E-LESSON-9

IDOL Institute of Distance and Online Learning ENHANCE YOUR QUALIFICATION, ADVANCE YOUR CAREER.

M.B.A 2 All right are reserved with CU-IDOL BUSINESS ENVIRONMENT AND REGULATORY FRAMEWORK Course Code: MBA605 Semester: First SLM UNITS : Unit: 9 6 www.cuidol.in Unit-6 (MBA605)

BUSINESS ENVIRONMENT AND 33 REGULATORY FRAMEWORK OBJECTIVES INTRODUCTION Student will be able to : Driven by the economic liberalisations, Explain the advantages and disadvantages of FDI, revolutionary technological advances and factors promoting FDI and global changes in the political scenarios, economies trends in FDI are becoming more interdependent and globalised. Evaluate the role of MNCs in the emerging global economy and business The proportion of what firms invest, produce and sell abroad and globalisation of supply Examine the functions and roles of IMF and World chains increased considerably. Bank with special reference to developing economies Global economic conditions, political conditions, trends in prices of crude oil and policies & Discuss the functions and role of WTO regulations of organisations like WTO, IMF, World Bank etc. affect domestic as well as international business. www.cuidol.in Unit-6 (MBA605) INASllTITriUgThEt aOrFeDreISsTeArNveCdE AwNitDh COUNL-IIDNOE LLEARNING

TOPICS TO BE COVERED 4 > Foreign Direct Investment (FDI) > Multinational Corporations (MNCs) > World Trade Organisation (WTO) > International Monetary Fund (IMF) > World Bank > Evaluation of IMF-World Bank > Trade Blocs/RIAs www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

Foreign Direct Investment (FDI) 5 ❖ International capital has historically played an important role in the economic development of the developed countries. The last three decades, however, have witnessed a surge in the international capital movement, driven by the economic liberalisation across the world, particularly in the developing countries, significantly contributing to economic and business growth. www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

Advantages of FDI 6 1. It helps increase the investment level and thereby the income and employment in the host country 2. Foreign investment may increase the tax revenue of the government 3. Direct foreign investment facilitates transfer of technology and thereby benefit enterprises and the recipient country. 4. It may kindle a managerial revolution in the recipient country through professional management and the employment of highly sophisticated management techniques 5. Foreign capital may enable the country to increase its exports and reduce import requirements www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

Advantages of FDI 7 6. Foreign investments may stimulate domestic enterprise because, to support their own operations, the foreign investors may encourage and assist domestic suppliers and consuming industries 7. Foreign investment may also help increase competition and break domestic monopolies 8. If foreign investment improves the quality and reduces the cost of inputs, that would benefit the domestic industry. This often happens when technology transfer is involved 9. Several FDIs have production linkages and they support the growth and upgradation of enterprises 10. Invigoration of enterprises by foreign collaboration may help international business www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

Advantages of FDI 8 11. FDI and Production Linkages – an important element of an international production system is the organisation and distribution of production activities and other functions in what is commonly known as the global value chain. 12. Foreign investment can accelerate economic and trade development. Indeed, FDI and foreign trade are mutually influential 13. Apart from potential gains through technology transfer, FDI has generated large employment opportunities in a number of countries. 14. Given the limitations of domestic savings, many developing countries, including India, rely on foreign investment to accelerate economic growth. It may be noted that China has been able to maintain a high GDP growth rate for a long time because of a high savings rate and huge inflow of FDI. www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

Disadvantages/Limitations of Foreign Investment 9 ❖ Foreign capital, both private and official (governmental and institutional), have certain limitations like: 1. The absorptive capacity of the recipient country, i.e., the capacity of the country to utilise the foreign capital effectively. Lack of infrastructural facilities, technical know-how, personnel, inputs, market, feasible projects, inefficiency or inadequacy of administrative machinery etc. are important factors that affect the absorptive capacity 2. Sometimes ‘strings’ are attached to the official assistance — the recipient country may be pressurised to fall in line with the ideology or direction of the donor 3. Foreign invest has deleterious socio-economic and political impacts www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

Disadvantages/Limitations of 10 Foreign Investment 4. Private foreign capital tends to flow to the high profit areas rather than to the priority sectors 5. The technologies brought in by the foreign investor may not be suitable or adapted to the consumption needs, size of the domestic market, resource availabilities, stage of development of the economy etc 6. Through their power and flexibility, the multinational corporations can evade or undermine economic autonomy and control, which may be inimical to the national interests of particular countries 7. Foreign investment, sometimes, have unfavorable effect on the Balance of Payments of a country because the drain of foreign exchange by way of royalty, dividend etc. is more than the investment made by the foreign concern www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

Disadvantages/Limitations of Foreign 11 Investment 8. Foreign capital sometimes interferes in the national politics specially when foreign investors tend to engage in unfair and unethical trade practices 9. Sometimes foreign investment can result in the dangerous situation of minimising/ eliminating competition and the creation of monopolies or oligopolistic structures 10. FDI can also potentially displace domestic producers by pre- empting their investment opportunities 11. Often, several costs are associated with encouraging foreign investment, such as costs arising from special concessions offered by the host country, adverse effects on domestic saving, deterioration in the terms of trade, and problems of balance of payments adjustment. www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

Factors Promoting International Investment International investments are influenced by a number of factors like: 12 1. Political stability and freedom from external aggression 2. Security of life and property 3. Reasonable opportunities for earning profits 4. Prompt payment of fair and transferable compensation in case of nationalisation of foreign owned enterprise 5. Guarantee of the possibility of remittance of profits, dividends and interest, as well as of a reasonable depreciation allowance on the capital invested 6. Facilities for immigration and employment of foreign technical and administrative personnel 7. A system of taxation that does not impose a crushing burden on private enterprise 8. Freedom from double taxation 9. Non-discriminatory treatment of foreigners in the administration of existing controls 11. Absence of competition between State-owned enterprises and private foreign capital 12. A general spirit of friendliness towards foreign investors www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

Trends in FDI by M&As 13 Some of the important features of the cross-border M & As are: 1. The liberalisation and deregulation of several vital industries in many countries across the world have given an impetus to cross-border M&As in both developed and developing countries. Privatisation has been a very important stimulant to M&As for eg Banking, finance, insurance and telecommunication industries have been witnessing a spate of M&As 2. The surge in cross-border mergers and acquisitions (M&As), has been causing substantial restructuring and transformation of the competitive environment of industries globally 3. M&As have been found to be particularly important in the FDI flows to the developed countries 4. A notable trend has been the increasing participation of developing country firms in the global M&A activities. Corporate India has significantly resorted to overseas acquisitions as part of the globalisation and competitive strategies. 5. Collective investment funds like private equity (PE) funds, sovereign wealth funds (SWF) and hedge funds are important part of the FDI dynamics. Growing role of special funds raises policy and strategic issues. www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

Trends in FDI by M&As 14 5. The large size and number of M&As; growing interest of collective funds, particularly private equity funds and sovereign wealth funds, in acquisition. 6. Collective investment funds like private equity (PE) funds, sovereign wealth funds (SWF) and hedge funds are important part of the FDI dynamics. Growing role of special funds raises policy and strategic issues. www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

Multinational Corporations 15 ❖ The world economy and business have been increasingly influenced by multinational corporations (MNCs), also known by such names as international corporation, transnational corporation (TNC), global corporation (or firm, company or enterprise) etc. ❖ These business corporations, many of which are gigantic in size, invest and do business in many countries, account for a significant share of the world’s industrial investment, production, employment and trade. www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

Multinational Corporations ❖ Among the various benchmarks sometimes used to define ‘multinationality’ are that the 16 company in question must: ✓ Produce (rather than just distribute) abroad as well as in the headquarter’s country ✓ Operate in a certain minimum number of nations (e.g., six) ✓ Derive some minimum percentage of its income from foreign operations (e.g., 25 per cent) ✓ Have a certain minimum ratio of foreign to total number of employees, or of foreign total value of assets ✓ Possess a management team with geocentric orientations ✓ Directly control foreign investments (as opposed simply to holding shares in foreign companies) www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

Economic Clout of MNCs 17 The global liberalisation has paved the way for fast expansion and growth of the MNCs, and their role in the economy in general and in the business sector in particular has been on the increase. TNCs have been playing an increasing role in the global economy. Their role in all categories of economies – developed and developing, capitalist and communist/socialist – has been growing fast as reflected by the increase in their: ❖ Investment/fixed capital formation ❖ Foreign assets ❖ International production ❖ Production linkages ❖ International employment ❖ Global trade ❖ R&D The economic clout of the MNCs is indicated by the fact that the GDP of nearly 90 of the countries is smaller than the value of the annual sales turnover of the largest multinational giant Walmart. The annual revenue of Walmart is larger than the SDP (State Domestic Product) of every Indian State. www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

Merits of MNCs 18 MNCs, it is claimed, help the host countries in the following ways: 1. MNCs help increase the investment level and thereby the income and employment in host country 2. The transnational corporations have become vehicles for the transfer of technology, especially to the developing countries 3. They also kindle a managerial revolution in the host countries through professional management and the employment of highly sophisticated management techniques 4. The MNCs enable the host countries to increase their exports and decrease their import requirements 5. They work to equalise the cost of factors of production around the world www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

Merits of MNCs 19 All right are reserved with CU-IDOL 6. MNCs provide an efficient means of integrating national economies 7. The enormous resources of the multinational enterprises enable them to have very efficient research and development systems. Thus, they make a commendable contribution to inventions and innovations 8. MNCs also stimulate domestic enterprise because to support their own operations, the MNCs may encourage and assist domestic suppliers 9. MNCs help increase competition and break domestic monopolies www.cuidol.in Unit-6 (MBA605)

Demerits of MNCs MNCs have been subject to a number of criticisms, like those 20 mentioned below: 1.Through their power and flexibility, MNCs can evade or undermine national economic autonomy, and their activities may be inimical to the national interests of particular countries. 2. MNCs may destroy competition and acquire monopoly powers. 3. The tremendous power of the global corporations poses the risk that they may threaten the sovereignty of the nations in which they do business. On political involvement, MNCs have been accused on occasion of supporting repressive regimes; paying bribes to secure political influence; not respecting human rights; paying protection money to terrorist groups; and, destabilising national governments of which they do not approve. 4. MNCs retard growth of employment in the home country. www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

Demerits of MNCs 21 5. The transnational corporations cause fast depletion of some of the non-renewable natural resources in the host country. They have also been accused of the following environmental problems: polluting the environment; not paying compensation for the environmental damages; causing harmful changes in the local living conditions; and, paying little regard to the risks of accidents causing major environmental catastrophes. 6. The MNCs have been criticised for their business strategies and practices in the host countries. They undermine local cultures and traditions, change the consumption habits for their benefit against the long-term interests of the local community, promote conspicuous consumption, dump harmful products in the developing countries etc. www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

The Bretton Woods Conference and IMF, 22 World Bank and WTO ❖ The Bretton Woods Conference, officially known as the United Nations Monetary and Financial Conference, held from July 1 to 22, 1944, in Bretton Woods, New Hampshire, USA, which was attended by delegates, from 44 nations, proposed the establishment of three institutions: ❖ International Monetary Fund (IMF) to help establish international monetary stability, to promote orderly development of international trade and economic growth and to provide financial assistance to countries with balance of payments problems. ❖ International Bank for Reconstruction and Development (IBRD) – World Bank – to provide financial assistance for the reconstruction (particularly of countries whose economies are ravaged by the World War II) and economic development of countries. ❖ International Trade Organisation (ITO) to promote global trade by facilitating free and transparent trade. www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

The Bretton Woods Conference and IMF, World Bank and WTO 23 The IMF and World Bank were established in 1946 and they have come to be known as the Bretton Woods Twins. However, the ITO charter was never ratified because of objections that its enforcement provisions would interfere with the autonomy of domestic policy making of member countries. Instead the General Agreement on Tariffs and Trade (GATT) which had been drawn up only as an interim agreement to fill the gap until the ITO charter was ratified, became the framework for international trading system, took effect on January 1, 1948. With effect from January 1, 1995, the World Trade Organisation (WTO) came into being, replacing the GATT, and thus the original proposal to establish a strong international trade organisation materialised about five decades after the Bretton Woods Conference. www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

GATT and WTO 24 GATT was converted into a formal international organisation called World Trade Organisation (WTO) with effect from January 1, 1995. The situation, after the coming into effect of WTO, replacing the GATT, may be described as the GATT is dead, long live the GATT. Under the old system, there were two GATTs: (i) GATT the Agreement, — the agreement between contracting parties (governments) setting out the rules for conducting international trade; (ii) GATT the Organisation — an international organisation created to facilitate discussions and administration related to the Agreement (ad hoc, though, continued to exist until the establishment of the WTO). (ii) GATT the organisation, ceased to exist with the establishment of WTO; GATT the agreement, which always dealt with (and still does) trade in goods, continues to exist, in amended form, as part of the WTO alongside two new agreements, viz., General Agreement on Trade in Services (GATS) and General Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPs). The old text is now called ‘GATT 1947’ and the updated version is called ‘GATT 1994’. In short, the WTO is GATT plus a lot more. The WTO is a more powerful body with enlarged functions than the GATT and is envisaged to play a major role in the world economic affairs. www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

The important difference between GATT 25 and WTO GATT WTO GATT was ad hoc and provisional. WTO and its agreements are permanent. GATT had contracting parties. WTO has members. GATT system allowed existing domestic legislation to WTO does not permit this. continue even if it violated a GATT agreement. GATT was less powerful, dispute settlement system WTO is more powerful than GATT, dispute was slow and less efficient, its ruling could be easily settlement mechanism is faster and more blocked. efficient, very difficult to block the rulings. www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

Objectives and Principles of WTO 26 The WTO agreements have three main objectives: 1. To help trade flow as freely as possible. 2. To achieve further liberalisation gradually through negotiation. 3. To set up an impartial means of settling disputes. A number of simple, fundamental principles run throughout all the WTO agreements. They are the foundation of the multilateral trading system. They include: 1. Non-discrimination (‘most-favoured-nation’ treatment and ‘national’ treatment). 2. Freer trade, predictable policies, encouraging competition. 3. Extra provisions for less developed countries. Functions of WTO The WTO seeks to achieve its overriding objective of helping trade flow smoothly, freely and predictably by: 1. Administering trade agreements 2. Acting as a forum for trade negotiations 3. Settling trade disputes 4. Reviewing national trade policies 5. Building the trade capacity of developing economies 6. Cooperating with other international organisations www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

WTO Agreements 27 The WTO endeavours to ensure that trade is as fair as possible and as free as practicable by negotiating rules and abiding by them. The WTO’s rules — the agreements — are the result of negotiations between the members. General Agreement on Trade in Goods: Since 1995, the updated GATT has become the WTO’s umbrella agreement for trade in goods. It has annexes dealing with specific sectors such as agriculture and textiles, and with specific issues such as state trading, product standards, subsidies and actions taken against dumping. General Agreement on Trade in Services (GATS): The General Agreement on Trade in Services which extends multilateral rules and disciplines to services and provides for liberalisation of trade in services, including education, financial services, telecommunications, transport, audio-visual, tourism and professional services as well as movement of workers. www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

WTO Agreements 28 All right are reserved with CU-IDOL Trade Related Investment Measures (TRIMs): TRIM refers to certain conditions or restrictions imposed by a government in respect of foreign investment in the country. TRIMs were widely employed by developing countries. The Agreement on TRIMs provides that no contracting party shall apply any TRIM which is inconsistent with the WTO Articles. Trade Related Aspects of Intellectual Property Rights (TRIPs): Intellectual Property Rights may be defined as “information with a commercial value”. IPRs have been characterised as a composite of “ideas, inventions and creative expression” plus the “public willingness to bestow the status of property” on them and give their owners the “right to exclude others from access to or use of protected subject matter.” www.cuidol.in Unit-6 (MBA605)

Benefits of WTO 29 GATTI WTO has made significant achievements in reducing the tariff and non-tariff barriers to trade. Developing countries too have been benefiting significantly out it. 1. The liberalisation of investments has been fostering economic growth of a number of countries. 2. The liberalisation of trade and investment has been resulting in increase in competition, efficiency of resource utilisation, improvement in quality and productivity, and fall in prices and acceleration of economic development. 3. WTO provides a forum for multilateral discussion of economic relations between nations. 4. It has a system in place to settle trade disputes between nations. 5. WTO has a mechanism to deal with violation of trade agreements. 6. WTO does considerable research related to global trade and disseminates a wealth of information. www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

Drawbacks/Criticisms 30 (WTO and Developing Countries/India) ❖ The WTO has been subjected to a number of criticisms. Important drawbacks/criticisms include the following: 1. Negotiations and decision-making in the WTO are dominated by the developed countries. 2. Many developing countries do not have the financial and knowledge resources to effectively participate in the WTO discussions and negations. 3. Because of the dependence of developing countries on the developed ones, the developed countries are able to resort to arms-twisting tactics. 4. Many of the policy liberalisations are done without considering the vulnerability of the developing countries and the possible adverse effect on them. 5. The WTO has not been successful in imposing the organisation’s disciplines on the developed countries. ❖ The developing countries have, in general, been getting a raw deal from the WTO. ❖ It is necessary that the developing countries do their homework properly before they go to the negotiating table, stand united to protect their common interests, and formulate and implement strategies to combat the threats, and to take advantage of the opportunities of the emerging world order. www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

International Monetary Fund (IMF) ❖ The International Monetary Fund (IMF), which was established on 31 December 27, 1945 with 29 countries began financial operations on March 1, 1947. It seeks to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. The resources of the IMF come from two sources, viz., (i) Subscription by members, and (ii) Borrowings. Primary Aims The primary aims of IMF are: 1. Promote international monetary cooperation; 2. Facilitate the expansion and balanced growth of international trade; 3. Promote exchange stability; 4. Assist in the establishment of a multilateral system of payments; and 5. Make resources available (with adequate safeguards) to members experiencing balance_x0002_of-payments difficulties. www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

International Monetary Fund (IMF) - Purpose 32 ❖ The IMF’s statutory purposes include promoting the balanced expansion of world trade, the stability of exchange rates, the avoidance of competitive currency devaluations, and the orderly correction of a country’s balance-of-payments problems. According to Articles of Agreement, the purposes of the International Monetary Fund are: 1. To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems. 2. To facilitate 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 of the productive resources of all members as primary objectives of economic policy. 3. To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation. www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

International Monetary Fund (IMF) - Purpose 33 4. To assist in the establishment of a 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 give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity. 6. In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members. www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

Special Drawing Right (SDR) 34 ❖ The special drawing right (SDR) is an international reserve asset introduced by the IMF in 1969 (under the First Amendment to its Articles of Agreement) out of concern among IMF members that the stock, and prospective growth, of international reserves might not be sufficient to support the expansion of world trade. ❖ The main reserve assets were gold and US dollars, and members did not want global reserves to depend on gold production, with its inherent uncertainties, and continuing US balance of payments deficits, which would be needed to provide continuing growth in US dollar reserves. ❖ The SDR was introduced as a supplementary reserve asset, which the IMF could “allocate” periodically to members when the need arose, and cancel, as necessary. ❖ The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. ❖ The SDR value is set daily using a basket of major currencies: US Dollar, Euro, Japanese Yen, Pound Sterling and the Chinese Renminbi. www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

World Bank 35 ❖ The World Bank Group, originated as a result of the Bretton Woods Conference of 1944, is one of the world’s largest sources of development assistance and it has extended assistance to more than 100 developing economies, bringing a mix of finance and ideas to improve living standards and eliminate the worst forms of poverty. For each of its clients, the Bank works with government agencies, non- governmental organisations, and the private sector to formulate assistance strategies. ❖ The World Bank Group consists of five closely associated institutions, each institution playing a distinct role in the mission to fight poverty and improve living standards for people in the developing world. The term World Bank refers specifically to two of the five, The International Bank for Reconstruction and Development (IBRD) and The International Development Association (IDA). The other institutions are The International Finance Corporation (IFC), The Multilateral Investment Guarantee Agency (MIGA) and The International Centre for Settlement of Investment Disputes (ICSID). ❖ While all five specialise in different aspects of development, they use their comparative advantages to work collaboratively toward the same overarching goal— poverty reduction. www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

World Bank 36 All right are reserved with CU-IDOL ❖ Mission: The mission of the Bank is to: ❖ Fight poverty with passion and professionalism for lasting results. ❖ Help people help themselves and their environment by providing resources, sharing knowledge, building capacity, and forging partnerships in the public and private sectors. ❖ Be an excellent institution able to attract, excite, and nurture diverse and committed staff with exceptional skills who know how to listen and learn. ❖ The principles of the Bank: client-centered, working in partnership, accountable for quality results, dedicated to financial integrity and cost-effectiveness, inspired and innovative. www.cuidol.in Unit-6 (MBA605)

World Bank Purposes: The purposes of the Bank, as laid down in its Articles of Agreement, are: 37 ❖ To assist in the reconstruction and development of the territories of the members, by facilitating the investment of capital for productive purposes, including the restoration of economies destroyed or disrupted by war, the reconversion of productive facilities to peace-time needs, and the encouragement of the development of productive facilities and resources in less developed countries. ❖ To promote private foreign investment by means of guarantees or participation in loans and other investments made by private investors, and when private capital is not available on reasonable terms, to supplement private investment by providing, on suitable conditions, finance for productive purposes out of its own capital funds raised by it and other resources. ❖ To promote the long-range balanced growth of international trade and the maintenance of equilibrium in the balance of payments, by encouraging international investment of the productive resources of members, thereby assisting in raising productivity, the standards of living and conditions of labour in their territories. www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

World Bank ❖ To promote private foreign investment by means of guarantees or participation in loans and other investments 3 8 made by private investors, and when private capital is not available on reasonable terms, to supplement private investment by providing, on suitable conditions, finance for productive purposes out of its own capital funds. ❖ To promote the long-range balanced growth of international trade and the maintenance of equilibrium in the balance of payments, by encouraging international investment of the productive resources of members, thereby assisting in raising productivity, the standards of living and conditions of labour in their territories. ❖ Orientations ❖ The main focus is on helping the poorest people and the poorest countries. The Bank emphasises the need for: ❖ Investing in people, particularly through basic health and education. ❖ Focusing on social development, inclusion, governance and institution-building as key elements of poverty reduction. ❖ Strengthening the ability of the governments to deliver quality services, efficiently and transparently. ❖ Protecting the environment. ❖ Supporting and encouraging private business development. www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

Trade Blocs/RTAs The term economic integration is a general term which covers several kinds of arrangements by which two 39 or more countries come together for joint efforts to promote economic development or other causes. The term Trade Bloc or RTA, which is one of the forms of economic integration, is commonly used to refer to the type of arrangement that removes artificial trade barriers, like tariffs and quantitative restrictions, between the integrating economies. A well integrated regional integration scheme is expected to give a boost to business and economic growth within the region (i.e., the countries encompassing the integration scheme) because: There will be the free flow of trade (unrestricted trade in goods and services). Free movement of factors of production – labour, capital and technology. Freedom to choose the optimum location (within the region) for business activities. Freedom to source any input – capital goods/technology, raw materials, parts/components, finance, human resource from the best source within the region. Economies of scale associated with the expansion of the market. www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

Trade Blocs/RTAs - Rationale and Objectives The motivation to form trading blocs may vary from region to region and from country to country. Nevertheless, as 40 Shiells suggests, the following motivations seem to play a key role in the formation of trading blocs. 1. To obtain economic benefits from achieving a more efficient production structure by exploiting economies of scale through spreading fixed costs over larger regional markets, increased economic growth from foreign direct investment, learning from experience etc. 2. To pursue non-economic objectives such as strengthening political ties and managing migration flows. 3. To ensure increased security of market access for smaller countries by forming regional trading blocs with larger countries. 4. To improve members’ bargaining strength in multilateral trade negotiations or to protest against the slow pace of trade negotiations. 5. To promote regional infant industries which cannot be viable without a protected regional market. 6. Finally, to prevent further damage to their trading strength due to further trade diversion from third countries.. www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

Some Important Integration Schemes 41 Europen Union (EU) Economic Significance and Setbacks: The prominent objective of the EU has been to create a very large and highly competitive economy that can stand in good stead with USA, Japan etc., and now, of course with emerging economies like China, India and South East Asian. A very conspicuous milestone in the development of the EU was the introduction of a common currency – the Euro – which is now the currency of majority (but not all) of the member nations of the Union. The EU accounts for around one-third of the global merchandise trade. The EU suffered a setback with the decision of British citizens to exit the EU (known as Brexit), expressed through the referendum of June 23, 2016. The Brexit is just one of the reflections of the growing dissatisfaction people of EU nations which have economic, social, demographic and political dimensions. www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

Some Important Integration Schemes 42 North American Free Trade Agreement (NAFTA) The NAFTA had its origin in the Canada-US Free Trade Agreement which became effective on January 1, 1989. Mexico became a member of it with effect from January 1, 1994. NAFTA has, in fact, been perceived to expand by pulling together North, Central and South America. NAFTA covers the following areas: 1. Market access: Tariff and non-tariff barriers, rules of origin and governmental procurement. 2. Trade rules: Safeguards, subsidies, countervailing and anti-dumping duties, health and safety standards. 3. Services: Provides for the same safeguards for trade in services (consulting, engineering, software etc.) that exist for trade in goods. 4. Investment: Establishes investment rules governing minority interests, portfolio investment, real property and majority-owned or controlled investments from the NAFTA countries; in addition, NAFTA coverage extends to investments made by any company incorporated in a NAFTA country, regardless of country of origin. 5. Intellectual property: All three countries pledge to provide adequate and effective protection and enforcement of intellectual property rights, while ensuring that enforcement measures do not themselves become barriers to legitimate trade. 6. Dispute settlement: Provides a dispute settlement process that will be followed instead of countries taking unilateral action against an offending party. www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

Economic Integration/Cooperation 43 Involving India SAARC/SAPTA/SAFTA ❖ The South Asian Association for Regional Cooperation (SAARC) involving seven countries, namely, India, Bangladesh, Pakistan, Nepal, Bhutan, Sri Lanka and Maldives, was formally launched in December 1985. ❖ The birth of SAARC was a logical response to the problems facing the region. The Secretariat of the Association is at Kathmandu, Nepal. The member countries of SAARC have many common features and problems which are characteristic of the developing countries. ❖ There are a number of areas which offer scope for development through mutual help and cooperation like meteorology, health, civil aviation, shipping, agriculture, communication and renewable sources of energy. ❖ SAARC countries are characterised by low per capita income and high population density. www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

Objectives of SAFTA 44 ❖ The objectives of SAFTA are to promote and enhance mutual trade and economic cooperation among Contracting States by, inter alia: ❖ (a) Eliminating barriers to trade in, and facilitating the cross-border movement of goods between the territories of the Contracting States; ❖ (b) Promoting conditions of fair competition in the free trade area, and ensuring equitable benefits to all Contracting States, taking into account their respective levels and pattern of economic development; ❖ (c) Creating effective mechanism for the implementation and application of this Agreement, for its joint administration and for the resolution of disputes; and ❖ (d) Establishing a framework for further regional cooperation to expand and enhance the mutual benefits of this Agreement. ❖ SAFTA’s main provisions called for the gradual reduction of tariffs and other trade barriers between the members, with some tariffs being removed immediately and others over periods of several years. SAFTA aimed at eventual duty-free access for a vast range of manufactured goods and commodities traded between the signatories. www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

ASEAN-India Free Trade Area (AIFTA) 45 ❖ The Association of South-East Asian Nations (ASEAN) was established on August 8, 1967 by five founding members – Indonesia, Malaysia, Philippines, Singapore and Thailand – with the objective of furthering their economic, socio-cultural, political and security integration and development. Another five nations became members of ASEAN between 1984 and 1999. Except Vietnam, the members who joined later are economically much poorer and weaker than the original five. ASEAN has a comprehensive development agenda. ❖ AIFTA ❖ A Free Trade Agreement between ASEAN and India, known as ASEAN-India Free Trade Area (AIFTA), came into effect from January 1, 2010. ❖ The ASEAN-India Free Trade Area (AIFTA) seeks to significantly reduce the trade barriers; it does not completely eliminate tariff barriers as it should be expected of a true free trade area. ❖ Many fear that the AIFTA will have very destructive effects on Indian economy, particularly on the agricultural sector. However, it is also felt the Agreement will have beneficial effects. www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

Indo-Lanka Free Trade Agreement ❖ According to the Bilateral Free Trade Area Agreement signed by India 46 and Sri Lanka on December 28, 1998, a large number of items will be eligible for duty free trade. India has offered to permit as much as 1000 items on zero duty from Sri Lanka and Sri Lanka will allow duty free imports of 900 items from India. ❖ The main objectives of this Free Trade Agreement, according to its Preamble, are the following: 1. To promote, through the expansion of trade, the harmonious development of the economic relations between India and Sri Lanka. 2. To provide fair conditions of competition for trade between India and Sri Lanka. 3. In the implementation of this agreement, both the countries would pay due regard to the principle of reciprocity. 4. To contribute, in this way, by the removal of barriers to trade to the harmonious development and expansion of world trade. www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

SUMMARY ❖ Foreign capital plays a very important role in the economic development, both of developed and developing nations. 47 ❖ Encouraged by the favourable business environment fostered by the global liberalisation, the international private capital flows have been increasing rapidly with periodic downturns. ❖ Cross-border M&As have been the major driver of the recent surge in the FDI. ❖ FDI inflows to the developing countries have increased substantially in the recent decades and their share in the global FDI inflows in some of the recent years was more half of the total. ❖ The FDI outflows from developing countries too increased impressively. Recently, there has been a spurt in India’s inward FDI flows. Outflows too increased significantly. www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

SUMMARY ❖ The FDI outflows from developing countries too increased impressively. Recently, there has been a spurt in India’s 48 inward FDI flows. Outflows too increased significantly. ❖ Multinational corporations (MNCs), also known by such names as international corporation, transnational corporation (TNC), global corporation (or firm, company or enterprise) etc. with their large number of foreign affiliates and a plethora of inter-firm arrangements, spans virtually all countries and economic activities. ❖ National economic policies, and international economic and business transactions are influenced by a number of international organisations sponsored by the United Nations system such as the IMF, World Bank, WTO etc. ❖ The World Trade Organisation (WTO) is the only global international organisation dealing with the rules of trade between nations. The WTO provides a forum for negotiating agreements aimed at reducing obstacles to international trade and ensuring a level playing field for all, thus contributing to economic growth and development. www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

FREQUENTLY ASKED QUESTIONS Q.1 Write the full forms of following abbreviations. 49 1. ASEAN: Association of South-East Asian Nations 2. AIFTA: ASEAN-India Free Trade Area 3. EU: European Union 4. EEC: European Economic Community 5. ECM: European Common Market 6. FTA: Free Trade Area 7. GATT: General Agreement on Tariffs and Trade 8. WTO: World Trade Organisation Q2. Write the full forms of following abbreviations. 9. IMF: International Monetary Fund 10. IPR: Intellectual Property Right 11. NAFTA: North American Free Trade Agreement 12. SAARC: South Asian Association for Regional Cooperation 13. SAPTA: SAARC Preferential Trade Arrangement 14. SAFTA: South Asian Free Trade Area 15. SD: Special Drawing Right 16. TRIPs: Trade Related Aspects of Intellectual Property Rights 17. RIA: Regional Integration Agreement/Arrangement 18. RTA: Regional Trade Agreement www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL

MULTIPLE CHOICE QUESTIONS 1. Euro is the currency of: (b) All EU nations 50 (a) All European nations (d) All EU nations except UK (c) Majority of the EU nations 2. SAARC is: (b) South Asian Association for Regional Cooperation (a) South African Association for Regional (d) South Asian Association for Regional Cooperation (c) South American Association for Regional Communication 3. SDR stands for: (b) Special Duty Rate (a) Special Development Requirement (d) Special Drawing Right (c) Special Drawing Rate 4. Bretton Woods twins refer to: (b) World Bank and WTO (a) GATT and WTO (d) MF and World Bank (c) IMF and WTO Answer : 1. (c), 2.(b), 3.(d) , 4.(d) www.cuidol.in Unit-6 (MBA605) All right are reserved with CU-IDOL