FYBMS-Business-Environment-SEM-II-munotes

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INTRODUCTION TO BUSINESS
ENVIRONMENT
Unit Structure
1.0 Objectives
1.1 Introduction
1.2 Business – Meaning, Definition, Nature & Scope, Types of Business
Organisations
1.3 Business Environment – Meaning, Characteristics, Scope and
Significance, Compo nents of Business Environment
1.4 Micro & Macro Environment - Definition, Differentiation, Analysis
of Business Environment, SWOT Analysis
1.5 Introduction to Micro -Environment
 Internal Environment: Value system, Mission, Objectives,
Organizational Struc ture, Organizational Resources, Company Image,
Brand Equity
 External Environment: Firm, customers, suppliers, distributors,
Competitors, Society
1.6 Introduction to Macro Components: Demographic, Natural,
Political, Social, Cultural, Economic, Technologica l, International and
Legal)
1.7 Summary
1.8 Questions
1.9 References
1.0 OBJECTIVES After studying this unit, the learner will be able to –
 Understand the concept of Business, its types and scope
 Relate the dynamics and components of business environment
 Appraise and analyse the Micro Environment of business
 Measure and review the Macro Environment of Business
 Elaborate SWOT Analysis and get an overview of its factors
1.1 INTRODUCTION Business environment is the sum of internal and external factors of an
organization. Its two major types are – Internal and External munotes.in

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2 Business objectives are the specific and measurable results organisations
hope to maintain and they are classified under five broad categories
namely – Economic, Social, Organic, Human, Natio nal/Global
1.2 BUSINESS 1.2.1 Meaning:
The term business refers to an organization or an enterprise engaged in
any commercial, industrial, or professional activity. Some businesses are
profit oriented, whereas some are non -profit that operate for a chari table
mission or to serve society. In terms of capital formation and management
- businesses can range from sole proprietorship to partnership firms, to
multinational companies at large (private or public limited).
Traditionally business included activiti es aimed at making profit through
production and marketing. But now, it has become more of customer
oriented and service oriented than the traditional method.
For example, Uber and Ola started with the concept of aggregating taxi
drivers and providing tran sportation services to the customers under their
brand name.
1.2.2 Definitions of Business:
1. According to Keith Davis, “Business may be defined as any form of
commercial activity to satisfy the economic wants of people at a
profit.”
2. According to Lew is H. Haney, “ Business is a human activity directed
towards producing or acquiring wealth through buying and selling
activities”.
3. According to James Stephenson, “business is the sum total of all the
processes that are engaged in the removal of hindran ces of persons
(trade), place (transport and insurance, and time (warehousing) in the
exchange (banking) of commodities.
4. According to Merriam -Webster Dictionary, “business is the activity
of making, buying, or selling goods or providing services in exc hange
for money.”
1.2.3 Nature & Scope of Business:
Nature/Characteristics of Business:
1. Economic Activity: Business is primarily an economic activity as it
undertakes production and distribution of goods and/or services for
satisfying customer wants.
2. Risk and uncertainty: Businesses are subject to risks and
uncertainties. This may be due to a number of possible reasons like munotes.in

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3 Introduction to Business Environment loss due to fire or theft, change in consumer demand, taste and
preferences, socio -economic changes and stiff market competition.
3. Regularity in Dealings: Business transactions must be regular in
nature. It involves frequent exchange of goods and services.
4. Profit Motive: The primary objective of business is profit
maximization. Earning of profits is important for growth, expansion
and su rvival of business.
5. Legal Activity: All businesses are governed under various applicable
laws for example The Indian Partnership Act, 1932, Indian Contract
Act, 1872, Indian Companies Act, 2013. Hence it should conduct
legal and lawful activities.
6. Creative & Dynamic: Business organisations must be creative in
production & distribution of goods and services to satisfy customer
demands and face competition. Constant changes in the business
environment like technology, government decisions, competition, etc.
make it highly dynamic.
Scope of Business:

The scope of business can be summarised in the above chart covering
various activities. It can be further explained as follows:
1. Industry :
It is the manufacturing side of business concerned with production of
goods and services. These are either consumer goods or industrial goods.
Following are the different types of industry:
i) Primary Industry : related to production of primary goods like
fisheries, cotton, rubber, agriculture goods, etc.
ii) Genetic Industry : relat ed to genetics or breeding – which involves
engaging in reproduction and multiplication of certain species of
plants and animals with the objective of selling them. Eg. Cattle
breeding, poultry, plant nurseries, etc.
iii) Manufacturing Industry : concerned with conversion of raw
materials into finished goods. It can be production of capital goods
(which helps to produce other goods/services) like machinery, munotes.in

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4 equipment, components, etc. and/or consumer goods (goods for final
consumption) like soap, food stuffs, aut omobiles, electric supplies,
etc.
iv) Extractive Industry : concerned with extracting raw materials or
minerals from natural resources. Oil and gas extraction, mining,
drilling are some examples
v) Construction Industry : involves construction activities like buil ding
bridges, roads, dams, buildings, canals, etc.
vi) Service Industry : relates to creating value addition through providing
services. It is India’s most dynamic and rapidly growing industry and
the range of services include – banking, insurance, transportat ion,
logistics, professional services of Doctors, Lawyers, Teachers,
Chartered Accountants, Researchers, etc.
vii) IT Industry : it deals with the use of computers and
telecommunications for development, storing, retrieving and sending
information.
2. Commerce :
It includes trade and aids to trade.
i) Trade : refers to buying and selling of goods and services for a
consideration. In financial markets, trade refers to purchasing and
selling securities, commodities, or derivatives.
Trade can be further divided into two groups: (a) Internal Trade and (b)
External Trade
a) Internal Trade:
It is also known as domestic or home trade and conducted within the
political boundaries of a country. Internal trade is further classified into
two groups:
1. Wholesale Trade:
It inv olves buying and selling in bulk quantities. The wholesaler buys
from the manufacturer or agent in large quantities to sell it in smaller
quantities to the retailers or final consumers.
2. Retail Trade:
It involves buying from the wholesaler or manufacturer in small or limited
quantities and selling it to the final consumers for their personal
consumption.
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5 Introduction to Business Environment b) External Trade:
It is also known as foreign or international trade and is conducted between
two or more countries. It is broadly divided into three groups:
1. Export Trade:
It involves selling of goods by sellers of one country to the buyer(s) of
another country. Export Trade generates foreign exchange and helps in
maintaining favorable balance of payments. As per RBI, India’s overall
exports (Mercha ndise and Services combined) in April -September 2022
are estimated to be USD 382.31 Billion, exhibiting a positive growth of
21.03 per cent over the same period last year. The top exports of India are
Refined Petroleum, Packaged Medicaments, Diamonds , Ric e, and
Jewellery, exporting mostly to United States, China, United Arab
Emirates, Hong Kong and Germany
2. Import Trade:
It involves buying of goods by buyers of one country from the seller(s) of
another country. The top imports of India are Crude Petrol eum, Gold, Coal
Briquettes, Diamonds and Petroleum Gas, importing mostly from China,
United States, United Arab Emirates, Saudi Arabia, and Iraq.
3. Entrepot Trade:
It involves buying of goods from one country for the purpose of re -
exporting to another co untry.

ii) Aids -to-trade : refers to those activities which remove the difficulties
or hindrances in the smooth flow of goods and services from the
producers to the final consumers.
a) Banking & Finance:
It solves the problem of finance. Banks and othe r financial organizations
offer capital and credit to company owners for their working capital and
fixed capital requirements. Banks are governed under Banking Regulation munotes.in

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6 Business Environment
6 Act, 1949, as amended by The National Bank for Financing Infrastructure
and Developme nt Act, 2021 (17 of 2021) (w.e.f.19 -4-2021)
b) Insurance :
Business is subject to risks and uncertainties like fire, theft, natural
calamities. Insurance spreads the financial strain of loss across a
significant number of people (insurance companies) thereb y reducing the
level of risk incurred by the business. Examples of insurance are life
insurance, fire insurance, marine insurance, workers’ compensation
insurance, and many more.
c) Warehousing :
As there is a time gap between the production and consumption of goods,
the goods must be kept in storage until you can sell them. Warehousing
eliminates the problem of time, resulting in time utility. There are three
sorts of warehouses: private, public, and bonded.
d) Transport & Communication :
Transport creates place utility. It helps movement of goods and men from
place of production to place of consumption. The different modes of
transport include: Air - airway, Water – river, sea, canal and Land –
roadways and railways.
e) Advertising & Publicity :
Advertisin g and publicity helps manufacturers in creating distinct brand
image for their product and service. Advertising fills the knowledge gap
and it solves the difficulty of information. The media used to advertise
products are Radio, Newspapers, Magazines, TV, the Internet, Billboard,
etc.
f) Mercantile Agents & Traders :
They are the intermediaries who act as a link between buyers and sellers.
They remove the difficulty of direct contact between manufacturers and
final consumers and help the manufacturer to foc us on their core
competency i.e. manufacturing.
1.2.4 Types of business organisations:
A business organization may be owned and managed by a single
individual or a group of individuals in the form of a partnership firm or a
Joint stock company. Business or ganisationsin India can be classified into
the following types:
I. Sole Trading Organisation:
This is the most common form of business organization. One person
provides the finances and in return, has full control of the business and is
able to keep all t he profits. Some important features are highlighted below: munotes.in

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7 Introduction to Business Environment a. Easy to set up - no legal formalities, less government regulations.
b. Owner has complete control – not answerable to anybody else.
c. Owner keeps all profits.
d. Able to choose times and patterns of workin g.
e. Able to establish close personal relationships with staff (if any are
employed) and customers.
f. The business can be based on the interest and skills of the owner –
rather than working as an employee for a larger business.
g. No separate legal status of sol e trading concern.
h. Business is restricted mostly to local area
i. Unlimited liability – all of the owner’s assets are potentially at risk
II. Partnership Firm:
Partnerships are agreements between two or more people to carry on a
business together, usually wi th a view of making a profit. A partnership
deed establishes the rights and privileges of the partners. Following are the
main features of partnership firm:
a. A partnership firm has minimum number of two persons and
maximum number of ten persons in case of banking business, and 20
in case of non banking business activity.
b. Shared decision making and flexibility in business operations
c. Additional capital injected by each partner
d. Business profits and losses are shared between the partners
e. Grea ter privacy and fewer legal formalities than that of corporate
organizations
f. Unlimited Liability for all partners
g. The norms are specified under the Indian Partnership Act of 1932
III. Joint Hindu Family:
The joint Hindu family firm is a distinct for m of business organization
existing only in India and comes into existence by the operation of Hindu
Law - The Hindu Succession Act, 1956. Its main features are:
j. Karta controls the entire family business. He has the authority to
manage the business. He tak es all the decisions and his decisions are
binding on all the co -parceners.
k. HUF is not affected by the death of the members. In the case of the
death of the Karta, the next eldest male member in the family munotes.in

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8 becomes the Karta. However, the business can be te rminated with the
mutual consent of the members
l. The liability of all the members except the Karta is limited to the
extent of shares in the co -coparcenary property of the business
m. The Karta has complete authority over all decisions, which avoids
conflicts among the members as there is no interference from
anybody. It also leads to quick decision making.
n. The membership of the business is restricted to family members
exclusively. Therefore, they face the demerit of limited membership.
IV. Joint Stock Company:
A Joint Stock Company is a business organization that is registered under
the Indian Companies Act, 1956 now amended as The Companies Act,
2013. Professor Haney defines it as “a voluntary association of persons for
profit, having the capital divided into some transferable shares, and the
ownership of such shares is the condition of membership of the company.”
Features of a joint stock company are as follows:
a. A company is a legal entity that has been created by the statues of law
and acts as an artific ial person. It can enter into a contract, borrow and
lend money, sue or be sued, etc.
b. The life of a company is in no way related to the life of its members.
Members or shareholders of a company keep changing, but this does
not affect the company’s life .
c. The liability of members is limited to the amount of unpaid share
capital.
d. Getting registered under the Companies Act, 2013 is legally
compulsory for a company.
e. There is a separation of ownership and management. The owner of a
company are its sh areholders who elect their representatives, also
known as directors of the company. The directors of the company are
responsible for the management and control of business activities and
they do so by appointing professional experts in different fields.
f. Due to large financial resources and high profit rates, a company has
more scope for growth and expansion.
V. Cooperative Societies:
It is a democratic form of organization formed to promote and protect
interest of its members. The members of a cooperati ve society raise the
capital through the issue of shares, and the members themselves purchase
those shares. According to “The Cooperative Societies Act 1912” –
Cooperative organization is “a society which has its objective for the
promotion of economic int erests of its members in accordance with
cooperative principles.” Following are its features: munotes.in

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9 Introduction to Business Environment a. The main objective is service motive and non profit.
b. The principle of one person, one vote is followed
c. It requires minimum 10 members and there is no upper limit.
d. An individual is free to join or leave the society according to their
will. It works according to a democratic society
e. The risk factor of members is limited to the extent of capital brought
by them in the cooperative society.
f. As there are different members in a cooperative society, it is difficult
to maintain a level of secrecy. Besides, a cooperative society has an
obligation to disclose the decisions of the meeting under the Societies
Act
1.3 BUSINESS ENVIRONMENT 1.3.1 Meaning:
Business Environment is the most important aspect of any business
organization. A Business Environment is the sum or collection of all
internal and external factors such as employees, organizations
products/services, customers, management, suppliers,
shareh olders/owners, investors, government, economic conditions,
competitors, etc. These factors affect the functioning of the organization
directly or indirectly.
Business Environment helps organizations to identify business
opportunities, determine growth, pro fitability and plan strategies
accordingly.
Definitions:
According to Keith Davis, “Business Environment is the aggregate of all
conditions, events and influences that surround and affect the business.”
According to Prof. Weimer, “Business Environment enco mpasses the
climate or set of conditions -economic, social, political or institutional in
which business operations are conducted.”
1.3.2 Characteristics:
Following are the important characteristics of business environment:
i) Internal and External Factor s: The Internal factors of a firm
includes its plans and policies, employees, technical, physical and
other facilities. The external factors comprise of social, economic,
legal, competition and other factors that are unpredictable. Internal
factors can be controlled by organisations, whereas external cannot.
ii) Dynamic Nature: Business environment is highly volatile as there
are constant and rapid changes it encounters. Unfavourable changes in munotes.in

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10 business environment bring threats to the business. Eg. before covid -
19 pandemic, multiplex theatres were highly popular and visited, but
now, the cinema industry has switched to OTT Platforms such as
Netflix, Amazon Prime, Disney+ Hotstar, SonyLIV, etc
iii) Complex : Different Elements of business environment are clos ely
inter-related and interdependent. A change in one element affects the
other elements. Eg. The introduction of smart mobile phones has
made cd player, watches, camera, etc. almost obsolete.
iv) Uncertainty : Business environment is largely uncertain bec ause it is
difficult to forecast the future environment. Due to its volatility, there
is increasing uncertainty. Eg. in some industries like Fashion, film,
information technology its not possible to predict the future trend.
v) Multi -faceted : The assumptio n of outcome of an environment
depends on the perception of its observers. One change in the
environment may be welcomed by one company while it may be a
threat for another. Eg. liberalization of policies for foreign companies
can be a threat to local firm s.
vi) SWOT Analysis : Strengths and weaknesses are often internal to an
organization, while opportunities and threats generally relate to
external factors. SWOT analysis facilitates internal and external
factors which impact the business.
v) Far reaching impact : Business environment has long lasting impact
on the future of business organisations. If one does not make required
changes to match present and future requirements, the business may
come to an end. Eg. Mukesh Ambani group tapped into the changes i n
its environment, moved from textile and refinery to retail outlets,
mobile services, news and business channels, etc.
1.3.3 Scope and Significance:
i. SWOT Analysis: The systematic study of the internal and external
environment of an organization will r eveal some significant
information i.e. strengths, weakness, opportunities and threats
(SWOT). Based on the organizational SWOT analysis, they can make
necessary changes in the organizational structure, mode of operation,
customer segmentation and product planning and management
ii. Organization & Optimum use of resources: With effective
environmental analysis, we can ensure optimum use of resources. The
business organizations can forecast demand and prepare future
projections and alternative plans. Arrange ment of required resources
can be made, employees can be trained accordingly and hence it can
help in reducing wastages
iii. Planning & Accomplishment of Goals/Objectives : The top level
management, middle level management and lower level management
need to devise organizational goals/objectives. Environmental munotes.in

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11 Introduction to Business Environment analysis helps in identification and formulation of organizational
goals. This will ensure effective management of resources,
development of plans and policies to accomplish short term, medium
term and long term goals/objectives.
iv. Face Competition: Business organizations face cut -throat
competition at all times. There are price wars, quality and technology
up gradations, encroachment in new markets, new product
developments that have an adverse impa ct on business operations.
Environmental analysis leads the business organizations to conduct
market research and formulate effective strategies.
v. Market Knowledge: The Macro and Micro External Environment are
dynamic in nature. The needs and wants of cu stomers, growing
demand, competitors, are ever present and keep changing.
Environmental analysis makes the organizations aware of ongoing
changes in the market. It helps the organization to incorporate
strategic changes in its plans and policies in order to achieve the set
objectives.
vi. Survival & Growth: Effective SWOT analysis enables the business
organisations to identify its current market status and helps to cope
with rapid changes. This will equip them with necessary strategies for
its survival and growth. Eg. with changes in technology, offline
retailers have also started with E -commerce business for better reach
and sales.
1.3.4 Components of Business Environment:
Business environment can be classified into two major types i.e. Internal
Environme nt and External Environment.
Internal Environment refers to the factors within the organization eg.
Mission and Vision, policies and programmes, organizational structure,
employees, financial and physical resources. These factors can be altered
hence know n as controllable factors. Internal environment helps the
business enterprise to identify its Strengths and Weakness.
External Environment refers to the factors outside the organization. These
factors are mostly uncontrollable and are further classified in to two
segments – micro and macro environment. The Micro environment
consists of marketing intermediaries, competitors, society, customers and
suppliers, whereas the macro environment consists of technological, socio -
cultural, demographic, natural, regulat ory, political and international
environment
1.4 MICRO & MACRO ENVIRONMENT 1.4.1 Definition
Micro Environment : munotes.in

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12 Micro environment or task environment refers to those individuals, groups
and agencies with which the organisations comes into direct and fre quent
contact in the course of its functioning. According to Philip Kotler, “The
micro environment consists of factors in the company’s immediate
environment which affect the performance of the business unit. These
include suppliers, marketing inte rmediaries, competitors, customers and
the public.”
Macro Environment:
The external macro environment determines the opportunities for a firm to
exploit for promoting its business. It also presents threats in the sense that
it can put restrictions on the expansion of business activities. The macro
environment forces are less controllable than the micro forces.
According to Philip Kotler, “Macro environment includes forces that
create opportunities and pose threat to the business unit. It includes
economic , demographic, natural, technological, political and cultural
environments.”
1.4.2 Differentiation: Micro Environment Macro Environment 1. Meaning: It refers to the business itself and to the internal challenges that come from the business. It refers to all forces that are part of the larger society that affect the business environment. 2. Elements: Competitors, Organization itself, Suppliers, Market, Intermediaries and Customers Political, Economic, Socio-cultural, Technological, Legal and Environmental. 3. Control: Micro environment is controllable on the part of business. Macro Environment factors are uncontrollable and beyond the direct influence of business. 4. Influence on organization: There is a direct and regular impact on business decisions There is an indirect impact on business decisions 5. Functioning: Factors may function in the form of strengths and weaknesses Factors may function in the form of opportunities and threats
1.4.3 Analysis of Business Environment:
Environmental analys is is a process to identify the internal and external
elements which can impact organizational performance. Environmental
analysis is a strategic tool.It helps in assessing the level of opportunities or munotes.in

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13 Introduction to Business Environment threats which the organisations might encounter. It a ids to align
organizational strategies with the business environment.
Environmental analysis requires information inputs which can be
gathered from:
 Forecasting
 Management information systems
 Reports, journals, newspapers
 Human resources / sales personnel’ s
 Competitors and government policies
Environmental Analysis is also called environmental scanning. Some
typical external environment issues include:
 Economic environment
 Socio -cultural environment
 Legal -Political environment
 Technological environment
 Natu ral environment
 Global environment
Environmental analysis is important as it aids in SWOT analysis, achieves
goals and objectives, helps in effective monitoring and control, face
competition. The Quality of workforce, political stability, economic
reforms and government initiatives are some driving factors affecting
environmental analysis
Importance of Environmental Analysis can be explained as follows:
a) It helps to find opportunities and threats so as to adjust business
activities accordingly
b) It enables bus iness organizations to develop suitable strategies for
exploiting business opportunities.
c) Identification of weakness and strengths can help organisations to
capitalize favourable and unfavourable situations
d) It helps in planning activities in most efficient manner
e) Optimum utilization of resources is possible due to environmental
analysis
f) It equips organisations to become more socially adaptable and
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14 1.4.4 Swot Analysis:
SWOT is the Acronym for STRENGTHS, WEAKNESS,
OPPORTUNITIES and THREATS.
SWOT an alysis is an important tool which can help you to analyse what
your organization does best at the present moment, and to frame
successful strategies for the future. It is used at regular intervals and
enables managers to achieve its performance with ease.
A SWOT analysis examines the organisations internal strengths and
weaknesses, and external opportunities and threats.
SWOT method was originally developed for business organisations and
industries, nowadays it is equally used in the work of community hea lth
and development, education, and even for individual growth.
Definition:
SWOT Analysis is “a simple but powerful tool for sizing up a companys
resource capabilities and deficiencies, its market opportunities and the
external threats to its future well -being.”
-Thompson and Strickland
SWOT Analysis Matrix
This Matrix will help us to understand how SWOT looks like in a 2 x 2
Grid: STRENGTHS  What is our competitive advantage?  What products/services are performing well?  What assets do you have in your teams? (ie. knowledge, education, network, skills, and reputation) WEAKNESS  What products are underperforming?  Are there gaps on your team?  Where do you have fewer resources than others?  What could you improve? OPPORTUNITIES  What technology can we use to improve operations?  What new market segments can we explore?  Are there upcoming changes to regulations that might impact your company positively? THREATS  What new regulations threaten operations?  What consumer trends threaten business?  What is your competition doing?
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15 Introduction to Business Environment An overview of the Four Factors of SWOT is explained below:
1. Strengths :
Strengths describe what the organization is best at and improves is ability
to compete. Strengths are internal to a business organization and are
controllable. Strengths enable the organisations to achieve its Vision,
Mission and Goals. It is the basis on which continued success can be made
and continued/sustained.
Examples : strong brand image, broad product line, loyal customer base,
strong financial standing/record, uni que technology/process, significant
market share, focused human resources, research and development, etc.
2. Weakness :
Weaknesses are the areas where the organizations need to improve to
maintain competitive advantage and survive in the market. They are
limitations which create strategic disadvantages as it relates to
incompetency and inability of the organization to perform certain
activities as compared to its competitors.
Examples : high product/service pricing, ineffective marketing channels,
untraine d and unexperienced staff, poor public image, poor financial
record – high levels of debt, obsolete technology, inadequate supply chain,
lack of capital, high employee turnover, low productivity, etc.
3. Opportunities :
Opportunities refer to external favo rable factors that give competitive
advantage to the organization. Opportunities arise when an organization
can take benefit of conditions in its environment to plan and execute
strategies that increase their profitability. If a business does not take
adva ntage of it, the competitors will take away the same
Examples : Tax Holidays / Rebate, limited competition, technological
innovations and advancements, easy availability of bank credit, market
boom, favourable government policies, etc.
4. Threats :
Threats are an unfavourable and uncontrollable condition in the
organisations environment. The manager can visualize that a threat exists
but there is very little one can do for survival of he business.
Examples : poor labor -management relations, fluctuations in f oreign
exchange rates, entry of global MNCs, aggressive trade unions, unethical
competition, changes in consumer tastes and preferences, etc.
1.5 INTRODUCTION TO MICRO -ENVIRONMENT: 1.5.1 Internal Environment:
The major factors affecting business decision are: munotes.in

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16 i) Value system:
The success of any organization depends upon the sharing of value system
by all members. The values of the business owner/founder seep down to
the entire organization and have a significant effect on the organization.
Organisations w ith a strong culture of ethical standards and value system
are highly preferred by external associates like suppliers, distributors or
financial institutions.
ii) Vision & Mission:
Vision states the future orientation of a business organization, where the
organization wants to be in the future. Mission reflects the vision
statement, as it reflects the basic purpose and philosophy of the
organization and gives a clear idea of its long run commitment. Eg. The
mission statement of Himalaya is to establish Him alaya as a science -
based, problem -solving, head -to-heel brand, harnessed from nature's
wealth and characterized by trust and healthy lives.
iii) Organisational Structure and functioning:
The type of organizational structure – tall or flat and the style of function
of the management, the level of professionalism of management and
composition of the board of directors are various factors that affects
organizational decision making
iv) Human Resources:
The success of an enterprise is solely dependent on its manpower.
Therefore the quality, skill competency, right attitude and commitment of
its human resources is essential for the success of an organisation.
v) Policies & Procedures:
Policies are statements that guide decision making. It defines the
boundarie s within which decisions can be made. Eg. Credit Policy for
Creditors/Debtors, dealing with customers, sales policy etc.
Procedures are plans that establish a required method of handling future
activities.
vi) Brand Equity:
It refers to the value of a bran d. Every organisation resorts to advertising
and other promotional measures like digital marketing, influencer based
marketing, feedback monitoring, etc. to build up its brand.
vii) Other Factors:
 Research and development
 Marketing and distribution networ k
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17 Introduction to Business Environment  Technology advancement
1.5.2 External Environment: Firm,, suppliers, , , Society
1. Customers :
The people that buy an organizations goods or services are its customers.
In order to be successful the organiz ation must understand and meet the
needs and expectations of the customers. There may be different types of
customers like individuals, households, Government departments,
commercial establishments, etc. For example, the customers of a paper
company may in clude students, teachers, educational institutions, business
firms and other users of stationery.
2. Competitors :
All organizations face competition at local, national and global levels.
They may have both direct and indirect competitors. Direct competit ors
are the other firms which offer the same or similar products and services.
For example, Sony TV faces direct competition from other brands like
LG, Samsung, MI, One Plus, etc. Indirect competition comes from firms
vying for discretionary income. For e xample, a cinema house faces
indirect competition from Casino, and other firms marketing
entertainment.
3. Suppliers:
Suppliers are those who supply the inputs like raw material, labour and
components to the company. Organizations should ensure that the ir
suppliers are reliable, offer uninterrupted supply and if possible, they
should keep multiple suppliers. There should be a strong, positive, and
healthy relationship between the organization and its suppliers.
4. Marketing Intermediaries:
Marketing int ermediaries help and support the organization to promote,
sell and distribute its products/services. Middlemen like wholesalers,
agents, and retailers serve as a link between the organization and its
consumers. Dabur India, Maruti Suzuki, Xaomi, Patanjali are some
companies that have exhibited a successful countrywide retail distribution
network
5. Society:
Society include all those groups who have an actual or potential, interest
in the company or who influence the company’s ability to achieve its
objecti ves. Media groups, environmentalists, non -government
organizations (NGOs), consumer associations and local community are
examples of publics
6. Financers:
The Shareholders, Investors, financial institutions, banks and debenture
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18 Business Environment
18 capacity, policies and attitudes of investors/financers are very important
factors.
7. Firm:
The activities of business firms have a direct impact on it. It should focus
on customers needs, develop greater custo mer satisfaction, increase loyal
customer base and launch new & better goods and services to expand its
business.
1.6 INTRODUCTION TO MACRO COMPONENTS Macro Environment consists of the following components:
i. Demographic Environment
ii. Political and Lega l Environment
iii. Social and Cultural Environment
iv. Economic Environment
v. Technological Environment
vi. Natural/Ecological Environment
vi. Global Environment
i. Demographic Environment:
It refers to various dimensions of the country’s population like size of
population, growth rate, gender ratio, age composition, income level,
education level, family size, family structure etc. The demographic
environment differs from one country to another and from one region to
another within a country. Business fir ms use the demographic factors as a
basis for market segmentation.
Availability of skill labor in certain areas motivates the firms to set up
their units in such area. For example, the business units from America,
Canada, Australia, Germany, UK, are comin g to India due to easy
availability of skilled manpower
ii. Political and Legal Environment:
Political environment comprises the elements relating to Government
affairs. It serves as the regulatory framework of business. A stable and
dynamic political en vironment is essential for business growth. Whenever
there is a change in the Government in a democratic country, it is a sign of
change in economic policies. The Political environment of business
depends on:
1. Ideology of the Government
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19 Introduction to Business Environment 3. Political Stability in the country
4. Relations with other countries
5. Defense and Military Policy
6. Centre State Relationship
7. Approach of Opposition parties towards business
Legal environment constitutes the laws framed by the Gov ernment and
various legislations passed in the parliament. These legislations cannot be
overlooked by the businessman.
Some of the main legislations regulating the business are as follows:
1. Industries (Development and Regulation) Act, 1951
2. The Fact ories Act, 1948
3. Consumer Protection Act, 1986
4. Companies Act, 2013
5. The Indian Partnership Act, 1932
6. Foreign Exchange Management Act, 1999
7. Securities and Exchange Board of India Guidelines, 2000
iii. Social and Cultural Environment:
Since business is an integral part of society , both influence each other.
These socio -cultural factors include: attitude of people, family system,
caste system, religion, education, marriage, habits and preferences,
languages, urbanization, customs and tradit ions, ethics etc. Socio -cultural
environment determines the code of conduct the business should follow.
In Delhi, the polluting industries (of F category) have been closed by the
orders of the Supreme Court. Also certain food products (meat), alcoholic
liquor for human consumption, etc are banned in certain states and regions
in India.
The culture prescribes and teaches what an individual learns and accepts.
All language, customs, habits, values, and attitudes are culturally derived.
In some ways, the cultu re overwhelms the individual. Every society
depends on its culture to instill normative behaviour into the populace so
that it can be maintained and survive.
iv. Economic Environment:
Economic environment includes the type of economic system that exists i n
the economy, the nature and structure of the economy, the phase of the
business cycle (for example, boom or recession), the fiscal, monetary and
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20 Business Environment
20 policies of the government, gross domestic product, per capita income,
markets for goods and services, availability of capital, foreign exchange
reserve, growth of foreign trade, strength of capital market, etc.
Favorable economic environment brings rapid expansion of business
activites.
v. Technological Environment:
It comprises the knowledge of latest technological advancements and
scientific innovations to improve the quality and relevance of goods and
services. Business organisations need to keep track of the technological
environment to avoid obsolescence, satisfy customers needs and face stiff
competition.
For example, watch companies have started manufacturing smart watches
along with traditional watches. Nokia, a renewed smartphone brand lost its
market share due to the launch of An droid systems.
vi. Natural/Ecological Environment:
Natural environment is the ultimate source of many inputs such as raw
materials, energy which business firms use in their productive activity.
These factors include the availability of natural resources, weather and
climatic condition, location aspect, topographical factors, etc.
Government policies to maintain ecological balance and conservation of
natural resources put additional responsibility on the business
organisations.
Some significant laws relatin g to ecological environment in India are:
 Environment Protection Act 1986,
 Forest (Conservation) Act 1980,
 Wildlife Protection Act 1972
 The Air (Prevention and Control of Pollution) Act 1981,
 The Water (Prevention and Control of Pollution) Act, 1974
vii. International Environment:
It is important for industries directly depending on import and export. The
global environment consists of all those factors that operate at the
transnational, cross -cultural and cross -border levels which have an impact
on the bu siness of the organization.
Some of the important factors that influence the international environment
are:
 Globalisation and Liberalisation
 International agreements and declarations munotes.in

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21 Introduction to Business Environment  International terrorism
 Global market and competitiveness
 Global human r esources, availability and quality of skills and
expertise, mobility of labourers and other skilled personnel
1.7 SUMMARY In this unit you studied the concept of business in detail. Business refers to
buying and selling of goods and services for profit.
Businesses play a key role in generating employment opportunities,
contribute to government revenue in the form of taxes and making a
country Self reliant .
Business objectives are the specific and measurable results organisations
hope to maintain and they ar e classified under five broad categories
namely – Economic, Social, Organic, Human, National/Global.
Business environment is the sum of internal and external factors of an
organization. Its two major types are – Internal and External .
Internal Environment consists of - Value system, Vision & Mission,
Organisational Structure and functioning, Human Resources, Policies &
Procedures
External Environment Consists of – Micro and Macro Environment Micro Environment Macro Environment Customers, Competitors, Suppliers, Marketing Intermediaries, Financers, Publics Demographic, Political and Legal, Social and Cultural, Economic, Technological, Natural/Ecological, Global
SWOT is the Acronym for STRENGTHS, WEAKNESS,
OPPORTUNITIES and THREATS and helps business organ isations to
effectively devise strategies.
1.8 QUESTIONS FILL IN THE BLANKS
1. The main objective of society and business is ______________
(economic and social objective , technological objective , cultural
objective )
2. A company is affected by two broad set of factors that are _______
(Local and regional , Internal and external , Financial and non -
financial )
3. ________ is a statement which derives the role that an organization
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22 Business Environment
22 4. ________ environment is beyond the control of the business (Internal ,
External , Micro )
5. Study of human population is called as _______ environment
(Demographic , Economic , Social )
6. Consumer protection Act was enacted in the year ______ ( 1989 , 1981 ,
1986 )
7. Liberalization means _______
(a) Reducing numb er of reserved industries from 17 to 8 (b) Liberating
the industry, trade and economy from unwanted restrictions (c)
Opening up of economy to the world by attaining international
competitiveness
8. _______ environment constitutes the laws framed by the Go vernment
and various legislations passed in the parliament (Legal ,
Technological, Global)
9. Micro environment is also called as _______ environment (Global,
operating , economic)
10. An analysis of the external environment enables a firm to identify
_____ (Stren gths and opportunities, Weaknesses and threats,
Opportunities and threats )
TRUE OR FALSE
1. The element of risk and uncertainty is very high in business – TRUE
2. A single transaction of buying and selling also constitutes business –
FALSE
3. Business objectives ne ed not be multiple – FALSE
4. Survival, growth and recognition are organic objectives of business –
FALSE
5. Business Environment is the aggregate of all conditions, events and
influences that surround and affect it – TRUE
6. Unfavorable changes in the environment bring opportunities to the
business – FALSE
7. Strengths and weaknesses are often external to an organization –
FALSE
MATCH THE PAIRS Group A Group B a) Economic Objective of Business i) Basic Philosophy b) Profit through service ii) Economic Objective munotes.in

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23 Introduction to Business Environment c) Fair wages, good working conditions and motivation iii) Organic Objectives d) Mission iv) Profit e) Survival, growth and Prestige v) Strengths, Weakness, Opportunities, Threats f) SWOT Analysis vi) Human Objectives
Answers: (a – iv), (b - ii), (c – vi), (d - i), (e – iii), (f – v)
ANSWER IN BRIEF
1. What is business? Explain its characteristics/features.
2. Define business. Discuss the scope of business
3. Explain the different types of business organisations
4. Define Business environment. Explain its characteristics
5. Differentiate between micro and macro environment.
6. What do you mean by analysis of business environment? Discuss the
SWOT analysis of business organisations.
7. Explain the internal environment factors of micro environment.
8. Explain the external environment factors of micro environment .
9. Explain the concept of macro environment and its various
components
10. Write short notes on:
a. Sole Trading Organisation
b. Partnership Firm
c. Joint Hindu Family
d. Joint Stock Company
e. Cooperative Societies
1.9 REFERENCES 1. K. Aswathappa, Essentials of Business Environment, Himalaya
Publishing House, New Delhi
2. https://www.taxmann.com/post/blog/business -environment -meaning -
characteristics -and-importance/
3. https://ncert.nic.in/textbook/pdf/lebs103.pdf
4. https://nios.ac.in/media/documents/srsec319new/319EL3.pdf munotes.in

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24 Business Environment
24 5. https://www.distanceeducationju.in/pdf/Business%20Environment%2
0PDF%20FILE%202022%20B%20Com%20Semester%20IV.pdf
6. https://www.researchgate.net/publication/346381732_BUSINESS_E
NVIRONMENT_The_Concept_and_A_Literature_Review
7. https://onlinelibrary.wiley.com/journal/10990836
8. https://www.vedantu.com/commerce/business -environment
9. https://byjus.com/comm erce/business -environment/
10. https://www.toppr.com/guides/business -environment/



*****

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25 2
POLITICAL AND LEGAL ENVIRONMENT
Unit Structure
2.0 Objectives
2.1 Introduction
2.2 Political Institutions: Legislature, Executive, Judiciary, Role of
government in Bus iness, Legal framework in India
2.3 Economic environment: economic system and econ omic policies.
Concept of Capitalism, Socialism and Mixed Economy
2.4 Impact of business on Private sector, Public sector and Joint sector
2.5 Sun-rise sectors of India Econom y. Challenges of Indian economy
2.6 Summary
2.7 Questions
2.8 References
2.0 O BJECTIVES After studying this unit, the learner will be able to –
 Understand the Political and Legal Framework and its role in India
 Evaluate the dynamics of Economic Environment – with reference to
systems and policies
 Understand the concept of Capitali sm, Socialism and Mixed Economy
 Examine the impact of business on Private, Public and Joint Sectors
 Review the Sunrise Sectors of Indian Economy and Discuss its
challenges
2.1 INTRODUCTION Political factors extend to the degree of intervention f the gove rnment in
the economy .
Legislature, Executive and Judiciary are the three important elements of
the Indian Political System. Responsibilities of the Legislature are to make
the laws, Executive are to pass the laws made by the legislature and of the
judicia ry is to solve conflicts between legislature and executive or other
matters related to the public.
Government plays a significant role in the promotion and shaping of
business organisations which are: regulatory, e ntrepreneurial and
Promotional
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26 2.2 POLIT ICAL INSTITUTIONS The political environment of business is the set of governmental
institutions, political parties, political ideology and practices, the ruling
party, government policies, legal enactments and organisations that are the
expression of the people in the nations of the world. It means government
actions which affect operations of business. Political environment varies
from one state to another and from country to country. Therefore,
assessment of political risk is very much crucial for busine ss operations.
Political factors extend to the degree of intervention f the government in
the economy. The government introduces and at times revises the
legislations to run the economy efficiently such as – tariff and trade
restrictions, taxation policie s, consumer protection laws. Etc. For
Example, the introduction of GST on 1st July, 2017 had a significant
impact on various sectors of the economy
Stability of the local government is a key factor for assessment of political
environment.
It is important for every business to function according to the political
ideology of the area in which they wish to operate.
There are three important elements of the Indian Political system, namely:
1. Legislature
2. Executive
3. Judiciary

2.2.1 Legislature:
Legislature of t he Parliament (Union), consists of the President and two
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27 the people). The legislature being the most powerful political institution is
vested with powers such as policy framing, makin g and amending laws,
approving various budgets and executive control.
The legislature has significant influence on business of the nation. Every
state has its own set of laws and regulations. For example, GST has been
implemented at the Centre and State l evel, but some taxes like VAT on
petroleum and alcohol is still under the ambit of State.
Business organisations have to function within the laws of the land. Every
aspect of business, right from inception to winding up is under the
legislature to ensure true and fair business and generate legal profits,
thereby keeping the interests of various state holders in mind.
2.2.2 Executive:
The executive has a significant role in regulating business. It is also
known as ‘government’ or ‘state’. The executive po wer is responsible for
implementing the law and works at all levels i.e. National, State, District
and local levels.
The government lays down the policy and delegates its authority of
oversight and superintendence to a regulatory agency created by them.
The Prime Minister, President, Chief Ministers / Governors, are included
and part of the executive.
 As per Article 53(1) of the constitution, the President of India is
mainly vested with the executive power
 The president is to act following aid and advice t endered by the Prime
Minister, who leads the Council of Ministers as described in Article
74 of the Constitution
 Although theoretically, all the executive powers are vested by the
constitution, in the President of India, these are not exercised by
him/her and are actually used by the Prime Minister and Council of
Ministers.
 The Prime Minister can remove any minister from office if he
decides, but when the Prime Minister resigns, the entire Council of
Ministers has to resign as well.
Powers of Executive: Prime Minister Council of Ministers President Recommends names of ministers for his cabinet to the president Cabinet Ministers - Hold all the major ministries of the country and Assist the Prime Minister Does all the major appointments of the country Decides which ministry to be given Ministers of State are there to assist the Supreme Commander munotes.in

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28 to the minster Cabinet Ministers of the armed forces He is the Chairman of meetings of Council of Ministers Power to summon or prorogue the parliament and also can dissolve the Lok Sabha Acts as chairman or head of the various national bodies or institutions or committees Power to pardon someone
2.2.3 Judiciary :
India’s Judicial System is a crucial part of the government. The Indian
Constitution has adopted an integrated judicial system. The Supreme
Court is at the National Level and is at the top hierarchy. It is followed by
High Courts at the State Level and Subordinate Courts at the District and
Lower Levels.
The judiciary is important for interpreting the laws enacted by the
legislative bodies and administration of Laws.
Some of the significant functions of the judiciary are:
 It ensures that the Constitution is Supreme, and the Judiciary should
take all the decisions according to it
 Provides advice to the executive and legislative bodies
 Resolves disputes according to the law
 Performs the function of an arbitrator when there are disputes between
the different state governments or between the central and state
governments
 has the responsibility of selecting, transferring, or elevating judges
 Responsible for safeguarding citizens rights
Functions as per hierarchy:
1. Supreme Court of India :
 Its decisions are binding on all courts.
 Can transfer Judges of High Courts.
 Can move cases from any court to itself.
 Can transfer cases from one High Court to another
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29 2. High Court :
 Can hear appeals from lower courts.
 Can issue writs for restoring Fundamental Rights.
 Can deal with cases within the jurisdiction of the State.
 Exercises superintendence and control over courts below it.
3. District Court :
 Deals with cases arising in the District.
 Considers appeals on decisions given by lower courts.
 Decides cases involving serious criminal offences.
4. Subordinate Courts :
 Consider cases of civil and criminal nature
2.2.4 Role o f government in Business:
Every government plays a significant role in regulating, shaping and re -
modelling of business environment. Post -independence, the Indian
Government played a noteworthy role by promoting public and private
sector companies, also e ncouraging foreign companies through foreign
direct investments and other reforms.
One such major change came in 1991 with the introduction of New
Industrial Policy, 1991. Its salient features were:
 Liberalisation : Government loosening restrictions on bus iness
 Privatization : Allowing entry of private enterprises into certain
business areas earlier owned by the government
 Globalisation : Expansion of business activities on a world -wide
scale, integrating a nations economy with global economy thereby
openin g international business opportunities.
The governments role in business is as follows:
1. Regulatory Role:
With the basic objectives to – (a) prevent the market structure from
becoming monopolistic, (b) developing the small and new entrepreneurs,
and (c) promoting the welfare of weaker sections of any society.
It also means regulating the business and economic activities of the nation
by government.

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30 To elaborate further Indian regulatory control is exercised as follows:
i. Industries (Development and R egulation) Act, 1951:
Its main objective is to promote development and regulate industries.
Through this Act a) available resources are properly utilised; b)
concentration of economic power is controlled; C) resources are properly
allocated; and d) new in dustries are given incentives.
ii. Industrial Licensing System:
It aims at at controlling the setting up of new industries and increasing the
capacity of existing industries.
iii. Price Control:
The central government and various state governments regul ate the
prices with a view to protect the interest of the consumers
iv. Distribution Mechanism:
Distribution of items of daily necessities are controlled and regulated
through Essential Commodities Act and Public Distribution System (PDS)
v. Monopolies and Restrictive Trade Practices Act, 1969:
Its principal objectives were (a) Prevention of concentration of economic
power to the common detriment, and (b) control of monopolistic.
restrictive and unfair trade practices which are prejudicial to public
interes t
vi. Foreign Exchange Regulation Act (FERA), 1973:
To regulate the foreign exchange
vii. Regulation of Companies:
Under Companies Act, 2013 the management of capital issue, dividend
distribution, loans and advances, share capital and other affairs are
controlled and regulated to safeguard the interests of share -holders and
creditors
viii. Labour Affairs:
to safeguard and prevent the exploitation of labour. Some of the important
laws are: Factories Act, 1948, Workmens’ Compensation Act, 1923,
Employees' Pr ovident Fund Act, 1952. Payment of Minimum Wages Act,
1948, Maternity Benefit Act, 1961, Payment of Bonus Act, 1975, and
Industrial Disputes Act. 1947.
2. Entrepreneurial Role:
It refers to government investment, capitalization and ownership of
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31 existing (sick) units to set off the depreciation and accumulated losses
against their tax liabilities, and (c) Nationalization, where certain
industries have been reserved exclusively for the public sector, eg.
defense, public transportation like – railways, etc.
3. Promotional Role:
Under this role the government builds up development oriented basic
structure which includes construction of roads, bridges, supply of water
and power, efficient tr ansport facilities, building industrial regions and
estates, existence of district industrial centers, counselling centers,
development centers, communication system provision of industrial
training and financial banking and marketing network.
Some similar functions are highlighted below:
i) To maintain public utilities
ii) To encourage the developmental attitude among various sectors
iii) To make economic resources productive and progressive
iv) To ensure equitable distribution of wealth and income
v) To promote investme nt climate in the country
2.2.5 Legal framework in India:
Legal factors affect both the internal as well as external environment.
Generally legal factors include – laws relating to company formation,
factory administration, foreign exchange regulations, i ndustrial licensing,
payment of wages, etc. The legal and regulatory environment can affect
the policies and procedures of an industry, and can control employment,
safety and regulations. Some of the main legislations regulating the
business are as follows :
1. Industries (Development and Regulation) Act, 1951
2. The Factories Act, 1948
3. Consumer Protection Act, 2019
4. Companies Act, 2013
5. The Indian Partnership Act, 1932
India has one of the oldest legal systems in the world. The Government of
India Act, 1935 had introduced a Federal Court of India which started
functioning from 1st October, 1935 with limited jurisdiction. Later, on 26th
January, 1950, the Supreme Court of India replaced the Federal Court
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32 Fundamental R ights :
They were enshrined in the constitution of India as the basic human rights.
It is enforceable by the courts, and In case of a violation, a person can
approach a court of law.
There are six fundamental rights of Indian Constitution along with the
constitutional articles related to them are mentioned below:
1. Right to Equality (Article 14 -18) - including equality before law,
prohibition of discrimination on grounds of religion, race, caste, sex
or place of birth, and equality of opportunity in matters o f
employment.
2. Right to Freedom (Article 19 -22) - freedom of speech and
expression, assembly, association or union, movement, residence, and
right to practice any profession or occupation (some of these rights
are subject to security of the State, friendly relations with foreign
countries, public order, decency or morality)
3. Right against Exploitation (Article 23 -24) - prohibiting all forms of
forced labour, child labour and traffic in human beings.
4. Right to Freedom of Religion (Article 25 -28) - freedom of
conscience and free profession, practice, and propagation of religion.
5. Cultural and Educational Rights (Article 29 -30) - any section of
citizens to conserve their culture, language or script, and right of
minorities to establish and administer educational in stitutions of their
choice
6. Right to Constitutional Remedies (Article 32) - for enforcement of
all the other Fundamental Rights, and the Supreme Court is
designated as the protector of these rights by the Constitution.
You can get more detailed information from the following link -
https://www.mea.gov.in/Images/pdf1/Part3.pdf
Laws relating to business:
The Indian Contract Act, 1872:
The Indian Contract Act is one of the oldest mercantile laws of our
country. It came into effect on the 1st of September 1872 and is applicable
to the whole of India with the exception of Jammu & Kashmir. Containing
a total of 266 sections it is the principal law regulating contracts in India
https://legislative.gov.in/sites/default/files/A1872 -09.pdf
The Sale of Goods Act, 1930 :
Contracts or agreements related to the sale of goods are governed under
the Sale of Goods Act 1930. This act came i nto effect on the 1st of July
1930 in the whole of India except the state of Jammu and Kashmir. munotes.in

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33 https://legislative.gov.in/sites/default/files/A1930 -3_0.pdf
The Indian Partnershi p Act, 1932 :
The Indian Partnership Act, 1932 defines a partnership as a relation
between two or more persons who agree to share the profits of a business
run by them all or by one or more persons acting for them all
https://www.mca.gov.in/Ministry/actsbills/pdf/Partnership_Act_1932.pdf
The Limited Liability Partnership Act, 2008 :
India introduced The Limited Liability Partnership Act in 2008 to legally
authorize the con cept of Limited Liability Partnerships (LLP). A blend
between a private company and a partnership LLP’s have recently become
a very popular form of business vehicle.
https://www.mca.gov.in/content/mca/global/en/acts -rules/llp -act-
2008.html
Companies Act 2013 :
The Companies Act 2013 is the law covering incorporation, dissolution
and the running of companies in India. The Act came into force across
India on 12th Septemb er 2013 and has a few amendments to the previous
act of 1956. It has also introduced new concepts like a One Person
Company.
https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf
2.3 ECONOMIC ENVIRONMENT Economic performance of the country influences economic environment.
These factors include – economic growth rates, interest rates, exchange
rates, inflation, unemployment rates, infrastructure development, etc. The
economic envir onment may affect how a company prices their products or
influence the supply and demand model.
2.3.1 Econom ic system and Economic policies:
The methods used by governments and societies to organize, allocate,
produce and distribute goods and services acr oss the nation or different
locations is termed as economic system. It serves as a monitoring and
regulating system for controlling various aspects of production and
distribution like land, labour, capital and other physical resources like
machinery, equip ment, materials, etc.
It also highlights whether the businesses are owned by private or
government entities or if there is a joint ownership of both public and
private.
Definition of Economic Systems:
Loucks defined Economic System as, “that which consists of those
institutions which give a people or nation or group of nations has chosen munotes.in

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34 or accepted as the means through which resources are utilized for the
satisfaction of human wants.”
An economic system deals with the issues of what to produce, how to
produce and for whom to produce?
2.3.2 Concept of Capitalism, Socialism and Mixed Economy
Economic Systems can be classified into the following categories:
1. Capitalist Economy
2. Socialist Economy
3. Mixed Economy
1. Capitalist Economy (Capitalism) :
A capitali st economy is the oldest type of economy. It is based on the
concept of free markets, here there is very little interference by the
government, an economy where businesses and individuals own the
factors of production.
Some prominent features of capitalis m are:
a. There is freedom of choice given to each and every customer to
buy the goods and services. Eg. consumer goods/services – An
individual can select the cellular network he desires out of Airtel,
Reliance Jio, Vi (Vodafone Idea), BSNL, etc. or he can b uy from any
brand of shoes from the range of different sellers.
b. There is a price mechanism followed as it is based on the principle
of demand and supply. Higher the demand, higher the prices, hence
increased production.
c. Manufacturers and service providers have stiff competition with
one another for sales, market share, discounts and concessions, new
products and even competent & suitable employees. This may also
lead to unhealthy competition and a monopolistic situation in some
economies.
d. A consumer is the sovereign king in such markets. They have
freedom of choice due to the competitive market catering to their
needs and wants at effective prices.
e. There is a clear division of rich class and poor class in a capitalist
economy. Although both are important an d have to be catered, they
cannot work together as a team due to this class system. Also there
is uneven distribution of income and wealth.
2. Socialist Economy (Socialism) :
A socialist economy is an economy where each person in society has equal
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35 the requirements of its citizens and determines what products and/or
services are to be manufactured and provided. Socialism is based on the
philosophy of equality, and hence every one is treat ed equally, irrespective
of the class system that the citizens belong to e .g. vaccinations and
treatment provided at government hospitals.
Features of Socialist Economy are:
a. There is social ownership, which means that the production and
distribution of goo ds and services are in the hands of the government.
This also serves for national interest and is against the capitalist
economy.
b. Socialist economy deals with a classless system where all the people
serve under the government. Hence – no landlords, capital ists and
every individual get an equal opportunity irrespective of the social
background or income class.
c. Since there are no private enterprises , the government takes charge.
Right from fixing of prices to payment of wages and salaries.
Government does not perform for own benefit, but for public welfare.
d. As the government is sole provider of goods/services and controls the
supply component, consumers do not have any right to choose and
have to compromise at some time.
e. The economic planning is done by the go vernment.
3. Mixed Economy :
A mixed economy is an economic system that has elements of both
capitalism and socialism. It is also referred to as dual economic system.
Here both public and private sector co -exist and work together towards
national interest.
Features of Mixed Economy:
a. There is coexistence of both public and private enterprises. Sectors of
national interest like defense, public transport, space etc. are in the
hands of government, whereas the remaining are in both private and
government.
b. Ther e is a burden on tax payers as loss incurred by the public sector
is compensated by the taxes collected by the government from the
public. Direct Tax includes – Income Tax, Wealth Tax, Property Tax.
Indirect Taxes include – Goods and Services Tax, Value Ad ded Tax,
Excise Duty, etc.
c. In a mixed economy private sectors generally flourish due to
professional and strategic management tactics, market survival
policies, effective financial planning and competitive pricing. But the
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36 loss in the view of providing service at subsidized cost. This creates a
burden on the common man
d. Prices on major commodities which are widely consumed are fixed
and regulated by the government .
e. The government protects labo rer’s and other weaker sections from
exploitative nature of private sector in capitalist economy.
Summary of Capitalist, Socialist and Mixed Economy: Points Capitalist Economy Socialist Economy Mixed Economy 1. Ownership of property Private Public Both public and private 2. Motive Profit Social welfare Private – Profit Public – Social welfare 3. Competition Exists among private No competition Only in the private sector 4. Income & Wealth Unequal distribution Equal to major extent There is inequality 5. Price Determined by demand & supply Determined by central authorities Both central authorities and forces of demand and supply.
Economic Policies:
Economic Policies are the key for favorable economic climate for any
nation. Some of the prominent economic policies are:
1. Industrial Policy: first Industrial Policy based on the mixed economy
principle was announced in 1948 which demarcated clearly the areas
of operation of the public and private sectors.
2. Monetary Policy : Monetary policy or credit polic y concerns itself
with the cost (i.e., the rate of interest) and the availability of credit to
affect the overall supply of money
3. Fiscal Policy : It is concerned with the policy of taxation, expenditure
and borrowing
4. International Trade Policy: A country’s trade policy, centers around
free trade versus protection.
5. EXIM Policy : to monitor and regulate imports and exports in the
economy, so that there is no adverse impact on balance of payments.
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37 2.4 IMPACT OF BUSINESS ON PRIVATE SECTOR, PUBLIC SECTOR AND JOINT S ECTOR 1. Increasing Market Competition :
Indian companies had to face stiff competition from the domestic market
and the foreign markets as well post the new economic reforms in 1991.
MNCs entered Indian Economy and those industries which adopted
rampant ch anges like changing technology, customer satisfaction, data
management, etc. could survive and face competition.
2. More Demanding Customer :
A shift from producer oriented economy to customer oriented economy
gave the customers an edge for choice and deman d. With options from
private and even foreign companies, there was a wide range of goods and
services, making the costumers more demanding.
3. Revolutionary and Rapid Technological advances :
Companies need to adopt new and revolutionary changes in technolo gy.
Many organisations have set up their own research and development
department to solve these pertinent issues.
4. Improved working conditions for employees :
With changes in laws concerning health and safety for workers, there was
a mandate to provide g ood working conditions to them. Now there are
many welfare facilities like – transportation, canteen, medical allowances,
creche, bonus, etc.
5. Developing Human Resource Skills :
New market conditions require employees with competent skills and
training. H ence Indian companies felt the urgent need to train its staff with
the required skill sets to be observed by employees like –
Conceptual Skills : to visualize, diagnose and understand business
problems
Human Skills : to understand employees, act as a link b etween different
levels of management, lead, communicate and motivate others
Technical Skills : for daily work activities which is domain oriented
2.5 SUN -RISE SECTORS OF INDIA ECONOMY Sunrise industry is a term frequently used for a sector that is develop ing
and poised for a rapid growth. Typically, such industries register high
growth rates and have numerous start -ups and plenty of funding.
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38 1. Infrastructure : From the past two decades major thrust has bee n
given to infrastructure development like highways, research and
development centres, state of art technologies etc.
2. Tourism : 29 States in India with varied culture and popular sites
attract tourists from around the globe and not only from India. This at
times good revenue in terms of foreign currency and FDI in India by
foreign companies.
3. Energy : India has mixed economy in this regard, as energy is a
constituent which is consumed throughout the nation. More number of
power generation projects like hydro, nuclear, solar energy are
required in India.
4. Animation : it is one of the booming sectors in the world. With the
increasing use of VFX and 3d technology in movies, videos, games,
etc. the demand for this sector is increasing rapidly.
5. Automobile : one of th e largest sectors in India and the world. It is in
continuous demand owing to the growing population and changes in
government polices for transport vehicles. Eg. Bharat -VI compatible
units.
6. Textile : this sector contributes a minimum of 12% of industrial
production and atleast 4% to Indias GDP.
7. Retail : there is 100% FDI in retail sector in India. This leads to
increased competition and more scope for niche markets
8. Education : with new changes brought about in the NEP, 2020, there
is a major shift in the educ ation system in India. Online teaching and
distance education has picked up pace owing to the Covid -19
Pandemic.
9. Biotechnology :one of the emerging sectors in india, there are more
than 300 labs and universities working in biotechnology with scope
for more players in this regard.
10. Banking : with the NIP, 1991, the banking framework in india
witnessed an major structural change. there is a shift from general
banking to need based. Also now due to the pandemic, digital / online
banking has picked up speed in Ind ia
For more details you can visit the following link:
https://www.ibef.org/blogs/category/
Challenges of Indian economy:
India is on the verge of being a developed economy. With multiple hurdles
to cros s, India has to work tirelessly hard to achieve optimum growth.
Some of the economic and development challenges in India are
highlighted below:
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39 1. Low level of National Income and Per Capita Income:
It is always said that if the national income is higher, higher will be the
rate of economic growth and economic growth of any nation is reflected in
its level of national and per capita income. India gdp per capita for 2021
was $2,277, a 17.81% increase from 2020.
There is also the problem of unequal distribu tion of income, thereby
alleviating poverty and creating a hurdle for economic growth of the
nation. Some of the schemes introduced by our government to generate
employment and alleviate poverty are :
a. The Mahatma Gandhi National Rural Employment Guara ntee Scheme
(MGNREGS)
b. Swarnjayan ti Gram Swarozgar Yojana (SGSY)
c. Swarna Jayanti Sahari Rozgar Yojna (SJSRY)
2. Providing Education:
According to census 2011, the literacy rates of India were 82.14 per cent
for males, 65.46 percent for females and 74.04 percent for all adults. Thus
educating all the citizens is another challenge.
Following measures were adopted by the government:
Right of children to free and compulsory education Act 2009 :
The government of India has made “free education for all c hildren
between 6 to 14 years of age” a fundamental right in 2009. This law has
been made effective from April 2010.
Schemes for elementary and secondary education
(i) Sarva Siksha Abhiyan (SSA)
(ii) National progra mme of Mid -day meals in Schools
(iii) Rashtriya M adhyamik Shiksha Abhiyan (RMSA)
(iv) Inclusive education for the disa bled at secondary stage (IEDSS)
(v) Saakshar Bharat
Programme for Higher and Technical Education :
By establishing new universities, setting up new model colleges at
education ally backwards districts of the country, setting up new IITs and
IIMs and To promote research in science the government has set up five
Indian Institutes of Science Education and Research (IISER) in various
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40 3. Inflation:
High infla tion is a major challenge for the Indian Government. According
to worlddata.info - During the observation period from 1960 to 2021,
the average inflation rate was 7.5% per year. Overall, the price increase
was 7,704.85%. An item that cost 100 rupees in 196 0 costs 7,804.85
rupees at the beginning of 2022.
For October 2022, the year -over-year inflation rate was 6.1%.
Inflation can be controlled by the Reserve Bank of India by making
required changes in its monetary and fiscal policies using credit control
instruments, increasing interest rates, decreasing bond prices, increasing
taxes, etc.
4. Sustainable Healthcare:
Good quality healthcare at subsidized price is still a major concern in
India.
In 2010 -11, the government spent only about 5 percent of total
expenditure on health care which is only 1.27 percent of our national
income.
Some of the significant facilities introduced by the Government of India
are:
(i) Natio nal Rural Health Mission (NRHM)
(ii) Janani Suraksha Yojana (JSY)
(iii) Pradhan Mantri S wasthya Suraksha Yojana (PMSSY)
(iv) National AIDS Control
5. Sustainable Growth :
It means – fulfilling the needs of the present generation without
compromising the ability of future generations to meet their needs.
Working on sustainable business models for enhancing economic growth
with low carbon development initiatives for improving food and water
security is need of the hour. Some highlights include:
 India expects investments to the tune of US$ 55 billion by 2015 in the
renewable energy sector which i s expected to produce 35 giga watt
(GW) of power, according to Mr Debashish Majumdar, Chairman and
Managing Director, Indian Renewable Energy Development Agency
Ltd (IREDA)
 According to a recent study on India attractiveness survey by Ernst &
Young, Foreig n Direct Investment (FDI) in Renewable Energy in
India witnessed a 105 per cent rise. Wind energy is the fastest
growing renewable energy sector and the FDI inflow in the sector has
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41  Private equity investment in renewable ene rgy sector picked up pace
in the country from 2004. According to a report by 3i Network –
IDFC, from a private equity investment of US$ 851 million in 2005,
inflows into the renewable sector in India soared to US$ 2,136 million
in 2008
6. Agricultural Pre -Dominance :
In India, 52 p.c. of the total population was engaged in agriculture in
2004 -05. Though agriculture occupies a predominant position in India, it
is still backward.
In India, in 1950 - 51, more than 55 p.c. of our GDP came from the
agricultural sector or the so - called primary sector. In 2007 -08, however,
the contribution of this sector toward GDP came down to 19.4 p.c.
7. Infrastructure Underdeveloped :
It consists of (a) transport and communications, (b) energy, (c) finance,
housing and insuranc e, (d) science and technology, and (e) health,
education, etc.
India’s social infrastructural facilities are not only inadequate compared to
the needs, but also low compared to different countries of the world.
2.6 SUMMARY
Political factors extend to the degree of intervention f the government in
the economy.
Legislature, Executive and Judiciary are the three important elements of
the Indian Political System. Responsibilities of the Legislature are to make
the laws, Executive are to pass the laws made by the legislature and of the
judiciary is to solve conflicts between legislature and executive or other
matters related to the public.
Government plays a significant role in the promotion and shaping of
business organisations which are: regulatory, entrepren eurial and
Promotional
Legal factors affect both the spheres of business environment and include
– laws relating to company formation, factory administration, foreign
exchange regulations, industrial licensing, payment of wages, etc
Economic Systems can b e classified into the following categories:
1. Capitalist Economy: based on the concept of free markets, low
government interference, factors of production owned by private
players
2. Socialist Economy: based on social ownership, government performs
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42 3. Mixed Economy: has elements of both capitalism and socialism,
where private and pubic sector co -exist.
Some prominent points on impact of business on Private sector, Public
sector and Joint sector are:
i. Increasing Market Compet ition
ii. More Demanding Customer
iii. Revolutionary and Rapid Technological advances
iv. Improved working conditions for employees
v. Developing Human Resource Skills
Sunrise industries are typically characterized by high growth rates,
numerous start -ups, an abundance of venture capital funding, showing
promise of a rapid boom
The Sunrise Sectors of Indian Economy are: Infrastructure, Tourism,
Energy, Animation, Automobile, Textile, Retail, Education,
Biotechnology and Banking.
Few challenges of Indian Eco nomy are:
1. Low level of National Income and Per Capita Income
2. Providing Education
3. Inflation
4. Sustainable Healthcare
5. Sustainable Growth
2.7 QUESTIONS FILL IN THE BLANKS
1. ________ means liberating the industry, trade and economy from
unwanted r estrictions (liberalisation , globalisation, privatisation)
2. The economic system in which both public and private sectors co
exist is known as
________ economy (capitalism , socialism , democratic )
3. _______ refers to all forces which have an economic impact.
(Economic Environment , Technological Environment , Legal
environment )
4. The ________ policies of the government covers all those principles,
policies, rules and procedures and control the industrial enterprise of
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43 (Fiscal , Industrial , Macro )
5. In indi a liberalization and privatization began from__ ( 1971, 1947,
1991 )
6. The _____________ is an introduction to the constitution and
contains its basic philosophy. (Preamble , Society, Service)
7. Which of the following is not a fundamental right in the Constituti on
of India? _____ ( Right to Equality , Right to Education , Right to
work )
8. Use of 3D technology belongs to ______ sector, which is one of the
sunrise sector. (Animation , Energy , Tourism )
TRUE OR FALSE
1. The economic system in which business units or factors o f production
are privately owned and governed is called as capitalism – TRUE
2. Denationalization is a method of priva tisation – TRUE
3. India is good example for capitalist economy – FALSE
4. The banking sector has emerged as a sunrise sector in the Indian
economy – TRUE
5. Under socialistic economic system, all the economic activities of the
country are controlled and regulated by the government in the interest
of the Public – TRUE
6. Capitalist state can have an elected or hereditary head – FALSE
7. Strengths and weaknes ses are often external to an organization –
FALSE
MATCH THE PAIRS Group A Group B a) Judiciary i) Constitute and systemise nations legal framework b) Privatisation ii) A partnership between private sector and the government c) Automotive industry iii) Growing and developing faster in near future d) Legislature iv) Consists of automobile and auto component sectors e) Joint Sector v) Allowing entry of private enterprises in all business areas previously owned by government f) Sunrise sectors vi) Interpretation of the law
Answers: (a – vi), ( b - v), (c – iv), (d - i), (e – ii), (f – iii) munotes.in

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44 ANSWER IN BRIEF:
1. Describe the political institutions in India.
2. Discuss the role of government in business?
3. Explain the legal framework in India
4. Distinguish between Capitalist, Social and Mixed Economy
5. State th e impact of business on Private sector, Public sector and Joint
sector
6. What do you mean by sun -rise sector? Explain the sun -rise sectors of
Indian Economy
7. Outline the challenges faced by the Indian Economy
8. Write Short Notes on :
a. Political Environment
b. Legislature
c. Judiciary
d. Capitalism
e. Socialism
Mixed Economy
2.8 REFERENCES 1. K. Aswathappa, Essentials of Business Environment, Himalaya
Publishing House, New Delhi
2. https://www.ics i.edu/WebModules/BUSINESS%20ENVIRONMENT
%20AND%20LAW.pdf
3. https://ncert.nic.in/textbook/pdf/lebs103.pdf
4. https://nios.ac.in /media/documents/srsec319new/319EL3.pdf
5. https://www.distanceeducationju.in/pdf/Business%20Environment%2
0PDF%20FILE%202022%20B%20 Com%20Semester%20IV.pdf
6. https://www.britannica.com/place/India/Constitutional -structure
7. https://www.mea.gov.in/Imag es/pdf1/Part3.pdf
8. https://www.livemint.com/news/india/judiciary -legislature -executive -
work -well-when -there -is-no-incursion -vice-president -
11670411866271.html
9. https://knowindia.india.gov.in/profile/the -union/executive.php munotes.in

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Political and Legal Environment
45 10. https://byjus.com/commerce/dimensions -of-business -environment/
11. https://egyankosh.ac.in/bitstream/123456789/12650/1/Unit -5.pdf
12. https://www.ibef.org/blogs/sunrise -opportunities -in-india
13. https://cleartax.in/g/terms/sunrise -industry
14. https://www.mmindia.co.in/article/206/growth -opportunities -in-
sunrise -sectors
15. https://www.niti.gov.in/prepar ing-post-pandemic -economy -sunset -
sunrise -areas -growth



*****
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46 3
SOCIAL & CULTURAL ENVIRONMENT,
TECHNOLO GICAL & COMPETITIVE
ENVIRONMENT
Unit Structure
3.0 Objectives
3.1 Introduction
3.2 Social & Cultural Environment
3.2.1 Nature
3.2.2 Impact of Foreign Culture on Business
3.2.3 Traditional Values & Its Impact
3.2.4 Social Audit
3.2.5 Corporate Governance & Social Responsibility of Business
3.2.6 Importance of Corporate Governance
3.2.7 So cial Responsibility of Business
3.3 Technological Environment
3.3.1 Meaning:
3.3.2 Impact of Technology on Business:
3.4 Competitive Environment
3.4.1 Meaning
3.4.2 Michael Porter’s Five Force Analysis
3.4.3 Porter’s five forces of competitive position analysis
3.4.4 Competitive Strategies:
3.5 Summary
3.6 Questions
3.0 OBJECTIVES After studying this unit students will b e able to –
 Understand the concepts of Social & Cultural environment,
their impact on Business
 Technology & its impact.
 Competitive Environment, different strategies
 Michael Porter’s Five Force Analysis.

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47
3.1 INTRODUCTION What is a social environ ment?
A person's social environment is their society and all surroundings
influenced in some way by humans . It includes all relationships,
institutions, culture, and physical structures.
The social environment comprises the beliefs, desires, values, and
attitudes of consumers and public members. Other social environment
examples are the consumption patterns, desires, and behaviours of the
market. This social environment definition includes demographic factors
of the market, such as:
 Occupation
 Age
 Income
 Consumption patterns
 Gender
 Ethnicity
The social environment depends on the social construct of the target
society. In this case, social construct refers to the ideas that are generally
accepted by the people. The social construct of the environment a busin ess
operates in contributes to its success or failure. Specifically, social
environment factors influence key stakeholders, such as the employees
and customers, ultimately shaping business decisions, strategies,
opportunities, and challenges. Moreover, thi s environment impacts
business performance and productivity. To maximize business
opportunities and address emerging challenges, businesses must promote a
positive social environment that encourages harmony, stability,
confidence, and productivity.
Notably , the social environment is a construct that depends on the
immediate population. It is a stark contrast to the natural environment.
Some prevailing social aspects are similar across cultures, but others differ
entirely. For example, an American visiting t he United Kingdom may
encounter a similar social environment, but he will find a stark distinction
to Western culture in Russia or China.
Organizations must leverage social factors to maximize opportunities and
limit challenges. Nonetheless, not all aspect s of the social environment can
be controlled or manipulated. These aspects are categorized as external or
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48  External social environment : Comprises aspects that are beyond the
business's control. Society at large creates its preva iling external
factors. Operating in a multicultural social environment is more
complicated because of diverse communities with unique customs,
traditions, and values.
 Internal social environment : This social environment is specific to
the organization. I t comprises the beliefs, customs, behaviours,
attitudes, values, and practices of employees and the management.
Businesses have direct control over their internal social environment.
The cultural environment consists of the influence of religious, family,
educational, and social systems in the marketing system. Marketers who
intend to market their products overseas may be very sensitive to foreign
cultures.
What is Cultural environment?:
Cultural environment is a concept in business which helps to understan d
the customs and collective beliefs of a set of people or society based on
their culture, religion, region, nationality, language etc.
Components of Cultural Environment:
There are many elements which need to be evaluated to understand the
socio -cultural environment. The key factors which define the culture,
customs and beliefs of a group of people or society are as follows:
1. Nationality :
The values, history and beliefs of every country defines the cultural
environment amongst the citizens of a country.
2. Religion :
Religious practices and beliefs defines various factors on how a business
should operate and communicate as it must be accurate about religion as
well as be careful of handling sensitive issues.
3. Language :
The preferred language or mother to ngue of a region, town, city, state or
country can define the cultural environment.
4. Region :
Regional factors like geography, terrain, climate etc. also creates a
collective group or segment of people which marketing firms can address
to.
5. Demographics :
Age, gender, marital status etc. also define cultures, beliefs and attitude of
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49 6. Education :
Cultural environment is also classified and segmented based on education,
social status, income levels etc.
3.2 SOCIO CULTURAL ENVIRONMENT The sociocultu ral environment refers to trends and developments in
changes in attitudes, behaviour, and values in society. It is closely related
to population, lifestyle, culture, tastes, customs, and traditions. These
factors are created by the community and often are passed down from one
generation to another.
Elements of Socio -Cultural Environment:

Attitude and Beliefs:
Beliefs of a person relate from which society he came from. Attitude
means how a person behaves. Beliefs of people matters a lot in order to set
up the business. i.e, western clothing is totally different from middle East
outfits.
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50 Demographic:
Demographics is about the characteristics of the population. It includes the
income of a family, area, age, society and etc.
Religion:
Which religion person be long effects the buying behavior. Religion
influences food habits, dress, and traveling.
Language:
Language is a medium of communication . What you spe ak relates to your
background. Language effect your relations.
Education:
Education leads to the person to communicate an idea and thought. An
educated person knows the value of discipline to do what is right.
Family Structure :
The family structure include s the people who are considered part of the
family and the quality of the relationships among them.
Social Organization :
In a Social organization, it made for fun and some small work. it may be
in the form of the group in the office. Circle of friends. The social groups
are the most influencing power. Cause we get a habit from our group. That
also influences the Socio -Cultural Environment.
Class Structure :
It can be classified into upper, middle, lower. It reflects income,
occupation, education an area of r esidence. Upper class means high
earning people. Lower class means low earning people.
3.2.2 Impact of Foreign Culture on Business :
Culture is formed based on beliefs, attitudes, assumptions, values
and a host of other social factors. Every culture is different, and has
different styles of etiquette. Every day deals are lost through
misunderstandings, even between relatively similar cultures. Culture
varies from nation to nation. It is necessary to study the cultural
variables:
1) Level of Education :
Effectiveness of any organisation depends upon the level of skills
an individual possesses, understanding of the job, application of
processes and interpersonal/inter -group behaviour. A country when has a
high level of educational standards of its populati on, is obviously going to
be a leader -organisation understanding of educational standards are
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51 i) It will dictate a minimum level at which the training and development
can be planned and conducted.
ii) To ascertain human skill-technology match.
iii) Leadership style that can sustain.
iv) Staffing and organising of workplace.
v) Expectations and growth that can be expected from the employees.
Russians and Indians are good at formal education under an
instructor.
The Japanese learn by pract ice. Americans are carefree about
educational levels. Indian education system and its product
could be considered best among the various countries.
2. Family Bond and Relationships:
There are joint family and nuclear family systems. China, Japan, India
and practically most of the Asian countries have a joint family
system. Families are broken due to job requirements.
Family bonds are very strong and have a positive impact on human
behaviour and higher productivity. Family is a base where people
form their value system and formulate behaviour pattern that last for
the whole life. In many societies, family roles and relationships are
very traditional, personal, and predictable. The husband is the provider,
the wife supervises the household, and males in the household are more
valued than females.
Each member of the family has a designated role and the
responsibility for maintaining status quo for such a role. Peer pressure
preserves the roles, and work situations and business interactions are less
influentia l than familial responsibilities.
3. Health:
This is an important factor to determine the culture of a nation. Mortality rate
of children, percentage of youth and old age people infrastructure for
health, medical support facilities available for production of drugs.
Expertise available is an important indicator of the health of a nation.
India is considered a young nation because it has over 65 per cent people
below 35 years of age. It has a vast skilled population and has a rich cultural
base.
4. Religion:
Spiritual beliefs and values have a far-reaching impact on the culture of a
nation. It canalises individual behaviour and enhances productivity. Indian
are considered to be better human resource the world over because of their
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52 3.2.3 Traditional Values & Its Impact:
Traditional values are your responsibilities to your family, your spouse,
your parents, your children, and your society ; IT is your knowledge
and your work.
Tradition contributes a sense of comfort and belonging . It brings
families together and enables people to reconnect with friends. Tradition
reinforces values such as freedom, faith, integrity, a good education,
personal responsibility, a strong work ethic, and the value of being
selfle ss.
Listed below are the 7 Reasons why Traditions are important :
 Tradition contributes a sense of comfort and belonging. It brings
families together and enables people to reconnect with friends.
 Tradition reinforces values such as freedom, faith, integrity, a good
education, personal responsibility, a strong work ethic, and the value
of being selfless.
 Tradition provides a forum to showcase role models and celebrate the
things that really matter in life.
 Tradition offers a chance to say “thank you” for the contribution that
someone has made.
 Tradition enables us to showcase the principles of our Founding
Fathers, celebrate diversity, and unite as a country.
 Tradition serves as an avenue for creating lasting memories for our
families and friends.
 Tradition offers an excellent context for meaningful pause and
reflection.
Traditional values emphasize the importance of religion, parent -child
ties, deference to authority and traditional family values . People who
embrace these values also reject divorce, abortion, euthanasia, and suicide.
These societies have high levels of national pride and a nationalistic
outlook.
What are traditional examples?
The definition of traditional is something that is in keeping with long -
standing tradition, style or custom. An example of traditional is the
practice of eating turkey as the traditional or accepted Thanksgiving
meal . An example of traditional is a formal style of furniture that doesn't
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3.2.4 Social Audit :
What Is a Social Audit?
A social audit is a formal review of a company's endeavours, procedures,
and code of conduct regarding social responsibility and the company's
impact on society. A social audit is an assessment of how well the
company is achieving its goals or benchmarks for social responsibility.
Items Examine d in a Social Audit :
The scope of a social audit can vary and be wide -ranging. The assessment
can include social and public responsibility but also employee treatment.
Some of the guidelines and topics that comprise a social audit include the
following:
 Environmental impact resulting from the company's operations
 Transparency in reporting any issues regarding the effect on the
public or environment.
 Accounting and financial transparency
 Community development and financial contributions
 Charitable giving
 Volunteer activity of employees
 Energy use or impact on footprint
 Work environment including safety, free of harassment, and equal
opportunity
 Worker pay and benefits
 Non-discriminatory practices
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54 Example of a Social Audit :
Salesforce.com (CRM) is a Fortune 500 company and one of the largest
enterprise software companies in the U.S. As part of its social audit and
assessment, the company has strived to use 100% renewable ene rgy
globally. The company lists its findings including an annual Stakeholder
Impact Report on its website.
According to the company's website, Salesforce was one of the first cl oud
companies to commit to powering all data center operations with
renewable energy. Below is a graph from the company's stakeholder report
showing where the company stands in its goal of 100% renewable energy.
3.2.5 Corporate Governance & Social Responsi bility of Business :
Corporate governance is one of the cornerstones of any good business.
Corporate governance encourages robust and effective decision -making
through processes, practices and policies . Moreover, it provides the first
line of defence agains t any allegation of malpractice or dereliction of
corporate duty.
The general directives of corporate governance can be outlined as such:
 To act as a system of principles, policies, procedures, defined
responsibilities, and accountabilities used by stakeh olders to work
through the inherent conflicts of interest that exist in the corporate
form.
 To control the interaction between various participants in shaping
a corporation’s performance and the direction in which it is
proceeding . These participants are usually a Shareholder, a Board of
Directors, and Company Management. Corpo rate governance aims to
determine the ways to reach the most effective strategic decisions.
 To ensure transparency , which in turn ensures a strong and balanced
economic development for the organization. Transparency also helps
to keep the interest of all shareholders safeguarded.

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55 3.2.6 Importance of Corporate Governance:
1) Changing Ownership Structure:
In recent years, the ownership structure of companies has changed a lot.
Public financial institutions, mutual funds, etc. are the single largest
shareholder in most of the large companies. So, they have effective control
on the management of the companies. They force the management to use
corporate governance. That is, they put pr essure on the management to
become more efficient, transparent, accountable, etc. They also ask the
management to make consumer -friendly policies, to protect all social
groups and to protect the environment. So, the changing ownership
structure has resulte d in corporate governance.
2) Importance of Social Responsibility :
Today, social responsibility is given a lot of importance. The Board of
Directors has to protect the rights of the customers, employees,
shareholders, suppliers, local communities, etc. Thi s is possible only if
they use corporate governance
3) Growing Number of Scams :
In recent years, many scams, frauds and corrupt practices have taken
place. Misuse and misappropriation of public money are happening
everyday in India and worldwide. It is hap pening in the stock market,
banks, financial institutions, companies and government offices. In order
to avoid these scams and financial irregularities, many companies have
started corporate governance.
4) Indifference on the part of Shareholders :
In gener al, shareholders are inactive in the management of their
companies. They only attend the Annual general meeting. Postal ballot is
still absent in India. Proxies are not allowed to speak in the meetings.
Shareholders associations are not strong. Therefore, directors misuse their
power for their own benefits. So, there is a need for corporate governance
to protect all the stakeholders of the company.
5) Globalization :
Today most big companies are selling their goods in the global market. So,
they have to attr act foreign investor and foreign customers. They also have
to follow foreign rules and regulations. All this requires corporate
governance. Without Corporate governance, it is impossible to enter,
survive and succeed the global market.
6) Takeovers and Mer gers:
Today, there are many takeovers and mergers in the business world.
Corporate governance is required to protect the interest of all the parties
during takeovers and mergers.
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56 7) SEBI :
SEBI has made corporate governance compulsory for certain companies .
This is done to protect the interest of the investors and other stakeholders.
Need of Corporate Governance:
Corporate Governance is needed to create a corporate culture of
transparency, accountability and disclosure.
1) Corporate Performance:
Improved g overnance structures and processes ensure quality decision -
making, encourage effective succession planning for senior management
and enhance the long -term prosperity of companies, independent of the
type of company and its sources of finance. This can be l inked with
improved corporate performance - either in terms of share price or
profitability.
2) Enhanced Investor Trust:
Investors consider corporate governance as important as financial
performance when evaluating companies for investment. Investors who
are provided with high levels of disclosure and transparency are likely to
invest openly in those companies.
3) Combating Corruption:
Companies that are transparent, and have sound system that provide full
disclosure of accounting and auditing procedures, allow transparency in all
business transactions, provide environment where corruption would
certainly fade out. Corporate Governance enables a corporation to
compete more efficiently and prevent fraud and malpractices within the
organization.
4) Easy Finan ce from Institutions:
Several structural changes like increased role of financial intermediaries
and institutional investors, size of the enterprises, investment choices
available to investors, increased competition, and increased risk exposure
have made monitoring the use of capital more complex thereby increasing
the need of Good Corporate Gove rnance.
5) Enhancing Enterprise Valuation:
Improved management accountability and operational transparency fulfill
investors expectations and confidence on manage ment and corporations,
and in return, increase the value of corporations.
6) Reduced Risk of Corporate Crisis and Scandals:
Effective Corporate Governance ensures efficient risk mitigation system in
place. A transparent and accountable system makes the Boa rd of a
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57 strategy, thereby, placing various control systems in place to facilitate the
monitoring of the related issues.
7) Accountability:
Investor relations are essential part of goo d corporate governance.
Investors directly/ indirectly entrust management of the company to create
enhanced value for their investment. The company is hence obliged to
make timely disclosures on regular basis to all its shareholders in
Corporate Governance is integral to the existence of the company.
3.2.7 Social Responsibility of Business:
Social responsibility in business, also known as corporate social
responsibility (CSR), pertains to people and organizations behaving and
conducting business ethically a nd with sensitivity towards social, cultural,
economic, and environmental issues .
Corporate Social Responsibility (CSR) is when a company operates in
an ethical and sustainable way and deals with its environmental and social
impacts. This means a careful c onsideration of human rights, the
community, environment, and society in which it operates.
Social responsibility and ethical practices are vital to your success
CSR demonstrates that you’re a business that takes an interest in wider
social issues, rather than just those that impact your profit margins, which
will attract customers who share the same values. Therefore, it makes
good business sense to operate sustainably.
Benefits of Corporate Social Responsibility :
The benefits of CSR speak volumes about ho w important it is and why
you should make an effort to adopt it in your business.
Some clear benefits of corporate social responsibility are:
 Improved public image : This is crucial, as consumers assess your
public image when deciding whether to buy from yo u. Something
simple, like staff members volunteering an hour a week at a charity,
shows that you’re a brand committed to helping others. As a result,
you’ll appear much more favourable to consumers.
 Increased brand awareness and recognition : If you’re comm itted
to ethical practices, this news will spread. More people will therefore
hear about your brand, which creates an increased brand awareness.
 Cost savings : Many simple changes in favour of sustainability, such
as using less packaging, will help to decre ase your production costs.
 An advantage over competitors : By embracing CSR, you stand out
from competitors in your industry. You establish yourself as a
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58  Increased customer engagement : If you’re using sustainable
systems, you should shout it from the rooftops. Post it on your social
media channels and create a story out of your efforts. Furthermore,
you should show your efforts to local media outlets in the hope they ’ll
give it some coverage. Customers will follow this and engage with
your brand and operations.
 Greater employee engagement : Similar to customer engagement,
you also need to ensure that your employees know your CSR
strategies. It’s proven that employees e njoy working more for a
company that has a good public image than one that doesn’t.
Furthermore, by showing that you’re committed to things like human
rights, you’re much more likely to attract and retain the top
candidates.
 More benefits for employees : There are also a range of benefits for
your employees when you embrace CSR. Your workplace will be a
more positive and productive place to work, and by promoting things
like volunteering, you encourage personal and professional growth.
3.3 TECHNOLOGICAL ENVI RONMENT 3.3.1 Meaning:
Technological environment refers to the state of science and technology in
the country and related aspects such as rate of technological progress,
institutional arrangements for development and application of new
technology, etc.
The technological environment is part of the company’s external
environment related to developments and changes in technology. Further,
the word ‘technology’ is usually associated with technique and eq uipment.
Their change raises threats and opportunities for the company.
Technology comprises of both machines (hard technology) and scientific
thinking (soft technology) used to solve problems and promote progress. It
consists of not only knowledge and met hods required to carry on and
improve production and distribution of goods and services but also
entrepreneurial expertise and professional know how.
Technology includes inventions and innovations.
The main features of technolog ical environment are as
follows :
1) Technological environment is a component of macro or indirect
action environment.
2) Technological environment changes very fast.
3) Technological environment affects the manner in which the resources
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59 4) Technological environment is self - reinforcing. An invention in one
place leads to a sequence of inventions in other places.
3.3.2 Impact of Technology on Business :
1) Globalization :
Informati on technology has enabled businesses to attain a greater reach.
Now more than ever, it’s easier for companies to do business across the
world. Emails, text, instant messaging, websites and applications have
made global communication quicker and more effec tive than ever.
2) Collaboration and Access :
Businesses have advanced internal communications quite a bit as well,
making it possible for employees at many companies to work from home
throughout the coronavirus pandemic . Communication networks enable
managers to access and share data within their department as well as
throughout their organization. Businesses have relied on
advanced collaboration tools to complete work that usually only occurred
in person.
3) Storage :
The thought of organizing and storing paperwork makes most employees
cringe. Fortunately, much data is stored electronic ally now, making it
easier for retrieval when the information is needed.
More organizations use cloud storage to supplement their facilities, which
is made possible by cloud storage. Users can remotely upload and view
content, store and retrieve data as ne eded. This is a much more convenient
way for organizations to access information. Now instead of purchasing
internal servers, hard drives and thumb drives, you can access information
almost anywhere.
4) Cyber security :
Every organization has information th at they want to be protected from
competitors, hackers and others trying to damage the company, which is
why cyber security is a major priority for businesses.
Virtual sto rage systems or cloud computing systems make information
accessible for all within an organization, and cyber security protects this
information. Cyber security professionals are continually working to
update systems to keep the information safe from unwanted intrusion.
5) Support :
Technology makes it possible for businesses to support external customer
service efforts as well as help individuals within the organization. There
are hundreds of platforms that streamline the workflow but also facilitate
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60 Getting feedback is also easier since communication is also more
straightforward.
For example, IT help desk departments have streamlined their work thanks
to ticketing systems that provide timely and accurate information. The
remote work boom during COVID -19 has demonstrated that not only
can employees work remotely , but that technology support is capable of
dealing with just about any technical issues that may arise.
6) Mobile Technology :
Thanks to mobile technology, it has truly become easier to take your work
anywhere. If you don’t have a laptop or pad at your disposal , it is now
possible to use your phone to complete your work. Mobile technology has
picked up momentum owing to its convenience, efficiency, and speed.
You can have your work with you in your back pocket!
The trend of BYOD (Bring Your Device) is on the rise at many
organizations, where employees can bring technology that they use at
home. Some of the benefits include:
 Improvement in productivity
 Boost in employee satisfaction
 Lower enterprise costs
 A perk that could attract prospective employers
Technology has driven a lot of advanced processes in many businesses. As
technology becomes even more advanced, its role with businesses will
continue to grow.
3.4 COMPETITIVE ENVIRONMENT 3.4.1 Meaning :
A competitive environment is one in which companies compete with each
other. The more businesses that provide a similar product or service, the
more competitive the environment.
A competitive environment is the dynamic external system in w hich a
business competes and functions. The more sellers of a similar product or
service, the more competitive the environment in which you compete.
Look at fast food restaurants - there are so many to choose from; the
competition is high.
3.4.2 Michael Po rter’s Five Force Analysis:
Was developed in 1979 by Michael E Porter of Harvard Business School
as a simple framework for assessing and evaluating the competitive
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61 This theory is based on the concept that t here are five forces that
determine the competitive intensity and attractiveness of a market. Porter’s
five forces help to identify where power lies in a business situation. This is
useful both in understanding the strength of an organisation’s current
competitive position, and the strength of a position that an organisation
may look to move into.
Strategic analysts often use Porter’s five forces to understand whether new
products or services are potentially profitable. By understanding where
power lies, th e theory can also be used to identify areas of strength, to
improve weaknesses and to avoid mistakes.
3.4.3 Porter’s five forces of competitive position analysis:

The five forces are:
1. Supplier power :
An assessment of how easy it is for suppliers to dr ive up prices. This is
driven by the: number of suppliers of each essential input; uniqueness of
their product or service; relative size and strength of the supplier; and cost
of switching from one supplier to another.
2. Buyer power :
An assessment of how easy it is for buyers to drive prices down. This is
driven by the: number of buyers in the market; importance of each
individual buyer to the organisation; and cost to the buyer of switching
from one supplier to another. If a business has just a few powerf ul buyers,
they are often able to dictate terms.
3. Competitive rivalry :
The main driver is the number and capability of competitors in the market.
Many competitors, offering undifferentiated products and services, will
reduce market attractiveness.
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62 4. Threat of substitution :
Where close substitute products exist in a market, it increases the
likelihood of customers switching to alternatives in response to price
increases. This reduces both the power of suppliers and the attractiveness
of the market.
5. Threat of new entry :
Profitable markets attract new entrants, which erodes profitability. Unless
incumbents have strong and durable barriers to entry, for example, patents,
economies of scale, capital requirements or government policies, then
profitability w ill decline to a competitive rate.
These forces include the number and power of a company's
competitive rivals, potential new market entrants, suppliers,
customers, and substitute products that influence a company's
profitability .
Five Forces analysis can be used to guide business strategy to increase
competitive advantage.
3.4.4 Competitive Strategies :
Meaning:
A competitive strategy is a set of policies and procedures that a business
uses to gain a competitive advantage in the market. It's the process of
identifying and executing actions that allow a business to improve its
competitive position. Businesses may use various competitive strategies to
raise the value of their products and services for consumers, investors and
employees. They also implement th ese strategies to gain sustainable
revenue streams.
Importance of Competitive Strategies :
Competitive strategy is important because it affects the overall strategies
of a business. If a business doesn't have a competitive strategy, it may not
find a unique advantage against its competitors. A competitive strategy is
crucial in finding and developing new ideas for products and services that
the company can offer. Other advantages of implementing a competitive
strategy include:
 The exploration of new opportun ities
 Retain ment of customer loyalty with better products and services
 Innovation to stay current on technological changes in the market
Types of Competitive Strategies:
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63

1. Cost leadership strategy
A cost leadership strategy keeps prices for products and services lower
than competitors to encourage customers to purchase the lower -priced
products to save money. Businesses use a cost leadership strategy in
industries with high price elasticity, such as energy and transportation.
This strategy is most effective for companies that can produce a large
volume of products for low costs. These businesses often have large -scale
production methods, high -capacity utilization and various distribution
channels with which to work.
2. Differentiation leadership strategy
Businesses may use the differentiation leadership strategy to differentiate
their products from competitors by emphasizing specific features of their
products. This strategy might involve the design or function of a product.
A company that's been in operation for a while may use this strategy to
show that an original offering is better than newer products. Alt ernatively,
a newer company may use this strategy to show that a new invention is
more beneficial than existing offerings. The goal is to appeal to more
customers through unique features and quality while keeping competitors
from obtaining a larger market share for products.
3. Cost focus strategy
The cost focus strategy is similar to the cost leadership strategy, but the
cost focus strategy involves catering to a specific market. This strategy
still involves trying to offer the lowest price, but it attempt s to target a
unique market segment with specific preferences and needs. When a
company implements a cost focus strategy, it can establish brand
awareness more easily within a specific geographic market.
4. Differentiation focus strategy
The differentiatio n focus strategy is similar to the differentiation
leadership strategy in that both attempt to highlight unique product
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64 differentiation leadership strategy may involve appealing to a br oader
market, the differentiation focus strategy involves appealing to a specific
market segment. This strategy typically doesn't prioritize the price of a
company's offerings, as it attempts to highlight how a company's offerings
are unique compared to th ose of its competitors.
3.5 SUMMARY The social environment comprises the beliefs, desires, values, and
attitudes of consumers and public members. Other social environment
examples are the consumption patterns, desires, and behaviours of the
market.
 Cultural environment is a concept in business which helps to
understand the customs and collective beliefs of a set of people or
society based on their culture, religion, region, nationality, language
etc.
 The sociocultural environment refers to trends and developments in
changes in attitudes, behaviour, and values in society. It is closely
related to population, lifestyle, culture, tastes, customs, and traditions.
These factors are created by the community and often are passed
down from one generation to an other.
 A social audit is a formal review of a company's endeavours,
procedures, and code of conduct regarding social responsibility and
the company's impact on society. A social audit is an
assessment of how well the company is achieving its goa ls or
benchmarks for social responsibility.
 A competitive strategy is a set of policies and procedures that a
business uses to gain a competitive advantage in the market. It's
the process of identifying and executing actions that allow a business
to improve its competitive position. Businesses may use various
competitive strategies to raise the value of their products and services
for consumers, investors and employees.
3.6 QUESTIONS 1) Define the term Social & Cultural environment. What is the impact o f
foreign culture on Business?
2) What are Traditional Values .Explain their impact?
3) Write a note on Social Audit?
4) Describe the term Corporate Governance & Social Responsibility
.What are their importance with regards Business?
5) Write a note on Technological E nvironment .Explain its features?
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65 7) Describe Competitive Environment? Explain its Importance?
8) Write a note on Michael Porter’s Five Force Analysis?
9) List out the various Competitive Strategies?


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66 4
INTERNATIONAL ENVIRONMENT
Unit Structure
4.0 Objectives
4.1 Introduction
4.2 GATT/WTO
4.2.1 Objectives
4.2.2 Evolution of GATT
4.2.3 Uruguay Round
4.2.4 GATT v/s WTO
4.2.5 Functions of WTO
4.2.6 Pros & Cons of WTO
4.3 Globalisation
4.3.1 Me aning,
4.3.2 Nature & Stages of Globalisation
4.3.3 Features of Globalisation
4.3.4 Foreign Mark et Entry Strategies , LPG Model
4.4 MNC
4.4.1 Definition, Meaning
4.4.2 Advantage of MNC
4.4.3 Dis advantages of MNC
4.4.4 MNC’s in India
4.5 FDI
4.5.1 M eaning
4.5.2 FDI Concepts & Functions
4.5.3Need for FDI in developing countries
4.5.4 Factors influencing FDI
4.5.5 FDI operations in India
4.5.6 Challenges faced by International Business
4.5.7 Investment Opportunity for Indian industry
4.6 Summary
4.7 Questions
4.0 OBJECTIVES After studying this unit students will be able to –
• Understand the concepts WTO, their effects.
• Learn more about Globalisation, Modes of entry in foreign markets munotes.in

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67 • LPG Model
• MNC -Advantages
• Factors influencing FDI
• Challenges faced by International Business & Investment
Opportunities for Indian industry.
4.1 INTRODUCTION Meaning:
The General Agreement on Tariffs and Trade (GATT ) is a legal
agreeme nt between many countries, whose overall purpose was to
promote international trade by reducing or eliminating trade barriers such
as tariffs or quotas .
The GATT was first discussed during the Unit ed Nations Conference on
Trade and Employment and was the outcome of the failure of negotiating
governments to create the International Trad e Organization (ITO). It was
signed by 23 nations in Geneva on 30 October 1947, and was applied on a
provisional basis 1 January 1948. It remained in effect until 1 January
1995, when the World Trade Organization (WTO) was established after
agreement by 123 nations in Marrak esh on 15 April 1994, as part of
the Uruguay Round Agreements.
The WTO is the successor to the GATT, and the original GATT text
(GATT 1947) is still in effect under the WTO fr amework, subject to the
modifications of GATT 1994. Nations that were not party in 1995 to the
GATT need to meet the minimum conditions spelled out in specific
documents before they can accede; in September 2019, the list contained
36 nations.
The GATT, a nd its successor the WTO, have succeeded in reducing
tariffs.
WTO has many roles: it operates a global system of trade rules, it acts as a
forum for negotiating trade agreements, it settles trade disputes between
its members and it supports the needs of de veloping countries.
All major decisions are made by the WTO's member governments: either
by ministers (who usually meet at least every two years) or by their
ambassadors or delegates (who meet regularly in Geneva).
4.2 GATT/WTO 4.2.1 Gatt Objectives:
The objectives of GATT are as follows:
1. To encourage full employment and large and steadily growing volume
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68 2. To improve the world production and exchange of goods.
3. To ensure the full use of world resources.
4. To ensure a steady improvement in the living standards of people in
member countries.
5. To settle the disputes through consultation within the framework of
GATT.
For the achievement of these objectives, the preamble of the GATT
agreement requires the membe rs to enter into reciprocal and mutually
advantageous arrangement directed to the, substantial reduction of tariffs
and other barriers to trade and elimination of discrimination treatment in
international commerce.
4.2.2 Evolution of Gatt:
The GATT was est ablished in 1948 to regulate world trade . It was created
to boost economic recovery after the Second World War by reducing or
eliminating trade tariffs, quotas and subsidies.
During the Great Depression , a breakdown of international relations and
an in crease in trade regulation made poor economic conditions worse.
These factors contributed to the outbreak of the Second World War. After
the war, the Allies believed that a multilateral framework for world trade
would loosen the protectionist policies that defined the 1930s. It would
also create an economic interdependency that would encourage
partnership and reduce the risk of conflict.
The idea was to establish a code of conduct that would progressively
liberalize (remove or loosen restrictions on) international trade. Within
this code of conduct, consultation on trade issues among member nations
could take place and be resolved. Data on world trade characterist ics and
trends could be collected and shared.
The GATT was established more than a year before the North Atlantic
Treaty Organization (NATO), a Weste rn military alliance. The GATT
played an important role in the Cold War , which began shortly after the
Second World War. It helped the US -led capitalist West spread its
influence b y liberalizing trade through multilateral agreements. The West,
with which Canada was aligned, gained more economic allies through
these agreements. This strengthened its global influence in the face of the
communist Eastern bloc led by the Soviet Union.
After the Cold War, with the collapse of the Soviet Union in 1991, the
GATT transitioned into a truly global organization — the WTO . It
admitted former communist blo c countries, such as Czech Republic,
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69 4.2.3 Uruguay Round:
The Uruguay Round was the 8th round of multilateral trade
nego tiations (MTN) conducted within the framework of the General
Agreement on Tariffs and Trade (GATT), spanning from 1986 to 1993
and embracing 123 countries as "contracting parties". The Round led to
the creation of the World Trade Organization , with GATT remaining as an
integral part of the WTO agreements.
The broad mandate of the Round had been to extend GATT trade rules to
areas previously exempted as too difficult to liberalize (agriculture,
textiles) and increasingly important new areas previously not included
(trade in services, intellectual property, investment policy trade
distortions).
The Round came into effect in 1995 with deadlines ending in 2000 (2004
in the case of developing country contracting parties) unde r the
administrative direction of the newly created World Trade Organization
(WTO)
The main objectives of the Uruguay Round were:
 To reduce agricultural subsidies
 To lift restrictions on foreign investment
 To begin the process of opening trade in services
like banking and insurance .
 To include the protection of intellectual property
 They also wanted to draft a code to deal with copyright violation and
other forms of intellectual property rights.
4.2.4 Distinguish between GATT V/S WTO: BASIS FOR COMPARISON GATT WTO Meaning GATT can be described as a set of rules, multilateral trade Agreement, that came into force, to encourage international trade and remove cross-country trade barriers. WTO is an international Organisation, that came into existence to oversee and liberalize trade between countries Institution It does not have any institutional existence, but have a small secretariat. It has permanent institution along with a secretariat. Participant nations Contracting parties Members Commitments Provisional Full and Permanent Application The rules of GATT are only The rules of WTO munotes.in

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70 for trade in goods. includes services and aspects of intellectual property along with the goods. Agreement Its agreement are originally multilateral, but plurilateral agreement are added to it later. Its agreements are purely multilateral. Domestic Legislation Allowed to continue Not allowed to continue Dispute Settlement System Slow and ineffective Fast and effective
4.2.5 Functions of WTO:
Following are the functions of the World Trade Organization:
 Operating under the principle of non -discrimination, WTO lowers the
trade barriers across countries to regulate trade through negotiations.
It results in lower cost of production which leads to lower cost of
finished goods thereby reducing the cost of living.
 WTO functions as a negotiator between countries by making rules
that are acceptable to all. Further, it also provides a dispute resolution
channel between countries.
 It cuts the cost of doing business internationally; and also stimulates
economic growth and development.
 WTO encourages good governance by encouraging t ransparency in
trade transactions.
 It helps developing countries foster their economies by providing a
level playing field for developing trade relations across countries.
4.2.6 Pros & Cons of WTO :
Pros of World Trade Organization :
1. Simplifies Businesses :
The World Trade Organization is committed to laying down guidelines
aimed at making business simpler. The WTO establishes these laws and
regulations and guarantees that all nations comply with the trade
regulations set down by them, thus simplifying businesses.
2. Endorses Harmony :
One of the prime objectives of the WTO is to endorse trade between the
member nations and guarantee that each nation continues to abide by the
provisions of the trade treaty set by it so as to maintain harmony and peace
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71 3. Rouses Monetary Progress :
The World Trade Organization is such an international firm that looks
after all the trade -related concerns of the member nat ions. Thus, for
confirming that people have enough to choose from, it inspires countries
to vary their product to simulate monetary progress.
4. Productively Knobs Quarrels :
Responsibility of the World Trade Organization is also to knob the
quarrels that m ight arise among the nations when conducting trade amid
themselves. Hence, the WTO makes sure that each dispute is heard clearly
and correct jurisdiction is passed for resolving it productively.
5. Heightens Nations’ Net Income :
The basic aim of WTO is to embolden trade between the nations and
ensure smooth trade flow. This allows nations to do business with other
nations and ensures the flow of the economy which eventually then leads
to the diversification of the capital and increasing of the nations’ net
income.
6. Lessens the Lifestyle Cost :
As long as the matter is related to trade, WTO confirms that the nations
remain fruitful which eventually raises their profiles. T he countries try to
maintain that profile by continuing the trade following the WTO
guidelines which then improves their lifestyle by lowering the living cost.
Cons of the World Trade Organisation
1. Insecurity :
The only concern of the World Trade Organiza tion is to govern and
maintain the conditions related to trade and thus validate the security of
the governments only in the case of trade. Other than that, the WTO is not
accountable for ensuring the nations’ security in any other aspect.
2. Unfair :
For a long time, WTO is blamed for being unfair towards the governments
of the developing countries since it conducts its dealings where powerful
governments and large firms dictate policy. Under WTO, developing
nations are bound to suffer more due to the cut -off of their trade deals with
other countries just because of their weak impact on the global economy.
3. Disregards Labour Rights :
The WTO’s primary concern lies among the interests of big corporations
and governments and thus does not care about the unjus t behaviour
towards the labourers and workers concerned with the trade. The rights of
neither the workers nor the consumers are protected by the WTO.
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72 4. Bends towards Multinationals :
Despite the WTO’s assertion that it has set rules and regulations on tra de
to treat all firms equally, the rules have been designed to mostly favour
multinationals and powerful firms. This compromises the trade balance
between the companies and compels other small companies to be
unproductive.
5. Hampers Nature :
The World Trad e Organization encourages countries to maintain free trade
throughout the globe and inspires them to increase their trade for more
profit. In doing so, the countries build more industries and technical
enterprises causing the destruction of the environment .
Conclusion :
In conclusion, the World Trade Organization is a globally recognized
organization to govern the trade among several nations and to set rules and
restrictions on the mode of conducting trade. This effectively aids in
limiting disputes and equa lizing progress among each nation which
eventually increases the per capita income of the nations and aids in
maintaining harmony and peace.
4.3 GLOBALISATION 4.3.1 Meaning:
Globalization is the word used to describe the growing interdependence of
the worl d's economies, cultures, and populations, brought about by cross -
border trade in goods and services, technology, and flows of investment,
people, and information.
In simple terms, globalisation is the catch -all term for the process by
which items and peopl e move across borders. From goods and services to
money and technology, globalisation promotes and speeds up how we
move and exchange things across the world.
Definition of Globalisation :
The process by which the whole world becomes a single market . This
means that goods and services, capital, and labour are traded on a
worldwide basis, and information and the results of research flow readily
between countries.
- Oxford Dictionary of Economics .
4.3.3 Features of Globalization:
1. Globalization is Not a New , Western Concept:
When ancient Indian scriptures mentioned “Vasudhaiva
Kutumbakam”, they had already viewed the world as a small global
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73 with “Saat samundar paar…”, she also meant that we are not alone in this
Universe, and the world is cohabited by others too at far off places.
2. Globalization is Basically a ‘Mind set’:
Usually, Globalization is seen as another economic theory to enhance
business & trade. It must be understood that Globa lization is basically a
mind set that is ready to encapsulate the whole universe into its scheme of
things; a mind set that is broader & open to receive all ideas; that takes the
whole globe as an area of operation.
3. Globalization is an Opportunity:
It is often feared that the implementation of Globalization will open up our
domestic economy for foreign competition, thereby endangering economic
progress & survival of local firms. While it does open our markets for
entry of multinationals, it also opens al l other markets in the whole world
for our products & services too.
4. Globalization means “Interdependence”:
We have all grown reading history wherein either a country is independent
or a slave of another country. With the advent of Globalization, it has been
understood that no country can be said to be totally independent, not
needing anything from any other country. Hence, a culture of
interdependence has been established between nations.
5. Globalization means “Caring & Sharing”:
The world today is mor e united and concerned about common problems
being faced by the people - be it global warming, terrorism, or malnutrition
etc. natural disasters faced or atrocities encountered at any part of the
world attract immediate attention all over.
6. Globalization puts Technology in Service of Mankind:
The world would not have shrunk into a small global village without the
support of technological innovations like Computers, Internet,
Telecommunication, E -Commerce etc. Thus, technology has proved to be
the major sou rce of the concept of Globalization, and for bringing people
nearer.
7. Globalization is Inevitable & Irreversible:
There have been attempts by fundamentalist forces all over the world to
oppose and stop the process of Globalization over past quarter centu ry.
Yet, despite differences in political ideologies, the ruling parties have gone
ahead with implementation of Globalization policies. It is rightly
said, “You cannot stop the advent of an idea whose time has
come”. Globalization is one such idea.

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74 8. Globalization has Linked Politics with Economics:
Earlier, political ideologies and relations between nations have determined
the fate of people over centuries; with economics being subservient to
politics. However, in the new era, it is the economics, emplo yment
generation and public welfare that determine the need & strength of
relations between nations.
9. Globalization means Raised Standards of Living:
With consumers having more choice to pick quality items at right price,
and with no boundary restriction s on flow of goods & services, the
markets have turned from ‘Seller’s Market’ to ‘Buyer’s Market’. This has
helped in raising the standard of living for vast populations across the
world. It has also raised aspirations among billions of people to upgrade
their lifestyles.
10. Globalization Demands and Respects Excellence:
With global level opportunities available to all the countries, the field is
wide open for the excellent companies, products and people from any
remote part of the world to showcase their excellence and win over
markets and contracts. There is pressure on everyone to continuously
improve to meet the raised bar of expectations.
Stages of Globalisation:
1) In the first stage of globalization, companies normally tend to focus
on their domestic m arkets. They develop and strengthen their
capabilities in some core areas.
2) In the second stage of globalization, companies begin to look at
overseas markets more seriously but the orientation remains
predominantly domestic. The various options a company h as in this
stage are exports, setting up warehouses abroad and establishing
assembly lines in major markets. The company gets a better
understanding of overseas markets at low risk, but without
committing large amounts of resources.
3) In the third stage of globalization, the commitment to overseas
markets increases. The company begins to take into account the
differences across various markets to customize its products
suitably.
Different strategies are formed for different markets to maximize customer
responsiveness. The company may set up overseas R&D centres and full -
fledged country or region specific manufacturing facilities. This phase can
be referred to as the multinational or multi -domestic phase. The different
subsidiaries largely remain independent of each other and there is little
coordination among the different units in the system.
4) In the final stage of globalization , the transnational corporation
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75 differences across different mar kets. Some activities are standardized
across the globe while others are customized to suit the needs of
individual markets. The firm attempts to combine global efficiencies,
local responsiveness and sharing of knowledge across different
subsidiaries. A se amless network of subsidiaries across the world
emerges. It is very difficult to make out where the home country or
headquarters is.
4.3.4 Foreign Market Entry Strategies:
There are 10 market entry strategies for international markets you can use
to sell y our product internationally are:
1. Exporting :
Exporting involves marketing the products you produce in the countries in
which you intend to sell them. Some companies use direct exporting, in
which they sell the product they manufacture in international ma rkets
without third -party involvement. Companies that sell luxury products or
have sold their goods in global markets in the past often choose this
method.
Alternatively, a company may export indirectly by using the services of
agents, such as internationa l distributors. Businesses often choose indirect
exporting if they're just beginning to distribute internationally. While
companies pay agents for their services, indirect exporting often results in
a return on investment (ROI) because the agents know what it takes to
succeed in the markets in which they work.
2. Piggybacking :
If your company has contacts who work for organizations that currently
sell products overseas, you may want to consider piggybacking. This
market entry strategy involves asking other businesses whether you can
add your product to their overseas inventory. If your company and an
international company agree to this arrangement, both parties share the
profit for each sale. Your company can also manage the risk of selling
overseas by allow ing its partner to handle international marketing while
your company focuses on domestic retail.
3. Countertrade :
Countertrade is a common form of indirect international marketing.
Countertrading functions as a barter system in which companies trade each
other's goods instead of offering their products for purchase. While legal,
the system does not have specific legal regulations like other forms of
market entry do.
This means companies may solve problems like ensuring other companies
understand the value of their products and attempting to acquire goods at a
similar level of quality. Countertrading is a cost -effective choice for many
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76 4. Licensing :
Licensing occurs when one company transfer s the right to use or sell a
product to another company. A company may choose this method if it has
a product that's in demand and the company to which it plans to license
the product has a large market. For example, a movie production company
may sell a s chool supply company the right to use images of movie
characters on backpacks, lunchboxes and notebooks.
5. Joint ventures :
Some companies attempt to minimize the risk of entering an international
market by creating joint ventures with other companies that plan to sell in
the global marketplace. Since joint ventures often function like large,
independent companies rather than a combination of two smaller
companies, they have the potential to earn more revenue than individual
companies. This market entry str ategy carries the risk of an imbalance in
company involvement, but both parties can work together to establish fair
processes and help prevent this issue.
6. Company ownership :
If your company plans to sell a product internationally without managing
the sh ipment and distribution of the goods you produce, you might
consider purchasing an existing company in the country in which you
want to do business. Owning a company established in your international
market gives your organization credibility as a local bu siness, which can
help boost sales. Company ownership costs more than most market entry
strategies, but it has the potential to lead to a high ROI.
7. Franchising :
A franchise is a chain retail company in which an individual or group
buyer pays for the rig ht to manage company branches on the company's
behalf. Franchises occur most commonly in North America, but they exist
globally and offer businesses the opportunity to expand overseas.
Franchising typically requires strong brand recognition, as consumers i n
your target market should know what you offer and have a desire to
purchase it. For well -known brands, franchising offers companies a way to
earn a profit while taking an indirect management approach.
8. Outsourcing :
Outsourcing involves hiring another c ompany to manage certain aspects of
business operations for your company. As a market entry strategy, it refers
to making an agreement with another company to handle international
product sales on your company's behalf. Companies that choose to
outsource m ay relinquish a certain amount of control over the sale of their
products, but they may justify this risk with the revenue they save on
employment costs.
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77 9. Greenfield investments :
Greenfield investments are complex market entry strategies that some
compa nies choose to use. These investments involve buying the land and
resources to build a facility internationally and hiring a staff to run it.
Greenfield investments may subject a company to high risks and
significant costs, but they can also help companies comply with
government regulations in a new market. These investments typically
benefit large, established organizations as opposed to new enterprises.
10. Turnkey projects :
Turnkey projects apply specifically to companies that plan, develop and
construct new buildings for their clients. The term "turnkey" refers to the
idea that the client can simply turn a key in a lock and enter a fully
operational facility. You might consider this market entry strategy if your
clients comprise foreign government agenci es. International financial
agencies usually manage arrangements between companies and their
overseas clients to ensure the companies provide high -quality service and
the client pays the full amount due.
Liberalization Privatization & Globalization:
LPG s tands for Liberalization , Privatization , and Globalization . India
under its New Economic Policy approached International Banks
for development of the country. These agencies asked Indian Government
to open its restrictions on trade done by the private sector and between
India and other countries.

1) Liberalization :
The basic aim of liberalization was to put an end to those restrictions
which became hindrances in the development and growth of the nation.
The loosening of government control in a country and when private sector
companies ’ start working without or with fewer restrictions and
government allow private players to ex pand for the growth of the country
depicts liberalization in a country.
Objectives of Liberalization Policy :
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78  To encourage foreign trade with other countries with
regulated imports and exports .
 Enhancement of foreign capital and technology.
 To expand global market frontiers of the country.
 To diminish the debt burden of the country.
2) Privatizatio n:
This is the second of the three policies of LPG. It is the increment of the
dominating role of private sector companies and the reduced role of public
sector companies. In other words, it is the reduction of ownership of the
management of a government -owned enterprise. Government companies
can be converted into private companies in two ways:
By disinvestment
By withdrawal of governmental ownership and management of public
sector companies.
Forms of Privatization :
 Denationalization or Strategic Sale : When 100% government
ownership of productive assets is transferred to the private sector
players, the act is called denationalization.
 Partial Privatization or Partia l Sale : When private sector owns
more than 50% but less than 100% ownership in a previously
construed public sector company by transfer of shares, it is called
partial privatization. Here the private sector owns the majority of
shares. Consequently, the pr ivate sector possesses substantial control
in the functioning and autonomy of the company.
 Deficit Privatization or Token Privatization: When the government
disinvests its share capital to an extent of 5 -10% to meet the deficit in
the budget is termed as d eficit privatization.
Objectives of Privatization :
 Improve the financial situation of the government.
 Reduce the workload of public sector companies .
 Raise funds from disinvestment.
 Increase the efficiency of government organizations.
 Provide better and improved goods and services to the consumer.
 Create healthy competition in the society.
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79 3) Globalization :
It means to integrate the economy of one country with the global
economy. During Globalization the main focus is on foreign trade &
private and institutional foreign investment. It is the last po licy of LPG to
be implemented.
Globalization as a term has a very complex phenomenon. The main aim is
to transform the world towards independence and integration of the world
as a whole by setting various strategic policies. Globalization is attempting
to create a borderless world, wherein the need of one country can be
driven from across the globe and turning into one large economy.
Outsourcing as an Outcome of Globalization:
The most important outcome of the globalization process is Outsourcing.
During th e outsourcing model, a company of a country hires a professional
from some other country to get their work done, which was earlier
conducted by their internal resource of their own country.
The best part of outsourcing is that the work can be done at a low er rate
and from the superior source available anywhere in the world. Services
like legal advice, marketing, technical support, etc. As Information
Technology has grown in the past few years, the outsourcing of
contractual work from one country to another has grown tremendously. As
a mode of communication has widened their reach, all economic activities
have expanded globally.
Various Business Process O utsourcing companies or call centres, which
have their model of a voice -based business process have developed in
India. Activities like accounting and book -keeping services, clinical
advice, banking services or even education are been outsourced from
devel oped countries to India.
What are the Benefits of Globalization?
The most important ad vantage of outsourcing is that big multi -national
corporate or even small enterprises can avail good services at a cheaper
rate as compared to their country’s standards. The skill set in India is
considered most dynamic and effective across the world. Indian
professionals are best at their work. The low wage rate and specialized
personnel with high skills have made India the most favourable d estination
for global outsourcing in the later stage of reformation.
4.4 MULTINATIONAL CORPORATIONS (MNC) 4.4.1 Meaning:
A multinational company (MNC) also referred to as a multinational
enterprise (MNE), a transnational enterprise (TNE), a transnational
corporation (TNC), an international corporation or a stateless corporation
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80 and controls the production of goods or services in at least one country
other than its home country.
Charac teristics of a Multinational Corporation:
The following are the common characteristics of multinational
corporations:
1. Very high assets and turnover :
To become a multinational corporation, the business must be large and
must own a huge amount of assets, both physical and financial. The
company’s targets are high, and they are able to generate substantial
profits.
2. Network of branches :
Multinational companies maintain production and marketing operations in
different countries. In each country, the busine ss may oversee multiple
offices that function through several branches and subsidiaries .
3. Control :
In relation to the previous point, the management of offices in other
countries is controlled by one head office located in the home country.
Therefore, the source of command is found in the home country.
4. Continued growth :
Multinational corporations keep growing. Even as they operate in other
countries , they strive to grow their economic size by constantly upgrading
and by conducting mergers and acquisitions .
5. Sophisticated technology :
When a company goes global, they need to make sure that their
investment will grow substantially. In order to achieve substantial growth,
they need to make use of capital -intensive technology, especially in their
production and marketing activities.
6. Right s kills:
Multinational companies aim to employ only the best managers, those
who are capable of handling large amounts of funds, using advanced
technology, managing workers, and running a huge business entity.
7. Forceful marketing and advertising :
One of th e most effective survival strategies of multinational corporations
is spending a great deal of money on marketing and advertising. This is
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81 8. Good quality products :
Because they use capital -intensive technology, they are able to produce
top-of-the-line products.
4.4.2 Advantages of MNC:
MNCs have many benefits which are not only good for people but also
help in the growth of the country, some of the advantages are:
 Production cost can be reduced : MNCs set up their manufacturing
plants in various countries that help them to make production cost -
efficient. They get the benefits of increased production and can grow
their brand.
 Good quality products : Due to global manufacturing access
companies get a chance to get good raw material which helps them
to come up with good quality products. Great products grow their
brand’s name in the local as well as global market.
 Growth is high: As compared to other local companies MNCs pay
more to their employees whi ch attracts more labour force. MNCs
give local taxes that also help in the country’s economic
development.
 More employment: MNCs give chances to local labourers as they
know the culture of their places that help to manufacture products
according to the nee ds of the locals. Thus there is more hiring of
local labourers who help companies to grow.
 New inventions: More products that are useful are invented as the
local labourers help them to give more understanding of local
equipment with the help of other comp any employees.
4.4.3 Disadvantages of MNC:
Here are a few disadvantages of MNCs:
 The exploitation of labourers : The multinational cooperation gives
all the facilities to locals to learn skills and after that, the company
starts earning more profits from th e local’s and in return the labourers
don’t get any profit and have struggled with low income.
 Dominate the host country’s supremacy : MNCs slowly build their
assets in the host country and indirectly dominate the country’s
freedom. As they pay local taxes and give employment to people so
sometimes the government also gets dominated.
 Increase pollution : The multinational corporation uses local raw
materials to get more benefit and that leads to more manufacturing.
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82  Import skilled labourers : To get better products sometimes
multinational corporations train local labourers but to get quick results
they hire skilled labourers from other countries too which a ffects the
host country’s economic growth. There is also job risk for the local
employees as the MNCs can fire the labourers for their benefits.
 Build legal monopolies : The Government treats each location as their
own entity, even though the assets control led by multinational
corporations are managed by a centralized structure. MNCs have the
freedom to handle their business but some companies come close to
making a monopoly.
4.4.4 MNC’s in INDIA :
Due to India’s growing economy, globalization, and its potent ial in the
market, many multinational companies are coming to India to extend their
business. Below is the list of the top 10 MNCs in India.
1. Microsoft :
Microsoft Corporation India is a subsidiary of Micros oft Corporation
which as we all know is an American multinational, started in the year
1975. Microsoft Corporation began its operations in 1990 with its
headquarters in Hyderabad, India, and ever since has worked closely with
the Government of India as wel l as the IT firms. It is indeed one of the
most popular on the list of MNCs in India.
2. IBM :
IBM (International Business Machines Corporation) is the second MNC in
our list of multinational companies in India with its headquarters in
Bangalore (IBM India Private Ltd). It started in the year 1992 in India and
has its credits with a range of products and services including business
consulting, storage solutions, etc.
3. Nestle :
3rd on the list of MNCs in India is Nestle. Nestle India which is a food and
beve rage company from Switzerland is a part of Nestle S.A. Nestle had
made its entry into the market in the year 1912 with improved products
and is currently one of the leading MNCs in India. It is considered one of
the largest food companies in India with its best food products. And also
comes with the rank 72 on the Fortune Global 500 in the year 2014
according to the revenue.
4. Proctor & Gamble :
Procter & Gamble (P&G) is a worldwide developer MNC and was started
by William Procter and James Gamble in 1837. P& G Indian is a part of
Procter and Gamble. The MNC made its way into India in 1964 and
currently has products such as Olay, Gillette, Vicks, Tide, etc. It has a
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83 5. Coca -Cola:
Coca -Cola is yet another widely acclaimed MNC in India that comes in
the list of the top best MNC in India. Coco -cola, the marketer of non -
alcoholic beverages founded in 1886 by Asa Griggs Candler and started
operation in India in 1993. The corporate office of Coco -cola is in Atlanta,
Georgia, and having a revenue of US $45.998 billion. The company
operated in India as a subsidiary of Coca -Cola India Private Ltd.
6. Pepsico :
PepsiCo too makes its way into the l ist of MNC India as a well -known
manufacturer of snacks and beverages. An American Company found in
1965, PepsiCo operates in India through its subsidiary, Pepsico India
Holding Private Limited, and is a leading manufacturer of popular brands
such as Lays, Pepsi, Slice, etc.
7. CITI Group :
The next one on the list of MNCs in India is the CITI Group , founded in
1998, an American Banking services Corp. It operates in India through the
subsidiary, Citibank, which presently has more than 40 branches in over
30 cities in India. Corporate office in Manhattan, New York City and
revenue US$ 76.88 billion and in India it’s headquartered is in Mumbai.
Citibank has 42 branches across 30 cities and more than 700 ATMs in
India. Interestingly, Citibank was formed by one of the largest mergers in
history and now owns the world’s largest financial services.
8. SONY Corporation :
Sony is yet another well -known Japanese multinational company t hat
came into existence in the year 1946. Sony Corporation began its
operations in the year 1994 and is well acclaimed for its products in
various categories: electronics, media, and entertainment. Televisions,
mobile phones, cameras, PlayStations, headpho nes, memory cards, etc. are
the major products of the Sony Corporation. It’s headquarter is situated in
Delhi, India with total revenue of US$ 153.683 billion.
9. Hewlett Packard :
HP has also made its way into the list of MNCs in India with its products
ranging from laptops, monitors, desktops, and other electronic items. HP
was started off in the year 1939 and has its headquarters in Palo Alto,
California, and having the biggest revenue of US$ 111.454 billion. HP, an
American Electronics and Information Te chnology Company has its
headquarters in Banglore, India. HP produces a line of printers, digital
cameras, scanners, PDAs, calculators, servers, workstation computers, and
computers for home and small -business use. Many of the computers came
from the 2002 merger with Compaq.

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84 10. Apple Inc:
Apple Inc was a foot bed in 1976 and currently sells laptops, phones,
software, and various online services. Apple Inc., an Am erican
Multinational Company was founded in the year 1976. The company is
well-renowned for electronic consumers and some of their best -selling
products such as iPhone, iPod, iPad, and Mac. This is one of the largest
MNC’s companies in India which develops and sells computer, laptops,
software, and online services.
4.5 FOREIGN DIRECT INVESTMENT 4.5.1 What Is a Foreign Direct Investment (FDI)?
Foreign direct investment (FDI) is an ownership stake in a foreign
company or project made by an investor, company, or government from
another country.
Generally, the term is used to describe a business decision to acquire a
substantial stake in a foreign business or to buy it outright to expand
operations to a new region. The term is usually not used to describe a
stock investment in a foreign company alone. FDI is a key element in
international economic integration because it creates stable and long -
lasting links between economies.
Examples of Foreign Direct Investment :
Foreign direct investments may involve mergers, a cquisitions, or
partnerships in retail, services, logistics, or manufacturing. They indicate a
multinational strategy for company growth.
4.5.2 Functions of FDI:
Foreign Direct Investment plays an important role in following ways:
i. FDI provides Capital:
Foreign Direct Investment is expected to bring needed capital to
developing countries. The developing countries need higher investment to
achieve increased targets of growth in national income.
Since they cannot normally have adequate savings, there is a need to
supplement savings of these countries from foreign savings. This can be
done either through external borrowings or through permitting and
encouraging Foreign Direct Investment. Foreign Direct Investment is an
effective source of this addition al capital and comes with its own risks.
ii. FDI removes Balance of Payments Constraint:
FDI provides ‘inflow of foreign exchange resource and removes the
constraints on balance of payment. It can be seen that a large number of
developing countries suffer from balance of payments deficits for their
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85 ability to earn. FDI inflows by providing foreign exchange resources
remove the constraint of developing countries seeking higher growth rates.
FDI has a distinct advantage over the external borrowings considered from
the balance of payments point of view. Loan creates fixed liability. The
governments or corporations have to repay. The resulting international
debt of the government and the corpor ation parts a fixed liability on
balance of payments.
This means that they have to repay loans along with interest over a
specific period. In the context of FDI this fixed liability is not there. The
foreign investor is expected to generate adequate resour ces to finance
outflows on account of the activity generated by the FDI. The foreign
investor will also bear the risk.
iii. FDI brings Technology, Management and Marketing Skills:
FDI brings along with it assets which are crucially either missing or scarce
in developing countries. These assets are technology and management and
marketing skills without which development cannot take place. This is the
most important advantage of FDI. This advantage is more important than
bringing capital, which perhaps can be had from the international capital
markets and the governments.
iv. FDI promotes Exports of Host Developing Country:
Foreign direct investment promotes exports. Foreign enterprises with their
global network of marketing, possessing marketing information a re in a
unique position to exploit these strengths to promote the exports of
developing countries.
v. FDI provides Increased Employment:
Foreign enterprises by employing the nationals of developing countries
provide employment. In the absence of this inves tment, these employment
opportunities would not have been available to many developing
countries.
Further, these employment opportunities are expected to be in relatively
higher skill areas. FDI not only creates direct employment opportunities
but also thr ough backward and forward linkages, it is able generate
indirect employment opportunities as well.
vi. FDI results in Higher Wages:
FDI also promotes higher wages. Relatively higher skilled jobs would
receive higher wages.
vii. FDI generates Competitive Environment in Host Country:
Entry of foreign enterprises in domestic market creates a competitive
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86 efficiency and bette r products and services. The Consumer may have a
wider choice.
4.5.3 Need For FDI in Developing Countries:
Developing countries, emerging economies and countries in transition
have come increasingly to see FDI as a source of economic development
and modern isation, income growth and employment . Countries have
liberalised their FDI regimes and pursued other policies to attract
investment.
Following points indicate need for FDI:
Economic development stimulation :
FDI can stimulate a target country’s economic de velopment and create a
more conducive environment for companies, the investor, and stimulate
the local community and economy.
Easy international trade:
Countries usually have their own import tariffs, which makes trading
rather difficult. A lot of economic sectors usually require presence in the
international markets to ensure sales and goals are met. FDI makes all of
these international trade aspects a lot easier.
Employment and economic boost:
FDI creates new jobs and more opportunities as investors build new
companies in foreign countries. This can lead to an increase in income and
more purchasing power to locals, which in turn leads to an overall boost in
targeted economies.
Tax incentives:
Of course — taxes. Foreign investors receive tax incentives that are very
beneficial regardless of your selected field of business. Everybody loves a
tax write -off.
Development of resources:
The development of human capital resources is a big advantage of FDI.
The skills gained by the workforce through training increas es the overall
education and human capital within a country. Countries with FDI are
benefiting by developing their human resources all while maintaining
ownership.
Resource transfer:
Foreign direct investment allows for resource transfers and the exchanges
of knowledge, technologies, and skills.

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87 Reduced costs:
Foreign direct investment can reduce the disparity between revenues and
costs. With such, countries will be able to make sure that production costs
will be the same and can be sold easier.
Increased productivity:
The facilities and equipment provided by foreign investors can increase a
workforce’s productivity in the target country.
Increase in a country’s income:
Another big advantage of foreign direct investment is the increase of the
target countr y’s income. With more jobs and higher wages, the national
income normally increases which promotes economic growth. Large
corporations usually offer higher salary levels than what you would
normally find in the target country, which can lead to an increme nt in
income.
4.5.4 Factors Influencing FDI:
1. Stability of the Government:
A stable Government is an essential prerequisite for any investment. The
investor will always look for a government which is supporting investment
and which will not take any step s that are anti -investment. The investor
should not have any fear of takeover by the government. This will enable
him to go for expansion.
2. Flexibility in the Government Policy:
Certain investments were not allowed in the hands of FDI but such a rigid
policy will not help in the growth of industries. With WTO regulation,
government has to adopt flexible policies, permitting FDIs in all areas
including those in which they were prevented previously. For example, in
India, power generation was not permitted to private sector. Now, in
Maharashtra, Dabhol Power Company is allowed to do so.
3. Pro-active measures of the Government to promote investment
(infrastructure):
The Government should also undertake pro -active measures such as
expansion of ports, captive power, development of highways, atomic
power etc. These measures will attract more foreign direct investment.
4. Exchange rate stability:
Commercial viability of any FDI is based on exchange rate stability. This
means that the value of domestic currency sh ould not drop abnormally by
which while repatriating the funds, the foreign investor will lose heavily.
Exchange rate should be more or less the same as prevailing at the time of
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88 5. Tar policies and concessions:
Government should adopt uniform tax policies as per international norms.
A heavy excise duty or sales tax or customs duty will prevent foreign
direct investment. A moderate tax policy should continue so that the FDIs
will feel comfortable.
6. Scope of the market:
FDIs must be in a positi on to exploit the market and expand both in the
domestic as well as the foreign markets. This will reduce their cost of
production and will give them ample scope for diversification.
7. Other favourable location factors (including logistics and labour):
The productivity of labour in the country should be high. Adequate skilled
labour should be available, especially in technical areas. Different
transport facilities with a proper coordination between land, rail and air
should be available.
8. Return on inves tment:
One of the major attractions for FDIs is the profit or the return they get for
the investment made. Unless the return is substantially higher than what
they could have obtained in other countries, they will not venture for
investment. The rectum sho uld also be consistent and it should be
increasing over a period. These factors are closely looked into while
undertaking investment. The financier of the FDIs will also ensure that
they get their money back as it is a safe investment.
Thus, return on investment is a major deciding factor for FDI’s while
undertaking investment in foreign countries.
4.5.5 FDI Operations In India:
There are three routes through which FDI f lows into India. They are
described in the following table: Category 1 Category 2 Category 3 100% FDI permitted through Automatic Route Up to 100% FDI permitted through Government Route Up to 100% FDI permitted through Automatic + Government Route
1) Automatic Route FDI :
In the automatic route , the foreign entity does not require the prior
approval of the government or the RBI.
Examples:
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89  Thermal power: up to 100%
 Services un der Civil Aviation Services such as Maintenance & Repair
Organizations
 Insurance: up to 49%
 Infrastructure company in the securities market: up to 49%
 Ports and shipping
 Railway infrastructure
 Pension: up to 49%
 Power exchanges: up to 49%
 Petroleum Refinin g (By PSUs): up to 49%
2) Government Route FDI :
Under the government route , the foreign entity should compulsorily take
the approval of the government. It should file an application through the
Foreign Investment Facilitation Portal, which facilitates sing le-window
clearance. This application is then forwarded to the respective ministry or
department, which then approves or rejects the application after
consultation with the DPIIT .
Examples:
 Broadcasting Content Services: 49%
 Banking & Public sector: 20%
 Food Products Retail Trading: 100%
 Core Investment Company: 100%
 Multi -Brand Retail Trading: 51%
 Mining & Minerals separations of titanium bearing minerals and ores:
100%
 Print Media (publications/printin g of scientific and technical
magazines/speciality journals/periodicals and a facsimile edition of
foreign newspapers): 100%
 Satellite (Establishment and operations): 100%
 Print Media (publishing of newspaper, periodicals and Indian editions
of foreign mag azines dealing with news & current affairs): 26%
3) Sectors where FDI is prohibited :
There are some sectors where any FDI is completely prohibited. They are: munotes.in

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90  Agricultural or Plantation Activities (although there are many
exceptions like horticulture, fish eries, tea plantations, Pisciculture,
animal husbandry, etc.)
 Atomic Energy Generation
 Nidhi Company
 Lotteries (online, private, government, etc.)
 Investment in Chit Funds
 Trading in TDR’s
 Any Gambling or Betting businesses
 Cigars, Cigarettes, or any relat ed tobacco industry
 Housing and Real Estate (except townships, commercial projects,
etc.)
4.5.6 Challenges Faced by International Business:
There are 12 challenges that highlight the problems of international
business:
1. Managing globally distributed tea ms:
Developing and successfully managing teams at the international level is a
tough job. The complexities of international businesses like varying labour
laws, payroll laws, compliance, t ax laws, employee rights, and varying
technology access increase global team management challenges.
To maintain a strong work association with your team spread across the
globe, you must ensure regular check -ins, preferably through a video
conferencing pl atform that enables real -time interactions. Many
researchers have shown that employees who regularly interact with their
managers are three times more likely to be engaged in their work than
employees who do not interact.
In the aftermath of the COVID -19 pandemic, when many companies have
shifted to remote working, distance divides teams. Therefore, effective
communication and collaboration are essential to ensure employees feel
valued and productive work engagement.
2. Language obstacles :
In international business, it's prevalent to meet people speaking different
languages. The language barrier is one of the most significant international
business challenges. Therefore, most multinational companies hire
employees fluent in at least one foreign language.
It's noteworthy that organizations often face difficulty explaining their
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91 vital to consider the languages your team members speak, and the
customer support executives should be in li ne with your target customers.
Significant investment in interpreters and maintaining a pool of employees
comfortable in major global languages ensures that your business operates
smoothly.
In some countries, labour laws dictate that employment contracts are
written in the local language. While employing talent in another country
becomes a challenge for international business. Employing a local to
verify the correctness and compliance of these contracts is one way to
solve this problem.
3. Currency exchang e and inflation rate issues
An international business receives payments from multiple nations. The
value of a dollar for your native country will not always be equal to the
same amount in other currencies. Therefore, it's one of the major problems
of inter national business as the currency's value consistently fluctuates for
the same amount of goods & services.
It's recommended that you familiarize yourself with the currency exchange
rates and the inflation rates of the nations where your international
busin ess operates. The inflation rates influence the price of commodities
and labour costs, which eventually steers the final product pricing.
Monitoring these two rates provides essential insights into the market
value of your product & services in different l ocations over time.
4. Cultural variations :
The different counties worldwide, sometimes other regions within these
countries, have a unique cultures. Understanding the different cultures
your employees and clients follow enhances the management and
increas es cross -cultural business relationships. Eventually, this reduces the
complexities of international business and makes your processes highly
effective.
Whether managing your overseas office, selling your products/services to
international clients/retailer s, or operating an overseas manufacturing set -
up, it will significantly benefit your international operations once you
understand their cultures and employ emotional intelligence.
5. Nuances of foreign policies, geopolitics, and cross -country relations :
The international business environment is greatly affected by political
scenarios and the foreign relations between the countries. When you
expand your business in the international market, it's essential to know the
financial systems, trade policies, and co untry -specific tax regulations.
Friction in cross -country relations is one of the significant complexities of
international business. This knowledge affects your business strategy and
ensures that you abide by the rules and regulations of the operating
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92 The political decisions taken by the leaders influence the taxes, labour
wages, commodity prices, transportation & infrastructure costs, etc.
Therefore, you should update yourself with the strategic decisions, and the
workplace policy should comply w ith all the regulations.
6. Supply chain risks :
Managing the supply chain that encompasses national borders lies among
the significant problems of international business. The particulars of
imports, exports, offshore shipping, and related logistics are ste ered by
international laws and other foreign legislations.
International expansion is a strategic decision that should be taken after
developing a solid supply chain strategy as it affects the future of your
business. Supply chain strategies need to be un ique based on your business
requirements, and you need to develop them specifically for the locations
you wish to expand. This includes studying the local trade regulations,
external influences, existing supply chain, and local material availability.
7. Ta lent acquisition and On boarding :
Hiring and retaining talented employees is an essential aspect of
international expansion. Talented and motivated staff with the required
knowledge base and industry experience of the specific region are assets
to the orga nization. If your business lacks experienced employees who can
act as an anchor for that location, your international expansion can face
challenges. This challenge is amplified in the case of venture mergers or
acquisitions.
For an international business, hiring employees across the globe involves
multiple challenges like an on boarding plan unique to remote work,
increased overhead expenses, extensive HR support, etc. When you hire
employees from overseas, access to these employees is not the same for all
as in offline work, making it challenging to make the right decision.
8. Compliance issues :
Tax compliance issues are one of the challenges of expanding globally.
All international businesses have to deal with multiple countries having
different business r egulations, tax rates, and other commercial fees; these
are hindrances that must be complied with to operate globally.
If the business fails to comply with regulations, it can hinder business
expansion and pay hefty compliance charges. This means that empl oyers
must do thorough research and legitimate paperwork to comply with the
dynamic international regulations.
9. New market competition :
When multiple companies offer similar products and services, their
business models create aggressive competition. If you wish to explore a
new market, you need to do a market search regarding the companies
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93 challenges of expanding globally also call for differentiating factors in
your products and services s o that they gain a competitive edge in the
market.
It's a profitable business idea to venture into unique products & services to
create your own market while developing reputable business relationships
with local vendors, shipping agencies, suppliers, and logistics to
strengthen your supply chain.
10. Brand consistency :
International businesses solve different problems for different customers
worldwide; it's challenging to create brand consistency and leverage it in
the global market. Brand consistency refe rs to the functional language,
logo, work culture, and many factors affecting your brand’s growth.
Evolving a global corporate strategy is imperative to brand consistency.
A company's brand differentiates it from the other companies as it is the
company's trademark. Another challenge with brand consistency is that
your business must maintain consistency in its deliverables. If the business
is successful, the brand recall value increases, leading to exponential
growth in profit.
11. Environmental issues on a global level :
The environmental risks and effects of global warming and climate change
are evident daily. Therefore, sustainability is high on the priority list of the
foremost multinational corporations. The UN's Sustainable Development
Goals have elevat ed environmental issues as the challenges of expanding
globally. Businesses should develop and implement more environmentally
sustainable business processes.
It's essential to be aware of the country -specific environmental regulations
to expand your busine ss overseas and avoid legal issues in global business.
This highlights the importance of sustainable production methods and
non-conventional energy resources for your production process.
12. Payroll Challenges :
The global expansion comes at a cost; the pay roll challenges can
accumulate if not appropriately managed. It's noteworthy that each global
payroll challenge gets multiplied by the number of nations your company
serves. Since every country has laws and regulations related to taxes,
retirement benefits , and healthcare requirements, managing all these
factors poses a significant challenge when you venture into a new country.
4.5.7 Investment Opportunity for Indian Industries:
1. Healthcare and Insurance Sector :
In respect of revenue and employment, Healt hcare is emerging as one of
the most important sectors in India. An ageing population, a rising middle
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94 public and private partnerships, ramped up adoption and implementation
of digital developments in technology, along with telemedicine, as well as
growing investor interest and FDI inflows considerably over the past two
decades, are all cruising the growth and flourishment of the Indian
Healthcare Sector.
Hospitals, Pharmaceuticals, Dia gnostics, Medical Equipment and
Supplies, and Medical Insurance are the five components of the healthcare
and insurance sector, according to the government. In FY 2020, the
average percentage of insurance premium was 3.76%, life insurance
premium was 2.82 %, and non -life insurance premium was 0.94%; in F.Y
2021, the percentages rose to 4.2% for insurance premium, 3.2% for life
insurance premium, and 1% for non -life insurance premium.
Following are some of the companies worth considering in this sector:
 Apollo Hospitals
 Abbott India
 Fizer
 Divi’s Laboratories
 HDFC Life Insurance
2. Renewable Energy Sector :
We are all aware that environmental conditions are deteriorating, and as a
result, under the Paris Agreement, every country is under enormous
international pressure to reduce carbon emissions. Renewable energy has
emerged as a very promising sector for investors. Sales of renewable
energy equipment such as solar panels are at an all -time high, and
renewable electricity is becoming increasingly affordable. By the end of
2022, India wants to have 175 GigaWatts of renewable energy installed.
The Ministry of Power has created the Renewable Energy Investment
Promotion and Felicitation Board (REIPFB) to provide one -stop assistance
to industry and investors for project development and new investment in
India’s renewable energy sector.
In addition, over $79 billion has been invested in renewable energy in
India over the last seven years, and India’s instal led renewable energy
capacity has increased by over two -and-a-half times in that time, to over
141 Giga Watts.
Following are some of the companies worth considering in this sector
in India:
 Relianc e Power Industries
 Indian Energy Exchange
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95  Borosil Renewables
 Siemens
3. IT Sector :
The IT Tech industry has exploded in the last two years, whether it’s in
the fields of Artificial Intelligence, Data Analytics, Data Science, or Big
Data. The IT industry has grown at such a breakneck pace and scale that it
almost seems unreal. Around 33 Indian IT start -ups have achieved the
“Unicorn” status, meaning their valuation has surpassed $1 billion.
With approximately 560 million internet users, India is n ow the second -
largest online market after China which makes it clear that India is
absolutely booming in this sector.
Following are some of the companies worth considering in this sector:
 Affle India
 L&T Infotech (Larsen & Toubro)
 TCS (Tata Consultancy Services)
 Info Edge
 Honeywell Automation
4. Real Estate Sector :
The Indian property market is trending in the right direction, and it is
expected to pick up steam in the upcoming months. Wit h strong end -user
consumption and calm market conditions, the average quarterly sales
volume is expected to exceed the pre -COVID year’s average quarterly
sales.
The unravelling of events as a consequence of Omicron is a key factor in
determining the dynam ism of the sales following any lockdowns.
In important Real Estates markets like Pune, Hyderabad, Bangalore,
Ahmedabad, and Mumbai, expansion levels have already been surpassed.
Following are some of the companies worth considering in this sector:
 Indiabulls Real Estate
 Oberoi Realty
5. Fast Moving Consumer -Goods Sector (FMCG) :
In India, FMCG is the most secure sector for long -term i nvestment. The
majority of the products in this industry have been in use for over a
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96 HUL, Dabur, Emami, ITC, Nestle, and other FMCG companies are
household names in India. For a long time, the ma jority of people in
Indian cities and towns have been using their products.
Contrary to many other industries that go through a contraction and
expansion cycle, the FMCG industry’s products are always in demand.
People may not buy a new car, make new loans , or avoid investing in real
estate/infrastructure during a recession or economic crisis, but because
FMCG products are basic necessities, their demand will not decrease as
much as in other industries. Companies based on FMCG have a lot of
room to grow in every area.
The FMCG industry is one of the best sectors in India for long -term
investment in India if you are looking for a safe industry to invest in.
Following are some of the companies worth considering in this sector:
 Adani Wilmar
 Hindustan Unilever Ltd. (HUL)
 ITC Limited
 Nestle Ind ia
 Britannia Industries
 Marico
6. Automobile Sector :
Leading global automobile players are entering India and setting up
production facilit ies to tap one of the fastest growing economies of the
world.
Also, Indian players such as Eicher Motors (Eicher Motors’ own Royal
Enfield bike that has been growing in terms of sales), Maruti Suzuki India
Ltd, Tata Motors Ltd, etc. are unveiling new model s, facelift versions, etc.
to tap the demand from the consumers.
Rising disposable income in the hands of individuals has resulted in
shifting preference towards the four -wheeler segment.
The growth of the automobile sector shall also translate to the gro wth of
the automobile component sector.
Following are some of the companies worth considering in this sector:
 Maruti Suzuki India Ltd
 Eicher Motors Ltd
 Automotive Axles Ltd
 Munjal Showa Ltd munotes.in

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97  Motherson Sumi S ystems Ltd
 Endurance Technologies Ltd
 Jamna Auto Industries Ltd
4.6 SUMMARY It makes sense for an intelligent investor to invest in India’s growing
sectors for long -term investments. However, there is an important lesson
to be learned here: not every growing sector will provide incredible
returns. The best approach to selecting the best sectors in India for
investment is to d iversify.
Allocate funds to various sectors that you believe will grow, reducing risk
and ensuring that you do not miss out on any booming sectors.
4.7 QUESTIONS 1) Define the term GATT. Explain Objectives of GATT.
2) Distinguish between WTO v/s GATT
3) Write a no te on Functions of WTO.
4) Explain the Pros & Cons of WTO.
5) Define the term Globalization .What are the various foreign Market
entry Strategies.
6) Write a note on LPG Model.
7) What is a MNC .Explain its merits & demerits.
8) Write a note on MNC’s in India.
9) Define FDI .Explain Need for FDI in developing countries.
10) What are the factors influencing FDI.
11) List out FDI Operations in India.
12) What are the challenges faced by International Business.
13) Explain Investment Opportunity for Indian industry.

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