UNIT 6

GLOBAL BUSINESS ENVIRONMENT

❖ Concept of globalization - trends and issues

❖ Regional grouping of nations
❖ Regional trade agreement in South Asia –
❖ SAARC
❖ SAPTA
❖ SAFTA and
❖ BIMSTEC
❖ Foreign direct investment (FDI) in Nepal
❖ WTO and Nepal
 Concept of globalization
Meaning of Globalization:

➢ Globalization is a process of integration among the people, companies and

governments of different nations.

➢ It is transferring local phenomena into global ones and it process by which activity becomes
worldwide in scope.

➢ Globalization refers to the increasing economic, socio-cultural, demographic, political and

environmental interdependence of different places around the world.
 Trends/ nature of Globalization
1. A global reallocation of Industries
2. Expansion in world trade volume
3. Growth in merger and acquition trend
4. Movement of capital from one country to another
5. An increased power of global and regional trade organizations
6. Growth of life style and consumption pattern

Issues of Globalization
1. Legal issues
2. Cultural issues
3. Political issues
4. Employment issues
5. Economic issues
6. Equity issues
7. Income distribution issues
 Regional grouping of nations
Concepts: Association of nations in a particular region of the world.

Objective:

1. Promote economic activities within the region for mutual benefits

2. Promotes free flow of factors of production within the countries in the region.
3. It work towards removing trade and other barriers among the countries.
4. Bases on the principles of reciprocity and mutuality.
5. The success of regional economic grouping of nations depends on the
cooperation and trust among the member countries.

Example: Some of the regional economic groupings of nations in the world are: SAFTA,
NAFTA, LAFTA, BIMSTEC, ASEAN, APEC, EU…
 Regional trade agreement in South Asia
An agreement among the countries in a geographic region to reduce and ultimately remove tariff
and non-tariff barriers for free flow of goods and services and factors of production among each
other.

1. SAARC
2. SAPTA
3. SAFTA
4. BIMSTEC
 South Asian Association for Regional Cooperation
1. SAARC
➢ Established in 8th December, 1985
➢ Founding members: Nepal, Bhutan, Bangladesh, India, Pakistan,
Maldives and Sri Lanka
➢ Afghanistan became its 8th member in 2007
➢ Head office: Kathmandu.
➢ General Secretary: Amjed Hussain B.Sial, Pakistan’s Diplomat
(since 1st March 2017, 3 years term)

Goal/ Objectives of SAARC:

➢ To improve collaboration with other emerging nations.
➢ To promote the region’s economic growth.
➢ Strengthen co-operation with other developing countries.
➢ Cooperate with international and regional organisation with
similar aims and purposes
➢ To contribute to mutual trust, understanding of one another’s
problem.
➢ To strengthen cooperation with other developing countries
with common aims.
➢ To maintain peace in the region.
Principles of SAARC:

1. Respect for sovereignty, territorial integrity, political equality and independence of all
member states.

2. Non interference in the internal matters.

3. Cooperation and mutual benefits.

4. All decisions to be taken totally and need a minimum of all the 8 members.

5. All bilateral issues to be kept aside and only multilateral issues to be discussed
without being prejudiced by bilateral issues.
SAARC comprises of 5 main bodies:

1. SAARC Summit
• Head of state meeting
• To be held annually
• First summit was held in Bangladesh
• Nepal has conducted 3 summits(3rd -1987, 11th - 2002, 18th - 2014)
• 19th Summit was to be held in Pakistan in 2016, November but withheld due to Indo-Pak Uri attack in
J&K issue
• 20th summit to be held in Sri Lanka

2. Council of ministers
• Foreign ministers of member nations

3. Standing committees
• Foreign secretaries meeting to be held twice annually
• Take decisions relating to overall monitoring and coordination of program of cooperation.

4. Programming committees
• Standing committees sets up programming committees

5. Technical committees
• Representative of member nations responsible for implementation
• Respective area of cooperation
 Critical Analysis
• SAARC Success:
• Creation of friendly environment.

• Creation of SAPTA: trading agreement for promoting trade amongst the member countries.

• Creation of SAFTA: a free trade agreement confines to goods to reduced customs duty of all traded
goods to zero.

• Advantages to developing and developed countries: provided a forum for bilateral and regional
agreements to the nations for collaboration among themselves.

• SAARC Failures:
• Unresolved border issue : led to terrorism, refugee crisis and smuggling.
 South Asian Preferential Trade Agreement
SAPTA
• Agreement signed in Dhaka on 11th April 1993
• It provided preferential treatment to reduce import tariff on preferential items
• It is regarded as the first step towards the establishment of SAFTA.

Objectives of SAPTA
• To promote cooperation among the countries for the benefit of the people.

• To aware the people about the importance of trade for the development of national
economy.
• To generate employment and enhance standard of living.
• To promote intra-regional economic cooperation.
• To increase the volume of trade of this region.
 South Asian Free Trade Area /Agreement
SAFTA
• It is a proposed FTA between the eight members of the SAARC group.

• Signed at SAARC summit held at Islamabad on January 6, 2004 (12th summit).

• The agreement incorporates trade in goods. Services and investment are not part of the agreement.

• It contains agreement on reduction of tariff, para-tariff and non-tariff barriers in the intra-region trade.

• SAFTA also incorporated simplification of standard, custom clearance, import licensing, import financing,
transit facilities for land locked countries.

Objectives of SAFTA

1. Trade Liberalization Programme.

2. Eliminating barriers to trade.

3. Rules of origin

4. Institutional Arrangements

5. Consultations and Dispute Settlement Procedures

6. Safeguard Measures

7. Fair competition

8. Enhance mutual benefit

 Principles of SAFTA
1. Rule based function
2. Reciprocity and mutuality
3. Emphasis on trade facilitation
4. Special preference to LDCs
5. Free movement of goods
6. Trade without discrimination
7. Compatibility with WTO and other agreements
8. Technical assistance for LDCS
 Focus of SAFTA (instruments)

1. Trade liberalization
• Negative list approach is followed in SAFTA trade liberalization.(In negative list approach, trade in all
commodities are permitted and unregulated unless specific measures are set out in the list of reservations. This is a liberal
form trade. In a positive list approach, only commodities evaluated and approved would be permitted in trade.)

• Non-LDC members shall reduce their existing tariff to 20% in two years(by 2008), and there after to 0-5%
over five years(by 2013). Sri Lanka gets one extra years.

• LDC members shall reduce their existing tariff to 30% in two years(by 2008), and there after to 0-5% over
eight years(2013).

2. Non-tariff barriers (quotas, subsidies, embargo, product content requirement)

QRs will be removed as soon as the tariff levels reach 0-5%
There is no provision for removing non-QR-NTBs

3. Sensitive list
• A sensitive list is a list with every country which does not include tariff concession.
• Each country will have its sensitive list of products, which will not be subjected to tariff concessions.
Nepal has 1,257 for the LDCs and 1,295 for the non-LDCs. Nepal has reduced its list by 259 from its
previous list of 1295. India has 25 items on the sensitive list for the LDCs and 695 for the non-LDCs…
 4. Rule of origin
• ‘Rules of origin’ are the criteria used to define where a product was made. They are an essential part of
trade rules because a number of policies discriminate between exporting countries: quotas, preferential
tariffs, anti-dumping actions, countervailing duty (charged to counter export subsidies), and more.
• Because the preferential treatment provided for in a free trade agreement is usually granted only
to products originating from members of that FTA, rules of origin are important.

5. Safeguard measures
• Members shall have the right to withdraw preference to safeguard domestic industry against possible

injury.
• Safeguard will not apply to LDC product if the share of import from LDCs is less than 5% of the total
import of the importing country in that product
 Bay of Bengal Initiative for Multi-sectoral Technical & Economic
Cooperation(BIMSTEC)
• Asian region grouping
• “Towards a Peaceful, Prosperous and Sustainable Bay of Bengal Region”
• Created through Bangkok declaration on 6th June, 1997
• Originally BIMST-EC(Bangladesh, India, Myanmar, Sri Lanka, Thailand – Economic Cooperation)
• After Nepal and Bhutan joined the alliance in 2004, it was renamed BIMSTEC
• Bangladesh, India, Sri Lanka, Thailand – original member since June 1997
• Myanmar admitted in December 1997
• Nepal & Bhutan admitted in February 2004

• BIMSTEC works as a bridge between SAARC and ASEAN(Brunei, Cambodia, Laos,

Myanmar, Vietnam).

• The fourth edition of Bay of Bengal Initiatives for Multi-Sectoral, Technical

and Economic
Cooperation (BIMSTEC) was held in Kathmandu, capital city from 30 to 31 August, 2018.
th st

Nepal is the current chair of BIMSTEC.

• The main focus of the summit is to increase connectivity between BIMSTEC nations including
roads, airways, and transmission lines. It will also give priority to poverty alleviation, counter
terrorism and transnational crime.
 Objectives of BIMSTEC

1. To create favorable environment for rapid economic growth.

2. To accelerate the economic growth and social progress.
3. To provide assistance to each other in the form of training and research facilities.
4. To promote active collaboration and mutual assistance on maters of common interest.
5. To cooperate more effectively.
6. To maintain close and beneficial cooperation.
7. To Increase standard Living.,

Principles of BIMSTEC
1. Respect for sovereignty, territorial integrity, political independence, non-interference
in internal affairs, peaceful co-existence and mutual benefit.

2. Consider bilateral, regional or multi-lateral cooperation involving the member states

There are 13 areas of cooperation of which Nepal’s specialized area is poverty alleviation.
Nepal being the lead nation in poverty alleviation area, it is responsible for planning and
implementation of program in this designated area and hold expert group meetings.
 Impact of regional Economic Groupings to Nepalese Business

• Positive impacts:

1. Expansion of trade
2. Increased joint venture
3. Transit facility
4. Reduction in transaction cost
5. Benefits to LDCs

• Negative impacts:

➢ Increased competition
➢ Revenue loss to the government
➢ An international organization that deals with the rules of trade between nations at Established in
1st January, 1995.

➢ It is the successor of GATT(General Agreement on Tariff & Trade, 1948).

➢ It is a forum for government to negotiate trade agreements, sort out the trade problems, settle trade
related disputes.

➢ After several round of negotiations, the Uruguay round of GATT from 1986-1994 let to the WTO’s
formation.

➢ GATT mainly dealt with trade in goods.

➢ WTO in addition deals in trade in services as well as intellectual property.

➢ Its main purpose is to help free flow of trade, removing every possible hindrances.

➢ Till date there are 164 member nations of WTO, Nepal being 147th member in 2004, 164 members
since 29 July 2016
 Objectives of WTO

1. To promote world trade beneficial for all its members.

2. To maintain a better balance in the sharing of advantages among

the member nations.
3. To remove every possible obstacles to an open world trading system.

4. To promote competitiveness among all trading partners.

5. To enhance productivity and level of production ensuring employment

generation in the world.

6. To optimize the use of world resources.

7. To improve living standard of global population and speed up economic

development of every member nations.
 Principles of the WTO

1. Trade without Discrimination

2. Free trade
3. Predictability
4. Promoting fair competition
5. Encouraging development and economic reform

Impact of the WTO to Nepal

• Positive impacts/ Opportunities of WTO membership

1. Trade expansion and diversification
2. Attract FDI: Through stability, predictability & mandatory provision to protect IPR.
3. Transit rights: WTO rules provide freedom of transit to member countries
4. Private sector development
5. Constructive handling of disputes

• Negative impacts/ Threats of WTO membership

1. Threat to the domestic businesses
2. Revenue loss to the government
3. Poor negotiation ability
4. Exploitation of natural resources
 Foreign Direct Investment(FDI)
Meanings:
➢ FDI is the international movement of capital.
➢ FDI is made for the purpose of actively controlling property, assets or companies
located in the host countries.
➢ Why companies engage in FDI:-
• To access new market overseas
• To take advantage of cheaper factor of production
• To access new technology and skills
• To locate a business near relates companies
 Factor Affecting (FDI)

1. Open Economy: Foreign direct investments are made when a host nation possesses an open economy—
welcoming investments from developed countries. Investors avoid capital investment in a closed economy.

2. Above-Average Growth: Usually, foreign investors are less interested in established markets. If a country is
still developing with room for above-average growth, investments are more likely.

3. Environmental Stability: Investors prefer sound political environments and geographically well-positioned
nations.

4. Skilled and Cheap Labour: Investors intend to employ affordable human resources with basic skills like
communication and technical know-how.

5. Exchange Rate Stability: The exchange rates between the investor and host nations should not fluctuate too
much.

6. Government Support: Investing companies often look for concessions—tax policies lenient towards the FDI.

7. Return on Investment: Investors anticipate high returns—there should be sufficient scope for profitability.

8. Good Infrastructure: Investors prefer countries that provide better infrastructure —networks, transportation,
and other facilities that can further ease business operations.
 Methods (FDI)

1. Greenfield Investments

Many companies start everything from scratch when operating in a foreign country. They build new factories and train the

workforce.

McDonald’s and Starbucks India are examples of that. Both started from scratch and became prominent in a foreign nation. These

are called greenfield investments.

2. Brownfield Investments

It can be viewed as a shortcut. Some foreign businesses decide not to start from scratch—they save time and effort. Instead, they

expand their business by going for cross-border mergers. As a result, they can operate right away. Tata Motors’ acquisition of

Jaguar is one such example. Tata did not need to build a new factory in the UK. Instead, they picked up where Jaguar left; from the

existing factory.
 Types of Foreign Direct Investment (FDI)

1. Horizontal FDI: Here, investors put their money on foreign companies that operate in the same
industry—niche in which the investor operates domestically. This way, firms expand their existing
business into different nations.

2. Vertical FDI: When a company acquires or merges with a foreign company to add more value to its
supply chain, it is called a vertical FDI. For example, if an automobile company invests in a foreign
company manufacturing semi-conductor chips, the vertical integration would improve supply
chain.

3. Conglomerate FDI: Here, investors invest in completely different segments—unrelated to their

existing operations.

4. Platform FDI: It is a unique form of FDI—businesses invest in a foreign company to manufacture

goods. They then sell the finished product in a third country.
 Foreign Direct Investment (FDI)

ADVANTAGES DISADVANTAGES

1. Capital Infusion and Job Creation 1. Risk of Political Instability

2. Transfer of Technology and Skills 2. Negative Effects on Domestic Firms

3. Increased Competition and Productivity 3. Dependence on Foreign Investment

4. Access to New Markets and Resources 4. Cultural and Legal Differences

5. Economic Growth and Development 5. Possible Exploitation of Labor and Resources

 FDI & Nepal

• Foreign investment in Nepal is regulated and administered by FITTA, 1992 and Industrial Enterprises Act(IEA) 1992.

• Department of Industry (DoI) is the sole agency for administration and FITTA in Nepal.

• Inflow of FDI in Nepal began in the early 1980s through the gradual opening up of the economy.

• Potential attraction for FDI in Nepal is mainly due to liberal trade policies comprising of tariff reductions, introduction of duty
drawback schemes and adaptation of a current account convertibility system.

Based on the national priority, the major sectors for the FDI are
• Hydroelectricity (Production and Transmission)

• Infrastructure related to Transportation (Fast Track, Railway, Tunnel, Cable Car, Metro Rail, Flyover and International Airport)

• Agricultural, Food Procession and Herbs Procession Industries

• Tourism Industries and

• Mineral and Productive Sector Industries

 Reasons for poor inflow of FDI in Nepal
1. Poor support from the government
• Process slowed down by government, changes in procedures are not incorporated
on timely manner

2. Lack of reliable information

• Due to lack of reliable information, lack of timely updates, investors do not get real picture of
the environment.

3. Infrastructural problem
• Good infrastructure is prerequisite for FDI attraction in any country. The condition of road
transportation and network, electricity communication is not satisfactory. This can lead to
higher production cost leading to poor FDI inflow.

4. Labor issues
• Strikes and lockouts are common practices in Nepal. The labor forces are influenced by
political parties resulting to poor FDI inflow of FDI.

5. Inefficient bureaucracy
• Unsupportive and inefficient bureaucracy creates hurdles for foreign investors. Lengthy process
of registration, common culture of corruption, and lack of transparency.

6. Legislative problem
• Several foreign investment legislation need to be amended to make it compatible
with changing FDI scenario
Thank you