Chapter 3: Private, Public and Global Enterprises

Every day, a student travels to school in a bus run by a private operator, posts a letter at a government post office, and buys a soft drink made by a company whose parent firm is based in another country. Three very different kinds of business organisations are at work in these ordinary activities.

India follows a mixed economy. Some enterprises are owned by private individuals, some are owned and managed by the government, and some operate across several countries at once. Each type comes into being for a different reason. Private enterprise is driven by profit and personal initiative. Government enterprise steps in where heavy investment, long waiting periods or national interest make private participation unlikely. Global enterprises bring capital, technology and brands across national borders.

This chapter explains what the private sector and the public sector are, the three forms in which public sector enterprises are organised, how the role of the public sector changed after 1991, the features of global enterprises, the meaning, types and benefits of joint ventures, and the working of the public private partnership model.

Fig. 3.0 – Enterprises in everyday life.

3.1 Introduction

Look around the market nearest to your home and you will find business organisations of many different kinds working side by side. Some shops are owned by a single person who invests the capital, takes the decisions and keeps the profit. Larger retail stores in the same market may be run by a company. Services such as legal advice or medical care are often provided by firms owned by two or more persons, that is, partnership firms. All of these are privately owned organisations, because the ownership and the capital come from individuals or groups of individuals.

There are also offices and places of business that are owned by the government. The Railways, for example, is wholly owned and managed by the government. The post office in your locality is owned by the Post and Telegraph Department, Government of India. Our dependence on postal services, particularly in cities and towns, has reduced a great deal, mainly because a large number of private courier firms now operate in the bigger towns.

Businesses Beyond One Country

A third kind of organisation carries on business in more than one country at a time. Such organisations are known as global enterprises. They manufacture, market and sell in several countries, and their operations are not limited by national boundaries.

All three types, therefore, exist together in the country. Whether an organisation is public, private or global, it forms part of the same economy and affects our daily economic life.

Business Example

Private Couriers And The Postal Service Private courier firms began operating widely in Indian towns and cities and now handle a large share of documents and parcels. Their speed and door-to-door delivery reduced the dependence of urban customers on the traditional postal system. The postal department, however, continues to serve remote areas where private operators do not find it profitable to go.

3.2 Private Sector and Public Sector

The Indian economy contains business enterprises of every description — small and large, industrial and trading, privately owned and government owned. Because both privately owned and government owned enterprises are allowed to operate side by side, India is described as a mixed economy. The Government of India deliberately chose this arrangement so that private initiative and government responsibility could work together.

On the basis of ownership, therefore, the economy is classified into two sectors, the private sector and the public sector.

Definition

Mixed Economy A mixed economy is an economy in which privately owned business enterprises and government owned business enterprises are both permitted to operate, so that the economy consists of a private sector and a public sector together.

The broad classification of the Indian economy, together with the forms of organisation found in each sector, is summarised in Fig. 3.1.

Fig. 3.1

Fig. 3.1 – Classification of the Indian economy.

The Private Sector

The private sector consists of business owned by individuals or by a group of individuals. As you have studied in the previous chapter, the various forms of organisation available in this sector are sole proprietorship, partnership, joint Hindu family business, cooperative society and company.

The capital in these organisations is contributed by private persons, and the decisions are taken by the owners or by managers appointed by them. The profit earned belongs to the owners, and the risk of loss is also borne by them. This direct link between effort and reward is what makes the private sector quick to act on business opportunities.

The Public Sector

The public sector consists of the various organisations that are owned and managed by the government. These organisations may be partly or wholly owned by the central government or by a state government. Some of them are a part of a ministry itself, while others come into existence through a Special Act of the Parliament. Through these enterprises, the government participates directly in the economic activities of the country.

Definition

Public Sector The public sector consists of business organisations owned and managed by the government, either partly or wholly, by the central or state government, which may function as a part of a ministry or be brought into existence by a Special Act of the Parliament.

The two sectors differ on several counts, as set out in Table 3.1.

Table

How Government Policy Divided The Two Sectors

The government, in its industrial policy resolutions issued from time to time, defines the areas of activity in which the private sector and the public sector are allowed to operate. In the Industrial Policy Resolution 1948, the Government of India specified the approach to be followed for the development of the industrial sector. The roles of the two sectors were clearly defined, and through various Acts and Regulations the government oversaw the economic activities of both.

The Industrial Policy Resolution, 1956 laid down certain objectives for the public sector to follow, so that the rate of growth and industrialisation could be accelerated. Great importance was given to the public sector, but at the same time the mutual dependency of the public and private sectors was emphasised.

The industrial policy of 1991 was radically different from all the earlier policies. The government was now deliberating disinvestment of the public sector and allowing greater freedom to the private sector. At the same time, foreign direct investment was invited from business houses outside India.

As a result, multinational corporations, which operate in more than one country, gained entry into the Indian economy. Public sector units, private sector enterprises and global enterprises therefore coexist in the Indian economy today.

Business Example

State Road Transport Undertakings Most Indian states run their own road transport corporations, which operate bus services on routes across the state. Many of these routes connect small towns and villages where passenger numbers are low and returns are poor, so private operators are reluctant to serve them. The state undertaking continues to run such services because its purpose is public service rather than profit alone.

3.3 Forms of Organising Public Sector Enterprises

The government’s participation in the business and economic activity of the country needs some kind of organisational framework to function. You have already studied the forms of business organisation available in the private sector, namely sole proprietorship, partnership, Hindu undivided family business, cooperative society and company.

As the public sector grows, an important question arises: how is a government owned undertaking to be organised, and what form should it take? The government has a major role in forming the public sector, but the government cannot act by itself. It acts through its offices, its officers and its employees, who take decisions on behalf of the government. For this purpose, public enterprises were formed to participate in the economic activities of the country.

These enterprises are expected to contribute to the economic development of the country in today’s liberalised and competitive world. They are owned by the public and are accountable to the public through the Parliament. Their distinguishing characteristics are public ownership, the use of public funds for their activities, and public accountability.

A public enterprise may take any particular form of organisation depending upon the nature of its operations and its relationship with the government. The suitability of a particular form depends upon the requirements of the enterprise concerned. At the same time, in accordance with general principles, any organisation in the public sector should ensure organisational performance, productivity and quality standards.

The forms of organisation which a public enterprise may take are as follows:

Departmental undertaking
Statutory corporation
Government company

These three forms are shown in Fig. 3.2.

Fig. 3.2

Fig. 3.2 – Forms of organising public sector enterprises.

3.3.1 Departmental Undertakings

This is the oldest and most traditional form of organising public enterprises. A departmental undertaking is established as a department of a ministry and is considered a part, or an extension, of the ministry itself. The Government functions through these departments, and the activities performed by them are an integral part of the functioning of the government.

Such undertakings have not been constituted as autonomous or independent institutions, and therefore they are not independent legal entities. They act through the officers of the Government, and their employees are Government employees. These undertakings may be under the central government or the state government, and the rules of the central or state government apply to them. Railways and the post and telegraph department are examples of this form.

Features

The main characteristics of departmental undertakings are as follows:

Funding from the Government Treasury — the funds come directly from the Government Treasury and are an annual appropriation from the budget of the Government. The revenue earned by these undertakings is also paid into the treasury.
Government accounting and audit — they are subject to the accounting and audit controls that apply to other Government activities.
Government servants as employees — the employees of the enterprise are Government servants, and their recruitment and conditions of service are the same as those of other employees directly under the Government. They are headed by Indian Administrative Service officers and civil servants, who are transferable from one ministry to another.
Part of a Government department — it is generally considered to be a major subdivision of the Government department concerned and is subject to the direct control of the ministry.
Accountability to the ministry — they are accountable to the ministry, since their management lies directly under the concerned ministry.

Merits

Departmental undertakings have certain advantages, which are as follows:

Effective parliamentary control — these undertakings enable the Parliament to exercise effective control over their operations.
High public accountability — they ensure a high degree of public accountability, because every rupee spent can be questioned.
Revenue to the Government — the revenue earned by the enterprise goes directly to the treasury and is therefore a source of income for the Government.
Suitability for national security — where national security is concerned, this form is the most suitable, since the undertaking is under the direct control and supervision of the concerned Ministry.

Limitations

This form of organisation suffers from serious drawbacks, some of which are as follows:

Lack of flexibility — departmental undertakings fail to provide the flexibility that is essential for the smooth operation of a business.
Delay in decisions — the employees or heads of departments are not allowed to take independent decisions without the approval of the ministry concerned. This leads to delays in matters where prompt decisions are required.
Inability to seize opportunities — these enterprises are unable to take advantage of business opportunities, because the over-cautious and conservative approval of the bureaucrat does not allow them to take risky ventures.
Red tapism — there is red tapism in day-to-day operations, and no action can be taken unless it goes through the proper channels of authority.
Political interference — there is a great deal of political interference through the ministry.
Insensitivity to consumers — these organisations are usually insensitive to consumer needs and do not provide adequate services to them.

Most of these limitations arise from a single cause. Because the undertaking is a part of the government itself, the controls designed for government offices are applied to a commercial activity, and commercial decisions must move at the speed of administrative approval.

3.3.2 Statutory Corporations

A statutory corporation is a public enterprise brought into existence by a Special Act of the Parliament. The Act defines its powers and functions, the rules and regulations governing its employees, and its relationship with government departments.

It is a corporate body created by the legislature with defined powers and functions. It is financially independent and has clear control over a specified area or a particular type of commercial activity. It is a corporate person and has the capacity of acting in its own name. A statutory corporation therefore combines the power of the government with a considerable amount of the operating flexibility of private enterprise.

Definition

Statutory Corporation A statutory corporation is a public enterprise brought into existence by a Special Act of the Parliament, the Act defining its powers, functions, the rules and regulations governing its employees, and its relationship with government departments.

Features

Statutory corporations have certain distinct features, which are as follows:

Creation by a Special Act — they are set up under an Act of Parliament and are governed by the provisions of that Act, which defines the objects, powers and privileges of the corporation.
Wholly state owned — this type of organisation is wholly owned by the state. The government has the ultimate financial responsibility and has the power to appropriate its profits, and at the same time the state has to bear the losses, if any.
Body corporate — a statutory corporation is a body corporate and can sue and be sued, enter into contracts and acquire property in its own name.
Independent financing — this type of enterprise is usually independently financed. It obtains funds by borrowing from the government or from the public, and through revenues derived from the sale of goods and services. It has the authority to use its revenues.
Separate accounting and audit — a statutory corporation is not subject to the same accounting and audit procedures that apply to government departments, and it is not concerned with the central budget of the Government.
Employees not civil servants — the employees of these enterprises are not government or civil servants and are not governed by government rules and regulations. Their conditions of service are governed by the provisions of the Act itself. At times, some officers are taken from government departments, on deputation, to head these organisations.

Merits

This form of organisation enjoys certain advantages in its working, which are as follows:

Independence and flexibility — they enjoy independence in their functioning and a high degree of operational flexibility, and are free from undesirable government regulation and control.
Freedom in financial matters — since the funds of these organisations do not come from the central budget, the government generally does not interfere in their financial matters, including their income and receipts.
Own policies and procedures — since they are autonomous organisations, they frame their own policies and procedures within the powers assigned to them by the Act. The Act may, however, specify a few matters that require the prior approval of a particular ministry.
Instrument of economic development — a statutory corporation is a valuable instrument for economic development, because it has the power of the government combined with the initiative of private enterprise.

Limitations

This type of organisation suffers from several limitations, which are as follows:

Limited flexibility in practice — in reality, a statutory corporation does not enjoy as much operational flexibility as stated above, because all its actions are subject to many rules and regulations.
Government and political interference — such interference has always been present in major decisions or where huge funds are involved.
Corruption in public dealings — where there is dealing with the public, rampant corruption exists.
Appointment of advisors — the Government has a practice of appointing advisors to the Corporation Board. This curbs the freedom of the corporation in entering into contracts and taking other decisions. If there is any disagreement, the matter is referred to the government for a final decision, which further delays action.

Business Example

An Insurer Created By Statute The Life Insurance Corporation of India was brought into existence by a special Act of Parliament and functions under the provisions of that Act. It runs its insurance business commercially, appoints its own staff on its own terms, and is not a department of any ministry. Its form of organisation shows how a statutory corporation can carry on a large commercial activity while remaining wholly government owned.

3.3.3 Government Company

A government company is established under The Companies Act, 2013 and is registered and governed by the provisions of that Act. Such companies are established for purely business purposes and, in true spirit, compete with companies in the private sector.

According to section 2(45) of the Companies Act, 2013, a government company means any company in which not less than 51 per cent of the paid up capital is held by the central government, or by any state government, or partly by the Central government and partly by one or more State governments, and includes a company which is a subsidiary of a government company.

Definition

Government Company A government company means any company in which not less than 51 per cent of the paid up capital is held by the central government, or by any state government, or partly by the Central government and partly by one or more State governments, and includes a company which is a subsidiary of a government company.

Under the Companies Act, 2013 there is no change in the definition of a company. All the provisions of the Act apply to government companies unless otherwise specified. A government company may be formed as a private limited company or as a public limited company. Certain provisions apply to the appointment and retirement of directors and other managerial personnel.

It is clear from the above that the government exercises control over the paid up share capital of the company. The shares of the company are purchased in the name of the President of India. Since the government is the major shareholder and exercises control over the management of these companies, they are known as government companies.

Features

Government companies have certain characteristics that make them distinct from other forms of organisation. These are as follows:

Created under company law — it is an organisation created under the Companies Act, 2013 or any other previous Company Law.
Capacity to sue and be sued — the company can file a suit in a court of law against any third party and can itself be sued.
Contracts and property in its own name — the company can enter into a contract and can acquire property in its own name.
Management under the Companies Act — the management of the company is regulated by the provisions of the Companies Act, like any other public limited company.
Own rules for employees — the employees of the company are appointed according to its own rules and regulations, as contained in the Memorandum and Articles of Association of the company. These are the main documents of the company, containing the objects of the company and its rules and regulations.
Separate audit arrangement — these companies are exempted from the accounting and audit rules and procedures applicable to government departments. An auditor is appointed by the Central Government, and the Annual Report is to be presented in the Parliament or the State Legislature.
Sources of funds — the government company obtains its funds from government shareholdings and from other private shareholders. It is also permitted to raise funds from the capital market.

Merits

Government companies enjoy several advantages, which are as follows:

Easy formation — a government company can be established by fulfilling the requirements of the Indian Companies Act. A separate Act in the Parliament is not required, so the form can be adopted quickly.
Separate legal entity — it has a separate legal entity, apart from the Government.
Autonomy in management — it enjoys autonomy in all management decisions and takes actions according to business prudence.
Control over the market — by providing goods and services at reasonable prices, these companies are able to control the market and curb unhealthy business practices.

Limitations

Despite the autonomy given to these companies, they have certain disadvantages:

Companies Act loses relevance — since the Government is the only shareholder in some of these companies, the provisions of the Companies Act do not have much relevance.
Evasion of constitutional responsibility — it evades the constitutional responsibility which a company financed by the government should have, as it is not answerable directly to the Parliament.
Purpose defeated — the government being the sole shareholder, the management and administration rest in the hands of the government, and the main purpose of a government company registered like other companies is defeated.

Comparing The Three Forms

The three forms differ mainly in the way they are created, the degree of freedom they enjoy and the manner in which they are financed and audited. Table 3.2 sets out the differences.

Table

Case Snippet

Case 3.1 — Choosing A Form Of Organisation The government of a state wishes to set up an enterprise to manufacture and sell electrical equipment. It wants the enterprise to have a separate legal identity, to be able to raise funds from the capital market, and to appoint its staff on its own terms so that it can compete with private manufacturers. It does not wish to pass a special law for the purpose. Q. Identify the form of public sector organisation the state government should adopt and state two reasons for your answer.

Try Yourself

Find out the names of three public sector enterprises operating in your state and identify the form of organisation each one has taken.

3.4 Changing Role of Public Sector

At the time of Independence, it was expected that public sector enterprises would play an important role in achieving certain objectives of the economy, either by taking part in business directly or by acting as a catalyst for others. The public sector was to build up infrastructure for the remaining sectors of the economy and to invest in key areas.

The private sector at that time was unwilling to invest in projects that required heavy investment and had long gestation periods, that is, projects in which money had to be locked up for many years before any return appeared. The government therefore took upon itself the task of developing infrastructural facilities and providing the goods and services essential for the economy.

The Indian economy is in a stage of transition. The Five Year Plans in the initial stages of development gave a great deal of importance to the public sector. In the period after the 1990s, the new economic policies emphasised liberalisation, privatisation and globalisation, and the role of the public sector was redefined.

The public sector was no longer supposed to play a passive role. It was expected to participate actively and to compete in the market with private sector companies in the same industry. Public enterprises were also held accountable for losses and for the return earned on investment. If a public sector unit was making losses continuously, it was referred to the Board for Industrial and Financial Reconstruction for complete overhauling or for shut down. Various committees were set up to study the working of inefficient public sector units and to report on how their managerial efficiency and profitability could be improved. The role of the public sector today is definitely not what was envisaged in the early 1960s or 70s.

Development Of Infrastructure

The development of infrastructure is a prerequisite for industrialisation in any country. In the pre-Independence period, basic infrastructure was not developed, and industrialisation therefore progressed at a very slow pace. The process of industrialisation cannot be sustained without adequate transportation and communication facilities, fuel and energy, and basic and heavy industries.

The private sector did not show any initiative to invest in heavy industries or to develop them in any manner. It had neither the trained personnel nor the finances to establish heavy industries immediately, which was what the economy required. It was only the government that could mobilise huge capital, coordinate industrial construction and train technicians and workforce.

Rail, road, sea and air transport was the responsibility of the government, and their expansion contributed to the pace of industrialisation and ensured future economic growth. Public sector enterprises were to operate in certain spheres, and investments were to be made to:

Give infrastructure to the core sector, which requires huge capital investment, complex and upgraded technology, and big and effective organisation structures, such as steel plants, power generation plants, civil aviation, railways, petroleum, state trading and coal.
Give a lead in investment to the core sector where private sector enterprises are not functioning in the desired direction, such as fertilizers, pharmaceuticals, petro-chemicals, newsprint, and medium and heavy engineering.
Give direction to future investments, such as hotels, project management, consultancies, textiles and automobiles.

Regional Balance

The government is responsible for developing all regions and states in a balanced way and for removing regional disparities. In the pre-Independence period, most industrial progress was limited to a few areas, such as the port towns.

After 1951, the government laid down in its Five Year Plans that particular attention would be paid to those regions that were lagging behind, and public sector industries were deliberately set up there. Four major steel plants were set up in backward areas to accelerate economic development, to provide employment to the workforce and to develop ancillary industries. This was achieved to some extent, but there is scope for a great deal more.

Development of backward regions, so as to ensure a regional balance in the country, is one of the major objectives of planned development. The government therefore had to locate new enterprises in backward areas and, at the same time, prevent the mushrooming growth of private sector units in areas that were already advanced.

Business Example

Steel Plants In Backward Regions The public sector steel plants at Bhilai, Rourkela, Durgapur and Bokaro were located in regions that had very little industry at the time. Around each plant grew townships, roads, schools, hospitals and a number of small ancillary units supplying parts and services. The plants show how a single large public investment can pull an entire backward region into industrial activity.

Economies Of Scale

Where large scale industries are required to be set up with a huge capital outlay, the public sector had to step in to take advantage of economies of scale. Electric power plants, natural gas, petroleum and telephone industries are some examples of the public sector setting up large scale units.

These units required a larger base in order to function economically, and such a base was possible only with government resources and mass scale production. In other words, the cost per unit of output falls only when output is very large, and only the government could afford to create capacity of that size.

Check Over Concentration Of Economic Power

The public sector acts as a check over the private sector. In the private sector there are very few industrial houses that would be willing to invest in heavy industries, with the result that wealth gets concentrated in a few hands and monopolistic practices are encouraged. This gives rise to inequalities in income, which is detrimental to society.

The public sector is able to set up large industries requiring heavy investment, and the income and benefits that accrue from them are shared by a large number of employees and workers. This prevents the concentration of wealth and economic power in the private sector.

Import Substitution

During the second and third Five Year Plan period, India was aiming to be self-reliant in many spheres. Obtaining foreign exchange was a problem, and it was difficult to import the heavy machinery required for a strong industrial base.

At that time, public sector companies involved in heavy engineering, which would help in import substitution, were established. Simultaneously, several public sector companies such as STC and MMTC played an important role in expanding the exports of the country.

Government Policy Towards The Public Sector Since 1991

The Government of India introduced four major reforms in the public sector in its new industrial policy in 1991. The main elements of the Government policy are as follows:

Restructure and revive potentially viable Public Sector Undertakings.
Close down public sector undertakings which cannot be revived.
Bring down the government’s equity in all non-strategic public sector undertakings to 26 per cent or lower, if necessary.
Fully protect the interest of workers.

These elements were carried out through the measures described below.

Reduction in the number of industries reserved for the public sector from 17 to 8, and then to 3 — in the 1956 resolution on Industrial policy, 17 industries were reserved for the public sector. In 1991, only 8 industries were reserved for the public sector, and these were restricted to atomic energy, arms and communication, mining, and railways. In 2001, only three industries were reserved exclusively for the public sector, namely atomic energy, arms and rail transport. This meant that the private sector could enter all other areas, and the public sector would have to compete with private firms.

The public sector has played a vital role in the development of the economy. However, the private sector is also quite capable of contributing substantially to the nation building process. Both sectors, therefore, need to be viewed as mutually complementary parts of the national sector. Private sector units also have to assume greater public responsibilities, and at the same time the public sector needs to focus on achieving more in a highly competitive market.

Disinvestment of shares of a select set of public sector enterprises — disinvestment involves the sale of the equity shares of public sector enterprises to the private sector and to the public. The objective was to raise resources and to encourage wider participation of the general public and of workers in the ownership of these enterprises. The government had taken a decision to withdraw from the industrial sector and to reduce its equity in all undertakings. It was expected that this would lead to improved managerial performance and would ensure financial discipline, but a great deal remains to be done in this area.

Definition

Disinvestment Disinvestment is the sale of the equity shares of a public sector enterprise to the private sector and to the public, in order to raise resources and to widen the ownership of the enterprise.

The primary objectives of privatising public sector enterprises are:

Releasing the large amount of public resources locked up in non-strategic Public Sector Enterprises, so that they may be utilised in other social priority areas such as basic health, family welfare and primary education.
Reducing the huge amount of public debt and the interest burden on it.
Transferring the commercial risk to the private sector, so that funds are invested in able projects.
Freeing these enterprises from government control and introducing corporate governance.
Giving consumers a better deal in areas where the public sector had a monopoly; in the telecom sector, for example, consumers have benefitted from more choices, lower prices and better quality of products and services.

Policy regarding sick units to be the same as that for the private sector — all public sector units were referred to the Board of Industrial and Financial Reconstruction, which decided whether a sick unit was to be restructured or closed down. The Board reconsidered revival and rehabilitation schemes for some cases and winding up for a number of units. There is a great deal of resentment among the workers of the units that are to be closed down. A National Renewal Fund was set up by the government to retrain or redeploy retrenched labour and to provide compensation to public sector employees seeking voluntary retirement.

There are many enterprises which are sick and not capable of being revived, as they have accumulated huge losses. With public finances under intense pressure, both the central and the state governments are simply not able to sustain them much longer. The only option available to the government in such cases is to close down these undertakings after providing a safety net for the employees and workers. The resources under the National Renewal Fund have not been sufficient to meet the cost of the Voluntary Separation Scheme or the Voluntary Retirement Scheme.

Memorandum of Understanding — performance was to be improved through a Memorandum of Understanding system, by which managements are granted greater autonomy but are held accountable for specified results. Under this system, public sector units were given clear targets and the operational autonomy needed to achieve those targets. The Memorandum of Understanding was signed between the particular public sector unit and its administrative ministry, defining their relationship and the autonomy allowed.

Definition

Memorandum of Understanding A Memorandum of Understanding is an arrangement signed between a public sector unit and its administrative ministry, under which the management of the unit is granted greater autonomy in its operations but is held accountable for achieving specified results.

Case Snippet

Case 3.2 — Targets And Freedom Ratnagiri Alloys Limited is a loss-making public sector unit whose managers must obtain ministry approval for most operating decisions. Its administrative ministry now signs an arrangement with the unit fixing a production target and a profit target for the year, while leaving purchase, pricing and staffing decisions to the management of the unit. Q. Name the reform measure being applied here and state one benefit the unit is expected to gain from it.

3.5 Global Enterprises

You must have come across products made by multinational corporations, usually referred to as MNCs. In the last two decades or so, MNCs have played an important role in the Indian economy, and they have become a common feature of most developing economies in the world.

As is evident from what we see around us, MNCs are gigantic corporations that carry on their operations in a number of countries. They are characterised by their huge size, a large number of products, advanced technology, well-planned marketing strategies and a network of operations spread all over the world.

Global enterprises are thus huge industrial organisations which extend their industrial and marketing operations through a network of their branches in several countries. They operate in several areas and produce multiple products, with a business strategy that extends over a number of countries. They do not aim at maximising profits from one or two products; instead, they spread their branches all over the world, so that a fall in demand in one market can be balanced by the other markets in which they operate.

Definition

Global Enterprise A global enterprise, or multinational corporation, is a huge industrial organisation which extends its industrial and marketing operations through a network of branches in several countries, producing multiple products with a business strategy spread over a number of countries.

Features

These corporations have distinct features which distinguish them from other private sector companies, public sector companies and public sector enterprises. These are as follows:

Huge capital resources — these enterprises possess huge financial resources and the ability to raise funds from different sources. They may issue equity shares, debentures or bonds to the public, and they are also in a position to borrow from financial institutions and international banks. They enjoy credibility in the capital market, and even investors and banks of the host country are willing to invest in them. Because of this financial strength they are able to survive under all circumstances.
Foreign collaboration — global enterprises usually enter into agreements with Indian companies relating to the sale of technology, the production of goods, the use of brand names for the final products, and similar matters. These MNCs may collaborate with companies in the public sector as well as the private sector. There are usually various restrictive clauses in such an agreement, relating to the transfer of technology, pricing, dividend payments and tight control by foreign technicians. Big industrial houses wanting to diversify and expand have gained by collaborating with MNCs in terms of patents, resources and foreign exchange. At the same time, these foreign collaborations have given rise to the growth of monopolies and the concentration of power in a few hands.
Advanced technology — these enterprises possess technological superiority in their methods of production. They are able to conform to international standards and quality specifications. This leads to industrial progress in the country in which such corporations operate, since they are able to exploit local resources and raw materials optimally. Computerisation and other inventions have come about because of the technological advancements provided by MNCs.
Product innovation — these enterprises are characterised by highly sophisticated research and development departments engaged in the task of developing new products and superior designs of existing products. Qualitative research requires huge investment, which only global enterprises can afford.
Marketing strategies — the marketing strategies of global companies are far more effective than those of other companies. They use aggressive marketing strategies in order to increase their sales in a short period. They possess a more reliable and up-to-date market information system. Their advertising and sales promotion techniques are normally very effective. Since they have already carved out a place for themselves in the global market and their brands are well known, selling their products is not a problem.
Expansion of market territory — their operations and activities extend beyond the physical boundaries of their own countries. Their international image builds up and their market territory expands, enabling them to become international brands. They operate through a network of subsidiaries, branches and affiliates in host countries, and due to their giant size they occupy a dominant position in the market.
Centralised control — they have their headquarters in their home country and exercise control over all branches and subsidiaries. However, this control is limited to the broad policy framework of the parent company, and there is no interference in day-to-day operations.

Taken together, these features explain why a global enterprise is difficult for a purely domestic firm to compete with. Financial strength allows it to bear losses in a new market, technology and research keep its products ahead, and a known brand name reduces the effort needed to sell in any country it enters.

Business Example

Global Brands Manufacturing In India Several global consumer electronics companies now assemble and manufacture products in India instead of importing them. They bring in their own designs, quality standards and production methods, and use local labour, components and suppliers. Their presence has raised the technical standards of the Indian supplier firms that work with them.

Fig. 3.3

Fig. 3.3 – A multinational manufacturing plant in India.

Case Snippet

Case 3.3 — A Familiar Name In A New Market Norvex Corporation, with its head office in another country, manufactures household appliances in eleven countries. It has just begun operations in India, where its brand is already well known through international media. Its research centre abroad designs the products, while broad policy for all its branches is decided at the head office. Q. Identify any two features of global enterprises that are visible in the working of Norvex Corporation.

3.6 Joint Ventures

Meaning

Business organisations, as you have studied earlier, may be of various types — privately owned, government owned, or global enterprises. Any business organisation, if it so desires, can join hands with another business organisation for mutual benefit. The two organisations may be private firms, government-owned enterprises or foreign companies.

When two businesses agree to join together for a common purpose and mutual benefit, it gives rise to a joint venture. Businesses of any size can use joint ventures to strengthen long-term relationships or to collaborate on short term projects.

A joint venture can be flexible, depending upon the requirements of the parties. These requirements need to be clearly stated in a joint venture agreement, so that conflict at a later stage is avoided.

A joint venture may also be the result of an agreement between two businesses in different countries. In this case, there are certain provisions laid down by the governments of the two countries, which will have to be adhered to.

Joint ventures may therefore mean many things, depending upon the context in which the term is used. In a broader sense, a joint venture is the pooling of resources and expertise by two or more businesses in order to achieve a particular goal. The risks and rewards of the business are also shared.

Definition

Joint Venture A joint venture is the pooling of resources and expertise by two or more businesses to achieve a particular goal, the risks and rewards of the business being shared between them in accordance with their agreement.

The reasons behind a joint venture often include business expansion, the development of new products, or moving into new markets, particularly in another country. It is becoming increasingly common for companies to create joint ventures with other businesses and to form strategic alliances with them. The reasons for these alliances may be complementary capabilities and resources, such as distribution channels, technology or finance. In this kind of joint venture, two or more parent companies agree to share capital, technology, human resources, risks and rewards in the formation of a new entity under shared control.

In India, joint venture companies are the best way of doing business. There are no separate laws for these joint ventures. The companies incorporated in India are treated the same as domestic companies.

Joint ventures are of two types — the contractual joint venture and the equity-based joint venture. These, and the forms they may take, are shown in Fig. 3.4.

Fig. 3.4

Fig. 3.4 – Types of joint ventures.

3.6.1 Types of Joint Ventures

Contractual Joint Venture

In a contractual joint venture, a new jointly-owned entity is not created. There is only an agreement to work together. The parties do not share ownership of the business, but they do exercise some elements of control in the joint venture. A typical example of a contractual joint venture is a franchisee relationship.

In such a relationship the key elements are:

Two or more parties have a common intention, that of running a business venture.
Each party brings some inputs into the venture.
Both parties exercise some control on the business venture.
The relationship is not a transaction-to-transaction relationship but has the character of a relatively longer duration.

Equity-based Joint Venture

An equity joint venture agreement is one in which a separate business entity, jointly owned by two or more parties, is formed in accordance with the agreement of the parties. The key operative factor in such a case is joint ownership by two or more parties. The form of the business entity may vary — it may be a company, a partnership firm, a trust, a limited liability partnership firm, a venture capital fund, and so on.

The key elements of an equity-based joint venture are:

There is an agreement either to create a new entity, or for one of the parties to join into the ownership of an existing entity.
There is shared ownership by the parties involved.
There is shared management of the jointly owned entity.
There are shared responsibilities regarding capital investment and other financing arrangements.
Profits and losses are shared according to the agreement.

The essential difference between the two types is set out in Table 3.3.

Table

A joint venture must be based on a memorandum of understanding signed by both the parties, highlighting the basis of the joint venture agreement. The terms should be thoroughly discussed and negotiated, so that legal complications at a later stage are avoided. Negotiations and terms must take into account the cultural and legal background of the parties. The joint venture agreement must also state that all necessary governmental approvals and licences will be obtained within a specified period.

3.6.2 Benefits

A business can achieve unexpected gains through a joint venture with a partner, and such ventures can prove to be extremely beneficial for both the parties involved. One party may have strong potential for growth and innovative ideas, but is still likely to benefit from entering into a joint venture, because the venture enhances its capacity, resources and technical expertise. The major benefits of joint ventures are as follows:

Increased resources and capacity — joining hands with another business adds to existing resources and capacity, enabling the joint venture company to grow and expand more quickly and efficiently. The new business pools financial and human resources and is therefore able to face market challenges and take advantage of new opportunities.
Access to new markets and distribution networks — when a business enters into a joint venture with a partner from another country, it opens up a vast growing market. When foreign companies form joint venture companies in India, for example, they gain access to the vast Indian market, and products which have reached saturation point in their home markets can be easily sold in new markets. They can also take advantage of the established distribution channels, that is, the retail outlets in different local markets. Otherwise, establishing their own retail outlets may prove to be very expensive.
Access to technology — technology is a major factor for most businesses entering into joint ventures. Advanced techniques of production leading to superior quality products save a great deal of time, energy and investment, as the partner does not have to develop its own technology. Technology also adds to efficiency and effectiveness, thus leading to a reduction in costs.
Innovation — markets are increasingly becoming more demanding in terms of new and innovative products. Joint ventures allow a business to come up with something new and creative for the same market. Foreign partners in particular can come up with innovative products because of new ideas and technology.
Low cost of production — when international corporations invest in India, they benefit immensely from the lower cost of production and are able to get quality products for their global requirements. India is becoming an important global source and is extremely competitive in many products. There are many reasons for this: the low cost of raw materials and labour, a technically qualified workforce, management professionals, and excellent manpower in different cadres such as lawyers, chartered accountants, engineers and scientists. The international partner thus gets products of the required quality and specifications at a much lower cost than what prevails in its home country.
Established brand name — when two businesses enter into a joint venture, one of the parties benefits from the other’s goodwill, which has already been established in the market. If the joint venture is in India and with an Indian company, the Indian company does not have to spend time or money in developing a brand name for the product or even a distribution system. There is a ready market waiting for the product to be launched, and a great deal of investment is saved in the process.

Business Example

A Car Made By Two Partners Maruti Udyog was set up as a joint venture between the Government of India and the Japanese carmaker Suzuki. The Indian side contributed land, approvals and access to the domestic market, while the foreign partner brought small-car technology, production methods and vendor development. The arrangement allowed a low-priced small car to be produced in India far sooner than either partner could have managed alone.

Case Snippet

Case 3.4 — Two Names On One Product Vaachi Foods Ltd., an Indian snack manufacturer with a strong distribution network, signs an agreement with Delvo SA of Europe. A new company is formed in which both hold shares, share the management and share the profits and losses in an agreed ratio. Delvo SA provides the processing technology, while Vaachi Foods Ltd. provides the plant, the workforce and access to retail outlets across India. Q. Identify the type of joint venture formed and state any two benefits each party gains from it.

Try Yourself

Find out two Indian companies that have entered into joint ventures with foreign companies, and note down what each partner contributed to the venture.

3.7 Public Private Partnership (PPP)

Some projects are too large or too costly for the government to carry out alone, and too risky or too unprofitable for a private firm to undertake by itself. The Public Private Partnership model exists for such projects. It allocates tasks, obligations and risks among the public and private partners in an optimal manner, so that each side carries the part of the work it is best able to handle.

The public partners in a public private partnership are Government entities, that is, ministries, government departments, municipalities or state-owned enterprises. The private partners can be local or foreign, and include businesses or investors with technical or financial expertise relevant to the project. Such a partnership also includes non-governmental organisations and community-based organisations who are the stakeholders directly affected by the project.

Definition

Public Private Partnership A public private partnership is a relationship between public and private entities in the context of infrastructure and other services, under which tasks, obligations and risks are allocated among the partners in an optimal manner.

Role Of Each Partner

Under this model, the public sector plays an important role and ensures that the social obligations are fulfilled and that sector reforms and public investment are successfully met. The government’s contribution takes the form of capital for investment and the transfer of assets that support the partnership, in addition to social responsibility, environmental awareness and local knowledge.

The private sector’s role in the partnership is to make use of its expertise in operations, in managing tasks and in innovation, so that the business is run efficiently.

Sectors in which such partnerships have been completed worldwide include power generation and distribution, water and sanitation, refuse disposal, pipelines, hospitals, school buildings and teaching facilities, stadiums, air traffic control, prisons, railways, roads, billing and other information technology systems, and housing.

Features Of The Model

A contract is entered into with the private party to design and build a public facility.
The facility is financed and owned by the public sector.
The key driver of the arrangement is the transfer of design and construction risk to the private party.

Application

It is suited to capital projects with a small operating requirement.
It is suited to capital projects where the public sector wishes to retain the operating responsibility.

Strengths

Transfer of design and construction risk to the party better able to manage it.
Potential to accelerate the completion of the project.

Weaknesses

Conflict between the parties may arise on environmental considerations.
The model does not attract private finance easily.

Business Example

An Expressway Built In Partnership Kundli Manesar Expressway Ltd. built a 135 kilometre expressway under a public private partnership. The land for the project was provided by the government, while the surface was laid out by the company. The arrangement combined the government’s power to acquire land with the company’s construction expertise.

Case Snippet

Case 3.5 — A New Water Treatment Plant A municipal corporation wants a water treatment plant for its city but does not have the technical staff to design and build one. It signs a contract with Trivenya Infra Ltd., which will design and construct the plant and bear the risk of any cost overrun during construction. The plant will be financed and owned by the municipal corporation, which will also operate it once it is complete. Q. Identify the model being used here and state one benefit it offers to the municipal corporation.

3.8 Summary

Private sector and public sector — business organisations of all kinds, small or large, industrial or trading, privately owned or government owned, exist in our country and become part of the Indian economy. The Government of India has opted for a mixed economy, in which both private and government enterprises are allowed to operate, so the economy may be classified into the private sector and the public sector. The private sector consists of business owned by individuals or a group of individuals, its forms being sole proprietorship, partnership, joint Hindu family business, cooperative society and company. The public sector consists of organisations owned and managed by the government, either partly or wholly, by the central or state government.
Forms of organising public sector enterprises — the government’s participation in business needs an organisational framework to function. A public enterprise may take any particular form of organisation depending upon the nature of its operations and its relationship with the government, and the suitability of a form depends upon its requirements. The forms available are the departmental undertaking, the statutory corporation and the government company.
Departmental undertakings — these enterprises are established as departments of a ministry and are considered a part or an extension of the ministry itself. The Government functions through these departments, and the activities performed by them are an integral part of the functioning of the government.
Statutory corporations — these are public enterprises brought into existence by a Special Act of the Parliament. The Act defines their powers and functions, the rules and regulations governing their employees, and their relationship with Government departments. A statutory corporation is a corporate body created by the legislature with defined powers and functions, and is financially independent with clear control over a specified area or a particular type of commercial activity.
Government company — a government company means any company in which not less than 51 per cent of the paid up capital is held by the central government, or by any state government, or partly by the central government and partly by one or more state governments, and includes a company which is a subsidiary of such a government company.
Changing role of public sector — at the time of Independence it was expected that public sector enterprises would help achieve certain objectives of the economy, either by direct participation in business or by acting as a catalyst. The Indian economy is in a stage of transition. In the period after the 1990s, the new economic policies emphasised liberalisation, privatisation and globalisation, and the role of the public sector was redefined. It was no longer to play a passive role, but to actively participate and compete in the market with private sector companies in the same industry.
Development of infrastructure — the process of industrialisation cannot be sustained without adequate transportation and communication facilities, fuel and energy, and basic and heavy industries. It was only the government that could mobilise huge capital, coordinate industrial construction and train technicians and workforce.
Regional balance — the government is responsible for developing all regions and states in a balanced way and for removing regional disparities. Development of backward regions to ensure a regional balance is one of the major objectives of planned development. The government therefore had to locate new enterprises in backward areas and at the same time prevent the mushrooming growth of private sector units in already advanced areas.
Economies of scale — where large scale industries are required to be set up with a huge capital outlay, the public sector had to step in to take advantage of economies of scale.
Check over concentration of economic power — the public sector acts as a check over the private sector. In the private sector there are very few industrial houses willing to invest in heavy industries, with the result that wealth gets concentrated in a few hands and monopolistic practices are encouraged.
Import substitution — during the second and third Five Year Plan period, India was aiming to be self-reliant in many spheres. Public sector companies involved in heavy engineering, which would help in import substitution, were established.
Government policy towards the public sector since 1991 — its main elements are to restructure and revive potentially viable public sector undertakings, to close down those which cannot be revived, to bring down the government’s equity in all non-strategic undertakings to 26 per cent or lower if necessary, and to fully protect the interest of workers. The measures taken were: reduction in the number of industries reserved for the public sector from 17 to 8 and then to 3, which meant that the private sector could enter all areas except the three and the public sector would have to compete with private firms; disinvestment of shares of a select set of public sector enterprises, involving the sale of equity shares to the private sector and the public in order to raise resources and encourage wider participation of the general public and workers in ownership, the government having decided to withdraw from the industrial sector and reduce its equity in all undertakings; and a policy on sick units the same as that for the private sector, under which all public sector units were referred to the Board of Industrial and Financial Reconstruction to decide whether a sick unit was to be restructured or closed down.
Memorandum of Understanding — performance is improved through a system under which managements are granted greater autonomy but are held accountable for specified results.
Global enterprises — in the last two decades multinational corporations have played an important role in the Indian economy. They are characterised by their huge size, a large number of products, advanced technology, marketing strategies and a network of operations all over the world. Global enterprises are huge industrial organisations which extend their industrial and marketing operations through a network of branches in several countries. Their distinct features are huge capital resources, foreign collaboration, advanced technology, product innovation, marketing strategies, expansion of market territory and centralised control.
Joint ventures — a joint venture may mean many things depending upon the context in which the term is used, but in a broader sense it is the pooling of resources and expertise by two or more businesses to achieve a particular goal, the risks and rewards of the business also being shared. The reasons behind a joint venture often include business expansion, the development of new products, or moving into new markets, particularly in another country.
Public private partnership — it is a relationship among the public sector and the private sector for the allocation and completion of development projects.

Fig. 3.5

Fig. 3.5 – Structure of the chapter.

3.9 Key Terms

Global enterprises Huge industrial organisations which extend their industrial and marketing operations through a network of branches in several countries.
Mixed economy An economy in which both privately owned and government owned business enterprises are allowed to operate.
Private sector The sector consisting of business owned by individuals or by a group of individuals.
Public sector The sector consisting of business organisations owned and managed, wholly or partly, by the central or state government.
Public enterprises Business enterprises formed by the government to participate in the economic activities of the country.
Public accountability The obligation of a public enterprise to answer to the public, through the Parliament or the State Legislature, for the use of public funds.
Departmental undertaking A public enterprise established as a department of a ministry and treated as a part or extension of the ministry itself.
Statutory corporation A public enterprise brought into existence by a Special Act of the Parliament, which defines its powers, functions and relationship with government departments.
Government company A company in which not less than 51 per cent of the paid up capital is held by the central government, or by any state government, or partly by both, and includes a subsidiary of such a company.
Liberalisation The removal of unnecessary government restrictions and controls on business activity.
Privatisation The transfer of ownership, management or control of public sector enterprises to the private sector.
Globalisation The integration of the domestic economy with the economies of the rest of the world.
Public Sector Undertakings Enterprises owned and run by the central or state government in the public sector.
Disinvestment The sale of the equity shares of a public sector enterprise to the private sector and to the public.
Memorandum of Understanding An arrangement between a public sector unit and its administrative ministry granting the unit greater autonomy while holding it accountable for specified results.
Multinational corporations Gigantic corporations which carry on their operations in a number of countries, also known as global enterprises.
Joint venture The pooling of resources and expertise by two or more businesses to achieve a particular goal, with risks and rewards shared between them.
Public Private Partnership A relationship between public and private entities for infrastructure and other services, in which tasks, obligations and risks are allocated among the partners in an optimal manner.

3.10 NCERT Questions

Short Answer Questions

Explain the concept of public sector and private sector.
State the various types of organisations in the private sector.
What are the different kinds of organisations that come under the public sector?
List the names of some enterprises under the public sector and classify them.
Why is the government company form of organisation preferred to other types in the public sector?
How does the government maintain a regional balance in the country?
State the meaning of public private partnership.

Long Answer Questions

Describe the Industrial Policy 1991, towards the public sector.
What was the role of the public sector before 1991?
Can the public sector companies compete with the private sector in terms of profits and efficiency? Give reasons for your answer.
Why are global enterprises considered superior to other business organisations?
What are the benefits of entering into joint ventures and public private partnership?

3.11 Check Your Concepts

Why is the Indian economy described as a mixed economy?
Distinguish between a departmental undertaking and a statutory corporation on any four bases.
Distinguish between a statutory corporation and a government company on any four bases.
Why does a departmental undertaking find it difficult to take quick business decisions?
Why is the departmental form considered most suitable for activities connected with national security?
What happens to the revenue earned by a departmental undertaking?
Explain why the private sector was unwilling to invest in infrastructure projects immediately after Independence.
Identify the term: the sale of the equity shares of a public sector enterprise to the private sector and to the public.
Identify the term: an arrangement under which the management of a public sector unit is given greater autonomy but is held accountable for specified targets.
Arrange the following in the correct sequence of years and state what happened in each case: 17 industries reserved for the public sector; 8 industries reserved for the public sector; 3 industries reserved for the public sector.
Assertion: A government company is registered under the Companies Act, 2013. Reason: A separate Act of Parliament is required for the formation of a government company. Choose the correct option:
1. Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
2. Both Assertion and Reason are true, but Reason is not the correct explanation of Assertion.
3. Assertion is true but Reason is false.
4. Assertion is false but Reason is true.
Assertion: The employees of a statutory corporation are not government servants. Reason: Their conditions of service are governed by the provisions of the Act that created the corporation. Choose the correct option:
1. Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
2. Both Assertion and Reason are true, but Reason is not the correct explanation of Assertion.
3. Assertion is true but Reason is false.
4. Assertion is false but Reason is true.
Match the following forms of organisation with the way each is created:

Column A	Column B
a. Departmental undertaking	i. Registration under the Companies Act, 2013
b. Statutory corporation	ii. A department of a ministry
c. Government company	iii. A Special Act of the Parliament

Why is a joint venture said to reduce the risk carried by each partner?
Distinguish between a contractual joint venture and an equity-based joint venture on any three bases.
What happens to a public sector enterprise in which the government reduces its equity below 51 per cent?
Explain why the head office of a global enterprise controls broad policy but not day-to-day operations of its branches.
State any three sectors in which public private partnerships have been used.

3.12 Case-Based Questions

Tarunika works in an enterprise that supplies drinking water in a district. The enterprise was set up as a part of the state water supply ministry, its funds come from the annual state budget, and its employees are state government servants. Any purchase above a small amount requires the approval of the ministry, and a decision to buy new pumps has been pending for eight months.
1. Identify the form of public sector organisation described here.
2. State any two features of this form that are visible in the case.
3. State one limitation of this form that the delay in buying pumps illustrates.
Ashvamedh Power Corporation was created by a special law passed in Parliament, which lays down its objects, its powers and the service conditions of its employees. It borrows from the public, uses its own revenues, appoints its staff on its own terms, and can enter into contracts and acquire property in its own name. The government, however, appoints advisors to its board, and a disagreement over a large contract has been referred to the ministry for a final decision.
1. Name the form of public sector organisation described here.
2. State any two features of this form visible in the case.
3. Identify the limitation of this form that the reference of the contract to the ministry illustrates.
Sarveshwar Cements Limited is registered under the Companies Act, 2013. Sixty per cent of its paid up capital is held by the central government and the remaining shares are held by private investors. It appoints its employees under its own rules, and its annual report is placed before the Parliament.
1. Identify the form of organisation of Sarveshwar Cements Limited and give one reason for your answer.
2. State any two merits this form of organisation enjoys.
Trivedi Textiles Ltd. of India and Corbin Fabrics Inc. of another country form a new jointly owned company in India. Corbin Fabrics Inc. brings in dyeing technology and a brand name already known in Europe, while Trivedi Textiles Ltd. brings in its factory, its trained workers and its distribution network in Indian cities. Profits and losses are to be shared in an agreed ratio.
1. Identify the type of business arrangement described here.
2. State any three benefits gained by the parties from this arrangement.
A state government wishes to build a large bus terminal in its capital city. It does not have the technical staff to design and construct the facility, so it contracts a private construction firm to design and build it. The land and the funds are provided by the state government, which will own the completed terminal, while the risk of faulty design and construction is borne by the firm.
1. Identify the model being followed by the state government.
2. State the role of the public partner and the role of the private partner in this model.
3. State one weakness of this model.