CHANGING DIMENSIONS

OF BUSINESS
ENVIRONMENT

Aakriti Bhola

Business Environment

CHANGING
DIMENSIONS
ENVIRONMENT

OF

BUSINESS

Let us analyze the topic in hand by starting with this news piece published in
THE ECONOMIC TIMES on 16 Sept 2015.

India ranks 34th out of 60 in business growth

environment:
Thornton
Report
India was ranked 34, gaining 14 positions compared to last year in the Grant
Thornton Global Dynamism Index (GDI). The GDI ranks the business growth
environments
of
60
leading
economies.
Although India's performance improved there is still a long way to go as it
continues to figure in the bottom 30 economies in the GDI index. Also while
India gained in the overall ranking, it was ranked in bottom 10 at 53rd rank
when
it
came
to
business
operating
environment.
India has improved a lot in last one year in overall growth and worker
productivity. "A rapidly expanding economy and stronger private
consumption helped India gain 19 places in the area of economics
and growth, to rank 2. Meanwhile, improvements in worker
productivity pushed the country to rank 15 in the area of labor and human
capital. However, a poorer regulatory environment and a lack of
investment in science and technology dragged down India's overall
ranking," GT said in a statement.
According to Grant Thornton's International Business Report (IBR) survey,
businesses expanding or considering expanding into India do not always
recognize the benefits of operating in the country. The strength of India's
GDI ranking for workforce and growth is recognized by many businesses. Six
in ten cite low cost labor as a reason to choose the country, while 45% say
the availability of skilled workers. Meanwhile, over half (57%) of firms
expanding into the country consider it to be a key market
"It is clear that the growth and human capital in India is attracting corporate
from across the world into India and the world has noted that the PM has
made it a personal priority to improve the business operating environment.
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This increased interest in India is reflected in the significant growth in India's

ranking in the GDI," said Harish HV, partner, India leadership team, Grant
Thornton India.

Another article published in THE ECONOMIC TIMES on 17 Dec 2015:

India ranks 97th on Forbes' best countries for

business list

India has ranked a low 97th out of 144 nations, behind Kazakhstan and
Ghana, on Forbes' annual list of the best countries for business in 2015,
scoring poorly on metrics like trade and monetary freedom and tackling
challenges like corruption and violence.
Denmark topped the list of the 144 nations on the Best Countries of Business
in 2015 list by Forbes.
The US has dropped four spots to number 22, continuing a six-year descent
since 2009 when it had ranked second overall.
The US is the financial capital of the world and its largest economy at $17.4
trillion (China is second at $10.4 trillion), but it scores poorly on monetary
freedom and bureaucracy/red tape, Forbes said.
India is ranked 97th on the list, with Forbes saying that while the
country is developing into an open-market economy, traces of its
"past autocratic policies" remain.
"The outlook for India's long-term growth is moderately positive due
to a young population and corresponding low dependency ratio,
BUSINESS ENVIRONMENT

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healthy savings and investment rates, and increasing integration

into the global economy.
"However, India has many challenges that it has yet to fully address,
including poverty, corruption, violence and discrimination against
women and girls, an inefficient power generation and distribution
system, ineffective enforcement of intellectual property rights,
decades-long civil litigation dockets, inadequate transport and
agricultural infrastructure, limited non-agricultural employment
opportunities," Forbes said.
The publication added that India faces other challenges like high spending
and poorly-targeted subsidies, inadequate availability of quality basic and
higher education, and accommodating rural-to-urban migration. Forbes
further said that growth in India last year fell to a decade low, as its
economic leaders struggled to improve the country's wide fiscal and current
account deficits.
"However, investors' perceptions of India improved in early 2014, due to a
reduction of the current account deficit and expectations of post-election
economic reform, resulting in a surge of inbound capital flows and
stabilization of the rupee," it said.
The country performed moderately well on certain factors, ranking eighth on
investor protection, 41st on innovation, 57th on personal freedom and 61st
on property rights.
It scored low on trade freedom, ranking 125th and on monetary freedom it
ranked 139th. On technology it ranked 120th, 77th on corruption and 123rd
on red tape.
Getting an overall conception of Indian Business scenario, let us define what we
mean by BUSINESS ENVIRONMENT.

Understanding the environment within which the business has to operate is

very important for running a business unit successfully at any place.
Because, the environmental factors influence almost every aspect of
business, be it its nature, its location, the prices of products, the distribution
system, or the personnel policies. Hence it is important to learn about the
various components of the business environment, which consists of the
BUSINESS ENVIRONMENT

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economic aspect, the socio-cultural aspects, the political framework, the

legal aspects and the technological aspects etc.
The term business environment connotes external forces, factors
and institutions that are beyond the control of the business and
they affect the functioning of a business enterprise. These include
customers, competitors, suppliers, government, and the social, political,
legal and technological factors etc. While some of these factors or forces
may have direct influence over the business firm, others may operate
indirectly. Thus, business environment may be defined as the total
surroundings, which have a direct or indirect bearing on the functioning of
business. It may also be defined as the set of external factors, such as
economic factors, social factors, political and legal factors, demographic
factors and technical factors etc., which are uncontrollable in nature and
affects
the
business
decisions
of
a
firm.
On the basis of the above discussion the
environment can be summarized as follows:

features

of

business

(a) Business environment is the sum totals of all factors external to the
business firm and that greatly influence their functioning.
(b) It covers factors and forces like customers, competitors, suppliers,
government, and the social, cultural, political, technological and legal
conditions.

(c) The business environment is dynamic in nature.

(d) The changes in business environment are unpredictable. It is very difficult

to predict the exact nature of future happenings and the changes in
economic and social environment.

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(e) Business Environment differs from place to place, region to region and
country to country. Political conditions in India differ from those in Pakistan.
Taste and values cherished by people in India and China vary considerably.

IMPORTANCE OF BUSINESS ENVIRONMENT

There is a close and continuous interaction between the business and its
environment. This interaction helps in strengthening the business firm and
using its resources more effectively. As stated above, the business
environment is multifaceted, complex, and dynamic in nature and has a farreaching impact on the survival and growth of the business. To be more
specific, proper understanding of the social, political, legal and economic
environment helps the business in the following ways:

(a) Determining Opportunities and Threats: The interaction between the

business and its environment would identify opportunities for and threats to
the business. It helps the business enterprises for meeting the challenges
successfully.

(b) Giving Direction for Growth: The interaction with the environment
leads to opening up new frontiers of growth for the business firms. It enables
the business to identify the areas for growth and expansion of their activities.

(c) Continuous Learning: Environmental analysis makes the task of

managers easier in dealing with business challenges. The managers are
motivated to continuously update their knowledge, understanding and skills
to meet the predicted changes in realm of business.

(d) Image Building: Environmental understanding helps the business

organizations in improving their image by showing their sensitivity to the
environment within which they are working. For example, in view of the
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shortage of power, many companies have set up Captive Power Plants (CPP)
in their factories to meet their own requirement of power.

(e) Meeting Competition: It helps the firms to analyze the competitors

strategies and formulate their own strategies accordingly.

(f) Identifying Firms Strength and Weakness: Business environment

helps to identify the individual strengths and weaknesses in view of the
technological and global developments

There are several layers of influences surrounding a business. The outermost

layer, called the macro-environment, consists of dimensions that impact
almost all companies in an economy. These factors are the six aspects of
business environment - Political, Economical, Social, Technological,
Environmental, & Legal.

(1) Economic Environment

Among the various factors of macro environment, the economic environment
has a special significance. Economic environment can be divided into three
parts as under:
(i)
(ii)
(iii)

Economic system
Economic policies
Economic conditions

(i) Economic System:

It is necessary to know about the economic system prevailing in a country in
order to understand the economic environment. Economic system influences
the freedom or openness of business. Economic system is mainly of three
kinds:
(a) Socialistic Economic System:
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Under this system, business is directed and controlled by the government. In

other words, individuals have no freedom to run business. The government
owns all the means of productions. No individual has the right to have
private property. All persons enjoy the benefits of centrally planned economy.
All have equal rights. This system of economy is mainly adopted by China,
Hungary, Poland and erstwhile USSR.
(b) Capitalistic Economic System:
Under this system, private ownership of business is given importance.
Hence, business gets extended. It is also known as free market economy. All
means of production (such as labor, land, capital, etc.) are owned by private
people. What to produce, how to produce and by whom it will be produced-all
such considerations are determined by the market forces.
Hence, it can be said that there is a complete freedom of consumption,
production, savings, investment, etc. Such type of economic system is
prevailing in USA and Canada.

(c) Mixed Economic System:

Under this system, business is owned both by the government and
individuals. Under this, several basic industries are run under the control and
ownership of the government.
As far as the private sector is concerned, it is run by the private persons, but
to save the interest of the country government regulates its activities. India
is a good example of countries following these concepts of economy.
(ii) Economic Policies:
Economic policies deeply influence the business of a country. The economic
policies are laid down to direct the economic activities. Economic activities
include import-export, employment, tax structure, industry, public
expenditure, public debt, foreign investment, etc.
Some of the important economic policies are:
(i)

Industrial policy: The Industrial policy of the government covers

all those principles, policies, rules, regulations and procedures,
which direct and control the industrial enterprises of the country
and shape the pattern of industrial development.

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(ii)
(iii)

(iv)

(v)

Fiscal policy: It includes government policy in respect of public

expenditure, taxation and public debt.
Monetary policy: It includes all those activities and interventions
that aim at smooth supply of credit to the business and a boost to
trade and industry.
Foreign investment policy: This policy aims at regulating the
inflow of foreign investment in various sectors for speeding up
industrial development and take advantage of the modern
technology.
ExportImport policy (Exim policy): It aims at increasing exports
and bridges the gap between expert and import. Through this
policy, the government announces various duties/levies. The focus
now-a-days lies on removing barriers and controls and lowering the
custom duties.

The government keeps on changing these policies from time to time in view
of the developments taking place in the economic scenario, political
expediency and the changing requirements. Every business firm has to
function strictly within the policy framework and respond to the changes
therein.
(iii) Economic Conditions:
Economic conditions are those conditions which are related with the
possibilities of economic development of a country. On the basis of the
economic conditions the government starts various programs for the welfare
of the people.
These programs influence business. Businessmen are influenced by these
programs and they start their own programs like the advertisement policy,
discovery of new market, bringing new products in the market, new methods
of production, etc. Some of the examples of economic conditions are as
under:
(a) Level of Economic Development
(b) National Income
(c) Industrial Development
(d) Rate of Interest

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(e) Supply of Natural Resources

(f) Flow of Foreign Capital
(g) Foreign Trade
(h) General Price Level.

LIBERALIZATION, PRIVATIZATION AND

(LPG) REFORMS IN INDIAN ECONOMY

GLOBALIZATION

Economic reforms in India started on 24 July 1991. After independence in

1947, Indian adhered to socialist policies. Attempts were made to liberties
the economy in 1966 and 1985. The first attempt was reversed in 1967.
Thereafter a stronger version of socialism was adopted. The second major
attempt was in 1985 by Prime Minister Rajiv Gandhi. The process came to a
halt in 1987, through 1966 style reversal did not take place. In 1991 after
India faced a balance of payments crisis, it had to pledge 20 tonnes of gold
to Union Bank of Switzerland and 47 tonnes to Bank of England as part of a
bailout deal with the International monetary fund. In addition the IMF
required India to undertake a series of structural economic reforms. As a
result of this requirement the government of P.V. Narasimha Rao and his
finance minister Dr. Manmohan Singh started back through reforms, although
they did not implement many of the reforms the IMF wanted. The new neoliberal policies included opening for international trade and
investment, deregulation, initiation of Privatization, tax reforms,
the inflation controlling measures.
The fruits of liberalization reached their peak in 2007, when India recorded
its highest GDP growth rate of 9%, with this India became the second fastest
growing major economy in the world, next only to China. The growth rate has
slowed significantly in the first half of2012. OECD report states that the
average growth rate of 7.5% will double the average income in a decade,
and more reforms speed up the pace.
There has been significant debate, however, around liberalization as an
inclusive economic growth strategy. Since 1992 income inequality has
deepened in India.

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As Indias GDP growth rate became lowest in 2012-13 over a decade,

growing merely at 5% more criticism of Indias economic reforms surfaced,
as it apparently failed to address employment growth, nutritional solutes in
terms of food intake in calories and also export growth and there by leading
to worsening level of current account deficit.
Privatization as a process that aims at reducing involvement of the state or
the public sector in the nations economic activities by shifting the divide
between public sector and private sector in favor of latter has made
considerable progress since the introduction of the new economic policy in
1991.The first dimension of Privatization namely, the fiscal dimension stems
from the governments need to reduce the fiscal deficit. Privatization for
efficiency is the second dimension. The third dimension of our impact
analysis is on intersecting oral linkages which have to be addressed by a
policy on privatization.
The economic reforms ushered in a new era of liberalization as
industrial licensing was abolished, role of public sector diluted,
doors to foreign investment considerably opened, and numerous
incentives and initiatives granted to the private sector to expand its
business activities. The 1991 policy welcomed the thought of lower taxes,
less red tape, less paperwork, more space to work and less government
interference.
"Globalization is a process of integration of business activities and growing
economic inter-dependence between countries in the world economy.
Growing similarities of countries in terms of availability of infrastructure led
to globalization. It has exposed firms to international competition, resulting
in an increase in employment opportunities and widening of competition.
The impact of these economic reforms was that total foreign investment in
India grew manifold and cities like Ahmedabad, Bangalore, Chennai,
Hyderabad, Pune, Noida, Gurgaon, Ghaziabad, Jaipur and Indore have risen in
prominence and economic importance. They have become centres of rising
industries and destination for foreign investment and firms. This time round,
the good cheer is likely to spread over a wider geographical area covering
smaller cities and towns. Tier II & Tier III cities have tremendous potential for
firms in the outsourcing, IT off shoring, retail and real estate development
sectors. This is really where the teeming Indian middle class lives.
Companies are going there because they see potential. In terms of
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education, several of these cities are home to good quality universities that
produce thousands of graduates & engineers. In terms of employment, with
outsourcing, IT & retail gunning for these smaller cities in search of space,
employees and customers. The government promotes these cities as
investment options to decongest Tier I cities and for a more uniform
development of the country.
The composition of Indias tax structure has changed dramatically since
liberalization of the Indian economy in 1991. In fiscal year 1991, Indias tax
system was highly dependent on indirect taxes, widely considered as more
regressive than direct taxes because they affect the rich and the poor alike.
Since then, the proportion of direct taxes has been steadily rising. The share
of direct taxes in total taxes eclipsed the share of indirect taxes in fiscal
2007, and has remained higher ever since. The surge in direct taxes is
largely because of a phenomenal increase in corporate taxes, which have
grown at an annual clip of 20% since 1991, the fastest among all major
categories of taxes. The share of corporate taxes alone eclipsed the share of
total indirect taxes in fiscal 2009, and has remained higher since then.
The share of income taxes has also risen thanks to simplification of tax rules
and better tax administration. The surge in corporate taxes is directly linked
to the freeing up of the economy, lowering of marginal tax rates, and the
development of Indias capital market since 1991. Before 1991, high tax
rates and the lack of a well-developed capital market meant that most
corporations and their promoters had an incentive to under-report profits or
net incomes. That changed after 1991, as more companies were listed on the
bourses, and Indian stock markets emerged as a key source of funds for
corporations.
The market capitalization of all firms listed on BSE as a proportion of Indias
gross domestic product (GDP) was a lowly 17% in 1991. The market-cap to
GDP ratio crossed the 50% mark at the end of fiscal 2000, and reached 71%
at the end of the last fiscal year.

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The following are the chief examples of the impact of economic environment
on business:
(i) When reforms were introduced in the banking sector, the bank loans were
allowed on easy terms. It also led to better services. It helped really fast
development of business.
(ii) The change in the economic environment resulted in the establishment of
Leasing Companies, Mutual Funds and Venture Capital Business.

(2) Political Environment

Political environment is the outcome of a combination of various ideologies
advocated by different political parties present in a State. Factors connected
with the activities of the government are included in it, e.g., the type of
government (single-party government or multi-party government), the
attitude of the government towards different industries, progress in passing
different laws, etc.
Every political party has a different attitude towards business community
depending on their ideology. A living example of this can be seen during
elections in the shape of fluctuations in the share market. It is quite possible
that the mere possibility of a particular political party coming into power can
make the prices of share rise sky high.
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It is also generally seen that Heads of State and governments both

at the centre and states organize investment summits to apprise
business community of the opportunities available in the land to
encourage business leaders to invest and set up their units in India.
The following are some of the examples of the impact of the political
environment on business:
(i) In 1977, the Janata Government adopted a stringent attitude towards the
multinational companies. As a result of this attitude, the multinational
companies like the IBM and the Coca-Cola had to ignore India.
(ii) The new government encouraged the multinational companies for
investment in India. This led to the opening of the doors of the Indian market
for the multinational companies. Consequently, the Coca-Cola entered the
Indian market once again.
(iii)It was only because of the political interest that Hyderabad came to be
known as Cyberabad In other words; it came to be recognized as the centre
of Information Technology (IT). As a result, many IT companies came to be
established there.

Political decisions affect the economic environment.

Political decisions influence the countrys socio-cultural environment.

Politicians can influence the rate of emergence of new technologies.

Politicians can influence acceptance of new technologies.

The political environment is perhaps among the least predictable

elements in the business environment. A cyclical political environment
develops, as democratic governments have to pursue re-election every few
years. This external element of business includes the effects of pressure
groups. Pressure groups tend to change government policies.
As political systems in different areas vary, the political impact differs. The
countrys population democratically elects open government system. In
totalitarian systems, governments power derives from a select group.
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Below, is a list of political factors affecting business:

Bureaucracy

Corruption level

Freedom of the press

Tariffs

Trade control

Education Law

Anti-trust law

Employment law

Discrimination law

Data protection law

Environmental Law

Health and safety law

Competition regulation

Regulation and deregulation

Tax policy (tax rates and incentives)

Government stability and related changes

Government involvement in trade unions and agreements

Import restrictions on quality and quantity of product

Intellectual property law (Copyright, patents)

Consumer protection and e-commerce

Laws that regulate environment pollution

There

are 4

main

effects of

these

organizations. They are:

Impact on economy

Changes in regulation

Political stability

Mitigation of risk

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political

factors

on

business

Impact on economy
The political situation of a country affects its economic setting. The economic
environment affects the business performance. For example, there are major
differences in Democratic and Republican policies in the US. This influences
factors like taxes and government spending, which ultimately affect the
economy. A greater level of government spending often stimulates the
economy.

Changes in regulation
Governments could alter their rules and regulations. This could in turn have
an effect on a business. After the accounting scandals of the early 21st
century; the US SEC became more attentive on corporate compliance. The
government introduced the Sarbanes-Oxley compliance regulations of 2002.
This was a reaction to the social environment. The social environment urged
a change to make public companies more liable.
Political Stability
Lack of political stability in a country effects business operations. This is
especially true for the companies which operate internationally. For example,
an aggressive takeover could overthrow a government. This could lead to
riots, looting and general disorder in the environment. These disrupt
business operations. Sri Lanka was in a similar state during a civil war. Egypt
and Syria faced disturbances too.
Mitigation of Risk
Buying political risk insurance is a way to manage political risk. Companies
that have international operations use such insurance to reduce their risk
exposure. There are some indices that give an idea of the risk exposure in
certain countries. The index of economic freedom is a good example. It ranks

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countries

based

on

how

politics

impacts

business

decisions

there.

2015 Economic Freedom Heat Map

The importance of observing the political environment

Firms should track their political environment. Change in the political factors
can affect business strategy because of the following reasons:

The stability of a political system can affect the appeal of a particular

local market.

Governments view business organizations as a critical vehicle for social

reform.

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Governments pass legislation, which impacts the relationship between

the firm and its customers, suppliers, and other companies.

The government is liable for protecting the public interest.

Government actions influence the economic environment.

Government is a major consumer of goods and services.

HOW STRONG POLITICAL WILL CAN POSITIVELY IMPACT

BUSINESS ENVIRONMENT: an example
With the coming of new government at the centre in 2014, the business
scenario in the country has seen an upturn. Various rating agencies and think
tanks have predicted that Indias growth would accelerate sharply in the next
few years.

Banking on the strong fundamentals & reforms undertaken,

Moodys upgraded Indias rating from stable to positive
recently.
Index of Industrial Production grew at 2.1% this year after the negative
growth last year. Inflation (WPI) has seen a steady decline, from 5.55%
in April 2014 to -2.65% in April 2015.
FDI Inflows are increasing at a historic pace. The FDI Equity Inflows
shot up by 40% to reach Rs 1,75,886 crore from Rs 1,25,960 last year.
The Fiscal Deficit is in a state of steady decline.
Indias current account deficit reduced from 4.7% of GDP last year to
1.7% of GDP this year.
Indias
Foreign
Exchange
Reserves
have
increased
significantly, from $ 311.8 Billion to $ 352.1 Billion. This will
provide insulation to India in the event of any global shocks.

All these figures are taken into consideration whenever investment decisions
are made. So these reflect India as an attractive investment destination.
To attract foreign investment, a forum called Invest India has been
set up. Invest India is the countrys official agency dedicated to
investment promotion and facilitation. Set up as a joint venture
between FICCI, DIPP and State Governments of India, Invest India acts as the
first point of contact for foreign investors. Its services include providing
quality input and support services particularly to MSMEs and family-owned
overseas enterprises through granulated, sector- and state-specific
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information, assistance with location identification, expediting of regulatory

approvals, facilitating meetings with relevant government and corporate
officials, organization of investment road shows and roundtables, and
aftercare services that include initiating remedial action on problems faced
by investors by involving the government department concerned. Invest
India regularly partners with similar agencies across the world in an
endeavor to enhance bilateral investment and economic engagement. It has
signed MoUs with IPAs of Italy, France, USA, UK, Japan, South Korea, Czech
Republic and Mauritius. In addition, Invest India actively contributes to the
Government of Indias investment-related engagement with Africa.
An Investor Facilitation Cell has been set up at Invest India as a part of
the Make in India initiative launched by the Indian Government. The Cell acts
as primary support for all investment queries and for providing handholding
and liaisoning services to investors. Invest India is also a part of the Japan
Plus initiative, launched to facilitate and speed up investment proposals and
augment economic ties between India and Japan. Invest India has also set up
investment promotion and facilitation help desks for select economic
ministries and countries.
EXAMPLE 2: Following is a report published in THE ECONOMIC TIMES on 4
Sept 2015:
India is working to create a conducive business environment for sustainable
economic growth and various reforms have been undertaken to modernise
labour market, Labour Minister Bandaru Dattatreya said at G20 Labour and
Employment Ministers' Meeting (LEMM).
"In this context, a number of labour law reforms have been
undertaken to rationalise and modernise the labour market
regulations and working conditions so that large excluded segment
of workforce can be brought into the ambit of labour regulatory
framework and provided with basic labour rights including social
security and wages," he said.
Addressing the G20 LEMM on 'More Inclusive Labour Markets' yesterday at
Ankara, Turkey, he said India welcomes the focus on inclusive growth and
employment generation, acknowledging the urgency of ensuring a job rich
growth which is also inclusive, the statement said.

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Further, he said India is committed to usher in a governance of transparency

and accountability and securing inclusive growth, leading to sustainable
development India adds about 10 million people every year to the workforce
so job creation for youth employment is one of the prime focus of
employment policy. Flagship initiatives taken so far include Make In
India, Skill India, Digital India, Smart Cities projects so as to
encourage domestic industry and attract large scale global
investment.
The Labour Ministry is also implementing National Career Service (NCS)
project for transforming and strengthening public employment services with
an aim to bring job seekers, employers and training providers on a common
platform with efficient use of information technology, he added.

(3) Social Environment

Business originates and develops in society. Therefore, the effect of various
social factors on business is but natural. For example, the production of
things should be according to the fashion. Similarly, religious values also
influence business. For example, some years ago the manufacturers of
Vanaspati Ghee used to import animal fat for manufacturing ghee.
On the basis of the strong public protests, the government cancelled the
import license of these manufacturers. Similarly, with the news that some
popular cold drinks contain pesticide elements, people protested against it
and minimized the consumption of these cold drinks.
Below is a list of social factors which impact customer needs and size of
markets:

Lifestyles

Buying habits

Education level

Emphasis on safety

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Religion and beliefs

Health consciousness

Sex distribution

Average disposable income level

Social classes

Family size and structure

Minorities

Attitudes toward saving and investing

Attitudes toward green or ecological products

Attitudes toward for renewable energy

Population growth rate

Immigration and emigration rates

Age distribution and life expectancy rates

Attitudes toward imported products and services

Attitudes toward work, career, leisure and retirement

Attitudes toward customer service and product quality

The social aspect focuses on the forces within the society. Family, friends,
colleagues, neighbors and the media are social factors. These factors can
affect our attitudes, opinions and interests.
It affects how we behave and what we buy. A good example is how peoples
attitude towards diet and health is changing. Because of this, businesses are
seeing some changes. More people are joining fitness clubs. There is also a
massive growth in demand for organic food. Products often take advantage
of the social factors.
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Population changes are also directly affecting organizations. The supply and
demand of goods and services in an economy can change with the structure
of the population. Decline in birth rates mean demand will decrease. It also
indicates greater competition as the total consumers fall.
World food shortage predictions can lead to call for more investment in food
production. An increase in the worlds population can have the same effect.
African countries like Uganda are facing food shortage. They are
reconsidering rejection of genetically modified foods now.
Organizations should be able to offer products and services which aim to
benefit peoples lifestyle. The offerings should complement customers
behavior. Not reacting to changes in the society can be a costly
mistake. They might lose market share. Demand for their products and
services will fall.

Social factors which impact Pepsi Co

Analysis shows that social factors impact the beverage company greatly. The
key reason behind this is perhaps that Pepsi is a non-alcoholic beverage. It
has to maintain the strict differences in cultures around the world.
It is essential that Pepsi communicates its image as a global brand to change
peoples perception. The company expects its buyers to be able to think of
their drink as something which connects the world together. The social
implications are visible in marketing campaigns most of the time.
For example, the religious festivals featured in TVC ads vary based on
cultures. Pepsi has to value all the festivals in order to relate to their market.
Reacting to the social factor can help Pepsi cash upon the opportunity.

(4) Legal Regulatory Environment

Many Acts are passed from time to time in order to control and regulate
business activities. The sum total of all these Acts creates legal regulatory
environment. Acts are mossy passed to regulate such business activities as
sale-purchase, industrial disputes, labor, regulating partnership business,
regulating company business, foreign exchange, etc.
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Legislations for health and Safety at work:

To protect workers from dangerous machinery.

Workers should be provided with proper safety equipments and

clothing.

A reasonable workforce temperature is maintained for workers.

Proper hygienic conditions and washing facilities are provided.

Workers get adequate breaks between shifts.

Ensure fair wages for the employees

In many countries, government makes it mandatory to have a written
contract of employment. It contains the details of the wage rate; working
hours, deductions (if any) and other necessary details regarding working
conditions. Minimum wages paid to different types of workers are also
determined by the government.
Consumer Protection legislations
Most of the countries have consumer protection laws aimed at making sure
that businesses act fairly towards their consumers: A few examples are
Weight and Measures Act: goods sold should not be underweight.
Standard weighting equipments should be used to measure goods.
Trade Description Act: deliberately giving misleading impression about the
product is illegal.
Consumer Credit Act: According to this act consumers should be given a
copy of the credit agreement and should be aware of the interest rates,
length of loan while taking a loan.
Sale of Goods Act: It is illegal to sell products with serious flaws or
problems and goods sold should conform to the description provided.

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In India, the following Acts have been passed in connection with the above
business activities:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)

Sale of Goods Act,1979

Industrial Disputes Act,1947
Minimum Wages Act,1961
Indian Partnership Act,1932
Companies Act,2013
Trademark Act,1999
Essential Commodities Act,1955
Consumer Protection Act,1986
Standards of Weights and Measures Act,1976

All these Acts influence business decisions. Besides, the above legislations,
the following are also form part of the legal environment of business.
(i)

(ii)

Provisions of the Constitution: The provisions of the Articles of

the Indian Constitution, particularly directive principles, rights and
duties of citizens, legislative powers of the central and state
government also influence the operation of business enterprises.
Judicial Decisions: The judiciary has to ensure that the legislature
and the government function in the interest of the public and act
within the boundaries of the constitution. The various judgments
given by the court in different matters relating to trade and industry
also influence the business activities.

The following are the examples of the impact of the legal regulatory
environment on business:
(i) By removing control on the capital market, a huge amount of capital was
collected by issuing various new issues in the primary market.
(ii) With introduction of relaxation in Foreign Direct Investment (FDI) and
Foreign Exchange, many multinational companies entered the Indian market.
Consequently, there has been a tremendous increase in the foreign
exchange reserves in the country.
Example of how
environment:

BUSINESS ENVIRONMENT

legislation

can

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negatively

impact

business

The Right to Fair Compensation and Transparency in Land

Acquisition, Rehabilitation and Resettlement Act, 2013 was not
welcomed by business community because:

It makes the land acquisition process slower

Compensation would raise costs of projects fivefold
Retrospective application clause not favorable.

(5) Technological Environment

Technological environment includes the discovery of new methods and
implements for the production of goods and services. Technological changes
make available better methods of production and that makes the optimum
use of the raw material.
The technological changes offer both the possibilities and threats for
business. In case a company understands these things well in time it can
achieve its objective, otherwise the very existence of the company is
threatened.
For example, it becomes a technological change for the automobile industry
to produce vehicles which consume less petrol in view of the ever increasing
prices of petrol.
Only that company will be able to survive which can move with the changes
taking place in the environment. Therefore, the companies should constantly
watch the technological changes so that they are able to exploit the business
opportunities.
The following are the examples of impact of technological environment on
business:
(i) With the advent of television in the market, the cinema and the radio
industry were adversely affected.
(ii) With the arrival of the Photostat machines in the market, the carbon
paper industry suffered a setback.
(iii) With the entry of synthetic thread in the market, the cotton cloth industry
was badly affected.

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(iv) The digital watches have almost eliminated the market of the traditional
watches.
Technology has changed the face and the pace of how we do business.
Business processes have been modified and organizations are now working
much more efficiently than ever. At the same time, technology has opened a
new way of communication, allowing businesses to communicate and
collaborate beyond borders. Mobile devices like smart phones and tablets
combining with the power of internet have revolutionized the way we work.
E-mail communication has replaced nearly all written memos, phone calls,
and faxes. Storing the important files on a cloud computing system rather
than PCs, for instance, has made information easily accessible at anytime
and anywhere. Also by the help of technology, virtual organizations are now
a reality. The Internet has allowed businesses to create geographically apart
teams to work like a single, unified organization. Video and conference
calling, cloud computing, and all instant messaging tools have simplified
business processes. The result is greater productivity and efficiency in many
cases.

(6)Environmental Factors
They refer to the physical or geographical environment affecting the
business. It also includes the considerations like environmental pollution,
climate change, carbon footprint, etc.
Key environmental issues affecting business include industrial waste,
sustainable development of raw materials and water and air emissions.
These issues affect business because laws require businesses to change
equipment and procedures to meet imposed standards, which costs
businesses money. Many businesses undertake stricter changes in an effort
to preserve the environment .These businesses pay for the protective and
proactive environmental measures and attempt to recoup the expenses
through consumer good will or the added consumer base gained from an
environmentally friendly policy.
Rising temperatures can cause more severe droughts, increased precipitation
and storms, all of which can have economic consequences. Many industries
have also started to react to the changing conditions they face as a result of
climate change and the policies surrounding this issue. Banks are reviewing
the risk of granting credit for construction in climate-sensitive areas.
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Insurance companies are looking for methods which they can use to cover
climate-related risks in their premiums. The automotive industry is investing
huge amounts in producing fuel-efficient cars and vehicles which can operate
on alternative fuels. For the aircraft industry, the problem of reducing
emissions is an enormous challenge, but progress is being made. The
winners from a warmer climate may be environmental consultants and clean
tech companies who see commercial advantages in the increasing demand
for solutions aimed at slowing down climate change. But the same is true of
traditional industrial operations, provided that they are sufficiently farsighted
and quick on their feet. Companies are being forced to sharpen their climate
analysis.
We need to plan for long-term preservation of forests and wildlife in
a developing India, while simultaneously improving efficiency of
resource-use. Instead, we are caught in an environment vs
development crossfire. Its time for a real attempt at balance. The
implicit attitude has been that ecological concerns are second
fiddle, and environmental procedures are the sole hurdles to
achieving
economic
goals.
Farsighted companies can turn many of the current environmental problems
to their commercial advantage. For many years, the problems which
politicians, scientists and the business sector have been focusing on have
involved climate issues. To establish the commercial opportunities stemming
from these environmental issues, companies need to know how societys
reactions to climate change affect the conditions for their own business
operations.

INDIAN SCENARIO
India with its consistent progression and adequate profoundly skilled
manpower delivers outstanding prospects for investments. India is the most
populous democracy and tenth most significant economy in the world. India
is the 4th most extensive economy all over the world when it comes to
purchasing power parity. India features a federal system of Government with
distinct demarcation of powers between the Central Government and the
State Governments.
India allows a liberal, captivating, and trader friendly investment
environment. India is straining on encouraging foreign investment. India
posses most liberal and transparent policies on foreign direct investment
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(FDI) among major economies around the globe. 100% FDI is acceptable
under the self-regulating approach in all sectors/activities apart from few
areas, which demands prior authorization of the Government. Under selfregulating, investors are required to only notify the Reserve Bank of India
within 30 days of receipt of inward remittances.
India has liberalized and articulated foreign exchange controls. Rupee is
readily convertible on current accounts. For FDI- Profits earned, dividends
and proceeds out of the sale of investments are fully repatriable.
India incorporates a giant socio-economic class and 55% of its population is
below the age of 25.High economic growth and escalating per capita income
has resulted into higher growth in the national market, which is the prime
growth engine for Indian marketplace.
Government of India highly emphasizes on the development of infrastructure
in highways, ports, railways, airports, power, telecom, etc. Government is
constantly looking for domestic and foreign private investment, for
infrastructure sector development.
Investment Opportunities in India
India provides great avenues for investments in various sectors.
Automobile
Biotechnology
Cement
Chemicals
Civil Aviation
Defence
Education
Food processing
Gems & Jewelry
Healthcare
Heavy Industry
IT & ITeS
Media & Entertainment
Mining Oil & Gas
Pharmaceuticals
Ports
Power
Retailing
Roads & Highways
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SEZs
Steel
Telecommunications
Textiles
Tourism and Hospitality

SWOT ANALYSIS OF INDIAN BUSINESS ENVIRONMENT

Strengths
Huge pool of labor force
High percentage of cultivable land
Diversified nature of the economy
Huge English speaking population
Stable macroeconomic fundamentals
Extensive higher education system, third largest reservoir of engineers
Rapid growth of IT and BPO sector bringing valuable foreign exchange
Abundance of natural resources
Weakness
Very high percentage of workforce involved in agriculture
Around a quarter of a population below the poverty line
High unemployment rate
Stark inequality in prevailing socio economic conditions
Infrastructure inadequacies
Huge population leading to scarcity of resources
Low level of mechanization
Red tapism, bureaucracy
Rural-urban divide, leading to inequality in living standards
Opportunities
Scope for entry of private firms in various sectors for business
Demographic Dividend
Inflow of Foreign Direct Investment is likely to increase in many
sectors
Huge foreign exchange earning prospect in IT and ITES sector
Investment in R&D, engineering design
Area of biotechnology
Huge population of Indian Diaspora in foreign countries (NRIs)
Huge domestic market: Opportunity for MNCs for sales
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Huge natural gas deposits found in India, natural gas as a fuel has
tremendous opportunities
Vast forest area and diverse wildlife
Huge agricultural resources, fishing, plantation crops, livestock

Threats
Global economy recession/slowdown
Threat of government intervention in some states
Volatility in crude oil prices across the world
Population explosion, rate of growth of population still high
Agriculture excessively dependent on monsoons

REFERENCES

THE ECONOMIC TIMES (www.economictimes.indiatimes.com)

Down to Earth magazine(http://www.downtoearth.org.in/blog/theenvironmentdevelopment-divide-is-there-room-for-dialogue-46687)
International Journal of Informative and futuristic Research Volume-1
Issue-7, March 2014.
www.investindia.gov.in
Indian Economy by Mishra and Puri
www.livemint.com
The Indian Express Newspaper

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