and Forces 5.

11 ANSWERS TO CHECK YOUR PROGRESS

A4 i) False ii) True iii) True iv) False v) True
Structure
EM i) False ii) True iii) False iv) True v) True
Objectives
Introduction
5.12 TERMINAL QUESTIONS Nature and Types of International Investment
FDI and Developing Countries
1) What do you mean by globalization?Describe various forces of globalization. 6.3.1 Advantages
6.3.2 Limitations
2) Do you think that the effects of globalization have been favourable on the world Recent Trends in FDI Flows
economy. Discuss. 6.4.1 Sectorat Distribution of FDI
6.4.2 Cross-Border Mergers and Acquisitions
3) Explain the Indian scenario of globalization. Do you think that India has
Trade Related Investment Measures (TRIMS)
entered into the globalization process significantly. Multilateral Investment Agreement (MIA)
Describe various approaches of globalization with suitable examples. 6.6.1 Arguments in Favour of a ComprehensiveMultilateral Framework
4) Various Measures for Consideration for MIA
6.6.2
5) Write nqtes on: 6.6.3 Incentives Provided by the Government
6.6.4 Multilateral Investment Guarantee Agency (MIGA)
i) Cross-border Mergers and Acquisition FDI in India
Let Us Sun1 Up
ii) Glocalization
Key Words
iii) Porter's view of Glabaiization Answers to Check Your Progress
Terminal Questions

After studying this unit, you should be able to:

e discuss the nature and types of international investment
a explain the i~npactof FDl on developing countries
o analyse the record trends in FDI flows

a discuss the trade related investment measures

describe various issues related to the Multilateral Tnvestrnent I

a explain the FDI policy of India.

6.1 INTRODUCTION
In fact, you have learnt the approaches, forces and recent trends in globalization in Unit 5.
International Investment is one of the most important vehicle of global operations. Economic
growth and developme~~t of countries depend to a large extent on adequate capital and
technological inputs. Most often, these inputs are not sufficiently available in a number of ,
countries. So importation of these inputs is made to supplement domestic resources that
Cnhance investment as well as productivity, Foreign capital can come to countries seeking jt
in various forms. It can be a loan capital, direct investment and also portfolio investment, etc.
In this unit you will learn the types of international investment, the impact of FDI on develop-
ing countries and recent trends in world FDI flows. You will be also acquainted with the trade
related investment measures and the scenario of FDI in India.

i 6.2 NATURE AND TYPES OF INTERNATIONAL

!
INVESTMENT
The growing international production and trade require increased amount of international
p investment. As a result, the flow of international investment has been increasing. The
 Internntional Investment
G Iuimlization: Process
country requires international investment for enhancing the production, trade and distribu- outside the scope of their core competence and acquiring strategic assets that enhance their
and Forces competitiveness. For these firms, the "ownership" assets acquired from another firm, such as
tion capabilities. The need for international investment is more pronounced in the developing
countries where the capital is in scarce. World Investment Report, 1999 has advocated the technical competence, established brand names and existing supply networks and distribu-
need of foreign investment. It says that the development priorities of developing countries tion systems can put to immediate use towards serving global customers, enhancing
include achieving sustained income growth for their economies by raising investment rates, projects, expanding market share and increasing corporate competitiveness by employing
strengthening technological capacities and skills, and impowing the competitiveness of their international production network more efficiently.
exports in world markets, distributing the benefits of growth equitably by creating more and
better employment opportunities, and protecting and conserving the physical environment -
for future generations. The international investment play an important role in the above effort 6.3 PDI AND DEVELOPING COUNTRIES
of the developing countries. There are two major types of international investment. They are
Foreign direct Investment and Portfolio Investment. Let us first learn about them. FDI helps in accelerating the rate of economic growth of the host country. Let us discuss the
advantages of FDI.
Foreign Direct Investment
6.3.1 Advantages
Foreign Direct Investment occurs when an investor based in one country (the home country)
acquires an asset in another country (the host country) with the interest to manage the asset. FDI helps in the development of the host countries. In specific term, the major advantages
The company investing in this country also transfers assets such as technoIogy, manage- are discussed as follow:
ment and marketing. F~rther,the investing company also seeks the power to exercise control
-
over decision making in a foreign enterprise the extent of which has to vary according to its
FlDI as Capital Supplier: Foreign Direct Investment is expected to bring needed capital to
equity participation. Foreign Direct Investment also includes reinvested earnings which developing countries. The developing countries need higher invcktment to achieve increased
comprise the direct investor's share of earnings not distributed as dividends by affiliates or
targets of growth in national income. Since they cannot normally have adequate savings,
earnings not remitted to the diiect investor. Such retained profits of affiliates of foreign
there is need to supplement savings of these countries f ~ o m
foreign savings. This cnn be
enterprise are reinvested.
done either through external borrowings or through permiting and encouraging Foreign ,

Direct Investment, Foreign Direct Investment is an effective source of this additional capital
Recent1y there has been tremendous expansion of FDI. There are four main characteristic
and comes with its own risks.
features of growth of foreign direct investment. These are:
e the bulk of investment flows is among the developed countries. FlDI a a Remover of Balance of Payments Constraint: FDI provides inflow of foreign
a the growth of investment has been substantial. exchange resource and removes the constraints on balance of payment. It can be seen that a
large nurnber of developing countries suffer from balance of payments deficit? for their
0 the developing countries have increasingly become recipients of FDI. demand on foreign exchange is normally far in excess of their ability to earn. FDI inflows by
0 the flow of FDI to developing countries, however, is concentrated in approximately ten providing foreign exchange resources remove the constraint of developing countries seeking
countries. higher growth rates.

Foreign Direct Investment specially in developing countries, has been a very controversial [Link] a distinct advantage over the external borrowings considered from the balance of
subject. Historically, FDIis associated with the domination of metropolitan powers over the payments point of view. Loans create fixed liability. The governments or corporiltions have to
colonies. It was believed that these investments were instruments of suppression of national repay, The resulting international debt of the government and the corporation parts a fixed
enterprises and exploitation of these economies for the benefit of foreign investors. However liability on balance of payments. This means that they have to repay loans alo,ng with
ovefthe years this historical assessment has given place to an important role to FDI. A interest over a specific period. In the context of FDI this fixed liability is not there. The
consensus has developed since the eighties that m)I is essential for economic development. foreign investor is expected to generate adequate resources to finance outflows on account
of the activity generated by the FDI. The foreign investor will also bear the risk.
Portfolio Investment
FDI as a Vehicles of Technology lhnsfer: FDI brings along with it assets which are crucially
Portfolio capital normally moves to investment in financial stocks, bonds and other financial either missing or scarce in developing countries. These assets art: technology and manage-
instruments. Further, the portfolio capital moves to the recipient country which has revealed ment and marketing skills without which development cannot take place. This is the most
its profitability and has a comparative advantage over the counterparts in investing country. important advantage of FDI. This advantage is more important than bringing capital which
Portfolio capital unlike PDI is effected largely by individuals and institutions through the perhaps can be had from the international capital markets and the govetments.
mechanism of capital market. Portfolio investment to a large extent is expected to be specula-
tive and footloose in its character. Very often depending on the confidence of the investor, FDI as a Promoter of Exports of Host Developing ~ o u ~ t rForeign
y: direct invqstmentpro-
the investment is made. In the event this confidence is shaken, the capital has a tendency to motes exports.' Foreign enterprises with their global netwprk of marketing,,possessing
shift from one country to another very fast occasionally creating a crisis for the host country. marketing information are in a unique position to exploit rhese strengths to promote the
exports of developing countries.
Equity capital is the value of the Multinational Corporations (Mt-32~) investment in shares of
an enterprisein a foreign country. An equity capital stakes of 10per cent or more of the FDI as a Provider of Increased Employment: Foreign enterprises by employing the nationals
ordinary shares or voting power in an incorporated enterprise is normally considered thresh- of developing countries provide employment. In the absence of this investment these
old for the control of assets. This category includes both mergers and acquisitions and employment opportunities would not have been available to a tot of developing countries,
greenfield investments (the creation of new facilities). Mergers and acquisitions are important Further, these employment opportunities are expected to be in relatively higher skills ereas. '

sources of investment in developed countries. . FDT not only creates direct employment ojpportunities but also through backward anu
forward linkages, it is able generate indirect employment opportunities as well.
Mergers and acquisitions are a popular mode of investment for firms wishing to project,
I 18 consolidate and advance theirglobal competitive positions by selling off divisions that fall
 FDI Result in Bigher Wages: Foreign Direct Investment has also promoted higher wages.
Relatively higher skilled jobs would receive higher wages.
There are a number of cases of countries which have developed without large h~flowsof
FDI. Notable examples are Japan and South Korea.
Generates Competitive Environment in Host Country: Entry of foreign enterprises in domes-
tic market creates a competitiveenvironment co~npellingnational enterprises to compete with
Check your Progress A
the foreign enterprises operating in the domestic market.'~hisleads to higher efficiency and
better products and services. The Consumer may have a wider Choice.
I ) What is Foreign Direct Investment?
6.3.2 Eimihltions
Besides, these favourableinipact of FDI, there are some limitations which have been dis-
cussed as follows.

Foreign Enterprises Depend on Domestic Capital: Ve~yoften foreign enterprise brings very
limited capital. It takes recourse to borrowing from domestic capital markets and banks. It has
been the experience of a number of developi~igcountries where foreign enterprises have
depended to a large extent ondomestic capital markets and have heavily borrowed from the 2) What do you mean by Portfolio Il~vzstment?
national financial institutions. Thus, they compete effectively with the national firrns for
scarce capital available domestically. Very often they deprive national firms of tlie needed
capital. Thus, the argument that they bring sufficient capital is spurious.

Nced not Necessarily Remove Balance of Payments Constraint in the Long Run: While FDI
may remove balance of payments constraint in the initial stages, the outflows generated in
the form of dividend, royalty and technical management fees may be far in excess of equity
inflows i n the early stages. Further, many foreign enterprises take recourse to loan finance
rather than equity finance. This obviously is a fixed liability on the enterprise as well as fixed Enumerate [Link] of FDI,
commitment for the balance of payments. 3)

Over and above this, when enterprises want to move their capital out of the country, the
repatriation may create balance of payments crisis.

Does Not Transfer Technology Effectively: Foreign enterprise very often keeps control of
technology. Therefore, effective transfer of technology and management skill does not take
place. What it does is to transfer*chnology relating to adaptation to local conditions
otherwise one has to deal with trouble shooting technologies. Fundamental aspects of
technology are strictly kept with the parent company. Thus the host economy, specially the
4) State whether following statements are True or Fnlsc.
developing countries, may not have effective transfer of technology arising out of FDI.
i) Portfolio investment to a large extent is expected to be specuiative.
FDJ is not a Provides of Additional Employment: It is argued that this will arise when FDI
ii) The developed countries have increasingly become the recipients of FDI.
does not substitute national investment. When FDI Substitutes national investment, what
exactly happens is that it replaces employlnent opportunities that could have been created by iii) Loans create fixed liability.
the national enterprise. Thus the net employment opportunities generated will be insignifi-
iv) Many foreign ellterprises take recourse to equity finance rather tl~anloin
qaht. Further, there are no effectivebackward linkages for the Transnational Corporations.
finance.
The operations of TNCs would depend on imports for getting their supplies rather than
depending on domestic sources of supply of host countries. v) TNCS through their market power always create oligopolistic or lnoriopo
listic market conditions.
Does Not Create Higher Wages: Most often FDI indulge in exploiting the wages in host,
deveIoping countries. Hence the argument that they generate higher wages is not correct.
Further, tlie eniployn~entof local personnel in high paid jobs is less for it is very often taken RECENT TRENDS IN FDI PLOWS
6.4
by foreign nationals.

Does Not CI-ealcAdditional Exports: Most often PmI comes to expldit the domestic market. In recent years, there has been a substantial growth in FDI flows globally. The process of
Barring a few export processing zones, the foreign enterprises most often exploit the domes- globalization has accelerated the flows of FDI. Look at Table 6.1 which shows the inflows and
tic market. outflows of world FDI. The FDI inflows have increased from 359 billion dollar in the year 1996
to 644 billion dollar in the year 1998. In the same w7y, the outflows hnve also increased fiom
Does Not Create Competitive Environment: The TNCs through their market power always 380 billion dollar to 649 billion dollar. The flows ofFD1 have reached to these levels dcspite
create oligopolistic or monopolistic market conditions. Three or four TNCs control the the unfavourable conditions in the world economy in the year 1996. In the year 1998, FDI
market. inflows grew by 39% in case of inflows and 37% in case of outflows. This is the highest rutc
attained since the year 1987.
The present consensus has been that despite this debate, the FDI has a net positive impact
on the development of developing countries. It may, however, be noted here that for growth The regional distribution of FDI shows that the most FDI is located in the developed world.
and developrnel~tof an economy it is not necessary for the econolny to depend an FDI flon \ . Among developed countries, FDI is concentrated in Western Europe and United States,
20
which account for 36.9% and 30% of the world FDI inflows in the ~[Link] the same time
Western Europe and United State$ account for 62.6% and 20.5% of the world FDI outflows in
 Glohatization: Process I n t e r ~ ~ s t i o l l elnvcstmellt
l
,
the year 1998. Look at Table 6.2 which shows the regional distribution of world FDI inflows acquisitions sales and purchases amounted to 544 billion dollar in the year 1998. This
and Forces
and outflows. witnessed 60%increase over the year 1997. Mergers and acquisitions represent a significant
share of FDI flows, at least in the developed countries. In the year 1998, there were 89 mega
The share of developing countries had been growing steadily until 1997, when i t reached to cross border mergers and acquisitions deals. These mega deals accounted for nearly three-
37.4%of the world FDI inflows. As a result of strong performance of FDI in the developed fifths of the total of all cross-border mergers.
countries and poor performance in the developing countries, the share of developing coun-
tries, in the world FDI inflows decreased to 25.8% in the year 1998. Recent cross-border mergers and acquisitions have been concentrated in industries that are
losing cotnparative advantages. In the year 1998, the largest cross-border mergers was in the
The share of FDI outflows'of the developing countries has also come down to 8.1% in the oil Industry followed by the automobile industry and the banking and telecommunication
year 1998. Among developing countries also FDI is concentrated in few regions. The Asian industry, The non-petroleum mining and refining industries also witnessed good mergers and
region and Latin America and Caribbean region account for 13.2%and 1~1.2%of the FDI acquisitions.
inflows. They account for 5.6%and 2.4%of FDI outflows. The share of FDI inflows of
Central and Eastern Europe has also decreased horn 4.0% in the year 1997 to 2.7% in the year
1998. 6.5 TRADE RELATED INVESTMENT MEASURES
(TRIMS)
Table 6.1 World J?DI Mows and Oufflows
Many host developing countries want the FDI flow to be consistent with their development
(Billion dollar) priorities. They also wanted multilateral measures to protect their interests. Thus the UN
Year Inflows Outflows Centre for Transnational Corporations was established to educate developing countries and
- also build a code of conduct for TNCs. The code was not approved. Hence it is called Draft
Code of TNCs. Issues covered by the Draft included issues of national sovereignty, obser-
vance of national laws, adherence to the socio-economic objectives of host countries,
appropriation of foreign assets and compensation and regulation of the restrictive business
practices of foreign enterprises. In the eighties, the US wanted a Multilateral Investment
Agreement preventing national policy discretion on FDI. The main arguments of the US were
Source: World Investment Report, 1999.
that performance requirements imposed by the host countries on foreign investor had led to
distortions in world trade. Further, the investing countries lost the opportunity of exporting
'Igble.6.2: Regional Distribution of lFDI Inflows and OuMows
their export potential on the one hand and constrained to buy products and services from
costly and inefficient sources of supply on the other. Hence it brought the issue of invest-
(Percentage) ments under Uruguay Round of multilateral trade negotiations. Although investment is not a
Region Inflows Outflows subject matter of the GATT regulations, the Punta Del Este Negotiating Mandate on Trade
Related Investment Measures stated: "Following an examination of the operation of the
GATT rules related to trade restricting and distorting effects of investments measures, the
;;egotiation should elaborate as appropriate, further provision that may be necessary to
Developed Countries 63.4 58.8 58.9 71.5 85.3 84.2 85.6 91.6 avoid such adverse effects on trade". Thus in the Uruguay Round of Multilateral Trade
Negotiations for the first time that some investment issues were directly introduced as part of
Developing Countries 32,3 37.7 37.2 25.8 14.5 15.5 13.7 8.1 the discipline of the multilateral trading system.
Central and Eastern 4.3 3.5 4.0 2.7 0.1 . 0.3 0.7 0.3
Europe GATT's article on national treatment, Art-IU:4, and quantitative restrictions, XI. 1, were
invoked to bring TRIMS under negotiations.
Source: World Development Report, 1999.
Investment Measures Prohibited in the Agreement on TRIMSunder the Marrakesh Agree-
6.4.1 Sectoral Distribution of FDI ment

FDl flows in the primary sector have been declining fast. The share of FDI in the manufactur- TRIMS inconsistent with Article 111.4 of GAlT
. ing sector has remained stable and it is the single most important sector in the developing a) The purchase or use by an enterprise of products of domestic origin or from any
countries. The share in services sector has been increasing in both developed and develop- domestic source, whether specific in terms of particular products, in terms of volume
ing countries. The industry with the largest share of inward FDI in the world is finance or value of products, or in terms of a proportion of volume or value of its local
foIlowed by trade. The services like banks, insurance securities and other financial services, production;
has remained top recipient of FDI over the past decade. The m3I in the services sector has
or
been growing over the past years at a faster rate than the FDI in other sectors.
b) that an enterprise's purchases or use of imported products be limited to an amount
6.4.2 Cross Border Mergers and Acquisitions related to the'volume of local products that it exports.
I

Cross border mergers and acquisitionsare another major trend in FDI, For the past several TRIMSInconsistent with Artide XI of GA'IT
years, mergers and acquisition involving firms located in different countries have increased n) The importation by an enterprise of products used in or related [Link] production,
I

[Link]-border mergers and acquisitions are primarily concentrated in developed generally or to an amount related to the volume or value of local production that it
countries, but there is also a trend towards an increase in such deals in some developing 1
exports.
countries. The number and value of total cross-border mergers and acquisitions have
increased significantly world wide. The absolute value of all cross-border mergers and
Gl~balizaiion:Proccsf
and Forces
b) The importatior by an cnterprisc of products used in or related to its local productiorl International Investment
by restricting its access to foreign exchange to an amount related to the foreign A comprehensive multilateral investment framework is seen by its proponents as the appro-
exchange inflows attributable to the enterprise; or priate response to the need for a global policy framework:

c) The exportation or sale for export by an enterprise of products, whether specified in The following section gives the views of the proponents of MIA.
terms of particular products, in terms of volume or value of products, or in terms of a
proportion of volume or value of its local production. Governments expect iccreqsed FDI flows to contribute to development, directly as well as
indirectly (as they increase tradej. They also expect that conflicts arising from FDI are
According to the TRIMSAgreement, all specific ~neasuresin the above five categories being more likely to be the subject to an effective dispute settlement process in the context of a
applied by any member will have to be notified within 90 days of the entry into force of the rule based, not power-based, framework;smaller countries, in particular, benefit from a rule
Agreement establishing the World Trade Organization (WTO). They will have to be elimi- based system not only because they are more protected but also because they can
nated within two years - within five years by the developing countries and 7 years by the participate in policy formulation and implementation.
least developed countries. A developing member country shall be free to deviate temporarily Firms -large and small -expect that a multilateral investment framework should remove
from the obligation to eliminate such measures, on balance of payment grounds. The opera- ' impediments to investment, establish high and coherent standards, provide protection for
tion of this discipline shall be reviewed after five years. A Committee on Trade-Related investment and put in place a mechanism for ;esolving disputes. A stable, predictable and
Investment Measures has been set up to monitor the operation and implementation of this transparent framework is particularly important for large-scale, long tenn infrashcture
Agreement in WTO. projects and for internationally integrated production networks.
Trade unions expect effective rules on FDI which would incorporate the principles of the
ILO Tripartite Declaration, thus alleviating the danger of downward pressure on basic
6.6 MCTLTILATERAL INVESTMENT AGREEMENT labour standards resulting from poliw competition and contributing to a stable labour
(MIA) regime, which is essential for integrating TNCs in development strategies.

Agreement on TRIMS under Mal~akeshTreaty, the culmination of the Uruguay Round of Other groups, in particular the consumer movement, expect a rule based system for
Trade Negotiations was the first step towards considering a Multilateral Investment Agree- international economic relations, which would also include effective consumer, competi-
ment. The developed countries are keen to establish a multilateral investment regime similar tion and environment policies, and which wouId not marginalise some groups of countries
to multilatera1 trade regime. The developed countries have already done this in their tiraft but rather complement global liberalization.
agreement prepared by the Organization of Economic Cooperalion and Development (OECD)
a largely developed countries grouping. They now would like MIA to be brought under Beyond that, it is expected that the existing multilateral economic institutions would benefit
WTO. because they would be able to function more effectively if FDI were brought into the purview
of the multilateral system governing international economic relations.
In fact in Singapore, WTO's interministerial meeting (1995) considered this issue. India
opposed it for she believes that FDI policy is primarily a national concern. Hence, it was A comprehensive multilateral agreement, especially if it is linked to the international trade
proposed in the meeting that a study would be made on the subject and any decision to framework, would contribute more to increasing international investment flows. Not only
negotiate a multilateral investment agreement must have explicit co?sensus of all. The would it entail a worldwide reciprocal lowering of barriers to the inflow and outflow of
Multilateral Investment Agreement is to standardize various provisions and bring it under investment, but the consolidation of commitment of countries to an open investment regime
the control of a multilateral institution with an effective dispute settlement mechanism. The would give greater credibility to such policies in the eyes of investors. It should thus enable
WTO is considered to be the most suitable organization which has an effective dispute countries to attract greater inflows of investment at a lower cost, and subscribing to it would
settlement mechanism possessing cross retaliation. However, it will take considerable amount become a "good housekeeping" seal of approval. The stronger the agreement, and the higher
of time to firlaliz$is agreement. the standards, the more it would contribute to investment flows and hence development.
^ d They are:
'-- ,$&
6.6.1 Arguments in Favour of a Comprehensive Multilateral Investment measure that effect the entry and operations of foreign investors
Framework The application, with respect to FDI, of certain positive standards of treatment,
The overreaching rationale for a comprehensive investment framework is that it woultl create Measures dealing with broader concerns, including setting appropriate standards of
a stable, predictable and lransparent enabling framework, which would facilitate the growth behaviour for investors and ensuring the proper functioning of the market.
of investment flows and their contribution to development. In fact, the globalization of The elimination (or reduction) of non-business risks through provisions on investment
business, the increased volumes and growing importance of l 3 1 , the extent to whichFDI and protection and settlement of disputes.
trade are inextrical~lyintertwined and the emergence of an integrated international production
system require a similarly global poIicy framework. A global economy requires a global policy The MIA is expected to have Most Favoured Nation Treatment and National Treatment to
framework consistent for trade and investment issues. be accorded to foreign investor.

What exists now, however, is a patchwork of bilateral, regional and niultilateral agreements 6.6.2 Various Measures for Consideration for MIA
that contains overlaps, gaps and inconsistencies. And these problelns are bound to increase
as the number of bilateral and regional agreements continues to proliferate. Measures relating to admission and establishment
Closing certain sectors, industries or activities to FDI
Apart from regional groupings investment agreements, there are more than 1100 bilateral
investment agreements. Even a complete network of BITS covering alI pairs of countries Quantitative restriction on the number of foreign companies in specific sectors, industries
which would require sonle 20,000 treaties requiring a very long period of time to negotiate. or activities.
Minimum capital requirements.
Subsequent additional investment or reinvestment requirements
Glohnlizntion: Proccss e Screening, authorization and registration of investment.
and Forces International Investment
Check Your Progress B
Conditional entry upon investment meeting certain development or other criteria (e.g.
environmental responsibility). 1) What is Multilateral Investment Agreement?
Investment must take certair. legal form (e.g., incorporated in accordance with local
9

company law requirements).

..............................................................................................................
@ Restrictions on forms of entry (e.g. mergers and acquisitions may not be allowed, or must
meet certain additional requirements).
@ Special requirements for non equity forms of investment (e.g., build operate transfer (BOT)
agreements, licensing of foreign technology).
e Investment not allowed in certain zones or regions within a countries.
2) Write two arguments in favour of a comprehensive multilateral framework.
e Restrictions on import of capital$goodsneeded to set up an investment (e.g. machinery,
software). ..............................................................................................................
e Investors required to deposit certain guarantees (e.g. for financial institutions). ..............................................................................................................
Admission to privatization bids restricted or conditional on additional guarantees, for
foreign investors.
e Admission fees (taxes)and incorporation fees (taxes).
e Investors required to comply with norms related to national security, policy, customs,
public morals requirements as conditions to entry. 3) State wheather following statements are m e or False.
i) Dominant recipients of FDI inflows are the developing countries.
Measures relating to ownership and control
ii) Many host developing countries want the FDI flow to be consistent with
e Restriction on foreign ownership (e.g. no more than 50 per cent of foreign owner capital their development priorities.
allowed).
iii) Developing countries are also becoming outward investors.
e Compulsory joint ventures, either with state participation or with local private investors.
iv) 'The developing countries are keen to establish a multilateral investment
e Mandatory transfers of ownership to local firms, usually over a period of time. regime similar to multilateral trade regime.
e Nationality restrictions on the ownership of the company or shares thereof. V) A comprehensive multilateral agreement would contribute more to increasing
o Restrictions on the use of long term (5 years or more) foreign loans (e.g. bonds). international investment flows. -
'@ Restrictions on the free transfer of shares or other proprietary rights over the company Operational and Other Measures
held by foreign investors(e.g. shares cannot be transferred without permission).
9 Restrictions on foreign shareholders rights (e.g. on payment of dividends, reimbursement Even after admission, foreign firms may be confronted by a range of restrictive measures
of capital upon liquidation;on voting rights; denial of information disclosure on certain aimed at their operations and seeking to influence their various side effects such as on
aspects of the running of the investment). employment and the use of technology. Restrictions and special measures can be found
across the board and tend to be less sectorally oriented.
o "Golden" shares to be held by the host government allowing it, e.g., to intervene if the
foreign investor captures more than a certain percentage of the investment. Some measures that have received special attention in some recent investment agreements
Government reserves the right to appoint one or more members of the board of directors. concern the issue of the right of temporary entry for key personnel in connection with the
development or operation of a foreign affiliate and the right of a foreign investor to hire key
a Restriction on the nationality of directors, or limitation on the numbers of expatriates in personnel legally resident in the host country without regard to nationality. Another cat-
top managerial positions. egory of such measures concerns performance requirements, i.e., conditions imposed on
Government reserves the right to veto certain decisions, or requires that important board foreign firms, at the time of entry or later, concerning their export policies, the local content of
decisions to be unanimous. their products, training of local labour and other such matters. While these requirements were
initially seen as a substitute for more restrictive measures, their trade and market distorting
e ~overnmentmust be consulted before adopting certain decisions. effects have led to the prohibition of some of them in some bilateral and regional agreements,
Management restrictions on foreign controlled monopolies or upon privatisation of public as well as the Uruguay Round of agreements on TRIMS
companies.
0 Restrictions on land or immovable property ownership and transfers thereof.
6.6.3 Incentives Provided by the Government
~estrictionson industrial or intellectual property ownership or insufficient ownership Measures relating to operations
protection. 0 Restrictions on employment of foreign key professionals or technical personnel, including
0 Restrictions on the licensing of foreign technology. restrictions associated with granting of visas, permits etc.
0 Performance requirements, such as sourcing/local content requirements, manufacturing
I requirements, technology transfer requirements, employment requirements, regional andl
or global product mandates, training requirements, export requirements, trade balancing
Globalization: Process requirements, importrestrictions, local sales requirements, linking export quotas to International Investrnen~
and Forces , Value added based incentives, including:
domestic sales, export/foreign exchange earning requirements.
a Corporate income tax reductions or credits based on the net local content of outputs.
e Public procurement restrictions (e.g, foreign investors excluded as government suppliers

0
or subject to providing special guarantees).
Restrictions on imports of capital goods, spare parts, manufacturing inputs.
1 e Granting of income tax credits based on net value earned.

Import based incentives including:

m Restrictions/conditionson access to local raw materials, spare parts and inputs.
a Exemption from import duties on capital goods, equipment or raw materials, parts and
m Restrictions on long term leases of land and real property. inputs related to the production process.
Restrictions to relocate operations within the country. t
t
a Tax credits for duties paid on imported materials or supplies.
e Restrictions to diversify operations. I1 Export based incentives including:
a Restrictions on access to telecommunications networks.
a Exemptions from export duties.
Restrictions on the free flow of data.
1
1 a Preferential tax treatment of income from exports.
Operation restrictions relating to monopolies or participation in public conipanies (e.g.
a Income tax reduction for special foreign exchange earning activities or for manufactured
obligation to provide a public service at a certain price).
exports.
Restriction on access to local credit facilities.
a Tax credits on domestic sales in return for export performance.
a Restrictions on access to foreign exchange (e.g. to pay for foreign finance, imports of
a Duty drawbacks.
goods and services or remitting profits).
a Income tax credits on net local content of exports.
a Restrictions on repatriation of capital and profits (case by case approval, additional
taxation or remittances, phase out of transfers over a number of years). Deduction of overseas expenditures and capital allowance for export industries.
"Cultural" restrictions, mainly in relation to educational media services.
Financial incentives, including:
e Disclosure of information requirements (e.g. on the foreign operations of a TNC).
e Direct subsidies to cover (part of) capital, production or marketing costs in relation to an
a Special operational requirements on foreign firms in certain sectors/activities (e.g. on investment project
branches of foreign banks).
Subsidized loans
a Operational permits and licences (e.g. to transfer funds).
I e Loan guarantees
Special requirements on professional qualifications, technical standards.
I a Guaranteed export credits

l
Advertising restrictions for foreign firms.
a Publicly funded venture capital participating in investments involving high commercial
a Ceilings on royalties and technical assistance fees or special taxes. risks.
Limits on the use of certain technologies (e.g. territorial restrictions), brand names, etc. or . Government insurance at preferential rates, usually available td cover certain types of
case-by-case approval and conditions. risks such as exchange rate volatility, currency devaluation, or non commercial risks such
as expropriation and political turmoil (often provided through an international agency).
o Rules of origin, tracing requirements.

0 Linking local production to access or establishmentof distribution facilities. Other Incentives, including:
Operational restrictions related to national security, public order, public morals etc. a Subsidized dedicated infrastructure
1
a Subsidized services, including assistance in identifying sources of finance, implementing
Main of incentive measures offered to foreigninvestors:
and managing projects, carrying out pre-investment studies, information on markets,
availability of raw materials and supply of infrastructure, advice on production processes
Fiscal Incentives, including:
and marketing techniques, assistance with training and retraining, technical facilities for
Reduction of the standard corporate income tax rate. developing know how or improving quality control.
e Tax holidays. Preferential government contracts
Allowing losses incurred during the holiday period to be written off against future profits. Closing the market to further entry or the granting of monopoly rights
Accelerated depreciation allowance on capital taxes, Protection from import competition
Investment and reinvestment allowances. Special treatment with respect to foreign exchange, including special exchange rates, ,
Reductions in social security contributions. special foreign debt-t5-eqbity conversion rates, elimination of exchange risks on foreign '
loans, concessions of foreign exchange credits for export earnings, and special conces-
a '~eductionsfrom taxable earnings based on the number of employees or on other labour sions an the repatriation of earnings and capital.
related expenditures,
0 Corporate income tax deductions based on, for exarrqile, expendituresrelating to marketing
and promotional activities.
 International Investment
Glnl~aIiaation:Process Investment related trade measures Table 6.4 Foreign Direct Investment Inflows
and Forces

Apart from incentives, the symbiotic relationship between FDI and trade creates the potential
for the volume, sectoral composition and geographical distribution of FDI to be affected by I ([Link] crores)

various trade measures which have already been discussed.

6.6.4 Multilateral Investment Guarantee Agency (MIGA)

I Name of Countries

Mauritius
1994-95

617.7
195%

1,697.O
1996-97

3,004.7
1997-98

3,346.3
1998-99

2,4822
USA 636.9 650.9 857.6 2,554.7 1,904.9
The International Bank for Reconstruction and Development or the World Bank wanted to
promote foreign direct investment flows specially to developing countries. The MIGA was
therefore established by the,WorldBank in 1988 with a specialized mandate to: (a) encourage
II Japan
Netherlands
298.1
140.2
203.8
166.7
343.3
439.3
607.5
590.5
989.0
224.2
equity investment and other direct investment flows to developing countries through the
mitigation of non-commercial risks; (b) advicedevelopingmember governments on the
i Germany 108.5 333.6 589.9 562.7 477.7
I
design, implementation of policies, programmes and procedures to related foreign invest-
ments; and (c) sponsor a dialogue between the international business community and host I U.K. 450.5 237.1 192.4 467.7 N.A.
government on investment issues. I Hongkong 67.1 334.6 147.4 231.8 N.A.
Singapore 76.8 201.1 268.4 N.A. N.A.
One hundred thirty four countries have become members of MIGA by 1996. Twenty are
developing countries and countries in transition have applied for membership. India had France 44.6 210.9 N.A. N.A. N.A.
ratified MIGA in 1995. Total 2738.0 4,743.O 7,312.0 . 10985.9 8,414.3

6.7 FDI IN INDIA

I Source: Statistical Outline of India 1999-2000.

The sectorwise analysis of FDI inflows shows that during the year 1998-99 engineering
sector continued to remain at the top of the list among the FDI recipients followed by the
India had a selective foreign direct investment policy since its independence. It wanted FDI chemicals and allied products. Services sector were the third and Electronics and Electrical
mainly as a source of supply of technology. While the Government of India considered aid as equipment were the fourth largest recipients of FDI for the year,[Link] at Table 6.5
the main form of capital inflow FDI flow into India was very limited. Since 1991, India has which shows sector-wise FDI inflows.
liberalized its FDI policy. Several initiatives have been taken to enhance the flow of FDI into
the country. You will learn FDI policy in IBO-3. Let us analyse here the trends of FDI in India.

Look at Table 6.3 which shows inflows of foreign investments. There has been remarkable
,

I n b l e 6.5 Foreign Dimt Investment (Industry-wise)

progress in the inflows of foreign investment. The country has witnesstd significant gro3wth Sectors 1994-95 1995-96 I S 9 7 1997-98 1998-99
in the inflows upto the year 1996-97. The inflows of foreign investment have decelerated
during the year P997-98 and 1998-99. Electronics & Electronic Equipments 177.1 433.6 545.4 2,395.6 960.4
Engineering 413.2 842.5 2,592.2 2,155.1 1,799.1 .
Table 6.3 Foreign InvestmentFlows by Different Categories
Services 293.2' 336.0 53.9 1,194.1 1,550.3
(US$.Million) Chemicals & Allied Products 443.3 423.8 1,078.5 956.2 1,579.7
- Finance 306.9 903.3 770.4 549.7 777.6
'Year Direct Investment Portfolio Investment Total
Computers 32.0 174.3 208.4 517.2 446.7
lB1-92 . 129 4 133
Pharmaceuticals 31.7 183.2 169.0 125.6 119.6

Total 2,738.0 4,743.0 7,312.0 10,985.9 8,414,3

Source: Statistical Outline of India, 1999-2000.
1%95 1314 3824 51318
1995-96 2144 2748 48% Check Your Progress C
1!996-97
1!WI-98
2821
3557
3312
1828
. 6133
5385
1 1) Write three fiscal incentives offered to foreign investors.

15B8-99
- 2462 -61
Source: Economic survey, 1999-2000,Government of India.
. 2401
P

Th~ecountywise analysis of FDI inflows shows that Mauritius continued to be the 1:argest
source of FDI inflows followed by the USA for the year [Link] has been su'bstantial
decline in inflows from these sources for the last two years. Japan, Italy and Germal,ly were
the third, fourth and fifth largest sources of FDI in the year [Link] at Table 6.4 which
shctu*scountry wise FDI inflows.
 Glohnlizntion: Process International Investment
2) Write 3 financial incentives offered to foreign investors.
and Forces 6.9 KEYWORDS
..............................................................................................................
Foreign Direct Investment (FDI): It is expected to occur when an investor based in one
.............................................................................................................. country (the home country) acquires assets in another country (the host country) with an
interest to manage the assets.

Portfolio Investment: It is an investment made by the foreigner in stocks, bonds and other
.............................................................................................................. financial investment.
3) What is Multilateral Investment Guarantee Agency? Most Favo~~red Nation Treatment: Non Discriminatory treatment to be accorded by the
................................I..................*.......*..........................,...*..,.......*....,...
government of host country to all foreign enterprises - regardless of country of origin.

.............................................................................................................. National Treatment: Equal treatment by the government of host country to all enterprises,
domestic and foreign.

Multilateral Agreement: An agreement signed by a large number of countries wherein rules

are agreed upon by all of them.

4) State whether following statements are Ykue or False. Bilateral Agreement: Agreement signed by only two countries which agree to observe rules
between them which may not apply to other countries.
i) Reduction of the standard corporate income tax rate is an example of
financial incentives. Non Commercial Risks: Risks created by factors beyond the control of investor. This
includes nationalization of assets by the host government, fire, earthquakes etc.
ii) Subsidised loan is an example of fiscal incentive.
iii) One hundred thirty four countries have become members of MIGA by 1996. Cross Border Mergers and Acquisitions: They are a popular mode of investment for firms
iv) Mauritius is the largestsource ofFDI inflow in india in the year 1998-99. wishing to protect, consolidate their global conpetitiveness by relling off divisions that fall
'
outside the scope of their core competence and acquiring strategic assets in firms in other
v) Services are the largest recipient of FDI in the year 1998-99. countriks that enhance their competitiveness.

6.8 LET US SUM UP 6.10 ANSWERS TO CHECK YOUR PROGRESS

The role of Foreign Direct Investment in the economies has grown substantially over the last . A4 i) True ii) False iii) True iv) False v) T N ~
fifteen years in developed and developing countries and economies in4ransition. The growth
'has been tremendous. Many developing countries are the beneficiaries of this inflow. This B3 i) False ii) True iii) True iv) False v).True
group of countries, however, is very small in number. The growth in global flow of FDI is
also attributed to tremendous expansion of cross border mergers and acquisitions. There is C3 i) False ii) False iii) True iv) True v) False
considerable controversy regarding FDI and economic development of host countries,
specially developing countries. Some argue that FDI has apositive impact on balance of
payments and expands exports, supplies needed capital, technology and management skills. 6.11 TERMINAL QUESTIONS
They also argue that it leads to efficient allocation of resources of the host country. It
increases employment. Critics of FDI argue that the positive balance of payments effects nre I) Evaluate the advantages and disadvantages of FDI. What is your opinion on the
temporay and ultimately lead to a negative impact. The FDI also uses domestic capital and role of FDI in the economic development of the host country.
deprives domestic enterprises of needed capital. They do not provide any additional employ-
ment. FDI encourages a monopolistic and oligopolistic competition. 2) Distinguish between foreign direct investment and portfolio investment.

The consensus now is that FDI is very positive and promotes development. Restrictions on 3) What do you understand by Trade Related Investment Measures? What are the
FDI by national governments deters the free flow of FDI. The first step is to remove all provisions of TRIMS under Marrnkesh Agreement?
restrictions which are trade related. In other words, Trade Related Investment Measures must
not be used by the host country. Now under the Marrakesh agreement, signatories are 4) Briefly describe the proposed Multilateral Investment Agreement.
expected to remove all such measures by 2000 AD. Further, it is felt that there is need for
multilaterally Agreed Investment rules. They include MFN, national treatment, right of 5) Do you think that there is a need for MIA? Give reasons. Describe the main
establishment, use of expatriates etc. This rule must be multilaterally agreed to by all coun- elements of the proposed MIA.
tries. The OECD is negotiating one such agreement. But it is expected to be considered by
the WTO. MIGA is an affiliate of the World Bank which provides for mitigation of non- 6) Describe the trends of FDI in India.
commercial risks of foreign investors. India has given up its traditional restrictive FDI policy.
India has now liberalized its foreign investment policy andis aparty to Marrakesh agreemen
where it has accepted all the provisions of intellectual property rights.

32