CASE 1
Globalization and Indian Industry
Globalization has been one of the most hotly debated topics in international economics over the past few years.
There are three familiar responses to globalization. First, that its novelty is grossly exaggerated. Globalization, the argument runs, has been around for a long time. The current phase is merely an intensification of a well-entrenched process, the basic features of which are much the same as before.
The second response is that globalization is not only novel but also extensive, touching everything, transforming everything within its reach. Therefore, it must be treated as the central organizing category of contemporary discourse. When evaluated, this response branches into two further sub-responses: either globalization (over-optimistically) is a universal remedy for all the problems of the world, or (over-pessimistically) it is the cause of all its maladies. The concern is that it has increased inequality and environmental degradation. However, the meaning of globalization is growing integration of economies and societies around the world, Poor and third word countries consider globalization as economical and cultural colonization and to some extent greed of developed nations is responsible to this.
The third response is an intermediate one, which sees globalization as introducing new structures without altogether displacing older patterns. From this point of view, globalization is a dynamic, open-ended and contradictory process that generates forces working in different, often opposite directions. Nevertheless, India has achieved a lot from Globalization. Using flows of goods and services, capital, people, and ideas, countries like India and china to grow rapidly with reduction in the poverty.
According to economist John Dunning, Multinational enterprises invest abroad for there reasons. First, they try to capture ownership-specific advantages (O) for instance patent rights, process and other strengths not available to competitors. Then they exploit location advantages (L): examples of this are presence of natural resources, cheap labor or cheap inputs. Lastly, they exploit internalization advantages (I) this is because some assets are better owned or employed by the firm instead of being bought from the market for instance an R & d outfit or a management structure.
From this building block, Dunning developed his theory of investment development path. Each country passes through five stages. The poorest countries that have nothing to draw foreign investment other than L advantage i.e. location of natural resources. As they get wealthier, a domestic market develops; it can be used as the magnet to attract foreign investment from multinational enterprises with O advantage. Eventually domestic firms come forward that can exploit domestic market just as well as foreign firms, and start using O advantage to invest abroad. In the fourth stage, outward investment comes to exceed foreign investment. In the last stage reached by the countries with highest incomes, both inward and outward investments are substantially balanced. Now where does India fit in this?
In the seventies, India was just emerging from the first stage. After 30 years from then, it has crossed second stage and going into the third one. Year 2003 was pivotal as it saw manifestation of India’s global aspiration. The number as well as size of the foreign targets showed steep rise. Close to 50 overseas acquisitions, amounting $1.8billion took place last year, which was only $0.21 billion in 2002. The increase in average deal size is from $7.5 million in 2002 to $36.5 million in 2003.
India has adopted domestic policies and institutions that have enabled people to take advantage of global markets and have thus sharply increased the share of trade in their GDP. India has been catching up with the rich ones – our annual growth rates increased from 1 percent in the 1960s to 5 percent in the 1990s. Now it is above 8%. Indians saw their wages rise, and the number of people in poverty declined.
Industry wise, the software and services sector lead the mergers and acquisitions charge overseas but now this list includes both old and new economy industries like auto ancillaries, pharmaceuticals, telecom, agro-chemicals and steel. There are thus no stereotypes that only new economy companies are invited to the mergers and acquisitions ball or that only the blue chip companies are partaking of the action. It is more democratic as smaller auto ancillary companies are also in the fray.
Thanks to the easier external profile, at this time, India clearly is tasting the fruits of globalization and the current liberal overseas investment regime will take the process forward. However, a far more important use of our reserves is for higher domestic investments. There are no prizes for guessing that it is only with higher investments that there can be faster GDP growth. In next two-three years, India must also work on improving delivery of education and health services. Indian government must provide social protection to a changing labor market. In addition, that the changes in climate due to industrializations will be especially burdensome for developing countries and poor people. There is broad agreement among scientists that human activity is leading to potentially disastrous global warming. India must demand effective international cooperation to address this problem.
I am sure in the next decade we should see our investment outflow increasing and our best companies going multinational.
Questions
1. Are the Indian companies getting impacted by the globalization? To what an extent international policies have influenced globalization?
CASE -2
The General Agreement on Tariffs and Trade (typically abbreviated ‘GATT’) was the outcome of the failure of negotiating governments to create the International Trade Organization (ITO). GATT was formed in 1947 and lasted until 1994, when it was replaced by the World Trade Organization. The Bretton Woods Conference had introduced the idea for an organization to regulate trade as part of a larger plan for economic recovery after World War II. As governments negotiated the ITO, 15 negotiating states began parallel negotiations for the GATT as a way to attain early tariff reductions. Once the ITO failed in 1950, only the GATT agreement was left. The GATT’s main objective was the reduction of barriers to international trade. This was achieved through the reduction of tariff barriers, quantitative restrictions and subsidies on trade through a series of agreements. The GATT was a treaty, not an organization. The functions of the GATT were taken over by the World Trade Organization which was established during the final round of negotiations in early 1990s.
The history of the GATT can be divided into three phases: the first, from 1947 until the Torquay Round, largely concerned which commodities would be covered by the agreement and freezing existing tariff levels. A second phase, encompassing three rounds, from 1959 to 1979, focused on reducing tariffs. The third phase, consisting only of the Uruguay Round from 1986 to 1994, extended the agreement fully to new areas such as intellectual property, services, capital, and agriculture. Out of this round the WTO was born.
GATT signatories occasionally negotiated new trade agreements that all countries would enter into. Each set of agreements was called a round. In general, each agreement bound members to reduce certain tariffs. Usually this would include many special-case treatments of individual products, with exceptions or modifications for each country.
Questions
What were the advantages and disadvantages of GATT ?
CASE 3
WTO-GATS Regime and Future of Higher Education In India
Education plays a very important role in framing the economic and social setup of any nation. Though Education is largely a governmental activity in India, things are changing under the WTO – GATS regime. India signed the World Trade Organization (WTO) Agreement including General Agreement on Trade in Services (GATS) in 1994 as part of a single undertaking, which came into force in 1995. GATS established a multilateral framework of principles and rules for trade in services with the objective of expansion and progressive liberalization of such trade as a means of promoting economic growth of all trading partners and for further development of developing countries. It provides for disciplines on transparency, Most Favored Nations (MFN) treatment, market access and national treatment for all the member nations. Education is one of the twelve services included in the Uruguay Round. Under GATS, education services are classified into five main categories, which include: Primary Education Services, Secondary Education Services, Higher Education Services, Adult and continuing Education Services and Other Education Services.
India has the second largest higher education sector in the world with 8.8 million students, who constitute seven percent of the total population. The number of universities in India has increased from 18 (at the time of independence) to 306 (including 18 central universities, 186 other universities, 5 institutions established under State Legislature Act, 84 deemed universities and 13 institutes of
national importance) government ones and about 150 private ones. Open universities are nine in number while women universities are five. They employ a total force of more than four hundred thousand teachers. Every year 66,000 Indian students are going abroad (mainly to US and UK), termed as import of services; in contrast to this, only 6000 foreign students are coming to India to pursue higher education (and that too from other developing countries or least developed countries) termed as export of services. With such imbalance in import and export of higher education services, the question arises ‘is India really ready for free trade regime in higher education?’
Questions
1. To what an extent WTO-GATS Regime has influenced higher education in India?
CASE 4
Impact of FDI on Indian Retail Trade: Good, Bad or a Mix
Liberalization of trade policies during the last one and half decade has led India to become an investment friendly country. Foreign direct investment (FDI) in this country assumed critical importance in the context of this liberalization. Though India is the tenth most industrialized country in the world, it is well known that it is mainly agro-based with around 70% population engaged in the farm sector. However, in the initial stage of liberalization, FDI was centered on the urban manufacturing sectors because of its civic infrastructure, labour availability, flexible taxation mechanism etc. The success story of FDI in these sectors is known to us.
For a long time there were efforts for FDI in the retail sector so that the trader can reap the benefit of FDI. Retail trade contributes around 10-11% of India’s GDP and currently employs over 4 crores of people. Recently, a great debate has cropped up against the government plans for FDI in the Indian retail sector. FDI in retail is fundamentally different from that in manufacturing. FDI in manufacturing basically enhances the productive employment in most cases; but FDI in retail trade may create job losses and displacement of traditional supply chain. One of the main features of rural India is disguised unemployment. Farmers, evicted from the agricultural sector, engage in small retail trades for livelihood. The main fear of FDI in retail trade is that it will certainly disrupt the livelihood of the poor people engaged in this trade. The opening of big markets or foreign-sponsored departmental outlets will not necessarily absorb them; rather they may try to establish the monopoly power in the country. However, so many positive factors are also there in favour of FDI in Indian retail service.
Questions
Explain as to why FDI’S in manufacturing increases employment but in retail might have adverse effect on the jobs of many?