Unit- IIIrd Ch- IIIrd

Liberalisation, Privatisation and Globalisation (FDI, BPOs and KPOs)

The LPG model of development was introduced in 1991 by the then Finance Minister Dr.
Man Mohan Singh to expand of Indian economic activities across political boundaries of
nation.

Liberlisation, privatization and globalization (LPG)

Liberalization refers to a relaxation of previous government restrictions, usually in areas of

economic policy.

Privatization is the transfer of property or responsibility from the public sector (government)
to the private sector (business).

Globlisation can be defined as an expansion of economic activities across political

boundaries of nation.

Benefits of Globalisation:

1. Trade in goods and services:

Each country will produce and export goods in which it has advantage and buy from
others, which are costly to produce at home.

2. Movement of Capital:

More investment opportunities will arise in countries that possess comparative advantage
in certain goods and services, these countries may become more profitable and attractive
destinations for international capital.

3. Financial Flaws:
Financial flaws across the nations have an important role in play in trade and
development of various developing countries. Globlisation is expected to strengthen the
foreign exchange markets.

Fears of Globalisation:.

1. Globalisatio may lead to Dumping of polluting technology:

Globalisation may also lead to dumping of polluting technology by the rich country in the
underdeveloped countries. It may pollute their environment and reduce their resource
availability as well as efficiency and productivity.

2. Globlisation may lead to income inequalities among various countries:

This fear of income inequalities is based on the gains from globlisation which arise from
improper efficiency of resource use. It would automatically grow to rich nation due to
their advanced technology that rich nations become still rich at the cost of poor countries.
 3. Globalisation may lead to capture the markets of the underdeveloped Countries
by the advanced countries:
It is quite evident that the rich countries are more interested in capturing wide markets.
They are anxious to exploit their resources and market for their own gains but are not
prepared to open up their domestic economies for goods and services produced by the
underdeveloped countries.

Foreign Direct Investment (FDI)

Foreign Investment can be broadly category in to two components:

1. Foreign Direct Investment (FDI)

2. Foreign institutional investors (FII)

1. FDI:
FDI is in the form of investment directly made in industry by foreign Industrial houses or
Multinational Corporation (MNC) with the objective of earning profits.FDI represents a
long term commitment.

2. FII:
It is in the form of purchase of some shares by foreign institutional investors and
companies. These investments are short term in nature.

Difference between FII & FDI

Foreign institutional investors buy stocks or bonds in foreign countries and foreign direct
investment is an investment in an enterprise or business.

The word "Institutional" refers to the organizations. An institutional investor is a large

entity investor such as a bank etc.

Advantages of FDI

1. Foreign capital fills up the saving and investment gap

Savings in underdeveloped countries are not adequate to increase the growth rate of the
economy. The gap between these, needed to achieve the desired rate of growth can be
filled by inflow of foreign capital.

2. Foreign capital Minimises Balance of payments problems:

FDI means that MNCs bring their own machines; plants etc. and buy other goods with
their own resources. Thus eliminating the burden of foreign exchange payments in this
account. Thus the gap in Balance of payments is minimised.

3. Foreign Capital Fills Technology and Management Gap:

The MNC’s not only bring their plant and equipment but also bring along their own
engineers, technicians, managers, etc. who are well versed in most modern methods of
work. This inflow of expertise, skill and knowledge makes the operations of industries
effective and cost efficient.
 Disadvantages of FDI

1. Eliminate local entrepreneurs:

As more and more FDI comes in and MNC grows, through their big size of operations
destroy competition and eliminate local entrepreneurs.

2. Local people may not be employed to such high ranking jobs

The local people may not be employed to such high ranking jobs where they can interact
and learn from the foreign experts.

3. MNC’S technology may be inappropriate and make worse Unemployment

Problem:
The modern technology absorbs less labour. In countries where labour is in large quantity
and unemployment widespread, such labour saving technology inappropriate.

4. MNC’S may Distort Economic Priorities and Investment Pattern:

MNCs are interested in producing those goods which give the maximum returns. Thus
while a poor country may need more of ordinary cloth or drinking water but the MNCs
may produce mineral water and soft drinks.

Knowledge process outsourcing (KPO)

Knowledge process outsourcing (KPO) describes the outsourcing of core information-related

business activities which are competitively important for a company. KPO requires advanced
technical skills as well as a high degree of specialist expertise.

Types of KPO

KPO services include all kinds of research and information gathering, e.g. business and
market research, legal and medical services; training, consultancy, etc.

Benefits

 Cost reduction
 Shortage of skilled employees
 Provides many high skilled people at very low cost
 High class services are provided at a lower cost to decrease unemployment and
benefit their economy

Risks

 lack of communication
 delay in delivery times
 And a great risk in lack of privacy.

Business Process Outsourcing(BPO)

What is outsourcing
To outsource means to engage the services of an outside agency to manage, deliver and
operate one or more business activities.

Benefits of Business Process Outsourcing

(i) Focus on Key Functions:

Outsourcing enables an enterprise to concentrate its time and efforts on its key activities.
Therefore, it can focus on matters which are more crucial to its success.

(ii) Reduction in Cost:

Outsourcing agencies are specialists in their activities. They can perform the same job at a
lower cost. Therefore, charges paid to outsourcing agents will be much less than what the
enterprise would itself spend on the performance of routine activities and functions.

(iii) Specialisation:

The outsourcing agent provides expert advice and assistance to the client company for
better management of concerned functions.

(iv) Freedom of Choice:

The company can choose the best outsourcing agency. It can have outsourcing contact
with the agency for a limited period. The company is free to terminate or review the
contract depending on the quality, reliability and efficiency of services offered by the
agency.

Limitations of Business Process Outsourcing

1. Lack of Secrecy:

Considerable information of the company has to be shared with the out sourcee. There is
risk of information being leaked out to competitors.

2. Potential Competition:

The outsourcer may start business in competition with the outsourcee due to outsourcing
over a period of time.

3. Resentment: (Anger)

Outsourced may have to face resentment in his own country because people feel that
outsourcing is reducing job opportunities for the local citizens.