Business Environment Handouts

Business Environment 1
Unit I
Introduction to Business Environment
Business environment - Dynamic factors of environment - Importance of scanning
the environment - Fundamental issues - Economics environment of business - Socio -
cultural environment - political/legal environment - Cultural environment.
Business Environment:
Business Environment has been defined by Bayard O. Wheeler as “the total of all
things external to firms and industries which affect their organization and
operation”.
According to Arthur M. Weimer, business environment encompasses the ‘climate’

or set of conditions, economic, social, political or institutional in which business
operations are conducted.
Concept of Business Environment
A business firm is an open system. It gets resources from the environment and
supplies its goods and services to the environment. There are different levels of
environmental forces. Some are close and internal forces whereas others are
external forces. External forces may be related to national level, regional level or
international level. These environmental forces provide opportunities or threats to
the business community. Every business organization tries to grasp the available
opportunities and face the threats that emerge from the business environment.
Business organizations cannot change the external environment but they just
react. They change their internal business components (internal environment) to
grasp the external opportunities and face the external environmental threats. It is,
therefore, very important to analyze business environment to survive and to get
success for a business in its industry. It is, therefore, a vital role of managers to
analyze business environment so that they could pursue effective business
strategy. A business firm gets human resources, capital, technology, information,
energy, and raw materials from society. It follows government rules and
regulations, social norms and cultural values, regional treaty and global alignment,
economic rules and tax policies of the government. Thus, a business organization
is a dynamic entity because it operates in a dynamic business environment.
The business environment or the external forces acting on the business consists of
a large number of forces.
These are.
1. Demographic
2. Economic
3. Geographical
4. Ecological
5. Social and Cultural
6. Political & Legal
7. Technological
Prepared by Mr. A. Jayakumar.BBM, MBA, M.Com
1. Demographic Factors:
Demography is a study of human population with reference to its size, density,
distribution and other connected vital statistics. This information is very essential
in modern days for planning and development and also for framing laws relating to
society and business. The density of population, the extent of their standard of
living, the level of their education and the nature of their occupation etc., greatly
influence the type of business the entrepreneurs could undertake. The business
units require customers for its survival and growth; naturally business can thrive in
populace regions, though now-a day’s transportation helps a lot in bringing the
commodities to the scarcely populated areas.
2. Economic Factors:
The business enterprise is affected by various economic forces which cannot be
controlled by the business. These economic forces, can be divided into two
categories, ie. Demand Force and Competitive Force. For a business firm to survive
and thrive, it should have adequate demand for its products. At the same time, the
firm has to complete with the rival firm producing similar products or substitute
products.
Economic forces affecting demand:
For customers to buy the commodity of the firm, they should have the ability to
buy and willingness to buy. The ability to buy a commodity depends on the income
of the customer, to be very precise, the disposable income of the customer. Out of
the total income, the individual has to pay taxes due to the government and the
disposable income will be less if the taxes are high. Secondly, if the individual
wants to save more, the amount for spending will be less. Thus, the ability to buy a
commodity depends on the a) Total income earned out of the employment of the
individual b) The taxes of the government and c) The savings of the individual.
An increase in tax will reduce the demand for the commodity. The attitude of the
individual towards ‘Saving’ will affect the demand. A change in ‘Price’ of the
commodity will affect the demand. Expectation of a further change in price or
change in taxes will also affect the demand.
Competitive forces:
The competitive tools are price cutting, advertisement, product differentiation,
marketing strategies and consumer service.
Price cutting:
Price cutting or price reduction is a method which has to be adopted very
cautiously, as it may ultimately lead to price-war between firms competing,
resulting in reduction of profits.
Advertisement:
Advertisements in modern days have become a very powerful tool in persuading
the consumers of a product to a particular brand. In monopolistic competition, a
large share of the market is entrenched by firms making effective and aggressive
advertisement.

Product differentiation:
A firm tries to get competitive strength by differentiating its product from those of
its rivals. By having special design, colour, packing and features, the firm tries to
get competitive edges.
Marketing strategies and Consumer Service:
Modern firm adopt various types of marketing strategies to create market for their
products. Installment system, credit system, hire-purchase, etc., are the prominent
ways by which firms try to cut through the poor segments of the society and
convert them their customers. Besides customer service like, free door delivery,
quick service, after sales service, guarantee from defects up to a certain period are
adopted to have more and more demand for their commodities.
3. Geographical and Ecological Environment:
Geographical conditions, to a greater extent, influence the type of industries and
business in a region. Generally, the people of a particular geographical region will
have similar tastes, preferences and requirements. The geographical situation, the
physical feature, the climate, rainfall, humidity, the vegetation, etc., decide the
type of living in a particular region and only those industries which could cater to
the needs of the people, could develop. In other words, geographical conditions
exert profound influence on the location of the business.
Ecological is a study “dealing with the interaction of living organism with each
other and with their non-living environment”. It is a science telling about the
relationship of all living beings. (ie., human beings, animals, plants) with non- living
beings (air, water, soil represented by atmosphere, rivers, lakes, mountains and
land).
4. Social and Cultural Environment:
Social and Cultural attitudes of a region influence the business organizations of the
region influence the business organizations of the region in a verity of ways. The
business practices and the management technique of the organization should cope
with the social and cultural attitudes of the people.
The modern business is a social system in itself, but it is also part of a larger social
system represented by society in general. Clearly, there should be some reciprocal
relationship between business and this larger society. To put it shortly, the
business should adopt itself to the social and cultural environment.
It is the class structure of the society. It tells about the social roles and
organizations and the development of social institutions. The class-structure
depend upon the occupation of the people, their education, income level, social
status, their mobility, their attitude towards living, work and social relationship and
above all, their attitude towards business.
Every society develops its own ‘culture’ which means how the members of that
society behave and interact with each other in society, as well as outside society.
The term culture includes values, norms, customs, ethics, goals and other
accepted behaviour patterns.
5. Political and Legal Environment:
Political Environment:
All business firms are directly affected to a greater or lesser degree by the
government and its programmes. Political forces will decide the nature of business,
programmes and projects to be
undertaken for the development of the country. These political forces can be
classified as long term forces, quick changes, cyclical changes and regional
factors.
Long term forces denote the secular trends in business activities due to the
political conditions prevailing and the adoption of a particular line of policy in
business.
Quick Changes consist of sudden political changes due to army coup or revolt or
capturing of the government machinery by the dissident group. The quick change
may also be the result of proclamation of ‘emergency’ or ‘Martial Law’ due to
sudden outbreak of war with a belligerent nation. In all these cases, the business
manager has to take quick decisions to adopt his business to the changed
environment.
Cyclical Changes denote periodical anticipated changes like ’General Election’
which may change the government and consequent change in plans and
programmes as well as priorities by the new Government.
Regional Factors the regional consideration may dominate the political scene.
Development of agricultural or development of an industrially backward region
may draw the attention of politicians and government. Consequently, special
legislations or policies will be framed to help the backward regions or sector. In
such changes, the business has to adopt itself by studying and estimating the risks
and dangers involved in taking decisions.
Legal Environment:
Business in a country can be started and nurtured to grow into big business only
within the legal system of the country. In this connection, all countries of the word
have a separate set of laws for the control and direction of business. The business
law of the country is a complex system of regulations and intervention that form
the legal environment of the business. All business managers should have the
knowledge of business law for taking management decision.
6. Technological Environment
Technology means “the systematic knowledge of the industrial arts”. ‘Technique’
denotes the method of performance. These two are increasingly used in modern
literature on industrial production. The present age is the age of technology.
Technology affects the business in two ways.
i) Its impact on the society and
ii) Its impact on business operation.
Environmental Scanning:
The concept of the Environment
Philosophically, the environment of a corporation includes all those realities whose
existence may effect the corporation directly in any perceptible way. These
realities may be sorted out in the following four categories:
1. The “Community” that is made up of all the human begins that inhabit it and
all their social organizations of all kinds
2. The “Culture” that is made up of all the constructs of the human mind that
affect the behaviour of all these individuals and organizations
3. The “Habitat” that includes all the physical features of this environment
4. The “Product” that includes all things made and services rendered by man
Applying the prevailing culture and using and consuming natural features of the
habitat and the product of past periods, the entries of the community have an
existence and generate goods and services.
Operationally, however, there are two main types of environment: corporate
environment and product/market environment. The corporate environment is
classified in three parts: external, operating, and internal. The external
environment comprises political, social, technological, and economic forces at work
surrounding the organization. The operating environment refers to interaction with
and between those entities having a stake in the organization. The internal
environment constitutes forces at work within the organization. The operating
environment is significant for day-to-day decisions and is, therefore, exclude from
further discussion here. The remaining two environments are appropriate for
strategic planning.
Importance of Environmental Scanning:

Without taking into account relevant environmental influences, a company cannot
expect to develop its strategy. It was the environmental influences emerging out of
the energy crisis that were responsible for the popularity of smaller, more fuel-
efficient automobiles and that brought about the demise of less efficient rotary
engines. It was the environmental influence of a coffee bean shortage and
geometric price increases that spawned the “coffee-saver” modification in Mr.
Coffee automatic drip coffee makers. Shopper and merchant complaints from an
earlier era contributed to the virtual elimination of deposit bottles; recent
pressures from environmental groups, however, have forced their return and have
prompted companies to develop low-cost, recyclable plastic bottles. Another
environmental trend, Americans’ insatiable appetite for eating out (in 1990,
restaurant sales accounted for $0.44 of every $1 spent on food; this number is
expected to reach $0.63 by the year 2000), worries food companies such as Kraft.
In response, Kraft is trying to make cooking as convenient as eating out (e.g., by
providing high-quality convenience foods) to win back food dollars. The sad tales of
companies that seemingly did everything right and yet lost competitive leadership
as a result of technological change abound. Du Pont was beaten by Celanese when
bias-ply tire cords changed from nylon to polyester. B.F. Goodrich was beaten by
Michelin when the radial overtook the bias-ply tire. NCR wrote off $139 million in
electro-mechanical inventory and the equipment to make it when solid-state point-
of-sale terminals entered the market.
Xerox let Canon create the small-copier market. Bucyrus-Erie allowed Caterpillar
and Deere to take over the mechanical excavator market. These companies lost
even though they were low-cost producers. They lost even though they were close
to their customers. They lost even though they were market leaders. They lost
because they failed to make an effective transition from old to new technology. In
brief, business derives its existence from the environment. Thus, it should monitor
its environment constructively. Business should scan the environment and
incorporate the impact of environmental trends on the organization by continually

reviewing the corporate strategy. The underlying importance of environmental

scanning is captured in Darwinian laws: (a) the environment is ever-changing, (b)
organisms have the ability to adapt to a changing environment, and (c) organisms
that do not adapt do not survive. We are indeed living in a rapidly changing world.
Many things that we take for granted today were not even imagined in the 1960s.
As we enter the next century, many more “wonders” will come to exist. To survive
and prosper in the midst of a changing environment, companies must stay at the
forefront of changes affecting their industries. First, it must be recognized that all
products and processes have performance limits and that the closer one comes to
these limits the more expensive it becomes to squeeze out the next generation of
performance improvements. Second, one must take all competition seriously.
Normally, competitor analyses seem to implicitly assume that the most serious
competitors are the ones with the largest resources. But in the context of taking
advantage of environmental shifts, this assumption is frequently not adequate.
Texas Instruments was a $5- to $10-million company in 1955 when it took on the
mighty vacuum tube manufacturers RCA, GE, Sylvania, and Westinghouse and
beat them with its semiconductor technology. Boeing was nearly bankrupt when it
successfully introduced the commercial jet plane, vanquishing larger and more
financially secure Lockheed, McDonnell, and Douglas corporations. Third, if the
environmental change promises potential advantage, one must attack to win and
attack even to play the game. Attack means gaining access to new technology,
training people in its use, investing in capacity to use it, devising strategies to
protect the position, and holding off on investments in mature lines. For example,
IBM capitalized on the emerging personal computer market created by its
competitor, Apple Computer. By becoming the low-cost producer, distributor,
seller, and servicer of personal computers for business use, IBM took command of
the marketplace in less than two years. Fourth, the attack must begin early. The
substitution of one product or process for another proceeds slowly and then
predictably explodes. One cannot wait for the explosion to occur to react. There is
simply not enough time. B.F. Goodrich lost 25 percentage points of market share
to Michelin in four years. Texas Instruments passed RCA in sales of active
electronic devices in five to six years. Fifth, a close tie is needed between the CEO
and the operating managers. Facing change means incorporating the
environmental shifts in all aspects of the company’s strategy.
Economics and the Business Environment:

The Firm as a Legal Entity
• The sole proprietor
– limited scope for expansion
– unlimited liability
• The partnership
• Companies
– limited liability
– public limited companies (plc)
• public issues of shares
• shares traded on the Stock Exchange
– private limited companies

– consortia
– public corporations
The Internal Organisation of the Firm
1. U-form business organisation
2. M-form business organisation
U-form business organisation
C h i e f e x e c u t i v
P r o d Fu ci n t ai o n S n c a e l e P s u r c h a
• U-form
– advantages
• direct control by central executive of the firm
• clear goals
– problems of large U-form firms
• co-ordination and communication costs
• distorted information
• decline in organisational efficiency
M-form business organisation
H e a d O f f ic e
D i v is io nD i1 v i s i o nD i2 v i s i o n
P r o d u c t Fi o i nn a n c e S a le s P u r c h a s i n g
• M-form
– advantages
• reduced length of information flows
• enhanced level of control
– problems
• bureaucracy and communication problems

• conflicts between divisions
• The flat organisation
• The holding company
– role of parent company and subsidiaries
The Aims of the Firm

• Goals of the firm
• The traditional theory of the firm
• Alternative theories
– the divorce of ownership from control
– the development of the joint-stock company
– managerial objectives
• The principal / agent relationship
– the principal – agent problem
– asymmetric information
– dealing with imperfect information
• monitoring
• incentives
• The goal of staying in business
– the willingness of firms to take risks
– problems of being over cautious
The External Business Environment

• PEST analysis
– Political / legal factors
– Economic factors
• the microeconomic environment
• the macroeconomic environment
– Social / cultural factors
– Technological factors
• Using PEST analysis
– relations between the four sets of factors
– importance of the economic factors
• Classifying industries
– Classifying production
• primary production
• secondary production
• tertiary production
• Classifying firms into industries
– nature of an industry
– industrial sectors
– why classify firms into industrial sectors?
• helps in analysing trends
• identifying specific needs
• helps to understand relationships between firms
• Standard industrial classification

– nature of the system of classification
– sections, subsections
• divisions, groups and classes
The Economist's Approach to Business
• Tackling the problem of scarcity
– meaning of scarcity
– production and consumption
• role of the business economist
– study of consumer behaviour
– study of firms
– factors of production
• labour
• land and raw materials
• capital
• Demand and supply
– actual and potential demand and supply
– the role of firms in satisfying demand
– business economists’ study of the supply process
• Macroeconomics and microeconomics
– macroeconomics
• the balancing of aggregate demand and supply
– microeconomics
• the balancing of the demand and supply for particular products
• Microeconomics and choice
– What?
– How?
– For whom?
• Choice and opportunity cost
– the meaning of opportunity cost
– rational choices
– marginal costs and benefits
• Microeconomic choices and the firm
Political/Legal Environment
Home and Host Country Political Environments
The Uncontrollable
• Sovereignty of nations and nationalism
• Stability of government policy
• Political risks in global business
o Confiscation
o Expropriation
o Domestication
• Embargoes, Boycotts and Sanctions
• Violence
• Economic and Commercial risks
o Exchange controls
o Import restrictions
o Local-content laws
o Price controls
o Labor problems
o Tax controls
o Commercial risks
• Assessment of potential political risks
• Politically sensitive products
• Reducing political vulnerability
o Good corporate citizenship
o Managing citizen affairs
o Understand the differences in political ideologies
• Strategies to lessen political risks
o Joint venture
o Expanding the investment base (Local financial partner)
o Marketing and distribution
o Licensing
o Planned domestication (Greater local participation)
o Use risk reduction through adequate insurance
• Strategies to reduce commercial risks
o Joint venture
o Investment base expansion
o Marketing and distribution
o Licensing
o Planned domestication (Greater local participation)
Home and Host Country Legal Environment

Bases for legal systems
o Common law (British/English)
o Code law (Roman law)
o Islamic law
o Socialist law
Legal dispute situations
o Between governments
o Between companies and governments
o Between companies
Political Environment - Individual Governments
• Government affects almost every aspect of business life in a country.
• National politics affect business environment directly, through changes in
policies, regulations, and laws.
• The political stability and mood in a country affect the actions a government
will take.
Structure of Government:
– Ideology

– Communism
– Capitalism
– Socialism
– Political Parties
• Single-party-dominant country
• Dual-party system
• Multi-party system
– Government Policies and Regulations: It is the role of government to promote
a country’s interests in the international arena for various reasons and
objectives such as: national security, developing new industries, and
protecting declining industries.
– Incentives and Government Programs
– Government Procurement
– Trade Laws
– Tariff and No tariff Barriers
– Embargoes and Sanctions
– Export License Requirements
What is Law?
• Law provides rules
• It tells us what we can and cannot do
• This is true in our personal lives (eg criminal law)
• And in our business lives (eg contract law)
• Therefore, it is important for a businessperson to know the rules which apply
to them
Bases of Legal Systems

• There are four primary basis of legal systems across the world:
– Common Law
– Civil or Code Law
– Islamic Law
– Marxist-Socialists Law
Common Law
• Common law is based on tradition, past practices, and legal precedents set
by interpretations of statutes, legal legislation, and past rulings.
– Found in US, England, Canada, etc.
• Common law has a premise that the rules are incomplete and tries to
establish rules on currently existing laws that relate to approximately the
same issues.
Code Law
• Code law is considered an all inclusive system of written laws which can be
broken up into commercial, civil, and criminal.
– Tends to be in Germany, Japan, and France.
• Code law leaves room for a broad set of interpretations of the rules.
Major Differences in Common versus Code Law
• In common law, ownership is usually established by use, where as in code
law, ownership is established under registration.
• Under common law, only forces of nature are reasons for not complying with
the fulfillment of a contract, whereas in code law, unforeseeable events are
enough.
Islamic Law
• Islamic law is based on the interpretation of the Koran.
• It encompasses both religious and secular aspects as to how a human may
act.
• Understanding Islamic law means understanding both the intent of the
writers of the Koran, as well as, the interpretation by the locals that are using
the law.
Marxist-Socialist Laws
• Since the fall of the Soviet Union, many of the laws that existed in those
respective countries have had to change with the time.
• Many of the laws are still being written which can imply an unstable legal
system?
Unit II
Economic & Non-Economic Environment:
Nature of Economic Environment - Economic factors-growth strategy - basic
economic system - economic planning - nature and structure of the economy -
Economic policies-industrial policy - Monetary and fiscal policies. Economic
Systems and their impact of Business – Macro economic parameters like GDP –
growth rate – Population – Urbanisation – Fiscal deficit – Plan investment – Per
capita Income and their impact on business decisions – Management of technology
- features and impact of technology - Demographic environment population size -
migration and ethnic aspects - birth rate - death rate and age structure.
Basic Economic Concepts

Wants - Simply the desires of citizens. Wants are different from needs as we will see below. Wants are
a means of expressing a perceived need. Wants are broader than needs.
Needs: These are basic requirements for survival like food and water and shelter. In recent years we
have seen a percieved shift of certain items from wants to needs. Telephone service, to many, is a need. I
would argue, however, that they are wrong.
Scarcity - the fundemental economic problem facing ALL societies. Essentially it is how to satisfy
unlimited wants with limited resources. This is the issue that plagues all government and peoples. How
do we conquor the issue of scarcity? Many people have thought they had the answer (see Marx, Smith,
Keynes, etc.) but the issue of scarcity still exists.
Factors of Production/Resources - these are those elements that a nations has at its disposal to deal
with the issue of scarcity. How efficiently these are used determines the measure of success a nation has.
They are
* Land - natural resources, etc.
* Capital - investment monies.
* Labor - the work force; size, education, quality, work ethic.

* Entrepreneurs - inventive and risk taking spirit. This is a rather new addition to a traditional list.
The "Three Basic Economic Questions" - these are the questions all nations must ask when dealing with
scarcity and efficiently allocating their resources.
* What to produce?
* How to produce?
* For whom to produce?
Economics - Economics is the study the production and distribution of goods and services, it is the
study of human efforts to satisfy unlimited wants with limited resources.
Opportunity Cost - the cost of an economic decision. The classic example is "guns or butter." What
should a nation produce; butter, a need, or guns, a want? What is the cost of either decision? If we
choose the guns the cost is the butter. If we choose butter, the cost is the guns. nations bust always deal
with the questions faced by opportunity cost. It is a matter of choices. Resources are limited thus we
cannot meet every need or want.
Free Products: Air, sunshine are and other items so plentiful no one could own them.
Economists are interested in "economic products" - goods and services that are useful, relatively scarce
and transferable.
Good: tangible commodity. These are bought, sold, traded and produced.
Consumer Goods: Goods that are intended for final use by the consumer.
Capital Goods: Items used in the creation of other goods. factory machinery, trucks, etc.
Durable Goods: Any good that lasts more than three years when used on a regular basis.
Non Durable Goods: Any item that lasts less than 3 years when used on a regular basis.
Services: Work that is performed for someone. Service cannot be touched or felt.
Consumers: people who use these goods and services.
Conspicuous Consumption: Use of a good or service to impress others.
Value: An assignment of worth. The assignment is usually based upon the utility (usefulness) or scarcity
of the item (supply and demand).
Utility: capacity to be useful.
Paradox of value: assignment of the highest value to those things we need the least, like water and the
highest things we often don't need at all like diamonds. Why do we do this? Good question. I do not
have an answer.
Wealth: the sum collection of those economic products those are tangible, scarce and useful.
Productivity - the ability to produce vast amounts of goods (economic products) in an efficient manner.
The American capitalist economy is productive because:
* We use our resource efficiently.

* We specialize to increase efficiency and productivity.
* We invest in Human Capital (our labor pool)
Comparative Economic Systems
As we have said, all nations must answer the question of scarcity. All nations and societies must allocate
their resources in order to meet their needs. This is where the essential dilemma between unlimited
wants and limited needs comes into play. We have also noted that all nations must make choices. This is
a matter of resource allocation. When we allocate limited resources we make choices. The cost of these
choices is known as opportunity cost. When making these choices and dealing with scarcity, resource
allocation and opportunity cost nations are answering what we have previously referred to as the three
basic economic questions. These are the questions all nations must ask when dealing with scarcity and
efficiently allocating their resources. They are:
* What to produce?
* How to produce?
* For whom to produce?
Each nation and society thus must make choices and decision based upon there own values. If a society
values meeting more wants and needs at the expense of freedom of choice then they may choose a
system radically different then our own. Thus we have seen the creation of a variety of economic
systems.
Economic systems are divided up into three basic types. These types are:
* Traditional Economic Systems

* Market Economic Systems
* Command Economic Systems
Traditional Economic System
A traditional economic system is one in which people's economic roles are the same as those of their
parents and grandparents. Societies that produce goods and services in traditional ways are found today
in some parts of South America, Asia, and Africa. There, people living in an agricultural village still
plant and harvest their own food on their own land. And the ways they produce clothing and shelter are
almost exactly the same as those used in the past. Tradition decides what these people do for a living and
how their work is performed.
Market Economic System
A market economic system is one in which a nation's economic decisions are the result of individual
decisions by buyers and sellers in the marketplace. The U.S. has a market economic system. When you
finish school, you may go to work where you choose, if a job is open. You are also free to go into
business on your own. Suppose that you decide to open a business. You will risk the money that you
have saved or borrowed in the hope that you will be successful. The price that you charge for your goods
or services will be influenced by the prices charged by your competitors (other businesses selling the
same items). The success that you have will depend on the demand by consumers for your goods. You
may do extremely well. But if people do not want what you are selling, you will go out of business.
Command Economic System
In a command economic system, the main decision maker is the government. No person may
independently decide to open and run any kind of business. The government decides what goods and
services are to be produced. And the government sells these goods and services. The government also
decides how the talents and skills of its workers are to be used.
major industries, such as coal mining, electric power, gas, telephone, and railroads, are owned by the
government. Under Sweden's national health insurance system, the people receive free medical services
all their lives.
If almost all the stores, factories, and farms in a nation are owned and operated by private individuals or
businesses, then its system is called free enterprise, or capitalism. The U.S. has a free enterprise, or
capitalist, economic system.
No country has an economic system that is 100 percent communism, socialism, or capitalism. All
countries today have mixed economic systems or mixed economies, with some free enterprise and some
government ownership.
In the U.S., as in most capitalist countries, there are many examples of government ownership. Public
colleges, high schools, and elementary schools, for example, are owned and operated by state or local
governments. Other publicly owned enterprises are the postal service, many municipal bus lines and
trains, a few electric power plants, and housing projects.
Economic Planning
Meaning and Need for Planning
The 20 th century was an era of planning. Almost every country had some sort of planning. In
socialist countries, planning is almost a religion. Even in countries like the U.S.A. and the U.K. with a
capitalistic system, they have partial planning. The 19th century State was a Laissez faire state. It
followed a policy of non – intervention in economic affairs. But the modern State is a Welfare State. The
two World Wars, the Great Depression of 1930s and the
success of planning in former Soviet Russia have underlined the need for planning. Planning is a gift of
former Soviet Russia to the world. For, it was the first country to practice economic planning on a
national scale.
According to Lionel Robbins, “strictly speaking, all economic life involves planning…. To plan is
to act with a purpose, to choose and choice is the essence of economic activity”.
In the words of Barbara Wootten, “Planning may be defined as the conscious and deliberate choice
of economic priorities by some public authorities”.
Many economists today agree that planning is an organized, conscious and continuous attempt to
select the basic available alternatives to achieve specific goals. Planning involves the
economizing of scarce resources.
Most of the underdeveloped countries of the world became independent only fifty or sixty years
back and most of them were poor at that time. So it became the main business of the Governments of the
newly emergent nations to provide food, clothing and shelter to their people. For that, first of all, they
had to increase their national income. Since most of them were agricultural countries, they had to evolve
some programmes for agricultural development. Not only that, they had to industrialize their economies.
And they had to provide more jobs to their people. That means, they had to do something for expanding
employment opportunities. Further, as most of them were wedded to some kind of socialism, they had to
reduce inequalities of income and wealth. All these things, the poor countries attempted to do by means
of economic planning.
Laissez faire policy is a luxury for modern governments. So they have economic plans. In the
developed nations of the world, they plan for economic stability. But in the underdeveloped nations,
they plan for economic growth and development.
Another main reason for the emergence of planning in underdeveloped countries is the failure of the
market mechanism. The capitalist economy is basically a market economy and price mechanism works
through the market system. The price system is a basic institution of capitalism. The allocation of
resources and distribution of rewards are done through the price system. All decisions of the
businessmen, farmers, industrialists and so on are guided by the profit motive. If the market is perfect,
price system is good. But if there is monopoly and other types of imperfect competition, the market
system fails. And it calls for government intervention by way of planning.
The dispute between planning and Laissez faire is essentially about efficiency. The case against
Laissez faire rests on the following grounds:
1. Under Laissez faire, income is not fairly distributed. As a consequence, less important and less
urgent goods are produced for the wealthy people while the poor lack basic goods like education, health,
housing, good food and ordinary comforts. Under such a situation, the State can control economic
activity by means of planning and reduce inequalities of income and wealth.
2. The market economy is a victim of trade cycles. And there will be alternating periods of
prosperity and depression. And during depression, there will be bad trade, falling prices and mass
unemployment. So there is need for state intervention. By means of proper planning, the State can
control trade cycles as they did in the case of former Soviet Russia.
Types of Planning
1. Centralized Planning: In a socialist economy (eg. Former Soviet Russia), there was centralized
planning; it was planning by direction. In a socialist state, most of the means of production are owned by
the State. All basic economic decisions such as whether priority is to be given for industrialization or for
development of agriculture ; if it is decided to give importance to industrialisation, whether to give
importance to basic and heavy industries or for consumer goods industries will be made by the central
authority.
2. Planning by Inducement: In a democracy, Planning is done by inducement. For example, ours is a
mixed economy where there is a public sector and a private sector. The government has to persuade the
industries in the private sector to fulfill the goals of the
Plan through inducements such as tax concessions and by providing incentives.
3. Indicative planning – In this type of planning, the government invites representatives of industry,
and business and discuss with them in advance what it proposes to do in the Plan
under question and indicates to them its priorities and goals. Then the Plan is formulated after detailed
discussions with varied interests.
Planning in France is a good example of indicative planning. After we embraced liberalization and
privatization policies in 1991, even Indian planning, in a way, has become indicative planning.

Economic plans can also be divided into midterm plans, short term plans and perspective plans. Our
Five Year Plans are in fact, midterm plans. Short term plans are Annual Plans. During the
period of implementation, Five Year Plans operated by dividing them into Annual Plans. Perspective
Plans are long term plans and the period ranges from 20 to 25 years. The Five Year Plans are formulated
by taking into account the long term objectives of the Perspective
Plan.
Rolling Plan : Unlike the Five Year Plan with fixed targets, in the case of the rolling plan, at the end of
each year, targets will be fixed by adding one more year to the Plan. That is, without fixed targets for all
the five years, depending upon the performance of the Plan in the current year, targets will be fixed for
one more year. Like this, it will go on a continuous basis. That is the idea behind the rolling plan.
A great advantage of centralized planning is that plans can be implemented with great speed and
targets and goals can be achieved.
For example, by means of planning, former Soviet Russia transformed its economy, which was
predominantly agricultural into a predominantly industrial nation, within a short span of 12 years. But a
demerit of centralized planning is that as the State enjoys a considerable degree of monopoly, in the
absence of competition, it is rather difficult to test the productive efficiency of state owned units. Under
planning by inducement (democratic planning), though there is a good deal of freedom for people,
because of the procedures and delays associated with the democratic process and because of
Parliamentary democracy, there will be a lot of delay in the
implementation of programmes and economic growth will be slow.
Monetary policy is the process by which the government, central bank, or monetary authority of a
country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of
interest, in order to attain a set of objectives oriented towards the growth and stability of the economy.[1]
Monetary theory provides insight into how to craft optimal monetary policy.
Monetary policy is referred to as either being an expansionary policy, or a contractionary policy, where
an expansionary policy increases the total supply of money in the economy, and a contractionary policy
decreases the total money supply. Expansionary policy is traditionally used to combat unemployment in
a recession by lowering interest rates, while contractionary policy involves raising interest rates in order
to combat inflation. Monetary policy should be contrasted with fiscal policy, which refers to government
borrowing, spending and taxation.
Overview
Monetary policy rests on the relationship between the rates of interest in an economy, that is the price at
which money can be borrowed, and the total supply of money. Monetary policy uses a variety of tools to
control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with
other currencies and unemployment. Where currency is under a monopoly of issuance, or where there is
a regulated system of issuing currency through banks which are tied to a central bank, the monetary
authority has the ability to alter the money supply and thus influence the interest rate (in order to achieve
policy goals). The beginning of monetary policy as such comes from the late 19th century, where it was
used to maintain the gold standard.
A policy is referred to as contractionary if it reduces the size of the money supply or raises the interest
rate. An expansionary policy increases the size of the money supply, or decreases the interest rate.
Furthermore, monetary policies are described as follows: accommodative, if the interest rate set by the
central monetary authority is intended to create economic growth; neutral, if it is intended neither to
create growth nor combat inflation; or tight if intended to reduce inflation.
There are several monetary policy tools available to achieve these ends: increasing interest rates by fiat;
reducing the monetary base; and increasing reserve requirements. All have the effect of contracting the
money supply; and, if reversed, expand the money supply. Since the 1970s, monetary policy has
generally been formed separately from fiscal policy. Even prior to the 1970s, the Bretton Woods system
still ensured that most nations would form the two policies separately.
Within almost all modern nations, special institutions (such as the Bank of England, the European
Central Bank, the Federal Reserve System in the United States, the Bank of Japan or Nippon Ginkō, the
Bank of Canada or the Reserve Bank of Australia) exist which have the task of executing the monetary
policy and often independently of the executive. In general, these institutions are called central banks
and often have other responsibilities such as supervising the smooth operation of the financial system.
The primary tool of monetary policy is open market operations. This entails managing the quantity of
money in circulation through the buying and selling of various credit instruments, foreign currencies or
commodities. All of these purchases or sales result in more or less base currency entering or leaving
market circulation.
Usually, the short term goal of open market operations is to achieve a specific short term interest rate
target. In other instances, monetary policy might instead entail the targeting of a specific exchange rate
relative to some foreign currency or else relative to gold. For example, in the case of the USA the
Federal Reserve targets the federal funds rate, the rate at which member banks lend to one another
overnight; however, the monetary policy of China is to target the exchange rate between the Chinese
renminbi and a basket of foreign currencies.
The other primary means of conducting monetary policy include: (i) Discount window lending (lender
of last resort); (ii) Fractional deposit lending (changes in the reserve requirement); (iii) Moral suasion
(cajoling certain market players to achieve specified outcomes); (iv) "Open mouth operations" (talking
monetary policy with the market).
Types of monetary policy:

In practice, all types of monetary policy involve modifying the amount of base currency (M0) in
circulation. This process of changing the liquidity of base currency through the open sales and purchases
of (government-issued) debt and credit instruments is called open market operations. Constant market
transactions by the monetary authority modify the supply of currency and this impacts other market
variables such as short term interest rates and the exchange rate. The distinction between the various
types of monetary policy lies primarily with the set of instruments and target variables that are used by
the monetary authority to achieve their goals.
Monetary Policy: Target Market Variable: Long Term Objective:
Interest rate on overnight
Inflation Targeting A given rate of change in the CPI
debt
Interest rate on overnight
Price Level Targeting A specific CPI number
debt
Monetary Aggregates The growth in money supply A given rate of change in the CPI
Fixed Exchange Rate The spot price of the currency The spot price of the currency
Low inflation as measured by the gold
Gold Standard The spot price of gold
price
Mixed Policy Usually interest rates Usually unemployment + CPI change
The different types of policy are also called monetary regimes, in parallel to exchange rate regimes. A
fixed exchange rate is also an exchange rate regime; The Gold standard results in a relatively fixed
regime towards the currency of other countries on the gold standard and a floating regime towards those
that are not. Targeting inflation, the price level or other monetary aggregates implies floating exchange
rate unless the management of the relevant foreign currencies is tracking the exact same variables (such
as a harmonized consumer price index).
Inflation targeting
Under this policy approach the target is to keep inflation, under a particular definition such as Consumer
Price Index, within a desired range.
The inflation target is achieved through periodic adjustments to the Central Bank interest rate target. The
interest rate used is generally the interbank rate at which banks lend to each other overnight for cash
flow purposes. Depending on the country this particular interest rate might be called the cash rate or
something similar.
The interest rate target is maintained for a specific duration using open market operations. Typically the
duration that the interest rate target is kept constant will vary between months and years. This interest
rate target is usually reviewed on a monthly or quarterly basis by a policy committee.
Changes to the interest rate target are made in response to various market indicators in an attempt to
forecast economic trends and in so doing keep the market on track towards achieving the defined
inflation target. For example, one simple method of inflation targeting called the Taylor rule adjusts the
interest rate in response to changes in the inflation rate and the output gap. The rule was proposed by
John B. Taylor of Stanford University.
The inflation targeting approach to monetary policy approach was pioneered in New Zealand. It is
currently used in Australia, Canada, Chile, the Eurozone, New Zealand, Norway, Iceland, Philippines,
Poland, Sweden, South Africa, Turkey, and the United Kingdom.
Price level targeting
Price level targeting is similar to inflation targeting except that CPI growth in one year is offset in
subsequent years such that over time the price level on aggregate does not move.
Something similar to price level targeting was tried by Sweden in the 1930s, and seems to have
contributed to the relatively good performance of the Swedish economy during the Great Depression. As
of 2004, no country operates monetary policy based on a price level target.
Monetary aggregates

In the 1980s, several countries used an approach based on a constant growth in the money supply. This
approach was refined to include different classes of money and credit (M0, M1 etc). In the USA this
approach to monetary policy was discontinued with the selection of Alan Greenspan as Fed Chairman.
This approach is also sometimes called monetarism.
While most monetary policy focuses on a price signal of one form or another, this approach is focused
on monetary quantities.
Fixed exchange rate
This policy is based on maintaining a fixed exchange rate with a foreign currency. There are varying
degrees of fixed exchange rates, which can be ranked in relation to how rigid the fixed exchange rate is
with the anchor nation.
Under a system of fiat fixed rates, the local government or monetary authority declares a fixed exchange
rate but does not actively buy or sell currency to maintain the rate. Instead, the rate is enforced by non-
convertibility measures (e.g. capital controls, import/export licenses, etc.). In this case there is a black
market exchange rate where the currency trades at its market/unofficial rate.
Under a system of fixed-convertibility, currency is bought and sold by the central bank or monetary
authority on a daily basis to achieve the target exchange rate. This target rate may be a fixed level or a
fixed band within which the exchange rate may fluctuate until the monetary authority intervenes to buy
or sell as necessary to maintain the exchange rate within the band. (In this case, the fixed exchange rate
with a fixed level can be seen as a special case of the fixed exchange rate with bands where the bands
are set to zero.)
Under a system of fixed exchange rates maintained by a currency board every unit of local currency
must be backed by a unit of foreign currency (correcting for the exchange rate). This ensures that the
local monetary base does not inflate without being backed by hard currency and eliminates any worries
about a run on the local currency by those wishing to convert the local currency to the hard (anchor)
currency.
Under dollarization, foreign currency (usually the US dollar, hence the term "dollarization") is used
freely as the medium of exchange either exclusively or in parallel with local currency. This outcome can
come about because the local population has lost all faith in the local currency, or it may also be a policy
of the government (usually to rein in inflation and import credible monetary policy).
These policies often abdicate monetary policy to the foreign monetary authority or government as
monetary policy in the pegging nation must align with monetary policy in the anchor nation to maintain
the exchange rate. The degree to which local monetary policy becomes dependent on the anchor nation
depends on factors such as capital mobility, openness, credit channels and other economic factors.
Gold standard
The gold standard is a system in which the price of the national currency as measured in units of gold
bars and is kept constant by the daily buying and selling of base currency to other countries and
nationals. (i.e. open market operations, cf. above). The selling of gold is very important for economic
growth and stability.
The gold standard might be regarded as a special case of the "Fixed Exchange Rate" policy. And the
gold price might be regarded as a special type of "Commodity Price Index".
Today this type of monetary policy is not used anywhere in the world, although a form of gold standard
was used widely across the world prior to 1971. For details see the Bretton Woods system. Its major
advantages were simplicity and transparency.
Fiscal policy refers to government attempts to influence the direction of the economy through changes
in government taxes, or through some spending (fiscal allowances).
Fiscal policy can be contrasted with the other main type of economic policy, monetary policy, which
attempts to stabilize the economy by controlling interest rates and the supply of money. The two main
instruments of fiscal policy are government spending and taxation. Changes in the level and composition
of taxation and government spending can impact on the following variables in the economy:
• Aggregate demand and the level of economic activity;

• The pattern of resource allocation;
• The distribution of income.
Fiscal policy refers to the overall effect of the budget outcome on economic activity. The three possible
stances of fiscal policy are neutral, expansionary and contractionary:
• A neutral stance of fiscal policy implies a balanced budget where G = T (Government spending
= Tax revenue). Government spending is fully funded by tax revenue and overall the budget
outcome has a neutral effect on the level of economic activity.
• An expansionary stance of fiscal policy involves a net increase in government spending (G > T)
through rises in government spending or a fall in taxation revenue or a combination of the two.
This will lead to a larger budget deficit or a smaller budget surplus than the government
previously had, or a deficit if the government previously had a balanced budget. Expansionary
fiscal policy is usually associated with a budget deficit.
• A contractionary fiscal policy (G < T) occurs when net government spending is reduced either
through higher taxation revenue or reduced government spending or a combination of the two.
This would lead to a lower budget deficit or a larger surplus than the government previously had,
or a surplus if the government previously had a balanced budget. Contractionary fiscal policy is
usually associated with a surplus.
Methods of funding
Governments spend money on a wide variety of things, from the military and police to services like
education and healthcare, as well as transfer payments such as welfare benefits.
This expenditure can be funded in a number of different ways:

• Taxation
• Seignorage, the benefit from printing money
• Borrowing money from the population, resulting in a fiscal deficit.
• Consumption of fiscal reserves.
• Sale of assets (e.g., land).
Funding the deficit
A fiscal deficit is often funded by issuing bonds, like treasury bills or consoles. These pay interest, either
for a fixed period or indefinitely. If the interest and capital repayments are too large, a nation may
default on its debts, usually to foreign creditors.
Some peculiarities exist: for example, the US owes most of its own debt to itself. Compared to GDP and
factoring in inflation, its debt is significantly less than in the past.
Consuming the surplus
A fiscal surplus is often saved for future use, and may be invested in local (same currency) financial
instruments, until needed. When income from taxation or other sources falls, as during an economic
slump, reserves allow spending to continue at the same rate, without incurring a deficit. Hong Kong ran
a fiscal surplus of HK$123.6 billion in fiscal year 2007/08 (ended March 31, 2008), equal to US$15.85
billion or 7.7% of 2007 GDP.
Economic effects of fiscal policy

Fiscal policy is used by governments to influence the level of aggregate demand in the economy, in an
effort to achieve economic objectives of price stability, full employment and economic growth.
Keynesian economics suggests that adjusting government spending and tax rates are the best ways to
stimulate aggregate demand. This can be used in times of recession or low economic activity as an
essential tool in providing the framework for strong economic growth and working toward full
employment. The government can implement these deficit-spending policies due to its size and prestige
and stimulate trade. In theory, these deficits would be paid for by an expanded economy during the
boom that would follow; this was the reasoning behind the New Deal.
During periods of high economic growth, a budget surplus can be used to decrease activity in the
economy. A budget surplus will be implemented in the economy if inflation is high, in order to achieve
the objective of price stability. The removal of funds from the economy will, by Keynesian theory,
reduce levels of aggregate demand in the economy and contract it, bringing about price stability.
Despite the importance of fiscal policy, a paradox exists. In the case of a government running a budget
deficit, funds will need to come from public borrowing (the issue of government bonds), overseas
borrowing or the printing of new money. When governments fund a deficit with the release of
government bonds, an increase in interest rates across the market can occur. This is because government
borrowing creates higher demand for credit in the financial markets, causing a lower aggregate demand
(AD) due to the lack of disposable income, contrary to the objective of a budget deficit. This concept is
called crowding out. Alternatively, governments may increase government spending by funding major
construction projects. This can also cause crowding out because of the lost opportunity for a private
investor to undertake the same project. Another problem is the time lag between the implementation of
the policy and detectable effects in the economy. An expansionary fiscal policy (decreased taxes or
increased government spending) is usually intended to produce an increase in aggregate demand;
however, an unchecked spiral in aggregate demand will lead to inflation. Hence, checks need to be kept
in place.
Macro Economic Parameters: (A.JK)

Economic environment will be changing for a country with the growth and development of the
economy. The growth rate is measured by several indicators. i.e there are several macro-economic
parameters to indicate the growth and development of the economy.
What is meant by ‘Parameter’?
It is a Greek mathematical expression that is Para means ‘alongside’ and ‘metron’ means
‘measure’. It is a quantity whose value varies with the circumstances of its applications. It is a constant
with variable values, used as a reference for other variables. In macro economic analyses, certain
indicators are used to find out the extent of growth and development of the economy. By applying the
indicators we will be to find out of the extent of growth whether it is rapid growth or slow or negative
growth.
These indicators are:
1. Gross Domestic Product (GDP) product and its change over years.
2. Per Capita national income
3. Changes in population
4. Extent of Urbanisation
5. The quantum of investment for economic development etc.
GDP - Gross Domestic Product:

It refers to the value of the aggregate product generated from the territory of the country. For
instance, a part of the aggregate product of a country may accrue to people abroad who have invested in
the industrial enterprises of the country. These people abroad are entitled to received profits interest and
dividends from these enterprises. Similarly many residents of the country may receive similar factor
income from abroad. On balance, if the country pays out more factor income than she receives from
abroad, the net factor income payments abroad are deducted from the GDP to arrive the GNP (Gross
National Product) the factor income payment abroad are very important to an open economy because of
existence of numerous foreign enterprises.
i.e GDP = GNP – Net income from Abroad
Growth rates or Rates of increase:

The rate at which an amount is changing over time is usually expressed as a percentage change from
year to year. Where that change is measured over more than one year, the rate of increase or compound
growth rate per annum is given by following formula;
[ ] - 100
−n
100 + A 
  x100
Growth rate in % p.a =  100 
Where ‘n’ is the number of years over which the increase is measured and ‘A’ is the percentage increase
over the period. Where a rate of increase or growth is increasing through time, it is said to be
accelerating and where it is decreasing it is said to be decelerating.
e.g If 1% increase for 1 year the growth rate is 0

If 1.10 % increases for 1 year the growth rate is 10%

If 1. 15% increases for 1 year the growth rate is 15%
If 1.10 % increases for 2 years the growth rate is 4.9%
If 1.10 % increases for 3 year the growth rate is 3.2%
If 1.10 % increases for 4 year the growth rate is 2.4%
For e.g. A rate of inflation is the percentage change from year to year but an increase in this rate is
acceleration, and a fall in the rate it is a deceleration. Over the period of a business cycle, the rate of
growth is positive during expansion and acceleration during the early stages of recovery then the rate of
growth falls and is small or negative during recession.
Population:
The population of a country and its economic growth is closely interlinked with the attainment of
economic development; a country must consider its human resources both from the angle of assets and
liabilities. That proper utilization of natural endowments and the level of production of national wealth
depend very much on the extent and efficiency of human resources, but too much of population will
again eat up all the fruits of developments.
From the point of view of economic welfare it is quite essential to study human resources in detail at the
same time it should be stressed human beings are the vital instruments of production. The fruits of all
economic activities are rested on the betterment of conditions of living of human being. The human
resources are playing a vital role in attaining economic development of country. The economic
development of country involves proper utilization of its physical resources by its labour force and other
forms of manpower, thus it involves achievement of 3 conditions.
(a) an increase in the per capita income to raise the level of living of the people
(b) a fall in the magnitude and rate of unemployment
(c) a consequent reduction is the number of people lying below poverty line
World Population Trends

Population in millions
1950 1985 1996 2010 2015 2050 1995

Life expectancy
World 2,516 4,855 5,768 7,204 7,286 9,367 64 Yrs

Africa 222 554 739 1,148 1,181 2,046 52 Yrs
Asia 1,378 2,842 3,488 4,240 4,381 5,443 65 Yrs
North America 166 264 299 311 345 384 76 Yrs
Latin America 166 400 484 615 625 810 68 Yrs
Europe (include USSR) 573 770 729 722 717 638 73 Yrs
Oceania 13 25 34 37 37 46 73 Yrs
Population growth as a source of Economic development:

The growing population can definitely stimulate the economic growth under the three following
conditions;
(i) If the labour supply is scarce in relation to natural and capital resources of the country.
(ii) If the economy can flourish in the world trade
(iii) If the social attitudes are in favour of turning hardships into opportunities.
The following are some of the important arguments in favour of the view that population as conducive
factors for economic growth:
(a) Increase in Investment
(b) Increase in production
(c) Supply of Labour and Economic development
(d) Population as a source of capital formation
(e) Increased labour productivity and economic growth
(f) Increasing population and expansion of market
(g) Rising population and increase in demand
(h) Raising population and growing talents
(a) Increase in Investment: Increase in the size of population enlarges the scope of investment in
an economy as a result of growing requirements for maintaining a growing size of population.
J.M. Keynes is also of the opinion that with the increase in the rate of growth of population, the
volume of investment also increases
(b) Increase in production: Increase in the size of population can enlarge the production base of the
economy. The increase in size of population enlarges the scope of division of labour which in
turn results large scale production, reduces cost of production and prices and expands market. In
many under developed countries of Latin America and Africa, total number of labourers
available is comparatively less to that of its available land and other natural resources. Naturally,
increase in the size of population of these countries would promote production through better
exploitation of tits available land and other resources.
(c) Supply of Labour and Economic development: Increase in the size of population can pave the
way for increasing supply of labour. Availability of skilled labour is an important determinant of
economic development. This will in turn raise the pace of capital formation and economic
development as well.
(d) Population as a source of capital formation: Disguised unemployment prevailing in an over

populated country can be a potential source of capital formation. Similarly, surplus labourers in
the rural sector can be shifted to industrial sector at a low subsistence wages. All these would
lead to considerable amount of capital formation through cost saving devices.
(e) Increased labour productivity and economic growth: Human capital formation can pave the
way for economic growth by raising the productivity of labourers. Kendrick was rightly observed
that increased labour productivity has contributed considerably to the higher rate of economic
growth in America.
(f) Increasing population and expansion of market: Increase in the size of population can pave
the way for expanding the size can pave the way for expanding the size of market. That with

increase in size of population in a country domestic market expands, businessman become more
secured and with its sense of optimism gathered momentum along with slowly rising price level.
(g) Rising population and increase in demand: With the increase in size of population of a
country consumption demand increases leading to increases leading to increased scale of
production and diversification of production pattern to meet such demand.
(h) Raising population and growing talents: With the increase in the size of population, the
number of talents like entrepreneurs, engineers, scientists, etc. started to increase which will lead
to extension of science, knowledge invention and innovations.
Limitation of population growth to Economic development:

By rapidly growing of high population retards the process of development of the country as under the
following;
 As increase in population leads to decrease in per capita income
 Rapidly growing population in a country can create serious food crises.
 Burden of high proportion of unproductive consumers
 More population creates un employments
 Population creates expensive and unavailability of education, housing and medical care
 High population reduces in capacity to save and invest
 High population creates wastage of human resources
 High population creates the low efficiency.
Significant Populations Trends

• Developed world population declining
• Less developed countries population is increasing
• Median age is increasing
• Life expectancy is increasing
• Two countries with 1 billion or more population : China and India
• Population under 15 years : 30%
• Population over 65 years : 10% and increasing
• Increasing urbanization
• Population density : 50 per square mile
The changing distribution of the world population

Urbanisation:
‘Urban’ denotes the characteristics of a city and ‘rural’ denotes the characteristics of village.
Urbanisation is the creation of cities. The marked feature of the industrial economy is the world is
towards urbanisation. The urbanisation that had take place in advanced countries of the world is
different from the urbanisation now taking place in under developed countries in advanced countries it
would arise due to technological development or revolution in agriculture. In developed countries it is
due to less land for living, midst of prosperity. In backward countries it is due to poverty of the village.
Problems of Urbanisation:
Urbanisation has created many problems for the planners and administrators to tackle. It creates
problems as follows;
a. Housing
b. Problem of drinking water
c. Transportation
d. Education
e. Problem of finance
f. Increasing rate of crimes
a. Housing: Adequate housing facilities to the growing population in cities have become an acute
problem in our country. The problems related to housing are the problems of land for housing,
cost production of houses and above all the problems of supplying drinking water. All these
result in the problem of finance for the government.
b. Problem of drinking water: Not only the villages but also cities also go without the basic
requirement of water facilities, the cities also are in the grip of water famine. This is due to over-
congestion and housing without adequate planning of the water needs of the new dwelling.
c. Transportation: Efficient transport system is the life-line of urbanisation. Well- laid roads with
adequate space in pavement for pedestrians to walk is the prerequisite of transport system. The
transportation through buses, trains should be efficiently maintained to render quick cheap
service to the commuters. This requires imaginative and bold policies in transportation without
giving room for political mudding.
d. Education: Meeting the demands of education in urban areas has become a serious problem.
The educational budget is a deficit budget is a deficit budget and the cost is borne by the society
by way of high taxes. Most of the pupils from the low- income group become drop-outs from the
elementary school.
e. Problem of finance: Most of the local bodies languish due to lack of finance for undertaking
many of the programs of urbanisation.
f. Increasing crimes: Another problem leading to the deterioration of urban life is its rising rates
of crimes of violence against property and also white-collar crime. The most bewildering fact
about crimes in cities will be its perfect organization and execution.
Deficit financing:
For the development through planning has to necessarily resort to deficit financing to find out adequate
resources for development projects. It is very difficult to find resources internally, through additional
taxation and borrowings, some countries from foreign countries this is not enough. So the government
has to adopt deficit financing techniques to bridge the gap in resources. There are needs to find out
resources through deficits financing. The deficit financing or deficit spending means any government
expenditure which is in excess of its current revenues or excess of expenditure incurred by the
government over its current revenue. It could be financed either through public borrowing or through
creation of new currency i.e issuing of fresh currency by the government or additional currency.
Fiscal deficit concept: Fiscal deficit means budgetary deficit plus loans taken by the government.
Fiscal deficit = Revenue deficit + capital expenditure.
Purpose or objective of Deficit financing:

The purpose or objectives of deficit financing are to create resources
1. to meet war expenditure
2. to promote economic development
3. to uplift the economy out of depression
4. to mobilize and utilized resources in the economy
Deficit financing Inflationary in character:

It is said that deficit financing is inflationary in character. It is true to some extent. But deficit financing
will not produce any inflationary symptoms; so long there are idle and unutilized resources present in
the economy. The inflationary spiral will appear only if deficit financing is continued beyond the point
of full employment of resources, according to J.M. Keynes. Inflation will set in only under the following
circumstances:
a. When production does not increase in proportion to the increase of money supply in circulation, it
leads to inflation.
b. If the new investment is not fruitful or if it does not give adequate returns or if the investment takes a
very long time for giving returns, it will lead to inflation, as there will be too much of money in the
economy in circulation with out adequate production to find stability of prices.
c. Under deficit financing, new currency comes into the market. If the credit formation exceeds the new
currency in circulation, it leads to inflation.
d. In underdeveloped countries, there is usually shortage of foreign exchange on account of larger
imports and smaller exports. If there is continuous rise in imports, it will lead to inflation.
Effects or consequences of deficit financing:
Deficit financing ultimate results in an expansion of currency created either by banks which
expand credit or by the government in the form of issue of fresh current. No doubt, this will help in
increasing the face of economic development; but, there are other consequences as well. These would
upset the expectations of the planners.
(i) Effect on price level :

The immediate effect of deficit financing is a sharp rise in general price level of the country.
Through creation of new money. The aggregate monetary demand will increase. While the supply of
goods and services will not increase in the same proportion. This produces the inevitable inflationary
gap in the economy, causing prices to rise at higher levels. it is argued that deficit financing for war

would be inflationary , as there will be no output or increase in wealth; whereas in the case of deficit
financing for economic development , there is increase in the output and wealth of the community and as
such it will not be inflationary. It should be realized that there will be time- lag between investment and
output to increase the real wealth of the community. Longer the time-lag. (or the gestation period of
investment ) greater will be the force of inflation . moreover, this inflation and rising prices would
encourage private investment as there would be increase in profit margin due to increase in price .
Consequently there will be public as well as private investment with returns taking their own time on
investment made. In the meantime, price will increase. Hence, even in the course of economic
development, deficit financing will lead to inflationary rise in price level.
(ii) In crease in money supply:

Deficit financing result in the direct addition to gross nation expenditure or in the creation
of fresh purchasing power in the hands of the government. it result in expansion of money supply in
circulation as a result of deficit financing.
(iii) Effects on employment :

J.M.Keynes advocated deficit financing as a means of elimination mass unemployment in a
developed country during depressionary condition. According to Keynes, the main cause of
unemployment in a development country is the deficiency of effective demand depends, (i.e.) the
demand of consumption goods and investment goods. The effective demand depends upon the marginal
propensity to consume. Thus, for increasing the effective demand and removing the condition of
unemployment, during the period of depression deficit financing should be resorted to finance
development projects. This will increase the purchasing power of the public and effective demand will
get increased. This will further increase employment, which again will increase effective demand will
get increased. This will further increase employment, which again will increase effective demand and so
on. Thus, it will have multiplier effect. But this does not hold good in underdeveloped countries, as the
assumption, on which Keynes analysis is based, are not found true to underdeveloped countries.
They are: (a) Existence of idle and unutilized capacity in industrial and agricultural sectors;
(b) Supply of working capital is relatively elastic. (c) The multiplier concept does not old good in
underdeveloped countries on account of lack of entrepreneurship, technical know-how, etc. (d) there is
long term chronic unemployment (e) there is chronic shortage of capital resources in relation to rapidly
increasing population. Thus, deficit financing is helpless in removing the conditions of unemployment in
underdeveloped countries.
(iv) Deficit financing and capital formation:

If deficit financing is applied in reasonable doses, according to the needs of the economy and
its development, it will increase capital formation which is very essential for underdeveloped countries.
Deficit financing increases capital in the following ways;
(a) Industrialists and businessmen will earn huge profits during inflation period and this will lead to
capital formation.
(b) The demand for consumer goods is likely to reduce on account of rapid increase in prices. It may
divert some resources from consumer goods industries to capital goods industries. It may also lead to
capital formation
(c) Deficit financing may prove helpful in making the best use of idle, unutilized and surplus resources
in the economy.
(v) Deficit financing and Distribution of income:

Deficit financing affects adversely the distribution of income. Generally, it is considered that
deficit financing is potentially inflationary. On one side, businessmen and industrialists will earn huge
profits during inflation period, while labourers and fixed income groups suffer on account of the sharp
reduction in the purchasing power of their hard earned money, due to rise in prices. Thus, the disparity
of incomes increases as the rich become more rich and poor becomes poorer.
Suggestions to control deficit financing:

Economists have suggested several measures to check the inflationary rise in prices, due to
deficit financing, the measures are
(a) Substantial reduction in government expenditure.
(b) Sharp reduction in fertilizer subsidy
(c) Rationalization of food subsidy
(d) Reduction of defence expenditure
(e) Restriction on bank credit
(f) Increase in production public enterprises and incentives to increase production
in private sector
(g) More emphasis in increasing the production of food grains, raw materials bad
bulk of consumer goods.
(h) More attention on poverty removal and employment generation.
(i) The ministers, both at the centre and at the state level should be prevented and
checked from making cheap announcements and promises costing billions of Kowatchas to
the exchequer, simply to strengthen their, ‘Vote Bank’.
National Income:
Simon Kuznets defines national income as, “the net out put of commodities and services following
during the year from the country’s productive system into the hands of ultimate consumers or into net
additions to the country’s stock of capital goods.”
National Income committee of India 1951 defines, “A national Income estimate measures the volume of
commodities and services turned out during a given period counted with out duplication.”
National income at factors cost, we deducted indirect taxes and add subsidies. This is the total of all
income payment received by the factors of production viz land, labour, capital and organisation or
production
National Income = Net national product (National income at market prices) – Indirect taxes + subsidies.
Per capita Income: (PCI):
This is one of the important concepts in National Income analysis, while NI (National Income) tells
about the production of goods and services in the country. Per Capita Income tells about what is
available to individuals in the country.
National Income
Population of country = Per Capita Income of the country in given year.

The pertaining to national income and per capita income over a period of time during planning period
serves as useful indices of economic development. Per capita income denotes what is available per head
and not what is available per head and not what is distributed. It is general indicators of economic
welfare.
Income distributions of U.S. households:
Management of Technology:
Technology helps to convert ideas into useful products. Technology is a high-risk, costly and uncertain
activity. The technology affects the business in two ways;
(1) Its impact on the society:
 Modern living depends on technology and specialization of the goods we get everyday
depends on special technologies and specialization adopted by various groups in society it
is the technology that helps in making use of different types of men and machinery
producing various kinds of goods and services.
 Information is collected quickly by technology development by interest, T.V, Radio, etc.
Geographical distances have become nothing with enormous revolution in transport
technology.
 Standard of life has been improved
 Standard of life, modern living, culture and attitudes are dependent on science and
technology
 The advancement of technology cannot be considered all goods limitations also there
 The limitations as such incidence diseases, pollutions, fall in standard in morality.
(2) Its impact on business operation:

Technology affects business operations in many ways. It affects production, product development,
employment practices, marketing and information processing it helps the business to adopt safer and
quicker method of production it provide safer and better conditions of work and living to the workers.
Features of technology:
1. Technology relates to its change:
Technology forces change on people whether they are prepared for it or not. It has brought so
much change that it creates what is called future shock, which means that changes comes so fast and
furiously that it approaches the limits of human tolerance and people lose their ability to cope with it
successfully. Business leaders must always watch out for changes and developments taking place
around.
2. Its effects are widespread:
The reaching far beyond the immediate point of technological impact, it ripples through society
until every community is affected by it. People can not escape from it, even they travel to remote places.
3. It is self- reinforcing:
Technology feeds on itself and makes more possible it acts as a multiplier to encourage its own
faster development. It acts with other parts of society so that an invention in one place leads to a
sequence of inventions in other places.
4. It is a complex set of knowledge:
The ideas and methods and knowledge are likely to be the result of a variety of activities both
internal and external. Technology process obviously tends to be a gradual process consisting of a
sequence of small increments lying along a continuous path.
Demographic Environment:
• Demography is the study of human populations in terms of size, density, location, age, gender,
race, occupation, and other statistics
• Demographics change over time and companies must keep up with them
• Baby boomers – 77 Million post-World War II babies born between 1946-1964
• Generation X – 45 million born between 1965-1976, the “birth dearth”
• Generation Y (echo boomers) – 72 million born between 1977-1994
The first environment fact of interest to marketers is population because the people make up markets.
The marketers are keenly interested in the size of the world’s population. Its geographical distribution,
density, trends, age, birth and death, marriage, religious structure, etc., for their business implication.
The world population has been a major concern of government and various groups as through out the
world. The two factors underlie this concern,
(a) Possible finiteness of the earth’s resources to support this much human life, at living standards that
represent the aspiration of most people.
(b) The population growth is highest in countries and communities that can least afford it. The less
developed region of the world currently account for 76% of the world population and are growing at 2%
per year. Where as population are developed regions is growing at only 0.6% per year. In the developing
countries the death rate has been falling and result of more medical facilities and birth rate remains
stable.
The growth in population has great implications for business it means growing human needs, but it
does not mean growing markets unless the sufficient purchasing power.

Slowdown in Birth rate:

The declining birthrate is a threat to some industries, a boon to others. It has created sleepless nights for
executives in such business as children’s toys, clothes, furniture and food. The factors contributing to
smaller families are;
(a) The desire to improve personal living standards
(b) The increasing desire of women to work outside home
(c) The improve technology and knowledge of birth control
(d) Publicity given by government regarding family planning
(e) Higher divorce rate
(f) Later marriage has been increased
Migration:
Scope for migration analysis, especially internal migration, is seriously hampered by a lack of
necessary data. There is no centralised mechanism for collecting data on internal migration. This lack of
data also impacts on analysis of international migration by DHBs, since no data is collected on the
subsequent movements of new migrants once they are inside the country.
The brief analysis in this section draws on a Census question which asks where the respondent was at
the last Census five years ago. The Census data is the only available dataset however it needs to be
treated with caution. A person could have moved a number of times between the two Censuses, or even
moved back to the same address five years ago. Inter-censal migration data is unlikely to provide a true
picture of population movement.
Also, as with other migration data, often only the net migration flow is reported, which masks the
magnitude of movement. For example, a large inflow of immigrants into an area could be offset by an
equally large outflow of emigrants, resulting in only a small net flow.
Table 3 below shows the impact of migration on Wairarapa TAs. All TAs benefit from international
migration which offset the net internal outflows.
Table 3: Inter-censal migration change by Territorial Authority, 1996 to 2001

2001 Net internal Net International Total net
Census migration migration migration
Pop
Number % Number % Number %
South 8,718 -309 -4% 198 2% -111 -1%
Wairarapa
Carterton 6,876 105 2% 138 2% 243 4%
Masterton 22,593 -600 -3% 618 3% 18 0%
Migration is the geographical shifts in population for some reasons the people move from one place to
another for survival and some other reasons, the major mobility tends are,
(a) Movement of people to the Sunbelt states:

The population shifts because of market differences in regional expenditure patterns. That’s from
cold place to hot place, this decrease the demand and expenses in heating, warm clothing, cold suffering
etc.
(b) Movement form rural to urban:

People have been moving faster from rural to urban areas because of the insufficient facilities in
rural areas. In cities show a faster pace of living, more commuting, higher income, greater variety of
goods and services etc., but recently there has been slight shift of population back to small towns and
rural areas.
(c) Movement from the city to the suburbs:
Many people live far away from their places of work as cities have become surrounded by sub-
urban. About 60% of total metropolitan populations now live in sub- urban.
(d) For education:
The people shifts from one place to another for their education purpose for their children
(e) For employment purpose:
The people basic thing is survival the people migrate from one place to developed place like cities
for their employment purpose.
Ethnic aspect:
• Gender and ethnicity also shape economic functions and social standing.
• A ‘sexual division of labour’ is said to characterise economic arrangements in which men and
women characteristically do different segments of the labour market.
• People of different ethnic background are often located in different segments of the labour market.
• Sexism and racism are pervasive ideologies, and sexist and racist practices can be institutionally
embedded.
In the Wairarapa, there are 5,391 Maori, 615 Pacific people and 32,181 people from ‘Other’ ethnic
groups. Expressed in percentage terms, the distribution of ethnicity differs from national figures for
Pacific people. As a proportion of the population, Wairarapa has 3.8 % less Pacific people and 3.7%
more people from ‘Other’ ethnic groups than New Zealand as a whole. However, Masterton has 2%
more Maori than the national figure.
Wairarapa DHB TA and New Zealand Ethnicity, 2001
Ethnicity Wairarapa vs New Zealand
100
90
80
Population %
70
60
50
40
30
20
10
0
Maori Pacific Peoples Other
Carterton Masterton South Wairarapa New Zealand

The Maori and Pacific population will continue to exhibit the younger age profile shown in Figure 2.4
and is projected to form an increasing proportion of the Wairarapa population. Figure 2.6 shows the
projected proportion of the population by the three main ethnic groups over time.
Wairarapa DHB Projected Population by Ethnicity

90%
80%
% of Total Population
70%
60%
50%
40%
30%
20%
10%
0%
1996 2001 2006 2011 2016 2021 2026
Year
Maori Other Pacific
Gender:
Data analysis shows no significant differences for males and females compared to national figures.
There are 51% females and 49% males in Wairarapa. The Masterton district has a slightly higher
proportion of females (52%) but this is not of significant importance.
The distribution of males and females by age shows a slightly greater number of males than females up
until age 29. In the 75+ age group Females are over 60% of the population.
Wairarapa DHB, Total Population Age-Gender distribution, 2001

85+
80-84
75-79
70-74
65-69
60-64
55-59
Age Group
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
05-09
00-04
0.10 0.08 0.06 0.04 0.02 0.00 0.02 0.04 0.06 0.08 0.10
Proportion
Female Male
Ideology
• Ideologies can be understood as systems of belief that shape behaviour, individually and
collectively; one would expect such ideologies to reflect the existing material economic
conditions.
• Dominant ideologies are continually challenged by rival, dissident beliefs. Therein lies an
important impetus for change in economic and social organisation
• These five dimensions of the relationship between the economy and society can be regarded as the
‘glue’ holding the political economic system together and determining how it works.
• How the elements are constructed varies considerably from country to country, and over time. The
relative importance of market, state, class, gender, ethnicity and ideology in shaping economic
and social order varies enormously.

Unit – III
Socio-Cultural Environment & Business Ethics:
Social Environment – Cultural heritage – social attitudes – impact of foreign culture
– communities – family systems – linguistic and religious groups- Types of Social
organization – social responsibilities of business – Business Ethics – Business code
of conduct – Role of trade associations in business.
The Socio cultural environment:

The society is that surrounded by the people they grow up their basic beliefs, values, and
norms. Culture environment refers to the influence exercised by certain social factors
which are ‘beyond the company’s gate’ such factor include, among others, attitude of
people to work, attitude to wealth, family, marriage, religion, education, and ethics.
Culture is the human-made part of the human environment - the sum total of mankind's
knowledge, beliefs, art, morals, laws, customs and other capabilities and habits acquired
by humans as members of society. It is the distinctive way of life of a group of people.
Their complete design for living - a mosaic of life.
Humans essentially create their own cultural and social environment. Customs, practices
and traditions for survival and development are passed down from one generation to the
next. In this way, the members of a particular society become conditioned to accept
certain "truths" about life around them. The increasingly competitive international
business environment calls upon exporters to tailor or adapt their business approach to
the culture and traditions of specific foreign markets. The inability or unwillingness to do
so could become a serious obstacle to success.
The task of adjusting to a new cultural environment is probably one of the biggest
challenges of export marketing. Export marketing attempts are frequently unsuccessful
because the marketer - either consciously or unconsciously - makes decisions or
evaluations from a frame of reference that is acceptable to his/her own culture but
unacceptable in a foreign environment. Therefore, business practices which are successful
in one group of countries may be entirely inappropriate in another group of countries. For
example, the Marlboro Company took its famous lone cowboy advertisement to Hong Kong

in the early 1960's.However, the image of the cowboy riding off in the distance by himself
led the Chinese to wonder what he had done wrong.
In the context of the socio-cultural environment, there are a number of factors that you
will need to consider. These are:
• Language
• Material culture
• Aesthetics
• Social organisation
• Religious beliefs, attitudes, values, space and time
Social environment:
The social environment consists of factors related to human relationship and development,
forms and functions of such relationship having a bearing on the business of an
organisation.
Important factors influencing social environment:
(a) The demographic characteristics such as population, density and distribution, change
in population and age composition, migration, and rural- urban mobility, income
distribution.
(b) The social concerns such as role in business in society, environment pollution,
corruption, consumerism, use of mass media, etc.
(c) Social attitudes and Values such as expectation of society from business, social
customs, beliefs, rituals and practices, changing life style patterns, and materialism.
(d) Family structure and Changes in it, attitude towards and within the family, and family
values.
(e) Role of women in society, position of children and adolescents in family and society.
(f) Educational levels, awareness and consciousness of rights, and work ethics of members
of society.
Cultural heritage
Cultural heritage ("national heritage" or just "heritage") is the legacy of physical

artifacts and intangible attributes of a group or society that are inherited from past
generations, maintained in the present and bestowed for the benefit of future generations.
Often though, what is considered cultural heritage by one generation may be rejected by
the next generation, only to be revived by a succeeding generation.
BUSINESS AND CULTURE:
What is Culture?
Culture may be defined as the behavior of man as a member of society.
It is the habit acquired by belief, knowledge of arts, morals, law and custom. In short, it is
the socially sanctioned behaviour of people. According to John Dewey, ` culture` is
existence of society. Culture denotes the habit of people in a particular society, their
manner of talk, behaviour, following of certain customs, the type of food they eat and the
manner of eating, the dress they wear, the association they nurture and persons they
marry, etc.
Thorough knowledge of the culture environment. This will be useful to the management of
the business in several ways.
(a) People generally are conditioned to behave in a particular way and perform their
work in a particular method. So awareness of their culture will help to understand
their behaviour and conduct.
(b) By observing their culture background the businessmen can easily predict their
future behaviour in the event of introducing a new article.
(c) Awareness of culture background will enable the business to quickly change the
product to suit to the needs of the changing society.
(d) The business managers should develop sensitivity to the culture of the society in
which they operate. This will help in making quick decisions.
Culture Lag:
Culture lag denotes that the different parts of culture do not change simultaneously and at
the same rate. A culture consists of different parts and they have intimate correlation and
also interdependence of those parts.
Social attitudes:
Social attitude is the general outlook or disposition of people of a particular society in
respect of any specific factor.
• Gesture and symbol
• Nature of use and occasion
• The values and beliefs
• Numbers
Gesture and symbol

A symbol or gesture that represents an appreciation in one society may mean quiet a
different thing in another.
For example the thumbs up sign, with thumb held straight up and four fingers kept folded
represents approval in countries like USA, UK and Russia; it is highly offensive in Iran and
regarded rude in Australia.
The OK sign with the thumb and index finger forming a circle and other three good, not
excellent, in Mexico. In most of Europe and Argentina it means and absolute zero or
worthless.
Shaking head left to right while conveys no in the United States and most of the, world, it
means yes in some countries like Bulgaria, Saudi Arabia and Malaysia.
A pat on the shoulder is offensive in Thailand while it donates encouragement/sympathy in
several countries.
Nature of use, occasion of use
Nature of use, occasion of use etc of products may vary between markets. Cola drinks are
taken with snacks in north America, just as coffee or tea in India, but they are promoted as
thirst quencher in india and several other countries. In usa orange juice may be promoted
as a breakfast drink but the promotion strategy will have to be different in countries where
fruit juice is not taken with breakfast.
In most European and Middle Eastern culture, coffee is served after dessert and, in the
case of Europe, after the cheese course which concludes the meal. In Japan, however,
coffee is considered a luxurious drink.
The Values and beliefs associated with colour

The Values and beliefs associated with colour vary significantly between different cultures.
Blue, considered feminine and warm 9in Holland, is regarded as masculine and cold in
Sweden.
Green is a favorite color in the Muslim world; but in Malaysia, it is associated with illness.
White indicates death and mourning in china and Korea but in some countries, it
expresses happiness and is the color of the bridal dress.
Red is a popular color in the communist countries, but many African countries have a
national distaste for red color.
Numbers
There are similar differences regarding value associations with numbers. Certain numbers
are regarded lucky while some others are considered bad or unlucky. 13 is considered a
bad/ unlucky number in several cultures. It is not uncommon in several countries,
including America, that hospitals, lodges etc., skip 13 while numbering rooms.
CASTE AND COMMUNITIES:

The caste community structure of a society its dynamics have very significant influence on
the occupational pattern ,entrepreneurship economic and business development, demand
pattern work culture government policies and so on.
Most countries are multicultural with many heterogeneous groups rooted in religion, caste
community, linguistic etc.
Given below are some example of developments related caste and community.
• The occupational pattern in many societies was traditionally linked to caste and
community.
• A large share of the seats for various courses in educational institutions are
reserved for backward castes and communities.
• Some caste and communities are known for their entrepreneurship in certain
industries and services.
• Caste and community organization have made a commendable contribution to the

development of certain social sectors like education, public health etc. in many
parts of the country.
• Money lending and indigenous banking in India have been dominated by certain
castes/communities background in respect of the origin and growth.
• Different communities and caste have different demand patterns.
Family system:
There are broadly, two types of family, namely, nuclear family, and joint family.

Nuclear family defines as “a small group composed of husband and wife and immature
children which constitute a unit apart from the rest of the community”.
Joint family defines as “a group of people who generally live under one roof, who eat
cooked at one hearth, who hold property in common family worship and are related to
each other as some particular type of kindered”
Characteristics of joint family:

• Several generation:
The joint family system consists of three or more generations living together.
• Single house hold:
The different families constituting the joint family live as a single household
under a common roof, eating food cooked at the common kitchen..
• Common property and income:
The members of the joint family hold a common property which is normally
managed by the head of the family like a trustee. all the earnings of the members
of the joint family are pooled together into a common fund and all the expenses
• Centralization:
The joint family system is characterized centralization of authority. The super-

ordination of the head of the family and the subordination of all other members to
him is a cardinal feature of the joint family system.
Linguistic and religious group:

Language:
Differences in the language are a very important problem in business. The estimates of the number of
languages in the world range from 4000 to 10,000.most countries are multilinguistic and many of them
have a large number of ethnic groups and languages.
Even some of the same words of a language have different meanings or connotation in different places.
The meaning of some of the English words and idioms differ between UK and USA. For example, in
Britain the statement “the project went a bomb” would mean that it was a great success; but in USA “the
project was a bomb” means it was a massive failure.
Problem caused by languages include, inter alia, those related to brand names and marketing
communication. For example ford’s third world truck brand named FIERA meant “ugly old woman” in
Spanish.
The Arabic language is read from right to left. A multinational blundered in the middle east when in the
advertisement of its detergent it pictured soiled clothes on the left, the box of detergent in the middle and
clean clothes on the right.
Religion:
Different Peoples have their own religious convictions, beliefs, sentiments, customs rituals,
festivals etc. the cost of ignoring certain religious aspects could be very high, sometimes even fatal, in
international business.

During the holy ramzan period, restaurants and the like owned by Muslims remain closed during
day time. Muslim would consume the meat of only those animals/birds slaughtered following the
prescribed religious rituals.
Many Christians do not consume non vegetarian during the lent during the 24 days preceding
Christmas and on all Fridays. During these periods, Christians do not conduct marriages and other
celebrations like baptism. Hence, the weeks following Christmas and Easter are season of such
celebrations.
In Asian countries where Confucianism is strong, this attitude is known as the Confucian work
ethic. In Japan, it is called the Shinto work ethic.
Religion may also play a role in deciding the weekly holiday, other holidays and working hours.
In several countries religious festival times are great business times. People buy new clothes,
exchanging gifts, spend a lot on goods etc. companies doing heavy promotions, including discounts and
other incentives schemes have become very common in India.
The influence of religion on politics is on the increase in many parts of the world. And politics
often plays an important role in shaping economic policies and business regulation and promotion. In
number o f countries religion and government are inseparably united.
Nature of cultures:
Culture includes several behavioral influencing factors shared by members of a society
and passed through generations.
The following characteristics of culture are worth knowing:
• Learned- culture is not inherited or biologically based; it is acquired by learning and
experience.
• Shared- peoples as members of a group, organization or society share culture; it is

not specific.
• Transgenerational- culture is passed on from one generation to the next.
• Symbolic- culture is based on the human capacity to symbolize or use one thing to
represent another.
• Adaptive- culture is based on the human capacity to change or adapt, as opposed to

the more genetically driven.
Levels of culture:
There are three levels of culture, viz., national culture, business culture and the
occupational and organizational culture.
National culture:
National culture is the dominant culture within the political boundaries of country.
Formal education is usually taught and business is generally conducted in the language of
the dominant culture.
Business culture:
Business culture guides everyday business transaction. What to wear to a meeting,
when and how to use business cards, whether to shake hands or embrace – all are
example of business etiquette taught by business culture. It needs no mention that
business culture is a part of the total national culture.

Organization culture:
Organizational culture refers to the philosophies, ideologies, values, assumptions,
belief, expectations, attitudes, and norms that knit an organization together and are
shared by its employees.
Organizational culture is shared by members of an organization and is tied together
by it.
Occupational culture:
Different occupational groups such as physicians, professors, lawyers, accountants,
and craft people have distinct cultures - called occupational cultures. Occupational
cultures are norms, beliefs and expected ways of behaving of people in the same
occupational groups, regardless of which organizations they work for.
Impact of culture on business:

• Culture creates people:
The concept of culture is great significance to business because it is the culture which
generally determines the ethos of the people. It trains people along particular lines,
tending to put a personality stamp upon them. Thus, we have Indians, Americans,
Germans, Britisha, and so on.
• Culture and globalization:
As business units go international, the need for understanding and appreciating

cultural differences across various countries is essential. Work motivation business
goals, negotiating styles ,attitudes towards the development of business
relationship, gift-giving customs, greeting significance of body gesture , meaning of
colors and numbers, and the like vary from country to country.
• Cultures determines goods and services:
Culture broadly determines the type of goods and services a business should
produce. The type of food people eat, the clothes they wear, the beverages they
drink and the building materials they use to construct dwelling houses vary from
culture to culture and from to time within the same culture. Business should realize
these cultural differences and bring out products accordingly.
• Language and culture:
The interface between language and culture is strong. There three thousands
language across the world.
There is no perfect equivalent in English for the word punya.
Language can be either low context or high context. Low context language is direct
but high context language carries multiple meanings with it.
European languages are low context type. Asian languages are high context type.
• Attitudes:
Attitudes are positive or negative evaluations that determine one’s behavior.

Culture determines people’s attitudes towards business. French culture lays
emphasis on elegance, eliticism and form. But Mexican culture is death oriented.
• Collectivism and individualism:
The spirit of collectivism and individualism is related to such personnel aspects as

employee morale, multiplicity of trade unions and intra union rivalries. It is said that

our culture, unlike Christianity, stresses individual salvation and negation of the
world.
The feeling of collectivism or individualism has its influence on employee morale,
multiplicity of unions and inter-union rivalry.
• Ambitious or complacent:
Culture makes a person to become ambitious or complacent.

• Education:
The interface between business and education, though a recent phenomenon, is a

significant one.
For a long time there was a stand-off between business and higher education. Now
the two have become closer. impact of education on business is basically three-fold
attract high wage industries, market potential is enhanced, type of advertising and
packaging.
• Family:
Family is a remarkable institution vested with several significant contributions.

Joint family had several benefits to offer but sadly it is waning. Joint families are
now being replaced by nuclear family.
• Religion:
Religion refers to a specific and institutionalized set of beliefs and practices agreed
upon by number of persons. People practice abnormal things in the name of
religion.
Though receipt and payment of interest are prohibited, profit sharing is allowed in
Islam.
Creation of wealth is not encouraged in Buddhism.
Impact of foreign culture

 As business units go international, the need for understanding and appreciating
cultural differences across various countries is essential.
 Work motivation, profit motivation, business goals, negotiating styles, attitudes
towards the developments of business relationships, gift- giving customs, greetings,
significance of body gestures, meaning of colours and numbers, and the like vary
from country to country.
 When people from different culture converge in a workplace, management will be
require to manage diversity
 Any move from one country to another will create a certain amount of confusion,
disorientation and emotional upheaval. This is called culture shock.
 The culture shock will be serving when the new environment is totally different from
the old one.
Social Organisation:
Social organisation refers to the ways in which people relate to one another, form groups
and organise their activities, teach acceptable behaviour and govern themselves. It thus
comprises the social, educational and political systems of a society. Social organisation is
the organisation of the society and small group. It is a system of social relationships.
Social relationships are complex and they are composed into numerous small groups,
these groups are individual the mutual relationships between individuals are controlled

and regulated by institutions and associations, the groups form a part of the social
organisation.
According to Earnes Jones describes, “Social organisation is the system by which the parts
of society are related to each other and to the whole society in a meaningful way.”
According to Elliot and Merrill, “Social organisation is a state of being a condition in which
the various institutions in a society are functioning in accordance with their recoganised or
implied purpose.”
The exporter's ability to communicate depends to some extent, on the educational level of
the foreign market. If the consumers are largely illiterate, advertising materials or package
labels may have to be adapted to the needs of the market. In this regard, however, a
company marketing baby food in a certain African country put the picture of a smiling
child on the outside of the jar. The local resident assuming there were preserved babies
inside avoided the product! In addition, there are unspoken signals which identify cultural
differences, from certain taboos to less obvious practices like the time taken to answer a
letter. In some societies, for instance, an important issue is dealt with immediately; in
others, promptness is taken as a sign that the matter is regarded as unimportant, the time
taken corresponding with the gravity of the issue.
In a culture where great importance is attached to the family unit, promotional efforts
should be directed at the family rather than the individual. The size of the family unit
differs from one culture to another. It can range from the nuclear family, i.e. mother,
father, and children, to the extended family which includes many relatives and whose role
is to provide protection, support and economic security to its members. In the extended
family, characteristic of developing countries, consumption decision-making takes place in
a larger unit and purchasing power patterns may be different from those evident in
western cultures.
In any society, certain occupations carry more prestige, social status and monetary reward
than others. In India, for example, there is a strong reluctance amongst people with
university education to perform 'menial' tasks using their hands, even answering the
telephone. In many countries, including France, Italy and Singapore, financial
independence is considered essential for occupation-related prestige. In Japan, however,
the majority of university-educated professionals tend to prefer working for large
multinational firms than for themselves.
Social organisation is also evidenced in the operation of the class system, e.g. the Hindu
caste system and the grouping of society members according to age, sex, political
orientation, etc.
Social organization:
Social organization is a grouping of people bound by certain rules, policies,
guidelines or norms formed for serving certain social purposes or achieving certain
common objectives.
Types of social organization:
• Formal and informal
• Closed and open

• NGOs
• Social activities
• Beneficiary sponsored
Formal and informal:

A formal organization is one which has a well defined structure, regulation and
objectives. It will have a clearly stated objective or set of objectives organizational
structure and rules and regulations. These rules and regulations may specify how the
office bearers of the organizations are appointed and removed; qualifications or
disqualifications to be members of the organization; duties, responsibilities and rights of
members and office bearers etc.
There are large numbers of organizations which do not have a formally laid down
structure, rules and regulation or objectives. For example, Recreation clubs formed by
residents of a locality. Informal organizations too have their objectives, structure and
regulations. Absence of written objectives and regulations become a serious problem
when controversies or differences of opinion arise.
Closed and open:
Membership in some organizations is available only to certain narrowly specified
group of people or organizations. Such organizations are regarded as closed organization.
For example, membership of some organizations is open to only members of certain
religion or community.
There are many social organizations the membership of which is very widely open.
For example, membership of political party or consumer organization may be open to all
irrespective of the caste, community or religion. Such organizations are known as open
organizations.
NGOs:
In recent years there has been very significant growth of voluntary organizations
known as non-governmental organizations. They have been successful in exposing many
social issues and concerns. They have become a force with by governments, business and
organizations like WTO, World Bank, and IMF. NGOs can do on-line campaign around the
world, with their messages travelling across borders in seconds. Through e-mail and media
networks, people are giving their support to associations across borders from informal
networks to formal organization.
Beneficiary sponsored:
Most social organizations have been formed to protect the interests of the members
of the organization, unlike the social activist organization. For example, organization of
workers, traders, industrialists, residents of a locality, consumers and so on.
Features of Social Organisation:
(1) Unanimity among the members of society:

The existence of unanimity among the members of the society is a feature of social
organisation. In its absence, conflict will arise between them and social organisation and
social dis-organisation will set in.
(2) Promptness in accepting status and roles:
Unanimity among members of a society can be maintained only so long as people
are prompt and ready to accept their status and respective roles within the social
organisation. In society it is not possible to all, that everyone gets same and equal work. In
society one comes across differences in the social status of difference individuals who

differ in respect of their age, sex, status, skill, capacity, duties, etc. The promptness of
people in accepting their own status and role is feature of social organisation.
(3) Control of society on the activities of the individual:

The members of society will be prompt in accepting their status and role only when
society has control over him. Society exercises the control through customs, habits,
traditions, rituals and institutions. It creates unanimity in society.
TECHNOLOGICAL DEVELOPMENT AND SOCIAL CHANGE:

Technology stands at the roots of culture of the society and technological development
brings about changes in social structure. Modern dynamic society with varieties of culture
is the results of technological development.
BUSINESS ORGANISATIONS AND THEIR SOCIAL RESPONSIBILITIES:

The main forms of business organisation and their features are enumerated below:
1. Sole proprietorship
2. Partnership
3. Corporations or joint – stock companies: (a) Public (b) Private
4. Co-operatives.
1. SOLE – PROPRIETORSHIP
This is a form of business organisation in which a single individual organises, controls and
operates the business in his own name. In this, a single individual starts the business,
manages capital and bears the entire risk of the business.
Features: The features of this form of organisation are: (i) There is no legal restriction to
start sole-proprietorship business, except in the case of prohibited and controlled articles,
like wine, drugs etc., where a license is supposed to be procured. Besides, the sole-trader
may have to get the formal local bodies license, on a payment of fee. For running the
business. It has no other legal formalities to be followed. (ii) The single owner of the
business has unlimited liability.
Demerits: (i) The fundamental demerit of this form of business organisation is that the
resources available will be very much limited and the individual cannot command larger
resources, except taking loans on personal basis which will be very much limited. In other
words raising huge capital would be an impossibility in this form.
2. PARTNERSHIP
This form of business is the voluntary combination of two or more persons who have
agreed to share profits of the business carried on by or any of them acting for all. Partners
are joint-owners in business.
Features: The salient features are as follows: (i) It is based on a contractual relationship.
(ii) It is formed to run some business (iii) The main objective of partnership is profit-
motive.
Merits: Partnership form of business possesses the following merits: (i) It commands
larger capital resources, as it is a combination of several persons. (ii) There will efficiency
in management, as the skill, intelligence and capacity of several people (partners) could
be achieved.

Demerits: This form of organisation has several demerits: (i) The liability of each partner
is unlimited. (ii) Each partner has to be consulted to take business decisions, and as such,
it leads to delay in business decisions.
3. CORPORATION (OR) JOINT-STOCK COMPANIES

This is a form of business organizations which is managed by a group of individuals
for profit.
Features: The salient features of a corporation are as follows: (a) It is legal entity (b) It
has perpetual existence (c) The holders of corporation have limited liability (d) The shares
of the corporation are transferable.
Private sector: A corporation carrying on its business in the private sector may be (i)
Private limited company, and (ii) Public limited company. A private limited company could
be set up by at least two members, the maximum number being fifty. Such a company is
purely a family affair and it cannot raise funds from the public. A public limited company
must have at least seven members and there is no limit for the maximum number. The
company can raise funds from the public.
Merits: Corporation has emerged as a very important form of business organisation for
the following reasons: (a) It has ability to raise large capital resources. (b) Share holders
have limited liability. (c) Corporation has perpetual existence. (d) Transferability of shares.
Demerits: This form of business organisation suffers from the following demerits or
defects: (a) Bogus companies are promoted by the promoters to earn profits. (b) Managers
of the company may misuse the funds by diverting them for speculative purposes. (c) The
management of a joint-stock company or corporation will be oligarchic in nature, i.e.,
controlled and run by a few, though there may be a large number of share-holders. Those
who purchase shares in large quantities have more control over the management.
SOURCES OF FINANCE OF CORPORATE BUSINESS:
Big firms, better known as Corporation, require enormous fixed capital for the
construction of factory, building, purchase of plant and machinery, tools and equipment.
Besides the fixed capital, corporations also need working capital to meet the day-to-day
requirements of business such as payment of daily wages, purchase of raw materials,
transportation costs, fuel charges, etc. How do big corporations raise their financial
resources? These are done by the following methods:
1. Share Debentures
A company’s owned capital is split into a large number of equal parts, each being
called a share. The company invites the general public to subscribe to the share capital.
The shares of a corporate of organisation is ideal for meeting the long term requirements.
A debenture is an acknowledgement under seal of debt or loan. Uniform parts of a loan are
called debentures. Debentures carry a fixed rate of interest to the holders and used to
finance the medium and long-term capital requirements of corporate business. Convertible
debentures could be converted into equity capital after a stipulated period.
2. Public deposits

Corporations may invite the general public to participate in the deposits of the
company. Corporations offer different rates of interest to the employees and general
public. Public deposits of longer duration carry higher rate of interest.
3. Ploughing back of profits

This source is the indicator of the inner strength and stability of any enterprise.
Companies may use their reinvestible surplus to finance the expansion and modernization
of the existing plants and establishment of new ones.
4. Specialized Financial Institutions

In modern days, this has become a very important source of corporate finance.
Specialized institutions called Development Banks have been set up to provide long-term
finance to industry. The Industrial Finance Corporations of India Industrial Development
Banks of India. Industrial Credit and Investment Corporations provide long-term finance to
industry.
5. Foreign capital
Another source of finance to industry is the foreign capital, for medium-term, as well
as, long-term. This will be available to corporate sector, either in the form of loans or
equity participation. Social responsibility may mean intelligent and objective concern for
the welfare of the society that restrains individual and corporate behaviour from ultimately
destructive activities. Business must recognize and understand the aspirations of the
society and determine to contribute to its achievement.
Social responsibility of Business

As business operates in society, it can’t exist and grows unless it cares for society. It
exist vis-à-vis with society. It is required to meet different needs of the society. For
meeting these needs, business has certain social responsibilities to discharge. “Cooperate
social responsibilities” is defined as considering the impact of the company’s action on
society. A newer concept,” social responsibilities”, is defined as the ability of a cooperation
to relate it’s operation and policies to social environment in ways that are mutually
beneficial to both the company and society. Social responsibilities of business are different
for different sections of society, which include responsibilities towards;
1. employees
2. consumers
3. Government
4. Society as a whole
Responsibilities towards employee
1. Fair wages and regular payment.

2. Good working conditions and safety
3. Reasonable working standards and norms
4. Labour welfare services,- Health, education, recreation and accommodation
5. Training and promotion
6. Recognition and respect for hard work, honesty, sincerity and loyalty
7. Efficiency of redressing employees’ grievances.
Responsibilities towards customers
1. Providing goods and services at a reasonable price

2. Supply goods and services of promised quality, durability and services.
3. Supply social harmless products.
4. Offering an efficient consumer redressal mechanism
5. Resisting profiteering and black marketing.
6. Improving product quality towards R & D.
Responsibilities towards government
1. Regular payment of taxes.

2. Resisting bribing, bureaucrat and administers.
3. Cooperating with go of in up gradation of environment.
4. Cooperating with go of in social values.
Responsibilities towards society as a whole
1. Prevention of environmental pollution.

2. Preservation of ethical and moral values.
3. Making provision of health education and cultural services.
4. Minimizing ecological imbalance.
Social Responsibilities of Business Towards the Community
In view of the interdependence of business and community, the former has onerous
responsibilities and obligations in the same way as the latter has towards the business.
(1) The social responsibility of the business corresponds to the Gandhian concept
of Trusteeship. No doubt the business has obligations towards customers, workers
and share-holders, besides it has to discharge its obligation to the community. To
do this effectively, the businesses should have openness in the affairs. There must
be some balance with the need to preserve “commercial confidentiality in a
competitive situation” and openness to secure responsible behaviour. Every
company should justify its existence as a socially responsible entity in the same way
as it should pass the test of economic viability. These depend on the resources of
the company, i.e. the social responsibilities will vary according to the size and
resources.
(2) The concept of social responsibility should be accepted as part and parcel of
the affairs of the company and this should get reflected in every activity of the
company.
How the business can extend their social responsibilities;
(a) Donation for school building or construction of a school.

(b) Giving equipment to local school or college.
(c) Aid to community hospital.
(d) Support of local Programme for recycling to conserve scarce resources and
preventing pollution.
(e) Support of schemes relating to air and water pollution control.
(f) Assistance for handicapped and other disadvantaged persons.
(g) Service responsibility for products sold to local consumers.
(h) Support of artistic and cultural activities.

(i) Educating the socially backward and make them fit for the competitive word.
(j) Education and employment of women
(k) Assistance in urban planning and development of civic amenities.
(l) Support of local health care Programme.
Business Giving
Recently, the concept of “Business Giving” companies is gaining momentum and
has also become a culture to fulfill the social responsibilities of the business. Business
firms give out money, i.e. donate money to areas of social involvement. The government
encourages corporate giving for public causes like educational institutions, charitable
organizations, hospitals and also scientific and religious cause.
Advantages of Business giving to the Community

The community stands to definite gains by getting business donations, as they are
resources for development.
(i) By making gifts to educational sector, the literacy of the religion would be
increased and the quality of labour would improve in due course, besides
creating a culture outlook.
(ii) By making support to health schemes and hospitals, the incidence of

diseases could be controlled and consequently the labour productivity of the
community would increase which will be in turn prove fruitful to the business.
(iii) By giving support to schemes of scientific advancement and research the

technological level of the industry and competence of the people would
increase contributing towards better industrialization and economic
development of the religion.
Business Ethics:
In general Ethics deals with the principle of right conduct and morals, that is refers to a
system of moral badness of actions and their motives and consequences. The business
ethics refers to the application of ethics to business it is an extension of values of personal
life to business. To be more specific, business ethics is the study of good and evil, right
and wrong and just and unjust actions of business man. It refers to the behaviour of the
business man values in his business situation where in the business man values certain
norms are very important than other things.
e.g It is ethical for business man to obey the rules and regulations enforced by the
government regarding conduct of the business. Disobeying the law of the government is
considered unethical, but it is difficult to follow the rules for the business man. Then the
ethical way doing is to make proper representation to the government and get the law
amended or changed.
Why Ethics is important?
It is important for several reasons,
(a) Ethics corresponds to basic human needs:

It is a human trait that man desires to be ethical both in private and in the business.
He knows his decisions may affect the lives of thousand of employees. More over many
people want to be part of organisation. The basic ethical needs compel the organisations
to be ethically oriented.
(b) Values create credibility with the public:
A company perceived by the public to be ethically and socially responsive will be
honoured and respected those who have no connection with it.
(c) Values give management credibility with employees:
The organisation ethics and values are common language to bring leaderships and
its people together. The management has credibility with its employees because it has
credibility with the public.
(d) Values help better decision making:
It helps management to make better decisions which are in the interest of the
public, their employees and the company own long term good. The respect for ethics will
force management to take various aspects like economic, social and ethical in making
decisions.
(e) Ethics and profit ethics and profit go together:
A company which is inspired by ethical conduct is also profitable one. The value
driven companies are sure to successful in long run, though short run may lose money.
(f) Law cannot protect society, ethics can:
Ethics is important because the government, law, police and lawyers can’t do every
thing to protect society. The technological develops faster than government can regulate.
The people in industry know the dangers in particular technology better than regulatory
agencies. The government cannot always regulate all activities which are harmful to
society, when law fails, ethics can succeed.
Business Codes of Conduct:
All business must need certain standards of law and minimum cultural standards.
The other things are influenced by the culture of the society at large, we cannot expect
uniform business code of conduct in all business, and each business has got its own image
and personality like human being.
Clarance. C. Walton has given models of business conduct. They are as follows;
(a) The Austere Model:
This business gives exclusive emphasis on ownership interest and profit objective.
This type of business will be always cost conscious in every activity. This firm will be
conservative in outlook.
(b) The house hold model:
This business gives extension of the benefit to the employees with condescension of
paternalism. This type of business is analogous to a family or household consisting of
shareholders, management and employees whose benefits will be looked after.

(c) The vendor model:
In this type of business, consumers’ interests, tastes and right would be given first
preference and consumer satisfaction would be dominating the organisation.
(d) The investment model:
This model focuses on the organisations as entity and thus on long-term profits and
survival. It gives recognition to social investments along with economic investments.
(e) The civic model:
This accepts social responsibility and makes a positive commitment to social needs.
Its slogan is corporate citizenship
(f) The Artistic model:
This model encourages the organisation to become a creative instrument serving

the cause of an advantage civilization with a better quality of life. It undertakes creative
ideas in its actions not originally contemplated by others.
Tata’s code of conduct:

S.no For the company For the employee
.
1. Conduct themselves professionally
with professionalism honesty;
To supply goods and services of the highest
integrity as well as high moral and
quality standards to ensure the total
ethical standards and to be fair and
satisfaction of customers.
transparent and to be seen so by
third parties.
2. Not to derive any benefits from any
To engage only in activities beneficial to the
information about the company or
national interest of the country they operate
group which constitutes inside
in
information
3. Report to the management any
actual or possible violation of the
To be fully transparent in accounting and
code or an event that the employee
financial reporting standards.
becomes aware of, that could affect
the business or reputation of the
employee’s company or any other
Tata company.
4. To fully strive for the establishment and
support of a competitive open market Permits employees to pursue
economy and to abhor unfair trade practices
Code of Fair business practices:

Industry associations too have evolved codes of conduct of their own. The Council for fair
Business Practices [CFBP] in India. It was established in 1966 adopted the following code
of fair business practices,
◊ To change only fair and reasonable prices and take every possible step to ensure
that the prices to be changed to the consumer are brought to his notice.
◊ To take every possible step to ensure that the agents or dealers do not change
prices higher than fixed.
◊ In times of scarcity, not to with hold or suppress stocks of goods with a view to
hoarding or profiteering.
◊ Not to produce or trade in spurious goods of standards lower than specified
◊ Not to adulterate goods supplied
◊ Not to publish misleading advertisements
◊ To invoice goods exported or imported at their correct prices.
◊ To maintain accuracy in weights and measures of goods offered for sale
◊ Not to deal knowingly in smuggled goods
◊ Providing after- sales services where necessary or possible
◊ Honoring the fundamental rights of the consumers Right to Safety, Right to Choose,
Right to Information and Right to Heard.
Trade Associations:
These are the oldest and simplest form of combinations. These are organisation formed to
serve particular branches of industry and trade and to protect their common interest. A
trade association can be defined “Voluntary, non- profit organisation for mutual protection
or advantage of independent enterprises producing or distributing similar goods or
services.” It is not a compound combination i.e. combination of business firms. But it is
only a combination of businessmen.
Special features of Trade Association;
For understanding the special characteristics of the trade associations, we shall briefly
enlist them,
1. Loose form of Organisation
2. Non- profit making bodies
3. Scope of the Association
4. Source of Income
5. Pattern of Organisation
Objectives of the Trade Associations:

The functions of the association are generally determined by their constitution. They are
formed with varied objectives and their pattern of organisation also differs. Their
objectives differ from association to association depending upon the type of trade or
industry they represent.
The objectives can be classify into four types,
1. To increase the individual efficiency through education
2. To minimize competition or to prevent cut- throat competition
3. To develop the trade as a whole through technical work.
4. To project or extent trade as a whole through legislation.
Functions or Role of the Trade Associations:

To attain the objectives, the trade associations generally perform the following functions;
1. Assist members to adopt uniform accounting and costing methods

2. Conduct industrial and market research, collect statistical data and make available
the findings to the members.
3. Formulate a code of business conduct and help to encourage business ethics
amongst members and put down or eliminate unfair business practices in the trade
or industry concerned.
4. Conduct conferences and arrange conventions with a view to bring together the
members or representatives of the trade and industry.
5. Collect and supply information to the members on matters such as prices,
government regulations, market news, taxes etc.
6. Assist in standardizing trade practices and thereby help to evolve uniform business
practices.
7. Publish trade magazines and release periodic bulletins on topic of interest and
thereby help to educate both the members and the general public
8. Raising the voice of the members or representing the grievances of the members to
the government when any move to affect their interest is proposed by the
government
9. Doing all such things as may be necessary for the extension and development of
trade and industry and doing all such things which are instrumental or incidental to
the achievement of
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Home > Import and Export Considerations

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Import and Export Considerations

Provided by Zambia Development Agency
IMPORT PROCEDURES
In order to clear goods through Customs, an importer must present the usual commercial documents
such as bill of lading, airway bill and commercial invoice. The Import Declaration Form is used for
statistical purposes, and no fee is required. For goods to be cleared at the border, the importer uses the
Zambia Revenue Authority (ZRA) form CE 20, the standard form for entry and exit. Zambia is using the
Automated System for Customs Data and Management (ASYCUDA). Customs clearance can be
accomplished within hours, however incomplete forms and other difficulties, e.g., lack of supporting
documents, can result isubstantial delays.
Tariff Structure
Zambia applies tariffs on the c.i.f. (cost, insurance and freight) basis. Customs tariffs are calculated on
the basis of the dutiable value, based on the WTO Agreement on Customs Valuation. Most tariffs are ad
valorum, but a few specific tariffs remain. Zambia uses the international harmonized system. Zambia's
2006 tariff schedule is structured around three tiers: 0 % - 5 % for capital equipment, 15% for
intermediate goods, and 25 % for finished goods, respectively.
Other Levies and Charges
Presently, Zambia levies excise duties on certain products at rates ranging from 7 percent to 125 percent.
The excise duty is collected on cane and beet sugar and some derivatives, beverages, tobacco and some
derivatives and substitutes, and petroleum products.
The Value Added Tax (VAT) rate of 17.5 percent applies to both goods and services, of domestic
production and those that are imported. VAT is levied on the c.i.f. value plus customs tariff.
Exemptions from VAT include social services such as health, education, and funeral services.

Import Restrictions
Import prohibitions are maintained for environmental, health and security reasons. Import licensing is
required for most agricultural products. Zambia does not currently apply trade sanctions.
Sanitary and Phytosanitary Regulations
Sanitary and phytosanitary regulations are applied to imports of live animals, plants and seeds. A
sanitary certificate from the exporting country is required as a prerequisite to the issuance of the
veterinary permit. Food imports must satisfy the provisions of the Food and Drugs Act of September
1978, which requires packaging and labeling requirement for food, and standards for maize samp, rice
and bread exist.
EXPORT PROCEDURES
As is the case with import procedures all businesses engaging in trade are required to register with the
Patents and Companies Registration Office. Exporters must complete an export declaration form
(standard customs authority form ZRA CE 20), mainly for statistical purposes. An original commercial
invoice and a packaging list for shipment should accompany the form CE20. An airway bill or bill of
lading for transportation of exports should be obtained either from the freight forwarder or the
transporter being used. Zambia has no export taxes, charges and levies. If there are preferences that are
being claimed in the exporting market (e.g., reduced tariffs), then an appropriate stamped certificate of
origin, from the ZRA is required. COMESA, SADC, EU and AGOA textiles have different certificates
of origin.
If the good is a good covered by the Veterinary Department, a sanitary/phytosanitary certificate is

needed. A phytosanitary certificate is obtained from the Mount Makulu Research Station for seeds,
stems, and fruits. A very limited number of goods require a special export permit. Gemstone exports
require a permit from the Ministry of Mines; timber requires a timber verification certificate from the
Forestry Department. Additional information on exports may be obtained from:
The Chief Executive Officer
Export Board of Zambia
Tel: 222509
E-mail: ebzint@zamnet.zm
REGIONAL AGREEMENTS
The Common Market for East and Southern Africa
The Common Market for East and Southern Africa [1] (COMESA) has been operating, in one form or
another, since 1981. COMESA aims to promote economic integration via the removal of barriers to
trade and investment among COMESA member states. Moreover, COMESA aims to advocate for
infrastructure development, and development in science and technology. Economic integration is

envisaged to progress from the Free Trade Area (FTA) to an economic monetary union. The FTA
became operational on 1st November 2000 with nine participating countries initially. The nine member
countries that are implementing zero tariffs are Egypt, Sudan, Djibouti, Malawi, Madagascar, Mauritius,
Zambia and Zimbabwe. However in January 2004, Burundi and Ruwanda joined the FTA, bringing the
total number of participating countries to eleven.
The COMESA FTA is an agreement among members not to apply customs duties or charges on goods
traded amongst themselves. The eligible goods for duty-free treatment must meet the agreed upon Rules
of Origin. Members also agree to eliminate all non-tariff barriers to trade between them.
A COMSEA Certificate of Origin is required for each consignment of goods and is obtained from the
Revenue Authority in respective member countries.
The Southern Africa Development Community
The Southern Africa Development Community (SADC) aims to promote regional integration and
sustainable development in the regional community.
Members of the Southern African Development Community (SADC), comprising 14 countries [2],
signed a Trade Protocol, which calls for the implementation of a Free Trade Area. Each country has
negotiated two reduced tariff schedules. One schedule is applicable only for South Africa, and another
schedule for all other SADC members. Zambia's implementation of her offer, effective 30th April 2001,
is provided to those countries that provide Zambia with the SADC reduced tariff schedule.
The reduction of tariffs to South Africa provide for delayed liberalization, while the schedule to other
members provide for broader and faster access to the South Africa market. The tariff schedule
applicable to SADC members, with the exception of South Africa, has three categories. Category A
products are those products which go to zero-duty immediately upon implementation. The tariff for
Category B products gradually goes down to zero-duty over a period of eight years, and the tariff of
Category C products reaches zero-duty twelve years after implementation. Category C products are
known as sensitive products, and include for Zambia meat and dairy products, tea, some flours, raw
sugar, cement, textiles and clothing, and motor vehicles.
Plans are currently underway to establish a Free Trade Agreement by 2008, and a SADC Customs
Union by 2010.
A SADC Certificate of Origin is required for each consignment of goods and is obtained from the
Revenue Authority.
MEASURES AFFECTING PRODUCTION AND TRADE
Competition Policy
The Competition and Fair Trading Act aims to encourage competition in the economy by prohibition of
anti-competitive trade practices and to regulate monopolies and concentration of economic power. The
Act protects consumer's welfare and strengthens the efficiency of production and distribution of goods
and services.

The Zambia Competition Commission (ZCC) was established under the Act, to guard against anti-
competitive business/trade practices and protect the interest of the consumer. ZCC has handled a
number of notifications for corporate mergers and takeovers. Consumer welfare is a concern, and the
Government is setting up a welfare court to handle consumer complaints.
The Executive Director,

Zambia Competition Commission
4th Floor Main Post Office Building
P.O Box 34919
Lusaka
Tel 222787/232657
Fax 222789
E-mail zcomp@zamtel.zm
Website: http://www.zcc.com.zm/
Privatization
The privatization process has continued to progress well. By July 2005, 262 of the 284 enterprises had
been completed. Tendering is the most frequently used procedure. Proceeds from sales and assets are
paid into a privatization revenue account held at the Bank of Zambia on behalf of the Ministry of
Finance and National Planning.
The main companies remaining to be privatized/commercialized include, the Zambia National

Commercial Bank (ZNCB), Zambia Telecommunications Company (ZAMTEL) - (telephone), Nitrogen
Chemicals of Zambia (chemical fertilizer), and Zambian State Insurance Corporation (ZSIC) -
(insurance).
Copy Rights © Zambia Development agency, all rights reserved
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Unit - IV
Political Environment :
Government controls and regulations - Regulating economic and industrial activities -
Industrial Licensing policy - Control of monopolies - Capital issues control -
Government control over FDI and collaboration - Distribution and price control - new
EXIM policy - Foreign exchange flow regulation - Technology transfer.
Government Controls and Regulations:

In an economy, all the sectors of business will be functioning with in the frame work of the rules and
regulation of the country. All types of business owe their existence through the privileges guaranteed
under the constitution of the country. The day-to-day working and the style of functioning of business in
a country depend upon the economic policy of the government and the rules and regulation framed. The
socio economic and political objectives of the government and the basic guiding principles of the state
have been laid down preamble to the constitution, in the Fundamental rights and in Directive principles
of the state. The Preamble to the Zambian constitutions is; Zambia is Democratic republic secure to all
its citizens.
 JUSTICE, Social, economic and political
 LIBERTY of thought, expression, belief, faith and worship
 EQUALITY of status and opportunity; and to promote among them all
 FRATERNITY assuring the dignity of the individual and the unity and integrity of the Nation.
Economic Roles (or) Relationship of Government in Business:

The Government is a very powerful institution which has a very important role in shaping the national
economy. Almost all countries of the world have realized the need of government intervention in
creating a favourable business environment. The government normally plays four important roles in an
economy, for shaping the business environment. The nature and extent of the cited roles of the
government will vary depending upon a given situation. They are as follows;
(a) Government as a regulator of business
(b) Government as a promoter of business
(c) Government as an entrepreneur
(d) Government as the Planner.
(a) Government as a regulator of business:

All regulatory policies of the government enacted the legislatures of the countries are covered by
this segment. Government regulation of the business may cover a very wide spectrum, right from the
entry of business to the final stage of the business units. Through licensing system, the government may
regulate the entry of a firm into a particular line of business. The governments’ regulatory measures on
business may be either Direct control or Indirect control or with the combination of both.
Direct Control: these are administrative physical controls with regards to trade and industry, by placing
limits for expansion, control of monopoly, and big business, or starting public enterprise in place of
private. These controls are applied selectively from firm to firm and industry to industry.
Indirect control: These are exercised by the government through several fiscal and monetary measures.
By imposing penalties, adopting disincentive measures, extending incentives, subsidies, high import
duty. The objective may be maintaining equilibrium in the allocation of resources or balanced regional
development.
(b) Government as a promoter of business:

The promotional role of the government is very important in developing countries and also in
developed countries. In developing countries, there will be deplorable dearth of entrepreneurial skill and
other infrastructural facilities. The government provides finance to industry, creating required minimum
infrastructural facilities, providing subsidies and tax holidays. The government has to develop
infrastructure such as power, transport, finance, marketing, institutions for training and guidance etc. and
other promotional activities.
(c) Government as an entrepreneur:

In many countries government established its own industries and has to take entrepreneurial role
the dearth of private entrepreneurship, unprofitable sectors or neglect of some sectors by the private
business, absence of adequate competition and the resultant exploitation of consumers and socio-
political ideologies of the state are all the contributing causes for the state to start the business and bear
the risks. Generally, private investors are solely guided by profit motive and they will avert any
enterprise involving high risks. Hence, they will not enter in areas of low returns and also public utility
services where the investments are very heavy and the returns very meager. The government does not
hesitate to take them up as a ‘Social responsibility’. Usually, capital intensive projects like steel,
petroleum, fertilizers, and other capital goods industries where the investments would be very heavy and
the gestation period too long, the government would setup its business.
(d) Government as the Planner:

The government is expected to bring about all-round prosperity. The government has to fulfill all
the economic of the people and their aspirations. In its role as a planner, the government indicates the
various priorities and makes sectoral allocations. The idea of economic planning can be traced to three
different sources. They are:
(i) Rationalisation of Resources: Since the resources of the economy are much limited, they
have to be utilized in a rationalized way or in an optimal manner so as to achieve optimum
satisfaction for the society. In other words, the planned economy is a rational economy which
attempts to secure the maximum return with minimum wastage or productive resources.
(ii) Socialisation of resources: The planned economy helps in the realization of certain well
defined social ends like economic equality, uniform growth etc. an unplanned economy, left
to it, is incapable of attaining the desired social ends. The resources of the country should be
owned by all the people of the country and the benefits should be enjoyed equally by all. This
will be possible only under social planning.
(iii) Nationalisation of resources: The concept connotes that a planned economy is a powerful
economy. The nationalists want to use planning as a weapon to strengthen the country, not
only economically, but also politically. This concept has a tinge of totalitarian principle.
Industrial Policy:
What is meant by Industrial policy?
The term Industrial policy refers to the Government’s policy towards the establishment of industries,
their work and management. It includes all those principles, regulations, rules etc. which would
inference the industrialisation of the country and also nationalisation of industries. The industrial
development of a country largely depends on the industrial policy adopted by the government.
Objectives of Industrial policy:

a) To clearly demarcate areas of production under public sector, private sector, joint sector, co-
operatives sector and small scale sector as well as large scale, medium scale and small scale
units.
b) To establish clear monetary and fiscal policies that could augment industrial developments
c) To provide guidelines for importing foreign capital in cash and kind, and their role.
d) To optimize production through a process of capacity utilisation of scarce resources.
e) To correct imbalance in the growth and development of industries.
f) To prevent formation of combinations, monopolies and concentration of wealth in the hands
of a few entrepreneurs as that would widen the gap between the rich and poor.
g) To take all necessary measures to solve the problem of unemployment that was threatening
the country; and lastly and not the least.
h) To bring about diversification of industries to avoid economic and regional imbalances.
i) To define clearly the role of private sector and its active participation.
Components of Industrial policy:

Main components of industrial policy are as follows:
1. Tariff policy
2. Government’s attitude towards private and public sectors
3. monetary policy
4. Tax system
5. Government’s attitude towards foreign capital
6. Labour policy.
Industrial Licencing:
An industrial licence is only a written permission from the government to an industrial unit
manufacturing goods. The written permission (licence) would contain all particulars regarding the
location of the unit, goods to be produced, the capacity of the industrial unit, etc. An industrial licence is
a tool and also an instrument as a policy of the state to control and regulate the industrial activities of the
economy, in order to give proper direction to ensure industrial development in accordance with the

policy statement. Any change in the industrial policy would automatically call for a corresponding
change in the industrial licensing policy to enforce the objectives of the industrial policy.
Objectives of Industrial licensing:

(a) Optimum utilisation of investible resources
(b) To meet the requirements of the economy on the basis of priorities
(c) To secure balanced development in the country
(d) To prevent concentration of economic power
(e) To stimulate more employment; absorption of agricultural surplus and prevention of urban
migration.
(f) To achieve optimal balance between public sector, private sector and small-scale sector
(g) To facilitate improvement in technology and industrial efficiency
(h) To widen and also strengthen the industrial base of the economy.
Zambian- Industrial Licensing Policy:

At first sight, Zambia has a fairly elaborate licensing system which requires most manufacturing and
trading business activities to be license. However, the effect of this system upon SMEs is alleviated by
the Small Enterprises Development Act of 1996 which exempts small and micro enterprises from the
need to obtain a licence for the first five years of operation.
The main legislation is the Trade Licensing Act, Cap 393 of the Laws of Zambia, which requires all
trading and manufacturing business to be licensed. In terms of the Act, the following types of licence
may be issued:
 a trading (whole sale) licence

 a trading (retail) licence
 a hawker’s licence
 a peddler’s licence
 a peddler’s (restricted) licence
 a stall licence
 a restricted licence
 an agent’s licence and
 a manufacturing licence
A licensing committee sits every month to scrutinise and consider applications before recommending or
rejecting them for issue of a licence. This process can take between thirty to sixty days, in spite of recent
changes which have failed to reduce the length of time involved. The main problem lies with the
procedures of the Local Authorities to whom the Ministry of Commerce, Trade and Industry has
delegated the licensing function. In addition to the general inefficiencies of Local Authorities, there is a
lack of capacity in the licensing departments, and poor co-ordination between different departments of
the Local Authorities and with the Ministry responsible for Trades licensing.
The Liquor Licensing Act, Cap. 167, provides for various types of liquor licenses:
o Whole sale liquor licence

o Retail liquor licence
o Bar licence
o Hotel liquor licence
o Private hotel liquor licence

o Restaurant liquor licence
o Railway restaurant car licence
o Passenger vessel licence
o Airport licence
o Theatre licence and
o Temporary licence
The process of obtaining a liquor licence is longer than that for an ordinary trading licence in that the
local authority’s liquor licensing committee has to be convened to consider applications which – if
approved- are submitted for further scrutiny by the Provincial Liquor Licensing Board which is
supposed to sit every three months. In reality, this board which is appointed by the Ministry of Local
Government and Housing rarely sits. As at August 1999, this Board had more than four meetings
pending. Applications pending are normally issued with provisional liquor licenses renewable every
three months. This is an inconvenience to business in terms of both time and cost.
Other types of licence are required for :
 A further category of licenses is required for any project to be located and / or undertaken in
National Parks and Game management Areas. In terms of National Parks and Wildlife Act, Cap
201.
 Fishing: under the Fisheries Act, Cap 200 of the laws of Zambia, the Minister responsible for
fisheries may declare any area of water to be a prescribed area and may regulate the method of
fishing in such area
 Air transport: the approval of the Ministry of Transport and Communications (Department of
Civil Aviation) must be sought before such a business is established.
 Tourism: under the Tourism Act, Cap 155 of the laws of Zambia, nearly all tourist enterprises
require approvals from the Zambia National tourist Board.
 Banking and financial services: require the approval of the Bank of Zambia; and
 Mining
Recent changes in licensing policy:

In recent years, several changes to licensing policy have been introduced, mainly with a view to
improving efficiency in the licence application procedure. Over the last ten years, the following acts
have made changes to the Trades licensing act:
(a) Act No: 26 of 1990;
(b) Act No. 5 of 1992;
(c) Act No. 32 of 1993;
(d) Act No. 10 of 1994 and
(e) Act No. 13 of 1994.
Reasons given for these amendments include the following:

 To minimize bureaucratic delays associated with the issuing of licenses

 To check arbitrary usage of power. The 1993 amendment obliges a licensing authority other than the
Minister to furnish the applicant in writing with reasons why the application has been rejected
 To facilitate the enforcement of licensing regulations by licensing authorities. These include
guidelines for enforcement such as the power of the minister to revoke a license, the power of the
court to endorse, cancel and or disqualify a license upon conviction of a licensee
 To facilitate effective maintenance of business records for tax purposes. Section 18A(1) and (2),
Section 28 (2) item (a), of the Trades Licensing Act, Cap 393
 To revise the fees chargeable for the various licenses in line with inflation and to increase revenue to
government and
 To mordernise the language used in the Act, as some of these laws had not been revised for a long
time.
Rationale for requiring certain business to be licensed:

In general terms, there appears to be no consistent policy reason for requiring some businesses to be
licensed but not others. The broad effect of the licensing laws is that manufacturing and retail business
should be licensed, but services businesses are generally exempted. This division is probably a historical
reflection of a previous era, when there were few services businesses in operation in Zambia.
The effect of the licensing system upon SMEs is alleviated by the Small Enterprises Development Act of
1996 which exempts small and micro enterprises from the need to obtain a licence for the first five years
of operation. The policy rationale for this exemption is to facilitate small and micro business starts-ups.
Foreign Direct Investment (FDI):

Foreign Direct Investment is one of the ways of globalisation. FDI differs from that of the IMF
(International Monetary Funds). FDI is characterized by a lasting interest in or effective management
control over, an enterprise in another country and is distinguished from portfolio flows which consist of
equity flows and bond issues purchased by foreign investors. FDI may also help reduce adverse shocks
to the poor stemming from financial instability, when FDI flows are more stable than other private
capital flows. FDI flows should get, in the recipient country, reflected in
(a) Capital formation
(b) Formation of new firms and factories
(c) Increase in foreign equity holding in the existing firms
(d) Mergers and acquisitions of existing firms and factories
Why Do Countries want FDI?

There are strong reasons why MNCs are welcomed to invest in foreign countries.
(1) FDI is seeks to fill the gaps in technology managerial skills and entreprreneurism, as a way
of filling in gaps between the domestically available supplies of savings, foreign exchange,
government revenue, and human capital skills and the desired level of these resources necessary
to achieve growth and development targets. The MNCs not only provide financial resources and
new factories, but also supply a “package” of needed resources, including managerial experience
of training programs to and educate local managers to establish contacts with foreign countries.
They bring sophisticated technological knowledge about production processes while transferring
modern technology.
(2) Factories set up by MNCs act as nucleuses of growth: The industry of MNCs gives birth to
several other enterprises which would supply inputs to the parent company. It is not that only a
few surrounding firms are the beneficiaries.
(3) FDI can generate healthy competition in the recipient countries: When FDI assumes the
form of green field projects, the result is the creation on new enterprises, adding to the number of
players in the market. This can increase the level of competition in a host country. It brings
consumers choice, tends to bring down prices and shall boost economic welfare of consumers.
(4) Tool often location advantages attract FDI: The location- specific advantages in particular,
include natural resources such as oil and other minerals, cost and skill of labours, which are by
nature specific to certain locations.
(5) FDI often depends on a country’s political attempts to reduce security risks: For example
China state owned petroleum companies have been investing abroad so as to minimize its
dependence on foreign companies for oil supplies. The move may also help China hold down
prices on the petroleum it receives.
(6) It is the poor countries that deserve FDI more than any others: Poverty is prevalent, not
withstanding globalisation, world becoming flat and millennium agenda. To alleviate poverty
they get aid from international institutions and rich countries can be temporary measures. The
Economic growth ushered in by increased investment can be a permanent solution.
Factors Influencing FDI:

Several factors influence the decision relating to the flow of FDI. These can be classified into three
categories,
(1) Supply Factors
(2) Demand Factors
(3) Government Factors
(1) Supply Factors: Supply factors include production costs, logistics, resource availability and access
to technology. These factors influence a firm’s decision relating to FDI.
(a) Production costs: Firms seek competitive advantage through low production cost. MNCs locate
production facilities in low wage countries. It is just not low labour cost. A host of other factors also
figure in low cost, e.g. lower real estate prices, lower taxes, and advantages of low wages and similarly
local incentives were the main motive behind establishing industries.
(b) Logistics: MNCs seek to invest on subsidiaries in foreign markets, if the cost of shipping raw
material is high. Coke and PEPSI have set up bottling plants in India as the cost of transporting water
from the US is considerable. International businesses also often make investments n host countries to
reduce distribution costs. The liberalisation of Latin American markets brought a surge of foreign direct
investment in transportation and physical distribution, and foreign providers have upgraded the region’s
transportation and warehousing facilities.
(c) Natural Resources: MNCs tend to utilize FDI to access natural resources that are critical to them.
Natural resources attract many companies into international markets. To access cheaper energy
resources used in manufacturing, several Japanese firms are relocating production to China, Mexico and
Vietnam where energy costs are lower.
(d) Key Technology: Technology and business have been intertwined since the industrial revolution.
The connection between the two became even stronger in the information age, particularly with the
advent of electronic business exchanges. Technology influences every aspect of global market places-
driving innovation, affecting partnerships and locations, and changing business-stakeholder
relationships.
(2) Demand Factors: Market expansion is another motive behind FDI. They include as the following;
(a) Customer Access: Certain international business need to be physically present in foreign markets to
serve customers better. KFC cannot provide freshly fried chicken to customers in INDIA from its
restaurants in the US. So they want to at customer access.
(b) Competitive Advantage: A company enjoying great reputation may seek to establish subsidiaries in
overseas countries to encase on its brand equity. An owner of a valuable trade mark, brand name, or
technology may choose to operate in foreign countries rather than export to them.
(c) Follow the Clients: Often, clients of a company attract FDI. If one of the clients builds a foreign
facility, the company may decide to locate a new factory of its own nearby, thus enabling it to continue
to supply its customer promptly and attentively. This practice of “following clients” is likely to be
followed in industries in which many component parts are obtained from suppliers with whom the
company has a close working relationship.
(d) Follow the Rivals: Competitor analysis indicates geographic strengths and weakness of individual
rivals. From such analysis, firms an select markets for investment. MNCs will be routinely monitoring
market sizes and growth rates in over 150 countries. Large and medium-sized growth markets are
always attractive propositions, and firms compete to build up factories in these regions and countries
such as INDIA, BRAZIL and CHINA.
(3) Government / Political Factors: Political factors are often the determinants of the quantum and
direction of FDI. They are as follows
(a) Economic priorities: The Economic priorities of developing countries often clash with profit
motives of MNCs seeking to invest in such markets. In other words, developing countries want MNCs to
invest in infrastructure development area but the international businesses seek to invest in consumer
goods industries. Obviously developing countries impose restrictions on the flow of FDI into their
economies. Inward flow of FDI was perceived essential as a means of acquiring technology that was not
available through licensing agreements and capital goods imports.
(b) Avoidance of Trade Barriers: In the host country there must be avoidance of Trade barriers to
locate the companies. E.g. Fuji photo Film Company that invested $200 million to set up a
manufacturing plant in US earlier to this, the company supplied film to its US customers from its
factories in the Netherlands and Japan. While thus exporting to the US, Fuji was paying 3.7% tariff
imposed by the US government. This tax has been saved by producing film in the US itself.
(c) Development Incentives: Many governments offer attractive incentives- may, throw red carpet
welcome to MNCs to invest in their economies, particularly the developing countries. The theories of

FDI explained earlier explain the reasons why developing countries invite FDI. The primary motive to
attract FDI is to fill the resource gaps which exist in industrializing countries.
Price control and distribution
Objectives of price control and distribution.
1. To control inflation and deflation.

2. Maintain equilibrium between supply demands.
3. To prevent hoarding.
4. To increasing the supply system
5. Proper supply of inputs to priority sectors.
6. Ensuring quality of goods and services
7. Preventing monopolistic and unfair trade practices
8. Social and Distributive justice
Methods of pricing:
The following pricing methods usually employed by business men, these methods are;
(1) Cost- plus or Full- cost pricing
(2) Pricing for a rate of return, also called Target pricing
(3) Marginal cost pricing
(4) Going rate pricing
(5) Customary prices.
The first three methods are cost- oriented as the prices are determined on the basis of costs. The last two
methods are competition- oriented; it is set on the basis of what competitors are changing though it is not
necessary to charge the same price as competitors are charging.
(1) Cost plus (or) Full- cost pricing:

This is the most common method used for pricing, under this method; the price is set to cover
costs and predetermined percentag for profit. The percentage may be different among industries, among
member firms and products of the same firm. This reflects in differences in competitive intensity,
differences in cost base and differences in the rate of turnover and risk. Usually profit margins under
price controls are so set as to make it possible for even the least efficient firms to survive. Thus the
margin of profits tends to higher than what would be possible under competitive conditions. It is adopted
because it is simple to apply full cost pricing.
Full cost pricing: it offers a means by which fair and plausible prices can be found with ease and speed,
no matter how many products the firm handles. Prices based on full cost look factual and precise and
may be more defensible on moral grounds than prices established by other means. Fixed cost must be
covered in the long-run and firms feel that if they are not covered in the short run, they will not be
covered in the long- run either.
Cost-plus pricing is use full in following cases: for public-utility pricing,
Product tailoring- this approach takes into account the market realities by looking from the view point of
the buyer in terms of what he wants and what he will pay.
Pricing products that are designed to the specification
Monopsony- where the buyer knows a great deal about suppliers costs.
(2) Pricing for a rate of return:

An important problem that a firm might have to face is one of adjusting the prices to changes in
costs for this purpose the popular policies that are often followed are as under;
o Revise prices to maintain a constant percentage mark-up over costs
o Revise prices to maintain profits as a constant percentage of total sales.
o Revise price to maintain a constant return on invested capital
o Rate of return pricing is a refined variant of full cost pricing. It has the same inadequacies, viz. it
tends to ignore demand and fails to reflect competition adequately.
o It is based upon a concept of cost which may not be relevant to the pricing decision at hand and
overplays the precision of allocated. The fixed cost and capital employed.
(3) Marginal cost Pricing:
Under previous two pricing, the prices are based on total costs comprising fixed and variable costs.
Under marginal cost pricing, fixed costs are ignored and prices are determined on the basis of marginal
cost. The firms use only those costs that are directly attributable to the output of a specific product.
A pricing decision involves planning into the future, and as such it should deal solely with the
anticipated and therefore estimated revenues, expenses and capital outlays. All past outlays which give
rise to fixed costs. The firm seeks to fix its prices so as to maximize its total contribution to fixed costs
and profit, this objective is achieved by considering each product in isolation and fixing its price at a
level which is calculated to maximize its total contribution. These are two consumptions,
(a) The firms is able to segregated its markets so that it is able to charge higher price in some market and
lower price in others.
(b) There are no legal restrictions.
(4) Going Rate – Pricing:
Instead of the cost, the emphasis here is on the market. The firm adjusts its own price policy to
the general pricing structure in the industry. Where costs are particularly difficult to measure, this may
seem to be the logical first step in a rational pricing policy. It may also reflect the collective wisdom of
the industry. Many cases of this type are situations of price leadership. Where price leadership is well
established, charging according to what competitors are charging may be the only safe policy. It may
simply be a way in which firms try to escape the hazards or price rivalry in an oligopolistic market. It
may be less costly and troublesome to the business than the exact calculation of costs and demand and
superficially seems to have practical advantage over a highly individualistic pricing policy.
Many big American corporations have adopted a policy of following competitors usually
implying that they follow a price set either by the market or by a price leader.
It must be noted that ‘Going rate pricing’ is not quite the same as accepting a price impersonally
set by a near perfect market. Rather it would seem that the firm has some power to set its own price and
could be a price maker if it chooses to face all the consequences. It prefers, however, to take the safe
course and conform to the policy of others.
(5) Customary Prices:

Prices of certain goods become more or less fixed for considerable periods of time, for such
goods, changes in cost are usually reflected in changes in quality or quantity. Only when the costs

change significantly, the customary prices of these goods are changed. Customary prices may be
maintained event when products are changed.
For e.g. the new model of an electric fan may be priced at the same level as the discontinued model.
This is usually so even in the face of lower costs. A lower price may cause an adverse reaction on the
competitors leading them to a price war as also on the consumers who may think that the quality of the
new model is inferior. Perhaps, going along with the old price is the easiest things to do the maintenance
of existing prices as long as possible is a factor in the pricing of many products.
If a change in customary prices is intended, the pricing executive must study the pricing policies and
practices of competing firms and the behaviour and emotional make-up. Another way out, especially
when an up ward move is sought is to test the new prices on a limited market to determine the consumer
reaction.
Price control and regulation
In planned economy, price control and regulation of prices have become important function of
the government. To realize these objectives and to prevent inflationary forces being generated in the
economy, certain measures are adopted by the government .they are
i) Dual pricing.
ii) Price pegging.
iii) Ceiling prices.
iv) Subsidies
Dual pricing:
Dual pricing is the act of charging two different prices for the same goods. The price
is pegged for a part of the output and has its effect on the free market price for the rest of the output. The
levy price is lower than, while the free market price is higher than, the price that would have prevailed in
the market, had there been no government intervention of this sort. Consequently, through the dual
pricing system, government subsidises the consumption of the quantity available through ration shop
(subsidised shops), and the taxes the consumption of the quantity bought in the open market.
While in some case of cement, paper and sugar, there is a dual pricing- a fixed part of the total output
has to be sold at the government fixed price. Where a fixed part of out put to be sold at the levy prices
and the remaining at the free market price.
Advantages of dual pricing

i)It protects the interest of weaker section of the society who cannot pay pay
higher prices in the free market. At the same time, it seeks to cater the needs of the market in full.
ii)the producers can find the difference between the controlled price and the
open market price and thereby remedy the shortfall of production.
Price pegging: The government itself an entrepreneur and thus is engaged in the production of many
goods and services, whose prices for all outputs are obviously set by the government agencies. These
include services rendered by railways, post and telegraph networks, Telephone Company, electricity,
nationalized banks etc. and commodities produced by nationalized textile mills, oil and natural gas
networks, government owned iron and steel manufacturing units, cement firms etc.

Partial or Dual pricing: Besides government produced goods and services, the government pegs the
prices of certain other products which are produced under the private sector. These include major drugs,
cement, paper, fertilizers, sugar, coal, school and college fees, and a few other essential goods and
services. In case of some drugs and school fees in many institutions, government fixes the price for all
their outputs.
Price floors/ Ceilings: Price floors and Price ceilings have repercussions both on the price as well as the
availability of the goods. Price ceilings are found in the case of rent on residential and other
accommodations, on the goods manufactured by monopolists and oligopolists and on goods of essential
consumption. It exists for many important agricultural goods for the services of unskilled labours,
minimum or guaranteed prices for all agricultural crops, minimum wages, etc. The agricultural prices
commission announces what they call the support, minimum or guaranteed prices for all important
agricultural crops. Also, there is a minimum wage rate, below which no worker, however unqualified he
or she may be, could be hired by any organization. Similarly, there are ceiling on a few prices. These
include rent on residential or office accommodations, prices of life saving and other basic drugs etc.
Thus effective price ceilings lead to an excess demand.
Indirect: It means through which government controls prices are various kinds of commodity taxes
(excise duty, sales tax and custom duties), tax on profit, tax on real estate and subsidies. A large number
of commodities fall under one or more kinds of taxes, and there are subsidies available for the
production of the selected goods across the country and for most goods if they are manufactured in the
notified backward areas.
Technology
Technology means “the systematic knowledge of industrial arts”. Technology denotes the methods of
performance. These two are increasingly used in modern literature on industrial production.
Impact of technology on business operations.

Technology affects business operationsin many ways. It affects following
things.,
Production
Product development
Employment practices
Marketing
• Information processing
Production:
Technological development helps the businessmen to adopt safer and quicker
methods of production. Electric power in the place of steam power, automation, computers and

much electronic equipment help to increase productive capacity, and efficiency and also
perfection.
Technological development helps the businessman to provide safer and better conditions of work
and living to the workers.
Marketing:
Marketing process and practices adopted now a days are the result of technology. Advertisement
in radio, TV, press and screen has become a regular feature of modern marketing. Informative
advertisement and aggressive advertisement are possible only with modern innovation in media
technology.
Information processing:
Information processing has been revolutionized in business through the adoption of electronic
data processing. Millions information gathered, computed and transmitted and stored for future
reference, which help the business to draw upon the information for taking quick decisions in the
context of changed business environment.
In short technology alters the structure and management of business both vertically as well as
horizontally. Vertically machinery is used at lower-level work and labor-saving technology used.
At the middle level, the process of work is more or less mechanized. At the top level multi-
professional level managers with specialized talents are appointed. At the horizontal level
procuring of raw materials, production process, packing, transporting, marketing finance, etc,.
Modern technological methods are used.
EXPORT PROCEDURE
The exporting activity involves several commercial and regulatory procedures. These
procedures also involve considerable documentation requirements. Besides the documentat
ion pertaining to the commercial aspects of the export business, there are documentation
requirements of a regular in nature like excise clearance, foreign exchange regulation.
Some preliminary steps have to be taken before an export transaction begins.
1. IEC number
2. Membership cum registration
3. Inquiry and offer
4. Confirmation of order
5. Export license
6. Production/procurement of goods
7. Shipping space
8. Packing and marking
9. Quality control and pre-shipment inspection
10 .Excise clearance
11. Shipping the goods
Shipping by sea
Shipping by air
Shipping by post
Shipping by land
Import and Export Considerations Zambia
IMPORT PROCEDURES
According to the World Trade Organization, trade represented 74.5% of Zambia’s GDP from
20052007. In 2008, merchandise exports totaled over $5 billion while merchandise imports
totaled over $5.1 billion. In 2007, commercial services exports totaled $279 million while
commercial services imports totaled $886 million.
Note: The information in this snapshot can help identify trade factors that may impact

investments in Zambia. For example, the higher the TradetoGDP ratio the greater sensitivity
Zambia’s economy might have to global economic, trade, and financial fluctuations. Also,
changes in economies or industries of key trading partners may trigger changes in
Zambia’s economy and industries.
Major Imports and Exports
According to the International Trade Centre, the top five export categories for Zambia in 2008,
along with percentage of total exports, were:
1. Copper and articles of copper (64.3%)
2. Ores, slag, and ash (15.1%)
3. Other base metals, cermets, and articles thereof (5.9%)
4. Tobacco and manufactured tobacco substitutes (1.4%)
5. Sugars and sugar confectionery (1.3%)
According to the International Trade Centre, the top five import categories for Zambia in 2008,
along with percentage of total imports, were:
1. Boilers, machinery, nuclear reactors, etc. (16.6%)
2. Mineral fuels, oils, distillation products, etc. (16.1%)
3. Vehicles other than railway (9.7%)
4. Ores, slag, and ash (8.4%)
5. Electrical and electronic equipment (9.5%)
Major Trading PartnersThe top three countries to which Zambia exports merchandise,

along with percentage of exports, are:
1. China (14.2%)
2. South Africa (8.5%)
3. Democratic Republic of Congo (8.1%)
4. The top three countries which import merchandise to Zambia, along with percentage of
imports, are:
1. South Africa (51.7%)
2. United Arab Emirates (8%)
3. China (6.8%)
In order to clear goods through Customs, an importer must present the usual commercial documents
such as bill of lading, airway bill and commercial invoice. The Import Declaration Form is used for
statistical purposes, and no fee is required. For goods to be cleared at the border, the importer uses
the Zambia Revenue Authority (ZRA) form CE 20, the standard form for entry and exit. Zambia is
using the Automated System for Customs Data and Management (ASYCUDA). Customs clearance
can be accomplished within hours, however incomplete forms and other difficulties, e.g., lack of
supporting documents, can result is substantial delays.
Tariff Structure
Zambia applies tariffs on the c.i.f. (cost, insurance and freight) basis. Customs tariffs are
calculated on the basis of the dutiable value, based on the WTO Agreement on Customs
Valuation. Most tariffs are ad valorum, but a few specific tariffs remain. Zambia uses the
international harmonized system. Zambia's 2006 tariff schedule is structured around three
tiers: 0 % 5 % for capital equipment, 15% for intermediate goods, and 25 % for finished
goods, respectively.
Other Levies and Charges
Presently, Zambia levies excise duties on certain products at rates ranging from 7 percent to
125 percent. The excise duty is collected on cane and beet sugar and some derivatives,
beverages, tobacco and some derivatives and substitutes, and petroleum products.
The Value Added Tax (VAT) rate of 17.5 percent applies to both goods and services, of
domestic production and those that are imported. VAT is levied on the c.i.f. value plus
customs tariff. Exemptions from VAT include social services such as health, education, and
funeral services.
Import Restrictions
Import prohibitions are maintained for environmental, health and security reasons. Import

licensing is required for most agricultural products. Zambia does not currently apply trade
sanctions.
Sanitary and Phytosanitary Regulations

Sanitary and phytosanitary regulations are applied to imports of live animals, plants and
seeds. A sanitary certificate from the exporting country is required as a prerequisite to the
issuance of the veterinary permit. Food imports must satisfy the provisions of the Food and
Drugs Act of September 1978, which requires packaging and labeling requirement for food,
and standards for maize samp, rice and bread exist.
EXPORT PROCEDURES:
The exporting activity involves several commercial and regulatory procedures. These procedures also
involve considerable documentation requirements. Besides the documentation pertaining to the
commercial aspects of the export business, there are documentation requirements of a regular in nature
like excise clearance, foreign exchange regulation.
Some preliminary steps have to be taken before an export transaction begins.
1. IEC number
2. Membership cum registration
3. Inquiry and offer
4. Confirmation of order
5. Export license
6. Production/procurement of goods
7. Shipping space
8. Packing and marking
9. Quality control and pre-shipment inspection
10 .Excise clearance
11. Shipping the goods
Shipping by sea
Shipping by air
Shipping by post
Shipping by land
Unit - V
Financial Environment:
Financial environment is the most essential factor in the development and growth of the economy. It is
through the favorable financial environment that the business and the industries thrive. Even though
other environments are favorable, it is the financial environment that dispenses everything in the
economy.
What is financial environment?

The economic growth depends upon three essential activities in the country. Finance is the primary
requirement for investment and production and growth of the economy. The country has to mobilize and
appropriate technology should be used for purposes of production and development. There should be
capital formation through investments, capital does not mean money capital, but real capital i.e. capital
goods. Capital formation implies the creating of real physical assets in the economy. It is carried on by
individuals, institution and government. Capital formation implies the creating of real physical assets in
the economy. Capital formation is carried on by individuals, institution and government.
Capital formation is formed by savings of the people; mere savings will not lead to capital formation.
The saved amount should be effectively mobilised and made available to the entrepreneurs to invest. So,
investment is another important step in capital formation. Investment would be made in the production
of capital goods.

Thus capital formation has three distinct activities,

(a) Savings of the people
(b) Mobilisation of savings of the people
(c) It made available for the entrepreneurs to invest in their business.
The mobilisation of the savings of the people and make them available for the entrepreneurs for
investment in business is done by the banking system of the country. The banking system in a country
depends upon the financial system of the economy. If there is a developed banking system, the business
enterprises would have comfortable environment.
Financial System:
Financial system of a country is made up of specialized and non-specialised financial institution. It also
consists of organised and unorganized financial markets, financial instruments and services which
facilitates transfer of funds. Financial system is a set of complex and also closely intermixed financial
institutions, markets, instruments, services, practices, procedures etc. Financial system is a very wide
term than payment system; payment system is concerned with payments in cash. Financial system mere
payment of money as it covers both cash and credit transaction. It is also defined as a set of institutional
arrangement by which the surplus resources in the economy are mobilised from surplus units and
transferred to deficit spenders. This is the type of financial assets, financial markets and financial
institutions are the three main constituents of any financial systems.
(1) Financial Assets:

Financial assets are claims of securities which are divided into two
(a) Primary or Direct securities
(b) Secondary or Indirect securities
(a) Primary or Direct securities: It is the financial claims against real-sector units, e.g. bills,
bonds, equities, book debts etc. They are created by real- sector units as ultimate borrowers
for raising funds to finance their deficit spending.
(b) Secondary or Indirect securities: They are financial claims issued by financial institution or
intermediaries against themselves to raise funds from the public. E.g. Zambian bank
currency, bank deposits, life insurance policies, saving deposits, corporate shares (ordinary
and preference), company deposits etc.
(2) Financial markets:

Financial system of the country operates through financial markets and institutions. Financial
markets deal in financial assets or instruments of various kinds such as currency, deposits, cheques, bills
and bonds. It is like markets of goods and services. They have their own demand, supply and quantities
and prices. It is the centers or arrangements that provide facilities for buying and selling of financial
claims and services. The financial market can be classified as follows;
(a) Primary markets: It deals with new financial claims or new securities. It is also known as
new issue markets.
(b) Secondary markets: It deals with securities which are already issued.
(c) Money markets: It deals with the short term (i.e. with maturity period ranging up to one year)
claims.

(d) Capital market: It deals with the long term claims (i.e. the maturity period above one year).
The main difference between money markets and capital markets is only with respect to the
period of maturity of financial assets issued in these markets.
(e) Broad and wide market: It attracts funds from national and international investors in large
volume. The second one i.e. the Deep market is one where there are always sufficient orders
for buying and selling at fine quotations, both below and above the market price and where
there are good opportunities for swap deal, i.e. medium and long term arrangement between
two parties in which each party commits to service the debt of the other.
(f) Shallow market: It is an underdeveloped market. The underdevelopment of this financial
market is due to several regulations and controls imposed by governmental authorities.
(3) Financial Institutions: These financial institutions may also be called financial intermediaries.
Under this category come all banks and non- banking financial institutions. The banking system
comprises of the commercial banks and co-operative banks. Under non-banking financial institutions we
have Development banks and Investment institutions etc.
Banks:
Bank performs a variety of functions it is very difficult to give a precise. The most acceptable definition,
“A bank is an institution which deals in money and credit.” This explains that the bankers are dealers in
money and credit, i.e. they sell money and buy money, the cost of which is termed interest and
commission.
Prof. Kinely defines, “ A bank is an establishment which makes to individuals such advances of money
as may be required and safely made, and to which individuals entrust money when not required and
safely made, and to which individuals entrust money when not required by them for use.”
Banking Sector in Zambia:
The government policy generally encourages the establishment of free market financial institutions.
Banking supervision and regulation by the Bank of Zambia (BoZ), the central bank, has improved over
the past few years. Improvements include revoking licenses of insolvent banks, denying bailouts,
limiting deposit protection, strengthening loan recovery efforts, and upgrading the training and
incentives of bank supervisors.
Although some improvements have been registered over the past year, credit to the private sector is
expensive and readily available only for extremely low-risk investments. One factor inhibiting lending is
a culture of tolerating loan default, which many views as minor transgression. In addition, until recently,
high returns on government securities encouraged commercial banks to invest heavily in government
debt, to the exclusion of financing productive private sector investments. Banking officials readily
acknowledge that they need to upgrade the assessment and credit management skills within their
institutions in order to better serve private sector investors. Some financial institutions restrict credit to
Zambian-registered companies, but foreign ownership does not disqualify a loan applicant. Banks
provide credit denominated in foreign currency only for investments aimed at producing goods for
export.
How does the Banking System Operates in Zambia:

The Banking system: Zambia has a commercial banking sector composed of private international banks,
private domestic banks, and state-owned banks. It is made up of eleven banks, five of which are foreign-
owned subsidiaries, four are owned by local investors, one is government owned and another is a joint
venture between the Zambian and Indian governments.
It is a requirement for all operating in Zambia to incorporate locally. As a result, there are no local
branches of foreign (including US) banks or financial institutions. How ever, Citi Bank Zambia Limited,
a wholly owned subsidiary of Citi corp New York, provides corporate banking services in Zambia.
The banking sector is supervised by the Central Bank, the BoZ which reports to the Ministry of Finance
and National Planning. The sector is governed by the Banking and Financial Services Act of 1994 and
accompanying regulations of the Laws of Zambia. The BoZ has proposed amendments to this Act to
strengthen its supervisory powers and make the act applicable to non-bank financial institutions.
Industry observers generally credit the BoZ with making large strides in improving bank oversight over
the past several years. Parliament has passed legislation for deposit insurance systems and to prevent
money laundering.
Functions of Commercial banks:
Modern commercial banks perform a number of functions and render a number of services to
businessman, industrialists, traders and the house holder. The functions can be classified as follows;
Functions of Commercial banks
Banking Functions Subsidiary Functions
Attraction of Deposits
Advancing of Loans
General Utility Agency Functions

Creation of Money or Credit Safe deposit
Clearing of Cheques Issue of personal and

commercial letter of credit
Financing Industries & Trade
Underwriting Loans
Collection and distribution

of information
(A) Banking functions:

(1) Attraction of deposits:
Banks attracts deposits by mobilizing the savings of the community there are deposits
may be as follows;
(a) Time deposits: This is called as fixed deposits, money is accepted for fixed period, say, two,
five and ten years etc. The rate of interest will be high and money cannot be with drawn
before the maturity date.
(b) Demand deposits: These deposits are kept in an account called current account. The
depositor can with draw can with draw or deposit at any time, no interest is given, the
facilities like cheque, over draft, etc are allowed.
(c) Savings deposits: It is kept under savings bank account, some restrictions are imposed on
the depositor under this account, and cheque facility is available.
(2) Advancing of Loans:

Attracting deposits and advancing loans are the twin functions of commercial banks. Banks
adopt several ways for granting loans. The bank gives money to a person or to a firm against some
collateral security. The granting loans can be done under three methods. They are,
(a) Cash credit: Under this method bank gives loan to the borrower against certain security. The
entire loan is fully given. Ceiling of loan is determined on the basis of stock in godown, which
will become banker possession the debtor will with draws in small sum and he cannot exceed the
credit limit. The ban charges interest only on the amount withdraw from account.
(b) Overdraft: The banks grants O.D facilities for reliable and respectable customers, O.D means
the customer can issue cheque and overdraw the money in times of need, even though there is no
adequate balance in his/ her account. The customer has pay interest to the bank for the amount
over drawn.
(c) Discounting of bills of exchange: This is another popular type of advancing in modern banks.
This is through discounting of commercial paper, promissory notes and bills of exchange usually
for short period.
(3) Creation of money or credit: A part of receiving deposits and advancing loans, the bankers create
money for every loan sanction by the banker creates a deposit. The bank opens an account in the name
of the borrower to with draw according to his requirement. Whenever a bank grants loan, it creates a
deposit or a liability against itself. Since the deposits leads to a net increase in the money stock of the
economy. This is known as creation of money or credit by the banks.
(4) Clearing of cheques: The depositor asks his banker to transfer into the account of some one else by
means of a cheque. The cheques are frequently deposited into bank other than the one in which they are
drawn the transfer of credit not only from one depositor to another, but also form one bank to another.
This process is called clearing of cheques.
(5) Financing Industries and trade: Banks provide the necessary finance for industrial development
this function is all the more important in countries which are planning their resources.
(B) Agency functions:

The commercial banker undertakes many agency services for the benefit of customers like
collection of cheques, bills, dividends etc. on behalf of customers. Banks also undertakes the payment of
subscriptions, premium, rents etc. They undertakes according to customers in buying and selling stocks
and shares on behalf of his customer. They may also act as a trustee, executor, administrator, and
attorney.
(C) General Utility Services:

The banks provides the general utility services like,
(a) Safe deposits: The bank undertakes the safe custody of valuables and important documents
against theft and fire. It is kept in specially constructed strong rooms, the bank act as a bailey of
the goods.
(b) Issue of personal and commercial letters of credit: This enables the customer to profit by the
superior credit of the bank. Thus, money can be promptly paid out to a customer or to his agent,
and bills drawn by his creditor can be accepted by the bank or any of its branches, agencies or
correspondents.
(c) Underwriting loans: It is not uncommon for join-stock banks to act as bankers to some local
authority or other public body and sometimes to manage and issue a loan on their behalf.
(d) Collection and distribution of information: Many of the big banks possess a separate
information and statistics from the bank’s various branches and agencies, both at home and
abroad. Such information is placed for the benefit of customer and commercial community.
Financial Institution:
Financial institutions are business organisations that act as mobilisers and depositories of savings and as
purveyors of credit or finance. They also provide various financial services to the community. Financial
institutions are fundamentally concerned with garnering the savings of different varieties of saver groups
and channeling them into productive outlets through the investing and entrepreneurial group. There are
several ways and forms in which the savings of different types of persons may be mobilised and
transferred to different types of investors to satisfy their varied needs. Each of these ways represents a
specialised activity, requiring expert knowledge and information and is carried on by specialist
institutions. The financial institution which cater to the requirements of saver group and provide
working capital to trade and industries in the forms of loans and advances are collectively called
“Money Market”. The financial institutions may be categorized into two groups;
(1) Money market
(2) Capital market
What is Money market?

Just like other market, this market is concerned with supply of and the demand of investible funds; it is a
reservoir of short-term funds. It provides a mechanism by which short-term funds are lent out and
borrowed. This market that a large part of the financial transaction of a country of the world is cleared;
this market is composed of commercial and other types of banks and agencies catering to the short-term
capital requirements. Thus money market institutions include the following;
(1) Central bank of the country
(2) Commercial banks
(3) Indigenous financial institutions
(4) Discount houses
(5) Accepting houses
What is Capital Market?

This market caters to the medium and long term financial needs of business and other undertakings by
supplying the financial resources to borrowers. These institutions may further be classified into investing
institutions and development banks on the basis of the nature of their activities and the financial
mechanism adopted by them. Investing institutions comprise those financial institutions which garner
the savings of the people by offering their own shares and stocks and which provide long term funds,
especially in the form of direct investment in securities and underwriting capital issues of business
enterprises. These institutions includes as follows;
(a) Investment banks
(b) Merchant banks
(c) Mutual funds
(d) Life insurance companies
(e) Development banks- this includes financial institutions.
Non- Banking Financial Companies [NBFC]:

Non-banking financial companies are financial intermediaries engaged primarily in the business of
accepting deposits and making loans and advances, investments, leasing, hire purchasing, etc. NBFCs
are heterogeneous lot. NBFCs sector is characterized by a large number of privately owned
decentralized and relatively small-sized financial intermediaries. NBFCs are of various types, such as
loan companies (LCs), investment companies, hire purchase finance companies, equipment leasing
companies, mutual benefit financial companies, miscellaneous non-banking companies and residuary
non-banking companies. Loan companies, investment companies, hire purchase finance companies,
equipment leasing companies are defined on the basis of the principal activity of their business. The
growth of the Non-banking financial companies are wondered because of their customer orientation,
concentration in the main financial centers and attractive rates of return offered by them are some of the
reason for their rapid growth.
Profile of Non- Banking Financial Companies:

The term of Non- Banking Financial Companies covers the following;
(a) Investment companies: The main function of the investment companies which are also known as
investment trust companies and investment trusts, is to mobilize savings and invest them in
industrial securities with the object of providing remunerative yield to savers and reducing the
risk of capital depreciation by diversifying investments.

(b) Finance corporations: These are setup for making profit from the business of lending resources
mainly raised by way of deposits or borrowings. It may be run as proprietary concern, a
partnership firm or a private limited or a public limited company. Higher levels of interest rates
and the practice of monthly payment of interest which raises the effective rate of return induce
the savers to deposit money with these corporations even at great risk. It came into existence
because credit is not available form the lending agencies in the organized sector for certain
business activities.
(c) Chit funds or miscellaneous non-banking companies: Under the chit fund scheme the promoter
at specified periods from each enrolled member of the chit fund. The amount so collected called
the capital given out as the prize amount to one of the members selected either by lot or auction.
All the members must contribute the periodical subscriptions till the end of the chit. Under the
scheme when a subscriber borrows from the chit fund, he essentially discounts the future value
of chit the amount, in order to meet his current needs. The discounted value is the prize amount.
The difference between the chit amount and the prize for the immediate realization of what
would have been due at the expiry of the chit period.
(d) Loan Companies: A company which lends money to any one for purposes other than its own is
classified as a loan company. Hire purchase companies and housing finance companies are not
considered as loan companies. Loan companies can be grouped into public limited and private
limited companies.
(e) Leasing companies: In recent years leasing companies have increased in number and the leasing
business is expected to grow considerably over the years. The diversity of equipment currently
manufactured in the country and the large number of manufacturing units, say in small scale
sectors which do not have resources to buy new equipment or which wish to replace existing
equipment with more modern equipment provide a good scope for the operation of leasing
companies.
Stock Exchange:
The Stock Exchange is concerned with sale and purchase of securities. It has a highly organised market
for the purchase and sale of shares and debentures as well as financial securities. It is a market through
which share- holdings in public companies can be bought and sold.
Definition:
Pyle defines, “Stock exchanges are market places where securities that have been listed there on, may be
bought and sold for either investment or speculation.” Stock Exchanges are not like ware house where
the securities are taken away from shelves and sold across the counters at fixed prices. It is only place
where the traffic of stocks and shares is conducted. Anybody who wants to buy a particular ‘security’
and any body who want immediate seller of that security and any body who wants to sell can find a
buyer. The Stock Exchange affords necessary facilities for transfer of stocks at competitive rates and
without undue delay. It is not a investment institution, it only provides aboard, continuous an liquid
market.
Stock Exchanges are not only theatres of business transactions, but also barometer indicating the general
condition of the economy. They are like traffic signals indicating green light when certain fields offer
the necessary inducement to attract capital. Red light when the outlook for new investment is not
attractive. Thus it is an important institution in a capitalistic system, with the advert of planning and
growth through the expansion of public sector, the importance of stock exchange had diminished
considerably.
Lusaka Stock Exchange:

The Lusaka Stock Exchange (LuSE) opened in February 1994 and is structured to meet the G-30
recommendations for clearing and settlement system design and operations. Since its inception, the
Lusaka Stock Exchange has offered trading in equity securities, and in March 1998, the LuSE became
the official market for trading in government bonds. Investors intending to trade in a listed security or
government bond are now mandated to trade via the LuSE. The market is regulated by the 1993
Securities Act, and enforced by the Securities and Exchange Commission.
The market capitalization of the LuSE for 25 listed companies in 2006 was USD 3.2 billion, compared
to USD 2.4 billion in 2005. LuSE officials attributed the growth to capital gains experienced by many
stocks. The number of shares transacted on the LuSE also increased significantly in 2006. Foreign
Portfolio investment inflows in 2006 were USD 10 million, compared to USD 14.7 million of domestic
participation in the market. There are no restrictions of foreign participation in the LuSE and foreigners
may invest in stocks on the same terms as Zambians.
Advantages of Stock Exchange:

(1) From the point of view of the community:
 The Stock Exchange assists in the economic development by providing a body of interested
investor.
 It encourages capital formation
 The government can undertake projects of national importance and social value by rising
funds through sale of its securities on the Stock Exchange.
 The Stock Exchange upholds the position of superior enterprises and assists them in raising
further funds. It places premium of efficiency.
(2) From the point of view of investor:

 The security which can be easily sold become a good collateral security of loans
 It safeguards his interest through strict enforcement of rules and regulations.
 The liquidity of the investment is increased
 His risk is considerably reduced when he purchases a security which is ordinarily dealt in a
Stock Exchange. The daily reports of the Stock Exchanges enable him to know the present
worth of his investment.
(3) From the point of Company:

o The market for the shares of such a company is naturally widened.
o Due to their purchase and sale on a Stock Exchange the market price of share of a company is
likely to be higher in relation to earnings, dividends and property values. This raises bargaining
power of the company in the event of merger or a amalgamation.
o It enables the companies to raise additional capital, because the securities listed in the Stock
Exchange carry high degree of collateral value.
Economic functions of Stock Exchanges:

The main economic functions of Stock Exchanges are as follows;
(a) Proper appraisal of securities: Under Stock Exchange rules all transaction on the exchange are
required to record and made public, so that price paid and received becomes the office market
quotations on this quotation every holder know the worth at any one time. In this way Stock
Exchange assists in evaluating prices of different securities.
(b) Ready market: Stock Exchange provides a market for the resale of existing securities it
facilitates the marketability of shares and debentures and enables the investors to realize quickly.
Cash can convert into securities and securities can readily obtain cash. This increases the
liquidity.
(c) Proper Canalisation of capital: It gives mobility to capital particularly in the direction of
profitable avenues. People invest their savings in companies securities, earns good profits. Thus
saving of people is canalized into industry yielding good return through well organised Stock
Exchange.
(d) Aid to Capital formation: Stock Exchange contributes considerably to the capital formation of
the country. It encourages people to save and invest. It maintains steady and regular flow of
capital into new enterprises which need it the most.
(e) Facilities for speculation: Stock Exchange enables shrewd businessmen to speculate and secure
substantial gains through fluctuations in security prices. Speculation is really an integral part of
stock exchange operation.
(f) Protection of investors: Through strict enforcement of regulation the Stock Exchange protect
the interests of investors in securities. For any malpractice or unfair dealing on the part of a
member broker while dealing with his client is severely dealt with by Stock Exchange and may
result in his suspension, fine or expulsion. Thus the Stock Exchange provides a reasonable
measure of a safety and fair dealing in the purchase and sale of securities.
Operators in the Stock Exchange:

They are classified as follows;
(1) BULL: A BULL is an operator who anticipates a rise in prices and enters into contract to buy
shares at current prices and with the hope of selling them at a future date, when prices rises. If
price rise he sells and makes a speculative profit.
(2) BEAR: A BEAR is a person who anticipates a fall in price and enters into a contract to sell the
shares at current prices and with the hope of buying them back at a future date when the prices
fall. If the price falls, he will buy back and thus make profit.
(3) STAG: STAG is a premium hunter. At the time of allotment of shares by the issuing company,
he applies for the shares with a hope that the prices of such shares will subsequently be quoted at
premium. When share prices rise, he sells them and knocks off the premium. He never holds the
shares as permanent investment.
(4) JOBBER: He is a specialist in speculative transactions. He does not deal with public directly.
He deals with brokers. Any person who wishes to deal with JOBBER can do so only through the
brokers. He is a market professional.

(5) BROKER: He is a person who works for a commission which he gets from his clients who are
outsiders. He links the outsiders with a JOBBER.
(6) REMISIER: He is an agent who secures business from non-members in return for a
commission. He is a sub- broker.
(7) AUTHORIZED CLERKS: He transacts the business on the floor of the stock exchange on
behalf of the members. A REMISIER acts on behalf of the members with non-members of the
stock exchange. Where as AUTHORIZED CLERKS act on behalf of members with other
members.
Listing of Securities in a Stock Exchange:

Listing of securities means the inclusion of securities in the official list of a Stock Exchange for the
purpose of trading. The Stock Exchange selects the companies who securities may be allowed to be
bought and sold. The companies have to apply to Stock Exchange for admission to dealings of its
securities on the exchange. The main purpose is to facilitate the sale and purchase of securities through
the stock exchange.
Objectives of Listing:
(a) To have ready marketability of the securities
(b) To ensure liquidity to the securities
(c) To facilitate negotiability of the shares and debentures
(d) To have proper supervision and control of dealings
(e) To protect the interest of the investors.
Advantages of Listing:
(a) It ensures that the company is solvent and a growing concern
(b) The prices of shares can be ascertained very easily, as the prices of listed securities are quoted on
an exchange
(c) It affords collateral value of the shares
(d) It also ensures safety in dealing with the shares.
Disadvantages of Listing:
(i) The governing bodies of Stock Exchange insist on disclosure of certain information from the
company for listing securities and such disclosure may prove dangerous.
(ii) The activities of stock exchange may induce violent fluctuations in listed securities.
Speculation:
What is Speculation?
Speculation is the purchase or sale of anything in the hope of profit from anticipated change in price.
Amery defines, “Speculation consists in buying and selling commodities or securities or other property
in the hope of a profit from anticipated changes of Value.”
The essence of Speculation lies in the forecasting of the price movements and buying and selling for
profit.
Difference between Speculation and Investors:

S.No. Investors Speculator
1. Purchases the securities for the purpose of The person who buy securities with the hope
investing their money in order to gear income of selling them at a future date at a profit, they
from their investment, they are called genuine realize profits through price differentials, they
investor. are called speculators.
2. Investors aims at income on a long term Speculator aims at profit during short-term or
period.
3. Invest for safety of investment and security of He wants appreciation of capital and
investment and security of income. immediate returns in full.
4. Invest take delivery of the securities which he Speculator does not take delivery of securities
purchased. bought and do not deliver the securities sold
by him. He would only pay or receive the
difference between selling and purchasing.
5. Investor will also be speculator when he is Speculator may also be an investor to certain
tempted to sell away the shares when there is extent.
good appreciation in the value of shares and
make profit there by.
Privatisation:
Privatisation is only a modern name assigned to the concept of Laissez-faire advocated by Adam Smith
and other classical economists. But in the environment of mixed economy, it has a new significance.
The world economists have adopted it as a tool of new economic prosperity. It is expected that the new
liberal era of industrialisation will open a new chapter in the field of productivity, efficiency, cost
consciousness, competitiveness and management. The participation of the private sector in the
development process is not an option; it is an essential requirement of development.
Earlier private enterprises which got into financial difficulties were taken over by the
government in most of the countries. Now the policy has completely changed. Public enterprises which
got into financial difficulties are transferred to a private agency.
Government policy in the country as in other countries is undergoing a sea change both on account of
shifts on ideological account as well as basic economic considerations. Moreover, international lending
agencies have increasingly bought in the privatisation of public enterprises as a condition for their
project lending in several countries. It is evident from the World Bank report which has supported
privatisation of a public sector steel industry and World Bank experts have suggested that privatisation
is essential to attain productivity and efficiency.
Methods of Privatisation:
(a) Divestiture (or) privatisation of ownership: through the sale of equity. In countries where
there are well functioning capital markets, this entails selling stock to the public. In industrial
countries, privatisation had taken place mainly through divestiture of government economic
activities. Bangladesh, Pakistan, Brazil, Peru, Chile, Jamaica, Sudan and Philippines are some of
the examples of this method.
(b) Denationalization (or) Reprivatisation. Several large enterprises were denationalized in
Pakistan, Bangladesh and Chile.
(c) Franchising is also one of the methods of privatisation. In this certain services are designated in
certain geographical areas which will be delivered by private companies. This is common in
utility services and transport.
Franchise business arrangements in Zambia are based on British contract law. Distributor or
agent franchising is most common in Zambia, although the business format type of franchising is
beginning to develop. There is increased interest in franchising in Zambia generated by publicity

and exposure to international franchise trade events in the U.S. lack of financing options remains
a major obstacle to franchise business in Zambia.
(d) Contracting is also common in public works. Where suppliers compete for contract and there
are no loss economies of scale, contracting is efficient. Long term contracts tend to encourage
monopolistic tendencies in private companies.
(e) Leases and management contracts: Privatisation may also take the form of privatisation of
management; using Leases this is offering the ownership for particular periods say for 20 years,
10 years.
Objectives of Privatisation:
(a) Improvement of the economic performance of assets.
(b) Depoliticalisation of economic decisions.
(c) Reduction in public outlays, taxes and borrowing requirements.
(d) Promotion of popular capitalism through wider ownership of assets.
(e) Promotion of equity.
Liberalisation:
“Liberalisation” is an essential pre-requisite for a successful privatisation. Liberalisation has got two
dimensions
(i) Domestic liberalisation:

A formal liberalisation of economic policy, which consists of relaxing restrictions on production,
investment, prices and increasing the role of the market, guiding resources allocations. The modification
of the licensing procedure and recognition of additional capacities. If the government announces the
facility of utilizing installed capacity without limit in certain cases, the licensing policy will be
liberalized. The statement focused attention on the need for promoting competition in the domestic
market, technological up gradation and mordernisation. The logic of liberalisation is the withering
effects of a sheltered market on industries and other competitive sectors.
(ii) Trade liberalisation (or) External sector liberalisation:

It is the relaxing of restrictions on international flow of goods and services, technology and
capital. It is the policy reversal. Here there been no trade restrictions or high tariffs. It ordinarily means
reducing restrictions on trade or ‘making trade free than before’. In technical sense it may defined as
policy change which would make a country’s trade system more neutral. A completely neutral system
means free trade system. There fore any move towards neutral system means trade liberalisation. There
is not a single country which has completely free trade; there is always some room for a movement
towards neutrality.
Import liberalization
• Policy for import of capital goods

• Policy for import of raw materials
• Import policy for registered exporters
• Policy for import of technology
Policy for import of capital goods

A large number of capital goods were placed under OGL (open general license) category i.e. they could
be import without any import license.
Policy for import of raw materials

In addition to OGL imports, actual users were extended the facility of raw materials, components
consumables under supplementary licenses. It includes dismantling of tariff as well as non-tariff.
Import policy for registered exporters

The aim of these policies was to provide the registered exporters an assured, continuous and
uninterrupted supply of the required production inputs, essential for expanding the exports on a
sustaining basis.
Policy measures for Liberalisation:

A number of policy measures are there, some of them are as follows;
(a) Limiting the role of licensing
(b) Expanding the scope for contribution to growth by large houses
(c) Encouraging mordernisation
(d) Raising the investment limits for the promotion of the small scale sectors.
(e) Providing fiscal incentives
(f) Encouraging existing industrial undertakings in certain industries to achieve minimum economic
levels of operations.
Globalisation:
Globalisation and Liberalisation are inter-related terms. It is not a synonym for the
‘Internationalisation’. Globalisation means adopting a global outlook for the business and business
strategies are aimed at enhancing global competitiveness. “Stop thinking of themselves as national
markets, but start thinking themselves as global marketers.” Companies planning business all the world
over, competing in international markets throughout the globe. Executives are trained in world wide
operations. Management staffs are recruited from many countries and procurements are made
throughout the world. The world is perceived as a global village. It is the integration of the country with
the world economy. It implies the linkage of nations market with the global market. Globalisation is
identified with external sector liberalisation.
Advantages of Globalisation:
(a) Globalisation trends with reduction in tariffs.
(b) Identification of products with competitive advantages
(c) Helps to compete in the international market
(d) It led to inflow of Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII).
(e) It helps to expand the domestic product in global.
(f) Globalisation production cost has been reduced and best products are available at competitive
prices.
(g) It creates more employment opportunities.
(h) It helps to improve the standard of living.
(i) It helps to increase the growth rate of GDP
(j) The balance of payments deficits have been improved.
Demerits of Globalisation:
There are some limitations and dangers prevail of Globalisation they are as follows;
(a) Unwanted goods are flooded and dumped into the country.
(b) It creates the ways of outflows of profits than the inflow of foreign investments.
(c) The globalisation will affect the development of the domestic industries.
(d) It will create more unemployment and inequalities of income in the country.
(e) It creates the track for monopolistic and oligopolistic structure in the country.
(f) Globalisation will lead to the exploitation with heavy prices.
(g) Globalisation causes the devaluation of money as the imports increases than the exports.
(h) It creates scarcity of Agricultural goods as they are lower price while comparing to other
countries.
(i) It decays the cottage and small scale industries.
(j) It will lead to loss of revenues to the government as the result of customs duty reduction.
(k) Globalisation may result in loss of immunity towards world level economic diseases.

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Business Environment 1

According to Arthur M. Weimer, business environment encompasses the ‘climate’

Concept of Business Environment

Prepared by Mr. A. Jayakumar.BBM, MBA, M.Com

Importance of Environmental Scanning:

Prepared by Mr. A. Jayakumar.BBM, MBA, M.Com

reviewing the corporate strategy. The underlying importance of environmental

Economics and the Business Environment:

– private limited companies

M-form business organisation

• bureaucracy and communication problems

The Aims of the Firm

The External Business Environment

• Standard industrial classification

Home and Host Country Legal Environment

Prepared by Mr. A. Jayakumar.BBM, MBA, M.Com

Bases of Legal Systems

Basic Economic Concepts

* Labor - the work force; size, education, quality, work ethic.

Consumers: people who use these goods and services.

Conspicuous Consumption: Use of a good or service to impress others.

Utility: capacity to be useful.

* We use our resource efficiently.

* Traditional Economic Systems

Traditional Economic System

Market Economic System

Command Economic System

Prepared by Mr. A. Jayakumar.BBM, MBA, M.Com

Types of monetary policy:

Price level targeting

Prepared by Mr. A. Jayakumar.BBM, MBA, M.Com

This approach is also sometimes called monetarism.

Fixed exchange rate

• Aggregate demand and the level of economic activity;

This expenditure can be funded in a number of different ways:

Funding the deficit

Consuming the surplus

Economic effects of fiscal policy

Macro Economic Parameters: (A.JK)

GDP - Gross Domestic Product:

i.e GDP = GNP – Net income from Abroad

Growth rates or Rates of increase:

Prepared by Mr. A. Jayakumar.BBM, MBA, M.Com

If 1.10 % increases for 1 year the growth rate is 10%

World Population Trends

1950 1985 1996 2010 2015 2050 1995

World 2,516 4,855 5,768 7,204 7,286 9,367 64 Yrs

Population growth as a source of Economic development:

Prepared by Mr. A. Jayakumar.BBM, MBA, M.Com

(d) Population as a source of capital formation: Disguised unemployment prevailing in an over

Prepared by Mr. A. Jayakumar.BBM, MBA, M.Com

Limitation of population growth to Economic development:

Significant Populations Trends

The changing distribution of the world population

Prepared by Mr. A. Jayakumar.BBM, MBA, M.Com

Purpose or objective of Deficit financing:

Deficit financing Inflationary in character:

Effects or consequences of deficit financing:

(i) Effect on price level :

Prepared by Mr. A. Jayakumar.BBM, MBA, M.Com

(ii) In crease in money supply:

(iii) Effects on employment :

(iv) Deficit financing and capital formation:

(v) Deficit financing and Distribution of income: