Module 5

The global business environment can be defined as the environment in different sovereign
countries, with factors exogenous to the home environment of the organization, influencing
decision making on resource use and capabilities. The global business environment can be
classified into the external environment and the internal environment (This book will focus
primarily on the external environment.) The external environment includes the social, political,
economic, regulatory, tax, cultural, legal, and technological environments.

To function effectively and efficiently, companies operating internationally must understand the
social environment of the host country they are operating in. Today there are thousands of MNCs
which operate in many parts of the globe. Such companies should acquaint themselves with the
language and culture of the country in which they are operating.

Globalisation of Indian Business

India’s economic integration with the rest of the world was very limited because of the restrictive
economic policies followed until 1991. Indian firms confined themselves, by and large, to the
home market. Foreign investment by Indian firms was very insignificant.

With the new economic policy ushered in 1991, there has, however, been a change. Globalisation
has in fact become a buzz-word with Indian firms now, and many are expanding their overseas
business by different strategies.

Obstacles to Globalisation

Government policy and procedures: Government policy and procedures in India are among the
most complex, confusing and cumbersome in the world. Even after the much publicised
liberalisation, they do not present a very conducive situation. One prerequisite for success in
globalisation is swift and efficient action. Government policy and the bureaucratic culture in
India in this respect are not that encouraging.

 High Cost: High cost of many vital inputs and other factors like raw materials and
intermediates, power, finance infrastructural facilities like port etc., tend to reduce the
international competitiveness of the Indian Business.
 Poor Infrastructure: Infrastructure in India is generally inadequate and inefficient and
therefore very costly. This is a serious problem affecting the growth as well as
competitiveness.
 Obsolescence: The technology employed, mode and style of operations etc., are, in
general, obsolete and these seriously affect the competitiveness.

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  Resistance to Change: There are several socio-political factors which resist change and
this comes in the way of modernisation, rationalisation and efficiency improvement.
Technological modernisation is resisted due to fear of unemployment. The extent of
excess labour employed by the Indian industry is alarming. Because of this labour
productivity is very low and this in some cases more than offsets the advantages of cheap
labour.
 Poor Quality Image: Due to various reasons, the quality of many India products is poor.
Even when the quality is good, the poor quality image India has becomes a handicap.
 Supply Problems: Due to various reasons like low production capacity, shortages of raw
materials and infrastructures like power and port facilities, Indian companies in many
instances are not able to accept large orders or to keep up delivery schedules.
 Small Size: Because of the small size and the low level of resources, in many cases
Indian firms are not able to compete with the giants of other countries. Even the largest of
the Indian companies are small compared to the multinational giants.
 Lack of Experience: The general lack of experience in managing international business is
another important problem.
 Limited R&D and Marketing Research: Marketing Research and R&D in other areas are
vital inputs of development of international business. However, these are poor in Indian
Business. Expenditure on R&D in India is less than one per cent of GNP while it is two
to three per cent in most of the developed countries.
 Growing Competition: The competition is growing not only from the firs in the
developed countries but also from the developing country firms. Indeed, the growing
competition from the developing country firms is a serious challenge to India’s
international business.
 Trade Barriers: Although the tariff barriers to trade have been progressively reduced
thanks to the GATT/WTO, the non-tariff barriers have been increasing, particularly in the
developed countries. Further, the trading blocs like the NAFTA, EC etc., could also
adversely affect India’s business.

Factors Favouring Globalisation

 Human Resources: Apart from the low cost of labour, there are several other aspects of
human resources to India’s favour. India has one of the largest pool of scientific and
technical manpower. The number of management graduates is also surging. It is widely
recognised that given the right environment, Indian scientists and technical personnel can
do excellently. Similarly, although the labour productivity in India is generally low, given
the right environment it will be good. While several countries are facing labour shortage
and may face diminishing labour supply, India presents the opposite picture. Cheap
labour has particular attraction for several industries.
 Wide Base: India has a very broad resource and industrial base which can support a
variety of business.

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  Growing Entrepreneurship: Many of the established industries are planning to go
international in a big way. Added to this is the considerable growth or new and dynamic
entrepreneurs who could make a significant contribution to the globalisation of Indian
business.
 Growing Domestic Market: The growing domestic market enables the Indian companies
to consolidate their position and to gain more strength to make foray into the foreign
market or to expand their foreign business.
 Niche Markets: There are many marketing opportunities abroad present in the form of
market niches.
 Expanding Markets: The growing population and disposable income and the resultant
expanding internal market provides enormous business opportunities.
 Transnationalisation of World Economy: Transnationalisation of the world economy. i.e.,
the integration of the national economies into a single world economy as evinced by the
growing interdependence and globalisation of markets is an external factor encouraging
globalisation of India Business.
 NRIs: The large number of non-resident Indians who are resourceful – in terms of capital,
skill, experience, exposure, ideas etc.– is an assed which can contribute to the
globalisation of Indian Business. The contribution of the overseas Chinese to the recent
impressive industrial development of China may be noted here.
 Economic Liberalisation: The economic liberalisation in India is an encouraging factor of
globalisation. The delicensing of industries, removal of restrictions on growth, opening
up of industries earlier reserved for the public sector, import liberalisations, liberalisation
of policy towards foreign capital and technology etc., could encourage globalisation of
Indian Business.
 Competition: The growing competition, both from within the country and abroad,
provokes many Indian companies to look to foreign markets seriously to improve their
competitive position and to increase the business.

Foreign Collaborations

If a underdeveloped or developing country is interested in rapid economic development,

it will have to import machinery, technical know-how, spare parts and even raw materials. One
method of paying for the imports is to step up exports. This is possible, if the Government is
prepared to curtail consumption drastically and export more, simultaneously curtailing import of
consumption goods. Russia, China, and others had adopted this method after the establishment of
communist governments in these counties. As this involves a lot of sacrifice, it can be adopted
only by a Government which is committed to such a policy. The second alternative of getting

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foreign technology and equipment is to depend upon foreign assistance in some form or the
other. Most countries of the world which embarked on the road to economic development had to
depend on foreign capital to some extent. The degree of dependence, however, varied with the
extent to which domestic resources could be mobilized, the state of the domestic economy in
respect of technical progress, the attitude of the respective governments, etc. But the fact cannot
be denied that foreign capital contributed in many ways to the process of economic growth and
industrialization. The need for foreign capital for a developing country like India can arise on
account of the following reasons :-

(a) Domestic capital is inadequate for purposes of economic growth and it is necessary to
invite foreign capital.
(b) For want of experience, domestic capital and entrepreneurship may not flow into certain
lines of production. Foreign capital can show the way for domestic capital.
(c) There may be potential savings in a developing economy like India but this may come
forward only at a higher level of economic activity. It is therefore, necessary that foreign
capital should help in speeding up economic activity in the initial phase of development.
(d) It may be difficult to mobilize domestic savings for the financing of projects that are
badly needed for economic development. In the early stages of development, the capital
market is itself underdeveloped. During the period in which the capital market is in the
process of development, foreign capital is essential for the development of capital market
itself.
(e) Foreign capital brings with it other scarce productive factors, such as technical know
how, business experience and knowledge which are equally essential for economic
development. It also create an overall environment for investment into various business
activities and boosts the demand thereof.

Forms of Foreign Capital

The different forms of foreign investment are :

(a) Direct Foreign Investment. Foreign capital can enter India in the form of direct investments.
In the past, companies had been formed in advanced countries with the specific purpose of
operating in India. Sometimes companies of advanced countries start their subsidiary offices or
branches and affiliates in India. Alternately, foreigners may subscribe to stocks and debentures
of concerns in India. (This is known as portfolio investment.)

(b) Foreign Collaboration. In recent years there has been joint participation of foreign and
domestic capital. India has been encouraging this form of import of foreign capital. There
are three types of foreign collaborations—joint participation between private parties, between
foreign firms and Indian Government and between foreign governments and Indian Government.

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(c) Inter-Government Loans. Since the Second World War, there has been a growing tendency
towards direct inter-government loans and grants. Marshall Aid was a massive system of
American aid given to the war-devasted European countries to reconstruct their economies.
Other advanced countries too provide grants and loans to Governments of less developed
countries.

(d) Loans from International Institutions. Since 1946, the World Bank and its affiliates have been
important suppliers of capital to India. International Monetary Fund (MF), Aid India
Consortium, Asian Development Bank (ADB) and the World Bank have been the major sources
of external assistance to India in recent years.

(e) External Commercial Borrowing (ECB). India has also been tapping export credit agencies
like the US Exim Bank, the Japanese Exim Bank, ECGC of the UK etc. to obtain a major portion
of the commercial borrowing from the capital market.

Corporate Sector Institutional Framework For business Environment

The principle and agreement of WTO have very significant impact on the business
environment. The Uruguay Round substantially expanded the scope of the international trade
negotiation by including services, intellectual property rights and trade related aspects of
investment measures, as against only goods in the past. With effect from January 1, 1995, GATT
was replaced by a permanent organisation, WTO. WTO is GATT plus a lot more. Under the
GATT there was only one major agreement-GATT. Under the WTO, there are agreements
related to three major areas - GATT, GATs, TRIPs. Further, WTO is more powerful and
effective organisation than GATT. It has a more effective dispute settlement mechanism.

After World War II, several international measures were undertaken to liberalise trade
and payments between nations. Plans for the creation of a liberal, multilateral system of world
trade were started while the war was still in progress. Initiated for the most part by the United
States, these plans envisaged a close economic cooperation among the nations in the fields of
international trade, payments and investment. International Monetary Fund and International
Bank for Reconstruction and Development (World Band) were set up. Similarly, International
Trade Organisation (ITO) was sought to set up to deal with the international trade. In 1945,
United States were called for convening of a United Nations conference for the purpose of
negotiating the international trade charter and for the establishment of an international trade
organisation. In December 1945, the US in consultation with UK and Canada prepared a detailed

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draft trade charter. The suggested Charter was discussed in London during October-November of
1946. There were two major tasks for this discussion. First, was the completion of the draft trade
for submission to UN Conference on Trade and Development scheduled for December 1947 in
Havana and second, a series of detailed negotiations among the principal countries of the
preparatory committee to reduce tariffs and tariff preferences. The results took the form of a
tariff schedule for each participating country. These tariff schedules together with those Articles
of the Draft Charter that were required to protect the integrity of the trade concessions were
combined in an instrument entitled the “General Agreement on Tariffs and Trade”-the GATT.
All the participants of the preparatory committee signed the Final Act establishing
GATT. GATT came into force in 1948 with a membership of 23 industrial countries. By the mid
1980s, its membership had enlarged 90 embracing as many as countries that accounted for over
four-fifth of world trade. The ever-expanding group of contracting parties to the GATT, the
number of countries joining GATT was 128 when WTO was created.
Main activities of GATT may be summarized as:
 tariff bargaining,
 bargaining on non-tariff trade barriers,
 elimination of quantitative restrictions
 settlement of disputes between contracting parties.

GATT is based on four major provisions:

(i) the rules of non-discrimination in trade relations between the contracting countries,
(ii) commitment to observe negotiated tariff concessions,
(iii) prohibitions against use of quantitative restrictions (quotas) on exports and imports,
(iv) special provisions to promote the trade of developing countries.

The remaining provisions of GATT are concerned with exceptions to these general
provisions, which include trade measures other than tariffs and quotas, and sundry procedural
matters. Uruguay Round took seven and a half years, almost twice the original schedule. By the
end, 125 countries were taking part. It covered almost all trade, from toothbrushes to pleasure
boats, from banking to telecommunications, from the plants to AIDS treatments. It was quite
simply the largest trade negotiation ever, and most probably the largest negotiation of any kind in
history. The seeds of the Uruguay Round were sown in November 1982 at a ministerial meeting
of GATT members in Geneva. Although the Ministers intended to launch a major new
negotiation, the conference was stalled on the issue of agriculture and was widely regarded as a
failure. In fact, the work programme that the Ministers agreed; formed the basis for what was to
become the Uruguay Round negotiating agenda. Nevertheless, it took four more years of
exploring, clarifying issues and painstaking consensus building, before the Ministers agreed to
launch the new round in September 1986, in Punta del Este, (Uruguay). They eventually
accepted a negotiating agenda, which covered almost every outstanding trade policy issue. The
talks were going to extend the trading system into several new areas, particularly, trade in

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services and intellectual property, and to reform the trade in the sensitive sectors of agriculture
and textiles. Two years later, in December 1988, ministers met again in Montreal (Canada).
The purpose was to clarify the agenda for the remaining two years, but the talks ended in a
deadlock that was not resolved until officials met more quietly in Geneva the following April.
Despite the difficulty, during the Montreal meeting, Ministers did agree a package of early
results. These included some concessions on market access for tropical products-aimed at
assisting developing countries, as well as a streamlined, which provided for the first
comprehensive, systematic and regular reviews of national trade policies and practices of GATT
members. The round was supposed to end when Ministers met once more in Brussels, in
December 1990. But they disagreed on how to reform agricultural trade and decided to extend
the talks. Despite the poor political outlook, a considerable amount of technical work continued,
leading to the first draft of a final legal agreement.
The then GATT director general, Mr. Arthur Dunkel, who chaired the negotiations at
officials’ level, compiled this draft “Final Act”. It was placed on the table in Geneva in
December 1991. The text fulfilled every part of the Punta del Este mandate, with one exception
(it did not contain the participating countries’ lists of commitments for cutting the import duties
and opening their services markets). The draft became the basis for the final agreement. In
November 1992, the EU and US settled most of their differences on agriculture in a deal known
informally as the “Blair House accord”. By July 1993, the “Quad” (US, EU, Japan and Canada)
announced significant progress in negotiations on tariffs and related subjects including market
access. On 15 April 1994, the deal was signed by ministers from most of the 125 participating
governments at a meeting in Marrakesh (Morocco).
The last round-the Uruguay Round-created a legal institution-the World Trade Organization
to replace the provisional GATT. The WTO is the only global international organization dealing
with the rules of trade between nations. At its heart are the WTO agreements, negotiated and
signed by a majority of the world’s trading nations and ratified by their Parliaments. The goal is
to help the producers of goods and services, the exporters, and the importers conduct their
business smoothly.

Fact File And Functions Of WTO

Location: Geneva, Switzerland
Established: 1 January 1995
Created by: Uruguay Round negotiations (1986-94)
Membership: 148 countries (on 13 October 2004)
Budget: 169 million Swiss francs for 2005
Secretariat staff: 630
Head: Supachai Panitchpakdi (director-general)

Functions:
• Administering WTO trade agreements

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• Forum for trade negotiations
• Handling trade disputes
• Monitoring national trade policies
• Technical assistance and training for developing countries
• Cooperation with other international organizations

The WTO’s main functions are to do with trade negotiations and the enforcement of negotiated
multilateral trade rules (including dispute settlement). Special focus is given to four particular
policies supporting these functions:
• Assisting developing and transition economies
• Specialized help for export promotion
• Cooperation in global economic policy-making
• Routine notifications when members introduce new trade measure or alter old ones.
• Keeping the WTO informed: Often the only way to monitor whether
commitments are being implemented fully is by requiring countries to notify the
WTO promptly when they take relevant actions.
• Keeping the public informed: The main public access to the WTO is the website,
www.wto.org. News of the latest developments is published daily. The objective is to make more
information available to the public.

WORKING OF WTO
The WTO is run by its member governments. All major decisions are made by the membership
as a whole, either by ministers (who meet at least once every two years) or by their ambassadors
or delegates (who meet regularly in Geneva).
Highest authority: the Ministerial Conference: So, the WTO belongs to its
members. The countries make their decisions through various councils and
committees, whose membership consists of all WTO members. Topmost is the
ministerial conference, which has to meet at least once every two years. The
Ministerial Conference can take decisions on all matters under any of the
multilateral trade agreements.
Second level: General Council in three guises: Day-to-day work in between the
ministerial conferences is handled by three bodies:
• The General Council
• The Dispute Settlement Body
• The Trade Policy Review Body
All three are in fact the same - the Agreement Establishing the WTO states they are all the
General Council, although they meet under different terms of reference. Again, all three consist
of all WTO members. They report to the Ministerial Conference. The General Council acts on
behalf of the Ministerial Conference on all WTO affairs. It meets as the Dispute Settlement Body

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and the Trade Policy Review Body to oversee procedures for settling disputes between members
and to analyze members’ trade policies.
Third level: councils for each broad area of trade, and more: Three more
councils, each handling a different broad area of trade, report to the General
Council:
• The Council for Trade in Goods (Goods Council)
• The Council for Trade in Services (Services Council)
• The Council for Trade-Related Aspects of Intellectual Property Rights
(TRIPS Council)

Fourth level: down to the nitty-gritty: Each of the higher-level councils has subsidiary
bodies. The Goods Council has 11 committees dealing with specific subjects (such as
agriculture, market access, subsidies, anti-dumping measures and so on). Again, these
consist of all member countries. Also reporting to the Goods Council is the Textiles
Monitoring Body, which consists of a chairman and 10 members acting in their personal
capacities, and groups dealing with notifications (governments informing the WTO about
current and new policies or measures) and state trading enterprises.