Chapter 10

Globalisation
and
Business Environment

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 Learning Objectives
• Outline the phases of globalisation

• Analyse the impact of globalisation on different sectors

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 GLOBALISATION
• Irreversible Phenomenon, which involves removing
restrictions on foreign trade and foreign investment to
leverage the benefits of comparative advantage

• Restructuring of industries and companies in the form of

privatisation and globalisation

• Based on the concepts ‘comparative advantage’, ‘unity in

diversity’ and ‘global village’

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 GLOBALISATION-MEANING

Globalisation of the economy means reduction of import

duties, removal of Non-Tariff Barriers on trade such as
Exchange control, import licensing etc., allowing FDI and
FPI, allowing companies to raise capital abroad and grow
beyond national boundaries and encourage exports. Both
Foreign Trade and Foreign investment volume have grown
rapidly over the last few years.

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 TRADE LIBERALISATION AND
GLOBALISATION

• First, When Tariffs are lowered and QRs are removed,

relative prices change and resources are reallocated to
production activities that may raise output. However,
increased import of manufactured products will have
adverse impact on domestic production.
• Second, larger long run benefits due to the free flow of
technology and new production structures.
• Exports and Imports - most dynamic factors in the process
of economic growth after 1995.

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 2 VIEWS on Globalisation

• Those stress the Virtues of Import Substitution and limited

openness ie, View against Free Trade and Globalisation

• Those emphasise the importance of Free Trade.

Arguments a) Achieve International Competitiveness b)
Reduce the price level c)More choice for consumers

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 GLOBALISATION - PHASES

 1870-1914 : First Wave

 1914-1945 : Retreat to Nationalism

 1945-1980 : Second wave of Globalisation

 1980 onwards : Third wave of Globalisation

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 GLOBALISE or PERISH
• Secret of Success of many firms. Eg: Software companies
get major chunk of revenue from foreign markets,
• Opening up of Markets for Global companies has sent a
shock wave among certain business circles. Many
Industrial Units are trying to catch up with the words
‘Globalise or Perish’. Many industries have realised that
Globalisation brings with it many new technologies and
Production structures

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 ECONOMIC ENVIRONMENT
• Free Flow of Imports
• Heavy Competition and Influx of New Technology
• Theoretical Foundation for the link between Open
Economy and Higher Economic Growth is not solid,
imports of raw materials, intermediate and capital goods
are not perfectly substitutable by domestically produced
goods.
• Economic Reforms has been transformed into the process
of globalisation

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 BUSINESS ENVIRONMENT
Indian industry (secondary sector) has not performed very
well over the post-reform period. Though the average
Annual real GDP growth accelerated from 5.4% (1981-82
to 1991-92) to 6.4% (1992-93 to 2000-01), Industrial
growth slowed down to 6.0% during the post-reform
period(1992-93 to 2000-01) as against 7.8% in the pre-
reform period(1981-82 to 1991-92).GDP and IIP
growth(%)- 5.8, 2.7(2001-02), 4, 5.7(02-03), 8.5, 7%(03-04)
and 7, 8.4% (2004-05) respectively.

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 REFORMS FOR
ECONOMIC GROWTH
• Exchange Market Reforms (Full current account convertibility
etc.)
• Reforms in Foreign Investment Regime (Liberalising rules for
FDI and allowing FII)
• Reforms in Infrastructure (PPP)
• Reforms in the form of EXIM policy(Tariff Rate reduction, QR
removal, EDI system)
• Allowing Indian Mutual Funds to invest in Foreign companies
• Challenges and Opportunities (Threat to SSIs?)
• Joint Ventures with Foreign Companies in India and Abroad

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 WTO-Main Agreements

• TRIPS(Trade Related Intellectual Property Rights)

• Bound Rates(Tariff Bindings) and QR removal
• GATS (Services)
• TBT(Technical Barriers to Trade)
• ATC(Agreement on Textiles and Clothing)
• TRIMS (Trade Related Investment Measures)
• Agreement on Agriculture

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 INDIA - GROWTH RATES in %
(1990-91 to 2004-05)

• Industrial Production – 8.2, 0.6, 2.3, 6.0, 8.4, 12.8, 5.6, 6.6,
4.1, 6.6, 5.7, 2.7, 5.7, 7 and 8.4% respectively
• Exports (in USD terms) – 9.2, -1.5, 3.8, 20, 18.4, 20.8, 5.3, 4.6,
-5.1, 13.2, 21, -1.6, 20, 21 respectively, 25.6% (04-05)
• Imports(in USD terms) –13.5, -19.4, 12.7, 6.5, 22.9, 28, 6.7,
6.0, 2.2, 11.4, 14.4, 1.7, 19.4, 27.3 respectively, 34.7% (04-05)
Source: Economic Survey, Ministry of Finance, Govt.of India

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 QRs: Some Facts
Removal of QRs doesn’t mean duty free imports. It
means that an item can be imported without
license/restriction. Goods are subject to payment of
Customs Duty (tariffs). Applied Duties can be raised
by the Govt. upto Bound level, to protect the
interests of the Domestic industry including SSIs and
agriculture.

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 AGRICULTURAL SECTOR

Agricultural products- Traditional export items of

India. Price of many items like Rubber, coconut etc.
have fallen due to import liberalisation. Therefore,
farmers suffer from low income. Thrust is given to
the export of agricultural items in the Exim
policy/Foreign Trade policy.

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 MINING AND PETROLEUM

Mining and Petroleum- Major policy changes

include automatic permission for foreign equity
participation of upto 50% in the mining of 13
minerals. The Govt.of India has emphasised on oil
exploration to reduce import dependence and
offers tax holidays to companies to invest in India.

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 MANUFACTURING SECTOR

Reforms have been widespread including reductions in

average. Tariff rates, removal of import licensing and
liberalisation of foreign investment policies. Sector
responded positively in the Mid 1990s, however, the
growth slipped down after 1996-97 due to constraints like
infrastructure bottleneck, low FDI flow etc.

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 SERVICE SECTOR

• Contribute more than 5% to India’s GDP.

• India has a large pool of well-qualified professionals

capable of providing services abroad whereas
developed countries have surplus capital to invest.

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 BUSINESS ENVIRONMENT –
SECTORWISE ANALYSIS

1. Telecom Sector
2. Insurance Sector
3. Banking and Financial Sector
4. Retail Sector
5. Automobile Sector
6. Textiles Sector

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 TEXTILES SECTOR
TRENDS IN IMPORT OF TEXTILES AND CLOTHING
(in US$ billion)

Year US EU-15 Canada World

1995 51 58 06 237
2000 83 64 08 287
2001 81 65 08 278
2002 84 68 08 290
2003 89 80 09 321
Source: WTO International Trade Statistics, 2004

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 INTERNATIONAL SCENARIO: TEXTILES SECTOR

Removal of quotas (as per WTO ATC agreement) has opened up

opportunities for the T & C Sector of India to increase its exports.
North America and West Europe together account for nearly 70% of
India’s exports of T & C and both had enforced strict quota
restrictions until last year. There is scope for increasing exports to
countries like Japan, Australia, Hong Kong an Latin American
countries. Studies have shown that world trade in T & C is likely to
increase substantially in the coming years.

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