Unit -05

Global Environment

Human societies across the globe have established progressively closer contacts over many
centuries, but recently the pace has dramatically increased. Jet airplanes, cheap telephone
service, email, computers, huge oceangoing vessels, instant capital flows, all these have made
the world more interdependent than ever. Multinational corporations manufacture products in
many countries and sell to consumers around the world. Money, technology and raw
materials move ever more swiftly across national borders. Along with products and finances,
ideas and cultures circulate more freely. As a result, laws, economies, and social movements
are forming at the international level. The globalization process includes globalization of
markets, globalization of production, globalization of technology, and globalization of
investment. Basically this chapter deals with features.
The globalization of business is bound to affect you. Not only will you buy products
manufactured overseas, but it’s highly likely that you’ll meet and work with individuals from
various countries and cultures as customers, suppliers, colleagues, employees, or employers.
The bottom line is that the globalization of world commerce has an impact on all of us.

Why do companies go global?

Why does the United States import automobiles, steel, digital phones, and apparel from other
countries? Why don’t we just make them ourselves? Why do other countries buy wheat,
chemicals, machinery, and consulting services from us? Because no national economy
produces all the goods and services that its people need. Countries are importers when they
buy goods and services from other countries; when they sell products to other nations, they’re
exporters.

1. Absolute Advantage A nation has an absolute advantage if (1) it’s the only source of
a particular product or (2) it can make more of a product using fewer resources than
other countries. Because of climate and soil conditions, for example, France had an
absolute advantage in wine making until its dominance of worldwide wine production
was challenged by the growing wine industries in Italy, Spain, and the United States.
Unless an absolute advantage is based on some limited natural resource, it seldom
lasts
2. Comparative Advantage How can we predict, for any given country, which products
will be made and sold at home, which will be imported, and which will be exported?
This question can be answered by looking at the concept of comparative advantage,
which exists when a country can produce a product at a lower opportunity cost
compared to another nation. But what’s an opportunity cost? Opportunity costs are the
products that a country must forego making in order to produce something else. When
a country decides to specialize in a particular product, it must sacrifice the production
of another product. Countries benefit from specialization - focusing on what they do
best, and trading the output to other countries for what those countries do best.
3. Increase Sales and Profitability Expanding on a global market space is more likely
to increase overall revenue sales and reduce operational costs, through attracting a
larger customer base. In addition, through the help of technologies and the revolution
of the internet, international commerce has become even more attractive, for smaller
businesses. Through having the opportunity to outsource, they are able to reduce costs
and improve their business management & operational efficiency.

4. Greater Economies of Scale Some companies may want to expand their business
products, as they are more likely to be accepted around the world. In many industries,
expansion through internationalisation may benefit companies, through achieving
better economies of scale. This is especially the case for companies operating in
smaller more domestic markets. Moreover, internationalisation may also serve as an
opportunity to differentiate or exploit a new product extension, service, or
brand.

5. Enter new Markets & Spread the Risk The popularity of internationalization is also
thanks to countries opening up trade barriers and lowering tariffs across the world.
Internationalization allows companies to diversify their businesses and be able to
ease the risk of decelerating demand, across different countries. Operating in
various countries also gives companies the opportunity to invest in innovation
and develop different variations of their products and services, which may also
shield them from declining interest in a particular product or service.
 What Are the Benefits of Globalization?
Globalization impacts businesses in many different ways. But those who decide to take on
international expansion find several benefits, including:
1. Access to New Cultures
Globalization makes it easier than ever to access foreign culture, including food, movies,
music, and art. This free flow of people, goods, art, and information is the reason you can
have Thai food delivered to your apartment as you listen to your favourite UK-based artist or
stream a Bollywood movie.
2. The Spread of Technology and Innovation
Many countries around the world remain constantly connected, so knowledge and
technological advances travel quickly. Because knowledge also transfers so fast, this means
that scientific advances made in Asia can be at work in the United States in a matter of days.
3. Lower Costs for Products
Globalization allows companies to find lower-cost ways to produce their products. It also
increases global competition, which drives prices down and creates a larger variety of choices
for consumers. Lowered costs help people in both developing and already-developed
countries live better on less money.
4. Higher Standards of Living across the Globe
Developing nations experience an improved standard of living—thanks to
globalization. According to the World Bank, extreme poverty decreased by 35% since 1990.
Further, the target of the first Millennium Development Goal was to cut the 1990 poverty rate
in half by 2015. This was achieved five years ahead of schedule, in 2010. Across the globe,
nearly 1.1 billion people have moved out of extreme poverty since that time.
5. Access to New Markets
Businesses gain a great deal from globalization, including new customers and diverse
revenue streams. Companies interested in these benefits look for flexible and innovative ways
to grow their business overseas. International Professional Employer Organizations (PEOs)
make it easier than ever to employ workers in other countries quickly and compliantly. This
means that, for many companies, there is no longer the need to establish a foreign entity to
expand overseas.
6. Access to New Talent
In addition to new markets, globalization allows companies to find new, specialized talent
that is not available in their current market. For example, globalization gives companies the
opportunity to explore tech talent in booming markets such as Berlin or Stockholm, rather
than Silicon Valley. Again, International PEO allows companies to compliantly employ
workers overseas, without having to establish a legal entity, making global hiring easier than
ever.

List of various Strategies of Globalization for Foreign Market Entry:

 Exporting.
 Licensing and Franchising.
 Contract Manufacturing.
 Management Contracting.
 Turnkey Contracts.
 Wholly Owned Manufacturing Facilities Companies.
 Assembly Operations.
 Joint Ventures.
 Third Country Location.
 Mergers and Acquisition.
 Strategic Alliance
Exporting- Exporting is the most traditional strategy of entering the foreign market.
Exporting is the appropriate strategy in following conditions:

 The volume of foreign business is not large enough to justify production in the foreign
market.
 Cost of production in the foreign market is high.
 Foreign market is characterized by production bottlenecks like infrastructural problems,
problems of raw materials.
 There are political or other risks of investment in the foreign country.
 The company has no permanent interest in the foreign market or there is no guarantee of the
market available for a long period.
 Foreign investment is not favoured by the foreign country.
 Licensing or contract manufacturing is not a better alternative.
Licensing and Franchising- Under international licensing, a firm in one country (licensor)
permits a firm in another country (licensee) to use its intellectual property (such as patents,
trademarks, copy rights etc.). Licensee pays royalty or fees to the licensor. Franchising is a
form of licensing in which a parent company (the franchiser) grants another independent entity
(the franchisee) the right to do business in a prescribed manner.
Management Contracting- In a management contract the supplier brings together a package
of skills that will provide an integrated service to the client without incurring the risk and
benefits of ownership. According to Philip Kotler, “Management contracting is a low-risk
method of getting into a foreign market and it starts yielding income right from the beginning.
The arrangement is especially attractive if the contracting firm is given an option to purchase
some shares in the managed company within a stated period. Some Indian companies Tata Tea,
Harrisons Malayalam and AVT—have contracts to manage a number of plantations in Sri
Lanka. One limitation of management contract is that it may prevent a company from setting
up its own operations for a particular period.
Wholly Owned Manufacturing Facilities Companies- Companies with long-term and
substantial interest in the foreign market normally establish fully owned manufacturing
facilities there. As Drucker points out, It is simply not possible to maintain substantial market
standing Man important area unless one has a physical presence as a producer. A number of
factors like trade barriers, differences in the production and other costs, government policies
etc., encourage the establishment of production facilities in the foreign markets.
Assembly Operations- A manufacturer who wants many of the advantages that are associated
with overseas manufacturing facilities and yet does not want to go that far may find it desirable
to establish. In a sense, the establishment of an assembly operation represents a cross between
exporting and overseas manufacturing.
Joint Ventures- Joint venture is a very common strategy of entering the foreign market. Under
joint venture, ownership and management are shared between a foreign firm and a local firm.
In countries, where fully foreign owned firms are not allowed or favoured, joint venture is the
alternative. Joint venture permits a firm with limited resources to enter more foreign markets.
Further, the local partner would be in a better position to deal with the government and public.
A right local partner for a joint venture can have a major impact on a firm’s competitiveness,
because such a partner can serve as a cultural, bridge between the manufacturer and the market.
Third Country Location- Third country location is sometimes used as an entry Strategy, when
there are no commercial transactions between two nations because of political reasons on when
direct transactions between: two nations are difficult due to political reasons or the like, a firm
is one of these nations which wants to enter the other market will have to operate from a third
country base. For example, Taiwanese entrepreneurs found it easy to enter People’s Republic
of China through bases in Hong Kong.
Mergers and Acquisition- Mergers and acquisitions have been a very important market
entry strategy as well as expansion strategy. A number of Indian companies have also used
this entry strategy. Mergers and acquisitions have certain specific advantages. It provides
instant access to markets and distribution network. As one of the most difficult areas in
international marketing is the distribution, this is often a very important consideration for
mergers and acquisitions. Another important objective of mergers and acquisitions is to
obtain access to new technology or a patent right. 
WTO: The World War–II, which lasted from 1939 to 1945, left many countries in Europe
and Asia totally ravaged. Their economies were shattered; there was tremendous stain on
political and social systems resulting in wide spread annihilation and migration of people.
Intentional peace was ruffled. Something had to be done to put these war-ravaged economies
back in shape. Simultaneously, the various colonies in Asia and Africa were acquiring
political freedom. And there was urgent pressure on them for rapid economic development
and political stabilization. In this background the United Nations Organisation (UNO) was
born on the collective wisdom of the world. Progressively, the UNO came to encompass the
concerns for development in economic, commercial, scientific, social and cultural sphere of
the member nations. It formed various forums and agencies. One such forum under the UNO
was the General Agreement on Tariffs and Trade (GATT) which was established in 1947.
GATT emerged from the ―ashes of the Havana Charter. In International Conference on
Trade and Employment in Havana in the winter of 1947-48, fifty-three nations drew up and
signed a charter for establishing an International Trade Organisation (ITO). But the US
Congress did not ratify the Havana Charter with the result that the ITO never came into
existence. Simultaneously, twenty-three nations agreed to continue extensive tariff
negotiations for trade concessions at Geneva, which were incorporated in a General
Agreement of Tariffs and Trade. This was signed on 30th October 1947 and came into force
form 1st January 1948 when other nations had also signed it. The critical juncture was
reached during the Uruguay Round of multilateral trade negotiations, which may be called
the final act. It was signed by 12 countries in which India was signatory. Popularly known as
Dunkel agreement, it finally emerged as the World Trade Organisation (WTO) on 1st
January, 1995.

What is GATT?

The General Agreement on Tariffs and Trade (GATT) is neither an organisation nor a
court of justice. It is simply a multinational treaty which now covers eighty per cent of the
world trade. It is a decision making body with a code of rules for the conduct of international
trade and a mechanism for trade liberalisation. It is a forum where the contracting parties
meet from time to time to discuss and solve their trade problems, and also negotiate to
enlarge their trade. The GATT rules provide for the settlement of trade disputes, call for
consultations, waive trade obligations, and even authorize retaliatory measures. The GATT
has been a permanent international organisation having a permanent Council of
Representative with headquarters at Geneva. 25 governments have signed it. Its function is to
call International conferences to decide on trade liberalizations on a multilateral basis. GATT
‘Rounds’ of Global Trade Negotiations The brief particulars of the various GATT Rounds‘
(conferences) for global trade negotiations are as follows:

1. First Round: - The earlier rounds of GATT have achieved a limited measure of
success. In the first round of talks held in Havana in 1947, 23 countries, which had
formed GATT, exchanged tariff concessions on 45,000 products worth 10 billion US
dollars of trade per annum.
2. Second Round: - Ten more countries had joined GATT when its second round was
held in Annecy (France) in 1949. In this round, customs and tariffs on 5000 additional
items of international trade were reduced.
3. Third Round: - The Third round was organized in Torquay (England) in 1950-51.
38 member countries of GATT participated in it and they adopted tariff reduction on
8700 items.
4. Fourth Round: - The fourth round of world trade negotiations were held in
Geneva in 1955-56. In this round countries decided to further cut duties on goods
entering international trade. The value of merchandise trade subjected to tariff cut was
estimated at $ 2.5b.
5. Fifth Round: - The fifth round took place during 1960-62 at Geneva. In this round
the negotiations covered the approval of common external tariff (CET) of the
European countries and cut in custom duties amounting to US $ 5 billion on 4400
items. Twenty-six countries participated in this round.
6. Sixth Round or the Kennedy Round:- With the formation EEC, the US had been
put at a disadvantage. As a reaction to this, the US Congress passed the Trade
Expansion Act in October 1962 which authorised the Kennedy administration to make
50 per cent tariff reduction in all commodities Seventh Round or Tokyo Round:-
7. The Seventh Round of Multilateral Trade Negotiations (MTN) was launched in
September 1973 under the auspices of GATT. Its objectives were laid down in the
Tokyo Declaration. The Declaration set out a far-reaching programme for the
negotiations in six areas. These are (i) tariff reduction; (ii) reduction of elimination of
non-tariff barriers; (iii) coordinated reduction of all trade barriers in selected sectors;
(iv) discussion on the multilateral safeguard system; (v) trade liberalisation in the
agricultural sector taking into account the special characteristics and (vi) special
treatment of tropical products. It also emphasized that MTN must take into account
the special, interests and problems of developing countries.
8. Eight Round or the Uruguay Round: - The Eighth Round of GATT negotiations
which began at Uruguay in September 1986 ought to have been concluded by the end
of 1990. But at the ministerial meeting in Brussels in December 1990, an impasse was
reached over the area of agriculture and the talks broke down.
WORLD TRADE ORGANISATION (WTO) The WTO was established on
January 1, 1995. It is the embodiment of the Uruguay Round results and the successor
to GATT. 76 Governments became members of WTO on its first day. It has now 146
members, India being one of the founder members. It has a legal status and enjoys
privileges and immunities on the same footing as the IMF and the World Bank. It is
composed of the Ministerial Conference and the General Council. The Ministerial
Conference (MC) is the highest body. It is composed of the representatives of all the
Members. The Ministerial Conference is the executive of the WTO and responsible
for carrying out the functions of the WTO. The MC meets at least once every two
years. The General Council (GC) is an executive forum composed of representatives
of all the Members. The GC discharges the functions of MC during the intervals
between meetings of MC. The GC has three functional councils working under its
guidance and supervision namely: a) Council for Trade in Goods. b) Council for
Trade in Services. c) Council for Trade Related Aspects of Intellectual Property
Rights (TRIPs). Director-General heads the secretariat of WTO. He is responsible for
preparing budgets and financial statements of the WTO. WTO has now become the
third pillar of United Nations Organization (UNO) after World Bank and International
Monetary Fund. Objectives of WTO In its preamble, the Agreement establishing the
WTO lays down the following objectives of the WTO.
1. Its relation in the field of trade and economic endeavour shall be conducted with a
view to raising standards of living, ensuring full employment and large and steadily
growing volume of real income and effective demand, and expanding the production
and trade in goods and services.
2. To allow for the optimal use of the world‘s resources in accordance with the
objective of sustainable development, seeking both (a) to protect and preserve the
environment, and (b) to enhance the means for doing so in a manner consistent with
respective needs and concerns at different levels of economic development.
3. To make positive efforts designed to ensure that developing countries especially the
least developed among them, secure a share in the growth in international trade
commensurate with the needs of their economic development.
4. To achieve these objectives by entering into reciprocal and mutually advantageous
arrangements directed towards substantial reduction of tariffs and other barriers to
trade and the elimination of discriminatory treatment in international trade relations.
5. To develop an integrated, more viable and durable multilateral trading system
encompassing the GATT, the results of past trade liberalisation efforts, and all the
results of the Uruguay Round of multilateral trade negotiations.
 6. To ensure linkages between trade policies, environment policies and sustainable
development.
Functions of WTO The following are the functions of the WTO:
1. It facilitates the implementation, administration and operation of the objectives of
the Agreement and of the Multilateral Trade Agreements.
2. It provides the framework for the implementation, administration and operation of
the Plurilateral Trade Agreements relating to trade in civil aircraft, government
procurement, trade in dairy products and bovine meat.
3. It provides the forum for negotiations among its members concerning their
multilateral trade relations in matters relating to the agreements and a framework for
the implementation of the result of such negotiations, as decided by the Ministerial
Conference. 4. It administers the Understanding on Rules and Procedures governing
the Settlement of Disputes of the Agreement.
5. It cooperates with the IMF and the World Bank and its affiliated agencies with a
view to achieving greater coherence in global economic policy-making.

Ministerial Conferences

 Geneva, week of 29 November 2021

 Buenos Aires, 10-13 December 2017
 Nairobi, 15-19 December 2015
 Bali, 3-6 December 2013
 Geneva, 15-17 December 2011
 Geneva, 30 November - 2 December 2009
 Hong Kong, 13-18 December 2005
 Cancun, 10-14 September 2003
 Doha, 9-13 November 2001
 Seattle, November 30 – December 3, 1999
 Geneva, 18-20 May 1998
 Singapore, 9-13 December 1996

Differences between GATT and WTO

The WTO is not an extension of the GATT but succession to the GATT. It completely
replaces GATT and has a very different character. The major differences between the
two are:
1. The GATT had no status whereas the WTO has a legal status. It has been created a
by international treaty ratified by governments and legislatures of member states.
2. The GATT was a set of rules and procedures relating to multilateral agreements of
selective nature. There were separate agreements on separate issues, which were not
binding on members. Any member could stay out of the agreement. The agreements,
which form part of the WTO, are permanent and binding on all members.
 3. The GATT dispute settlement system was dilatory and not binding on the parties to
the dispute. The WTO dispute settlement mechanism is faster and binding on all
parties.
4. GATT was a forum where the member countries met once in a decade to discuss
and solve world trade problems. The WTO, on the other hand, is a properly
established rule based World Trade Organization where decisions on agreement are
time bound.
5. The GATT rules applied to trade in goods. Trade in services was included in the
Uruguay Round but no agreement was arrived at. The WTO covers both trade in
goods and trade in services.
6. The GATT had a small secretariat managed by a Director General. But the WTO
has a large secretariat and a huge organizational setup.

Implications for India

After the Uruguay Round, India was one of the first 76 Governments that became
member of the WTO on its first day. Different views have been expressed in support
and against our country becoming a member of the WTO.
Favourable Factors
1. Benefits from reduction of tariffs on exports.
2. Improved prospects for agricultural exports because the prices of agricultural
products in the world market will increase due to reduction in domestic subsidies and
barriers to trade. 3. Likely increase in the exports of textiles and clothing due to the
phasing out of MFA by 2005.
4. Advantages from greater security and predictability of the international trading
system.
5. Compulsions imposed on India to be competitive in the world market.

What is the main purpose of the GATS?  

The creation of the GATS was one of the landmark achievements of the Uruguay Round,
whose results entered into force in January 1995. The GATS was inspired by essentially the
same objectives as its counterpart in merchandise trade, the General Agreement on Tariffs
and Trade (GATT): creating a credible and reliable system of international trade rules;
ensuring fair and equitable treatment of all participants (principle of non-discrimination);
stimulating economic activity through guaranteed policy bindings; and promoting trade and
development through progressive liberalization.
While services currently account for over two-thirds of global production and employment,
they represent no more than 25 per cent of total trade, when measured on a balance-of-
payments basis.  This — seemingly modest — share should not be underestimated, however.
Indeed, balance-of-payments statistics do not capture one of the modes of service supply
defined in the GATS, which is the supply through commercial presence in another country
(mode 3).  Furthermore, even though services are increasingly traded in their own right, they
also serve as crucial inputs into the production of goods and, consequently, when assessed in
value-added terms, services account for about 50 per cent of world trade. 
Regional Trade Bloc

A regional trading bloc (RTB) is a co-operative union or group of countries within a

specific geographical boundary. RTB protects its member nations within that region
from imports from the non-members. Trading blocs are a special type of economic
integration.

Preferential Trade Area − Preferential Trade Areas (PTAs), the first step towards making a
full-fledged RTB, exist when countries of a particular geographical region agree to decrease
or eliminate tariffs on selected goods and services imported from other members of the area.

Free Trade Area − Free Trade Areas (FTAs) are like PTAs but in FTAs, the participating
countries agree to remove or reduce barriers to trade on all goods coming from the
participating members.
Customs Union − A customs union has no tariff barriers between members, plus they agree
to a common (unified) external tariff against non-members. Effectively, the members are
allowed to negotiate as a single bloc with third parties, including other trading blocs, or with
the WTO.
Common Market − A ‘common market’ is an exclusive economic integration. The member
countries trade freely all types of economic resources – not just tangible goods. All barriers to
trade in goods, services, capital, and labour are removed in common markets. In addition to
tariffs, non-tariff barriers are also diminished or removed in common markets.

What is export promotion?

Export promotion is used by many countries and regions to promote the goods and services
from their companies abroad. This is good for the trade balance and for the overall
economy. Export promotion can also have incentive programs designed to draw more
companies into exporting. Governments do this by providing assistance in the marketing and
product identification and development, by arranging payment guaranty schemes, pre-
shipment and post-shipment financing, trade visits, training, trade fairs, and foreign
representation. Export promotion has been defined as “those public policy measures which
actually or potentially enhance exporting activity at the company, industry, or national level”.
Although many forces determine the international flow of goods and services, export
promotion is one of the principal opportunities that governments have to influence the
volume and types of goods and services exported from their areas of jurisdiction.
Government of India, like in almost all other nations, has been endeavouring to develop
exports. Export development is important to the firm and to the economy as a whole.
Government measures aim, normally, at an overall improvement of the export performance of
the nation for the general benefit of the economy. Such measures help exporting firms in
several ways. Export Promotion strategy promotes only the industries that have potential for
developing and competing with foreign rivals. Since the goal is to trade abroad, there
becomes competition, which in turn remedies the returns to scale. The main goal of the
export promotion is to prepare the “potential” industries for competition with the foreign
rivals.

Import substitution is a trade and economic policy that advocates replacing foreign imports

with domestic production. It is based on the premise that a country should attempt to reduce
its foreign dependency through the local production of industrialized products. A strategy that
emphasizes the replacement of imports with domestically produced goods, rather than the
production of goods for export, to encourage the development of domestic industry. The term
primarily refers to 20th-century development economics policies, but it has been advocated
since the 18th century by economists such as Friedrich List and Alexander Hamilton.

The associated practices are commonly:

 an active industrial policy to subsidize and orchestrate production of strategic substitutes

 protective barriers to trade (such as tariffs)
 an overvalued currency to help manufacturers import capital goods (heavy machinery)
 discouragement of foreign direct investment
EXIM Policy
Export Import Policy or better known as Exim Policy is a set of guidelines and
instructions related to the import and export of goods. The Government of India notifies the
Exim Policy for a period of five years (1997 2002) under Section 5 of the Foreign Trade
(Development and Regulation Act), 1992. The current policy covers the period 2002 2007.
The Export Import Policy is updated every year on the 31st of March and the modifications,
 improvements and new schemes become effective from 1st April of every year. All types of
changes or modifications related to the Exim Policy is normally announced by the Union
Minister of Commerce and Industry who coordinates with the Ministry of Finance, the
Directorate General of Foreign Trade and its network of regional offices. Indian EXIM
Policy contains various policy related decisions taken by the government in the sphere of
Foreign Trade, i.e., with respect to imports and exports from the country and more especially
export promotion measures, policies and procedures related thereto. Trade Policy is
prepared and announced by the Central Government (Ministry of Commerce). India's Export
Import Policy also know as Foreign Trade Policy, in general, aims at developing export
potential, improving export performance, encouraging foreign trade and creating favourable
balance of payments position. In other words, the main objective of the Exim Policy is:

 To accelerate the economy from low level of economic activities to high level of economic
activities by making it a globally oriented vibrant economy and to derive maximum benefits
from expanding global market opportunities.
 To stimulate sustained economic growth by providing access to essential raw materials,
intermediates, components,' consumables and capital goods required for augmenting
production.
 To enhance the techno local strength and efficiency of Indian agriculture, industry and
services, thereby, improving their competitiveness.
 To generate new employment.
 Opportunities and encourage the attainment of internationally accepted standards of quality.
 To provide quality consumer products at reasonable prices.
Foreign Trade Regulation

The Central Government appoints any person to be the Directorate General of Foreign Trade.
Normally a member of the Indian Administrative Service having rendered 30 or more years is
appointed to the post of the Director-General of Foreign Trade. The Director-General heads an
attached office under the administrative control of the Ministry of Commerce and Industry of
the Government of India. The Director-General is an Ex-Officio Additional Secretary to the
Government of India. The Director-General advises the central Government in the formulation
of Foreign Trade Policy and is responsible for carrying out that Policy. At present, the Director-
General formulates Foreign Trade Policy and Hand Book of Procedures of Foreign Trade Policy
and ITC (HS) Classifications of Import and Export Items. The Director-General heads an
organization known as the Directorate General of Foreign Trade. The organization has its
offices known as Regional Authority (RA) and Zonal Office. These offices administer the
Foreign Trade Policy and Procedures. While the Regional Offices at Kolkatta, Delhi, Chennai
and Mumbai are Zonal Offices which are headed by Additional Director General of Foreign
Trade, the remaining Regional Offices are headed by Joint Director General, Deputy Director
General and Assistant Director-General. Some of the RAs are also headed by Additional
Director General. Office of the Director-General is located at Gate No 2 of Udyog Bhavan, New
Delhi.
Export Processing Zones Export Oriented Units (EOUs)
Export-oriented units are units undertaking to export their entire production of goods. EOUs can
engage in manufacturing, services, development of software, repair, remaking, reconditioning,
re-engineering including making of gold/silver/platinum jewellery and articles. Further, units
involved in agriculture, agro-processing, aquaculture, animal husbandry, biotechnology,
floriculture, horticulture, pisciculture, viticulture, poultry, sericulture and granites can also
obtain the status of EOU.
The need for a higher level of technological and industrial progress has made the Government
devise a series of export promotion schemes. The Export Oriented Unit Scheme is one of the
oldest export promotion schemes of Government of India. This Scheme was introduced on 31st
December 1980. The EOU Scheme is often referred to as ‘100% EOU Scheme’ and the Units
operating under this Scheme are called ‘100% EOUs’. During the initial years of the
introduction of this Scheme the Units operating under EOU Scheme were required to export
100% of their production. But, nowadays EOUs are permitted to do Domestic Tariff Area sales
up to 50% of FOB value of previous year’s export after fulfilling certain conditions. During the
past 36 years the Government has made many changes in the EOU Scheme to meet the
requirements of the ever-changing international scenario. As per this Scheme the EOUs are
provided with certain concessions to equip them to meet the requirements of international
market. The EOU Scheme is complementary to the Special Economic Zone Scheme, except that
it is widely dispersed in location, unlike Special Economic Zones, which are set up at specific
geographic locations. The aim of this Scheme is to encourage exports by creating additional
production capacity. Under the EOU Scheme India offers bonded manufacturing facilities for
Units doing export-oriented activities. An Export Oriented Unit can get a location of its choice
for undertaking export-oriented activity. An EOU can be set up in the manufacturing or service
sector. In past few years, Export Oriented Units have evolved as a major player in the country’s
export effort.
Export Processing Zones
After independence in India as per the first Industrial Policy Resolution, IPR 1948 import
substituting industrialization policy was adopted for all sectors. Under the purview of an ISI
policy framework, export promotion had also been a considerable concern of the government.
Hence, initiatives have been taken to promote the EPZ as an export platform on the basis of
economic incentives, like, the provision of well-developed infrastructure and tax holidays
became a feature of Indian development. The first export processing zone in the country was set
up in 1965 and it has had four phases in the evolution of the EPZ policy since then.
SEZs in India:

o Asia’s first EPZ (Export Processing Zones) was established in 1965 at Kandla,

Gujarat.
o While these EPZs had a similar structure to SEZs, the government began to
establish SEZs in 2000 under the Foreign Trade Policy to redress the infrastructural
and bureaucratic challenges that were seen to have limited the success of EPZs.
o The Special Economic Zones Act was passed in 2005. The Act came into force
along with the SEZ Rules in 2006.
o However, SEZs were operational in India from 2000 to 2006 (under the Foreign
Trade Policy).
o India’s SEZs were structured closely with China's successful model.
o Presently, 379 SEZs are notified, out of which 265 are operational. About 64% of
the SEZs are located in five states – Tamil Nadu, Telangana, Karnataka, Andhra Pradesh
and Maharashtra.
o The Board of Approval is the apex body and is headed by the Secretary,
Department of Commerce (Ministry of Commerce and Industry).

Following is a brief overview of the evolution of the EPZ policy in India through these
phases:
1. Initial Phase: 1965-1984 The first phase of EPZ development starts from 1965 with a
setting up of Kandla Free Trade Zone in a highly backward region of Kutchh in Gujrat as
early as in 1965 by the central government. It was followed by the Santacruz export
processing zone in Mumbai by central government, which came into operation in 1973. There
was however no clarity of objectives that the government wanted to achieve behind setting up
of these EPZ, Kandla aimed at only regional development of backward region and Santacruz
EPZ was set up with an objective of sector specific development (Electronics). Moreover, an
overall inward looking trade policy with higher controls and regulations adversely influenced
the EPZ policy. Further, in 1980 the government introduced the Export Oriented Units
Scheme (EOU) for setting up of EOUs beyond the boundaries of EPZs.
2. Expansionary Phase: 1984-1991 To boost-up to exports, the government decided to
establish four more zones in 1984. These were at Noida (Uttar Pradesh), Falta (West Bengal)
Cochin (Kerala) and Chennai/ Madras (Tamil Nadu). Thereafter, Visakhapatnam EPZ in
Andhra Pradesh was established in 1989; however, it could not commence its operations
before 1994. All these zones with the exception of Chennai/ Madras were set up in
industrially backward regions. The primary objectives of the zones were still not specified
and there were no significant changes in other laws and procedures pertaining to the EPZs.
3. Liberalization Phase: 1991-2000 In this phase, wide-ranging measures were taken by the
government for revamping and restructuring EPZs also. This phase was thus characterized by
the progressive liberalization of policy provisions and relaxation in the severity of controls.
The policies in this phase are meant for the simplification of procedures and decentralization.
The scope and coverage of the EPZ/EOU scheme was widened in 1992 by permitting the
agriculture, horticulture and aquaculture sector units as well. Thereafter, trading, re-
engineering and re-conditioning units were also allowed to be set up with effect from the year
1994.
4. Transition Phase: 2000 afterwards This phase is termed as a phase of transition because
this period has witnessed a major shift in direction, thrust and approach. The SEZ policy was
first introduced in 1st April 2000, as a part of the Export-Import (EXIM) policy of India. SEZ
is an almost self contained area with high class infrastructure for commercial as well as
residential inhabitation so the objective was to provide an internationally competitive
environment for exports that would in turn earn precious foreign exchange for India and to
provide a stable economic environment for the promotion of export-import of goods in a
quick, efficient and hassle-free manner. In this phase the Central govt. established Export
Processing Zones at Kandla, Santa Cruz, Cochin, Noida, Falta, Chennai, Vishakhapatnam
and Surat (Private Sector Established Zone) were converted into SEZs. Objectives of EPZ
Scheme · Attracting foreign investment · Earning foreign exchange · Generating employment
· Facilitating the transfer of technology · Upgrading skills