Ugc Net Commerce: Unit Snapshot

UNIT SNAPSHOT
UGC NET COMMERCE

Unit I
Business Environment &

International Business
❖ Business – Business is an economic activity, which is related with continuous and regular
production and distribution of goods and services for satisfying human wants. In simple
words, Business can be defined as the activity of making one's living or making money by
producing or buying and selling products (goods and services). Along with the large, well-
known businesses such as the Coca-Cola Company and IBM, there are many thousands
small businesses that provide employment opportunities and produce products or services
that satisfy customers.
❖ Environment - According to Barnard “Environment consists of atoms and molecules,

agglomeration of things in motion, alive, of men and emotions, of physical and social law,
social ideas, norms of actions, of forces and resistance. The number is infinite and they are
always present, they are always changing”. Environment includes all the conditions and
circum- stances, influences surrounding and affects the total organization or any of its part.
Each business organization operates in its unique environment.
❖ Business Environment – Business Environment can be defined as the combination of internal
and external factors that influence a company's operating situation. The business
environment can include factors such as: clients and suppliers; its competition and owners;
improvements in technology; laws and government activities; and market, social and
economic trends.
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❖ Environmental Scanning - Environmental scanning can be defined as the process by which
organizations monitor their relevant environment to identify opportunities and threats
affecting their business for the purpose of taking strategic decisions. It is the process of
gathering information regarding company’s environment, analysing it and forecasting the
impact of all predictable environmental changes. It helps the managers to decide the future
path of the organization. The factors which need to be considered for environmental
scanning are events, trends, issues and expectations of the different interest groups.
Example – Reliance Jio identifying the opportunity for low lost 4G penetration in the country
and Airtel identifying the threat from Reliance Jio 4G.
❖ External Environment - These are factors existing outside the business and are beyond its
control to a large extent. The external business environment is classified again in to micro
and macro environment.
Example of External Environment for an educational organisation:

❖ Micro Environment - Micro environment consists of those factors which have a direct and
intimate impact on the firm. E.g.: Suppliers and distributors of the firm. The micro
environment is also known as task environment or operating environment. Micro factors
need not affect all the firms in a particular industry in an equivalent manner. Example – If
there is shortage of wheat production in the country, then it will directly impact the bread-
making industry but not the telecom industry.
❖ Macro Environment - Certain factors like economic policies of the government; demographic
factors etc affect the industry as a whole and is known as macro environment of business.
It is also called general environment. Example – Introduction of Goods and Services Tax (GST)
affected the industry as a whole.
❖ Internal Environment - An organization's internal environment is composed of the elements

within the organization. It deals with the vision, mission and objectives of organisation,
values on which organisation is built upon, structure of management, physical resources,
human resources, financial resources, technology, research and development etc.. Internal
environment also includes culture and other intangible aspects like teamwork, coordination,
efficiency level of employees, employee’s salaries and monitoring costs.
❖ 6 Ms of Internal Environment - They include
– Man (Human Resource)
– Money (Financial Factors)

– Marketing Resources
– Machinery (Physical Assets)
– Management Structure and Nature
– Miscellaneous Factors (Research and Development, Company Image and Brand
Equity, Value System, Competitive Advantage)
Usually, these factors are within the control of business.
❖ Environmental analysis - Environmental analysis refers to the process of identifying
the external and internal elements, which can affect the performance of an
organisation. The analysed facts will then be used for formulating strategies and taking
decisions, so as to exploit opportunities and enhance strengths, and to minimize
threats and weaknesses. Example – ITC will take its decisions with regard to new brand
of Pasta only after analyzing the internal elements (production capacity) and external
elements (market demand).
❖ PESTLE Analysis - The term PESTLE is used to describe a framework for analysis of
macro environmental factors. PESTLE analysis involves identifying the political,
economic, socio-cultural, technological, legal and environmental influences on an
organization.

❖ First Mover Advantage - A form of competitive advantage that a company earns by being
the first to enter a specific market or industry. Being the first allows a company to acquire
superior brand recognition and customer loyalty. The company also has more time to perfect
its product or service. Example – Flipkart was one of the first to provide online ordering and
delivery of different products and got the first mover advantage.
❖ SWOT Analysis - SWOT analysis (alternatively SWOT matrix) is a configured planning method
used to assess the strengths, weaknesses, opportunities and threats involved in a project or

in a business venture. In SWOT analysis, one has to identify all the four factors i.e. Strength,
Weaknesses, Opportunities, and Threats. Strengths should be enhanced and weaknesses
should be eliminated for effectively reaping benefits of opportunities and avoiding
challenges of threats.
❖ Quick Environmental Scanning Technique (QUEST) - The Quick Environmental Scanning

Technique, is a scanning procedure designed to assist executives and planners to keep side
by side of change and its implications for the organizational strategies and policies. QUEST
produces a broad and comprehensive analysis of the external environment.
❖ 5 Forces Model by Michael Porter - Five forces model was created by M. Porter in 1979 to
understand how five key competitive forces are affecting an industry. These forces
determine an industry structure and the level of competition in that industry. The stronger
competitive forces in the industry are the less profitable it is. An industry with low barriers
to enter, having few buyers and suppliers but many substitute products and competitors
will be seen as very competitive and thus, not so attractive.

❖ Fiscal Policy - Fiscal Policy includes the government’s tactics on public expenditure and
revenue. When the government decides on the goods and services it purchases, the transfer
payments it distributes, or the taxes it collects, it is engaging in fiscal policy. Implementation
of Goods and Services Tax (GST) is an example of Fiscal Policy of the government.
Fiscal Policy is sometimes also referred to as the budgetary policy of the government,
which involves the government manipulating its level of spending and tax rates within the
economy.
❖ Monetary Policy - Monetary policy refers to the policy of the central bank – i.e. Reserve Bank
of India – in matters of interest rates, money supply and availability of credit. It is through
the monetary policy, RBI controls inflation in the country. RBI increasing the interest rates
to check inflation is an example of monetary policy.
❖ Corporate social responsibility (CSR) - CSR is how companies manage their business
processes to produce an overall positive impact on society. Companies can showcase this
through their waste and pollution reduction processes, contributing towards educational
and social programs and by earning adequate returns on the employed resources. The
Ministry of Corporate Affairs has notified Section 135 and Schedule VII of the Companies

Act 2013 as well as the provisions of the Companies (Corporate Social Responsibility Policy)
Rules, 2014 to come into effect from April 1, 2014. Example - Mahindra & Mahindra runs
programs such as Nanhi Kali focusing on girl education as part of its CSR.
❖ Economic environment - Economic environment includes broad factors like structure and
nature of the economy, the stage of development of the economy, economic resources, the
level of income of the economy, the distribution of income and assets among citizens,
linkages with global economy, economic policies etc.
❖ Economic Structure - Economic Structure encompasses factors such as contribution of
different sectors like primary (agricultural), secondary (industrial) and tertiary (service)
sectors. The character of each sector and its various components has bearing on the
business.
❖ Economic policy - Economic policy is the term used to describe government actions that are
intended to influence the economy. Some examples of these actions include setting tax
rates, setting interest rates, and government expenditures. Economic policies like industrial

policy, trade policy, foreign exchange policy, monetary policy, fiscal policy, and foreign
investment and technology policy etc can exert high influence on business operations.
❖ Economic systems - Economic systems are the means by which countries and governments
distribute resources and trade goods and services. There are are three main types of
economic systems - planned economy, market economy and mixed economy.
❖ Market Economy - In a Market Economy, prices are determined by levels of supply and
demand, instead of central and or local government. Market forces determine what is
produced, how much is produced, how it is distributed, plus the prices of goods and
services. It is also referred to as Free Economy or Capitalism. Under this system, Government
interferences will be minimum and can be termed as Laisses Faire system, ie.; lack of external
force. USA and Japan are examples for free economy.
❖ Planned Economy - In a planned economy, all decisions regarding production, distribution,

salaries, investment and prices are made by a central authority – usually the government.
Government owns means of production. The closest examples to this type of economy are
China, North Korea and Cuba (to a lesser extent). It is also equated with the concept of
socialism.

❖ Mixed Economy - Mixed Economy envisages the co-existence of public sector units and
private sector undertakings. Key establishments are owned and run by Government and the
Government itself set norms and regulations for private establishments. All western
European countries are in this style. After independence Indian economy accepted a mixed
system where, Government decide and handle key and heavy manufacturing sectors,
whereas the rest will be handled by private sector.
❖ Economic Planning in India - Economic Planning is a term used to describe the long term
plans of government to co-ordinate and develop the economy with efficient use of
resources. Economic planning in India was stared in 1950 after independence, it was deemed
necessary for economic development and growth of the nation. The idea of Five year
planning was taken from the erstwhile Soviet Union under socialist influence of first Prime
Minister Jawahar lal Nehru.
❖ Planning Commission: Planning Commission was set up by the Government of India in 1950
with the objective of promoting the rapid rise in standard of living of people of India using

the available resources in efficient manner. Jawaharlal Nehru was the first chairman of
Planning Commission. First Five Year Plan started in 1951. NDA Government, in 2014,
decided to set up NITI Aayog (National Institution for Transforming India), in place of the
Planning Commission as a way to serve the developmental aspirations of the people of India.
❖ NITI Aayog - National Institution for Transforming India, also called NITI Aayog, was formed
via a resolution of the Union Cabinet on January 1, 2015. NITI Aayog is the premier policy
‘Think Tank’ of the Government of India, providing both directional and policy inputs. Prime
Minister is the Ex-officio chairman. At the core of NITI Aayog’s creation are two hubs – Team
India Hub and the Knowledge and Innovation Hub. The Team India Hub leads the
engagement of states with the Central government, while the Knowledge and Innovation
Hub builds NITI’s think-tank capabilities.
❖ Public Sector Undertakings (PSUs) - The Government owned corporations are termed as
Public Sector Undertakings in India. In a PSU majority (51% or more) of the paid up capital
is held by Central government or by any State government or partly by the Central
governments and partly by one or more state governments. The Public Sector Enterprises
are run by the Government under the Department of Public Enterprises of Ministry of Heavy
Industries and Public Enterprises.
❖ Maharatna/Navratna/Miniratna Status - The status of Maharatna, Navratna, Miniratna to

Central Public Sector Enterprises (CPSEs) is provided by the Department of Public
Enterprises. These prestigious titles provide them greater autonomy and goodwill to

compete in the global market.
❖ Strategic Public Sector Enterprises - Central Public Sector Enterprises (CPSEs) are further
classified into 'strategic' and 'non-strategic'. Areas of strategic CPSEs are arms & ammunition,
atomic energy and railways transport. All other CPSEs are considered as non-strategic.
❖ Public-Private Partnership (PPP) - A Public-Private Partnership (PPP) is a partnership
between the public sector and the private sector for the purpose of delivering a project or
a service traditionally provided by the public sector. The advantage of a PPP is that the
management skills and financial acumen of private businesses could create better value for
money. PPP can increase the quality, the efficiency and the competitiveness of public
services.
❖ New Economic Policy, 1991 - The year 1991 is an important landmark in the economic
history of post-Independent India. The country went through a severe economic crisis
triggered by a serious Balance of Payments situation. The crisis was converted into an
opportunity to introduce some fundamental changes in the content and approach to
economic policy. The New Economic policy (NEP) launched in 1991 by the union Finance
Minister Dr. Manmohan Singh ushered in the era of Liberalization, Privatization and
Globalization (LPG).
❖ Liberalisation - Liberalisation refers to the freeing of trade, investment and capital flows
between countries. It refers to the gradual decrease in government command and control
over the economic policies. Simplification of tax structure, removing quotas, bars and
economic restrictions are some examples of liberalization.
❖ Department of Industrial Policy & Promotion (DIPP) - DIPP was established in 1995 and has
been reconstituted in the year 2000. It is housed under Ministry of Commerce & Industry.
Department of Industrial Policy & Promotion is responsible for formulation and
implementation of promotional and developmental measures for growth of the industrial
sector, keeping in view the national priorities and socio-economic objectives.
❖ Privatization - Privatization is the process of transferring an enterprise or industry from the

public sector to the private sector. In real life, it is done in different forms. In some cases,
ownership of all shares is transferred from government to a single highest bidder (VSNL was
taken by Tata Telecom). In some cases, a large chunk of shares is sold to public, but majority
shares are in the hands of the government (ONGC, SAIL, State Bank of India etc.).
❖ Disinvestment - Literally, disinvestment means selling of assets. Here, in the case of PUSs,
disinvestment means Government selling/ diluting its stake (share) in Public Sector
Undertakings in which it has a majority holding. Disinvestment is carried out as a budgetary
exercise, under which the government announces yearly targets for disinvestment for
selected PSUs.
❖ Strategic Disinvestment of PSUs - Strategic divestment refers to the government not only
selling a substantial portion of its stake but also giving up the management control of the
PSU to a private enterprise. This means that it will give up more than 51% of its stake to the
private sector.
❖ Department of Investment and Public Asset Management (DIPAM) - Department of
Disinvestment was set up as a separate Department in 1999 and was later renamed as
Ministry of Disinvestment in 2001. From May, 2004, Department of Disinvestment is one of
the Departments under the Ministry of Finance. The Department of Disinvestment has been
renamed as Department of Investment and Public Asset Management (DIPAM) from 14th
April, 2016. DIPAM is mandated to advise the Union Government in the matters of financial
restructuring of PSUs.
❖ Industrial Policy - Industrialisation is the first and foremost requirement of rapid economic
development of a country. The industrial policy refers to such formal declaration by the
government through which general policies for industries adopted by the govt. are made
public. The Government of India announced its Industrial Policy Resolution (IPR) on April 6,
1948. Subsequent Industrial Policies were announced in 1956, 1977 and 1980.
❖ Hindu Rate of Growth - The term ‘Hindu rate of growth’ was coined by Professor Rajkrishna,
an Indian economist, in 1978 to characterize the slow growth and to explain it against the
backdrop of socialistic economic policies. The term came into being to show India’s

contentment with the low growth rate, post independence.
❖ New Industrial Policy, 1991 - Indian government announced New Industrial Policy on July
24, 1991. The basic assumption underlying the policy was ‘Continuity with change’. The
industrial policy of 1991 is the big reform introduced in Indian economy since independence.
The policy caused big changes including emergence of a strong and competitive private
sector and a sizable number of foreign companies in India.
❖ Second Generation Reforms - The term `second generation reform' is being increasingly
used in India to refer to a general continuation of the process of economic reform and
liberalisation initiated by the Centre at the behest of the International Monetary Fund in
the early 1990s. The concept of second generation reform was evolved by the IMF to insulate
developing countries from marginalisation in the wake of globalisation. Second generation
reform involves a continuation of economic reform as construed by the IMF.
❖ Business Incubator - An organization designed to accelerate the growth and success of

entrepreneurial companies through an array of business support resources and services that
could include physical space, capital, coaching, common services, and networking
connections.
❖ Legal Environment - This refers to set of laws, regulations, which influence the business
organisations and their operations. Every business organisation has to obey, and work
within the framework of the law. Businesses prefer to operate in a country where there is a
sound legal system. However, in any country businesses must have a good working
knowledge of the major laws protecting consumers, competitions and organizations.
Businesses must understand the relevant laws relating to companies, competition,
intellectual property, foreign exchange, labour and so on. For Example: New GST law will
influence most of the businesses.
❖ Foreign Exchange Management Act (FEMA) - FEMA came in to effect from January.1, 2000,
by replacing the Foreign Exchange Regulations Act (FERA) of 1973. FERA was an act to
regulate certain payments dealing in foreign exchange, securities, the import & export of
currency and acquisition of immovable property by foreigners. FEMA extends to the whole
of India and also applies to all branches, offices and agencies outside India, owned or
controlled by a person resident in India.
❖ Rupee Convertibility - The convertibility of a currency such as Rupee has different meanings
in different times. In existing standards, it means that the country’s currency becomes
convertible in foreign exchange and vice versa in the market. In simple terms, exchanging
Indian rupee for dollars is an example of rupee convertibility.
❖ Current Account Convertibility - Current account convertibility refers to freedom in respect

of payments and transfers for current international transactions. Current account
convertibility implies that the Indian rupee can be converted to any foreign currency at
existing market rates for trade purposes for any amount. It allows easy financial transactions
for the export and import of goods and services. India has current account convertibility.
For example – Mobile company importing mobiles from China and selling in India can get
foreign exchange for its imports under Current Account Convertibility.
❖ Capital Account Convertibility - Capital Account Convertibility is not just the currency
convertibility freedom, but more than that, it involves the freedom to invest in financial
assets (shares, bonds etc.) of other countries. Though it encourages the inflow of the foreign
capital, but the risk is that it may accelerate the flight of the capital from the country if things
are unfavourable. For example, an Indian can sell property here and take the Capital outside.
Convertibility on the capital account is usually introduced after a certain period of
introducing the Current account convertibility. In India, we have partial convertibility of
Rupee on Capital Account.
❖ Consumerism – The term ‘Consumerism’ came into existence in the early 1960s when it was
coined by the business community in the western world particularly in America.
Consumerism is a social force designed to protect consumer interests in the market place
by organizing consumer pressures on business houses. In economics, consumerism may
refer to economic policies which emphasise consumption.
❖ Consumer Protection Act, 1986 - It is an Act of the Parliament of India enacted in 1986 to
protect the interests of consumers in India. It makes provision for the establishment of
consumer councils and other authorities for the settlement of consumers' disputes and for
matters connected therewith also. The act was passed in Assembly in October 1986. This Act
extends to the whole of India except the State of Jammu and Kashmir and save as otherwise
expressly provided by the Central Government by notification, it applies to all goods and
services. This statute is regarded as the 'Magna Carta' in the field of consumer protection
for checking the unfair trade practices and ‘defect in goods’ and ‘deficiencies in services’ as
far as India is concerned.
❖ Consumer Protection Council - The Consumer Protection Act postulates establishment of

Consumer Protection Councils at different levels for the purpose of spreading consumer
awareness.

(a) Consumer Protection Act empowers the Central Government to establish a Central
Consumer Protection Council consisting of the Minister in charge of consumer affairs
in the Central Government as its Chairman.
(b) Consumer Protection Act provides for the establishment of State Consumer
Protection Councils by the State Governments. The State Council shall consist of a
Minister in charge of consumer affairs in the State Government as its Chairman.
(c) In order to promote and protect the rights of consumers, within the district, the
Consumer Protection Act, provides for the establishment of a District Consumer
Protection Council in every district. It shall consist of the Collector of the district as its
Chairman.
❖ Consumer Dispute Redressal Agencies - Consumer Protection Act provides for a three-tier
consumer disputes redressal system encompassing the district, state and national levels. A
complaint where the value of the goods or services and the compensation, if any,
(a) is less than rupees twenty lakh is to be dealt with the District Forum;
(b) where such value exceeds rupees twenty lakh but does not exceed rupees one
crore it is to be dealt with the State Commission and
(c) cases involving more than rupees one crore fall within the jurisdiction of the
National Commission.
❖ Environment Protection Act, 1986 - Environment Protection Act,1986 is an Act of the

Parliament of India. In the wake of the Bhopal Tragedy, the Government of India enacted the
Environment Protection Act of 1986 under Article 253 of the Constitution. Passed in March
1986, it came into force on 19 November 1986. The purpose of the Act is to implement the

decisions of the United Nations Conference on the Human Environments. They relate to
the protection and improvement of the human environment and the prevention of hazards
to human beings, other living creatures, plants and property. The Act is an “umbrella”
legislation designed to provide a framework for central government coordination of the
activities of various central and state authorities established under previous laws, such as
the Water Act and the Air Act.
❖ Triple Bottom Line (TBL) - It is the philosophy that promotes the belief and evaluates the
business’s performance on the basis that attainment of profit, care for people and care for
the planet are equally important. The equal emphasis on these triple Ps, viz., Profits, People
and Planet is known as the TBL. This idea at the macro level corresponds to the more evolved
notion of the development of a country’s economy, society and ecology.
❖ India Vision 2020 - India Vision 2020 was initially a document prepared by the Technology
Information, Forecasting and Assessment Council (TIFAC) of India's Department of Science
and Technology under the chairmanship of A. P. J. Abdul Kalam and a team of 500 experts.
Kalam described the plan as follows: "Transforming the nation into a developed country, five
areas in combination have been identified based on India's core competence, natural
resources and talented manpower for integrated action to double the growth rate of GDP
and realize the Vision of Developed India".
❖ Vision, Strategy and Three Year Action Agenda of NITI Aayog: The 12th and last five year
plan of India was completed on March 31, 2017. With this, the five year plans have become
a thing of past. NITI Aayog has come up with a new idea of planning for future development
of India and has come up with three plans spread over three different time periods.
(a) First is a 15 year “Vision” that encompasses overall goals and objectives of the
country for next 15 years.

(b) Second is a 7 year “Strategy” which lays the roadmap of development for next
seven years dividing those goals and objectives into two parts.
(c) Third and Final is a “Three Year Action Agenda” which states the tasks and targets
to be accomplished in next three years time frame, further dividing the strategy
into two parts.
❖ New India 2022 - NITI Aayog will soon come out with a development agenda for ‘New India
2022’, which will spell out the strategy for expediting economic growth. The work on the
strategy document is in an advanced stage and will most likely be titled ‘Development
Agenda document for New India 2022’. And once this document has been completed and
put in public domain, the work on preparing 15-year vision till 2030 will start. The think-tank,
in a presentation last year, had said the foundation for freedom from six problems—
poverty, dirt, corruption, terrorism, casteism and communalism—will be laid by 2022 when
India celebrates 75 years of independence.
❖ International Business: International business refers to cross-border commerce and other

business transactions between governments or companies. The exchange of goods and
services among individuals and businesses in multiple countries. A specific entity, such as a
multinational corporation or international business company that engages in business
among multiple countries.
❖ Trade: Trade involves the transfer of goods or services from one person or entity to another,
often in exchange for money. A system or network that allows trade is called a market. An
early form of trade, barter, saw the direct exchange of goods and services for other goods
and services.

Modes of Entry into International Business
(1) Exporting – It is the process of selling goods and services produced in one country to other
country.
(2) Joint Venture – It is a strategy used by companies to enter a foreign market by joining
hands and sharing ownership and management with another company. It is used when two
or more companies want to achieve some common objectives and expand international
operations.
(3) Outsourcing – It is a cost effective strategy used by companies to reduce costs by
transferring portions of work to outside suppliers rather than completing it internally. It
includes both domestic and foreign contracting and also off shoring (relocating a business
function to another country).
(4) Franchising – It is a system in which semi-independent business owners (franchisees) pay
fees and royalty to a parent company (franchiser) in return for the right to be identified by its
trademark, to sell its product or services, and often to use its business format or system.
(5) Turn Key Project – It involves the delivery of operating industrial plant to the client
without any active participation. A company pays a contractor to design and construct new
facilities and train personnel to export its process and technology to another country.
(6) Foreign Direct Investment – It is a mode of entering foreign market through
investment. Investment may be direct or indirectly through Financial Institutions.
(7) Mergers & Acquisitions – A merger is a combination of two or more district entities into
one, the desired effect being accumulation of assets and liabilities of distinct entities and
several other benefits such as, economies of scale, tax benefits, fast growth, synergy and
diversification etc. The merging entities cease to be in existence and merge into a single
servicing entity.
(8) Licensing – Licensing is a method in which a firm gives permission to a person to use its
legally protected product or technology (trademarked or copyrighted) and to do business in
a particular manner, for an agreed period of time and within an agreed territory.
(9) Contract manufacturing – When a foreign firm hires a local manufacturer to produce their

product or a part of their product it is known as contract manufacturing. This method utilizes
the skills of a local manufacturer and helps in reducing cost of production. The marketing and
selling of the product is the responsibility of the international firm.
(10) Strategic Alliance – It is a voluntary formal agreement between two companies to pool
their resources to achieve a common set of objectives while remaining independent entities.
It is mainly used to expand the production capacity and increase market share for a product.
Alliances help in developing new technologies and utilizing brand image and market
knowledge of both the companies.
❖ Trade Barriers: Government laws, regulations, policies, or practices that either protect
domestic products from foreign competition or artificially stimulate exports of particular
domestic products.
❖ Tariff Barriers: A duty (or tax) levied upon goods transported from one customs area to
another either for protective or revenue purposes. Tariffs raise the prices of imported goods,
thus making them generally less competitive within the market of the importing country
unless that country does not produce the items so tariffed. The tariffs most frequently
encountered in foreign trade are: tariffs of international transportation companies operating
on sea, land, and in the air; tariffs of international cable, radio, and telephone companies.

❖ Non-Tariff Barriers: Non-tariffs are barriers that restrict trade through measures other than
the direct imposition of tariffs. This may include measures such as quality and content
requirements for imported goods or subsidies to local producers. By establishing quality and
content requirements the government can restrict imports, because only products can be
imported that meet certain criteria. Example - US government could restrict trade by passing
a law that requires all candy bars sold within the US to contain at least 50% locally produced
sugar.
❖ Quotas: Quotas are restrictions that limit the quantity or monetary value of specific goods
or services that can be imported over a certain period of time. The idea behind this is to
reduce the quantity of competitive products in local markets which increases demand for
local goods and services. For example, the US government could decide to limit the amount
of candy bars that can be imported from Japan to 100,000 every year.
❖ Exchange Rate: An exchange rate is the price of a nation's currency in terms of another
currency. Thus, an exchange rate has two components, the domestic currency, and a foreign
currency, and can be quoted either directly or indirectly.

❖ Licensing Agreement: A legal contract between two parties, known as the licensor and the
licensee. The licensor grants the licensee the right to produce and sell goods, apply a brand
name or trademark, or use patented technology owned by the licensor.
❖ Globalization: The process of the development of a global market-driven economy.

Globalization is the process of interaction and integration between people, companies, and
governments worldwide. Globalization has grown due to advances in transportation and
communication technology. With increased global interactions comes the growth of
international trade, ideas, and culture. Globalization is primarily an economic process of
interaction and integration that’s associated with social and cultural aspects. Globalization
involves goods and services, and the economic resources of capital, technology, and data.

❖ Theories of international trade:
❖ Theory of Mercantilism
• This trade theory prevailed during 16th to 19th centuries.

• The wealth of a nation is measured based on its accumulated wealth in terms of gold and
silver.
• Nations should accumulate wealth by encouraging exports and discouraging imports.
• Theory of mercantilism aims at creating trade surplus and in turn accumulate nation’s
wealth.
❖ Absolute Advantage Theory

• Origin in Adam Smith, ‘An Enquiry into the Nature and Causes of the Wealth of Nations’,
1776.
• When one country can produce a unit of good with less cost than another country, the first
country has an absolute (cost) advantage in producing that good.
• Example - In a hypothetical two-country world, if Country A could produce a good cheaper
or faster (or both) than Country B, then Country A had the advantage and could focus on
specializing on producing that good. Similarly, if Country B was better at producing another
good, it could focus on specialization as well.
• There is international benefit from trade – Everyone better off without making anyone
worse off.
• His theory stated that a nation’s wealth shouldn’t be judged by how much gold and silver it
had but rather by the living standards of its people.
❖ Comparative Advantage Theory

• Origin in David Ricardo’s ‘The Principles of Political Economy & Taxation’, 1817.
• Nations can still gain from trade even without an absolute advantage.
• Facilitator – Difference in opportunity cost
• A country has a Comparative Advantage in producing a good if the opportunity cost of
producing that good in terms of other goods is lower in that country compared to other
countries.
• Comparative advantage focuses on the relative productivity differences, whereas
absolute advantage looks at the absolute productivity.
❖ Endowment Theory / Heckscher-Ohlin model / Factor Proportions Theory:

• According to this theory, a nation will export the commodity whose production requires
intensive use of the nation’s relatively abundant and cheap factors and import the
commodity whose production requires intensive use of the nation’s scarce and
expensive factors.
• Thus, a country with an abundance of cheap labour would export labour-intensive
products and import capital-intensive goods and vice versa.
❖ Product Life-Cycle Theory:

• International markets tend to follow a cyclical pattern due to a variety of factors over a
period of time, which explains the shifting of markets as well as the location of
production. The level of innovation and technology, resources, size of market, and
competitive structure influence trade patterns.
• In addition, the gap in technology and preference and the ability of the customers in
international markets also determine the stage of international product life cycle (IPLC).

❖ Theory of Competitive Advantage of International Trade: As propounded by Michael Porter
in The Competitive Advantage of Nations, the theory of competitive advantage concentrates
on a firm’s home country environment as the main source of competencies and innovations.
The model is often referred to as the diamond model, wherein four determinants, interact
with each other.
▪ factor conditions;

▪ demand conditions;
▪ related and supporting industries; and,
▪ firm strategy, structure, and rivalry.
❖ UNO: The United Nations is an international organization founded in 1945 after the Second
World War by 51 countries committed to maintaining international peace and security,
developing friendly relations among nations and promoting social progress, better living
standards and human rights.

❖ What does UN assist in?
▪ Peacekeeping
▪ Security
▪ Human Rights
▪ Economic Development
▪ Humanitarian Assistance
❖ Economic and Social Council (ECOSOC): It is the principal organ to coordinate the economic,
social and related work of the United Nations and the specialized agencies and institutions.
Voting in the Council is by simple majority; each member has one vote.

❖ Nations Conference on Trade and Development (UNCTAD): UNCTAD is principal organ of
United Nations General Assembly (UNGA) dealing with trade, investment, and development
issues. It was established in 1964 and its permanent secretariat is in Geneva. Its primary
objective is to formulate policies relating to all aspects of development including trade, aid,
transport, finance and technology. It ordinarily meets once in four years.
❖ Bretton Woods: It is the site of the first world economic conference in July 1944. The
International Monetary Fund and the World Bank were both created at an international
conference convened in Bretton Woods. The Bretton Woods Agreement is the landmark
system for monetary and exchange rate management established in 1944. It was developed
at the United Nations Monetary and Financial Conference held in Bretton Woods, New
Hampshire, US from July 1 to July 22, 1944.
❖ WORLD BANK: World Bank is one of the institutions created at the Breton Woods Conference
in 1944. World Bank is part of the United Nations system, but its governance structure is
different. The World Bank Group headquarters building in Washington, D.C.
World Bank comprises only two institutions viz. the International Bank for Reconstruction

and Development (IBRD) and the International Development Association (IDA). In contrast,
World Bank Group comprises three more viz. International Finance Corporation (IFC),
Multilateral Investment Guarantee Agency (MIGA), and International Centre for Settlement
of Investment Disputes (ICSID).
India is one of the founder members of IBRD, IDA and IFC. However, India is not a member
of ICSID (International Centre for Settlement of Investment Disputes).
❖ International Bank for Reconstruction and Development (IBRD): Created in 1944 to help
Europe rebuild after World War II, IBRD joins with IDA, our fund for the poorest countries, to
form the World Bank. They work closely with all institutions of the World Bank Group and
the public and private sectors in developing countries to reduce poverty and build shared
prosperity.
❖ International Development Association (IDA): IDA is the part of the World Bank that helps
the world’s poorest countries. Overseen by 170 plus shareholder nations, IDA aims to reduce
poverty by providing loans (called “credits”) and grants for programs that boost economic
growth, reduce inequalities, and improve people’s living conditions. IDA complements the
World Bank’s original lending arm—the International Bank for Reconstruction and
Development (IBRD).
❖ International Finance Corporation (IFC): IFC was established in 1956 to support the growth
of the private sector in the developing world. The IFC’s stated mission is “to promote

sustainable private sector investment in developing countries, helping to reduce poverty and
improve people’s lives.” While the World Bank (IBRD and IDA) provides credit and non-
lending assistance to governments, the IFC provides loans and equity, advice, and technical
services to the private sector.
❖ Multilateral Investment Guarantee Agency (MIGA): MIGA was established in 1988 as an

investment insurance facility to encourage confident investment in developing countries.
MIGA’s mandate is to promote cross-border investment in developing countries by providing
guarantees (political risk insurance and credit enhancement) to investors and lenders.
❖ International Centre for Settlement of Investment Disputes (ICSID): ICSID was established
in 1966 by the Convention on the Settlement of Investment Disputes between States and
Nationals of Other States (the ICSID Convention). ICSID is the world’s leading institution
devoted to international investment dispute settlement. It has extensive experience in this
field, having administered the majority of all international investment cases. States have
agreed on ICSID as a forum for investor-State dispute settlement in most international
investment treaties and in numerous investment laws and contracts.
❖ INTERNATIONAL MONETARY FUND (IMF): The World Bank and the IMF performs different
functions, but they are often confused with each other either with reference to their
functions or with their operation. One must remember that the name World Bank does not
refers to a bank in conventional sense (this is because it performs development function)
and International Monetary Fund or IMF performs the lending function (which we associate
with banks).
❖ Structure and Size of IMF:

Members: 189 countries.

Headquarters: Washington, D.C. but has offices in Paris, Tokyo, New York, and Geneva.
❖ Functions of IMF: The IMF is basically a lending institution which gives advances to members
in need. It is the mentor of its members’ monetary and exchange rate policies. To maintain
the stability in Exchange rate system around the World.
❖ Extended fund facility (EFF) of IMF: The Extended Fund Facility is lending facility of the Fund
of the IMF and it was established in 1974 to help countries address medium- and longer-term
balance of payments problems. The EFF is prescribed for a country who is suffering from
balance of payment problem caused by structural weaknesses and who need fundamental
economic reforms.
❖ Poverty Growth and Reduction Facility (PGRF): The Poverty Reduction and Growth Facility
(PRGF) is an arm of the International Monetary Fund which lends to the world's poorest
countries. It was created in September 1999, replacing the Enhanced Structural Adjustment
Facility.
❖ Quotas in IMF: Every member of IMF has to subscribe a quota of the IMF. An individual
member country’s quota broadly reflects its relative position in the world economy. For any
member country, out of the quota, 25% should be paid in foreign currency or gold and 75%
in domestic currency. Quotas are denominated in Special Drawing Rights (SDRs), the IMF’s
unit of account.

❖ Reserve Tranche Position in IMF: Reserve tranche is the component of a member country’s
quota with the IMF that is in the form of gold or foreign currency. For any member country,
out of the total quota, 25% should be paid in the form of foreign currency or gold. Hence this
is called as reserve tranche or gold tranche. The remaining 75% can be in domestic currencies
and it is called credit tranche.
❖ Special Drawing Rights:
• A reserve asset used by the International Monetary Fund in addition to gold and
United States dollars. The Special Drawing Rights (SDRs) as an international reserve
asset or reserve money in the international monetary system was established in 1969
with the objective of alleviating the problem of international liquidity.
• SDR is defined as a composite of five currencies—the Dollar, Mark, Franc, Yen and
Pound. The SDRs are allocated to the member countries in proportion to their quota
subscriptions. Only the IMF members can participate in SDR facility.
❖ Asian Development Bank (ADB): Asian Development Bank (ADB) is a regional development
bank established on 19 December 1966, which is headquartered in Manila, Philippines. The
company also maintains field offices around the world to promote social and economic
development in Asia. ADB assists its members, and partners, by providing loans, technical
assistance, grants, and equity investments to promote social and economic development.
From 31 members at its establishment, ADB now has 67 members, of which 48 are from
within Asia and the Pacific and 19 from outside. The ADB was modelled closely on the World
Bank, and has a similar weighted voting system where votes are distributed in proportion
with members' capital subscriptions.
❖ Asian Infrastructure Investment Bank (AIIB): AIIB is multilateral development bank initiated
by China. Its purpose is to provide finance to infrastructure development and regional

connectivity projects in Asia-Pacific region. It is viewed as Asia’s response to West-dominated
Asian Development Bank (ADB) and World Bank (WB). It was officially established in
December 2015 with mission to improve social and economic outcomes in Asia and beyond
and opened for business in January 2016. It is headquartered in Beijing, China. Its goals are
to boost economic development in Asia-Pacific region, provide infrastructure, and promote
regional cooperation and partnership. China is largest shareholder of AIIB with 26.06% voting
shares. India with 7.5% vote share is second largest shareholder.
❖ New Development Bank (NDB): NDB is a multilateral development bank promoted by BRICS
nations viz. Brazil, Russia, India, China and South Africa. It is outcome of 6th BRICS Summit
being held in Fortaleza, Brazil. It is headquartered in Shanghai, China. It will have a regional
office in Johannesburg, South Africa. NDB began its operations in July 2015 with an initial
capital of 100 billion dollars. The goal of the bank is to fund infrastructure projects in
emerging economies for sustainable development. In the NDB, each participant country has
been assigned one vote, and none of the countries have veto power.
❖ WTO (World Trade Organization): World Trade Organization, as an institution was

established in 1995. WTO operates a system of trade rules that apply to all its members. The

WTO is also a place for Member governments to settle their trade disputes. Its located in
Geneva, Switzerland.
❖ General Agreement on Trade and Tariffs (GATT): WTO replaced General Agreement on
Trade and Tariffs (GATT). GATT was signed by 23 nations in Geneva on 30 October 1947 and
took effect on 1 January 1948. General Agreement on Tariffs and Trade (GATT) was a legal
agreement between many countries, whose overall purpose was to promote international
trade by reducing or eliminating trade barriers such as tariffs or quotas. Various rounds of
trade negotiations were held under GATT and eighth round known as Uruguay round (1986-
1994) led to formation of WTO. India has been member of GATT since 1948; hence it was
party to Uruguay Round and a founding member of WTO.
GATT rules applied to trade in goods. The WTO covers not just goods, but also trade in
services and trade-related aspects of intellectual property rights.
❖ WTO Agreements: WTO provides to its Member governments a forum for negotiating global
trade rules. Negotiations in the WTO are conducted directly and exclusively by the Member
governments. WTO agreements are essentially contracts legally binding on Member
governments to keep their trade policies within agreed limits.

❖ TRIMS (Trade Related Investment Measures): The Agreement on Trade-Related Investment
Measures (TRIMS) recognizes that certain investment measures can restrict and distort
trade. It states that WTO members may not apply any measure that discriminates against
foreign products or that leads to quantitative restrictions, both of which violate basic WTO
principles. A list of prohibited TRIMS, such as local content requirements, is part of the
Agreement.
❖ Trade Related Intellectual Property Rights (TRIPs): Intellectual property rights may be
defined as “Information with commercial value”. TRIPS agreement lays down minimum
standards for protection and enforcement of intellectual property rights in member
countries. It includes:
a. Protection of patent
b. Copyright
c. Industrial design
d. Geographical indication

e. Trademarks
f. Trade secrets
g. Layout design (topographies of integral circuits)
❖ Agreement on Agriculture (AOA): WTO Agreement on Agriculture, which came into force in
1995, represents a significant step towards reforming agricultural trade and making it fairer
and more competitive. Negotiations are still going on for some of its aspects. Agreement on
agriculture stands on 3 pillars viz. Domestic Support, Market Access, and Export Subsidies.
❖ General Agreement on Trade in Services (GATS): The General Agreement on Trade in

Services (GATS) is the first multilateral agreement covering trade in services. It was
negotiated during the last round of multilateral trade negotiations, called the Uruguay
Round, and came into force in 1995.
❖ Agreement on subsidies and countervailing measures: The Agreement on Subsidies and

Countervailing Measures (“SCM Agreement”) addresses two separate but closely related
topics: multilateral disciplines regulating the provision of subsidies, and the use of
countervailing measures to offset injury caused by subsidized imports. Part I of the
Agreement defines the coverage of the Agreement. In order for a financial contribution to
be a subsidy, it must be made by or at the direction of a government or any public body
within the territory of a Member. Further, Such Financial contribution must also confer
benefit to the industry. Further, there is separate category of ‘Actionable subsidies’.
❖ Actionable Subsidies: These are not prohibited but countries can take ‘Countervailing
measures’ against these subsidies or they can be challenged in ‘dispute resolution body’ of
WTO. Against such subsidies members can take Countervailing Measures, such as imposing
countervailing duties or antidumping duty. These can only be done in a transparent manner
and a sunset period should be specified.

❖ Countervailing Duty: It is imposed on imported goods to counterbalance subsidy provided
by the exporter country.
❖ Anti-Dumping Duty: At times countries resort to subsidize production or exports so heavily

that exporters are able to sell goods below domestic price or even cost of production in
foreign markets. It is aimed at wiping out target country’s industry. Anti-Dumping Duty is
aimed at counterbalancing such subsidization.
❖ WTO’s Principle of Non-Discrimination: Non-discrimination is a fundamental principle of the

WTO. It has two components:
▪ The Most-Favoured Nation (MFN) principle: If a WTO Member grants to a country

an advantage, it has to give such advantage to all WTO Members
▪ The National Treatment Principle: WTO member should not discriminate between
imports and like domestic products from a WTO member.
These two principles apply to trade in goods, trade in services as well as trade related
aspects of intellectual property rights.
❖ SAARC: South Asian Association for Regional Cooperation (SAARC) is the regional
intergovernmental organization and geopolitical union of nations in South Asia. SAARC
comprises 3% of the world’s area, 21% of the world’s population and 3.8% of the global
economy, as of 2015. SAARC was founded in Dhaka on 8 December 1985. Its secretariat is
based in Kathmandu, Nepal. The organization promotes development of economic and
regional integration. It launched the South Asian Free Trade Area in 2006. SAARC maintains
permanent diplomatic relations at the United Nations as an observer and has developed links
with multilateral entities, including the European Union.

❖ SAFTA: South Asian Free Trade Area (SAFTA) is an agreement reached on January 6, 2004, at
the 12th SAARC summit in Islamabad, Pakistan. It created a free trade area of 1.6 billion
people in Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka (as
of 2011, the combined population is 1.8 billion people). The foreign ministers of the region
signed a framework agreement on SAFTA to reduce customs duties of all traded goods in a
phased manner.
❖ NAFTA: North American Free Trade Agreement, an agreement signed by Canada, Mexico,
and the United States to create a trilateral rules-based trading bloc in North America.
The North American Free Trade Agreement is a treaty between Canada, Mexico and the
United States. That makes NAFTA the world’s largest free trade agreement. The gross
domestic product of its three members is more than $20 trillion. NAFTA is the first time two
developed nations signed a trade agreement with an emerging market country.
❖ European Union: European Union (EU) is a political and economic union of 28 member states
that are located primarily in Europe. The EU has developed an internal single market through
a standardised system of laws that apply in all member states in those matters, and only

those matters, where members have agreed to act as one. EU policies aim to ensure the free
movement of people, goods, services and capital within the internal market, enact legislation
in justice and home affairs and maintain common policies on trade, agriculture, fisheries and
regional development. For travel within the Schengen Area, passport controls have been
abolished A monetary union was established in 1999 and came into full force in 2002 and is
composed of 19 EU member states which use the euro currency.
Brexit is a word that is used as a shorthand way of saying the UK leaving the EU - merging
the words Britain and exit to get Brexit. The UK is due to leave the European Union on 29
March, 2019.
❖ Euro: The official common currency of many European Union member countries. The
eurozone is a geographic and economic region that consists of all the European Union (EU)
countries that have fully incorporated the euro as their national currency.
❖ Balance of Payments: The relationship between the payments made by one country to all
other countries and its receipts from all countries. The balance of payments accounts records
all flows of money in and out of a country. These flows might result from exports (an inflow
or credit) or from imports (an outflow or debit).
All flows of money are added together and grouped according to their type. The overall
account is then called the balance of payments – principally because the total of outflows
must equal the total of inflows. These transactions consist of imports and exports of goods,
services and capital, as well as transfer payments such as foreign aid and remittances.
❖ Current account: The current account records exports and imports of goods and services as
well as unilateral transfers. A unilateral transfer is a one-way transfer of money, goods, or
services from one country to another.
❖ Capital account: The capital account records purchase and sale transactions of foreign assets
and liabilities during a Particular year. The capital account is a record of the inflows and

outflows of capital that directly affect a nation’s foreign assets and liabilities.
❖ Balance of Trade: The difference in value between a country’s imports and exports is termed
as balance of trade. Balance of payments is the overall record of all economic transactions
of a country with the rest of the world. Balance of trade includes imports and exports of
goods alone i.e., visible items.
❖ CR – CAFTA: Central America and Dominican Republic Free Trade Agreement. The Dominican
Republic-Central America FTA (CAFTA-DR) is the first free trade agreement between the
United States and a group of smaller developing economies: our Central American
neighbours Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, as well as the
Dominican Republic. The CAFTA-DR promotes stronger trade and investment ties, prosperity,
and stability throughout the region and along our Southern border.

❖ MERCOSUR: Mercosur is an economic and political bloc comprising Argentina, Brazil,
Paraguay, Uruguay, and Venezuela. Created during a period when longtime rivals Argentina
and Brazil were seeking to improve relations, the bloc saw some early successes, including a
tenfold increase in trade within the group in the 1990s.
❖ ASEAN: The Association of Southeast Asian Nations (ASEAN) is a regional grouping that
promotes economic, political, and security cooperation among its ten members: Brunei,
Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and
Vietnam. ASEAN countries have a population of nearly 640 million people and a combined
GDP of $2.57 trillion. The group has spurred economic integration, signing six free-trade
agreements with other regional economies.

❖ PACER PLUS: Pacific Agreement on Closer Economic Relations Plus Negotiations since 2009.
The Pacific Agreement on Closer Economic Relations (PACER) is an umbrella agreement
between members of the Pacific Islands Forum (the Forum Island
Countries plus Australia and New Zealand) which provides a framework for the future
development of trade co operation. It was first signed at Nauru on 18 August 2001 and
entered into force on 3 October 2002. It is a framework agreement that sets an outline for
the future development of trade and economic relations across the Forum region as a whole.
❖ Regional Comprehensive Economic Partnership (RCEP): Regional Comprehensive Economic

Partnership since 2013. Regional Comprehensive Economic Partnership (RCEP) is a proposed
free trade agreement (FTA) between the ten member states of the Association of Southeast
Asian Nations (ASEAN) (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines,
Singapore, Thailand, Vietnam) and the six Asia-Pacific states with which ASEAN has existing
free trade agreements (Australia, China, India, Japan, South Korea and New Zealand). It is
reported that a broad agreement is likely to be reached soon.

❖ GCC (Gulf Cooperation Council): He Cooperation Council for the Arab States of the Gulf,
originally known as the Gulf Cooperation Council, is a regional intergovernmental political
and economic union consisting of all Arab states of the Persian Gulf except Iraq.
❖ International liquidity: International liquidity’ embraces all those assets which are
internationally acceptable without loss of value in discharge of debts (on external accounts).
In its simplest form, international liquidity comprises of all reserves that are available to the
monetary authorities of different countries for meeting their international disbursement. In
short, the term ‘international liquidity’ connotes the world supply of reserves of gold and
currencies which are freely usable internationally, such as dollars and sterling.
❖ Forex Reserves: The forex are reserve assets held by a central bank in foreign currencies. The
components of India’s FOREX Reserves include Foreign currency assets (FCAs), Gold
Reserves, Special Drawing Rights (SDRs) and RBI’s Reserve position with International
Monetary Fund (IMF). FCAs constitute largest component of Indian Forex Reserves and are
expressed in US dollar terms.
❖ FDI (Foreign Direct Investment) - FDI refers to obtaining ownership in foreign business
entity. It can also be attributed that FDI circulates capital across national boundaries. It can
be defined as an investor based on one country (home country), acquires an asset in another
country (host country), with the intention to manage it. Permission for Foreign Direct
Investment (FDI) in India is not uniform for all sectors. Some sectors are opened up for 100%
and in some sectors, it is allowed only upto 26%, 49% or 51%. Also, FDI is prohibited in sectors
like lottery business, gambling, chit fund etc.

❖ Inward FDI - Foreign firms taking control over domestic assets is termed as inward FDI. From
an Indian perspective, direct investments made by foreign firms such as Suzuki, Honda, LG,
Samsung, General Motors, Electrolux etc come under inward FDI.
❖ Outward FDI - Domestic firms investing overseas and taking control over foreign assets are
known as Outward FDI. Such outward investment is also known as direct investments
abroad.
❖ Horizontal FDI - It is the investment activities undertaken by a foreign firm in similar
production activity as it is carried out in its home country. In other words, it signifies that an
MNC assumes the same production process in two or more countries. A number of MNCs
such as Kodak, HSBC, LG, Samsung etc expanded their business territory by way of horizontal
FDI.
❖ Vertical FDI - Under this, a firm assumes investment activities overseas, with the intention
of supplying raw materials required for its domestic production, or to sell its domestically
produced final products in a foreign country.
❖ Backward Vertical FDI – Under this, a foreign firm enters the business scenario of another
country with the intention of obtaining raw materials needed for carrying out its domestic
production activities. Such FDI is historically common in extractive industries such as mining
(Gold, Copper, Tin, Bauxite, petroleum etc). Companies like British Petroleum and Shell have
expanded their international business by backward vertical FDI.
❖ Forward Vertical FDI – Here a firm assumes FDI for selling out the products it domestically
produced. Setting up a marketing network, assembly or mixing operations overseas are
illustrations of forward vertical FDI.
❖ Conglomerate FDI - Direct investment overseas aimed at manufacturing products not
manufactured by the firm in the home country is termed as Conglomerate FDI.
❖ Foreign Institutional Investment (FII): A foreign institutional investor (FII) is an investor

or investment fund registered in a country outside of the one in which it is

investing. Institutional investors most notably include hedge funds, insurance
companies, pension funds and mutual funds. The term is used most commonly in India and
refers to outside companies investing in the financial markets of India. The biggest source
through which FIIs invest is the issuance of Participatory Notes (P-Notes), which are also
known as Offshore Derivatives.
❖ Greenfield Investments - Greenfield investments are done primarily for creation of new
facilities or expansion of existing facilities. Firms often enter international markets by way
of Greenfield investments in industries where technological skills and production technology
are the key factors. Example – Foreign company setting up a new project in India and
constructing factories for it.
❖ Brownfield Investments - An investment is called Brownfield when a company or
government entity purchases or leases existing production facilities to launch a new
production activity. This is an alternative to Greenfield investments. Example – Foreign
company rather than setting up a new factory decides to acquire the business of existing
factory.

❖ FDI Policy in India: The Department of Industrial Policy & Promotion is the nodal
Department for formulation of the policy of the Government on Foreign Direct Investment
(FDI). It is also responsible for maintenance and management of data on inward FDI into
India, based upon the remittances reported by the Reserve Bank of India. The FDI policy is
reviewed on an ongoing basis, with a view to making it more investor-friendly.
Foreign Direct Investment (FDI) is a major driver of economic growth and a source of non-
debt finance for the economic development of the country. Government has put in place an
investor friendly policy on FDI, under which FDI up to 100%, is permitted on the automatic
route in most sectors/ activities. In the recent past, the Government has brought FDI policy
reforms in a number of sectors viz. Defence, Construction Development, Insurance, Pension,
Other Financial Services, Asset reconstruction Companies, Broadcasting, Civil Aviation,
Pharmaceuticals, Trading etc.
FDI growth hits 5-year low in 2017-18

Foreign direct investment (FDI) in India seems to be petering out with the inflows growth
rate recording a five-year low of 3 per cent at USD 44.85 billion in 2017-18. According to the
latest data of the Department of Industrial Policy and Promotion (DIPP), FDI in 2017-18 grew
by only 3 per cent to USD 44.85 billion. Foreign inflows in the country grew by 8.67 per cent
in 2016-17, 29 per cent in 2015-16, 27 per cent in 2014-15, and 8 per cent in 2013-14.
However, FDI inflows recorded a negative growth of 38 per cent in 2012-13.
The main sectors that received maximum foreign inflows in the last fiscal include services
(USD 6.7 billion), computer software and hardware (USD 6.15 billion), telecommunications
(USD 6.21 billion), trading (USD 4.34 billion), construction (USD 2.73 billion) automobile
(USD 2 billion) and power (USD 1.62 billion) .
Mauritius has emerged as the largest source of FDI in India with USD 15.94 billion in 2017-
18 followed by Singapore (USD 12.18 billion), Netherlands (USD 2.8 billion), the US (USD 2.1
billion) and Japan (USD 1.61 billion).
Further, the data showed that the FDI equity inflow of USD 44.8 billion in 2017-18 is the
highest ever for any financial year.
❖ Trade Agreement: A trade agreement is a contract/agreement/pact between two or more

nations that outlines how they will work together to ensure mutual benefit in the field of
trade and investment. This can be bilateral (2 countries) or multilateral (more than 2
countries).

❖ Economic Integration: Economic integration refers to trade unification between different
states by the partial or full abolishing of customs tariffs on trade taking place within the
borders of each state.
❖ Levels of Economic Integration: There are different levels of Economic Integration which can
be seen from following diagram:
❖ Preferential trade agreement (PTA): A preferential trade agreement, is a trading bloc that
gives preferential access to certain products from the participating countries. This is done by
reducing tariffs but not by abolishing them completely. A PTA can be established through a
trade pact. It is the first stage of economic integration.
❖ Free trade agreement (FTA): A free-trade area is a trade bloc whose member countries have
signed a free-trade agreement (FTA), which eliminates tariffs, import quotas, and

preferences on most (if not all) goods and services traded between them. Example - ASEAN
FTA (Trade agreement within the Southeast asian nations)
❖ CECA (Comprehensive Economic Cooperation Agreement) and CEPA (Comprehensive

Economic partnership Agreement): When the countries go beyond FTA and agree for a
greater degree of economic integration which includes improving the attractiveness to
capital and human resources, and to expand trade and investment, it would result in CECA
or CEPA. While CECA comes first with elimination of tariffs, CEPA comes later including trade
in services and investments. CEPA has a bit wider scope than CECA.
❖ Customs Union: An agreement among countries to have free trade among themselves and
to adopt common external barriers against any other country interested in exporting to these
countries. Example: Gulf Cooperation Council (GCC).
❖ Common Market: A type of custom union where there are common policies on product
regulation, and free movement of goods and services, capital and labour.
❖ Economic Union: An economic union is a type of trade bloc which is composed of a common
market with a customs union. The participant countries have both common policies on
product regulation, freedom of movement of goods, services and the factors of production
(capital and labour) and a common external trade policy.
❖ Economic and Monetary Union: When an economic union involves unifying currency it
becomes a economic and monetary union. E.g. – Euro.
❖ Foreign Trade Policy 2015-20: The new five year Foreign Trade Policy, 2015-20 provides a
framework for increasing exports of goods and services as well as generation of employment
and increasing value addition in the country, in keeping with the “Make in India” vision of
Prime Minister. The focus of the new policy is to support both the manufacturing and services
sectors, with a special emphasis on improving the ‘ease of doing business’. The release of
Foreign Trade Policy was also accompanied by a FTP Statement explaining the vision, goals
and objectives underpinning India's Foreign Trade Policy, laying down a road map for India’s
global trade engagement in the coming years.
❖ MEIS and SEIS: FTP2015-20 introduces two new schemes, namely “Merchandise Exports
from India Scheme (MEIS)” for export of specified goods to specified markets and “Services
Exports from India Scheme (SEIS)” for increasing exports of notified services, in place of a
plethora of schemes earlier, with different conditions for eligibility and usage. Duty credit

scrips issued under MEIS and SEIS and the goods imported against these scrips are fully
transferable.
❖ Mid-Term Review of FTP 2015-20: The mid-term review of the five-year Foreign Trade Policy
(FTP), which was rolled out in 2015, was released in 2017. Key Highlights of Review are:
▪ Incentives under the Merchandise Export from India Scheme (MEIS) and Service
Exports from India Scheme (SEIS) have been raised.
▪ Import of second hand goods for repair/refurbishing/re- conditioning/re-
engineering is made free.
▪ Validity of Duty Credit Scrips has been increased from 18 to 24 months to enhance
their utility in the GST framework.
▪ A New Logistics Division to promote integrated development of the logistics sector
will be put in place.
▪ The round-the-clock customs clearance facility has been extended to more number
of sea ports and air cargo complexes.
▪ State-of-the-art trade analytics division in DGFT (Directorate General of Foreign
Trade) will be set up for data-based policy actions.
▪ New Services Division is planned in DGFT to examine Exim policies and procedures
to push services exports.
❖ India’s foreign Trade: Foreign trade in India includes all imports and exports to and from
India. At the level of Central Government it is administered by the Ministry of Commerce and
Industry It is also called as International trade, External trade or Inter-Regional trade. It
consists of imports, exports and entrepot. The inflow of goods in a country is called import
trade whereas outflow of goods from a country is called export trade. Many times goods are
imported for the purpose of re-export after some processing operations. This is called
entrepot trade. Foreign trade basically takes place for mutual satisfaction of wants and
utilities of resources.

❖ India’s trading positions with regard to other countries of the world is as follows:

❖ Sector wise share and growth rate of exports: Sector wise share of exports from India to
other countries of the world is as follows:

❖ Sector wise share and growth rate of imports: Sector wise share of imports to India from
other countries of the world is as follows:

Miscellaneous Terms:
❖ Import license: A document required and issued by some national governments authorizing
the importation of goods into their individual countries. A certificate issued by countries
exercising import controls that permits importation of the articles stated in the license and
often authorizes and/or releases the funds in payment of the importation.
❖ Export License: A document secured from a government, authorizing a shipper to export a

specific quantity of a particular commodity to a certain country. An export license is often
required when a government places restrictions upon exports.
❖ Global Dependency: Mutual dependence between two countries at a global level, with one
country depending on another country for trading of goods and services, and creating global
interdependence
❖ End Products: The product that is produced as the final result of an activity or process,
especially the finished article in a manufacturing process
❖ Franchise: An authorization granted by a government or company to an individual or group

enabling them to carry out specified commercial activities (such as providing a broadcasting
service or acting as an agent for a company’s products).

❖ Global Dependency: Mutual dependence between two countries at a global level, with one
country depending on another country for trading of goods and services, and creating global
interdependence
❖ End Products: The product that is produced as the final result of an activity or process,
especially the finished article in a manufacturing process
❖ Franchise: An authorization granted by a government or company to an individual or group

enabling them to carry out specified commercial activities (such as providing a broadcasting
service or acting as an agent for a company’s products).
❖ Separate International Division: In a company, international staff is isolated and functioned

separately for the company. The international division of a company has its own systems for
sales, marketing, customer support, and logistics; and this department handles all products
going to all foreign markets.

❖ Trade Sanction: A trade penalty imposed by one nation onto one or more other nations.
Trade sanctions are a subcategory of economic sanctions, which are commercial and
financial penalties imposed by one or more countries, and targeted against a country,
organization, group or individual.
❖ Gold Standard: A former monetary system under which the basic unit of currency was
exchangeable for a specific weight of gold.
❖ Purchasing Power Parity: A theory suggesting that exchange rate between currencies is in
equilibrium when they purchase the same amount of goods and services. Purchasing power
parity (PPP) is a neoclassical economic theory that states that the exchange rate between
two countries is equal to the ratio of the currencies’ respective purchasing power.

❖ Global Mindset: The change from an ethnocentric to a global perspective in business and
international affairs Global Mindset is the ability to absorb information, traditions, and
cultural norms from around the world and be able to conceptualize how to make an impact
in all environments
❖ Hard and Soft Currencies: Currencies having stable exchange rate over a longer period like
us dollar, british pound sterling, euro and japanese yen are called hard currencies, while
currencies whose exchange rate fluctuates from time to time are called soft currencies.
❖ Transhipment: The transfer of a shipment from one carrier to another in international trade,
most frequently from one ship to another. Because the unloading and reloading of delicate
merchandise may cause damage, transhipments are avoided whenever possible.
❖ Repatriation - The transfer of corporate money or property from a foreign country back to
its home country. For example, a corporation in the United States may repatriate the profits
earned by a Indian subsidiary in India. Some foreign governments restrict this action to
prevent a drain of capital or exploitation by the company to its home country. Repatriated
profit may be subject to special tax rules.
❖ Special Economic Zones (SEZs) - SEZs are zones created to promote export production, trade,
investment etc. Special Economic Zone (SEZ) is a specifically delineated duty-free enclave
and shall be deemed to be foreign territory for the purposes of trade operations and duties
and tariffs. In India, the government has designed Special Economic Zone (SEZ) policy during
the late 1990s and the SEZ Act came into force in 2005 for giving further clarification for the

working ofthe SEZs.
❖ EXIM Bank: Export–Import Bank of India is the premier export finance institution in India,
established in 1982 under Export-Import Bank of India Act 1981. Since its inception, Exim
Bank of India has been both a catalyst and a key player in the promotion of cross border
trade and investment. Commencing operations as a purveyor of export credit, like other
export credit agencies in the world, Exim Bank India has, over the period, evolved into an
institution that plays a major role in partnering Indian industries, particularly the Small and
Medium Enterprises, in their globalisation efforts, through a wide range of products and
services offered at all stages of the business cycle, starting from import of technology and
export product development to export production, export marketing, pre-shipment and
post-shipment and overseas investment.


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UNIT SNAPSHOT

UGC NET COMMERCE

Business Environment &

❖ Environment - According to Barnard “Environment consists of atoms and molecules,

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❖ Internal Environment - An organization's internal environment is composed of the elements

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❖ Quick Environmental Scanning Technique (QUEST) - The Quick Environmental Scanning

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❖ Planned Economy - In a planned economy, all decisions regarding production, distribution,

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❖ Maharatna/Navratna/Miniratna Status - The status of Maharatna, Navratna, Miniratna to

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❖ Privatization - Privatization is the process of transferring an enterprise or industry from the

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❖ Business Incubator - An organization designed to accelerate the growth and success of

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❖ Consumer Protection Council - The Consumer Protection Act postulates establishment of

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❖ Environment Protection Act, 1986 - Environment Protection Act,1986 is an Act of the

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❖ International Business: International business refers to cross-border commerce and other

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❖ Globalization: The process of the development of a global market-driven economy.

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• This trade theory prevailed during 16th to 19th centuries.

❖ Absolute Advantage Theory

❖ Comparative Advantage Theory

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❖ Endowment Theory / Heckscher-Ohlin model / Factor Proportions Theory:

❖ Product Life-Cycle Theory:

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❖ Multilateral Investment Guarantee Agency (MIGA): MIGA was established in 1988 as an

❖ Structure and Size of IMF:

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❖ Special Drawing Rights:

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❖ WTO (World Trade Organization): World Trade Organization, as an institution was

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❖ General Agreement on Trade in Services (GATS): The General Agreement on Trade in

❖ Agreement on subsidies and countervailing measures: The Agreement on Subsidies and

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❖ Anti-Dumping Duty: At times countries resort to subsidize production or exports so heavily

❖ WTO’s Principle of Non-Discrimination: Non-discrimination is a fundamental principle of the