Business Environment - Privatisation And Globalisation - Notes - Business Management, Study notes for Business Administration. Agra University

Business Administration

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Privatization, which has become a universal trend, means transfer of ownership and/or

management of an enterprise from the public sector to the private sector. It also means

the withdrawal of the state from an industry or sector, partially or fully. Another

dimension of privatization is opening up of an industry that has been reserved for the

public sector to the private sector.

Privatization is an inevitable historical reaction to the indiscriminate expansion of the

state sector and the associated problems. Even in the ‘communist’ countries it

became a vital measure of economic rejuvenation.


The objects are:

• To improve the performance of PSUs so as to lessen the financial burden on


• To increase the size and dynamism of the private sector, distributing

ownership more widely in the population at large.

• To encourage and to facilitate private sector investments, from both

domestic and foreign sources.

• To generate revenues for the state

• To reduce the administrative burden on the state • Launching and sustaining the transformation of the economy from a

command to a market model.



The important ways of privatization are:

• Divestiture, or privatization of ownership, through the sales of equity.

• Denationalization or reprivatisation.

• Contracting - under which government contracts out services to other organizations that produce and deliver them.

• Franchising- authorizing the delivery of certain services in designated geographical areas- is common in utilities and urban


• Government withdrawing from the provision of certain goods and services

leaving then wholly or partly to the private sector.

• Privatization of management, using leases and management contracts

• Liquidation, which can be either formal or informal. Formal

liquidation involves the closure of an enterprise and the sale of its assets.

Under informal liquidation, a firm retains its legal status even though some

or all of its operations may be suspended.


The benefits of privatization may be listed down as follows:

• It reduces the fiscal burden of the state by relieving it of the losses of the

SOEs and reducing the size of the bureaucracy.

• Privatization of SOEs enables the government to mop up funds.

• Privatization helps the state to trim the size of the administrative


• It enables the government to concentrate more on the essential state



• Privatization helps accelerate the pace of economic developments as it

attracts more resources from the private sector for development.

• It may result in better management of the enterprises.

• Privatization may also encourage entrepreneurship.

• Privatization may increase the number of workers and common man who

are shareholders. This could make the enterprises subject to more public vigilance.


Some of the important argument against privatization is as follows:

• The public sector has been developed with certain noble objectives and

privatization means discarding them in one stroke.

• Privatization will encourage concentration of economic power to the

common detriment.

• If privatization results in the substitution of the monopoly power of the

public enterprises by the monopoly power of private enterprises it will be

very dangerous.

• Privatization many a time results in the acquisition of national firms by

foreign firms.

• Privatization of profitable enterprises, including potentially

profitable, means foregoing future streams of income for the


• Privatization of strategic and vital sectors is against national interests.

• There are well managed and ill-managed firms both in the public and

private sectors. It is not sector that matters, but the quality and

commitment of the management.


• The capital markets of developing countries are not developed enough

for efficiently carrying out privatization.

• Privatization in many instances is a half-hearted measure and therefore

it is not properly carried out. As a result that the expected results may not

be achieved.

• In many instance, there are vested interested behind privatization and it

amounts deceiving the nation. In many countries privatization often has

been a “garage sale” to favored individuals and groups.


• Privatization cannot be sustained unless the political leadership is

committed to it, and unless it reflects a shift in the preferences of the public

arising out of dissatisfaction with the performance of other alternatives.

• Replacement of a government monopoly by a private monopoly may not

increase public welfare-there must a multiplicity of private suppliers.

Freedom of entry to provide goods and services.

• Public services to be provided by the private sector must be specific or have

measurable outcome.

• Lack of specificity makes it more difficult to control services

provided by the private sector. Service delivery by non-governmental

organizational or local governments may be more appropriate under these conditions.

• Consumers should be able to link the benefits they receive from a service to the costs they pay for it, since they will then shop more

wisely for difficult services.


• The importance of educating consumers and disseminating

information to the public is necessary.

• Privately provided services should be less susceptible to fraud than

government services if they are to be effective.

• Equity is an important consideration in the delivery of public services.

Broadly speaking, the benefits of privatization can accrue to the capital

owner to the consumer and to public at large.


In India, although there were some isolated cases of privatization, no definite policy

decision was taken until the new economic policy was been ushered in

.The accumulated loses of many SOEs, including some state transport

corporations, are larger than the capital invested in them. Privatization of certain

sectors and enterprises are, therefore, necessary to reduce the budgetary burden on the

public, to make available more resources for the development activities, to enable the

government to concentrate more on the essential and priority areas.

The new industrial policy, which has abolished the public sector

monopoly in all but a very few industries is a significant step towards

Privatization. The new policy also proposes Privatization of enterprises by

selling shares to mutual funds, workers and the public. The central government has

been reviewing the existing portfolio of public investment with a view to offloading

public investment.

The disinvestments Commission was set up by Government of India in August

1996, for suggesting the modalities for undertaking disinvestments of equities for

select PSUs. The commission has recommended disinvestments at

varying levels for a number of PSUs



The current direction of Privatization policy is to put national resources and

assets to optimal use and in particular to unleash the productive potential inherent in

our public sector enterprises.

The policy of disinvestments specifically aimed at:

• Modernization and up gradation of Public Sector Enterprises.

• Creation of new assets.

• Generation of Employment

• Retiring of public debt

• To ensure that disinvestments does not result in alienation of national

assets, which through the process of disinvestments, remain where they

are. It will also ensure that disinvestment does not result in private


• Setting up a Disinvestments Proceeds Fund.

• Formulating the guidelines for the disinvestments of natural assets



India’s economic integration with the rest of the world was very limited because of the

restrictive economic policies followed until 1991. Indian firms confined themselves,

by and large, to the home market.

Foreign investment by Indian firms was very insignificant. With the new

economic policy ushered in 1991, there has, however, been change.

Globalization has in fact become a buzzword with Indian firms now and many are

expanding their overseas business by different strategies.

Globalization may be defined as “ the growing economic

interdependence of countries worldwide through increasing volume and variety


of cross border transactions in goods and services and of international capital flows,

and also through the more rapid and widespread diffusion of technology”.

Globalization may be considered at two levels .Viz, at the macro level (i.e.,

globalization of the world economy) and at the micro level (i.e., globalization of

the business and the firm).

Globalization of the world economy is achieved, quite obviously, by globalising the national economies. Globalization of the economies and globalization of business are very much interdependent.


• The rapid shrinking of time and distance across the globe thanks to faster

communication, speedier transportation, growing financial flows and rapid

technological changes.

• The domestic markets are no longer adequate rich. It is necessary to search of

international markets and to set up overseas production facilities.

• Companies may choose for going international to find political stability, which

is relatively good in other countries.

• To get technology and managerial know-how.

• Companies often set up overseas plants to reduce high transportation costs.

• Some companies set up plants overseas so as to be close to their raw materials

supply and to the markets for their finished products.

• Other developments also contribute to the increasing international of business.

• The US, Canada and Mexico have signed the North American Free Trade agreement (NAFTA), which will remove all barriers to trade among these countries.


• The creation of the World Trade Organization (WTO) is stimulating increased

cross-border trade.


The following are the features of the current phase of globalization:

New markets

• Growing global markets in services – banking, insurance, transport.

• New financial markets - deregulated, globally linked, working around the

clock, with action at a distance in real time, with new instruments such as


• Deregulation of anti - trust laws and proliferation of mergers and


• Global consumer markets with global brands.

New actors

• Multinational corporations integrating their production and marketing,

dominating food production

• The World Trade Organization - the first multilateral organization with

authority to enforce national governments compliance with rule

• An international criminal court system in the making

• A booming international network of NGOs

• Regional blocs proliferating and gaining importance – European Union,

Association of South- East Asian Nations, Mercosur, North American Free

Trade Association, Southern African Development Community, among

many others

• More policy coordination groups – G-7, G40, G22, G77, OECD


New rules and Norms

• Market economic policies spreading around the world, with greater

privatization and liberalization than in earlier decades

• Widespread adoption of democracy as the choice of political regime

• Human rights conventions and instruments building up in both coverage and

number of signatories – and growing awareness among people around the world

• Consensus goals and action agenda for development

• Conventions and agreements on the global environment – biodiversity, ozone

layer, disposal of hazardous wastes, desertification, climate change

• Multilateral agreements in trade, taking on such new agendas as

environmental and social conditions

• New multilateral agreements- for services, intellectual property,

communications – more binding on national governments than any

previous agreements

• The multilateral agreements on investment under debate

New Tools of communication

• Internet and electronic communications linking many people


• Cellular phones

• Fax machines

• Faster and cheaper transport by air, rail and road

• Computer-aided design

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