Global business environment

What is globalization ?
• It means integration of national economies with the world economy.
• Globalization is the process in which an activity or undertaking becomes
worldwide in scope.
• It refers to the expansion of business in the global market.
• Globalization may be defined as “ the growing economic interdependence of
countries worldwide through increasing volume and variety of cross border
transactions in goods and services and of international capital flows, and also
through the more rapid and widespread diffusion of technology”.
• Globalization may be considered at two levels .Viz, at the macro level (i.e.,
globalization of the world economy) and at the micro level (i.e., globalization of
the business and the firm). Globalization of the world economy is achieved,
quite obviously, by globalizing the national economies.
• Globalization of the economies and globalization of business are very much
interdependent.

REASONS FOR GLOBALIZATION
• The rapid shrinking of time and distance across the globe thanks to faster
communication, speedier transportation, growing financial flows and rapid technological
changes.
• The domestic markets are no longer adequate rich. It is necessary to search of
international markets and to set up overseas production facilities.
• Companies may choose for going international to find political stability, which is
relatively good in other countries.
• To get technology and managerial know-how.
• Companies often set up overseas plants to reduce high transportation costs.
• Some companies set up plants overseas so as to be close to their raw materials supply
and to the markets for their finished products.
• Other developments also contribute to the increasing international of business.
• The US, Canada and Mexico have signed the North American Free Trade agreement
(NAFTA), which will remove all barriers to trade among these countries.
• The creation of the World Trade Organization (WTO) is stimulating increased cross-
border trade.

NatureofGlobalization
1. Integration through interdependence
2. Free market economies
3. Free movement of products
4. Free flow of factors of production
5. Standardized technology
6. Information and communication
7. Global corporation with global image

Forms of globalization
•Economic globalization
•Political globalization
•Cultural globalization
•Environmental globalization

Effects of Globalization
•Liberalized International Trade
•Import Penetration
•Foreign Direct Investment
•Multinational Companies
•Competitive Environment
•Workforce Diversity

ADVANTAGES OF GLOBALIZATION
• Productivity grows more quickly when countries produce goods and
services in which they have comparative advantage.
• Living standards can go up faster.
• Global competition and imports keep a lid on prices, so inflation is less
likely to derail economic growth.
• An open economy spurs innovation with fresh ideas from abroad.
• Export jobs often pay more than other jobs.
• Unfettered capital flows give access to foreign investment and keep
interest rates low.

DISADVANTAGES
• Millions have lost jobs due to imports or production shifts abroad. Most find new
jobs that pay less.
• Millions of others fear losing their jobs, especially at those companies operating
under competitive pressure.
• Workers face pay cut demands from employers, which often threaten to export
jobs.
• Services and white-collar jobs are increasingly vulnerable to operations moving
offshore.
• Employees can lose their comparative advantage when companies build
advanced factories in low-wage countries, making them as productive as those at
home.

ESSENTIALS FOR GLOBALIZATION
They are some essential conditions to be satisfied on the part of the domestic economy as well
as the firm for successful globalization of the business.
• Business freedom There should not be unnecessary government restrictions like import
restriction, restrictions on sourcing finance or other factors from abroad, foreign investments etc.
the economic liberalization is regarded as a first step towards facilitating globalization.
• Facilities The extent to which an enterprise can develop globally from home country base
depends on the facilities available like the infrastructural facilities.
• Government support Government support may take the form of policy and procedural
reforms, development of common facilities like infrastructural facilities, R & D support, financial
market reforms and so on.
• Resources Resourceful companies may find it easier to thrust ahead in the global market.
Resources include finance, technology, R & D capabilities, managerial expertise, company and
brand image, human resource etc.
• Competitiveness A firm derives competitive advantage from any one or more of the factors
such as low costs and price, product quality, product differentiation, technological superiority,
after sales services, marketing strength etc.
• Orientation A global orientation on the part of the business firms and suitable globalization
strategies are essential for globalization.

Problems of International Trade
• Different laws and regulations
• Different financial and currency systems
• Immobility of factors of production
• Risks in transit
• Chain of intermediaries

Multinational Companies
It is defined as the company engaged in producing and selling goods or services in more
than one country.
The dynamics of the business environment fostered by the drastic political changes in the
erstwhile communist and socialist countries and the economic liberalization across the
world has enormously expanded the opportunities for the multinational corporations,
also known by such names as international corporation, transnational corporation, global
corporation (or firm, company or enterprise) etc.
“A company that controls production facilities in more than one country, such facilities
having been acquired through the process of foreign direct investment. Firms that
participate in international business, however large they may be, solely by exporting or
by licensing technology are not multinational enterprises.”
Types of MNCs
1. Raw material Seekers
2. Market Seekers
3. Cost Minimizers

Advantages of MNCs
• MNCs help increase the Investment level and thereby the income and employment in
host country.
• The transnational corporation has become vehicles for the transfer technology,
especially to the developing countries.
• They also kindle a managerial revolution in the host countries through professional
management and the employment of highly sophisticated management techniques.
• The MNCs enable the host countries to increase their exports and decrease their
import requirements.
• They work to equalize the cost of factors of production around the world.
• MNCs provide an efficient means of integrating national economies.
• The enormous resources of the multinational enterprises enable them to have very
efficient research and development systems. Thus, they make a commendable
contribution to inventions and innovations.
• MNCs also stimulate domestic enterprise because to support their own operations, the
MNCs may encourage and assist domestic suppliers.
• MNCs help increase competition and break monopolies.

Disadvantages of MNCs
• The MNCs technology is designed for worldwide profit maximization, not the
development needs of poor countries.
• Through their power and flexibility, MNCs can evade or undermine national economic
autonomy and control, and their activities may be inimical to the national interests
• MNCs may destroy competition and acquire monopoly powers.
• The tremendous power of the global corporations poses the risk that they may
threaten the sovereignty of the nations in which they do business.
• MNCs retard growth of employment in the home country.
• The transnational corporations cause fast depletion of some of the nonrenewable
natural resources in the host country. They have also been accused of the environmental
problems.
• The transfer pricing enables MNCs to avoid taxes by manipulating prices on intra
company transactions
• The MNCs undermine local culture and traditions; change the consumption habits for
their benefits against the long-term interests of the local community.

Foreign Direct Investment (FDI)
• It is the investment made from one country to another by
Multinational Companies.
• It is long term capital investment, involve in acquisition of domestic
firms by foreign based factories or any other type of business firm.
• The investor enjoys managerial control over the assets of acquired firm
Objectives of FDI:
• Expands sales in foreign
• Gain excess to raw material suppliers
• Take advantage of cheap labor
• Transfer of technology management and technical skills to foreign skills

Contribution of FDI in Nepalese Economy
1. Capital Transfer
2. Productivity Improvement
3. Management Development
4. Employment
5. Better Products
6. Export
7. Industrialization

Reasons of Poor Inflow of FDI in Nepal
•Unstable government policies
•Bureaucratic hurdles
•Political uncertainties
•Weak financial sector
•Electricity shortages
•Unsupportive environment

Negative Effects of FDI on Nepalese Business
•Increased unemployment
•Competition
•Exchange rate uncertainties
•Environmental degradation
•Erosion of national sovereignty
•Dependency
•Corruption

WTO [World Trade Organization]
• WTO was established on 1st Jan. 1995.
• It is successor to the GATT( General Agreement on Tariffs and Trade) which was
signed on 30th Oct. 1947 by 23 nations and came into force on 1st Jan. 1948.
• WTO is a legal and institutional foundation of multinational trading system.
• It is the global platform on which trade relation among countries evolve through
collective debate, negotiation and adjudication.
• It covers trade in goods, services and intellectual property.
• It is significantly strengthened legal mechanism for resolving trade disputes,
multilaterally.
• It is the body which regularly conduct research and studies on trade facilitation.
• regional grouping is the first phase in the creation of a smoothly functioning
multi-trading system

• It is based on rules of trade which need to be followed by all the members.
• Trade liberalization is main focus of WTO.
• It has given due attention to investment and issue of boarder economic
cooperation.
• To integrate world economy, it has emphasized in elimination of barriers in
trade and investment.
• WTO has generated growth and encouragement to competitive activity which
benefit to mankind across the globe.
• WTO has accepted and recognized the importance and relevance of regional
grouping as the

Objectives of WTO
The purpose of WTO is to promote free trade by persuading countries to abolish
import tariff and other barriers. It offers a system for international commence. The
main objectives of WTO are as follow:
• Raise standards of living
• Increase incomes
• Promote full employment
• Expand production and multilateral trade
• Protect environment through optimum utilization of world’s resources for
sustainable development.
• Take positive steps to secure a better share of growth in trade of developing and
least developed countries.

Functions of WTO
• Administer and implement multi-lateral trade agreement
• Act as a forum for multi-lateral trade negotiation
• Seek to resolve trade disputes
• Oversee national trade policy
• Cooperate with other international institution involved in global economic
policy making such as IMF [international monetary fund] and World Bank.
• Maintain trade related data base.
• Act as a watch dog of international trade
• Provide technical assistance and training for developing countries and LDC.

Nepal’s Membership of WTO
• Nepal became member of WTO on April 23, 2004.
• Nepal became 147th member of WTO
• Nepal had applied for GATT membership in 1989 but it couldn’t succeed.
• It re-initiated the membership process and obtain observer status in 1993.
• Nepal’s cabinet decided in 1996 to seek the membership of WTO
• Since, 1997, UNDP [united nation development program] provided technical assistance
through “Nepal’s accession to WTO project”.
• Nepal's membership was discussed in Nov. 1999, meeting of WTO
• In bilateral negotiation with selected member countries of WTO in Sep. 2000, Nepal
received the suggestion to reduce tariff and to further liberalize trade in services.
• In meeting 2001 Nov. of Doha, Quatar, Nepal lobbied for priority of membership to
Least Developed Countries.
• Nepal finally was granted membership of WTO in the Mexico conference in 2003

Positive Impact of WTO on Nepal’s Economy
•Trade expansion
•Trade diversification
•Freedom of transit
•Industrial development
•Dispute settlement
•End of bilateralism
•Image and power
•Special benefits

Negative Impact of WTO on Nepal’s Economy
•Erosion of preferences
•Price hike
•Competition
•Accession commitments
•Institutional requirements
•Gaps in theory and practices

Regional economic groupings of Nations
• It is a preferred economic integration and arrangement among a group of countries
• It is also called regional trading blocs, contains the countries into group that ultimately
abolish trade restriction with member countries.
• They may also engage in other economic activities that promote their citizen's welfare
• economic grouping leads to mutual interdependence among the member nation.
• Countries in close geographical proximity or the neighborhood join hands and decide to
co-operate with each other for their mutual economic benefit.
• Thus the fortune of each member country depends on the performance of the body as
a whole.
• Regional economic grouping first started from Europe in 1950s,
• today the regional grouping are widely found in all parts of the globe.
• 1/3rd of global trade occurs between the countries of regional economic grouping.
• Some countries are even members of more than one trading blocs to expand their
trading opportunities.
• Today we rarely find any country adopting the policy of economic independent and self-
sufficiency

Forms/Types of regional economic grouping
•Preferential trading agreement
•Free trade area
•Customs unions
•Common market
•Economic union

Regional economic groupings in different
continents
• European Union
• North American free trade area
• Latin American integration Association
• South African customs Union
• South African customs Union
• The Bay of Bengal initiative for multi- sectoral technical and economic co-
operation
• SAFTA [South Asian Free Trade Area]

Opportunities provided by Regional economic
groupings:
•As the trade barriers, tariffs, etc. are removed the
efficient business firm can enter and expand all the
member countries with in the region.
•More efficient business firm help the less efficient
business firm in acquiring competencies.
•Overall business performance increase
•Customer get the best product at lowest possible price
•Employment opportunities increase in the region
•Risks of exporting among the members removed

Negative impact of regional economic groupings
•Because of the entry of efficient business firm local or less
efficient business may die.
•A single market vanishes the price differential which creates
opportunities for some but difficulties for many firm to reduce
cost.
•Less developed countries in the region becomes mostly a
consumption center while developed countries become
production centers.
•The gap between rich and poor countries increase rich or
advanced countries become richer and poor or less developed
countries becomes poorer.

SAPTA [South Asian Preferential Trading
Arrangement]:
•Member countries of SAARC realized that regional trade is an
important instruments to bring about economic development
in the regions.
•To cope with the challenges of globalization and enhances the
trading capacity, SAARC countries felt the requirement of this
type of trade.
•The member countries of SAARC raise the voice in favor of the
establishment of SAPTA in April 1993 in Dhaka summit which
came into practice in December 1995.
•This was the significant move towards economic co-operation
in the region.

Objectives
the first step towards the transitions to South Asian Free Trade. SAPTA provides
SAARC countries the preferential treatments to reduce imports tariffs on the
preferential items.
The SAPTA was established with the following consideration:
• Promoting co-operation for the benefits of the people of member’s countries.
• Development of national economics through expansion of trade investment and
production.
• Providing employment opportunity and improved the standard of living of the
people of the member countries.
• Strengthening inter-regional economic co-operation.
• Increase the share in the total volume South Asian Trade.

Principles of SAPTA:
•Principles of overall reciprocity and mutuality to give equal
benefit to all member states.
•Negotiated step by step and extended in successive stages
with periodic reviews.
•The special needs of least developed nations get recognized.
•Include all the product, manufactured and the commodities
in their raw, semi-processed firms.

SAFTA [South Asian Free Trade Area]:
• Free trade area is an arrangement in which each member countries retains
tariffs system with 3rd countries.
• Member’s countries of free trade area eliminated tariffs and non-tariffs and
other restrictions on products of member’s countries.
• There is free flow of goods and services among member’s countries without
barrier.
• SAFTA is the leap forward in promoting free trade in SAARC region.
• The agreement was signed on Jan. 6, 2004 and came into force in Jan. 1,
2006.
• Currently, sensitive list of products, rules of origin technical assistance as
well as mechanism for compensation of revenue loss for least developed
member countries are under consideration.

Objectives:
The objectives of SAFTA are to promote and enhance multi-trade and
economic co-operation by:
• Eliminating barriers in trade and facilitating the cross border
movement of goods.
• Promoting condition of fair competition in free trade area and ensuring
equitable benefit to all the members taking into account their
respective levels and pattern of economic development.
• Creating effective mechanism for the implementation and application
of this agreement for its joint administration and for the reason of
dispute.
• Establishing a framework for further regional co-operation to expand
and enhance mutual benefits.

SAFTA principles:
• SAFTA is governed by rules, regulations, decisions, and understanding
to be agreed upon within its framework by member countries.
• Reciprocity and mutuality of advantage
• Emphasis on trade facilitation and progress
• Special preference at least developed countries
• Free movement of products
• Trade without discrimination
• Compatibility with WTO and other agreement

Impacts of SAPTA and SAFTA on Nepalese
business
•Intra-regional Trade Expansion
•Low cost of Transactions
•Special Measures for LDCs
•Comparative Advantages
•One SAARC Voice
•Increased Joint Ventures

Negative Impacts of SAPTA & SAFTA
•Increased Competition
•Limited Capital and Technology
•Smuggling
•Transit Problems
•Poor mobility of people

BIMSTEC
It stands for Bay of Bengal Initiative for Multi-Sectoral Technical
and Economic Cooperation (BIMSTEC). It was created on 6 June
1997 at Bangkok.
Originally it had 5 members Bangladesh, India, Myanmar,
Srilanka and Thailand on the name of these countries it got its
name.
Nepal joined BIMSTEC in February 2004.
BIMSTEC works as a bridge between SAARC and ASEAN.
It has provided significant recognition to potentialities of multi-
dimensional co-operation within the region.

Objectives:
• To create favorable environment for rapid economic development in
the region.
• To promote social and economic progress through joint effort based
equality and partnership.
• To promote active collaboration and mutual assistance on matters of
common interest.
• To provide cooperation to one another for the provision of training and
research facilities in educational and technical fields.
• To provide effective assistance through joint efforts in the national
development of member countries.
• To establish close and advantageous co-operation with international
and regional organization.

Functions:
•It administers and implements agreements reached by
member countries for e.g. free trade area agreement.
•It acts as a forum for promotion of co-operation among
member countries in specified areas.
•It increases cooperation with international and regional
organization with similar aims and purposes.

Positive Impacts of BIMSTEC on Nepalese business:
• Trade expansion: - Cross regional trade will have positive impact on Nepal
trade expansion market accessibility will increase.
• Investment expansion: - BIMSTEC focuses on the promotion of investment.
In Nepal, hydropower is an important area for investment.
• Infrastructural development: - BIMSTEC is working on feasibility of trans-
Asian highway. It is also working on BIMSTEC airlines to connect capital
cities of member countries which is very helpful for Nepal business
opportunity and development.
• Low cost transaction: - Geographic nearness reduce the cost of trade
transaction for Nepal.
• Prospects of tourism: - cooperation among member countries will increase
in tourism matters. Nepal can get advantage of Buddhist’s pilgrimage
tourism.

Negative impact:
•No special privileges: - BIMSTEC does not provide any
preference or privileges to the least developed countries.
•Increase competition: - Nepal has to face competition from
strong countries like India, Thailand, etc.
•Limited factors of production: - Nepal has limited factors of
production in terms of skilled human resources, capital and
technology. This may limit the benefit of cooperation.
•Transit problem: - because of land lockedness, Nepal may face
transit problems.

Global business environment

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