Unit – 4: International Business Environment
International Business
International business refers to business activities that take place across national frontiers. Though many people use the terms international business and international trade synonymously, the former is a much broader term. International business involves not only trade in goods and services, but also other operations such as production and marketing of goods and services in foreign countries.
Reasons: The primary reason for international business is that nations cannot efficiently produce all that they require. Due to differences in resource endowments and labour productivity, countries find it much more advantageous to produce goods and services in which they have cost advantage and trade the surplus in such goods and services with other nations in exchange of goods and services which others can produce more efficiently.
Scope: Scope of international business is quite wide. It includes not only merchandise exports, but also trade in services, licensing and franchising as well as foreign investments.
Benefits: International business benefits both the nations and firms. Nations gain by way of earning foreign exchange, more efficient use of domestic resources, greater prospects of growth and creation of employment opportunities. The advantages to the business firms include: prospects for higher profits, greater utilisation of production capacities, way out to intense competition in domestic market and improved business vision.
Modes of entry: A firm desirous of entering into international business has several options available to it. These range from exporting/importing to contract manufacturing abroad, licensing and franchising, joint ventures and setting up wholly owned subsidiaries abroad. Each entry mode has its own advantages and disadvantages which the firm needs to take into account while deciding as to which mode of entry it should prefer.
The important features of international business are as follows:
a)      Large scale operation: In international business, all the operations are conducted on a very huge scale. Production International Business and marketing activities are conducted on a large scale. It first sells its goods in the local market. Then the surplus goods are exported.
b)      Integration of economies: International business integration (combines) the economies of many countries. This is because it uses finance from one country, labour from another country, and infrastructure from another country. It designs the product in one country, produces its part in many different countries and assembles the product in another country. It sells the product in many countries, i.e. in the international market.
c)       Dominated by developed countries and MNCs: International business is dominated by developed countries and Japan dominated (fully control) foreign trade. This is because they have large financial and other resources. They also have the best technology and research and development (R & D). They have highly skilled employees and managers because they give very high salaries and other benefits. Therefore, they produce good quality goods and services at low prices. This helps them to capture and dominate the world market.
d)      Benefits to participating countries: International business gives benefits to all participating countries. However, the developed (rich) countries get the maximum benefits. The developing (poor) countries also get benefits. They get foreign capital and technology. They get rapid industrial development of the developing countries. Therefore, developing countries open up their economies through liberal economic policies.
e)      Keen competition: International business has to face keen (too much) competition in the world market. The competition is between unequal partners i.e. developed and developing countries. In this keen competition, developed countries and their MNC s are in a favourable position because they produce superior quality goods and services at very low prices. Developed countries also have many contacts in the world market. So, developing countries find it very difficult to face competition from developed countries.
f)       Special role of science and technology: International business gives a lot of importance to science and technology. Science and Technology (S & T) help the business to have large-scale production. Developed countries use high technologies. Therefore, they dominate global business. International business helps them to transfer such top high-end technologies to the developing countries.
g)      International restrictions: International business faces many restrictions on the inflow and outflow of capital, technology and goods. Many governments do not allow international businesses to enter their countries. They have many trade block, tariff barriers, foreign exchange restrictions, etc. All this is harmful to international business.
h)      Sensitive nature: The international business is very sensitive in nature. Any changes in the economic policies, technology, political environment, has a huge impact on it. Therefore, international business must conduct marketing research to find out and study these changes. They must adjust their business activities and adapt accordingly to survive changes.
Problems of International business: The major problems faced are as follows:
1. Different currencies: Every country has its own currency. So importer has to make payment in the currency of exporter’s country.
2. Legal Formalities: International business is subject to a large number of legal formalities and restrictions.
3. Distance Barriers: Due to large distance between countries, it is difficult to establish quick and personal contacts between traders from different countries.
4. Language Barrier: Due to different languages in different countries, it becomes difficult for traders to understand the terms and conditions of the contract.
5. Difference in Laws: International business transactions are subject to laws, rule and regulations of multiple countries. International business transactions are subject to laws, rule and regulations of multiple countries.
6. Information Gap: It is difficult to obtain accurate information about foreign markets and about the financial position of foreign merchants.
International vs Domestic business
Conducting and managing international business operations is more complex than undertaking domestic business. Differences in the nationality of parties involved, relatively less mobility of factors of production, customer heterogeneity across markets, variations in business practices and political systems, varied business regulations and policies, use of different currencies are the key aspects that differentiate international businesses from domestic business. These, moreover, are the factors that make international business much more complex and a difficult activity. Some of the differences in Domestic and International business are given below:
Employees, suppliers, middleman, shareholders and partners are usually citizens of the same country.
Employees, suppliers, middleman, shareholders and partners are from different nations.
Mobility of factors of production is more within a country.
Mobility of factors of production is relatively less.
It is subject to political system and risks of a single country.
It is subject to political system and risks of different countries.
Business practices, taxation system and policies of a single country are applicable.
Business practices, taxation system and policies vary considerably across countries.
Mainly currency of domestic country is involved.
Currencies of more than one country are involved in international business.

International Business Environment
The international business environment can be defined as the environment in different sovereign countries, with factors exogenous to the home environment of the organization, influencing decision-making on resource use and capabilities.
International business environment refers to totality of all the factors viz. geographic, economic, financial, socio-cultural, political, legal, technological and ecological which are external to and beyond the control of individual business enterprises. International business environment is more complex than the business environment because international business environment consists of foreign and global factors, which are external to domestic environment. A firm is generally familiar with the factors operating at the national level but a firm has to be aware of various factors operating in a country of trading partner. Thus, international business environment is sum total of domestic, foreign and global environments.
International business environment consists of a number of micro-level and macro-level factors operating at domestic level, foreign level and global level. Accordingly various factors constituting business environment may be grouped as under:
(i) Domestic Environment
(ii) Foreign Environment
(iii) Global Environment
Elements of International Business Environment
The home-based or the domestic export expansion measures are necessarily related to the conditions prevailing in possible markets. An Exporter has to overcome various constraints and adapt plans and operations to suit foreign environmental conditions. The main elements of foreign environment affecting marketing activities of a firm in a foreign country consist of the following.
A) POLITICAL DIMENSION: Nations greatly differ in their political environment. Govt. policies, regulations and control mechanisms regarding the countries, foreign trade and commercial relations with other countries or groups of countries. At least four factors should be considered in deciding whether to do business in a particular country. They are
1) Attitudes towards International Buying:  Some nations are very receptive, indeed encouraging, to foreign firms, and some others are hostile. For e.g.: Singapore, UAE and Mexico are attracting foreign investments by offering investment incentives, removal of trade barriers, infrastructure services, etc.
2) Political Stability:  A country's future and stability is another important issue. Government changes hands sometimes violently. Even without a change, a region may decide to respond to popular feeling. A foreign firm's property may be seized; or its currency holdings blocked; or import quotas or new duties may be imposed. When political stability is high one may go for direct investments. But when instability is high, firms may prefer to export rather than involve in direct investments. This will bring in foreign exchange fast and currency convertibility is also rapid.
3) Monetary Regulations: Sellers want to realise profits in a currency of value to them. In best situations, the Importer pays in the seller's currency or in hard world currencies. In the worst case they have to take the money out of the host country in the form of relatively unmarketable products that they can sell elsewhere only at a loss. Besides currency restrictions, a fluctuating exchange rate also creates high risks for the exporter.
4) Government Bureaucracy: It is the extent to which the Government in the host country runs an efficient system for assisting foreign companies: efficient customs handling, adequate market information, etc. The problem of foreign uncertainty is thus further complicated by a frequently imposed "alien status", this increases the difficulty of properly assessing and forecasting the dynamic international business. The political environment offers the best example of the alien status.
A foreign political environment can be extremely critical; a shift in Government often means sudden changes in attitudes that can result in expropriation, expulsion, or major restrictions in operations. The fact is that a foreign company is foreign and thus always subject to the political whim to a greater degree than a domestic firm.
B) CULTURAL ENVIRONMENT: The manner in which people consume their priority of needs and the wants they attempt to satisfy, and the manner in which they satisfy are functions of their culture which moulds and dictates their style of living. This culture is the sum total of knowledge, belief, art, morals, laws, customs and other capabilities acquired by humans as members of the society. Since culture decides the style of living, it is pertinent to study it especially in export marketing. e.g. when a promotional message is written, symbols recognizable and meaningful to the market (the culture) must be used. When designing a product, the style used and other related marketing activities must be culturally acceptable.
C) ECONOMIC ENVIRONMENT: In considering the international market, each Exporter must consider the importing country's economy. Two economic characteristics reflect the country's attractiveness as an export market. They are the country's industrial structure and the country's income distribution by employment industrialization and socio economic justices.
D) LEGAL ENVIRONMENT: The legal dimension of international Business environment includes all laws and regulations regarding product specification and standards, packaging and labeling, copyright, trademark, patents, health and safety regulations particularly in respect of foods and drugs. There are also controls in promotional methods, price control, trade margin, mark-up, etc., These legal aspects of marketing abroad have several implications which an exporting firm needs to study closely.
Meaning of Globalisation
Globalizations are the outcome of the policies of liberalisation and privatisation. Globalisation is generally understood to mean integration of the economy of the country with the world economy, it is a complex phenomenon. It is an outcome of the set of various policies that are aimed at transforming the world towards greater interdependence and integration. It involves creation of networks and activities transcending economic, social and geographical boundaries.
Globalisation involves an increased level of interaction and interdependence among the various nations of the global economy.  Physical geographical gap or political boundaries no longer remain barriers for a business enterprise to serve a customer in a distant geographical market.
In simple words, The term globalization can be defined as the opening one's economy toward the world economy. It means to integrate the domestic economy with world economy. The govt. of India under the prime minister ship of P. V Narasimha introduced liberalisation, privatisation and globalization during 1991 .Due to globalization the multinational corporations have been very popular. These corporations transact their business activities more than one countries.
Globalisation and India
Indian economy had experienced major policy changes in early 1990s. The new economic reform, popularly known as, Liberalization, Privatization and Globalization (LPG model) aimed at making the Indian economy as fastest growing economy and globally competitive. The series of reforms undertaken with respect to industrial sector, trade as well as financial sector aimed at making the economy more efficient.
With the onset of reforms to liberalize the Indian economy in July of 1991, a new chapter has dawned for India and her billion plus population. This period of economic transition has had a tremendous impact on the overall economic development of almost all major sectors of the economy, and its effects over the last decade can hardly be overlooked. Besides, it also marks the advent of the real integration of the Indian economy into the global economy.
This era of reforms has also ushered in a remarkable change in the Indian mindset, as it deviates from the traditional values held since Independence in 1947, such as self reliance and socialistic policies of economic development, which mainly due to the inward looking restrictive form of governance, resulted in the isolation, overall backwardness and inefficiency of the economy, amongst a host of other problems. This, despite the fact that India has always had the potential to be on the fast track to prosperity.
Benefits of Globalisation
a)      Increased Competition: One of the most visible effects is the improved quality of products due to global competition. Customer service and the ‘customer is the king’ approaches to production have led to improved quality of products and services. As the domestic companies have to fight out foreign competition, they are compelled to raise their standards and customer satisfaction levels in order to survive in the market.
b)      Employment: With globalisation, companies are moving towards the developing countries and hence generated employment for them. It has given an opportunity to invest in the emerging markets and tap up the talent which is available there. In developing countries, there is often a lack of capital which hinders the growth of domestic companies and hence creates unemployment. In such cases, due to global nature of the businesses, people of developing countries too can obtain gainful employment opportunities.
c)       Investment and Capital Flows: A lot of companies have directly invested in developing countries like Brazil and India by starting production units. Companies which perform well attract a lot of foreign investment and thus push up the reserve of foreign exchange.
d)      Spread of Technical Know-How: While it is generally assumed that all the innovations happen in the Western world, the know-how also comes into developing countries due to globalisation. Without it, the knowledge of new inventions, medicines would remain cooped up in the countries that came up with them and no one else would benefited. The spread of know –how can also be expanded to include economic and political knowledge, which too has spread far and wide.
e)      Spread of Culture: Not all good practices were born in one civilization. The world that we live in today is a result of several cultures coming together. People of one culture, if receptive, tend to see the flaws in their culture and pick up the culture which is more correct or in tune with the times. Societies have become larger as they have welcomed people of other civilization and backgrounds and created a whole new culture of their own. Cooking styles, languages and customs have spread all due to globalization. The same can be said about movies, musical styles and other art forms. They too have moved from one country to another, leaving impression on a culture which has adopted them.
1)      Impact of Globalization on Agricultural Sector
Agricultural Sector is the mainstay of the rural Indian economy around which socio-economic privileges and deprivations revolve and any change in its structure is likely to have a corresponding impact on the existing pattern of Social equity. The liberalization of India’s economy was adopted by India in 1991. Facing a severe economic crisis, India approached the IMF for a loan, and the IMF granted what is called a ‘structural adjustment’ loan, which is a loan with certain conditions attached which relate to structural change in the economy. Essentially, the reforms sought to gradually phase out government control of the market (liberalization), privatize public sector organizations (privatization), and reduce export subsidies and import barriers to enable free trade Globalization has helped in:
Ø  Raising living standards,
Ø  Alleviating poverty,
Ø  Assuring food security,
Ø  Generating buoyant market for expansion of industry and services, and
Ø  Making substantial contribution to the national economic growth.
2)      Impact of Globalization on Indian trade and industry:
Globalization has its impact on India which is a developing country. The positive impact of globalization can be analysed as follows:
1. Access to Technology: Globalization has drastically, improved the access to technology. Internet facility has enabled India to gain access to knowledge and services from around the world. Use of Mobile telephone has revolution used communication with other countries.
2. Growth of international trade: Tariff barriers have been removed which has resulted in the growth of trade among nations. Global trade has been facilitated by GATT, WTO etc.
3. Increase in production: Globalization has resulted in increase in the production of a variety of goods. MNCs have established manufacturing plants all over the world.
4. Employment opportunities: Establishment of MNCs have resulted in the increase of employment opportunities.
5. Free flow of foreign capital: Globalization has encouraged free flow of capital which has improved the economy of developing countries to some extent. It has increased the capital formation.
6. Products of superior quality: Products of superior quality are available in the market due to increased competition, efficiency and productivity of the businesses  and this leads to increased consumer satisfaction.
7. Free flow of finance enable the banking and financial institutions in a country to fulfill financial requirements through internet and electronic  transfers easily and help businesses to flourish.
3)      Impact on Financial Sector
Reforms of the financial sector constitute the most important component of India’s programme towards economic liberalization. The recent economic liberalization measures have opened the door to foreign competitors to enter into our domestic market. Innovation has become a must for survival. Financial intermediaries have come out of their traditional approach and they are ready to assume more credit risks. As a consequence, many innovations have taken place in the global financial sectors which have its won impact on the domestic sector also. The emergences of various financial institutions and regulatory bodies have transformed the financial services sector from being a conservative industry to a very dynamic one. In this process this sector is facing a number of challenges. In this changed context, the financial services industry in India has to play a very positive and dynamic role in the years to come by offering many innovative products to suit the varied requirements of the millions of prospective investors spread throughout the country. Reforms of the financial sector constitute the most important component of India’s programme towards economic liberalization.
Growth in financial services (comprising banking, insurance, real estate and business services), after dipping to 5.6% in 2003-04 bounced back to 8.7% in 2004-05 and 10.9% in 2005-06 The momentum has been maintained with a growth of 11.1% in 2006-07. Because of Globalization, the financial services industry is in a period of transition. Market shifts, competition, and technological developments are ushering in unprecedented changes in the global financial services industry.
4)      Impact on Export and Import
India’s Export and Import in the year 2001-02 was to the extent of 32,572 and 38,362 million respectively. Many Indian companies have started becoming respectable players in the International scene. Agriculture exports account for about 13 to 18% of total annual of annual export of the country. In 2000-01 Agricultural product valued at more than US $ 6 million were exported from the country 23% of which was contributed by the marine products alone. Marine products in recent years have emerged as the single largest contributor to the total agricultural export from the country accounting for over one fifth of the total agricultural exports. Cereals (mostly basmati price and non-basmati rice), oil seeds, tea and coffee are the other prominent products each of which accounts from nearly 5 to 10% of the country’s total agricultural exports.
The implications of globalization for a national economy are many. Globalization has intensified interdependence and competition between economies in the world market. This is reflected in Interdependence in regard to trading in goods and services and in movement of capital. As a result domestic economic developments are not determined entirely by domestic policies and market conditions. Rather, they are influenced by both domestic and international policies and economic conditions. It is thus clear that a globalizing economy, while formulating and evaluating its domestic policy cannot afford to ignore the possible actions and reactions of policies and development in the rest of the world. This constrained the policy option available to the government which implies loss of policy autonomy to some extent, in decision-making at the national level.
Negative effect of globalization:
Negative effects of globalization on Indian industry have been: 
1. Rise in demand for labor and the rise in wage rates leading to some increase in costs. 
2. Weakening power of the trade unions over labor in emerging industries and growth sectors like IT, entertainment, internet and mobile services, airlines, banking, insurance, banking services. 
3. Too much competition in the market leading to continuous pressure on raising productivity, enhancing consumer service, improving product quality, in order to survive. 
4. Voluntary retirement for many public sector units. 
5. Too many sales person chasing customers. 
6. Too many cars on the road and traffic congestion. 
7. Growth of consumerism. 
8. Instability in profits due to too much choice among customers. 
9. Shortage power and infrastructure affecting industrial expansion. 
10. Closure of inefficient units supplying costly and shoddy products and loss of jobs. 
11. Two years of large increase in textile industry jobs followed by large loss of jobs due to Rupee appreciation making Indian industry uncompetitive. 
12. Problems of dealing with uncertainty in the international market in terms of demand, supply and prices., 
 The Indian business suffers from many disadvantages in respect of globalization of business. The important problems are following:
a)      Government Policy & Procedures: Government policy procedure in India is among the most complex, confusing and cumbersome in the world. Even after the much publicized liberalization, they do not present a very conducive situation. Government policy and the bureaucratic culture in India in this respect are not that encouraging.
b)      High Cost: High cost of many vital input and factors like raw material and intermediates, power, finance, infrastructure facilities like port etc. tent reduce the international competitiveness of the Indian business.
c)       Poor Infrastructure: Infrastructure in India is very inadequate and insufficient and they for very costly this is the serious problem affecting the growth and competitiveness.
d)      Resistance to Change:  There are several socio-political factors which resist change and this comes in the way of modernization, rationalization and efficiency improvement. Technological resist due to fear of unemployment. The extend labors employed by Indian industry is alarming because of labors of production is low and this may come in offsets the advantages of cheap labors.
e)      Poor quality image: Due to various reasons, the quality of many Indian products is poor. Even when the quality is good, the poor quality image, India has become a handicap.                           
f)       Supply problem: Due the various reason like low production, infrastructure like power, port facilities.
g)      Small Size: Because of the small size and the low level of resources, in many cases Indian firms are not able to compete with the giants of other counties. Even the largest   Indian companies are small compared to the multinational giants.
h)      Limited R&D and marketing Research: Marketing research and R&D in other areas are vital inputs for development of international business. However, these are poor in Indian business. Expenditure on R&D in Indian is less than one percentage of the GNC while it is two to three percent in most of the developed counties. In 1994-95, Indian’s per capital R&D expenditure was less than $3 when it was between $100 and $825 for most of the developed nation.
i)        Growing competition: The competition is growing not only from the firm in the developed countries but also from the developing country firms. Indeed, the growing competition from the developing country firms is a serious challenge to Indian’s International business.
j)        Trade Barriers: Although the tariff barriers to trade have been progressively reduced thanks to the GATT/WTO, the non-tariff barriers have been increasing, particularly in the developed counties.
International Economic Grouping
After the Second World War, when the entire economy of the world was destroyed and a transformation was going on from the wartime economy to peacetime economy, the world leaders have started to give thought on the line of increasing the world trade. After the two world wars the countries of the world erected tariff wall to reduce import. This ultimately resulted in fall in trade. Secondly, the need was felt for an international institution which will monitor and act as the regulator of the world trade. All these come out in the form of General Agreement on Trade and Tariffs (GATT). Later on it was replaced by world Trade Organization (WTO). At the regional level also several groups emerges to promote cooperation and trade at the regional level. Some of these are ASEAN and SAARC. After the World War II, in order to revive the international monetary system a necessity was felt for an international financial institution to support the economies which were damaged due to the war and also to help the countries to run their economy efficiently. So, two international financial institutions came out which are International Monetary Fund and World Bank.
GATT / World Trade Organisation and its Impact on Indian economy
The first half of the 20th century was marked by a major worldwide economic depression that occurred between the two world wars and that all but destroyed most of the industrialized nations. International trade got a setback when after the First World War countries erected high tariff walls and raised other tariff barriers to intolerable heights. All this resulted in to the great depression. This was also one of the fundamental reasons of the World War II.
After the Second World War leaders creates General Agreement on Tariffs and Trade (GTTO), to avoid the repletion of the same. GATT was a forum for the member countries to negotiate a reduction of tariffs and other barriers to trade. Countries including India signed the GATT. The original agreement provides a process to reduce tariffs and created an agency to serve as a watchdog over world trade.
GATT came into existence with effect from 1st January 1948 and remained in force till December 1994. Various rounds of negotiations have taken place under the auspices of GATT to reduce tariff and non-tariff barriers. The last one, known as the Uruguay Round, was the most comprehensive one in terms of coverage of issues, and also the lengthiest one from the point of view of duration of negotiations which lasted over a period of seven years from 1986 to 1994.
One of the key achievements of the Uruguay Round of GATT negotiations was the decision to set up a permanent institution for looking after the promotion of free and fair trade amongst nations. Consequent to this decision, the GATT was transformed into World Trade Organisation (WTO) with effect from 1st January 1995. The head quarters of WTO are situated at Geneva, Switzerland. Establishment of WTO, thus, represents the implementation of the original proposal of setting up of the ITO as evolved almost five decades back.
Though, WTO is a successor to GATT, it is a much more powerful body than GATT. It governs trade not only in goods, but also in services and intellectual property rights. Unlike GATT, the WTO is a permanent organisation created by an international treaty ratified by the governments and legislatures of member states. It is, moreover, a member driven rule-based organisation in the sense that all the decisions are taken by the member governments on the basis of a general consensus. As the principal international body concerned with solving trade problems between countries and providing a forum for multilateral trade negotiations, it has a global status similar to that of the IMF and the World Bank. India is a founding member of WTO. As on 11th December 2005, there were 149 members in WTO.
Objectives of WTO: WTO lays down the following objectives:
a)      Relation in the field of trade shall be conducted with a view to raising standards of living, ensuring full employment and large and steadily growing volume of real income and effective demand, and expanding the production and trade in goods and services.
b)      To allow for the optimal use of the world’s resources in accordance with the objective of sustainable development.
c)       To make positive efforts designed to ensure that developing countries especially the least developed among them, secure a share in the growth in international trade.
d)      To achieve these objectives by entering into reciprocal and mutually advantageous arrangements directed towards substantial reduction of tariffs and other barriers to trade and the elimination of discriminatory treatment in international trade relations.
e)      To develop an integrated, more viable and durable multilateral trading system.
f)       To ensure linkages between trade policies, environment policies and sustainable development.
Functions of WTO: The following are the functions of the WTO:
a)      It facilitates the implementation, administration and operation of the objectives of the Agreement and of the Multilateral Trade Agreements.
b)      It provides the framework for the implementation, administration and operation of the multilateral Trade Agreements relating to trade in civil aircraft, government procurement, trade in diary products and bovine meat.
c)       It provides the forum for negotiations among its members.
d)      It administers the Understanding on Rules and Procedures governing the Settlement of Disputes of the Agreement.
e)      It cooperates with the IMF and the World Bank and its affiliated agencies with a view to achieving greater coherence in global economic policy-making.
Implications for India: After the Uruguay Round, India was one of the first 76 Governments that became member of the WTO on its first day. Different views have been expressed in support and against our country becoming a member of the WTO.
Favourable Factors
a)      Benefits from reduction of tariffs on exports.
b)      Improved prospects for agricultural exports because the prices of agricultural products in the world market will increase due to reduction in domestic subsidies and barriers to trade.
c)       Likely increase in the exports of textiles and clothing due to the phasing out of MFA by 2005.
d)      Advantages from greater security and predictability of the international trading system.
e)      Compulsions imposed on India to be competitive in the world market.
Unfavourable Factors
a)      Tariff reductions on goods of export interest to India are very small.
b)      Less prospects of increase in agricultural exports due to the limited extent of agricultural liberalisation.
c)       There will be hardly any liberalisation of our textile exports during the next 10 years.
d)      India will be under pressure to liberalize the services industries.
e)      There will be only marginal liberalisation to the movement of labour services in which it is competitive.
f)       Increased outflows of foreign exchange due to commitments undertaken in the fields of TRIPS, TRIMS and services.
g)      Technological dependence on foreign firms will increase.
h)      Only a few large firms or transnational corporations may benefit and smaller firms may disappear.
IMF and Its Contribution in Indian Economy
Introduction to IMF: The IMF was established on December 27, 1945 in Washington on the recommendations of Bretton Woods Conference. But it started working on March 1, 1947. The fund has 185 member countries accounting for more than 80 per cent of total world production and 90 per cent of world trade. The purpose of the Fund is to promote international monetary cooperation, to facilitate the expansion and balanced growth of international trade, to promote exchange stability and to prevent unnecessary exchange depreciations, to remove all exchange controls and restrictions and to establish multi-convertibility of all currencies and lastly to help member countries with funds to correct maladjustments in their balance of payments. The fund of the IMF is SDRs 216.75 billion and to replenish its resources it borrows from the world financial markets and member countries. IMF’s own fund is contributed by member countries.
IMF has played an importance role in Indian economy. IMF had provided economic assistance from time to time to India and has also provided appropriate consultancy in determination of various policies in the country. India is the founder member of IMF. It played a significant role in the formulation of Fund Policies. The Finance Minister is ex-officio Governor in IMF Board of Governors. Till 1970, India was among the first five nations having the highest quota with IMF and due to this status India was allotted a permanent place in Executive Board of Directors.
India has taken loans in foreign currencies from IMF or improving its balance of payments imbalances. India has also taken technical consultancy for solving its internal economic problems. The expert groups of the IMF have visited India on various occasions.
Objective of IMF: The objective for which IMF was established has been described as following:
1)         Promote International Monetary Co-operation: The main objective of the fund was to promote international monetary co-operation through a permanent institution which provides that machinery for consultation and collaboration on international monetary problems.
2)         Balanced Growth of International Trade: The one of the main objective of the Fund was to facilities the expansion and balanced growth of international trade and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development productive resources of all members.
3)         Stability of Exchange Rates: Another important objective of IMF was to promote exchange stability, to maintain orderly exchange arrangements among members and to avoid competitive exchange depreciation.
4)         Establishment of Multilateral trade and payment system: Another objective of the establishment of IMF was to assist the establishment of the multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade.
5)         To develop confidence to member: Another objective of IMF was to give confidence to members by making the funds, resources available to them under adequate safeguards, thus providing with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.
6)         Removing Deficit of balance of Payments: Another objective of the establishment of IMF was removal of the deficit of balance of payments also. IMF makes arrangement of necessary loans from foreign exchange reserves for removing the deficit of balance of payments.
In addition to this India also got the following benefits of becoming the IMF members:
1. Independence of the Indian Rupee: Before the establishment of the IMF, the Indian rupee was linked with the British Pound Sterling. But Indian rupee has become independent after the establishment of IMF. Its value is expressed in terms of gold. It is not determined by the Pound Sterling. It means that Indian rupee is easily convertible into the currency of any other country.
2. Membership of the World Bank: India has become a member of the World Bank also by virtue of its membership of the Fund. As a result, India got several loan facilities from the World Bank for the development purposes.
3. Availability of Foreign Currencies: The Government of India has been purchasing foreign currencies from the Fund from time to time to meet the requirements of development activities. The large amount of availability of foreign currencies has greatly promoted the economic development of the country.
4. Reputation in International Circle: India is one of those six countries which have occupied a special place in the Board of Directors of the Fund. Thus, India had played a creditable role in determining the policies of the Fund. This has increased India’s prestige in the international circles. India takes keen interest in the formulation of Fund’s policies.
5. Guidance and Advice: Being member of the Fund, India got the expert opinion from the Fund for solving its economic problems. The attitude of the Fund towards India has always remained sympathetic. The Fund has given valuable advice to the Government of India with regard to the financing of the Five-Year Plans.
6. Timely Help: India has received timely help from the Fund to eliminate the deficit on its balance of payments. The Fund granted loans to meet the financial difficult is arising out of the Indo-Pak conflict of 1965 and 1971. Thus, the fund has given timely help to solve economic crisis.
7. Freedom from Sterling: Indian rupee was convertible into other currencies through the medium of sterling before becoming the member of the fund. With the fixation of paper value of the rupee in gold, Indian currency is now freely convertible into any other currency.
8. Sale and Purchase of Foreign Exchange: Fund has entrusted the sale and purchase of foreign exchange worth more than Rs. 2 lakh to Reserve Bank of India. The latter cannot enter into any transaction of foreign exchange that is of the value of less than Rs. 2 lakh.
9. Economic Consultation: In the financial management of Five- Year Plans, IMF has given valuable advice to Government of India and to suggest measures for its economic development.
10. Help during Emergency: India got a large amount of financial assistance from the Fund to solve its economic crisis arising due to natural calamities like flood, earthquakes, famines etc.
World Bank and Its Impact on Indian Economy
Introduction: A need arises to finance various projects in various countries to promote the development of economically backward regions. The United States and other countries have established a variety of development banks whose lending is directed to investments that would not otherwise be funded by private capital. The investments include dams, roads, communication systems, and other infrastructural projects whose economic benefits cannot be computed and/or captured by private investors, as well as projects, such as steel mills or chemical plants, whose value lies not only in the economic terms but also, significantly in the political and social advantages to the nation.
The loans generally are medium-term to long-term and carry concessional rates. Even though most lending is done directly to a government, this type of financing has two implications for the private sector. First, the projects require goods and services which corporations can produce. Secondly, by establishing an infrastructure, new investment opportunities become available for multinational corporations.
The World Bank or the International Bank for Reconstruction and Development (IBRD) was established in 1945 under the Bretton Woods Agreement of 1944. An International Monetary and Financial Conference was held at Bretton Woods, New Hampshire during July 1-22, 1944. The main purpose of the conference was finalisation of the Articles of Association of IMF and establishment of an institution for the reconstruction of the war shattered world economies. Thus, the conference has given birth to World Bank or International Bank for Reconstruction and Development (IBRD). World Bank was established to provide long-term assistance for the reconstruction and development of the economies of the member countries while IMF was established to provide short term assistance to correct the balance of payment disequilibrium.
There are the four basic objectives of the World Bank’s funding strategy:
a)      To make sure availability of funds in the market.
b)      To provide the funds at the lowest possible cost to the borrowers through appropriate currency mix of its borrowing and opting to borrow when interest rates are expected to rise.
c)       To control volatility in net income and overall loan changes.
d)      To provide an appropriate degree of maturity transformation between its lending and the borrowing. Maturity transformation depicts the Bank’s capacity to lend for longer period than it borrows.
Functions and objectives of World Bank
a)      To assist in the reconstruction and development of the territories of its members by facilitating the investment of capital for productive purposes.
b)      To promote private foreign investment by means of guarantee of participation in loans and other investments made by private investors and, when private capital is not available on reasonable terms, to make loans for productive purposes out of its own resources or from funds borrowed by it.
c)       To promote the long term balanced growth of international trade and the maintenance of equilibrium in balance of payments by encouraging international investment for the development of the productive resources of members.
d)      To arrange loans made or guaranteed by it in relation to international loans through other channels so that more useful and urgent projects, large and small alike, will be dealt first.
India and the World Bank
India is the founder member of the Bank and held a permanent seat for number of years on its Board of Executive Directors. India is one of the largest receivers of assistance since 1949. Upto June 2002, cumulative lending’s of the World Bank to India amounted to $ 26.69 billion in 187 loans. The total amount borrowed by India from the World Bank and the IDA till June 2002 amounted to $ 58.54 billion in 434 loans. This amounted to 11.6 per cent of the total loans and credits approved by the World Bank groups. During 2001-02, India received $ 893 million from the World Bank accounting for 11.22 per cent of its total loans. India is helped by the World Bank in its planned economic development through granting loans, conducting field surveys, sending study terms and missions and through rendering expert advice. The Bank also provides training to Indian personnel at EDI. It also helped India to solve its river water dispute with Pakistan.
The benefits desired by India from the World Bank are:
a)      India has received a lot of assistance from the World Bank for its development projects.
b)      Aid India Club was founded in 1950 by the efforts of the World Bank with a view to help India. This club is now called India Development Forum. This Forum had decided to give loans amounting to $ 600 crore to India for implementing its structural adjustment.
c)       The bank’s role in solving the Indus water dispute between India and Pakistan has been invaluable.
d)      General loans have also been granted by the World Bank to India, to be utilised as per its own discretion.
e)      As a member of the World Bank, India has become the members of International Finance Corporation, International Development Association and Multilateral Investment Guarantee Agency also.
f)       India has received technical assistance from time to time from the World Bank for its various projects. The Expert Team of the Bank has visited India and given valuable suggestions also.
g)      The massive population of India has always created problems in the economic development of the country. World Bank has been helping India in the population control programmes and urban development. For this purpose loans amounting to $ 495 crore have also been given to India.
h)      World Bank has been giving financial assistance to NGOs operating in India e.g. Leprosy Elimination, Education Projects, Child development service projects etc.
On the other hand, critics argue that the World Bank have endangered the economic freedom of India. The basic points of criticism are as follows:
a)      The World Bank has laid a great deal of emphasis on measures of economic liberalisation and more free play of market forces.
b)      A lot of stress has been laid on going very slow on the setting up of public sector enterprises including financial intermediaries and encouraging private sector.
c)       India’s dependence on World Bank has been increasing which is adversely affecting its economic freedom.
d)      The attitude of World Bank reflects the preference for free enterprise and a market oriented economy. It shows dissatisfaction with the general performance of economies which are based on planning and regulation. At different occasions the Bank has tried to undermine the Significance of our Planning Commission.
e)      The devaluation of Indian rupee in 1966 and 1991 was done at the insistence of the World Bank only.
India’s main problem till now has been the government’s incapacity to act rightly, firmly and effectively in time, on account of being more emotional to set ideologies and compromising attitude to safeguard the political party’s interest more than the national interest.
SAFTA is an abbreviation for the South Asian Free Trade Area. It is a proposed free trade agreement between the seven members of the SAARC group. These include Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. The ultimate aim of Safta will be to put in place a full-fledged South Asia Economic Union on the lines of the EU. Among its aims are promoting and enhancing mutual trade and economic cooperation by eliminating barriers in trade, promoting conditions of fair competition in the free trade area, ensuring equitable benefits to all and establishing a framework for further regional cooperation to expand the mutual benefits of the agreement.
It could lead to enhancement of foreign investment among Saarc nations. The visible spurt in foreign investment within Asean countries and the increase in investments by India in Sri Lanka and vice versa following the India-Sri Lanka FTA bear testimony to the potential of such agreements in boosting investments.
The agreement can be structured to ensure that such investments don’t harm the domestic industries of member-nations. RTAs, like the proposed Safta, can also catalyse beneficial industrial restructuring in member-countries through cross-border corporate marriages and acquisitions.

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