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  • 8/10/2019 Globalisation Econs


  • 8/10/2019 Globalisation Econs


  • 8/10/2019 Globalisation Econs



    Shri Vineet Joshi, Chairman, CBSEDr. Sadhana Parashar, Director (Training), CBSE Ms. Abha Adams, Consultant, Step-by-Step School, Noida

    Dr. Sadhana Parashar, Director (Training), CBSE

    Ideators: Classes IX and XDr. Anju Srivastava Ms. Sarita Manuja Ms. Varsha Seth Prof. Chand Kiran Saluja

    Mr. N K Sehgal Ms. Preeti Hans Ms. Sunita Tanwar Dr. Usha Sharma

    Dr. Uma Choudhary Ms. P Rajeshwary Ms. S Radha Mahalakshmi Ms. Renu Anand

    Ms. Anita Sharma Ms. Suganda Vallli Ms. Neelima Sharma Dr.Rajesh Hassija

    Mr Mukesh Kumar

    Material Developers: Classes IX - X

    Conceptual Framework

    Shri G. Balasubramanian, Former Director (Acad), CBSE


    Ms. Gayatri Khanna

    Ms. Renu Anand

    Ms. P Rajeshwary

    Ms. Sarabjit Kaur

    Hindi :

    Ms. Sunita Joshi

    Ms. Babita Singh

    Ms. Veena Sharma

    Mr. Akshya Kumar Dixit


    Ms. Vandna

    Ms. Nishtha BharatiMs. Seema Bhandari,

    Ms. Seema Chopra

    Ms. Madhuchhanda

    Ms. Reema Arora

    Ms. Neha Sharma


    Ms. Meera Bharihoke

    Ms. Parul Tyagi

    Ms. Sudha Tyagi

    Ms. Sonia Jarul

    Ms. Neena Phogat

    Mr. Nisheeth Kumar

    History :

    Ms. Sajal Chawala

    Ms. Jyoti Sharma

    Ms. Kamna Kurana

    Ms. Shalini Chatarvedi

    Mr. Dalia Haldar

    Political Science:

    Dr. Sangeetha Mathur

    Ms. Ananya Roy

    Ms. Sunita Rathee

    Ms Amarjit Kaur

    Ms. Nishu Sharma

    Ms. Manisha Anthwal

    Ms. Mamta Talwar

    Mathematics :

    Dr. K P Chinda

    Dr. Ram Avtar

    Sh. Mahender Shankar

    Sh. J C Nijhawan

    Ms. Rashmi Kathuria

    Ms. Reemu Verma


    Ms. Anubha Malhotra

    Ms. Vintee Sharma

    Ms. Chaitali Sengupta


    Ms. Guneet KaurMs. Ritu Ranjan

    Mr. Mukesh Kumar

    Ms. Babita

    Mr. Akashdeep

    Chemistry :

    Ms. Charu Maini

    Ms. S Anjum

    Physics :

    Ms. Novita Chopra

    Ms. Meenambika Menon

    Biology :

    Ms. Pooja Sareen

    Ms. Neeta Rastogi


    Ms. Madhuchhanda,

    RO(Innovation)Ms. Varsha Seth, Consultant

    Ms. Neha Sharma


    Ms. Renu Anand

    Ms. Gayatri Khanna

    Dr. N.K. Sehgal

    Ms. Anita Sharma

    Ms. Rashmi Kathuria

    Ms. Neha Sharma

    Ms. Neeta Rastogi

    Ms. Manjustha Bose

    Ms. Varsha MankuDr. K.L. Chopra



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    Chief Co-ordinator :Dr. Srijata Das, EO


    Ms. Sugandh Sharma, E O Dr Rashmi Sethi, E O Ms. S. Radha Mahalakshmi, E O

    E OMr. Navin Maini, R O (Tech) Ms. Madhu Chanda, R O (Inn) Shri R. P. Sharma, Ms. Neelima Sharma,

    Consultant (Science) Consultant (English)

    Shri Al Hilal Ahmed, AEO Ms. Anjali, AEO Ms. Reema Arora, Mr. Sanjay Sachdeva, S O

    Consultant (Chemistry)

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    PrefaceThis International Curriculum initiated by Central Board of Secondary Education - (CBSE) is a

    progressive step in making the educational content and methodology more sensitive andresponsive to the global needs. It signifies the emergence of a fresh thought process in

    imparting a curriculum which would restore the autonomy of the learner to pursue the

    learning process in harmony with the existing personal, social and cultural ethos.

    The Central Board of Secondary Education has been providing support to the academic

    needs of the learners worldwide. It has about 12500 schools affiliated to it and over 158

    schools situated in more than 23 countries. The Board has always been conscious of the

    varying needs of the learners and has been working towards contextualizing certain

    elements of the learning process to the physical, geographical, social and cultural

    environment in which they are engaged. The International Curriculum being designed byCBSE-i, has been visualized and developed with these requirements in view.

    The nucleus of the entire process of constructing the curricular structure is the learner. The

    objective of the curriculum is to nurture learner autonomy, given the fact that every learner

    is unique. The learner has to understand, appreciate, protect and build on values, beliefs and

    traditional wisdom, make the necessary modifications, improvisations and additions

    wherever and whenever necessary.

    The recent scientific and technological advances have thrown open the gateways of

    knowledge at an astonishing pace. The speed and methods of assimilating knowledge have

    put forth many challenges to educators, forcing them to rethink their approaches forknowledge processing by their learners. In this context, it has become imperative for them

    to incorporate those skills which will enable young learners to become'life long learners'.

    The ability to stay current, to upgrade skills with emerging technologies, to understand the

    nuances involved in change management and the relevant life skills have to be a part of the

    learning domains of the global learners. The CBSE-i curriculum has taken cognizance of

    these requirements.

    The CBSE-i aims to carry forward the basic strength of the Indian system of education while

    promoting critical and creative thinking skills, effective communication skills, interpersonal

    and collaborative skills along with information and media skills. There is an inbuilt flexibilityin the curriculum, as it provides a foundation and an extension curriculum, in all subject areas

    to cater to the different pace of learners.

    The CBSE introduced classes I and X in the session 2010-11 as a pilot project in schools. It was

    further extended to classes II, VI and X in the session 2011-12. In the seesion 2012-13, CBSE-i is

    going to enter in third year with classes III, VII and XI. The focus of CBSE-i is to ensure that the

    learner is stress-free and committed to active learning. The learner would be evaluated on a

    continuous and comprehensive basis consequent to the mutual interactions between the

    teacher and the learner. There are some nonevaluative components in the curriculum which

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    would be commented upon by the teachers and the school. The objective of this part or the

    core of the curriculum is to scaffold the learning experiences and to relate tacit knowledge

    with formal knowledge. This would involve trans-disciplinary linkages that would form the

    core of the learning process. Perspectives, SEWA (Social Empowerment through Work and

    Action), Life Skills and Research would be the constituents of this 'Core'. The Core skills are

    the most significant aspects of a learner's holistic growth and learning curve.

    The International Curriculum has been designed keeping in view the foundations of the

    National Curricular Framework (NCF 2005) NCERT and the experience gathered by the

    Board over the last seven decades in imparting effective learning to millions of learners,

    many of whom are now global citizens. The Board does not interpret this development as an

    alternative to other curricula existing at the international level, but as an exercise in

    providing the much needed Indian leadership for global education at the school level. The

    International Curriculum would evolve building on learning experiences inside theclassroom over a period of time. The Board while addressing the issues of empowerment

    with the help of the schools' administering this system strongly recommends that practicing

    teachers become skillful learners on their own and also transfer their learning experiences

    to their peers through the interactive platforms provided by the Board.

    I profusely thank Shri G. Balasubramanian, former Director (Academics), CBSE, Dr. Sadhana

    Parashar, Director (Training) CBSE, Dr. Srijata Das, Education Officer CBSE along with all the

    Officers involved in the development and implementation of this material.

    The CBSE-i website enables all stakeholders to participate in this initiative through the

    discussion forums provided on the portal. Any further suggestions for modifying any part of

    this document are welcome.

    Vineet Joshi

    Chairman, CBSE

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    CONTENTSGlobalisation: Its Meaning, causes and outcomes

    Capital Formation: It's meaning, components, need, importance

    and sources

    Capital Movement: It's meaning need and types

    Private Foreign investment: Foreign Direct Investment(FDI) and Foreign

    Institutional Investment

    Stock Market: Basic terms used, working and market








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    INTRODUCTIONMcDONALDS', SONY, COKE and PEPSI - these are some MNCs that the present generation is

    well aware of. Whereas, NASDAQ, SHANGHAI STOCK EXCHANGE, SAUDI STOCKEXCHANGE, BOMBAY STOCK EXCHANGE are names that still puzzle students and many of

    the adults alike.

    The ripple effect of fluctuation in one stock market is felt globally in other stock markets

    of the world. Isnt this phenomenon confusing?

    Why do some groups oppose the coming of MNCs, although they generate more

    employment, is to be comprehended.

    To what extent does the progress of a country depend upon Foreign Direct Investment

    is also debatable.All these issues can be answered logically, once we understand how the world has changed,

    after the transformation of GATT into WTO and its impact on different countries economic


    In this unit, apart from understanding conceptual differences between different

    terminologies, students will be acquainted with issues like Great Depression.

    Source: Source:






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    Globalisation : An OverviewIn the flat world of maps, sharp lines show where one country ends and another begins.

    The real world is more fluid. People do not have borders the way that parcels of land do.

    More Chinese people live outside mainland China than French people live in France, while

    many South Asians are found in the Middle East. These hundreds of big and small

    communities of people of one or the other country have been part of the world for a long


    Today two things that make them more pronounced are,

    First, these groups or communities of people are larger than before.

    Second, thanks to easy availability and accessibility of means of transport and

    communications, people can now stay in touch with the places they came from.

    A century ago, a migrant might board a ship, sail to America and never see his friends and

    family again. Today he texts his mother while still waiting to clear customs. He can wire his

    money in minutes. He can follow news from his hometown on his laptop. He can fly regularly

    to visit relatives or invest his earnings in a business in his hometown.





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    Fig : An Overview of Globalisation

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    In order to understand this significant development around the world, lets look at the

    following live experiences.

    Chike Obi Igbo, for example, runs a factory in Emugu, Nigeria, making soap and

    other household goods. He needs machines to churn palm oil and chemicals

    into soap, stamp it into bars and package it in plastic. He buys Chinese

    equipment because although he knows it is not as good as European stuff, it is

    much cheaper.

    When he wants to inspect a machine he has seen on internet, he asks an agent

    from his tribe, who lives in China to go and look at it. After receiving a feedback

    via e-mail he is in a better position to make a decision.

    By Gumisai Mutume

    In the small, remote village of Logokourani in western Burkina Faso, cotton is

    everything. It is the mainstay of that rural community, providing the major,

    and in some cases the only, source of income for many inhabitants. Cotton

    pays for health and education. It

    helps build houses and schools.

    Not too long ago, when exports of

    co t t o n i n cre a se d i n v a l u e ,production expanded in that part

    of the country, raising village


    But the collapse of the cotton price

    on the world market it has fallen

    by 54 per cent since the mid-1990s

    threatens the very existence of

    communities such as Logokourani.

    Cotton prices are too low to keepour children in school, or to buy

    food and pay for health, notes Mr.

    Brahima Ouattara, a small-scale

    cotton farmer in Logokourani.

    Some farmers are already leaving.

    Another season like this will

    destroy our community.

    CASE STUDIES1) Soap factory in Nigeria

    2) African cotton farmers battling to survive



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    Fig : Loading bales of cotton in Zimbabwe


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    Source: topnews.inThis is about a graduate Salma and her friend Samaira in India. Both of them while still

    studying in the University doing their undergraduate course are motivated by their

    seniors and friends in college to apply for a job in a call center run by US based company

    in 2006. One day they got a call for walk-in-interview and got selected for voice based


    Both were very excited as they got a pay package of about $1500 which was

    considered to be a decent salary. Their odd working hours hardly gave them time to

    study. They had to leave their studies.

    After working for three to four months in night shifts as the company was US based,

    their health started showing signs of deterioration. Long and odd working hours with

    work related deadlines gave them promotion but took a toll on their health. After

    working for a year both were promoted as project leaders. Then one day Salma was

    shocked to find that her I-Card was denied access at the office-entrance.

    Later, she was informed that many like her in the company have been laid off due to

    slowdown in the U.S. economy.

    She had no other option but to sit at home to wait for another job opening.

    From all the new channels and means of fast transport and communications people around

    the world are not only engaging in foreign trade (buying and selling goods and services) but

    are increasingly making investments in foreign countries.

    This greater integration and interconnectedness among economies is what is termed as

    Globalisation. Therefore, Globalisation is not only movement of people, goods and services

    across boundaries but it also encompasses flow of technology, capital, ideas and culture





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    among Nations. For example, a Chinese businessman in South Africa, who senses demand

    for plastic umbrellas will quickly inform his cousin who runs a factory in China.

    It is not that these flows did not exist earlier in the world but what is novel about these flowstoday are the intensity, frequency and speed with which these flows are carried out.

    Globalisationis the result of set of various policies that are aimed at transforming the world

    towards greater interdependence and integration.

    It involves creation of networks and activities transcending economic, social and

    geographical boundaries. It is turning the world into a global village.

    Globalization attempts to establish links in such a way that happenings in Dubai or America

    or China can be influenced by events happening across seven seas.

    The United Nations ESCWA (United Nations Economic and Social Commission for

    Western Asia) says Globalisation is a widely-used term that can be defined in a

    number of different ways.

    When used in an economic context, it refers to the reduction and removal of

    barriers between National borders in order to facilitate the flow of goods, capital,

    and services and labour... although considerable barriers remain to the flow of


    Outcomes of Globalisation

    Thomas L. Friedman has examined the impact of the

    flattening of the world, and argues that globalized

    trade, outsourcing, supply-chaining, and political forces

    have changed the world permanently, for both better and

    worse. He also argues that the pace of Globalisation is

    quickening and will continue to have a growing impact on

    business organization and practice.

    From all the above three examples you must have gathered the contemporary phenomena

    of Globalisation taking place around you and that the effects are not always what you like.

    There are certain aspects of these phenomena which you may not like.

    Now lets look at the causes and consequences of Globalisation.

    Globalisation is principally caused due to a gamut of economic, technological, socio-cultural,

    political and biological factors.

    Is the world flat?????




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    With the invention and development of computers, work done at high cost location can

    be transferred to low cost location which includes development of software,

    engineering and designing.

    Further, with the advent of internet telephony, other developments in science and

    technology, fast means of transport, under sea video cables-dissemination of

    information has grown exponentially.

    Imagine the day when people no longer need to carry their wallet everywhere.

    Instead of making payment through smartcard/credit card, people just have to

    flash their mobile phone in front of swiping machines.

    Such transactions are not far away thanks to Near fieldcommunication or NFC technology which facilitates

    contactless transactions and is revolutionizing mobile

    based payment across the globe. People in Japan are

    already using NFC enabled mobile phones to make

    payments for the day-to-day purchases.

    Even in developing countries of Southern Africa, large

    numbers of people are carrying out personto-person

    money transfers over mobile phones.

    Since World war II, under the auspices of GATT(General Agreement on Tariffs and Trade), a

    number of multilateral and bilateral trade and investment agreements among countries to

    remove restrictions on free trade are seen as one of the most significant factors contributing

    to Globalisation. The two main international financial institutions like World Bank and IMF

    have also played an important part in augmenting global exchanges.

    As the world trade had undergone number of changes since the commencement of GATT

    (General Agreement on Tariffs and Trade),share of employment and export in the service

    sector increased .Therefore, under the leadership of USAdeveloped countries took the initiative of bringing the service

    sector into trade negotiations.

    This is the reason that the Uruguay round of GATT included

    negotiations on trade in services, trade in investment ,subsidies,

    intellectual property rights, anti dumping measures were taken

    besides traditional GATT subjects such as tariff and non tariff

    barriers on goods.






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    These negotiations were supposed to be concluded in four years but because of differences

    in certain critical areas like agriculture, textiles etc. the Uruguay round went on from 1986 to


    The final agreement was signed on 15th April, 1994 at the ministerial conference held at

    Marrakech, Morocco. This agreement signed in 1994 consists of the following features:

    Establishment of WTO

    Multilateral agreement on trade in goods

    Trade related investment measures(TRIMS)

    General Agreement on Trade in services (GATS)

    Trade Related aspects of Intellectual property rights(TRIPS)

    Dispute Settlement (DSU)Reviews of Governments policies.

    The GATTS (now WTO) approach of reducing trade barriers was based on two principles:

    Most Favoured Nation principle: which refers to equal treatment a country gives to all

    its trading partners.

    National Treatment: A country should not discriminate between domestic and

    imported goods/services.

    Another main difference between GATT and WTO is that WTO panel decisions are binding

    .This means that if one Nation makes a complaint to WTO that the other Nations law areviolating the rules laid down in WTO agreement; the WTO can enforce the laws on the

    country concerned in accordance with WTO standards. Even then if the country fails to

    comply, WTO authorizes the complaining country to impose trade sanctions.

    The International Monetary Fund (IMF) is responsible for promoting international monetary

    cooperation, exchange stability, expansion of capital investment in the under developed

    countries, generate higher employment income and to establish multilateral trade and


    Economic Globalisation is a historical process, driven mainly by invention and innovation, as

    well as economic policy. This integration of markets has brought about the more effective

    use of scarce global resources, with enhanced economic growth and increased employment

    and job quality. For individuals, this has meant higher incomes, more variety for consumers,

    and better access to education, health care, and other services. Particularly with the

    development of the emerging Asian economies, Globalisation has until recently helped

    dampen price pressures.













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    Rapid Globalisation has in many countries also coincided with rising income inequality,

    although research at the IMF and elsewhere indicates that this mainly reflects the direct

    impact of technological change on inequality. Trade and foreign investment flows

    themselves have had neither a clear negative, nor a clear positive, impact on inequality.

    Economic and financial Globalisation and the expansion of world trade have brought

    substantial benefits to countries around the world. But the current financial crisis has put

    Globalisation on hold, with capital flows reversing and global trade shrinking. Some analysts

    see the drivers of the recent Globalisation wave getting undermined, with protectionism on

    the rise.

    Even supporters of Globalisation agree that the benefits of Globalisation are not without

    riskssuch as those arising from volatile capital movements. The IMF works to help

    economies manage or reduce these risks, through economic analysis and policy advice and

    through technical assistance in areas such as macroeconomic policy, financial sector

    sustainability, and the exchange-rate system

    World Trade in manufactured goods has increased more than 100 times (from $95 billion to

    $12 trillion) since 1955.Till 80s most developing countries used to consider Foreign Direct

    Investment (MNCs) a threat to their sovereignty and security.

    The huge size of their investments was sometimes bigger than the budget of some smallcountries. This also raised the fears that these MNCs would influence their economic and

    political affairs. These fears were not baseless as many of these MNCs belonged to those

    very Nations who had colonised these developing and poor Nations during nineteenth

    century. Moreover, a lot of the multinational corporations were found to be engaged in

    unfair business practices.

    Therefore, before and during 90s it was mainly MNCs from US and Europe who had the

    capacity of making huge investments in different parts of the world, but these investments

    remained at a low level. It was during the late 90s and twenty first century that large

    number of mergers and acquisitions by MNCs from developed as well as developing worldstarted taking place.These big MNCs like oil and steel majors Petrobras of Brazil, PetroChina

    of China, Samsung and LG of Korea, Reliance industries and Tata group of companies from

    India have launched their various investment projects in different parts of the world. This is

    further shown in worldwide production markets and increase in international trade of

    manufactured goods by hundred times since 1955 (from $95 billion to % 1.2 trillion).

    But everything about Globalisation is not as bright as it appears to be. Large numbers of

    African countries who have remained confined to a limited number of primary commodities

    have not been successful in reaping benefits of economic integration. As these products are


    Emergence of MNCs power across the world



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    such that there is a tough competition from other developing and developed countries and

    demand remains largely static therefore these products are susceptible to price fluctuations

    thus adversely affecting the producers of these products.

    Wal-Mart has 8500 retail stores

    around the world in 15 countries.

    Wal-Mart has expanded to all the

    countries for the simple reason that

    its domestic market is saturated.

    Therefore, it is looking to emerging

    economies like India, Argentina,

    Braz i l , and China a long with

    developed nations like Japan, Canada

    and U.K.

    In China itself Wal-Mart has opened 30

    outlets out of which three were opened in 2010 in Shanghai, Beijing and Shenzhen

    in South China to Kunming, Yunnan in the West and Harbin in the North. Wal-Mart

    China is rapidly expanding in Chinas increasingly modern business.

    To which country does Wal-Mart belong to?

    The American Ford Motor Company

    has announced a new investment

    package worth $450 million in a new

    modern automobile factory in

    Thailand. Prior to that, Japanese

    Mitsubishi Motors had also decided to

    invest $450 million in its third factory

    in Thailand, which will churn out a new

    generation of environmental-friendlyvehicles. The third factory, to be

    located near the two existing

    factories in the west of Thailand, will

    have the capacity to churn out some 50,000 products per annum, and is expected

    to wheel its first products off the assembly line in 2012.



    Fig : A Wal-Mart store in China




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    Meanwhile, Japanese Suzuki Motors late last year announced a plan to invest $225

    million in Thailand, after winning approval from relevant Thai agencies. The

    manufacturer plans to make small-size environmental-friendly cars, with the firstproducts expected to come out in March 2012.

    In the 1990s, Thailand came to be known as the Detroit of Asia, when it

    successfully developed supporting industries with many enterprises which made

    car parts and accessories. Despite recent political upheaval, Thailand still trumps

    many other countries in the region in auto manufacturing and has caught the eyes

    of the worlds largest car producers, attracting them to head to Thailand to

    establish bases.



    Workers in developing countries

    The biggest impact of Globalisation is on the workers in developing Nations who now have

    more occupational choices than before. Educated labour forces in these economies are able

    to compete at global level for high paying jobs.

    In fact manufacturing workers in developing Nations not only have a level playing field with

    their counterparts in developed Nations but also have a better cost advantage over them.

    HSBC, one of the worlds largest banks, operates across the globe shown here is the HSBC

    Global Technology Centre in developing country which develops software for the entire

    HSBC group.

    This has also given them immense opportunity of migrating and taking up employment in

    these Industrialized Nations or staying at home in outsourced destinations.This

    phenomenon has benefited countries like Vietnam, India, China, Philippines and Uganda. As




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    Fig : HSBC Global Technology Centre

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    a result of their opening up to world economy, poverty in these countries has reduced


    In fact manufacturing workers in developing Nations not only have a level playing field withtheir counterparts in developed Nations but also have a better cost advantage over them.

    In Vietnam large number of jobs was created in footwear and garment industry along with

    better pricing of products produced by farmers, like rice, fish, cashew due to economic

    integration. This has further resulted in reduction of poverty by 40% as shown in a survey

    conducted by the Government there.

    Before 90s due to the policies of protectionist regimes in developing countries, of putting

    restrictions on imported goods, consumers had to purchase whatever was produced locally.The domestic businessmen were aware that they had a captive market so they had no

    incentive to improve the quality of their products.

    The competition from imports forces producers to be more efficient and previous policy of

    protecting domestic industries did more harm than good for domestic markets.

    Debenhams, Marks and Spencer, Louis Vuitton, Coca-Cola, McDonaldsare some of the brand

    names which were earlier considered to be imported brands are now available under one

    roof of big departmental stores in all countries .This has brought competition for domestic

    producers who in order to face competition are forced to upgrade their products. In order to

    survive in this highly competitive world, producers have to aim for higher productivity usingbetter technology.

    Tourism and medical Tourism

    With Globalisation the world is witnessing an increased spending on different kinds of

    luxurious consumption. Large number of people with increased purchasing power in

    Impact of Consumers




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    developing and developed countries is an attractive source of customers for many travel

    promotion companies. These tour operators are selling various tour packages to the neorich

    of globalized world.

    Be it a family vacation, leisure, pilgrimage or business trips all kinds of tour packages by

    different countries are being aggressively advertised and sold. South East city states like

    Hong Kong and Middle East cities like Dubai attract shoppers from all over the world for

    unlimited duty-free shopping and entertainment. Nature and adventure tourism are being

    promoted and enjoyed the world over. Countries like Egypt with rich culture and ancient

    civilization have become one of the most visited tourist destinations.

    This trend has helped many countries like Sri Lanka in South East Asia and UAE in Middle East

    to develop Tourism as an industry. Thus, many Middle East countries along with oil as a

    source of income are reaping the profits from this new industry called Tourism.

    What is Medical Tourism?

    When people of one country travel to another country for those medical treatments that are

    either not available in ones own country or are too expensive in the country an individual

    resides it is known as Medical Tourism. This concept of travelling for healthcare started as a

    way for people in developing countries to developed nations to receive medical treatment

    that was not available in their own countries.

    But, now people from developed nations like America are travelling to developing nations

    for medical treatment as these are done at a fraction of cost it is done in their home country.

    In fact medical procedures in countries such as India, Thailand and South America are afraction of cost of medical procedures in United States.

    For Example,

    The cost of an open heart surgery is up to $1, 50,000 in

    United States, it ranges around only $10,000 in Iran.

    Cosmetic surgeries in Costa Rica are normally onethird of the cost that they are in United States.

    Over the last few years, Medical tourism has been

    steadily rising. In 2008, nearly 5, 40,000 Americans travelled abroad for various

    kinds of medical treatments.

    Singapore, India, Cuba and Thailand have witnessed an increase in medical tourists

    showing 20% growth.

    As Medical tourism is still a new trend, it does have its own drawbacks.


    Do You Know!



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    What if, any complications from procedures arise after patient has returned to

    his home country?

    Are there any laws or regulations concerning International medicalprocedures? Or is it so risky?

    Will this trend develop International standards in medical education and

    health facilities all over the world?

    Public-Private Partnership (PPP) is a concept in which a public infrastructure project such as

    a new telecommunications system, airport or power plant is developed by a public partner

    (represented by the Government at a local, state and/or National level) and a private partner

    (a privately-owned business, public corporation or consortium of businesses in the samearea).

    PPP is a broad term that can be applied to anything from a simple, short term management

    contract. To a long-term contract that includes funding, planning, building, operation,

    maintenance and divestiture. PPP arrangements are useful for large projects that require

    highly-skilled workers and a significant cash outlay to get started. They are also useful in

    countries that require the state to legally own any infrastructure that serves the public.

    This concept has gained popularity as private sector runs such projects more efficiently than

    public sector. The private sector not only brings efficiency in the function of the project but it

    also provides financial support.

    Many such Public Private Partnerships started during nineties and the start of

    twenty first century as shown in the following examples

    Public Private Partnership is being used for teaching and learning in schools in

    Abu Dhabi, United Arab Emirates.

    In India PPP have been extremely successful in developing infrastructure

    particularly road assets under National Highways Authority of India.

    In Canada PPP have become significant in both social and infrastructural


    The Abu Dhabi Education Council (ADEC), an Independent corporate body set up in

    September 2005, is attempting to change the face of public education in the Emirate

    through a public-private partnership (PPP) with International education operators

    A new trent called Public Private partnership

    Some Examples in the world



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    The SABIS School Network, through its managing arm, was awarded a contract to

    manage 6 kindergarten and primary schools in the Emirate of Abu Dhabi through a

    public-private educational initiative of the Abu Dhabi Educational Council inSeptember 2006.

    Mosaica Education was contracted to manage six Abu Dhabi schools in the Abu

    Dhabi school reform initiative under ADEC. Mosaica was awarded two clusters of

    schools: one cluster in Abu Dhabi and a second cluster in Baniyas, a suburb of Abu

    Dhabi. Mosaica Education is a leading US educational service provider, managing

    90 charter school programs in eight states, the District of Columbia and Qatar.

    Serving over 18,000 students, Mosaica Education operates charter schools, which

    emphasize strong basic skills, an inter-disciplinary curriculum and extensive use of


    In 1999, His Majesty King Abdullah II articulated his vision that the economic future

    of Jordan would be found through successful participation in the global

    knowledge economy, and more particularly in the value-added information

    technology industries. The JEI is a Public-Private Partnership launched in June 2003

    with the support of the WEF and is being marketed as a mechanism for enabling

    and accelerating social and economic development across the region. It aims at

    developing an e-learning curriculum and piloting in 100 discovery schools.

    Private organizations are investing around $15 million, in addition to $5-$6 million

    from the government.



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    On Farmers in Developing Countries

    Fig : Cotton farmers in Africa Fig : Brazilian sugarcane producer


    Statistics suggest that 96% of the worlds farmers live in developing countries, with some 2.5

    billion people who depend on agriculture. Almost all developing countries are largely

    dependent on agriculture. It is the main source of livelihood of 70% of worlds poorest

    people. Therefore the subsidies under common agriculture policy of Europe are criticized

    for preventing developing countries from exporting agricultural produce to European

    Union on equal ground.

    Moreover, poor countries farmers produce and export only few products which make them

    vulnerable to sharp decline in prices of these products. The competition emanating from

    imports has not been fair, in many cases. This is because imports coming from developed

    countries are usually heavily subsidized, and thus their prices are artificially cheapened.

    Poor farmers are not able to compete at these prices.

    The drastic fall of cotton price in the world market by 54 percent in mid 1990s has proved to

    be a danger for the survival of the rural communities in Maharashtra, India and in Burkina

    Faso. It has mainly affected the cotton producers in Central and West Africa. Nine of the

    West and Central African countries account for 15 percent of the worlds total production of


    The main reason mentioned for fall in cotton prices is attributed to agricultural subsidies in

    United States. These subsidies have resulted in overproduction in the US, due to which

    International market is being supplied cotton at a price which is less than its cost of




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    Though the cotton farmers in developing countries are capable to produce at much lower

    cost but, it is the access to the subsidies that is making the cotton growers in US have

    comparative advantage. The farmers of developing countries are usually not subsidized.

    Moreover, the assistance that their Governments provided have, in many countries, been

    withdrawn or substantially reduced, due to the structural adjustment policies. In manydeveloping countries, the liberalisation of imports has resulted in intense competition from

    imports that have threatened to displace some of the products of small farmers from their

    own domestic market. In spite of this in May 2002, US Government had passed a law to

    further increase the amount of subsidy that the Government pays to farmers. As per WTO,

    share of developing countries in worlds exports fell from 40% in 1961 to 35% in 2010.

    This measure has further infuriated developing countries. Brazil has lodged a legal

    challenge against US at WTO, on grounds of breach of trust of Agreement on Agriculture.

    In many developing countries, the liberalisation of imports has resulted in intense

    competition from imports that have threatened to displace some of the products ofsmall farmers from their own domestic market.

    The competition emanating from imports has not been fair, in many cases. This is

    because imports coming from developed countries are usually heavily subsidized, and

    thus their prices are artificially cheapened.

    On the other hand, the farmers of developing countries are usually not subsidized.

    Moreover, the assistance that their Governments provided have, in many countries,

    been withdrawn or substantially reduced, due to the structural adjustment policies.






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    l Another important fact which is hurting the farmers in developing countries is that

    countries like US and other developed Nations have imposed high tariffs on agricultural

    products coming from developing Nations. At the same time these countries force

    developing countries to open their markets for their products.


    Workers in developed Nations like United States and Europe in manufacturing sector and

    services sector are facing a tough challenge directly from workers in developing countries.As the same work now is being done in developing nations at a cheaper cost therefore, many

    workers in developed countries have lost their jobs.

    With increasing competition from migrants and BPOs in developing Nations, countries like

    U.S and European Union are losing jobs on a large scale. This has further created resentment

    among people in these countries manifested recently by large scale protests and rioting in

    Greece, Italy, and U.K. As a result Governments of these countries have made the

    immigration policy more restrictive.

    It is indeed surprising that on one hand efforts for greater movement of goods, capital and

    service are going on while on the other hand restrictions are being imposed on the

    movement of people among countries especially developed ones, in the name of safety

    measures against terrorism.

    Post 90s with greater Globalisation world has witnessed increase in income inequality

    among people within countries i.e. rich are getting richer and poor are getting poorer.

    Impact on workers in Developed Nations




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    The economic disparity has widened among developed Nations and developing countries.

    Developed countries like USA taking the advantage of WTO policies of greater access to

    developing countries market has resulted in greater incomes for its entrepreneurs.

    On the other hand, with greater flexibility in labour laws, no job security and exploitation of

    labour in developing countries has made workers in these countries economically


    This has increased the gap between rich and poor in these developing countries too. In

    urban areas in these countries, on one hand urban rich live in enclosed apartments while a

    large population of poor live in ever increasing slum areas. Most of the developing countries

    in order to acquire the membership have carried out taxation reforms and have reduced

    corporate taxes. These countries are moving towards a flatter taxation system. Which

    means the burden of direct and indirect taxes will further make the poor, poorer with lesser

    available income.

    With Globalisation fierce competition among producers across the globe has resulted in

    progress which is using the resources mindlessly.

    The zenith of consumerism is evident in large amounts of income being spent on

    consumption. Many production units are being set up in developing countries. But, in the

    absence of adequate environmental laws and regulations, free trade is causing higher levels

    of environmental pollution. This is observed in over fishing of ocean waters, air and water

    pollution along with deforestation on account of excessive mining for mineral wealth.

    Global warming resulted in dramatic rise of global temperatures. This rise in temperatures is

    mainly caused by carbon dioxide emissions. It is a well-established fact that these

    greenhouse gas emissions are largely from industrialised Nations who should bear the

    responsibility of fighting the damage done to the environment.

    But a question arises; can developing countries be treated partially on CO2 emissions? On

    the grounds of development should we leave environmental concerns unattended?

    Seventy-five percent of Brazils greenhouse gas emissions are the result of

    deforestation and changes in land use to pave the way for production of livestock

    and crop. Almost a million square km (386,000 sq mi) or nearly half of the Cerrado,

    have been burned and are now cattle pasture, or are cultivated for soybeans, corn

    (both primary ingredients in livestock feed), and sugarcane, for ethanol


    According to Brazilian journalist Washington Novaes, if we consider the viable

    Impact on Environment

    Environmental hazards



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    fragments of the Cerrado, those with at least two continuous hectares (5 acres),

    only 5 percent of it is left. Its a very severe level of habitat loss. At least one

    quarter of Brazils grain is grown in the cerrado.

    Fig : Deforestation done for grazing land in Amazon Basin


    1. With the increase in consumers and their needs there is increase in pressure

    on the resources available. Explain the impact on mineral wealth, Land as a


    2. Globalisation has given rise to increased incomes, standard of living and as a

    result consumerism. Evaluate this change light of environmental concerns.

    3. Find out more about greenhouse gas emissions and how they increase with

    the increase in cattle population.

    From all the above discussion, on impact of Globalisation on different economies, werealize that Globalisation has fostered interdependence and competition among

    Nations like never before. As a result of this various policies and measures being framed

    in all countries are not only determined by domestic policies and market conditions but

    also by International policies and market conditions.

    Therefore while formulating National, political and economic policies countries have to

    anticipate the possible actions and reactions of these policies in rest of the world.

    We can conclude that





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    In this process of Modern Globalisation, countries have lost their autonomy to some

    extent to take decisions for their own countries.

    All economic entities, be it producers, consumers or investors have become moreinterdependent for their needs in todays Globalised world.

    The process of Globalisation has given mixed results. Large scale producers like

    multinational companies entering developing countries with numerous facilities

    benefit these countries in a limited way. Since these companies use the resources of the

    host country exclusively for quick profits, without transferring skills to local people do

    more harm than good to these third world countries. On the other hand local small

    businesses close down due to unfair competition.

    It is hypocritical to preach the advantages of free trade and free markets and thenerect obstacles in precisely those markets in which developing countries have a

    comparative advantage.

    Nicholas Stern, Chief Economist, World Bank

    Leaders of India, Brazil, South Africa and China have been realizing the fact that the current

    impasse going between developed and developing countries should be resolved. Though

    they know that measures taken by developing countries to open up their economies for rest

    of the world is not being reciprocated by developed countries like US and European Unionthese developed countries have not given equal access to their markets to developing

    Nations. They continue with their existing trade barriers and subsidies to their farmers

    adversely affecting developing countries interests.

    In view of the above fact, we come to a conclusion that developing countries in order to reap

    maximum benefits out of Globalisation need economic development to overcome the

    handicap of being exporters of primary products. Developing countries have to acquire the

    capability of becoming a hub of manufactured goods. A significant progress has been made

    by China and some South East Asian countries like Thailand, South Korea in this direction.

    But there are many Asian, African and Latin American countries that have to catch up withthe west as far as development is concerned. These countries should build their capacity for

    Industrial and agricultural production. In order to achieve the targets, these countries

    should identify those sectors in which they have competitive advantage. Such sectors

    should be promoted with subsidies and favourable tariffs.

    As these countries generally lack availability of required capital and entrepreneurial

    capabilities Foreign Direct Investment should be invited by creating Special Economic Zones

    and similar zones where restrictions and taxes are minimum possible.

    Is Globalisation equally fair for all ? Or not !



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    A big question for developing countries?

    How to fast track growth and development?

    How should a country go about?

    Imagine, if we want to provide clothes to our ever increasing

    population and future generation for next 20 years, should a

    country produce more machines that produce cloth or should it

    produce cloth for next 20 years.

    There are three basic forms of Economic Activities viz. Production, Consumption and Capital

    formation. They are called Vital Processes of an Economy.

    Production :The act of making and providing goods and services is called production in


    Consumption : The act of using goods and services to satisfy human wants is called


    Capital formation :The surplus of production over consumption in any accounting year

    which takes the form of goods that are used for further production is called Capital



    The Term Capital here in Economics refers to man made goods used for further production.

    These goods have a life of more than one year.




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    Capital formation refers to the proportion of present income saved and invested in order to

    increase future production and income. It is usually acquisition of new factory along with

    machinery, equipment and all productive capital goods. It is the process of building up the

    capital stock of a country through investing in productive plants and equipments.Capital

    formation involves the increasing of capital assets by efficient utilisation of available natural,

    man-made and human resources of the country. Simply put, Capital formation or

    investment is the means of adding to economys wealth. Capital formation can either take

    place domestically or from rest of the world.

    When domestic capital formation is insufficient, capital movement from across the borders

    is what fills the gap between requirement and availability within the country.

    Foreign capital in a country comes in mainly three forms

    First, Foreign aid(usually comes from foreign Governments and international financialorganisation like IMF, World Bank)

    Second, Foreign Direct Investment(By Foreign Multinational Companies)

    And third Foreign Institutional Investment (investment in stock market by foreign

    investment firms for example mutual fund companies.

    According to United Nations system of National Account Gross Domestic Capital Formation

    is further subdivided in to following two parts.

    (a) The production of fixed assets such as machinery, factory buildings, offices, residential

    buildings, trucks, go downs, cold storages etc. These goods have a life of more than one


    (b) The stocks or inventories of raw material, finished or semi finished goods lying with the


    Fig : Gross Domestic Fixed Capital Formation





    Gross Capital Formation

    Gross Domestic Capital Formation Net Exports

    Gross Domestic Fixed Capital Net Inventories

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    Fig : Net Inventories Fig : Fixed Assets

    There is another way of looking at Gross Domestic Capital formation which can be

    comprehended with the following example:

    In a factory lets say there are 50 machines .The producer /owner of the factory comes to the

    conclusion that 10 machines out of the existing are no longer of any use and need to be


    Along with this he also wants to double the production next year for which, he purchases 30

    machines.Out of the new 30 new, 10 machines are meant for only replacing the 10 bad ones, which

    means, net addition to the capital stock of company is only 20. If the price per machine is

    $1,00,000.How much is the company spending on Gross Investment, depreciation and Net


    In Economics not only Gross Capital formation is valued without deduction of consumption of

    fixed capital (depreciation) but Net Capital formation is also valued after deducting



    Gross Capital formation

    Net Capital Formation Depreciation



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    Need for Capital Formation for Development

    As in most of the low income countries rural areas are plagued by disguised unemployment,

    which means there is a large population of surplus farmers who if given gainful employmentelsewhere ( other than farm) will result in increase in income of their household.

    In order to provide this alternative employment multiple projects for capital formation are

    needed in rural areas.

    Therefore, construction of roads, tube wells, canals, school buildings etc should be


    This not only provides income and employment to surplus farmers but also become a

    valuable source of capital formation in the country.

    Relationship between Capital Formation and Economic Growth

    A study conducted by Nigeria tested the Harrods-Domar model to examine the

    relationship between capital formation and economic growth in Nigeria.

    The results supported Harrod-Domar model which proved that the growth rate of

    National Income will directly or positively be related to saving rate and capital

    formation. That is, more the economy is able to save and invest greater will be the

    growth of GDP.

    Simply put, more the number of machines produced at present, greater will be the

    ability to produce goods and services in an economy.The Harrod-Domar model was developed to help analyze the business cycle.

    However, it was later adapted to explain economic growth. It concluded that:

    Economic growth depends on the amount of labour and capital.

    As LDCs (Less Developed Countries) often have an abundant supply of labour

    it is a lack of physical capital that holds back economic growth and


    More physical capital generates economic growth.

    Net investment leads to more capital accumulation, which generates higher

    output and

    Gross capital formation is said to take place when savings are utilized for investment

    purposes, which is investment in production.

    Large number of poor and developing countries, face the problem of lack of capital








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    formation due to low levels of domestic savings required for the purpose. In these less

    developed countries large parts of the population are abysmally poor and hence their

    capacity to save is too low.

    On the other hand rich sections of the society mostly spend their wealth in acquiring real

    estate, luxury goods or keep their wealth in foreign tax safe havens. As far as business sector

    is concerned, though they save voluntarily they usually dont want to take the risk

    associated with investment.There is constant fear of political instability and Nationalization

    (Government taking over loss making units) which stops many of the entrepreneurs taking

    up investment.

    The past records in many such underdeveloped Nations have shown that such Nations

    manage to save only 15% of their GDP (National Income), which is not even sufficient to

    maintain present standards of living.As domestic savings are insufficient for capital

    formation in such countries, foreign capital is required to fill this gap.

    Capital movement here refers to flow of capital among countries that is investor in one

    Nation and financial institution of the other country. The capital flow across the borders can

    take place by any of the following ways:

    Foreign direct Investment (FDI) :This kind of investment includes establishment of a

    production unit, acquisition of the domestic company, and joint venture with domestic

    firm or offering the franchisee.

    Examples are all Multinational firms like Ford Motors, Wal-Mart, Samsung, and Sony

    Ericsson operating across the world.

    Foreign Institutional Investment (FII)(Portfolio Investment) : this refers to purchase of

    bonds, securities by investors in foreign stock markets

    Real Estate Purchases or investments :Purchase of land, plots, buildings etc.

    Granting of Loans and Credits : Lending and borrowing can take place among National

    Governments (at lower interest rates) or commercially (private people at market rate

    of interest).

    Foreign Assistance (Aid) : This source is mostly for reconstruction purpose after anynatural calamity or for consumption or for military purpose.

    Foreign Aid to Zambia

    Since 1960s Zambia has been receiving foreign aid .The amount of aid increased

    significantly during 70s and again in the early 90s as percentage of GDP. Increase

    in foreign debt is mainly due to poor performance of Zambian economy and partly

    due to decline in prices.









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    Most of the foreign aid was directed to agriculture, education, infrastructure and

    health? Zambia mainly borrowed from IBRD (World bank) at commercial rates of

    interest and IDA (International Development Association) at concessional rates

    after 1978.

    Though it received bilateral aid from countries which was largely condition free.

    But due to heavy repayment of loans and debt crisis various conditions were

    imposed by world Bank on them for future like making economic policy changes.

    Between 1996 and 1998 many donor countries withheld the aid as Zambia faced

    debt payment crisis along with political turmoil.

    At present world Bank is trying to provide Zambia Highly indebted Poor Country

    (HIPC) status.

    The above example of Zambia shows that foreign loan and foreign aid as a source of capital

    formation comes with a heavy cost. With foreign aid comes huge cost of political pressure

    and arm-twisting by the donor country and their economic exploitation at the hand of

    developed country by agreeing to greater access to markets and raw material sources.

    In recent years due to significant reduction in restrictions on FDI by developing Nations and

    factors like accelerating technological change, emergence of integrated production across

    the world, marketing networks and existence of bilateral investment treaties has given a

    boost to FDI across the world.

    This is the reason why foreign direct investment has become an easy alternative to foreign

    loans as a source of foreign capital.

    The need for liability and condition free foreign capital prompted many developing

    countries to offer subsidies and an incentive to those MNCs who supported industrial

    policies of these countries. In addition to the above fact, FDI has further been promoted as

    countries have undergone technological changes along with the signing of bilateral

    investment treaties as part of a newly formulated WTO.

    By virtue of becoming the member of WTO, these developing Nations had to oblige byadoptingopen door policy to MNCs. Developing countries in general and Asia in particular,

    have been able to reduce restrictions and implement foreign investment friendly policies,

    which have further provided impetus to FDI flows across countries.

    FDI includes three basic aims:

    1). Investors from rich countries should be protected through bilateral and multilateral

    investment treaties.

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    3). To use FDI for developing infrastructure and those services which were earlier provided

    by the government in these countries.

    The following facts substantiate the growth of FDI:-FDI flows across the globe have surpassed the growth of world exports.

    FDI flows reached to a staggering amount of $1.4 trillion in 2000 from a meager $53.7


    Compared to the increase in world output, total FDI flows have increased at a faster


    Patterns of Private Foreign Investment in different countries

    Different countries have responded differently to FDI flows.

    1. Largest volumes of foreign investment flows have taken place among rich countries.Europe and North America continued to be the largest sources of FDI flows in the world,

    supplying at least 75 % of total FDI and also the biggest recipients of FDI.

    2. Developed Nations have contributed maximum share of FDI in middle income countries

    like China, Brazil and Mexico. Among Industrialized Nations Japan has shown a decline

    as an important source of FDI.

    3. Share of Asia and Pacific in total FDI outflows declined due to falling importance of

    Japan as an FDI supplier.

    4. In this period share of Worlds FDI to middle income countries exceeded to that of poor

    countries by a good 15%.Among middle income countries, Republic of Korea, Brazil,Finland have overtaken Malaysia, Singapore and Thailand as preferred locations for FDI.

    5. India has replaced Indonesia as one of the top FDI destinations in Asia till late 1990s.

    6. Hong Kong, China has become more important as preferred destination than Singapore

    and Malaysia.

    7. It is the less developed countries who have the lowest share in the worlds FDI flows.

    8. After the 1997 East Asian financial crisis, FDI flows to poor countries has further

    declined, while it has increased towards middle income countries consistently till 2001.

    Both FDI and FII are investments made in a foreign country.

    Foreign Direct Investment can take place in following ways:

    Establishment of a production unit by MNC in the foreign country.

    Taking over the company of the foreign country.

    Entering into the joint collaboration with the company belonging to country in which it

    intends to invest.










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    Getting the production done under its brand name produced by local producers i.e.

    extending franchisee.

    In Foreign Institutional Investment (FII)-

    Company only needs to register in stock exchange of that country.

    FII is also referred as Hot Moneyas the investor has the freedom to enter the stock

    market (buy shares, bonds) and exit from the stock market (sell shares).

    Through FDI production increases in the economy moreover the recipient country gets

    the benefit of better technology, management practices and employment for its


    FDI is considered to be more stable than FII.

    Though FII helps in making the capital available through secondary market, it is a short

    term investment unlike FDI which is a long term investment.

    This is the reason why FDI is preferred over FII.

    Foreign Institutional Investors

    Foreign investors, meanwhile, are few and far between.

    Although we have opened to international investors, it has not

    been of the variety that is a long-term investor. Weve attracted

    relatively short-term investors and hot money, so thats why we

    need to look more closely at providing access to long-term


    Says Nasser Saidi, Chief Economist of the Dubai International

    Financial Centre Authority and Executive Director of the Hawk

    Amah Institute for Corporate Governance.

    Stock Market is one of the most important sources to raise


    This is an area of contact by which companies raise capital to be

    used later for expansion, diversification or for launch of a new


    There are two typesof stock markets where securities are traded:

    Primary Market :in this form of market companies offer their new shares/bonds for sale

    popularly referred as Initial Public Offering (IPOs). Companies raise funds from primary

    market directly.




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    Secondary Marketis those contact markets where previously issued shares/bonds are

    resold to retail (or common) investors.

    The shares/bonds traded can be categorized as:Debentures :these are particular types of bonds on which the company has to pay the

    investor a fixed percentage at regular time intervals till maturity irrespective of success

    or failure of the investment project for which these borrowings were used.

    On the other hand equityis a security that gives shareholder an ownership right in the

    company to share the profit or loss as the case may be.

    When a firm is started by an entrepreneur, he either has the option of using his own funds or

    friends /relatives may provide funds as start-up capital.

    In order to further expand or diversify, it will need more money or capital.

    For this purpose he will either borrow from a bank or market or raise funds through


    Another option for the entrepreneur is to sell a part of his company by issuing shares.

    This is where the role of a stock market becomes important by making the capital resources

    available for corporations (companies that issue shares) that require capital to expand their

    operations and finance their growth.

    Do you want to buy shares??? Know the Share Market

    There are two kinds of stocks(shares) issued in the market:

    (a)Initial Public Offering:Majority of investors are not able to purchase these

    IPOs which are meant largely for institutional and listed investors.

    Lets understand by this example:

    SupposeAan entrepreneur is the owner of a firm that is worth $10 million. Now, A

    wants to share his risk of loss or rewards of profit of undertaking an investment so

    he decides to make his firm public i.e. he issues shares of his company (IPOs).Adivides his firm net worth ($10 million) into million small parts. Out of the 1 million

    parts he sells 90 000 shares with an initial price of $10per share. By doing this he is

    able to gather $9 million cash but at the same time he is no longer the only owner

    of his business he has to work for his shareholders and will share the profit or loss

    of the business.

    The secondary marketis more popular among common investors, who buy used

    shares from brokers. The company whose name is mentioned on the share




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    Brokers receive sales commissions.

    Examples : Real estate brokers, stock brokers

    2. Dealers :Like brokers dealers facilitate trade by matching buyers with sellersof assets. However a dealer takes position i.e. maintains inventories in assets

    he or she trades.

    Unlike brokers dealers do not receive sales commission they make profits by

    buying assets at relatively lower prices and reselling them at relatively higher


    The price at which a dealer offers to sell an asset (the asked price) minus the

    price at which a dealer offers to buy an asset (bid price) is called bid-ask

    spread and represent dealers profit margin on asset exchange.

    3. Investment Banks : An investment bank assists in the initial sale of newly

    issued securities (i.e. in IPOs=Initial Public Offerings)by engaging in a number

    of different activities: Some of the best known US investment banks are

    Morgan Stanley, Merrill Lynch, Goldman Sachs

    4. Advice : Corporations whether they should issue bonds or stock and for bond

    issues, on the particular types of payment schedules these securities should


    5. Underwriting :Guaranteeing corporations a price on the securities they offer,

    either individually or by having several different investment banks form a

    syndicate to underwrite jointly.

    6. Sales Assistance : Assisting in the sale of these securities to the public.

    Financial Intermediaries:

    Unlike brokers, dealers and investment banks, financial intermediaries are the

    financial institutions that engage in financial asset transformation. That is,

    financial intermediaries purchase one kind of financial asset from borrowers

    (generally some kind of loan contract) whose terms are adapted to the specific

    circumstances of the borrower (e.g. a mortgage) and sell a different kind of

    financial asset to savers, generally some kind of relatively liquid claim againstFinancial Intermediary (e.g. a deposit account).

    In addition, unlike brokers and dealers, financial intermediaries make profit by

    charging higher interest rates to borrowers and paying relatively lower interest

    rates to savers.

    Example:commercial banks, pension funds, life insurance companies, stock and

    mutual fund companies, finance companies.



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    Note : These four types of financial institutions are simplified idealized

    classifications, but many actual financial institutions today engage in activities

    that overlap two or more of these classifications.Example :Merrill Lynch acts as a broker, dealer, financial intermediary and an

    investment banker.


    A stock exchange is a corporation or mutual organization which provides trading facilities

    for brokers to trade in stocks and securities. (Securities include shares issued by companies,

    unit trusts, bonds etc)

    Fig : Shanghai Stock Exchange (China) Fig : NASDAQ Stock Market (America)

    Source: Source





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    Interesting facts

    The Dutch started joint stock companies, which let shareholders invest in businessventures and get a share of their profits or losses. In 1602, Dutch East India

    Company issued the first shares on the Amsterdam Stock Exchange. It was the first

    company to issue the stocks and bonds. It was also the first joint stock company to

    get a fixed capital stock.

    The Amsterdam Stock Exchange (or AmsterdamBeurs) is also said to have been

    the first stock exchange to introduce continuous trade in the early 17th century.

    Established in 1875, Bombay Stock Exchange is Asias first Stock Exchange

    In order to trade in a stock exchange a company has to be listed there, as the trading can be

    done only by members of the stock exchange.

    There are some legal requirements for companies to be listed on a stock exchange.

    Physical Stock Exchange : Is a place where trading is done by brokers or

    dealers by being present physically on the floor of stock exchange.

    Open Outcry : In this method shares and bonds are auctioned by tradeverbally bidding and offering at the same time.

    Virtual Stock Exchange : Is where trading is done through a network of

    computers electronically.

    In actual transaction, auctioning of shares is done where the trader who

    wants to buy the share bids at a price and the trader who wants to sell the

    share asks a price.

    When both bid and ask price match, transaction takes place.

    If more than one buyer and seller are able to match the price transaction is done onthe basis of first come first serve basis.










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    Read the below given stock market crashes and answer the following:

    Wall Street Crash of 1929

    The stock market crash of 1973-74

    The Black Monday of 1987

    Dot-com bubble of 2000

    The stock market crash of 2008

    During first world war, as large parts of resources were diverted for war purposesand excessive expenditure on war resulted in heavy debt. This resulted in high

    inflation rate and rise in costs of production. Though the war was not fought on

    American soil but all Europe the suffered vast devastation and had to depend on

    USA for borrowing.

    As a result USA emerged as financial superpower. Inspite of all the efforts done on

    the part of United States the global economic slowdown broke which was

    followed by crash in American stock markets. This is termed as Wall Street Crash of

    1929, the most devastating crash in worlds economic history. This crash was the

    beginning of the twelve year old depression that continued till World War IIerupted.

    Political Clash in Middle East over Israel and oil embargo imposed by OPEC

    countries resulted in severe oil crisis. The failure of Foreign Exchange Rate System

    failed as a result of certain shocking measurs taken by President Nixon at that

    time. This had a fall out on all the stock markets in the world specially European

    countries .

    Also known as internet bubble or IT bubble, this happened during late 90s when

    large number of web based companies came up which also included some

    fraudulent companies.

    The shares of those companies even with prefix e_ or suffix dot com were heavily

    speculated and their share prices rose dramatically in stock markets. This created

    highly inflated markets which ultimately went bust resulting in loss of large

    amounts of investment.

    There have been number of famous stock market crashes like

    Great Depression 1929

    1973-74 Stock Market Crash

    Dot com Bubble2000








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    2007-2009 Housing Bubble

    Reasons :

    Read the given case studies.


    In United States since the beginning of twenty first century rising prices of housing

    sector motivated large number of speculators and buyers to invest in housingsector. This investment was done mainly by taking loans from banks. The banks

    gave large number of such loans against subprime mortgages (the very houses for

    which loans were given). Too much of loan activity and failure on part of borrowers

    to pay the loan resulted in large number of defaulters. They could not recover the

    money and the mortgages could not be liquidated.

    This resulted in financial crisis in banks and loss of confidence in banking system.

    The crisis reached to such an extent that some of the largest banks like Lehman

    Brothers; Citigroup went bankrupt and brought Global financial system to a


    Along with various economic factors, a reason for stock market crashes

    is also due to panic and investors loss of confidence.

    Read the above given crashes and answer the following

    1) What do you infer from the above experiences?

    2) What are the causes for Great Depression 1929?

    3) What is IT Bubble and why those situations arise?

    4) Whether oil price fluctuations have any effect on Stock markets? Explain.

    5) Story of two brothers... one used his money to buy land, a shop. Other bought

    shares to get quick returns. What happens when market crashes? Second

    brother loses all money as he did not have the understanding of the stock


    1) Analyse the factors responsible for the countries economic growth

    2) Understand the behaviour of stock markets in these countries3) Make a case study of similar nature of some other country

    After the end of world war II since 1945 U.S experienced an increase in the middle

    class National income and productivity. This period is known as theGolden Age for





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    Most of the development that took place during this

    period was due to migration of low income farm

    labourers to better paying jobs in towns and citieswhich went on till 1960s.

    United States during 70s was dependent on oil imports

    for its needs. World was facing oil crisis during this

    period. This resulted in high inflation rates inspite of

    price control measures taken by the then Nixon government. Collapse of Bretton

    Woodss system and rising importance of market further aggravated the problem.

    Though economy recovered in 1973 by increase in expenditure done by U.S.

    government the inflation rate remained at double digits and out of control.After the turbulent 70s, Reagan government during 80s took special measures

    to deregulate transport, banking sectors.Inspite of the measures taken by

    American government, the economy faced recession in 80s.Around one million

    people lost jobs in manufacturing and service sector.

    In 1981 President Reagan took special measures by cutting tax rates which helped

    in bringing inflation rate down from 13.5 % to 3 %. Unemployment came down from

    10% to 6% by end of Reagans President Ship in 1989.

    During 90s since the formation of WTO due to increased free trade and high

    corporate taxes in the country American companies began to shift their

    manufacturing and heavy industries to developing countries with low labour

    costs. Income inequality in the country increased on one hand while on the other

    hand consumers were able to buy goods at lower prices and in large quantities.

    From 1994 to 2000, unemployment had dropped below 5 %, resulting in a boom in

    the market due to large number of IPOs of high-tech companies called dot com




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    By 2001 economy worsened as growth reduced to 3% and unemployment

    increased. The situation further deteriorated by September 11 terrorist attacks in

    the same year. No of corporate scandals is also said to be responsible for USmarket failure.

    Since then there was bubble in making, from 2001 Boom in housing sector across

    US fuelled a false sense of security. By 2008 a situation reached when another

    disaster hit not only the country, but also the whole world. Largest banks of US

    and European Union went bankrupt. These banks had to be bailed out by their

    respective Governments. Though President Osama has taken various measures to

    boost the American economy which only time will tell, in the coming years

    After the civil war in China from 1937 to 1940 and formation of Peoples Republic of

    China many development strategies were adopted which included Great Leap

    Forward Programme campaign and commune cultivation. But famine and

    temporary discord with erstwhile USSR resulted in economies failure.

    The economic performance of China remained poor when compared with

    countries like Japan and South Africa. China under the leadership of Mao had slow

    growth as it was plagued with huge inefficiencies and failed investments.

    Fig : President Mao Fig : President Deng Xianoping





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    After Maos death reforms were introduced under the leadership of Deng

    Xianoping. Though he faced opposition from conservative members of party

    Politbureau, he went ahead with reforms and proved to be successful.Reforms were introduced first in agriculture which was neglected during earlier

    regimes, as they were reminded of 1959 famine. Agricultural land was distributed

    among farmers who were allowed to keep the produce after paying taxes/share

    to the government.

    This helped in boosting agricultural production and living standards of millions of


    In industrial and urban sector dual pricing system was brought in, so that people

    were able to sell their output at Government fixed prices as well as at market

    prices. Private sector was allowed to set up industries for the first time.FDI was allowed for which special economic zones were created which were free

    of bureaucratic regulations. Government intervention and control on private

    sector went on reducing. State owned enterprises which were running in losses

    were privatized.

    During 80s, due to corruption, inflation and vested interests led by Chen Yun

    (opposition leader) large scale protests at Tiananmen square many key reformers

    were eliminated. But Deng continued with his reforms.

    During 90s share of private sector surpassed states share in GDP for the first time.

    After Dengs death, reforms continued under Jiang Zemin and Zhu Ronji.

    By 1997 and 1998 except for a few state monopolies, all public sector companies

    were liquidated and sold to private sector.

    During the same period tariffs and other trade barriers were reduced. Economic

    growth in China after reforms has been exceptionally fast i.e. around 9-10%.

    China is seen as the engine of world and regional growth.

    A significant transformation is the change in crop growing pattern of China from

    just rice and grain to cash crops. Trade in agriculture has also been liberalized.

    China has become an exporter of food grains in contrast to previous famine andfood shortages.

    Industrially China has emerged as the biggest manufacturer of steel, ships,

    textiles, concrete and has largest automobile market.

    China joined WTO and it agreed to considerably harsher conditions than