Video Lecture Link: https://www.youtube.com/watch?v=6Js1nwD_0Sc&t=40s
NCERT: GLOBALISATION AND
THE INDIAN ECONOMY (UNDERSTANDING ECONOMIC DEVELOPMENT)
PRODUCTION ACROSS COUNTRIES
INTERCONNECTEDNESS
BETWEEN COUNTRIES HAS MULTIPLE DIMESNSIONS – CULTURAL, POLITICAL, ECONOMIC AND
SOCIAL: Most regions of the world are getting increasingly
interconnected. While this interconnectedness across countries has many
dimensions — cultural, political, social and economic — this chapter looks at
globalisation in a more limited sense.
ECONOMIC
DEFINITION OF GLOBALISATION: It defines globalisation as the integration between countries through foreign trade and
foreign investments by multinational corporations (MNCs). As you will notice, the more complex issues of portfolio investment have been left out.
If we look at the past
thirty years or so, we find that
MNCs have been a major force in the
globalisation process connecting distant regions of the world.
Integration
of production and integration of markets
is a key idea behind understanding the process of
globalisation and its impact.
FACTORS
PROMOTING GLOBALISATION = TECHNOLOGY + LIBERALISATION + ROLE OF WTO: Globalisation has
been facilitated by several factors. Three of these have been highlighted:
rapid improvements in technology, liberalisation
of trade and investment policies and, pressures from international
organisations such as the WTO.
EXPLOSION
OF BRANDS CAN BE SEEN ACROSS PRODUCT TYPES – CARS, CLOTHES, COSMETICS: As consumers in
today’s world, some of us have a wide choice of goods and services before us.
The latest models of digital cameras, mobile phones and televisions made by the
leading manufacturers of the world are within our reach. Every season, new
models of automobiles can be seen on Indian roads. Gone are the days when
Ambassador and Fiat were the only cars on Indian roads. Today, Indians are
buying cars produced by nearly all the top companies in the world. A similar
explosion of brands can be seen for many other goods: from shirts to
televisions to processed fruit juices.
THIS
WASN’T THE CASE IN PRE-GLOBALISATION DAYS – OR AT LEAST THE SCALE WASN’T AS
WIDE AND AS DEEP AS IT IS TODAY. YOU MAY SAY THAT IN A MATTER OF FEW DECADES,
MARKETS HAVE BEEN TRANSFORMED.
WHY AND HOW IS THIS
HAPPENING?
UNTIL
THE MIDDLE OF TWENTIETH CENTURY, PRODUCTION ACTIVITY WAS CONFINED WITHIN
INDIVIDUAL COUNTRIES: Until the middle of the twentieth century, production was
largely organised within countries. What crossed the boundaries of these
countries were raw materials, food stuff and finished products. Colonies such
as India exported raw materials and food stuff and imported finished goods.
Trade was the main channel connecting distant countries. This was before large
companies called multinational corporations (MNCs) emerged on the scene.
MNC
SET UP PRODUCTION OPERATIONS SPANNING MULTIPLE COUNTRIES: A MNC is a
company that owns or controls production in more than one nation. MNCs set up
offices and factories for production in regions where they can get cheap labour
and other resources. This is done so that the cost of production is low and the
MNCs can earn greater profits.
EXAMPLE
OF HOW AN MNC’S PRODUCTION OPERATIONS MAY SPAN ACROSS COUNTRIES: A large MNC,
producing industrial equipment, designs its products in research centres in the
United States, and then has the components manufactured in China. These are
then shipped to Mexico and Eastern Europe where the products are assembled and
the finished products are sold all over the world. Meanwhile, the company’s
customer care is carried out through call centres located in India.
ADVANTAGES
OF DIVIDING PRODUCTION ACROSS COUNTRIES:
The production process is divided into small parts
and spread out across the globe.
1.
In
the above example, China provides the
advantage of being a cheap manufacturing
location.
2.
Mexico and Eastern Europe are useful for their closeness
to the markets in the US and Europe.
3.
India
has highly skilled engineers who can
understand the technical aspects of production. It also has educated English speaking youth who can provide
customer care services.
4.
And
all this probably can mean 50-60 per cent
cost-savings for the MNC! The advantage of spreading out production
across the borders to the multinationals can be truly immense.
FOREIGN
INVESTMENT IS THE MONEY MNC SPENDS IN INDIA TO SET UP PRODUCTION FACILITIES: Having assured
themselves of these conditions, MNCs set up factories and offices for
production. The money that is spent to buy assets such as land, building,
machines and other equipment is called investment. Investment made by MNCs is
called foreign investment. Any investment is made with the hope that these
assets will earn profits.
YOU
SHOULD BE ABLE TO MAKE A DISTINCTION BETWEEN GREEN FIELD AND BROWN FIELD
INVESTMENTS. ABOVE WAS AN EXAMPLE OF GREEN FIELD INVESTMENT, WHEREIN PRODUCTION
FACILITY IS BEING SETUP SCRATCH UPWARDS. ON THE OTHER HAND, BROWN FIELD
INVESTMENTS BUY EXISTING SETUP ON GROUND AND THEN PROBABLY TRANSFORM IT.
EXAMPLE
OF BROWNFIELD INVESTMENT – CARGILL FOODS TAKING OVER PARAKH FOODS IN
INDIA: But the
most common route for MNC investments is to buy up local companies and then to
expand production. MNCs with huge wealth can quite easily do so. To take an
example, Cargill Foods, a very large American MNC, has bought over smaller
Indian companies such as Parakh Foods. Parakh Foods had built a large marketing
network in various parts of India, where its brand was well-reputed. Also,
Parakh Foods had four oil refineries, whose control has now shifted to Cargill.
Cargill is now the largest producer of edible oil in India, with a capacity to
make 5 million pouches daily!
EXAMPLE
OF FORD MOTORS PARTNERING WITH M&M:
Ford Motors, an American company, is one of the
world’s largest automobile manufacturers with production spread over 26 countries of the world . Ford Motors came to India
in 1995 and spent Rs. 1700 crore to set up a large plant near Chennai
. This was done in collaboration with Mahindra and Mahindra, a major Indian manufacturer of jeeps and trucks.
By the year 2004, Ford Motors was selling
27,000 cars in the Indian markets, while 24,000 cars were exported from India
to South Africa, Mexico and Brazil. The
company wants to develop Ford India as a component supplying base for its other
plants across the globe.
MNC
HAVE DEEP POCKETS – THEY HAVE GREAT ECONOMIC MIGHT: In fact, many of
the top MNCs have wealth exceeding the entire budgets of the developing country
governments. With such enormous wealth, imagine the power and influence of
these MNCs!
There’s another way in
which MNCs control production. Large MNCs in developed countries place
orders for production with small producers. Garments, footwear, sports items
are examples of industries where production is
carried out by a large number of small producers around the world. The products
are supplied to the MNCs, which then sell these under their own brand names to
the customers. These large MNCs have
tremendous power to determine price, quality, delivery, and labour conditions
for these distant producers.
CONCLUSION:
PRODUCTION IS GETTING INTERLINKED:
Thus, we see that there are a variety of ways in
which the MNCs are spreading their production and interacting with local
producers in various countries across the globe. By setting up partnerships
with local companies, by using the local companies for supplies, by closely
competing with the local companies or buying them up, MNCs are exerting a
strong influence on production at these distant locations. As a result, production
in these widely dispersed locations is getting interlinked.
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FOREIGN
TRADE AND INTEGRATION OF MARKETS
FOREIGN
TRADE HAS BEEN HAPPENING SINCE THE DAYS OF INDUS VALLEY CIVILISATION: For a long time
foreign trade has been the main channel connecting countries. In history you
would have read about the trade routes connecting India and South Asia to
markets both in the East and West and the extensive trade that took place along
these routes. Also, you would remember that it was trading interests which
attracted various trading companies such as the East India Company to India.
TWIN
BENEFITS OF FOREIGN TRADE = CONSUMER CHOICE + PRODUCER MARKET: To put it
simply, foreign trade creates an opportunity for the producers to reach beyond
the domestic markets, i.e., markets of their own countries. Producers can sell
their produce not only in markets located within the country but can also compete
in markets located in other countries of the world. Similarly, for the buyers,
import of goods produced in another country is one way of expanding the choice
of goods beyond what is domestically produced.
EXAMPLE
OF FOREIGN TRADE: PENETRATION OF CHINESE TOYS INTO THE INDIAN MARKET: Chinese
manufacturers learn of an opportunity to export toys to India, where toys are
sold at a high price. They start exporting plastic toys to India. Buyers in
India now have the option of choosing between Indian and the Chinese toys.
Because of the cheaper prices and new designs, Chinese toys become more popular
in the Indian markets. Within a year, 70 to 80 per cent of the toy shops have
replaced Indian toys with Chinese toys. Toys are now cheaper in the Indian
markets than earlier. What is happening here? As a result of trade, Chinese
toys come into the Indian markets. In the competition between Indian and
Chinese toys, Chinese toys prove better. Indian buyers have a greater choice of
toys and at lower prices. For the Chinese toy makers, this provides an
opportunity to expand business. The opposite is true for Indian toy makers.
They face losses, as their toys are selling much less.
Foreign trade thus
results in connecting the markets or integration of markets in different
countries.
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FOREIGN
INVESTMENT + FOREIGN TRADE = GREATER INTERCONNECTION / INTEGRATION =
GLOBALISATION: The result of greater foreign investment and greater
foreign trade has been greater integration of production and markets across
countries. Globalisation is this process of rapid integration or
interconnection between countries. MNCs are playing a major role in the
globalisation process. More and more goods and services, investments and
technology are moving between countries. Most regions of the world are in closer
contact with each other than a few decades back.
FACTORS THAT HAVE
ENABLED GLOBALISATION:
1.
TECHNOLOGY:
a.past fifty years have seen several
improvements in transportation
technology. This has made much faster
delivery of goods across long distances possible at lower costs
b.
Goods are placed in containers
that can be loaded intact onto ships, railways,
planes and trucks. Containers have led to huge reduction in port handling costs
and increased the speed with which exports can reach markets.
c. Even more remarkable have been
the developments in information and communication technology. This has been facilitated by satellite communication
devices
2.
LIBERALISATION
OF FOREIGN TRADE AND FOREIGN INVESTMENT POLICY
a.TAXES WORK AS TRADE BARRIERS: Tax on imports is
an example of trade barrier. It is called a barrier because some restriction
has been set up. Governments can use trade barriers to increase or decrease
(regulate) foreign trade and to decide what kinds of goods and how much of
each, should come into the country
b.
The Indian government, after Independence, had put barriers
to foreign trade and foreign investment.
This was considered necessary to protect the
producers within the country from foreign competition. Industries were just
coming up in the 1950s and 1960s, and competition from imports at that stage
would not have allowed these industries to come up. Thus, India allowed imports of only essential items such as
machinery, fertilisers, petroleum etc.
Note that all developed countries, during the early stages of development, have
given protection to domestic producers through a variety of means.
c. AROUND 1991,
GOVT CONCLUDED THAT TIME HAD COME TO OPEN UP THE INDIAN MARKET: Starting around
1991, some farreaching changes in policy were made in India. The government decided
that the time had come for Indian producers to compete with producers around
the globe. It felt that competition would improve the performance of producers
within the country since they would have to improve their quality. This
decision was supported by powerful international organisations.
d.
BARRIERS WERE REMOVED = FREE FLOW OF GOODS AND SERVICES: Thus, barriers on
foreign trade and foreign investment were removed to a large extent. This meant
that goods could be imported and exported easily and also foreign companies
could set up factories and offices here.
e.
Removing barriers or restrictions set by the government is
what is known as liberalisation. With liberalisation of trade, businesses are allowed to make
decisions freely about what they wish to import or export. The government
imposes much less restrictions than before and is therefore said to be more
liberal.
3.
WORLD
TRADE ORGANISATION
a.POWERFUL INTERNATIONAL ORGANISATIONS ARGUED
THAT TRADE BARRIERS ARE HARMFUL TO THE ECONOMY:
Liberalisation of foreign trade and investment in
India was supported by some very powerful international organisations. These
organisations say that all barriers to foreign trade and investment are
harmful. There should be no barriers. Trade between countries should be ‘free’.
All countries in the world should liberalise their policies.
b.
World Trade Organisation (WTO) is one such organisation whose aim is to
liberalise international trade. Started at the initiative of the developed
countries, WTO establishes rules regarding international trade, and sees that
these rules are obeyed. Nearly 160 countries of the world are currently members
of the WTO (as on June 2014).
c. Though WTO is supposed to allow
free trade for all, in practice, it is seen that the developed
countries have unfairly retained trade barriers. On the other hand, WTO rules
have forced the developing countries to remove trade barriers. An example of this is the current debate on trade in
agricultural products.
d.
DEBATE OVER FREE AND FAIR TRADE: Agriculture
sector provides the bulk of employment and a significant portion of the GDP in
India. Compare this to a developed country such as the US with the share of
agriculture in GDP at 1% and its share in total employment a tiny 0.5%! And yet
this very small percentage of people who are engaged in agriculture in the US
receive massive sums of money from the US government for production and for
exports to other countries. Due to this massive money that they receive, US
farmers can sell the farm products at abnormally low prices. The surplus farm
products are sold in other country markets at low prices, adversely affecting
farmers in these countries. Developing countries are, therefore, asking the
developed country governments, “We have reduced trade barriers as per WTO
rules. But you have ignored the rules of WTO and have continued to pay your
farmers vast sums of money. You have asked our governments to stop supporting
our farmers, but you are doing so yourselves. Is this free and fair trade?”
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POSITIVE IMPACTS OF GLOBALISATION:
1.
MNC
GENERATE EMPLOYMENT IN MULTIPLE COUNTRIES.
a.MNCs have been interested in industries such as cell phones,
automobiles, electronics, soft drinks, fast food or services such as banking in
urban areas. These products have a large number of well-off buyers. In these
industries and services, new jobs have been created.
2.
MNC
MIGHT BRING WITH THEM LATEST TECHNOLOGY OF PRODUCTION (RENAULT MAHINDRA
EXAMPLE)
3.
SEVERAL
OF THE TOP INDIAN COMPANIES HAVE BEEN ABLE TO BENEFIT FROM THE INCREASED
COMPETITION. THEY HAVE INVESTED IN NEWER TECHNOLOGY AND PRODUCTION METHODS AND
RAISED THEIR PRODUCTION STANDARDS.
4.
LOCAL
COMPANIES SUPPLYING RAW MATERIAL TO MNC HAVE ALSO PROSPERED,
5.
CONSUMERS
HAVE WIDER CHOICE OF PRODUCTS TO CHOOSE FROM – BETTER QUALITY / CHEAPER PRICES
/ HIGHER STANDARDS OF LIVING (CHINESE TOYS EXAMPLE)
a.THIS IS ESPECIALLY TRUE FOR WELL OFF SECTION IN URBAN AREAS
6.
PRODUCERS
HAVE A BIGGER MARKET TO SELL THEIR PRODUCTS (CHINESE TOYS EXAMPLE)
a.Globalisation has enabled some large Indian companies to emerge
as multinationals themselves! Tata Motors (automobiles), Infosys (IT), Ranbaxy
(medicines), Asian Paints (paints), Sundaram Fasteners (nuts and bolts)
7.
APART
FROM MOVEMENT OF GOODS/SERVICES/TECHNOLOGY/INVESTMENT, PEOPLE ALSO MOVE IN
SEARCH OF JOBS = THIS IS A GREAT PLUS FOR INDIA AS IT REDUCES NUMBER OF
EDUCATED UNEMPLOYED IN INDIA AND THESE PEOPLE ARE ABLE TO REMIT BACK DOLLARS
WHICH IS MUCH NEEDED
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NEGATIVE IMPACTS OF GLOBALISATION:
1.
MANC
HAVE FORMIDABLE ECONOMIC MIGHT – UNEQUAL POWER RELATIONS WITH LOCAL/NATIONAL
GOVERNMENTS AND WITH SMALLER SUPPLIERS.
2.
LOCAL
MANUFACTURERS – COMPETED OUT OF THE MARKET (CHINESE TOYS EXAMPLE)
a.Batteries, capacitors, plastics, toys, tyres, dairy products,
and vegetable oil are some examples of industries where the small manufacturers
have been hit hard due to competition. Several of the units have shut down
rendering many workers jobless. The small industries in India employ the
largest number of workers (20 million) in the country, next only to
agriculture.
3.
OUT-MIGRATION
OF TALENTED INDIANS = BRAIN DRAIN = INDIA’S GROWTH AND DEVELOPMENT IS
NEGATIVELY IMPACTED
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