Indian Business Environment

Globalisation
The IMF defines globalisation as “the growing economic interdependence of countries worldwide through increasing volume and variety of cross border transactions in goods and services and of international capital flows, and also through the more rapid and widespread diffusion of technology.”

Globalisation of World Economy

• The world economy has been emerging as global or transnational economy. A global or transnational economy is one which transcends the national borders unhindered by artificial restrictions like Government restrictions on trade and factor movements.
  
• The Transnational economy is different from the international economy. The international economy is characterised by the existence of different national economies the economic relations between them being regulated by the national governments. The transnational economy is a border less world economy characterised by free flow of trade and factors of production across national borders.
  
• According to Drucker, the transnational economy is characterised by, inter alia the following features:

1. The transnational economy is shaped mainly by money flows rather than by trade in goods and services. These money flows have their own dynamics. The monetary and fiscal policies of sovereign governments increasingly react to events in the international money and capital markets rather than actively shape them.
2. In the transnational economy management has emerged as the decisive factor of production and the traditional factors of production, land and labour, have increasingly become secondary. Money and capital markets too have been increasingly becoming transnational and universally obtainable.
3. In the transnational economy the goal is market maximisation and not profit maximisation.
4. Trade, which increasingly follows investment, is becoming a function of investment.
5. The decision making power is shifting from the national state to the region. (e.g., European Union, NAFTA, etc.)
6. There is a genuine – and almost autonomous – world economy of money, credit and investment flows. It is organised by information which no longer knows national boundaries.
7. Finally, there is a growing pervasiveness of the transnational corporations which see the entire world as a single market for production and marketing of goods and services.

Drivers of Globalisation

In general, globalisation represents the increasing integration of the world economy, based on five interrelated drivers of change:

• International trade (lower trade barriers and more competition)
• Financial flows (foreign direct investment, technology transfers/licensing, portfolio investment, and debt)
• Communications (traditional media and the Internet)
• Technological advances in transportation, electronics, bioengineering and related fields
• Population mobility, especially of labor

Globalisation of Business

Globalisation is an attitude of mind – it is a mind-set which views the entire world as a single market so that the corporate strategy is based on the dynamics of the global business environment.

Globalisation encompasses the following:

• Doing or planning to expand business globally.
• Giving up the distinction between the domestic market and foreign market and developing a global outlook of the business.
• Locating the production and other physical facilities on a consideration of the global business dynamics, irrespective of national considerations.
• Basic product development and production planning on the global market considerations.
• Global sourcing of factors of production, i.e., raw materials, components, machinery/technology, finance etc., are obtained from the best source anywhere in the world.
• Global orientation of the organisational structure and management culture.

Features of current globalisation

The period 1870 to 1913 experienced a growing trend towards globalisation. The new phase of globalisation which started around the mid 20th century became very widespread, more pronounced and overcharging since the late 1980s by gathering more momentum from the political and economic changes that swept across the communist countries, the economic reforms in other countries, the latest multilateral trade agreement which seeks to substantially liberalise international trend and investment and the technological and communication revolutions.

Essential conditions for globalisation

• Business Freedom: There should not be unnecessary government restrictions which come in way of globalisation, like import restriction, restrictions on sourcing finance or other factors from abroad, foreign investments etc.
• Facilities: The extent to which an enterprise can develop globally from home country base depends on the facilities available like the infrastructural facilities.
• Government Support: Although unnecessary government interference is a hindrance to globalisation, government support can encourage Globalisation. Government support may take the form of policy and procedural reforms, development of common facilities like infrastructural facilities, R&D support, financial market reforms and so on.
• Resources: Resources is one of the important factors which often decides the ability of a firm to globalise. Resourceful companies may find it easier to thrust ahead in the global market. Resources include finance, technology, R&D capabilities, managerial expertise, company and brand image, human resource etc.
• Competitiveness: The competitive advantage of the company is very important determinant of success in global business. A firm may derive competitive advantage from any one or more of the factors such as low costs and price, product quality, product differentiation, technological superiority, after sales service, marketing strength etc.
• Orientation: A global orientation on the part of the business firms and suitable globalisation strategies are essential for globalisation

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.
• 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.
• 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.

The following factors produces changes in Business Environment:

• Changes in Govt. polices
• Variations in Growth Performances(Example: forward and backward linkages)
• Corrective policy action
• Changes in market structure and competition
• Future expectations and business speculation(Example: derivatives)
• Changes in consumer attitudes, tastes and preferences
• Imports and foreign investment changes
• External economic shocks
• Non economic factors

Strengths
Huge pool of labour force
High percentage of cultivable land
Diversified nature of the economy
Huge English speaking population, availability of skilled manpower
Stable economy, does not get affected by external changes
Extensive higher education system, third largest reservoir of engineers
High growth rate of economy
Rapid growth of IT and BPO sector bringing valuable foreign exchange
Abundance of natural resources

Weakness
Very high percentage of workforce involved in agriculture which contributes only 23% of GDP
Arround a quarter of a population below the poverty line
High unemployment rate
Stark inequality in prevailing socio economic conditions
Poor infrastructural facilities
Low productivity
Huge population leading to scarcity of resources
Low level of mechanization
Red tapism, bureaucracy
Low literacy rates
Unequal distribution of wealth
Rural-urban divide, leading to inequality in living standards

Opportunities
Scope for entry of private firms in various sectors for business
Inflow of Foreign Direct Investment is likely to increase in many sectors
Huge foreign exchange earning prospect in IT and ITES sector
Investment in R&D, engineering design
Area of biotechnology
Huge population of Indian Diaspora in foreign countries (NRIs)
Area of Infrastructure
Huge domestic market: Opportunity for MNCs for sales
Huge matural gas deposits found in India, natural gas as a fuel has tremendous opportunities
Vast forest area and diverse wildlife
Huge agricultural resources, fishing, plantation crops, livestock

Threats
Global economy recession/slowdown
High fiscal deficit
Threat of government intervention in some states
Volatility in crude oil prices across the world
Growing Import bill
Population explosion, rate of growth of pobulation still high
Agriculture excessively dependent on monsoons