Global Business Environment

Module 1

Introduction
 It has witnessed lot of changes within a period of the last decade and a half.
 IN 1995 WTO was set up-watch for world business.
 USA remains the only super power in the world.
 Here we will learning about:
 The global economic performance and prospect
 Recent development at WTO
 Regional Trade and preferential trading agreement
 FTAs being negotiated by India and their evaluation.

1. The Global Economic Performance and prospects

 The world economy has shown good progress in last couple of years.
 GDP rate was 1.7% in 2002 rose to 4% in 2004 – due 4.3% increased in GDP of
USA & Japan, 8.8 in China, 8% in Russia and 6% in India.
 10.2% of World trade in 2004 because of increased in import in China.

World bank report -

Global economic prospect-2005
 Economic growth is expected to slow down in 2005-2006 expanding by 3.2%
each year due the e following factors:

1. Slow down in US growth rate

2. World demand has outstripped
supply - Increase in price of oil cut
demand and Income.
3. higher interest rates slow investment growth
4. In Europe, budgetary policy is expected to be
tighten – control over deficit.
5. The large fiscal impulse that has helped US economy
will weaken.
 However the growth in most low and middle income countries are expected to be
moderate but it may fall if the following factors operates:
1. If there is an additional
rise in Oil prices.
2. Financing requirement of US
current Account and government deficit (Twin deficits),
and renewed pressure on the dollar, may cause long term
interest rates to rise more than forecasted.
3. If current efforts to slow the unsustainable pace of growth in
 China fail, major disruptions could result.

Global Macroeconomic Imbalances: The Twin US deficit

 The fiscal as well as the current account deficit in the USA
are, at present close to 5% of GDP.(1.5% in 1996)
 This large deficit may not be sustainable and at some point of
time, the US deficit has to narrow.
 The adjustment process might accompany the reduction in
the US current account deficit hold a threat of global
inflation.
 Depreciation of US dollar is the only remedy- Joseph Stiglitz.

2. WTO : Recent Issues

 The most impt. Devt. In global envt. During the period of last one
decade is setting up of WTO in 1995.
 The main focus is to cut down trade barriers among countries with
the main objective of multilateralism.
 A meeting of ministerial Conference once or twice in a year is
organize.
 Last meeting was held b/w Sep. 10-14,2003 in Cancum, Mexico
 Three issues are important here which has bearing on the global eco. envt:
* The Developing countries unity at Cancum
* Introduction of product patent regime
* Dismantling of MFA in the field of textiles.

The Developing countries unity at Cancum

 Here there was a debate on two issues:

1. Liberation of Agriculture: USA & EU are main providers of Subsidies. When they
enter into mutual agreement on this then to counterpart this India & other developing
countries form a group called as G-20, spokesperson in Brazil – to cut don subsidies.

2. Developing new multilateral disciplines on the Singapore issues: This include

four issues: Investment, competition policy, government procurement and trade
facilitations – A core group of 16 countries G-16 in including India led by Malaysia was
formed. Took a strong decision on this.

Cancum failure is due to the strong negotiation on the part of developing countries.

Introduction of product patent regime

 The government of India introduced the patents Amendment bill 2005 in the
parliament. This allows pdt. Patent on both drugs as well as food & Agro
chemicals.
  Its provisions:
* Discovery of a new form of a known substance does not constitute
invention and cannot given pdt. Patent.
* Claim of invention can be challenged, even at the patent
application stage.
* Indian firms can produce under a compulsory license.

Impact on Pharma Companies:

 Prior to 1970, MNC Pharma companies had 70% of share in India.
 The patent Act of 1970, adopted by the govt. emphasised public
interest over patent right. This policy implied granting process
patent rather than product patent.
 This helped in massive devt. Of Indian pharma industry by 75% in
2003
 Impact on consumers: The price of the drugs might increase- as
MNC product price is high.
 The availability of drugs could be adversely affected.

Textiles: Dismantling of MFA in the field of textiles

 Since Jan 1, 1974 the textile and clothing industry came to
governed by MFA (multi fibre arrangement).
 MFA handed country wise quotas for exports of textiles.
 India has bilateral arrangements under MFA with USA, Canada,
Australia etc.
 from Jan 1 2005, MFA has been dismantled.
 China & India gain from this. Garment shops set up in small
countries to take the advantage of quota will die.
 China will grab lion’s share of Market. In 2003 it was 16% as
against 4% of India.
 Hundreds of power looms units producing 90-95% of the fabrics in
the country, while the organized sectors is just 5%.
 The planning commission has estimated that Rs. 85,000 crore to
Rs. 90,000 crore will have to be invested in next 3 to five years
to bring the economy on par with global.

3. Regional Trade and Prefential Trading Arrangement

 WTO rules say a trading nation must offer equal access to every other (exporting)
nation, in every distinct product line.

 This is the essence of the famous Most Favoured Nation (MFN) rules which
means that importing economies must extend the best terms that they offer any
exporting countries to every other WTO-contracting party.
  Such non-discrimination has been the cornerstone of all multilateral trade
negotiations first under GATT & now under WTO

Types of RTA
Against this member of RTAs trade freely only amongst themselves; and confront
outsiders with a common tariff wall. RTA can be of following Types:

1. Preferential Trade agreement: here a group of countries agrees to reduce tariffs on

a few product which they trade between themselves.
2. Free trade agreement: When all tariffs b/w member counties are removed on some
items, but each country has its own tariff for rest of the world.
3. Custom union: When there is free trade with member countries and common
tariffs are applied on goods of other countries.
4. Common Market: When there is a truly open market among all member countries-
not only goods and services but also capital and Labour can move freely.

According to world bank report Global Economic Prospect 2005,The

RTA will be increased from 50 on 1990to 230 by late 2004. 40% of
Total global trade.
On an average each country will have 6 RTAs.

Changing global Envt: New changes in RTAs

 World bank’s report delas with three such issues namely:

1. The EU’s move towards bilateral market access FTAs, EPAs with some countries.
2. The shift in the US position towards bilateral prefential agreement;
3. The effort of the handful of developing countries to open up market through RTAs.

1. EU’s Prefential Trade agreement

During the 1990s the EU was active sponsor of bilateral arrangement with individual
countries. EU is having bilateral trade agreement with 111 countries. They fall into
following categories:

1. Europe Agreement- within Europe

2. Euro-Mediterranean agreement- with neighbors.
3. Partnership and Cooperation Agreement (PCAs): with West, Russis
4. Economic partnership Agreement (EPAs) –with 77 countries in WTO consistent
fashion
5. Free Trade agreement: with South Africa, Mexico and Chile are designed to open
markets.

2.The shift in the US position towards bilateral prefential agreement

 USA has been turning towards more and more bilateralism and RTAs in recent
years.
  USA have signed bilateral accords with Australia, Bahrain, Central America,
Shile, Morocco and Singapore.

 After the failure of Cancum the USA has intensified its pursuit of RTAs with
Colombia, Panama, Peru and Thailand.

 Other in Queue are Bolivia, Egypt, New Zealand, Pakistan The Philippines, South
Korea, Sri Lanka, Taiwan & Uruguay.

3. Developing Countries Actively Pursue RTAs

 Many developing countries have evinced keen interest in establishing new RTAs
or joining existing ones with a view to increase their access to more markets.

 Mexico & Chile have been at the forefront of these efforts.

 In 2001, Asian countries have launched similar negotiations. These includes

China, India, Thailand etc.

INDIA’S TRYST WITH FTAS

 The main reason for the negotiation is that India now wants to play more role in
global trade.

 As China is growing fast with this, it has become imperative for India also to
foster stronger relationship with East Asia.

 Eg. In Singapore The Thailand’s product will be cheap compare to Indian as we

have to pay high Tariffs whereas Thailand enjoys free trade.

A Critical View on India's FTA Negotiations:

1. Some critics have pointed out that are presently being negotiated by India
constitute only a small part of India’s trade.
2. India with its high tariff barriers, is negotiating with countries and blocks as
ASEAN, whose trade barriers are already low – other members gain than India.
3. We could start importing goods made by inefficient producers within FTA rather
than more efficient ones.
4. Producers in countries outside FTA could start trying to route their goods to India
through a third country with which we have an agreement. Rule of origin is
brought in to solve this problem.

Environmental Analysis
Environmental Analysis/Scanning
Meaning:
 It is the process of monitoring and collecting the information about the
various current and potential changes taking place in the environment to facilitate in
decision making and problem solving.

Objectives of Environmental scanning

1. To provide an understanding of current and potential changes taking place in the
environment .

2. To provide inputs for strategic decision making.

3. To facilitate and foster strategic thinking in organization.

Benefits of Environmental scanning

“Firms which systematically analyze and diagnose the environment are more effective
than those which don’t” It helps in:
1. Development of broad strategies and long term policies of the firm.
2. Devt. Of action plans to deal with technological advancements.
3. To foresee the impact of socio-economic changes at the national and international
level.
4. To analyze the competitor’s strategies and formulation of effective counter-
measures.
5. To keep oneself dynamic.

Limitations of Environmental Analysis

1. It does not foretell the future, nor does it eliminate the uncertainty.
2. It is just input, not a sufficient guarantor of Organisational effectiveness
3. The potential of EA is often not realized because of how it is practice.
4. “Paralysis through analysis syndrome”.

Sources of Scanning
• Daily New papers
• Journals
• Other sources
• Census data
• Annual Reports of IDBI, ICICI and IFCI
• Five year plan documentation
• RBI bulletin
• Economic survey
• Report of committees
• Government publication

Techniques for EA
1. Verbal and Written Information
2. Search and scanning
3. Spying
4. Forecasting and formal studies.
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