LOGOBusiness Environment

UNIT-II

Globalization & Characteristics of Indian Economy

Course Coordinator: Dr. Saboohi NasimFMS&R, AMU

Unit –II (Syllabus)

❖Globalization & International

Environment of Business

❖Features of Indian Economy

❖Contemporary Economic Reforms

❖Financial System in India

External Environment of Business

ECONOMIC

ENVIRONMENT

NON

ECONOMIC

ENVIRONMENT

-Political

-Legal

-Social

-Cultural

-Technological

-Physical/Natural

-Demographics

Domestic

Economic

Environment

Global

Economic

Environment

Globalization & International Environment of Business

•Globalization: Relevance,

Concept, Drivers…

•Global Economic Scenario•Overview

•Global Economic Crisis•Global Economic Trends

Globalization & International Environment of Business?

Globalization?

… processes of international integration arising

from the interchange of world views, products,

ideas, and other aspects of culture.

Advances in transportation and

telecommunication infrastructure, including the

rise of the Internet generate further

Interdependence

of economic and cultural activities.

(Al-Rodhan et. al. (2006), Martin & King (1990))

Defining Globalization

“...all those processes by which the people of the world

are incorporated into a single world society.”(Martin & King, 1990)

“……. in its simplistic sense, it refers to the widening,

deepening and speeding up of global interconnection…”(David Held, et al. in Global Transformations )

• …….derived from the word globalize, which refers to

the emergence of an international network of social and

economic systems; (used mostly as noun since 1930s)

•Oxford Dictionary

Defining Globalization…

•The term ‘globalization’ increasingly used in mainstream press

since the mid-1980s (especially since the mid-1990s).

•Thomas L. Friedman popularized the term "flat world", arguing

that globalized trade, outsourcing, supply-chaining, and political

forces had permanently changed the world, for better and worse.

•Kenichi Ohmae coined the term ‘globalization’ to explain the

internationalization of business (“The Borderless World: Power and Strategy

in the Interlinked Economy”1992)

• In 2000, International Monetary Fund (IMF) identified four basic

aspects of globalization:•Trade and transactions,

•Capital and investment movements

• Migration and movement of people

• Dissemination of knowledge

Defining Globalization…

…is a process of interaction and integration

among the people, companies, and

governments of different nations, a process

driven by international trade and investment

and aided by information technology.

…dismantling of trade barriers between

nations and the integration of the nations

economies through financial flow; trade in

goods and services, and corporate

investments between nations”

Globalization…

….has effects on the environment,

on culture, on political systems,

on economic development and

prosperity,

and on

human physical well-being in

societies around the world.

Globalization…

Three distinct stages of ‘globalization’ (World Bank)

First Wave of Globalization (1870-1914)

•Drivers: Falling transportation cost & lowering of tariff barriers

•Impact: •Exports as a share of world income doubled;

•Increase in labor mobility;

•Foreign capital stocks in developing countries increased to 32% from 9%;

• Growth rate in per capita income of the world increased from 0.5% to 1.3%

•(1914-1945): Retreat to Nationalism•Protectionism and World Wars reduced international trade, anti-immigrant

sentiments, and political sanctions..

•Second Wave of Globalization (1945-1980)

•Drivers: Lack of growth with protective policies, Reduction in transportation

cost & lowering of trade and tariff barriers

•Impact: Overall trade doubled; Economies of scale opportunity for MNCs,

Greater inequality between developed & developing economies….

Phases of Globalization

Third Wave of Globalization (1980 onwards..)

•Drivers: •Large group of developed and developing countries actively involved in

international business

•Substantial increase in international migration/labor mobility and capital

movements (advances in transportation and telecommunication..)

•Impact: •Movement towards free trade

•Significant increase in cross border investments-capital flows to developing

countries increased over 10 times

•Creation of global workforce

• Globalization of financial markets…

Recommended route for globalization•IMF and World Bank: Removal of budgetary subsidies, pursuance of liberal

economic policies, promotion of foreign investment, privatization of banking and other

sectors…

•WTO: Pursuance of free trade, Removal of restrictions on MNCs….

Phases of Globalization…

Fourth Wave of Globalization (2018 onwards..) • “Globalization 3.0.” : benefits — include reduced poverty,

better living standards in underdeveloped countries, and more

accessible services through Internet-based technologies.

• But this development also contributed to inequality and

frustration.

• The global economy is now morphing into the

era of Globalization 4.0, fueled by the swift

universal spread of digital technologies.

• Nature of exchange between countries and organisations will

become fundamentally different, relying on digital connectivity

and the related flow of ideas and services.

Phases of Globalization…

Phases of Globalization…Globalization 4.0

Globalization 4.0 (WEF Davos 2019)

'Globalization 4.0' the buzzword at 2019 World Economic

Forum

https://www.youtube.com/watch?v=6m0TnUKA1pU

Globalization 4.0: Explaining the theme of WEF 2019

https://www.youtube.com/watch?v=9R5i6ibLOqc

Phases of Globalization…

•Technology

•Technology is truly stateless; there are no

cultural boundaries limiting its application

•It has specifically facilitated the medical and

health care sector

•Communication Revolution

•Internet and WWW have changed business

dynamics

•Cyber leadership is the key (Ohmae)

Drivers of Globalization of Business

•Product Development Cost & Efforts

•High cost of NPD calls for large market to

recover the cost…

•Quality and Cost

•Important determinants of demand, better

achieved if operating globally

•Rising Aspirations and Wants of today’s customer•Increasing level of education and exposure…want

best quality product from anywhere.

•Increasing Competition•Compels firms to explore new ways to increase

their efficiency—increasing international reach;

shifting production facilities etc…

Drivers of Globalization….

•Regional Integration•Proliferation of regional integration –trade blocs like

EU, NAFTA, OECD, ASEAN..

•World Economic Trends

•Economic conditions affect globalization…;

difference in growth rates of the economies

•Leverage: global companies leverage their strengths to

expand its global operations•Experience Transfers

•Scale Economies

•Resource utilization

•Global strategy

Drivers of Globalization…

•International Trade

•International trade growing faster than

the world output

•Trade-GDP ratio is increasing..more than

50%

•Foreign sale of domestic good (one

fourth) and domestic consumption of

foreign goods (one fifth) are rising very

fast.

Indicators of Globalization

•International Production

•Production process and marketing are

increasingly becoming global

•Growing number of MNCs

•World Investment Report

2019 ??

Indicators of Globalization…

Year No. of MNCs No of Affiliates

1997 44,500 2.77 lakhs

2009 Over 80,000 8 lakhs

•Liberalization•Universal economic policy liberalization fostering a

borderless world (via GATT/WTO or otherwise..)

•Surge in cross border M&A and FDI

•Global FDI inflows slipped by 16% in 2017 to $1.52

trillion…declined further in 2019 ($1.39); Top three

countries are USA($251b), China($140b) &

Singapore($110b)…India ranked 8th (FDI increased

from $42bn to $49bn in 2019

•M&A deals worth $2.21 trillion in 2013; … reached $4.9

trillion in 2015; reduced to $ 4.74 trillion in 2017….declined 40% in 2019 to $490 billion – the lowest level since

2014.

(UNCTAD’s Investment Trends Monitor, 2020)

Indicators of Globalization…

Indicators of Globalization…FDI inflows: global and by group of economies,

2008–2019(Bn US dollars) UNCTAD

Indicators of Globalization…FDI inflows: top 10 host economies, 2019(Bn

US dollars) UNCTAD Report 2020

Globalization Index

Drucker on the inevitability of globalization……

“All global institutions will have to make global

competitiveness a strategic goal. No institution, whether

a business, a university or a hospital, can hope to

survive, let alone succeed, unless it measures up to the

standards set by the leaders in its field, any place in the

world”

Management Challenges for the 21st Century (1999)

Charles Mitchell on the impact of

globalization on business……

“Globalization, for better or for

worse, has changed the way world

does business ……it (globalization) is

all but unstoppable. The challenge

that individuals and businesses face

is learning how to live with it,

manage it, and take advantage of the

benefit it offers”

International Business Culture (2000)

Warren J Keegan on the implication of globalization for

business……

“A company that fails to go global is in the danger of

losing its domestic business to competitors with lower

costs, greater experience, better product and in

nutshell, more value for the customer. ”

Global marketing Management (2002)

Firms need global orientation even to survive in

the domestic market

Kenichi Ohmae: Hailed as globalization

guru since 1970s: “The Mind of the

Strategist”, (1982) and “Triad Power: The

Coming Shape of Global Competition” (1985)

•In his groundbreaking bestseller, The

Borderless World (1992), Ohmae coined the

term ‘globalization’ and described the ways

in which international business was

bypassing national borders.

• In The End of the Nation State, he argued

that nation-states have become inefficient;

business units in the new global economy

will be increasingly replaced by regional

economies.

•The Invisible Continent (2000) described

how technology was creating new

platforms for generating wealth that

transcended borders.

•In The Next Global Stage(2005), Ohmae

returned to his concept of "region states,"

tomorrow’s most potent economic

institutions, with China exemplifying its

power.

•In all these books, his focus has been:•What are the forces that are dissolving national borders and

building new regional economies?

•How do you leverage technology and the other new platforms for

growth that are replacing the old ones based on national

economies?

•How do you lead a global corporation? What roles should

governments play when nation-states no longer matter?

“Globalization 4.0 has only just

begun, but we are already vastly

underprepared for it. Clinging to an

outdated mindset and tinkering with

our existing processes and

institutions will not do.”

Klaus Schwabfounder and Executive Chairman of the World Economic Forum (2019)

New Perspectives on Globalization…suggested

readings• At the root of inequality, unemployment, and

populism are radical changes in the world

economy.

• Digital technology is allowing talented foreigners

to telecommute into our workplaces and compete

for service and professional jobs.

• Instant machine translation is melting language

barriers ("tele-migrants" will soon include almost

every educated person in the world.

• Computing power is dissolving humans' monopoly

on thinking.

• The combination of globalization and robotics

is creating the globotics upheaval

• The inhuman speed of this transformation

threatens to overwhelm our capacity to adapt

Richard Baldwin

Global Economic ScenarioOverview

Global Economic Crisis Recent Global Economic Trends

Global economic environment witnessed

drastic changes in the last 2-3 decades

•Collapse of East European socialist economies (1989) and

Soviet Union (1991) led to the demise of socialism

•Fast growing Japanese economy slipped into recession many

times…not recovered yet

•Emerging dominance of the dragon(Chinese economy) on the

global economic environment (growth rates around 9% since

1978….double digit growth later…have tapered down to 6-7%)

•The onset of the Great Recession (2008) and

recovery…..AND the recent Recession (2016, 2019…) milder

ones though and the recovery??

Global Economic Scenario: Overview

•The Great Recession (GR) (the Lesser

Depression, the Long Recession, or the global recession of 2008)

refers to a global economic decline that began

in Dec 2007 and took a particularly sharp

downward turn in Sep 2008.

•Roots of the GR lie in the Sub-Prime Lending

Crisis affecting US financial market in 2007

and turned into a full blown global financial

crisis in the fall of 2008

The Great Recession??

SUB-PRIME LENDING CRISIS

The Great Recession:Sub Prime Lending Crisis

/The Credit Crisis?

•Credit market froze, stock markets

crashed and a sequence of insolvencies

threatened the entire international

financial system.

•Massive liquidity injections by Central

banks and any variety of stopgap

measures by govts proved inadequate to

contain the crisis.

The Great Recession…..Impact!!

•The first signs of major crisis appeared in June

2007 when Bear Sterns (Wall Street Investment

Banker) admitted that two of its funds with large sub

prime mortgage holdings were in trouble (BS taken

over by J P Morgan in March 2008)

•The active phase of the crisis, which manifested as

a liquidity crisis, can be dated from August 7, 2007

when BNP Paribas terminated withdrawals from

three hedge funds citing "a complete evaporation of

liquidity".

The Great Recession…..The First Signs

By Sep, 2008…several US financial institutions came

under stress

• 7 Sep, 2008 : US Govt. seized control of Fannie Mae

& Freddie Mac- institution that owned or guaranteed

about half of all mortgage assets in USA.

•14 Sep, 2008: US investment bank LEHMAN

BROTHERS collapsed and filed for bankruptcy

• Merrill Lynch was taken over by BOA (Bank of

America) for $50 b

The Great Recession…..The Crisis Spreads

• Sep, 2008 US Govt. seized control of AIG Inc

(American International Group)- World’s largest

insurance company by providing $85b emergency

loan for 79.9% equity stake.

•28 Sep, 2008- Washington Mutual became the

largest bank failure in US history (asset valued at

$328 b)

•3 Oct 2008- US Government created $700 billion

bank bailout fund (TARF-Troubled Asset Relief Fund)

The Great Recession…..The Crisis Spreads

This Crisis became the biggest Financial Blowout in US history.

❖Massive bank failures; the contraction lasted

for at least three quarters.

❖Lehman’s Collapse: Lehman’s demise was the

biggest failure in world history.

❖Previously Enron and WorldCom (2001, 2002)

had been the biggest corporate failures; But the

Lehman failure was ten times bigger than Enron

and six times bigger than WorldCom.

Sudden collapse of institutions in USA was

accompanied by the collapse of major institutions in

Europe as well

•Sep-Oct, 2008

•Britain’s largest mortgage lender(HBOS) was

taken over by Lloyds($18.9b)

•UK govt. nationalized the mortgage bank

Bradford & Bingley (loan $90b)

•Belgian, Dutch & Luxemburg govts. took stake

in banking & insurance co. Fortis injecting

$16.4 b capital

The Great Recession…..The Crisis Spreads beyond USA

•Iceland began to have seizures as crisis wiped out

75% of its GDP

•German parliament passed a bank bailout plan of

$680b.

•European govts. announced a financial package of $

2.5 trillion

•UK govt. injected $60b to bailout three largest banks

On Dec 4, 2008 Euro zone was officially

declared to be in recession;

Japan too joined the league shortly

The Great Recession…..The Crisis Spreads beyond USA….

September 7, 2008:Federal takeover of Fannie

Mae and Freddie Mac

September 14, 2008:Merrill Lynch sold to Bank of America amidst fears of a liquidity crisis and Lehman

Brothers collapseSeptember 15, 2008:Lehman Brothers files for

bankruptcy protection

September 16, 2008:Moody's and Standard and Poor's downgrade ratings

on AIG's credit on concerns over continuing losses to

mortgage-backed securities, sending the company into

fears of insolvency.

September 17, 2008: The US Federal Reserve loans $85 billion to American

International Group (AIG) to avoid bankruptcy.

September 19, 2008:Paulson financial rescue

plan unveiled after a volatile week in stock and debt

markets.

September 25, 2008:Washington Mutual was seized by the Federal

Deposit Insurance Corporation, and its banking

assets were sold to JP Morgan Chase for $1.9bn.

September 29, 2008: The House rejected bail-out bill,

DJIA down 7%October 3,2008: The

House pass the bail out bill

Sep-08 Sep-08 Sep-08 Sep-08 Sep-08 Oct-08

GLOBAL FINANCE CRISIS- "Red September"

The list of casualties kept growing….

•Affected the entire world economy, with higher

detriment in some countries than others.

•It was a major global recession characterized by

various systemic imbalances. Three major factors

accounted for the crisis (World Bank):

•Bubble in global real state market (lowering

interest rates)

•Financial Engineering/Innovation (derivative

trade grew five times in five yrs 2002-07)

•Failure of national financial regulators

The Great Recession….

•Drastic reduction in export earnings

•Lower remittances from migrant workforce

•Earnings from Tourism adversely affected

•Credit conditions tightened and cross border

lending became very expensive

•Decline in equity prices

•Depreciation in exchange rates

•Adverse consequences for domestic growth

The Great Recession….Impact on Developing Economies

Steps Taken by the Advanced Economies to Address the Crisis?

❖Massive Liquidity Injection by the

Government (Quantitative Easing??)▪ US Fed reserve implemented QE1(2008-10), QE2 (2010-

2012) and QE3 (sep2012-15) in recent recession

▪ European Central Bank implemented QE in recent recession

▪ Bank of England implemented QE in recent recession

❖ The Fed’s monetary easing was regarded as an implicit

devaluation of the dollar to unfairly boost US trade

competitiveness …. triggered a cycle of currency and

trade wars with the emerging world.

❖ Led to in rise in commodity prices and inflationary

pressures..especially in developing countries

54

Impacts of the US Financial Crisis on India

❖Impact on stock market

▪ The immediate impact of the US financial crisis has been felt

when India’s stock market started falling.

▪ On 10 October 2008, Rs. 250,000 crores was wiped out on a

single day bourses of the India’s share market.

▪ The Sensex lost 1000 points on that day before regaining

200 points, an intraday loss of 200 points.

▪ This huge withdrawal from the India’s stock market was

mainly by Foreign Institutional Investors (FIIs), and

participatory-notes.

55

❖Impact on India’s trade▪ The trade deficit reached at alarming proportions.

▪ Foreign exchange reserves of the country depleted by

around $57 billion to $253 billion for the week ended

October 31, 2008

▪ “…Because of worker’s remittances, NRI deposits, FII

investment and so on, the current deficit is at around $10

billion. But if the remittances dry up and FII takes flight, then

we may head for another 1991 crisis like situation, if our

foreign exchange reserves depletes and trade deficit keeps

increasing at the present rate..” (Sivaraman, 2008)

Impacts of the US Financial Crisis on India…

56

❖Exchange rate depreciation

▪ With the outflow of FIIs, India’s rupee depreciated

approximately by 20 per cent against US dollar and stood at

Rs. 49 per dollar at some point, creating panic among the

importers.

❖FII and FDI

▪ The contagious financial meltdown eroded a large chunk of

money from the Indian stock market.. FIIs made withdrawal

of $5.5 billion

▪ However, the inflow of foreign direct investment (FDI)

doubled from $7.5biilion in 2007 to $19.3 billion in 2008

(April-September).

❖ Negative Impact on India’s export: handloom sector,

jewelry export and tourism; IT-BPO sector

Impacts of the US Financial Crisis on India…

Lehman impact shakes up India Inc's league Table

Top 10 Bankruptcies in the world (in value)

59

To Conclude……

❖‘Financial or Subprime Crisis’ was the

consequence of ‘greed’…. to make ‘too

much profit’ on the part of Wall Street Firms

and Investment Banks??

❖Highlighted the failure of capitalist market

economy or the Regulators??

Refer to the Ted Talk by Brian S. Wesbury:

The real truth about the 2008 financial crisis (2014)

Watch the Ted Talk

by

Brian S. Wesburyon

The real truth about the 2008 financial crisis (2014)

https://www.youtube.com/watch?v=RrFSO62p0jk

Mark to Market Accounting??

Did it accentuate the 2008 financial crisis??

The Great Recession….The Real Truth

“The only surprise about the economic crisis of

2008 was that it came as a surprise to many.

For a few observers, it was a textbook case that was

not only predictable but also predicted.

A deregulated market awash in liquidity and low

interest rates, a global real state bubble, and

skyrocketing sub-prime lending were

a toxic combination.

Add in the US fiscal & trade deficit and the

corresponding accumulation of huge reserves of

dollars in China- an unbalanced global economy---

it was clear that things were horribly awry.”

Joseph Stiglitz

The Great Recession….Surprise???

Joseph Stiglitz

•One of the most influential economists in the

world

•Named by Time magazine as one of the 100

most influential people in the world (2011)

•Stiglitz's work focuses on income distribution, asset

risk management, corporate governance, and

international trade

•Author of ten books, with his latest, The Price of

Inequality (2012), hitting The New York Times best

seller list

•Freefall: America, Free Markets, and the Sinking of

the World Economy (2010): discusses the causes of the

2008 recession/depression and goes on to propose

reforms needed to avoid a repetition of a similar crisis,

advocating government intervention and regulation in a

number of areas.

Wake Up !! The Crisis Is Over

Thank YouThank You

Economic Trends: Post Great Recession

The Great Recession…Impact on GDP

World map showing real GDP growth rates for 2009. (Countries in brown were in recession.)

World map showing real GDP growth rates for 2009. (Countries in brown were in recession.)

Source: World Economic Outlook database, IMF

Trends in GDP: Pre and Post GFC

Post Great Recession: The Recovery

continues…

Ten years on from the global financial crisis,

the world economy remains locked in a

cycle of low or flat productivity growth

despite the injection of more than $10 trillion

by central banks.

The latest Global Competitiveness

Report(2019) paints a gloomy picture, yet it

also shows that those countries with a

holistic approach to socio-economic

challenges, look set to get ahead in the race

to the frontier.GCR-2020, WEF

Recent Movies on the Financial Crisis 2008

Thank You

1. Panic: The Untold Story of the 2008 Financial

Crisis(2018)

2. Inside Lehman Brothers (2018)

3. The Big Short (2015)

4. Money for Nothing: Inside the Federal Reserve (2013)

5. Margin Call (2011)

6. Too Big to Fail (2011)

Recent Global Economic Trends:

year 1999 2000 2001 2003 2004 2005 2006 2007 2008 2009 2010 2011

World

GDP

growt

h rate

3 4.8 2.7 3.8 4.9 4.7 5.3 5.2 3.1 -0.7 4.9 3.7

GDP - real growth rate: 3% (2012 est.)

World GDP Growth Rate

World GDP Growth Rate: IMF Projections

IMF revised world growth forecast to 3.3% for 2020 (Jan, 2020)

IMF blames India for global slowdown, lowers 2019 growth

forecast to 4.8% (BS, Jan 21, 2020)

World economy at risk as Covid-19 spreads-OECD(March, 2020)

Global Wealth Distribution Environment

Global Wealth Distribution Environment…

Thomas Piketty(WID Report 2018) warned that

if the "world follows the trajectory of the US"

inequality would get much worse.

Global Social Mobility Index 2020:World Economic Forum

• WEF has created a new index to measure “social mobility”

• The Global Social Mobility Index- benchmarks 82 global

economies; uses 05 determinants of social mobility – health,

education, technology access, work opportunities, working

conditions & fair wages and social protection & inclusive

institutions.

• Nordic countries are the best performers. Denmark tops the

rankings with a social mobility score of 85.2, closely followed

by Finland (83.6), Norway (83.6), Sweden (83.5)

and Iceland (82.7) (United Kingdom (21st), the United States (27th)

and Italy (34th))

• Russia is the most socially mobile among the BRICS nation

with 39th rank and a score of 64 points. China (45th),

Brazil (60th), India (76th) and South Africa (77th).

Global Social Mobility Index 2020: WEF

The Fourth Industrial Revolution, globalization and technology is expected to create more inequalities: WEF

• Income disparities have grown exponentially since the 1970s.

• The top 1% of income earners in USA in 2018 earned 158% more than in 1979,

in comparison to just 24% for the bottom 90%.

GLOBAL TRENDS & PREDICTIONS by Ruchir Sharma(Morgan Stanley Investment Management's Head of Emerging Markets and

its Chief Global Strategist)

❖ Global Recession in 2016

❖ China weakest Link

❖ Chinese Flu hits India

❖ Commodity Prices plunging to Normal

❖ Global Disinflation Comes to India

❖ Hard for Fed to raise rates much

❖ Rupees Cheap; Others Cheaper

❖ FANG In-BRIC Out

❖ India’s Public Sector Problems

❖ Political Turmoil Rising Globally

(Ruchir Sharma, 2016; The Rise and Fall of Nations: Forces of Change in

the Post-Crisis World, Morgan Stanley Investment Management's Head

of Emerging Markets and its Chief Global Strategist)

Global Recession? Top 10 Trends in 2016:

Implications for India

Ruchir Sharma, 2017;

Morgan Stanley Investment Management's Head of Emerging Markets

and its Chief Global Strategist)

Ruchir Sharma (2018);

(Morgan Stanley Investment Management's Head of Emerging Markets

and its Chief Global Strategist)

Global Economic Outlook 2019: Key Trends

https://www.youtube.com/watch?v=xFJ-eBAnv5s

DO WATCH: Top 10 Trends for 2020s: Implications for India

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