MULTINATIONAL CORPORATIONS (MNCs):

MNCs are defined as an enterprise that is headquartered in one country but has operations in one
or more countries. Sometimes it is difficult to know if a firm is an MNC because multinationals
often downplay the fact that they are foreign held.

Multinational corporations (MNCs) are huge industrial organisations which extend their
industrial and marketing operations through a network of their branches or their majority owned
foreign affiliates (MOFAs).

MNCs are also known as transnational corporations (TNCs). Instead of aiming for
maximization of their profits from one or two products, the MNCs operate in a number of field
and from this point of view, their business strategy extends over a number of products and over a
number of countries.

Multinational, Global, Multi-domestic and Transnational

Multinational, Global, International and Transnational are terms which are frequently used to
describe the organizations which are operating in more than one nation. Though usually these
terms are used interchangeably, they have specific meanings.

1. Multinational Enterprise (MNE) is a company that takes a global approach to foreign

markets and production; it is thus willing to consider market and production location anywhere
in the world. The term multinational corporation (MNC) is also commonly used in the
international business arena and often is a synonym for MNE. Usually, most authors prefer MNE
as there are many international firms which are not organized as corporations.
2. Transnational Companies (TNC) is a term used by United Nations and most of the
developing nations for multinational firms. This term is used in two contexts though some
writers use this term for a company that is:

(a) trying to achieve economies of scale through global integrations of its functional area while at
the same time.
(b) highly responsive to different locational environment (a newer name is multiculturals
multinational).

Global Company: The term Global Company is widely used for MNE but every MNE is not a
Global MNE. A global company is one that has a global vision. It is a company which looks for
opportunities worldwide, it sources it products, raw material, and financing and personnel
worldwide, seeks to maintain a presence in key markets of world and look for similarities, not
differences among markets. The biggest characteristic of these companies is that they look at the
whole world as a single market and standardise operations and products worldwide in one or
more of the firm's functional areas.
Example: There are firms who to an extent can be classified as global firms, such as Coco
Cola, Pepsi, Kellogg's, SONY, etc.
These are the companies who keep their product portfolio same and manufacture the product for
the whole world considering them as a single market, though they change their functional
strategy according to the local requirements.
4. Multi-domestic Company: It is a company which treats each of its units operating in different
countries as an independent profit centre. It allows its foreign country operations to act fairly and
independently such as by designing and producing a product or service in India for the Indian
market and in China for the Chinese market.
Benefits of Being MNCs

Undoubtedly, firms cross national boundaries and accept the risk of operating in an unknown
environment in the hope of earning more profit and increasing their shareholders wealth. Besides
this, there are many other reasons such as survival, new sources of supplies, cheap human
resource and even just to keep busy the nearest rival in its home country. Some of the key
reasons of crossing national boundaries are as follows:
1. Survival: Most countries are not as fortunate as that of India, Russia, China or the US in terms
of size, resources and opportunities. Most European nations are small in size or most Middle
East and South East countries are rich in only one or very few resources. In these countries
organizations are bound to do business in and with other countries to survive. Even organisations
of big countries are bound to look out for new markets for their products and cheap resources to
remain competitive and to survive.
2. Growth of Overseas Market (Sales): This has been the biggest reason for more and more
Companies expanding overseas. In the last 20 years many economies have opened their
doors for the world. This resulted in a big opportunity in terms of Market. Most of the European
nations, USA, Canada, Japan, etc., have a stagnant population growth and very low GDP growth.

All these factors led to companies searching for a new market. Emerging economies like
India, China, and South East Asia form a significant market-perhaps more than 35% of the
world market. This has given them opportunities and MNCs have started expanding their
wings in these parts of the world.
India and China are amongst the top five countries of the world in terms of Purchasing Power
Parity. All this attracted many organizations to tap new markets in emerging economies. Besides
this agreements/groups like GATT, GATS, ASEAN, EU, SAPTA,
NAFTA, etc., have also created huge opportunities of business for organizations and to tap
these, they are going abroad.

3. Diversification: No organization wishes to keep all its eggs in one basket. Every organization
wants to diversify its risk and internationalization is a good manner to do that, along with
sticking to its core competency or old business. Different countries have different trade cycles
for the same product. When there is a recession in one economy, there could be a boom in the
other and an organization can cover losses in one country by profits.

4. Resources: In today's cut-throat competition, cost cutting is the key to success. Prices are
controlled by consumers and the only thing which can be manipulated to increase profit is cost.
Organizations go abroad in search of economical sources of supply. A truly global firm always
locates its processing in the best available location in the world and outsource HR and other
physical resources from the best suited place available. In fact, this is the reason that more and
more companies are establishing their call centres in India.

5. To Protect Market Share: Firms also become MNEs in response to increased foreign
competition and a desire to protect their home market share. Using a "follow the competitor"
strategy, a growing number of MNEs have now set up operations in the home countries of
their own major competitors. This approach serves as a dual purpose:
(1) it takes away business from their competitors by offering customers other varied choices and
(2) it lets competitors know that, if they attack the MNEs home markets, they will face a similar
response.

6. Tariff and Non-Tariff Barrier: Organizations establish their operation overseas to deal
with tariff and non-tariff barriers. Many time countries impose tariff and non-tariff
restrictions on import in such cases. Organizations establish their production unit in the
host country so that it can be treated as a local company.

7. Technology Expertise: One reason for becoming an MNE is to take advantage of

technological expertise by manufacturing goods directly (by FDI) rather than allowing others to
do it under a license. Many MNCs feel it unwise to give another firm access to proprietary
information such as patent, trademarks or technological expertise.

8. Access to Economical Human Resources: Many times companies cross borders to have
access to economical human resource. Organizations which used to earlier import Human
Resource from our country are now establishing their operations in India itself, only to
take advantage of economical human resource. Various companies are crossing borders
because the cost of human resource is rising.
Demerits of MNCs Notes
Multinational corporations have become too powerful in absolute terms as well as relative to
governments.
The enormous resources controlled by multinational corporations give them a tremendous
amount of power, especially over individuals and governments. The ongoing erosion of national
barriers to trade and investment enables these firms to close shop and head overseas if
government, workers or NGOs place restrictions (e.g., minimum wage, taxation, labour
standards, fines for pollution, etc.) on them or otherwise inhibit their ability to earn profits.
Certainly, there is a danger to any organization that controls resources and market share on par
with giant conglomerates like HLL, Reliance, TATA, or AV Birla may abuse their power in
ways that undermine democratic processes or hurt consumers. But these corporations earn their
profits through efficiency and innovation, without which they would quickly lose market share to
rivals.
They employ millions of workers with competitive wages, provide relatively low-cost/
high-quality goods and services to consumers and enrich shareholders. Moreover, they must
accomplish all of this without stepping beyond the boundaries of Competition/Antitrust Law/
Consumer Act in the countries in which they operate. In light of the profit motive, firms spend
money to influence legislation to its favour in case doing so is likely to enhance profitability.

REASONS FOR THE GROWTH OF MNCs:

Reasons for the growth of multinationals are manifold, the important ones beings as
follows:

1. Expansion of market territory: As the operations of a large-sized firm expand and

as its international image builds up, it seeks more and more extension of its activities
beyond the physical boundaries of the country in which it is incorporated.
2. Marketing superiorities: A multinational firm enjoys a number of marketing
superiorities over the national firms: (a) It possesses a more reliable and upto date
market information system; (b) It enjoys market reputation and faces less difficulty in
selling its products; (c) It adopts more effective advertising and sales promotion
 techniques; and (d) It has efficient warehousing facilities due to lower inventory
requirements.
3. Financial superiorities: A multinational firm enjoys the following financial
superiorities over the national firms: (a) It has huge financial resources with which it
can easily turn all circumstances in its favour; (b) It maintains a high level of fund
utilization by generating funds in one country and using them in another; (c) It has
easier access to external capital markets; and (d) Because of its international
reputation it is able to raise more international resources. Even investors and banks of
the host country are eager to invest in it.
4. Technological superiorities: The main reason why MNCs have been encouraged by
the underdeveloped countries to participate in their industrial development is on
account of the technological superiorities which these firms possess as compared to
national companies. The underdeveloped countries regard transfer of technology from
MNCs useful on account of the following reasons: (a)Industrialization represents the
most important way out of underdevelopment and the resources of these countries are
insufficient to sustain the industrial progress on their own; (b) Local manpower,
material, local capital equipments etc. Have to be optimally exploited and these
countries are unable to accomplish this; (c) Depending totally on local companies
would require heavy imports of raw materials, capital equipment, machinery and
technical knowledge whereas MNCs bring these on their own; (d) The
underdeveloped countries have to face stiff competition for selling their products in
international markets. Unless their goods meet international standards and quality
specifications, they cannot sell. MNCs help them in producing such goods.
5. Product innovations: MNCs have research and development departments engaged in
the task of developing new products and superior designs of existing products.
Therefore their production opportunities are far greater as compared to national
companies.
A CRITICAL APPRAISAL OF MNC OPERATIONS ON INDIAN ECONOMY:

The operations of MNCs open up the possibilities of interference in the industrial (and
other) activities of the recipient country and are thus resented by the ‘nationalist’ thinker. Their
arguments against the operations of MNCs can be summed up as follows:

1. Payment of dividends and royalty: A large sum of money flows out of the country
in terms of payment of dividends, profits, royalties, technical fees and interest to the
foreign investors.
2. Distortion of economic structure: MNCs can inflict heavy damage on the host
country in various forms such as suppression of domestic entrepreneurship, extension
of oligopolistic practices (such as unnecessary product differentiation, heavy
advertising, or excessive profit talking), supplying the economy with unsuitable
technology and unsuitable products, worsening of income distribution by distorting
the production structure to meet the requirements of high-income elites, etc.
3. Political interference: Because of their immense financial and technical power, the
MNCs have gained the necessary strength to influence the decision making processes
in underdeveloped countries. Through they do help in transferring technology to
underdeveloped countries, it has been often found that models and patterns of
industrial development and technologies transferred and not in harmony with the
interest of the host countries. The governments of underdeveloped countries have also
felt threatened by the direct and indirect interference of MNCs in their internal affairs.
The autonomy and sovereignty of the host countries is in danger. Because of these
reason, the governments of various countries have sought to restrict the activities of
MNCs in their economies through a battery of administrative controls and legal
provisions.
4. Technology transfer not necessarily conducive to development: As far as transfer
of technology to underdeveloped countries is concerned, the behaviour pattern of
MNCs reveals that they do not engage in R and D activities within the
underdeveloped countries. Their R and D efforts are concentrated in laboratories in
the home country or in other industrialised countries. Through R and D activities
continue to be centralized in the parent country, the host countries have to bear the
 bulk of their costs since the affiliates of the MNCs in these countries remit payments
on this account generally in relation to their sales volume. Such payments by the
affiliates are generally over and above those remitted in the form of royalties and
technical fees to the parent firm.
In many cases, the technology transferred is of a capital-intensive nature which is
not useful from the point of view of a labour surplus economy. In fact, continued
insistence on the import of such technology can have serious consequences for the
economy of the host country since unemployment will increase. Also market will fail
to grow and this constraint alone would suffice to restrain the rate of growth from
increasing.

CONTROL OVER MULTINATIONAL CORPORATIONS

The responsibility of controlling the activities of multinational corporations in India rests

on different government agencies. These agencies are: (i) The ministry of company affairs, (ii)
The reserve bank of India, (iii) The ministry of industrial development, and (iv) The ministry of
finance. However, these agencies do not work in close cooperation with each other. As a result,
there is no coordination in their functioning. Each case is discussed on its own merits by the
authorities. There are no objective criteria for approving applications and the procedure resorted
to by the various ministries is lengthy and cumbersome.

As a result of a study by Michael Kidron entitled foreign investment in India published in

1965 (and the follow-up discussions in which many economists participated) and the appearance
of the industrial licensing policy inquiry committee report in 1968, the belief got strengthened
that import of foreign technology were overpriced and were designed to perpetrate dependence.

As a consequence, the government policy was progressive tightened in the following

directions: 3

(1) some industries were not allowed to import technology to all, the underlying
principles of the policy being that (a) no ‘inessential’ articles should be produced with the
fresh import of technology and (b) where domestic capacity was adequate no technology
should be imported;
 (2) Among industries where technology imports were allowed, the maximum rate
of royalty was laid down;

(3) In some designated industries, foreign investment was allowed in principles,

but sanction in individual cases was a matter of administrative decision;

(4) The normal permissible period of agreements was reduced from ten years to
five, and renewals were generally frowned upon;

(5) Export and other marketing restrictions were generally not allowed, and often
an obligation to export a certain proportion of the output was insisted upon;

(6) A clause was often inserted in the agreements granting permission to the
imported to sub-licence the technology;

(7) The CSIR was allowed to look at applications for approval of technology
imports, and if it expressed willingness to supply the technology, approval was withheld
or at least delayed.

The most effective curb on the activities of foreign companies, especially MNCs, was
support to come with the passing of the foreign exchange regulation act (FERA) in 1973 to
which we now turn.

FOREIGN EXCHANGE REGULATION ACT (FERA), 1973:

Foreign exchange regulation act (FERA) was promulgated in 1973 and it came into force
on January 1, 1974. Section 29 of this act referred directly to the operations of MNCs in
India. According to the section, all non-banking foreign branches and subsidiaries with
foreign equity exceeding 40 per cent had to obtain permission to establish new
undertakings, to purchase shares in existing companies, or to acquire wholly or partly and
other company.

Guidelines for administering this Section of FERA were announced in 1973 and later
amended in 1976.
 According to these guidelines, the principal rule was that all branches of foreign
companies operating in India should convert themselves into India companies with at least 60 per
cent local equity participation. Furthermore, all subsidiaries of foreign companies should bring
down the foreign equity share to 40 per cent or less. Exempted from these rules were, however,
companies exporting a substantial part of their production, and companies engaged in core
sectors and priority industries. In these cases, the guidelines provided for higher levels of foreign
equity.

According to Martinussen, “this exception to the general rule reflected the government’s
endeavours to induces TNCs to use their superior access to global distribution and marketing
system, with a further view to improving India’s balance of payments position. Besides, they
reflected a desire on the part of the India government to channel TNCs away from certain
industries and into core sectors and high priority industries. The latter included primarily basic
intermediates and capital goods, whereas the former group comprised mainly consumer goods.
As a rule, the manufacture of priority items required sophisticated technology not available from
indigenous source”.4

Implementation of FERA: There were substantial delays in implementing FERA.

According to Martinussen, by June 1979, only about half the companies directed to dilute the
foreign holdings had carried out the process as stipulated. Most of the companies were in the
process of diluting, but 64 companies had, at that time, yet to initiate the process. Not until 1982,
i.e., eight year after FERA came into force, did the last group of 28 companies receive final
direction pursuant to the act. Moreover, upto the end of 1985, a total of 252 foreign controlled
companies were exempted from the general rule stipulating a maximum of 40 per cent non-
resident interest.5

In regard to the companies that did not comply with FERA regulations, martinussen
observes a certain pattern. For instance, he found that almost all these companies belonged to
only three groups. They were either engaged in tea plantation activities or in the manufacture of
drugs and pharmaceuticals, or they were affiliated with particularly large TNCs. The special
treatment to tea companies was due to importance of tea in India’s foreign trade. As far as the
drugs and pharmaceuticals industry is concerned, India’s heavy dependence of MNCs for bulk
drugs came in the way of compliances of FERA regulations. As far as the third category of
powerful MNCs in concerned. Martinussen given in detail the experience with regard to
Hindustan lever Ltd.6 this company managed to secure concessions from the government on
flimsy grounds. For instance, it succeeded in getting 60 per cent of its toiletries manufacturing
classified by government as high technology activity as it helped in ‘import substitution’.

The general conclusion that emerges from a review of FERA is that it did not in any
significant way restrict the expansion and activities of TNC affiliated companies in general. In
fact, “the overwhelming majority of large, well established and experienced TNC affiliated
companies were able to extract sizeable benefits from the working of the approval system, not
necessarily in keeping with government policy. In other word, the approval system proved
ineffective as a regulatory framework in relation to resourceful TNCs that close to come to term
with the system.”7

FOREIGN EXCHANGE MANAGEMENT ACT (FEMA), 1999

The foreign exchange management bill (FEMA) was introduced by the government of
India in parliament on August 4, 1998. The bill aims “to consolidate and amend the law
relating to foreign exchange with the objective of facilitating external trade and payments
and for promoting the orderly development and maintenance of foreign exchange market
in India.”

It was adopted by the parliament in 1999 and is known as the foreign exchange
management act, 1999. Chapter II of FEMA deals with the regulation and management of
foreign exchange. Section 3 states that except as otherwise provided in this act, no person shall
any manner deal in or transfer any foreign exchange, foreign security or any immovable property
situated outside India.

Current account and capital account transactions: Section 5 and 6 deal with current
account and capital account transactions. According to section 5, any person may sell or draw
foreign exchange to or from an authorised person if such sale or drawal is a current account
transaction. However, the central government may, in a public interest and in consultation with
the reserve bank, impose such reasonable restrictions for current account transactions as may be
prescribed.
 According to sub-section 1 of section 6, any person may sell or draw foreign exchange to
or from an authorised person for a capital account transaction subject to provisions of sub-section
2. Sub-section states that reserve bank may, in consultation with the central government,
specify... (a) Any class or classes of capital account transactions which are permissible; (b) The
limit upto which foreign exchange shall be admissible for such transactions.

Sub-section 4 of section 6 states that a person resident in India may hold, own, transfer or
invest in foreign currency, foreign security or any immovable property situated outside India if
such or any immovable property was acquired, held or owned by such person when he was
resident outside India or inherited from a person who was resident outside India. Sub-section 5
states that a person resident outside India may hold, own, transfer or invest in India currency,
security or any immovable property situated in India if such currency, security or property was
acquired, held or owned by such person when he was resident in India or inherited from a person
who was resident in India.

Realisation and repatriation of foreign exchange: section 8 lays down that save as
otherwise provided in the act, where any amount of foreign exchange is due or has accrued to
any person resident in India such person shall take all reasonable steps to realise and repatriate to
India such foreign exchange within such period and in such manner as may be specified by the
reserved bank.

Section 9 provides the following exemptions from realisation and repatriate of foreign
exchange: (a) possession of foreign currency of foreign coins by any person up to such limit as
the reserve bank may specify; (b) foreign currency account held or operated by such person or
class of person and the limit up to which the reserve bank may specified; (c) foreign exchange
acquired or received before the 8th day of July, 1947 or any income arising or accruing thereon
which is held outside India by any person in pursuance of permission granted by the reserve
bank; (d) Foreign exchange held by a person resident in India upto such limit as the reserve bank
may specify, if such foreign exchange was acquired by way of gift or inheritance from a person
referred to in clause (c), including any income arising therefrom; (e) foreign exchange acquired
from employment, business, trade, vocation, services, honourarium, gifts, inheritance or any
other legitimate means upto such limit as the reserve bank may specified; and (f) such other
receipts in foreign exchange as the reserve bank may specified.
 Contravention and penalties: chapter IV deals with the issue of contravenes and
penalties. Section 13 says that if any person contravenes any provisions of this act he shall upon
adjudication, be liable to a penalty upto thrice the sum involved in such contravention where
such amount is qualifiable, or upto two lakh rupees where the amount is not quantifiable, and
where such contravention is a continuing one, further penalty which may extend to five thousand
rupees for every day after the first day during which the contravention continues. Section 14 says
that if the person concerned fails to make full payment of the penalty imposed on him within a
period of ninety days, he shall be liable to civil imprisonment.

Adjudication and appeal: chapter V deals with the issues of adjudication and appeal.
Section 16 that the central government may appoint adjudicating authorities for holding an
inquiry in the manner prescribed after giving the accused person a reasonable opportunity of
being heard for the purpose of imposing any penalty.

Section 17 provides for the appointment of one or more special directors (appeals) to hear
appeals against the order of the adjudicating authorities. Section 18 says that the central
government shall, by notification, establish an Appellate Tribunal to be known as the Appellate
tribunal for foreign exchange to hear appeals against the orders of the adjudicating authorities
and the special director (Appeals) under this Act.

Directorate of Enforcement: chapter VI deals with the establishment of the directorate

of enforcement and its power, etc. Sub-section 1 of section 36 states that the central government
shall established a directorate of enforcement with a director and such other officers or class of
officers as it thinks fit, who shall be called officers of enforcements, for the purpose of this Act.
Sub-section 3 of section 37 states that the director of enforcement and other officers of
enforcement shall exercise the like power which are conferred on income-tax authorities under
the income-tax act, 1961 and shall exercise such power, subject to such limitations laid down
under the Act.

Miscellaneous: The last chapter VII consisting of section 39 to 49 deals with

miscellaneous issues. Sub-section 1 of section 40 empowers the central government in the public
interest and by notification to suspend or relax the provisions of the Act in certain circumstances.
Section 41 empowers the central government to give general or special direction to the reserve
bank.

Section 42 provides that where contravention of any of the provision of this Act is
committed by a company, the person responsible for the conduct of its business shall be deemed
to be guilty of the contravention. Section 44 bars the prosecution of legal producing against the
officer of the central government or the Reserve Bank or any other person exercising any power
or discharging any function or performing any duties under the provisions of this Act for
anything done in good faith.

Section 45 empowers the central government to removes the difficulties in giving effects to the
provisions of the Act. Section 46 empowers the central government to frame the rule and the
section 47 empowers the Reserve Bank to make regulation to carry out the provisions of this Act
and the rule made there under. Section 48 provides for laying before parliament the rules and
regulation made under this Act. Section 49 provides for repeal for the foreign exchange
regulation Act, 1973 and for dissolution of the appellate Board constituted under section 52 of
the said Act.

FOREIGN DIRECT INVESTMENT;

Foreign direct investment (FDI) is an investment made by a company or individual in one

country in business interests in another country, in the form of either establishing business
operations or acquiring business assets in the other country, such as ownership or controlling
interest in a foreign company.

Foreign direct investment (FDI) is an investment made by a company or individual in one

country in business interests in another country, in the form of either establishing business
operations or acquiring business assets in the other country, such as ownership or controlling
interest in a foreign company.
Foreign direct investment is one of the most important sources of foreign investment in
developing counties like India. It is seen as a means to supplement domestic investment for
achieving a higher level of growth and development. FDI is permitted under the following forms
of investments.

1. Through financial collaborations/capital/equity participation.

2. Through joint ventures and technical collaborations.

3. Through capital markets (Euro Issues).

4. Through private placements or preferential allotment

From investors’ point of view, the FDI inflows can be classified into the following three
groups:
(a) Market seeking. The investors are attracted by the size of the local market, which
depends on the income of the country and its growth rate.
(b) Lower cost. Investors are more cost-conscious. They are influenced by infrastructure
facilities and labour costs.
(c) Location and other factors. Technological status of a country, brand name, goodwill
enjoyed by the local firms, favourable location, openness of the economy, policies of the
Government and intellectual property protection granted by the Government are some of
the factors that attract investors to undertake investments.

Industrial Policy (1991) announced by the Congress Government accepted the fact that
foreign investment is essential for modernization, technology upgradation and industrial
development of India. The policy, therefore overbent to cajole foreign capital to come to India.
The main points of the policy were :
(i) Approval would be given for direct foreign investment up to 51 per cent foreign equity in
high priority industries. Clearance would be available if foreign equity covers the foreign
exchange requirement for imported capital goods.
(ii) The payment of dividends would be monitored through the Reserve Bank of India
so as to ensure that outflows on account of dividend payments are balanced by
export earnings over a period of time.

(iii) To provide access to international markets, majority foreign equity holding up to 51% equity
would be allowed for trading companies primarily engaged in export activities.
(iv) Automatic permission would be given for foreign technology agreements in high priority
industries up to a lump sum payment of Rs. 1 crore, 5% royalty for domestic sales and 8% for
exports, subject to a total payment of 5% of sales over a 10 year period from date of agreement
or 7 years from commencement of production.

Factors that Attracts FDIs in India

The following factors can be held responsible for the flow of foreign direct investments
in India :
1. India has a well developed network of banking and financial institutions and an
organized capital market open to foreign institutional investors that attracts them to
undertake investments.
2. India has vast potential of young entrepreneurs in the private sector. Indian skills and
competence is used as a base for carrying out production activities and export to
neighbour countries.
3. For the last few years there has been political stability in the country.
4. India enjoys good reputation among other countries as to honouring of its commitments
about repayment obligations, remittance of dividends etc.
5. India has vast pool of unskilled labour available at cheap rates as compared to other
countries, and vast natural resources that attract foreign investors.

Factors that Discourage FDIs

Factors that discourage foreign investors to undertake investments in India include:
(i) High rates of taxation.
(ii) Lack of infrastructure facilities.
(iii) Favouritism in the selection of investment.
(iv) Complicated legal framework of rules, regulations procedures for foreign direct
investment into India.
(v) Lack of transparency

TYPES OF INVESTORS;

Individual:

 FVCI (Foreign Venture Capital Investors)

 Pension/Provident Fund
 Financial Institutions

Company:

 Foreign Trust
 Sovereign Wealth Funds
 NRIs (Non Resident Indians)/ PIOs (Persons of Indian Origin)

Foreign Institutional Investors:

 Private Equity Funds

 Partnership / Proprietorship Firm
 Others

Types of Foreign Direct Investment: An Overview

FDIs can be broadly classified into two types: outward FDIs and inward FDIs. This classification
is based on the types of restrictions imposed, and the various prerequisites required for these
investments. An outward-bound FDI is backed by the government against all types of associated
risks. This form of FDI is subject to tax incentives as well as disincentives of various forms. Risk
coverage provided to the domestic industries and subsidies granted to the local firms stand in the
way of outward FDIs, which are also known as "direct investments abroad." Different economic
factors encourage inward FDIs. These include interest loans, tax breaks, grants, subsidies, and
the removal of restrictions and limitations. Factors detrimental to the growth of FDIs include
necessities of differential performance and limitations related with ownership patterns. Other
categorizations of FDI exist as well.

Vertical Foreign Direct Investment

Vertical Foreign Direct Investment takes place when a multinational corporation owns some
shares of a foreign enterprise, which supplies input for it or uses the output produced by the
MNC.

Horizontal foreign direct investments

Horizontal foreign direct investments happen when a multinational company carries out a similar
business operation in different nations. Foreign Direct Investment is guided by different motives.
FDIs that are undertaken to strengthen the existing market structure or explore the opportunities
of new markets can be called "market-seeking FDIs." "Resource-seeking FDIs" are aimed at
factors of production which have more operational efficiency than those available in the home
country of the investor. Some foreign direct investments involve the transfer of strategic assets.
FDI activities may also be carried out to ensure optimization of available opportunities and
economies of scale. In this case, the foreign direct investment is termed as "efficiency-seeking."

Advantages

Economic development

Foreign direct investment is that it helps in the economic development of the particular country
where the investment is being made. This is especially applicable for the economically
developing countries. During the decade of the 90s foreign direct investment was one of the
major external sources of financing for most of the countries that were growing from an
economic perspective. It has also been observed that foreign direct investment has helped several
countries when they have faced economic hardships. An example of this could be seen in some
countries of the East Asian region. It was observed during the financial problems of 1997-98 that
the amount of foreign direct investment made in these countries was pretty steady. The other
forms of cash inflows in a country like debt flows and portfolio equity had suffered major
setbacks. Similar observations have been made in Latin America in the 1980s and in Mexico in
1994-95.

Transfer of technologies

Foreign direct investment also permits the transfer of technologies. This is done basically in the
way of provision of capital inputs. The importance of this factor lies in the fact that this transfer
of technologies cannot be accomplished by way of trading of goods and services as well as
investment of financial resources. It also assists in the promotion of the competition within the
local input market of a country.

Human capital resources

The countries that get foreign direct investment from another country can also develop the
human capital resources by getting their employees to receive training on the operations of a
particular business. The profits that are generated by the foreign direct investments that are made
in that country can be used for the purpose of making contributions to the revenues of corporate
taxes of the recipient country.

Job opportunity

Foreign direct investment helps in the creation of new jobs in a particular country. It also helps in
increasing the salaries of the workers. This enables them to get access to a better lifestyle and
more facilities in life. It has normally been observed that foreign direct investment allows for the
development of the manufacturing sector of the recipient country. Foreign direct investment can
also bring in advanced technology and skill set in a country. There is also some scope for new
research activities being undertaken.
Income generation

Foreign direct investment assists in increasing the income that is generated through revenues
realized through taxation. It also plays a crucial role in the context of rise in the productivity of
the host countries. In case of countries that make foreign direct investment in other countries this
process has positive impact as well. In case of these countries, their companies get an
opportunity to explore newer markets and thereby generate more income and profits.

Export/Import

It also opens up the export window that allows these countries the opportunity to cash in on their
superior technological resources. It has also been observed that as a result of receiving foreign
direct investment from other countries, it has been possible for the recipient countries to keep
their rates of interest at a lower level.

It becomes easier for the business entities to borrow finance at lesser rates of interest. The
biggest beneficiaries of these facilities are the small and medium-sized business enterprises.

FOREIGN PORTFOLIO INVESTMENT;

Foreign portfolio investment (FPI) consists of securities and other financial assets passively
held by foreign investors. It does not provide the investor with direct ownership of financial
assets and is relatively liquid depending on the volatility of the market.

Foreign Portfolio Investment (FPI) is investment by non-residents in Indian securities

including shares, government bonds, corporate bonds, convertible securities, infrastructure
securities etc. The class of investors who make investment in these securities are known as
Foreign Portfolio Investors.
SPECIAL ECONOMIC ZONE;

A special economic zone (SEZ) is an area in which business and trade laws differ from the rest
of the country. SEZs are located within a country's national borders, and their aims include:
increased trade, increased investment, job creation and effective administration.

Objectives of SEZ Scheme

The main objectives of the SEZ Act are:
1. Generation of additional economic activity
2. Promotion of exports of goods and services
3. Promotion of investment from domestic and foreign sources
4. Creation of employment opportunities
5. Development of infrastructure facilities

Benefits of SEZ Scheme

It is expected that this will trigger a large flow of foreign and domestic investment in SEZs, in
infrastructure and productive capacity, leading to generation of additional economic activity
and creation of employment opportunities.
The incentives and facilities offered to the units in SEZs for attracting investments into the SEZs,
including foreign investment include:
1. Duty free import/domestic procurement of goods for development, operation and
maintenance of SEZ units.
2. 100% Income Tax exemption on export income for SEZ units under Section 10AA of the
Income Tax Act for first 5 years, 50% for next 5 years thereafter and 50% of the ploughed
back export profit for next 5 years.
3. Exemption from minimum alternate tax under section 115JB of the Income Tax Act.

4. External commercial borrowing by SEZ units up to US $ 500 million in a year without any
maturity restriction through recognized banking channels.
5. Exemption from Central Sales Tax.
6. Exemption from Service Tax.
7. Single window clearance for Central and State level approvals.
8. Exemption from State sales tax and other levies as extended by the respective State
Governments.
The major incentives and facilities available to SEZ developers include:
1. Exemption from customs/excise duties for development of SEZs for authorized operations
approved by the BOA.
2. Income Tax exemption on income derived from the business of development of the SEZ in
a block of 10 years in 15 years under Section 80-IAB of the Income Tax Act.
3. Exemption from minimum alternate tax under Section 115 JB of the Income Tax Act.
4. Exemption from dividend distribution tax under Section 115O of the Income Tax Act.
5. Exemption from Central Sales Tax (CST).
6. Exemption from Service Tax (Sections 7, 26 and Second Schedule of the SEZ Act).

Economic Development and Environmental Issues

Ecologists and environmentalists believe that one principal reason for the existence of the
environmental problem stems from the emphasis on the growth by the industrialized nations.
They point out that economic growth has been made possible only at the expense of the
environment.
Ecologists postulate that growth rates were so high, because of the fantastic increase in
population and demands of the society. Increased production and consumption had
unscrupulously released wastes and pollutants into the environment without consideration of
their effects.
Fast growth has resulted in the destruction of the environment, the impairment in the
quality of elemental environmental services, the deterioration of air quality and the
contamination of seas, rivers, lakes, etc. These were not taken into account in economic
calculations. The loss and deterioration of important environmental goods went relatively
unnoticed. In short, the social costs of growth were not included in economic analyses.
Economists who analyze in a straight jacket always contend that sustained economic growth
increases human welfare. These economists base their arguments on international companies in
terms of the value of goods and services produced in the economy. To put in shortly, they
compare gross national product (GNP) in terms of dollar value to assess the economic growth of
nations. Countries feel highly satisfied if their GNP graph shows an ascending tendency, year
after year and they proclaim that they are forward.
But, the measurement of economic growth in terms of output of goods and services
(GNP) is rather faulty. It takes into consideration the national product only. It does not consider
the national Dis-product in the process of production. Billions of dollars worth of cigarettes
produced in the economy have been brought under the calculation of GNP per year. It does not
take into consideration the external cost, the pollution it creates, the diseases it spreads in the
society among smokers and silent smokers.
These are the Dis-products of the nation. Edward F. Denison considers that air and water
pollution and also the solid wastes generated in the process of production as the real costs of
economic growth. He has suggested that value of the deterioration to environment by these real
costs should be deducted from NNP to contain a better. In this context, Samuelson’s NEW (Net
Economic Welfare) is worth considering as very appropriate, whereby the National Dis-Products
are deducted from the national product.

Measure of output
The role of environment and the need for maintaining the quality of the environment have
emerged recently as important issue and have assumed greater importance in the context of
several ecological disasters in many parts of the globe in recent times.
Barry commoner has analyzed the interaction of three major factors influencing
environmental impact. They are:
▪Population factor
▪Per capita availability of goods
▪Pollution per unit of economic good
The Environmental Impact (EI) is given as follows
Economic Good Pollutant
EI = Population * ---------------------------------- * -----------------------------------
Population Economic Good
This enables us to estimate the contributions of the three factors to the environmental impact,
viz., the size of the population, per capita production or consumption; and the pollutant generated
per unit of production or consumption.
Thus, environmental impact represents the environmental cost of a given economic process. By
the economic process, agencies external to the eco- system is produced and which tends to
degrade its capacity for self-adjustment.
According to Kenneth Boulding, “the world is finite and the resources are scarce”. Man out of
greed exploits this earth, as if its resources are limitless, to enrich himself in his pursuit of
economic growth. If this is continued by man who is too much enterprising, soon “we will have
a plundered plant”.

Key Words
▪Micro Environment: The microenvironment refers to the forces that are close to the company
and affect its ability to serve its customers. It includes the company itself, its suppliers,
marketing intermediaries, customer markets, competitors, and publics.
▪Macro Environment: The macro environment refers to all forces that are part of the larger
society and affect the microenvironment. It includes concepts such as demography, economy,
natural forces, technology, politics, and culture.
▪Privatization: It is the incidence or process of transferring ownership of a business, enterprise,
agency, public service or property from the public sector to the private sector or to private non-
profit organizations.
▪Business Ethics: It is a form of applied ethics or professional ethics that examines ethical
principles and moral or ethical problems that arise in a business environment. It applies to all
aspects of business conduct and is relevant to the conduct of individuals and entire organizations.
▪Globalization: It has to do with processes of international integration arising from increasing
human connectivity and interchange of worldviews, products, ideas, and other aspects of culture.
▪Economic System: An economic system is the combination of the various agencies, entities (or
even sectors as described by some authors) that provide the economic structure that defines the
social community. These agencies are joined by lines of trade and exchange along which goods,
money etc.

.
 Outsourcing
Outsourcing

– “The strategic use of outside resources to perform activities traditionally handled by

internal staff and resources” Dave Griffiths
Why Outsource?

– Provide services that are scalable, secure, and efficient, while improving overall
service and reducing costs

Reasons for Outsourcing

Traditional role - Reaction to problem

– Reduction and control of costs

– Avoid large capital investment costs

– Insufficient resources available

Modern role – Business strategy

– Allows company to focus on their core competencies

– Keeping up with cutting-edge technology

– Creating value for the organization and its customers

– Building partnerships

Layers of an Organization
Strategy
Process Design

Operation

System

The Key Layers in Outsourcing

Retain in-house
 Strategy - governance, policy setting, decision-making and direction
 Process Design - design, and “consultative” activities
Outsource
 Operations - administration, clerical activities and day-to-day execution
 System - technology, infrastructure and transactional processing

When to Outsource; What Can be Outsourced:

 System integration
 Data network
 Mainframe data center
 Voice network, internet/intranet
 Maintenance/repair
 Applications development
 E-commerce
 End-user support system

How to Implement Outsourcing:

 Program initiation
– Opinions and ideas shared to form draft contract
 Program implementation
– Transferring staff
– Service Level Agreement (SLA)
– Establish communications between partners
– Actual transfer of the service
– Establish management procedures
 Contract agreement
 Contract fulfillment

Problems with Outsourcing

 Loss of Control
 Increased cash outflow
 Confidentiality and security
 Selection of supplier
 Too dependent on service provider
 Loss of staff or moral problems
 Time consuming
 Provider may not understand business environment
 Provider slow to react to changes in strategy

Pros and Cons of Outsourcing

Pros:
• Lower labor costs
• Low investment risk
• On-demand talent: Product development & management skills available if not found in-
house
• Time-to-market improvement: Products can be launched closer to the point of
consumption
• Time-to-market improvement
• Introduction of new and legacy products in new markets is more efficient
Cons:
• Potential security problems
• Identifying qualified and reliable suppliers
• Disruption of supplies
• Low product quality and slow time to market
• Difficulty in protecting confidentiality

Typical Sourcing Decisions

 Single sourcing: Choosing a single supplier
 Multiple sourcing: Choosing several qualified suppliers
 Cross sourcing: A sourcing strategy in which the company uses a single supplier for a
certain part or service in one area of business, and another supplier with the same
capabilities for the similar part or service in another area of business.

Outsourcing Examples:
BPO; KPO; ITO; EPO; LPO; RPO; 3PL

Foreign Collaboration. In recent years there has been joint participation of foreign and
domestic capital. India has been encouraging this form of import of foreign capital. There
are three types of foreign collaborations—joint participation between private parties,
between foreign firms and Indian Government and between foreign governments and
Indian Government.

CONCEPT AND HISTORY OF SEZs

The concept of SEZ would be clear from the following description given by Arvind
panagariya, “conceptually, SEZs operate like foreign entities within the territory of a country.
They are usually separated by physical barriers from each other and from the rest of the country.
They have no trade barriers. The country’s trade barriers apply strictly within the area excluding
the SEZs which is called the domestic tariff area (DTA). Any goods sold by agents within the
DTA to agents inside the SEZ are treated as exports of the country, and those purchased by
agents in the DTA from those in the SEZ, as imports subject to customs duty. Any trade between
the SEZ and the outside world is allowed to bypass all custom requirements applicable to the
DTA. That is, foreign goods enter the SEZ free of custom duty, and exit abroad without being
subject to any domestic taxes or customs regulations.’

With a view to overcoming the above shortcomings and attract larger foreign investments in
India, the special economic zone (SEZ) policy was announced in April 2000. The major
difference between an SEZ and EPZ is that the former is an integrated township with fully
developed infrastructure, whereas an EPZ is just an industrial enclave.The SEZ policy,
2000, was intended to make SEZs an engine for economic growth supported by quality
infrastructure complemented by an attractive fiscal package, both at the centre and the state level,
with minimum possible regulations. Under the new scheme, all the eight existing EPZs located at
Kandla and Surat(Gujarat), santa cruz (Maharashtra), cochin (kerala), Chennai (Tamil Nadu),
Visakhapatnam (Andhra Pradesh), falta (west Bengal) and Noida (U.P) have been converted into
SEZs. The salient features of the SEZ scheme are:

1. A designated duty free enclave to be treated as foreign territory only for trade operations
and duties and tariffs.
 2. No licence required for import.
3. Manufacturing or service activities allowed.
4. SEZ units to be positive net foreign exchange earners within three years.
5. Domestic sales subject to full customs duty and import policy in force.
6. Full freedom for subcontracting.
7. No routine examination by custom authorities of export/import cargo.

SEZ act, 2005

To instil confidence in investors and signal the government’s commitment to a stable

SEZ policy regime, the special economic zones act, 2005, was passed by parliament in May
2005. The SEZ act, 2005, supported by SEZ rules, came into effect on February 10, 2006. The
main objectives of the SEZ act are generation of additional economic activity, promotion of
export of goods and service, promotion of investment from domestic and foreign source, creation

Of employment opportunities and development of infrastructure facilities. The salient features of

the act are as follows:

Governance. An important feature of the act is that it provides a comprehensive SEZ policy
framework to satisfy the requirements of all principal stakeholders in an SEZ – the developer and
operator and, occupant enterprise, out zone supplier and residents. Earlier, the policy relating to
EPZs/SEZs was contained in the foreign trade policy while incentives and other facilities offered
to the SEZ developer and units were implemented through various notifications and circulars
issued by the concerned ministries/departments. This system did not give confidence to investors
commit large funds for the development of infrastructure and for setting up units.

Another major feature of the act is that it claims to provide expeditious and single
window clearance mechanisms. The responsibility for promoting and ensuring orderly
development of SEZs is assigned to the board of approval (BOA) constituted by the central
government. At the zone level, approval committees are constituted to approve/reject/modify
proposals for setting up SEZ units. The administrative control over the zone is to be exercised by
the development commissioner (DC) to be appointed by the central government. The labour
commissioner powers are also delegated to the DC. Thus, the development commissioner may be
in a position to exercise effective power to allow the units in the SEZ to reduce the number of
workers if required. Finally, clause 23 requires that designated court will be set up by the state
governments to try all suits of a civil nature and notified offences committed in the SEZs.
Affected parties may appeal to high court against the orders of the designated courts.

INCENTIVES. The act offers a highly attractive fiscal incentive package, which ensures (1)
exemption from custom duties, central excise duties, service tax, central sales tax and securities
transactions tax to both the developers and the units; (2)tax holidays for 15 years, i.e., 100 per
cent tax exemption for 5 years, 50 per cent for the next 5 years, and 50 per cent of the ploughed
back export profits for the next five years; and (3) 100 per cent income tax exemption for 10
years in a block period of 15 years for SEZ developers.

INFRASTUCTURE. Provision have been made for (1) the establishment of free trade and
warehousing zones to create world class trade-related infrastructure to facilitate import and
export of goods aimed at making India a global trading-hub; (2) the setting up of offshore
banking units and units in an international financial service centre in SEZs; (3) the public-private
participation in infrastructure development; and (4) the setting up of a “SEZ authority’’ in each
central government SEZ for developing new infrastructure and strengthening the existing one.

SPECIAL ECONOMIC ZONES IN INDIA

As is clear from the above discussion, a large number of incentives and facilities have
been providing to SEZs. As a result, there was a tremendous rush to set up SEZs. Consequent
upon the SEZ rules coming into effect from February 10, 2006, as many as 462 formal approvals
were granted till May 2008. Out of these 462, Maharashtra accounts for the largest number (89),
followed by Andhra Pradesh (75) and Tamil Nadu (59).
 (1) In most of the states, the largest number of SEZs approved is in the field of IT/ITES
(information technology/information technology enabled service). In Chandigarh and
Chhattisgarh, all SEZs, in Madhya Pradesh 63 per cent SEZs, and in TamilNadu 58 per
cent SEZs are in the field of IT/ITES. For the country as a whole, 62 per cent of the
approved SEZs are in the field of IT/ITES, 5 per cent in the field of biotech, 4 per cent in
pharmaceuticals, 4 per cent in textiles, 5 per cent in multi-products, and the balance 20
per cent in others; (2) a large amount of area i.e.,1,26,077 hectares would be required in
setting up the SEZs ( Tamil Nadu would require 58,501 hectares of land, Gujarat 33,803
hectares of land, Maharashtra 11, 361 hectares of land and Andhra Pradesh 10,826
hectares of land). Acquisition of such a large area of land is bound to displace a number
of people and these most contentious issues that has cropped up in recent times.

BENEFITS OF SEZs

The main arguments in favour of SEZs are follows:

1. According to Arvind Panagariya, “international trade in India remains subjects to

substantial bureaucratic red tape. Goods move into and out of the country at a slow pace.
Faster movement is particularly important for export that involves bringing components
from abroad for assembly and re-exports. Domestic indirect taxes that must be
reimbursed when goods are exported are not always fully reimbursed. The SEZs help
overcome these inefficiencies’’.
2. The organised sector in India has been hamstrung by stringent labour market laws which
do not allow the firm to hire and fire workers as they desire. According to Panagariya,
this has hampered the emergence of large-scale manufacturing in the labour intensive
sectors. Through the instrumentality of SEZs, some of the most burdensome provisions in
the labour- laws can be relaxed with the result that such firms can emerge.
3. Through the promotion of SEZs it would become possible to provide world class
infrastructure which is necessary to ensure unhindered production. Moreover, since
country-wide development of infrastructure is expensive and implementation of structural
 reforms would require time, the establishment of SEZs is an important strategic tool for
expediting the process of industrialisation.
4. SEZs can reduce procedural complexities, bureaucratic hassles and barriers raised by
monetary, trade, fiscal, taxation, tariff and labour policies.
5. SEZs offer numerous benefits like (1) tax incentives, (2) provision of standard
factories/plots at low rents with extended lease period, (3) provisions for infrastructure
and utilities,(4)single window clearance,(5)simplified procedures, and (6)exemption from
various restrictions that characterise the investment climate in the domestic economy.
These benefits foster a conducive business environment to attract local and foreign
investment which would not otherwise be forthcoming.
6. SEZs are expected to give a big push to exports, employment and investment. The
ministry of commerce claims that by December 2009, investment of the order of rs.2,
83,219 crore is expected and 21.09,589 additional jobs are likely to be created. As far as
exports are concerned, SEZs contributed rs.22, 840 crore of export earnings in 2005-
2006. These rose to rs.34, 615 crore in 2006-07 (an increase of 52 per cent). In 2007-08,
they were projected to increase to rs.67, 088 crore.

In fact, the government of India has been systematically projecting SEZs as “carriers of
economic prosperity’’ that would (1) boost economic growth at an extremely fast rate, (2)
usher in affluence in rural area, (3) provide large number of jabs in manufacturing and others
services, (4)attract global manufacturing and technological shill, (5) bring in private and
public sector investment from both home and abroad, (6) develop infrastructure facilities, (7)
help slow down rural-urban migration. In short, “they are the officially acclaimed carriers of
India’s modern industrialisation that would create all round transformation and lead the
country towards a modern mode of living.’’ The logic of establishing SEZs rests on the
concepts of ‘growth’ and ‘competition’ and supposed economic magic they can achieve. It is
now widely accepted in official circles that to succeed in the global market a country must
have competitive advantage and this competitive advantage can be achieved through the
setting up of SEZs.
SUSTAINABLE DEVELOPMENT;
The Brundtland Commission’s brief definition of sustainable development as the “ability to
make development sustainable—to ensure that it meets the needs of the present without
compromising the ability of future generations to meet their own needs”

sustainable development means adopting business strategies and activities that meet the
needs of the enterprise and its stakeholders today while protecting, sustaining and enhancing the
human and natural resources that will be needed in the future