LPG Framework

Welcome again friends to the course of International Business. So, in the last lecture we
talked about the EPRG framework and the stages of internationalization. So, we said
what is the EPRG basically it starts from ethnocentric; that means home country, where
the major focus is on the domestic country or home and then polycentric, where you
move towards outside with having the same product and marketing strategy one tries to
move across to other countries.
Then the third is regiocentric, which is where the company tries to focus on similar
locations or places which is or regions which have a similar culture and economic status
and all. And finally with the particular product, obviously with different kind of product
and finally polycentric where they tried to reach different ((you know)) places all the
different, the whole globe, becomes one right! as good as that.
So, it is a extension from the home to the whole world right!. Then we talked about the
different stages of internationalization, in which again we said there are 5 stages right!.
So, these 5 stages in which one of them was the domestic, then the MNC, the
transnational, (you know) the global, the international.
So, the point is what is we said is a MNC is somebody works from a home country, but
then wherever they operate in each place they worked with a identity. That means, the
company tries to locate itself and become act like a localized company, they behave like
a localized company. But they are basically (you know) an MNC right!.
So, multinational so every country wherever they work, they try to adjust it is themselves
to the local market. Transnational’s generally do not (you know) are not available they
are in the true sense, but still we can say some of the companies like Hindustan Unilever
Colgate are truly are transnational’s.
But as such getting a very true definition of meaning (you know) somebody in today’s
days it is talking somebody truly transnational and somebody today purely domestic is
very difficult to find, both are extremes which are very difficult to find. Today we will
look into one model given by Bartlett and Sumatra Ghoshal a very known Indian
economist.
(Refer Slide Time: 02:47)
So, this is what we are talking about the domestic’s, international, multinational, global
and transnational company right!.
(Refer Slide Time: 02:54)
So let us before that let us talk about what are the Barriers to internationalization right!.
So, in terms of the ranking it has a ranking was done of after doing some survey and as
per this survey the first comes under the heading of capabilities. So, what is that? Now
inadequate quantity of untrained personnel you do not have good human resource right!
adequate people.
So, that was the first problem to become international to go international, finance was
considered to be the second which has shortage of working capital to finance exports is a
problem. Access accessibility access limited information to locate or analyze the markets
is third problem, fourth problem again is connected with access where to say is
identifying the foreign business opportunities is a barrier is a problem right! challenge.
Then capabilities again comes which is says lack of managerial time, the first one was
untrained personnel right!. Now it is saying managerial time to deal with the
internationalization right!. Then again it says inability to contact potential overseas
customers, developing new products for foreign markets.
Now business environment was another point which says unfamiliar foreign business
practices, you do not know the practices in that host country and that might be a
problem. Again under heading capabilities it is meeting export product quality or
standards or specification right!. And finally another is under access which says
unfamiliar exporting or procedures or paperwork.
So, these are just few of the (you know) this is not all may be, but then these are few
important points. So, this description of the barriers are if you understand them it tells
what problems will somebody face some firm face, when they are trying to go global or
they are trying to internationalize themselves ok.
(Refer Slide Time: 04:47)
So, this Bartlett and Ghoshal method indicates that strategic options for businesses
wanting to manage their international operations are based on two pressures, one local
responsiveness and global integration. So the two pressure or forces on firms wanting to
compete in international markets which determine the four grids in the box below
basically are let us say.
(Refer Slide Time: 05:14)
So what these 4 grids the first look at this side. So, what it is saying high pressure for
global integration low pressure for global integrations. So, the global integration pressure
right!. Now pressure for local responsiveness low pressure and high pressure for local, so
a company there are 4 grids now. So, when there is a high pressure for global integration,
but there is a now pressure for local responsiveness.
Then this comes under global companies category. When there is a high pressure for
global integration and high pressure for local responsiveness, it is a transnational
company right!.
When there is a low pressure for global integration and low pressure for local
responsiveness it is more of a international structure right!. As Sumatra Ghoshal has and
Bartlett have said and when there is a low pressure for global integration and high
pressure for responsiveness it is called a multi domestic or MNC basically it for the that
comes under the MNC category.
So, these are the four different kinds of breakups which have been given in their model
by Bartlett and Ghoshal, explaining taking this forces of high pressure of global
integration or pressure of global integration and pressure of local responsiveness right!.
So, they gave this model.
(Refer Slide Time: 06:31)
Now look at this MNC, for example let us go visit back to the revisit the multinational
corporation. What it is saying? It is a company in corporate in it is home country, but it
carries out business operations beyond that country in many other countries host
countries.
But it is head office will be in the home country and they behave try to localize
themselves. So, (you know) what Sumatra Ghoshal had and Bartlett had said is basically
that companies need to act local right! be global, but act local.
So, they were basically focusing on be global act local. So, you need to have your
tentacles (you know) your operations spread up everywhere. But then you need to keep
in mind that if you need to be successful if you want to be successful you have to be
understand the local taste and preferences and the local needs of the people, the
consumers local consumers needs of the host country right!.
Otherwise no company can ever be successful, if they try to (you know) push their
product or their products and services entirely in the same way to a new host country that
might be very dangerous. So, MNCs have managerial headquarters in many countries
and but they while they carry out operations in the number of other host countries.
Examples have been given right! some of the best examples of MNC TCS Tech
Mahindra right! and IBM Deloitte are some of the examples of MNC in India right!.
(Refer Slide Time: 07:59)
Now, what are these models of MNCs Centralized Regional Multinational right!.
(Refer Slide Time: 08:05)
So, what is saying in the centralized? In the centralized model the companies put up an
executive headquarter in it is home country and then build various manufacturing plants
and facilities in the other countries right!.
So, it is most important advantage is being able to avoid tariffs and import quotas and
take advantage of lower production costs. So, you put up a plant or operation in the home
country and take advantage of this production cost.
In the regional what is happening, the model states that the company keeps it is
headquarter in one country that supervises a collection of offices that are located in
various other countries. Unlike the centralized model the regionalized model includes
subsidiaries and affiliates that all report to the headquarter right!.
So, there is a headquarter and there are regional affiliates subsidiaries they would report
to the headquarter. In the multinational model a parent company operates in the home
country and puts up subsidiaries in different countries, the difference is that the
subsidiaries and affiliates are more independent that is the only difference. This
subsidiaries and affiliates are more independent in comparison to the regional counter
parts right!. So, this is the only difference between them.
(Refer Slide Time: 09:25)
Now, after understanding the different kinds of the stages of the companies and
accordingly breaking up into different kinds of companies, let us talk about economic
policy of India. India’s economic policy greatly changed in the year1991 and we saw a
transformation in the Indian economy entirely right! to a very very large extent right!.
(Refer Slide Time: 09:51)
So, what is this new economic policy that happened, it refers to the economic
liberalization. We were a more of a closed market before 1991 we were of a closed
market and we had several issues. For example, before that we had the license raj permit,
you need a licenses for everything which was controlled by some Babu’s or the
bureaucrats. So, this used to be serious factor which used to hinder the growth of
business in India and it was specially a very difficult for even the foreign firms.
So, what it says is basically it refers to the liberalization or relaxation in the import
tariffs, deregulation of the markets or opening up the markets for private and foreign
players and reduction of taxes to expand the economics wings of the country.
So, the whole idea of the new economic policy that happened in 1991 when India was
really in a very difficult condition at that time and we were wondering what would
happen to India. When this LPG framework came up the liberalization privatization
globalization policy that was started by Dr. Manmohan Singh former Prime Minister is
considered with the father of New Economic Policy of India.
So, July 24 1991 he gave this (you know) New Economic Policy to India and that was
the point where India’s growth trajectory was really it grew at a was very high right!.
The thrust of the economic policy new economic policy has been towards creating a
more competitive environment.
So, as I said it was a closed economy we were not allowing the foreign firms to come
freely. So, this all resulted in poor business interests from the foreign firms right! and as
a result the economy was not growing fast. Why fast even it was in a very bad state. So,
in the economy as a means to improving the productivity and efficiency of the system, so
this new economic policy came.
What are the objective that the new economic policy came? So, at that time I remember
Narsimha Rao was the prime minister and Manmohan Singh was finance minister.
(Refer Slide Time: 11:37)
The main objective was to plunge Indian economy into the arena of globalization and to
give it a new thrust on market orientation. So, first of all what happened was we wanted
to say that India is now open. So, we welcome the other countries and firms from other
countries to come to India, that was the first point we state there.
The intention was to bring down the rate of inflation right!, because inflation was
becoming very high and we needed to curve it. What is inflation I hope you understand
when the price of the basic commodities rises, so we say the inflation has grown right!. It
intended to move towards higher economic growth rate and to build a sufficient foreign
exchange, India was suffering from a serious foreign exchange crisis right! at that time.
So, in 1991 we had a serious foreign exchange crisis and the whole objective was to have
a economic growth. So, we wanted the economy to run faster and to build sufficient
foreign exchange reserves, otherwise if there would be no foreign exchange reserves our
imports would be at stake we cannot buy anything we cannot (you know) get anything
from outside it would be very difficult.
It wanted to achieve economic stabilization and to convert the economy into a market
economy, market driven economy by removing all kind of unnecessary restrictions. We
had number of unnecessary restrictions, we were (you know) I said as a closed economy.
So, we had lot of restrictions you need a permit you needed (you know) permission from
something this permission that permission so that was all much unnecessary permissions
were required.
So, you I remember there was something called a Note 7, where (you know) the foreign
company had to had a joint venture with an Indian firm to even make it presence felt in
India. So these are some of the problems, it wanted to permit the international flow of
goods, services, capital, human resource and technology without many restrictions.
So, India started welcoming the foreign players and because this foreign players had a
better technology with them, they had large amount of capital and reserve. So, this was
good for India because, the Indian market did not have this (you know) benefits. So, at
least sudden somebody came it was good for the Indian economy, because people got
employment and they would get employment and the reserves would increase right!.
So, that was a best possible solution at that point of time, there can be debates on what
could have been done better. But at that point of time today we can see as that was that
being one of the best policies that was done. It wanted to increase the participation of
private players in all the sectors of the economy. So private players were encouraged to
participate which was less, because of this bureaucratic issues right!.
(Refer Slide Time: 14:18)
Now, you see this diagram will tell you how we although it is a up to 2010, but then still
we 1950 onwards you see there is hardly any movement 1990 this is the point where we
were right!. And how the trajectory has taken up, how the movement has gone up you
see it is serious growth right! it is positively very high growth that has taken up. So, from
1990 to 2010 this 20 years India saw a tremendous a tremendous growth right!. If you
make it a graph you can check the kind of growth we generated in this 20 years.
(Refer Slide Time: 14:58)
What are the major highlights of these economic reform was during in this 1991reform,
first was the de-reservation of industries of the public sector right!. Second was
liberalization a abolition of industrial licensing system. Third privatisation of the public
sector enterprise, we started thinking how to go the make some of the public sector units
also privatize them right!. The government thought that it is none of our business to be to
do business right!. Fourth we welcomed globalization ok.
(Refer Slide Time: 15:28)
So, this in totally (you know) this LPG framework liberalization privatization increase
privatization and go global. So, this was the model which India accepted at that point of
time.
(Refer Slide Time: 15:41)
So, LPG this liberalization refers to the relaxation of the government regulations and
restrictions in the economy, in exchange of free flow of goods and services between the
countries right!, for greater participation of private entities. Privatization is defined a
transfer of ownership and management of an enterprise from the public sector to the
private sector.
So, most of the ill public sectors are unhealthy public sectors, where they thought the
government thought we should sell it off and try to until there were in some sensitive
sectors like defense and all. We should try to privatize give it some private hands and let
them do it efficiently this helped saving the governments capital also and the government
did not have to intervene to much in between and that saved precious time of the
government.
Globalization is described as the process by which regional economies societies and
cultures have become integrated through a global network of communication
transportation and mode and trade. So now when globalization was encouraged when we
liberalized and we (you know) went global.
So, we also went global and we invited countries (you know) outside companies to come
to India, this really helped wonders for India. So, many products were there been in
which India had a strong hold and those products where easily exported today then at
that time.
And in many many areas India was quite weak and we needed a hand holding and
support at that time. So, that helped because the foreign companies found that India is a
domestic as a market is huge. So, if they come to India they would find a good presence
here and they would find a good market. So, this helped them also.
(Refer Slide Time: 17:14)
Some of the major aspects of liberalization that happened in that time was, first we start
with the Abolition of the licensing. So, the license raj and you needed a permit. So, what
it says in the year 1991 the abolishing licensing for most industries except 6 right!
industries of strategic significance.
They include alcohol, cigarettes, industrial explosives, defense products, drug and
pharmaceuticals and hazardous chemicals and certain others reserved for the public
sector. So, this would boost to set up of new industries and shift focus to the productive
activities.
So, the government thought if we abolish the licensing which is a unnecessarily a
hindrance and a problem for the private players to come into the business, they thought
you should (you know) completely remove it right!. Liberalization of Foreign
Investment, earlier prior approval was essential by foreign companies but as I said, but in
present situation automatic approvals were given for FDI to flow into the country.
So, there was to we have already studied the government route and the automatic route
for FDI inflows. A list of high priority and investment intensive industries were
delicensed and could invite up to 100 percent. In the last class I had given you a task also
if you remember, where I asked to find out the different investment (you know) FDI
investments in the various sectors.
So, in some sectors it is almost it is 100 percent and in some others it is like 49 percent,
so some where it is 20 percent so that is range varies ok. FDI including sectors such as
hotel and tourism, infrastructure, software development etcetera. Use of foreign brand
name or trademark was permitted for sale of the goods. So, that also have boosting the
economy.
(Refer Slide Time: 18:56)
The third point was Relaxation of the Locational Restrictions, there was no restrict
requirements to get approval from the Central Government for setting up industries
anywhere in the country, except those specified under compulsory licensing or in cities
within population exceeding 1 million.
So the some like for example, the polluting industries were required to be located 25
kilometers away from the city peripheries, if the city population was greater than 1
million or the 10 lakhs. So, these kind of relaxation were also given to the industries to
set up their facilities.
The last fourth point was Liberalization of the Foreign Technology imports, for business
projects in which imported capital goods were required. The (you know) there is
imported technology imported raw materials were required, automatic license would be
given for foreign technology imports up to 2 million US dollars right!. No permission
would be required for hiring foreign technicians and foreign testing of indigenously
developed technologies.
So, you do not require any permission to hire foreign technicians and testing our own
products own products developed in our own country. So, these are some of the
important aspects.
(Refer Slide Time: 20:04)
Another important aspect was the Phased manufacturing programmes, under phased
manufacturing programme any enterprise had to progressively substitute imported inputs
right!. So, inputs which you imported have to be substituted right! with the local made
ones right!. Components with domestically produced inputs under local content policy,
so that was the policy was how much of import you can make and how much you what
are the limit right!. The new industrial policy abolished this PMP right!.
So, this phased manufacturing programme they abolished this point of how much you
can import right! for all industrial enterprises. Foreign Investment Promotion Board
FIPB was setup to speed an approval for foreign investment proposals. So now
companies the Indian companies could import and the foreign companies could easily
setup their plants in India.
The reforms in the public sector was also a very key factor that happened in during this
time. There was more autonomy to the PSUs through the memorandum of understanding
MOUs restricting interference of the government officials. The government officials
would not interfere much in the PSUs because it was felt that this government officials
were actually creating trouble in the smooth running of this PSUs and allowing their
management’s greater freedom in the decision making.
The next point is the MRTP act, MRTP is Monopolies Restrictive Trade Practises Act.
So, what it say the industrial policy of 91 modernized the MRTP act right!. Regulations
relating to concentration of economic power, pre entry restrictions for setup new
enterprises, expansion of existing businesses, merges and acquisitions have been
abolished.
So, the monopolies and restrictive trade practises act which was modernized right! which
helped in paving way and encouraging the investments to grow larger and the investors
to feel more safer right!.
(Refer Slide Time: 22:06)
How the impact? What was the Impact of the Liberalization in the Indian Economy? So,
it these are some of the impacts you can see some simple ones let us take. So, implement
was generated right!, new technology emerged came to the market, infrastructure
expansion happened, we were known as a open market in the world level. So, countries
which were not aware they started looking at India as a opportunity our value currency
also was more aligned with the world currency the dollar and the euro right!.
That there was a growth in GDP, the increased consumption and new life styles the there
was change in the Indian market and the consumption adoption adaptation of new
lifestyle happened. Competition grew in fact competition grew healthy competition grew
and increment in the foreign investors.
So, more foreign investors started putting in their money into Indian market. So, what are
the objective now? What was the objective of privatization. So, first to was to improve
the financial situation of the government. So, the by privatizing the capital was saved of
the government and they could use it for better purposes for social development and
social causes.
(Refer Slide Time: 23:13)
Reduce the workload of PSUs right!, raise funds from disinvestment. So, you
disinvestment means you divest some of the stocks in the foreign company and the in the
PSUs and raise this money and use it for social causes again. Increase the efficiency of
the government organizations, provide better and improved goods and services. So, the
market demand was growing, the market expected better products and services. If the
domestic players would not do that the private firms the international firms they had
stepped in.
So, thier market demand started growing immensely and people also because of this
globalization concept people India was India had started doing well in the IT sector and
all slowly. So, there was flow of revenue into India good flow of revenue and there was a
healthy market.
(Refer Slide Time: 23:59)
So, all these things helped these were the main objectives of privatization. Some of the
examples I have brought you can see, so like for example these were some examples of
privatization the VSNL, the popular ones let me take BALCO Bharat Aluminium
Company Limited right!, Indian Tourism Development Corporation ITDC right!, Hotel
Corporation of India Limited, Paradeep Phosphates.
So, all these are the good examples of privatization, where the government started gave
up the stake and (you know) they asked the foreign the private players to step in and own
the company right!. So, there are 3 major types of (you know) privatization. Now what
are they? So, let us talk about them.
(Refer Slide Time: 24:40)
Delegation government keeps hold of the responsibility and private enterprises handles
fully or partly the delivery of product and services. So, what is the relationship what is
happening, the government Delegates that means the it holds the responsibility, but it
allows the private enterprises to deliver the product so make and deliver the product and
services. Second is the Disinvestment method the government surrenders the
responsibility completely gives up the to the private sector.
Displacement, the private enterprise expands and gradually displaces the government
entity. So, the it the government allows it for to do that, the private enterprises expand
and finally, they completely displaces the government entity.
(Refer Slide Time: 25:22)
So, these are the 3 types of the prominent types in which privatization happens. What are
the merits profit making increases right! in the PSUs and it helps to diversify their
business and make them more healthy and competitive.
Sick units which was a major problem in India, there were lots and lots of sick units. So,
to how to revive this sick units was also an important point. How to create accountability
and responsibility in the PSUs, because if there was a lot of burecracy and involvement
of the political (you know) people and all. So, to find out to hold somebody accountable
and responsible was becoming very difficult.
So, the government right!ly thought they should (you know) come out of it slowly and
that helped PSUs event. And some of the PSUs for example, today IOC ONGC you can
these companies are doing extremely good right!, BHEL it will decrease budgetary
deficits that results from expenditure on loss making PSUs.
Privatization facilitates globalization by opening out the economy and increasing it is
competitiveness in the international market. So, as we became more and more healthy
more and more competitive a products became better a services become better, so we
were we start we got slowly we started getting recognition in the international markets
and political interference started going down right!.
(Refer Slide Time: 26:43)
But there ware some demerits of the privatization also what was it? Sometimes it could
lead to monopoly that would increase disparity in the income and wealth. So, this is a
criticism against privatization, private sectors display lack of interest in buying shares of
sick or loss making PSUs they only want to be in their when the PSUs are already doing
good right! or there were not sick the assets were quite in a healthy shape.
Private enterprises aims at maximizing profits and ignoring the needs of the economy, so
this was a fear. Finally, private enterprises will not be interested in long period projects.
So, they wanted only short time short period project not long period projects like for
example (you know) for infrastructural development of the country right!.
So, they were not interested which may retire the growth of capital goods industries. So,
if the private entrepreneurs will not get involved in these kind of long projects, the
government will have to again step in, so that would again become a difficult thing.
Some private sectors lacked experience and expertise in facing foreign competition. So,
they have to be again trained, but that is not a big (you know) the market was such at that
point of time right!.
(Refer Slide Time: 27:57)
And the last point is the Globalization, concept of globalization as explained by the IMF
is the growing economic interdependence of countries world wide through increasing
volume and variety of cross border transactions in goods and services of international
capital flow and also through the more rapid and wide spread diffusion of technology.
So, what it is saying globalization is helping the countries to join hand and increase the
volume and variety of cross border transaction basically.
So, but the fear at that time or any time is always whether the markets are ready, whether
the country is ready for it. But then to much of thinking also may not work because if the
whole everybody is doing it in India would have lacked behind, may be India could not
have taken the advantage. What it did at that time and today India’s economy is in a
much much better shape right!.
India signed many agreements with a WTO the World Trade Organization, affirming it is
commitment to liberalize trades such as TRIPs Trade Related Intellectual Property right!
s. So, this is these are the problems if you do not treat it properly foreign investors would
be scared, TRIMs trade related investment measures and agreement on agriculture. What
steps was taken for globalization?
(Refer Slide Time: 29:13)
First Reduction in tariffs, the customs duty and tariffs imposed on the imports and
exports where reduced gradually to make the Indian economy attractive to the global
investors. This was the first thing that the government did. Long term trade policy as we
said you need to private players have to come into that long term trade (you know)
projects long term projects.
Trade policy was enforced for longer duration ok, because short term trade policies are
not going to benefit much. Increase in equity limit of foreign investment, equity limit of
foreign investment has been raised by the governments specific sectors