Economic Development - Assignment Example

Does financial development translate into competitive advantage in the industries that use more external finance? The globalization was considered asthe most feasible option for the elimination of all the trade barriers across different countries by free flow of finance, trade in goods and services and also in attracting huge investments. The heavy reliance on external finance is considered as one of the easiest options for enhancing the economic development of all the economically weaker nations of the world ( Mishra, 2006). Extensive research has been undertaken into the macroscopic analysis on the impact of globalization on growth and equality of nations. The key observations reported shows wide variation of the impact across regions and different industrial sectors within the countries, mostly due to the diversity in the industrial distribution and also due to the manner in the implementation of liberalization policies (Yew, n.d.). Closeness to the technological frontier to fight the entry of the external competitors is considered to be very significant in this connection. The industries that have capability to improve their technological strength for investing in the updation of the production systems would be able to withstand the competition (Mishra, 2006). Thus the industries in this group tend to flourish and perform well under liberalized regime. While the companies that were very weak didn’t have the enough strength to enhance their capacity and elevate them in towards the technological frontier. Thus most of these units have shorter business life span and ultimately get eliminated from the race. Thus the industries having very low technological frontiers would be losers under the globalised business environment (Mishra, 2006). Indian experiment on globalization started in the year 1991 with the major sectors involved being steel, pharmaceutical, petroleum, chemical, textile, cement, retail and BPO (Business maps of India.com, n.d.). The government had expected that high rate of growth could be achieved by inviting large volumes of foreign direct investments. A comparison on the number of companies that operated in India across pre and post-liberalized era clearly show the impact of the policy change. Earlier to 1991, the number of factories in India stood at 1,10,179 while their number reported in the year 2004 was 1,29,074. The first observable signs in this direction after the implementation of the polices were setting up of different companies with foreign investments for enhancing its operation in the above-mentioned sectors. This is said to have helped to address the local unemployment problems to a significant level and thus reducing the poverty levels in a few of the locations (Mishra, 2006). Also indirect benefits were obtained as a result of considerable improvements in the technology and management that the domestic companies had to attain to face the competition from their foreign counterparts having highly efficient production systems. On the other hand, the consumer preferences in buying also had a sporadic shift. The Indian consumer who were mostly dependent on the domestic products had the opportunity to purchase quality products at affordable prices. This had resulted in the lowering of business volumes of the pharmaceutical, chemical, manufacturing, and cement manufacturing industries (Business maps of India.com, n.d.). Also, the companies resorted to various structural adjustments like lowering of profits, which threatened the viability of long-term operations. Another striking feature was the reduction in the labour strength across the sectors. The labour statistics available for the year 1990 was 81,62,504 and those for the year 2004 was lowered to 78,70,081. Thus the influence of globalization policies on the poverty reduction in India as a whole is very ambiguous (Mishra, 2006). Hence a The sector specific assessment on the impact of the globalization is as given below (i) Petroleum Industry: Globalization of the petroleum Industry had begun much before the comprehensive liberalization polices had been implemented by government of India. The Indian petroleum Industries had relied on much on the foreign nations for the need of capital, expert personal and technology support. Also, this support was required for all the important stages like production, refining, exploration and transportation (Dey, 2001). When the policies of liberalization were implemented in the year 1991, the country opened its petroleum market further for the foreign direct investments. The major initiatives taken by the government were involvement of private sector in the production and exploration, formation of a company as Oil and Natural Gas Corporation and transfer of contracts of discovered fields to foreign and private companies. In addition various incentives like tax holidays, tax reduction on the production of crude oil etc were also implemented. These have had positive influence on the Industries in this sector (Dey, 2001). (ii) Pharmaceutical Industry: The major globalization process in this sector was started in the year 1990 when government initiated the policies of liberalization. This is one of the sectors that have observed a major boost in the post-liberalized period. The major share of leading Indian pharmaceutical industries have taken advantage of the situation like establishing collaborative ventures like technology upgradation, improvement in the quality of the products, acquiring other companies and strengthening its business operations etc (Dubey, n.d.). At the same the globalised environments also created an environment of threats to large number of domestic companies. The increased competition forced large number of domestic companies to operate at lower profit margin in order to retain the market share. This finally led to the closure of many of such companies or they were finally acquired by foreign pharmaceutical giants. These events have even led to large scale job loses mostly from specific locations where the possibility to find alternate employment for huge numbers turned impossible (Dubey, n.d.). (iii) Chemical Industry: Most of the Industries in the sector operated directly under the government. Thus considerable amount of protection and monopoly in the market had existed till 1990 (Business wire, 2008). The policies implemented in 1991 granted permission to Foreign Institutional Investors (FII) and Foreign Direct Investors (FDI) and thus initiated an end to the monopoly markets of government run Industries. These changes started showing sudden changes of growth. With high quality production systems and competitive pricing mechanism Indian chemical sector is one of the sough after sectors all over the world. The globalizations have had positive effect on this sector (Business wire, 2008). (iv) Textile sector: From a highly unorganized units of operation the globalization have the made the industries to attain an enviable growth. Indian textile industry is one of the largest in the world and contributes nearly 27 percent of foreign exchange from the exports of textiles and its related products, generates 21 % of the total employment created in the economy and also adds about 3 % to the India’s GDP. These achievements were possible as India was able to address the important operational issues prevailing in this sector. Major being converting the huge number of unorganized and decentralized textile industries, which are reported to consist of 75 %, into an organized unit (Prasad and Chandra, 2005). (v) Manufacturing sector: The liberalization policies have helped the manufacturing sector to improve its contribution to India’s GDP from 25.38 % in 1990 to 27 % in 2004. And contribution of this sector to Indian exports too witnessed an increase of 8 % (from 71 to 79 %) with in 10 years. The export figures within the sector too showed 100 % increase – from 5 % in 1990 to 10 % in 2005. (vi) Steel Industry: It is one the major sectors that faces significant threats after the liberalization policies were put in place. Lack of good manufacturing processes, high energy and raw materials costs are the major reasons that the sectors need to address to withstand the foreign onslaught. (vii) Cement Industry : The post liberalized period having witnessed huge quantities of infrastructure development initiatives the demand of cement have gone up considerably in India. These opportunities have been made use of by large numbers of foreign companies who have entered into by business collaborations with the Indian companies. The reported values of Total Factor Productivity Growth of Indian companies showed a sharp fall during the period of 1991 to 2005 (Sharma, 2007) Conclusion The impact of globalization on the major sector of industries have been presented in this paper. The cumulative effect on the industrial growth has also been analyzed. From the graph presented on the effect of globalization it is clear that this policy have not created a major impact on the overall development of the nation in terms of poverty alleviation, job security etc. References: Business maps of India.com (n.d.), Effect of globalization on Indian Industry [Online] Available at [18 February 2009] Business wire (2008), New Report Reveals the Indian Chemical Industry isGrowing at an Average Rate of 12.5% Per Year. [Online] Available at < http://www.allbusiness.com/trade-development/international-trade-exports-imports-by/6621635-1.html> [18 February 2009]. Dey, D (2001)Globalization and the Indian Petroleum Industry [Online] Available at [17 February 2009] Dubey, D P. (n.d.), Globalisation and its Impact on the Indian Pharmaceutical Industry [Online] Available at [18 February 2009]. Mishra, SK (2006): Globalization and Structural Changes in the Indian Industrial Sector: An Analysis of Production Functions [Online] Available at < http://mpra.ub.uni-muenchen.de/1231/ > [18 February 2009] Prasad, A. and Jain-Chandra (2005), The Impact on India of Trade Liberalization in the Textiles and Clothing Sector(November 2005). IMF Working Paper, [Online] Available at < http://ssrn.com/abstract=888083> [18 February 2009] Sharma, S (2007) , Liberalisationand productivity growth : a case of Indian cement industry, International Journal of Productivity and Quality Management, 2(3), 307-321. Yew, L. K. (n.d.)Managing Globalisation: Lessons from India and China [Online] Available at [18 February 2009]. Read More