Firms in a tough global environment

Source-This post on Firms in a tough global environment has been created based on the article “Firms in a tough global environment” published in “Business Standard” on 1 April 2024.

UPSC Syllabus-GS Paper-3-Ecomomy- Effects of Liberalization on the Economy, Changes in Industrial Policy and their Effects on Industrial Growth.

Context-The article highlights the need for strategic thinkers to redesign firms in the tough global environment. India has had poor growth in foreign direct investment (FDI) and exports in last decade. Total exports grew just by 3 % per year in real dollars from 2012-22. Steps such as cutting import duties for phone parts (which helps Apple and Xiaomi) or electric vehicles (which helps Tesla) are in the correct direction, but the strategy of being unstrategic is not good.

What is the evolving global economic landscape that poses challenge to firms worldwide?

1) Era of third globalization– In this era, there is a rise of protectionism which leads to lesser economic engagement into the advanced economies for countries that do not have robust foreign policy and military affairs.
It involves the destruction of tangible and intangible capital such as factories in China and oil extraction in Siberia. This decline in capital stock is a one-time negative level shock to global GDP.

2) Carbon-border taxes-It has the potential to reshape global production. The emergence of carbon-border taxes in many important countries will involve the destruction of capital stock in carbon-intensive ways. In the transition to clean energy, China is already ahead of India. The weaknesses of Indian energy policy may reduce the global competitiveness of Indian exports.

3) Chinese government subsidies– The Chinese economy has been under severe stress. To overcome this, the Chinese government is subsidizing exporters in ways that violates global trade norms.
Since China is one of the largest economies in the world, its export policies can have substantial repercussions on other countries.

4) Incoherency in trade policies across many countries-There are unsystematic movements on trade policy by various countries that often go on the wrong direction. The trade policies of many countries pose threats to trade openness. For ex- the attempt to disrupt the global agreement on free trade for digital services. Further, return of Donald Trump to power, would also add to the climate of political uncertainty.

Read more- Market Access Initiative (MAI) scheme

In the background of these challenges, the organization design of firms needs to be improved to fit better in this environment.Also,there should be a pro-active approach by envisioning bad scenarios and establishing financial risk management.

Question for practice

How does the evolving global economic landscape that poses challenge to firms worldwide?