instabilit& in t!e
#ast t!ree &earsC 8oes t!e countr& #re(ent freedo" of e3#ressionC
ii. Economic i""ue":
0as t!ere been a recent econo"ic crisis or declineC -!at is t!e countr&2s ran'in on t!e 0u"an Po(ert& Inde3C
Is one identifiable rou# *e$$ et!nic, cultural+ at a serious econo"ic disad(antae o(er anot!erC
iii. Socio-cu!tura! i""ue":
0o% lare is t!e countr&2s #o#ulation and ro%t! rate, and is t!ere a sinificant urban9rural di(ideC Are t!ere
different et!no nationalist rou#s s#read une(enl& in different reionsC 0a(e lare #o#ulations relocated to or
%it!in t!e countr& or reion due to (iolenceC
i($ Securit5 i""ue":
-!at is annual o(ern"ent "ilitar& e3#enditure !i! as a #ercentae of G8PC 8oes t!e o(ern"ent !a(e
difficult& in controllin state securit& forces, includin "ilitar&, #olice, intellience and "ilitia rou#s, or t!e
acti(ities of #ri(ate securit& co"#aniesC Are state o##osition rou#s ar"edC 0as t!ere been a !istor& of (iolent
conflict, and is t!ere currentl& (iolence in t!e countr&C Are t!ere an& incidences of rou# (iolence in a
nei!bourin countr&C
@. Duman Ri2*t" Comp!iance A""e""ment (DRCA%:
Effecti(e 0u"an Ri!ts )o"#liance Assess"ent is "ost needed to address t!e issue of conflicts in t!e
i"#le"entation of o(erseas #roDects$ 0R)A on,line dianostic tool is a(ailable %!ic! is desined to #ro"ote
better cor#orate #erfor"ance b& co"#anies b& !el#in t!e" to detect #otential !u"an ri!ts (iolations caused
b& t!e effect of t!eir o#erations on e"#lo&ees, local residents and all ot!er sta'e!olders$ T!e tool ai"s to
#ro(ide co"#anies %it! useful infor"ation about !o% to deal %it! !u"an ri!ts issues rele(ant for t!eir
#articular o#erations, and runs on a database containin o(er A;< 6uestions and @<<< corres#ondin !u"an
ri!ts indicators, de(elo#ed fro" t!e Uni(ersal 8eclaration of 0u"an Ri!ts, t!e @GII 8ual )o(enants and
o(er =< ot!er "aDor !u"an ri!ts treaties and con(entions$ T!e 0R)A %eb,based interface allo%s eac!
co"#an& to select 6uestions in t!e database to suit t!eir t&#e of business and area of o#erations$ -!en a
6uestionnaire is co"#lete, t!e co"#uter #rora" enerates a final re#ort identif&in areas of co"#liance and
non,co"#liance in t!e co"#an&2s o#erations$ Nu"eric scores are included in t!e re#ort to !el# t!e co"#an&
re#ort, i"#ro(e and trac' its #erfor"ance fro" &ear to &ear$ T!e standards and indicators in t!e database are
u#dated on an annual basis, based on feedbac' fro" bot! co"#an& users and !u"an ri!ts rou#s$ T!is ensures
t!at t!e tool continuousl& addresses t!e real life #roble"s faced b& co"#anies and reflects t!e c!anes and
de(elo#"ents in international !u"an ri!ts la%$
c.7No-2o9 Criteria:
In so"e countries, t!e #robabilit& of conflict ris' affectin a #articular #roDect "a& be so !i! t!at fro" t!e
conflict,sensiti(e #ers#ecti(e it %ould be un%ise for an in(est"ent to #roceed$ 8ue dilience screenin s!ould
alert #roDect financiers and insurers to t!is #ossibilit&$ -!ere(er a #roDect is located in an area %!ere !u"an
ri!ts abuses are currentl&, or !a(e been, co""itted in t!e recent #ast, financiers s!ould consider a(oidin t!e
#roDect$
4.1.+.4 Encoura2in2 @etter con'!ict ri"8 mana2ement @5 proKect "pon"or"
If conflict ris's and #otential i"#acts are co"#re!ensi(el& assessed durin due dilience, t!e loical ne3t ste#
is to identif& and i"#le"ent conflict ris' "itiation "easures$ One o#tion is for lenders to %or' %it! s#onsors
to ensure #roDects are de(elo#ed and o#erated in a conflict,sensiti(e "anner$ T!is "a& lead to t!e incor#oration
of %arranties and co(enants in loan aree"ents$ 7or instance, an aree"ent "a& include a %arrant& t!at t!e
#roDect s#onsor*s+ !as conducted a #roDect,le(el ris' assess"ent, as %ell as %it! co(enants re6uirin t!at t!e
s#onsor co"#l& %it! conflict,sensiti(e business #ractices, for instance, b& de"onstratin ad!erence to t!e
Koluntar& Princi#les on 0u"an Ri!ts and Securit&$
;$; ROLE O7 NEGOTIATIONS IN INTERNATIONAL BUSINESS
Neotiation is an interaction of influences %!ic! include t!e #rocess of resol(in dis#utes, areein u#on
courses of action, barainin for indi(idual or collecti(e ad(antae, or craftin outco"es to satisf& (arious
interests$ Neotiation is t!us a for" of alternati(e dis#ute resolution$ In a successful neotiation, e(er&one %ins$
T!e obDecti(e s!ould be aree"ent, not (ictor&$ E(er& desire t!at de"ands satisfaction and e(er& need to be
"et,is at least #otentiall& an occasion for neotiation$ -!ene(er #eo#le e3c!ane ideas %it! t!e intention of
c!anin relations!i#s and %!ene(er t!e& confer for aree"ent, t!e& are neotiatin$
Basic ele"ents of Neotiation: Neotiation in(ol(es t!ree basic ele"ents: #rocess, be!a(ior and substance$ T!e
#rocess refers to !o% t!e #arties neotiate: t!e conte3t of t!e neotiations, t!e #arties to t!e neotiations, t!e
tactics used b& t!e #arties, and t!e se6uence and staes in %!ic! all of t!ese #la& out$ T!e be!a(ior refers to t!e
relations!i#s a"on t!ese #arties, t!e cordialit& of co""unication bet%een t!e" and t!e st&les t!e& ado#t$ T!e
substance refers to %!at t!e #arties neotiate o(er: t!e aenda, t!e issues #ositions and , "ore !el#full& ,
interests+, t!e o#tions, and t!e aree"ent*s+ reac!ed at t!e end$
S'illed neotiators "a& use a (ariet& of tactics ranin fro" neotiation !&#nosis, to a strai!t for%ard
#resentation of de"ands or settin of #reconditions to "ore dece#ti(e a##roac!es suc! as c!err& #ic'in *cases
or data to #ro(e one2s line of aru"ent as correct+$ Inti"idation and sala"i tactics *di(ide and rule+ "a& also
#la& a #art in s%a&in t!e outco"e of neotiations$
4.4.1 Ne2otiation" @et-een $oernment and 3NE"
0o"e and !ost countries e(aluate business #ro#ositions of MNEs fro" t!eir #oints
of (ie%$ No% t!e tendenc& is %elco"in MNEs$ So t!e e(aluation relates to si5e, #lace, #roduct, #rice, #rocess,
#eo#le and #artners!i# related issues$ Lot "ore neotiations ta'e #lace %!ene(er consensus is not reac!ed on
"aDor issues$ 0ere co"es t!e i"#ortance of business,o(ern"ent relations!i#s$ In India ri!t no% !alf,a,do5en
front,line states (ie %it! eac! ot!er to %oo "ore MNE #roDects, outfits or so %it!in t!e fra"e%or' of Union
Go(ern"ent2s #olic&$ -!ere o(ern"ent itself is a #artner of t!e #roDect, neotiation bet%een o(ern"ent and
t!e MNE ta'e #lace directl&$ -!ile Go(ern"ents %ant "a3i"u" fro" t!e MNE outfit, MNEs barain for best
ter"s$ But countries and co"#anies do co"e to aree"ents t!at, alt!ou! not usuall& ideal for eit!er #art&$ But
t!e beinnin is sufficient for an e(ol(in relations!i#$ T!e business neotiations and di#lo"ac& bet%een
co"#anies and o(ern"ents deter"ine t!e ter"s of international business o#erations$
3NE"9 attitude to $oernmenta! Stipu!ation"
MNEs2 attitude to Go(ern"ental Sti#ulations "a& be one of co"#l&in$ T!is is !i!l& #ositi(e$ In a
!ierarc!ical (ie% of o(ern"ental aut!orit&, co"#anies acce#t reulations as /i(ens2, and MNEs co"#l& %it!$
Occasionall& t!e& tr& to circu"(ent, a(oid or re#udiate o#eratin because of t!e reulations$ MNEs co"#l&
%it! Go(ern"ent reulations %!en t!e reulations don2t undul& constrain t!eir desired "ode of o#erations,
%!en benefits are sufficientl& attracti(e in s#ite of reulations, and %!en t!e& cannot #racticall& alter t!e
reulations to t!eir benefit$ MNEs %ill circu"(ent or et around t!ose reulations t!e& find unacce#table
t!rou! loo#!oles, leal or illeal$ 7or e3a"#le, a fir"2s abilit& to control a forein subsidiar& in s#ite of a
countr&2s re6uire"ent for s!ared o%ners!i# "i!t be #ossible if t!e co"#an& "a'es a side aree"ent %it! a
local #artner not to e3ercise t!e latter2s (otin ri!ts$A(oidance is a(oidin doin business in t!e locale$ It is
neati(e$ A si"#le tas'$ Re#udiation is t!e re(erse of co"#liance as t!e MNE decides not to follo% t!e
reulations or so"e of t!e sa"e in a i(en locale and is #re#ared to face conse6uences$ T!is is not onl&
neati(e, but also #ro(ocati(e$
One-"ided a2reement" ti!t t*e ot*er -a5 in due cour"e
As t!e !ost countr& and t!e MNE "a& eac! control assets t!at are useful to t!e ot!er, conflicts arise due to oal
difference, different "asters controllin t!e destin& of one fir" and so on$ Eac! %ants to !a(e barainin ede
o(er t!e ot!er$ T!e neotiated ter"s for a forein in(estor2s o#erations de#end on !o% "uc! t!e in(estor, and
t!e !ost countries need eac! ot!er2s assets$ T!ere can be neotiated one,sided concessions if eit!er t!e MNE or
t!e countr& !as assets t!at t!e ot!er stronl& desires and t!ere are fe% or no alternati(es for ac6uirin t!e"$ In
t!e earl& #eriods, t!e Middle,East countries de#ended "ost on -estern Oil )o"#anies for oil e3#loration or
refinin as t!e& didn2t !a(e t!e e3#ertise$ 7e% lare co"#anies do"inated t!e e3traction, #rocessin, s!i#"ent,
and final sale$ T!e econo"ies %it! #etroleu" de#osits could do little but acce#t t!e ter"s t!e& %ere offered
because t!e& lac'ed alternati(es for e3#loitin t!eir oil$ If a o(ern"ent refused t!e ter"s, a co"#an& could
easil& find anot!er countr& t!at %ould acce#t a si"ilar #ro#osal no% as t!e su##l& of oil di"inis!ed and
#etroleu",#roducin countries found alternati(es, t!e ter"s raduall& fa(ored #roducin countries$ Of course,
t!ere are (ast differences in barainin strent! a"on countries, a"on industries, and a"on co"#anies$
/o"itie "um "o!ution !a"t" 'or !on2 t*an ;ero-"um "o!ution
T!e barainin relations!i# bet%een MNEs and o(ern"ents de#ends (er& "uc! on %!et!er t!e #arties see
aree"ents as 5ero,su" or #ositi(e su" solutions$ In a 5ero,su" solution one #art&2s ain e6uals t!e ot!er
#art&2s loss$ T!ere is no %a& bot! can ain$ It is %in,lose or lose,%in s&ndro"e$ Positi(e,su" solution is t!at
bot! #arties !a(e net benefits or ains$ It is %in,%in solution$ MNEs b& #roDectin t!e %in,%in #ossibilities can
enter countries t!at are enerall& !ostile to forein businesses$ T!e line of aru"ent de#ends on barainin
strent!$ Parties !a(in co"#etiti(e strent! "i!t #ress a %in,lose solution, %!ile a %ea' #art& "i!t #ress
%in,%in solution$
Countr5 Bar2ainin2 Stren2t* !ie" in t*eir Ine"tor (riend!ine"" and Opportunitie"
-!at constitutes countr& barainin strent!C Better Go(ernance, Econo"ic U#s%in and 0ei!t, Sound
Infrastructure, 0i! )aliber 0u"an Resources, )ulturall& )os"o#olitan
Societ&, etc$ "a'e t!e nations attracti(e for in(estors, assu"in in(est"ent a(enues still not e3!austed$ T!ere
are countries %it! !i!er barainin strent! li'e United States, )anada, U>, 7rance, .a#an, Sina#ore, Sout!
>orea and Ger"an&$ Generall&, co"#anies #refer to establis! in(est"ents in !i!l& de(elo#ed countries
because t!ose countries offer lare "ar'ets and a !i! deree of #olitical stabilit&$ T!ese countries are lare
reci#ients of forein in(est"ent$ Because t!e& are suc! attracti(e countries to in(est in, t!e& "a'e fe%
concessions to MNEs$ In all of t!ese countries, !o%e(er, reional areas (ie for in(est"ents b& offerin
incenti(es$ In t!e recent &ears t!e BRI) countries *Bra5il, Russia, India and )!ina+ (ie %it! eac! ot!er to attract
"ore 78I fro" t!e MNEs$ -it!in t!ese countries se(eral States tr& to attract t!e MNEs to t!eir territor& b&
offerin freebies li'e ta3 !olida&, infrastructure ad(ances, etc$ If offered incenti(es fit closel& %it! co"#anies2
cor#orate strateies and %!en co"#anies belie(e t!at t!e o(ern"ent !as t!e credibilit& to fulfill its #ro"ises,
MNEs #ut u# t!eir (entures$
3NE9" Bar2ainin2 Stren2t* !ie" in Core Competence Brand and Ot*er EHuitie"
So"e MNEs !a(e traditionall& enDo&ed better barainin #ositions t!an ot!ers$ T!eir stature in ter"s of lobal
#resence, co"#etiti(eness, brand e6uit& and financial strent! outs"art t!e rest$ Suc! MNEs can dictate ter"s
to countries$ T!e barain struc' bet%een t!e forein in(estor and t!e !ost countr& also de#ends on t!e nu"ber
of co"#anies offerin si"ilar resources to t!e !ost nation$ Usuall& uni6ueness !as reat barainin #o%er$
7orein in(estors are "ore li'el& to !a(e a stron barainin #osition in forein o#erations %!en t!e& !a(e fe%
co"#etitors and %!en t!e& control certain uni6ue t&#es of assets, tec!nolo&, "ar'etin e3#ertise, #rocess,
#eo#le, net,%or', etc$ T!ese assets include:
Technology, 7or e3a"#le, o(ern"ents !a(e allo%ed IBM @<<,#ercent o%ners!i# of o#erations in a nu"ber of
countries because of t!e local need for its uni6ue tec!nolo&$ 0o%e(er, t!e& !a(e refused ot!er co"#anies t!e
sa"e o%ners!i#$ T!e 7renc! o(ern"ent also a##ro(ed IBM2s "inorit& sta'e in state,o%ned Grou# Bull
because of t!e co"#an&2s s#eciali5ed tec!nolo&$
Marketing e+cellence: 7or e3a"#le, )oca,)ola a##arentl& !as been able to ain local consu"er allies %!o
belie(e its differentiated #roducts are su#erior$
-rocess *+pertise: Process re#resents t!e critical lin' bet%een RF8 and #roduction$
As suc!, it is a 'e& in ac!ie(in interated solutions$ As al%a&s, t!e c!allene is to ensure t!at #roduct, #rocess,
e6ui#"ent, and (alidation re6uire"ents co"e toet!er to a robust, balanced solution$
*+port ability: Abilit& to e3#ort out#ut fro" t!e forein in(est"ent, es#eciall& %!en e3#orts o to ot!er entities
controlled b& t!e #arent co"#an&, is a reat strent!$ T!ese in(est"ents earn forein e3c!ane for t!e countr&
t!at "i!t ot!er%ise not be fort!co"in$ )!ina %elco"es e3#orters "ore t!an co"#anies see'in onl& to sell
%it!in )!ina$
Brand *(uity: Brand e6uit& is t!at incre"ental (alue t!at accrues to a #roduct %!en it is branded$ Na"e t!at
sells itself is brand e6uit&$ T!at is t!e confidence, e"inence and fanciness t!e na"e s#ells in consu"ers2 #s&c!e
leadin to lobal #resence$
-roduct diversity: Go(ern"ents %ill allo% "ore forein o%ners!i# %!en a co"#an& #ro(ides reater #roduct
di(ersit&$
'arge capital: )o"#anies %it! abilit& to contribute lare a"ounts of ca#ital "a& !a(e "ore barainin
strent!s$ Man& e"erin econo"ies encountered debt,ser(icin #roble"s since t!e "id,@G=<s$ As alternati(e
to "ultilateral debt, 78I is #referred b& t!e"$ 7urt!er, o(ern"ents "a& not %ant to co""it resources to
neotiatin %it! co"#anies t!at are too s"all to "a'e a substantial i"#act on t!eir econo"ies$
onsortium of companies: T!e de(elo#"ent of Airbus Industries, a consortiu" in Euro#e to co"#ete aainst
Boein in aircraft #roduction, is an e3ercise to boost t!e lobal sa& of t!e Airbus Industries in its dealins$
Si"ilar consortia are in EU in consu"er a##liances, "edical electronics, teleco""unications, and tele(ision$
Eure'a #rora", a Euro#e,%ide Net%or' for Industrial RF8, strent!enin Euro#ean co"#etiti(eness b&
#ro"otin /"ar'et,dri(en2 collaborati(e RF8, in(ol(in industr& and institutions$ It includes about :I<<
entities of lare, "ediu" and s"all co"#anies, researc! institutes, uni(ersities, etc fro" H: countries *A= of
%!ic! are Euro#ean+ to de(elo# a %ide rane of tec!noloies in frontier fields includin nano,sciences$
)onsortia !a(e !i!er barainin #o%er$
Dome"tic /re""ure" to counter 3NE"9 @ar2ainin2 "tren2t*
8o"estic co"#anies %!ic! are direct or indirect co"#etitors of t!e MNEs concerned %ill e3ert #ressure aainst
allo%in t!e MNEs entr& on t!e round of lac' of le(el #la&in field for t!e" bein tec!noloicall& bac'%ard
and ot!er reasons$ Political o##onents %ill (e!e"entl& o##ose MNEs2 #resence "erel& to ain a #olitical
le(erae b& %!i##in son,of,t!e soil or co"#an&,of,t!e,soil senti"ents issue$ Ot!er critics "a& arue t!at t!e
o(ern"ent "ust #ress for e3tractin "ore concessions fro" t!e MNEs$
Reactions fro" t!e !ost,countr& o(ern"ents to local #ressure rou#s de#end on t!e ti"in, barainin #o%ers
of t!e aitators, etc$ Ta'in s!elter under t!ese #rotests, t!e o(ern"ents do e3tract furt!er concessions fro"
t!e MNEs$ ReDectin entr& for MNEs %ill in(ol(e re#ercussions$ Of late business,o(ern"ent relations!i# is
t!ic' and e(er& o(ern"ent %ants to interests of co"#anies of its soil$ T!ere used to be trade retaliations as a
"ar' of #rotest$ 4ieldin to #ressure fro" its ar"ent industr&, t!e United >indo" li"ited i"#orts of
Indonesian T,s!irts, and t!e Indonesian o(ern"ent retaliated b& den&in t!e construction of a Britis!,o%ned
c!e"ical #roDect$ )o"#anies also "a& face #ressures fro" stoc'!olders, %or'ers, consu"ers, o(ern"ental
officials, su##liers, and nono(ern"ental orani5ations *NGOs+ concerned %it! t!eir o%n interests$
4.4.& Ne2otiation /roce"" in Internationa! Bu"ine""
Neotiations are a "eans b& %!ic! an MNE "a& initiate, carr& on, or ter"inate o#erations in a forein countr&$
Generall& neotiations are needed for direct in(est"ents$ Of late, licensin aree"ents, debt re#a&"ent, and
lare,scale e3#ort sales as %ell need neotiation$ T!e neotiation #rocess often leads to "ulti,tiered barainin
%it! a local co"#an& for tie,u# to #ro(ide tec!nolo& in e3c!ane of #art o%ners!i# sta'e$ T!e situations in
countries differ$ In certain countries clear,cut uidelines are t!ere %it! auto"atic a##ro(als #ro(ided t!e
a##lications are routed t!rou! a##ro#riate aut!orities$ 7e% !i! #rofile 78I sta'es onl& o to t!e Go(ern"ent
for case b& case clearance$ T!e o(ern"ent aenc& "a& a##ro(e, disa##ro(e, or #ro#ose entirel& ne% ter"s$
T!e MNEs !a(e to re,neotiate %it! its !o"e o(ern"ent and t!en et bac' to t!e !ost,countr& o(ern"ent$
Sta2e" in Ne2otiation:
A ten,stae neotiation #rocess t!at uni6uel& co"bines t!at #uts toet!er t!e best of "an& ot!er a##roac!es to
neotiation is i(en belo%$
[ STA$E ACTION
[ Pre#are >no% %!at &ou %ant$ Understand t!e"$
[ O#en Put &our case$ 0ear t!eirs$
[ Arue Su##ort &our case$ E3#ose t!eirs$
[ E3#lore See' understandin and #ossibilit&$
[ Sinal Indicate &our readiness to %or' toet!er$
[ Pac'ae Asse"ble #otential trades$
[ )lose Reac! final aree"ent$
[ Sustain Ma'e sure %!at is areed !a##ens$
[ Reneotiate -!en sustenance ets struc', reneotiate
[ Ter"inate Sto# neotiation, once and for alli$
/reparation:
Neotiation re6uires t!rou! #re#aration to #resent one2s side as %ell as to counter, if need be, o##osin (ie%s
fro" an& side$ )o"#lete 'no%lede of t!e MNE, full details of t!e current #ro#osal, t!e %in,%in results,
success stories of earlier (entures of si"ilar t&#es, t!e core issues, etc need to be full& con(ersant$ A re!earsal
%ould do %ell %it! "oc' tea"s$ -!at one %ants, %!at one can i(e, %!at ot!ers "i!t e3#ect, can t!at be
acco""odated, etc need to be %ell anal&5ed fro" different #ers#ecti(es$
Open t*e di"cu""ion:
T!is is t!e /lo(e all2 o#enin of t!e "atc! on t!e discussion table$ Al%a&s offer to let t!e ot!er #art& s#ea' first$
T!e ot!er #art& "a& !a(e o(eresti"ated %!at &ou are oin to as' for and "a& actuall& offer "ore t!an %!at
&ou %ere oin to re6uest$ T!e eneral contours of t!e #ro#osal, t!e s#ecific aenda, t!e rane of issues
needin detailed discussion, etc are #resented$ 4ou "a& ta'e @<,@; "inutes$ T!e ot!er side need to be in(ited to
res#ond and as t!e& do Dust 'ee# listenin$ If need be ta'es notes do%n$ Al%a&s tr& not to interfere and i(e
ti"e as "uc! as &ou too' Dust earlier$ Of course, enerall&, t!e si5e or seriousness of t!e neotiation, t!e e3tent
of #ast neotiations, if an& done, and areas of acce#tance and disaree"ent reac!ed alread&, etc deter"ine t!e
a"ount of ti"e needed to neotiate it$ A##ro3i"atel& G<J of neotiations et settled in t!e last @<J of t!e
discussion$
T!e outco"e of forein neotiations %ill de#end #artl& on ot!er recent neotiations or e(ents, %!ic! ser(e as
"odels$ Abroad, %!at !as trans#ired recentl& eit!er bet%een ot!er MNEs and a !ost,countr& o(ern"ent or
bet%een si"ilar t&#es of MNEs or t!e sa"e MNE in si"ilar countries "a& ser(e as a co""on reference$
Neotiations are unli'el& to stra& too far fro" t!at establis!ed #recedent$
T!ere are 5ones of acce#tance and non,acce#tance for t!e #ro#osals #resented$ If t!e acce#tance 5ones of
#arties o(erla#, an aree"ent is #ossible$ If acce#tance 5ones !a(e no o(erla#, #ositi(e neotiations are not
#ossible$ 7or e3a"#le, if 7ord Motors insisted on ;@,#ercent o%ners!i# of an Indian facilit& but %ould acce#t
u# to @<< #ercent and t!e Indian o(ern"ent or #artner insisted on ;@,#ercent local o%ners!i# but %ould acce#t
u# to ?; #ercent, t!ere %ould be no o(erla# of acce#tance 5ones in %!ic! to neotiate$ 0o%e(er, if 7ord
insisted on a MsinificantN interest in an Indian facilit& *sa&, :; #ercent+ but %ould ta'e as "uc! as it could et
and t!e Indian o(ern"ent or #artner re6uired ;@#ercent local o%ners!i# and %anted to "a3i"i5e it, t!ere
%ould be a %ide 5one acce#table to bot! #arties,for instance, :; to HG #ercent for 7ord2s o%ners!i# and for t!e
Indian side fro" ;@J to ?;J$
Ar2ument:
-!en t!e oin is tou!, t!e tou! ets oin$ Aru"ents in fa(our of one2s (ie% #oints and aainst t!at of
ot!ers are needed$ Aru"ents "ust be cris#, focused and functional$ Al%a&s res#ect and listen to %!at &our
o##onent !as to sa&$ T!is is i"#ortant e(en if !e or s!e does not e3tend t!e sa"e courtes& to &ou$ 8o &our best
to re"ain cal" and #leasant e(en if t!e ot!er #art& is dis#la&in frustration or aner$ Re"e"ber so"e #eo#le
%ill do an&t!in to inti"idate &ou$ Ac'no%lede %!at t!e ot!er #art& sa&s$ E(er&one li'es to 'no% t!at %!at
t!e& sa& is i"#ortant$ If t!e ot!er #art& o#ens first, use it to &our ad(antae, b& #ara#!rasin %!at &ou !a(e
!eard$ Re#eat t!eir i"#ortant ideas before &ou introduce &our o%n stroner ones$
Lanuae to use to s!o% understandin9aree"ent on a #oint: I aree %it! &ou on t!at #ointE T!at2s a fair
suestionE So %!at &ou2re sa&in is t!at &ou$$$ E In ot!er %ords, &ou feel t!at$$$ E 4ou !a(e a stron #oint t!ereE
I t!in' %e can bot! aree t!at$$$E I don2t see an& #roble" %it!9!ar" in t!atE
Lanuae to use for obDection on a #oint or offer: I understand %!ere &ou2re co"in fro"E !o%e(er,$$$E I2"
#re#ared to co"#ro"ise, but$$$E T!e %a& I loo' at it$$$E T!e %a& I see t!ins$$$E If &ou loo' at it fro" "& #oint of
(ie%$$$E I2" afraid I !ad so"et!in different in "indE T!at2s not e3actl& !o% I loo' at itE 7ro" "&
#ers#ecti(e$$$E I2d !a(e to disaree %it! &ou t!ereE I2" afraid t!at doesn2t %or' for "e$ Is t!at &our best offerC
Be #olite F un,#ro(ocati(e
E=p!oration,
Nor"all& t!e =<::< Princi#le %or's$ =< J of areas areed in about :<J of neotiation #rocess$ T!e balance
:<J reall& needs =<J of deliberations$ E3#lorations in all %ards needed$ )reati(it& and inno(ation is needed$
)!ane t!e #roble" settin$ Loo' fro" a different #ers#ecti(e$ Meanti"e tr& to con(ince t!e ot!er side t!at t!e
solutions suested are fine enou!$ Ma& be a sub,tea" to %or' on ne% a(enues "a& be t!ou! off$ Or bot!
sides aree to "eet aain after a recess to co"e %it! fres! t!in'in, "utual acco""odation, s!iftin distant
t!ins near and near t!ins to a distant$ T!e areas of aree"ent "ust be en!anced after #assae of deliberation$
E3#loration "ust be for aree"ent, not disaree"ent$
Si2na!:
After t!e e3#loration, "a'e t!e fres! offer$ 7irst sinal &our readiness to resu"e deliberation fro" %!ere it %as
left$ In(ite t!e ot!er side %it! sa"e, if not "ore, readiness to resu"#tion of tal's and earl& settle"ent$ )ertain
urencies "a& be cited, if a##ro#riate, %!ile at t!e sa"e ti"e tellin t!at let all issues be t!readbare discussed
des#ite t!e ti"e factor$ Lastin solution does "ore ood t!an !astil& #us!ed u# ones$ Pa& attention to &our
o%n and &our counter,#artner2s bod& lanuae for t!at "a& sinal so"et!in s#ecial$
A""em@!e:
)ateori5e t!e areas of aree"ent reac!ed$ As t!is is done, tell t!at %!at is left out is better concurred %it! so
t!at sense of fulfill"ent results$ International neotiations "a& ta'e "uc! loner and "a& include #ro(isions
un!eard of in t!e !o"e countr&, suc! as a neotiated ta3 rate$ 7urt!er, o(ern"ents (ar& in t!eir attitudes
to%ard forein in(estors, so t!eir neotiatin aendas also (ar&$ Most countries offer in(est"ent incenti(es to
attract MNEs$ 8irect incenti(es t!at countries !a(e offered forein in(estors include ta3 !olida&s, e"#lo&ee
trainin, RF8 rants, accelerated de#reciation, lo%,interest loans, loan uarantees, subsidi5ed ener& and
trans#ortation, e3e"#tion of i"#ort duties, and t!e construction of rail s#urs and roads$ )ountries also #ro(ide
indirect incenti(es, suc! as a trained labor force and labor la%s t!at #re(ent %or' disru#tions$
/otentia! !ine" o' a2reement ma5 @e !i"ted "o t*at a con"en"u" i" reac*ed "ooner$
C!o"e:
A final accord is arri(ed at$ T!an' t!e #artici#ants for t!eir ti"e, ideas, fle3ibilit&, inno(ati(e t!rusts, benin
acco""odation of ot!er #erson2s (ie%s, "aturit& s!o%n in t!e %a'e troublin issues, sacrifices "ade and
abo(e all ood co"rades!i# s!o%n$
Su"tain:
T!e aree"ent "ust be i"#le"ented$ Me"bers "ust dedicate t!e"sel(es for trut!ful i"#le"entation of t!e
accord$ Neotiations are seldo" a one,%a& street$ )o"#anies aree to "an& #erfor"ance re6uire"ents ai"ed
at !el#in !ost countries reac! econo"ic and nonecono"ic obDecti(es, suc! as a fa(orable balance of #a&"ents,
ro%t! and !i! e"#lo&"ent$ T!ese "ust be fulfilled sooner t!an later$ 7urt!er, certain conditions suc! as
obliator& le(els of local in#ut into #roducts "anufactured, li"its on t!e use of e3#atriate #ersonnel and on old
or reconditioned e6ui#"ent and local control o(er i"#ortant decisions "ust be fulfilled fro" ab initio$ T!ere is
al%a&s a ris' t!at #ro"ises %ill be bro'en, #uttin sustenance in Deo#ard&$
Rene2otiate:
It !a##ens, t!at e(en %!en a #roDect is on strea", t!e c!aned #olitical uards "a& #ress for a reneotiation,
%!en t!e& solidl& #ro(e national interests are better ser(ed %it! a fres! loo'$ Of course, da"ae to national
culture "i!t !a##en$ In t!e earl& &ears of forein in(est"ents in e"erin econo"ies t!e MNEs %ere i(en
"an& concessions$ In t!e "iddle t!ins did c!ane$ MNEs %ere forced to acce#t a reneotiation to t!eir
disad(antae$ T!is !a##ened to t!e Enron2s 8!abol #o%er #roDect in Ma!arastra, India$ After in(estin LA<<
"illion, t!e ne% o(ern"ent !alted furt!er %or', but areed to reneotiate t!e aree"ent$ T!e co"#anies lost
about L:;<,<<< #er da& durin t!e reneotiations$ 7inall&, t!e o(ern"ent areed to use "ore Indian na#!t!a *a
fuel+ rat!er t!an Pataran natural as to enerate electricit&$ O%ners!i# relocation %as also done$ reducin
Enron2s o%ners!i# to ;< #ercent, and t!e #rice of #o%er b& ::$: #ercent$
O@"o!e"cin2 Bar2ain T*eorem:
Barainin relations!i# bet%een MNE and 0ost )ountr& is function of bot! #arties2 oals, resources and
constraints$ Goals assu"ed to be conflictin, but a"e is #ositi(e su" *%in,%in a"e+ so bot! #arties ac!ie(e
absolute ains$ Relati(e ains de#end on relati(e barainin #o%er$ Outco"e fa(ors MNE, but its barain
obsolesces o(er ti"e$ Reneotiation is #ressed b& t!e !ost o(ern"ent$
Generall&, an MNE2s best barainin #osition e3ists before it "a'es an in(est"ent in a forein countr&$ Once
an MNE transfers ca#ital and tec!nolo& abroad and trains local nationals to direct o#erations, t!e MNE2s
barainin #o%er %ea'ens$ T!e MNE2s assets are not easil& "o(ed to "ore fa(orable locales$ T!e !ost countr&
"a& be in a better #osition to e3tract additional concessions fro" t!e co"#an&$ T!is erosion of t!e MNEs2
barainin strent! is 'no%n as t!e t!eor& of t!e obsolescin barain$ Rate of obsolescence de#ends on relati(e
resources and constraints$
Re2ainin2 Bar2ainin2 po-er: As MNEs are used to t!ese finer burnin, t!e& !a(e beco"e s"art$ Instead of
#us!ed to reneotiation, t!e& #us! t!e !ost o(ern"ent for reneotiation #ro"isin i"#ro(ed tec!nolo&,
%!ic! "a& albeit be onl& %it!!eld tec!nolo&$ Anot!er strate& is to use #lant e3#ansion or e3#ort "ar'ets as
barainin %ea#ons$ In addition, an MNE "a& cede #art of its o%ners!i# to local interests in e3c!ane for
uarantees on re"ission of its earnins$
Termination o' Ne2otiation": Ter"ination is an ad"ission of failure$ T!e neotiators are #rone to #ublicl&
bla"e ot!ers to sa(e face$ T!is !ad !a##ened in suc! !i! #rofile trade neotiations under t!e -TO banner in
8o!a$ Suc! accusations "a& co"#licate future dealins t!e countr& or t!e MNE "a& !a(e %it! ot!er #arties$
Alt!ou! ter"ination is stressful, %!en it is necessar&, t!e sa"e be #ro(ided for %it!out "uc! #ublicit&$
4.4.+ Cu!tura!) Lan2ua2e and ot*er intan2i@!e (actor" A''ectin2 Ne2otiation"
)ultural and lanuae factors affect neotiations because t!ere are differences across nations and %it!in nations
across different societies as to t!e %a& t!e& neotiate, t!e facilities, nor"s and contours of neotiation$
>no%lede of t!ese di(ersities !el# in effecti(e business$
a. Cu!tura! (actor" and Ne2otiation
)ulture s!o%s %a&s in %!ic! #eo#le interact and co""unicate %it! ot!ers and de(elo# and "aintain
relations!i#s$ T!ere used to be cultural differences across different societies9 reions9nations$ Understandin
t!ose differences and ada#tin to t!e" is t!e 'e& to successful neotiation$
Lo--conte=t <". Di2*-conte=t cu!ture":
Neotiators fro" lo%,conte3t cultures %ant to et to t!e !eart of t!e "atter 6uic'l&$ Neotiators fro" !i!,
conte3t cultures %ant to s#end ti"e de(elo#in ra##ort and trust before addressin business details$
/ra2mati"t cu!ture" <". Idea!i"tic cu!ture":
Neotiators fro" #ra"atist cultures atte"#t to se#arate t!e issues into s"all cateories *ettin closure on
ite"s in a linear fas!ion+, %!ile neotiators fro" idealistic cultures (ie% neotiations "ore !olisticall&$
Di2* tru"t <" Lo- tru"t cu!ture":
Neotiators fro" cultures %it! !i! trust are less #rone to %ant to co(er e(er& #ossible continenc& in a
contract t!an are neotiators fro" cultures %it! lo% trust$
3ono-c*ronic cu!ture" <". /o!5-c*ronic cu!ture":
Neotiators fro" "ono,c!ronic cultures %ill %ant to i(e t!eir undi(ided attention to one issue at a ti"e$
0o%e(er, neotiators fro" #ol&,c!ronic cultures feel unco"fortable if t!e& do not si"ultaneousl& ta'e care of
ot!er business affairs$
/unctua!it5 "tre""in2 cu!ture <". Ea"5 2oin2 cu!ture:
Neotiators fro" cultures t!at #lace a !i! i"#ortance on #unctualit& and sc!edules are "ore #rone to set
deadlines and t!en "a'e concessions at t!e last "inute to "eet t!e sc!edules t!an are neotiators fro" cultures
t!at #lace less i"#ortance on #unctualit& and sc!edules$ 7urt!er, Neotiators fro" cultures t!at #lace a !i!
i"#ortance on #unctualit& "a& underesti"ate t!e i"#ortance t!eir counter#arts #lace on t!e neotiations if t!eir
counter#arts arri(e late and don2t stic' to sc!edules$
T!e i"#ortance of cultural factors c!anes durin reneotiations because t!e #arties alread& 'no% eac! ot!er$ If
t!e relations!i# %as a"icable in t!e oriinal neotiations, t!at 6ualit& is li'el& to be carried o(er$ 0o%e(er, if
t!e #ast relations!i# !as been !ostile, t!e reneotiations "a& be suffused b& e(en "ore sus#icion and
obstruction t!an e3isted durin t!e oriinal #rocess$ T!e fact t!at "anaers2 counter#arts in neotiations co"e
fro" countries %it! different cultures does not necessaril& "ean t!e& %ill be!a(e accordin to t!eir culture2s
nor"$
7irst, a counter#art "a& be an e3ce#tion to t!e countr&2s nor"$ Second, a counter#art "a& 'no% t!e ot!er2s
culture and be ada#ti(e to it$ So "anaers s!ould deter"ine at t!e start %!et!er t!e& %ill adDust to t!eir
counter#arts, allo% t!eir counter#arts to adDust to t!e", or follo% so"e for" of !&brid adDust"ent$
@. Lan2ua2e (actor" and Ne2otiation
T!e c!oice of lanuae, use of inter#reters, etc !a(e influence on business neotiation$
Enlis! 1 t!e Uni(ersal lanuae is better: Because Enlis! is understood %orld%ide, #eo#le "a& understand
6uite %ell "ost of %!at is said in Enlis!$ At t!e sa"e ti"e t!e& can ea(esdro# on confidential co""ents and
for" res#onses %!ile re"ar's are bein translated into t!eir lanuae$
To !a(e or not lanuae inter#reters: )ultural factors influence %!et!er inter#reters are acce#table$ 7or
e3a"#le, Saudi "anaers enerall& #refer to neotiate in Enlis!, e(en if t!eir Enlis! is not (er& ood$ -!en
neotiators do use inter#reters, eac! side s!ould !a(e its o%n$ Good inter#reters brief t!eir tea"s on cultural
factors affectin t!e neotiation #rocess$
Inter#reters are te3tual and not conte3tual: Ta'e as an e3a"#le t!e e3#erience of a U$S$ #olitician %!o s#o'e
t!rou! an inter#reter in )!ina$ -it! t&#ical A"erican fort!ri!tness, Vt!e #oliticianW said, MI2" oin to tell
&ou %!ere I2" co"in fro"$N T!e inter#reter said, M0e2ll no% i(e &ou t!e na"e of !is !o"e to%n$N T!en !e
said, MI2" oin to la& all "& cards on t!e table$N T!e inter#reter said, M0e2ll #la& cards no%$N T!en, "a'in a
Do'e, !e said, MI2" not a "e"ber of an& orani5ed #olitical #art&E I2" a 8e"ocrat$N T!e inter#reter said, MI
t!in' !e Dust "ade a Do'e$ Please lau!$N T!e audience lau!ed and t!e #olitician 'ne% !e !ad t!eir ra#t
attention$
c. Intan2i@!e 'actor"
Intanibles are often t!e 'e& factors in "an& neotiations$ It is i"#ortant to co""unicate (er& carefull&$ Subtle
(erbal and bod& lanuae can "a'e a difference in !o% &our neotiation #roresses$ S#end "ore ti"e listenin
t!an tal'in and "a'e direct e&e contact$ Use t!e %ord MandN instead of Mbut$N T!is !el#s to send t!e sinal t!at
&ou are interested in t!e ot!er #art& and are see'in co""on round$ So"e of t!e intanibles are dealt belo%$
ommunications, )o""unications "ust be careful about usin t!e #!one, e,"ail, and ot!er non,(isual
co""unication (e!icles$ A lac' of facial e3#ressions, (ocal intonation, and ot!er cues can result in a
neotiation brea'do%n$ )onstantl& reiterate &our interest in t!e ot!er side2s concerns and &our deter"ination to
find a "utuall& satisfactor& resolution$
-ersonalities, Personalities "ust be conscious of as#ects of &our #ersonalit& suc! of &our o%n needs and
inter#ersonal st&le as %ell as t!e ot!er #erson2s #ersonalit&E t!ese factors %ill #la& a 'e& role and understandin
&ourself %ill be an i"#ortant factor rele(ant to reac!in a solution$
Bour own personality and style: 0o% "uc! &ou trust t!e #ersonE !o% free %it! &our e"otionsE !o% "uc! &ou
%ant to conceal or re(eal and suc! ot!er factors
-hysical space: So"eti"es %!ere t!e neotiation ta'es #lace can be i"#ortantE are %e neotiatin in a s#ace
%e are unco"fortable and ot!er is co"fortableC
-ast interaction: If t!ere is a !istor& of conflict resolution %it! t!is #erson, t!in' about !o% t!is !istor& "i!t
affect t!e u#co"in neotiation$
Time pressure: T!in' about %!et!er ti"e #ressure %ill affect t!e neotiation and %!et!er &ou need to tr& to
c!ane t!is (ariable$
Su@Kectie uti!itie": Be a%are t!at #eo#le #lace (er& different (alues on ele"ents of a neotiation$ 7or
e3a"#le, in neotiatin for a Dob, &ou "a& #lace a !i! (alue on location and relati(el& lo%er on salar&E it is
i"#ortant to be a%are of &our subDecti(e utilities and tr& to ascertain t!e ot!er #erson2s subDecti(e utilitiesE it is
difficult to 'no% in ad(ance or e(en durin t!e neotiation %!at a #articular outco"e %ill "ean to t!e ot!er
#art&$ 7indin out %!at is M(aluedN is one of t!e 'e& #arts of neotiation$
4.:. ROLE O( INTERNATIONALA$ENCIES IN CON(LICT RESOLUTION
Select international aencies li'e MIGA, International c!a"ber of co""erce and International )entre for
Settle"ent of In(est"ent 8is#utes are co(ered$ Besides, #roacti(e "easures to be underta'en b& "ultilateral
de(elo#"ent ban'ers, reional de(elo#"ent ban'ers, co""ercial ban's, etc are co(ered$
4.:.1 Ro!e o' Internationa! (inance Corporation (I(C% in Con'!ict Re"o!ution
International 7inance )or#oration is a -orld ban' rou# institution co""itted to #ri(ate sector de(elo#"ent$
To ensure t!at its financin actions do not lead to conflicts #ro#er due dilience is follo%ed$
I7) Perfor"ance Standards, )o""on A##roac!es, E6uator Princi#les , o##ortunit& to raise standards: T!e
I7)2s Perfor"ance Standards, alon %it! t!e )o""on A##roac!es and E6uator Princi#les, offers an
o##ortunit& for financial actors to e3#lore %a&s of #ro"otin !i!er standards, as %ell as encourain reater
!ar"on& of a##roac!es in relation to assessin and "itiatin conflict ris' in t!e conte3t lobal business
financin$ I7) %or's "ore closel& %it! clients to ensure i"#ro(ed understandin of t!e t%o,%a& relations!i#
bet%een in(est"ent and conflict, t!rou! incor#oratin t!e conce#t of /conflict,sensiti(it&2 into t!e ne%
Perfor"ance Standards$
I"#ortance of conflict ris': I7) !as i"#licitl& ac'no%leded t!e i"#ortance of conflict ris' b& includin
uidance on #roDect securit& arrane"ents in Perfor"ance Standard and offerin so"e e3#lanation of t!e nature
of conflict ris' in Guidance Note$ T!is uidance reflects t!e eneral s#irit of t!e Koluntar& Princi#les on
Securit& and 0u"an Ri!ts *KPs+$
Social and En(iron"ental ris's: 7inancial institutions and ot!er actors outside t!e E6uator Princi#le fra"e%or'
%!ic! loo' to I7) for uidance on social and en(iron"ental ris's %ill also need to consider t!e i"#lications of
I7)2s inclusion of conflict and securit& issues on t!eir o%n due dilience #ractices$ I7) in turn "ust i(e t!is
issue reater #riorit& in future re(ie%s, #articularl& as I7) and MIGA #roDects t!e"sel(es are so"e of t!ose
%!ic! !a(e s!o%n t!e"sel(es to be least able to understand and "anae conflict issues effecti(el& in t!e recent
#ast$
;$I$: Ro!e o' 3u!ti!atera! Ine"tment $uarantee A2enc5 (3I$A% in Con'!ict
Re"o!ution
Multilateral In(est"ent Guarantee Aenc& *MIGA+ is a "e"ber of t!e -orld Ban' rou#$ It %as establis!ed to
#ro"ote forein direct in(est"ent into de(elo#in countries$
MIGA %as founded in @G== %it! a ca#ital base of L@ billion and is !ead6uartered in -as!inton, 8$)$ MIGA
#ro"otes forein direct in(est"ent into de(elo#in countries b& insurin in(estors aainst #olitical ris',
ad(isin o(ern"ents on attractin in(est"ent, s!arin infor"ation t!rou! on,line in(est"ent infor"ation
ser(ices, and "ediatin dis#utes bet%een in(estors and o(ern"ents$ MIGA also re6uires !ost countr&
o(ern"ent a##ro(al for e(er& #roDect$ MIGA tries to %or' %it! !ost o(ern"ents , resol(in clai"s before
t!e& are filed$
MIGA2s Business: MIGA #ro(ides uarantees aainst nonco""ercial ris's to #rotect cross,border in(est"ent
in de(elo#in "e"ber countries$ Guarantees #rotect in(estors aainst t!e ris's of Transfer Restriction,
E3#ro#riation, -ar and )i(il 8isturbance, and Breac! of )ontract *for contracts bet%een t!e in(estor9#roDect
enter#rise and t!e aut!orities of t!e !ost countr&+$ T!ese co(ers "a& be #urc!ased indi(iduall& or in
co"bination$
MIGA can co(er onl& ne% in(est"ents$ T!ese include: Ne%, reen,field in(est"entsE Ne% in(est"ent
contributions associated %it! t!e e3#ansion, "oderni5ation, or financial restructurin of e3istin #roDectsE and
Ac6uisitions in(ol(in #ri(ati5ation of state enter#rises$ Unli'e ot!er insurers, MIGA is bac'ed b& t!e -orld
Ban' Grou# and its "e"ber countries$
4.:.+ Ro!e o' Internationa! C*am@er o' Commerce in Con'!ict Re"o!ution
T!e International )!a"ber of )o""erce *I))+ is an international orani5ation t!at %or's to #ro"ote and
su##ort lobal trade and lobali5ation$ It ser(es as an ad(ocate of %orld business in t!e lobal econo"&, in t!e
interests of econo"ic ro%t!, Dob creation, and #ros#erit&$ As a lobal business orani5ation, "ade u# of
"e"ber states, it !el#s t!e de(elo#"ent of lobal outloo's on business "atters$ I)) !as direct access to
national o(ern"ents %orld%ide t!rou! its national co""ittees a"on ot!ers$ T!e I)) %as founded in @G@G
to ser(e %orld business b& #ro"otin trade and in(est"ent, o#en "ar'ets for oods and ser(ices, and t!e free
flo% of ca#ital$ T!e orani5ation2s international secretariat %as establis!ed in Paris in @G:A$
ICC Internationa! Court o' Ar@itration: To attain t!is obDecti(e, I)) !as de(elo#ed a rane of acti(ities$ T!e
I)) International )ourt of Arbitration is t!e "ost res#ected ser(ice of its 'ind in t!e %orld$ Its (oluntar& rule,
%ritin for business s#reads best #ractice in areas as (aried as ban'in, "ar'etin, anti,corru#tion and
en(iron"ental "anae"ent$ T!eir #olic&,"a'in and ad(ocac& %or' 'ee#s national o(ern"ents, t!e United
Nations s&ste" and ot!er lobal bodies a##rised of t!e (ie%s of t!e %orld business on so"e of t!e "ost
#ressin issues of t!e da&$ T!e I))2s International )ourt of Arbitration %as created in @G:A$ Initiall&
re#resentin t!e #ri(ate sectors of Beliu", Britain, 7rance, Ital& and t!e United States, it e3#anded to re#resent
%orld%ide business orani5ations in around @A< countries$
#or!d Counci!) Nationa! Committee") and Internationa! Secretariat: T!e I)) -orld
)ouncil is a eneral asse"bl& of a "aDor intero(ern"ental orani5ation co"#osed of business e3ecuti(es$
National co""ittees na"e deleates to t!e )ouncil$ Ten direct "e"bers "a& be in(ited to #artici#ate$ It
usuall& "eets t%ice a &ear$ T!e )ouncil elects t!e )!air"an and Kice,)!air"an for t%o,&ear ter"s$ T!e
)ouncil elects t!e E3ecuti(e Board on t!e )!air"an2s reco""endation$
T!e Secretar& General !eads t!e International Secretariat$ T!e Secretar& General %or's %it! t!e national
co""ittees to carr& out I))2s %or' #rora"s and is a##ointed b& t!e -orld )ouncil$ T!e I)) International
Secretariat is based in Paris and is t!e o#erational ar" of I))$ It carries out t!e %or' #rora" a##ro(ed b& t!e
-orld )ouncil, feedin business (ie%s into intero(ern"ental orani5ations$T!e E3ecuti(e Board is
res#onsible for i"#le"entin I)) #olic&$ T!e E3ecuti(e Board !as bet%een @; and A< "e"bers of bot!
business leaders and e3,officio "e"bers$
T!e& ser(e for t!ree &ears$ T!e& !a(e a one t!ird rotation in "e"bers!i#$ T!e )!air"an, !is i""ediate
#redecessor, and t!e Kice,)!air"an for" t!e )!air"ans!i#$
National )o""ittees re#resent t!e I)) in t!eir res#ecti(e countries$ T!e& reco""end to t!e I)) t!eir
res#ecti(e national business concerns in its #olic& reco""endations to o(ern"ents and international
orani5ations$ T!ere are establis!ed for"al I)) structures in o(er G< countries$ In countries %!ere t!ere is no
national co""ittee, co"#anies and orani5ations suc! as c!a"bers of co""erce and #rofessional associations
can beco"e direct "e"bers$ I)) !as access to national o(ern"ents t!rou! its net%or' of national
co""ittees$
7inance )o""ittee ad(ices t!e E3ecuti(e Board on all financial "atters$ It re(ie%s t!e financial i"#lications of
I))2s acti(ities and su#er(ises t!e flo% of re(enues and e3#enses of t!e orani5ation$ T!e )!air"an is elected
b& t!e I)) -orld )ouncil$
)o""issions de(elo# international and national o(ern"ent initiati(es in t!eir subDect areas$ T!e& also de(elo#
business #ositions for sub"ission to international orani5ations and o(ern"ents$ )o""issions are co"#osed
of "ore t!an ;<< business e3#erts fro" "e"ber co"#anies$
Di"pute Re"o!ution Serice": I)) International )ourt of Arbitration continues to #ro(ide t!e "ost trusted
s&ste" of co""ercial arbitration in t!e %orld, !a(in recei(ed @H<<< cases since its ince#tion in @G:A$ O(er
t!e #ast decade, t!e )ourt2s %or'load !as considerabl& e3#anded as its re#utation for fast, fle3ible dis#ute
resolution ser(ices s#reads around t!e lobe$ T!e )ourt2s "e"bers!i# !as also ro%n and no% co(ers =I
countries$
-it! re#resentati(es in Nort! A"erica, Latin and )entral A"erica, Africa and t!e Middle East and Asia, t!e
I)) )ourt !as sinificantl& increased its trainin acti(ities on all continents and in all "aDor lanuaes used in
international trade$
In t!e %orld of international co""erce, t!e I)) is #er!a#s best 'no%n for its role in #ro"otin and
ad"inisterin international arbitration as a "eans to resol(e dis#utes arisin under international contracts$ It is
one of t!e %orld2s #re"ier and leadin institutions in #ro(idin international dis#ute resolution ser(ices,
toet!er %it! t!e A"erican Arbitration Association, t!e London )ourt of International Arbitration *L)IA+, t!e
Sina#ore International Arbitration )entre *SIA)+, and t!e Stoc'!ol" )!a"ber of )o""erce$
It is co""on for international co""ercial contracts to #ro(ide for an areed "eans of resol(in an& dis#utes
t!at "a& arise, and t!e I)) is one of leadin institutions for ad"inisterin international arbitration$ T!e I))2s
dis#ute resolution ser(ices also include Alternati(e 8is#ute Resolution *A8R+ #rocedures suc! as "ediation
and e3#ert deter"inations$
Bu"ine"" Action" Stoppin2 Counter'eit And /irac5 (BASCA/%: -it! t!e launc! of
I))2s BAS)AP initiati(e, "ore t!an @A< co"#anies and trade associations are no% acti(el& enaed in a set of
#roDects desined to defeat t!e #irates and increase #ublic and #olitical a%areness of t!e econo"ic and social
!ar" caused b& t!is illeal acti(it&$ BAS)AP is usin I))2s lobal "edia net%or' and national co""ittee
structure to s#read t!e %ord$
BAS)AP %as launc!ed in :<<H and it is an o#erational #latfor" establis!ed b& I)) t!at connects all business
sectors and cuts across all national borders, dra%in t!e" toet!er to ensure t!at t!eir "essae is clearl& !eard
b& o(ern"ents and t!e #ublic$
1.:.1 Ro!e o' Internationa! Centre 'or Sett!ement o' Ine"tment Di"pute" (ICSID%
in Con'!ict Re"o!ution
T!e International )entre for Settle"ent of In(est"ent 8is#utes *I)SI8+, %as founded in @GII #ursuant to t!e
)on(ention on t!e Settle"ent of In(est"ent 8is#utes bet%een States and Nationals of Ot!er States$ It is an
institution of t!e -orld Ban' rou# based in -as!inton, 8$)$ As of Ma& :<<;, @;; countries !ad sined t!e
I)SI8 )on(ention$
I)SI8 !as an Ad"inistrati(e )ouncil, c!aired b& t!e -orld Ban'2s President, and a Secretariat$ It #ro(ides
facilities for t!e conciliation and arbitration of in(est"ent dis#utes bet%een "e"ber countries and indi(idual
in(estors$ Annual "eetins of t!e )ouncil are !eld in conDunction %it! t!e Doint Ban'97und annual "eetins$
I)SI8 is an autono"ous international orani5ation$ 0o%e(er, it !as close lin's %it! t!e -orld Ban'$ All of
I)SI82s "e"bers are also "e"bers of t!e Ban'$ Unless a o(ern"ent "a'es a contrar& desination, its
Go(ernor for t!e Ban' sits e3 officio on I)SI82s Ad"inistrati(e )ouncil$ T!e e3#enses of t!e I)SI8
Secretariat are financed out of t!e Ban'2s budet, alt!ou! t!e costs of indi(idual #roceedins are borne b& t!e
#arties in(ol(ed$
8urin t!e #ast decade, %it! t!e #roliferation of bilateral in(est"ent treaties *BITs+, "ost of %!ic! refer #resent
and future in(est"ent dis#utes to t!e I)SI8, t!e caseload of t!e I)SI8 !as substantiall& increased$ As of .une
A<, :<<;, I)SI8 !ad reistered @=H cases "ore t!an A< of %!ic! %ere #endin aainst Arentina 1 Arentina2s
econo"ic crisis in t!e late @GG<s and subse6uent Arentine o(ern"ent "easures led se(eral forein in(estors
to file cases aainst Arentina$ Boli(ia, Nicaraua, Ecuador and Kene5uela !a(e announced t!eir intention to
%it!dra% fro" t!e I)SI8$
Mediation or conciliation of in(est"ent dis#utes bet%een o(ern"ents and #ri(ate forein in(estors: On a
nu"ber of occasions in t!e #ast, t!e -orld Ban' as an institution and t!e President of t!e Ban' in !is #ersonal
ca#acit& !a(e assisted in "ediation or conciliation of in(est"ent dis#utes bet%een o(ern"ents and #ri(ate
forein in(estors$ T!e creation of t!e International )entre for Settle"ent of In(est"ent 8is#utes *I)SI8+ in
@GII %as in #art intended to relie(e t!e President and t!e staff of t!e burden of beco"in in(ol(ed in suc!
dis#utes$ But t!e Ban'2s o(erridin consideration in creatin I)SI8 %as t!e belief t!at an institution s#eciall&
desined to facilitate t!e settle"ent of in(est"ent dis#utes bet%een o(ern"ents and forein in(estors could
!el# to #ro"ote increased flo%s of international in(est"ent$
I)SI8 acti(ities: Pursuant to t!e )on(ention, I)SI8 #ro(ides facilities for t!e conciliation and arbitration of
dis#utes bet%een "e"ber countries and in(estors %!o 6ualif& as nationals of ot!er "e"ber countries$ Recourse
to I)SI8 conciliation and arbitration is entirel& (oluntar&$ 0o%e(er, once t!e #arties !a(e consented to
arbitration under t!e I)SI8 )on(ention, neit!er can unilaterall& %it!dra% its consent$ All I)SI8 )ontractin
States, %!et!er or not #arties to a dis#ute, are re6uired b& t!e )on(ention to reconi5e and enforce I)SI8
arbitral a%ards$
)onciliation and arbitration #roceedins: Besides t!is oriinal role, t!e I)SI8 !as since @G?= !ad a set of
Additional 7acilit& Rules aut!ori5in t!e I)SI8 Secretariat to ad"inister certain t&#es of #roceedins bet%een
States and forein nationals %!ic! fall outside t!e sco#e of t!e )on(ention$ T!ese include conciliation and
arbitration #roceedins %!ere eit!er t!e State #art& or t!e !o"e State of t!e forein national is not a "e"ber of
I)SI8$ Additional 7acilit& conciliation and arbitration are also a(ailable for cases %!ere t!e dis#ute is not an
in(est"ent dis#ute #ro(ided it relates to a transaction %!ic! !as Mfeatures t!at distinuis!es it fro" an ordinar&
co""ercial transaction$N T!e Additional 7acilit& Rules furt!er allo% I)SI8 to ad"inister a t&#e of #roceedins
not #ro(ided for in t!e )on(ention, na"el& fact,findin #roceedins to %!ic! an& State and forein national
"a& !a(e recourse if t!e& %is! to institute an in6uir& Mto e3a"ine and re#ort on facts$N
A t!ird acti(it& of I)SI8 in t!e field of t!e settle"ent of dis#utes !as consisted in t!e Secretar&,General of
I)SI8 acce#tin to act as t!e a##ointin aut!orit& of arbitrators for ad !oc *i$e$, non,institutional+ arbitration
#roceedins$ T!is is "ost co""onl& done in t!e conte3t of arrane"ents for arbitration under t!e Arbitration
Rules of t!e United Nations )o""ission on International Trade La% *UN)ITRAL+, %!ic! are s#eciall&
desined for ad !oc #roceedins$
Pro(isions on I)SI8 arbitration are co""onl& found in in(est"ent contracts bet%een o(ern"ents of "e"ber
countries and in(estors fro" ot!er "e"ber countries$ Ad(ance consents b& o(ern"ents to sub"it in(est"ent
dis#utes to I)SI8 arbitration can also be found in about t%ent& in(est"ent la%s and in o(er G<< bilateral
in(est"ent treaties$
Arbitration under t!e aus#ices of I)SI8 is si"ilarl& one of t!e "ain "ec!anis"s for t!e settle"ent of
in(est"ent dis#utes under four recent "ultilateral trade and in(est"ent treaties *t!e Nort! A"erican 7ree Trade
Aree"ent, t!e Ener& )!arter Treat&, t!e )artaena 7ree Trade Aree"ent and t!e )olonia In(est"ent
Protocol of Mercosur+$
In addition to t!ese acti(ities, I)SI8 also carries on ad(isor& and researc! acti(ities, #ublis!in In(est"ent
La%s of t!e -orld and of In(est"ent Treaties, and collaborates %it! ot!er -orld Ban' Grou# units$ Since
A#ril @G=I, t!e )entre !as #ublis!ed a se"i,annual la% Dournal entitled I)SI8 Re(ie%,7orein In(est"ent La%
.ournal$
I)SI8 #roceedins do not necessaril& ta'e #lace in -as!inton, 8$)$ Ot!ers #ossible locations include t!e
Per"anent )ourt of Arbitration at T!e 0aue, t!e Reional Arbitration )entres of t!e Asian,African Leal
)onsultati(e )o""ittee at )airo and >uala Lu"#ur, t!e Australian )entre for International )o""ercial
Arbitration at Melbourne, t!e Australian )o""ercial 8is#utes )entre at S&dne&, t!e Sina#ore International
Arbitration )entre, t!e G)) )o""ercial Arbitration )entre at Ba!rain and t!e Ger"an Institution of
Arbitration *8IS+$
1.:.4 Ro!e o' #or!d Trade Or2ani;ation in Con'!ict Re"o!ution
Settlin dis#utes is t!e res#onsibilit& of t!e 8is#ute Settle"ent Bod& *8SB+ of -TO$
8SB consists of all -TO "e"bers$ T!e 8is#ute Settle"ent Bod& !as t!e sole aut!orit& to establis! /#anels2 of
e3#erts to consider t!e case, and to acce#t or reDect t!e findins of t!e #anels or t!e results of an a##eal$ It
"onitors t!e i"#le"entation of t!e rulins and reco""endations, and !as t!e #o%er to aut!ori5e retaliation
%!en a countr& does not co"#l& %it! a rulin$
.irst stage , )onsultation , u# to I< da&s: Before ta'in an& ot!er actions t!e countries in dis#ute !a(e to tal'
to eac! ot!er to see if t!e& can settle t!eir differences b& t!e"sel(es$
If t!at fails, t!e& can also as' t!e -TO director,eneral to "ediate or tr& to !el# in an& ot!er %a&$
%econd stage , T!e #anel , u# to H; da&s for a #anel to be a##ointed, #lus I "ont!s for t!e #anel to conclude: If
consultations fail, t!e co"#lainin countr& can as' for a #anel to be a##ointed$ T!e countr& Min t!e doc'N can
bloc' t!e creation of a #anel once, but %!en t!e 8is#ute Settle"ent Bod& "eets for a second ti"e, t!e
a##oint"ent can no loner be bloc'ed, unless t!ere is a consensus aainst a##ointin t!e #anel$
Officiall&, t!e #anel is !el#in t!e 8is#ute Settle"ent Bod& "a'e rulins or reco""endations$ But because t!e
#anel2s re#ort can onl& be reDected b& consensus in t!e 8is#ute Settle"ent Bod&, its conclusions are difficult to
o(erturn$ T!e #anel2s findins !a(e to be based on t!e aree"ents cited$ T!e #anel2s final re#ort s!ould
nor"all& be i(en to t!e #arties to t!e dis#ute %it!in si3 "ont!s$ In cases of urenc&, includin t!ose
concernin #eris!able oods, t!e deadline is s!ortened to t!ree "ont!s$
T!e "ain staes are:
Before the first hearing: Eac! side in t!e dis#ute #resents its case in %ritin to t!e #anel$
.irst hearing: T!e case for t!e co"#lainin countr& and defence: t!e co"#lainin countr& *or countries+, t!e
res#ondin countr&, and t!ose t!at !a(e announced t!e& !a(e an interest in t!e dis#ute, "a'e t!eir case at t!e
#anel2s first !earin$
)ebuttals, T!e countries in(ol(ed sub"it %ritten rebuttals and #resent oral aru"ents at t!e #anel2s second
"eetin$
*+perts, If one side raises scientific or ot!er tec!nical "atters, t!e #anel "a& consult e3#erts or a##oint an
e3#ert re(ie% rou# to #re#are an ad(isor& re#ort$
.irst draft: T!e #anel sub"its t!e descri#ti(e *factual and aru"ent+ sections of its re#ort to t!e t%o sides,
i(in t!e" t%o %ee's to co""ent$ T!is re#ort does not include findins and conclusions$
Interim report: T!e #anel t!en sub"its an interi" re#ort, includin its findins and conclusions, to t!e t%o
sides, i(in t!e" one %ee' to as' for a re(ie%$
)eview, T!e #eriod of re(ie% "ust not e3ceed t%o %ee's$ 8urin t!at ti"e, t!e #anel "a& !old additional
"eetins %it! t!e t%o sides$
.inal report: A final re#ort is sub"itted to t!e t%o sides and t!ree %ee's later, it is circulated to all -TO
"e"bers$ If t!e #anel decides t!at t!e dis#uted trade "easure does brea' a -TO aree"ent or an obliation, it
reco""ends t!at t!e "easure be "ade to confor" %it! -TO rules$ T!e #anel "a& suest !o% t!is could be
done$
T!e re#ort beco"es a rulin: T!e re#ort beco"es t!e 8is#ute Settle"ent Bod&2s rulin or reco""endation
%it!in I< da&s unless a consensus reDects it$
4ppeals, Bot! sides can a##eal t!e re#ort$ Eit!er side can a##eal a #anel2s rulin$ So"eti"es bot! sides do so$
A##eals !a(e to be based on #oints of la% suc! as leal inter#retation X t!e& cannot ree3a"ine e3istin
e(idence or e3a"ine ne% issues$
Dearin2 @5 + mem@er" o' a permanent E-mem@er Appe!!ate Bod5: Eac! a##eal is !eard b& t!ree "e"bers
of a #er"anent se(en,"e"ber A##ellate Bod& set u# b& t!e 8is#ute Settle"ent Bod& and broadl& re#resentin
t!e rane of -TO "e"bers!i#$ Me"bers of t!e A##ellate Bod& !a(e four,&ear ter"s$ T!e& !a(e to be
indi(iduals %it! reconi5ed standin in t!e field of la% and international trade, not affiliated %it! an&
o(ern"ent$
=phold& Modify or )everse, T!e a##eal can u#!old, "odif& or re(erse t!e #anel2s leal findins and
conclusions$ Nor"all& a##eals s!ould not last "ore t!an I< da&s, %it! an absolute "a3i"u" of G< da&s$
4cceptance or reCection by 3%B, T!e 8is#ute Settle"ent Bod& !as to acce#t or reDect t!e a##eals re#ort %it!in
A< da&s X and reDection is onl& #ossible b& consensus$
4.:.: Ro!e o' 3u!ti!atera! Dee!opment Ban8er" (3DB"%) Re2iona! Dee!opment
Ban8er" (RDB"% and E=port Credit A2encie" (ECA"% and ot*er @an8"
Multilateral 8e(elo#"ent Ban'ers *M8Bs+, Reional 8e(elo#"ent Ban'ers *R8Bs+ and E3#ort )redit
Aencies *E)As+ and ot!er ban's can do a lot in "itiatin in(est"ent led conflict b& #ro#er c!oosin of
e3#osures, collecti(e sur(eillance, etc$ T!ese and ot!er "easures b& t!ese institutions are dealt !ere$
Ti!tenin #olic& co!erence: M8Bs suc! as t!e -orld Ban' *s#ecificall& t!rou! I7) and MIGA+, as %ell as
reional de(elo#"ent ban's *R8B+, suc! as Asian 8e(elo#"ent Ban' *A8B+, offer a (ariet& of financial
#roducts associated %it! #roDect finance$ -!ile M8Bs and R8Bs are accountable to o(ern"ent s!are!olders,
and disburse a lare #art of t!eir fundin to #ublic sector #roDects, t!ere is an increasin focus on #ri(ate sector,
related acti(ities, reflectin t!e ro%in trend a"on de(elo#"ent institutions of loo'in to%ard t!e #ri(ate
sector as a strateic #artner for t!e reali5ation of de(elo#"ent oals$
)onflict #re(ention, #eace buildin and #ost,conflict reconstruction %or' b& M8Bs:
M8Bs and R8Bs !a(e in recent &ears beun to de(elo# a role in conflict #re(ention, #eace buildin and #ost,
conflict reconstruction %or'$ T!is effort !as included t!e introduction of ne% anal&sis tools for use b& countr&
des' staffE t!e o#tion of for"ulatin de(elo#"ent #roDects desined to address t!e root causes of conflictE as
%ell bro'erin #roDects to rebuild infrastructure and institutional ca#acit& in t!e after"at! of conflict$ MIGA,
M8B and R8B are beinnin to define a nic!e as #ro(iders of finance in suc! conte3ts$
E=tractie Indu"trie" Reie- (EIR% to ado#t !u"an ri!ts #olicies: T!e -orld Ban' Grou# !as co"e under
#articular scrutin& for t!e role I7) and MIGA !a(e #la&ed in t!e su##ort of e3tracti(e industr& #roDects lin'ed
%it! social disru#tion, increased (ulnerabilities, social !ostilit& and conflict$ T!e E3tracti(e Industries Re(ie%
*EIR+ co""issioned b& t!e -orld Ban' in :<<A reco""ended t!at -orld Ban' Grou# *-EG+ institutions
*includin I7) and MIGA+ "ainstrea" !u"an ri!ts into all areas of #olic& and su##ort #roDect s#onsors to
ado#t !u"an ri!ts #olicies$ T!e EIR also reco""ended an end to -BG su##ort for e3tracti(e industr&
in(est"ents in countries #rone to or affected b& (iolent conflict, i(en t!at t!e o(erall de(elo#"ental benefits
of suc! in(est"ents in suc! conditions are far fro" #ositi(e$ -!ile t!is reco""endation %as not ado#ted in t!e
-B2s "anae"ent res#onse to t!e EIR, usin conflict,sensiti(e lendin #ractice , not onl& for e3tracti(e
industr& but for all #ri(ate sector #roDects conflict #rone reions , %ould be one ste# to%ards addressin t!e
concerns relatin to t!e relations!i# bet%een #roDects and (iolent conflict t!at %ere (oiced b& sta'e!olders
durin t!e EIR #rocess$
Di2* corre!ation @et-een poert5 and con'!ict) ine"tment" to not e=acer@ate con'!ict:
Ado#tin a conflict,sensiti(e a##roac! to #ro(idin financial #roducts and ser(ices in #roDect finance
transactions %ould be a ood first ste# at i"#ro(in co!erence bet%een lobal #o(ert& reduction oals and t!e
need to au"ent t!e nu"ber of #ri(ate sector in(est"ents t!at to /do no !ar"$2 Suc! in(est"ent a##roac!
%ould not e3acerbate conflicts$
E=port Credit A2encie" (ECA"+ to be conflict,sensiti(e to #roDects: If #ri(ate sector de(elo#"ent is t!e 'e& to
econo"ic ro%t! and #o(ert& reduction, t!en #ublic financial institutions li'e E3#ort )redit Aencies *E)As+
also !a(e a role to #la& in su##ortin sustainable, conflict,sensiti(e #roDects t!at furt!er national o(ern"ent2s
co""it"ents to #o(ert& reduction$ Indeed, as E)As s!ould be obliated to ensure t!at E)As business acti(ities
are co!erent %it! ot!er #ublic #olic& co""it"ents 1 includin de(elo#"ent and conflict #re(ention oals$
E)As to !a(e close lin'ae %it! %ider international #olic& to a(ert conflicts: E)As sit %it!in o(ern"ents t!at
t!e"sel(es are increasinl& co""itted to conflict #re(ention and #eace buildin as #art of de(elo#"ent
assistance and forein #olic&$ A co!erent national #olic& a##roac! re6uires re(ie%in in(est"ent #ro"otion
and trade #olic& fro" t!e #ers#ecti(e of securit& 1 bot! national and %it!in t!e international s&ste"$ At #resent
!o%e(er t!ese ar"s of o(ern"ent tend to sit far fro" eac! ot!er culturall& and functionall&, resultin in
aencies suc! as E)As !a(in little lin'ae %it! %ider international #olic& oals$ T!e fact t!at so"e forein
"inistries !a(e beun to s!are countr& anal&ses %it! E)As as an in#ut to ris' anal&sis is a s"all but i"#ortant
ste# in t!e ri!t direction$
E)A #roDects to be screened for trans#arenc& to a(ert corru#tion: Gi(en t!e correlation bet%een #oor
o(ernance and t!e incidence of (iolent conflict, addressin corru#tion in E)A #roDects %ould be one %a& to
bein "o(in aencies to%ards re6uired le(els of #olic& co!erence$ E)A,bac'ed #roDects !a(e been !ea(il&
critici5ed for reinforcin corru#tion in conflict,#rone areas$ So"e indi(idual E)As !a(e ta'en ste#s to i"#ro(e
trans#arenc& and address #otential for corru#tion *for instance, t!e U> E)G8 screenin of co"#anies t!rou!
t!e -orld Ban' corru#tion list+$ 0o%e(er t!ese re"ain unilateral initiati(es, and "ore needs to be done$
Increased efforts to i"#ro(e !ar"on& bet%een M8B and ot!er #ublic financial institutions in #olicies on
#ri(ate sector in(est"ent #ro"otion, de(elo#"ent assistance and conflict #re(ention %ould !el# create t!e ri!t
en(iron"ent for #roDect finance to beco"e a factor enablin #eaceful and sustainable de(elo#"ent in t!e lobal
%orld econo"&$
<o!untar5 /rincip!e" on Securit5 and Duman Ri2*t") OECD $uide!ine" 'or
3u!tinationa! Enterpri"e" and t*e E=tractie Indu"tr5 Tran"parenc5 Initiatie
(EITI%:
In relation to t!e acti(ities of e3tracti(e industr& actors, reulator& instances include t!e Koluntar& Princi#les on
Securit& and 0u"an Ri!ts, and t!e E3tracti(e Industr& Trans#arenc& Initiati(e *EITI+$ UN S#ecial
Re#resentati(e on Business and 0u"an Ri!ts focuses on conflict and %ea' o(ernance 5ones and leads to
useful uidance and nor",settin$ M8Bs, E)As and ban's ali'e could do "ore to ensure t!at t!e& acti(el&
#ro"ote "eaninful ad!erence to t!ese standards b& clients, as %ell as e3istin standards suc! as t!e OE)8
Guidelines for Multinational Enter#rises, includin t!rou! "onitorin i"#le"entation as #art of t!e financial
relations!i#$
O)E82s 7inancial Action Tas' 7orce H< Reco""endations *7AT7 H< Reco""endations+: 8e(elo#"ents in
international financial reulations also #oint to #ossible "easures to lin's bet%een conflict and finance$
International efforts to co"bat "one& launderin, suc! as t!e Koluntar& -olfsber Princi#les or t!e O)E82s
7inancial Action Tas' 7orce H< Reco""endations *7AT7 H< Reco""endations+, offer so"e o##ortunities to
#ro"ote conflict,sensiti(e finance #ractices$ T!e 7AT7 H< reco""endations are a series of H< uidelines to
#re(ent "one& launderin and terrorist financin$
One set of reco""endations focuses on national o(ern"ents, and outlines %a&s to cri"inali5e "one&
launderin and terrorist finance *e$$ t!rou! confiscation of #roceeds or #ro#ert&, national "onitorin and
anal&sis, la% enforce"ent and #rosecution+$ T!e ot!er set of reco""endations focuses on financial institutions,
and outlines %a&s ban's can #erfor" due dilience on custo"ers, es#eciall& in M!i! ris'N cateories *e$$ b&
>no%in 4our )usto"er, "onitorin accounts and transactions, record 'ee#in, re#ortin sus#icious
transactions, establis!in interit& standards, and creatin internal enforce"ent "ec!anis"s+$ T!e 7AT72s
desinated M!i! ris'N cateories alread& include #recious "etals and stones, but s!ould e3#anded to co(er
ot!er areas, suc! as certain oil, forestr& and e(en aribusiness acti(ities, %!ic! also can be #art of "one&
launderin sc!e"es and e3acerbate (iolent conflict$
Ba"e! Capita! Accord (Ba"e! II%: Per!a#s t!e "ost sinificant ne% international ban'in reulation in t!e last
se(eral &ears is t!e ne% Basel )a#ital Accord *Basel II+,%!ic! %as de(elo#ed b& a co""ittee of t!e Ban' for
International Settle"ents$ Basel II re6uires ban's to anal&5e all t!eir loans for ris', and set aside #articular
#ercentaes of ca#ital in reser(e based on t!eir ris' anal&sis$ So for e3a"#le, ban's %ould !a(e to 'ee#
relati(el& !i! reser(es for a loan to a co"#an& %it! an un#ro(en trac' record, but 'ee# lo%er reser(es for a
loan to %ell,establis!ed and %ell,"anaed co"#an& %it! solid business #lan$ In all li'eliness, Basel II %ill
!a(e t!e effect of re6uirin ban's to 'ee# a sinificant a"ount in reser(e for loans to countries enulfed in
(iolent conflict$ 0o%e(er, t!e Basel )o""ittee and "ost co""ercial ban's are #robabl& not as so#!isticated in
anal&5in t!e lin's (iolent conflict and ris' in cor#orate lendin$ Ado#tin a conflict,sensiti(e a##roac!
to #roDect finance "a& also en!ance t!e abilit& of ban's to 6ualif& for t!e Internal Ratins Based */IRB2+
a##roac! to ca#ital re6uire"ents under t!e Basel II 7ra"e%or' Aree"ent$
Cii! Ri2*t" Impact Ana!5"i" (CRIA%: )RIA is an anal&tical #rocess used to deter"ine t!e sco#e, intensit&,
direction, duration, and sinificance of t!e effects of an aenc&2s #ro#osed e"#lo&"ent and #rora" #olicies,
actions, and decisions$ T!e )RIA #rocess %ill identif& conflict issues and #ro"ote understandin of t!e t%o,
%a& interaction bet%een t!ese and t!e #roDect, as %ell as a##ro#riate "itiation strateies$ T!e "et!odolo& is
desined to acco"#an& t!e entire life,c&cle of a #roDect, %!ic! "eans it s!ould be constantl& u#dated to reflect
t!e c!anin d&na"ic in t!e e3ternal conte3t and as t!e #roDect de(elo#s$ T!e 'e& #rinci#les uidin t!e
a##roac! are: Partici#ator& anal&sisE En!anced co""unicationE Stron local relations!i#sE S!ared decision,
"a'in$ T!ese "easures en!ance trans#arenc& and act as a conflict,ris' "itiation strate&, as trust %ill be
built, fosterin leiti"ac& and relie(in tensions$ -!ile #roDect financiers "a& find t!e in,de#t! and d&na"ic
)RIA a##roac! not suited in e(er& situation, as#ects can be built into e3istin due dilience #rocedures in order
to i(e a fuller and ric!er #icture of t!e ris' conte3t$ An i"#ortant as#ect of en!anced due dilience b& lenders
%ould include consideration of t!e #roDect s#onsor2s trac' record in addressin and "anain conflict ris'$ T!is
%ould re6uire e3#lorin t!e s#onsor2s #ast #erfor"ance on social and en(iron"ental issues, #articularl& if t!e
s#onsor !as o#erated in
a conflict 5one, and !o% it !as dealt %it! securit& and !u"an ri!ts issues$ A financial institution "a& also
en6uire into t!e #roDect s#onsors2 #olicies on corru#tion, business et!ics, en(iron"ental issues, and #roDect
securit&$
Con'!ict-"en"itiit5 'or 3NE": MNEs !a(e beun to #a& attention to !u"an ri!ts, t!e en(iron"ent and ot!er
areas of cor#orate social res#onsibilit&, but t!e& often lac' t!e s'ills and e3#erience to a(oid e3acerbatin
instabilit& or (iolence$ B& ado#tin a #roacti(e a##roac! to conflict,sensiti(e business #ractice, businesses can
reduce ris's to t!eir o#erations in conflict,affected reions, #ro"ote stabilit& and i"#ro(e relations %it! local
#o#ulations$ If t!e econo"ic benefits of t!eir o#erations are distributed "ore fairl& and trans#arentl&, t!e& can
#la& a sinificant role in buildin t!e stron econo"ic foundations t!at are (ital for lastin #eace$
In'!uencin2 pu@!ic po!ic5: T!e Euro#ean Union, Orani5ation for Econo"ic )o,o#eration and 8e(elo#"ent,
-orld Ban', (arious UN aencies, a nu"ber of o(ern"ents and NGOs all ac'no%lede t!e critical role of
econo"ic factors in conflict in a nu"ber of 'e& #olic& docu"ents and are beinnin to reconi5e t!e #otential
of t!e #ri(ate sector to contribute to #eace buildin$ T!ere is ro%in debate on t!e need for clearer
international uidelines and constraints on co"#anies o#eratin in conflict #rone 5ones$ A"nest& International,
0u"an Ri!ts -atc!, OE)8 -atc!, International )o""ittee of t!e Red )ross, and Global -itness "ust !el#
#ro"ote a clearer reulator& en(iron"ent for co"#anies doin business in conflict,#rone 5ones$

Ibm Scribd

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Ibm Scribd

Uploaded by

Copyright:

Available Formats

INTERNATIONAL BUSINESS MANAGEMENT

You might also like