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A social audit is a formal review of a company’s endeavors in social responsibility. A social audit looks at factors such as a company’s record of charitable giving, volunteer activity, energy use, transparency, work environment, and worker pay and benefits, to evaluate what kind of social and environmental impact a company is having in the locations where it operates.

Social audits are optional. Companies can choose whether to perform them and whether to release the results publicly or only use them internally.

A social audit is an internal examination of how a particular business is affecting a society. It serves as a way for a business to see if the actions being taken are being positively or negatively received and relates that information to the company’s overall public image.

A social audit examines issues regarding internal practices or policies and how they affect the identified society. The activities included tend to pertain to the concepts of social responsibility. This can include activities affecting the financial stability of a region, any environmental impact resulting from standard operations and issues of transparency in reporting.

There is no standard regarding what must be considered as the society during the audit. This allows a business to expand or contract the scope based on its goals. While one company may wish to understand the impact it has on a small-scale society, such as a particular city, others may choose to expand the range to include an entire state, country or the world as a whole.

Principal Objectives of Social Audit

1. The extension, development and improvement of the company’s business and building up of its financial independence.
2. The payment of a fair and regular dividend to the shareholders.
3. The payment of fair wages under the best possible conditions to the worker.
4. The reduction of prices to the consumers.

Secondary Objectives of Social Audit

1. Provision of a bonus to the workers.
2. Assist in promoting the amenities of the locality.
3. Assist in developing the industry in which the firm is a member.
4. Promote education, research and development in the techniques of the industry.

From these objectives, we can infer that social audit is really an extension of the principle of public disclosure to which corporations are subject.

Need for Social Audit

Each business enterprise is not only connected with internal public but intimately connected with external public also. The modem corporations are more powerful and command huge resources. This power should not be used indifferently, irresponsibly or in an antisocial way. Its activities can create much impact on the society. As such its impact over society cannot be ignored or taken lightly. Its behavior not only affects the society but also creates problems to the Government. Thus, social audit has become the need of the day.

“This is a matter not of ambition”, Prof. Galbraith says “but of necessity”.

1. Components:

Social components are a concern with the relationship of the company with society and the employees working in it. The social component is concerned with the general working conditions of employees, their rights, and the initiative taken by the organization for the betterment of the society and the local community.

2. Economic Components:

Economic indicators of the organization must be audited, and required actions should be should if there is a case of any irregularity.

3. Health and Educational Components:

The measurement of the health and educational facility in the organization. Whether the required safety and health measures are taken by the organization in the workplace.

4. Environmental components:

Whether the production process or working procedure is harmful to the environment. Whether the working process of the organization is polluting the environment and what measures are taken by the organization to minimize the impact on the environment.

5. Political Components:

The political environment in the organization is audited, which is the analysis of the relationship between management and employees, and manager and workers of the organization.

Introduction to Values in Business:

The value systems in societies differ considerably because the value systems are built through centuries. Japanese and Chinese ethical values differ considerably to Indian ones.

The main issues in ethics are:

(1) The academic discipline of business ethics requires approval and support of industry in those countries.

(2) Equal treatment of technical and human resources in management. In Japan human resource is given more weightage.

(3) Social justice and efficiency should go hand in hand.

(4) In Japan ethical managements already in place since last two decades with emergence of large business houses and MNCs. In China the importance of business ethics is felt and being practiced under the conditions of contemporary market economy.

(5) Japanese consumers are more willing to support business that were identified as socially more responsible than Chinese.

(6) Chinese value economic aspects of business organisation whereas Japanese considered more about business conforming to legal and ethical standards.

(7) The culture has profound base on ethical management in each country.

Table 10.1 below gives the cultural differences between US, Japan and Indian in a tabular form.

Some of the ethical values noticed in different countries are:

Indian Value System:

India has a place of pride in a strong ethical base. It needs to be rekindled by proper education to our young and budding managers. Indian ethico-moral discussions go back to three and half millennia when Vedas specified the ground rules of human existence and living. The ethical discussions and teaching continued all through Indian history though India was ruled by different emperors and foreign rulers.

The Upanishads, Puranas and Smritis continued the traditions. The values were put for popular use in great epics of Mahabharata and Ramayana. Bhagavad-Gita puts ethics in a clear and concise way.

The epics give human dilemmas in every walk of life and attach importance to values in dealing all such issues. Kautilya’s Arthashastra, Vishnu Sharma’s Panchatantra, Hitopadesha, Neetishastra, Katha Saritsagar, Neeti Shataka, Somadev Neeti Sootra and many more works stress Indian ethos in different ways.

Perhaps to attract readers these works are in story form, ornate, colourful and poetic giving an unparalled practical ethical values in them. The current ethical behaviour of Indian is an intimate mix of good textures of values taken from Vedantic, Jaina, Buddhist, Sikh and Sufi traditions. In recent past we have also added western values.

About 2½ millennia ago the roots of western ethical values started in Greece from Socrates, Plato and Aristotle. At about the same time Chinese got ethical base in Confucius. The Vedantic ethical values are spiritual, sacred and simple. The entire value system is put as ‘Dharma’ or righteousness in all what one does.

Some of ethical Vedantic principles as applied to modern business are:

1. Treat people decently. Respect all stakeholders’ opinions, background, privacy dignity and desire to grow.
2. All people are having egos and selfish nature. Respect diversity.
3. Companies or business is created to serve people and all stakeholders.
4. Some are more intelligent and powerful but protect the weak.
5. Look inside sitting alone and think is it right? Is it fair? Will it do good to all?
6. Be good, do good to as many and as much.
7. Mahabharata sums up importance of ethical behaviour in a sloka.

Ethical behaviour is important for a man. When a man goes down in ethical values, he will have no use of his money or his relatives and he has no reason to live.

As noted above, ethics was and is a traditional subject in India. Vedantic ethics had spiritual approach, which is summed up in its entirety (what you do not wish unto you do not do it to others). Business ethics is a new branch of study giving ethic plus business combination in decision making processes in industry and commerce.

Indian ethos was introduced in daily walk of life for everyone by various methods. Religious teachings, listening to Puranas, Kathas, Bhajans, Yoya, Pooja, Yajyas and the like are some examples where these remind time and again the essence of ethical behavior in a society. Over the centuries many of these became mechanical and ritualistic and lost the ethical touch in them.

Two other religions which had their origins in India are Jainism and Buddhism. Buddhism and Jainism stress the ethical behavior and non-violence in more stringent manner to the society. In fact ‘The Digambar’ sect of Jainism advocated no attachments of possession to any worldly goods.

Indian ancient texts give guidelines to ethical behaviour of a man in his daily life since days of Veda. The same principles apply to modern day business.

Some of the important ethical lessons are:

1. Foundation for a healthy business is sound morals and ethics.
2. For managers to be good decision makers and to stand up to temptation and pressures, he should have his own peace of mind, strength of will and ethics.
3. Selfishness and greed are source of evil that reduces ethical standards in an organisation.
4. Ethical levels should be built up from top down to curb lies, hurting, cheating or unethical acts.

Indian Values:

Indian culture is much diversified because of varieties of customs, beliefs and many gods. It is difficult to find single culture at one place. Hinduism has much type of worship and festivals.

In tradition Indian has Vedantic, Buddhist, Jaina and Sikh traditions. India has also welcomed and absorbed good ethical lessons from Christian, Islamic and Parsi religions. The culture has enriched with diversity of outsiders. It is now a unity in diversity.

The important Vedantic values in Indian society valid even today are:

1. Showing respect to elders specially teachers
2. Not showing emotion outward
3. God fear in all walks of life. In any function Pooja or offering to God is made first before the work begins.
4. Marriage is made in heaven and is considered lifelong bond. Some consider it as bond even after death.
5. In recent years Indian household look western. These are outward looks, whereas the Vedantic culture flews in hearts and actions. Similarly Indian ethos had many changes when foreigners ruled India for many centuries but Vedantic identify and ethos remained intact.
6. Indian ethos were built and perfected long before others evolved them. Hence India contributed immensely in teaching ethical lessons to outside world with its classical books. The ethical thought process in Vedantic ethos starts with Vedas, Upanishads, Smritis and Puranas. These were told in many ways with day to day life in epics Ramayana, Mahabharata and Gita. The ethical values were told in story form in Panchatantra, Hitopdesha, Katha- Saritsagaf, Bhoja prabhand, Chanakya Neeti, Bliagavata, Sooktimuktavali, Neeti Shastra, Neeti Shataka Manusmuti and the like.
7. Sacred simplicity of four goals to a man.

a) Dharma – Righteousness

b) Artha – Creation of wealth

c) Kama – Desires and needs

d) Moksha – Liberation of the spiritual core.

The ethos in work life are:

a) Man’s inner strength. Simple living

b) Holistic relationship between man and nature

c) Cooperation with each other

d) Yoga and meditation. That is excellence and concentration.

e) Spirit of sacrifice.

Internal orientation towards work as worship.

A holistic grasp of Indian values is stated by great Poet Kalidasa as Satyam-Shivam-Sundaram. The meaning and connection is shown in Fig. 10.1 below.

In Indian Vedantic system personality types have been suggested based on set of attributes.

The classification are:

a) Daivi or good attributes give Sattwa type of personality.

b) Rajas personality shows an angry and always busy type.

c) Tamas is always thinking negative doing such harmful work.

The classification of three types of personalities show hereunder the attributes of each type.

Indian army has set itself high ethical standards in its policies and operations. These are built and perfected over for centuries. These apply to business environment.

Doing business on the international plane presents many challenges because of a variety of factors which differ from one market to the other. These differences are basically informed by the environment of the host country, which is often times different from that at home. One of the environmental factors that present such a challenge is culture. Culture can be defined as complex construct that embodies a people’s knowledge, morals, art, beliefs, customs, laws and other capabilities gathered by a community over time. The culture of the host country strongly impacts on the performance of a firm that engages in international business. Notable aspects of culture central to the conduct of international business include the social structure, religion, language and education. G4S, a company that has established itself in international business has had its fair share of challenges in this area.

Explanation:

• Doing business on a global basis the main aspect of a successful business relationship has very little to do with the agreement or the contracts. It is based more on inter-personal relationships
• The impact of foreign culture on business has brought different people in connect with other cultures of the world and it gives them an understanding of different cultures and behavior of the people globally
• The effect of globalization has created more avenues for business in the country in the areas of marketing, sales, distribution, and transfer of technology from across the borders

Social structure has to do with how society is socially organized. It could be looked at from the individual-group dimension, or from the social stratification dimension. Some societies consider an individual the pillar of social organization This is the scenario G4S encountered when it entered the American and most Western markets. The challenge here was how to instill a sense of teamwork among employees. It was an uphill task for managers who had been socialized to believe in the superiority of teamwork, as individuals compete against each other for results. On the Japanese market however, the firm found that emphasis was on group, rather than individual performance. Though this is said to be the driving force behind the company’s success in Japan, it is vilified for imbedding creativity, and is touted as a stumbling block to dynamism. This, indeed, is a challenge the firm has had to deal with.

Social stratification has to do with placing members of society in certain classes. There are those in the lower, middle and upper classes. Many times, this is borne out of one’s family background, income or occupation. Those from the lower class only hope to move from that class to the upper one through a process called social mobility, which is in most cases done through education and job opportunities. When opportunities for mobility are suffocated, there is likely to be conflict between the classes; and in the job situation, between management and employees. Some societies have room for social mobility, while others do not. A country like Britain has less social mobility. As a result, there is always simmering tension between management and workers, which the firm has had to deal with from time to time. When industrial disputes become frequent, the firm finds doing business in the country quite expensive. Such a problem is not common in America, where social mobility is easy.

Social environment

There is no doubt that society is continually changing. The tastes and fashions are a great example of this change. One of the most significant differences is the growing popularity of social media. Social networking sites like Facebook have become very popular among younger people. The young consumers have grown used to mobile phones and computers.

The younger generation prefers to use digital technology to shop online. Older people will perhaps stick to their traditional methods. The effect of changing society is often discussed. You must also understand that these changing factors have a toll on businesses too. Changes in social factors can impact a firm in many different ways.

Companies often focus on these changes in depth.  To do so, they employ environmental analysis such as PEST analysis. STEP is a variation of PEST. Extended versions include PESTLE, STEEP, and STEEPLE analysis. The “S” in all these analyses indicates social or socio-cultural factors. Other factors you should assess are political, economic, technological, environmental, ethical, and legal.

Businesses choose an environmental analysis depending on the nature of operations. However, all of them study the social factors.

In the social step for these analyses, you have to look carefully at the social changes. You will also have to look into the cultural changes which take place in your business environment. Market research is a critical part of this step. It is vital to see the trends and patterns of society.

To understand the impacts better, you might need to study the factors in detail. Most companies analyze population growth and age structure. They also show interest in consumer attitudes and lifestyle changes. Your analysis can show if there are faults in your marketing strategy. It can also help find new ideas.

Below is a list of social factors which impact customer needs and the size of markets:

• Lifestyles
• Buying habits
• Education level
• Emphasis on safety
• Religion and beliefs
• Health consciousness
• Sex distribution
• Average disposable income level
• Social classes
• Family size and structure
• Minorities
• Attitudes toward saving and investing
• Attitudes toward green or ecological products
• Attitudes toward renewable energy
• Population growth rate
• Immigration and emigration rates
• Age distribution and life expectancy rates
• Attitudes toward imported products and services
• Attitudes toward work, career, leisure, and retirement
• Attitudes toward customer service and product quality

The social aspect focuses on the forces within society. Family, friends, colleagues, neighbors, and the media are social factors. These factors can affect our attitudes, opinions, and interests. So, it can impact the sales of products and revenues earned.

The social factors shape who we are as people. It affects how we behave and what we buy. A good example is how people’s attitude towards diet and health is changing in the UK. Because of this, UK businesses are seeing some changes. More people are joining fitness clubs. There is also a massive growth in demand for organic food.

Products often take advantage of social factors. The Wii Fit, for instance, attempt to deal with society’s concern about children’s lack of exercise.

Population changes are also directly affecting organizations. The supply and demand of goods and services in an economy can change with the structure of the population. A decline in birth rates means demand will decrease. It also indicates greater competition as the total consumers fall.

World food shortage predictions can lead to call for more investment in food production. An increase in the world’s population can have the same effect. African countries like Uganda are facing food shortages. They are reconsidering the rejection of genetically modified foods now.

Organizations should be able to offer products and services which aim to benefit people’s lifestyle. The offerings should complement customers’ behavior. Not reacting to changes in society can be a costly mistake. They might lose market share. Demand for their products and services will fall.

Cultural environment

Even in today’s global world, there are wide cultural differences, and these differences influence how people do business. Culture impacts many things in business, including

• The pace of business;
• Business protocol how to physically and verbally meet and interact;
• Decision making and negotiating;
• Managing employees and projects;
• Propensity for risk taking; and
• Marketing, sales, and distribution.

There are still many people around the world who think that business is just about core business principles and making money. They assume that issues like culture don’t really matter. These issues do matter in many ways. Even though people are focused on the bottom line, people do business with people they like, trust, and understand. Culture determines all of these key issues.

The opening case shows how a simple issue, such as local flavor preferences, can impact a billion-dollar company. The influence of cultural factors on business is extensive. Culture impacts how employees are best managed based on their values and priorities. It also impacts the functional areas of marketing, sales, and distribution.

It can affect a company’s analysis and decision on how best to enter a new market. Do they prefer a partner (tending toward uncertainty avoidance) so they do not have to worry about local practices or government relations? Or are they willing to set up a wholly owned unit to recoup the best financial prospects?

When you’re dealing with people from another culture, you may find that their business practices, communication, and management styles are different from those to which you are accustomed. Understanding the culture of the people with whom you are dealing is important to successful business interactions and to accomplishing business objectives. For example, you’ll need to understand

• How people communicate;
• How culture impacts how people view time and deadlines;
• How they are likely to ask questions or highlight problems;
• How people respond to management and authority;
• How people perceive verbal and physical communications; and
• How people make decisions.

To conduct business with people from other cultures, you must put aside preconceived notions and strive to learn about the culture of your counterpart. Often the greatest challenge is learning not to apply your own value system when judging people from other cultures. It is important to remember that there are no right or wrong ways to deal with other people just different ways. Concepts like time and ethics are viewed differently from place to place, and the smart business professional will seek to understand the rationale underlying another culture’s concepts.

For younger and smaller companies, there’s no room for errors or delays both of which may result from cultural misunderstandings and miscommunications. These miscues can and often do impact the bottom line.

Liberalization

The basic aim of liberalization was to put an end to those restrictions which became hindrances in the development and growth of the nation. The loosening of government control in a country and when private sector companies’ start working without or with fewer restrictions and government allow private players to expand for the growth of the country depicts liberalization in a country.

Objectives of Liberalization Policy

• To increase competition amongst domestic industries.
• To encourage foreign trade with other countries with regulated imports and exports.
• Enhancement of foreign capital and technology.
• To expand global market frontiers of the country.
• To diminish the debt burden of the country.

Privatization

This is the second of the three policies of LPG. It is the increment of the dominating role of private sector companies and the reduced role of public sector companies. In other words, it is the reduction of ownership of the management of a government-owned enterprise. Government companies can be converted into private companies in two ways:

• By Disinvestment
• By Withdrawal of governmental ownership and management of public sector companies.

Forms of Privatization

• Denationalization or Strategic Sale: When 100% government ownership of productive assets is transferred to the private sector players, the act is called denationalization.
• Partial Privatization or Partial Sale: When private sector owns more than 50% but less than 100% ownership in a previously construed public sector company by transfer of shares, it is called partial privatization. Here the private sector owns the majority of shares. Consequently, the private sector possesses substantial control in the functioning and autonomy of the company.
• Deficit Privatization or Token Privatization: When the government disinvests its share capital to an extent of 5-10% to meet the deficit in the budget is termed as deficit privatization.

Objectives of Privatization

• Improve the financial situation of the government.
• Reduce the workload of public sector companies.
• Raise funds from disinvestment.
• Increase the efficiency of government organizations.
• Provide better and improved goods and services to the consumer.
• Create healthy competition in the society.
• Encouraging foreign direct investments (FDI) in India.

Globalization

It means to integrate the economy of one country with the global economy. During Globalization the main focus is on foreign trade & private and institutional foreign investment. It is the last policy of LPG to be implemented.

Globalization as a term has a very complex phenomenon. The main aim is to transform the world towards independence and integration of the world as a whole by setting various strategic policies. Globalization is attempting to create a borderless world, wherein the need of one country can be driven from across the globe and turning into one large economy.

Outsourcing as an Outcome of Globalization

The most important outcome of the globalization process is Outsourcing. During the outsourcing model, a company of a country hires a professional from some other country to get their work done, which was earlier conducted by their internal resource of their own country.

The best part of outsourcing is that the work can be done at a lower rate and from the superior source available anywhere in the world. Services like legal advice, marketing, technical support, etc. As the Information Technology has grown in the past few years, the outsourcing of contractual work from one country to another has grown tremendously. As a mode of communication has widened their reach, all economic activities have expanded globally.

Various Business Process Outsourcing companies or call centres, which have their model of a voice-based business process have developed in India. Activities like accounting and book-keeping services, clinical advice, banking services or even education are been outsourced from developed countries to India.

The most important advantage of outsourcing is that big multi-national corporate or even small enterprises can avail good services at a cheaper rate as compared to their country’s standards. The skill set in India is considered most dynamic and effective across the world. Indian professionals are best at their work. The low wage rate and specialized personnel with high skills have made India the most favourable destination for global outsourcing in the later stage of reformation.

LPG Model in India

After Independence in 1947 Indian government faced a significant problem to develop the economy and to solve the issues. Considering the difficulties pertaining at that time government decided to follow LPG Model. The Growth Economics conditions of India at that time were not very good. This was because it did not have proper resources for the development, not regarding natural resources but financial and industrial development. At that time India needed the path of economic planning and for that used ‘Five Year Plan’ concept of which was taken from Russia and feet that it will provide a fast development like that of Russia, under the view of the socialistic pattern society. India had practiced some restrictions ever since the introduction of the first industrial policy resolution in 1948.

Liberalization is defined as making economics free to enter the market and establish their venture in the country. Privatization is defined as when the control of economic is sifted from public to a private hand. Globalization is described as the process by which regional economies, societies, and cultures have become integrated through a global network of communication, transportation, and trade.

Objectives of Liberalization Policy

• To increase competition amongst domestic industries.
• To encourage foreign trade with other countries with regulated imports and exports.
• Enhancement of foreign capital and technology.
• To expand global market frontiers of the country.
• To diminish the debt burden of the country.

Impact of Foreign Direct Investment on Developing Countries

Many developing countries do not have the necessary resources at their disposal to develop some sectors and hence, they permit foreign capital to invest in these sectors. Of course, they also ensure that sectors like defense and other sectors that have national security implications are kept off the list of sectors in which foreign direct investment is allowed. For many countries, opening up of their economies results in benefits since they need the dollars as well as because they might not have the expertise to commence productive activities in these sectors. Finally, foreign direct investment can be used to pay for expensive imports and encourage exports as well. After all, every developing country (except those with large oil reserves) needs to pay for its oil imports in dollars and hence foreign direct investment helps to earn precious dollars.

Downsides of Foreign Direct Investment on Developing Countries

There are many downsides to allowing Foreign Direct Investment into the developing countries. However, the developing countries benefit because of inflow of dollars and much needed capital, which is not available domestically, there is scope for outflow of dollars as well since the foreign companies typically repatriate a part or whole of their profits back to their home countries. This is the reason why developing countries must think twice before allowing blanket foreign direct investment. To circumvent this, many developing countries typically restrict foreign direct investment into sectors that badly need capital and where the developing country does not have expertise. Further, the fact that many developing countries have capital controls on the capital account (which is to restrict wholesale repatriation of both profits and investment) and relax the current count where only profits and that too a percentage of it is repatriated.

Significance for developing countries

FDI has become an important source of private external finance for developing countries. It is different from other major types of external private capital flows in that it is motivated largely by the investors’ long-term prospects for making profits in production activities that they directly control. Foreign bank lending and portfolio investment, in contrast, are not invested in activities controlled by banks or portfolio investors, which are often motivated by short-term profit considerations that can be influenced by a variety of factors (interest rates, for example) and are prone to herd behavior. These differences are highlighted, for instance, by the pattern of bank lending and portfolio equity investment, on the one hand, and FDI, on the other, to the Asian countries stricken by financial turmoil in 1997: FDI flows in 1997 to the five most affected countries remained positive in all cases and declined only slightly for the group, whereas bank lending and portfolio equity investment flows declined sharply and even turned negative in 1997.

While FDI represents investment in production facilities, its significance for developing countries is much greater. Not only can FDI add to investible resources and capital formation, but, perhaps more important, it is also a means of transferring production technology, skills, innovative capacity, and organizational and managerial practices between locations, as well as of accessing international marketing networks. The first to benefit are enterprises that are part of transnational systems (consisting of parent firms and affiliates) or that are directly linked to such systems through nonequity arrangements, but these assets can also be transferred to domestic firms and the wider economies of host countries if the environment is conducive. The greater the supply and distribution links between foreign affiliates and domestic firms, and the stronger the capabilities of domestic firms to capture spillovers (that is, indirect effects) from the presence of and competition from foreign firms, the more likely it is that the attributes of FDI that enhance productivity and competitiveness will spread. In these respects, as well as in inducing transnational corporations to locate their activities in a particular country in the first place, policies matter.

The Benefits of Foreign Investment

Hence, the fact that FDI is preferred more by developing countries become clear when one considers the deep and the longer-term nature of these flows. However, this does not mean that investments in equity and bond markets are not welcomed. This is because many developing countries run large current account deficits, which have to be financed with dollars. In other words, current account deficits are the difference between the imports and the exports that a country does and since many developing countries import more than they export, there needs to be a mechanism through which the deficit is financed. This is made possible by the investment in bonds and equities. On the other hand, FDI is suitable for generating jobs and creating conditions for future prosperity. Moreover, FDI comes with the added advantage of technology and knowledge transfer, which is beneficial to the developing countries. Therefore, as can be seen from this explanation, both FDI and hot money are attractive in terms of the usefulness they have to developing countries.

The Downsides of Foreign Investment

However, the downsides of these investments are that whenever there is a crisis like the recent economic crisis and the Asian financial crisis of 1997, there tends to be outward flows of foreign capital as panicky investors flee the developing countries markets lest they lose out in the process of the crisis eroding their investments. This is the key downside of foreign investment. Further, even FDI or capital investment can flee the developing countries if they have full capital account convertibility or the provision for the foreign companies to quickly convert their holdings in domestic currencies back to their home currency, which in many cases is the United States Dollar. Hence, the implications of FDI and Hot Money have to be clearly understood by policymakers before they commit themselves to opening up their economies. Indeed, as the experiences of China and India illustrate, the gradual opening up of the economy and the careful monitoring of flows of hot money are needed for developing countries to withstand currency shocks and liquidity crunches.

Foreign direct investment (FDI) means companies purchase capital and invest in a foreign country. For example, if a US multinational, such as Nike built a factory for making trainers in Pakistan; this would count as foreign direct investment.

The main factors that affect foreign direct investment are

• Infrastructure and access to raw materials
• Communication and transport links.
• Skills and wage costs of labour

Tax policies and concessions:

Government should adopt uniform tax policies as per international norms. A heavy excise duty or sales tax or customs duty will prevent foreign direct investment. A moderate tax policy should continue so that the FDIs will feel comfortable.

Wage rates

A major incentive for a multinational to invest abroad is to outsource labour-intensive production to countries with lower wages. If average wages in the US are $15 an hour, but $1 an hour in the Indian sub-continent, costs can be reduced by outsourcing production. This is why many Western firms have invested in clothing factories in the Indian sub-continent.

 However, wage rates alone do not determine FDI, countries with high wage rates can still attract higher tech investment. A firm may be reluctant to invest in Sub-Saharan Africa because low wages are outweighed by other drawbacks, such as lack of infrastructure and transport links.

Stability of the Government:

A stable Government is an essential prerequisite for any investment. The investor will always look for a government which is supporting investment and which will not take any steps that are anti-investment. The investor should not have any fear of take over by the government. This will enable him to go for expansion.

Return on investment:

One of the major attractions for FDIs is the profit or the return they get for the investment made. Unless the return is substantially higher than what they could have obtained in other countries, they will not venture for investment. The rectum should also be consistent and it should be increasing over a period. These factors are closely looked into while undertaking investment. The financier of the FDIs will also ensure that they get their money back as it is a safe investment.

Thus, return on investment is a major deciding factor for FDls while undertaking investment in foreign countries. They also would like to ensure that the payback period is also less so that the return is ensured within a short period. Weightage is given to each of these factors and decisions are finalized.

Scope of the market:

FDIs must be in a position to exploit the market and expand both in the domestic as well as the foreign markets. This will reduce their cost of production and will give them ample scope for diversification.

Exchange rate stability:

Commercial viability of any FDI is based on exchange rate stability. This means that the value of domestic currency should not drop abnormally by which while repatriating the funds, the foreign investor will lose heavily. Exchange rate should be more or less the same as prevailing at the time of investment.

Flexibility in the Government Policy:

Certain investments were not allowed in the hands of FDI but such a rigid policy will not help in the growth of industries. With WTO regulation, government has to adopt flexible policies, permitting FDIs in all areas including those in which they were prevented previously. For example, in India, power generation was not permitted to private sector. Now, in Maharashtra, Dabhol Power Company is allowed to do so.

Other favorable location factors (including logistics and labor):

The productivity of labor in the country should be high. Adequate skilled labor should be available, especially in technical areas. Different transport facilities with a proper coordination between land, rail and air should be available.

Labour skills

Some industries require higher skilled labour, for example pharmaceuticals and electronics. Therefore, multinationals will invest in those countries with a combination of low wages, but high labour productivity and skills. For example, India has attracted significant investment in call centres, because a high percentage of the population speak English, but wages are low. This makes it an attractive place for outsourcing and therefore attracts investment.

A foreign direct investment (FDI) is an investment in the form of a controlling ownership in a business in one country by an entity based in another country. It is thus distinguished from a foreign portfolio investment by a notion of direct control. Broadly, foreign direct investment includes “mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations, and intra company loans“. FDI is the sum of equity capital, long-term capital, and short-term capital as shown in the balance of payments. FDI usually involves participation in management, joint-venture, transfer of technology and expertise. Stock of FDI is the net (i.e., outward FDI minus inward FDI) cumulative FDI for any given period. Direct investment excludes investment through purchase of shares (if that purchase results in an investor controlling less than 10% of the shares of the company).

Types of Foreign Direct Investment

There are mainly two types of FDI: Horizontal and Vertical. However, two other types of FDI have emerged- Conglomerate and Platform FDI.

1. HORIZONTAL FDI: Under this type of FDI, a business expands its inland operation to another country. The business undertake the same activities but in foreign country.
2. VERTICAL FDI: In this case, a business expands into another country by moving to a different level of supply chain. Thus business undertakes different activities overseas but these activities are related to main business.
3. CONGLOMERATE FDI: Under this type of FDI, a business undertakes unrelated business activities in a foreign country. this type is uncommon as it involves the difficulty of penetrating a new country and an entirely new market.
4. PLATFORM FDI: Here, a business expands into another country but the output from the business is then exported to a third country.

Routes

There are two routes by which India gets FDI.

1. Automatic route: By this route FDI is allowed without prior approval by Government or Reserve Bank of India.
2. Government route: Prior approval by government is needed via this route. The application needs to be made through Foreign Investment Facilitation Portal, which will facilitate single window clearance of FDI application under Approval Route. The application will be forwarded to the respective ministries which will act on the application as per the standard operating procedure. Foreign Investment Promotion Board (FIPB) which was the responsible agency to oversee this route was abolished on May 24, 2017. It held its last meeting on 17 April, which was the 245th meeting of the Board. On 24 May 2017, Foreign Investment Promotion Board was scrapped by the Union Government. Henceforth, the work relating to processing of applications for FDI and approval of the Government thereon under the extant FDI Policy and FEMA, shall now be handled by the concerned Ministries/Departments in consultation with the Department for Promotion of Industry and Internal Trade(DPIIT) , Ministry of Commerce, which will also issue the Standard Operating Procedure (SOP) for processing of applications and decision of the Government under the extant FDI policy

The aim of globalization is to secure socio-economic integration and development of all the people of the world through a free flow of goods, services, information, knowledge and people across all boundaries.

Globalization is seen as a conscious and active process of expanding business and trade across the borders of all the states. It stands for expanding cross-border facilities and economic linkages. This is to be done with a view to secure an integration of economic interests and activities of the people living in all parts of the world. The objective of making the world a truly inter-related, inter-dependent, developed global village governs the on-going process of globalization.

Globalization is the concept of securing real social economic, political and cultural transformation of the world into a real global community. It is considered to be the essential means for securing sustainable development of all the people of the world.

“Globalization represents the desire to move from national to a global sphere of economic and political activity”. It seeks to transform the existing international economic system into a unified system of global economics. In the existing system, national economies are the major players. In the new system, the globalized economic and political activity will ensure sustainable development for the whole world.

“Globalization is both an active process of corporate expansion across borders and a structure of cross border facilities and economic linkages that has been steadily growing and changing.” :Edward S.Herman

“Globalization is the process whereby social relations acquire relatively distance-less and borderless qualities.” :Baylis and Smith

Nature of Globalization

1. Liberalization

It stands for the freedom of the entrepreneurs to establish any industry or trade or business venture, within their own countries or abroad.

2. Free trade

It stands for free flow of trade relations among all the nations. Each state grants MFN (most favored nation) status to other states and keeps its business and trade away from excessive and hard regulatory and protective regimes.

3. Globalization of Economic Activity

Economic activities are be governed both by the domestic market and also the world market. It stands for the process of integrating the domestic economy with world economies.

4. Liberalization of Import-Export System

It stands for liberating the import- export activity and securing a free flow of goods and services across borders.

5. Privatization

Keeping the state away from ownership of means of production and distribution and letting the free flow of industrial, trade and economic activity across borders.

6. Increased Collaborations

Encouraging the process of collaborations among the entrepreneurs with a view to secure rapid modernization, development and technological advancement.

7. Economic Reforms

Encouraging fiscal and financial reforms with a view to give strength to free world trade, free enterprise, and market forces.

Globalization accepts and advocates the value of free world trade, freedom of access to world markets and a free flow of investments across borders. It stands for integration and democratization of the world’s culture, economy and infrastructure through global investments.

Typical Stages of the Globalization of Business Companies

1. “In the first stage of globalization, companies normally tend to focus on their domestic markets. They develop and strengthen their capabilities in some core areas.
2. In the second stage of globalization, companies begin to look at overseas markets more seriously but the orientation remains predominantly domestic. The various options a company has in this stage are exports, setting up warehouses abroad and establishing assembly lines in major markets. The company gets a better understanding of overseas markets at low risk, but without committing large amounts of resources.
3. In the third stage of globalization, the commitment to overseas markets increases. The company begins to take into account the differences across various markets to customize its products suitably. Different strategies are formed for different markets to maximize customer responsiveness. The company may set up overseas R&D centers and full-fledged country or region specific manufacturing facilities. This phase can be referred to as the multinational or multi-domestic phase. The different subsidiaries largely remain independent of each other and there is little coordination among the different units in the system.”
4. In the final stage of globalization, the transnational corporation emerges. Here, the company takes into account both similarities and differences across different markets. Some activities are standardized across the globe while others are customized to suit the needs of individual markets. The firm attempts to combine global efficiencies, local responsiveness and sharing of knowledge across different subsidiaries.

Important Features of Globalization

1. Liberalization

It stands for the freedom of the entrepreneurs to establish any industry or trade or business venture, within their own countries or abroad.

2. Free trade

It stands for free flow of trade relations among all the nations. Each state grants MFN (most favoured nation) status to other states and keeps its business and trade away from excessive and hard regulatory and protective regimes.

3. Globalization of Economic Activity

Economic activities are be governed both by the domestic market and also the world market. It stands for the process of integrating the domestic economies with world economy.

4. Liberalisation of Import-Export System

It stands for liberating the import-export activity and securing a free flow of goods and services across borders.

5. Privatisation

Keeping the state away from ownership of means of production and distribution and letting the free flow of industrial, trade and economic activity across borders.

6. Increased Collaborations

Encouraging the process of collaborations among the entrepreneurs with a view to secure rapid modernization, development and technological advancement.

7. Economic Reforms

Encouraging fiscal and financial reforms with a view to give strength to free world trade, free enterprise, and market forces.

8. Several dimensions of Globalization

Increased and Active Social, Economic and Cultural Linkages among the people. Globalization has social, economic, political cultural and technological dimensions. It involves all round inter-linkages among all the people of the world.

Free flow of knowledge, technology goods services and people across all societies is it key feature. It attempts at making geographical borders soft permitting all the people to develop their relations and links.

Globalization accepts and advocates the value of free world, free trade, freedom of access to world markets and a free flow of investments across borders. It stands for integration and democratization of the world’s culture, economy and infrastructure through global investments.

GATT expands to General Agreement on Tariffs and Trade, is an international trade treaty, that came into existence in the year 1947, just after the second world war, as a result of Bretton Woods Agreement. It is a multilateral legal agreement which was signed by 23 nations. It was enacted to bolster the economic recovery which aimed at expanding world trade, by abolishing those trade barriers, such as reducing tariff, quota, subsidies etc.

There are three main provisions made in this regard, which are:

• When it’s about the tariff, all the member nations are considered as equal.
• Restriction on the number of imports and exports are prohibited but subject to certain exceptions.
• Special provisions are made to encourage trade of developing nations.

WTO

WTO stands for World Trade Organization, is the sole international body concerned with the provisions of cross-country trade, based in Geneva, Switzerland. Basically, there is an agreement called WTO agreement, which is duly signed and negotiated by member nations of the world and confirmed in their parliaments.

In the real sense, WTO is a place, where the governments of member countries attempt to resolve their trade problems, encountered by them during the trade with other countries. The member governments (who can be ministers or their ambassadors or delegates) operate WTO and all decisions are also taken by consensus.

The Differences between GATT and WTO

• GATT was ad-hoc and provisional. The WTO and its agreement are permanent with WTO having a sound legal basis because members have ratified the WTO agreements.
• GATT refers to an international multilateral treaty to promote international trade and remove cross-country trade barriers. On the contrary, WTO is a global body, which superseded GATT and deals with the rules of international trade between member nations.
• While GATT is a simple agreement, there is no institutional existence, but have a small secretariat. Conversely, WTO is a permanent institution along with a secretariat.
• The participating nations are called as contracting parties in GATT, whereas for WTO, they are called as member nations.
• The grandfather clause in the Protocol of Provisional Application in GATT 1947 has not been carried forward to WTO. WTO contains an improved version of original GATT rules-GATT Rules 1994.
• GATT commitments are provisional in nature, which after 47 years the government can make a choice to treat it as a permanent commitment or not. On the other hand, WTO commitments are permanent, since the very beginning.
• The scope of WTO is wider than that of GATT in the sense that the rules of GATT are applied only when the trade is made in goods. As opposed to, WTO whose rules are applicable to services and aspects of intellectual property along with the goods.
• GATT agreement is primarily multilateral, but the plurilateral agreement is added to it later. In contrast, WTO agreements are purely multilateral.
• The domestic legislation is allowed to continue in GATT, while the same is not possible in the case of WTO.
• The dispute settlement system of GATT was slower, less automatic and susceptible to blockages. Unlike WTO, whose dispute settlement system is very effective.