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B.E -1\nswers

2. Meaning of Inflation : In economics inflation means, a rise in generai level of prices of goods and services in a

economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services.

Thus, infla tion results in loss of value of money. Another popular way of looking at inflation is "too much money chasing

too few gQQd.s". The last definition attributes the~ause of inTiation to monetary growth relative to the output T availability of goods and services in the economy.

l~case tb.e_orice of ~ay only one cc.mmodity rise sharply but prices of other commodi_ties fa ll, it will not be termed as

inflation. Similarly, in case due to rumors if the price of a commodity rise during the day itself, i t will not be termed as inflation.

Two types of inflation :

(a) DEMAND - PULL INFLATION: In this type of inflation prices increase ;esults from an excess of demand over supply for

the economy as a whole. Demand inflation occurs when supply cannot expand any more to meet demand; that is, wh en

critical production factors are being fully utilized, also called Demand inflation.

Demand pull inflation usually occurs when there is an increase in aggrega te monetary demand caused by an increase in

one or more of the components of aggregate den:!Sfili (ADI. but where aggregate supply {8.S~ is slow to adjust.

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The commonest causes are demand shocks, such as:

• Earnings rising above factor productivity.

• Cheaper credit, foilow!ng a reduction in in terest rates.

• Excessive public sector borrowing.

• A housing boom creating equity withdrawal and a positive wealth effect.

• Changes in the savings rat io.

(b) COST - PUSH INFLATION: This type of inflation ocq~rs when genernl price levels ri se owing to rising input costs. In

general, there are three factors that could contribute to Cost-Pu sh inflation: rising wages, increases in corporate taxes,

and imported inflation. [imported raw or partly finished goods may become expensive due to rise in interna"tiurrah:-osts

or'Cis a feSUit of dep;eciation of local currency]

Cost-push inflation occurs when an econo~ces a nagati11Q cost <hock, - I The commonest causes are: -

• Oil price shocks, caused by wars or decisions by OPEC to rest rict output.

• • • •

2

Increases in farm prices or general food prices, following a series of poor harvests . Rapidly rising wage cost s. ·

A fa ll in the exchange rate, which increases the price of atUm ports

~mported cost push inflation

J•nce Level

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Consequences of inflation

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Greate; uncertainty: There may be great er uncertainty for both fi rms and househQlds. Firms wi ll postpone t heir investment due to uncertainty in the market. This will result in negative implicat ions on the economic growt h in the economy.

Redistributive effects: High rate of inflation wili affect people who have constant incomes, such as ret ired people, student s, and dependents. Moreover, r ise in prices of essent ial commodities (food & cloth ing) will affect the poor

segment of the society as they spend a major part of their income on these good. This will lead to increased inequality in

the economy.

Less saving: High rate o f inflat ion wi ll have an adverse ef fect on the savings in the economy. As people spend more to

sustain their present standard of living, less is being savP.d. This wi ll result in less loanable funds being avai lable to firms

for !nvestment .

Damage to export competit iveness: High rate of inflation w ill hit hard the export industry in the economy. The cost of

production will rise and the exports will become less competi tive in the international market. Thus, inflation has an

adverse effect on the balance of payments.

Social unrest : High rate of inflation leads to social unrest in the economy. There is increase dissatisfaction in among the workers as they demand higher wages to sustain their present living standard. Moreover, high rate of inflation leads to a

general feeling of discomfort for the household as their purchasing power is consistently falling.

Interest rates: The Central Ba nk might use monetary tools to control high inflation rate by increasing interest rates. This

will increase the cost of borrowing and will have a negative effect on both consumption and investment.

Shoe leather cost refers to the cost of time and effort (more specifica lly the opportunity cost of time and energy) that

people spend t rying to counter-act the effects of inflation, such as holding less cash and having to make additional trips to

the bank.

3

3. M eaning of Deflation : Deflation is the opposite of inflation. Deflation refers to situation, where there is decline in

general price levels: Jhus, deflation occurs when the inflation rate fa lls below 0% (or it is negative inflation rate). \.Deflat ion increases the rea! value of money and allows one to buy more goods with the sa.me_an}Q!!nt of money over

time. Deflation can occur owing to reduction in the supply of money or credit. Deflation ca n also occur due t~ direct

contractions in spending, either in the form of a reduction in government spending, personal spending or investment

spending. Deflation has often had the side effect of increasing unemployment in an economy, since the process often leads to a lower level of demand in the economy. Causes of Deflation

• Shift in supply & demand curve

• Reduction in money supply

• Technological development

• Increases in supply of goods & Decrease in supply of money

• Cash bui lding

• Fall in demand causes fall in price

Deflation tends to occur when the economy's capacity, as indicated by the position of the AS curve, grows at a faster rate than AD. Firms have to cut prices in order to stimulate sales and get rid of stocks. Deflation can be triggered by an increase in supply. As business and consumer confidence in the economy declines, AD falls, resulting in recession.

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Consequences of deflation

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Cyclical unemployment: Deflation usually happens to due to a fall in Aggregate Demand in th e economy. This will lead to

businesses cutting the output levels which will result in retrenchment/laying off of workers. Moreover, if consumers delay spending in anticipation of falling prices economic activity fa lls, unemployment increases.

Bankruptcies: As the value of money is increasing, it becomes difficult fo; debtors to repay the load. Moreover, during deflation firms will be having lower profits due to falling prices and will find it difficult to meet their liabilities. This might

lead to greater number of bankruptcies. Businesses see profi ts fall; as they do so dividends and investment returns fall

and so share prices fa ll.

Deflationary spiral: Consistent fall in prices may trigger deflationary spiral. As firms make less profit, this leads to less

profits, they might not be willing or able to invest which will have negative implications on the economic growth.

Moreover, as firms cu t cost by lay off workers, there is less income for the households and the aggregate demand might

fal l. Due to a fall in consumer and business confidence the economy might fall !nto a deflationary spiral.

The principle problem of deflation is that it leads to a rise in the real value of debt. In the early stages low interest rates and low prices encourage borrowing but as the real weight of the borrowing is recognised so borrowing is reduced.

4

It is sometimes difficuit to control deflation and Monetary policy can prove ineffective when interest rates {nominal) are already low.

6. Technology collaboration :

The growth of the Indian economy is presenting immense opportunities for development of new technologies to fuel this

growth. However, developing new technologies by Indian firms is costly and risk as most of them do not possess the

necessary technological capabilities. With the increasing cost and risk of technology development, it has come to be

recognized that external sourcing of technology through collaborative technology development provides strategic

advantage by providing faster access to new technology and markets through complementing resources and risks

between partners. On the other hand, collaborative technology development also faces problems due to fear of

opportunistic beh aviour of partners. The balance of benefits and risks related to collaborative technology development is

contingent on the nature of industry and technologica l characteri :;t ics surrcu nding th e coi laboration. The failure of

collaborative technology development is due to the fact that partners do not have adequate understanding of context.

Therefore it is important to understand the context and e!:pecially in the Indian context, where collaborative technology

development is a new phenomenon and there is little understanding regard ing the perception and practice of it.

To understand the perception and practice of collaborative technology development in the Indian context, a study was

conducted across three industria l sectors- electronics & IT, chemicals & pharmaceu ticals, and engineering. The choice of

these sectors was influenced by thQ fact that these sectors experience greater technology based competition so the

necessity for up gradation of technology would be a relativeiy important concern. Data on col laborative t echnology

development practice was coilected through a questionnaire from 119 respondent firms representing the identified

sectors. The resu lts of the study show that different industries have different perception regarding the importance they

attach to different modes of cci laborative technology development which is influenced by the t echnological environment.

Across the sectors, the perception is that collaborat ive technology development modes that provide greater control fo r

the firm to monitor partner opportunistic behaviour are considered more effective than others. The motivation to

undertake collaborative technology development is i:ifluenced by the benefits accruing from access to new technology

and markets to maintain their competitive posi tion as compared to benefits of coliaboraticn like r isk sharing or

establishing common industry standards or technology cartelization . On the other hand, conflicts between partners that

would be seen to give rise to opportunist ic behaviour are considered a major obstacle for co llaborative technology

deveiopment acros5 the industries. Overall, the strong obstacles to undert aking collaborative technology development as

perceived by the different sectors are those that are perceived to give rise to the fear of loss of control on proprietary

technical knowledge. Based on the findings, implications could be dri:lwn rega rding what needs to be done while entering

into technology collaboration with Indian firms so as to ensure that the collaborative ventur c is successful and long

last ing.

COLLABORATIVE TECH NOLOGY DEVELOPMENT

In the mid eight ies, a marked shift was noted towards the increased use of external sources of technology as against

internal R&D in technology development (Graham, 1985) and since then, the importance of external sources of

technology as a source of strategic advantage has come to be recognised wideiy. The potential benefits of collaborative

technology development cculd be summarised as (1) gaining faster access to new technologies or markets; (2) accessing

technological experti se iocated beyond the boundaries of the firm; (3) leveraging the comparative advantage of each

partner; (4) increasing the firm's openness to its environment and stimui ate internal innovativeness; and (5) sharing the

risks of R&D beyond the resources of any one firm (Powell, 1987). According to Hagedoorn (1993) these set of benefits

could be related to three major motivations viz. (1) technology complementarity, (2) fas ter development of innovation,

and (3) improved market access.

While benefits of collaborative technology development cannot be disputed, collaborative technology development had

its share of problems and that has prevented effective collaborat ion between firms. Studies by McKinsey and Coopers &

Lybrand suggest 7 out of 10 R&D collaborations fail to meet the expectations and had to be dissolved (Achrol, Sheer &

5

Stern, 1989). Some of the major sources of prob!ems/ obstacles related to collaborative technology development that have been identified are (a) conflicting objectives among members, (b) difference in value, concept and attitude among

members, (c) conflicc in distributing and sharing results, (d) di fficulties for individual members to maintain autonomy and

control, (e} difficulties in decidir.g the ownership of R&D results, (f} difficulty in exploitation of intellectual property rights,

(g) confidentia lity, and (h} unwillingness to let top level personnel participate in collaborat ive effort (Dodgson, 1992; Ta n

& Lung, 1997}. These obstac!es are a result of the participating firm in collaborative technology development network

being exposed to a variety of risks such as (1) loss of proprietary control over technology, (2) loss of proprietary access to

markets, (3) exposure to opportunistic behaviour of partners, (4) unintended leakage of technical information to partners, and (5) poaching of technical experts by partner5.

The nature of the collaborative arrangemem couici affect ~he percept ion of ri sk and benefits and thus affect the overall

success of the collaboration. From the transaction cost perspective (Williamson, 1985), collaborative technology

development involve transact ions that give rise to (1) asset specificity, (2) behaviour<1 J uncertainty, and (3) market

uncertair.ty (Robertson & Gatignon, 1998). !f the nature of the collaborative ar;angement chosen is not able to address the uncertainty, it gives rise to increased perception of risk leading to ultimate fai lure of the collaboration.

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7. The main advantages of a joint venture are:

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1. More resources: since two or more firms join together to form a joint ven ture, there is availabi lity of increased capi tal and other resou rces.

2. Access to new markets: by engaging with a foreign collaborator, the products and services can be marketed in a foreign

country.

3. New and improved Technology: One partner may have the new and improved technology but do not have the

resources. Other partner may have resources like capit al but do not have the technology. In such causes joint venture can

fetch new and improved technology as well as great resources. By engaging a foreign partner, improved foreign

technology can be availed from it's foreign collaborator. 4. Use of exist ing marketing arrangements or existing distribu tion network of one of the party is possible.

5. Access to improved resources like experienced technicians, experienced staff, greater capacity, financial resources etc.

are possible through joint venture business.

6. Sharing of costs and risks with partners.

6

7 .. Diversification of business by producing new products or new area of business. 8. l nc~eased productivity and grater profits.

9. Exchange of Products: Joint venture companies can offer thei; existing product to sell through the partners network

and share the profit. Both JV partners can do the same. By exchanging products and services of the partner, they can

diversify the product basket and sell it to their existing customers and increase the profit.

There many disadvantage in the joint venture form of business. They are:

1. It take time and efforts to form the right relationship.

2. The objectives of each partner may differ. The objectives needs to be dearly defined and communicated to everyone involved.

3. lmbal;rnce in the share of capital, expertise, investment etc., may cause friction in between the partners. 4. Diffe1ence in the culture and style cf business lead to poor co-operation.

5. Lack of assuming responsibility by the partners may lead the collapse of business. 6. Lack of communication between the partners may affect the business.

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B. DEFIN!TION of 'Corporate Social Responsibility'

Corporate initiative to assess and take responsibility for the company's effects on the environment and impact on social

welfare. The term generally applies to company efforts that go beyond what may be required by regulators or

environmental protection groups.

Corporate social responsibility may aiso be referred to as "corporate citizenship" and can involve incurring short-term

costs that do not provide an immediate financial benefit to the company, but instead promote posi tive social and

environmental change.

The Importance of Business Ethics to a Company: Working as an ethica l business has many benefits, not least of which is the ability to attract and keep investors,

employees and customers. Knowing that the company they deal with has stated their mora ls and made a promise to work in an ethical and responsible manner allows investors peace of mind that their money is being used in a way that

aligns with their own moral standing. When working for a company with strong Business Ethics, employees are comfortable in the knowledge that they are not by their own action or inaction allowing unethical practices to continue.

Customers are at ease buying products or services from a company they know to source their materials and labour in an

ethica l and responsible way.

7

For example, a coffee company which states all their raw beans are picked from sustainable plants where no

deforestation has occurred, by peopie paid a good living wage, in an area w here investments have been made to ensure

that producing the co ffee for a foreign market has not damaged the local way of life, will find that all these elemen ts of

their buying si ra tegy become themselves a sell ing point for their final product.

A company which sets out to work within its own ethical gu idelines is also less at risk of being fined for poor behaviour,

and less likely to find themselves in breach of one of the multitude of laws concerning required behaviour - for example,

Jaws around payments to corrupt regimes, or environmental practice poiicies. The whole company can be fined, the

directors can be fined, and individual employees can be fined if the responsibility for an infraction fa lls on their shoulders.

Reputation is one of a company's most important assets, and one of the most difficult to rebui ld should it be lost.

Upholding the promises it has made is crucial t o maintaining that reputation . !f you're looking to start up a company that

is eth ically sound right from the ground up, here's a short cot.:rse on How to Create an Ethical Organization which will put

you on the right path.

10. Advanta!@s of Running a Family Business

• Family members understand each other better : The biggest advantage of running a family busin ess is the fact that family

memoers go along well with each other. You can just consider how Guido and his brothers Paolo and Luca improved their

father'$ Bari liLJ Group. They did not only make ::>rofits but also expanded internationally.

• The organizational structure is simple and effective : _It is much easier to start a famiiy business and manage it too. The

reason is because the business hierarchy is very simpie. Many of them even started with an owner, manager and staff like

Mornflake Oats. One of the reason crime organizations have thrived ever the century is because of the effectiveness of

their management system, which is very simple, well organized and efficient.

• Family members are commit ted: The family owning and running a busi ness is also much more com mitted, though in

rea lity; they are usual:y committed to the family tha n the business. The reason I say this i'> because such commitment

usually wanes when the founder or he:id dies. Many of them are like Bob Rich of the Rich Products.

Most of the ir.dividuals in a family business want to protect the family reputation. For instance, Rich worked hard to

ensure that the business opera tes ethically. This even prevented him from expanding just to avoid government corruption

or risking the safety of his employees.

• Most family members have a soiid in formal trai ning: Most o f the leaders o f a family business are trained by the parents or

grandparents. For example, Gareth Ackerman of Pick n Pay has been in different divisions of the company before

becoming the chairman, replacing his father. This is why such business is likely to have similar leadership although some

may opt to add something new to the system.

• Speed : "In a family business, we can think about something in the morning and begin working on it in the afternoon,"

says Schechter. After all, the fami ly is a natural team. And in the pearl business, where new designs must get to market

fast, speed is everything.

• Trust : Trust is essential in all business, but especially so in a business w here trade secrets are make-or-break. "For us,

there's a very high level of trust among family members. And we can talk to each other very freely and openly."

• Control : Family businesses control their fate. "We've looked at different scenarios for investors. And it always kind of

comes back to the same thing: Do we want to lose control of this family business, of the specialness that we have of

working with each other on a day-to-day basis? It's nice for me as a father to work with my sons."

8

Disadvantages of Running a Family Business

* Mixed interests: In a famiiy business, there is a risk that your family interests would be mixed with the corporate interest.

Misunderstandings at home could also be brought to the office and the family expenses could be deducted from the

business. However, some businessmen have solved the problem. Take it from Abdulrahman Al Zamil, chairman of Al Zamil

Group. He supports transparency and even came up with documents to separate the interests of family and business.

o Poor performance: One truth about running a family business is that some of the family members might become too

comfortable, knowing that they are in the business with the people closest to them. The result of this nonchalant attitude is poor performance, lack of formal pi<mP.ing and budgeting.

• Management with Sentiments: Family businesses also tend to appoint family members even if they lack training or

experience. The head of the family wants to turn over the business to his first son or favorite child, even if such a person

is not competent. Take for instance the chairman of Kikkoman Corporation, Yuzaburo Mogi, he went to Columbia Universitt to get a degree so as to avoid ruining the business.

He is even the first Japanese to get an MBA from the said university. To further curtail the risk of ruining the family

business is to take a cue from Mayer Amschel Rothschild, who delegated duties to his chi ldren according to their strengths, ~ki lls and weaknesses .

• Lack of openness: Another big disadvantage is that there is a temptation of keeping the business to the fam ily. Most

famiiy businesses are tightly run by the family and very few outsiders. Now outsiders may work in the business but they won't be in the top management or have decision making control.

Note that outsiders might have ideas and skills that can be useful to the family business but their ideas won't be

incorporated because they are outsiders. Take it from the Auchan Group which is owned primarily by the Mulliez family,

while about 12% of shares are owned by the employees.

• Rivalry between family members: Of course, not all family businesses succeed all the time. If it goes down, there is a risk that family members start to hate and blame each other. !f the head of the fami ly dies, there tend to be fighting and

scrambling for the business assets among the kids. Even when the head of the family writes a will and split the assets

accordingly, there still tend to be hate and rivalry.

• Lack of business continuity or successfu l succession: Most family businesses lack a continuity plan. The business is run

entirely by the family that the head feels that the smooth operation of the business w ill continue even after his demise. Lar.k of a succession plan is the reason why most family businesses don't survive after the death of the founder. The

founder's survivors usually lack the competence and passion to run the family business.

12. Motivation to go abroad: pull and push factors Why enter overseas markets?

The reasons for entering overseas markets can be categorised into "push" and "pull" factors. Push factors force a

company to look into new markets because their current markets are showing signs of problems. While pull factors lure a

company to enter a market.

Push factors

• Saturation in domestic markets

• Economic difficulty in domestic markets

9

• Near the end of the product life cycle ;;i t home

• Excess capacity

• Risk diversi fication

Pull factors

• The attraction of overseas markets

" Increase sales

• Enjoy greater economies of scale

e Extend the product life cycle

• Exploit a competitive advantage

• Personal ambition

Import-push or Export-put!?

Trade theory points to the welfare gains from trade through within-industry rea llocations: trade openr:ess allows t he

most productive firms to expand their marke t shares and forces the least productive ones to exit. In the publ ic debate, on

the other hand, concerns about the displacement of workers and the crowding out of local varieties prevail, and both of

these effects are strongly connected to th e notion of firms being squeezed out of the domestic market.

The import-\push" hypothesis postu lates that ir.cre2sed competition from foreign firms squeezes domestic f!rms out of

the rna r~et. The export-\pull" hypothesis, on the contrary, conjectures that high productivity firms expand tneir market

shares and use of resources at the expense of low -productivity rms, which are forced to exit.

Use expert penetration of the foreign market as a theory-consistent measure of export openness, which conven iently

bypasses the m;.ilti co-linearity issue. This measure of export exposure is closely linked to the relative competitiveness of

domestic producers compared to foreign producers. Indirect ly, it also reflects foreign demand for an industry's output,

and therefore export potentia l.

Import-pull The implicit assumption here is ei ther that only import competition has an either

that only import competition has an effect on firm failure, or tha t b ilateral trade costs are symmetric. Regarding the

exporting side o f the economy, empirical studies have focused on the exporting status of the firm, showing that exporting

firms are more likely to survive.

13. Environmental Sem itivity

Hooper Corporation was founded in 1913 and since our inception our overriding goal has been to conduct business the

correct way. Hooper is an exemplary environmental steward and accepts a high level of social responsibi lity in addition to

our commitment to safety.

Hooper is dedicated to complying with environmental laws and regulations while exceeding any project specific

requi re:nents set forth by our customers. Envirnnmental sensitivity is a key component of ou r everyday practices,

beginning in the project p lanning stages and con tinuing through commissionir.g. Our staff, from the upper levels of

mar:agemer:t to individua l fi eld employees, is committed to ensuring the sa fety of our planet's future.

Hooper chooses to take a proactive approach to environmental and wi ldlife pre tection because we understand the

impact construction has on the planet. Should an incident occu r, we will accept responsibili ty for our actions, and qu ickly

and efficiently inform the proper parties while also responding to the incident. Our commi tment to conduct ing business

the corr ect way wi ll not be compromised.

Hooper's commitment is exemplified in our core environmental values:

• Conducting Business the Correct Way

10

Hooper Corporation was founded on the value of conducting business the correct way. Doing so in an honest, down to

earth manner has built Hooper's credibility and respected character in the industries we serve. Conducting business the correct way indudes having an uncompromising commi tment to protecting natural environments and wildl ife. This

commitment is demonstrated by our project history and our green campuses, including a LEED Certified Gold faci lity.

• Pursuit of Excellence

Hooper Corporation's expectations on each and every project we complete begin, but do not end, with the expectations

set by our customers. We exceed expectations and pursue excellence in every aspect of every project, whether in safety, production levels, environmental protection, or any other measure.

• Environmental Stewardship

Hooper Corporation's environmental philosophy is driven by its commitment to the protection and preservation of our

natural resources. We achieve our environmental protection goals by effectively balancing project objectives with sound

environmental protection measures. We avoid impacts where feasible and if impacts ca nnot be practicably avoided, we

take steps to minimize those impacts and protect environmentally sensitive resources. Through the Hooper Foundation,

we contribute to the protection of our planet and the improvement of our communities.

15. Generalized System of Preferences, or GSP

The Generalized System of Preferences, or GSP, is a preferential tariff system which provides for a formal system of

exemption from the more general rules of the Worid Trade Organization (WTO), (formerly, the General Agreement on Tariffs and Trade or GAIT). BENEFITS OF GSP

• Indian exporters benefit indirectly - through the benefit that accrues to the importer by way of reduced tariff or duty free entry of eligible Indian products

• Reduction or removal of import duty on an Indian product makes it more competitive to the importer - other

th ings (e.g. quaHty) being equal.

• This tariff preference heips new exporters to penetrate a market and established exporters to increase their m3rket share and to improve upon the profit margins, in the donor c;ountry.

16. Busin<?ss Ethics

Some commentators, such as Milton Friedman, believe that the "primary and only responsibility of business is to make

money" while abiding by the law. Supporters of this point of view argue that companies' self-interested pursuit of profit

benefits the whole of society. Profitable businesses clearly benefit shareholders, but other commentators, such as Edward

Freeman, argue that businesses ~hot.:ld also benefit other stakeholders. Stakeholders are people and groups with whom

the business has a relationship. This includes shareholders, but extends out to include employees, their familiE:s, the

community within which the business operates, customers and suppliers .

Advantages

• Business ethics offer companies a competitive advantage. Consumers learn to trust ethical brands and remain

loyal to them, even during difficu lt periods. In 1982, Johnson & Johnson spent over $100 million dollars recalling

Tylenol, its best-selling product, after someone tampered with !Jetties of the painkill er. The company followed its

credo, a set of ethical organizational values, and the result was a boost in consumer confidence, despite the

contamination scare. Society benefits from business ethics because ethical companies recognize their social

responsibilities.

• Higher revenues - got requests from positive consumer support

• Increasing brand ;ind business awareness and recognition

• Improve to be better employee motivation and recruitment

• New source of fin ance example from ethical investors

11

• Simplifica tion: One advantage of any fi rm ethical system is that when the t ime comes to make a decision, there is

often an existing framework for making that decision. For example, i f an ethical system decides that theft is

wrong in all circumstances, ther. any person who firmly believes in that ethical system should oe able to turn

away ideas of stealing. This process ca n expedite decision-making in general, as it has often already answered

questions that may arise

• Building "Good" : The Internet Encyclopedia of Philosophy notes that ethics "involves systematizing, defending

and recommending concepts of right and wrong behavior." As such, the field is, by and large, dedicated to

helping derive systems for understanding and improving human behavior. As an end-result of finding and

invoking a true ethical system, the world should evolve into a safer, friendlier and happier place

Disadv&nt;iges

• Busi ness ethics reduce a company's freedom to maximize its profit. For example, a mu ltinational cornpan'I may

move its manufacturing facility to a developing country to reduce costs. Practices acceptable in that country,

such as chi ld labor, poor health and safety, poverty level wages and coerced emµloyment, will not be t olerated

by an ethical company. Improvements in working conditions, such as a living wage and mir.imum health and

safety standard,s reduce the level of cost -savings that the company generates. However, i t could be argued that

the restrict ions on company freedom benefit wider society.

• Higher cost - sourcing from lowest price suppliers

• Higher overhead - training and communication of ethical policy

• To danger to give the fa ise expectations

• Poiarization of Society: Because it offers such an integral look into human nature, ethics -- as a branch of

philosophy -- tends to create divisions among those of varying opinions. Within the United Sta tes, the

reverberations o f this effect are at the core of government policy. Two groups, such as Pro-Choice and Pro-Lif e,

work from similar facts and land on different notions o f what is ethically and moraliy "right." These rifts within

society rnay slow down legis la tion and other government progress.

• Varied Theories and Constant Change: Ethics, as a whole, is a branch of philosophy that many consider to be

necessarily unfinished. As technology and cu lture changes, new ethical issues are always arising, such as ethics

within distributing content online. Likewise, issues of "cultural relativism" can create various interpretations of

similar issues simply through the specific traditions of any given cu lture. These problem s, and others, cause

2th ics to be a field of tumultuous change with highly varied interpretation.

18. Busines:;

12

The Business potential of India

lndiJ is considered as one of the poorest and b2ckward countries in the world. Only 52% of its population is literate.

Its per capita income is about $350. Less than 50% of the houses have electricity, less than 23% of the houses have

sanitation facil ities. With these figures it might seem that India isn't a good market for business. But if these figures

are broken up in different factors like Indian states or into numbers, one might find that India could be a good lucrative market for business.

In the educational field, after every ten years the literate population of India goes up by about 10%. During its

independence, there were only 12% literate Indians and according to 1991 census there were 52% literate Indians,

me2ning that over half a billion people are literate. Among the literates, about one-third of them (according to

researches made in the 1980s) study or studied in schools which have English as language of instruction. For these

people, English is in many senses their first language and it is easier for them to read and write and even

communicate in English than in their Indian languages. This makes India the second largest English speaking country in the world after USA.

In 1995 there were over 5 million students in Indian universities. In general, less then 3% of India's population has academic education, which is very low compared to world standard. But numerically India has almost 24 million

university graduates. India is also among the few countries in the world to launch satellite and has proven its nuclear

capability. Because of this high number of academicians and their good knowledge of English, rn3ny technology companies (especially in the computer field) from around the world have arrived in India.

The per capita income of India is iow at $350. From this figure one can conclude that the salaries are low in India and

therefore it is cheap to produce in India. But one might also conclude that India isn' t a good market for marketing

quality and costly products. But, even though the per capita income in India is low, India is a huge market, even for costly products. In general, India has a potential of almost a billion buyers. About 10% of Indian households have an

income of just over $1400. Numerically that is about 100 million people, which is about the population of Germany. Less them 5% of Indian households have an income of over $30000, but numerically that is over 40 million people.

Some estimated that by the year 2000, the number of Indian households to have th is level of income would surpass

that of USA. Beyond these figures, when the Indian income is measured by purchasing power parity - PPP -

calculations, the Indian economy and income gives better figures. In this sense India is the fifth largest economy in

the world. The middle c!ass of India is estimated at 180 million people. For these reasons, many international

companies and names in different fields, from shoes to cars, have arrived in India and they manufacture and sell their

goods in India.

True to 1994, Indians had more than 40 mill ion televisions; 10 million telephones; 60 million radios; 10 million

refrigerators; 16 miilion two-wheel vehicles; 2 million cars and according to 1997 figures almost a million ceiluiar

phones. Some estimate that by the year 2002, about 25 million Indians can be potential buyers of cellular phones. There are many business fields which are new in India and have huge potentials like credit cards. According to 1995

figures there were less than a million credit card holders, while the potentia l is estimated at about 10 mill ion by the

year 2000. Another potential market that involves millions of people is tourism. In general India has about 2 million

foreign tourists per year, which is low considering India's potential as a cultural country. But India also has over 130

million Indians travelling around India .

The standard of living, like education figures is differen t from state to state. Punjab in north India has the highest

income per capita in India, whi le Bihar in east India has the lowest. Punjab, Haryana, Maharashtra and Gujarat are

considered as the more prosperous states of India. Bihar, Orissa, Madya Pradesh, Uttar Pradesh and Rajasthan are considered as the less prosperous states of India. Goa which was created in 1987 also has a high per capita income.

The prosperity of states finds its expression in electricity used by the states. In prosperous sta tes all the villages are

elect rified, whil e in the less prosperous states not all villages are electrified . But the electric figures can be misleading

13

because some states, like Kerala, where all villages are electrified there are hours in the day when there are

electricity problems. Because of these electricity problems, many houses and businesses use private generators.

According to the 1991 census about a quarter of India's population live in cities. The standard of living is higher in

cities than in villages. The urban people are more aware to modernization than villagers. Less than one third of th e

vi llages are electrified while almost 75% of the urban dwellers have electrified homes. Less than 10% of the village

households have sani tation facilities while 60% of the urban households have sanitation facilities. Its not rare in

Indian vi llages to find sa tellite dishes on house roofs, while in the whole village there isn't a single toilet. Drinking

water is more secure in cities than in villages. In many vi llages, water is even today pumped from wells or from writer

streams. Most of the urban houses don't have 24 hours water facilities, but instead these houses and buildings hrive

big water tanks which get filled during those hours when there is water in order to secure 24 hours water facilities for

the houses. These problems mentioned above, have good business opportunities for development p!anners. As

mentioned above people who live in cities are more aware of modernization than villagers. About a quarter of India's

population (numerically that is about the w hole population of USA) is urban. At least 23 Indian cities have over

million residents. Delhi, Calcutta, Mumbai and Chennai are the four main cities of India. The tirst three cities have over 10 million residents each.

The first impression a foreigner gets of Mumbai is poverty. But Mumbai for Indians is like New York and Los Angles

together. In many fields it is the center of India. Mumbai is the commercial, financial and entertainment center of

India. Of the 23 stock exchanges in India, the stock exchanges of Mumbai are the most important. In general there

are over 7000 companies registered in Indian stock exchanges, secord after USA. India produces the largest number

of movies in the world. Until the mid-90s it had over 800 movies a year. In this fie!d Gollywood(like Hollywood) in

Mumbai is the entertainment center, even though some other cities of India, like Chennai in south India produces more movies than Mumbai.

The Mumbai cinema is perhaps the only cu lture common to Indians all over India. The Hindi movies produced in

Mumbai (before the boom of cable TV) were the most popular entertainment of India. In Indian movies, except in a

few cases, there are always a few dances and songs. But almost all of these songs are sung by professional singers

called playback singers and the actors only move their lips in the film. One such playback singer, Lata Mangeshkar,

sung over 50000 songs for different actresses in different Indian languages. These Indian fi!ms and their dances,

songs, singers, and actors are very popular in India and with Indians all around the world. Many non-Indian

compan ies that sell Indian music almost never sell music from Indian movies, only c!assical, missing a huge market.

In the last few years Hyderabad, capital of Andra Pradesh, is competing w ith Chenai as the movie center of India.

Hyderabad is also competing with Bangalore as the 'silicon valley' of India. Bangalore is considered today as the

technology center of India. Most of the high technology companies that operate in India are centered in Bangalore. Bangalore is called 'garden ci ty'. It is very clean compared to other Indian cities. It is also seen as the most

westernized city in India because of the pubs and western style shopping centers.

Until the ea rly 1990s, the Indian governments were very conservative in their approach towards west. They were

very suspicious of the capitalist system. One of the reasons for this fear of western capitalist c;ystem was the fact that

a British trading company, East India Company, came to India as a trading company and turned up to be rulers of

India. During Indira Gandhi's reign as Prime Minister, many new laws were enforced which prohibited foreign

companies from holding more than 49% of the companies shares operating in India. For this reason many foreign

companies left India and came back again in the 1990s. Many other companies, from shoes Lo cars, who foresaw the

potential of Indian market also arrived in India. For the last few years, the 'hot' field in Indian business is computers.

Many international computer companies have subsidiaries in India. A combination of low salaries, good English knowledge of Indians, big number of academicians and the government 's desire to make India a high technology

country has made India to transform into one of the computer centers in the world. The Indian government has

established many software parks in different places in India where foreign companies can also establish software

compa nies.

~ ILJ.),li.i.l.tfaJ.iikllJ,£U _________________________ _

IAAt·1~1N t4i i¥14•l !tiill Monetary Policy refers to the use of instruments within the control of the Central Bank to

influence the level of aggregate demand fOJ goods and services or to influence the trends in certain sectors of the economy. Monetary policy operates through varying the cost and availability of credit, these producing desired changes in the assets pattern of credit institutions, principally commercial banks. These variations affect the demand for, and the supply of credit in the etonomy, and the level and nature of economic activities.

The modern economy is regarded as a credit economy in the sense that credit forms the basis of most of the economic activities in such an economy. The level and nature of economic activities such an economy, obviously, are influenced by the cost and availability of credit. The c~ritral bank's policies that affect the demand for and the supply of money, therefore, are very impOrtant to the industrial and commercial sectors. In a developed economy, credit forms a very iMportant component of money supply.

Measures of Money Stock

A knowledge of the measures of money stock in an economy would help us to understand monetary pol icy better.

The Reserve Bank of !ndia emp1oys four mecsures of money stock, namely, M 1, M2, M3 and M4.

Ml: The measure of money stock designated by Ml is usually described as the money s.uf ply. The components of money supply are currency with the public (i.e., notes in circulation, dit'ulation of rupee coins and circulation of small coins) and deposits (demand deposits with li\hlks and other deposits with the RB:). ,. .. ,.

·•i ·' · Currency with the public forms less than half of the total money supply, whereas the derliand deposits constitute more than SO per cent of the money supply today.

''fl 'In advanced countries, demand deposis form a major part of the money supply. In India, th~0 proportion of the currency in money supply has been declining. Two decades ago, it formed ai)out three-fourths as against less than SO per cent today.

M2: M2 is M 1 + Post Office Savings Bank Deposits .

. ,, . M3: M3 is Ml + Time Deposits with the banks. In other words, M3 is money supply plus f\;~.<l .deposits with the banks. M3 is usually referred to as aggregate monetary resources.

:~ ' ,,~

·•· .··.~:!.'~~. M4: M4 is M3 plus the total Post Office Deposits.

,.tllietary Policy and Money Supply

· ~(lii~.>,\s has been mentioned earlier, money supply comprises currency with the public and JJlartd deposits. Both the monetary and fiscal policies can affect money supply.

: "the budgetary operations of the Government considerably affect. the money supply. If the ~.O&ernment meets its budgetary deficits by borrowing from the Reserve Bank, there will be an

· '~-&/1iftse in money supply, both in currency and bank deposits. The RBI has no control over -~r-:.

I 386 IL __________________ J1'1iifil'rnlfili'llf!il·1,11""11i ,

budgetary operations, though it has opportunities of tendering advice to Government on this ., ... matter.

Another source of variation in money Supply, over which the RBl's influence is restricted, is the country's international payments position.

Demand deposits are a very important determinant of money supply. As has already· been mentioned above, in advanced countries demand deposits form a major part of money supply. In many developing countries, the proportion of demand deposits in money supply has been increasing. This is a trend associated with economic development and improvements in the bankisation and banking habits of the people.

Deposits with banks may originate in two ways-through passive creation or active creation. The former occurs when banks open deposit accounts for customers against the receipt of value either in cash or cheques drawn on other banks. The latter takes place when banks create deposits by extending credits. In the first case, the immediate effect is that there is no addition to the quantum of money, though its distribution may undergo a change; but ultimately it enables the banks to extend credit and thus results in an increase in money. In the second instance, the supply I of money is augmented immediately. When a bank extends credit, it would result partly in a rise in deposits either with itself or with other banking institutrons. Under the fraction2I reserve

1 system, the banks can create deposits by a multiple of the reserves, since the payments made with the proceeds of bank loans are eventualiy redPcositerl wi~h banks, leading to additionetl rese1Ve

funds.

Central banking instruments of contiol operate by varying ti1e cost :irid av;;iilability of credit,

and these produce desired changes in the assets pattern of credit institutions, p1incipally commercial banks. The item among banks' assets having special significance in this connection is the credit

extended by banks to their constituents, which is the sum of what are usually ca!led loans and discounts. The capacity of banks to provide credit depends on their cash reserves (comprising cash in hand and balances with the Reserve Bank), a substantial portion of the reserves being generally held in the form of balances with the Reserve Bank. These increase through a rise in the deposit resources of banks, or by their borrowrng from the Reserve Bank, or by sale of their investments. The regulation of credit by the Reserve Bank in essence means regulation of the

quantum of the reserves of banks. lf the Bank de:>ires to bring about an expansion in credit, it adopts measures to augment the banks' reserves. If credit is to be restricted, ii 2ttempts to curtail

the reserves.

Instruments of Monetary Policy

The instruments of monetary policy (methods of credit control) m<iy be broadly divideEI into:

• General (Quantitative) methods; and

• Selective (Quantitative) methods.

The general methods affect the total quantity of credit and affect the economy generally. The selective methods, on the other hand, affect certain select sectors. In other words, under the selective methods, certain qualitative distinctions are made between different seclors clnd segments

of th~ economy; and selectivity is applied in regulating the flow of credit. n

. 'The statutory basis for the regulation of credit in India is embodied in the Reserve Bank of a Act and the Banking Regulation Act. The former Act confers on the Bank the usual powers Jable to central banks generally, while the latter provides special powers of direct regulation fie operation of commercial and co-operative banks.

· · ral Credit Controls

· There are three general or quantitative instruments of credit control, namely, the Bank Rate, en Market Operations and Variable Reserve Requirements . . ' Jn considering the general methods of credit control, it is important to stress that these are ~ly inter-related and have to be operated in co-ordination. All the three instruments affect the

el of bank reserves. Open Market Operations and the Reserve Requirements directly affect the .,. rve base, while the Bank Rate produces its impact indirectly by variations in the cost of P

The use of one instrument rather than another at any point of time is determined by the ure of the situation and the range of influence it is desired to wield as well as the rapidity with 1ch the change is required to be brought about. Open Market Operations, for instance, are

\ed to carry out day-to-day adjustments on even the smallest scale. Changes in Reserve ~·uirements produce an impact at once and affect the banks generally. The effecis of B;rnk Rate

' anges are not confined to the banking system and the short-term money market; thev have jer repercussions on the economy as a whole.

~ Bank Rate Policy: The Bank Rate, also known as the Discount Rate, is the oldest instrument ilf;monetary policy. The traditional definition of Bank Rate is that it is the rate at which the centra:

.I,."'-.. k. discounts or, more accurately, red.iscounts-eligible bills. However, today, the term Bank

. e is used in a broader sense and refers to the minimum rate at which the central bank provides ancial accommoclation to commercia: banks in the discharge of its function as the lender of j; last resort. .

I The Bank Rate policy seeks to affect both the cost and availability of credit. The availability ~ends largely on the statutory requirements regarding the eligibility of bills for rediscounting, a;~ securities for collateral for advances, as also the maximum period for which the credit is ailailable. ',,;-,-

,~~-'

:: As the central bank is the lender of the last resort, a commercial bank which is ioaned up ~D obtain financial accommodation (i.e., loan) from the central bank and re-lend 1t to its own \\)Stpmers. (

ii) An increase in the Bank Ra!e means an increase in the rate of interest charged by the central . ~~?k on its advances to commercial banks. Hence, an increase in the Bank Rate compels \l(nmercial banks to raise the rate of interest they charge en their loan and advances to their $tamers and vice-versa.

:: .1l.l!· The importance of the Bank Rate lies in the fact that it acts as a pace-setter to all the other ts ts of interests. In a well-developed money market, like the London Money Market, all the

'frket rates quickly and effectively respond to a variation in the Discount rate.

An increase in the Bank Rate implies an increase in the cost of credit and vice-versa. The 0emand for credit usually varies with the variation in the cost of credit. The central bank can,

, ,

:· ·:-- ·~~ ...... : . ' ~ ··.~· l 3~~ I !T'F:!U:O!!'"!'.:;il

therefore, hope to bring about a contraction in the money supply by raising the Bank Rate and an expansion in the money supply by lowering it.

f>,s per the theory of Bank Rate, an increase in the Bank Rate reduces the exle:it of borrowings from the money market, the level of inventory holding, investment, employn1ent and prices. A

reduction in the Discount Rate has the opposite effects. The central bank may, therefore, atternpi to contain an inflationary situation by raising the Bank Rate and fight a depression or recession by lowering it.

Open Market Operations: Open Market Operations refer broadly to the purchase and sale by the Central Bank of a variety of assets, such as foreign exchange, gold, Government securities and even company shares. In India, however, in practice, they are confined to the purchase and sale of Government securities.

Under the Open Market operations, the central bank seeks to influence the economy either by increasing the money supply or by decreasing the money supply.

To increase the money supply, the central bank buys securities from commercial banks and public. For instance, if the Rese~1e Bank of India buys securities worth Rs. 100 crores, in the fir~

instance the reserves of the commercla1 banks and currency with the public wilt increase by Rs. 100 crores. However, the ultimate increase in money supply might be much 'more than this. V/hen the central bank purchases securities from commerciai banks the increasP in their reserves might result in a multiple credit creation. Sometirnes the purchase from the public may lead to an increase in the reserves of the bar.king system and credit expansion if the sellers of securities deposit the receipts with commercial banks. A sale of securities by the central bank has the opposite effects.

Open Market Operations have been employed by the Reserve Bank primarily to assist the Governrnent in its borrowing operations and t·o m.aintain -orderly condit1'o~s in the gilt-edged market. In this process, this instrument has been us.e<J to groom the market by purchasing securities nearing maturity to facilitate redernption and to make availab!e on tap a variety of loans to broaden the gilt-edged ma1ket. A.s banker to t~e GovernrT'ent, it is the duty of ihe Reserve Bank to create in the gilt-edged market conditions that are favourable to the successful imple1r1entation of the Government's borrowing and. ·refunding operations. On the- other hand, the Government's loan oreratlor.s themselves are so a_rranged as 'to be 'in harrn?ny, as general stability of the mon~ and capital markets. Open Market Operatibns have also been used to provide seasonal finance to banks. In the slack season, banks generally invest their surplus funds rn Government securities, which they sell (or against which they borrow) during the busy season, in order to expand credit to industry and commerce, the Reserve Bank being generally ready to deal in these securities.

Variable Reserve Ratios: COmmercia!- banks. i.n every country maintain, either by the requirement of law by or custom, a certain perc;entage of their deposits in the forn1 of balances with the central bank. The central bank has the power to vary this reserve requirement; and the variation in the reserve requirernents affect the credit creati~g capacity of commerciai banks. for instance, if ihe reserve reQuirernent is 10 per cent, the maximum amount the bank can lend is equivalent lo 90 per cent of the total reserves. If the reserve ratio is raised to 20 per cent, the bank cannot lend more than 80 per cent of the total reserves.

IU.A.!.!.ffll!.if@iliif I • . The Reserve Bank of India is empowered to vary the cash reserve ratio between 3 oer cent ;~d 15 per cent of the total demand and time liabilities. To facilitate the flexible ope;ation of this system, the RBI has also been vested with the power to requ.ire the scheduled banks to maintain with it additional cash reserves, computed with reference to the excess of their total demand and time liabilities over the level of such liabilities on the base date to be notified by the Reserve Bank, subject to the proviso that the total reserve to be maintained with the Bank should not exceed 15 per cent of their demand, and time liabilities.

i!0 In March 2001, the Reserve Bank of India cut the CRR by half a percentage to 7.5 per cent tHd this was estimated to release over Rs. 4000 crore to the economy. This indicates the impact l~~t variations in the CRR can have on the money supply and the economy.

SLR: Action has also been taken to prevent banks from offsetting the impact of variable reserve requirements by liquidating their Government security holdings. The Banking Regulation Act has been amended, requiring all banks to maintain a minimum amount of liquid assets which shall not be less than a certain specified percentage of their demand and time liabilities in India, e~clusive of the cash balances maintained under Section 42 of the Reserve Bank of India Act in th'e case of schedule banks, and exclusive of the cash balances maintained under Section 18 of the Banking Regulation Act in th 0 case of non-scheduled banks. This ensures that with every intrease in the cash reserve requirements, the overall liquidity obligations are also correspondingly raised.

Selective Credit Regulation

Selective and qualitative credit control refers to .2gu!ation of credit for specific purposes or branches of economic activity. While general credit controls operate on the cost and total volume of credit, selective controls relate to the distribution or direction of available credit supplies. It may be mentioned here that some element of selectivity can be imparted to general credit controls also by giving concessions to priority sectors or dctivities. This has often been done in India .

.,, The aim of selective controls is to discourage such forms of activity as are considered to be relatively inessential or less desirable. Selective credit controls have been used in the Western countries to prevent the demand for durable consumer goods outrunning the supply, and generating infiationary pressure. In the USA, they have been used to regulate stock market credit as well. In India, such controls have been used to prevent speculative hoarding of commodities like foodgrains and essential raw materials to check an undue rise in their prices. In addition to selective credit controls, many central banks have acquired powers of direct regvlation of the totd! magnitude, as also the distribulion of advances and investments of individual banks as well as of the entire banking system.

Selective credit controls are considered to be a useful supplement to general credit regulation. ·frqm available experience, it appears that their effectiveness is greatly enhanced when they are 4s~d together with general credit controls. They are designed specifically to curb excesses in s~lected area without affecting other types of credit. They attempt to achieve a reasonable stabilisation of the prices of particular commodities on the demand side, by regulating the availability of bank credit for purchasing and holding them. It should, however, be noted that ·prices are determined by the interaction of supply and demand, and that when supply is substantially short, what selective credit controls are likely to accomplish is to moderate the price rise rather than arrest the basic trend.

I 390 IL ____________________ ...J,li"ll111111111::i1Hl!il'1·1111"'1iUI1lii.1I' The Banking Regulation /\ct confers on the Reserve Bank the power to give directions to

banking companies, either generally or to any banking company or group of b.rnking companies in particular, as to-

(a) the purposes for which advances rnay or 1r.ay not be made;

(b) the margin to be maintained in respect of secured advances;

(c) the maximum amount of ddvances or other financial accommodation which, having regard to the paid·up capital, reserves and deposits of a banking company and other relevant considerations, may be made by that banking company to any one company, firm, association of persons or individual;

(d) the maximum amount up to which, having regard to the considerations referred to in clause (c) guarantees may be given by a banking company on behalf of any one company, firm, association of persons or individual; and

(e) the rate of interest and other terms and conditions on which advances or other financial accommodation may be made or guarantees may be given.

The Reserve Bank is also empowered to issue, from time to time, to banking companies generally or to any banking company in particuldr, such directions as it deems fit in the public interest; or in rhe ir.tere5~ of banking poiicy;· or to prevent th2 affairs of any banking company from being co ~ducte::1 in a manner detrin1entdl to the interests of the depositors; or in a manner prejudicial to the interests of the b1nk1ng c0mµc1r.y, or tn SE:cure the proper management of any banking company generally. The banking companies or the banking company, as the case may be, shall be bound to compiy with such directions.

Further, th~ Reserve Bank :nay caution or prohibit banking companies generally or any banking cvmpany in particular against entering into any particular trans.-::iction or class of transactions, ar.d genera.Hy give advice to any banking company.

From time to time, the Reserve Bank has asked bank$ in its circular letters to exercise c-aution in their lending in general as well as rending against the security of specified con1modities and shares.

The techniques of selective credit controls u:;ed generally are:

(a) Minirnum 1nJrgins for lending Jgdinsr specific securities;

(bJ Ceilings on the amounts of credit for certain purposes; and

(c) Discriminatory rates of interest charged or. certain types of ;idvances;

In India, selective credit controls dre opereted under all the three techniques. While imposing selective controls, care is generally taken lo ensure that credit for production, the movement of commodities and exports, is not affected. Selective controls are focused mainly on credit to traders financing inventories.

Moral Suasion: In addition to the abovemenl1oned methods of credit control, both quantitative and qualitative, 1t may be noted that the use has also been made in this country of moral suasion. Periodically, lellers are issued to banks urging them to exercise control over credit in general or

·~'dvances against particular commodities or unsecured advances. Discussions are also held with .\'.\)ankers for the same purpose. Such discussions between the bank and commercial banks have , ~en frequent. The RBI has been able to build up over the years good informal relations with ~banks. Moral suasion, backed as it is by the Bank's vast powers of direct regulation, has proved ·' uite useful. The use of this instrument is facilitated by rhe concentration of banking business in

hands of the Government.

Fiscal Policy is that part of Government policy which is concerned with raising revenue :rough taxation and other means and deciding on the level and patter of expenditure.

The fiscal policy operates through the budget. The Budget is an estimate of Government :expenditure and revenue for the ensuing financial year, presented to Parliament (in case of \inion Budget) usually by the Finance Minister. Occasionally, in times of financial crisis, interim

'.'.f.'cd_i.§Udgets may be introduced later in the year to increase taxation, expenditures, etc. Sometimes

'.'.~;there may be slight modifications in taxation and expenditure without the formality of a revised >~budget. . CJ~

._:-.<i:.~}.'t

;);f':i'HE UNION BUDGET \'·

The Constitution of India provides that -

1. No tax can be levied or collected except by authority of law.

2. No expenditure can be incurred for public funds except in the manner provided in the Constitution.

3. The executive authorities must spend public money only in the n1anner sanctioned by

Parliament in the case of the Union and by the State legisleture in the case of " State.

An es~imate of ai! anticipated revenue and expenditure of the Union Government for the

ensuing financial year is laid before Parliament on the last working day of February every year. This is known as the Annual Financial Statement or the Budget and covers the Central Governn1ent's

"transactions of all kinds in and outside India during the year in wh:ch the statement is prepared as well as ensuing year, or the Budget year, as it is known.

All receipts and disbursements of the Union Government are kept under two separate headings, namely, the Consolidated Fund of India and the Public Account of India. All revenues received, loans raised and money received in repayment of loans by the Union Government form the Consolidated fund. No money can be withdrawn from this Fund except under the authority

1g of an Act of Parliament. All other receipts and disbursements .. such as deposits, service funds and o' remittances go into the Public Account, which is not subject to the vote of Parliament. To meet to unforeseen needs not provided in the Annual Appropriation Act, a Contingency Fund of India has

1also been established under Article 267(1) of the Constitution.

11 The presentation of the Annual Financial Statement is followed by a general discussion on

1n the Budget in both the Houses of Parliament. The estimates of expenditure from the Consolidated o.

rJ

·. ·_ -.... - . ~· . -.. ; -11

3~ lt_~~~~~~~~~~~~~~~~~~~~~~Jlili?i1!liPiJ1iP'll!riW'iwilllil Fund of India are then placeC: before the Lok Sabha in the form of Demands for Grants. Ordinarily, a separate demand IS made for each Ministry. All withdrawals of money from the Consolidated Fund are thereafter authorised by an Appropriation Act passed embodied in another Bill, which is passed as the Finance Act of the Year.

The receipts and expenditure of the Central and State Governments are ;;udited by the Comptroller and Auditor-General who is independent of the executive, and h15 reports on the accounts are submitted to the President/Governor for having them laid before Parliament/Stale legislature.

The Structure of the Budget

The Budget IS divided vertically into revenue (receipts) and expenditure (disbursements). Horizontally, it is divided into revenue account and capital account. The receipts are, thus, broken up into Revenue Receipts and Capital Receipts; and disbursements are broken up into Revenue Expenditure and Capital Expenditure.

The revenue expenditure includes all current expenditure of the Government on administration, and the capital expenditure includes all the capital transactions of the Government.

The revenue receipts include revenue from taxes, while capital receipts include market loans, external aid, income from repayments and other receipts, such as income from public undertakings.

STATE BUDGETS

Like the Union Government, State Governments, too, have their own budgets. Estimates of receipts and expenditure are presented by the State Governments to their legislatures before the beginnir1g. of the finarici2I y~ar and legislative sanction of expenditure is secured through similar procedure.

As in the ca;e of the Union Government, the Constitution has provided for the estoblishment of a Consolidated Fund, a Public Account and a Contingency Fund for each State.

FINANCES OF THE UNION AND STATES

The Constitution of India has earmarked separate sources of revenue for the lJnion and \he States.

Sources of Revenue for the Union

The Union List in the Constitution includes the following revenue subjects:

1. Taxes on income other than agricultural income;

2. Duties and customs, including export duties;

3. Duties of Pxcise on tobacco and other goods manufactured or produced in India, except alcoholic liquors for human consumption and opium, Indian hemp and other narcotic drugs and narcotics;

4. Corporation tax;

f I

5. Taxes on the capital value of assets, exclusive of agricultural land, of individual companies; taxes on the capital of companies;

6. Estate duty in respect of p1operty other than agricultural land;

7. Duties in respect of succession to property other than agricultural land;

8. Terminal taxes on goods of passengers carried by the railways, by sea, or air; taxes on railway fares and freight;

9. Taxes other than stamp duties on transactions on stock exchanges;

10. Rate of stamp duty on bills of exchange;

11. Taxes on sale or purchase of newspapers and on advertisements published therein;

12. Fees in respect of any of the matters in the Union List, but not including fees taken in any court;

13. Any tax not mentioned in the State List or Concurrent List.

· Sources of Revenue for the State

~··

The Sta'.e List in the Constitution includes the following revenue subjects:

1. Land revenue, incl 11din~ the assessment and collect!on of revenue, the maintenance of land records, survey for revenue purposes and records of rights and alienation of revenue.

2. Taxes on agricultural income.

3. Duties in respect of succession to agricultural lands.

4. Estate duty in respect of agricultural land.

5. Taxes on lands and buildings.

6. Taxes on mineral rights, subject to any limitations imposed by Parliament by law relating to mineral development.

7. Duties of excise on the following goods manufactured or produced elsewhere in India: (a) alcoholic liquors for human consumption; (b) opium, Indian hemp and other narcotic drugs and narcotics.

8. Taxes on the entry of goods into a local area for consumption, use or sale therein.

9. Taxes on the consumption or sale of electricity.

10. Taxes on the sale or purchase of goods (other than news papers).

11. Taxes on advertisements (other than those on newspapers).

12. Taxes on goods and passengers carried by road or inland water ways.

1 '-i

I 394 .ll~~~~~~~~~~~~~~~~~~_l'·lfrl1.!flfflhl!iill·1'11!111· 13. Taxes on vehicles, whether mechanically propelled or not, used on roads.

14. Taxes on animals and boats.

15. Tolls.

16. Taxes on profession, trades, callings and employment.

1 7. Capitation taxes.

18. Taxes on luxuries, including taxes on entertainment, amusements, betting and gambling.

19. Rates of stamp duty in respect of documents other than those specified.

20. Fees in respect of any of the matters in this list but not including fees taken in any court.

21. Fisheries.

22. Forests.

23. Irrigation, water storage and water power.

Concurrent list

The main revenue items in the Concurrent List under the Constitution are:

1. Stamp duties other than duties or fees collected by means of judicial stamps but including rates of stamp duty.

2. Fees in respect of any of the matters in this list but no including fees taken in any court.

The Finance Commission '

Under the Constitution of India, a Finance Commission is to be constituted every fifth y~ar 1·

or at such earlier time as the President considers necessary to make recommendations to the President as to:

1 1. The distribution between the Union and States of the net proceeds of taxes which are

to be or rnay be divided between. the States of the respective shares of such proceeds;

2. The principles which should govern the grants-in-aid of the reven.ues oi the State in need of such assistance out of the Consolidated fund of India; and

3. Any other matters referred to the Commission by the Pres.ident in the interest of sound finance.

The recommendation of the Commission, together with an explanatory memorandum as to the action taken thereon, are laid before each House of Parliament. The twelfth Finance Commissions submitted its report in November 2004, covering the period 2005-10. The 13th Finance Comn1ission is in operation now.

------·-------------

I

No business enterprise functions in a vacuum. Business -is an integral part of the ecolog)' and social system and, therefore, its decisions and performance are influenced by a host of diverse factors. Important decisions related to business such as what business to do, which should be the customer segrnents to target at and what strategies be adopted, whereto do the business, when to do the business, hovv to Jo the business, whether to continue a business, "\hether to expand a business and if yes where and how to expand it, and so on are influenced by a number

·. of .factors which constitute what is generally referred to as the business environment.

I~ I :r~ ~II gte:t•l ii ~llM I~ I $-}13~~l;t•l:I~13 ~iii · Business Environrnent consists of al! those factors that have a bearing on t~e business, such

as the strengths, weaknesses, internal power relationships and orientations of the organisation; government poli'cies ·and regulations; nature of the economy and econornic conditions; socio~ cultural factors; demographic trends; natural factors; and, global trends and cross-border developments. Transformation of the Indian Two Wheeler Market given at the end of the chapter illustrates the impact of business environment on the business.

BUSINESS ECOLOGY

The business ecology indeed is very similar to the human ecology (or any ecology for that matter). Just as the survival and success of any individual depend on his innate capability - such as the physiological and physiological facto,; - to cope up with the environment and the extent to which the environment is conducive to the development of the individual, the suMva.1 and success of a business firrn depend on its innalc s::-ength - resources at its command>.iricluding physical resources, financial resources, human resources, the inter-linkages and synergy, skill Jnd organisation - and its adaptabiiity to the environrnent and the extent to v1h-ich the enVironment is favourable to the development of the organisation. The survival and success of a firm, thus, depend on two sets of factors, viz, the internal factors (the internal environment) and external factors (the external environrnent).

The external environment has, broadly, tvvo components, viz, business opportunitiP.s and threats to business, Similarly, the organisational environment has two components: strehgths and vveaknesses of the organisation. Thus, strategy formulation is properly pitting the organisational factors (the internal environment) against the opportunities and threats in the external environment. In other words, business decisions are conditioned by tv..,,.o broad sets of factors, viz., the internal environment and the external environment.

BUSINESS - ENVIRONMENT INTERRELATIONSHIP

Any meaningfui organisation has certain mission, objective{s) and goal(s) and a strategy to achieve them. Business environment has a bearing on the shaping of all these integral and interrelated elements. It is, therefore, only very appropriate that formulation of strategy is sometimes defined as establishing a proper firm-environment fil. Indeed, the mission/objectives/goals themselves should be b.3.sed on an assessrnent of the external environment and the organisational factors (i.e. the internal environment). A SWOT analysis (analysis of the strengths and weaknesses of the organisation and opportunities and threats in the environment), therefore is One of the first steps in the strategic man2gement process. Business dynamics, to a large extent, is a dependent factor - it depends on 1 inter a/ia, the environmental dynamics. Hence, the importance of environmental analysis.

The external environment has, broadly, two componenls, viz, busin~ss opportuni_ties and threats to business. Similarly, the organisational environment has two components: strengths and

15

.- ' ,:· . ' :: .. ~ ... ···: ': ... ~ .. ::.· If 1'11·"~"·"'"'""'~--="'"''"'"''ill _____________________________ f !,J weaknesses of the organisation. Thus, strategy ~ormulation is properly pitting the organisational factors (the internal environment) against the opportunities and threats in the external environment. In other words, business decisions are cond.itioned by two broad sets of factors, viz., the internal environment and the external environment

Internal Environment

External Environment

A SWOT analysis (analysis of the stren~ths and weaknesses of the organisation and opportunities and threats in the environment), therefore is one of the first step< in the strategic

·management process. Business dynamics, to a large extent, is a dependent factor - it depends on, inter alia, the environmental dynamics. Hence, the importance of environmental analysis.

vAfuit•J@a~~T4!;t1l@l~l#~iil On the basis of ihe extent of intimacy with the firm, the environmental factors may be

classified in to different types or levels. As indicated above, there are, broadly, two types of environment, th~ internal environment, i.e., factors internal to the firm and external environment, i.e., factors external to the firm which have relevance to it.

Ti1e internal factors are generally regarded as controllable factors because the company has control over these factors; it can alter or modify such factors a: its personnel, physical facilities, organisation and- functional means, such as marketing mix, to suit the environment

The external factors, on the other hand, are, by and !arge, beyond the control of a company. The external or environmental facto.rs such as the economic factors, socio-cultural factors, governrnent and legal factors, demographic facto1s1 geo-physical factors etc.,··are, therefore, generally regarded as uncontrollable factors.

It' may, however, be noted that a firm may not sometimes have complete control ovei all the internal factors. Also, it is some times possible to change certain external factors.

Sarne of the external factors have a direct and intimate impact on the firm (like the suppliers and distributors of the firm). These factors are classified as micro environment, aiso known as task environment and operating environment. There are other external factors which affect an industry very generally (such as industrial policy, demographic factors etc.). They constitute what is called .macro environment, general environment or remote environment.

Although business environment consists of both the internal and external environments, many people often confine the term to the external environment of business. 1n this book too, in the subsequent chapters, the term refers mostly to external environment of business.

L!I / ~ERNAL ENVIRONMENT

• '~ • ~·~ ._·. • .. . J .. • ••

, ~-:·· .~ .. -·: -; :_· .

The important internal factors which have a bearing on the strategy and other decisions are outlined be!ow.

Value System

The value system of the founders and those at the helm of affairs has important bearing on the choice of business, the mission and objectives of the organisation, business policies and practices. It is a widely acknowledged fact that the extent to which the value system is shared by all in the organization is an important factor contributing to success.

The value system of JRD Tata and the acceptance of it by others who matter were responsible for the voluntary incorporation in th€ Articles of Association of TISCO its social and mora[ responsibilities to consumers, employees, shareholders, society and the people.

After the EID Parry group was taken over by the Murugappa group, one of the most profitable businesses (liquor) of the ailing Parry group was sold off as the liquor business did not fit into the value system of the Murugappa group.

The value system and ethical standards are also among the factors evaluated. by many companies in the selection of suppliers, distributors, collaborators etc.

lnfosys Tecluwlogies lin~it:Jd is ti publicly held company based in India that provides infonnation technnlogy consulting and softwure .>ervices to Fortune I 000 cornpanies and employs rrwre than 3,000 people worldwide. Infosys has based its _growth on several .~ey principles of corporate govemaru:e: best practices, financial markets, afl!L human capital, Its co~e-value: To achieve our objectives in an environment of fairness, honesty, transparency, and courtesj towards our customerl, emplo)'ees, ve:ndors, and society at large.

AIL Infosys activities arc conti.--iuallr be.'tchm~rked w_ith global best practices. The Firm's quality control and project management have helped it ach~·eve total quality management accreditation. Feedback froni proless audits enable the reengineering of inti:rnal processes when required. International accounting practices are also followed. Infosys publishes all financial reports accoi-ding to both U.S. and Indian Generally Accepted Accounting PracticeS. Best practices at Infosys are captured th roU[Jh a knowledge management systems that makes experience

1 _ gained from various client a~sigrunentsfrcdy av.ailable in an intranet repository.

The first lndian-re'gi.~tered direct ii.Hiri.g on a U.S. market, Infosys began trading on N'lSdaq ili Afarch 1999. lnjOsys viewed the listing as a way to achieve a_ rnore liquid c1JJTeri,,,,7 (through s!ock options) for attracting the be,(t employees and-future acquisilions. It anticipatf!S thai its _presence on Nasdaq will give potential customers greater comfort and c<infidence Lu the company.

lnfoiys views its employees as- its key resourct!. With "wealth creation for employees" as one of its stated objectives, Info::.ys provides innovative compensation and benefit packages. Infosys pioneered the concept oj· the employee stock ow:ierlhip plan in /_ndia. Infosys also offers such benefits as training, asset acqitisition, loans, housing, and penona_l assistan·ce services. This combination of s'vck options and bent;/i.ts allows Infosys to attract top talent to contribute to its growth.

Infosys won thefir5t l\'ational _Corporate. Governance Award (1999), instituted by the Minis!ry of Finance and sparuored by the UT/,

Source : Financial Times, reproduced in M.R. iskander and N. Chamlou, Corporate Governance: A Frame-ivork for Implementation.

Vision, Mission and Objectives

The business domain of the company, priorities, direction of development, business philosophy, business policy etc., are guided by the vision mission and objectives of the company.

I<.

.· .... · .. ':·.·.··:·': ·.:.:.,.:· ... :·:· . .:..:•:·

Ranbaxy's thrust in to the foreign markets and development have been driven by its m1ss10n "to become a research based international pharmaceutical company". Arvind Mills' mission - "To achieve ·global dominance in select businesses built around our core competencies through continuous product and technical innovation, customer orientation and focus on cost effectiveness", - has driven its future development strategy including the portfolio strategy. and indicated the thrusts required in the functional areas to help achieve the mission.

Management Structure and Nature

The .organisational structure, the composition of the Board of Directors, extent of professionalisation of management etc., are irnportant factors influencing business decisions. Some management structures and styles delay decision making while some others facilitate quick decision making.

The Board of Directors being the highest decision making body which sets the diredion for the development of the organisation and which overseas the performance of the organisation, the auality ohhe Board is a very critical factor for the development and performance of company. The private sector in India presents extreme cases in this respect. At one end there are companies with highly qualified and responsible Board and at the other end there are companies which do not possess these qualities.

The share-holding pattern could have important' managerial implications. There are very large companies where majority of the share is held by the promoters (like Wipro) and there are large firms where the promoters' position is very vulnerable (like the Tat3 group of companies).

Fir.ancial -institutions had large share holJing in many Indian companies. The stand of nnrr.inees of financial institutions could be very dtcisive in several cdtica! ir.stances.

Internal Power Relationship

Factors !ike the amount of support the top management enjoy!== from different levels of employees, shareholders and Board of Directors have important influence en the decisions arid their implementation.

The relationship between the members of BoarJ of Directors and between the chief executive and the Board are aiso a critical factors.

Hurnan Resources

The characteristics of the human resources like ski!I, quality, morale1 cornrnitment, attitude etc., could contribute to the strength and weakness of an organisation. Some organisations find it difficult to carry out restructuring or modernisation because of resistance by employees whereas they are srnoothly done in some others.

The involvement, initiative etc., of people at different level' may vary from organisation to organisation. The organisational culture and overall environment have b.,,aring on them. John

I Towers, M.D., Rover Group, observes that a Japanese company of 30,000 employees is 30,000 I! 1

process i provers. In a Western company, it ts 21000 process improvers _and 28,000 workers. I

i _ Ai:m~a:: 1

1

::;: ac::::::: Equity

~ The image of the company matters while ra151r1g finance, forming joint ventures or other ! l alliances, soliciting marketing intermediaries, entering purchase or sale contracts, launching new ! products etc. Brand equity is also relevant in several of these cases.

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·. ' .. ;.~: ' ,· . ·... ,

./I -;;-"11 ---------------1iiliilllliiiilliil · I...! L ''rti"'t?IPWCU::t!! Miscellaneous Factors

There are a number of other internal factors which contribute to the business success/failures or influence the decision-making. They include the following.

1. Physical Assets and Facilities I ike the production capacity, technology and efficiency of the productive apparatus, distribution logistics etc., are among the factors which influence the competitiveness of a firm. For example, as quality is very important in the pharmaceutical industry, particularly for a global player, in the case of Core Healthcare not only there is no compromise on quality but also the company made the quality norms stricter than international or other relevant standards and the quality mantra has been well imbibed throughout the organisation.

2. R & D and Technological Capabilities, among other things, determine a company's abiJity to innovate and compete.

3. Marketing Resources like the organisation for marketing, quality of the marketing men, brand equity and distribution network have direct bearing on marketing efficiency. They are important also for brand extension, new product introduction etc.

4. Financial Factors like financial policies, financial position and capital structure are also .... /)mportant internal environment affecting business performances, strategies and decisions.

~ERNAL ENVIRONMENT .

As stated earlier, the externa1 business environment consists of a micro environment and a ma....:ro environment.

Micro Environment

"'The micro environment consists of the actors in the company's immediate environment that affect the performance of the company. These include the suppliers, marketing intermediaries, competitors, customers and the publics:·2 The macro environment consists larger soci~tal forcec; that affect all the actors in the company's micro environment - namely, the derr.ographic, economic, natural, technical, political and cultural forces."3

It is quite obvious that the micro environmental factors are more intimately iinked with the company than the macro factors. The micro forces need not necessarily affect all the firms ir, a particular industry in the same way. Some of the micro factors may be particular to a firm. for example, a firm which depends on a supplier may have a supplier environment which is entirely different from that of a firm whose supply source is different. When competing firms in an industry have the same micro elements, the relative success of the firms depends, inter alia, on their relative effe<;tiveness in dealing with these elements.

Suppliers

An important force in the micro environment of a company is the suppliers, i.e., those who supply the inputs like raw materials and components to the company. The importance of reliable source/sources of supply to the smooth functioning of the business is obvious. Uncertainty regarding the supply or other supply constraints often compel companies to maintain high inventories causing cost increases. It had been pointed out that factories in India maintained indigenous stocks of 3-4 months and imported stocks of 9 months as against an average of a few hours to two weeks in Japan.4 The liberalization, however, has caused a significant change in the situation.

I c:i-

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~-'~ · .. ·.~:. •': .··~· .... · .. -:·.·; ".:· • , • f ""

1·1"'"'"~"·"'·11···"'·~· .. , ... ,, ..... ,, .• ___________________________ r ~ Because of the sensitivity of the supply, many companies give high importance to Vendor

development. Vertical integration, where feasible, helps solve the supply problem. For example, Nirma has always been a believer of the logic that captive production plants for raw materials '

15 the best way to production costs in check and it has gone for a mammoth backward integration. Jn many cases, however, outsourcing is rnore beneficial.

It is very risky to depend on a single supplier because a strike, lock out or any other production problem .with that supplier rnay seriously affect the company. Similarly, a change in the attitude or behaviour of the supplier may also affect the company. Hence, multiple sources of supply often help reduce such risks.

The supply management assumes more importance in a scarcity environment. 'Company purchasing agents are learning how to 'wine and dine" suppliers to obtain favourable treatment during periods of shortages. In other words, the purchasing department might have to "market" itself to suppliers.•s

Recognising the critical importance of the supply factor, companies all around the world are increasingly resorting to partnering I relationship marketing. (For details see the author's B°usiness Marketing (Himalaya Publishing House). Partnering is becoming more and more international and this provides a challenging opportunity for Indian suppliers to become international players.

Customers

As it is often exhorted, the major task of a business is to create and sustain customers. ,\ business exists only because of its custo'llers. Monitoring the custom•er sensitivity is, therefore, a prerequisite for the business success.

A company may have different categories of consumers like individuals, households, industries and other commercial establishments, and government and other institutions. For example, the ~ustomers of a tyre company may include individual automobile owners, automobile ma~ufacturers, public sector transport undertakings and other transport operators.

Depending on a single customer is often too risky because it may place the company in a poor bargaining position, apart from the risk> of iosing business consequent to the winding up of busines~ by the customer or due to the customer's - switching over to the competitors of the conipony.

With the growing globalisation, the customer environmer.t is increasingly becoming global. Not only that the markets of other countries are becoming more open, the Indian market is becoming more exposed to the global competition and the Indian customer is becoming more 'global' in his shopping.

Competitors

A firm's competitors include not only the other firms which market the same or similar products but also all those who compete for the discretionary income of the consumers. For example, the competition for a company's televisions may come not only from other T.V. manufacturers but also from two-wheelers, refrigerators, cooking ranges, stereo sets and so 011 and from Firms offering savings and investment schemes like banks, Unit Trust of India, companies accepting public deposits or issuing shares or debentures etc. This competition among these products may be described as desire competition as the primary task here is to influence the basic desire of the consumer. Such desire competition is generally very high in countries characterised by limited disposable incomes and many unsatisfied desires (and, of course, with many alternatives for spending/investing the disposable income).

··---·-· -----------------

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..

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' '• .-· : : :~ . . , . . ·._..

·: . . ,:: .. ' ; .~ . ·: Ii 10 ·---------------------------------1i1'"'1"'..._"'"..-..-nll:'"''''r"r111 If the consumer decides to spend his discretionary income on recreation (or recreation cum

education) he will still be confronted with a number of alternatives to choose from like T.V., stereo, two-in-one,. three-in-one etc. The competition among such alternatives which satisfy a particular category of desire is called generic competition.

If the consumer decides to go in for a T.V., the next question is which form of the T.V. -black and white or colour with remote control or without it etc. In other words, there is a product form competition. Finally, the consumer encounters the brand competition i.e., the competition between the different brands of the same product form.

An implication of these different demands is that a marketer should strive to create primary and selective demand for his products.

Consequent to the liberalisation, the competitive environment in India has been undergoing a sea change. Many companies restructured their business portfolio and strategies. In many industries where a seller's market existed a buyer's market has emerged.

The competitive environment is detailed in the section Competitive Structure of Industries later in this chapter.

Marketing Intermediaries

The immediate environment of a company may consist of a number of marketing intermediaries which 11re •firms that aid the company in promoting, selling and distributing its goods to final buyers'.6

The marketing intermediaries include middlemen such as agents and merchants who 'help the company find customers or close sales with them"/ physical distribution firms which •assist the company in stocking and moving goods from their origin to their destination"8 such as warehouses and transportation firms; marketing service agencies which •assist the company in targeting and promoting its products to the right markets"9 such as advertising agencies, marketing

. research firms, mcdi?_ firm:;· and. consuJting firms; and financial intermediaries which finance marketing activities and insure business iisks.

Marketing intermediaries are vital links between the company and the fieal consumers. A dislocation or disturbarice of the li~k, or a wrong choice of the iink, may cost the company very heavily. Retail chemists and druggists in !ndia once decided to boycott the/products of a leading company on some_ i-ssue ,1Such as poor retail margin. This move for collective boycott was, however, objected to by the' MRTP Commission; but for this the company would, perhaps, have been in trouble. Hindt;stan Lever too faced major challenge when it faced a collective boycott in Kerala on the issue of trade margin.

Financiers I ,

Another important micro environmental factor is the financiers of the company. Besides the financing capabilities, their policies and strategies, attitudes (including attitude towards risk), ability to provide non-financial assistance etc. a<e very important.

Publics

A company may encounter certain publics in its environment. •A public is any group that has an actual or potential interest in or impact on an organisation's ability to achieve its interests.'10

Media publics, citizens action publics and local publics are some examples.

Some companies are seriously affected by such publics. For example, one of the leading companies in India was frequently under attack by the media public, particularly by a. leading

1i

r '\'• B ~nTI!'""'"111.,,,,,,, .. ,.:r.m,.,,, .. , ••. , ____________________ ~--------f , , daily which was allegedly bent on bringing down the share prices of the company by tarnishing

its irnage. Such exposures or campaigns by the media might even influence the government

I

I "

i I

decisions affecting the company. Many companies are also affected by local publics. Environmental pollution is an issue often taken up by a number of local publics. Actions by local publics on this issue have caused some companies to suspend operations and/or take pollution abatement measures. Non-government organisations (NGOs), particularly in developed countries, have been mounting up protests against child labour, sweat labour, cruelty against animals, environmental problems, deindustrialisation resulting from imports and so on. Exports of developing countries, particularly, are affected by such developments.

It is wrong to think that all publics are.threats to business. Some of the actions of the publics may cause problems for companies. However, some publics are an opportunity for the business. Some businessmen, for example, regard consumerism as an opportunity for the business. The media public may be used to disseminate useful information. Similarly, fruitful co-operation between a company and the local publics may be established for the mutual benefit of the company and the local community.

~----------{ Macro (General/Remote) Environment 1---------~

Political/Govt. environrnent Legal environment

Demographic environment

r - - - - - -[0cro (Task/Operating) Environme~t ]- - - - -:-·- ~ Financiers

~ - -[ Internal Environment I- -. '

Promoters' / shareholders' values

Suppliers Mis.5lon I Cbjectives Management structure

Publics

1 Internal poi.ver relationship 1 Physical assets & facilities

Co. 'image/ brand equity Human resources Financial capabilit_ies

, Technological capabilities MarketlQg capabl!lties

' i Custom~rs

' ' 1 Global

' environment '

I

1Competitors 1

'

~--------~----------d

Marketing intermediaries

~----------------------------------d

SociaVCultural envirorunent Technological/Natural environment

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,: . . . : . . ·- ... ;. . L ';71;...-· -~/"-------------1!.,,.,T,m'"'"'.l,,ll dcRO ENVIRONMENT

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A company and the forces in its micro environment operate in a larger macro environment of forces that shape opportunities and pose threats to the compaoy.

The macro forces are, generally, more uncontrollable than the micro forces. When the macro environment is uncontrollable, the success of a company depends on its adaptability to the environment. For examf)fe, if the cost of the imported components increases substantially because of the depreciation of the domestic currency, a solution may be their domestic manufacture.

Important macro environment factors include economic environment, political and regulatory environment, social/cultural environment, demographic environment, technological environment, naJural environment, and global environment. Several of these are dealt with in some detail in subsequent chapters.

Global Environment

The global environment refers to those global factors which are relevant to business, such as the \l\1TO principles and agreeinents; other international conventions I treaties I agreements I declarations I protocols etc.; economic and business conditions I sentiments in other countries etc. Similarly, there are certain developments, !ike a hike in the crude oil price, which have global impact. ·

:~x {.:~.:~iHe 2i~~iEt.i~~y~~!E~N~'tI~NAL,S'(s'i'm· ,· -···~,..,..:· •• ¥•> •P~--'""• ~ • ..,•. ifl/l.;;,,_,-.,.;:._"'--"'·•"!I."',...._~~.~-·~· '>f.,.i~'.Y'.•,·,,, ,.

The inlernGtionol system oftii.e twenty-first century will be marked by a seeming ccntradiction: on the one hand, fragrnentation; on the other, growing globalisalion. On the level of the relations among stares, the new order will be more like the European .state system of the eighteenth and nineteenth centuries than the rigid

pauems o,f the Cold War. It will contain at le~t six major powers - the United States, Europe, Chiria, Japan, Ru.uia, ar.d probably India - as well ru a multiplicity of medium-sized and smaller coururies. Ai the .same time, intemaliona! relations have become truly global;Or tlv!first tini.e. Communicatioru are inJtantaneous; the world ecorwmy operates on all continentJ &imultaneou.sly. A wlwle set of issues has surfaced that can only be dealt with on a worldwide ba.Jis, such a.s nuclear proliferation, the environ.men!, t1'.e p:;,pulation explosion, and ecorwm.ic interdependence.

Source: Henry Kissinger, Oiplornacy (l"vu-thstone, Neu: York, 1994). I The WTO principles and regulations have far reaching imp!ications for Indian business.

Acceptance of product patents, for example, seriously impacts the Indian pharmaceutical industry. The import and investment liberalisations mandated by WTO have substantially changed the competitive enyir~nment in India.

I Economic. conditions in other countries may affect the business. For example, if the economic conditions in a comP.any's export markets are very good, export prospects are generally very good and vice versa. Recession in other countries can increase the import threats, including dumping.

International political factors can also affect business, like war or political tensions or uncertainties, strained political relations between the nation and other countries (which some times even culminates in sanctions).

Developments in information and communication technologies facilitate fast cross border spread of cultures, significantly influencing attitudes, aspirations, tastes, preferences and even customs, traditions and values. This has significant implications for business.

I I

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~<['\-:\-,I~ r~ 11+1'1.fl/l.J:/.,ii,ji ,) / l:\if)l~!f}1§i:lti11 -The term business ethics refers to the system of moral principles and rules of conduct applied

to business.

That there should be business ethics means that the business should be conducted according ··~~if~{~.~·~.~;1/L· .. to certain self-recognised moral standards. Business, being a social organ, shall not conduct itself ·~~~.~;·.:Ko-,:--.;. in a way detrimental to the interests of society and the business sector itself. ~·!t"~§

A profession is bound by certain ethical principles and rules of conduct which reflect its responsibility, authority and dignity. The professionalisation of business management should, th~refore, be reflected in the increasing acceptance of business ethics.

- There is, however, no unanimity of opinion on what constitutes business ethics. In this connection, Peter Drucker very appropriately remarks: "There neither is a separate ethics of business, not is one needed." For "men and women do not acquire exemption from ordinary rules of persona! behaviour because of their work or job. Nor, however, do they cease to be human beings when appointed vice--president, city manager, or college dean. And there have always been a number of people who cheat, steal, lie, bribe or take bribes. The problem is one of moral values and moral education of the individual, of the family, of the school". 9

One is inclined to agree with Drucker that every individual and organ in society should abide by certain rnoral codes, and that there is no separate ethics of business.

J-iowever, certain norms and principles of conduct have been commonly advocated as constituting business ethics.

In the 1930s, Rotary International developed its Code of Ethics that is still used extensively. It uses four questions that are called the four way ethical behaviour for any ethical issue a business faces.

• Is it the truth?

• Is ii fair to all concerned?

• Will it build goodwill and better friendship?

• Will it be beneficial to all concerned?

The most important professional ethics is expressed by the Hippocratic oath of the Greek physician : Primum non nocere ( "not knowingly do harm"). This dictum implies that a professional shoUld carefully evaluate his decision and ensure that his actions will not produce negative effects. Thus, this code rules out all anti-social business practices.

The code, primum non nocere, encompasses most busine~s ethics. We may, however, list the important ethical principles that a business should follow:

1. Do not deceive or cheat customers by selling sub-standard or defective products, by under-measurernent or by any other means.

2. Do not resort to hoarding, blackmarketing or profiteering

3. Do not destroy or distort competition.

4. Ensure sincerity and accuracy in advertising, labelling and packaging.

5. Do not tarnish the image of competitors by unfair practices.

'6. Make accurate business records available to all authorised persons.

7. Pay taxes and discharge other obligations promptly.

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8. Do not form cartel agreements, even informal, to control production, price, etc., to the common detriment.

I 146 I ~~~~~~::;:;:;:~;:;:;:::;;;::::;,-:-;:;::;::::_J'lil+l"ll*l51l11 ''1:1i!fai'I 9. Refrain from secret kickoacks or payoffs to customers, suppliers, administrators,

politicians, etc.

10. Ensure payment of fair wages to and fair treatment of employees.

Role of Trade Associations

Trade associations which are voluntary organisations of businessmen formed to promote , their common interests can promote business ethics in three important ways:

Education and Persuasion: Trade associations can promote business ethics by educating the members about the importance of, and the need for, having business ethics, and persuading them to give due regard to ethical principles in the conduct of their business. The members should understand that if every businessman follows business ethics, everyone of them would be benefited and there would be an improvement in the general image of the business community in the eyes of the pub I ic.

Code of Ethics: Trade associations can formulate a Code of Conduct for their members. Such a code of conduct should also contain the code of ethics. The code of condud will not only guide but also regulate the conduct of business by the members.

Moral Sanctions: 'Sanctions' refer to the ways in which moral conduct is rewarded or misconduct;, punished. Such incentives and punishments should be expected to promote business ethics. A trade association may even debar a member for a serious violation of the code of :ondud. Fear o( such punishment might prompt members to refrain from unfair business practices. On the other hand, public recognition and reward for high, moral standards in business might give a positive inducement to them to practice business ethics.

BUSINESS AND CULTURE

Culture, which is a very intriguing and complex factor is, often, a ·1ery critical component of business environment. An important problem iJ that severa! dimensions of culture are not easily explicit. A company which sets out to do business in unfamiliar cultural environment may, therefore, encounter several problems if proper home work is not done. Many multinational businessmen agree that ucultural differences are the most significant and troublesome variables encountered by the multinational company. The failure of managers to comprehend fully these

f disparities has led to most international business blunders. "' 10

Meaning of Culture

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There are varying definitions of culture: 'Culture, in its broadest definition, refers to that part/in 1 of the total repertoire of human action (and its product) which is socially, as opposed to genetically. But transmitted". A very popular definition is that of E.B. Tylor: "Culture of civilization is that an complex whole which includes knowledge, belief, art, morals, law, custom, and other capabilities c and habits acquired by man as a member of society". Kluckhohn has defined culture very simply as "the total life way of a people' As Geert Hofstede, a noted Dutch writer und academic haslfhe nicely put it, culture is the software of the mind-the social programming that runs the way we exa1 think, act and perceive ourselves and others. In other words, your brain is simply the hardware effo1 that runs the cultural programming. The implication is that culture is not in note. It is learned of ir behavior and hence can be changed. 11

, _ On the basis of the various definitions of culture, Francis Merill formulates the concept of ~;::;::;::,-;::~~ ' ~'%\culture as follows." 12 Culture:

Ji!'. lX • is the characteristically human product of social interaction; ,f,t-; 7r >;.-~·

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• provides socially acceptable patterns for meeting biological and social needs;

• is curnu!ative, for it is handed down frorr1 ,generation to generation in a given society;

• is meaningful to human bein_gs because_ of its symboli_c_quality;

• is learned by each person in the course of his development in a particular society;

• is, therefore, a basic determinant of personality; and --:'h:;~

:(Ir, • depends for its existence upcn the continued functioning of society but is independent . ;,;_ of any individual or group.

[/ Culture consists of both material culture and non-material culture. Material culture involves ;,_fn;in-made things (e.g., automobile, television, telephone, etc.) and man-made alternations in the :::~·nvironment. Non-material culture includes such factors as language, ideals, beliefs, values, music,

tetc. : ... -·-Elements of Culture

Culture includes at least three elements, namely, knowledge one! beliefs, ideals and preferences.

Knowledge •nd Beliefs: The knowledge and belieis refer to a people's prevailing notiqns of reality. They include myths a11d metaphysical beliefs ao well as scientific realities. As Rose remarks,

;. I _'one of the features of culture in general that is of special sociological interest is the shared quality it I qf •belief system. People who share a given culture tend to take a hostile attitude towards those

,,,within their midst who cannot, or will not, accept conventional definitions of fact""

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· .r .. - Ideals: Ideals refer to the societal norms which define what is expected, customary, right or proper in a given situafon. Norms are enforced by sanctions, i.e., by rewarding the right behaviour ilnd punishing the wrong behaviour,

.... Folkways and mores are 'mportant aspects of every culture. Folkways are norms of proper _(lehaviour (like the proper way to greet a friend) that are informally enforced. But mores are ;~~arms of obligatory behaviour considered vital to the welfare of the group.

iai·1 ·:~~". Preferences: Preferences refer to society's definitions of those things in life which are attractive ief ~r unattractive as objects of desire. Preferences may differ between cultures. Interestingly enough,

lhe judgments of the ideal or the proper do not always correspond to our judgments of the !S~

pleasant or enjoyable_ An example in point is the temptations (not proper but desirable). "All the things I really like lo do are immoral, illegal, or fattening," said Alexander Woollcott: 14

ri ,,(, "A culture tends to provide the standards of tastes in specific lines of human activity, Taste '1: 611': the most liberal sense varies greatly with the food consumption preferences of different cultures, h~ - -~t there is also taste in clothing, housing sexual practices, and In an endless variety of possessloni ti~ _Jd activities. What is tasteful in one culture m«y be highly distasteful in another." 15

-l- Cultural characteristics are very important in the formulation of pragmatic business strat~gies. ,.,'fhe cost of ignoring customs, traditions, taboos, tastes and preferences, etc, can be very high, For ~,lample, in Italy, a US company that set up a corn-processing plant found that its m;irketlng efforts failed because Italians thought of corn as •pig food". The Nestle company brews a variety Of instant coffee to satisfy different national tastes.

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The term organisation of culture refers to the social structure and the integration of traits, complexes and patterns that make up the cultural system.

That cultures are organised or integrated "does not mean that every single item of each culture is neatly and precisely integrated with everything else. It means rather that it is normal

- for the-parts tobe somewnafcfrganisect,<md· that--culture--trait> -receive- t""if-si~nifitanEe "<l<I meaning out of their relation to the rest of the culture." 16

The social structure - "the web of organised relationships among individuals and groups that defines their mutual rights and liabilities" - together with traits, complexes and patterns, reflects the organisation of a culture.

Stratification, i.e.,, differentiatior. based on criteria such as age, sex, caste, occupation, education, income and so on, is an important aspect vf the social structure and cultural organisation. Each stratum is assigned or supposed/expected to have a certain rank or position, role, or limitation~

·--~ etc., in the societal set-up. It is important to recognise such roles and ranks for effective negotiation,

''"".'·l::F_~·~;::--:-::·-:- promotion etc .

. ·\;,. )~:;~iil.~iif T~e organisation of a culture. is .de~ermined to a l.arge e~tent by majo~ .social institutions. ·" · ~~ ':""':·~\-.> .. ->::~~'-· According to Maciver and Page, 1nst1tut1ons are e~tablished torms or cond1t1ons of procedure

characteristic of group activity. The group which performs these standardised actions has been termed by them an association .. A.ccording to Biesanz and Biesanz, "institutions are clusters of norms organised and established for the pursuit of some need or activity of a social grcup, supported by the group's knowledge, beliefs ar.d values, as Nell as by the meaningful aspects oi i material culture". j

The important common institutions of modern cultures are the economic systeni, the politic<il administrative system, the educational system; religion, family, expressionistic, aesthetic and recreational institutions, etc. Such inst!tutions have been established to meet soc-iet}1's common needs of a biological, sociological, psychological, economic, and political nature - the type and nature of institutions reflect the comrnon goals, aspirations and the ways of dchieving them, definition and regulation of roles, positions, inter-relationships, etc., of the individuals and sub­groups and groups and the overall organisdtion of the cultur:?.

Culture traits, complexes and patlerns also help us to understand the organi~cuion of a culture. A trait is a unit of observation. It !nay be d unit uf nurn~Jtive beh..iviuur, like >haking hands or saying namasle; or it may br <in articraft, like .:i culture object such .is <1 \vouden bowl. As Lumby observes, "a culture trait is the simplest acquired mJterial or act!vity pa:tern kno·~vn;

and these traits are the bricks, so to speak, of \1vhich the vvhole culture of the society is constructed'' Most trc3its are related to others and fit into larger meaningful wholes called trait complexes. For example, the various traits involved in greeting and receiving a guest form d trd1l complex. A complex, thus, is a system of interrelated traits that function together as a unit and a number of complexes, in turn come together to form et culture pattern. A culture pattern "is a specific and enduring system of trait complexes". The organi,ation of culture may, thus, be looked upon frorn 1 the point of view a meaningful integration of different traits into interrelatP.d comµ!exes and a complexes in turn into patterns. The term ,culture pattern is sometimes used to designate the overall organisation of the culturP; hut sornetimes !t is used to refer to thP major segments of th~, oi culture1 like the religious pattern of a particular ethnic group. a

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Perhaps it is because of our need for the means of survival that Japanese science terids to concentrate more on ,he applied than on the theoretical. We have taken many basic ideas and turned them into practical objects, in many cases products not even. thought of by the or\,ainators of the basic technology. This is i.neuitable, of cours~ . ..

;,I I We Japanese have always been eager to develop our own technology, absorb asp1::cis of technology from abroad, and bLend them to make suitable objects or system.; ...

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The attitude in America i.s rr~uch nwre easygoing as far as raw materials a.re concerned than inJapan. America has-so much-&/ everythi-ng~oil, coal, copper, gold, 1u-an.ium;-tiinber-=-thatei.ieli.7:iidaYArnY{cans do ~Ot s~;m t; take co:ueroation seriously. I am reminded of the American expression, "There's pleruy rnore where that came from." We {Japanese) have no such expression.. Oitr people also seem naturally nwre concerned about precision.. It may have so:nething to do with the meticulousness with which we must learn to write the e-0mplica1ed characters of our language. But "for whatever reason., when. U'e tell one of our Japanese employees that the measurement of a certain part must be within a tolerance of plus or min.us.five, for example. he wilt automatically .strive to get th'll part as close to Z(;ro tolerance as possible. Wlhen we stan~d our plant in the United States, i;;e found that workers would follow in.strudions perfectly. But if we .said make it between plus or min.u.t flue, we wocld get it somewhere near plus or minus five all right, but rarely as close to zero as the Japanese workers did. We discussed what to do about this, and in n.o time had the anrwer. For the U.S. specifications, we just set the tolerance at pl:.LS or min1LS two, and in that raRi:,<re the American workers con.sister..tly gave us what we needed. if we have the need a."d de1narul zero toleranc:! from the American work en, we can get it if we .specify it. I do not for a moment discredit the foreign worker. Some:ime.s you have to !Ll'e a different approach where people are accustomed to differeru approaches.

Courtesy: Ak.io filorita, Made in Japan, (Ne'w York, New American Library, 1986)

The culture traits, cornp1exes and patterns differ from community to con1munity. This indicates some of the compiexiti..:=s i11volved in multicultural business.

Cultural Adaptation

The term cultural adaptation refers to the manner in \vhich a social system or an individual fits into the physical or social environment. The social system m;;iy be a small group, such as the family or a larger collectivity, such as an organisation, or even a total society, like a tribal society.

Adaptation 's essential for survival. The type of clothing, food and dwelling, suitable for the f 'I !=limatic and weather conditions, are forms of adaptations. Culture adaptation can be viewed in in! a. very ... vide context. We have adapted to the· energy crisis caused by the oil price hikes by ,v;l ~odifying our energy policy end intensifying oil exploration, developing, alternative .;ource of 1<n: ~nergy and restricting oil consumption. Humanity adapts to contagious diseases by immunisation.

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Adaptation is relevant at the individual- level as well. An individual ... vho joins or accepts a new religion has to adapt himself to the beliefs and ways of that religion. A worker who becomes a member of a trade union has to fit into the objectives, rules and vvays of the union. A woman >yho lives with her husband's family would have to fit into that family culture. An Indian who

a1 ot"'),ettles in the U.S.A. has to adjust to the social ar.d physical environments there. One who joins

ra i'il,ne\v organisation will have to- aciapt to the new environment.

The message for business is that the firm and its people will have to adapt to the environment ,-Of the different markets. As Maciver and Page remark, "every difference of environment means •difference in our habits, our ways of living. On the other hand, our habits, our ways of living,

.in so far as they differ .. create for us a different environment, a different selection within it, and ~-different accommodation to it. Through a process of constant selection and constant adaptation, the moving equilibrium of life is maintained". 17

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It is often necessary to know the process and nature of the cultural environment for a successful formulation of business strategies. For example; \vhile introducing new ideas, techniaues products; whi11';3 segmenting the 1Tiarket; while formulating the product and promotion mix strate8ies; one should consider the extent to which different categories of consumers adapt to the new things or environment and the factors favouring and disfavouring adaptations (and also the

___ ---l;g'"ner~L<i\!it~Q_e sif society_ to the_n_e_w ideas_ and environment and their impact on different categories of consumers). ----- ---

Cultural Shock

Environmental changes sometimes produce culture shock - a feeling of confusion, insecurity, and anxiety caused by the strangeness of the new environment For example, if a youngster, born and brought up in a large city; is posted to a bank office in a remote viliage, he may experience a cultural shock. Similarly, a viilager may experience a cultural shock when he takes up a job in a large modern company in a far a.way metropolitan city or foreign nation. They have, however, to adapt to the new culture in due course if they war.t to survive.

Executives and other employees on foreign assignments may experience culture shock in alien environment. Sometin1es the organisation itself may suffer shock. Proper home work to understand the culture can help avoid the shock. This a!so highlights the importance of the selection of peopie for foreign markets.

Cu:turai Transmission

A very importar.t character of culture is its transrr,issive quaiity. The elements of culture are transmitted among the members of the culture, from one generation to the r.ext and to the new membErs admitted into the culture. Some of the.aspects of a culture may be transmitted to other c;,ultures also.

The transmissive quality of culture makes it cumulative. Every generation inherits a stock of cultural elements, many of which have been accumu!ated over a long period of time. As time goes on, cultures accumulate more techniques, ideas, -produ.:ts and skills. It is also quite obvious that certain old elements are dropped as new ideas and tr?its are acquired.

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Many cultural behavhurs are handed down by one's parents, teachers and other elders. The reference groups play an important role in handing dov1_n new traits and ideas. Some cultural behaviours are however, I/handed up'' to the eiders. It is not uncommon to come across elders imitating or adopting sorr1e of the nevv traits.of the youngsters 'ivho are the trend-setters. Cultural transmission is r.ot only downward and upward; a lot of transmission takes place among contemporaries, too, e.g., styles of dress, recreational fads; reading and !earning habits, political, social and economic views. These are ofte_n _transmitted among contemporaries. Cultural tran'smission, thus, takes place horizontally as :-vell ~s vert;caily.

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Cultural trans~ission takes place by-'means of-symbolic communication. A symbol is anY/ SE

sign, signal or word that conveys a meaning .. The great importance of language in cultural fo transmission is quite clear. Literature, film, T'J and some other electronic gadgets, social institutionSi advertising and marketing techniques, and so -?n,".p~ay very i~1portant roles in cultural· transmission.,· rn:

Transmission also facilitates cultural diffusion, i.e., the spread of cultural e!ements from one m. place to another. Cultural transmission and diffusion are easy in a culture with high educational _cai levels and a ~Nell-organised communication system. An effective communication system and hig~ int educational levels facilitate socio-economic change through better cultural transmission andl C diffusion, fer nev· ideas and innovations are easily and quickly transmitted, diffused, and absorbed { in such a culture. In the context of the generally low literacy rates in India, :he government ha! realised the importance cf the media, such as film T V and radio in transmitting information such) hel

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as better agricultural pradices and techniqces, market information, the concept and importance of family planning, and so on. ·

The nature and process of cultural transmission and diffusion in a society is important to business decision-making. For example~ to formulate a promotional policy for a product, a service or an idea, it is important to identify the relevant elements of transmission, to evaluate the relative effectiveness of alternative communication media, to identify the reference groups and the extent of their influence, to identify the channel of influenc"_ on~the__r"f"rence ~OIJ]JS,__.<'nd_>_o rn~ ....

Cultural Conformity

Individuals in a culture tend either to conform to the cultural norms or to deviate from them. If the culture endures as it is, most people would conform to the norms. As lnkeles observes, "the social order depends on the regular and adequate fulfilment of the roie obligations incurred by the incumbents of the major status-posit;ons in a social system. !t follows that the most important process in society is that which ensures that people do indeed meet their role obligation." 18

A student who abides by the rules of his school discipline, does his home-works promptly and studies properly is conforming,_ to his role obligations. Similarly, an employee who works properly is conforming to his role ooligation. And an employee who strikes work for a reasonable cause in response to a strike call '_ y his union is also conforming to his role as member of the union. "When an individual has incorporated within himself the knowledge and appropriate skills necessarr to the fulfilment of a role, and when he accepts the value '" appropriateness of the action, socio!ogists speak of his having 'inte~nalised' the role and its psychological underpinnings.'' 19

Such internalisation helps achieve culturcil conformity.

If a society is, by and large, characte .. se..; by l:1ind conformity, it would be very difficult to market new revolutionary ideas (including products and techniques) in such a society. Special efforts may be required in such a society to change the attitudes of the people in favour of unconventional ideas. It is also important to understand the extent and nature of the snow-balling effects of initial deviations in a society.

· Cultural Lag

The cultural lag thesis put forward by William F Orgburn says that the various parts of modern culture do not change at the same rate, and that since there is a correlation and interdependence of parts, a rapid change in one part of our cu!ture requires readjustments through other changes in various correlated parts of that culture. These readjustments are often difficult, if not impossible, to make because cf a variety of factors, ranging from ignorance to adive resistance. Technological changes call for adaptive changes in non-material culture, which is inherently conservative. The cultural lag thus places con~traints on the scope of social change through technological development For example, in some cultures social inertia and religious sentiments come in the way of population control, though a variety of techniques are available for birth control.

International business arena is replete with cases of cultural lag. It indicates that different markets may be in different levels of readiness to accept a new product or idea. To successfully market a new idea (including product, service, technique), it is necessary to identify the factors causing the lag and to overcome them by taking appropriate measures. It would be a blunder to introduce a product to a market which is not ready to adopt it.

CULTURAL TRAITS

Cultures have some important traits. An understanding of these cultural dimensions will be helpful in business.

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Whether a culture is high context or low context is veiy significant in several cases like that of negotiation.

A high context culture is one 1hat places great value on the intangible aspects of a negotiation -·-o,-busiAess .deaLlndividual~__frorrl_~ucb_cultures look beyond the facts and figures and take into

consideration such factors as personal relationships, atmosphere and attitudes--toward respect;­religion and trust 20

A low context culture, on the other hand, assumes a high degree of shared knowledge on the behalf of a transaction partner and thus deals only in such tangible aspects of the deal as facts, figures and performance. The atmosphere and the personal relationship with the business partners means little. In a low-context culture, business can be conducted without ever meeting face-to. face. 21

Masculine and Feminine Cultures

Societies with so called masculine values appreciate aggressiveness and assertiveness while respecting the goal of material acquisition. A masculine culture contrasts with a feminine culture whirli. appreciates inter-personal relationships, put quality of life before material acquisition, and applaud concern for individuals and less-fortunates. 22

As Mitchell observes, the pace of business tends to be more pedestrian in cultures with a majority of ,.eminirie trJits. Business hinges more on personal relationships-friends doing business -..vith friend:;-rather than on pure e~:;ciency and written contracts. Business people from feniin!ne cultures are c•ften more res~rved and less time-driven than those from masculine cultures where achievements more important than building a ·long-term relationship. In masculine cultures, success is the function of the ind!vidua! and society is made up of leaders and followers. 23

Needless to say, understanding the cultural trait is essential for formulation of appropriate strategies and for their effective execution.

Monochronk and Polychronic Societies

Monochronic is a term that describes how a culture views time. In a mcnochronic society time is used for ordering one's Hfe, for setting priorities and for doing tasks in a sequential order:_ one thing at a time. f\.~ost of the societies of the developed world are monochronic. It contrasts with a polychronic society which uses time to accomplish diverse goais simultar.eously and to interact with as many individuals as possible-· even at the same time. Polychronism is a characteristic of emerging socities 11

Universalism vs. Particularism

This is one of the five cultural dimensions identified by Fons Trcmpenaars, a Dutch researcher. The other four follows this. 25

Universaiism is the belief that an ideas or practice can be applied as it is uniyersally in contrdsl to particularism which holds that the environment dictates how ideas should be applied.

In cultures with high universalism, the focus is more on rules .than on relatioriships, business contracts •re adhered to very closely, and people believe that •a deal is a deal." In cultures with high particularism, the focus is on relationships and trJst than on formal rules. In a particulari~ culture, legdl contracts often are modified, and as people get to know each other better, they often change the ways in which deals are executed.

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-.,'. Trompenaars recommends that when individuals from particularist cultures do business In .. ~ universalist cul.tu re," they should be prepared for rational, professional arguments and a 'let's ,.;get down to business attitude. 'f': '¥f:"- Convers-:::ly, when-individUals from universalist cultures do business in a particularist "~flvironment, they should be prepared for personal meandering or irrelevancies that seem to go

_ ".owhere and should not regard personal, get-to know-you attitudes as mere smal I talk. ri'

'1nd;vidualism vs. Communitariantsm -

In individualism people regard themselves as individuals, while in communitarianism they ard themselves as part of a group. Countries like the United States, Czechoslovakia, and the

'"~mer Soviet Union have high individualism.

Mexico ar.d Argentina which were ear!ier found to be co!lectivistic or communitarianistic ffiy another researcher, Hofstede, are chara(.ierised by individualism according to Trompenaars. ·tnterestingly, former communist countries of Czechoslovakia ar.d the Soviet Union now appear ,_!b be quite individualistic, which of course is contrary to assurr1ptions and conventional \Visdom

·~bout the former communist bloc. These may be indications of cultural change over rime. The "1froining of NAFTA and its increasing global orientation might have brought about a cultural ·'1.x "''0i:hange in respect of Mexico. Similarly, such a change could have happened in the former ·_·-~ommunist countries consequent to the political and economic changes. One also cannot rule ··:out the methodological factors in respect of these findings.

Trompenaars recommends that when people from cultures with high individualism deal ,-;With those from comn1unitarianism cultures, they should have patience for the t'.:ne taken to ~~·onsent and to ccnsuit, and they should aim to build lasting relationships. When people from

<.i:ultures y;!th high communitarianism deal with those from individualist cultures, they should be · prepared to make quick decisions and commit their organization to these decisions. Also, ,~~mmunitarianistics ?ealing with individualists sho.uld realize that the reason they are dealing \)<'Ith only one negotiator (as opposed to a grourJ) 1s that this peroon 1s respected by h1S or her

.. organization and has its authority and esteem. :J.' .::~

'ii.Neutral vs. Emo!ional

~~ A neutral culture is one in which emotions are held in check whereas an emotional culture _js one in which emotions are openly and naturally expressed.

·'· Japan and the United Kingdom are regarded high neutral cultures. People in these countries ·:try not to show their feelings; lhey act stoicaliy dnd maintain their composure. People in emotional cultures often smile a great deal, talk loudly when they are excited, and greet each other with

t? great deal of enthusiasm. i\texico, the Netherlands, and Switzerland are examples of high ~motional cultures.

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Trompenaars recommends that when individuals from emot!onal cultures do business in Jieutral cultures, they should put as much as they can on paper and submit it to the other side. ;!hey should realize that lack of emotion does not mean disinterest or boredom, but rather that ]eople from neutral cultures do not like to show their hand. Conversely, when those from neutral Jultures do business in emotional cultures, they should not be put off stride when the other side freates scenes or grows animated and boisterous, and they should try to respond warmly to the <F ~~motional affections of the other group.

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A specific culture is one in which individuals have a large public space they readily let others enter and share and a small private space they guard closely and share with only close friends and associates. A diffuse culture is one in which both public and private space are similar in size and individuals guard their public space carefully, because entry into public space affordo entry Into-private space as·weitc Austria, the United Kingdom, tRe- UAAed States,..and Switzerland all are specific cultures, while Venezuela, China, and Spain are diffuse cultures.

In specific cultures, people often are invited into a person's open, public space; individuals in these cultures often are open and extroverted; and there is a strong separation of work and private life. In diffuse cultures, people are not_ quickly invited into a person's open, public space, because once they are in, there is easy entry into the private space as well. Individuals in these cultures often appear to be indirect and introverted, and ·..vork and private life often are closely linked.

Trompenaars recomrnends that when those from specific cultures do business in diffuse cultures, they should respect a person's title, age, and background connections, and they shout d not get impatient v.·hen people are being indirect Or circuitous. Conversely, when individuals from diffuse cultures do business in specific cultures, they should try to get to the point and be efficient, learn to structure meetings with the judicious use of agendas, and not use their titles or _

acknowledge. achievements or skills that are irrelevant to the issues. being discussed. , I Achievement Vs. Ascription

An achievement culture is one in which peop!e are accorded status based on how well they perform their function5. An ascription culture is one in \1vhich status is attributed bdsed un who or what a person is. Achievement cultures give high status to high achievers \vhere as ascription cultures a~cord status based on age, gender, or social connections.

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Trompe;ia.ars recommends that when individuals from achievement cultures do business in ascription cu!tures, they shou~d make sure that th~ir group has older. senior, and formal position­holders who can impress the other side, and they srould respect the status and influence of their counterparts in the other group. Conversely, when individuals from ascription cultures do business

in achievement cultures, they should make sure that their group has sufficient data, technical advisers, and knowledgeable people to convince the other that they are proficient, and they should respect the knowledge and information of their counterparts on the other team.

'

RELIGION (f

cl Different peoples hc:ive their own religious conviclions, beliefs, sentiments, customs, rituals, 1· lo

festivals etc. The cost of ignoring certain religious aspects could be very high, sometimes even in fatal, in business. ba

in' When an American fast food chain was planning to enter India, one political party staled M;

that it would oppose the marketing of beef producl in the country by the mu itinational. !n a ,_,,, .. country where cow is regarded sacred, although there were some protests against slaughter of

· 'cow, beef ~s consumed by a sizable population arid the number of the beef consumers in India/ ad; is larger than the total population of many countries. 1t may, cherefore, look ironic that a foreign nan

1 firm should encounter this kind of a situation. Pork is banned in Muslim countries. During th• Pea holy Ramzan period, restaurants and the like owned by Muslims remain closed during day time Muslims would consume the meat of only those animals/birds slaughtered following the prescribe<ll b religious rituals. Many Christians do not consume non·vegetarian during the Jeni (50 days precedinl c ~tv Easter) during the 24 days preceding Christmas and on all Fridays. During these periods, Christians a e do not conduct marriages and other celebrations like baptism. Hence, the weeks f<;>lJ,owinl,

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1 a 1 a I H"1f 11.!f +ii!f!!!!i11!!.ia The global business environment is very significantly influenced by the World Trade

Organisation (WTO) principles and agreements. They also affect the domestic environment. For example, India has had to substantially liberalise imports, including almost complete removal of quantitative import restrictions.

The liberalisation of imports implies that domestic firms have to face an increasing competition from foreign goods. Liberalisation of foreign investment can result in growing competition from local outfits of MNCs.

These liberalisations, on the other hand, also provides new opportunities for Indian firms as the foreign markets become more open for exports and investments.

The liberalisation also enables Indian ·firms to seek foreign equity participation and foreign technology. This could help them to expand their business or improve competitiveness.

Further, the liberalisation facilitates global sourcing by Indian firms so that they can improve their competitiveness. Indian suppliers can benefit from global sourcing by foreign firms;

Firms will have to be efficient and dynamic to survive the global competition. Inefficient firms may go out of business.

Consumers stand to benefit significantly from the liberalisation.

lffii 1 •1· The General Agreement on Tariffs and Trade (GAIT), the predecessor of WTO, was born

in 1948 as result of the international desire to liberalise trade.

The Bretton Woods Conference of 1944, which had recommended the IMF and World Bank, had also recommended the est2blishment of an International Trade Organisation (ITO). Although the IMF and World Bar,k were established in 1946, the ITO charter was never ratified, because oi objections that its enforcement provisions would interfere with the autonomy of domestic policy making. Instead, the GATT, which had been drawn up only as an interim agreement to fill the gap until the ITO charter was ratified, became the framework for international trading system since it came into being in 1948. The international trading system since 1948 was, at least in principle. guided by the rules and procedures agreed to by the signatories to the GA TT which was an agreement signed by the contracting nations which were admitted on the basis of their willingness to accept the GA TT disciplines

The GATT was transformed into a World Trade Organisation (WTO) with effect from January, 1995. Thus, after about five decades, the original proposal of an International Trade Organisation took shape as the WTO. The WTO, which is a more powerful body than the GATT, has an enlarged role than the GA TT.

India is one of the founder members of the IMF, World Bank, GA TT and the WTO.

Objectives

The Preamble to the GATT mentioned the following as its important objectives.

1. Raising standard of living.

2. Ensuring full employment and a large and steadily growing volume of real income and effective demand.

3. Developing full use of the resources of the world.

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4. Expansion of production and international trade.

GATT embodied certain conventions and general principles governing international trade among countries that adhere to the agreement. Th.e rules or conventions of GATT required that:

1. Any proposed change in the tariff, or other type of commercial policy of a member country should not be undertaken without consultation of other parties to the agreement.

2. The countries that adhere to GA TI should work towards the reduction of tariffs and other barriers to international trade, which should be negotiated within the framework of GATT.

For the realisation of its objectives, GA TI adopted the following principles:

1. Non-discrimination: The principle of non-discrimination requires that no member country. shall discriminate between the members of GATT in the conduct of international trade. To ensure non-discrimination the members of GA TI agree to apply the principle of most favoured nation (MFN) to all import and export duties. This means that 'each nation shall be treated as well as the most favoured nation." As far as quantitative restrictions are permitted, they too, are to be administered without favour.

However, certain exceptions to this principle are allowed. For instance, GATT does not prohibit economic integration such as free trade areas or custorr1s union, provided the purpose of such integration is "to facilitate trade between the constituent territories and not to raise barriers to the trade of other parties." The GA TI also permits the members to adopt measures to counter dumping and export subsidies. However, the applicdtion of such measures shall be limited to ti." offending countries.

2. Prohibition of Quantitative Restrictions: GA TI rules seek to prohibit quantitative restrictions as far as possible and lirr1it restrictions on trade to the less rigid tariffs. However, certain exceptions to this prohibition are granted to countries confronted with balance ·of payments difficulties and to developing countries. Further, import restrictions were allowed to apply to agricultural and fishery products if domestic production of these articles was ;ubject to equaliy rernictive product:on or marketing controls.

3. Consultation: By providing a forum for continuing consultation, it sought to resolve disagreements through consultation. So far eight Rounds of trade negotiations were held under the auspices of the GATT. Each Round took several yeacs. The Uruguay Round, the latest one, took more than seven years to conclude, as against the originally contemplated more than four years. This shows the complexity of the issues involved in the trade negotiations.

An Evaluation of GA TT

The growing acceptance of GATT, despite its shortcomings, is evinced by the increase in the number of the signatories. When the GATT was signed in 1947, only 23 nations were party to it. It increased to 99 by the time of the Seventh Round and 117 countries participated in the next, i.e., the Uruguay Round. In April 2008, there were 151 members with several more countries formally seeking accession to the WTO. The signatory countries account for about 90 per cent of the international trade indicating the potential of the WTO in. bringing about an orderly development of the international trade.

One of the principal achievements of GATI was the establishment of a forum for continuing consultations. "Disputes that might otherwise have caused continuing hard feeling, reprisals, and even diplomatic rupture have been brought to the conference table and compromised".

GATT could achieve considerable trade liberalisation. There were, of course, several exceptions.

I 619 I

Agricultural trade was ciearly an exception to the liberalisation. Far from becoming freer trade in agriculture became progressively more distorted by the support given to farmers (which took the form of severe barriers to imports and subsidies to exports) in the industrial nations.

Slmilarly, another exception was textiles. Trade in textiles was restricted by the Multifibre Arrangc:r1ent (MFA). Under the MFA imports of textile items to a number of developed countries were reJtricted by quotas.

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Besides agriculture and textiles, two exceptions to the general trend of trade liberalisation have been trade of developing countries and economic integration. Developing countries with balancp of payments problems have been generally exempted form the liberalisation. Even the Uruguay Round has granted such exemptions to developing countries.

Although the picture of trade liberalisation has to be qualified with such exceptions, the GA TT achieved very commendable trade liberalisation. The average level of tariffs on manufactured products in industrial countries was brought down frorn about 40 per cent In 1947 to nearly three per cent after the Uruguay Round.

Indeed the period of 1950-1973 is conspicuous by the splendid results of progressive trade liberalisation. In the 275 years since 1720, this period vvitnessed the highest average annual growth rates in output and international trade. These rates were substantially higher than for any other period. lnaeed, the 1950s and 1960s are described as the golden decades of capitalism. The output levels of companies using newer and newer technologies in many cases were much larger than the domestic markets could absorb. Expansion of markets to other countries enabled even companie" in other inc ustries to increase their output. There vvas also a surge in international investments.

The progressive liberalisation vf trade, however, suffered a setback since 1974. Although the elimination of Tariff Barriers continued, even the developed countries have substantially increased Non-Tariff Barriers since then.

The collapse of the Bretton Woods system in the early 1970s and the oil crisis made matters very difficult for many countries, both developing and developed, and JS a result cf these demands for protection increased dramatically. The developing country exports have been hit very hard by the NTBs, as pointed out earlier in this chapter.

f-urther, the exports of developing countries gained significantly less from the GATT Rounds than did exports of the industrial nations. The trade liberalisation has bet'n confined rnostly to goods of interest to the developed countries. In case of agricultural commodities not only was that there was no liberalisation, but also there was an increase in protection. Manufactured products of interest to developing countries like textiles and clothing, footwear etc. have been subject to increasing non-tariff barriers. While the developed countries enjoy a more liberalised trading environment, the growing NTBs have been severely affecting the exports of developing countries. Ironically, the developed countries are increasing the protectionism when the developing countries are liberalising. fhis is indeed a sad comrnentary on the GATT and other multilateral organisations.

ii:!Jili!i!fiiM1;t•1•1:1•Jf Uruguay Kound (URI is the name by which the eighth Round of the multilateral trade

negotiations (MlNs) held under the auspices of the GATT is popularly known because it was launched in Punta del Este in Uruguay, a developing country, in September 1986.

Because of the complexities of the issues involved and the conflicts of interests among the participating countries, the Uruguay Round could not be concluded in December 1990 as was

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originally scheduled. When the negotiations dragged on, Arther Dunkel, the then Director General of GA TT, presented a Draft Act embodying what he thought was the result of the Uruguay Round. This came to be popularly known as the Dunkel Draft. This was replaced by an enlarged and modified final text which was approved by delegations from the member countries of the GA TT on 1 s•h December 1993. This final Act was signed by ministers of 125 govemmehts on .1 sth April 1994. The results of the Uruguay Round are to be implemented within ·ten years since 1995. Different time periods were given for effecting the different agreements.

The first six Rounds .of MTNs concentrated almost exclusively on reducing tariffs, while the Seventh Round (Tokyo Round-1973-79) moved on to tackle non-tariff barriers (NTBs). The UR sought to broaden the scope of MTNs far wider by including new areas such as:

• Trade in services

• Trade related aspects of intellectual property (TRIPs)

• Trade related investment measures (TRIMs).

Because of the inclusion of these new aspects in the GATT negotiations, the developing countries had serious apprehensions, about outcome of the Uruguay Round.

The Uruguay Round took up three basic subjects for discussion:

1. Reducing specific trade barriers and improving market access.

2. Strengthening GA TT disciplines.

3. Problems of liberalisation of trade in services, trade related aspects of intellectual property rights (TRIPs) a.id frade related investment measures (TRIMs).

The most outstanding feature of the UR was the inclusion of the subjects in the 3nl item referred to above in the MTNs of GA TT. The traditional concerns of the GATT were limited to international trade in goods. The UR went much beyond goods to services, technology, investment and information.

Some of the important features of the Uruguay Round Agreements are given below.

GATT AND WTO

Following the UR Agreement, GATT was converted from a provisional agreement into a formal international organisation called World Trade Organisation (WTO) with effect from January l, 1995. WTO now serves as a single institutional framework encompassing GATT and all the results of the Uruguay Round. It is directed by a Ministerial Conference that will meet at least once every two years and its regular business is overseen by a General Council.

The old GATT system allowed, under what was known as the 'grandfather clause', existing domestic legislation to continue even if it violated a GA TT agreement that a member country had accepted by being a signatory to GA TT. The WTO, specially rules this out.

The situation, after the coming into effect of WTO may be described as the CA TT is dead, long live the CA TT.

Under the old system, there were two GATTs: (i) GA TT the Agreement - i.e., the agreement between contracting parties (governments) setting out the rules for conducting international trade; (ii) GATT the Organisation-an international organisation created to facilitate discussions and administration related to the Agreement (ad hoc, though, continued to exist until the establishment of the WTO). GA TT the organisation, ceased to exist with the establishment of WTO; GA TT the agreement, which always dealt with (and still does) trade in goods, continues to exist, in amended

I 621 I

form, as part of the WTO alongside two new agreements, viz., General Agreement on Trade in Services (GATS) and General Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPs). The old text is now called 'GATT 1947' and the updated version is called 'GATT 1994'.

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functions

The WTO has the following five specific functions.

1. The WTO shall facilitate the implementation, administration and operation and further the objectives of the Multilateral Trade Agreements and shall also provide the framewc.: tor the implementation, administration and operation of plurilateral Trade Agreements.

2. The WTO shall provide the forum for negotiations among its members concerning their multilateral trade relations in matters dealt with under the Agreements.

3. The WTO shall administer the 'Understanding on Rules and Procedures Governing •he Settlement of Disputes'

4. The WTO shall administer the 'Trade Review Mechanism'

5. With a view to achieving greater coherence in global economic policy making, '.:1-:

WTO shall cooperate, as appropriate, with the IMF and IBRD and its affiliated agenc< •.

The GEneral .Couno:il will serve four main functions:

1. To supervise on a regular basis the operations of the revised agreements and ministerial declarations relating to (a) goods, (b) services and (c) TRIPs;

2. to act as a Dispute Settlement Body;

3. to serve as a Trade Review Mechanisrn; and

4. to establish Goods Council, Services Council and TRIPs Council, as subsidiary bodies.

To become a member of the WTO, a country must completely accept the results of the Uruguay Round.

Liberalisation of Trade in Manufactures

Liberalisation of trade in manufactures is sought to be achieved mostly by reduction of ta, .. and phasing out of non-tariff barriers.

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LE1 ~ 1w1++ ?!ll::O'!!::W"' buy from. Although the dealer will make the sale to the customer, the net marketer will get a commission from the dealer.

The net facilitates quick, easy and wider reach across the globe both for the seller and buyer. This implies that firms which do not have websites will simply be bypassed by many (in future by most) of the potential customers. E-commerce is becoming more quickly prevalent in business tO business- marketing.

Information and communication technology is becoming all embracing efficiently networking the whole business system, making a shift from e-commerce to e-business. E-commerce becomes e-business when a company connects its business system directly to its critical constituencies -customers, employees, vendors and suppliers - via Intranet, extranet and over the internet. This is depicted in the following diagram.

When a company has properly linked its business system cornpns1ng intranet, extranet and over the internet, when a customer places an order by the internet, it gets communicated to the company, distributors and the bankers. Goods are shipped by the distributor on intimation to the company and the banker who will collect the money and credit the supplier. When the stock with the distributor falls to a specified level, the company replenishes it. All these transactions take place on the real time.

lij@:tii3;1•Jjig3:1:c.]!•Wll Technology transfer is the process by which commercial_t"'.chnolQgy is dissemi_M\ed. This

. will take the form of a technology transfer transaction,-Wliieli may or may not be a legally binding contract,27 but which will involve the c;.Qrnrnunication, by the transferor, of the relevant knowledge to the recipient. Among the types of transfer transactions that may be used, the Draft TOT Code by UNCTAD has listed the following: 28

(a) The a.ssjgnment, sale and licensing of al! torms of indl!~trial pro[Jerty, ~xc:ept for trade marks, service marks and -trade name.s when they c:re not part of transfer of technology transactions;

(b) The proYision of know-how and technical expertise in the form of feasibility studies, plans, diagrams, models, instructions, Suides, formulae, basic or detailed engineering designs, specifications and equipment for training, s_ervices involving technical advisory and managerial personnel, and personnel training; ~!

·-. (c) The provision of technological knowledge necessary for the installation, operation and

functioning of plant and equipment, and turnkey projects; .

. Jg) The provision of technological knowledge necessary to acquire, install and use machinery, equipment, intermediate goods and/or raw materials which have been acquired by purchase, lease or other means;

. (e) The provision of technological contents of indu.strial and technical cooperation arrangements.

The list excludes non-commercial technology transfers, such as those found in international cooperation agreements between developed and developing states. Such agreements may relate to infrastructure or agricultural development, or to international; cooperation in the fields of research, education, employment or transpo~rt>·

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Efalii!ll.!!IHlll+' Establishment of manufacturing facilities abroad has several advantages. It provides the firm with complete control over production and quality. It does not have the risk of developing potential competitors as in the case of licensing and contract manufacturing.

Wholly owned manufacturing facility has several disadvantages too. In some cases, the cost of production is high in the foreign market. There may also be problems such as restrictions regarding the types of technology, non-availability of skilled labour, production bottlenecks due to infrastructural problems etc. If the market size is small, a separate production unit for the market may be uneconomical. Foreign investment also entails political risks.

Fully owned enterprises may not be allowed or favoured in some countries, particularly in low priority areas.

Moreover, this method demands sufficient financial and managerial resources on the part of the company.

Assembly Operations

As Miracle and Albaum point out, a manufacturer who wants many of the advantages that are associated with overseas manufacturing facilities and yet does not want to go that far may find it desirable to establish overseas assembly facilities in selected markets. In a sense, the establishment of an assemb1y operation represents a cross between exporting and oVerseasil manufacturing. 16 ··

Having assembly facilities in foreign markets is very ideal when there are economies of scale in the manufacture of parts and components and when assc1bly operations are labour intensive and !Jbour is cheap in the foreign country. It may be noted that a number of U.S. manufrcturers ship the parts and components to the developir.0 countries, get the product assembled there and bring it back home. The U.S. tariff law also encourages this. Thus, even products meant to be marketed domestically are assembled abroad.

Assembling the product meant for the foreign market in the foreign market itself has certain other advantages, besides the cost advantage. The import duty is cormally low on parts and components than on the finished product. Assembly operations would satisfy the 'local content' demand, at least to some extent. Because of the employment generation, the foreign government's attitude will be more favourable than towards the import of the finished product.

Another advantage is that the investment to be made in the foreign country is very small in comparison with that required for establishing complete manufacturing facilities. The political risks of foreign investment is, thus, not much.

Joint Ventures

Joint venture is a very common strategy of entering the foreign market. In the widest sense1 any form of association which implies collaboration for more than a transitory period is a joint venture (pure trading operations are not included in this concept). Such a broad definition encompasses rTiany diverse types of joint overseas operations, viz,

1. Sharing of ownership and management in an enterprise.

2. Licensing/franchising agreements.

3. Contract manufacturing.

4. Management contracts.

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Three of the above have already been discussed in the preceding sections. The following paragraphs are confined to the first category referred to above, i.e., joint ownership ventures. What is often meant by the term joint venture is joint ownership venture.

The essential feature of a joint ownership venture is that the ownership and management are shared between a foreign firm and a local firm. In some cases there are more than two parties involved.

A joint ownership venture may be brought about by a foreign investor buying an interest in a local company, a local firm acquiring an interest in an existing foreign firm or by both the foreign and local entrepreneurs jointly forming a new enterprise.

It is also a common practice to split the local interest between a partner and various public participation (including public sector firms or industrial development organisations). Such a strategy may enable the international firm to retain much control despite a minority holding as the power of the remaining shares is spread out. Further, equity holding by the public would help the enterprise get some public support. Partnership with government organisation may help to obtain favourable treatment from the government.

In countries where fully foreign owned firms are not allowed or favoured, joint venture is the alternative if the international maiketer is interested in establishing an enterprise in lhe forei~n market. Many foreign companies entered the communist, socialist and other developing countries by joint venturing.

One important advantage of joint venturing is that it permits a firm with limited resources to enter more foreign markets than might be possible under a policy of forming wholly owned subsidiaries.

In some cases, it is also possible to swap know-how (such as patent rights for equity) in forming joint venture as a means of securing ownership in foreign operations.

Partnership with local firms has certain specific odvantages. The local partner would be in a better position to deal with the government and the publics. Further, there would not be much pllblic hostility when there is a local partner; it would be much less when there is equity holding by the government sector ana"the._public. ------

A right local partner for a joint venture can have a major impact on a firm's competitiveness because such a partner can serve as a cultural bridge between the manufacturer and the market. For example, several successful foreign affiliated companies have demonstrated how the right partnership can strongly enhance a firm's competitive edge and its ability to adapt to and cope with the idiosyncrasies of the Japanese market.17

A joint venture can succeed only if both the partners have something definite to offer to the advantage of the other, and reap definite advantages, and have mutual trust and respect.

Third Cpuntry Location

Third country location is sometimes used as an entry strategy. When there are no commercial transactions between two nations because of political reasons or when direct transactions between two nations are difficult due to political reasons or the like, a firm in one of these nations which wants to enter the other market will have to operate from a third country base. For example, Taiwanese entrepreneurs found it easy to enter People's Republic of China through bases in Hong Kong.

Third country location may also be helpful to take advantage of the friendly trade relations • between the third country and the foreign market concerned. T(lus, for example, Rank Xerox

found it convenient to enter the erstwhile USSR through its Indian joint venture Modi Xerox.

I 669J

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THE INDUSTRIAL ENVIRONMENT 66

Since 1999, small scale units are cc..1sidered as lhos.e wilh an investment limit in piant and

machinery ;t .Rs. One ·crore. I~ additfori, there are Tiny industriei: wit!t an invesliUeilt liini~ of .

Rs. 25 lakhs. During the stventies, the limit to Tiny industries \ijas Rs>2 liikhS 'whidhvas ta.is~ 10 Rs. 5 lakhs in 199 i .The investment limi.t for small scale sectorin. 1980 wa$jus't Rs. iOlakhs.

II was raised. to Rs. 60 iakhs inl99L

. Small Scale lnduscrfos ~re preforred because. !hey require low capital~ have low,gesiatio~ . period, have greacer employmen! effect: make fuller utilisation of local resources, and Jead,.to

(aster induscrialisation and growth.

The performance of the small scale seccor has been noteworthy .. By 2000-0J, there were

34 lakh units with an output of Rs. 639,000 crores (at 199;3C94 pnces), .an empl<iyni~n!of 1.8fi

- crores; and exports of Rs .. 60,000 ~rores {9.4 % of outpui)'.which was about30 pe'tterit.df ib!al exports.

. .

The major problerr. of SS! units is sickness, which is· quite large in n·umbers~ though riot in

debts_ As per RBI statistics, as on March 2001, there were about 2.53 lakh sick ind\lstrfal units.

in the country, of which about 2.50 Jakh units were in the SSI sector However, ihe. baclc' ciCd~ it blocked in SSI units was just about 17.5 % or abou' Rs·- 25,000 ctores. The. top ~tales with

·S<;I sickness were West lkngJI, Bihar, and Maharasht:ra.

POST•I'19i SCENARfO

AfLer Jib!:!rali.sation, 1hc items reserved for the SSI sector earlie_r, were allowed.to be· impon­

ed freely. Al present. more than 550 items are under free import. Under the WTO regime of

reduction in. protectionism and removal of technical baniers, the SS! units are s.uffering from

severe competition from countries lik.e.China.

.iiiiet, in many items of exports, SSI units are farjng strongly. In te:i:tiles production; as much

~s four-fifth of fabri'c exports are made in che small sc;ile sector.* Ir.dian econpmists and

critics, are arguing for doing .away completely, with n:~ervation of the.Ssl sector, as .,yell_ as . - . . . .

· reforrn its labour laws .

In " recent article published in The Economk: Times (Pune: dated 17 NovcmbCr 2004)·an

economist working as a Professor.at US A's Columbia University, argued ·chat the need of the

hour is' to achieve economies of scale. To this end, lie advocates, that India must first 'do away

·with SS! reservacion. also reform its labour laws. (Arvi~d P,ag;mya) .

. Mentioning exports of cloth_ing and tCJ\tile•; lie says that most labollr-abutidant countries,

induding Japan in the 1930's as well as K.orea and Taiwan lalcr,.and China recently have ··'i~~.

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. exported texiiles. i~.::iia: with aii·exporl j;erforinance of$ i-3'biiiion In te~tilci aC!:oiJil!S'for .Only

· · 3 % cif world exports of textiles and clothing. Now that quotas aie coming to an end.on Janu·ary. I, idos, expeciations are high th~i india'.s expGtti of cdiiles and d(ilhirig wguidjl_i>.jl6IMo $

16 billion. A recent wtO stu~ esiimates iljac India's exports of US imports wo~l\I qu!!druple (rcin'i 4% io 1.5%. Prof. Pag~fiy~ argue~tliaihigh costsiathedhan quoias limit'ilidia;S export

~llafes~ bur infrastructure Is l!iso poor. We niust. fully liberalise this sector and allow niartet forcl!S to operate. · · · · · ·

·1 India .:Oust be fully prepar~ for th.e new WTOr~gime; though not at the,ex1*nse of the

I .. SSf sector. We must modernise it and make it cost-effective; rather th_an,do away wi_th t.he.sec-

. torw'1ol~ale.

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OUESTIQNS' ..

I. Have the post-199i reforms t~ make India a liberilliiCdand globalisCdceonomy made In<lian . . . . .

industry. in the private sec(or, su.ccessfui an_d evmpetitive?-

2. What is the role of the public se~to; ln jndilslrfaliSatiori ? Is the disinvestment policy beciim­irig successful?

3 .. What is ·the contribution of ihe small scale industry in th;: post-liberalisation pefiod ? Is it st;ll achieving its export targets ?

~·:~p.~1- J

AGRICI

Eat Agric

than a bit';. ag1:icullur·

income. t portion of

and n1anu

despite th

The prob'

no cost of

to exlrav;

the rural

~l'ifnY ~~£'Jg;

Looi i.!.ppear tc

gramme

vice~. n cei"11 of '.I

port prlc

support .J

.sificatio1 received

but ;;1ed

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