Business Studies - Class 11th (CBSE) - Chapter 3 (Public, Private, and Global Enterprises)

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Subject: Business Studies
Class: 11th (CBSE)
Chapter Number: 3
Chapter Name: Public, Private, and Global Enterprises

Table of Content

Private Sector	Public Sector
Global Enterprises (Multinational Corporations)	Joint Venture
Public Private Partnership (PPP)

Let's start!

Indian Economy has two sectors:

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Do you want to understand the private sector better? Read Chapter 2 – Forms of Business Organisations for a clear explanation.

Public Sector

Business enterprises which are managed and owned by the government. These organizations may either be partly or wholly owned by the central or state government.
The forms of organization which a public enterprise may take are departmental undertaking, statutory corporation and government company etc.

Differences between Private and Public Sector Enterprises

Basis	Private Sector Enterprise	Public Sector Enterprise
Aim	The basic aim of any private sector enterprise is to earn maximum profit.	The basic aim of any public sector enterprise is to provide services to the public.
Capital Contribution	The capital is invested either by the owner or the investor.	The capital is contributed by the government.
Management	The management and control lie in the hands of the board of directors having more private professionals.	The management and control lie in the hands of the board of directors having more government representatives.
Employees	They have their own rules and regulations regarding the selection and remuneration of their employees.	They follow government rules and regulations regarding the selection and remuneration of employees.
Freedom of Operations	In private sector enterprise, there is more freedom of operations.	In public sector enterprise, there is less freedom of operations because of interference of government.

The Changing Role of the Public Sector

Point	Explanation
Development of Infrastructure	The various facilities like transportation, communication, and fuel require heavy investment. Initially, the private sector was unwilling to invest in these projects. So, the government provided huge funds for the development of infrastructure facilities.
Economies of Scale	It is an accepted principle that if we produce on a large scale, we may get goods at cheaper rates. This is known as the economy of scale. To achieve the benefits of large-scale industries, huge capital outlay had to be established.
Import Substitution	In the initial, second, and third five-year plans, our country aimed to be self-reliant in many spheres. Public sector companies like STC, BHEL, HAL, etc. had a strong base for providing import substitution. They also helped in expanding exports of the country.
Regional Balance	During the pre-independence period, industrial progress was limited to only a few areas. Thus, to ensure regional balance, many public sector enterprises were established in backward areas. This helped increase the rate of economic growth and employment opportunities.
Check Over-Concentration of Economic Power	Concentration of economic power means accumulation of wealth in the hands of a few. This leads to economic inequalities, which are harmful for any society. The basic role of public sector enterprises was to check the concentration of economic power and monopolistic practices in the private sector.
Government Policies Towards the Public Sector Since 1991	In its industrial policy resolutions, the government defines the area of activities in which the private and public sectors are allowed to work. These resolutions gave more importance to the public sector. The major developments regarding the role given to public sector enterprises are as under: Reduction in the number of industries reserved for the public sector. Disinvestment of shares. Policy regarding sick units to be the same as that of the private sector. Memorandum of understanding.

Below is the explanation:

Departmental Undertakings

This is the oldest and most traditional form of public sector enterprises. These enterprises are established as departments of the ministry and are considered 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.
They have not been constituted as autonomous or independent institutions and as such are not independent legal entities.
They act through the officers of the Government and its employees are Government employees.

Features of Departmental Undertakings

Feature	Explanation
Funding	The funding of these enterprises comes directly from the government treasury. The revenue earned also belongs to the government and is paid to the government treasury.
Accounting and Audit Rules	These undertakings follow accounting rules framed by the Indian Accounts Department, and the audit is also under the direct control of the government.
Service Conditions	The employees of these enterprises are government servants, and they are headed by IAS officers and civil servants who are transferable from one ministry to another.
Accountability	They are accountable to the ministry since their management is directly under the concerned ministry.

Merits of Departmental Undertakings

Limitation	Explanation
Lack of Flexibility	Departmental undertakings fail to provide flexibility, which is essential for the smooth operation of business.
Delay in Decision-making	These enterprises fail to make quick decisions because, for every decision, they have to obtain approval from the concerned ministry.
Political Interference	Political interference hinders the efficient working of these undertakings. Most of the time is spent attending political meetings and implementing their recommendations.
Red Tapism	Departmental undertakings suffer from red tapism in their day-to-day working. Actions can be taken only after following the proper channels of authority.
Bureaucracy	These enterprises are not able to take full benefit of business opportunities. The bureaucratic and conservative approach of the concerned ministry hinders their initiative.

Statutory Corporations

Statutory corporations are public enterprises brought into existence by a special act of the Parliament. The act defines its powers and functions, 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 and is financially
independent with a clear control over a specified area or a particular type of commercial activity.
For e.g. : Indian Airlines, Air India, State Bank of India, (LIC) Life Insurance Corporation of India etc.

Features of Statutory Corporations

Feature	Explanation
Formation	Statutory corporations are set up under an Act of Parliament. The Act defines the objects, powers, and privileges of a statutory corporation.
A Body Corporate	It has a separate legal entity, distinct from its members. Therefore, it can sell or purchase property, enter into contracts, and can sue and be sued.
Independently Financed	Usually, these enterprises are independently financed by borrowings from the government, from the public, or through revenue. They earn from the sale of goods and services. These enterprises have the authority to use their revenues.
Own Service Conditions	The employees of these enterprises are not government employees. The conditions of recruitment and service of the employees are laid down by the legislation that creates them.
Independence from Government Accounting	Unlike government departments, enterprises are not bound to adopt government accounting or audit procedures. They are also not dependent on the central budget of the government.

Merits of Statutory Corporations

Advantage	Explanation
Operational Flexibility	Statutory corporations can enjoy a high degree of flexibility in their operations, as they are free from unnecessary government control and regulations.
Non-interference by the Government	The government does not interfere in the financial matters of the organization because they are independently financed.
Valuable Instrument for Economic Growth	The enterprises are considered to be an effective instrument for economic development as they have the power of the government along with the initiative of private enterprises.
Autonomous Organizations	Statutory corporations have the autonomy to frame their policies and procedures within the provided authority.

Demerits of Statutory Corporations

Limitation	Explanation
Corruption	Where it involves dealing with the public, corruption is inevitable. This corruption destroys the whole purpose of creating such enterprises.
Government Interference	In matters related to some important decisions, there is always government and political interference.
Flexibility on Papers Only	All decisions of the enterprise are subjected to many rules and regulations by the government. Therefore, operational flexibility is available on paper only.

Government Company

According to the Companies Act 2013, a government company means any company in which at least 51 per cent of the paid-up share capital is held by the central or 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.
For e.g.: Steel Authority of India, State Trading Corporation, and Hindustan Machine Tools.

Features of a Government Company

Feature	Explanation
Created by Companies Act	It is an organization created under the Companies Act, 2013 or any other previous company law.
File a Suit	Being a separate legal entity, a government company can sue and be sued by a third party.
Enter into a Contract	The company has the authority to sell and purchase property and to enter into contracts in its name.
Audit by Central Government	Audit of accounts is conducted by an auditor appointed by the central government. Its annual report is also laid on both houses of the Parliament.
The Rules Contained in MOA and AOA	The memorandum and articles of association lay down the rules and regulations for appointing the employees of the company.

Merits of a Government Company

Point	Explanation
Ease in Formation	A separate Act of Parliament is not required for setting up a government company as it is established under the Companies Act, 2013.
Autonomy	A government company has full autonomy in doing its business operations and in all business decisions. It takes action which it thinks necessary for the betterment.
Good Market Control	These companies, by providing goods and services at reasonable prices, can control the market and reduce unhealthy business practices.
Independent Status	The government company has its legal entity, separate from the government.

Demerits of a Government Company

Point	Explanation
Provisions of Companies Act not Relevant	Since, in a government company, the government is the only shareholder and also the management is in the hands of the government. Hence, the provisions of the Companies Act do not have much relevance.
Evades Constitutional Responsibility	In some of the companies, the provision of the Companies Act does not have much relevance. The companies are not answerable to the Parliament. Hence, they evade constitutional responsibility which an enterprise financed by the government should have.
Main Purpose Defeated	Being a government company, the whole management is in the hands of the government. Thus, the purpose of registering it under the Companies Act, 2013 gets defeated.

Differences between Departmental Undertaking, Statutory Corporation and Government Company

Basis	Departmental Undertaking	Statutory Corporation	Government Company
Formation	It is established as one of the departments of the ministry and is considered as the extension of the ministry.	It is brought into existence by an Act of Parliament.	It is established under the Companies Act, 2013.
Legal Status	It doesn’t have a separate legal entity.	It has a separate legal entity.	It has a separate legal entity.
Status of Employees	Employees of these enterprises are government employees.	Employees of these public enterprises are not government employees.	Employees of the government company are not government employees.
Financed	It is financed out of the government treasury.	It is independently financed either by borrowings or through the revenue obtained from the sale of goods and services.	It obtains its funds from government and private shareholdings.
Ownership	These enterprises are wholly under the concerned ministry.	These enterprises are fully owned by the government.	The majority of shares i.e., at least 55 shares are owned by the government.
Accountability	These enterprises are fully accountable to the ministry.	They are accountable to the Parliament.	These are accountable to the ministry.

Global Enterprises (Multinational Corporations)

MNCs are gigantic corporations which have operations in a number of countries. They are characterized by their huge size, large number of products, advanced technology, marketing strategies and network of operations all over the world.
Global enterprises thus are huge industrial organizations which extend their industrial and marketing operations through a network of their branches in several countries.
Their branches are also called Majority Owned Foreign Affiliates (MOFA). These enterprises operate in several areas producing multiple products with their business strategy extending over in a number of countries.

Features of a Multinational Company (MNC)

Feature	Explanation
Huge Capital Resources	These enterprises have huge financial resources and also possess the ability to raise funds from different sources. They can raise funds by issuing equity shares, debentures, or bonds to the public or by borrowing from financial institutions, international banks, etc.
Advanced Technology	These enterprises have up-to-date advanced technology for production. Hence, goods and services produced by MNCs conform to international standards and quality specifications.
Foreign Collaboration	Usually, these enterprises agree with the companies of the host country. The agreement may be in respect of the sale of technology, production of goods, resources, use of brand name, etc.
Marketing Strategies	The marketing strategies of global companies are far more effective than other companies. They use aggressive marketing strategies like advertising and sales promotion techniques to increase their sales in a short period.
Product Innovation	These enterprises have efficient teams doing research and development in their R&D departments. The main task is to develop new products and design existing products into new shapes in such a manner as makes them look attractive and also creates demand for the consumer.
Centralized Control	The branches of MNCs are spread all over the world, but all the branches are managed and controlled by their head office in their home country. All these branches have to work as per the policies of the parent country. A common system for working is evolved, but the day-to-day working is not disturbed by the head office.

Joint Venture

When two or more organizations may be private, government-owned or a foreign company agree to join together for a common purpose and mutual benefit, it gives rise to a joint venture.
A joint venture is the pooling of resources and expertise by two or more businesses, to achieve a particular goal. The aim may be of starting a new business or expansion of existing business.
Joint ventures are formed either for long-term or short-term projects. The basic purpose of the joint venture is to attain the top position for both enterprises.

Types of Joint Ventures

Contractual Joint Venture (CJV)	Equity-based Joint Venture (EJV)
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 exercise some element of control in the joint venture. A typical example of a contractual joint venture is a franchise relationship.	An equity joint venture agreement is one in which a separate business entity, jointly owned by two or more parties, is formed by the agreement of the parties. The key operative factor in such a case is joint ownership by two or more parties. The form of business entity may vary — company, partnership firm, trust, limited liability partnership firm, etc.

Benefits of Joint Ventures

Benefit	Explanation
Increased Resources and Capacity	A joint venture involves the pooling of human and financial resources. Thus, a joint venture enterprise can easily face market challenges and take advantage of new growth opportunities.
Access to Technology	A joint venture helps to use the latest and advanced technology of the world. Advanced technology helps in improving the quality of the product, saving time, cost, energy, and money spent in developing own technologies.
Low Cost of Production	A joint venture helps in reducing the cost. Joining hands with others, especially with foreign companies, helps in reducing the cost of production because of their good systems, know-how, qualified workforce, and management professionals, etc.
Established Brand Name	Joint ventures may prove very beneficial in developing and branding the name of the enterprises. This is possible when two enterprises enter into a joint venture, as both are benefited from each other’s name, fame, reputation, and goodwill already established in the market.
Innovation	Joint ventures enable business enterprises to come up with new ideas for products and services that help them to meet market demand. The joint venture also helps to create and tap demand for their new products.

Public Private Partnership (PPP)

PPP is defined as a relationship between public and private entities in the context of infrastructure and other services.
The cooperative venture between the public and private sectors built on the expertise of each, through the allocation of resources, risks and returns jointly.

Features of a Public-Private Partnership

Basis	Explanation
Allocation of Risk	Under public-private partnership projects, there is a joint distribution of resources. Hence, the risks and returns are jointly shared by both sectors.
Ensures Economy, Effectiveness & Efficiency	Under this model, rewards and investments are shared by both the public and private sectors. Hence, the projects ensure that resources are used most economically.
Faster Implementation	Under the public-private partnership, private sector partners join hands with expertise and funds. So, they are always interested in recovering the benefits through faster implementation.

The End

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A List of Notes:

CBSE Class 11th Business Studies Notes - n3