CHAPTER 4. GLOBALISATION AND THE INDIAN ECONOMY 1. Define Multinational Company.

(MNC)

A MNC is a company that owns or controls production in more than one nation. MNCs set up offices and factories for production in regions where they can get cheap labour and other resources. The MNC is not only selling its finished products globally, but the goods and services are produced globally.
2. Discuss the advantages of MNCs. (i) MNCs set up offices and factories for production in regions where they can get

cheap labour and other resources. (ii) The cost of production is low and the MNCs can earn greater profits. (iii) MNCs can get host countrys concessions for exports and imports. (iv) The production process is divided into small parts and spread out across the globe. It leads to increase the scale of output and the MNC can enjoy economies of scale. (v) By selling goods at cheaper rates, the MNCs can acquire the world market. 3. Where do generally the MNCs prefer to setup their production process ? (or)
1

By setting up the production plants MNCs tap the advantage not only of the large markets that countries provide, but also the lower costs of production. Explain the statement. MNCs set up production (i) where it is close to the markets; (ii) where there is skilled and unskilled labour available at low costs; (iii) where the availability of other factors of production is assured. (iv) The concerned government policies are favourable to the MNCs.
4. What is investment?

The money that is spent to buy assets such as land, building, machines and other equipment is called investment. 5. What is foreign investment? Investment made by MNCs is called foreign investment. 6. Discuss the benefit to the local company by setting up production with a MNC. MNCs set up production jointly with some of the local companies of these countries. The benefit to the local company of such joint production is two-fold. i. MNCs can provide money for additional investments, like buying new machines for faster production.
2

ii. MNCs might bring with them the latest technology for production.
7. Explain the various ways by which the MNCs are spreading their production

and interacting with local producers in various countries across the globe. (i) MNCs set up production jointly with some of the local companies of various countries. (ii) The most common route for MNC investments is to buy up local companies and then to expand production. MNCs with huge wealth can quite easily do so. Example, Cargill Foods, a very large American MNC, has bought over smaller Indian companies such as Parakh Foods. (iii) Large MNCs in developed countries place orders for production with small producers. Examples are Garments, footwear, sports items etc. The products are supplied to the MNCs, which then sell these under their own brand names to the customers. 8. In what ways is a MNC different from other companies? A MNC is a company that owns or controls production in more than one nation. MNCs set up offices and factories for production in regions where they can get cheap labour and other resources. The goods and services are produced globally by an MNC.
3

As a result, a MNC operates in a huge world market; enjoys large scale production and economies of scale; its pricing is competitive world wide; has huge capital base. But other companies own production in their own nation and export their products. These companies are selling their goods and services globally not producing globally. 9. Nearly all major multinationals are American, Japanese or European, such as Nike, Coca-Cola, Pepsi, Honda, Nokia. Can you guess why? America, Japan and many European countries are developed countries. MNCs need huge money to expand their production and market outside the country. That much money is not generally available with the companies of poor countries. That is why, nearly all major multinational are American, Japanese or European.

10. What was the main channel connecting countries in the past? How is different now? Foreign trade was the main channel that connected different countries in the past. Presently, in addition to foreign trade, movement of services, people, technology and capital are taking place through out the world.
11. What is the basic function of foreign trade?
4

(i) Foreign trade creates an opportunity for the producers to reach beyond the

domestic markets. Producers can sell their produce not only in markets located within the country but can also compete in markets located in other countries of the world. (ii) Similarly, for the buyers, import of goods produced in another country is one way of expanding the choice of goods beyond what is domestically produced. (iii) Foreign trade thus results in connecting the markets or integration of markets in different countries. 12. Distinguish between foreign trade and foreign investment. Foreign trade implies exchange of goods and services across nations. Foreign investment implies transfer of capital from one nation to another. 13. What is Globalisation? Globalisation is the process of rapid integration or interconnection between countries. (Globalisation refers to increasing global connectivity, integration and interdependence in the economic, social, technological, cultural, political, and ecological spheres.) 14. What are the various ways in which countries can be linked? a. greater integration of production and markets across countries b. More and more goods and services, investments and technology are moving
5

between countries. c. the movement of people between countries 15. What is the role of MNCs in the globalisation process? MNCs are playing a major role in the globalisation process. (a) MNCs are spreading their production to other countries. (b) They bring foreign investment into other countries. (c) A large part of foreign trade is controlled by MNCs. MNCs involve substantial trade in goods and services. (d) They bring new and advanced technology, research and development with them. 16. How is information technology connected with globalisation? Would globalisation have been possible without expansion of IT? Information and communication technology (or IT in short) has played a major role in spreading out production of services across countries. (a) The developments in information and communication technology, in the areas of telecommunications, computers, Internet has been changing rapidly. (b) Telecommunication facilities (telegraph, telephone including mobile phones, fax) are used to contact one another around the world, to access information instantly, and to communicate from remote areas. This has been facilitated by satellite communication devices.
6

(c) Internet also allows us to send instant electronic mail (e-mail) and talk (voicemail) across the world at negligible costs. Globalisation would not have been possible without expansion of IT. 17. What do you understand by liberalisation of trade? Removing barriers or restrictions set by the government on foreign trade and foreign investment is known as liberalisation. 18. What are the measures of protectionism (trade barrier)? (a) tariff (tax on imports or custom duty) (b) quota (upper physical limit imposed by government on goods to be imported (c) embargo (ban on import of goods and services) 19. What was the reasons for putting barriers to foreign trade and foreign investment by the Indian government? Why did it wish to remove these barriers? The Indian government, after Independence, had put barriers to foreign trade and foreign investment. This was considered necessary to protect the producers within the country from foreign competition. Industries were just coming up in the 1950s and 1960s, and competition from imports at that stage would not have allowed these industries to come up. Thus, India allowed imports of only essential items such as machinery, fertilisers, petroleum etc.
7

In 1991, the Indian government decided that the time had come for Indian producers to compete with producers around the globe. It felt that competition would improve the performance of producers within the country since they would have to improve their quality. This decision was supported by powerful international organisations. Thus, barriers on foreign trade and foreign investment were removed to a large extent. This meant that goods could be imported and exported easily and also foreign companies could set up factories and offices here. 20. Write a note on WTO (World Trade Organisation). World Trade Organisation (WTO) is an organisation whose aim is to liberalise international trade. Started at the initiative of the developed countries, WTO establishes rules regarding international trade, and sees that these rules are obeyed. 149 countries of the world are currently members of the WTO (2006). It started functioning from January 1, 1995. 21. Discuss the advantages of Globalisation. (i) Lowers poverty in developing countries with increased employment which provides income through trade and investment. (ii) Global togetherness helps to bring about better environmental, labour and human rights standards. The most global countries tend to rank higher in Environmental Performance.
8

(iii) Globalizations prime characteristic is the free market: the increasing elimination of barriers to the movement of people, capital and goods. (iv) By having free trade as a feature, Globalization leads to reduction of Global Price Level which declines the World Inflation Rate. (v) Globalization promotes industrialization, employment level and income of the country and ultimately leads to higher economic growth. (vi) Globalisation promotes competition which leads to improvements in management practices and workplace arrangements. (vii) Distance and national borders are less important when dealing with digital products. International standards facilitate technological and economical integration. Globalization is feeding e-business too. (viii) There is a definite correlation between globalisation and lower perceptions of corruption, with the trend suggesting that lower corruption and open economies go together. 22. Discuss the disadvantages of globalisation. Globalisation is a complex and rapidly evolving phenomenon. Economic and financial globalisation is happening at a rate disproportionate to all other developments.
9

 Free trade is not a fair trade - trade when a nation's own global trading policies together with international corporations' desire to increase their profits, result in manipulated international trade pacts and agreements.
The gap between rich and poor is growing on a local and an international level:The richest 20% of the worlds population enjoy 86% of its resources while the poorest 20% must survive with a little over 1%. The 225 richest people in the world have the equivalent income to the poorest 2.25 billion. Due to changes in technology, there is a risk of being destroyed by actually exacting the adoption of different new styles of working, living and organising communities. Innovations in science and technology helps to manufacture both chemical and biological weapons are accessible to individuals, groups and states that seek to disrupt societies. Globalisation is part of the struggle between capital on the one hand and workers, citizens and consumers on the other hand. This process of globalisation is as old as capitalism.
10

 It must respect the diversity of cultures; it must not deprive the poor of what remains most precious to them, including their religious beliefs and practices The world is overproducing mountains of commodities and throwaway manufactured goods, with little regard for environmental sustainability.

Exploitation in employment, wages

Huge multinational corporations are benefiting at the expense of economies, farmers, workers and the environment. 23. What do you think can be done so that trade between countries is more fair? (i) International organisations like WTO, IMF should be strengthened. They should play a key role in this direction. (ii) In practice, it is seen that the developed countries have unfairly retained trade barriers. On the other hand, WTO rules have forced the developing countries to remove trade barriers. Developing countries should strongly keep their views before the International Institutions. 24. Analyse the impact of globalisation in India.
11

A. Advantages (or) positive impacts 1. Consumers have benefited a great deal from globalisation. There is a wide range of goods available to them. 2. Doors of investment have been opened up for MNCs. They have been investing large sums of money in India. 3. Domestic suppliers of goods and services have also gained by selling these to MNCs. 4. Indian companies have invested in newer technology and production method and raised their production standard. 5. Indian companies have also gained from successful collaborations with MNCs. 6. Many of the Indian companies themselves are now becoming MNCs. Examples, Tata Motors (automobiles), Infosys (IT), Ranbaxy (medicines) etc. 7. New markets and opportunities have opened up for many new industries particularly those involving IT. Negative impact (or) disadvantages 1. Flexibility in labour laws has been reduced. Labour has lost security of job. 2. Small-scale industries are not in a position to stand up against the competition from big Indian companies and MNCs. Batteries, capacitors, plastics, toys, tyres, dairy products, and vegetable oil are some examples of industries where the small manufacturers have been hit hard due to competition.
12

3. New technologies are labour displacing which results in increase in unemployment. 25. How has competition benefited people in India? Refer Qn no. 24, A part (advantages) 26. Should more Indian companies emerge as MNCs? How would it benefit the people in the country? Globalisation has encouraged Indian companies to go global. They are investing large sums of money abroad. They are setting up new industries abroad and acquiring new companies. Positive side: 1. This will lead t integration of Indian economy with the global economy. 2. Advanced technologies will be easily accessible to Indian companies. 3. Availability of more choice and better quality goods to Indian consumers 4. Cheaper goods in the Indian market from other countries 5. Increasing Indian efficiency industrialisation more output Negative sides: 1. If the Indian companies spend a large proportion of their capital abroad, it will restrict the domestic investment. Employment opportunities will not get created.
13

2. Our imports will suffer local producers will suffer, this will adversely affect our balance of payment position. 3. Indian small scale industries will get affected. 4. Over exploitation of resources will affect our sustainable development. 27. Why do governments try to attract more foreign investment? It brings money and capital. Foreign investments create new job opportunities in the country. This not only provides finance but managerial and technical personnel and new technology in production also. This encourages local enter-prises to invest more in subsidiary services like transport and training agents and in collaboration with foreign enterprises. A part of the profits from such investments generally invested in the expansion and modernisation of related industries. The social returns are greater than the private returns on foreign investment. The governments get revenue when it taxes the profits of foreign firms. 28. What is Fair Globalisation? How it can be achieved? Fair globalisation would create opportunities for all, and also ensure that the benefits of globalisation are shared better.

14

a. The government can play a major role in making fair globalisation possible. Its policies must protect the interests, not only of the rich and the powerful, but all the people in the country. b. The government can ensure that labour laws are properly implemented and the workers get their rights. c. It can support small producers to improve their performance till the time they become strong enough to compete. If necessary, the government can use trade and investment barriers. d. It can negotiate at the WTO for fairer rules. a. It can also align with other developing countries with similar interests to fight against the domination of developed countries in the WTO.

15