UNIT-II Globalization & Characteristics of Indian Economy · -Demographics Domestic Economic...
Transcript of UNIT-II Globalization & Characteristics of Indian Economy · -Demographics Domestic Economic...
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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