ECONOMIC

ENVIRONMENT

4
Structure

Nature of the Economy

Structure of the Economy
Economic Policies
Economic Conditions
Summary
References
 Economic Environment 75

Business fortunes and strategies are influenced by the economic characteristics and economic
policy dimensions. The economic environment includes the structure and nature of the economy,
the stage of development of the economy, economic resources, the level of income, the distribution
of income and assets, global economic linkages, economic policies etc.
Important economic factors are described below.

NATURE OF THE ECONOMY

The general level of development of the economy has lot of implications for business – it
has significant bearing on the nature and size of demand, government policies affecting business
etc.
Countries, and even different regions within a country, show great differences in the level
and pattern of economic development.
A widely used method of classification of the economies is on the basis of the per capita
income (i.e., the average annual income per person). Accordingly, countries are broadly classified
as low income, middle income and high income economies by the World Bank.
Low Income Economies are economies with very low level of per capita income. All
economies with per capita GNI (Gross National Income — new term for GNP) of $1,045 or less
in 2014 are regarded as low income economies. There were 32 low income economies in 2012.
High Income Economies are countries with very rich income per capita. Those with a per

income economies which shelter about 37 per cent of the world population produce only
3 per cent of the global income. In 2005, India with 47 per cent of the population of the 54
LICs contributed 58 per cent of their GNI. High income economies with less than 16 per
The low income economies are sometimes referred to as the third world (the high
income and middle income economies representing the first and second worlds). Low
capita GNI of $12,736 or above in 2014 fall in the category of high income economies. In 2012,
there were 35 high income economies. There are mainly two categories of high income economies,
namely, industrial economies and oil exporters.

cent of the world population enjoy nearly 80 per cent of the global income.
Falling in between the low income economies and high income economies are the middle
income economies.
Middle Income Economies are subdivided into lower middle income (those with per capita
GNI between $1,046 and $4,086 in 2014) and upper middle income ($4,087 – $12,615)
economies. In 2012, there were 66 middle income economies (33 upper and 33 lower middle
income).
The numbers of countries given in this section includes only those with a populations of
more than 3 million. There are about 80 countries with populations of less than 3 million or with
sparse data.
Differences in the income levels between countries is not a true reflection of the purchasing
powers or living standards of people. For example, international comparisons of GNP and per
capita income in a nominal currency unit (say US dollar) do not reflect a realistic picture because
the purchasing power of the national currencies vary. Further, exchange rate changes would give
a misleading picture of the economic position of the country when the income is converted into
dollars from the national currency. For instance, if the national currency has depreciated against
the dollars at a rate higher than the GNI growth rate, when the GNI is converted into dollar, it
will show a decline even though the GNI has actually increased in terms of the national currency.
To overcome such problems, it has become common to estimate the GNI and per capita income
at purchasing power parity (PPP) too. For example, in 2015, the per capita income of India was
estimated at $1,688; in PPP terms it was estimated at $6,209. What it means is that a bundle of
goods which costs $1,688 in India will cost $6,209 in USA. In other words; having $1,688 in
India is equivalent to having $6,209 in USA.
 76 Business Environment

TABLE 4.1 : LEADING ECONOMIES IN 2015 AND 2020 (ESTIMATES AND FORECASTS)

Country Nominal GDP ($ billion) & Rank PPP GDP ($ billion) & Rank
2015 2020 2015 2020

GDP Rank GDP Rank GDP Rank GDP Rank

USA 17,968 1 22,294 1 17,968 2 22,294 2

China 11,385 2 17,100 2 19,510 1 28,921 1

Japan 4,116 3 4,747 3 4,842 4 5,512 4

Germany 3,371 4 4,005 4 3,842 5 4,514 5

United Kingdom 2,865 5 3,852 5 2,660 9 3,251 9

France 2,423 6 2940 7 2,647 10 3,160 10

India 2,183 7 3,444 6 8,027 3 12,706 3

Italy 1,819 8 2,144 8 2,174 12 2,520 12

Brazil 1,800 9 2,054 9 3,208 7 3,828 8

Canada 1,573 10 1,958 10 1,628 16 1,982 17

Korea 1,393 11 1,899 11 1,849 13 2,408 13

Australia 1,241 12 1,516 13 1,137 19 1,441 20

Russia 1,236 13 1,792 12 3,474 6 3,998 7

Spain 1,221 14 1,498 14 1,636 15 1,990 16

Mexico 1,161 15 1,496 15 2,220 11 2,844 11

Source: http://statisticstimes.com/economy

Note: Some countries within the first 15 ranks in 2020 do not figure in the Table as they were not within the 15 ranks in 2015.

Developing and Developed Economies/Countries is an often used classification of countries.

Low income and middle income economies are developing economies.
The developed economies as a group are sometimes referred to as
the North as they, with some exceptions like Australia and New
Zealand, are in the northern hemisphere and the developing economies
are referred to as the South as most of them are in the southern
hemisphere. The High Income OECD members (24) are industrial

The use of the terms developed and developing, though convenient, is not, however, intended
to imply that all economies in the group of developing are experiencing similar; development or
that other economies have reached a preferred or final stage of development. Classification by
economies whereas most other HICs are oil exporters.

income does not necessarily reflect development status. In the group of the high income economies,
the industrial economies are developed economies; all the oil exporters are not developed
economies (For example, Kuwait and UAE, though high income economies, are regarded as
developing economies). Besides income, some other criteria such as the sectoral distribution of
the income and employment generation, social development indicators etc., are applied to
consider whether an economy is a developed or developing one. Besides the income and social
dimensions, there are a number of common characteristics of developed economies. They are
characterised by widespread use of modern and sophisticated technology; continuous innovations;
fast diffusion of new ideas and technologies; low share of the primary sector (mainly agriculture)
and dominance of the tertiary (service) sector and secondary (mostly manufacturing) sector in the
income and employment generation; market-friendly economic policies; comparatively open
trade and investment policies; democratic rights; competition and consumer choice etc.
 Economic Environment 77

Sometimes, the terms less developed countries (LDCs) and more developed countries (MDCs)
are used to refer to the developing and developed countries. The use of the term underdeveloped
to refer to the developing countries is also common.
Low income is just an indication of deprivation people in developing countries. Low income
prevents access to even basic necessities, not only better and modern amenities.
Further, in the developing economies, the inequality in the distribution of income is very
high and as a result a large proportion of the population lives in object poverty. Although many
countries have achieved considerable reduction in poverty, the incidence of poverty is very high
in many countries. They are generally characterised by high birth and population growth rates.
Death rates are also higher than in developed countries.
Developing countries are generally characterised by the prevalence of rudimentary and
traditional methods and obsolete technology.
The group of developed as well as the developing countries is a heterogeneous mixture.
Because of the large number, the developing countries exhibit a very diverse spectrum.
Within the category of low income economies, for example, sometimes a special category
by name least developed economies is identified. Most of the least developed economies suffer
from one or more of the following constraints: a very low GNP per capita, landlocked remote
insularity, desertification and exposure to natural disasters. According to the Human Development
Report 2015, there were 48 least developed countries including Bangladesh, Bhutan, Nepal,
Maldives, Mali, Uganda, Myanmar, Sudan, Zambia, Zimbabwe, and Yemen.
There are, on the other hand, developing economies which have been experiencing rapid
industrialisation such as Hong Kong, South Korea, Singapore and Taiwan (i.e., Taipei, China) –
the Asian Tigers. They are sometimes referred to as newly industrialising economies. Some
publications use the term newly industrialised (instead of industrialising) to refer to them. Now,

are amongst the largest economies of the world. In terms of the size of

was the 2 nd and India the 4 th largest economy while their per capita
income rankings were very poor. There are, however, many
Although the per capita income is very low, some developing countries

the GNI, in 2005 China ranked 4 th and India 10th. In PPP terms, China
People’s Republic of China is regarded as a newly industrialising economy. The newly industrialising

developing economies with very small per capita income and GNI.
economies show a very high growth rate, over a long period, of the economy and per capita
income. They have also been presenting very impressive export performance.
Those economies which are in a transition from the centralised economic system to the
market economy are referred to as transition economies. The transition economies, thus, are the
former communist/socialist economies (erstwhile USSR, i.e., the present CIS) and East European
countries which are undergoing an economic (system) transition. They also represent a transition
from authoritarianism to democracy.
As indicated earlier, income is not the only criterion to consider a country as developed.
There is indeed some important difference between economic growth and development. An
increase in income is an indication of economic growth. Economic development, besides growth,
has some qualitative dimensions too, such as the distribution of income, standard of living,
composition of output, character of working conditions and overall improvement in economic
welfare.
The differences in the income and development levels have important implications for
business.
In a developing country, the low income may be the reason for the very low demand for
a product. The sale of a product for which the demand is income-elastic naturally increases with
an increase in income. But a firm is unable to increase the purchasing power of the people to
generate a higher demand for its product. Hence, it may have to reduce the price of the product
to increase the sales. The reduction in the cost of production may have to be effected to facilitate
price reduction. It may even be necessary to invent or develop a new low-cost product to suit
78 Business Environment

the low income market. Thus, Colgate designed a simple, hand-driven, inexpensive ($10) washing
machine for low-income buyers in less developed countries. Similarly, the National Cash Register
Company took an innovative step backward by developing a crank-operated cash register that
would sell at half the cost of a modern cash register and this was well received in a number of
developing countries.
In countries where investment and income are steadily and rapidly rising, business prospects
are generally bright, and further investments are encouraged. There are a number of economists
and businessmen who feel that the developed countries are no longer worthwhile propositions
for investment because these economies have reached more or less saturation levels in certain
respects.
In developed economies, replacement demand accounts for a considerable part of the total
demand for many consumer durables whereas the replacement demand is negligible in the
developing economies.
In most of the countries, the service sector
is the largest and fastest growing sector.
The services sector now contributes
nearly 70 per cent of the world GDP.

STRUCTURE OF THE ECONOMY

The structure of the economy – factors such as contribution of different sectors like primary
(mostly agricultural), secondary (industrial) and tertiary (secondary) sectors, large, medium, small
and tiny sectors to the economy, and their linkages, integration with the world economy etc. –
are important to business because these factors indicate the prospects for different types of
business, certain factors which affect the business etc. For example, if an economy is highly
integrated with the global economy it will be quickly affected by developments in the global
economy.
Normally, as an economy develops, the share of the primary sector in the GDP and
employment declines and those of the other sectors increase. After a certain stage, the share of
the manufacturing sector may also decline.
The developed economies are primarily service economies in the sense that the service
sector generates bulk of the employment and income. The contribution of services to GDP and
employment is substantially high in, particularly, the developed economies.

TABLE 4.2 : CONTRIBUTION OF SERVICES TO VALUE ADDED AS PERCENTAGE OF GDP

Region/Country 1980 1990 2010

World 56 60 70

High Income Economies 59 64 73

Low & Middle Income Economies (Developing Countries) 42 46 55

India 39 42 55

Source: World Bank, World Development Report, 1999, 2000 and 2012.

The nature of each sector has business implications. For example, although India is one of
the largest producer of several agricultural products, because of the small and fragmented nature
of the land holdings, efficient collection and processing of the produce become difficult. The land
holding pattern also makes productivity improvements difficult. It also has implications for the
agricultural inputs business.
 Economic Environment 79

The tremendous growth of trade in services and, more recently, of electronic commerce, is

share of services in the GDP of India increased

growing very fast in the developing world. The

from 39 per cent in 1980 to 54 per cent in 2005.

developing economies is lower than in the
developed ones, the service sector has been
Although the share of services in the GDP of
part of a new trade pattern. Exports of commercial services have been growing on every continent
(particularly Asia) throughout the 1990s and later. This change has its own special significance,
as services are frequently used in the production of goods and even other services. Enhanced
international competition in services means reductions in price and improvements in quality that
will enhance the competitiveness of downstream industries. Both industrial and developing
economies have much to gain by opening their markets. Developing countries would derive large
gains from an easing of barriers to agricultural products and to labour-intensive construction and
maritime services. Over the longer term, electronic business will loom large as an area where
expanding opportunities for trade require an expanding framework of rules.1

ECONOMIC POLICIES
There are several economic policies which can have a very great impact on business.
Important economic policies are industrial policy, trade policy, foreign exchange policy, monetary
policy, fiscal policy, foreign investment and technology policy.
Some types or categories of business are favourably affected by government policy, some
adversely affected, while it is neutral in respect of others.

opportunities. It has at the same time tremendously increased the

some of their old businesses, unable to be competitive in the new

competition tending to make survival of the fittest order. While
The liberalisation has enormously expanded the business

many companies entered new businesses, many exited from

Similarly, an industry that falls within the priority sector in terms of the government policy
may get a number of incentives and other positive support from the government, whereas those

environment. A number of companies have done both.

industries which are regarded as inessential may have the odds against them.
Industrial Policy: Industrial policy can even define the scope and role of different sectors
like private, public, joint and cooperative, or large, medium, small and tiny. It may influence the
location of industrial undertakings, choice of technology, scale of operation, product mix and so on.
In India, until the liberalisation ushered in 1991, the scope of private sector, particularly of
large enterprises, was very limited. The development of 17 of the most important industries was
reserved for the state. In the development of another 12 major industries, the state was to play
a dominant role. In the remaining industries, cooperative enterprises, joint sector enterprises and
small-scale units were to get preferential treatment over large entrepreneurs in the private sector.
Further, the production of a large number of items was reserved for the exclusive manufacture
of the small-scale sector. Even in respect of industries which were open to the private sector, entry
and growth were regulated by licensing and also by, in the case of certain categories of large
firms, the MRTP Act. The government policy, thus, limited the scope of private business. However,
the new policy ushered in July 1991 has wide opened all but a few industries for the private
sector, dramatically changing the business environment. In the pre-liberalisation era, the government
policy was a severe constraint on the portfolio and growth strategies of companies.
Trade Policy: The trade policy can significantly affect the fortunes of firms. For example, a
restrictive import policy, or a policy of protecting the home industries, may greatly help the
import competing industries, while a liberalisation of the import policy may create difficulties for
such industries.
Trade policy is, often, integrated with the industrial policy. As part of the economic
liberalisation and WTO compliance, India has very substantially liberalised imports. Domestic
firms now face increasing competition from imports. In other words, they face a growing
international competition in the domestic turf. This implies that in many cases Indian firms which
do not come up to the international standards – in quality, cost, marketing, after-sales service etc.
– will not be able to survive. And a firm which effectively fights foreign competition in the home
market may be provoked to think ‘why not compete with foreign firms in the foreign markets.’
 80 Business Environment

Liberalisation of imports facilitate global sourcing and this could help many Indian firms to
become more competitive.
Foreign Exchange Policy: Exchange rate policy and the policy in respect of cross-
border movement of capital are important for business. The abolition/liberalisation of exchange
controls all around the world since the late 1970s has encouraged cross-border movement of
capital, for example.

TABLE 4.3 : INDIAN ECONOMIC REFORMS AND ENVIRONMENTAL CHANGE

Pre-1991 Situation Post-1991 Situation Consequence/Implication

of the Change

Private sector excluded from All but a few industries are Enormous scope for private investment.
many important industries. In open to the private sector. Considerable freedom to decide the
a number of other important portfolio strategy. Competition increases
industries, public sector had substantially and public sector loses its
priority to establish new monopoly/dominant positions.
undertakings.

Entry, involving investment All but a few industries are Reinforces the above factors.
above specified exemption free from licensing.
limit, was restricted by
licensing.

Entry of large firms was No MRTP Act restrictions on Reinforces the above factors.
subject to MRTP Act entry.
restrictions, besides licensing.

Licensing and MRTP Act All but a few industries are free Companies can grow organically and by
restrictions on growth of from licensing restrictions on acquisitions. Firms will grow in size and
existing undertakings. growth. No MRTP Act several industries will witness
restrictions on growth. consolidation of firms. A small number of
firms would eventually dominate the
industry in several cases.

Limited scope for foreign Foreign capital and technology Entry of many foreign firms by green-
capital and technology. policies have been field projects and acquisitions.
substantially liberalised. Opportunity for Indian firms for acquiring
technology and establishing joint
ventures. Substantial increase in
competition.
Imports substantially
Highly restrictive import liberalised. User industries can benefit by global
policy. sourcing. Import competing firms face stiff
competition. Global competition emerges in
the Indian market. Indian firms will have to
improve their competitiveness and become
more innovative to face the global
competition.

Foreign Investment and Technology Policy: Until the late 1980s, when the worldwide trend
towards liberalisation set in, foreign capital and technology were under severe restrictions in
many developing and socialist/communist countries.
Restrictions on foreign capital and technology constrain not only the foreign firms but also
the domestic firms because it may come in their way of acquiring the technology of their choice
from the best source. Restrictions on foreign capital may affect the growth plans of firms, including
establishment of joint ventures. India has restrictions on foreign investment by Indian companies.
 Economic Environment 81

Huge investments in infrastructural and other vital sectors can significantly improve the
environment for industrial development, as in the case of China.
A liberal foreign investment and technology policy will increase domestic competition and
would put many domestic firms, which were shielded from foreign competition, in to problems.
At the same time, it would benefit many domestic firms – by permitting global sourcing of capital
and technology, by increasing the quantity and quality of domestic supply of many goods and
services etc.
Fiscal Policy: Government’s strategy in respect of public expenditure and revenue can have
significant impact on the business. The pattern of public expenditure may affect the development
of various regions, sectors and/or industries differently. Such is the case with the taxation policy.
Governments often use tax incentives or disincentives to encourage or discourage certain activities.
For example, when an industry suffers from recession, a reduction of taxes like excise duty or sales
tax may help improve the demand. A reduction of rates of direct taxes like personal income tax
and corporate tax may help increase, because of the resultant increase in the disposable income,
the spending in the economy leading to an increase in demand. Governments, central as well
as provincial, of many countries offer different fiscal incentives to woo industries.
Monetary Policy: The central bank, by its policy towards the cost and availability of credit,
can significantly influence the savings, investments and consumer spending in the economy.
Depending on the conditions of the economy and the general economic policy of the government,
the central bank (called the Reserve Bank in India) may adopt an expansionary or contractionary
or neutral monetary policy. For example, a one percentage point reduction in the Cash Reserve
Ratio or Statutory Reserve Ratio (SLR) will significantly increase the loanable funds with the
commercial banking system. An increase in these ratios will have the opposite effect. Monetary
policy may also be pressed into action to influence the exchange rate of the currency.

ECONOMIC CONDITIONS

generates about 28 per cent of the world income buys about 18

per cent of the goods exported by all other nations and supplies
The US with less than 5 per cent of the world population
General economic conditions affect business. Economies pass through periods of boom and

about 10 per cent of the goods other nations’ import.

recession. A boom is characterised by high level of output, employment and rising demand and
prices. A recession has the opposite of these characteristics.
If a region depends to a significant extent on any particular industry or sector, business in
that region would be significantly affected by fortunes of that industry. The economic and
business prospects in major oil exporting countries depend to a very great extent on the crude
oil price. The economic condition of a region may be linked to the prices of major crops of the
region. For example, because of the fall in the prices, the coconut farmers of Kerala were
estimated to have lost about ` 10,000 crore between 1997-2000. Similarly, the rubber farmers
lost an estimated ` 1,500 crore during the 5 year period ended 2000. The price of several other
commercial crops also crashed. This situation has very adversely affected the general economic
and business conditions in the State.
A particular economic condition may be widespread – international or national – or may
be confined to a region. For example, during 1997-98 when several South East economies
underwent a crisis, it affected the business of even firms in a number of other countries. The
Indian steel exports to South East Asia, for example, suffered a severe setback. This prompted the
Indian steel industry to very seriously consider the US and European markets and it was largely
successful in its export to these markets – in 1998-99 steel exports to the US surged by over
100 per cent and to Europe nearly 90 per cent.
 82 Business Environment

As Table 4.1 indicates, the US economy accounts for well over one-fourth of the global
economy. This implies that the growth trend of the US economy can affect the overall growth
trend of the global economy by more than 25 per cent. For example, in an year even if the rest
of the global economy remains stagnant, on the whole, if the US economy grows by two per cent,
it will have the effect of the world economy growing by about half a per cent. A recession in
the US economy will have the opposite impact. As the US economy is highly integrated globally,
the economic conditions in the US can have repercussions in other economies. See Box 1.3
(Chapter 1).
The current account and balance of payments positions of a country can significantly
influence certain economic policies and business environment. For example, a sustained current
account surplus may encourage the government to liberalise imports and capital movements.
Exports and imports of a country are generally affected by a number of domestic and
international economic conditions. For example, analysis of empirical data reveals that India’s
export performance is affected by certain important factors. They include a set of external factors,
a set of internal factors and the real exchange rate.
The external factors are:
• The rate of growth of the economies of the importing countries
• The rate of growth of the world trade
• The rate of change in the price level in the importing country
The internal factors are:
Capital and trade flows and
Balance of Payments are

and global economic and

affected by both domestic

• The rate of growth of the Indian economy

• The rate of change in the domestic price level
The most favourable condition for the growth of Indian exports is a combination of the high
other factors.

growth rates for all the three external factors, a high growth rate with price stability for the Indian
economy and a fall in the real exchange rate for exports (RERx). If some of the above conditions
are satisfied and other conditions are not favourable, the export performance should be expected
to be determined by the relative strengths of the favourable and unfavourable factors. We will
have the worst situation when the reverse of the ideal combination of conditions occurs.
The analysis of the impact of the interrelationship of the above-mentioned variables on
India’s exports for a period of nearly two decades by G.C. da Costa has revealed the following:2
1. Good growth in the economies of the industrial countries has been associated with good
growth in India’s exports. This has been very pronounced in those years characterised
by good growth in the world trade, sharp fall in the RERx and relative price stability in
India.
2. Low growth or recessionary conditions in the economies of the industrial countries,
along with depressed world trade together with even moderate increases in the RERx did
not provide any competitive edge to the country’s exports—the volume of India’s exports
broadly kept pace with the growth in the economies of the industrial countries.
3. In some years, even when the growth in the economies of the industrial countries was
low, the country experienced good growth in the volume of exports because of the
sharp decline in the RERx.
4. During certain periods, despite modest growth in the industrial countries and in world
trade, the volume of India’s exports fell because of the rise in the RERx.
 Economic Environment 83

Besides import regulations, the important factors which determine the volume of India’s
imports are:3
1. The rate of growth of the Indian economy—high rate of growth, ceteris paribus, is
associated with rise in imports.
2. The relative price of imports (i.e., the relative change in the prices of imports and
domestic goods). An increase in the imports, ceteris paribus, is associated with a fall in
the relative price of imports.
From the above two factors, it can be inferred that the volume of imports tends to be very
high when there is a conjecture of high rate of economic growth and a sharp fall in the relative
price of imports and vice versa.
There are, thus, a number of economic factors, many of which form a complex web, which
affect the business.

SUMMARY
Business fortunes and strategies are influenced by economic characteristics and economic policy
dimensions such as the structure and nature the economy, the stage of development of the economy,
economic resources, the level of income, the distribution of income and assets, global economic
linkages, economic policies etc. Important economic environmental factors are listed in Table 4.4.

TABLE 4.4 : IMPORTANT FACTORS OF ECONOMIC ENVIRONMENT

Structure and Nature Economic Economic Global

of Economy Conditions Policies Linkages

 Level of development  Income levels  Industrial policy  Magnitude and nature

of the economy  Distribution of income  Trade policy of cross-border:
 Sectoral composition  GDP trends  Monetary policy Trade flows
of output Financial flows
 Sectoral growth trends  Fiscal policy
 Inter-sectoral Membership of WTO,
 Demand and supply  Foreign exchange policy 
linkages IMF, World Bank, trade
trends  Foreign investment and
blocs etc.
 Price trends technology policy
 Trade and BoP trends
 Foreign exchange
reserves position
 Global economic trends

REFERENCES
1. Cited from Different Sources by World Bank, World Development Report 2000, New York, Oxford
University Press, 2000, p. 33.
2. G.C. DaCosta, “Balance of Payments: Pitfalls on the Path of Adjustments”, The Economic Times,
November 21, 1991.
3. Ibid.

—F—F—F—
 POLITICAL AND
GOVERNMENT
ENVIRONMENT

5
Structure

Functions of State
Government and Legal Environment
Economic Roles of Government in India
Summary
References
Political and Government Environment 85

The fact that it is often politics that determines economic and business policies highlights

characteristics and policies of the political parties, the nature

government environment encompassing the economic and

very considerably between different nations, between different

business policies and regulations. These factors may vary
of the Constitution and government system and the
The political environment includes factors such as the
the critical importance of the political environment to business. Dimock observes: “The two most
powerful institutions in society today are business and government; where they meet on common

provinces of the same nation and also over time.

ground – amicably or otherwise – together they determine public policy, both foreign and
domestic, for a nation”.1
Major economic policy decisions often have political underpinnings. The adoption, in the
early 1950s, of the principle of socialist pattern of society as the socio-economic philosophy by
the Congress party, which ruled India until 1995 except for a brief period (1977-1980), was
mainly responsible for the public sector dominated development strategy followed in India until
the early 1990s. It is indeed the dramatic changes in the political environment in the erstwhile
USSR and East European countries that gave rise to drastic changes in their economic policies in
the late 1980s. And these developments have encouraged a revolutionary change in India’s
economic policies in 1991. See Box 5.1.

BOX 5.1 : POLITICAL ENVIRONMENT AND ECONOMIC REFORMS

Despite his pragmatic views, dynamism and the dream of the 21st century India, Prime Minister Rajiv Gandhi
could not introduce any far-reaching changes even with the candid mandate that overwhelmed him in the election
of 1984. But, the Congress government under Narasimha Rao did it in 1991 and the successive non-Congress
Governments have carried further forward the economic liberalisation. Why? The changing global scenario,
particularly the developments in the communist countries, provides the answer.
There were considerable differences between the Rajiv era and 1991. Rajiv Gandhi who assumed office in
1984 had given great hopes to the teeming millions of India. No wonder, the Congress party led by the young
prime minister who promised to mould India for the 21st century was given a thumping victory by the grief-
stricken electorate.
Rajiv who was well aware of the damages done by the unpragmatic regulations was eager to radically reform
the economic regime. Hence, many in India and abroad naturally expected that he would introduce farreaching
reforms. But alas, the great expectations were belied soon as he succumbed to what he thought, or was made to
believe, was political prudence. The word socialism was still dominant on the political surface. The leftists were
severely opposed to even minor economic liberalisations and deregulations. To speak against socialism or public
sector was regarded a sin. Many in the Congress party, who thought that socialism and public sector still had a
magic spell, thought that it was still necessary to swear by these ideas which were losing glamour in many other
countries. Although the number of people who were in favour of deregulation and privatisation couldbe more
than those who opposed it, the latter was very vociferous and therefore a determinant force.
In short, what was thought to be political expediency prevented even Rajiv from making any major departure
from the old regime and, therefore, dogmatism continued to dominate pragmatism. And what started with a big
bang ended with a whimper.
Of course, Rajiv carried further forward, with a little more vigour, the policy of piecemeal economic
liberalisations started since the early 1980s. These have had favourable effects. These measures were, however,
quite insufficient to rejuvenate the economy. Even the perestroika and glasnost in the USSR and the developments
in the Eastern Europe and China, let alone the developments in several other countries, failed to make Indians
socialist political genera either to openly admit the folly or to rethink. And Indians development continued to be
handicapped by the irrelevant political dogmatism which was being discarded by others.
The environment in 1991, however, has been quite different and conducive for a major change. Mikhail
Gorbachev and his perestroika and glasnost send a message to the people in the Eastern Europe that the USSR
would not any more use its mighty power in these countries to suppress the democratic rights. People in these
countries wanted to free themselves from the decades old deprivation and suppression. The fall of the Berlin Wall
was symbolic. Despite the Tiananmen square tragedy in China (gunning down of students who demonstrated
demanding democratic freedom), people in the Eastern Europe revolted against the wall of authoritarianism and
oppression, demanding bread and freedom. Even the very words communism and socialism began to be opposed,
tooth and nail, by the very people who were put under these regimes for quite a long time.
86 Business Environment

These nations have been seeking large financial, technical and managerial assistance not only from such
institutions as the IMF and the World Bank, which had been described by many leftists in the past as organs of
capitalist imperialism, but also from the capitalist governments for reconstructing the economies impoverished
by decades of communist rule. Gorbachev has gone on knocking at the doors of capitalist countries, known as
group of seven (G7), for help. Some of the debates in the G7 and in the Western media as to whether the USSR
should be given assistance or what should be the extent and mode of help etc. should have been embarrassing for
the aid seeker but Gorbachev consoled, quite rightly, that it was for the economic salvation of the millions of his
countrymen that he has been doing it.
The communist countries had taken up privatisation at an amazing speed. Their economies have been opened
up even for multinationals. Consequently, there has been an influx of investment. In short, in the communist
countries, the clock turned a full round.
There was a time when certain political parties all over the world put the blame for the world economic
disorder on the capitalist nations, particularly the USA. And now, nations or provinces which have been ruled by
these very parties seek varied assistance of American capitalism and the like.
In short, the global political environment in 1991 was quite different from that during the Rajiv era. At the
same time, economic crisis in India was assuming more serious proportions demanding effective measures for
economic rejuvenation and survival in a highly competitive and transnationalising global environment. And the
emerging global political environment made the political decision of a dramatic change in the economic policy
easy in India. Thus, the economic and political factors acted and reacted upon each other resultingin a drastic
change in the economic policy and direction of the nation.

Courtesy: Francis Cherunilam, Economic Reforms in India and Abroad (Himalaya Publishing House, Mumbai, 1992).
foreign capital and technology, fiscal
Important economic policies such as

policy and foreign trade policy are

industrial policy, policy towards

Peter Drucker in the Management Challenges for the 21st Century observes: “Even within
transnational economic units, national politics still overrule economic rationality. Despite the
European Economic Community, for instance, it has proven all but politically impossible to close
often political decisions.

a totally redundant plant in Belgium and shift the work to a French plant of the same company
only thirty miles away, but on the other side of a national border.”2
Many political decisions have serious economic and business implications. The economic
policy of the ruling party is very important. In the past, communists and other leftists favoured
state capitalism and were against private capital, particularly foreign.

FUNCTIONS OF STATE
There are very divergent perceptions of the functions of the state. On the one extreme is the
view that “the government that governs is the best” and on the other extreme is the demand for
government ownership or control of almost everything. Further, the philosophy regarding the
state’s role in the society has undergone significant changes over time in many countries over
time. A number of countries are, in fact, transitioning from Marx to the market.
The economic role of the state has been recognised for several centuries now. “States have
come in all shapes and sizes, depending on a mix of factors including culture, natural endowments,
opportunities for trade and distribution of power.”3 Seventeenth century mercantilists wanted the
state to play a major role in guiding trade. Adam Smith’s Wealth of Nations, published in the late
eighteenth century, however, popularised the view that economic growth and welfare are best
achieved by the free market mechanism and the state should confine itself to certain core
functions such as law and order defence etc. and enforcement of contracts, essential for the
proper functioning of the market economy. “But even then, state intervention went on to play
a vital, catalytic role in the development and growth of markets in Europe, Japan and North
America.”4 Even in the United States, which is regarded as the citadel of market economy, State
has been playing an active role in the development of several industries/sectors.
Political and Government Environment 87

BOX 5.2 : STATE AND GOVERNMENT : SOME CONCEPTS

State, in its wider sense, refers to a set of institutions that possess the means of legitimate coercion, exercised
over a defined territory and its population referred to as society. The state monopolises rulemaking within its
territory through the medium of an organised government.
The term government is often used differently in different contexts. It can refer to the process of governing,
to the exercise of power. It can also refer to the existence of that process, to a condition of “ordered rule.”
“Government” often means the people who fill the positions of authority in a state. Finally, the term may refer to
the manner, method, or system of governing in a society: to the structure and arrangement of officesand how they
relate to the governed. While keeping these distinctions in mind, we also use the terms state and government
colloquially and sometimes interchangeably—as they are often used in discussion and writing around the world.
Government is normally regarded as consisting of three distinct sets of powers, each with its assigned role.
One is the legislature, whose role is to make the law. The second is the executive (sometimes referred to as “the
government”), which is responsible for implementing the law. The third is the judiciary, which is responsible for
interpreting and applying the law.
Classifications of government are many but have tended to concentrate on two criteria; the arrangement of
offices, which is more narrow in conception, and the relationship between government and the governed.
The first classification is based on the relationship between the executive and the legislature. In a
parliamentary system the executive’s continuance in office depends on its maintaining the support of the legislature.
Members of the executive are commonly also members of the legislature. A prime minister may be the most
powerful member of the executive, but important decisions within the executive are usually made collectively by
a group of ministers. In a presidential system the executive’s position is independent of the legislature. Members
of the executive are not normally also members of the legislature, and ultimate decision making authority within
the executive lies with one person, the president.
The second classification concentrates on the distribution of power between levels of government. Ina unitary
state, all authority to make laws is vested in one supreme legislature whose jurisdiction covers the whole country.
Local legislatures may exist, but only with the sufferance of the national legislature. In a federal state, local
legislatures are guaranteed at least a measure of autonomous decision making authority. In aconfederation, a
group of sovereign states combine for specified purposes, but each state retains its sovereignty.

Courtesy: World Bank : World Development Report, 1997.

In most modern economies, the state’s regulatory role is now broader and more complex
than ever before, covering such areas as the environment and the financial sector, as well as more
traditional areas such as monopolies. The design of regulation needs to fit the capability of state
regulatory agencies and the sophistication of markets, and give greater emphasis to personal
responsibility.
The first half of the twentieth century witnessed an increase in the state intervention in the
economy. The Russian Revolution of 1917 and the consequent establishment of communist rule
in the USSR had great influence across the globe on the thinking of the state’s role. The Great
Depression in USA (which eventually spread to other countries), that set in with the Wall Street
collapse of 1929 and assumed terrific proportions in the early 1930s, brought to the fore the
important role the state has in a capitalist economy. Shortage of entrepreneurship and other
development resources and ideological flavour encouraged many developing countries to assign
a very important role to the state in the socio-economic system.
important sectors are effectively
Even in market economies,

The post second world war paradigm “coalesced around three basic themes, all of which
regulated by the state.

commanded broad, if not uniform, agreement. This three-pillared consensus remained largely
undisturbed until the first oil price shock of 1973. First was the need to provide welfare benefits
to those suffering from transitory loss of income or other deprivation. Second was the desirability
of a mixed public-private economy, which would often mean nationalising a range of strategic
industries. Third was the need for a coordinated macroeconomic policy, on the grounds that the
market alone could not deliver stable macroeconomic outcomes that were consistent with
88 Business Environment

individuals’ objectives. In time, the goals of macroeconomic policy were made explicit: full
employment, price stability, and balance of payments equilibrium.
The government expenditure

the GDP in the developed and

forms a substantial percentage of

States, thus, took on new roles and expanded existing ones. By mid-century, the range of
tasks performed by public institutions included not only wider provision of infrastructure and
developing countries.

utilities, but also much more extensive support for education and health care.”5
A reversal of this trend set in the 1980s. Communism collapsed in the USSR and East Europe.
China started economic reforms in the late 1970s and widely opened the economy for foreign
investment in the eighties. Privatisation caught on at an amazing speed in many developed
market economies and developing economies.

CLASSIFICATION OF FUNCTIONS OF STATE

Functions of the state varies from basic minimum requirements to active participation in
several other sectors. Figure 5.1 classifies the functions of government along a continuum, from
activities that will not be taken at all without state intervention to activities in which the state
plays an active role in coordinating markets or redistributing assets.
• The basic functions include the pure public goods such as the provision of property
rights, macroeconomic stability, control of infectious diseases, safe water, roads, and
protection of the destitute. In many countries, the state is not even providing these.
Recent reforms have emphasised economic fundamentals. But social and institutional
(including legal) fundamentals are equally important to avoid social disruption and
ensure sustained development.
• Going beyond these basic services are the intermediate functions, such as management
of externalities (pollution, for example), regulation of monopolies, and the provision of
social insurance (pensions, unemployment benefits). Here, too, the government cannot
choose whether, but only how best to intervene, and government can work in partnership
with markets and civil society to ensure that these public goods are provided.

Addressing market failure Improving equity

Functions of the State (Adopted from World Bank,

Minimal Providing pure public goods Protecting the

functions poor
Defence
Law and order Antipoverty
Property rights programmes
World Development Report, 1997)

Macroeconomic management Disaster relief

Public health

Intermediate Addressing Regulating Overcoming Providing social

functions externalities monopoly imperfect information insurance
Providing
Basic Utility Insurance (health, social insurance:
Redistributive
education regulation life, pensions) pensions
Redistributive
Environmental Antitrust Financial Regulation Family allowances
pensions
Protection Policy Consumer Protection Unemployment
Family allowances
insurance
Unemployment
insurance
Activist Redistribution
Coordinating private activity
functions
Fostering markets Asset
Fig. 5.1 :

Cluster initiatives redistribution

Political and Government Environment 89

• States with strong capability can take on more activist functions, dealing with the problem
of missing markets by helping coordination. East Asia’s experience has renewed interest
in the state’s role in promoting markets through active industrial and financial policy.6

Reinvigorating the State’s Capability

Reinvigorating the state’s capability can be achieved through the following:7
• Rules and Restraints: Mechanisms for enforcing the rule of law, such as an independent
judiciary, are critical foundations for sustainable development. Along with appropriate
separation of powers and the presence of watchdog bodies, they also restrain arbitrary
behaviour.
• Competitive Pressure: Competitive pressure can come from within the state bureaucracy,
through recruitment of civil servants on the basis of merit. It can come from the domestic
private sector, through contracting out for services and allowing private providers to
compete directly with public agencies. Or it can come from the international marketplace,
through trade and through the influence of global bond markets on fiscal decisions.
• Voice and Partnership: The means to achieve transparency and openness in modern
society are many and varied—business councils, interaction groups, and consumer groups,
to name a few. Institutional working arrangements with community groups can contribute
to greater state effectiveness by giving citizens a greater voice in the formulation of
government’s policies. And partnerships between levels of government and with
international bodies can help in the provision of local and global public goods.

THE STATE, INSTITUTIONS, AND ECONOMIC OUTCOMES

The State sets the formal rules—laws and regulations—that are part and parcel of a country’s
institutional environment. These formal rules, along with the informal rules of the broader society,
are the institutions that mediate human behaviour. But the state is not merely a referee, making
and enforcing the rules from the sidelines; it is also a player, indeed often a dominant player,
in the economic game. Every day, state agencies invest resources, direct credit, procure goods
and services, and negotiate contracts; these actions have profound effects on transactions costs
and on economic activity and economic outcomes, especially in developing economies. Played
well, the state’s activities can accelerate development. Played badly, they will produce stagnation
or, in the extreme, economic and social disintegration. The state, then, is in a unique position:
not only must it establish, through a social and political process, the formal rules by which all
other organisations must abide; as an organisation itself, it, too, must abide by those rules.8

ECONOMIC ROLES OF GOVERNMENT

The Government plays an important role in almost every national economy of the world.
The scope of government regulation of business

conduct of the business and final results to exit.

can extend from entry into business through

Even in the countries described as capitalist economies or market economies, “a substantial

share of the nation’s product goes to satisfy public wants, a substantial part of the private income
originates in the public budget and public tax and transfer payments significantly influence the
state of private income distribution. Moreover, the budget policy affects the level of employment
and prices in the private sector.”9
In the predominantly private enterprise economies, government interference is necessitated
by the fact, besides the socio-political ideological reasons, if any, “that the market mechanism
alone cannot perform all economic functions. Public policy is needed to guide, correct and
supplement it in certain respects. It is important to realise this fact since it implies that the proper
size of the public sector is, to a significant degree, a technical rather than ideological issue.”10
 90 Business Environment

TABLE 5.1 : IMPACT OF STATE

Ways of State Harmful Impact

Promoting Development of State

 By providing a macroeconomic  The wrong kind of rules can actively discourage the creation of wealth.
and a microeconomic For example, the state may penalise private wealth by distorting prices–
environment that sets the right through an overvalued currency, for example, or by creating agricultural
incentives for efficient economic marketing boards that tax farmers’ output and give them little in return.
activity
 By providing the institutional  Even if the rules themselves are benign, they may be applied by public
infrastructure–property rights, organisations–and their employees–in harmful fashion. They may, for
peace, law and order, and rules– example, impose huge transactions costs, in the form of red tape or
that encourages efficient long- bribery, on entrepreneurs setting up new businesses or restructuring old
term investment, and ones.
 By ensuring the provision of  But potentially the largest source of state-inflicted damage is uncertainty.
basic education, health care, and If the state changes the rules often, or does not clarify the rules by which
the physical infrastructure the state itself will behave, businesses and individuals cannot be sure today
required for economic activity, what will be profitable or unprofitable, legal or illegal, tomorrow. They will
and by protecting the natural then adopt costly strategies to insure against an uncertain future–by entering
environment. the informal economy, for example, or sending capital abroad–all of which
impede development.

Courtesy: World Bank, World Development Report, 1997

Governments normally play four important roles in an economy, viz., regulation, promotion,
While the state control of economy is a universal phenomenon,
the extent and nature of the control vary widely between nations,
depending upon the nature and stage of development of the
economy, the behaviour of the private sector, the political

entrepreneurship, and planning.

philosophy, social attitudes, administrative system etc.

As stated above, the extent and nature of these roles in a given situation depend on a
number of factors. Some salient features of these roles are outlined below:

Regulatory Role
Government regulation of the business may cover a broad spectrum extending from entry
into business to the final results of a business. The reservation of industries to small-scale, public
and cooperative sectors, licensing system etc. regulate the entry. Regulations of product mix,
promotional activities etc. amount to regulation of the conduct of business.
Results of business operations may be regulated by such measures as ceilings on profit
margins, dividend etc. The State may also regulate the relationship between enterprises. Examples
of this include restrictions on intra-corporate investments, interlocking of directors and appointment
of sole selling agents.
Government regulation of the economy may be broadly divided into direct controls and
indirect controls.
Indirect controls are usually exercised through various fiscal and monetary incentives and
disincentives or penalties. Certain activities may be encouraged or discouraged through monetary
and fiscal incentives and disincentives. For instance, a high import duty may discourage imports
and fiscal and monetary incentives may encourage the development of export-oriented industries.
The direct administrative or physical controls are more drastic in their effect. The distinguishing
characteristic of direct controls is their discretionary nature. They can be applied selectively from
firm to firm and industry to industry, at the discretion of the State.
Regulation of the business had been rampant in the developing countries. Since the late
1980s, however, a deregulation trend has set in. This has drastically transformed the competitive
environment and has given an impetus to globalisation.
Political and Government Environment 91

Promotional Role
The promotional role played by the Government is very important in developed countries
as well as in the developing countries. In developing countries, where the infrastructural facilities
for development are inadequate and entrepreneurial activities are scarce, the promotional role of
the Government assumes special significance. The State will have to assume direct responsibility
to build up and strengthen the necessary development infrastructures, such as power, transport,
finance, marketing, institutions for training and guidance and other promotional activities.
The promotional role of the State also encompasses the provision of various fiscal, monetary
and other incentives, including measures to cover certain risks, for the development of certain
priority sectors and activities.

Entrepreneurial Role
In many economies, the State also plays the role of an entrepreneur – establishing and
operating business enterprises and bearing the risks. A number of factors such as socio-political
ideologies; dearth of private entrepreneurship; neglect of certain sectors, like the unprofitable
sectors, by the private entrepreneurs; absence of or inadequate competition in certain segments
and the resultant exploitation of consumers, etc. have contributed to the growth of State owned
enterprises (SOEs) in many countries.
There was a tendency in many developing countries to assign a dominant place to the public
sector. Public sector dominance was usually established in capital-intensive projects like steel,
capital goods, petrochemicals and fertilisers for which investment requirements were very large
and the expected private returns, at least in the short-run were too low to provide an incentive
for private profitability. In many cases even when the private sector was prepared to undertake
the risk and invest, State ownership of such industries existed for one reason or other.
However, recently, many governments have resorted to privatisation in varying degrees, and
have redefined the role of the public sector.

Planning Role
Especially in the developing countries, the State plays a very important role as a planner.
The importance of planning to a less developed economy was often emphasised by Jawaharlal
Nehru, the chief architect of Development Planning in India. He rightly observed: “Whatever it
may be in other countries, in underdeveloped countries like ours, which have to develop fairly
rapidly, the time element is important and the question is how to use our resources to the best
advantage. If our resources are abundant, it will not matter how they are used. They will go into
a common pool of development. But where one’s resources are limited, one has to see that they
are directed to the right purpose so as to help to build up whatever one is aiming at”.

ECONOMIC SYSTEMS
Different economic systems are distinguished
on the basis of the economic role of the
government and the scope and freedom of

The scope of private business depends, to a large extent, on the economic system which
indeed is rooted in political philosophy. At one end, there are the free enterprise/market economies
or capitalist economies, and at the other end are the centrally planned economies or communist
countries. In between these two are the mixed economies. Within the mixed economic system
itself, there are wide variations. The freedom of private enterprise is the greatest in the market
private enterprise.

economy, which is characterised by the following assumptions:

1. The factors of production (labour, land, capital) are privately owned, and production
occurs at the initiative of the private enterprise.
92 Business Environment

2. Income is received in monetary form by the sale of services of the factors of production
and from the profits of the private enterprise.
3. Members of the free market economy have freedom of choice insofar as consumption,
occupation, savings and investment are concerned.
4. The free market economy is not planned, controlled or regulated by the government.
The government satisfies community or collective wants, but does not compete with
private firms; nor does it tell the people where to work or what to produce.
The completely free market economy, however, is an abstract system rather than a real one.
Today, even the so-called market economies are subject to a number of government regulations.
Countries like the United States, Japan, Australia, Canada and member countries of the EEC are
regarded as market economies.
The communist countries have, by and large, a centrally planned economic system. Under
the rule of a communist or authoritarian socialist government, the state owns all the means of
production, determines the goals of production and controls the economy according to a central
master plan. There is hardly any consumer sovereignty in a centrally planned economy, unlike
in the free market economy. The consumption pattern in a centrally planned economy is dictated
by the state.
China, East Germany Soviet Union, Czechoslovakia, Hungary, Poland, etc., had centrally
planned economies. However, recently, several of these countries have discarded communist
system and have moved towards the market economy.
In between the capitalist system and the centrally planned system, falls the system of the
mixed economy, under which both the public and private sectors co-exist, as in India. The extent
of state participation varies widely between the mixed economies. However, in many mixed
economies, the strategic and other nationally very important industries are fully owned or dominated
by the state.
The economic system, thus, is a very important determinant of the scope of private
business. The economic system and policy are, therefore, a very important external constraint on
business.

TRENDS IN POLITICAL/ECONOMIC PHILOSOPHIES/OUTLOOK

While there are not radical differences in the philosophies of major political parties in some
countries, the situation is quite different in some others. The government system in a number
countries, including several countries which are making rapid economic progress and having
liberal policies towards foreign capital and technology, is not very democratic. That does not
mean that they are not good to make business with. As a matter of fact, in several such countries,
the procedures are simpler and decisions are quicker than in some of the democratic countries.
Until the political and economic changes ushered in the late 1980s and in the early 1990s
in the Eastern Europe, and erstwhile USSR, these countries were a separate block by themselves
with several common characteristics. Private enterprises were very limited and State trading,
particularly counter trade, was the rule. There were a lot of restrictions on imports and foreign
business. This did not, of course, mean that the communist system was insurmountable for
multinationals or other foreign firms. Under such a system, in several instances, winning over the
top brass of the party or government was a strategy to obtain business. It may be noted that
although companies like PepsiCo were kept out of India they were going better with countries
like USSR.
Political and Government Environment 93

In the past, public sector was assigned a very important role in many non-communist,

As against the past suspicion of and antagonism against foreign capital

the former communist ones, are in a competition to woo foreign capital

and technology, a large number of the developing countries, including

and technology. As a result, there has been an influx of foreign investment

particularly the developing, countries too. In India, for example, where the industrial policy
wanted the public sector to gain control over the commanding heights of the economy limited
the scope of the private enterprise, both domestic and foreign. Even in areas where foreign capital
was allowed, there was ceiling on the foreign equity participation.
Further, in the past, foreign firms in many developing countries were under the fear of
nationalisation.
The clock, however, has turned a full circle in most of the communist and many other
countries. Privatisation has progressed at an amazing speed. The erstwhile communist countries
and the People’s Republic of China where the communist party is still in power, are on the rapid
road from Marx to the market.
Although the trend of the direction of government policies across the world appears to be

to these countries.
broadly one of convergence, there are lots of differences in the restrictions and regulations of
business, scope of foreign business, trade policies, procedures, incentive systems and so on.
Coalition governments of different political parties are becoming common. Sometimes the
constituents of the coalition are parties with very different economic ideologies, making the
scenario complex or confusing/uncertain.
Some political leaders are so powerful that they wield enormous control over the party.
The vision and ideology of such leaders have stupendous implications for business.

many nations and formation of new independent

People across the word are becoming more
ethnic-centred which may lead of break up of

century there could by nearly 1000 countries.

nations. It is predicted that by middle of this
Changes in the nature of State’s role or extent of State’s involvement in the economy can
affect the business environment. When public sector was assigned a major role in the industrial
development and industrial licensing was very widely applicable, the Central Government in
India had an imposing position in deciding the location of projects and type and size of enterprises.
However, the substantial reduction in the role of the public sector and delicensing drastically
changed the situation and now State Governments have a much greater role and freedom than
in the past in the industrial development, including promotion of FDI.
There is a universal trend towards political decentralisation. This indicates some shifts in the
power centres firms have to deal with.
The number of politically independent nations has been on the increase as a result of
the splitting up of what was once a single country in to several ones. A major reason for this is
the rise of what Naisbitt calls tribalism which is defined as “the belief in fidelity to ones’ own
kind, defined by ethnicity, language, culture, religion, or, (now) the profession.”11 Universally,
the desire of ethnic groups to become independent of the supremacy of others is growing. Naisbitt
observes that democracy greatly magnifies and multiplies the assertiveness of the tribes; repression
does the opposite. And the anguished drama of the tribalism is most pronounced where they are
repressed the most brutally. According to Naisbitt, it may be a long time before there are
1,000 countries in this world, but by the middle of this century we should be close to that
number.12
Hostilities between some countries affect business of firms even in third countries. Arab
nations, for example, did not do business with firms having dealings with Israel. These countries
even insisted that third country firms who wanted to do business with them must produce an
Israel boycott certificate. Because of the political ties with Israel, the US government had adopted
countervailing laws to prevent the US firms from complying with this boycott. Sometimes, there
are also economic sanctions.
 94 Business Environment

GOVERNMENT AND LEGAL ENVIRONMENT

that regulate the conduct of the business. These laws cover
investment and related matters, there are a number of laws

such matters as standards of product, packaging, promotion,

In most countries, apart from those laws that control

Several aspects of the government environment have already been referred to in the previous
chapter and preceding section of this chapter. A detailed description of the government’s role in
the economy is given in a subsequent chapter.
competition, ethics, ecological factors etc.

In many countries, with a view to protecting consumer interests, regulations have become
stronger. Regulations to protect the purity of the environment and preserve the ecological balance
have assumed great importance in many countries.
Some governments specify certain standards for the products (including packaging) to be
marketed in the country: some even prohibit the marketing of certain products. In most nations,
promotional activities are subject to various types of controls. Several European countries restrain
the use of children in commercial advertisements. In a number of countries, including India, the
advertisement of alcoholic liquor is prohibited. Advertisements, including packaging, of cigarettes
must carry the statutory warning that “cigarette smoking is injurious to health”. Similarly, baby
foods must not be promoted as a substitute for breast feeding. In countries like Germany, product
comparison advertisements and the use of superlatives like best or excellent in advertisements is
not allowed. In the United States, the Federal Trade Commission is empowered to require a
company to provide sufficient evidence to substantiate the claim concerning the quality, performance
or comparative prices of its products.
There are a host of statutory controls on business in India. Although the controls have been
substantially brought down as a result of the liberalisation, a number of controls still prevail.
Many countries, today, have laws to regulate competition in the public interest. Elimination
of unfair competition and dilution of monopoly power are the important objectives of these
regulations.
Certain changes in government policies such as the industrial policy, fiscal policy, tariff
policy etc. may have profound impact on business. Some policy developments create opportunities
as well as threats. In other words, a development which brightens the prospects of some enterprises
may pose a threat to some others. For example, the industrial policy liberalisations in India have
opened up new opportunities and threats. They have provided a lot of opportunities to a large
number of enterprises to diversify and to make their product mix better. But they have also given
rise to serious threat to many existing products by way of increased competition; many seller’s
markets have given way to buyer’s markets. Even products which were seldom advertised have
come to be promoted very heavily. This battle for the market has provided a splendid opportunity
for the advertising industry.

ECONOMIC ROLES OF GOVERNMENT IN INDIA

THE CONSTITUTIONAL ENVIRONMENT
The Indian Constitution incorporates a number of matters that are economically very significant
and have far-reaching implications. The socio-economic and political objectives of the Indian
Republic and the basic guiding principles of state functioning have been clearly laid down in the
Preamble to the Constitution, the Fundamental Rights and in the Directive Principles of State
Policy. The Constitution also outlines the economic powers and responsibilities of the Union
Government and the State Governments.
The economic responsibility bestowed on the state by the Indian Constitution is so enormous
that it calls for great government interference in the functioning of the economy. In fact, a
 Political and Government Environment 95

number of constitutional amendments, including the first amendment, were effected to enable the

It is indeed paradoxical that though the government, in

effect to certain Constitutional provisions, some of these

repealed since the liberalisation ushered in 1991 while

very policies have been given up or reversed and Acts
the past, had proclaimed that certain policy measures
had been taken and laws had been enacted to give
state to implement its economic policies and programmes.

those Constitutional provisions continue unchanged.

The Preamble
The Preamble to the Indian Constitution states that,
THE PEOPLE OF INDIA have solemnly resolved to constitute India into a SOVEREIGN
SOCIALIST, SECULAR,* DEMOCRATIC REPUBLIC to secure to all its citizens:
JUSTICE, social, economic and political;
LIBERTY of thought, expression, belief, faith and worship;
EQUALITY of status and of opportunity;
and to promote among them all —.
FRATERNITY assuring the dignity of the individual and the unity and integrity* of the
Nation.
[*The words “Socialist Secular”, and “and integrity” were inserted by the Constitution (42nd
Amendment) Act, 1976.]
The Preamble of a statute conveys the general object and intention of the legislature in
enacting it. Although not an essential feature, whenever a Constitution contains a Preamble, it
expresses the political, religious and socio-economic values which it envisages to promote. But,
it does not control the meaning and scope of the other provisions of the Constitution. However,
the Preamble may be a guide when the statute is vague. Otherwise, full effect should be given
to the express words of the enactment.
The Preamble to the Indian Constitution lays down that the attainment of social, economic
and political justice, and equality of status and of opportunity should be among the most important
basic guiding principles of the functioning of the State. As if this were not enough, the Constitution
was amended in 1976 to add, among other things, that India should be a socialist state. In fact,
as early as December 1954, the Indian Parliament had accepted the socialist pattern of society
as the objective of social and economic policy. As if to give this objective more prominence,
it was incorporated in the Preamble to the Constitution in 1976 under the controversial
42 nd Amendment.
As the Preamble conveys the general object and intention of the Constitution and would be
a guide in the interpretation of a statute when it is vague, the above-mentioned aspects of the
Preamble to the Constitution give some indications of the need and scope for state intervention
in the functioning of the economy with a view to discharging its duties and responsibilities for
the realisation of economic and associated objectives.
limited government. It aims at preventing

affords the individual an opportunity for

The theory of fundamental rights implies

the government and the legislature from

becoming totalitarian, and in doing so it

The Fundamental Rights

It has been claimed that the Indian Constitution offers all citizens, individually and collectively,
the best fruits of democracy and those basic freedoms and conditions of life which alone make
life significant and productive. The rights enumerated in Part III of the Constitution cover a wide
range and are declared to be fundamental and justiceable.
self-development.

But these rights are not absolute; they are subject to limitations imposed by the state in order
to secure rights for all individuals or to promote the greater interests of the community or the
state, or to serve the ends of a planned society.
96 Business Environment

The Fundamental Rights enumerated in Part III of the Constitution are:

1. Right to Equality
2. Right to Freedom
3. Right against Exploitation
4. Right to Freedom of Religion
5. Cultural and Educational Rights
6. Right to Constitutional Remedies
The Constitution had also guaranteed, under Article 19(1)(f), the Fundamental Right to
Property; and Article 31 had prohibited the deprivation of property of any person save by
authority of law; and for the deprivation of property compensation had been payable. But, in
1976, the 44th Amendment of the Constitution abolished the fundamental right to property by
deleting Articles 19(1)(f) and 31. However, Article 300A of the new Chapter IV added to Part XII
of the Constitution provides that “no person shall be deprived of his property save by authority
of law”. Thus, though the right to property is no longer a fundamental right, it has been retained
as a Constitutional Right.
The Fundamental Rights also have economic significance.
The Right to Equality prohibits discrimination against any citizen on grounds of religion,
race, caste, sex or place of birth. In public employment, it ensures equality of opportunity to all
citizens. This is, however, subject to certain limitations, such as the right of the state to reserve
posts for backward classes which, in the opinion of the state, are not adequately represented in
the services.
The Constitution guarantees the citizens the fundamental right to freedom to practise any
profession, carry on any occupation, trade or business. This right is subject to reasonable restrictions
in the interest of the general public. Under the First Amendment to the Constitution (1951), the
State is empowered to make laws relating to professional or technical qualifications necessary for
practising any profession or carrying on any trade, business, industry or service, whether to the
exclusion, complete or partial, of citizens or otherwise.
The Fundamental Right against Exploitation prohibits traffic in human beings, and beggary
and other forms of forced labour; and any contravention of this provision shall be an offence
punishable in accordance with the law. However, this does not prevent the state from imposing
compulsory service for public purposes. In imposing such service, the state shall not make any
discrimination on grounds only of religion, race, caste or class, or any of them.
Thus, the Fundamental Rights enumerated in the Constitution guarantee a number of economic
rights to the citizens; but at the same time, the State has the power to impose reasonable
restrictions on such rights in the public interest. A very important thing to be noted is that this
power of the state to impose reasonable restrictions in the public interest had resulted in a
remarkable increase in the statutory control over the business and a substantial expansion of the
entrepreneurial or participative activities of the state. Consequently, there has been an abridgement
of the economic liberty of the citizens embodied in Article 19(l)(g).
Political and Government Environment 97

BOX 5.3 : FUNCTIONS AND POWERS OF PARLIAMENT

As in other parliamentary democracies, Parliament of India has the cardinal functions of legislation,
overseeing of administration, passing of budget, ventilation of public grievances and discussing various subjects
like development plans, international relations and national policies. The distribution of powers between the
Union and the States, followed in the Constitution, emphasizes in many ways the general predominance of
Parliament in the legislative field. Apart from a wide range of subjects, even in normal times Parliament can,
under certain circumstances, assume legislative power with respect to a subject falling within the sphere exclusively
reserved for the States. Parliament is also vested with powers to impeach the President and to remove the Judges
of Supreme Court and High Courts, the Chief Election Commissioner and the Comptroller and Auditor General
in accordance with the procedure laid down in the Constitution. All legislations require consent of both the
Houses of Parliament. In the case of money bills, however, the will of the Lok Sabha prevails.
Delegated legislation is also subject to review and control by Parliament. Besides the power to legislate, the
Constitution vests in Parliament the power to initiate amendment of the Constitution. A list of laws made by
Parliament during 1998 is given in Appendices.
The functions of Parliament are not only varied in nature, but considerable in volume. The time at its
disposal is limited. It cannot make very detailed scrutiny of all legislative and other matters thatcome up before
it. A good deal of its business is, therefore, transacted in committees.
Both Houses of Parliament have a similar committee structure, with a few exceptions. Their appointment,
terms of office, functions and procedure of conducting business are also more or less similar and are regulated
under rules made by the two Houses under Article 118(1) of the Constitution.
Broadly, parliamentary committees are of two kinds – standing committees and ad hoc committees. The
former are elected or appointed every year or periodically and their work goes on, more or less, on a continuous
basis. The latter are appointed on an ad hoc basis as need arises and they cease to exist as soon as they complete
the task assigned to them.
Among standing committees, the three financial committees – Committees on Estimates, Public Accounts
and Public Undertakings – constitute a distinct group and they keep an unremitting vigil over Government
expenditure, and performance.

Courtesy: Government of India, India 2000.

Fundamental Duties
By the 42nd Amendment of the Constitution, adopted in 1976, Fundamental Duties of the
citizens have also been enumerated. These enjoin upon a citizen among other things, to abide
by the Constitution, to cherish and follow noble ideals which inspired our national struggle for
freedom, to defend the country and render national service when called upon to do so and to
promote harmony and spirit of common brotherhood amongst all people of India transcending
religious, linguistic and regional or sectional diversities.

The Directive Principles

The Directive Principles of State Policy is a unique feature of India’s Constitution. The
Directive Principles are in the nature of directions to the legislature and executive that they
should exercise their authority in such a manner as to ensure due respect for, and observance
of, these principles. Although these directives are not justiceable, the courts cannot altogether
avoid taking cognizance of them. They are the imperative basis of state policy and the Constitution
directs the state to apply these principles in making laws.
The Directive Principles that are economically very significant are quoted below:
(a) The State shall strive to promote the welfare of the people by securing and protecting
as effectively as it may be a social order in which justice, social, economic and political,
shall inform all the institutions of the national life [Article 38(1)].
98 Business Environment

(b) The State shall, in particular, strive to minimise the inequalities in income, and endeavour
to eliminate inequalities in status, facilities and opportunities, not only among individuals
but also amongst groups of people residing in different areas or engaged in different
vocations [Article 38(2)].
(c) The State shall, in particular, direct its policy towards securing:
1. That the citizens, men and women equally, have the right to an adequate means of
livelihood.
2. That the ownership and control of the material resources of the community are so
distributed as best to subserve the common good.
3. That the operation of the economic system does not result in the concentration of
wealth and means of production to the common detriment.
4. That there is equal pay for equal work for both men and women.
5. That the health and strength of workers, men and women, and the tender age of
children are not abused and that citizens are not forced by economic necessity to
enter a vocation unsuited to their age or strength.
6. That children are given opportunities and facilities to develop in a healthy manner
and in conditions of freedom and dignity and that childhood and youth are protected
against exploitation and against moral and material abandonment (Article 39).
It may be noted that sections of Article 39 were quoted as the basis of certain policies
and Acts.
(d) The state shall ensure that the operation of the legal system promotes justice, on a basis
of equal opportunity, and shall, in particular, provide for legal aid, by suitable legislation
of schemes or in any other way, to ensure that opportunities for securing justice are not
denied to any citizen by reason of economic or other disabilities (Article 39-A).
(e) The state shall take steps to organise village panchayats and endow them with such
powers and authority as may be necessary to enable them to function as units of self-
government (Article 40).
(f) The state shall, within the limits of its economic capacity and development, make
effective provision for securing the right to work, to education and to public assistance
in cases of unemployment, old age, sickness and disablement, and in other cases of
underserved wants (Article 41).
(g) The stale shall make provision for securing just and humane conditions of work and for
maternity relief (Article 42).
(h) The state shall endeavour to secure, by suitable legislation or economic organisation or
any other way, to all workers, agricultural, industrial or otherwise, a living wage, conditions
of work ensuring a decent standard of life and full enjoyment of leisure and social and
cultural opportunities and in particular the state shall endeavour to promote cottage
industries on an individual or cooperative basis in rural areas (Article 43).
(i) The state shall take steps, by suitable legislation or in any other way, to secure the
participation of workers in the management of undertakings, establishments or other
organisations engaged in any industry (Article 43-A).
(j) The state shall promote with special care the educational and economic interests of the
weaker sections of the people, and, in particular, of the scheduled castes and the
Political and Government Environment 99

scheduled tribes, and shall protect them from social injustice and all forms of exploitation
(Article 46).
(k) The state shall regard the raising of the level of nutrition and the standard of living of
its people and the improvement of public health as among its primary duties and, in
particular, the state shall endeavour to bring about prohibition of the consumption,
except for medicinal purposes, of intoxicating drinks and of drugs which are injurious
to health (Article 47).
(l) The state shall endeavour to organise agriculture and animal husbandry on modern and
scientific lines and shall, in particular, take steps for preserving and improving the
breeds, and prohibiting the slaughter of cows and calves and other milch and draught
cattle (Article 48).
(m) The state shall endeavour to protect and improve the environment and to safeguard the
forests and wild life of the country (Article 48-A).
These Directive Principles make quite clear how important is the economic responsibility
bestowed on the state by the Constitution.

The Directive Principles of State Policy enunciated in the Indian Constitution

provide an enormous scope for Government intervention in the functioning
of the economy. However, quite interestingly, although state control of the
economy had been deepened and widened as if it were a Constitutional
requirement, this trend has been reversed since 1991 while the same
Through constitutional amendments, new directives were added to provide a greater socialist
orientation to development. For instance, in 1978, by the 44th Amendment, a new clause was
added to Article 38; and this new clause contains a directive to strive to minimise the inequalities
in status, facilities and opportunities. The 42nd Amendment incorporated a new Article, 43-A, to
direct the state to take suitable steps to secure workers’ participation in management.

Preamble and Directive Principles are held sacrosanct.

There have been many occasions when the Directive Principles and Fundamental Rights
have been in conflict with each other. In the early days, the Supreme Court held that the
Fundamental Rights were a sacrosanct part of the Constitution and nothing, including the Directive
Principles, could override them. But the view that the Fundamental Rights should be subordinated
to the Directive Principles gained ground in later years.
While asking the Lok Sabha to refer the Constitution (Fourth Amendment) Bill to the Select
Committee, Prime Minister Nehru declared that the Fundamental Rights must subserve the Directive
Principles. In the Keshwanand Bharti vs. State of Kerala, Justice Mathew observed that “in building
up a just social order, it is sometimes imperative that the Fundamental Rights should be subordinated
to Directive Principles. Economic goals have an uncontestable claim for priority over ideological
ones on the ground that excellence comes only after existence. It is only if men existed that there
can be fundamental rights.”

Freedom of Trade, Commerce and Intercourse

According to Article 301 of the Constitution of India, trade, commerce and intercourse
The Indian Constitution guarantees freedom
to carry out trade and commerce throughout

throughout the territory of India shall be free. This freedom, however, is not without restrictions.
India subject to reasonable restrictions.

The freedom guaranteed by Article 301 is in the widest terms and applies to all forms of
trade, commerce and intercourse. It is subject only to restrictions specified in Articles 302 to 305
and the freedom to carry on trade, commerce and intercourse throughout India guaranteed under
Article 301 cannot be taken away by an executive action.
According to Articles 302 to 305, the State can impose reasonable restrictions on the
freedom expressed by Article 301. Accordingly, Parliament may impose such restrictions on the
freedom of trade, commerce or intercourse between one States and another or within any part
of the territory of India as may be required in the public interest. The State governments are
empowered to impose any tax on goods imported from other States if similar goods in the State
are subject to similar tax so as not to discriminate between goods so imported and goods
manufactured or produced in that State.
100 Business Environment

Separation of Powers
Separation of powers is an important feature of the Indian Constitution. “the separation of
between legislature, executive and
judiciary. They shall not step out of
The contribution of India provides
for a tripartite division of powers

powers contemplates the idea that the governmental functions must be based on a tripartite
division of legislature, executive and judiciary. Each organ should be separate, distinct and
their respective jurisdictions.

sovereign in its own allocated sphere and it should not exercise the functions assigned to another.”13
As Chief Justice Subba Rao observed in the Golak Nath v. State of Punjab, the Constitution
demarcates the jurisdiction of these organs minutely and expects them to exercise their respective
powers without overstepping their limits. They should function within the spheres allotted to
them. No authority created under the Constitution is supreme; the Constitution is supreme and
all the authorities function under the supreme law of the land.”14

Division of Power
India’s Constitution distributes the items for legislation among three lists:
• Union List
• State List
• Concurrent List.
The respective jurisdictions of the Union and the States and their mutual relations have been
clearly defined.
The Union has exclusive power to make laws on all matters in the Union List and the States
have exclusive powers to make laws in the State List. Except for the Union Territories, the Centre
cannot normally legislate on any matter included in the State List. Parliament can, however, do
so if the Council of States recommends by at least two-thirds majority that such legislation is in
national interest; if two or more States mutually agree that this should be done for such States
and to implement treaties or international agreements or conventions.
Both the Union and States can legislate on matters in the Concurrent List. However, in case
of any conflict between the Union laws and State laws, the Union laws shall prevail. Further, the
Union has exclusive power to make laws on any matter not enumerated in the Concurrent List
or State List.

Expansion in State Intervention

The first four decades of planning witnessed an expansion of state intervention in the
economy. The Constitution was amended a number of times. The Constitution of India, which
came into force in 1950, was first amended in the very next year. By the First Amendment of
the Constitution, the State has been empowered to impose restrictions on the right of citizens to
carry on any trade, business, industry or service with a view to enabling the state to undertake
any scheme of nationalisation or prescribing the professional or technical qualifications necessary
for practicing any profession or carrying on any occupation, trade or business.
The state has, from time to time, acquired increasing powers to control private activity and
enlarge its own ownership and management of the economy.
The brief account of the economic significance of the Indian Constitution given above
makes it abundantly clear that the state has to shoulder a very heavy responsibility to attain the
egalitarian goals set forth in the Constitution. Any responsibility should have commensurate
authority also. Over the years, the Government has assumed enormous powers of control over
the economy. How effectively and judiciously these powers have been exercised, and how
satisfactorily the problems have been solved are different questions.
Political and Government Environment 101

The Government has been very active in playing all the four important economic roles.

CONSTITUTION

Judiciary Executive Legislature

The Constitutional Environment

Central List Concurre nt List State List

Central Gov t. State Govt. Local Govt.

Dire ct Policies De ve lopment/Promotional Re gulatory

involvement Guideline Organisations Organisations
Budg et in business C od e s (e.g.: De velopment (e.g.: SEBI,
Laws Bank s, Exp ort TRA I)

Fig. 5.2 :
Development Authorities)

The first four decades have witnessed a clear trend towards an expanding control of the state
over the various segments of the economy. With the increase in the problems, there has also been
a tendency on the part of the Government to arm itself with more and more powers of control
over the functioning of the economy. The Industries (Development and Regulation) Act, the
Companies Act, Capital Issues Control Act (repealed following the liberalisation), Securities
(Contracts Regulation) Act, Monopolies and Restrictive Trade Practices Act, Essential Commodities
Act, Prevention of Blackmarketing and Maintenance of Supplies of Essential Commodities Act,
Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, Foreign Exchange
Regulation Act (replaced by the Foreign Exchange Management Act in 2000), Imports and Exports
(Control) Act [replaced by the Foreign Trade (Development and Regulation) Act in1992] etc.,
provide the Government with sweeping powers of control over industry and commerce, so much
so that Government cannot escape the responsibility for any shortfalls, drawbacks, or imperfections
in these sectors of vital importance to the economy.
There are quite a good number of industrial and labour laws which regulate employer-
employee relations, working conditions, wages, bonus, labour welfare and social security, etc.
The commercial banking sector was brought under the effective control of the Reserve Bank
of India by the Banking Companies Act of 1949 and the Amendment Acts of 1956 and 1962,
the Banking Laws (Miscellaneous Provisions) Act, 1963, etc. The Securities and Exchange Board
of India (SEBI) regulates the capital market.
Indirect controls have also been playing their part in serving the national development goals.
Various quantitative and qualitative monetary weapons have been deployed from time to time
to regulate the economy, mainly to control prices. A number of fiscal and monetary incentives
have been offered to encourage the growth of such priority sectors as the export industry, small
industry and small business. Monetary, fiscal, financial and physical incentives have been provided
for the accelerated development of the backward regions. Fiscal and monetary policies have also
102 Business Environment

been employed, as disincentives to discourage certain undesirable or inessential activities. The

direct controls had considerably grown in importance.
No less important than the regulatory role is the promotional role of the Government in
India. Being a mixed economy, the state has to provide the necessary facilities for the growth of
the private sector. Our industrial policy has assigned an important role to the private sector in
a number of industries. State’s promotional role include development of infrastructural facilities,
fostering of institutions to provide financial aid developmental support to business.

BOX 5.4 : HURDLES OF CONTROLS

The control regime that prevailed in India in the past was described by the chief executive of a large company
as follows.
“One of the most important roles of the Chief Executive in many parts of the world today is the management
of the relationship with the external environment which consists of government, the media, the trade unions,
industry associations and various interest groups.. a major difference is that in India, the government is such an
overwhelmingly dominant factor that I can confine myself to what has become the most important taskof a Chief
Executive of any large company in our country, viz., the management of relationship with government. Government
in India has such an all-pervasive and predominantly restrictive influence over various aspects of business, e.g.,
industrial licensing, which decides location, capacity and process; import licensing for machinery and materials;
size and price of capital issue; loan. Finance; pricing; managerial remuneration; expansion plans distribution
restrictions and a host of other enactments. Therefore, a considerable part of the attention of theChief Executive
and his senior colleagues has to be devoted to continuous dialogue with various government agencies to ensure
growth and profitability within the framework of controls and restraints…A notable trend has been the manner
in which decision-making has moved up the ladder of government. Decisions which were taken in the early sixties
by Joint Secretaries became decisions for Secretaries and decisions for Secretaries became decisionsfor Ministers
as the decade progressed. In the seventies, these became decisions for Cabinet Committees and even for the whole
Cabinet. This movement has bad a significant effect, not only in slowing down decisions, but also in increasing
the chances of negative decisions. ..Trying to set up a new industrial unit in India is like runningan obstacle race,
except that in this case, as you go along, the obstacles are increased both in numbers and complexity without
warning. We have estimated that it takes 7 years from the conceptual stage to the production stage for any
significant investment to take place in India. Out of this, at least 50 per cent of the time is spent in procedures
to satisfy government regulations. In any 3-year period of such delay, the cost escalation in moderntimes will be
almost 50 per cent. In our protected economy, the Indian consumer ultimately pays the price for this cost
escalation. At the same time, our exports become less competitive. A further consequence of the delay is that in
many cases, we are compelled to import or lose the potential for longer periods.”
–From “Managing a Business in India”, speech delivered by T. Thomas, Chairman, HindustanLever Limited,
at the Annual General Meeting of the Company held at Bombay on 20th February, 1980.

The expansion in the entrepreneurial/participative role of the state was been very spectacular.
highly controlled regime. Since 1991, it has been an
era of progressive relaxation of controls ushering in
the Indian system had been characterised by a
For more than four decades since independence,

The public sector has grown substantially, both vertically and horizontally. The total investment
more scope and freedom for private enterprise.

in the Central Government industrial enterprises has grown from ` 29 crore spread over 5 units
on April 1, 1951, to ` 2,23,000 crore in over 236 units in 1998. In some industries, the public
sector gained an absolute or near monopoly, and it had a commanding position in a number of
basic and heavy industries.
Both fresh investments and nationalisation have contributed to the growth and expansion of
the public sector. More than 90 per cent of the commercial banking sector came to be in the
hands of the state. Successive nationalisations — the nationalisation of the Imperial Bank and the
establishment of the State Bank of India out of it in 1955, the nationalisation of 14 major private
banks in 1969 and another six in 1980 — have been mainly responsible for it. The insurance
business in the country, too, had been nationalised. The dawn of the present century has witnessed
the move towards privatisation/divestment.
Political and Government Environment 103

Apart from monopoly in the field of railway transport, communications and air transport,
the public sector accounted for a considerable share in shipping and road passenger transport.
In the energy sector, the public sector had virtual monopoly in coal mining, exploration and
refining of petroleum and in the generation and supply of electricity.
At one time, the public sector corporations accounted for about one-tenth of the country’s
total foreign trade. Imports and exports of certain important items are canalised through public
sector agencies.
As a consequence of the liberalisation, however, privatisation/divestment has been spreading.
The public distribution system has been expanded to remove the imperfections in the
distribution of essential goods and to protect the interests of the vulnerable sections. The Government
has been playing a major role as a planner. The Planning Commission was set up in 1950 and
the First Five Year Plan was launched in 1951 with the objective of achieving a rapid rise in the
standard of living of the people by, an efficient exploitation of the resources of the country,
increasing production and offering opportunities to all for employment in the service of the
community. Our Five-Year Plans place special emphasis on improvements in the living conditions
of the poor. The objective of distributive justice has been given added emphasis in the later Plans.
A significant aspect of Indian planning is the respect for democratic and property rights,
unlike in the centrally planned economy. In Indian planning, there has been the balancing of the
various economic elements and a sort of a fusion of the public, private and joint sectors, heavy
and light industries, and big, medium, small and cottage industries.
In short, as Rosan observed,15 unquestionably, the Indian government held the levers that
determined the levels of output of all large and medium-sized firms by: (1) its own direct
production of a wide variety of inputs and final products; (2) its grant, or refusal, of permission
to private firms to produce new items or to expand production; (3) its provision of capital funds
– to, and control of security issues by, private firms; (4) its control of access to foreign exchange;
and, (5) its control of imports.
There has, however, been a very significant relaxation of these controls since 1991.

BOX 5.5 : THE EVOLUTION OF THE ROLE OF THE STATE IN INDIA

When India became independent in 1947, income per capita had been stagnating for half a century, and
modern industry was minimal.
The Nehru years, 1947-64. India’s first Prime Minister, Jawaharlal Nehru, saw industrialisation as the key
to alleviating poverty, and a powerful state with a planned economy as essential if the country wasto industrialise
rapidly, accelerate public saving and investment, and reduce the role of foreign trade and achieve self-sufficiency.
Unlike many East Asian countries, which used state intervention to build strong private sector industries, India
opted for state control over key industries. Believing the potential of agriculture and exports to be limited, Indian
governments taxed agriculture by skewing the terms of trade against it and emphasizing import substitution.
They saw technical education as vital for industrialisation.
Garibi hatao, 1966-77. Under Prime Minister Indira Gandhi, two major shifts took place in the role of the
state. First, the neglect of agriculture was reversed through state activism in subsidising new seeds and fertilisers,
agricultural credit, and rural electrification. The green revolution took off, and by the mid 1970s India was self-
sufficient in grain. The second shift was the tightening of state control over every aspect of the economy. Under
the slogan of garibi hatao (“abolish poverty”), banks were nationalised, trade was increasingly restricted, price
controls were imposed on a wide range of products, and foreign investment was squeezed. The state achieved a
stranglehold on the economy. Yet growth of gross domestic product (GDP) failed to accelerate, remaining during
this period at 3.3 per cent a year.
The spending boom and rising fiscal deficits, 1977-91. Between 1977 and 1991, most stringent controls
on imports and industrial licensing were gradually relaxed, stimulating industrial growth. The government
104 Business Environment

expanded antipoverty schemes, especially rural employment schemes, but only a small fraction of the rising
subsidies actually reached the poor. Competition between political parties drove subsidies up at every election.
The resulting large fiscal deficits (8.4 per cent of GDP in 1985) contributed to a rising current account deficit.
India’s foreign exchange reserves were virtually exhausted by mid-1991, when a new government headedby
Narasimha Rao came to power.
The reform phase, since 1991. Rising interest payments on India’s foreign debt meant that neither the
central government nor the state governments could continue to finance both subsidies and heavy public investment.
The former won out, and the government began to woo private and foreign investment. Thus, impendingbankruptcy
drove the reform process and changed the state’s role from that of principal investor to that of facilitator of
entrepreneurship. This shift was expected to free up government finances for more social spending, but in practice
the fiscal crunch prevented a significant increase.
Rao’s government abolished most industrial and import licensing, devalued the rupee, drastically reduced
import tariffs, liberalised the financial sector and foreign investment, and allowed private investment in areas
previously reserved for the government.
The new coalition governments that came to power in 1996 and thereafter has by and large sustained these
reforms.
Thus the old national consensus on socialism has given way over the course of a few years to a new consensus
on liberalization. But formidable challenges remain. Most parties agree on the need for reform, yet no party is
eager to retrench surplus labour, close unviable factories, or reduce subsidies. The reforms so farare a positive step
but must be extended and accelerated if India is to catch up with the East Asian tigers.

Courtesy: World Bank, World Development Report, 1997.

SUMMARY
The State, i.e., the government, plays a very active role in all economies, including the
market economies, albeit, the extent and nature of State intervention vary widely between nations.
Functions of the state varies from basic minimum requirements to active participation in
several other sectors. The functions of government may be classified along a continuum, from
activities that will not be taken at all without state intervention to activities in which the state
plays an active role in coordinating markets or redistributing assets.
The economic roles of Government may be classified into four categories. Figure 5.3 gives
a summary view of the important functions and economic roles of the state.
The role the Government in India is guided and governed by the principles and provisions
of the Indian Constitution. Of particular significance are the Preamble to the Constitution which
indicates the objects and intention of the Constitution, the Fundamental Rights which imposes
limitations on State’s power, the Directive Principles of State Policy which suggest numerous
socio-economic welfare responsibilities for the State, separation of powers of judiciary, executive
and legislature and division of power and responsibility between the Union and the States.
The Government control over the Indian economy grew enormously in the first four decades
since Independence. Since 1991, India has been passing through a process of decontrols and
economic reforms. This implies a redefinition of the role of the state.
There has been a global trend towards decentralisation of power and responsibility. It has
been true of India too to some extent. The Central Government’s role in industrial development
has significantly diminished as result of the delicensing and substantial reduction in the role of
the public sector. Now, it is left to the States to play an active role in the industrial development
by creating a conducive environment for the development of industries, including attracting
foreign investment.
Political and Government Environment 105

Functions of Government Economic Roles of Government

Basic Functions Regulatory Role

These include the pure public goods Regulation may cover a wide spectrum extending
such as the provision of property from entry into a business through the conduct
rights, macroeconomic stability, of the business to final results of the business,
control of infectious diseases, safe and also the exit. Regulation is very important
water, roads, and protection of the
for the proper functioning of a market economy.
destitute.

Entrepreneurial Role
Direct participation of government in business was
Intermediate Functions very common particularly in the socialist and

Functions and Economic Roles of Government

These, include matters such as developing countries. Reasons included ideological
management of externalities (e.g.: and dearth of private entrepreneurship and
pollution), regulation of monopolies, capital. Privatisation, however, has become
and the provision of social insurance widespread since the mid-1980s.
(pensions, unemployment benefits).

Planning Role
The national necessity for proper utilisation
of scarce resources and prioritisation of
development objectives and ideological reasons
Activist Functions have made this an important role of governments
These involve measures to stabilise in the developing and socialist countries.
and promote markets and to
redistribute assets/income. Promotional Role
This is also more important in developing
countries than in the developed because speedy
development of the industry and commerce and
the economy requires the development of
the infrastructure, including facilitating

Fig. 5.3 :
organisations.

REFERENCES
1. Marshall E. Dimock, Business and Government (New York: Holt, Rinehan and Winston Inc., 1960),
p. l.
2. Peter F Drucker.
3. World Bank, World Development Report, 1997, p. 19.
4. Ibid., p. 21.
5. Ibid., p. 22.
6. Ibid., pp. 26-27.
7. Ibid., p. 28.
8. Ibid., p. 30.
9. R.A. Musgrave, The Theory of Public Finance (Tokyo: Kogakusha Ltd., 1959), p. 3.
10. R.A. Musgrave and P.B. Musgrave, Public Finance in Theory and Practice (Tokyo: McGraw-Hill
Kogakusha Ltd., 1976), p. 5.
11. John Naisbitt.
12. Ibid.
13. D. Rajeev, “Separation of Powers and Judicial Activism: Tradition versus Modernity”, Cochin
University Law Review, 1997, p. 329.
14. Cited by Rajeev, Ibid., p. 331.
15. George Rosan, Industrial Change in India, Allied Publishers Ltd., Allahabad, p. 15.

—F—F—F—
 NATURAL AND
TECHNOLOGICAL
ENVIRONMENT

6
Structure

Natural Environment
Technological Environment
Innovation
Technological Leadership and Followership
Technology and Competitive Advatages
Sources of Technological Dynamics
Time Lags in Technology Introduction/Absorption
Appropriate Technology and Technology Adaptation
Impact of Technology on Globalisation
ICT and Marketing
Transfer of Technology
Summary
References
 Natural and Technological Environment 107

The natural and technological environments present the impulsive potential for development
while the other environments like the economic, social, and political and government factors
represent the propulsive potential for development.

determine the development/business potential

The natural and technological environments
Factors Affecting Business
Impulsive and Propulsive
IMPULSIVE FACTORS PROPULSIVE FACTORS

Ý
Ý
Economic Factors
Technology Economic &
Social/Demographic
Business
Development Factors
Natural Factors Political/Government
Ý Factors

of an economy.
Ý

Fig. 6.1 :
6
Box 6.1 describes the interrelationship between the natural and technological environments.

BOX 6.1 : THE CORE OF SOCIAL SYSTEM

At the core of any social system is the natural environment and the available technology. Both define the
possibilities for human action in the society — the natural environment through its resources and constraints,
technology through the tools and processes available for human use. To some extent the ecology and technology
are inter-dependent; technology is always built upon what is physically possible in the natural environment, and
the natural environment can be degraded or enhanced, made more productive for human uses or depletedfor any
use, by the application of technology.
— S.L. Wartrick and D.J. Wood, International Business and Society, Blackwell Publishers Inc.,
Massachusetts, 1998.

Given the natural and technological environments, the propulsive factors determine the
extent of exploitation of the development potential and the direction, pace and pattern of
development.

(Adopted from UNDP, Human Development Report, 2001)

Links between Technology and Human Development
Building human capabilities
To live a long, healthy life
To acquire knowledge and be creative
To enjoy a decent standard of living
To participate in the social, economic
and political life of a community

Resources for education,

health, communication
Employment Advances in
medicine,
Knowledge communications,
Creativity Economic growth agriculture,
energy,
manufacturing
Resources
Productivity
for technology
gains
development
Fig. 6.2 :

Technological change
 108 Business Environment

NATURAL ENVIRONMENT
As Watrick and Wood observe, “the natural environment ultimately is the source and support
The geographical and ecological factors, such as natural
resource endowments, weather and climatic conditions,
topographical factors, locational aspects in the global
context, port facilities, etc., are all relevant to business.

of everything used by businesses (and almost any other human activity) – every raw material,
every energy source, every life-sustaining factor, even every waste disposal site.
The natural environment determines what can be got done in a society and how institutions
can function. Resource availability is the fundamental factor in the development of business in
societies.”1
Differences in geographical conditions between markets may sometimes call for changes in
the marketing mix. Geographical and ecological factors also influence the location of certain
industries. For example, industries with high material index tend to be located near the raw
material sources.
The dreadful earthquakes that ravaged several areas of Gujarat in early 2001 and the
potential for such occurrences in a number of other places would influence the decision-making
in respect location of business. It is also likely to affect the demand for flats and accommodation
in high rise buildings. It could also influence the choice of building technology, design, material
etc.
Climatic and weather conditions affect the location of certain industries like the cotton
textile industry. Topographical factors may affect the demand pattern in some cases. For example,
in hilly areas with a difficult terrain jeeps may be in greater demand than cars.
Weather and climatic factors affect the demand for certain type of products. For example,
in several regions where the temperature is very high in summer, there is good demand for desert
coolers; but they are not at all used in some of the States in India. In regions characterised by
very cold climate in winter and very hot climate in summer, both room heaters and air conditioners
may be in good demand in the respective seasons.
Weather and climatic factors can affect the demand pattern for clothing, building materials
and designs, food, medicines etc. Further, weather and climatic conditions may call for modifications
to the product, packaging, storage conditions etc.
Ecological factors have recently assumed great importance. The depletion of natural resources,
environmental pollution and the disturbance of the ecological balance have caused great concern.
Government policies aimed at the preservation of environmental purity and ecological balance,
conservation of non-replenishable resources, etc., have resulted in additional responsibilities and
problems for business, and some of these have the effect of increasing the cost of production and
marketing. Externalities have become a very important problem the business has to confront with.

TECHNOLOGICAL ENVIRONMENT
with which new technologies are adopted
The type of technology in use, the level of

and diffused, the type of technologies that

are appropriate, the technology policy etc.
technological developments, the speed

Technology is one of the important determinants of success of a firm as well as the economic
and social development of a nation.
are important to business.

“Technology includes the tools – both machines (hard technology) and ways of thinking (soft
technology) – available to solve problems and promote progress between, among and between
societies.”2
According to the UNCTAD’s Draft TOT Code, Technology should be described as “systematic
knowledge for the manufacture of a product, for the application of a process or for the rendering
of a service and does not extend transactions involving mere sale or lease of goods.”
 Natural and Technological Environment 109

“Technology includes not only knowledge or methods that are necessary to carry on or to
improve the existing production and distribution of goods and services, but also entrepreneurial
expertise and professional know-how.”3 The latter two elements may often prove to be the
essential competitive advantage possessed by the technology owner.4 The MNCs are often in a
particularly advantageous position in this regard.
Technology is one of the eight factors considered by the World Economic Forum to evaluate

Technology is one of the important

the global competitiveness of nations. The 1999 Global Competitiveness Report of the Forum,

determinants of global competitiveness.

which continued to increase its focus on information technology as a new source of competitiveness,
observes that there are at least three aspects to this. First, e-mail has greatly expanded the
possibilities for interpersonal, inter-firm, and international communication. Second, the Internet
has allowed for much more extensive and rapid dissemination of information. Third, the emerging
area of e-commerce offers a potentially huge increase in the customer base for companies and
huge savings in marketing costs and search costs in finding low-cost suppliers. Competitiveness
in all of these areas is closely linked with the competitiveness of the local telephone infrastructure
and with the penetration of the computer culture in the local economy. The Report also observes
that for a successful internet culture, the population needs to have computers, telephones need
to work, and the country’s telecommunications hardware needs to support high bandwidth for
Internet traffic.

INNOVATION
Innovation is a very important factor that provides competitive advantage and, consequently,
determines success.
Joseph Schumpeter, a well-known economist, has given a lot of importance to innovation
in economic development. According to him, significant advances in the economy occur by
disharmonious leaps and spurts as entirely new investment horizons are exploited. The entrepreneur,
who is the innovator is the central figure in the Schumpeterian analysis. Innovation may take any
of the following forms: the introduction of a new product; the use of a new method of production;
the opening of a new market; the conquest of a new source of raw material supply; and the
reorientation of an industry. Our concern here is technological innovation; some of the above,
obviously, do not represent technological innovation.
In the business context, innovation may be defined as “the technical, industrial and commercial
steps which lead to the marketing of new manufactured products and to commercial use of new
create entirely new industries and markets. Although innovation
capture new markets, create new market segments or even to

success in the market, it is not uncommon that some other

is expected to give a company a competitive advantage or
Innovations may help companies to increase market share,

technical processes and equipment.”

Betz classifies innovations into the following types or what is called scales.5 This is based
company or substitute product steals away the show.

on how big an impact does a technology change make on the applications.

1. Radical Innovation—a basic technological innovation that establishes a new functionality
(e.g., steam engine or steamboat).
2. Incremental Innovation—a change in an existing technology system that does not alter
functionality but incrementally improves performance, features, safety, or quality or
lowers cost (e.g., governor on a steam engine).
3. Next-generation Technology Innovation—a change in an existing technology system that
does not alter functionality but dramatically improves performance, features, safety, or
quality or lowers cost and opens up new applications (e.g., substitution of jet propulsion
for propellers on airplanes).
110 Business Environment

From the innovator. For example, in the US, the steel tin plate manufacturers developed the
market for cans for soft drinks and the like. However, it was later taken away by the aluminium
industry.
All innovations need not be commercially successful. For example, many new products fail
commercially due to a variety of reasons. From a study of a wide variety of industrial product
winners and losers, Calantone and Cooper have identified six major reasons for the new product
failures.6 They are as follows:
1. The better mousetrap no one wanted: These are products which have some uniqueness
or some superiority but which failed to generate enough demand. It is not because of any
technical problem with the product or inadequacy of marketing effort. These products often
represent technical R&D efforts not guided by proper marketing research or identification of
customer requirements and preferences. Industrial customers, particularly, want products that can
serve their purpose to their full satisfaction and they are not prepared to pay a higher price for
a product, however superior the product may be, if it does not bring in additional income larger
than the additional cost.
2. The me-too product meeting a competitive brick wall: Products which are mere imitations
of competitors’ products may find it difficult to succeed in the market because of intense competition
from entrenched firms with established market shares and customer loyalty. The established firms
often fight heavily the new entrants, sometimes even sacrificing their profits, so that the new
entrant will find it very difficult to penetrate the market and establish a foothold.
3. Competitive one-upmanship: New product failures of this type result from factors such
as deficiencies of the marketing management. Even if a product is good, it may not succeed in
the market if not marketed effectively. The promotion, including the launch, positioning, distribution,
and pricing play their role in the marketing of the product. Competitors would initiate the
product. Often they try to come out with better products and steal the march away from the
pioneer firm. Even if the product is not superior, more efficient marketing may make a difference.
The company which introduces the new product should, therefore, constantly try to improve the
product and marketing.
4. Environmental ignorance: Product failures may also emanate from the ignorance of
marketing environment leading to wrong decisions. Ignorance, neglect of environmental factors
such as regulatory factors (encompassing, for example, performance standards, materials permitted
A combination of factors is often required for the

R&D support, allocation of required finance and

effective marketing. Deficiencies in respect of any
success of a new product – the product itself,

to be used, safety norms, environmental aspects, technology etc.), technological factors, customer
preferences and demands, competitive environment etc. Such factors should be considered since
conception of the product idea to its launch.
5. Technological dog products: These are products which fail to increase up to the expectations
of the customers. In most of these cases, it is not that the companies have not understood what
of these can cause failure.

the market wants but they fail to deliver the product of the required quality or other attribute.
6. The price crunch: New products also fail because of mismatch between price of the
product and value of the product as perceived by the customers. This may arise because of the
eagerness of the companies to recoup all the investment at the earliest by charging a high price.
Overestimation of the value of the product to the customer often results in pricing the product
high.

PRODUCT AND PROCESS INNOVATIONS

William Abernathy and James Utterback have pointed out that usually, the pattern of early
innovations in a new-technology-based industry will be, first, product innovations (improving the
 Natural and Technological Environment 111

performance and safety of the product); later, innovations shift to improving the production
process to make the product cheaper and with better production quality.7 This is depicted in
Figure 6.3. The rate of product innovations peaks about the time of introduction of a design
standard for the new-technology product. Thereafter, the rate of innovations to improve the
product declines, and the rate of innovations to improve production increases. This occurs
because until the product design has been standardised manufacturer cannot focus on improving
the production processes that produce such a design.

Rates of Product and Process Innovations

Rate of innovations

Product Process
innovations innovations

Fig. 6.3 :
Design Time
Standardisation

After the key technologies of the industry mature, the market for the industry will eventually
saturate. This level of market for the industry will continue, unless the key technologies for the
industry become obsolete by technology substitution. Then, the market volume of the industry
based on the older key-technology product will decline to zero or to a market niche.

TECHNOLOGY S-CURVE
According to the commonly observed pattern in the development of technologies, the rate
of progress in a new technology follows an S-shaped curve, with an initial exponential rate,
slowing to a linear rate, and turning off toward a natural limit.
As Betz points out8 at first, all new basic inventions for a new technology show poor
The different rates of progress of technology over

inprovement and maturity generally produce a

time through technology stages of invention,

performance, are awkward and dangerous to use, and are costly to produce. Yet the opportunities
for technical improvement begin as inventors and engineers seek ways of overcoming the limitations
of the original invention. There is usually a rapid flush of new ideas that provides exponential
increase in performance. Eventually, and rather soon, all the obvious ideas get tried. Further
progress in the new technology gets harder. Thus, begins the linear phase of technology progress
on the S-curve. As Pearson observes,9 in due course, the rate of improvement slows down as it
approaches its limit, which may be technological (e.g., some physical limit on performance),
economic (e.g., diminishing returns from further research and development) or social (e.g.,
S-shaped curve.

production of undesirable by-products). At this point, there will be considerable economic and
competitive benefit in changing to an alternative technology to which the limit does not apply,
and consequently in due course a new technology will emerge and be adopted.
112 Business Environment

Technology Performance Parameter

Nature of Limits
Technology S-Curve

New Technology Mature

Fig. 6.4 :

Invention Improvement Technology

Period Period Period

TECHNOLOGICAL LEADERSHIP AND FOLLOWERSHIP

An important broad issue a firm must address in technology strategy is whether to seek
technological leadership. According to the notion of technological leadership, “a firm seeks to be
the first to introduce technological changes that support its generic strategy. Leadership can be
established in technologies employed in any value activity.” Technological followership refers to
a conscious and active strategy in which a firm explicitly chooses not to be first on innovations.”10
The decision to become a technological leader or follower can be a way of achieving either
low cost or differentiation. Porter points out that the choice of whether to be a technological
leader or follower in an important technology is based on the following three factors.11
Sustainability of the Technological Lead, i.e., the degree to which it can sustain its lead over
competitors in a technology.
Technological uniqueness and sustained
innovative competence are essential for

First Mover Advantages, i.e., the advantages a firm reaps from being the first, such as
reputation, preempting a positioning, swithcing costs, unique access for a new product, proprietory
learning curve, favourable access to facilities, inputs or other scarce raw materials; definition of
standards; institutional barriers against imitations; and early profits.
technological leadership.

First Mover Disadvantages, i.e., the disadvantages a firm faces by being first rather than
waiting for others, such as pioneering costs (like costs of gaining regulatory approvals, achieving
code compliance,. educating buyers, high costs of early inputs because of scarcity of supply or
small-scale needs); demand uncertainty, changes in buyer needs, specificity of investments to
early generations or factor costs; technological discontinuities and low cost imitation.
Technological leadership can be sustained only if the competitors cannot duplicate the
technology, or the firm innovates as fast or faster than competitors can catch up.

TECHNOLOGY AND COMPETITIVE ADVANTAGE

As Michael Porter points out in his well-known Competitive Advantage, technological change
is “one of the principal drivers of competition. It plays a major role in industry structural change,
 Natural and Technological Environment 113

as well as in creating new industries. It is also a great equaliser, eroding the competitive advantage
of even well-entrenched firms and propelling others to the forefront. Many of today’s great firms
grew out of technological changes that they were able to exploit. Of all the things that can change
the rules of competition, technological change is among the most prominent.”12
According to Gorden Pearson, “innovation is the key weapon in achieving a sustaining
competitive advantage. To compete successfully, it is vital to use the most appropriate technology
to produce and distribute your product or service. Generally, this means using the latest technology,
which will mean using the latest technology, which will incorporate more features, higher
performance, greater quality or lower costs. In some cases, this may involve invention as well as
innovation. Innovations may be based on inventions or discoveries, but their importance rests on
their commercial exploitation.”13
Porter who observes that the relationship between technological change and competition is

of new entrants and substitutes and bargaining

competitive forces, viz., inter-firm rivalry, threats
Technology can help influence all the five
widely misunderstood, points out that “technological change is not important for its own sake,
but is important if it affects competitive advantage and industry structure. Not all technological
change is strategically beneficial; it may worsen a firm’s competitive position and industry

power of suppliers and buyers.

attractiveness. High technology does not guarantee profitability. Indeed, many high-technology
industries are much less profitable than some “low-technology” industries due to their unfavourable
structures.”14 It is very important to understand that technology “pervades a firm’s value chain
and extends beyond those technologies associated directly with the product. There is, in fact, no
such thing as a low technology industry if one takes this broader view. Viewing any industry as
technologically mature often leads to strategic disaster. Moreover, many important innovations for
competitive advantage are mundane and involve no scientific breakthroughs. Innovation can
have important strategic implications for low-tech as well as hi-tech companies.”15
As Porter points out, technology can alter the nature and basis of rivalry among existing
competitors in several ways. Technology affects competitive advantage if it has a significant role
in determining relative cost position or differentiation. It can also alter the bargaining power of
the suppliers and buyers. Technology, in several instances, is an entry barrier. Thus, technology
can influence all the five competitive forces.
If the technology employed in a value activity becomes widespread, it would be an important
determinant of overall industry structure. “Technological change that is diffused can potentially
affect each of the five competitive forces, and improve or erode industry attractiveness. Thus,
even if technology does not yield competitive advantage to any one firm, it may affect the profit
potential of all firms. Conversely, technological change that improves a firm’s competitive advantage
may worsen structure as it is imitated. The potential effect of technological change on industry
structure means that a firm cannot set technology strategy without considering the structural
impacts.” 16
According to Porter, technological change by a firm will lead to sustainable competitive
advantage under the following circumstances, which he calls the tests of a desirable technological
change.17
• The technological change itself lowers cost or enhances differentiation and the firm’s
technological lead is sustainable.
• The technological change shifts costs or uniqueness drivers in favour of a firm.
• Pioneering the technological change translates into first mover advantages besides those
inherent in the technology itself.
• The technological change improves overall industry structure.
114 Business Environment

Porter cautions that technological change will destroy competitive advantage if it not only
fails the tests but has the opposite effect contemplated in the tests, such as skewing cost or
uniqueness drivers in favour of competitors. A firm may also find itself in the situation where a
technological change may meet one test but worsen a firm’s position via another.

BOX 6.2: INDIA’S INNOVATIVE POTENTIAL

Although the R&D spend in India, both as a percentage of GDP and company sales, is very low, India is
fast emerging as an R&D hub for the multinationals because of the human resource factor. Indian firms too have
been increasing their R&D budget thanks to the new patent regime, increasing competition and strategic orientation
of the firms. The Global Competitiveness Report 2007, which has ranked India 48th on overall competitiveness
gives 28th ranking for the innovative potential. On innovation, the country is ranked an impressive 4th in the
availability of scientists and engineers and 22nd in the quality of its scientific and research institutions. Although
China is ranked much higher (34th) than India on overall competitiveness, on innovation and business sophistication
factors India is much ahead of China (26th and 50th). The respective ranks of India and China are 26 and 57 in
business sophistication and 28 and 38 in innovation.

SOURCES OF TECHNOLOGICAL DYNAMICS

There are a number of factors which determine the technological dynamics of a company.
Innovation can result from the
internal drive of the company

The source of technological change may be internal or external. As Porter suggests, technological
leaders in industries with key external sources of technology must capture the best of those
or from external forces

sources through coalitions or exclusive arrangements in order to sustain their lead, or have a
superior ability to adapt externally developed technology to the industry.18
The important factors which determine the technological dynamics of a company include
the following.

Innovative Drive of the Company

Many companies view technology as a driving force of competitiveness and development
and give great importance to R&D. Recognising the critical role of R&D in the pharmaceutical
industry, Ranbaxy, for instance, has positioned itself as a research-based international company.
Several other firms, such as Dr. Reddy’s Laboratories, have also been investing considerably on
R&D and they have been significantly benefiting out of it. It is a policy of some companies that
a certain percentage of their sales every year shall come from new products.

Customer Needs/Expectations
Technological orientation and R&D efforts of a company may also be influenced by the
customer needs and expectations. In several cases, the customer and the supplier have a collaborative
relationship to develop products or solutions. If the consumers are highly demanding, companies
would be compelled to be innovative.

Demand Conditions
Besides customer needs/expectations, there are certain demand related factors which influence
the technology choice. For example, the size of the demand influences the choice of the
technological scale. Expected future trend could also be important. For example, a fast growing
trend of demand would encourage adoption/development of technology of large scale. It would
also encourage R&D efforts. The situation may be different in a declining industry.
 Natural and Technological Environment 115

Suppliers’ Offerings
Many a time, technological changes are encouraged by the suppliers of a company, like
capital goods suppliers and other technology suppliers etc. In many process industries, for example,
the key source of technology is construction engineering firms that design production processes
and build plants. The competitiveness of the Italian tile industry, for example, owes a lot to the
dynamic and innovative technology suppliers.

Competitive Dynamics
Competition compels the adoption of the best technology and constant endeavour to innovate.
Japanese companies have, generally, a high degree of technological orientation. According to
Akio Morita, the glory and the nemesis of Japanese business, the lifeblood of the industrial engine,
is good old-fashioned competition. And this makes the consumer in Japan a king. In Japan, there
are more makers of civilian industrial products than in any other country, including the United
States.19
Absence of/lack of competition was a major reason for the technological backwardness of
corporate India. The impact of competition on technological improvement is very evident in
many industries in India after the liberalisation.

Substitutes
Emergence of new substitutes or technological improvements of substitutes which alter a
firm’s/industry’s competitive advantage vis-à-vis the substitutes is a compelling reason for
technological change. Porter points out that perhaps the most commonly recognised effect of
technology on industry structure is its impact on substitution. Substitution is a function of the
relative value to price of competing products and the switching costs associated with changing
between them. Technological change creates entirely new products or product uses that substitute
for others, such as fiberglass for plastic or wood, word processors for typewriters, and microwave
ovens for conventional ovens. It influences both the relative value/price and switching costs of
substitutes. The technological battle over relative value/price between industries producing close
substitutes is at the heart of the substitution process.20

Social Forces
Certain social forces like protest against environmental pollution or other ecological problems,
demand/preference for eco-friendly products, the need to tackle certain social problems etc. may
prompt efforts to technological developments in certain direction.
The technological environment has some other social/cultural dimension too. For instance,
Morita points out that the Japanese have always been eager to develop their own technology from
abroad, and blend them to make suitable objects or systems.

Research Organisations/Technical Facilities

The technological environment of the business is enriched by research organisations, including
research departments of universities, which develop new technologies and provide other technical
inputs. Research establishments like Indian Council for Scientific Research (ICSR), Central Food
Technological Research Institute (CFTRI), Defence Food Research Laboratory etc. are well known
in India. The technology developed by the CFTRI for making baby food from buffalo milk and
its commercialisation by Amul, for example, was a milestone development.
116 Business Environment

Customer needs/
expectations

Supplier’s offerings Demand conditions

Innovative
Social forces Dynamics Substitutes
Innovative Drivers

of the
Company

Competitive Government policy

Ý
dynamics

Innovations by research
Fig. 6.5 :

organisations

Another supportive technological environment is the availability of common technical facilities

like testing facilities or facilities to do certain jobs.

Government Policy
also encourage private R&D by various incentives, like tax incentives, subsidies
Government can contribute to the development of technology by its own direct
involvement by establishing research organizations and funding R&D. It may
Government, often, is an important actor in the technological environment.

Technology policy of the government is a very important element of the technological

environment. For example, a government may favour or disfavour certain types of technologies.
Government’s policy towards foreign technology is also a critical factor.
etc. Technology policy of the government is also very important.

Some labour-abundant countries have a preference for labour-intensive technology.

Mechanisation and automation may be opposed in such countries. Such a situation may adversely
affect the business.
Lack of adequate patent protection in many countries was a serious problem for multinationals.
The absence of product patent facilitated several Indian pharmaceutical firms to copy patented
products by employing processes different from the patented one. The new patent regime stipulated
under the WTO is ushering in a different environment. This has prompted companies like Ranbaxy
and Reddy’s Laboratories to give a thrust to R&D. Ranbaxy has positioned itself as a research-
based international company.
In the past, the restriction of foreign technology followed by some governments had an
inherent bias against domestic firms because while in many cases domestic firms were not
permitted to go for foreign technology, foreign firms in those countries could bring in foreign
technology. This could affect the comparative competitiveness of these firms. Access to global
technology could help firms to improve their competitiveness. For example, this has enabled the
Reliance to establish world-class production facilities. This along with the project implementation
skills, debottlenecking capabilities and low labour costs held Reliance to gain a competitive edge
globally.
In countries like India, the overemphasis on indigenous technology had led to high costs and
distorted developments. Again, the policy bias in favour of small business has resulted in production
units of uneconomic size in a number of industries. Further, the reservation of certain products
exclusively for the small-scale sector promoted several companies, including multinationals, to
resort to such strategies as franchising and contract manufacturing in some of these industries in
 Natural and Technological Environment 117

India. The reservation of products for the small-scale sector sometimes comes in the way of
adoption of modern technology if it involves capital investment higher than the specified limit.
The failure to absorb modern technology swiftly has adversely affected the exports of several
import items like leather goods, textile items etc.
The nature technology can affect the location of production base and global trade flows.
For example, when the television technology was labour-intensive, this encouraged the location
of television manufacturing in the developing countries. Advances in technology may also
cause relocation of production. However, when further technological developments reduced
the labour content of the T.V., some firms relocated their production back to the developed
countries.

BOX 6.3 : S&T POLICY

Science and Technology Interface with Industry

The domestic R&D system and the industrial enterprises are the two main players in the S&T-industry
interface which had been functioning so long had been functioning so long in distinct and distant compartments
without much interaction, as the former is generally in the strategic and non-competitive areas of R&D whereas
industrial R&D, which was concerned more with investigating incremental production problems, was notgeared
to new process/product development and was having little interaction with the national and international S&T
community. But now the move towards a market economy is compelling both to establish a dialogue andwork
together for mutual advantage. Indeed in the emerging competitive environment, cooperation and coordination
between Indian enterprises and R&D institutions is not a matter of choice but rather of compulsion derived by
competitive pressures.
The increasing complexity of technology makes it difficult for the individual enterprises, especially the small
and medium enterprises (SMEs), to engage themselves in the competitive R&D and technological development
efforts due to high financial risks. In the emerging competitive environment, cooperation and coordination
between Indian enterprises and R&D institutions is not a matter of choice but rather of compulsion derived from
competitive pressures. The initial emphasis and endeavour should be on developing synergies and alliances to
enhance India industry’s competitive advantage and on gaining greater share of global markets.
The need for cooperation is to bring about value addition to the products through endogenous resources/
skills; environmentally clean and economically viable processes; closely held technologies that arecommercially
denied to Indian industry; strategic/dual-use technologies; technology packages as available from commercially
operating units; process/product upgradation and incremental productive improvements; and strategicalliances
with partners abroad for gaining market/technology advantage/dominance.
The initial emphasis and endeavour should be on developing synergies and alliance to enhance Indian
industry’s competitive advantage and on gaining a greater share of global markets in such areas like speciality
chemicals, drugs and pharmaceutical; footwear and leather products, automotive and light engineeringcomponents,
customized software, textiles and garments, gems and jewellery, agro-based products etc. This is already visible in
the drugs and pharmaceuticals sector. Several Indian pharmaceutical companies have already forged strategic
alliances with the domestic R&D institution; The Drugs & Pharmaceuticals Research Scheme of the DST, the
Home Grown Technologies of the TIFAC and the PATSER scheme of the DSIR are some examples of successful
Government intervention in shaping the cooperative endeavours.
The Government will have to provide an economic environment favourable not only for the conduct of
different kinds of business but also to catalyse the arrangements and the institutional mechanisms that would
facilitate synergistic technological development, its absorption and upgradation.
The efficiency and effectiveness of the R&D institutions can be significantly enhanced by providing them
adequate flexibility and freedom to function in a market economy.
The increased participation and involvement of the industry in the decision making bodies of R&D institutions
will make their programmes not only more attractive to industry but also to the financial institutions offering
venture/risk capital.

Courtesy: Planning Commission, Government of India, Ninth Five Year Plan, 1997-2000, Vol. II.
118 Business Environment

TIME LAGS IN TECHNOLOGY INTRODUCTION/ABSORPTION

significantly between
absorption/penetration of
technology may differ
The time and pace of

Considerable time lags have been observed between countries in respect of introduction or
absorption of technologies. This lag is not explainable in terms of the developed versus developing
countries difference alone.
markets.

In many developing countries, including India, the T.V. arrived very late. Although the
colour T.V. had become quite common in the advanced and even in some developing countries
when the telecast started in India, in the early period there was only black and white telecast.
The cable T.V. came to India only by about the beginning of the 1990s. The late introduction
and the slow expansion of the telecast affected not only the T.V. business but also the advertising
industry and product promotion.
The time lags in the introduction of technologies may even result in some products not being
able to reap the market. The electronic typewriter became popular in India before the electric
typewriter could penetrate the market. The electronic typewriter could not achieve growth because
of the advent of the computer.
Many companies in advanced countries have considered the developing countries as a
market for their obsolete technology. Several developing countries even import second hand
plant and machinery.
There is often a time lag between countries in the adoption and diffusion of technologies.
The developing countries generally lag behind the developed ones. Even among the developed
countries the technology absorption is not simultaneous and similar. The time lag has, however,
been diminishing in several cases.
Technological environment of the use facilities etc. also have very important implications for
business. For example, advances in the technologies of food processing, packaging and preservation,
transportation etc. have facilitated product improvements and introduction and have considerably
improved the marketability of products.

APPROPRIATE TECHNOLOGY AND TECHNOLOGY ADAPTATION

the technology depends
on the characteristics of
The appropriateness of

When different technologies are available, it needs to be ensured that the technology chosen
is the most appropriate for the company/country. The technology suitable in one environment
the environment.

may not be appropriate in a different environment. This could be due to reasons like differences
in natural factors such as topographical conditions, climatic/weather condition, soil conditions
etc.; differences in income levels, scale of operation, demand conditions, use facility characteristics,
and customer characteristics.
It is pointed out that much of Japan’s successful growth has been due to her systematic
purchase of appropriate technologies from abroad. The choice of technologies was aided by the
fact that Japan possessed a body of competent scientists and engineers who for the most part were
employed by the government and worked in government laboratories.21
The latest or highly sophisticated technology may not be the appropriate technology in
several environments. Thanks to writers like Schumacher, the concept of appropriate technology
(which, in this context, often implies intermediate technology) became popular in the developing
world. Intermediate technology, which often means a technology which combines elements of
traditional technology with elements of modern technology, gained importance in the developing
countries. Thus, the sophisticated capital-intensive technologies in use in the developed countries
are not acceptable in some sectors in several of the developing countries. An Indian company,
 Natural and Technological Environment 119

Mekins Agro Products Ltd., with designs from International Crop Research Institute for Semi Arid

situations require adaptations of or modifications

to technology. Modifications many a time help
companies to do better than users of the
between different environments. Further, many
Technological appropriateness can vary
Tropics (ICRISAT), Hyderabad, introduced easy to maintain bullock-drawn agricultural equipments
in India. It has been exporting them to other developing countries with comparable agrarian
environments.
One multinational found that the reason for low demand for its washing powder in a

technology in its original form.

developing economy was the low washing machine ownership. The low income and lack of
electrification/unreliability of power supply came in the way of increasing the washing machine
ownership. So, the company asked its R&D department to develop a low cost, manually operated
(i.e., which does not use electricity) washing machine. The ‘innovation backward’ resulted in the
introduction of such a washing machine. Similarly, another company took an innovative step
backward by developing a crank-operated cash register that would sell at half the price of a
modern cash register. It found a good demand in a number of developing countries.

IT REVOLUTION AND BUSINESS ENVIRONMENT

The computer, considered “the machine that changed the world,” and the rapid changes in
the related technologies have been making the business environment immensely dynamic.
As Lucas observes,22 IT:
• Provides new ways to design organisations that can lead to structure like the T-Form
organisation.
• Creates new relationships between customers and suppliers who electronically link
themselves together.
• Enables tremendous efficiencies in production and service industries through electronic
data interchange to facilitate just-in-time production.
• Changes the basis of competition and industry structure, for example, in the airline and
securities industries.
• Provides mechanisms through groupware for coordinating work creating a knowledge
base of organisational intelligence.
• Contributes to the productivity and flexibility of knowledge workers.
• Provides the manager with electronic alternatives to face-to-face communications and
supervision.
As Lucas points out, there are a number of recent trends that have drastically altered the way
organisations use technology. These trends make it imperative that a manager becomes familiar
with both the use of technology and how to control it in the organisation. He pinpoints the
following five major trends:23
1. The use of technology to transform the organisation: The cumulative effect of what all
the technology firms are installing is to transform the organisation and allow new types of
organisational structures. This ability of information technology to transform organisations, to
create the T-Form firm, is one of the most powerful tools available to a manager today.
2. The use of information processing technology as a part of corporate strategy: Firms that
prosper in the coming years will be managed by individuals who are able to develop creative,
strategic applications of the technology.
3. Technology as a pervasive part of the work environment: From the largest corporations
to the smallest business, technology is used to reduce labour, improve quality, provide better
customer service, or change the way the firm operates. Factories use technology to design parts
and control production.
120 Business Environment

4. The use of personal computers as managerial workstations: The personal computer, when
connected to a network within the organisation and to external networks like the Internet, it
provides a tremendous tool for knowledge workers.
5. The evolution of the computer from a computational device to a medium for
communications: For many people today, the communications aspects of computers are more
important than their computational capabilities.

IMPACT OF TECHNOLOGY ON GLOBALISATION

Technological advances have tremendously fostered globalisation. Technology has, in fact,
different technological
Globalisation has
been fostered by,
among other things,

been a very important facilitating factor of globalisation.

developments.

Several technological developments become a compelling reason for internationalisation.

Technological breakthroughs are substantially increasing the scale economies and the market
scale required to break-even.

BOX 6.4 : GLOBAL VILLAGE

Because of the shrinking time and shrinking space thanks to the technological revolution and the disappearing
borders thanks to the liberalisation and technological factors the world is evolving into a global village, in
several respects.
Contacts between the world’s people are widening and deepening as natural and artificial barriers fall. Huge
declines in transport and communication costs have reduced natural barriers. Shipping is much cheaper: between
1920 and 1990 maritime transport costs fell by more than two-thirds. Between 1960 and 1990 operating costs
per mile for the world’s airlines fell by 60 per cent.
Communication is also much easier and cheaper. Between 1940 and 1970 the cost of an international
telephone call fell by more than 80 per cent, and between 1970 and 1990 by 90 per cent. In the 1980s,
telecommunication traffic was expanding by 20 per cent a year. The Internet, the take-off point forthe information
superhighway, was used by 50 million people in 1998, with the number of subscribers tapping into it doubling
every year.
Some of the changes in international trade and finance reflect advances in technology. The lightningspeed
of transactions means that countries and companies now must respond rapidly if they are not to be left behind.
Technological change is also affecting the nature of investment. Previously, high-technology production had
been limited to rich countries with high wages. Today technology is more easily transferred to developing
countries, where sophisticated production can be combined with relatively low wages.
The increasing ease with which technology can accompany capital across borders threatens to break the links
between high productivity, high technology and high wages. Further, the availability of higher levels of technology
all over the world is putting pressure on the wages and employment of low-skilled workers.
Who really benefit from the IT and communication revolution?
Financial Dealers are at the pinnacle of connections. Instant communications, free flows of capital and
constant updates from around the world enable money markets from London to Jakarta, from Tokyo to New York,
to act as a unit in real time.
Multinational Corporations, too are roaming global markets and integrating production, Cross-border mergers
and acquisitions (majority – foreign-owned) account for a large chunk of the total foreign direct investment.
NGOs online can campaign around the world, with their messages travelling across borders in seconds.
Through e-mail and media networks, people are giving their support to associations across borders—from informal
networks to formal organisations.
Skilled Labour also travels the global village. With Internet access in nearly every country, the highly
educated are increasingly online and in touch around the world. In 1998, more than 250,000 African professionals
 Natural and Technological Environment 121

were working in the United States and Europe, Immigrants with skills in computing technologies are in high
demand – in the European Union alone, 500,000 information technology jobs go unfilled because of lack of
national skills. The United States offers a special visa to professional immigrants to keep high-tech industries
staffed.
Unskilled Labour, by contrast, runs up against hurdles. Many families are divided across international
borders as a result of the increasingly tight restrictions in the rich countries in the immigration of unskilled
labour. Millions of people do not even have passports—difficult to get. In some countries—let alone the visas
required to travel abroad.
The collapse of space, time and borders maybe creating a global village, but not everyone can be a citizen.
The global, professional elite faces low borders, but billions of others find borders as high as ever.

Courtesy: UNDP, Human Development Report, 1997 and 1999.

Global sourcing was encouraged not only by trade liberalisation but also by technological
developments which reduced transport costs. Advent of containerisation and supertonnage cargo
ships drastically reduced transport costs.
Technology monopoly, like possession of patented technology, encourages internationalisation
because the firm can exploit the respective demand without any competition.
The pace of globalisation has been accelerated by several enabling technologies. Technological
revolution in several spheres, like transport and communication, has given a great impetus to
globalisation by their tremendous contribution to the reduction of the disadvantages of natural
barriers like distance and cost. The IT revolution has made an enormous contribution to the
emergence of the global village. The developments in the field of air cargo transportation has
fostered globalisation by enabling quick and safe transportation of sensitive goods (like perishables
and goods subject to quick changes in fashion/taste). Developments of containerisation and
refrigeration have also been of high significance. The steep fall in the cost of transportation and
communication have considerably accelerated pace of globalisation. All these have contributed
to the drastic transformation of the logistical and global distribution of the value chain system.
The world wide web has a stupendous impact on globalisation.

BOX 6.5: TECHNOLOGY, GLOBALISATION AND INEQUALITY

Some studies show that technology is contributing to the widening of the income gap within countries.
Research by IMF using newly available data shows that inequality (measured using the Gini coefficient) has
risen over the past two decades in most regions, including developing Asia, emerging Europe, Latin America, and
the newly industrialised economies of Asia, as well as in the advanced economies. In contrast, it has declined in
sub-Saharan Africa and the Commonwealth of Independent States. The data, however, reveals that most people
are better off now. Despite this observed rise in inequality, per capita incomes have risen across virtually all
regions for all segments of the population, including the poorest. As a result, the poor are now better off in
absolute terms, although in most cases incomes have risen at a faster pace for those who are already better off.
This research has come out with the following four main findings.
First, the main factor driving the recent increase in inequality across countries has been technological
progress. This factor alone explains most of the increase in the Gini coefficient from the early 1980s, supporting
the view that new technology, in both advanced and developing countries, increases the premium on skills.
Second, globalisation has had a much smaller effect relative to technological change, reflecting theopposing
influences of trade and financial globalisation on inequality.
Third, contrary to common belief, trade globalisation has helped reduce inequality rather than increase it. In
developing countries, both rising agricultural exports and tariff liberalisation have contributed to improving
income distribution. In advanced economies, rising imports from developing countries are associatedwith declining
income inequality, presumably through the substitution of lower-paying manufacturing jobs with higher-paying
service sector jobs.
122 Business Environment

Fourth, FDI has had a mainly negative effect on the distribution of income. Higher FDI inflows have
increased the demand for skilled labor in developing countries, whereas outward FDI in advanced economies has
reduced the demand for lower-skilled workers in these countries.
In brief, technological advances have made the biggest contribution to widening income inequality. The
contribution of globalisation is less important. Whereas trade globalisation has helped reduce inequality,
financial globalisation—in particular foreign direct investment (FDI)—has tended to increase it.
The implication of these findings for policymakers is that technological change and FDI are associated with
higher incomes and should therefore be encouraged rather than suppressed. But because they increase the returns
on acquiring skills, it is felt that increased access to education and training is the key to sharing the fruits of
economic growth in a more equitable way. Policies that broaden the access to finance of the poor would also help,
as would further trade liberalisation.

Courtesy: “Technology Widening Rich-Poor Gap” by Florence Jaumotte and Subir Lall, IMF Research
Department, IMF Survey, November, 2007.

ICT AND MARKETING

Advances in information and communications technology are revolutionalising the modus
operandi of marketing and the business system. The business horizon is humming with buzzwords
like internet, world wide web (www), cyberspace, information superhighways etc. which are
changing the way of contacting customers; order receiving and processing; and networking and
integrating business system. The revolutionary changes being ushered in by the internet are
indeed exciting.
Technology experts are anticipating that the internet and the www would become the centre
of commercial universe. Electronic markets will eliminate the need for intermediaries and that
direct contact between manufacturer and customer will bring down the cost of transaction and
the cost of the final product. The internet has the potential to evolve into an interconnected
electronic marketplace (cyberspace) bringing buyers and sellers together to facilitate commercial
exchanges. The internet is fast becoming an important new channel for commerce in a range of
business – much faster than anyone who would have predicted in the past. The opportunities
presented by this new channel seem to be readily apparent; by allowing for direct ubiquitous
links to anyone anywhere, the internet allows companies build interactive relationships with
consumers and suppliers and deliver new products and services at low cost.
Revolutionary changes in information technology have been sweeping across the global
business. Developments in telecommunications and information technologies have reduced the
barriers to time and place in doing business. It is now possible for customers and suppliers to
transact business at any time in any part of the globe, without having to come together physically,
thanks to the developments in optical fiber technology, videophone and teleconferencing facilities.
The net has changed face and pace of business-to-business marketing and retailing.
sweeping changes in

Effective use of information technology helps a company to identify and profile customers,
the marketing scenario.
ICT has brought about

reach out to customers quickly and more effectively, and make inventory management and
distribution system more efficient.
If Indian firms do not keep pace with such contemporary developments, global business, and
even domestic business in due course, will be largely out of their reach.
ICT has been significantly transforming the distribution system. Xavier points out that effective
use of ICT in distribution can help companies:24
 Natural and Technological Environment 123

• Reduce inventories
• Reduce delivery time/unproductive waiting time
• Reduce stock-outs/lost sales
• Respond faster to market changes
• Reduce rush orders
• Cut down overproduction
• Reduce unnecessary movement (forwarding and back-tracking)
• Reduce paperwork and wasteful processing
• Plan production better
All the above benefits result in improved service at a lesser cost. In the West, IT is drastically
changing the distribution systems. Electronic networking has become all-pervasive. The boundary
of the organisation is blurring, as it becomes more of a network, with electronic links forward
into customers, backwards to suppliers and sideways to business partners. Looking at the enormous
benefits, one may wonder as to why Indian companies have not computerised their distribution
as yet.25
As Xavier points out, IT has also greatly contributed to the retail revolution, which is
sweeping the entire world. What used to be a fragmented industry has got consolidated due to
the sophisticated use of IT systems. Large retail chains are gobbling up small-town retailers.
Retailing has now become a global business, thanks to the sophisticated IT systems being used
by them. Typically, the retail stores were all along operated by owners, but currently the shift is
towards systems-driven stores.26 The major shifts that are taking place in the retail industry are
summarised in Table 6.1.

TABLE 6.1 : RETAIL REVOLUTION

From To
Fragmented Consolidated
Local Global
Low technology use High technology use
Owner-operated Systems-driven
Traders Retail brand managers
Mass marketing Individualised relationship customisation
Marketplace Market space

Source: M.J. Xavier, Marketing in the New Millennium, p. 142.

restructured. The number of intermediaries

with the manufacturer and ultimate buyer.

gradually being replaced by (net) space.

is falling. An e-tailer may directly deal

The channel system is being drastically
The place in the marketing mix is

Retailing in developed markets is increasingly becoming net-tailing or e-tailing. Developing

Direct marketing will also get a boost.

countries will follow the trend sooner or later.

A large number of match maker or infomediary has sprung up. Infomediaries can have a
beneficial role even when there are established dealers for a product, with no need for the match
maker to stock the goods. The match maker model of e-commerce connects buyers on one side
with sellers on the other. For example, the Jaldi.com has set up an online mall for white goods
which enables potential buyers to compare price and features across all brands of white goods.
The customer can post an inquiry for a model at the site and all the dealers registered with the
net marketer will quote the price for it. The customer can then choose the dealer he wants to
124 Business Environment

buy from. Although the dealer will make the sale to the customer, the net marketer will get a
commission from the dealer.
The net facilitates quick, easy and wider reach across the globe both for the seller and the
buyer. This implies that firms which do not have websites will simply be bypassed by many (in
future by most) of the potential customers. E-commerce is becoming more quickly prevalent in
business-to-business marketing.
Information and communication technology is becoming all embracing efficiently networking
the whole business system, making a shift from e-commerce to e-business. E-commerce becomes
e-business when a company connects its business system directly to its critical constituencies –
customers, employees, vendors and suppliers – via intranet, extranet and over the internet.
When a company has properly linked its business system comprising intranet, extranet and
over the internet, when a customer places an order by the internet, it gets communicated to the
company, distributors and the bankers. Goods are shipped by the distributor on intimation to the
company and the banker who will collect the money and credit the supplier. When the stock
with the distributor falls to a specified level, the company replenishes it. All these transactions take
place on the real time.

TRANSFER OF TECHNOLOGY
Technology transfer is the process by which commercial technology is disseminated. This
the formal process of transfer
Technology transfer refers to

of technology from the

will take the form of a technology transfer transaction, which may or may not be a legally binding
proprietor to other firms.

contract,27 but which will involve the communication, by the transferor, of the relevant knowledge
to the recipient. Among the types of transfer transactions that may be used, the Draft TOT Code
by UNCTAD has listed the following:28
(a) The assignment, sale and licensing of all forms of industrial property, except for trade
marks, service marks and trade names when they are not part of transfer of technology
transactions;
(b) The provision of know-how and technical expertise in the form of feasibility studies,
plans, diagrams, models, instructions, guides, formulae, basic or detailed engineering
designs, specifications and equipment for training, services involving technical advisory
and managerial personnel, and personnel training;
(c) The provision of technological knowledge necessary for the installation, operation and
functioning of plant and equipment, and turnkey projects;
(d) The provision of technological knowledge necessary to acquire, install and use machinery,
equipment, intermediate goods and/or raw materials which have been acquired by
purchase, lease or other means;
(e) The provision of technological contents of industrial and technical cooperation
arrangements.
The list excludes non-commercial technology transfers, such as those found in international
cooperation agreements between developed and developing states. Such agreements may relate
to infrastructure or agricultural development, or to international; cooperation in the fields of
research, education, employment or transport.
Broadly, there are two forms of TT, viz., internalised and externalised forms of technology
transfer. Internalised forms refer to investment associated TT, where control resides with the
 Natural and Technological Environment 125

technology transferer. The transferer, normally, holding the majority or full equity ownership.

technology to internalise or
is influenced by the
The modes operandi of TT

externalise the technology.

decision of proprietor of
Externalised forms refer to all other forms, such as joint ventures with local control, licensing
strategic alliances and international subcontracting.
The distinguishing feature between these two modalities of resource transfer is that in
internalised TT, the transferor has a significant and continuing financial stake in the success of the
affiliate, allows it to use its brand names and to have access to its global technology and marketing
networks, exercises control over the affiliate’s investment, technology and sales decisions, and
sees the affiliate as an integral part of its global strategy. Externalised forms lack one or all of these
features, with repercussions on the TT process. Over time, the array of TT arrangements has
diversified and particular modes have also become more flexible. Thus, the dividing lines between
externalised and internalised modes are becoming less easy to draw.29

LEVELS OF TT
A simplified treatment of the subject would suggest four levels of TT.30
Operational Level: At the bottom level are the simplest ones, needed for operating a given
plant. These involve basic manufacturing skills, as well as some more demanding troubleshooting,
quality control, maintenance and procurement skills.
Duplicative Level: At the intermediate level are duplicative skills, which include the investment
capabilities needed to expand capacity and to purchase and integrate foreign technologies.
Adaptive Level: At this technological self-reliance level, imported technologies are adapted
and improved, and design skills for more complex engineering learned.
Innovative Level: This level is characterised by innovative skills, based on formal R&D, that
are needed to keep pace with technological frontiers or to generate new technologies.

Channels of Technology Flow

The most important channels for the flow of technology are Foreign Investment and Technology
Licence Agreements and Joint Ventures.
Foreign Investment: Traditionally, the flow of technology to developing countries has been
an integral part of direct foreign investment. Multinational corporations and other firms have
resorted to foreign direct investment for a variety of reasons like protection and development of
foreign markets, utilisation of local resources (in the host country) including cheap labour,
overcoming or lessening of the impact of tariff restrictions and tax laws. The flow of sophisticated
technology, in particular, has thus been associated with direct investment.
Technology Licence Agreements and Joint Ventures: Technology transfer has been taking
place on a significant scale through licensing agreements and joint ventures. There has been a
fairly rapid growth of joint ventures, encouraged by government restrictions on foreign investment
and foreign trade or the perceived advantages of such ventures. When foreign capital participation
in joint ventures is below 50 per cent, technological agreements assume considerable significance.

Methods of Technology Transfer

Transfer of technology takes a variety of forms depending on the type, nature and extent of
technological assistance required. The following are the important methods of technology transfer:
1. Training or Employment of Technical Expert: Fairly simple and unpatented manufacturing
techniques/processes can be transferred by imparting the requisite training to suitable personnel.
Alternatively, such technology can be acquired by employing foreign technical experts.
126 Business Environment

2. Contracts for Supply of Machinery and Equipment: Contracts for supply of machinery
and equipment, which normally provide for the transfer of operational technology pertaining to
such equipment, is often quite adequate for manufacturing purposes not only in small-scale
projects but also in a number of large-scale industries where the nature of technology is not
particularly complex.
3. Licensing Agreements: Licensing agreements, under which the licensor enters into an
agreement with a licensee in another country to use the technical expertise of the former, is an
important means for the transfer of technology. Licensing agreements are usually entered into
when foreign direct investment is not possible or desirable.
4. Turnkey Contracts: Transfer of complex technology often takes place through turnkey
project contracts, which include the supply of such services as design, creation, commissioning
or supervision of a system or a facility to the client, apart from the supply of goods.
Many times, a combination of two or more of the above-mentioned methods is used.
Turnkey contracts, obviously, are the most comprehensive of such combinations.

Issues in Transfer of Technology

Cost, appropriateness, dependence
and obsolescence are the four

In many cases, the developing countries obtain foreign technology at unreasonably high
important issues associated with

prices. In a number of cases of foreign direct investment associated with technology transfer, the
net outflow of capital by way of dividend, interest, royalties and technical fees has been found
the transfer of technology.

to be much higher than the corresponding inflow.

The appropriateness of the foreign technology to the physical, economic and social conditions
of the developing countries is an important aspect to be considered in technology transfer. It has
been argued that there are a large number of cases where the foreign technology transferred has
been irrelevant or inappropriate to the recipient country’s socio-economic priorities and conditions.
Further, heavy reliance on foreign technology may lead to technological dependence.
It is pointed out that the import of modern sophisticated technology has tended to displace
the traditional indigenous technology which have been improved under a different set of policies.
The steady stream of new products and processes introduced by multinationals into developing
countries has been unfavourable to the promotion of domestic technological capacities and has
discouraged local scientists and technicians from devoting themselves to practical development
problems. It creates an attitude of subservient dependence, which may inhibit the capacity to do
even relatively minor adaptive research or to adopt processes which are developed locally.
It has also been observed that there is a tendency to transfer outdated technology to the
developing countries. Thus, they would not enjoy the advantages of the latest technology and
would still technologically lag behind. It is unfortunate that the owners of modern technology
view the developing countries as a means to salvage technology that is obsolescent in the advanced
countries, even when they possess more advanced technology.

PROMOTION AND REGULATION

Several regulatory and promotional
measures are required to take
advantage of the TT opportunities.

Despite the problems or shortcomings of foreign technology, it is widely recognised that if

properly regulated and promoted it can play a positive role, particularly in the technologically
backward LDCs. The Government of India and a number of other countries have, therefore, taken
a number of regulatory and promotional measures to take advantage of foreign technology
without sacrificing national interests.
 Natural and Technological Environment 127

Areas of Regulation
A number of regulatory measures have been taken by different countries to ensure that the
technology chosen is the best available, appropriate to domestic conditions and that indiscriminate
and unnecessary import of foreign technology is not undertaken. The following are the aspects
of technology commonly regulated.
The Extent and Terms of Equity Participation: These are generally determined by the priorities
of the technology-using industry in the nation’s economy, supply conditions of the technology
and its type and nature.
Phasing of Domestic Manufacturing: Where foreign technology is employed, many
governments, including that of India, insisted upon indigenisation on a phased manner.
The Government of India in the past also insisted that suitable provisions should be made for
the training of Indians in the field of production and management. Further, there should be
adequate arrangements for research and development, engineering design, training of technical
personnel and other measures for the absorption, adaptation, and development of the imported
technology.
The Appropriateness of the Technology: Permission to import a particular technology is
generally based on considerations such as suitability of the technology to the socio-economic and
ecological conditions in the country and the priority of the technology using industry in the
national economy. According to the guidelines issued by the Government of India, the entrepreneurs
should, to the fullest extent possible, explore alternative sources of technology, evaluate them for
a techno-economic point of view and furnish reasons for preferring the particular technology and
source of import.
Payment Terms and Foreign Exchange Outflow: Most governments take measures to ensure
that disproportionately high payments are not paid for any technology. Restrictions were imposed
also on dividend payments and pricing.
The Government of India’s guidelines clearly laid down that there should be no requirement
for the payment of minimum guaranteed royalty, regardless of the quantum and value of production.
Restrictive Terms in the Agreement: Technology imports with highly restrictive terms on the
importing parties are not generally favoured. For instance, according to the Government of India’s
policy, to the fullest extent possible, there should be no restrictions on free exports to all countries.
Further agreements or clauses which in any manner bind the Indian party with regard to the
procurement of capital goods, components, spares, raw materials, pricing policy and selling
arrangements should be avoided.

Promotional Measures
To take full advantage of the positive role of foreign technology, it is necessary to take
certain promotional measures. These include:
1. Assessing technological requirements of various sectors and identifying areas where foreign
technology is required.
2. Dissemination of information in foreign countries regarding foreign investment potentials
and scope for technical collaboration in the domestic economy, government policy and
regulation in respect of foreign capital and technology, institutional assistance and
infrastructural and other facilities for industrial development. The Indian Investment
Centre, established in 1961 has been playing such a role.
3. Provision of advisory services to Indian entrepreneurs in respect of foreign technology
including the techniques and process of technology transfers.
128 Business Environment

SUMMARY
The natural factors and available technology indicate, normally, the innate potential for
development of business/economy of a nation/region. The extent to which this potential is really
exploited depends on the economic, social and demographic, and political environments.
Technological developments have been revolutionising the business scene. They facilitate
not only the introduction of new products but also tremendous improvements in the operational
efficiency and exciting changes in the modus operandi of business. It implies, inter alia, that even
when good demand exists for an old product, adoption of the state-of-the-art technology for the
conduct of the business would be necessary for survival.
The information technology has vastly transformed the marketing and the financial markets
scenario and has significantly contributed to the globalisation process.
Technology often provides a competitive advantage. Success in many industries has a lot to
do with R&D and innovation. There are many factors which stimulate the innovative drive of a
firm. These include the company’s own strategy, demanding customers, competition (including
threat of substitutes), certain social forces, government policies etc.
There is no guarantee that an innovation will be a commercial success. An innovative
product can commercially fail due to various reasons; success presupposes several favourable
conditions.
An important strategic issue confronting many firms is whether to be a technology leader or
follower – there are a number of prerequisites, advantages and disadvantages associated with
both.
A company may also source technology externally, like from R&D organisations, other
firms (including foreign firms). While sourcing foreign technology, the firm should ensure that the
technology it chooses is the appropriate one and should be able to properly absorb the technology.
Japanese industry is known for the choice of appropriate technology and improving on them after
the absorption.
Government policy sometimes is a very important technological environment. Restrictions
on foreign technology, scale of operation, type of the technology etc. very adversely affected the
Indian business in the past. The liberalisation has significantly improved the situation.

REFERENCES
1. Steven L. Wartick and Donna J. Wood, International Business and Society, Blackwell Publishers
Inc., Massachusetts, 1998, p. 31.
2. Ibid., p. 32.
3. Cited by P.T. Muchlinsk, Multinational Enterprises and the Law, Blackwell, Oxford, 1999,
p. 426.
4. Muchlinsk, Ibid., p. 426.
5. Frederick Betz J., Managing Technological Innovation, Wiley and Sons Inc., New York, 1998,
p. 43.
6. R.J. Calantone and R.G. Cooper, “A Typology of Industrial New Product Failures” in B.A. Greenberg
and D.N. Bellenger, Proceedings, Educators Conference, Series No. 41, Chicago, American Marketing
Association, 1977 [Cited by Michael H. Morris, Industrial and Organisational Marketing, Macmillan
Publishing Co., New York, 1992, pp. 304-305).
7. Cited by Betz, op. cit., p. 60.