LPG

Prof. Parul Gupta Globaliation, Privatization and

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Liberalization
 Globalization
The international Monetary Fund defines it as “the

growing economic interdependence of countries

worldwide through the increasing volume and
variety of cross-border transactions in goods and
services and of international capital flows, and also
through the more rapid and widespread diffusion of
technology

Prof. Parul Gupta Globaliation, Privatization and

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Liberalization
 Meaning and dimensions:

 L Expanding the business globally

 2. No distinction between domestic and
foreign market
 3* Locating physical facilities like
production etc on consideration of global
 business dynamics instead of domestic.
 Global market consideration for product
development and product planning
 Global sourcing of factors of production
 Global orientation of organizational
structure and management culture

Prof. Parul Gupta Globaliation, Privatization and

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Liberalization
 Stages of globalization:-
First stage:-
 Linking up of essential service activities of domestic
company
 with local dealers and distributors of foreign market
Second stage:-
 Company takes over these activities on its own
Third Stage:-
 Starting of manufacturing, marketing and sales in the
key foreign market
Fourth stage:-
 Replication of hardware system and operations in a
new environment
Fifth stage :-
 This stage is known as " global localization stage"
which comprises of ability to serve local customers in
4 markets around the globe in an efficient
Prof. Parul Gupta manner
Globaliation, Privatization and
Liberalization
 Essential conditions for Globalization:-

Business freedom
Facilities
Govt. support
Resources
Competitiveness
Orientation

Prof. Parul Gupta Globaliation, Privatization and

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Liberalization
 Effects Of
Globalization
Movement Toward Free Trade and Trade
Blocs
Types of Trade Blocs
Free Trade Area: member countries eliminate
trade barriers among themselves, but retain right
to impose barriers on non-members.
Customs Union: member countries remove
barriers among themselves and have common
barriers on non-member countries
Common market: A customs Union that allows
free movement of factors of production
Economic Union: A common market where
economic policies are also harmonized

Prof. Parul Gupta Globaliation, Privatization and

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Liberalization
 Evolution & Growth of Global
Companies

Principally companies from Europe,

United States, Japan and South Korea

Global Companies and their global

network of subsidiaries are connecting
countries and companies world-wide.

Prof. Parul Gupta Globaliation, Privatization and

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Liberalization
 Globaliation,
Privatization and Prof. Parul Gupta 8
Liberalization
 Challenges Faced
By Businesses in
Global
Environment

Prof. Parul Gupta Globaliation, Privatization and

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Liberalization
 Environmental Challenges

Political Ideologies

Economic Systems

Technological Sophistication

Legal Challenges

Cultural Distance
Prof. Parul Gupta Globaliation, Privatization and
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Liberalization
 Foreign market entry
strategies;-

A. Exporting- ,is appropriate in following conditions

1. Volume-of business is small
2. Cost of production in domestic market is low
3. Presence of production barriers overseas
4. Political risk
5. Company has no permanent interest in foreign market
6. Foreign investment not favored by foreign govt
7. Other better alternatives are not available

Prof. Parul Gupta Globaliation, Privatization and

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Liberalization
 B. Licensing and Franchising -

Licensing:- Under this strategy a firm in one

country( licensor ) permits a firm in other
country (The licensee) to use its intellectual
property
Franchising:- Is a form of licensing in which
a company (franchisor) grants other
independent entity (the franchiser) right to
do business in a prescribed manner

Prof. Parul Gupta Globaliation, Privatization and

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Liberalization
 C. Contract Manufacturing:-
Under this a firm contracts with a foreign company to
manufacture or assemble the product while
retaining the right to market product with it
D. Management Contracting: -
Here a firm provides management know how to
another firm and may or may not have a equity
stake in the firm being managed
E. Turnkey contracts :-
Is an arrangement by the seller to supply a buyer with
a facility fully equipped and ready to be operated by
buyer's personnel who will be trained by seller

F. Assembly Operations :-
When assembly operations are labor intensive and
labor is cheap in foreign country, firm can get its
products assembled overseas and bring it back
home or sell globally
Prof. Parul Gupta Globaliation, Privatization and
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Liberalization
 G. Joint Venture
Any form of association which implies
collaborations for more than one transitory
periods is a joint venture. There can be many
diverse types of joint ventures
a. Sharing of ownership and management
b. Licensing & Franchising
c. Contract manufacturing
d Management contracting
.
H. Third country location
When direct transactions between two firms of
different countries is not possible due to political
or other reasons firms sometimes take help of
some third party base

I. Mergers and Acquisitions

Prof. Parul Gupta Globaliation, Privatization and
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Liberalization
 J. Strategic Alliances
a* Technology development alliance
b. Marketing sales and services
alliances
c. Multiple Activity alliances

G, Counter trade
Is a form of international trade in which
certain export and import transactions are
direct linked with each other and in which
import of goods are paid by export of
goods instead of money payment
Forms of counter trade
A Barter
B.Buy Back
C. Compensation
D. Counter purchase
Prof. Parul Gupta Globaliation, Privatization and
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Liberalization
 Pros and cons of
Globalization
Merits
 Inflation is controlled
Export jobs may pay more
Innovations and fresh ideas
Demerits
Unemployment
Often Pay cut demands from
employers
Country can lose its competitive
advantage

Prof. Parul Gupta Globaliation, Privatization and

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Liberalization
 What is Privatization?
“The act of reducing the role of
government or increasing the role of
the private sector in an activity or the
ownership of assets.”
Contracting with a private company
Awarding a contract to a private firm for
management services
Vouchers to purchase some or all services from a
private vendor
Deregulating entry into an area in which most
services have traditionally been delivered by
public institutions,

Prof. Parul Gupta Globaliation, Privatization and

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Liberalization
 HISTORY:
The history of privatisation is very short
just 10 to 15 years old to be precise.
Though real disinvestment started only in
the later 1980’s. The word privatisation first
made its appearance way back in the late
60’s.

Prof. Parul Gupta Globaliation, Privatization and

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Liberalization
 NATURE AND OBJECTIVE:
Transfer of ownership to private.
Improve the performance of PSU’s
To improve the results.
To improve the quality of service.
To make things more competitive.
To make the enterprise more efficient.
To encourage innovation.
To bring in Foreign exchange
Generate revenues

Prof. Parul Gupta Globaliation, Privatization and

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Liberalization
 PRIVATISATION ROUTES:
Sale to outsider.
Management employee buyout.
Equal-access voucher privatisation.
Spontaneous privatisation.

Prof. Parul Gupta Globaliation, Privatization and

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Liberalization
 CONDITIONS FOR SUCCESS:
Commitment by the political leadership.
Multiplicity of private suppliers.
Freedom of entry to provide goods and
services.
Long term contracts and franchises limit
competition and consumer choice.
Consumers should be able to lionk the
benefits.
Privately supplied services should be less
susceptible to fraud.
Prof. Parul Gupta Globaliation, Privatization and
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Liberalization
 OBSTACLES:
Govt sells those enterprises which private
sector is not ready to buy.
Obstacles created by employees who may
loose their jobs.
Underemployed capital market sometimes
make it difficult for govt to float shares and
for individual buyers to finance large
purchases.

Prof. Parul Gupta Globaliation, Privatization and

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Liberalization
 PRIVATISATION IN INDIA

Prof. Parul Gupta Globaliation, Privatization and

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Liberalization
 RANGA RAJAN COMMITTEE:
Units to be disinvested to be identified.
Need for the govt to retain the majority
holdings in areas like defence and
atomic energy. In others disinvestment
can be to any level.
Disinvestment shall be in stages and
sales to be done in such a way so as to
get max possible price from the bidders.
Workers interests to be protected.
Disinvestment must be transparent.
An autonomous body needs to be set up
to monitor the process of disinvestment.
Prof. Parul Gupta Globaliation, Privatization and
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Liberalization
 BENEFITS:
Reduces fiscal burden on the state.
It helps govt to mop up funds.
It helps the state to trim the size of
administrative machinery.
It helps govt to concentrate more on
essential state functions.
Accelerating pace of economic
development.
Better management of the enterprises.
Encouraging entrepreneurship.
Increases shareholders.

Prof. Parul Gupta Globaliation, Privatization and

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Liberalization
 ARGUMENT AGAINST
PRIVATISATION

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Liberalization
 PITFALLS:
Lack of proper strategy.
Ambiguity of objectives.
Hidden objectives of politicians.
Wrong timings.
Lack of political consensus
Lack of political will.
Poor financial stratigies.
Wrong environment.
Prevailance of monopoly elements.
Problems of cultural change.

Prof. Parul Gupta Globaliation, Privatization and

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Liberalization
 Privatisation succeeds and fails for several
reasons of relevance to the Indian situation
are four factors:
1.Commitment.
2.Competition.
3.Transparancy.
4.Mitigation.
These four factors indirectly make privatisation
yield the necessary results. Of these four
factors India scores highly on competition and
transparancy. But it scores poorly on the other
two.

Prof. Parul Gupta Globaliation, Privatization and

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Liberalization
 Most Commonly
Privatized Services

Transportation—over 30%
Food Service—doubled in last 10 years to 28%
Maintenance Service—over 18%
Clerical/Information Services
Paraprofessionals—education mgmt. companies

Prof. Parul Gupta Globaliation, Privatization and

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Liberalization
 Overview of tax regime in
India
Income tax

Foreign Trade Policy

Customs Duty

Indian tax
regime Service tax
Indirect
taxes
R&D cess

Cenvat (Excise) Duty

Sales tax/ Value

Added Tax (“VAT”)

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Liberalization
Slide | 30
 LIBERALIZATION

Prof. Parul Gupta Globaliation, Privatization and

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Liberalization
 Free trade is a market model in which the
trade of goods and services between or
within countries flows unhindered by
government-imposed restrictions.
These restrictions may increase costs to
goods and services, producers, businesses,
and customers, and may include taxes and
tariffs, as well as other non-tariff barriers,
such as regulatory legislation and quotas.
Trade liberalization entails reductions to
these trade barriers in an effort for
relatively unimpeded transactions.
Prof. Parul Gupta Globaliation, Privatization and
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Liberalization
 FREE TRADE
 Trade of goods without taxes (including tariffs) or other trade
barriers (e.g., quotas on imports or subsidies for producers)
 Trade in services without taxes or other trade barriers
 The absence of trade-distorting policies (such as taxes, subsidies,
regulations or laws) that give some firms, households or factors of
production an advantage over others
 Free access to markets
 Free access to market information
 Inability of firms to distort markets through government-imposed
monopoly or oligopoly power
 The free movement of labor between and within countries
 The free movement of capital between and within countries

Prof. Parul Gupta Globaliation, Privatization and

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Liberalization
 Free trade can be contrasted with
protectionism, which is the economic
policy of restricting trade between
nations. Trade may be restricted by high
tariffs on imported or exported goods,
restrictive quotas, a variety of
restrictive government regulations
designed to discourage imports, and
anti-dumping laws designed to protect
domestic industries from foreign take-
over or competition
Prof. Parul Gupta Globaliation, Privatization and
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Liberalization