Public, Private and Global Enterprises Class 11 Notes

The classification turns on ownership. An enterprise in which the government holds a controlling interest is in the public sector, and one in which private individuals hold it is in the private sector. The distinction matters because the two behave differently on objectives, accountability and the burden of loss.

• Public sector: owned and controlled by the government, established to serve the public interest, and the objective may include social welfare as well as profit.
• Public sector merits: the government can undertake projects where the commercial return is too low to attract private capital, and it can guarantee the security of the enterprise.
• Public sector limitations: it may be unable to respond quickly to change because of the elaborate procedure, and it may not be efficiently managed because there is no competitive pressure to improve.
• Public sector limitations: it is a heavy burden on the treasury, and there is a loss of efficiency and lack of initiative in the management.
• Private sector: owned by private individuals or groups, with the objective of earning profit and maximising the shareholders' wealth.
• Private sector merits: it is more efficient because of competition and the pressure to cut costs, and it can take quick decisions without the delay of departmental procedure.
• Private sector limitations: it provides no service to the public interest, it may exploit the labour force, and it has no obligation to serve a backward region where the return is low.

A departmental undertaking is the simplest public sector form. It is a department of the government and not an independent body, and the distinction that matters in the examination is whether it has a separate legal existence.

• It is formed by an order of the government and is managed by a ministry or a department of the central or state government.
• It has no separate legal personality, so it enjoys the status of the government in law and its contracts and suits are in the name of the Union or the State.
• Its funds are part of the government budget, and the loss of the undertaking is a loss of the government.
• It is headed by a minister, and its officers are government servants whose service conditions are those of the state.
• Merits: the government can exercise direct control, the undertaking can use the resources of the state, and it can be closed down by an order of the government if the need disappears.
• Limitations: there is no separate legal person and no separate management, the rules of the civil service apply, and there is little flexibility in recruitment.

A statutory corporation is created by a statute, and a government company is incorporated under the Companies Act like any other company but with the government holding a majority of the shares. Both are separate legal persons, and the difference between them lies in how they are created.

• A statutory corporation is created by an Act of Parliament or of a state legislature, and the Act itself defines its functions, its powers and its working.
• It is a body corporate, so it can own property, sue and be sued in its own name, and it can be sued for the acts of its servants.
• Its staff are not government servants, though they may be given the status of civil servants in certain cases, and its finances are outside the government budget.
• The boards of members are appointed by the government and the government exercises control through the Act, so the members are not elected.
• A government company is a company registered under the Companies Act in which the government holds a majority of the share capital, and it therefore has the rights and obligations of any other company.
• It is a separate legal person, its members are the shareholders, and the government controls it by the votes it holds and not by an Act, so it is regulated by the Companies Act and the law of the general company.
• Examples: the Life Insurance Corporation and the Reserve Bank of India are statutory corporations, while the Hindustan Aeronautics and the Oil and Natural Gas Corporation are government companies.

The private sector is classified by the size of the investment, and the limits are fixed by the legal definition of a small enterprise rather than by the syllabus. The categories matter because the incentives, the compulsory investment and the credit facilities are different in each.

• The private sector includes the sole proprietorship, the partnership, the private limited company and the co-operative societies, so that a large part of the private sector consists of small and medium enterprises.
• The MSMED Act, 2006 defines the small and medium enterprise on the basis of the investment in plant and machinery in the manufacturing sector and in the service sector, and the limits are revised periodically.
• The classification into micro, small and medium is used for the purpose of the schemes of the government, such as the priority sector lending limit and the guarantee scheme offered by the Credit Guarantee Fund.
• The smaller enterprises are given a greater share in the exports and in the supplies to the government so that a wider number of regions is developed.
• A large private enterprise in the public-interest sector is permitted only in the fields where the public sector has failed to supply adequately, and only after the required approvals.

A global enterprise is a business that owns or controls value-creating operations in more than one country, and the co-operative arrangements through which firms enter foreign markets are the syllabus's focus.

• Global enterprises are characterised by a large share of their operations in more than one country, by a global spread of resources and markets, and by a global structure of ownership and control.
• A joint venture is an arrangement in which two or more businesses pool their resources for a common purpose, so that a foreign business and a local business form a jointly owned enterprise, and it may be an equity joint venture or a contractual joint venture.
• Joint venture merits: it pools the technical, financial and managerial resources of two firms, it shares the risk, it gives access to the local knowledge and the network of the Indian partner, and it may bring the foreign exchange and the technology that the country needs.
• Joint venture limitations: there may be a conflict of interest between the two partners, the Indian partner may have very little control over the management, there may be a lack of transparency in the working of the joint venture, and if the foreign partner is a multinational, a large part of the profits may be taken out of the country.
• A public private partnership is an arrangement in which the government and a private partner share the responsibility and the risk for the provision of a public service, so that the private partner builds and operates the project for a fixed period and recovers the cost through the charges levied on the users.
• PPP merits: the public sector does not have to bear the whole cost and the technical risk, the project is completed faster because the two partners work in parallel, and the private partner brings in the finance and the technology.
• PPP limitations: it requires a long-term agreement and a well-defined risk-sharing arrangement, the project is expensive to prepare, and the private partner has a strong incentive to raise the charges in order to recover the cost, which creates a conflict with the public interest.

The last part of the chapter is not descriptive. It asks what happens to the country when firms from outside operate here, and the answer is always given in two columns, one of gains and one of costs, because the two are set against each other.

• Gains: foreign capital is brought in, which enlarges the capital base of the country, and new technology and managerial skill arrive with the foreign firm.
• Gains: global enterprises create employment and they open up international markets for the domestic producers who supply them, so the exports of the country rise.
• Gains: competition increases, which forces the domestic firms to improve their efficiency and their product quality, and the consumer is offered a wider and cheaper choice.
• Costs: a large part of the profit earned in the country is transferred abroad, so the benefit to the host country is less than the profit shown in the accounts.
• Costs: MNCs often have the power to influence the policy of the host country in their own interest, and their operations may force Indian firms to close down in competition.
• Costs: the MNC is often attracted to the Indian market for its cheap labour and its large market rather than for research and development, and so the technology that arrives is not always the most advanced.
• Costs: the entry of the MNC leads to the withdrawal of capital by the Indian enterprises that cannot compete, and this leads to unemployment in the sectors that are affected.

A useful way to hold the whole chapter is to see that each part answers a different question, and the questions appear in a fixed order in the examination.

• Who owns the enterprise, which is decided by whether the government holds a controlling interest, and this gives the public and the private sector.
• What form does the public sector take, and the answer is three, namely the departmental undertaking, the statutory corporation and the government company, which differ in whether they are a separate legal person and in how they are created.
• How is the private sector classified, and the answer is by size, as the micro, small and medium enterprise under the MSMED Act, which decides the incentives and the protections.
• What is a global enterprise, and the answer is a firm that owns or controls value-creating operations in more than one country.
• How does a foreign firm enter, and the answer is through a joint venture with an Indian firm or a public private partnership with the government.
• What are the consequences, which are the inflow of capital, technology and employment against the outflow of profit and the pressure on domestic producers.