Business Environment Solved Papers: November' 2018

2018 (November)
Commerce (General/Speciality)

The figures in the margin indicate full marks for the questions
Full Marks: 80
Pass Marks: 24

1. Answer as directed:                                                   1x8=8
a)         In which year the first Industrial Policy of India was introduced?             Ans: 1991

b)         Name the Act, which was passed in India in 2002 to ensure free and fair competition in the market. Ans: Competition Act’ 2002
c)          Write the full form of FDI.                 Ans: Foreign Direct Investment
d)         Money market deals in short-term funds. (Fill in the blank)
e)         Mention one hindrance of economic growth of India.         Ans: Increasing Population of our country
f)          Write the full form of IBRD.                              Ans: International Bank for Reconstruction and Development
g)         Coexistence of public and private sectors is one of the main features of Indian business environment.  (Write True or False)    
h)         During prosperity, price of commodity increases.  (Write True or False)
2. Write short notes on:                                               4x4=16
a)      Importance of business environment.
Ans: Importance of Business Environment
There is a close and continuous interaction between the business and its environment. This interaction helps in strengthening the business firm and using its resources more effectively. As stated above, the business environment is multifaceted, complex, and dynamic in nature and has a far-reaching impact on the survival and growth of the business. To be more specific, proper understanding of the social, political, legal and economic environment helps the business in the following ways:
1.       Determining Opportunities and Threats: The interaction between the business and its environment would identify opportunities for and threats to the business. It helps the business enterprises to exploit business opportunities and face the threat associated with such opportunities. For example, Maruti Udyog became the leader in the small car market because it was the first to recognize the need for small cars in India.
2.       Continuous Learning: Environmental analysis makes the task of managers easier in dealing with business challenges. The managers are motivated to continuously update their knowledge, understanding and skills to meet the predicted changes in realm of business.
3.       Image Building: Environmental understanding helps the business organisations in improving their image by showing their sensitivity to the environment within which they are working. For example, in view of the shortage of power, many companies have set up Captive Power Plants (CPP) in their factories to meet their own requirement of power.
4.       Ensures Optimum Utilization of Resources: The study of business environment is needed as it ensures optimum use of resources available. For this, the study of economic and technological environment is useful. Such study enables organization to take full benefit of government policies, concessions provided, and technological developments and so on.
5.       Giving Direction for Growth: The interaction with the environment leads to opening up new frontiers of growth for the business firms. It enables the business to identify the areas for growth and expansion of their activities.
b)      Role of the private sector in India.
Ans: Role of Private Sector:
1. Improved Efficiency: Private sector have a profit incentive to cut costs and be more efficient. If we work for a government run industry, managers do not usually share in any profits. However, a private firm is interested in making profit and so it is more likely to cut costs and be efficient.
2. Lack of Political Interference: It is argued that governments make poor economic managers. They are motivated by political pressures rather than sound economic and business sense.
3. Short Term view: A government many think only in terms of next election. Therefore, they may be unwilling to invest in infrastructure improvements which will benefit the firm in the long term because they are more concerned about projects that give a benefit before the election.
4. Shareholders: It is argued that a private firm has pressure from shareholders to perform efficiently. If the firm is inefficient then the firm could be subject to a takeover. A government owned firm doesn’t have this pressure and so it is easier for them to be inefficient.
5. Increased Competition: Often privatisation of state owned monopolies occurs alongside deregulation – i.e. policies to allow more firms to enter the industry and increase the competitiveness of the market. It is this increase in competition that can be the greatest motivation for improvements in efficiency. However, privatisation doesn’t necessarily increase competition, it depends on the nature of the market.
c)       Objectives of the World Bank.
Ans: 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.
d)      Causes of industrial sickness.
Ans: 1) Internal Cause for sickness: Internal causes are those which are within the control of management.  This sickness arises due to internal disorder in the areas justified as following:
a) Lack of Finance:  This including weak equity base, poor utilization of assets, inefficient working capital management, absence of costing & pricing, absence of planning and budgeting and inappropriate utilization or diversion of funds.
b) Bad Production Policies :  The another very important reason for sickness is wrong selection of site which is related to production, inappropriate plant & machinery, bad maintenance of Plant & Machinery, lack of quality control, lack of standard research & development and so on.
c) Marketing and Sickness: This is another part which always affects the health of any sector as well as SSI.  This including wrong demand forecasting, selection of inappropriate product mix, absence of product planning, wrong market research methods, and bad sales promotions. 
2) External causes for sickness:
a) Personnel Constraint: The first for most important reason for the sickness of small scale industries are non availability of skilled labour or manpower wages disparity in similar industry and general labour invested in the area.
b) Marketing Constraints: The second cause for the sickness is related to marketing.  The sickness arrives due to liberal licensing policies, restrain of purchase by bulk purchasers, changes in global marketing scenario, excessive tax policies by govt. and market recession.
c) Production Constraints:  This is another reason for the sickness which comes under external cause of sickness.  This arises due to shortage of raw material, shortage of power, fuel and high prices, import-export restrictions.
3. (a) What do you mean by ‘internal’ and ‘external’ business environment? Briefly discuss the external components of business environment.                                 2+2+10=14
Ans: Factors (Components) of business environment
On the basis of extent of intimacy with the firm, the environmental factors may be classified into different levels or types. There are broadly two types of environment, the internal environment, i.e. factors internal to the firm and the external environment i.e. factors external to the firm which have relevance to it.
The internal factors are generally regarded as controllable factors because the company has control over these factors; it can alter or modify such factors as its personnel, physical facilities, organisation and functional means such as marketing mix to suit the environment.
The external factors on the other hand are, by and large, beyond the control of a company. The external or environmental factors such as the economic factors, socio-cultural factors, government and legal factors, demographic factors etc., are therefore generally regarded as uncontrollable factors.
Some of the external factors have a direct and intimate impact on the firm (like the suppliers and distributors of the firm). These factors are classified as micro environment, also known as task environment and operating environment. There are other external factors which affect an industry very generally (such as industrial policy, demographic factors etc.). They constitute what is called macro environment, general environment or remote environment. We may therefore consider the business environment at three levels:
1.       Internal environment
2.       Micro environment/ task environment/ operating environment
3.       Macro environment/ general environment/ remote environment
Although business environment consists of both internal and external environments, many people often confine the term to the external environment of business.
1. Internal Environment: The factors in internal environment of business are to a certain extent controllable because the firm can change or modify these factors to improve its efficiency. However, the firm may not be able to change all the factors. The various internal factors are:
a)      Value system: The value system of an organisation means the ethical beliefs that guide the organisation in achieving its mission and objectives.  It is a widely acknowledged fact that the extent to which the value system is shared by all in the organisation is an important factor contributing to its success.
b)      Mission and objectives: The business domain of the company, direction of development, business philosophy, business policy etc are guided by the mission and objectives of the company.  The objective of all firms is assumed to be maximisation of profit.  Mission is defined as the overall purpose or reason for its existence which guides and influences its business decision and economic activities.
c)       Organisation structure: The organisational structure, the composition of the board of directors, the professionalism of management etc are important factors influencing business decisions. The nature of the organisational structure has a significant influence over the decision making process in an organisation.  An efficient working of a business organisation requires that the organisation structure should be conducive for quick decision-making. 
d)      Corporate culture: Corporate culture is an important factor for determining the internal environment of any company.  In a closed and threatening type of corporate culture the business decisions are taken by top level managers while the middle level and lower level managers have no say in business decision-making.  This leads to lack of trust and confidence among subordinate officials of the company and secrecy pervades throughout the organisation.  This results in a sense of alienation among the lower level managers and workers of the company. In an open and participating culture, business decisions are taken by the lower level managers and top management has a high degree of confidence in the subordinates. 
e)      Quality of human resources:  Quality of employees that is of human resources of a firm is an important factor of internal environment of a firm.  The characteristics of the human resources like skill, quality, capabilities, attitude and commitment of its employees etc could contribute to the strength and weaknesses of an organisation.  Some organisations find it difficult to carry out restructuring or modernisation plans because of resistance by its employees. 
f)       Labour unions: Labour unions collectively bargains with the managers for better wages and better working conditions of the different categories of workers. For the smooth working of a business firm, good relations between management and labour unions are required.
g)      Physical resources and technological capabilities: Physical resources such as, plant and equipment and technological capabilities of a firm determine its competitive strength which is an important factor for determining its efficiency and unit cost of production.  Research and development capabilities of a company determine its ability to introduce innovations which enhances productivity of workers. It is, however, important to note that the rapid technological growth and the growth of information technology in recent years have increased the relative importance of intellectual capital and human resources as compared to physical resources of a company. 
2. External Environment: The external environment is made up of micro and macro environment.
Micro Environment: This refers to the factors which influence the prospects of a particular firm; the firm can influence them with certain efforts. They are as follows:
a) Customers: The type and the nature of the customers influence the rate of growth of any firm. The firm has to be very particular about choosing the inputs and transforming them in to the output. The cost factor is subsidiary if the firm is dealing with such customers. If the customers are more commoners the quality of the commodity if less important than the cost of production. The customers want the commodity at a lower price so the firm will have to conscious about the cost in purchasing the inputs, in employment of labour, in packing and such other factors influencing the cost.
b) Competitors:  In modern age an absolute monopoly is a very rare thing. Most of the FIRMS have to work in some type of competition such as Monopolistic Competition or Oligopoly. A Firm has to be particular about the intensity of the competition. If the competition is severe the firm will have to be very particular about keeping the costs at the lowest level so that it can sell the commodity at a competitive price.
c) Suppliers:  The quality of the commodity and the cost of production are considerably influenced by the supplies of the inputs. If the inputs are supplied at economical prices, are of standard quality and if the supply is uninterrupted and timely the firm can produce a standard quality of a commodity and sell it at reasonable prices. Often the firms employ more than one supplier so as to ensure an uninterrupted supply of inputs. If the supplies of inputs are regular, consistent and reliable there is no need to keep a larger quantity in stock.
d) Channel Intermediaries: They refer to the different levels in the chain from the production unit to the final customer. The chain incorporates the stockists, the wholesalers, the distributors, the retailer etc. If there is a high level of efficiency maintained at every part of the chain the commodity can reach the final consumer in good condition and at a reasonable price. So the Firm has to select and maintain efficient intermediaries. The firm has to offer them proper terms
e) Society: The prospects of a firm depend upon the society in which it has to work and sell its products. In a homogenous society the job of the firm is easy. The people have almost the same habits likes and dislikes, values and ethical norms. In a heterogeneous society the job of the firm is difficult. A particular product may be acceptable to a particular section of the society but not acceptable to some other sections. In a country like India a firm has to into consideration all types of sections of the community such as the religious sections, the caste, the sect, language, region etc.
Conclusion: All these forces influence the chances available to a firm to survive and develop.
Macro Environment: The macro environment comprises of those forces which influence all business firms operating in an economy. They can be studied under the following categories: economic environment, political and regulatory environment, social/ cultural environment, demographic environment and technological. The components of these environments are discussed as below:
a) Economic Environment:  The survival and success of each and every business enterprise depend fully on its economic environment. The main factors that affect the economic environment are:
(i) Economic Conditions: The economic conditions of a nation refer to a set of economic factors that have great influence on business organisations and their operations. These include 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. All these help in improving the pace of economic growth.
(ii) Economic Policies: All business activities and operations are directly influenced by the economic policies framed by the government from time to time. Some of the important economic policies are: Industrial policy, Fiscal policy, monetary policy, foreign investment policy and Export –Import policy. The government keeps on changing these policies from time to time in view of the developments taking place in the economic scenario.
(ii) Economic System: The world economy is primarily governed by three types of economic systems, viz. Capitalist economy; Socialist economy; and Mixed economy. India has adopted the mixed economy system which implies co-existence of public sector and private sector.
b) Political Environment: This includes the political system, the government policies and attitude towards the business community and the unionism. All these aspects have a bearing on the strategies adopted by the business firms. The stability of the government also influences business and related activities to a great extent. It sends a signal of strength, confidence to various interest groups and investors.
c) Legal Environment:  This refers to set of laws, regulations, which influence the business organisations and their operations. Every business organisation has to obey, and work within the framework of the law. The important legislations that concern the business enterprises include: Companies Act, 1956, Foreign Exchange Management Act, 1999, The Factories Act, 1948, Industrial Disputes Act, 19112, Payment of Gratuity Act, 19112, Industries (Development and Regulation) Act, 1951 etc. Besides, the above legislations, the following are also form part of the legal environment of business:
(i) Provisions of the Constitution
(ii) Judicial Decisions.
d)  Social Environment: The social environment of business includes social factors like customs, traditions, values, beliefs, poverty, literacy, life expectancy rate etc. The social structure and the values that a society cherishes have a considerable influence on the functioning of business firms. For example, during festive seasons there is an increase in the demand for new clothes, sweets, fruits, flower, etc.
e) Technological Environment:  Technological environment include the methods, techniques and approaches adopted for production of goods and services and its distribution. The varying technological environments of different countries affect the designing of products. In the modern competitive age, the pace of technological changes is very fast. Hence, in order to survive and grow in the market, a business has to adopt the technological changes from time to time.
f) Demographic Environment:  This refers to the size, density, distribution and growth rate of population. All these factors have a direct bearing on the demand for various goods and services.
g) Natural Environment:  The natural environment includes geographical and ecological factors that influence the business operations. These factors include the availability of natural resources, weather and climatic condition, location aspect, topographical factors, etc. Business is greatly influenced by the nature of natural environment. For example, sugar factories are set up only at those places where sugarcane can be grown. It is always considered better to establish manufacturing unit near the sources of input.
(b) What is SWOT analysis? Describe its importance.                                     4+10=14
Ans: SWOT analysis
SWOT analysis is a simple framework for generating strategic alternatives from a situation analysis. It is applicable to either the corporate level or the business unit level and frequently appears in marketing plans.
 SWOT (sometimes referred to as TOWS) stands for Strengths, Weaknesses, Opportunities, and Threats. A SWOT analysis consists of the following two activities: 
a)      An assessment of the organization’s internal Strengths and Weaknesses and
b)      An assessment of the Opportunities and Threats posed by its external environment
a)      Assessing the Internal Environment
Internal scan or assessment of the internal environment of the organization involves identification of its strengths and weaknesses i.e., those aspects that help or hinder accomplishment of the organization’s mission and fulfillment of its mandate with respect to the following Four Ps:
1)      People (Human Resources)
2)      Properties (Buildings, Equipments and other facilities)
3)      Processes (Such as student placement services, M.I.S etc.)
4)      Products (Students, Publications etc.)
b)      Assessing the External Environment
External scan refers to exploring the environment outside the organisation in order to identify the opportunities and threats it faces. This involves considering the following:
1)      Events, trends and forces in the Social, Technological, Economical, Environmental and Political areas (STEEP).
2)      Identifying the shifts in the needs of customers and potential clients and
3)      Identification of competitors and collaborators.
Techniques of SWOT analysis
An overview of the four factors (Strengths, Weaknesses, Opportunities and Threats) is given below:
1)      Strengths: Strengths are the qualities that enable us to accomplish the organization’s mission. These are the basis on which continued success can be made and continued/sustained. Strengths can be either tangible or intangible. These are what you are well-versed in or what you have expertise in, the traits and qualities your employees possess (individually and as a team) and the distinct features that give your organization its consistency. Strengths are the beneficial aspects of the organization or the capabilities of an organization, which includes human competencies, process capabilities, financial resources, products and services, customer goodwill and brand loyalty.
Examples of STRENGTHS under SWOT Analysis
a)      Specialist marketing expertise
b)      Exclusive access to natural resources
c)       New, innovative product or service
d)      Location of your business
e)      Strong brand or reputation
f)       Quality processes and procedures
2)      Weaknesses: Weaknesses are the qualities that prevent us from accomplishing our mission and achieving our full potential. These weaknesses deteriorate influences on the organizational success and growth. Weaknesses are the factors which do not meet the standards we feel they should meet. Weaknesses in an organization may be depreciating machinery, insufficient research and development facilities, narrow product range, poor decision-making, etc. Weaknesses are controllable. They must be minimized and eliminated.
Examples of WEAKNESS under SWOT Analysis
a)      Lack of marketing expertise
b)      Undifferentiated products and service (i.e. in relation to your competitors)
c)       Competitors have superior access to distribution channels
d)      Poor quality goods or services
e)      Damaged reputation
f)       Lost brand value
3)      Opportunities: Opportunities are presented by the environment within which our organization operates. These arise when an organization can take benefit of conditions in its environment to plan and execute strategies that enable it to become more profitable. Organizations can gain competitive advantage by making use of opportunities. Organization should be careful and recognize the opportunities and grasp them whenever they arise. Selecting the targets that will best serve the clients while getting desired results is a difficult task. Opportunities may arise from market, competition, industry/government and technology. Increasing demand for telecommunications accompanied by deregulation is a great opportunity for new firms to enter telecom sector and compete with existing firms for revenue.
Examples of OPPORTUNITIES under SWOT Analysis
a)      Developing market (China, the Internet)
b)      Loosening of regulations
c)       Removal of international trade barriers
d)      A market led by a weak competitor
4)      Threats: Threats arise when conditions in external environment jeopardize the reliability and profitability of the organization’s business. They compound the vulnerability when they relate to the weaknesses. Threats are uncontrollable. When a threat comes, the stability and survival can be at stake. Examples of threats are - unrest among employees; ever changing technology; increasing competition leading to excess capacity, price wars and reducing industry profits; etc.
Advantages of SWOT Analysis: SWOT Analysis helps in strategic planning in following manner:
a)      It is a source of information for strategic planning which helps in achieving desired objectives at a minimum cost.
b)      SWOT analysis plays a big role in forecasting as it provides important information that might be required in making forecast for the future.
c)       SWOT analysis builds organization’s strengths.
d)      Reverse its weaknesses by identifying weak areas.
e)      Maximize its response to opportunities.
f)       Overcome organization’s threats.
g)      It helps in identifying core competencies of the firm.
h)      It helps in setting of objectives for strategic planning.
i)        It helps in knowing past, present and future so that by using past and current data, future plans can be chalked out.
4. (a) Define ‘economic growth’ and ‘economic development’. Discuss the main hindrances of economic growth of India. 2+2+10=14
Ans: Economic Growth and Economic Development
Economic growth is the increase in the amount of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP. Growth is usually calculated in real terms, i.e. inflation-adjusted terms, in order to net out the effect of inflation on the price of the goods and services produced. In economics, "economic growth" or "economic growth theory" typically refers to growth of potential output, i.e., production at "full employment," which is caused by growth in aggregate demand or observed output.
As an area of study, economic growth is generally distinguished from development economics. The former is primarily the study of how countries can advance their economies. The latter is the study of the economic aspects of the development process in low-income countries. As economic growth is measured as the annual percent change of gross domestic product (GDP), it has all the advantages and drawbacks of that measure.
Economic Development implies changes in income, saving and investment along with progressive changes in socioeconomic structure of a country (institutional and technological changes). Economic Development relates to growth of human capital indexes, a decrease in inequality figures, and structural changes that improve the general population’s quality of life.
Hindrances/Obstacles in Economic Growth
Some of the major problems in economic growth of India are given below:
1. Misuse of Resources due to Market Imperfections: Main reason for the economic back wardens of the under developed countries is the misuse of resources owing to market imperfections by the market imperfections we mean the immobility of the factors of production , price rigidities, ignorance regarding market , trends static social structure , lack of specialization etc. These market imperfections are great obstacles in the way of economic growth. It is due to market imperfections that productive efficiency in these countries is low, the resources are either unutilized or underutilized and the resources are misallocated. When the resources are perfectly mobile and there is perfect competition among them, they can easily move from one sector to another in search of a better return and in this way they make an optimum contribution to the national output.
2. Low Rate of saving and investment: Another main reason of the poverty and under development of the under – developed countries is that the rate of saving and investment in these countries is very low. In these countries only5-8 percent of the national income goes into savings, whereas the rate is 15-20 percent and even more in the developed countries. When the rat of saving in a country is low the rate of investment is bound to be low and the rate of capital formation is low too. Since capital per man is low, the productivity is also low productivity being low, the per capita income and the national income too are low.
3. Demonstration  Effect: The under development of the economically backward countries is also due to what has been called the demonstration effect the demonstration effect  increases propensity to consume which reduces the rate of savings and investment . A very important principle has been propounded regarding consumption. That an individual’s consumption does not merely depend on individuals own income but it is very much influenced by the standard of living or consumption of his friends and relations. When a man sees that some of his friends and relatives have refrigerator, scooter, radio or TV set. Thus , consumption does not depend upon absolute real income but on relative level of real income the is consumption expenditure does not depend on our own purchasing power but on what in being spent by other son the purchase of luxury articles.
4. Rapidly Growing Population: In the under – developed countries, especially in the over populated countries of Asia, population increases very rapidly. this has very adversely affected their rate of economic growth. In fact rapid population growth is the greatest obstacle to economic growth. Whatever increase takes place in the national output and income in such countries as a result of development is devoured by the ever pouring torrent of babies. It is like writing on the sand. That is why their standard of living and income per capita cannot rise. For example the major part of increase in national income that has accrued in India during the five year plans has been nullified by the rapid population growth.
5. Social and political obstacles to growth: There are several other factors which have retarded the economic growth of under developed countries, among this we may mention the following in the under developed countries like India agriculture has been carried on in a very inefficient manner. Lack of adequate irrigation facilities and fertilizers, primitive agricultural practices. Poverty of the peasant out molded systems of tenure. The under developed countries are generally wanting in dynamic entrepreneurship. No wonder trade and industry have been conducted at a very low level and few new grounds have been broken. Economic development requires an army of trained and skilled personnel who serve as instruments of economic progress these the under- developed countries lack and consequently remain backward. Not only have the economic factors handicapped economic progress of the under developed countries but social factors too. Have played their part to keep them economically backward. has divided the Indian society into ware tight compartments and has rendered co operation in the economic sphere impossible. It has created divergence between aptitude and the occupation actually pursued. By making functions here dietary. It killed imitative and enterprise. Untouchability   has demolished millions of our propel striking at the very root of dignity of labour.
6. Economic Factors Impeding Growth: Most of the countries of Asia and Africa, which are under developed, have been at one time or another under an alien rule. The most important cause of poverty in India and it’s under- development is its subjection to the British rule. The foreign rulers, naturally, exploited the dependent countries and used their resources to promote their own interest. These countries were made to supply raw material at low prices. The foreign industrialist also made investments in primary industries such as mining, drilling of oil wells, tea, coffee etc. Thus the foreign masters used these countries as suppliers of raw materials to their industries and markets for their manufactured goods. They did not take any interest in their economic development.
(b) What do you mean by economic environment of business? Explain the elements of economic environment of business.                                             4+10=14
Ans: ECONOMIC ENVIRONMENT: Economic environment consist of Grosse national product, corporate profits, inflation rate productivity, employment rates, interest rates, debt and spending economic environment has stronger influence over organization policies and action. The survival and success of each and every business enterprise depend fully on its economic environment. The three main factors/components that affect the economic environment are:
(a)    Economic Conditions: The economic conditions of a nation refer to a set of economic factors that have great influence on business organisations and their operations. These include gross domestic product, per capita income, markets for goods and services, availability of capital etc.
(b)   Economic Policies: All business activities and operations are directly influenced by the economic policies framed by the government from time to time. Some of the important economic policies are: Industrial policy, Fiscal policy, Monetary policy, Foreign investment policy, Export –Import policy (Exim policy)
(c)    Economic System: The world economy is primarily governed by three types of economic systems, viz., (i) Capitalist economy; (ii) Socialist economy; and (iii) Mixed economy. India has adopted the mixed economy system which implies co-existence of public sector and private sector.
(d)   Economic Planning: The management of national economy must begin with national level economic planning within the framework provided by the general economic policy of the government. An economic planning is a mechanism for allocation of available resources and encourages efficient decision making process in an economy to achieve pre determined objectives of plans like increasing growth rate, reducing inflation, creating employment , obtaining self sufficiency etc. A government plays an important role as it has the authority of drafting and implementing financial plans keeping in mind the interest of various business industries and social welfare.
(e)   Regional economic groups: They promote cooperation and free trade among members by removing tariff and other restrictions. They provide opportunities to member countries and threats to non-member counties. Examples are: SA ARC: South Asian Association for Regional Cooperation. ASIAN: Association of South East Asian Nations. EU: European Union.
5. (a) Discuss the policy of the Government of India concerning foreign collaboration and its impact on industrialization. 7+7=14
Ans: Foreign Collaboration
Foreign collaboration is such an alliance of domestic (native) and abroad (non-native) entities like individuals, firms, companies, organizations, governments, etc., that come together with an intention to finalize a contract on some tasks or jobs or projects.
“Foreign collaboration includes ongoing business activities of sharing information related to financing, technology, engineering, management consultancy, logistics, marketing, etc., which are generally, offered by a non-resident (foreign) entity to a resident (domestic or native) entity in exchange of cheap skilled and semi-skilled labour, inexpensive high-quality raw-materials, low cost hi-tech infrastructure facilities, strategic (favourable) geographic location, and so on, with an approval (permission) from a governmental authority like the ministry of finance of a resident country.”
Foreign Collaboration is of two types:
When a foreign company acquires equity shares of an Indian company for collaboration it is known as Financial Collaboration. The extent to which the foreign company can acquire equity shares depends upon the policies of the Government of India.
Technical Collaboration means the transfer of information relating to the business of the collaboration. It includes transfer of data, information, drawings, product and tool designs, production engineering, between the collaboration companies.
Features of Foreign Collaboration
a)      Foreign collaboration is a mutual co-operation between one or more resident and non-resident entities. In other words, for example, an alliance (a union or an association) between an abroad based company and a domestic company forms a foreign collaboration.
b)      It is a strategic alliance between one or more resident and non-resident entities.
c)       Only two or more resident (native) entities cannot make a foreign collaboration possible. For its formation and as per above definitions, it is mandatory that one or more non-resident (foreign) entities must always collaborate with one or more resident (domestic) entities.
d)      Before starting a foreign collaboration, both entities, for example, a resident and non-resident company must always seek approval (permission) from the governmental authority of the domestic country.
e)      During an ongoing process of seeking permission, the collaborating entities prepare a preliminary agreement.
f)       According to this preliminary agreement, for example, the non-resident company agrees to provide finance, technology, machinery, know-how, management consultancy, technical experts, and so on. On the other hand, resident company promises to supply cheap labour, low-cost and quality raw-materials, ample land for setting factories, etc.
g)      After obtaining the necessary permission, individual representative of a resident and non-resident entity sign this preliminary agreement. Signature acts as a written acceptance to each other's expectations, terms and conditions. After signatures are exchanged, a contract is executed, and foreign collaboration gets established. Contract is a legally enforceable agreement. All contracts are agreements, but all agreements need not necessarily be a contract.
h)      After establishing foreign collaboration, resident and non-resident entity starts business together in the domestic country.
i)        Collaborating entities share their profits as per the profit-sharing ratio mentioned in their executed contract.
j)        The tenure (term) of the foreign collaboration is specified in the written contract.
FDI- Foreign Direct Investment
FDI- Foreign Direct Investment refers to international investment in which the investor obtains a lasting interest in an enterprise in another country. Most concretely, it may take the form of buying or constructing a factory in a foreign country or adding improvements to such a facility, in the form of property, plants, or equipment.
FDI is calculated to include all kinds of capital contributions, such as the purchases of stocks, as well as the reinvestment of earnings by a wholly owned company incorporated abroad (subsidiary), and the lending of funds to a foreign subsidiary or branch. The reinvestment of earnings and transfer of assets between a parent company and its subsidiary often constitutes a significant part of FDI calculations. FDI is more difficult to pull out or sell off. Consequently, direct investors may be more committed to managing their international investments, and less likely to pull out at the first sign of trouble.
(b) Give a short account of the ‘New Economic Policy’ introduced in India since July 1991 and state your opinion on the effectiveness of this new policy.                                             7+7=14
Ans: New Industrial Policy, 1991
In order to solve economic problems of our country, the government took several steps including control by the State of certain industries, central planning and reduced importance of the private sector. The main objectives of India’s development plans were:
a)   Initiate rapid economic growth to raise the standard of living, reduce unemployment and poverty;
b)   Become self-reliant and set up a strong industrial base with emphasis on heavy and basic industries;
c)    Reduce inequalities of income and wealth;
d)   Adopt a socialist pattern of development based on equality and prevent exploitation of man by man.
As a part of economic reforms, the Government of India announced a new industrial policy in July 1991. The broad features of this policy were as follows:
a)      The Government reduced the number of industries under compulsory licensing to six.
b)      Policy towards foreign capital was liberalized. The share of foreign equity participation was increased to 51% and in many activities 100 per cent Foreign Direct Investment (FDI) was permitted.
c)       Government will encourage foreign trad­ing companies to assist Indian exporters in export activities.
d)      Foreign Investment Promotion Board (FIPB) was set up to promote and channelise foreign investment in India.
e)      Automatic permission was now granted for technology agreements with foreign companies.
f)       Relaxation of MRTP Act (Monopolies and Restrictive Practices Act) which has almost been rendered non-functional.
g)      Dilution of foreign exchange regulation act (FERA) making rupee fully convertible on trade account.
h)      Disinvestment was carried out in case of many public sector industrial enterprises incurring heavy losses.
i)        Abolition of wealth tax on shares.
j)        General reduction in customs duties.
k)      Provide strength to those public sector enterprises which fall in reserved areas of operation or in high priority areas.
l)        Constitution of special boards to negoti­ate with foreign firms for large investments in the development of industries and import of technol­ogy.
Impact of Government Policy Changes (New Industrial Policy, 1991) on Business and Industry
1.    Increasing competition: As a result of changes in the rules of industrial licensing and entry of foreign firms, competition for Indian firms has increased especially in service industries like telecommunications, airlines, banking, insurance, etc. which were earlier in the public sector.
2.    More demanding customers: Customers today have become more demanding because they are well-informed. Increased competition in the market gives the customers wider choice in purchasing better quality of goods and services.
3.    Rapidly changing technological environment: Increased competition forces the firms to develop new ways to survive and grow in the market. New technologies make it possible to improve machines, process, products and services. The rapidly changing technological environment creates tough challenges before smaller firms.
4.    Necessity for change: In a regulated environment of pre-1991 era, the firms could have relatively stable policies and practices. After 1991, the market forces have become turbulent as a result of which the enterprises have to continuously modify their operations.
5.    Threat from MNC Massive entry of multi nationals in Indian marker constitutes new challenge. The Indian subsidiaries of multi-nationals gained strategic advantage. Many of these companies could get limited support in technology from their foreign partners due to restrictions in ownerships. Once these restrictions have been limited to reasonable levels, there is increased technology transfer from the foreign partners.
6. (a) Describe the role of “World Trade Organization’ in developing international trade.             14
Ans: 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.
(b) Write an explanatory note on ‘international business environment’.                                             14
Ans: 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
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; shifts 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.
Full Marks: 80
Pass Marks: 32
Time: 3 hours

1. Answer the following questions:                                        1x8=8
a)         Mention one hindrance of economic growth.          Ans: High rate of population growth
b)         Write one salient features of New Industrial Policy, 1991 of India.                Ans: Liberalisation
c)          Write one cause of industrial backwardness in North-East region of India.  Ans: Lack of proper transport facility.
d)         In which year was the IMF set up?                 Ans: 1945
e)         Mention one function of Stock Exchange. Ans: Liquidation of securities already held
f)          Write the full form of BSE.                Ans: Bombay Stock Exchange
g)         Write the full form of SAFTA.          Ans: South Asian Free Trade Area
h)         Where is the Head Office of the World Bank?         Ans: Washington
2. Write short notes on the following:                                    4x4=16
a)         External factors of business environment.
b)         Indian money market.
c)          SWOT analysis.
d)         Special economic zone.
3. (a) Describe the nature and significance of business environment.                                      6+5=11
(b) Discuss in detail the internal factors of business environment.                                         11
4. (a) What do you mean by ‘trade cycle’? Discuss its phases with a diagram.                       3+8=11
(b) What is meant by ‘economic environment’? Describe its significance.                          3+8=11
5. (a) Write a critical note on EXIM Policy of India.                                             11
(b) Explain the concept of ‘privatization’. Discuss its disadvantages.                                     3+8=11
6. (a) Discuss the role played by the ‘money market’ in the economic development of a country.                              11
(b) What do you mean by ‘monetary policy’? Explain the importance of monetary policy in a developing economy. 3+8=11
7. (a) Discuss the impact of globalization of Indian trade and industry.                                     12
(b) Discuss the objectives and functions of the World Trade Organization.                        6+6=12

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