generally speaking an environment includes the air we breathe

8/7/2019 Generally speaking an environment includes the air we breathe

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Richman & Copen

Environment factors orconstraints are largely, if not totally, external andbeyond the

control of individual industrialenterprises & their managements. These areessentially the givers within which the firms

&their managements must operate in a specificcountry & they vary often greatly from country tocountry.

Generally speaking an environment includes the air we breathe, the water we drink,the available business, social and educational infrastructure in the locality , stateand country etc. In the context of business the environment refers to the sum ofinternal and external forces operating on an organization. The managers mustperforce recognize the elements, severity and impact of these forces on theorganization. They must identify, evaluate and react to the forces triggered by theexternal environment.

More often than not, these forces are beyond the control of an organization and itsmanagers. Accordingly, the factors of the environment will need to be considered as

inputs in the planning and forecasting models developed by an organization.

It is quite possible that some large organizations themselves constitute a greaterpart of the business environment e.g. Public Sector Oil Companies in India.An organization operates within the larger framework of the external environmentthat shapes opportunities and poses threats to the organization. The externalenvironment is a set of complex, rapidly changing and significant interactinginstitutions and forces that affect the organization's ability to serve its customers.External forces are not controlled by an organization, but they may be influenced or

affected by that organization. It is necessary for organizations to understand theenvironmental conditions because they interact with strategy decisions. The

external environment has a major impact on the determination of marketingdecisions. Successful organizations scan their external environment so that theycan respond profitably to unmet needs and trends in the targeted markets.The Organization as a System

Internally, an organization can be viewed as a resource conversion machine thattakes inputs (labor, money, materials and equipment) from the externalenvironment (i.e., the world outside the boundaries of the organization), convertsthem into useful products, goods, and services, and makes them available tocustomers as outputs. The organization must continuously monitor and adapt to theenvironment if it is to survive and prosper. Disturbances in the environment mayspell profound threats or new opportunities. The successful organization will

identify, appraise, and respond to the various opportunities and threats in itsenvironment.External Macro environmentThe external macro environment consists of all the outside institutions and forcesthat have an actual or potential interest or impact on the organization's ability toachieve its objectives: competitive, economic, technological, political, legal,demographic, cultural, and ecosystem. Though noncontrollable, these forces requirea response in order to keep positive actions with the targeted markets. An


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organization with an environmental management perspective takes aggressiveactions to affect the forces in its marketing environment rather than simplywatching and reacting to it.1. Economic EnvironmentThe economic environment consists of factors that affect consumer purchasingpower and spending patterns. Economic factors include business cycles, inflation,unemployment, interest rates, and income. Changes in major economic variableshave a significant impact on the marketplace. For example, income affectsconsumer spending which affects sales for organizations. According to Engel's Laws,as income rises, the percentage of income spent on food decreases, while thepercentage spent on housing remains constant.2. Technological EnvironmentThe technological environment refers to new technologies, which create newproduct and market opportunities. Technological developments are the mostmanageable uncontrollable force faced by marketers. Organizations need to beaware of new technologies in order to turn these advances into opportunities and acompetitive edge. Technology has a tremendous effect on life-styles, consumption

patterns, and the economy. Advances in technology can start new industries,radically alter or destroy existing industries, and stimulate entirely separatemarkets. The rapid rate at which technology changes has forced organizations toquickly adapt in terms of how they develop, price, distribute, and promote theirproducts.3. Political and Legal EnvironmentOrganizations must operate within a framework of governmental regulation andlegislation. Government relationships with organizations encompass subsidies,

tariffs, import quotas, and deregulation of industries.The political environment includes governmental and special interest groups thatinfluence and limit various organizations and individuals in a given society.

Organizations hire lobbyists to influence legislation and run advocacy ads that statetheir point of view on public issues. Special interest groups have grown in numberand power over the last three decades, putting more constraints on marketers. Thepublic expects organizations to be ethical and responsible. An example of responseby marketers to special interests is green marketing, the use of recyclable orbiodegradable packing materials as part of marketing strategy.The major purposes of business legislation include protection of companies fromunfair competition, protection of consumers from unfair business practices andprotection of the interests of society from unbridled business behavior. The legalenvironment becomes more complicated as organizations expand globally and facegovernmental structures quite different from those within the United States.4. Demographic Environment

Demographics tell marketers who current and potential customers are; where theyare; and how many are likely to buy what the marketer is selling. Demography isthe study of human populations in terms of size, density, location, age, sex, race,occupation, and other statistics. Changes in the demographic environment canresult in significant opportunities and threats presenting themselves to theorganization. Major trends for marketers in the demographic environment includeworldwide explosive population growth; a changing age, ethnic and educationalmix; new types of households; and geographical shifts in population.


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5. Social / Cultural EnvironmentSocial/cultural forces are the most difficult uncontrollable variables to predict. It isimportant for marketers to understand and appreciate the cultural values of theenvironment in which they operate. The cultural environment is made up of forcesthat affect society's basic values, perceptions, preferences, and behaviors. U.S.values and beliefs include equality, achievement, youthfulness, efficiency,practicality, self-actualization, freedom, humanitarianism, mastery over theenvironment, patriotism, individualism, religious and moral orientation, progress,materialism, social interaction, conformity, courage, and acceptance ofresponsibility. Changes in social/cultural environment affect customer behavior,which affects sales of products. Trends in the cultural environment includeindividuals changing their views of themselves, others, and the world around themand movement toward self-fulfillment, immediate gratification, and secularism.6. Ecosystem EnvironmentThe ecosystem refers to natural systems and its resources that are needed asinputs by marketers or that are affected by marketing activities. Green marketingor environmental concern about the physical environment has intensified in recent

years. To avoid shortages in raw materials, organizations can use renewableresources (such as forests) and alternatives (such as solar and wind energy) fornonrenewable resources (such as oil and coal). Organizations can limit their energyusage by increasing efficiency. Goodwill can be built by voluntarily engaging inpollution prevention activities and natural resource.External MicroenvironmentThe external microenvironment consists of forces that are part of an organization'smarketing process but are external to the organization. These micro environmental

forces include the organization's market, its producer-suppliers, and its marketingintermediaries. While these are external, the organization is capable of exertingmore influence over these than forces in the macro environment.

1. The MarketOrganizations closely monitor their customer markets in order to adjust to changingtastes and preferences. A market is people or organizations with wants to satisfy,money to spend, and the willingness to spend it. Each target market has distinctneeds, which need to be monitored. It is imperative for an organization to knowtheir customers, how to reach them and when customers' needs change in order toadjust its marketing efforts accordingly. The market is the focal point for allmarketing decisions in an organization.2. SuppliersSuppliers are organizations and individuals that provide the resources needed toproduce goods and services. They are critical to an organization's marketingsuccess and an important link in its value delivery system.

3. Marketing IntermediariesLike suppliers, marketing intermediaries are an important part of the system usedto deliver value to customers. Marketing intermediaries are independentorganizations that aid in the flow of products from the marketing organization to itsmarkets. The intermediaries between an organization and its markets constitute achannel of distribution. These include middlemen (wholesalers and retailers whobuy and resell merchandise). Physical distribution firms help the organization tostock and move products from their points of origin to their destinations.


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Warehouses store and protect the goods before they move to the next destination.Marketing service agencies help the organization target and promote its productsand include marketing research firms, advertising agencies, and media firms.Financial intermediaries help finance transactions and insure against risks andinclude banks, credit unions, and insurance companies.

Importance of understanding the environmentThe managers job cannot be accomplished in a vacuum within the organization.There are a number of factors both internal as well as external which jointly affectmanagerial decision-making. It is therefore very important for the manager tounderstand and evaluate the impact of the business environment due to thefollowing reasons :

a)Businesses may be doomed to be non starters due to restrictive businessenvironment which may take the form of rigid government laws ( no pollutingindustry can ever be located in around 50 Km radius of the Taj) , state ofcompetition ( Car manufacturing capacity presently in the country is far in excess of

demand) etc.

b)The present and future viability of an enterprise is impacted by the environmentFor eg no TV manufacturer can be expected to survive by making only B&Wtelevision sets when consumer preference has clearly shifted to colour televisionsets.

c)The cost of capital and the cost of borrowing - two key financial drivers of any

enterprise are impacted by the external environment . For eg the ability of abusiness to fund its expansion plan by raising money from the stock marketsdepends on the prevalent public mood towards investment in stock markets.

d)The availability of all key inputs like skilled labour , trained managers , rawmaterials , electricity , transportation , fuel etc are a factor of the businessenvironment.

e)Increasing public awareness of the negative aspects of certain industries likehand woven carpets ( use of child labour ) , pesticides (damage to environment inthe form of chemical residues in groundwater), plastic bags (choking of sewer lines)have resulted in the slow decline of some industries.

f)Finally , the environment offers the opportunities for growth and profits . For egwhen the insurance and aviation industry was thrown open to the private sector ,

the new entrant could easily build on the expectations of the public.

Changing profile of Indian economic environmentIndia gained independence in 1947 paving the way for national leaders of theIndian Government to build an economically independent new India. Policiesbetween 1950-70 were implemented with a sincere belief in the efficacy of thesocialist philosophy and political democracy. Heavy investment by government inSteel plants, atomic energy, hydroelectric power and irrigation projects laid the


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foundation of a strong industrial edifice. The non-aligned movement at a time whenthe world was divided into two power blocks with cold war between the Super-powers, prevented India from becoming a satellite of any other nation and enabledit to protect Its economy and the Indian Population.Indian economy has made great strides in the years since independence. In 1947the country was poor and shattered by the violence and economic and physicaldisruption involved in the partition from Pakistan. The economy had stagnated sincethe late nineteenth century, and industrial development had been restrained topreserve the area as a market for British manufacturers. In fiscal year (FY) 1950,agriculture, forestry, and fishing accounted for 58.9 percent of the gross domesticproduct (GDP) and for a much larger proportion of employment. Manufacturing,which was dominated by the jute and cotton textile industries, accounted for only10.3 percent of GDP at that time.India's new leaders sought to use the power of the state to direct economic growthand reduce widespread poverty. The public sector came to dominate heavyindustry, transportation, and telecommunications. The private sector producedmost consumer goods but was controlled directly by a variety of government

regulations and financial institutions that provided major financing for large private-sector projects. Government emphasized self-sufficiency rather than foreign tradeand imposed strict controls on imports and exports. In the 1950s, there was steadyeconomic growth, but results in the 1960s and 1970s were less encouraging.Beginning in the late 1970s, successive Indian governments sought to reduce statecontrol of the economy. Progress toward that goal was slow but steady, and manyanalysts attributed the stronger growth of the 1980s to those efforts. In the late1980s, however, India relied on foreign borrowing to finance development plans to

a greater extent than before. As a result, when the price of oil rose sharply inAugust 1990, the nation faced a balance of payments crisis. The need foremergency loans led the government to make a greater commitment to economic

liberalization than it had up to this time. In the early 1990s, India's post-independence development pattern of strong centralized planning, regulation and

control of private enterprise, state ownership of many large units of production,trade protectionism, and strict limits on foreign capital was increasingly questionednot only by policy makers but also by most of the intelligentsia.But too much of protection from the Government had its own disadvantages. Ourquality standards were not in tune with international competition. It had producedmore traders than industrialists. It was high time that Indian economy becamemore open and entered the international market.India embarked on a series of economic reforms in 1991 in reaction to a severeforeign exchange crisis. Those reforms have included liberalized foreign investmentand exchange regimes, significant reductions in tariffs and other trade barriers,

reform and modernization of the financial sector, and significant adjustments ingovernment monetary and fiscal policies.The reform process has had some very beneficial effects on the Indian economy,including higher growth rates, lower inflation, and significant increases in foreigninvestment. Foreign portfolio and direct investment flows have risen significantlysince reforms began in 1991 and have contributed to healthy foreign currencyreserves ($32 billion in February 2000) and a moderate current account deficit ofabout 1% (1998-99). India's economic growth is constrained, however, by


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inadequate infrastructure, cumbersome bureaucratic procedures, and high realinterest rates. India will have to address these constraints in formulating itseconomic policies and by pursuing the second generation reforms to maintainrecent trends in economic growth.India's trade has increased significantly since reforms began in 1991, largely as aresult of staged tariff reductions and elimination of non-tariff barriers. The outlookfor further trade liberalization is mixed. India has agreed to eliminate quantitativerestrictions on imports of about 1,420 consumer goods by April 2001 to meet itsWTO commitments. On the other hand, the government has imposed "additional"import duties of5% on most products plus a surcharge of 10% over the past 2years. The U.S. is India's largest trading partner; bilateral trade in 1998-99 wasabout $10.9 billion. Principal U.S. exports to India are aircraft and parts, advancedmachinery, fertilizers, ferrous waste and scrap metal, and computer hardware.Major U.S. imports from India include textiles and ready-made garments,agricultural and related products, gems and jewelry, leather products, andchemicals.Significant liberalization of its investment regime since 1991 has made India an

attractive place for foreign direct and portfolio investment. The U.S. is India'slargest investment partner, with total inflow of U.S. direct investment estimated at$2 billion (market value) in 1999. U.S. investors also have provided an estimated11% of the $18 billion of foreign portfolio investment that has entered India since1992. Proposals for direct foreign investment are considered by the ForeignInvestment Promotion Board and generally receive government approval.Automatic approvals are available for investments involving up to 100% foreignequity, depending on the kind of industry. Foreign investment is particularly sought

after in power generation, telecommunications, ports, roads, petroleum explorationand processing, and mining.As India moved into the mid-1990s, the economic outlook was mixed. Most

analysts believed that economic liberalization would continue, although there wasdisagreement about the speed and scale of the measures that would beimplemented. It seemed likely that India would come close to or equal therelatively impressive rate of economic growth attained in the 1980s, but that thepoorest sections of the population might not benefit.In the recent past, India has witnessed changes in several critical factorsstrengthening its economy. With globalisation becoming the key word of the 90's, itseems to have paved the way for India's entry in world markets. Economic reformshave been initiated to facilitate stabilisation and structural -adjustments essentialfor the growth of the economy

Read more: http://www.articlesnatch.com/Article/Business-

Environment/252704#ixzz1J96jQDPdUnder Creative Commons License: Attribution No Derivatives Definition:Globalised World - What does it mean?Does it mean the fast movement of people which results in greater interaction?Does it mean that because of IT revolution people can be in touch with each other in anypart of the world?


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Does it mean trade and economy of each country is open in Non-Intrusive way so that allvarieties are available to consumer of his choice?Does it mean that mankind has achieved emancipation to a level of where we can say itmeans a social, economic and political globalisation?Though the precise definition of globalisation is still unavailable a few definitions worth

viewing, Stephen Gill: defines globalisation as the reduction of transaction cost oftransborder movements of capital and goods thus of factors of production andgoods.Guy Brainbant: says that the process of globalisation not only includes opening upof world trade, development of advanced means of communication, internationalisationof financial markets, growing importance of MNC's, population migrations and moregenerally increased mobility of persons, goods, capital, data and ideas but also infections,diseases and pollutionImpact on India:India opened up the economy in the early nineties following a major crisis that led by a foreignexchange crunch that dragged the economy close to defaulting on loans. The response was a slew

of Domestic and external sector policy measures partly prompted by the immediate needs andpartly by the demand of the multilateral organisations. The new policy regime radically pushedforward in favour of amore open and market oriented economy.Major measures initiated as a part of the liberalisation and globalisation strategy in the earlynineties included scrapping of the industrial licensing regime, reduction in the number of areasreserved for the public sector, amendment of the monopolies and the restrictive trade practicesact, start of the privatisation programme, reduction in tariff rates and change over to marketdetermined exchange rates.Over the years there has been a steady liberalisation of the current account transactions, moreand more sectors opened up for foreign direct investments and portfolio investments facilitatingentry of foreign investors in telecom, roads, ports, airports, insurance and other major sectors.

The Indian tariff rates reduced sharply over the decade from a weighted average of 72.5%in 1991-92 to 24.6 in 1996-97.Though tariff rates went up slowly in the late nineties it touched35.1% in 2001-02. India is committed to reduced tariff rates. Peak tariff rates are to be reduced tobe reduced to the minimum with a peak rate of 20%, in another 2 years most non-tariff barriershave been dismantled by march 2002, including almost all quantitative restrictions.India is Global:The liberalisation of the domestic economy and the increasing integration of India with theglobal economy have helped step up GDP growth rates, which picked up from 5.6% in 1990-91to a peak level of 77.8% in 1996-97. Growth rates have slowed down since the country has stillbee able to achieve 5-6% growth rate in three of the last six years. Though growth rates hasslumped to the lowest level 4.3% in 2002-03 mainly because of the worst droughts in twodecades the growth rates are expected to go up close to 70% in 2003-04. A Global comparisonshows that India is now the fastest growing just after China.This is major improvement given that India is growth rate in the 1970's was very low at 3% andGDP growth in countries like Brazil, Indonesia, Korea, and Mexico was more than twice that ofIndia. Though India's average annual growth rate almost doubled in the eighties to 5.9% it wasstill lower than the growth rate in China, Korea and Indonesia. The pick up in GDP growth hashelped improve India's global position. Consequently India's position in the global economy has


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improved from the 8th position in 1991 to 4th place in 2001. When GDP is calculated on apurchasing power parity basis.Globalisation and Poverty:Globalisation in the form of increased integration though trade and investment is an importantreason why much progress has been made in reducing poverty and global inequality over recent

decades. But it is not the only reason for this often unrecognised progress, good national polices ,sound institutions and domestic political stability also matter.Despite this progress, poverty remains one of the most serious international challenges we faceup to 1.2 billion of the developing world 4.8 billion people still live in extreme poverty.But the proportion of the world population living in poverty has been steadily declining andsince 1980 the absolute number of poor people has stopped rising and appears to have fallen inrecent years despite strong population growth in poor countries. If the proportion living inpoverty had not fallen since 1987 alone a further 215million people would be living in extremepoverty today.India has to concentrate on five important areas or things to follow to achieve this goal. Theareas like technological entrepreneurship, new business openings for small and medium

enterprises, importance of quality management, new prospects in rural areas and privatisation offinancial institutions. The manufacturing of technology and management of technology are twodifferent significant areas in the country.There will be new prospects in rural India. The growth of Indian economy very much dependsupon rural participation in the global race. After implementing the new economic policy the roleof villages got its own significance because of its unique outlook and branding methods. Forexample food processing and packaging are the one of the area where new entrepreneurs canenter into a big way. It may be organised in a collective way with the help of co-operatives tomeet the global demand.Understanding the current status of globalisation is necessary for setting course for future. For allnations to reap the full benefits of globalisation it is essential to create a level playing field.President Bush's recent proposal to eliminate all tariffs on all manufactured goods by 2015 willdo it. In fact it may exacerbate the prevalent inequalities. According to this proposal, tariffs of5% or less on all manufactured goods will be eliminated by 2005 and higher than 5% will belowered to 8%. Starting 2010 the 8% tariffs will be lowered each year until they are eliminatedby 2015.GDP Growth rate:The Indian economy is passing through a difficult phase caused by several unfavourabledomestic and external developments; Domestic output and Demand conditions were adverselyaffected by poor performance in agriculture in the past two years. The global economyexperienced an overall deceleration and recorded an output growth of 2.4% during the past yeargrowth in real GDP in 2001-02 was 5.4% as per the Economic Survey in 2000-01. Theperformance in the first quarter of the financial year is5.8% and second quarter is 6.1%.Export and Import:

India's Export and Import in the year 2001-02 was to the extent of 32,572 and 38,362million respectively. Many Indian companies have started becoming respectable players in theInternational scene. Agriculture exports account for about 13 to 18% of total annual of annualexport of the country. In 2000-01 Agricultural products valued at more than US $ 6million wereexported from the country 23% of which was contributed by the marine products alone. Marineproducts in recent years have emerged as the single largest contributor to the total agricultural


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export from the country accounting for over one fifth of the total agricultural exports. Cereals(mostly basmati rice and non-basmati rice), oil seeds, tea and coffee are the other prominentproducts each of which accounts fro nearly 5 to 10% of the countries total agricultural exports.Where does Indian stand in terms of Global Integration?India clearly lags in globalisation. Number of countries have a clear lead among them China,

large part of east and far east Asia and eastern Europe. Lets look at a few indicators how muchwe lag.

yOver the past decade FDI flows into India have averaged around 0.5% of GDPagainst 5% for China 5.5% for Brazil. Whereas FDI inflows into China nowexceeds US $ 50 billion annually. It is only US $ 4billion in the case of India

yConsider global trade - India's share of world merchandise exports increased from.05% to .07% over the pat 20 years. Over the same period China's share hastripled to almost 4%.

yIndia's share of global trade is similar to that of the Philippines an economy 6 timessmaller according to IMF estimates. India under trades by 70-80% given its size,proximity to markets and labour cost advantages.

yIt is interesting to note the remark made last year by Mr. Bimal Jalan, Governor ofRBI. Despite all the talk, we are now where ever close being globalised in termsof any commonly used indicator of globalisation. In fact we are one of the leastglobalised among the major countries - however we look at it.

yAs Amartya Sen and many other have pointed out that India, as a geographical,politico-cultural entity has been interacting with the outside world throughouthistory and still continues to do so. It has to adapt, assimilate and contribute. Thisgoes without saying even as we move into what is called a globalised worldwhich is distinguished from previous eras from by faster travel andcommunication, greater trade linkages, denting of political and economicsovereignty and greater acceptance of democracy as a way of life.

Consequences:The implications of globalisation for a national economy are many. Globalisation has intensified

interdependence and competition between economies in the world market. This is reflected in

Interdependence in regard to trading in goods and services and in movement of capital. As a

result domestic economic developments are not determined entirely by domestic policies and

market conditions. Rather, they are influenced by both domestic and international policies and

economic conditions. It is thus clear that a globalising economy, while formulating and

evaluating its domestic policy cannot afford to ignore the possible actions and reactions of

policies and developments in the rest of the world. This constrained the policy option available to

the government which implies loss of policy autonomy to some extent, in decision-making at the

national level.

ntroduction:-Various environmental factors such as economic environment, socio-

cultural environment, political, technological, demographic and international, affect the

business and its working. Out of these factors economic environment is the most

important factor.


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Meaning of Economic Environment:- Those Economic factors

which have their affect on the working of the business is known as economic

environment. It includes system, policies and nature of an economy, trade cycles,

economic resources, level of income, distribution of income and wealth etc. Economic

environment is very dynamic and complex in nature. It does not remain the same. It

keeps on changing from time to time with the changes in an economy like change in

Govt. policies, political situations.

Elements of Economic Environment:- It has mainly five main components:-

1. Economic Conditions

2. Economic System

3. Economic Policies

4. International Economic Environment

5. Economic Legislations

Economic Conditions:- Economic Policies of a business unit are largely affected by

the economic conditions of an economy. Any improvement in the economic conditions

such as standard of living, purchasing power of public, demand and supply, distribution

of income etc. largely affects the size of the market.

Business cycle is another economic condition that is very important for a business unit.

Business Cycle has 5 different stages viz. (i) Prosperity, (ii) Boom, (iii) Decline, (iv)

Depression, (v) Recovery.

Following are mainly included in Economic Conditions of a country:-

I. Stages of Business Cycle

II. National Income, Per Capita Income and Distribution of Income

III. Rate of Capital Formation

IV. Demand and Supply Trends

V. Inflation Rate in the Economy

VI. Industrial Growth Rate, Exports Growth Rate


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VII. Interest Rate prevailing in the Economy

VIII. Trends in Industrial Sickness

IX. Efficiency of Public and Private Sectors

X. Growth of Primary and Secondary Capital MarketsXI. Size of Market

Economic Systems:- An Economic System of a nation or a country may be defined as

a framework of rules, goals and incentives that controls economic relations among

people in a society. It also helps in providing framework for answering the basic

economic questions. Different countries of a world have different economic systems and

the prevailing economic system in a country affect the business units to a large extent.

Economic conditions of a nation can be of any one of the following type:-

1. Capitalism:- The economic system in which business units or factors of production

are privately owned and governed is called Capitalism. The profit earning is the sole aim

of the business units. Government of that country does not interfere in the economic

activities of the country. It is also known as free market economy. All the decisions

relating to the economic activities are privately taken. Examples of Capitalistic

Economy:- England, Japan, America etc.

2. Socialism:- Under socialism economic system, all the economic activities of the

country are controlled and regulated by the Government in the interest of the public.The first country to adopt this concept was Soviet Russia. The two main forms of

Socialism are: -

(a) Democratic Socialism:- All the economic activities are controlled and regulated by

the government but the people have the freedom of choice of occupation and

consumption.

(b) Totalitarian Socialism:- This form is also known as Communism. Under this,

people are obliged to work under the directions of Government.

3. Mixed Economy:- The economic system in which both public and private sectors co-

exist is known as Mixed Economy. Some factors of production are privately owned and

some are owned by Government. There exists freedom of choice of occupation and

consumption. Both private and public sectors play key roles in the development of the

country.


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Economic Policies:- Government frames economic policies. Economic Policies affects

the different business units in different ways. It may or may not have favorable effect on

a business unit. The Government may grant subsidies to one business or decrease

the rates of excise or custom duty or the government may increase the rates of customduty and excise duty, tax rates for another business. All the business enterprises frame

their policies keeping in view the prevailing economic policies. Important economic

policies of a country are as follows:-

1. Monetary Policy:- The policy formulated by the central bank of a country to control

the supply and the cost of money (rate of interest), in order to attain some specified

objectives is known as Monetary Policy.

2. Fiscal Policy:- It may be termed as budgetary policy. It is related with the income

and expenditure of a country. Fiscal Policy works as an instrument in economic and

social growth of a country. It is framed by the government of a country and it deals with

taxation, government expenditure, borrowings, deficit financing and management of

public debts in an economy.

3. Foreign Trade Policy:- It also affects the different business units differently. E.g. if

restrictive import policy has been adopted by the government then it will prevent the

domestic business units from foreign competition and if the liberal import policy has

been adopted by the government then it will affect the domestic products in other way.4. Foreign Investment Policy:- The policy related to the investment by the foreigners

in a country is known as Foreign Investment Policy. If the government has adopted

liberal investment policy then it will lead to more inflow of foreign capital in the country

which ultimately results in more industrialization and growth in the country.

5. Industrial Policy:- Industrial policy of a country promotes and regulates the

industrialization in the country. It is framed by government. The government from time to

time issues principals and guidelines under the industrial policy of the country.

Global/International Economic Environment:- The role of international economic

environment is increasing day by day. If any business enterprise is involved in foreign

trade, then it is influenced by not only its own country economic environment but also

the economic environment of the country from/to which it is importing or exporting


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goods. There are various rules and guidelines for these trades which are issued by

many organizations like World Bank, WTO, United Nations etc.

Economic Legislations:- Besides the above policies, Governments of different

countries frame various legislations which regulates and control the business.

Asia-Pacific Development Journal Vol. 12, No. 2, December 2005

81

ECONOMIC DEVELOPMENT IN INDIA:

THE ROLE OF INDIVIDUAL ENTERPRISE

(AND ENTREPRENEURIAL SPIRIT)

Anil K. Lal* and Ronald W. Clement**

T h e I n d i a n e c o n omy p r o v i d e s a r e v e a l i n g c o n t r a s t b e twe e n h ow

individuals react under a government-controlled environment and how

they respond to a market-based environment. Evidence suggests that

recent market reforms that encouraged individual enterprise have led

to higher economic growth in that country.

I n d i a c a n g e n e r a t e a d d i t i o n a l e c o n o m i c g r o w t h b y f o s t e r i n g

ent repreneur ial act ivi ty wi thin i ts borders. To pursue fur ther the

entrepreneurial approach to economic growth, India must now provide

opportunities for (1) education directed specifically at entrepreneurial

skills, (2) financing of entrepreneurial efforts, and (3) networking among

potential entrepreneurs and their experienced counterparts. Further,

although the Indian government should establish policies supportive of

entrepreneurial efforts, its role overall should be minimized so that the

influence of the free market and individual self-interest can be fully

realized.


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Economic development, achieved largely through productivity growth, is

very important to both developed and developing nations. However, even though

we know that higher productivity leads to improved economic outcomes (for

example, higher income, more choices to the consumers, better quality products,

etc.), there has been no consensus among researchers about either the desired

path of development or the role of state in economic development. Concerning

the path of development, Lall (2001) says that the appropriate strategy for any

country depends not only on its objective economic situation but also on its

government policies and national views regarding the appropriate role of the state.

* Associate Professor of Economics, Pittsburg State University, Pittsburg, Kansas, U.S.A.

** Professor of Management, Pittsburg State University, Pittsburg, Kansas, U.S.A.Asia-Pacific

Development Journal Vol. 12, No. 2, December 2005

82

Regarding the appropriate role of the state, it seems that for every argument in

favour of a smaller government role one can find a counter argument in favour of

a more active government role.

The role of the state in economic development began to change dramatically

w i t h t h e a d v e n t o f t h e I n d u s t r i a l R e v o l u t i o n . I n t h e We s t , t h e re s u l

t i n g

industrialization and economic development were based on the establishment of

individual property rights that encouraged the growth of private capital. Competition

and individual enterprise thrive in this environment because individuals pursue their

self-interest of survival and wealth accumulation. The instinct to survive under

competitive pressures yields innovation and productivity increases, which eventually

lead to both increased profits for business and lower prices to consumers.

1


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However, the rise and spread of capitalism led a number of thinkers to

examine the consequences of the market -based approach to development .

Socialists argued that capitalism (or private ownership of capital) can lead to greater

inequalities of income and wealth, while developmental economists argued that

private decisions may not always lead to socially desirable outcomes (particularly

in the case of market imperfections). Indeed, many policymakers at the time saw

market failures as quite common and therefore assumed that only appropriate

government interventions could guide an economy to a path of sustained economic

development (Krueger, 1993).

In the early 20

th

century, the former Soviet Union attempted a bold

experiment of improving individual well-being without sacrificing the objective of

greater equality of income and wealth through total ownership of capital by the

government. Initially, the Soviet Government was able to raise productivity through

directed industrialization and, within a span of 25 years (by the end of World War

II), emerged as a superpower. It was around this time that a substantial number of

colonized nations were gaining their independence (for example, India, Pakistan

and Burma). Unfortunately, during their time as colonies to the Western nations,

these countries, for the most part, had been deprived of the industrialization that

had engulfed those same Western nations. Based on the successful experience of

the former Soviet Union, many economists and policymakers concluded that,

particularly in a poor country, planning was essential for the efficient allocation of

an economys resources (Panagariya, 1994, p. 194).

1


16/41

The history of U.S. business has shown how the pursuit of self-interest by individual economic

agents has led to benefits for the larger society. Consider the well-known example of Henry Fords

introduction of assembly line production. This technological advancement led to a significant increase

in productivity at Ford Motor Company. Indeed, despite paying higher wages to his workers, Ford

could still produce automobiles at a much lower cost and pass on part of that lower cost to consumers

in terms of lower prices.Asia-Pacific Development Journal Vol. 12, No. 2, December 2005

83

The governments in these newly independent nations assumed a significant

role in economic development. They sought to quickly and substantially raise the

standard of living through directed and controlled economic development. Apart

from everything else, these developing countries invested heavily in education to

promote literacy and to ensure an adequate supply of technical manpower to meet

their growing needs. Further, these previously colonized nations did not want to

subject their poor and weak economies to international economic fluctuations and

thus sought to industrialize through import substituting industrialization, where

imports were expected to be increasingly replaced by domestic production.

In this paper we examine economic development in India, a former British

colony that became one of the most closed economies in the world, to contrast

the roles of government intervention and individual enterprise in that countrys

economic growth. In particular, we demonstrate that, given recent economic reforms

in India, along with the evidence for the role that individual enterprise can play in

a countrys economic growth, the Indian government should devise policies that

rely more on individual enterprise, with its emphasis upon individual initiative and

self-interest, to spur economic development. Further, we describe the special role

that can be played in the economic development of India by a greater emphasis


17/41

upon entrepreneurship.

The plan of the paper is as follows. Section I summarizes the strategy of

economic development and the overall economic environment that has prevailed in

India since its independence from the United Kingdom. Section II analyses the

consequences of regulated economic development in India, with particular emphasis

on the implications of the microeconomic aspects of Indias approach to its

economic environment. Section III assesses the results of Indias economic reforms

since the countrys economic crisis of 1990, and highlights the role that individual

enterprise has played and can continue to play in that countrys economic fortunes.

Section IV describes the special role that entrepreneurship can play in Indias efforts

at economic growth. Finally, section V summarizes the main findings and concludes

the paper.

I. INDIAS STRATEGY OF ECONOMIC DEVELOPMENT

Indias economic development strategy immediately after Independence

was based primarily on the Mahalanobis model, which gave preference to the

investment goods industries sector, with secondary importance accorded to the

services and household goods sector (Nayar, 2001). For example, the Mahalanobis

model placed strong emphasis on mining and manufacturing (for the production of

capital goods) and infrastructural development (including electricity generation andAsia-Pacific


84

transportation). The model downplayed the role of the factory goods sector because

it was more capital intensive and therefore would not address the problem of high

unemployment in India. Any increase in planned investments in India required

a higher level of savings than existed in the country. Because of the low average

incomes in India, the needed higher levels of savings had to be generated mainly


18/41

by restrictions on the growth of consumption expenditures. Therefore, the Indian

government implemented a progressive tax system not only to generate the higher

levels of savings

2

but also to restrict increases in income and wealth inequalities.

3

Among other things, this strategy involved canalization of resources into

their most productive uses.

4

Investments were carried out both by the government

and the private sector, with the government investing in strategic sectors (such as

national defense) and also those sectors in which private capital would not be

f o r t h c omi n g b e c a u s e o f l a g s o r t h e s i z e o f i n v e s tme n t re q u i re d ( s u c h

a s

infrastructure). The private sector was required to contribute to Indias economic

growth in ways envisaged by the government planners. Not only did the government

determine where businesses could invest in terms of location, but it also identified

what businesses could produce, what they could sell, and what prices they could

charge.

Thus the strategy of economic development in India meant (1) direct

participation of the government in economic activities such as production and

selling and (2) regulation of private sector economic activities through a complex

system of controls. In addition, the Indian economy was sheltered from foreign

competition through use of both the infant industry argument and a binding foreign

exchange constraint. Imports were limited to goods considered essential either to

the development of the economy (such as raw materials and machines) or to the


19/41

maintenance of minimal living standards (such as crude oil and food items). It was

further decided that exports should play a limited role in economic development,

thereby minimizing the need to compete in the global market place. As a result,

India became a relatively closed economy, permitting only limited economic

transactions with other countries. Domestic producers were sheltered from foreign

competition not only from abroad but also from within India itself.

2

The huge savings-investments gap could not be filled by the amount of foreign aid that was both

sought and available. Further, additional foreign investments (both direct and portfolio) were never

seriously considered as a way to close this savings-investment gap.

3

Higher levels of income and wealth were taxed at much higher rates relative to lower income and

wealth. Further, as Rao (2000) notes, the marginal rate of taxation including a tax surcharge was

93.5 per cent in early 1970s.

4

In India, this meant transfer of savings from the private to the public sector.Asia-Pacific Development

Journal Vol. 12, No. 2, December 2005

85

Over time, India created a large number of government institutions to meet

the objective of growth with equity. The size of the government grew substantially

as it played an increasingly larger role in the economy in such areas as investment,

production, retailing, and regulation of the private sector. For example, in the late

1950s and 1960s, the government established public sector enterprises in such

areas as production and distribution of electricity, petroleum products, steel, coal,

and engineering goods. In the late 1960s, it nationalized the banking and insurance

sectors. To alleviate the shortages of food and other agricultural outputs, it provided


20/41

modern agricultural inputs (for example farm machinery, irrigation, high yielding

varieties of seeds, chemical fertilizers) to farmers at highly subsidized prices (World

Economic Indicators, 2001). In 1970, to increase foreign exchange earnings, it

designated exports as a priority sector for active government help and established,

among other things, a duty drawback system, programmes of assistance for market

development, and 100 per cent export-oriented entities to help producers export

(Government of India, 1984). Finally, from the late 1970s through the mid-1980s,

India liberalized imports such that those not subject to licensing as a proportion

to total imports grew from five per cent in 1980-1981 to about 30 per cent in

1987-1988 (Pursell, 1992). However, this partial removal of quantitative restrictions

was accompanied by a steep rise in tariff rates.

This active and dominant participation by the government in economic

a c t i v i t i e s re s u l t e d i n t h e c re a t i o n o f a p ro t e c t e d , h i g h l y - re g u l a t e d , p

u b l i c

sector-dominated economic environment. Along with this government domination

of the economy, India soon faced not only some major problems in its overall

approach to development, particularly in the area of industrialization (Ahluwalia,

1985), but also a dramatic increase in corruption in its economy. Finally, like any

other growing economy, the Indian economy faced a number of serious sectoral

imbalances, with shortages in some sectors and surpluses in others. These

consequences of Indias government-controlled economy are discussed in depth

in the next section.

II. THE CONSEQUENCES OF INDIAS REGULATED

ECONOMIC DEVELOPMENT

I n d i as e n v i ro nme n t o f re g u l a t e d e c o n omi c d e v e l o pme n t l e d t o t h e

formulat ion of pol icies that were concer ned wi th both macroeconomic and


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microeconomic aspects. Whereas much attention in the literature has been devoted

to the macroeconomic issues, we focus primarily on the microeconomic aspects of

Indian economic policies. In particular, we examine how individuals guided by

their self-interests of survival and wealth accumulation will act in a regulated

environment, which in fact discourages the pursuit of those self-interests. To doAsia-Pacific


86

so, we describe the consequences of Indias use of price ceilings, in which prices

are set below their equilibrium level to make products and services affordable to

relatively poorer sections of the society.

Figure 1 illustrates how price ceilings can influence a nations economy.

Specifically, when prices are kept artificially low, demand outstrips supply. To

alleviate the resulting shortage of products and services, the government can either

help to increase the supply or help to decrease demand for those products and

services. Considering the supply side options first, the government had the following

choices: (1) increase the price of the product; (2) subsidize production of existing

suppliers so they will produce and sell more; (3) encourage new businesses to

enter the line of production and selling; or (4) permit imports to reduce or eliminate

the shortage. In India, none of these options was seen as satisfactory. First, the

government certainly did not wish to increase prices, because price ceilings

appealed to a majority of the vote bank. Second, although the government did

subsidize production in several sectors considered essential, the resulting increased

production was not sufficient to eliminate the large shortages. Third, the government

decided to restrict rather than increase the entry of new producers under the

pretext of directing scarce resources into their efficient uses. Finally, it allowed

only limited recourse to imports, in order to protect Indian producers, unless the


22/41

shortage reached a stage of crisis. The overall result was that inadequate amounts

of products and services were supplied to the market.

Figure 1. Price ceiling

Rs per unit

Quantity (million of units)

Equi l ibr ium Pr ice

Gover nment Pr ice

Shor tage

Gover nment

Pr ice

Supply

Demand

0

1

2

3

4

5

6

1 2 3 4 5 6 7Asia-Pacific Development Journal Vol. 12, No. 2, December 2005

87

In contrast to the supply side options just considered, if the government


23/41

had decided instead to limit demand, it could have done so by increasing taxes or

by regulating the level of demand itself, usually by restricting how much an individual

or a family could consume. To ensure the availability of the scarce products and

services to Indian consumers, albei t at less than desi red levels, the Indian

government in fact resorted to large-scale rationing. This rationing was undertaken

by government agencies themselves or by licensed private retailers. As might be

expected, the rationing regulations required those licensed private retailers to follow

government stipulations in their sale of the scarce products and services.

The policy of price ceilings, along with the quantitative restrictions on

production and consumption, led to an economic environment ripe for corruption.

Specifically, because of the general scarcity of products and services, individuals

competed to receive the privilege of economic rights to produce or consume. The

implementing authority responsible for allocating these economic rights politicians,

government officials and businesses enjoyed monopoly power in this situation

and, as might be expected, were susceptible to bribes and other illegal favours.

The result was an informal and illegal market in which the desired economic rights

could be traded. Also, the lure of higher profits led producers and sellers (1) to

have little concern for quality such that many deliberately produced and sold inferior

quality products, and (2) to resort to the creation of artificial shortages by not

releasing to the market all of the products that were available for selling.

Bardhan (1997) defines corruption as the use of public office for private

gain, in which an official entrusted with the responsibility for certain public duties

engages in malfeasance for personal enrichment that is not easy to monitor. He

says that corruption has multiple effects on economic development. For example,

it diminishes the efficiency of economic transactions, because corrupt officials will


24/41

delay or otherwise obstruct those transactions until they receive their expected

favours. Also, the payment of a bribe to receive an investment license tends to

reduce the incentive to in vest. Honest investors will see the futility of competing

with dishonest investors who are guaranteed, through their bribes, to receive the

privilege of investment rights.

To fully understand the widespread nature of the corruption that existed in

India at this time, it is necessary to consider the roles played by the many

participants. For example, business people bribed government officials not only

for the right to enter a particular line of business, but also to prevent others from

entering that same line of business. Government officials made payoffs to politicians

to receive the premium government positions that would allow them to easily contact

businesses to seek illegal income and wealth. Indeed, as Wade (1985) indicates,

those officials could earn far more through bribes and other corrupt behaviour thanAsia-Pacific


88

they could earn in salary. Consumers bribed government officials, politicians, and

business people to receive a particular amount of a scarce good or a higher quality

version of the good. Even individuals and organizations outside India took part in

the corruption. Some bribed both officials and politicians, particularly those

connected with the revenue and police departments, to smuggle scarce goods into

India at a high profit.

The complex system of government controls, including price ceilings, along

with the resultant corruption, meant that decision making was arbitrary and the

transactions non-transparent. The result was an increase in transaction costs. For

example, businesses had to spend more to stay connected with appropriate

government officials and politicians. And consumers, in addition to waiting in line


25/41

to purchase needed products and services, also made illegal payments for what

they should have received at a reasonable price in the first place. It has already

been explained how Indias government grew in size as it played an increasing role

in controlling the economy. It grew even further in trying to be appropriately

vigilant in dealing with the increased corruption among government officials,

businesses, and other participants.

P r i c e c o n t ro l s w e re o n l y o n e e x a m p l e o f t h e re g u l a t e d e c o n o m i c

environment. Another example of a harmful policy was the control of ownership of

private capital (both income and wealth) by Indian nationals in India and also by

foreign nationals doing business in India. Such policies, coupled with high individual

and corporate income tax rates and high customs and excise duties, led to

outcomes similar to those resulting from price ceilings namely, increased corruption

and higher transaction costs.

In conclusion, this section has shown how individuals guided by their selfinterests, will act in a regulated

environment. Government controls based on

arbitrary and ad hoc administrative decisions lead not only to greater concealed

income and wealth but also to diminished productivity, particularly due to the

resulting higher transaction costs.

III. ECONOMIC REFORMS: THE MIXED RESULTS FOR INDIA

Due to government intervention, particularly the high levels of government

subsidies, it was clear by 1990 that India was living beyond its means. The result

was a severe payments crisis in which, for the first time, the government physically

transported gold overseas to prevent defaulting on foreign commitments. To meet

its immediate balance of payments crisis, India also entered into a structural loan

adjustment agreement with the International Monetary Fund (IMF). However, oneAsia-Pacific



26/41

89

condition of this loan required India to undertake economic reforms to move from

a centrally-planned development strategy to one based on market-based resource

allocations. As a result, the government of India undertook a package of economic

reforms between 1991 and 1993, with the intent of placing the market in place of

government controls as the prime mover in the economic development process.

As one might expect, macroeconomic policy played a major role in Indias

economic progress in the 1990s. For example, Acharya (2001) concludes that

Indias devaluation of the rupee and its decision to increase the level of allowable

foreign investment helped it to make considerable economic progress. Joshi (2001)

and Karunaratne (2001) both say that Indias policy of selective capital account

liberalization helped it to achieve important economic objectives (and still avoided

the crises faced by the East Asian countries). Gupta (1999) highlights the important

role played by Indias prudent management of exchange rate policy and its tight

monetary policy. Bhalla (2000) notes both the privatization of the public sector

enterprises and the gradual dismantling of the government planning process in

favour of market forces.

Overall, there can be no doubt that the reforms implemented since 1991

h a v e l e d t o c o n s i d e r a b l e e c o n omi c p ro g re s s i n I n d i a . F o r e x amp l e , f

rom

1992-1993 through 2000-2001, economic growth averaged an unprecedented

6.3 per cent per year (Acharya, 2001). Further, as Bhalla (2000) indicates, the rate

of inflation and the fiscal deficit have both decreased substantially. He also says

that Indias improved exchange rate management has restored the confidence of

foreign investors, which in turn has led to improved financing of the current account

deficit and higher levels of foreign exchange reserves.


27/41

However, even though India has made substantial economic progress in

recent years, it still has several areas in need of major market-based reforms.

5

Below, we identify three examples from Indias economy that reveal a restriction of

the pursuit of individual self-interest and a diversion of resources away from their

most efficient use. The first example concerns the obstacle still presented by the

Indian tax system, the second highlights the inefficiencies of the Indian civil service,

and the third describes the need for further land reform in India.

5

A study undertaken by McKinsey Global Institute found that the Indian product markets are still

over-regulated; government still owns about 43 per cent of total capital stock; and the real estate

market is still substantially distorted. This study concluded that this over-regulation is still the major

barrier to economic growth in India (see Lewis (2001).Asia-Pacific Development Journal Vol. 12, No. 2,

December 2005

90

1. In spite of recent tax reforms in India, the present tax system still

works against the individual self-interest to survive and accumulate

wealth and, as a result, still leads to the hiding of income, wealth

and expenditures. Indeed, whereas in the United States and the

Republic of Korea, the highest tax rate applies to an income level

of $250,000 and $66,000, respectively, in India that same tax rate

applies to an income of only $3,400. Simply reforming its tax

system to bring it in line with comparable nations should yield

several substantial benefits to the Indian economy.

6

2. The Indian civil service provides attractive career choices for young


28/41

job seekers due mainly to the excellent job security, non-monetary

compensation, and opportunities for influence available in those

careers. For example, despite minimal salaries for individuals

holding top-tier positions in such areas as administration, police,

revenue and railways,

7

these civil servants are entitled to high job

security and heavily subsidized housing, transport, medical services,

telephone privileges, and at times domestic help. We believe that

the policies underlying compensation to government employees

should be reformed such that they are based primarily on market

p r i n c i p l e s . T h e a d v a n t a g e s o f d o i n g s o i n c l u d e e l imi n a t i n g

departments known for corrupt practices, making explicit the

true cost of a government employees performance, and giving

government employees a good sense of their market worth.

3. Finally, considerable reform is needed in the Indian real estate

sector. A large proportion of the land is owned by the government,

and any land made available for private use is governed by archaic

ownership, zoning, tenancy, and rent laws. Further, this government

control of land has reduced the amount of land available for trading

purposes. The result is that Indian land prices are the highest

among all Asian nations relative to average income (Lewis, 2001).

6

Most of the illegal income is concealed by people at higher income brackets trying to avoid

paying higher taxes. Consider the following illustration: suppose the extent of unreported income is


29/41

100 per cent of reported income. Since the tax on income, profits, and capital gains was about three

per cent of GDP, we can assume that unreported income, once reported, should yield at least three

per cent of GDP (or around $13.42 billion in 1999). This total should be enough to cover more than

67 per cent of the overall budget deficit of the Indian Central Government (World Economic Indicators,

2001).

7

The starting salaries for these positions are in the range of $1,800 to $2,200 per year, with the

highest salary at about $10,000 per year.Asia-Pacific Development Journal Vol. 12, No. 2, December

2005

91

Further, the officially assessed values of real estate are low, while

the true market price is very high.

8

This situation leads, among

other things, to higher levels of corruption as individuals use real

estate as a major hiding place for investments of illegally acquired

income (DiLodovico, Lewis, Palmade and Sankhe, 2001).

Examples such as these indicate that there are still a large number of

areas where the individual self-interests of survival and wealth accumulation are

not respected. In the next section, we examine how one fairly new approach to

microeconomic policy the encouragement of entrepreneurship can help India to

continue its recent economic growth.

IV. THE ROLE OF ENTREPRENEURSHIP IN INDIAS

FUTURE ECONOMIC DEVELOPMENT

The progress of Indian economic development from 1947 to the present

provides further evidence that individuals do respond to incentives in their pursuit


30/41

of self-survival and accumulation of wealth. Further, the nature of this response

depends on the economic climate, particularly the role of the government. Indias

economy struggled as long as it was based in a system of government regulation

with little interaction with economic forces outside the country. The economic

reforms of the early 1990s set the stage for substantial improvements in the Indian

economy. As was stated earlier, Indias economy grew at an average of 6.3 per

cent from 1992-1993 to 2000-2001 (Acharya, 2001). Further, its rate of inflation

and fiscal deficit both decreased substantially (Bhalla, 2000). Improved exchange

rate management led to improved financing of the current account deficit and

higher foreign exchange reserves. Finally, Indias GDP and per capita income both

increased substantially from 1990-1991 to 1998-1999.

India can do more, however, to further advance its economic development.

Indeed, one of the more recent microeconomic approaches to economic growth is

the promotion of entrepreneurial activities. Entrepreneurial efforts have been found

to generate a wide range of economic benefits, including new businesses, new

jobs, innovative products and services, and increased wealth for future community

investment (Kayne, 1999). The following narrative explains in considerable depth

how entrepreneurial activities have succeeded in several countries and how it can

now be used to further Indias economic development.

8

It is entirely possible that the officially assessed value may be 5 to 10 per cent of the actual

market price of the dwelling of the plot of land.Asia-Pacific Development Journal Vol. 12, No. 2,

December 2005

92

Following an extensive study of entrepreneurship in 21 countries, Reynolds,

Hay, Bygrave, Camp and Autio (2000) concluded that successful entrepreneurial


31/41

activity is strongly associated with economic growth. Their research was subsumed

under the Global Entrepreneurship Monitor (GEM), a joint research initiative

conducted by Babson College and London Business School and supported by the

Kauffman Center for Entrepreneurial Leadership. Their findings, based on surveys

of the adul t populat ion of each count ry, in-depth interviews of exper ts on

entrepreneurship in each country, and the use of standardized national data,

supported their conceptual model depicting the role of the entrepreneurial process

in a countrys economic development (see figure 2).

Figure 2. The GEM Conceptual Model

The GEM Conceptual Model suggests that the social-cultural-political

c o n t e x t wi t h i n a c o u n t r y mu s t f o s t e r c e r t a i n Ge n e r a l Na t i o n a l F r amewo

r k

Conditions, which can generate not only the opportunities for entrepreneurship

but also the capacity for entrepreneurship in particular, the skills and motivation

necessary to succeed. Together, the entrepreneurship opportunities, on the one

hand, and the skills and motivation, on the other, lead to business dynamics that

yield creative destruction, a process in which new firms are created and older, less

efficient firms are destroyed. The overall result for a country is economic growth.

Of the eight General National Framework Conditions listed in figure 2,

the three that Reynolds, et al. (2000) highlighted as especially important are the

availability of financing for new entrepreneurs, the need for government policies

which are supportive of entrepreneurial efforts, and the opportunities for education

and training in entrepreneurship.

Social,

cultural,

political


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context

Entrepreneurial

Framework Conditions

Availability of financing

Supportive government policies

Education and training

Cultural & social norms

R & D transfer

Commercial & legal infrastructure

Internal market openness

Access to physical infrastructure

Entrepreneurial

opportunities

Entrepreneurial

capacity

Skills

Motivation

Business

dynamics

National

economic

growth

Source: Reynolds, Paul D., Michael Hay, William D. Bygrave, S. Michael Camp, and Erkko Autio, 2000.

Global Entrepreneurship Monitor: 2000 Executive Report (Kansas City, Kauffman Center for

Entrepreneurial

Leadership), p. 6.Asia-Pacific Development Journal Vol. 12, No. 2, December 2005


33/41

93

Given Indias economic progress in recent years, the country may now

be ready for the implementat ion of microeconomic pol icies that wi l l foster

entrepreneurial activities. Fortunately, in addition to the macroeconomic reforms

mentioned earlier, India has taken other steps to lay the foundation for the type of

economic growth that can be fostered only by entrepreneurial activities and

appropriate economic policies that reflect individual rights and responsibilities. For

example, in recent years India has made several important structural changes,

including the construction of telecommunications networks and the implementation

of a nationwide road-construction programme (Solomon, 2003). Further, several

thousand new economy businesses the types of businesses especially suited

for entrepreneurship efforts-were started in 2000 alone.

However, more than just opportunities should lead India to consider

entrepreneurial activities as a way to economic growth. At least one major threat,

a growing population, also should motivate it to consider entrepreneurial effort as

an economic policy. Specifically, the countrys population is expected to increase

by 110 to 130 million people over the next 10 years, with approximately 80 to 100

million of those new citizens seeking jobs that do not currently exist (Gupta, 2001).

Entrepreneurial efforts can help to provide those jobs.

Recent research on entrepreneurship around the world indicates that the

cultural characteristics that can foster successful entrepreneurial activities and its

related economic benefits are a strong education base, the necessary financial

support, opportunities for networking among entrepreneurs, and a well-defined,

minimal role for the government. In the case of India specifically, an emphasis

upon entrepreneurial activities in the information technology sector also seems


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relevant.

Consider first the need for a strong education base. The study of 21

nations by Reynolds, et al. (2000) found that providing opportunities for education

in entrepreneurship was critical to success in new entrepreneurship efforts. For

example, experts interviewed in the 21 nations felt strongly that new entrepreneurs

n e e d e d t r a i n i n g i n t h e s k i l l s n e e d e d t o c o n v e r t a ma r k e t o p p o r t u n i t y

i n t o

a commercial enterprise. Gupta (2001) says that India now has an extraordinary

talent pool suited to entrepreneurship. However, he also says that the government

must ensure that new entrepreneurs have access to both the functional and

entrepreneurial skills needed for success in business startups. He sees both sets

of skills as still somewhat lacking in India. The functional skills include abilities in

such areas as marketing, finance and product development. The entrepreneurial

skills include managing risk, building an effective team and raising funds. Gupta

says that Indias educational institutions can play a major role in the development

of these skills. For example, the Indian School of Business (ISB) at HyderabadAsia-Pacific Development

Journal Vol. 12, No. 2, December 2005

94

has already produced a curriculum suited to the development of entrepreneurial

leaders. It will soon have a new Entrepreneurship Centre that will be founded, led

and managed by several leading Silicon Valley entrepreneurs.

Lall (2001) says that the structure of a countrys exports affects its prospects

for economic growth. He claims that a technology-intensive structure is desirable

for a country that has a substantial industrial base. Although India has such an

industrial base, its export structure is still dominated by low-technology products.

Lall says that a low-technology export structure is based in such products as


35/41

textiles, garments, simple metal and plastics products, and furniture. However,

these types of products are produced by low-skilled labour and are undifferentiated,

so they do not yield the competitive advantages necessary for broad economic

growth. A high-technology export structure, on the other hand, relies upon such

products as complex electronic machinery, precision instruments and fine chemicals.

This type of structure, based in complex skills and fast-changing technologies,

g e n e r a l l y d o e s y i e l d c o m p e t i t i v e a d v a n t a g e s a n d e x p o r t - b a s e d e c o n

o m i c

development. Given Indias extraordinary talent pool (Gupta, 2001), it would seem

that the country is poised to take advantage of a high-technology export structure.

Consider next the f inancial suppor t requi red to produce successful

entrepreneurial efforts. On the one hand, as Solomon (2003) indicates, foreign

capital has been pouring into India recently, with one of its aims being to tap the

count rys emergence as a center for sof tware development and informat ion

technology services. However, much remains to be done, and the government can

play a major role in this area. Among other things, India must ensure that its new

entrepreneurs will have access to venture capital. Gupta (2001) suggests the

establishment of a global support network of venture capitalists and other funding

sources (also known as angels) who would be willing to support the new

entrepreneurs. He also says that India must create areas of excellence breeding

grounds where ideas grow into new businesses similar to those created in Silicon

Valley in the United States. They can attract the ideas, the venture capital, and the

management talent often found to succeed in other entrepreneurial efforts around

the world. India can begin to create these areas of excellence by drawing upon

the resources of its universities and other educational institutions, including the

Indian Institutes of Technology.


36/41

Providing opportunities for networking among entrepreneurs themselves

also can help new businesses get started on the right foot. In particular, Gupta

(2001) says that India needs to foster networking and exchange among both new

and established entrepreneurs. The obvious reason is that entrepreneurs can learn

not only through their own experience but also through that of others. An effective

approach to encouraging this type of networking might be to follow the academicAsia-Pacific


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model and begin to schedule conferences throughout India at which these individuals

could interact. At these conferences, experienced entrepreneurs could present

their ideas on what has worked for them (and what has not). Entrepreneurs just

getting started could describe what they hope to achieve in their new businesses

and get feedback on their plans from other entrepreneurs present. Obviously,

newer entrepreneurs will want to be careful not to divulge important company

secrets. The Indian government might have to provide small grants to subsidize

the travel and lodging expenses of individuals lacking the resources to attend such

conferences. However, just as in the academic setting, those grants could be

awarded based on the merits of an individuals ideas for a startup business.

T h e ro l e t h a t t h e g o v e r n m e n t c a n p l a y i n t h e e n c o u r a g e m e n t o f

entrepreneurial efforts has already been noted in the above narrative. Clearly, the

government can develop policies concerning educational and financial support.

Government policies on taxing and regulation of business also are relevant here,

given that such policies can either promote or hamper entrepreneurial efforts. And

the government can certainly help to provide networking opportunities among new

and experienced entrepreneurs.

Kayne (1999) identifies additional actions that the Indian government can


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take to provide a solid foundation for entrepreneurial efforts. He says that, in any

c o u n t r y, t h e a d v o c a t e s o f a n e n t re p re n e u r i a l e c o n omy mu s t p romo t e a n

d

communicate policies that will provide a clear link between entrepreneurial efforts

and overall economic prosperity. That is, voters and taxpayers must understand

t h e r e a s o n s w h y t h e i r g o v e r n m e n t i s i n v e s t i n g i n a n y t h i n g a s n e w a

s

entrepreneurship. Rodrik (1996) also addressed this issue by concluding that

reforms will be resisted if they are seen as being primarily redistributive (i.e., zerosum) in nature. He

further says that, while most economists prefer speedy economic

reforms administered from above (i.e. the state), the best approach might be

a gradual approach that considers the political economy of the situation (and

involves relevant powerful groups). Panagariya (1994) further addressed this issue

when he said that, especially in a democratic society like India, the government

must mobilize public opinion in favour of new economic policies. He says that one

reason for the relative success of the economic reforms beginning in 1991 was

that the Rao government moved quickly to announce major economic reforms.

Finally, Reynolds, et al. (2000) also found that the perceived social legitimacy of

entrepreneurship can be a critical factor in its success. Specifically, they found

that respect for individuals starting new firms was an important cultural factor for

countries with high levels of entrepreneurial activities. In short, uncertainty within

the culture can lead to resistance.Asia-Pacific Development Journal Vol. 12, No. 2, December 2005

96

However, as Reynolds et al. (2000) concluded, the role of government

beyond laying the foundation for entrepreneurship through tax and regulatory

pol icies, suppor t for educat ion in ent repreneurship, and so for th should be

minimized. Specifically, they found that a reduced government role in the economy


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including a low tax burden on both firms and individuals could yield substantially

higher levels of entrepreneurial activity. They also found that, in India, excessive

government regulations and related bureaucratic complexities did indeed handicap

entrepreneurs. As was reported extensively earlier in this paper, India has for

decades been saddled with a government that is far too involved in its economy.

V. CONCLUSION

The Indian economy provides a revealing contrast between how individuals

react under a gover nment -cont rol led envi ronment and how they respond to

a market-based environment. The evidence presented here suggests that recent

market reforms encouraging individual enterprise have led to higher economic growth

in that country. The reasoning here is not new, although it is refreshing to discover

that this tried-and-true reasoning applies to developing as well as to developed

nations. Specifically, reliance upon a free market, with its emphasis upon individual

self-interest in survival and wealth accumulation, can yield a wide range of economic

benefits. In India those benefits have included, among other things, increased

economic growth, reduced inflation, a smaller fiscal deficit, and higher inflows of

the foreign capital needed for investment.

We further conclude that India can generate additional economic growth

by fostering entrepreneurial activities within its borders, particularly within its

burgeoning middle class. Not only has entrepreneurship been found to yield

significant economic benefits in a wide variety of nations, but India specifically has

reached a point in its development where it can achieve similar results through

entrepreneurial efforts. Among other things, India is poised to generate new

business startups in the high technology area that can help it become a major

competitor in the world economy. For example, it has a strong education base


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suited to entrepreneurial activities, increased inflows of foreign capital aimed at its

growing information technology services sector, and a host of successful new

business startups. To pursue further the entrepreneurial approach to economic

growth, India must now provide opportunities for (1) education directed specifically

at developing entrepreneurial skills, (2) financing of entrepreneurial efforts, and

(3) networking among potential entrepreneurs and their experienced counterparts.

Obviously, the government can play a substantial role in helping to provide these

types of opportu

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