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Unit 3 Chapter 1

Globalisation
Meaning
The term globalisation refers to the integration of the economy of the nation with
the world economy. It is a multifaceted aspect. It is a result of the collection of
multiple strategies that are directed at transforming the world towards greater
interdependence and integration.

It includes the creation of networks and pursuits transforming social, economic,

and geographical barriers. Globalisation tries to build links in such a way that the
events in India can be determined by the events happening distances away.

Definition
In the context of economic reforms, Globalization means the integration of the
Indian economy with the world economy. It means that the economy of India will
now also depend on the world economy and vice versa. It encourages FDI and
foreign trade with different countries.

Indicators of Globalization
1. International Trade: The volume and value of international trade in goods
and services is a crucial indicator of globalisation. Increasing trade flows,
higher export-import ratios, and the growth of global supply chains
indicate deeper integration and interdependence among nations.

2. Foreign Direct Investment (FDI): FDI refers to investments made by

individuals or companies from one country into businesses located in
another country. Higher levels of FDI indicate increased economic
integration and global investment flows.

3. Cross-Border Capital Flows: The movement of capital across national

borders, including foreign portfolio investments, bank lending, and
remittances, reflects global financial integration. Large-scale cross-border
capital flows suggest global interconnectedness and interdependence.

4. Global Supply Chains: The fragmentation of production across different

countries, with components and services being sourced from various
locations, is a key indicator of globalisation. The establishment and
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expansion of global supply chains demonstrate economic interconnections
on a global scale.

5. International Communication and Information Flow: The growth of

telecommunications, internet usage, social media, and international media
networks has facilitated the rapid dissemination of information and ideas
across borders. Increased cross-border communication signifies a more
interconnected and globalised world.

6. Migration and Mobility: The movement of people across national borders,

whether for work, education, or other reasons, is an important aspect of
globalisation. Higher levels of international migration and mobility indicate
increased global connectivity.

7. Cultural Exchange and Influence: The diffusion of ideas, values, and

cultural practices across borders is a significant indicator of globalisation.
The spread of international cuisine, music, movies, fashion, and the
adoption of global cultural trends suggest cultural integration.

8. Transnational Organizations and Institutions: The presence and influence

of international organisations, such as the United Nations, World Trade
Organization (WTO), World Bank, and multinational corporations,
demonstrate global governance structures and cooperation beyond
national borders.

9. Global Governance and Policy Harmonization: The development of global

agreements, treaties, and international frameworks for addressing issues
like climate change, human rights, and trade regulations illustrates efforts
towards global cooperation and policy harmonisation.

10.Technological Advancements: Advances in transportation,

communication, and information technologies have significantly
contributed to globalisation. The widespread adoption of digital
technologies and the internet has accelerated global interconnectedness
and integration.

FDI (Foreign Direct Investment)

➔ Foreign Direct Investment takes place when a company, multinational
corporation or individual from one country invests in another country’s
assets or takes an ownership stake in its companies. It generally takes the
form of acquiring a stake in an existing enterprise in a foreign country or
starting a subsidiary to expand the operation of an existing enterprise in
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that country. It can stimulate a country’s economy by creating new job
openings, increasing the production capacity of the nation, and improving
the lives of residents.
➔ Direct Investment is vital in supporting developing countries by motivating
them to participate in international trade by facilitating the flow of capital,
skills, and knowledge.
➔ FDI can be beneficial for both the home country and the host country. In
the home country, FDI can help to create jobs, increase exports, and boost
innovation. In the host country, FDI can help to attract new technology,
create jobs, and improve productivity.
➔ However, FDI can also have some negative consequences. For example, it
can lead to job losses in the home country, and it can also lead to the
exploitation of natural resources in the host country.
➔ Overall, FDI is a complex issue with both positive and negative
consequences. It is important to carefully consider the potential benefits
and risks of FDI before making an investment.

Types of FDI
There are two main types of FDI:
1. Greenfield investment: involves the creation of a new company or
establishment of facilities abroad. A greenfield investment is a form of
market entry commonly used when a company wants to achieve the
highest degree of control over foreign activities
2. M&A: amounts to transferring the ownership of existing assets to an
owner abroad. In a merger, two companies are merged to form one, while
in an acquisition one company is taken over by another.

Importance of FDI
➔ It Helps in Diversifying Investor's Portfolio investing in FDI will have a
diversified portfolio comprising many investments that can be national
investments or FDI. A diversified portfolio is by investing in a variety of
different foreign companies, an investor can reduce their risk.
➔ It Infuses New Technology in Developing Nation Advanced countries
making FDI a great opportunity for developing countries. They are likely to
bring cutting-edge technology and skills with them to the host country
which can be very helpful to a developing country like India.
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➔ Creates Further Jobs and Openings Foreign Direct Investments (FDI) create
more job opportunities in the host country, indirectly boosting the economy
and attracting more investments.

Benefits of FDI
➔ Job creation: FDI can create jobs in the host country, both directly and
indirectly.
➔ Technology transfer: FDI can help to transfer technology from the home
country to the host country. This can help to improve productivity and
competitiveness in the host country.
➔ Increased exports: FDI can lead to increased exports from the host
country. This can help to boost the host country's economy.
➔ Increased investment: FDI can lead to increased investment in the host
country. This can help to improve the host country's infrastructure and
economy.

Risks of FDI
➔ Job losses: FDI can lead to job losses in the home country, as companies
move production to the host country where labour is cheaper.
➔ The exploitation of natural resources: FDI can lead to the exploitation of
natural resources in the host country, as companies extract resources
without giving back to the local community.
➔ Environmental damage: FDI can lead to environmental damage in the host
country, as companies pollute the environment without taking steps to
clean up their mess.

FPI (Foreign Portfolio Investment)

➔ It is also known as non-direct investment.
➔ It takes place when companies, financial institutions or individuals buy
stakes in companies on a foreign stock exchange. This type of investment
is not made with the intention of acquiring a controlling interest in the
issuing company. Typically, this type of investment is short-term in nature
and is made to take advantage of favourable changes in exchange rates or
to earn short-term profits on interest rate differences.
➔ The group of investors who make investments in the securities includes
Bankers, asset management companies, pension funds, mutual funds,
➔ The companies must register at SEBI
➔ Invested in the secondary market – shares, government, securities. Etc.
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➔ To earn profit
➔ Short or long-term investment
➔ No locking period
➔ Investment cannot exceed 10% of the paid-up capital of the Indian
Company.
➔ Foreign portfolio investment (FPI) is a type of investment made by an
individual or institution in a security or asset of another country. FPIs can
include stocks, bonds, mutual funds, and other financial instruments.
➔ FPIs can have a significant impact on the economies of the countries in
which they are made. In countries with strong economies, HFPIs can
provide a source of capital for investment and growth. In countries with
weaker economies, FPIs can help to stabilise the financial system and
attract foreign investment.
➔ However, FPIs can also have negative consequences. For example, if FPIs
are made in large amounts, they can drive up the prices of assets, making
it more difficult for local investors to buy them. Additionally, if FPIs are
withdrawn suddenly, they can cause a financial crisis.

Role of Foreign Investments

➔ Economic Growth: Foreign investments can stimulate economic growth by
providing capital, technology, and expertise to host countries. These
investments help create new businesses, expand existing industries, and
generate employment opportunities. They contribute to increased
production, productivity, and overall economic development.
➔ Infrastructure Development: Foreign investments often contribute to the
development of infrastructure projects such as roads, bridges, ports, power
plants, and telecommunications networks. These investments help improve
the host country's transportation and communication systems, which are
crucial for economic activities and trade.
➔ Transfer of Technology and Knowledge: Foreign investments bring
advanced technologies, know-how, and management practices to the host
country. This transfer of technology and knowledge can enhance domestic
industries' efficiency and competitiveness, leading to innovation, improved
productivity, and the development of new industries.
➔ Access to Global Markets: Foreign investments can provide access to
international markets and supply chains. Multinational corporations often
invest in host countries to tap into new markets, benefit from lower
production costs, or secure access to valuable natural resources. This can
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boost exports and enhance the host country's integration into the global
economy.
➔ Job Creation and Skills Development: Foreign investments generate
employment opportunities in the host country, both directly and indirectly.
They create jobs in the industries where investments are made and also in
supporting sectors such as logistics, services, and construction. These
investments can also contribute to skills development through the transfer
of technology and knowledge to local employees.
➔ Government Revenue and Balance of Payments: Foreign investments can
bring in foreign currency through capital inflows, dividends, and taxes paid
by foreign companies. This can strengthen the host country's balance of
payments and provide a source of government revenue that can be used
for public services, infrastructure development, and social welfare
programs.
➔ Increasing competition: Foreign investment can also increase competition
in domestic markets. This can lead to lower prices, better quality products
and services, and more innovation.
➔ Risks and Challenges: Foreign investments also pose certain risks and
challenges to the host country. These include the potential for exploitation
of natural resources, environmental concerns, dependency on foreign
investors, unequal distribution of benefits, and the risk of capital flight if
investors decide to withdraw their investments.
➔ Financing new projects: Foreign investment can provide the necessary
capital to finance new projects, such as infrastructure, manufacturing, and
technology. This can help to create jobs and boost economic growth.
➔ Expanding existing businesses: Foreign investment can also help to
expand existing businesses by providing them with the capital they need
to acquire new assets, hire new workers, and enter new markets. This can
lead to increased productivity and profitability.