MNC Eco Notes

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pndtw0\charscalex93 \ul0\nosupersub\cf2\f3\fs34 UNIT 18
MULTINATIONAL \par\
pard\qj \li3129\ri3589\sb19\sl-380\slmult0 \up0 \expndtw0\charscalex97 CORPORATI
ONS AND FOREIGN \up0 \expndtw0\charscalex98 CAPITAL \par\pard\ql \li1546\sb0\sl253\slmult0 \par\pard\ql\li1546\sb12\sl-253\slmult0 \up0 \expndtw-3\charscalex10
0 \ul0\nosupersub\cf3\f4\fs23 Structure \par\pard\li1546\sb120\sl-264\slmult0\fi
0\tx2224 \up0 \expndtw-3\charscalex100 \ul0\nosupersub\cf1\f2\fs23 18.0\tab \up0
\expndtw-3\charscalex100 Objectives\par\pard\li1546\sb34\sl-264\slmult0\fi0\tx2
224 \up0 \expndtw-3\charscalex100 18.1\tab \up0 \expndtw-3\charscalex100 Introdu
ction\par\pard\li1546\sb35\sl-264\slmult0\fi0\tx2224 \up0 \expndtw-3\charscalex1
00 18.2\tab \up0 \expndtw-3\charscalex100 Capital Transfers and Economic Growth\
par\pard\ql \li2224\sb18\sl-218\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosup
ersub\cf4\f5\fs19 18.2.1 Savings Gap \par\pard\ql \li2224\sb43\sl-218\slmult0
\up0 \expndtw-2\charscalex100 18.2.2 Trade Gap or Foreign Exchange Gap \par\pa
rd\ql \li2224\sb43\sl-218\slmult0 \up0 \expndtw-1\charscalex100 18.2.3 Technol
ogical Gap \par\pard\li1546\sb41\sl-264\slmult0\fi0\tx2225 \up0 \expndtw-3\chars
calex100 \ul0\nosupersub\cf1\f2\fs23 18.3\tab \up0 \expndtw-3\charscalex100 Type
s of Foreign Capital\par\pard\ql \li2224\sb19\sl-218\slmult0 \up0 \expndtw-2\cha
rscalex100 \ul0\nosupersub\cf4\f5\fs19 18.3.1 Sources of Private Foreign Capit
al \par\pard\ql \li2224\sb43\sl-218\slmult0 \up0 \expndtw-1\charscalex100 18.3.2
Types of FDI \par\pard\ql \li1546\sb54\sl-253\slmult0\tx2224 \up0 \expndtw-3\
charscalex100 \ul0\nosupersub\cf1\f2\fs23 18.4 \tab \up0 \expndtw-3\charscalex10
0 Multinational Corporations \par\pard\ql \li2224\sb36\sl-218\slmult0 \up0 \expn
dtw-3\charscalex100 \ul0\nosupersub\cf4\f5\fs19 18.4.1 Characteristics of Mult
inational Corporations \par\pard\ql \li2224\sb23\sl-218\slmult0 \up0 \expndtw-3\
charscalex100 18.4.2 Importance and Significance of MNCs \par\pard\ql \li2224\
sb43\sl-218\slmult0 \up0 \expndtw-2\charscalex100 18.4.3 Need for Regulation o
f MNCs \par\pard\li1546\sb45\sl-264\slmult0\fi0\tx2224 \up0 \expndtw-2\charscale
x100 \ul0\nosupersub\cf1\f2\fs23 18.5\tab \up0 \expndtw-2\charscalex100 Foreign
Capital in India\par\pard\li1546\sb36\sl-218\slmult0\fi677 \up0 \expndtw-1\chars
calex100 \ul0\nosupersub\cf4\f5\fs19 18.5.1 Government Policy towards Foreign
Capital\par\pard\li1546\sb37\sl-218\slmult0\fi677 \up0 \expndtw-1\charscalex100

18.5.2 Policy Changes 1991-2005\par\pard\li1546\sb35\sl-264\slmult0\fi0\tx2224
\up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf1\f2\fs23 18.6\tab \up0 \expndt
w-2\charscalex100 Critical Evaluation of the New Policy\par\pard\li1546\sb36\sl218\slmult0\fi677 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf4\f5\fs19 18.6
.1 Points of Concern to Foreign Investors\par\pard\li1546\sb36\sl-218\slmult0\
fi677 \up0 \expndtw-1\charscalex100 18.6.2 Criticism of Inflows and Need for C
orrective Action\par\pard\li1546\sb37\sl-218\slmult0\fi677 \up0 \expndtw-1\chars
calex100 18.6.3 Suggestions\par\pard\li1546\sb37\sl-264\slmult0\fi0\tx2224 \up
0 \expndtw-2\charscalex100 \ul0\nosupersub\cf1\f2\fs23 18.7\tab \up0 \expndtw-2\
charscalex100 Let Us Sum Up\par\pard\li1546\sb35\sl-264\slmult0\fi0\tx2224 \up0
\expndtw-2\charscalex100 18.8\tab \up0 \expndtw-2\charscalex100 Exercises\par\pa
rd\li1546\sb33\sl-264\slmult0\fi0\tx2225 \up0 \expndtw-2\charscalex100 18.9\tab
\up0 \expndtw-2\charscalex100 Key Words\par\pard\ql \li1546\sb27\sl-253\slmult0
\up0 \expndtw-2\charscalex100 18.10 Some Useful Books \par\pard\ql \li1546\sb47
\sl-253\slmult0 \up0 \expndtw-4\charscalex100 18.11 Answers or Hints to Check Y
our Progress Exercises \par\pard\ql \li1546\sb270\sl-322\slmult0 \up0 \expndtw-1
0\charscalex100 \ul0\nosupersub\cf5\f6\fs28 18.0
OBJECTIVES \par\pard\ql \l
i1546\sb135\sl-253\slmult0 \up0 \expndtw-3\charscalex100 \ul0\nosupersub\cf1\f2\
fs23 After reading this unit, you shall be able to: \par\pard\qj \li1546\ri3405\
sb142\sl-260\slmult0\tx1899 \up0 \expndtw0\charscalex106 \u8226? state the rol
e of foreign capital in the growth process of a developing \line\tab \up0 \expnd
tw-3\charscalex100 economy; \par\pard\ql \li1546\sb126\sl-253\slmult0 \up0 \expn
dtw-2\charscalex100 \u8226? differentiate between different types and sources
of foreign capital; \par\pard\qj \li1546\ri3403\sb142\sl-260\slmult0\tx1899 \up0
\expndtw0\charscalex100 \u8226? explain the nature of multinational corpor
ations and their role in the \line\tab \up0 \expndtw-3\charscalex100 process
of economic growth; \par\pard\qj \li1546\ri3403\sb120\sl-260\slmult0\tx1899 \up
0 \expndtw0\charscalex106 \u8226? describe the different phases in the growth
of Government of India\u8217?s \line\tab \up0 \expndtw-3\charscalex100 policy to
wards foreign capital; \par\pard\qj \li1546\ri3404\sb120\sl-260\slmult0\tx1899 \
up0 \expndtw0\charscalex105 \u8226? explain the changes in the policy towards
foreign capital in the recent \line\tab \up0 \expndtw-3\charscalex100 years; and
\par\pard\qj \li1546\ri3404\sb140\sl-260\slmult0\tx1899 \up0 \expndtw-1\charsca
lex100 \u8226? identify the weaknesses in the government policy and ma
ke relevant \line\tab \up0 \expndtw-2\charscalex100 suggestions in this regard.
\par\pard\ql \li10565\sb0\sl-253\slmult0 \par\pard\ql\li10565\sb0\sl-253\slmult
0 \par\pard\ql\li10565\sb60\sl-253\slmult0 \up0 \expndtw-3\charscalex100 47
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}}\par\pard\sect\sectd\fs24\paperw12240\paperh15840\pard\sb0\sl-240{\bkmkstart P
g2}{\bkmkend Pg2}\par\pard\sect\sectd\sbknone\cols2\colno1\colw3419\colsr160\col
no2\colw8521\colsr160\ql \li1467\sb0\sl-195\slmult0 \par\pard\ql \li1467\sb0\sl195\slmult0 \par\pard\ql \li1467\sb38\sl-195\slmult0 \up0 \expndtw-2\charscalex1
00 \ul0\nosupersub\cf6\f7\fs17 Sectoral Performance-III\par\pard\ql \li1546\sb0\
sl-264\slmult0 \par\pard\ql \li1546\sb0\sl-264\slmult0 \par\pard\ql \li1546\sb0\

sl-264\slmult0 \par\pard\ql \li1546\sb0\sl-264\slmult0 \par\pard\ql \li1546\sb13
\sl-264\slmult0 \up0 \expndtw-3\charscalex100 \ul0\nosupersub\cf1\f2\fs23 48\par
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lt0 \up0 \expndtw-9\charscalex100 \ul0\nosupersub\cf5\f6\fs28 18.1
INTRODUC
TION\par\pard\qj \li20\ri1326\sb140\sl-259\slmult0 \up0 \expndtw0\charscalex104
\ul0\nosupersub\cf1\f2\fs23 Spread of information technology and recent technolo
gical advances have \up0 \expndtw0\charscalex102 opened up the economies the
world over as never before, and, hence, \up0 \expndtw0\charscalex100 inc
reasing multinational role for enterprise and capital. For a developing \u
p0 \expndtw0\charscalex107 economy, it is all the more critical, as it is requir
ed to fill: (i) investment \up0 \expndtw0\charscalex101 saving gap, \up0 \expnd
tw0\charscalex103 (ii) technology gap, and \up0 \expndtw0\charscalex103 (iii)
foreign exchange gap. But\par\pard\qj \li20\ri1327\sb0\sl-260\slmult0 \up0
\expndtw0\charscalex103 unregulated flow of foreign enterprise and capital
may go against the \line \up0 \expndtw-2\charscalex100 economic interests o
f sovereign nations, and, hence, the need for regulations.\par\pard\qj \li20\ri1
326\sb113\sl-259\slmult0 \up0 \expndtw0\charscalex103 Till 1991, India allowed
selective foreign investment in collaboration with \up0 \expndtw0\charscalex102
domestic enterprise; the majority control was preferred to be with the
\up0 \expndtw-1\charscalex100 residents. Beginning with July, 1991, there has b
een a change in the policy. A \up0 \expndtw-1\charscalex100 large number of high
-tech areas have been left open to foreign investment that \up0 \expndtw-2\chars
calex100 has come to be regarded as a better vehicle of capital inflows than loa
ns.\par\pard\qj \li20\ri1327\sb113\sl-259\slmult0 \up0 \expndtw0\charscalex100 T
he response of foreign capital to policy initiatives can only be described as \u
p0 \expndtw0\charscalex104 mixed. Although proposals have been plenty, and appro
vals many, actual \up0 \expndtw0\charscalex105 inflows have been limited. In thi
s unit, we shall discuss the various issues \up0 \expndtw0\charscalex100 involve
d in the foreign capital and role of MNCs in this regard. Let us begin \up0 \exp
ndtw-3\charscalex100 with discussing the importance of foreign capital in econom
ic growth.\par\pard\ql \li20\sb257\sl-322\slmult0 \up0 \expndtw-2\charscalex100
\ul0\nosupersub\cf5\f6\fs28 18.2 CAPITAL TRANSFERS AND ECONOMIC\par\pard\ql \li
723\sb4\sl-322\slmult0 \up0 \expndtw-4\charscalex100 GROWTH\par\pard\qj \li20\ri
1327\sb141\sl-259\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf1\f2\f
s23 Inflow of capital from abroad is vital for the growth of a developing econom
y, \up0 \expndtw-2\charscalex100 especially in the initial stages of its economi
c development. Modern economic \up0 \expndtw0\charscalex103 history abounds with
examples of countries which have successfully drawn \up0 \expndtw0\charscalex10
3 upon the capital resources of the more advanced industrial countries for the \
up0 \expndtw-3\charscalex100 sake of economic development.\par\pard\qj \li20\ri1
328\sb113\sl-259\slmult0 \up0 \expndtw0\charscalex100 The role of foreign capita
l can be explained in terms of gap-filling functions. \up0 \expndtw-1\charscalex
100 Three such gaps can be identified, viz., (a) Savings gap, (b) Trade gap and
(c) \up0 \expndtw-1\charscalex100 Technology gap. The function of foreign capita
l is to fill these gaps and create \up0 \expndtw-3\charscalex100 conditions suit
able for fast economic growth.\par\pard\ql \li20\sb230\sl-299\slmult0 \up0 \expn
dtw-9\charscalex100 \ul0\nosupersub\cf7\f8\fs26 18.2.1
Savings Gap\par\pard
\qj \li20\ri1326\sb113\sl-259\slmult0 \up0 \expndtw0\charscalex100 \ul0\nosupers
ub\cf1\f2\fs23 The key to the development problem lies in raising the
rate of capital \line \up0 \expndtw0\charscalex102 formation. Such a raise env
isages a much higher level of investment than is \line \up0 \expndtw-1\charscale
x100 warranted by the present level of savings in a developing economy. The scop
e \line \up0 \expndtw0\charscalex102 for a sharp rise in domestic savings is lim
ited by the prevailing low level of \line \up0 \expndtw0\charscalex104 income,

slow rates of growth and rising consumption needs in these \line \up0 \
expndtw-3\charscalex100 economies.\par\pard\ql \li20\ri1328\sb67\sl-316\slmult0
\up0 \expndtw0\charscalex100 The gap between investment requirements and domesti
c savings can be filled \up0 \expndtw-3\charscalex100 in by foreign capital. A l
ittle simple algebra will show why. \line \up0 \expndtw-3\charscalex100 The fund
amental proposition of national income accounting is that\par\pard\ql \li2652\sb
99\sl-264\slmult0 \up0 \expndtw-1\charscalex100 Y = C + I + (X - M)\par\pard\qj
\li20\ri1327\sb114\sl-259\slmult0 \up0 \expndtw0\charscalex104 Where Y = Gross n
ational product (total spending), C = Consumption, I = \up0 \expndtw0\charscalex
103 Investment, X = Exports of Goods and Services plus income received from \up0
\expndtw-3\charscalex100 abroad, and M = Imports of goods and services plus inc
ome paid abroad.\par\pard\qj \li20\ri1328\sb115\sl-259\slmult0 \up0 \expndtw0\ch
arscalex100 All this spending generates an identical flow of income (Y); this to
tal income \line \up0 \expndtw-1\charscalex100 equals total spending: of all inc
ome, some is consumed (C) and some is saved\par\pard\ql \li20\sb1\sl-260\slmult0
\up0 \expndtw-3\charscalex100 (S). Thus,
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no2\colw3237\colsr160\ql \li4642\sb0\sl-264\slmult0 \par\pard\ql \li4642\sb155\s
l-264\slmult0 \up0 \expndtw-3\charscalex100 \ul0\nosupersub\cf1\f2\fs23 Y = C +
S\par\pard\ql \li1546\sb110\sl-264\slmult0 \up0 \expndtw-3\charscalex100 Then, s
ince total spending equals that income, by substitution\par\pard\ql \li4000\sb10
9\sl-264\slmult0 \up0 \expndtw-1\charscalex100 C + I + (X - M) = C + S\par\pard\
qj \li1546\ri0\sb115\sl-259\slmult0 \up0 \expndtw0\charscalex100 From this equa
tion, we can, by simple manipulation, easily discover the \up0 \expndtw0\c
harscalex100 essential constraints on capital formation. Move (X - M) to to the
right hand, \up0 \expndtw-3\charscalex100 reversing its sign; cancel C on both s
ides. The result is\par\pard\ql \li4419\sb110\sl-264\slmult0 \up0 \expndtw0\char
scalex100 I= S + (M - X)\par\pard\qj \li1546\ri0\sb113\sl-259\slmult0 \up0 \expn
dtw0\charscalex100 The algebra is clear. A country\u8217?s investment opportunit
ies are determined by \up0 \expndtw0\charscalex106 its potential for domestic sa
ving plus any net capital inflows from abroad \up0 \expndtw0\charscalex100 (M >
X). The only way for imports to exceed exports is for the country to get \up0 \e
xpndtw-3\charscalex100 capital from abroad; M > X is thus equivalent to a capita
l inflow.\par\pard\qj \li1546\ri0\sb113\sl-259\slmult0 \up0 \expndtw0\charscalex
100 The availability of foreign capital increases the availability of total reso
urces \up0 \expndtw0\charscalex100 in the economy. The increase in total resourc
es helps a developing economy \up0 \expndtw-3\charscalex100 primarily in two way
s:\par\pard\qj \li1546\ri0\sb113\sl-259\slmult0 \up0 \expndtw0\charscalex105 \ul
0\nosupersub\cf3\f4\fs23 One\ul0\nosupersub\cf1\f2\fs23 , It influences investme
nt decisions. It makes possible construction of \up0 \expndtw0\charscalex102 man
y projects which would not have been possible otherwise. Certain \up0 \
expndtw0\charscalex100 programmes of development can give optimum results if all
the components \up0 \expndtw0\charscalex103 of the programme are undertaken sim
ultaneously in a phased manner. The \up0 \expndtw-2\charscalex100 availability o
f foreign capital makes this type of investment possible.\par\pard\qj \li1546\ri
0\sb114\sl-259\slmult0 \up0 \expndtw0\charscalex104 \ul0\nosupersub\cf3\f4\fs23
Two\ul0\nosupersub\cf1\f2\fs23 , establishment of bigger projects and projects w
ith a high investment \up0 \expndtw0\charscalex104 component open up new opportu

nities of investment and, thus, encourage \up0 \expndtw0\charscalex102 domestic
entrepreneurs and savers to supply their services and savings. The \up0 \expndtw
0\charscalex100 addition to the total volume of resources generated ther
eby exceeds the \up0 \expndtw-3\charscalex100 addition made by foreign resourc
es.\par\pard\ql \li1546\sb230\sl-299\slmult0 \up0 \expndtw-6\charscalex100 \ul0\
nosupersub\cf7\f8\fs26 18.2.2
Trade Gap or Foreign Exchange Gap\par\pard\qj
\li1546\ri0\sb114\sl-259\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\
cf1\f2\fs23 A developing economy is faced with two structural constraints: (i) a
minimum \up0 \expndtw0\charscalex104 requirement of inputs to sustain a given r
ate of growth of GNP, and (ii) an \up0 \expndtw-1\charscalex100 actual or potent
ial ceiling on export earnings which are insufficient to finance \up0 \expndtw-3
\charscalex100 the required imports.\par\pard\qj \li1546\ri0\sb113\sl-260\slmul
t0 \up0 \expndtw0\charscalex103 The foreign exchange gap, i.e., the difference b
etween the required imports \up0 \expndtw-3\charscalex100 and total exports is g
iven by\par\pard\ql \li2224\sb138\sl-264\slmult0 \up0 \expndtw0\charscalex100 M\
ul0\nosupersub\cf8\f9\fs15 n\ul0\nosupersub\cf1\f2\fs23 - X\ul0\nosupersub\cf8\
f9\fs15 n\ul0\nosupersub\cf1\f2\fs23 = M\ul0\nosupersub\cf8\f9\fs15 o\ul0\nosup
ersub\cf1\f2\fs23 + \u946? (V\ul0\nosupersub\cf8\f9\fs15 n\ul0\nosupersub\cf1\f
2\fs23 - V\ul0\nosupersub\cf8\f9\fs15 o\ul0\nosupersub\cf1\f2\fs23 ) - X\ul0\no
supersub\cf8\f9\fs15 o\ul0\nosupersub\cf1\f2\fs23 (1 + x)\ul0\super\cf8\f9\fs22
n\par\pard\ql \li1546\sb82\sl-264\slmult0 \up0 \expndtw-3\charscalex100 \ul0\no
supersub\cf1\f2\fs23 Where, M\ul0\sub\cf8\f9\fs23 o \ul0\nosupersub\cf1\f2\fs23
= Observed initial level of imports,\par\pard\ql \li2224\sb109\sl-264\slmult0 \u
p0 \expndtw-3\charscalex100 V\ul0\sub\cf8\f9\fs23 o\ul0\nosupersub\cf1\f2\fs23
= The GNP in the initial year,\par\pard\ql \li2249\sb110\sl-264\slmult0 \up0 \ex
pndtw0\charscalex100 V\ul0\sub\cf8\f9\fs23 n\ul0\nosupersub\cf1\f2\fs23 = V\ul0
\sub\cf8\f9\fs23 o\ul0\nosupersub\cf1\f2\fs23 (1 + r)\ul0\super\cf8\f9\fs22 n\u
l0\nosupersub\cf1\f2\fs23 , r being the compound growth rate and n the number\pa
r\pard\ql \li2779\sb0\sl-259\slmult0 \up0 \expndtw-3\charscalex100 of years afte
r o,\par\pard\ql \li2224\sb109\sl-264\slmult0 \up0 \expndtw-3\charscalex100 X\ul
0\sub\cf8\f9\fs23 o\ul0\nosupersub\cf1\f2\fs23 = The initial level of export,\p
ar\pard\ql \li2224\sb110\sl-264\slmult0 \up0 \expndtw-3\charscalex100 \u946? = T
he marginal rate of imports per additional unit of GNP,\par\pard\ql \li2224\sb10
9\sl-264\slmult0 \up0 \expndtw-3\charscalex100 r = Rate of growth of exports.\pa
r\pard\qj \li1546\ri0\sb114\sl-259\slmult0 \up0 \expndtw0\charscalex104 In a sit
uation where the foreign exchange gap is dominant, the total import \up0 \expndt
w-3\charscalex100 capacity, i.e.,\par\pard\ql \li2224\sb110\sl-264\slmult0 \up0
\expndtw-3\charscalex100 X\ul0\sub\cf8\f9\fs23 n\ul0\nosupersub\cf1\f2\fs23 = X
\ul0\sub\cf8\f9\fs23 o\ul0\nosupersub\cf1\f2\fs23 (1 + x)\ul0\super\cf8\f9\fs22
n\par\pard\ql \li1546\sb109\sl-264\slmult0 \up0 \expndtw-3\charscalex100 \ul0\n
osupersub\cf1\f2\fs23 will effectively set the limit to the increase in GNP.\par
lt0 \par\pard\ql \li20\sb63\sl-195\slmult0 \up0 \expndtw-2\charscalex100 \ul0\no
supersub\cf6\f7\fs17 Multinational Corporations\par\pard\ql \li570\sb4\sl-195\sl
mult0 \up0 \expndtw-2\charscalex100 and Foreign Capital\par\pard\ql \li10468\sb0
\sl-264\slmult0 \par\pard\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql \li10468\s
b0\sl-264\slmult0 \par\pard\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql \li10468
\sb0\sl-264\slmult0 \par\pard\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql \li104
68\sb0\sl-264\slmult0 \par\pard\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql \li1
0468\sb0\sl-264\slmult0 \par\pard\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql \l
i10468\sb0\sl-264\slmult0 \par\pard\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql
\li10468\sb0\sl-264\slmult0 \par\pard\ql \li10468\sb0\sl-264\slmult0 \par\pard\q
l \li10468\sb0\sl-264\slmult0 \par\pard\ql \li10468\sb0\sl-264\slmult0 \par\pard
\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql \li10468\sb0\sl-264\slmult0 \par\pa
rd\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql \li10468\sb0\sl-264\slmult0 \par\
pard\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql \li10468\sb0\sl-264\slmult0 \pa
r\pard\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql \li10468\sb0\sl-264\slmult0 \
par\pard\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql \li10468\sb0\sl-264\slmult0
\par\pard\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql \li10468\sb0\sl-264\slmul
t0 \par\pard\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql \li10468\sb0\sl-264\slm

ult0 \par\pard\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql \li10468\sb0\sl-264\s
lmult0 \par\pard\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql \li10468\sb0\sl-264
\slmult0 \par\pard\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql \li10468\sb0\sl-2
64\slmult0 \par\pard\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql \li10468\sb0\sl
-264\slmult0 \par\pard\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql \li10468\sb0\
sl-264\slmult0 \par\pard\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql \li10468\sb
0\sl-264\slmult0 \par\pard\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql \li10468\
sb0\sl-264\slmult0 \par\pard\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql \li1046
468\sb0\sl-264\slmult0 \par\pard\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql \li
10468\sb0\sl-264\slmult0 \par\pard\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql \
li1625\sb167\sl-264\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf1\f2
\fs23 49
}
}}
}

lt0 \up0 \expndtw0\charscalex107 The constraint will be more severe if any of th
e following two situations\par\pard\ql \li20\sb1\sl-260\slmult0 \up0 \expndtw-3\
charscalex100 obtains:\par\pard\qj \li20\ri1327\sb113\sl-259\slmult0 \up0 \expnd
tw-2\charscalex100 \ul0\nosupersub\cf3\f4\fs23 One\ul0\nosupersub\cf1\f2\fs23 ,
some \u8220?Strategic Goods\u8221? like capital equipment and technical know-how
, \line \up0 \expndtw0\charscalex100 etc. are not available locally and co
uld be procured only from external \line \up0 \expndtw-3\charscalex100 sour
ces.\par\pard\qj \li20\ri1327\sb114\sl-259\slmult0 \up0 \expndtw-1\charscalex100
\ul0\nosupersub\cf3\f4\fs23 Two\ul0\nosupersub\cf1\f2\fs23 , technical conditio
ns of industrialisation require a complement of foreign \up0 \expndtw-1\charscal
ex100 resources along with domestic resources, so that the latter would lie idle
if the \up0 \expndtw-3\charscalex100 former are not available.\par\pard\qj \li2
0\ri1327\sb114\sl-259\slmult0 \up0 \expndtw0\charscalex100 In either of the abov
e two situations, the availability of foreign exchange can \up0 \expndtw0\charsc
alex100 save an economy from an impasse in which it may find otherwise, and plac
e \up0 \expndtw0\charscalex104 at her disposal high quality factors such as impr
oved machinery, technical \up0 \expndtw0\charscalex104 know-how and qualified fo
reign technicians which may have a beneficial \up0 \expndtw0\charscalex100 effec
t on her development by, what Harrod called, \u8216?fertilising productivity of
\up0 \expndtw-3\charscalex100 common labour\u8217?.\par\pard\ql \li20\sb230\sl-2
99\slmult0 \up0 \expndtw-8\charscalex100 \ul0\nosupersub\cf7\f8\fs26 18.2.3
Technological Gap\par\pard\qj \li20\ri1324\sb113\sl-259\slmult0 \up0 \expndtw0\
charscalex103 \ul0\nosupersub\cf1\f2\fs23 The role of technology in bringing abo
ut economic growth is obvious. The \line \up0 \expndtw0\charscalex103 level of t
echnology in a developing economy can be raised through: (a) the \line \up0 \exp
ndtw0\charscalex100 internal evolutionary process of education, research, traini
ng and experience, \line \up0 \expndtw-1\charscalex100 or (b) the external proce
ss of importing from other countries. In respect of the \line \up0 \expndtw0\cha
rscalex104 import of technology, contemporary developing countries have the adde
d \line \up0 \expndtw-1\charscalex100 \u8220?advantages of the latecomers\u8221?
. This has received much attention lately. Since \line \up0 \expndtw0\charscalex
102 development has actually proceeded in the rest of the world, these countries
\line \up0 \expndtw0\charscalex103 have a rather whole range of technology to c
hoose from and do not have to \line \up0 \expndtw0\charscalex102 repeat the proc
ess of evolving it. The import of technology, however, raises \line \up0 \expndt
w0\charscalex100 two issues, viz., (a) the choice of technology and (b) local ad
aptation. The act \line \up0 \expndtw0\charscalex103 of choosing a particularly
technology is dependent on the state of domestic \line \up0 \expndtw0\charscalex
100 complementary research. Only then a country will be able to know
the \line \up0 \expndtw0\charscalex100 quantity and quality of the know-how to b
e imported and the price to be paid \line \up0 \expndtw0\charscalex104 for it. A
daptation of technology contemplates that the process of import of \line \up0 \e
xpndtw0\charscalex100 technology should be accompanied by indigenous research an
d development. \line \up0 \expndtw0\charscalex102 Analogous to technology gap is
a gap in management, entrepreneurship and \line \up0 \expndtw0\charscalex100 sk
ill. Foreign capital can supply a \u8220?package\u8221? of needed resources that
can be \line \up0 \expndtw0\charscalex102 transferred to their local counterpar
ts by means of training programmes and \line \up0 \expndtw-3\charscalex100 the p
rocess of learning by doing.\par\pard\qj \li20\ri1326\sb114\sl-259\slmult0 \up0
\expndtw0\charscalex102 To sum up, foreign capital touches three sensitiv
e areas crucial in the \up0 \expndtw0\charscalex100 development strategy of

a developing country. It is almost true to say that the \up0 \expndtw0\charscale
x106 growth, at least in the initial stages, in the present times cannot be a se
lf-\line \up0 \expndtw-1\charscalex100 generating process. Indeed, with a sole d
ependence on the domestic resources, \up0 \expndtw0\charscalex106 it may be diff
icult to breach the vicious circle within which a developing \up0 \expndtw-3\cha
rscalex100 country is usually caught.\par\pard\ql \li20\sb110\sl-264\slmult0 \up
0 \expndtw-3\charscalex100 \ul0\nosupersub\cf3\f4\fs23 Check Your Progress 1\par
\pard\ql \li20\sb109\sl-264\slmult0 \up0 \expndtw-2\charscalex100 Note:\ul0\nosu
persub\cf1\f2\fs23 i) Space is given below each question for your answer.\par\
pard\ql \li605\sb109\sl-264\slmult0 \up0 \expndtw-2\charscalex100 ii) Check your
answer(s) with those given at the end of the unit.\par\pard\qj \li20\ri1330\sb1
13\sl-259\slmult0\tx382 \up0 \expndtw0\charscalex103 1) What do you mean by sav
ing gap? How foreign capital helps to fill this \line\tab \up0 \expndtw-3\charsc
alex100 gap?\par\pard\qj \li372\ri1372\sb21\sl-372\slmult0 \up0 \expndtw-3\chars
calex100 \u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\
u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u82
30?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?... \line \up0 \expndtw-3\ch
arscalex100 \u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u823
0?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\
u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?... \line \up0 \expndtw-3
\charscalex100 \u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u
8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u823
0?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?...
}
}}
}
l-264\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf1\f2\fs23 2) Expl
ain the gap-filling functions of foreign capital.\par\pard\qj \li1899\ri17\sb20\
sl-372\slmult0 \up0 \expndtw-3\charscalex100 \u8230?\u8230?\u8230?\u8230?\u8230?
\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8
230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230
?\u8230?... \line \up0 \expndtw-3\charscalex100 \u8230?\u8230?\u8230?\u8230?\u82
30?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?
\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8
230?\u8230?... \line \up0 \expndtw-3\charscalex100 \u8230?\u8230?\u8230?\u8230?\
u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u82
30?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?
\u8230?\u8230?...\par\pard\ql \li1899\sb90\sl-264\slmult0 \up0 \expndtw-3\charsc
alex100 \u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u
8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u823
0?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?...\par\pard\ql \li1546\ri17\
sb20\sl-372\slmult0\tx1899\tx1899\tx1899\tx1899 \up0 \expndtw-1\charscalex100 3)
Explain the nature of technology gap faced by a developing economy. \line\tab
\up0 \expndtw-3\charscalex100 \u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\
u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u82
30?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?... \li
ne \tab \up0 \expndtw-3\charscalex100 \u8230?\u8230?\u8230?\u8230?\u8230?\u8230?
\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8
230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230
?... \line \tab \up0 \expndtw-3\charscalex100 \u8230?\u8230?\u8230?\u8230?\u8230
?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u
8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u823
0?\u8230?... \line \tab \up0 \expndtw-3\charscalex100 \u8230?\u8230?\u8230?\u823
0?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\
u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u82
30?\u8230?\u8230?...\par\pard\ql \li1546\sb240\sl-322\slmult0 \up0 \expndtw-7\ch
arscalex100 \ul0\nosupersub\cf5\f6\fs28 18.3
TYPES OF FOREIGN CAPITAL\par\p
ard\qj \li1546\ri0\sb139\sl-260\slmult0 \up0 \expndtw0\charscalex104 \ul0\nosupe
rsub\cf1\f2\fs23 The inflow of capital from abroad may take place either in the
form of: (a) \up0 \expndtw-3\charscalex100 foreign aid, or (b) private investmen
t.\par\pard\qj \li1546\ri0\sb113\sl-259\slmult0 \up0 \expndtw0\charscalex104 For
eign aid includes loans and grants from foreign governments and \up0 \e
xpndtw0\charscalex100 institutions. This source of foreign capital, especially l
oans, has an important \up0 \expndtw-3\charscalex100 limitation in the form of r
epayment obligations.\par\pard\qj \li1546\ri0\sb113\sl-259\slmult0 \up0 \expndtw
0\charscalex104 As regards private foreign capital investment, the intense acade
mic debate \up0 \expndtw0\charscalex103 relating to its effects remains inc
onclusive. The \ul0\nosupersub\cf3\f4\fs23 opponents\ul0\nosupersub\cf1\f2\fs2
3 of foreign \up0 \expndtw0\charscalex100 investment have drawn attention to
several imperfections and adverse effects, \up0 \expndtw0\charscalex105 such as
capital intensity of such investment, inappropriate technology, the \up0 \expndt
w0\charscalex100 possible adverse effects on income distribution, transfer
pricing and the \up0 \expndtw0\charscalex107 negative contribution that such
investment often makes to the balance of \up0 \expndtw0\charscalex106 payments.
The \ul0\nosupersub\cf3\f4\fs23 advocates\ul0\nosupersub\cf1\f2\fs23 of foreig
n investment, on the other hand, have \up0 \expndtw0\charscalex107 highlighted
the beneficial effects in terms of encouragement to the \up0 \expndtw0\c
harscalex100 development of technology, managerial expertise, integration with t
he world \up0 \expndtw0\charscalex108 economy, exports and higher growth. It has
also been claimed that debt \up0 \expndtw0\charscalex100 financing generates f
ixed debt servicing obligations, while equity needs to be \up0 \expndtw-3\charsc
alex100 serviced only after profits are made.\par\pard\qj \li1546\ri0\sb113\sl-2
59\slmult0 \up0 \expndtw-1\charscalex100 There is also sufficient empirical evid
ence to support both points of view. For \up0 \expndtw0\charscalex100 example,
in recent years, foreign investment seems to have contributed \up0 \expn
dtw0\charscalex100 enormously to the growth of several Asian countries, includin
g China. There \up0 \expndtw0\charscalex104 are examples, particularly from
Latin America and Africa, where the \up0 \expndtw-3\charscalex100 contribut
ion of foreign investment has not been so encouraging.\par\pard\ql \li1546\sb230
\sl-299\slmult0 \up0 \expndtw-6\charscalex100 \ul0\nosupersub\cf7\f8\fs26 18.3.1
Sources of Private Foreign Capital\par\pard\ql \li1546\sb109\sl-264\slmult
0 \up0 \expndtw0\charscalex101 \ul0\nosupersub\cf1\f2\fs23 The two important
sources of foreign private capital are: \up0 \expndtw-1\charscalex100 (a)
Portfolio\par\pard\qj \li1546\ri0\sb1\sl-259\slmult0 \up0 \expndtw-1\charscalex1
00 Investment and (b) Direct Business Investment, also known as Foreign Direct \
up0 \expndtw-3\charscalex100 Investment (FDI).\par\pard\ql \li1546\sb110\sl-264\
slmult0 \up0 \expndtw0\charscalex100 a) \ul0\nosupersub\cf3\f4\fs23 Portfolio I

nvestment\par\pard\ql \li1899\sb109\sl-264\slmult0 \up0 \expndtw-3\charscalex100
\ul0\nosupersub\cf1\f2\fs23 It comprises the following:\par\pard\ql \li1899\sb1
10\sl-264\slmult0 \up0 \expndtw0\charscalex100 i) Equity holdings by non-reside
nts in the recipient country\u8217?s joint stock\par\pard\ql \li2224\sb1\sl-259\
slmult0 \up0 \expndtw-3\charscalex100 companies,\par\pard\ql \li1899\sb109\sl-26
4\slmult0 \up0 \expndtw0\charscalex100 ii) Creditor capital from private so
urces abroad invested in recipient\par\pard\ql \li2224\sb0\sl-260\slmult0 \u
p0 \expndtw-3\charscalex100 country\u8217?s joint stock companies, and\par\pard\
column \ql \li8863\sb0\sl-195\slmult0 \par\pard\ql \li8863\sb0\sl-195\slmult0 \p
ar\pard\ql \li20\sb63\sl-195\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosupers
ub\cf6\f7\fs17 Multinational Corporations\par\pard\ql \li570\sb4\sl-195\slmult0
\up0 \expndtw-2\charscalex100 and Foreign Capital\par\pard\ql \li10468\sb0\sl-26
4\slmult0 \par\pard\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql \li10468\sb0\sl264\slmult0 \par\pard\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql \li10468\sb0\s
l-264\slmult0 \par\pard\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql \li10468\sb0
\sb167\sl-264\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf1\f2\fs23
51
}
}}
}
}}
}
}}
}
\pard\column \ql \li3931\sb0\sl-264\slmult0 \par\pard\ql \li372\sb155\sl-264\slm

ult0 \up0 \expndtw0\charscalex100 iii) Creditor capital from official sources in
recipient country\u8217?s joint stock\par\pard\ql \li697\sb1\sl-260\slmult0 \up
0 \expndtw-3\charscalex100 companies.\par\pard\ql \li20\sb109\sl-264\slmult0 \up
0 \expndtw-1\charscalex100 b)\ul0\nosupersub\cf3\f4\fs23 Foreign Direct Invest
ment\par\pard\ql \li372\sb110\sl-264\slmult0 \up0 \expndtw-3\charscalex100 \ul0\
nosupersub\cf1\f2\fs23 There are three main categories of FDI:\par\pard\ql \li37
2\sb109\sl-264\slmult0 \up0 \expndtw0\charscalex106 i) \ul0\nosupersub\cf3\f4\fs
23 Equity Capital:\ul0\nosupersub\cf1\f2\fs23 It is the value of the Multina
tional Corporations\par\pard\ql \li697\sb0\sl-259\slmult0 \up0 \expndtw-1\charsc
alex100 (MNCs) investment in shares of an enterprise in a foreign country. An\pa
r\pard\ql \li697\sb1\sl-260\slmult0 \up0 \expndtw0\charscalex103 equity capital
stake of 10 per cent or more of the ordinary shares or\par\pard\ql \li697\sb1\sl
-259\slmult0 \up0 \expndtw0\charscalex107 voting power in an incorporated enterp
rise or its equivalent in an\par\pard\ql \li697\sb1\sl-260\slmult0 \up0 \expndtw
0\charscalex102 unincorporated enterprise is normally considered a threshold for
the\par\pard\ql \li697\sb0\sl-259\slmult0 \up0 \expndtw0\charscalex107 control
of assets. This category includes both mergers and\par\pard\qj \li372
\ri1330\sb0\sl-373\slmult0\fi325 \up0 \expndtw-2\charscalex100 acquisitions, and
green field investment (the creation of new facilities). \line \up0 \expndtw-1\
charscalex100 ii) \ul0\nosupersub\cf3\f4\fs23 Reinvested Earnings:\ul0\nosupers
ub\cf1\f2\fs23 These are the MNC\u8217?s share of affiliate earnings\par\pard\q
l \li697\sb0\sl-207\slmult0 \up0 \expndtw0\charscalex102 not distributed as divi
dends or remitted to the MNCs. Such retained\par\pard\ql \li697\sb0\sl-207\slmul
t0 \up0 \expndtw-3\charscalex100 profits by affiliates are assumed to be reinves
ted in the affiliate.\par\pard\ql \li372\sb102\sl-264\slmult0 \up0 \expndtw0\cha
rscalex104 iii) \ul0\nosupersub\cf3\f4\fs23 Other Capital:\ul0\nosupersub\cf1\f2
\fs23 It refers to short-term or long-term borrowing and\par\pard\ql \li697\sb0
\sl-259\slmult0 \up0 \expndtw-3\charscalex100 lending of funds between the MNCs
and the affiliate.\par\pard\ql \li20\sb231\sl-299\slmult0 \up0 \expndtw-9\charsc
alex100 \ul0\nosupersub\cf7\f8\fs26 18.3.2
Types of FDI\par\pard\qj \li20\r
i1328\sb112\sl-260\slmult0 \up0 \expndtw0\charscalex105 \ul0\nosupersub\cf1\f2\f
s23 Looked at from the point of view of the investors, the FDI inflows can be \u
p0 \expndtw-3\charscalex100 classified into three groups:\par\pard\qj \li20\ri13
29\sb112\sl-260\slmult0\tx382 \up0 \expndtw-1\charscalex100 i) \ul0\nosupersub\c
f3\f4\fs23 Market-seeking:\ul0\nosupersub\cf1\f2\fs23 These are attracted by
the size of the local market which \line\tab \up0 \expndtw-3\charscalex100 depen
ds on the income of the country and its growth rate.\par\pard\ql \li20\ri1327\sb
76\sl-259\slmult0\tx382\tx382\tx382\tx382\tx382\tx382\tx382 \up0 \expndtw0\chars
calex104 ii) \ul0\nosupersub\cf3\f4\fs23 Efficiency-seeking:\ul0\nosupersub\cf1
\f2\fs23 In developing countries where capital is relatively \line\tab \up0 \ex
pndtw0\charscalex105 scarce the marginal efficiency of capital tends to be highe
r than in the \line \tab \up0 \expndtw0\charscalex102 developed world where i
t is abundant. Assuming that interest rates \line \tab \up0 \expndtw0\char
scalex105 broadly reflect Marginal Efficiency of Capital (MEC), it follows that
\line \tab \up0 \expndtw0\charscalex100 lending rates in Western financial cent
res are below MECs in developing \line \tab \up0 \expndtw0\charscalex102 countri
es. Hence, economic efficiency and commercial logic dictate that \line \tab \up0
\expndtw0\charscalex100 capital should flow from the relatively less-profitable
developed world to \line \tab \up0 \expndtw-3\charscalex100 the relatively more
profitable developing countries.\par\pard\ql \li20\ri1327\sb76\sl-259\slmult0\t
x382\tx382\tx382\tx382\tx382\tx382\tx382 \up0 \expndtw0\charscalex100 iii) \ul0\
nosupersub\cf3\f4\fs23 Other Location Advantages:\ul0\nosupersub\cf1\f2\fs23 Th
ese include the technological status of a \line\tab \up0 \expndtw-1\charscalex10
0 country, brand name and goodwill enjoyed by the local firms, openness of \line
\tab \up0 \expndtw0\charscalex102 the economy, trade and macro policies pursued
by the Government and \line \tab \up0 \expndtw0\charscalex100 intellectual pro
perty protection granted by the Government. Whatever \line \tab \up0 \expnd
tw0\charscalex100 form of FDI, in modern times, Multinational Corporations (MNCs
) have \line \tab \up0 \expndtw0\charscalex100 become the major carriers of fore
ign capital and technical know-how. We \line \tab \up0 \expndtw0\charscalex108 s

hall examine in brief the major characteristics of this form of \line
\tab \up0 \expndtw-3\charscalex100 organisation.\par\pard\ql \li20\sb145\sl-322\
slmult0 \up0 \expndtw-6\charscalex100 \ul0\nosupersub\cf5\f6\fs28 18.4
MULT
INATIONAL CORPORATIONS\par\pard\qj \li20\ri1327\sb141\sl-259\slmult0 \up0 \expnd
tw0\charscalex102 \ul0\nosupersub\cf1\f2\fs23 An MNC is one which undertakes for
eign direct investment, i.e., it owns or \line \up0 \expndtw0\charscalex102 cont
rols income generation assets in more than one country, and in so doing \line \u
p0 \expndtw0\charscalex108 produces goods or services outside its country of ori
gin, i.e., engages in \line \up0 \expndtw0\charscalex107 international productio
n. As per the estimates made available by the UN \line \up0 \expndtw0\charscalex
103 Centre on Transnational Corporations, there are more than eleven thousand \l
ine \up0 \expndtw-2\charscalex100 MNCs with more than eighty-two thousand subsid
iaries in operation abroad.\par\pard\ql \li20\sb119\sl-299\slmult0 \up0 \expndtw
-5\charscalex100 \ul0\nosupersub\cf7\f8\fs26 18.4.1
Characteristics of Mult
inational Corporations\par\pard\qj \li20\ri1329\sb113\sl-260\slmult0 \up0 \expnd
tw0\charscalex100 \ul0\nosupersub\cf1\f2\fs23 The MNCs have certain characterist
ics among which the more important are \up0 \expndtw-3\charscalex100 as follows:
}
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l-264\slmult0 \up0 \expndtw0\charscalex100 \ul0\nosupersub\cf1\f2\fs23 i) \ul0\n
osupersub\cf3\f4\fs23 Giant Size:\ul0\nosupersub\cf1\f2\fs23 The assets and s
ales of MNCs run into billions of dollars and\par\pard\qj \li1899\ri0\sb2\sl-259
\slmult0 \up0 \expndtw0\charscalex103 they also make supernormal profits. \ul0\n
osupersub\cf3\f4\fs23 The Economist\ul0\nosupersub\cf1\f2\fs23 estimates that t
he \line \up0 \expndtw0\charscalex105 world\u8217?s top 300 MNCs now control ove
r 25 per cent of the 20 trillion \line \up0 \expndtw0\charscalex105 stock of pro
ductive assets. No size, howsoever big, is perceived to be\par\pard\qj \li1899\r
i0\sb1\sl-259\slmult0 \up0 \expndtw0\charscalex102 sufficient. Hence the MNCs ke
ep on growing even through the route of \up0 \expndtw-3\charscalex100 mergers an
d acquisitions.\par\pard\ql \li1546\ri0\sb114\sl-259\slmult0\tx1899\tx1899 \up0
\expndtw0\charscalex103 ii) \ul0\nosupersub\cf3\f4\fs23 International Operation
s:\ul0\nosupersub\cf1\f2\fs23 In such a corporation, control resides in the \li
ne\tab \up0 \expndtw-1\charscalex100 hands of a single institution. But its inte
rests and operations sprawl across \line \tab \up0 \expndtw-1\charscalex100 nati
onal boundaries. MNCs have become in effect \up0 \expndtw-2\charscalex100
\u8220?global factories\u8221?\par\pard\ql \li1899\sb2\sl-260\slmult0 \up0 \exp
ndtw-3\charscalex100 searching for opportunities anywhere in the world.\par\pard
\ql \li1546\ri0\sb113\sl-259\slmult0\tx1899\tx1899 \up0 \expndtw0\charscalex104
iii) \ul0\nosupersub\cf3\f4\fs23 Oligopolistic Structure:\ul0\nosupersub\cf1\f2\
fs23 Through the process of merger and takeover, \line\tab \up0 \expndtw0\chars
calex102 etc., in course of time, an MNC acquires awesome power. This coupled \l
ine \tab \up0 \expndtw-3\charscalex100 with its giant size makes it oligopolisti
c in character.\par\pard\qj \li1546\ri0\sb114\sl-259\slmult0\tx1899 \up0 \expndt
w0\charscalex100 iv) \ul0\nosupersub\cf3\f4\fs23 Spontaneous Evolution: \ul0\no
supersub\cf1\f2\fs23 MNCs usually grow in a spontaneous and \line\tab \up
0 \expndtw0\charscalex106 unconscious manner. Very often they develop thro
ugh \up0 \expndtw-3\charscalex100 \u8220?creeping\par\pard\qj \li1899\ri0\sb1\sl
-259\slmult0 \up0 \expndtw0\charscalex101 incrementalism\u8221?. Many firms have
become international by accident. At \up0 \expndtw0\charscalex102 times, firms
have also established subsidiaries abroad due to wage \up0 \expndtw-3\c
harscalex100 differentials and better opportunities prevailing in the home count
ry.\par\pard\ql \li1546\ri0\sb114\sl-259\slmult0\tx1899\tx1899\tx1899\tx1899\tx1
899 \up0 \expndtw0\charscalex106 v) \ul0\nosupersub\cf3\f4\fs23 Collective Tran
sfer of Resources:\ul0\nosupersub\cf1\f2\fs23 An MNC facilitates a multilateral
\line\tab \up0 \expndtw0\charscalex105 transfer of resources. Usually this tran
sfer takes place in the form of a \line \tab \up0 \expndtw0\charscalex103 \u8216
?package\u8217? which includes technical know-how, equipments and \l
ine \tab \up0 \expndtw-2\charscalex100 machinery, raw materials, finished produc
t, managerial services and so on. \line \tab \up0 \expndtw0\charscalex101 MNCs a
re composed of a complex of widely varied modern technology \line \tab \up0 \exp
ndtw-3\charscalex100 ranging from production and marketing to management and fin
ance.\par\pard\ql \li1546\sb230\sl-299\slmult0 \up0 \expndtw-6\charscalex100 \ul
0\nosupersub\cf7\f8\fs26 18.4.2
Importance and Significance of MNCs\par\par
d\qj \li1546\ri0\sb112\sl-260\slmult0 \up0 \expndtw0\charscalex105 \ul0\nosupers
ub\cf1\f2\fs23 With the retreat of socialism, MNCs have become a powerful force
in the \up0 \expndtw-3\charscalex100 world economy.\par\pard\ql \li1546\sb111\sl
-264\slmult0 \up0 \expndtw-3\charscalex100 \ul0\nosupersub\cf3\f4\fs23 The Case
for MNCs\par\pard\qj \li1546\ri0\sb113\sl-259\slmult0 \up0 \expndtw0\charscalex1
03 \ul0\nosupersub\cf1\f2\fs23 The case for MNCs revolves around that the
potential benefits that a \up0 \expndtw0\charscalex102 developing economy c
an hope to get from MNC operations. These benefits \up0 \expndtw-3\charscalex100

are summarised in Table 18.1.\par\pard\ql \li2767\sb113\sl-241\slmult0 \up0 \ex
pndtw-2\charscalex100 \ul0\nosupersub\cf9\f10\fs21 Table 18.1: Potential Benefit
s from MNC Operations\par\pard\column \ql \li8863\sb0\sl-195\slmult0 \par\pard\q
l \li8863\sb0\sl-195\slmult0 \par\pard\ql \li20\sb63\sl-195\slmult0 \up0 \expndt
w-2\charscalex100 \ul0\nosupersub\cf6\f7\fs17 Multinational Corporations\par\par
d\ql \li570\sb4\sl-195\slmult0 \up0 \expndtw-2\charscalex100 and Foreign Capital
\par\pard\sect\sectd\sbknone \li1546\sb167\sl-241\slmult0\fi382\tx4236 \up0 \ex
pndtw-2\charscalex100 \ul0\nosupersub\cf9\f10\fs21 Impact Area\tab \up0 \expndtw
-2\charscalex100 Potential Benefits\par\pard\sect\sectd\sbknone \li1546\sb80\sl241\slmult0\fi0\tx1929\tx4237 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf10
\f11\fs21 1.\tab \up0 \expndtw-2\charscalex100 Capital\tab \up0 \expndtw-2\chars
calex100 Provision of scarce capital resources\par\pard\li1546\sb52\sl-241\slmul
t0\fi2690 \up0 \expndtw0\charscalex100 \u9135? internally generated\par\pard\li1
546\sb52\sl-241\slmult0\fi2690 \up0 \expndtw0\charscalex100 \u9135? externally g
enerated.\par\pard\li1546\sb36\sl-241\slmult0\fi2690 \up0 \expndtw0\charscalex10
0 (privileged access to global capital markets)\par\pard\li1546\sb73\sl-241\slmu
lt0\fi0\tx1929\tx4237 \up0 \expndtw0\charscalex100 2.\tab \up0 \expndtw0\charsca
lex100 Technology\tab \up0 \expndtw0\charscalex100 Provision of sophisticated
technology and other\par\pard\li1546\sb1\sl-236\slmult0\fi2690 \up0 \expndtw2\charscalex100 technology not available in the host country.\par\pard\li1546\sb
74\sl-241\slmult0\fi0\tx1929\tx4237 \up0 \expndtw-2\charscalex100 3.\tab \up0 \e
xpndtw-2\charscalex100 Exports and Balance of\tab \up0 \expndtw-2\charscalex100
Access to superior global distribution and marketing\par\pard\li1546\sb0\sl-238\
slmult0\fi382\tx4237 \up0 \expndtw-2\charscalex100 Payments\tab \up0 \expndtw-2\
charscalex100 systems\par\pard\qj \li4237\ri3411\sb49\sl-240\slmult0 \up0 \expnd
tw0\charscalex101 \u9135? MNCs may increase exports and create positive \up0 \ex
pndtw-4\charscalex100 balance of payments effects. \par\pard\li1546\sb75\sl-241\
slmult0\fi0\tx1929\tx4237 \up0 \expndtw0\charscalex100 4.\tab \up0 \expndtw0\cha
rscalex100 Diversification\tab \up0 \expndtw0\charscalex100 MNCs command technol
ogy and skills required for\par\pard\qj \li4237\ri3412\sb0\sl-240\slmult0 \up0 \
expndtw-1\charscalex100 diversification of the industrial base and for th
e \up0 \expndtw-4\charscalex100 creation of backward and forward linkages. \par\
pard\ql \li10468\sb0\sl-253\slmult0 \par\pard\ql\li10468\sb0\sl-253\slmult0 \par
\pard\ql\li10468\sb89\sl-253\slmult0 \up0 \expndtw-4\charscalex100 \ul0\nosupers
ub\cf1\f2\fs23 53
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g8}{\bkmkend Pg8}\par\pard\li1467\sb0\sl-253\slmult0\par\pard\li1467\sb205\sl-25
3\slmult0\fi0\tx3579 \up0 \expndtw0\charscalex104 \ul0\nosupersub\cf6\f7\fs17 Se
ctoral Performance-III\tab \dn4 \expndtw0\charscalex105 \ul0\nosupersub\cf1\f2\f
s23 A recent study on the subject concludes that in today\u8217?s world of glo
bal\par\pard\qj \li3579\ri1370\sb0\sl-260\slmult0 \up0 \expndtw0\charscalex105 c
apitalism, foreign investment is the only instrument that can reduce the \up0 \e
xpndtw-5\charscalex100 inequalities between nations. \par\pard\ql \li3579\sb101\
sl-253\slmult0 \up0 \expndtw-3\charscalex100 \ul0\nosupersub\cf3\f4\fs23 The Cas
e against MNCs \par\pard\qj \li3579\ri1372\sb122\sl-260\slmult0 \up0 \expndtw0\c
harscalex105 \ul0\nosupersub\cf1\f2\fs23 In actual operations, in the past half
a-century or so, the experience with \up0 \expndtw0\charscalex102 MNCs has not b
een an unmixed blessing. Main points of criticism can be \up0 \expndtw-3\charsca
lex100 summarised as in Table 18.2. \par\pard\ql \li5033\sb116\sl-241\slmult0 \u
p0 \expndtw-4\charscalex100 \ul0\nosupersub\cf9\f10\fs21 Table 18.2: Actual Impa
ct of MNCs Operations \par\pard\li3667\sb202\sl-241\slmult0\fi383\tx6361 \up0 \e
xpndtw-2\charscalex100 Impact Area\tab \up0 \expndtw-2\charscalex100 Potential B
enefits\par\pard\li3667\sb155\sl-241\slmult0\fi0\tx4051\tx6361 \up0 \expndtw-2\c
harscalex100 \ul0\nosupersub\cf10\f11\fs21 1.\tab \up0 \expndtw-2\charscalex100
Capital\tab \up0 \expndtw-2\charscalex100 Insignificant net inflow,\par\pard\qj
\li6361\ri3396\sb0\sl-320\slmult0 \up0 \expndtw-4\charscalex100 Large dividend r
emittances, \line \up0 \expndtw-4\charscalex100 Large technical payments, \par\p
ard\qj \li6361\ri1470\sb44\sl-240\slmult0 \up0 \expndtw0\charscalex101 Progressi
ve fall of foreign participation in \up0 \expndtw-4\charscalex100 corp
orate capital formation. \par\pard\li3667\sb165\sl-241\slmult0\fi0\tx4051\tx6360
\up0 \expndtw-2\charscalex100 2.\tab \up0 \expndtw-2\charscalex100 Technology\t

ab \up0 \expndtw-2\charscalex100 Costly \u8216?over-import\u8217?,\par\pard\li36
67\sb73\sl-241\slmult0\fi2693 \up0 \expndtw0\charscalex100 Problems with advance
d technology and updating,\par\pard\li3667\sb73\sl-241\slmult0\fi2693 \up0 \expn
dtw0\charscalex100 Problems with technical support.\par\pard\li3667\sb149\sl-241
\slmult0\fi0\tx4051\tx6361 \up0 \expndtw0\charscalex100 3.\tab \up0 \expndtw0\ch
arscalex100 Exports and Balance of\tab \up0 \expndtw0\charscalex100 Export per
formance at par with domestic\par\pard\li3667\sb0\sl-237\slmult0\fi383\t
x6361 \up0 \expndtw0\charscalex100 Payments\tab \up0 \expndtw0\charscalex100 com
panies,\par\pard\qj \li6361\ri1469\sb64\sl-240\slmult0 \up0 \expndtw0\charscalex
103 Higher
import
propensity
than
domestic \up0 \expndtw-3\charscale
x100 companies, \par\pard\qj \li6361\ri1470\sb80\sl-240\slmult0 \up0 \expndtw0\c
harscalex105 Some import substitution but negative BDP \up0 \expndtw-3\char
scalex100 effects. \par\pard\li3667\sb149\sl-241\slmult0\fi0\tx4051\tx6361 \up0
\expndtw0\charscalex103 4.\tab \up0 \expndtw0\charscalex103 Diversification\tab
\up0 \expndtw0\charscalex103 Preemption
of
growth
opportunities
and\
par\pard\qj \li6361\ri1471\sb0\sl-240\slmult0 \up0 \expndtw0\charscalex102 subst
itution of domestic capital in several \up0 \expndtw-4\charscalex100 p
romisive areas, \par\pard\ql \li6361\sb51\sl-241\slmult0 \up0 \expndtw-4\charsca
lex100 Increased foreign influence in key sectors. \par\pard\qj \li3579\ri1369\s
b204\sl-260\slmult0 \up0 \expndtw0\charscalex107 \ul0\nosupersub\cf1\f2\fs23 In
a partial response to the above propositions, it may be stated that the \up0 \ex
pndtw-2\charscalex100 modern MNCs acknowledge their responsibility to the concer
ns and interests \up0 \expndtw-3\charscalex100 of the host country and basically
operate on the basis of mutuality of interests. \up0 \expndtw0\charscalex106 In
fact, in present times international capital has no loyalty towards any \up0 \e
xpndtw0\charscalex102 nationality. MNCs realise they cannot be oriented toward t
he state of their \up0 \expndtw-2\charscalex100 origin. They have to be the citi
zens of the country they are in. If they are not, \up0 \expndtw-2\charscalex100
they cannot succeed. \par\pard\ql \li3579\sb228\sl-299\slmult0 \up0 \expndtw-6\c
harscalex100 \ul0\nosupersub\cf7\f8\fs26 18.4.3
Need for Regulation of MNCs
\par\pard\qj \li3579\ri1372\sb114\sl-260\slmult0 \up0 \expndtw0\charscalex103 \
ul0\nosupersub\cf1\f2\fs23 In view of the fact that MNCs do possess a potential
that can be gainfully \up0 \expndtw0\charscalex104 exploited, most of the develo
ping countries have chosen to regulate their \up0 \expndtw-3\charscalex100 activ
ities rather than to dispense with them altogether. \par\pard\ql \li3579\sb126\s
l-253\slmult0 \up0 \expndtw-4\charscalex100 i) Threat of nationalisation is an
important tool of regulation. \par\pard\ql \li3579\sb107\sl-253\slmult0 \up0 \e
xpndtw-4\charscalex100 ii) The Government may allow or deny permission in ident
ified areas. \par\pard\ql \li3579\ri1370\sb122\sl-260\slmult0\tx3931\tx3931 \up0
\expndtw-2\charscalex100 iii) MNCs may be allowed to invest for specific period
s. Thus, after a certain \line\tab \up0 \expndtw-1\charscalex100 period of time,
restrictions may be imposed on foreign holdings, or there \line \tab \up0 \expn
dtw-3\charscalex100 may be provision for gradual disinvestments. \par\pard\ql \l
i3579\sb106\sl-253\slmult0 \up0 \expndtw-3\charscalex100 iv) A multi-tax system
may be followed by the Government. The MNCs may\par\pard\sect\sectd\sbknone\cols
2\colno1\colw3771\colsr160\colno2\colw8169\colsr160\ql \li1546\sb187\sl-264\slmu
lt0 \up0 \expndtw-3\charscalex100 54\par\pard\column \ql \li20\sb15\sl-264\slmul
t0 \up0 \expndtw-3\charscalex100 be taxed at a higher rate.
}
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l-264\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf1\f2\fs23 v) The
host country may lay down certain export criteria.\par\pard\qj \li1546\ri0\sb114
\sl-259\slmult0\tx1899 \up0 \expndtw0\charscalex106 vi) MNCs may be asked to car
ry out a minimum fixed share of their total \line\tab \up0 \expndtw-3\charscalex
100 research and development activities within the host countries.\par\pard\ql \
li1546\sb144\sl-322\slmult0 \up0 \expndtw-7\charscalex100 \ul0\nosupersub\cf5\f6
\fs28 18.5
FOREIGN CAPITAL IN INDIA\par\pard\qj \li1546\ri0\sb142\sl-259\sl
mult0 \up0 \expndtw0\charscalex102 \ul0\nosupersub\cf1\f2\fs23 In the planned
economy of India, foreign capital has been assigned a \up0 \expndtw0\ch
arscalex100 significant role, although it has been changing over time. In the ea
rlier phase \up0 \expndtw-1\charscalex100 of planning, foreign capital was
looked upon as a means to supplement \up0 \expndtw0\charscalex100 domestic
investment. Many concessions and incentives were given to foreign \up0 \expndtw
0\charscalex109 investors. Later on, however, the emphasis shifted to en
couraging \up0 \expndtw0\charscalex105 technological collaboration between In
dian entrepreneurs and foreign \up0 \expndtw0\charscalex108 entrepreneurs. In
more recent times, efforts are on to invite free flow of \up0 \expndtw0\charsca
lex106 foreign capital. It would be instructive in this background to examine th
e \up0 \expndtw-3\charscalex100 Government\u8217?s policy towards foreign capita
l.\par\pard\ql \li1546\sb230\sl-299\slmult0 \up0 \expndtw-5\charscalex100 \ul0\n
osupersub\cf7\f8\fs26 18.5.1
Government Policy towards Foreign Capital\par\
pard\qj \li1546\ri0\sb115\sl-259\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosu
persub\cf1\f2\fs23 Foreign investment in India is subject to the same industrial
policy as all other \up0 \expndtw-1\charscalex100 business ventures, plus some
additional policies and rules specially governing \up0 \expndtw-3\charscalex100
foreign collaborations.\par\pard\qj \li1546\ri0\sb113\sl-259\slmult0 \up0 \expnd
tw0\charscalex100 The first articulate expression of free India\u8217?s attitude
towards foreign capital \line \up0 \expndtw-1\charscalex100 was embodied in the
Industrial Policy Resolution, 1948 (IPR, 1948). The IPR, \line \up0 \expndtw0\c
harscalex100 1948 emphasised the need for carefully regulating as well as inviti
ng private \line \up0 \expndtw-1\charscalex100 foreign capital. It laid special
stress, inter-alia, on the need to ensure that in all \line \up0 \expndtw0\chars
calex102 cases of foreign collaboration, the majority interest was always Indian
. This \line \up0 \expndtw0\charscalex100 was followed by the Fiscal Commission
of 1949-50 which recommended that \line \up0 \expndtw0\charscalex100 foreign in
vestment may be permitted, first, in the public sector projects \line \
up0 \expndtw0\charscalex100 needing imported capital good, and secondly, in new
capital industries where \line \up0 \expndtw-2\charscalex100 no indigenous capit
al or technical know-how was likely to be available.\par\pard\qj \li1546\ri0\sb1
13\sl-259\slmult0 \up0 \expndtw0\charscalex100 This was followed by a statement
on policy towards foreign capital made by \up0 \expndtw0\charscalex100 the Gover
nment on April 6, 1949. The underlying principles of the policy by \up0 \expndtw
-3\charscalex100 and large are valid even now. These may be enumerated as follow
s:\par\pard\qj \li1546\ri0\sb131\sl-259\slmult0\tx1899 \up0 \expndtw0\charscalex
100 \u8226? Foreign capital once admitted will be treated at par with
indigenous \line\tab \up0 \expndtw-3\charscalex100 capital.\par\pard\ql \li154
6\sb127\sl-264\slmult0 \up0 \expndtw-1\charscalex100 \u8226? Facilities for re
mittance of profits abroad will continue.\par\pard\qj \li1546\ri0\sb131\sl-257\s
lmult0\tx1899 \up0 \expndtw0\charscalex109 \u8226? As a rule, the major intere
st in ownership and effective control of an \line\tab \up0 \expndtw-3\charscalex
100 undertaking should be in Indians hands.\par\pard\qj \li1546\ri0\sb95\sl-257\
slmult0\tx1899 \up0 \expndtw0\charscalex110 \u8226? If an enterprise is acquir
ed, compensation will be paid on a fair and \line\tab \up0 \expndtw-3\charscalex
100 equitable basis.\par\pard\ql \li1546\ri0\sb96\sl-258\slmult0\tx1899\tx1899 \
up0 \expndtw0\charscalex104 \u8226? The Government would not object to foreign
capital having control of a \line\tab \up0 \expndtw-1\charscalex100 concern for
a limited period and each individual case will be dealt with on \line \tab \up0
\expndtw-3\charscalex100 its merits.\par\pard\qj \li1546\ri0\sb78\sl-259\slmult
0 \up0 \expndtw0\charscalex102 In short, the Government promised non-discriminat
ory treatment of foreign \line \up0 \expndtw-1\charscalex100 investment and fr
ee remittance facilities for both profits and capital. An \line \up0 \ex
pndtw0\charscalex105 emphasis was laid down on the employment and training of th
e Indians in \line \up0 \expndtw0\charscalex102 higher positions. In keeping wit
h these guidelines, the general policy was to \line \up0 \expndtw0\charscalex104
allow such foreign investments and collaborations as were in line with the \lin
e \up0 \expndtw-1\charscalex100 priorities and targets of the Five-Year Plans. T
he policy was to restrict foreign \line \up0 \expndtw0\charscalex100 collaborati
on to those cases which would bring technical know-how into the \line \up0 \expn
dtw0\charscalex103 country such as was not available indigenously for developing
new lines of \line \up0 \expndtw-3\charscalex100 production.\par\pard\column \q

l \li8863\sb0\sl-195\slmult0 \par\pard\ql \li8863\sb0\sl-195\slmult0 \par\pard\q
l \li20\sb63\sl-195\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf6\f7
\fs17 Multinational Corporations\par\pard\ql \li570\sb4\sl-195\slmult0 \up0 \exp
ndtw-2\charscalex100 and Foreign Capital\par\pard\ql \li10468\sb0\sl-264\slmult0
li10468\sb0\sl-264\slmult0 \par\pard\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql
\li10468\sb0\sl-264\slmult0 \par\pard\ql \li10468\sb0\sl-264\slmult0 \par\pard\
ql \li10468\sb0\sl-264\slmult0 \par\pard\ql \li10468\sb0\sl-264\slmult0 \par\par
d\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql \li10468\sb0\sl-264\slmult0 \par\p
ard\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql \li10468\sb0\sl-264\slmult0 \par
\pard\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql \li10468\sb0\sl-264\slmult0 \p
ar\pard\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql \li10468\sb0\sl-264\slmult0
\par\pard\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql \li10468\sb0\sl-264\slmult
0 \par\pard\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql \li10468\sb0\sl-264\slmu
lt0 \par\pard\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql \li10468\sb0\sl-264\sl
mult0 \par\pard\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql \li10468\sb0\sl-264\
slmult0 \par\pard\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql \li10468\sb0\sl-26
-264\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf1\f2\fs23 55
}
}}
}
}}

}
}}
}
g10}{\bkmkend Pg10}\par\pard\sect\sectd\sbknone\cols2\colno1\colw3419\colsr160\c
olno2\colw8521\colsr160\ql \li1467\sb0\sl-195\slmult0 \par\pard\ql \li1467\sb0\s
l-195\slmult0 \par\pard\ql \li1467\sb38\sl-195\slmult0 \up0 \expndtw-2\charscale
x100 \ul0\nosupersub\cf6\f7\fs17 Sectoral Performance-III\par\pard\ql \li1546\sb
0\sl-264\slmult0 \par\pard\ql \li1546\sb0\sl-264\slmult0 \par\pard\ql \li1546\sb
13\sl-264\slmult0 \up0 \expndtw-3\charscalex100 \ul0\nosupersub\cf1\f2\fs23 56\p
ar\pard\column \ql \li3579\sb0\sl-264\slmult0 \par\pard\ql \li20\sb155\sl-264\sl
mult0 \up0 \expndtw0\charscalex107 These principles define the broad contours wi
thin which the state policy\par\pard\qj \li20\ri1328\sb2\sl-259\slmult0 \up0 \ex
pndtw0\charscalex104 towards foreign capital has been framed all through the dif
ferent five-year \up0 \expndtw0\charscalex100 plans. Beginning with the First Fi
ve-Year Plan in 1951, three distinct phases \up0 \expndtw-3\charscalex100 as fol
lows can be marked:\par\pard\ql \li20\ri1327\sb131\sl-259\slmult0\tx382\tx382 \u
p0 \expndtw0\charscalex100 \u8226? The \ul0\nosupersub\cf3\f4\fs23 First Phase
\ul0\nosupersub\cf1\f2\fs23 lasted till 1965 and was characterised by a liberal
attitude \line\tab \up0 \expndtw0\charscalex101 towards foreign capital. Many c

oncessions and incentives were given to \line \tab \up0 \expndtw-2\charscalex100
foreign capital participation in the industrial development of the country.\par
\pard\ql \li20\ri1327\sb131\sl-259\slmult0\tx382\tx382 \up0 \expndtw0\charscalex
100 \u8226? In the \ul0\nosupersub\cf3\f4\fs23 Second Phase\ul0\nosupersub\cf1
\f2\fs23 beginning with the mid-1960s, the liberal attitude of \line\tab \up0 \
expndtw-2\charscalex100 the state yielded place to strict controls and the broad
policy was to restrict \line \tab \up0 \expndtw-3\charscalex100 the area of ope
ration of foreign capital.\par\pard\ql \li20\ri1328\sb131\sl-259\slmult0\tx382\t
x382 \up0 \expndtw0\charscalex100 \u8226? The \ul0\nosupersub\cf3\f4\fs23 Thi
rd Phase\ul0\nosupersub\cf1\f2\fs23 , beginning with the adoption of econ
omic reforms \line\tab \up0 \expndtw0\charscalex100 programme since July, 1991,
has adopted a more liberal attitude towards \line \tab \up0 \expndtw-3\charscal
ex100 foreign capital and has aimed at attracting a free flow of FDI.\par\pard\q
l \li20\sb230\sl-299\slmult0 \up0 \expndtw-7\charscalex100 \ul0\nosupersub\cf7\f
8\fs26 18.5.2
Policy Changes 1991-2005\par\pard\qj \li20\ri1326\sb113\sl-25
9\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf1\f2\fs23 The New Indu
strial Policy, 1991, can be described as a minor revolution as far \up0 \expndtw
0\charscalex102 as decisions concerning foreign investment and forei
gn technology \up0 \expndtw-3\charscalex100 agreements are concerned.\par\pard
\qj \li20\ri1327\sb114\sl-259\slmult0 \up0 \expndtw0\charscalex103 The various
changes in the policy can be broadly classified into four \up0 \expndt
w-3\charscalex100 categories as follows:\par\pard\ql \li20\sb109\sl-264\slmult0\
tx377 \up0 \expndtw-3\charscalex100 1)\tab \up0 \expndtw-1\charscalex100 \ul0\no
supersub\cf3\f4\fs23 Choice of Product:\ul0\nosupersub\cf1\f2\fs23 The number o
f products in which foreign investment\par\pard\ql \li372\sb2\sl-259\slmult0 \up
0 \expndtw-3\charscalex100 is freely permitted has been significantly increased.
\par\pard\ql \li20\sb109\sl-264\slmult0\tx377 \up0 \expndtw-3\charscalex100 2)\t
ab \up0 \expndtw0\charscalex102 \ul0\nosupersub\cf3\f4\fs23 Choice of Market:\ul
0\nosupersub\cf1\f2\fs23 The foreign investors are now free to compete with\par
\pard\ql \li372\sb1\sl-259\slmult0 \up0 \expndtw-3\charscalex100 the domestic pr
oducers in the Indian market.\par\pard\ql \li20\sb109\sl-264\slmult0\tx377 \up0
\expndtw-3\charscalex100 3)\tab \up0 \expndtw0\charscalex102 \ul0\nosupersub\cf3
\f4\fs23 Choice of Ownership Structure:\ul0\nosupersub\cf1\f2\fs23 In most case
s, the foreign investor is\par\pard\ql \li372\sb0\sl-260\slmult0 \up0 \expndtw-3
\charscalex100 free to own a majority share in equity.\par\pard\ql \li20\sb109\s
l-264\slmult0\tx377 \up0 \expndtw-3\charscalex100 4)\tab \up0 \expndtw0\charscal
ex100 \ul0\nosupersub\cf3\f4\fs23 Simplification of Procedures:\ul0\nosupersub
\cf1\f2\fs23 India has opened two routes for FDI\par\pard\qj \li372\ri13
27\sb1\sl-259\slmult0 \up0 \expndtw0\charscalex100 inflows. First, the RBI route
(or the Mumbai route). This is transparent in \up0 \expndtw-2\charscalex100 the
sense that the guidelines are clear. If projects satisfy the guidelines, the \u
p0 \expndtw-3\charscalex100 approvals are practically automatic.\par\pard\qj \li
372\ri1326\sb114\sl-259\slmult0 \up0 \expndtw-1\charscalex100 FDI proposals whic
h fall under the automatic route are listed in Annexure \line \up0 \expndtw-1\ch
arscalex100 III of the industries list; it consists of 42 industries. This annex
ure has four \line \up0 \expndtw-2\charscalex100 categories: industries where fo
reign equity capital limit is pegged at 50 per\par\pard\qj \li372\ri1326\sb0\sl259\slmult0 \up0 \expndtw0\charscalex102 cent, 51 per cent, 74 per cent and 100
per cent, respectively. 50 per cent \line \up0 \expndtw0\charscalex103 through t
he automatic route is allowed in the mining sector. 51 per cent \line \up0 \expn
dtw0\charscalex101 through the automatic route is allowed in \up0 \expndtw
-1\charscalex100 51 industries, whereas \up0 \expndtw-4\charscalex100 9\par\pa
rd\ql \li372\sb0\sl-259\slmult0 \up0 \expndtw0\charscalex103 industries quality
for \up0 \expndtw0\charscalex105 74 per cent equity. 100 per cent foreign equi
ty\par\pard\qj \li372\ri1326\sb0\sl-259\slmult0 \up0 \expndtw0\charscalex105 thr
ough the automatic route is allowed only in a handful of industries, \up0 \expnd
tw0\charscalex106 such as power, roads and ports. In this category, there is a m
aximum \up0 \expndtw-3\charscalex100 foreign investment limit of Rs. 1,500 crore
s.\par\pard\qj \li372\ri1327\sb114\sl-259\slmult0 \up0 \expndtw-1\charscalex100
The second route is the Foreign Investment Promotion Board (FIPB) route \line \u
p0 \expndtw-2\charscalex100 (or the Delhi route). Foreigners are welcome to make
proposals that do not \line \up0 \expndtw-1\charscalex100 fit into the first ca
se. Such proposals are considered case by case. Detailed\par\pard\ql \li372\sb1\
sl-259\slmult0 \up0 \expndtw0\charscalex106 guidelines covering this route were
issued on January \up0 \expndtw-2\charscalex100 20, 1997. The\par\pard\qj \li3
72\ri1326\sb0\sl-259\slmult0 \up0 \expndtw0\charscalex106 Government has also
set up Foreign Investment Implementation \up0 \expndtw0\charscalex107 Autho
rity, independent of the FIPB, to act as a single point interface \up0 \expndtw3\charscalex100 between the investor and Government agencies.\par\pard\qj \li20\
ri1328\sb113\sl-259\slmult0 \up0 \expndtw-1\charscalex100 The above changes are
pointers to the fact that, lately, the Government is keen \line \up0 \expndtw-2\
charscalex100 to attract more of foreign investment. It seems it has come to be
believed that:
}
}}
}
olno2\colw3237\colsr160\ql \li1546\sb0\sl-264\slmult0 \par\pard\ql \li1546\sb173
\sl-264\slmult0 \up0 \expndtw0\charscalex113 \ul0\nosupersub\cf1\f2\fs23 \u8226?
It is better to allow equity than to go out to borrow. For one thing,\par\par
d\qj \li1899\ri0\sb0\sl-259\slmult0 \up0 \expndtw0\charscalex104 dividend remit
tance on equity will start only when the unit starts \up0 \expndtw-3\ch
arscalex100 producing.\par\pard\ql \li1546\ri0\sb130\sl-259\slmult0\tx1899\tx189
9 \up0 \expndtw0\charscalex103 \u8226? Capital is generally never repatriated.
Profit also is normally reinvested. \line\tab \up0 \expndtw0\charscalex103 The
company meanwhile makes a substantial contribution to GNP and \line \tab \up0 \e
xpndtw-3\charscalex100 domestic market becomes competitive.\par\pard\ql \li1546\
ri0\sb130\sl-259\slmult0\tx1899\tx1899\tx1899\tx1899 \up0 \expndtw0\charscalex10
8 \u8226? FDI brings technology. This technology spills over into other sector
s \line\tab \up0 \expndtw-1\charscalex100 which supply components and inputs
. Also when FDI firms produce \line \tab \up0 \expndtw0\charscalex109 cheap
er and better capital goods or intermediate products, the \line \tab \u
p0 \expndtw0\charscalex102 competitiveness of sectors which use these, improves.
The competitive \line \tab \up0 \expndtw-3\charscalex100 edge will spur develop
ment and accelerate the growth process.\par\pard\ql \li1546\sb110\sl-264\slmult0
\up0 \expndtw-3\charscalex100 \ul0\nosupersub\cf3\f4\fs23 Check Your Progress 2
\par\pard\ql \li1546\sb109\sl-264\slmult0 \up0 \expndtw-2\charscalex100 Note: \u
l0\nosupersub\cf1\f2\fs23 i) Space is given below each question for your answer
.\par\pard\ql \li2131\sb109\sl-264\slmult0 \up0 \expndtw-2\charscalex100 ii) Che

ck your answer(s) with those given at the end of the unit.\par\pard\ql \li1546\s
b110\sl-264\slmult0\tx1894 \up0 \expndtw-3\charscalex100 1)\tab \up0 \expndtw0\c
harscalex102 Distinguish between loans and private investment as sources of fore
ign\par\pard\ql \li1899\sb0\sl-259\slmult0 \up0 \expndtw-3\charscalex100 capital
.\par\pard\qj \li1899\ri17\sb20\sl-372\slmult0 \up0 \expndtw-3\charscalex100 \u8
230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230
?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u
8230?\u8230?\u8230?\u8230?\u8230?\u8230?... \line \up0 \expndtw-3\charscalex100
\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8
230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230
?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?... \line \up0 \expndtw-3\charscalex1
00 \u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?
\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8
230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?...\par\pard\ql \li1899\sb92\sl-26
4\slmult0 \up0 \expndtw-3\charscalex100 \u8230?\u8230?\u8230?\u8230?\u8230?\u823
0?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\
u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u82
30?...\par\pard\ql \li1546\sb109\sl-264\slmult0\tx1894 \up0 \expndtw-3\charscale
x100 2)\tab \up0 \expndtw-1\charscalex100 Distinguish between foreign direct inv
estment and portfolio investment as\par\pard\ql \li1899\sb0\sl-260\slmult0 \up0
\expndtw-3\charscalex100 sources of private foreign capital.\par\pard\qj \li1899
\ri17\sb20\sl-372\slmult0 \up0 \expndtw-3\charscalex100 \u8230?\u8230?\u8230?\u8
230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230
?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u
8230?\u8230?\u8230?... \line \up0 \expndtw-3\charscalex100 \u8230?\u8230?\u8230?
\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8
230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230
?\u8230?\u8230?\u8230?... \line \up0 \expndtw-3\charscalex100 \u8230?\u8230?\u82
30?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?
\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8
230?\u8230?\u8230?\u8230?...\par\pard\qj \li1899\ri17\sb2\sl-371\slmult0 \up0 \e
xpndtw-3\charscalex100 \u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\
u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u82
30?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?... \line \up0
\expndtw-3\charscalex100 \u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u823
0?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\
u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?...\par\par
d\ql \li1546\sb204\sl-264\slmult0\tx1894 \up0 \expndtw-3\charscalex100 3)\tab \u
p0 \expndtw0\charscalex103 What are multinational corporations? Highlight their
role in the growth\par\pard\ql \li1899\sb1\sl-259\slmult0 \up0 \expndtw-3\charsc
alex100 process of a developing economy.\par\pard\qj \li1899\ri17\sb22\sl-371\sl
mult0 \up0 \expndtw-3\charscalex100 \u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u
8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u823
0?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?.
.. \line \up0 \expndtw-3\charscalex100 \u8230?\u8230?\u8230?\u8230?\u8230?\u8230
?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u
8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u823
0?... \line \up0 \expndtw-3\charscalex100 \u8230?\u8230?\u8230?\u8230?\u8230?\u8
230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230
?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u
8230?...\par\pard\qj \li1899\ri17\sb0\sl-373\slmult0 \up0 \expndtw-3\charscalex1
00 \u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?
\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8
230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?... \line \up0 \expndtw-3\charscal
ex100 \u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u82
30?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?
\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?...\par\pard\ql \li1546\sb203\s
l-264\slmult0\tx1894 \up0 \expndtw-3\charscalex100 4)\tab \up0 \expndtw0\charsca
lex101 Discuss the different changes in the Government policy towards foreign\pa
r\pard\ql \li1899\sb0\sl-259\slmult0 \up0 \expndtw-3\charscalex100 capital.\par\

pard\qj \li1899\ri17\sb21\sl-372\slmult0 \up0 \expndtw-3\charscalex100 \u8230?\u
8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u823
0?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\
u8230?\u8230?\u8230?\u8230?\u8230?... \line \up0 \expndtw-3\charscalex100 \u8230
?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u
8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u823
0?\u8230?\u8230?\u8230?\u8230?\u8230?... \line \up0 \expndtw-3\charscalex100 \u8
230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230
?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u
8230?\u8230?\u8230?\u8230?\u8230?\u8230?...\par\pard\qj \li1899\ri17\sb0\sl-373\
slmult0 \up0 \expndtw-3\charscalex100 \u8230?\u8230?\u8230?\u8230?\u8230?\u8230?
\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8
230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230
?... \line \up0 \expndtw-3\charscalex100 \u8230?\u8230?\u8230?\u8230?\u8230?\u82
30?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?
\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8
230?...\par\pard\column \ql \li8863\sb0\sl-195\slmult0 \par\pard\ql \li8863\sb0\
sl-195\slmult0 \par\pard\ql \li20\sb63\sl-195\slmult0 \up0 \expndtw-2\charscalex
100 \ul0\nosupersub\cf6\f7\fs17 Multinational Corporations\par\pard\ql \li570\sb
4\sl-195\slmult0 \up0 \expndtw-2\charscalex100 and Foreign Capital\par\pard\ql \
r\pard\ql \li1625\sb167\sl-264\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosupe
rsub\cf1\f2\fs23 57
}
}}
}
mult0 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf5\f6\fs28 18.6 CRITICAL E
VALUATION OF THE NEW\par\pard\ql \li723\sb3\sl-322\slmult0 \up0 \expndtw-4\chars
calex100 POLICY\par\pard\qj \li20\ri1326\sb117\sl-287\slmult0 \up0 \expndtw0\cha
rscalex102 \ul0\nosupersub\cf1\f2\fs23 The economic reforms have, undoubtedly, i
mproved the foreign investment \line \up0 \expndtw0\charscalex103 environment in
India. As a matter of fact, the success of the new economic \line \up0 \expndtw
-2\charscalex100 policy hinges in a large measure on the liberal response of the
foreign capital. \line \up0 \expndtw-1\charscalex100 Let us examine what has be
en the response of the foreign capital to the policy \line \up0 \expndtw-3\chars
calex100 initiatives.\par\pard\qj \li20\ri1326\sb109\sl-259\slmult0 \up0 \expndt
w0\charscalex105 The response of the foreign capital, however, going by the tren
ds, has not \up0 \expndtw-1\charscalex100 been ungrudging. Where a deluge was ex
pected, only trickle has flowed in, as \up0 \expndtw-3\charscalex100 would be se
en from Table 18.3.\par\pard\ql \li1958\sb114\sl-241\slmult0 \up0 \expndtw-2\cha
rscalex100 \ul0\nosupersub\cf9\f10\fs21 Table 18.3: Inflows of FDI ($ billion)\p
ar\pard\ql \li2127\sb195\sl-241\slmult0\tx4415 \up0 \expndtw-3\charscalex100 Yea

r\tab \up0 \expndtw-3\charscalex100 Amount\par\pard\ql \li2001\sb156\sl-241\slmu
lt0\tx4596 \up0 \expndtw-3\charscalex100 \ul0\nosupersub\cf10\f11\fs21 1990-91\t
ab \up0 \expndtw-3\charscalex100 .001\par\pard\ql \li2001\sb150\sl-241\slmult0\t
x4596 \up0 \expndtw-3\charscalex100 1991-92\tab \up0 \expndtw-3\charscalex100 .0
13\par\pard\ql \li2001\sb148\sl-241\slmult0\tx4596 \up0 \expndtw-3\charscalex100
1992-93\tab \up0 \expndtw-3\charscalex100 .032\par\pard\ql \li2001\sb149\sl-241
\slmult0\tx4596 \up0 \expndtw-3\charscalex100 1993-94\tab \up0 \expndtw-3\charsc
alex100 .059\par\pard\ql \li2001\sb147\sl-241\slmult0\tx4596 \up0 \expndtw-2\cha
rscalex100 1994-95\tab \up0 \expndtw-3\charscalex100 1.32\par\pard\ql \li2001\sb
149\sl-241\slmult0\tx4596 \up0 \expndtw-2\charscalex100 1995-96\tab \up0 \expndt
w-3\charscalex100 2.15\par\pard\ql \li2001\sb149\sl-241\slmult0\tx4596 \up0 \exp
ndtw-2\charscalex100 1996-97\tab \up0 \expndtw-3\charscalex100 2.82\par\pard\ql
\li2001\sb147\sl-241\slmult0\tx4596 \up0 \expndtw-2\charscalex100 1997-98\tab \u
p0 \expndtw-3\charscalex100 3.56\par\pard\ql \li2001\sb150\sl-241\slmult0\tx4596
\up0 \expndtw-2\charscalex100 1998-99\tab \up0 \expndtw-3\charscalex100 2.46\pa
r\pard\ql \li1897\sb149\sl-241\slmult0\tx4596 \up0 \expndtw-3\charscalex100 1999
-2000\tab \up0 \expndtw-3\charscalex100 2.16\par\pard\ql \li2001\sb148\sl-241\sl
mult0\tx4596 \up0 \expndtw-2\charscalex100 2000-01\tab \up0 \expndtw-3\charscale
x100 2.34\par\pard\ql \li2001\sb149\sl-241\slmult0\tx4596 \up0 \expndtw-2\charsc
alex100 2001-02\tab \up0 \expndtw-3\charscalex100 3.90\par\pard\ql \li2001\sb149
\sl-241\slmult0\tx4596 \up0 \expndtw-2\charscalex100 2002-03\tab \up0 \expndtw-3
\charscalex100 2.58\par\pard\ql \li2001\sb147\sl-241\slmult0\tx4596 \up0 \expndt
w-2\charscalex100 2003-04\tab \up0 \expndtw-3\charscalex100 3.20\par\pard\ql \li
20\sb197\sl-241\slmult0 \up0 \expndtw0\charscalex100 \ul0\nosupersub\cf9\f10\fs2
1 Note:\ul0\nosupersub\cf10\f11\fs21 The Government has reorganised FDI data fo
r 2000-01, 2001-02 and 2002-03\par\pard\ql \li548\sb0\sl-237\slmult0 \up0 \expnd
tw0\charscalex100 along the lines recommended by the IMF to include some hithert
o uncaptured\par\pard\ql \li548\sb1\sl-236\slmult0 \up0 \expndtw0\charscalex100
elements of capital. The fresh items have been classified under equity capital,\
par\pard\ql \li548\sb2\sl-238\slmult0 \up0 \expndtw0\charscalex105 reinvested ea
rnings and other capital. As per the revised data, FDI inflows\par\pard\ql \li54
8\sb1\sl-238\slmult0 \up0 \expndtw-1\charscalex100 during 2000-01 would now be $
4.03 billion, while these would be $6.13 billion\par\pard\ql \li548\sb1\sl-237\s
lmult0 \up0 \expndtw-2\charscalex100 in 2001-02, and $4.67 billion in 2002-03.\p
ar\pard\qj \li20\ri1329\sb113\sl-259\slmult0 \up0 \expndtw0\charscalex108 \ul0\n
osupersub\cf1\f2\fs23 Less than 40 of the top 100 MNCs - and none of the top sma
ll MNCs -\line \up0 \expndtw0\charscalex100 operate in this country. This shows
what a long way we have to go to become \up0 \expndtw-3\charscalex100 a multinat
ional heaven.\par\pard\ql \li20\sb231\sl-299\slmult0 \up0 \expndtw-6\charscalex1
00 \ul0\nosupersub\cf7\f8\fs26 18.6.1
Points of Concern to Foreign Investor
s\par\pard\qj \li20\ri1327\sb112\sl-260\slmult0 \up0 \expndtw0\charscalex109 \ul
0\nosupersub\cf1\f2\fs23 It might be of interest to analyse main points of conce
rn at this stage to \up0 \expndtw-3\charscalex100 foreign investors in relation
with the new policy.\par\pard\qj \li20\ri1328\sb112\sl-260\slmult0\tx382 \up0 \e
xpndtw0\charscalex100 1) \ul0\nosupersub\cf3\f4\fs23 Comparative Advantage amon
g Different Investment Markets:\ul0\nosupersub\cf1\f2\fs23 India \line\tab \up0
\expndtw-3\charscalex100 offers three basic advantages to foreign investors:\pa
r\pard\ql \li398\sb109\sl-264\slmult0 \up0 \expndtw-2\charscalex100 i) Availabi
lity of inexpensive manpower.
}

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\sl-264\slmult0 \up0 \expndtw-3\charscalex100 \ul0\nosupersub\cf1\f2\fs23 ii)
Existence of vast domestic market.\par\pard\ql \li1924\sb110\sl-264\slmult0 \up0
\expndtw-3\charscalex100 iii) Easy availability and lower costs of inputs.\par
\pard\ql \li1899\sb109\sl-264\slmult0 \up0 \expndtw-2\charscalex100 Foreign inve
stors have their own apprehensions in regard to each of these.\par\pard\qj \li18
99\ri0\sb115\sl-259\slmult0 \up0 \expndtw0\charscalex100 As to the \ul0\nosupe
rsub\cf3\f4\fs23 first\ul0\nosupersub\cf1\f2\fs23 , it is argued that low
wage levels may be offset by \line \up0 \expndtw-1\charscalex100 productiv
ity level to a large extent. For example, notwithstanding sizeable \line \up0 \e
xpndtw0\charscalex104 improvement in productivity in almost all the sectors over
the last five\par\pard\qj \li1899\ri0\sb1\sl-259\slmult0 \up0 \expndtw-2\charsc
alex100 decades, labour productivity is one of the lowest in the world. Producti
vity \line \up0 \expndtw0\charscalex108 in China is 30 per cent higher than her
e. Other Asian countries like \line \up0 \expndtw0\charscalex103 Thailand and In
donesia have productivity levels that are 300 to 400 per\par\pard\ql \li1899\sb0
\sl-259\slmult0 \up0 \expndtw-3\charscalex100 cent that of India.\par\pard\qj \l
i1899\ri0\sb113\sl-259\slmult0 \up0 \expndtw0\charscalex104 Further, industrial
relations may have a direct bearing on productivity. \up0 \expndtw0\charscalex10
6 This is consequence of the fact that the FDI operations in developing \up0 \ex
pndtw-3\charscalex100 countries are labour rather than capital intensive.\par\pa
rd\qj \li1899\ri0\sb114\sl-259\slmult0 \up0 \expndtw0\charscalex105 As to the \u
l0\nosupersub\cf3\f4\fs23 second\ul0\nosupersub\cf1\f2\fs23 , for taking hard in
vestment decisions, consumption \up0 \expndtw0\charscalex102 patterns are more
relevant than classifications based on incomes. In this \up0 \expndtw-3\charscal
ex100 regard, India may not score very high in foreigners\u8217? projections.\pa
r\pard\qj \li1899\ri0\sb114\sl-259\slmult0 \up0 \expndtw0\charscalex100 As to th
e \ul0\nosupersub\cf3\f4\fs23 third\ul0\nosupersub\cf1\f2\fs23 , the number of i
ndustries where India can offer such input \line \up0 \expndtw0\charscalex106 ad
vantages are few and not all of them will be considered by foreign \line \up0 \e
xpndtw0\charscalex100 companies that are sensitive to the possibility of their t
echnologies being\par\pard\qj \li1899\ri0\sb0\sl-259\slmult0 \up0 \expndtw0\char
scalex105 cloned in an environment where patent laws are weak. For suc
h \line \up0 \expndtw0\charscalex103 companies India\u8217?s trained manpower
may even be a liability, as this \line \up0 \expndtw-1\charscalex100 manpower
has the ability to recreate technology that they have worked on.\par\pard\qj \l
i1899\ri0\sb0\sl-260\slmult0 \up0 \expndtw0\charscalex109 The benefit of lower c
osts of inputs can also be eroded if increased \up0 \expndtw-3\charscalex100 dem
and raises prices.\par\pard\ql \li1546\sb109\sl-264\slmult0\tx1894 \up0 \expndtw
-3\charscalex100 2)\tab \up0 \expndtw0\charscalex105 \ul0\nosupersub\cf3\f4\fs23
Permanence of New Policy:\ul0\nosupersub\cf1\f2\fs23 The foreign investors wou
ld wish to be\par\pard\ql \li1546\ri0\sb0\sl-315\slmult0\fi352\tx1899 \up0 \expn
dtw0\charscalex107 assured of the liberalisation policy in the future. The absen
ce of trust \line\tab \up0 \expndtw-3\charscalex100 provides formidable obstacle
s to the creation of public institutions. \line \up0 \expndtw-3\charscalex100 3
) \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf3\f4\fs23 Exit Policy:\ul0\nos
upersub\cf1\f2\fs23 Disinvestment by foreign partners in joint ventures in Indi
a is\par\pard\qj \li1899\ri0\sb0\sl-259\slmult0 \up0 \expndtw0\charscalex100 at
present under a highly restrictive control by the Government. Required \line \up
0 \expndtw-1\charscalex100 approvals are both cumbersome and time-consuming and
the sale price of \line \up0 \expndtw0\charscalex100 equity shares to be dispose
d of by foreign investors are virtually dictated\par\pard\qj \li1899\ri0\sb0\sl259\slmult0 \up0 \expndtw0\charscalex103 by the RBI. While the underlying thinki
ng behind such a system is not \up0 \expndtw-1\charscalex100 incomprehensible, i
t has probably been making potential foreign investors \up0 \expndtw-3\charscale
x100 more cautious in considering investment proposals in India.\par\pard\ql \li
1546\sb55\sl-264\slmult0\tx1894 \up0 \expndtw-3\charscalex100 4)\tab \up0 \expnd
tw0\charscalex106 \ul0\nosupersub\cf3\f4\fs23 Procedural Simplifications:\ul0\no

supersub\cf1\f2\fs23 In this respect, the country seems to be\par\pard\ql \li18
99\sb1\sl-259\slmult0 \up0 \expndtw-3\charscalex100 known more for erecting hurd
les in the investors\u8217? path.\par\pard\ql \li1546\sb109\sl-264\slmult0\tx189
4 \up0 \expndtw-3\charscalex100 5)\tab \up0 \expndtw-2\charscalex100 \ul0\nosupe
rsub\cf3\f4\fs23 Removal of Comparative Disadvantages:\ul0\nosupersub\cf1\f2\fs2
3 Foreign investors would have\par\pard\qj \li1899\ri0\sb1\sl-259\slmult0 \up0
\expndtw-1\charscalex100 to be convinced that the existing comparative advantage
s are not offset by \up0 \expndtw-3\charscalex100 the comparative disadvantages
they have to cope with:\par\pard\ql \li1899\sb109\sl-264\slmult0 \up0 \expndtw0\
charscalex103 i) They would wish to examine security situation and living condi
tions\par\pard\ql \li2250\sb0\sl-260\slmult0 \up0 \expndtw-3\charscalex100 affec
ting foreign residents in India.\par\pard\ql \li1899\sb109\sl-264\slmult0 \up0 \
expndtw0\charscalex100 ii) They would also be concerned with the availab
ility, quality and\par\pard\ql \li1899\ri0\sb0\sl-371\slmult0\fi350 \up0 \expn
dtw-3\charscalex100 reliability of local vendors producing parts and components.
\line \up0 \expndtw-1\charscalex100 iii) They would have to look into whatever
shortcomings may be found in\par\pard\ql \li2250\sb0\sl-207\slmult0 \up0 \expndt
w0\charscalex106 infrastructural facilities and services, including telepho
ne and\par\pard\ql \li2250\sb0\sl-207\slmult0 \up0 \expndtw-3\charscalex100 tel
ecommunication services, power supply, water supply, and road and\par\pard\ql \l
i2250\sb1\sl-252\slmult0 \up0 \expndtw-3\charscalex100 railway transportation.\p
ar\pard\ql \li1899\sb112\sl-264\slmult0 \up0 \expndtw-2\charscalex100 iv) Cost o
f doing business in India continues to be high.\par\pard\column \ql \li8863\sb0\
sl-195\slmult0 \par\pard\ql \li8863\sb0\sl-195\slmult0 \par\pard\ql \li20\sb63\s
l-195\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf6\f7\fs17 Multinat
ional Corporations\par\pard\ql \li570\sb4\sl-195\slmult0 \up0 \expndtw-2\charsca
lex100 and Foreign Capital\par\pard\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql
\pard\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql \li1625\sb167\sl-264\slmult0 \
up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf1\f2\fs23 59

}
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ar\pard\column \ql \li3931\sb0\sl-264\slmult0 \par\pard\ql \li372\sb155\sl-264\s
lmult0 \up0 \expndtw0\charscalex100 v) The regulatory system is still non-trans
parent. Bureaucratic maze and\par\pard\ql \li723\sb1\sl-260\slmult0 \up0 \expndt
w-3\charscalex100 redtapism abound.\par\pard\ql \li372\sb109\sl-264\slmult0 \up0
\expndtw-2\charscalex100 vi) Intellectual property rights regime continues to b
e weak.\par\pard\qj \li20\ri1330\sb114\sl-259\slmult0 \up0 \expndtw0\charscalex1
00 A recent editorial comment has to say: \u8220?Indian form of controlling econ
omic \up0 \expndtw-3\charscalex100 activity has proved as hardy and survival-pro
ne as the cockroach.\u8221?\par\pard\ql \li20\sb231\sl-299\slmult0 \up0 \expndtw
-5\charscalex100 \ul0\nosupersub\cf7\f8\fs26 18.6.2
Criticism of Inflows an
d Need for Corrective Action\par\pard\qj \li20\ri1327\sb113\sl-259\slmult0 \up0

\expndtw-1\charscalex100 \ul0\nosupersub\cf1\f2\fs23 MNCs are being increasin
gly criticised for their investment policies and \up0 \expndtw-3\charscale
x100 behaviour, specially on the following counts:\par\pard\qj \li20\ri1329\sb11
4\sl-259\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf3\f4\fs23 One\u
l0\nosupersub\cf1\f2\fs23 , cowboy approach of landing in India, hastily choosin
g a partner, making \up0 \expndtw-3\charscalex100 a mistake and then breaking th
e relationship.\par\pard\qj \li20\ri1327\sb114\sl-259\slmult0 \up0 \expndtw0\cha
rscalex100 \ul0\nosupersub\cf3\f4\fs23 Two\ul0\nosupersub\cf1\f2\fs23 , leverage
an Indian partner to get in, and then move quickly to a 51 per \up0 \expndtw-1\
charscalex100 cent equity, and if possible a near total takeover. Indeed, a rece
nt study brings \up0 \expndtw-2\charscalex100 out that 35 to 40 per cent of FDI
inflows in recent years have been trigerred by \up0 \expndtw-2\charscalex100 mer
gers and acquisitions by foreign companies and not for fresh projects.\par\pard\
qj \li20\ri1328\sb113\sl-259\slmult0 \up0 \expndtw0\charscalex102 \ul0\nosupersu
b\cf3\f4\fs23 Three\ul0\nosupersub\cf1\f2\fs23 , setting up a 100 per cent owned
subsidiary despite a joint venture. It \up0 \expndtw0\charscalex107 only goes t
o show how sensitive foreign firms are about the managerial \up0 \expndtw0\chars
calex100 control. However, it is often argued that majority equity holding is ne
cessary \up0 \expndtw0\charscalex100 for international firms to be assured enoug
h to bring in the latest technology \up0 \expndtw-3\charscalex100 that could hav
e positive spillover in the host economy.\par\pard\qj \li20\ri1327\sb113\sl-259\
slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf3\f4\fs23 Four\ul0\nosup
ersub\cf1\f2\fs23 , some of them have transferred their brands to 100 per cent s
ubsidiaries. \up0 \expndtw0\charscalex108 Indeed, a recent study on the subject
concludes that the days of the joint \up0 \expndtw-3\charscalex100 ventures were
over.\par\pard\qj \li20\ri1327\sb58\sl-259\slmult0 \up0 \expndtw0\charscalex107
\ul0\nosupersub\cf3\f4\fs23 Five\ul0\nosupersub\cf1\f2\fs23 , supply second han
d plant and machinery declared obsolete in their \up0 \expndtw-3\charscalex100 c
ountry.\par\pard\ql \li20\sb53\sl-264\slmult0 \up0 \expndtw-3\charscalex100 \ul0
\nosupersub\cf3\f4\fs23 Six\ul0\nosupersub\cf1\f2\fs23 , short-term focus for qu
ick results.\par\pard\ql \li20\ri1327\sb35\sl-287\slmult0 \up0 \expndtw-3\charsc
alex100 \ul0\nosupersub\cf3\f4\fs23 Seven\ul0\nosupersub\cf1\f2\fs23 , sales app
roach to India as distinct from manufacturing. \line \up0 \expndtw0\charscalex10
0 \ul0\nosupersub\cf3\f4\fs23 Lastly\ul0\nosupersub\cf1\f2\fs23 , using expatr
iate management and CEOs rather than competitive \up0 \expndtw-3\charscale
x100 Indian management.\par\pard\ql \li20\sb227\sl-299\slmult0 \up0 \expndtw-9\c
harscalex100 \ul0\nosupersub\cf7\f8\fs26 18.6.3
Suggestions\par\pard\qj \li
20\ri1328\sb112\sl-260\slmult0 \up0 \expndtw0\charscalex100 \ul0\nosupersub\cf1\
f2\fs23 Policy reform is an on-going process. Following suggestions can be made
to \up0 \expndtw-3\charscalex100 make policy towards foreign capital more meanin
gful and effective:\par\pard\ql \li20\ri1326\sb113\sl-259\slmult0\tx382\tx382\tx
382 \up0 \expndtw0\charscalex104 1) State infrastructure is a major constraint
and things can worsen if quick \line\tab \up0 \expndtw0\charscalex109 action is
not taken to watch the quality and size of all infrastructure \line \tab \up0 \e
xpndtw0\charscalex100 components like transport, communication and energy, compa
rable with \line \tab \up0 \expndtw-3\charscalex100 that in other countries comp
eting for the same capital.\par\pard\ql \li20\ri1327\sb114\sl-259\slmult0\tx382\
tx382 \up0 \expndtw0\charscalex100 2) Attention need be paid to restructuring e
ducation, training and skills - the \line\tab \up0 \expndtw0\charscalex100 proce
ss must begin at the level of primary education upwards with \line \ta
b \up0 \expndtw-3\charscalex100 emphasis on absorption of appropriate skills and
through upgradation.\par\pard\qj \li20\ri1328\sb113\sl-259\slmult0\tx382 \up0 \
expndtw0\charscalex104 3) India should promote quality standards. The present m
indset favouring \line\tab \up0 \expndtw-3\charscalex100 cheapness of the cost o
f capital needs a change.\par\pard\ql \li20\ri1327\sb114\sl-259\slmult0\tx382\tx
382 \up0 \expndtw0\charscalex103 4) The existing framework of legislation and p
ractices related to industrial \line\tab \up0 \expndtw0\charscalex100 action sho
uld be reorganised so as to make it conducive to the promotion \line \tab \up0 \
expndtw-2\charscalex100 of productivity - oriented measures.\par\pard\qj \li20\r
i1328\sb113\sl-259\slmult0\tx382 \up0 \expndtw0\charscalex105 5) The operating

environment need be made \u8216?investor-friendly\u8217?. For this \line\tab \u
p0 \expndtw-3\charscalex100 purpose, following suggestions can be made:
}
}}
}
\sl-264\slmult0\tx2276 \up0 \expndtw-3\charscalex100 \ul0\nosupersub\cf1\f2\fs23
i)\tab \up0 \expndtw-1\charscalex100 At the entry level, there are two alternat
ive routes, viz., the Automatic\par\pard\ql \li2250\sb1\sl-260\slmult0 \up0 \exp
ndtw0\charscalex100 Approval Route (AA) of RBI and the Foreign Investment Promot
ion\par\pard\ql \li2250\sb0\sl-259\slmult0 \up0 \expndtw-3\charscalex100 Board (
FIPB). The policy framework should be liberalised to make the\par\pard\ql \li225
0\sb0\sl-259\slmult0 \up0 \expndtw0\charscalex102 AA route more effective. An in
creased share of the AA route in the\par\pard\ql \li2250\sb1\sl-260\slmult0 \up0
\expndtw0\charscalex105 FDI approvals will concurrently reduce the pressures on
the FIPB\par\pard\ql \li2250\sb1\sl-259\slmult0 \up0 \expndtw-3\charscalex100 r
oute.\par\pard\ql \li1899\sb110\sl-264\slmult0 \up0 \expndtw0\charscalex104 ii)
The efficiency of the state-level frontline bureaucracy is absolutely\par\pard\
ql \li2250\sb0\sl-259\slmult0 \up0 \expndtw0\charscalex107 critical to keep up i
nvestors\u8217? confidence to prevent cost and time\par\pard\ql \li2250\sb0\sl-2
59\slmult0 \up0 \expndtw-2\charscalex100 overruns which, unless prevented, will
have adverse effect not only on\par\pard\ql \li2250\sb2\sl-260\slmult0 \up0 \exp
ndtw-3\charscalex100 individual investors but also on the economy as a whole.\pa
r\pard\ql \li1546\sb109\sl-264\slmult0\tx1894 \up0 \expndtw-3\charscalex100 6)\t
ab \up0 \expndtw0\charscalex108 We need to be tough with MNCs. But the real way
to be tough with\par\pard\qj \li1899\ri0\sb1\sl-259\slmult0 \up0 \expndtw0\chars
calex101 MNCs is to make the domestic market a ruthlessly competitive place by \
line \up0 \expndtw0\charscalex100 doing away with discretionary FDI approva
ls. Otherwise, corporates \line \up0 \expndtw0\charscalex100 would be back at
the old game of maximising gains by taking advantage\par\pard\ql \li1899\sb2\sl260\slmult0 \up0 \expndtw-3\charscalex100 of opportunities to politically manage
the market place.\par\pard\ql \li1546\sb109\sl-264\slmult0\tx1894 \up0 \expndtw
-3\charscalex100 7)\tab \up0 \expndtw0\charscalex103 FDI may actually be harmful
to the recipient country if the economy is\par\pard\qj \li1899\ri0\sb1\sl-259\s
lmult0 \up0 \expndtw0\charscalex104 highly protected and foreign investment take
s place behind high tariff \line \up0 \expndtw0\charscalex101 walls. This type
of investment is generally referred to as the \up0 \expndtw-3\charscalex10
0 \u8216?tariff-\par\pard\qj \li1899\ri0\sb1\sl-259\slmult0 \up0 \expndtw-1\char

scalex100 jumping\u8217? variety of foreign investment, whose primary objective
is to take \line \up0 \expndtw0\charscalex104 advantage of the protected markets
in the host country. The longer the \line \up0 \expndtw0\charscalex100 Governme
nt shields its home market with tariffs, the more will the\par\pard\qj
\li1899\ri0\sb1\sl-259\slmult0 \up0 \expndtw0\charscalex100 foreigner come in t
o exploit that protected market, and more acute will be \line \up0 \expndtw0\cha
rscalex102 the conflict between him and the domestic entrepreneur. In view of th
is, \line \up0 \expndtw0\charscalex105 an appropriate policy framework must
respond to two conflicting\par\pard\qj \li1899\ri0\sb1\sl-259\slmult0 \up0 \
expndtw0\charscalex100 objectives: the need to liberalise rules governing such i
nvestment in view \line \up0 \expndtw0\charscalex100 of the growing integration
of the world economy, and the need to ensure \line \up0 \expndtw0\charscalex102
that such investment has positive effects on the country\u8217?s economy and\par
\pard\ql \li1899\sb0\sl-259\slmult0 \up0 \expndtw-3\charscalex100 does not lead
to negative welfare effects.\par\pard\ql \li1546\sb111\sl-264\slmult0 \up0 \expn
dtw-3\charscalex100 \ul0\nosupersub\cf3\f4\fs23 Check Your Progress 3\par\pard\q
l \li1546\sb108\sl-264\slmult0 \up0 \expndtw-2\charscalex100 Note:\ul0\nosupersu
b\cf1\f2\fs23 i) Space is given below each question for your answer.\par\pard\
ql \li2131\sb109\sl-264\slmult0 \up0 \expndtw-2\charscalex100 ii) Check your ans
wer(s) with those given at the end of the unit.\par\pard\qj \li1546\ri0\sb114\sl
-259\slmult0\tx1899 \up0 \expndtw0\charscalex100 1) State the major drawbacks i
n the inflows of foreign capital as experienced \line\tab \up0 \expndtw-3\charsc
alex100 in recent times.\par\pard\qj \li1899\ri17\sb22\sl-372\slmult0 \up0 \expn
dtw-3\charscalex100 \u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u82
30?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?
\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?... \line \up0 \e
xpndtw-3\charscalex100 \u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\
u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u82
30?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?... \line \up0
\expndtw-3\charscalex100 \u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u823
0?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\
u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?...\par\par
d\qj \li1899\ri17\sb1\sl-372\slmult0 \up0 \expndtw-3\charscalex100 \u8230?\u8230
?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u
8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u823
0?\u8230?\u8230?\u8230?\u8230?... \line \up0 \expndtw-3\charscalex100 \u8230?\u8
230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230
?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u
8230?\u8230?\u8230?\u8230?\u8230?... \line \up0 \expndtw-3\charscalex100 \u8230?
\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8
230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230
?\u8230?\u8230?\u8230?\u8230?\u8230?...\par\pard\qj \li1546\ri0\sb95\sl-259\slmu
lt0\tx1899 \up0 \expndtw0\charscalex108 2) Make suggestions to remove hurdles i
n the path of inflow of foreign \line\tab \up0 \expndtw-3\charscalex100 capital.
\par\pard\qj \li1899\ri17\sb23\sl-371\slmult0 \up0 \expndtw-3\charscalex100 \u82
30?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?
\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8
230?\u8230?\u8230?\u8230?\u8230?\u8230?... \line \up0 \expndtw-3\charscalex100 \
u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u82
30?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?
\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?... \line \up0 \expndtw-3\charscalex10
0 \u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\
u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u82
30?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?...\par\pard\qj \li1899\ri17\sb2\sl
-371\slmult0 \up0 \expndtw-3\charscalex100 \u8230?\u8230?\u8230?\u8230?\u8230?\u
8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u823
0?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\
u8230?... \line \up0 \expndtw-3\charscalex100 \u8230?\u8230?\u8230?\u8230?\u8230
?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u
8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u8230?\u823
0?\u8230?...\par\pard\column \ql \li8863\sb0\sl-195\slmult0 \par\pard\ql \li8863
\sb0\sl-195\slmult0 \par\pard\ql \li20\sb63\sl-195\slmult0 \up0 \expndtw-2\chars
calex100 \ul0\nosupersub\cf6\f7\fs17 Multinational Corporations\par\pard\ql \li5
70\sb4\sl-195\slmult0 \up0 \expndtw-2\charscalex100 and Foreign Capital\par\pard
0 \par\pard\ql \li1625\sb167\sl-264\slmult0 \up0 \expndtw-2\charscalex100 \ul0\n
osupersub\cf1\f2\fs23 61
}
}}
}

mult0 \up0 \expndtw0\charscalex92 \ul0\nosupersub\cf11\f12\fs30 18.7
LET US
SUM UP\par\pard\qj \li20\ri1327\sb141\sl-259\slmult0 \up0 \expndtw-1\charscalex
100 \ul0\nosupersub\cf1\f2\fs23 In an increasingly globalising world where the d
ifferent economies are getting \up0 \expndtw0\charscalex102 more integrated than
ever before, flows of capital from one place to another \up0 \expndtw0\charscal
ex102 acquire added significance, both quantitative and qualitative. Capital mov
es \up0 \expndtw0\charscalex104 from less productive uses to more productive one
s. Developing economies \up0 \expndtw0\charscalex106 provide foreign capital wit
h an opportunity to earn better returns. Hence, \up0 \expndtw-2\charscalex100 de
veloping economies always work as magnets for multinational corporations, \up0 \
expndtw0\charscalex106 the carriers of foreign capital. Foreign capital performs
three critical gap-\line \up0 \expndtw0\charscalex107 filling functions. Howeve
r, for foreign capital to play a critical role, it is \up0 \expndtw0\charscalex1
04 necessary that a suitable environment is provided. A suitable environment \up
0 \expndtw0\charscalex109 enables an MNC to work at and exploit its potential. I
ndia has virtually \up0 \expndtw0\charscalex100 thrown open its doors to foreign
capital. Despite that, however, the response \up0 \expndtw0\charscalex105 of fo
reign capital has not been very encouraging. It is important to have a \up0 \exp
ndtw0\charscalex105 fresh look at the policy framework so that a balance is stru
ck between the \up0 \expndtw-3\charscalex100 interests of the host country and f
oreign capital.\par\pard\ql \li20\sb257\sl-345\slmult0 \up0 \expndtw0\charscalex
91 \ul0\nosupersub\cf11\f12\fs30 18.8
EXERCISES\par\pard\ql \li20\ri1327\sb
142\sl-259\slmult0\tx382\tx382 \up0 \expndtw0\charscalex102 \ul0\nosupersub\cf1\
f2\fs23 1) Critically examine the role of multinational corporations in a devel
oping \line\tab \up0 \expndtw0\charscalex103 economy. In this context, would you
advocate a policy of encouraging \line \tab \up0 \expndtw-3\charscalex100 inves
tment by multinationals in India?\par\pard\qj \li20\ri1327\sb113\sl-259\slmult0\
tx382 \up0 \expndtw0\charscalex100 2) What are the arguments advanced agai
nst multinational corporations \line\tab \up0 \expndtw-3\charscalex100 operati
ng in India?\par\pard\ql \li20\sb110\sl-264\slmult0\tx376 \up0 \expndtw-3\charsc
alex100 3)\tab \up0 \expndtw0\charscalex102 \u8220?Response of foreign capital t
o recent policy initiatives is considered as\par\pard\ql \li372\sb1\sl-259\slmul

t0 \up0 \expndtw-3\charscalex100 lukewarm.\u8221? Make suggestions to change thi
s trend.\par\pard\ql \li20\sb110\sl-264\slmult0\tx376 \up0 \expndtw-3\charscalex
100 4)\tab \up0 \expndtw-2\charscalex100 \u8220?The new industrial policy can be
described as a minor revolution as far as\par\pard\qj \li372\ri1329\sb0\sl-260\
slmult0 \up0 \expndtw0\charscalex102 decisions concerning foreign capital are co
ncerned.\u8221? Elaborate what has \up0 \expndtw-3\charscalex100 the impact of t
he new policy.\par\pard\ql \li20\sb256\sl-345\slmult0 \up0 \expndtw0\charscalex9
2 \ul0\nosupersub\cf11\f12\fs30 18.9
KEY WORDS\par\pard\qj \li20\ri1328\sb1
39\sl-260\slmult0 \up0 \expndtw0\charscalex106 \ul0\nosupersub\cf3\f4\fs23 Capit
al Transfers:\ul0\nosupersub\cf1\f2\fs23 Inflows and outflows of capital from o
ne country to \up0 \expndtw-3\charscalex100 another.\par\pard\qj \li20\ri1328\sb
113\sl-259\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf3\f4\fs23 Sav
ings Gap:\ul0\nosupersub\cf1\f2\fs23 The difference between the required rate o
f investment and the \up0 \expndtw-3\charscalex100 actual rate of saving availab
le in an economy.\par\pard\qj \li20\ri1327\sb114\sl-259\slmult0 \up0 \expndtw-1\
charscalex100 \ul0\nosupersub\cf3\f4\fs23 Trade Gap:\ul0\nosupersub\cf1\f2\fs23
The difference between the expenditure of foreign exchange and \up0 \expndtw-3\
charscalex100 receipts of foreign exchange in transactions of goods and services
.\par\pard\qj \li20\ri1326\sb114\sl-259\slmult0 \up0 \expndtw0\charscalex103 \ul
0\nosupersub\cf3\f4\fs23 Multinational Corporations:\ul0\nosupersub\cf1\f2\fs23
A business organisation which owns or \up0 \expndtw0\charscalex102 contr
ols income generation assets in more than one country, and in so doing \up0 \exp
ndtw-3\charscalex100 produces goods or services outside its country of origin.\p
ar\pard\ql \li20\ri1328\sb82\sl-297\slmult0 \up0 \expndtw-1\charscalex100 \ul0\n
osupersub\cf3\f4\fs23 Foreign Direct Investment:\ul0\nosupersub\cf1\f2\fs23 Mor
e generally refers to the value of the MNC\u8217?s \up0 \expndtw-3\charscalex100
investment in equity shares of an enterprise in a foreign country. \line \up0 \
expndtw0\charscalex100 \ul0\nosupersub\cf3\f4\fs23 Greenfield Investment:\ul0\n
osupersub\cf1\f2\fs23 Refers to an investment in building up a new \up
0 \expndtw-3\charscalex100 production facility.\par\pard\qj \li20\ri1327\sb109\s
l-259\slmult0 \up0 \expndtw0\charscalex106 \ul0\nosupersub\cf3\f4\fs23 Portfolio
Investment:\ul0\nosupersub\cf1\f2\fs23 Refers to equity holdings by a non-resi
dent in the \up0 \expndtw-3\charscalex100 recipient counry\u8217?s joint stock c
ompanies.
}
}}
}
}}
}
}}
}
}}
}
}}
}
}}
}
}}
}
\sl-345\slmult0 \up0 \expndtw0\charscalex93 \ul0\nosupersub\cf11\f12\fs30 18.10
SOME USEFUL BOOKS\par\pard\ql \li1546\ri0\sb93\sl-316\slmult0 \up0 \expndtw
-3\charscalex100 \ul0\nosupersub\cf1\f2\fs23 Basu, Kaushik (ed.) (2004); \ul0\no
supersub\cf12\f13\fs23 India\u8217?s Emerging Economy\ul0\nosupersub\cf1\f2\fs23
, MIT Press. \line \up0 \expndtw0\charscalex103 Bhagwati, Jagdish (2004); \ul0
\nosupersub\cf12\f13\fs23 In Defence of Globalisation\ul0\nosupersub\cf1\f2\fs23
, Oxford University \up0 \expndtw-3\charscalex100 Press, New Delhi.\par\pard\ql
\li1546\ri0\sb57\sl-316\slmult0 \up0 \expndtw0\charscalex100 Bhattacharya, Adit
ya and Marzit, Sugata (eds.) (2004); \ul0\nosupersub\cf12\f13\fs23 Globalisation
and the \up0 \expndtw-3\charscalex100 Developing Economies: Theory and Evidence
\ul0\nosupersub\cf1\f2\fs23 , Manohar, New Delhi. \up0 \expndtw-3\charscalex100
Jha, Raghbendra (ed.) (2003); \ul0\nosupersub\cf12\f13\fs23 Indian Economic Refo
rms\ul0\nosupersub\cf1\f2\fs23 , Hampshire, U.K.\par\pard\qj \li1546\ri0\sb105\s
l-259\slmult0 \up0 \expndtw0\charscalex100 Kalirazan, K.P. and Sankar, U. (e
ds.) (2002); \ul0\nosupersub\cf12\f13\fs23 Economic Reform and the \up0 \exp
ndtw-3\charscalex100 Liberalisation of the Indian Economy\ul0\nosupersub\cf1\f2\
fs23 , Cheltenham, Edgar Elgar.\par\pard\ql \li1546\sb255\sl-345\slmult0 \up0 \e
xpndtw0\charscalex98 \ul0\nosupersub\cf11\f12\fs30 18.11 ANSWERS OR HINTS TO CH
ECK YOUR\par\pard\ql \li2426\sb3\sl-345\slmult0 \up0 \expndtw0\charscalex97 PROG
RESS EXERCISES\par\pard\ql \li1546\sb138\sl-264\slmult0 \up0 \expndtw-3\charscal
ex100 \ul0\nosupersub\cf3\f4\fs23 Check Your Progress 1\par\pard\ql \li1546\sb10
8\sl-264\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf1\f2\fs23 1) S
ee Sub-section 18.2.1\par\pard\ql \li1546\sb110\sl-264\slmult0 \up0 \expndtw-1\c
harscalex100 2) See Sub-section 18.2.2\par\pard\ql \li1546\sb109\sl-264\slmult0
\up0 \expndtw-1\charscalex100 3) See Sub-section 18.2.3\par\pard\ql \li1546\sb
111\sl-264\slmult0 \up0 \expndtw-3\charscalex100 \ul0\nosupersub\cf3\f4\fs23 Che
ck Your Progress 2\par\pard\ql \li1546\sb108\sl-264\slmult0 \up0 \expndtw0\chars
calex100 \ul0\nosupersub\cf1\f2\fs23 1) See Section 18.3\par\pard\ql \li1546\sb
109\sl-264\slmult0 \up0 \expndtw-1\charscalex100 2) See Sub-section 18.3.1\par\
pard\ql \li1546\sb110\sl-264\slmult0 \up0 \expndtw-1\charscalex100 3) See Sub-s
ection 18.4.1\par\pard\ql \li1546\sb109\sl-264\slmult0 \up0 \expndtw-1\charscale
x100 4) See Sub-section 18.5.2\par\pard\ql \li1546\sb112\sl-264\slmult0 \up0 \e
xpndtw-3\charscalex100 \ul0\nosupersub\cf3\f4\fs23 Check Your Progress 3\par\par
d\ql \li1546\sb108\sl-264\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\
cf1\f2\fs23 1) See Sub-section 18.6.2\par\pard\ql \li1546\sb110\sl-264\slmult0
\up0 \expndtw-1\charscalex100 2) See Sub-section 18.6.3\par\pard\column \ql \li
20\sb63\sl-195\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf6\f7\fs17
Multinational Corporations\par\pard\ql \li570\sb4\sl-195\slmult0 \up0 \expndtw2\charscalex100 and Foreign Capital\par\pard\ql \li10468\sb0\sl-264\slmult0 \par

ult0 \par\pard\ql \li10468\sb0\sl-264\slmult0 \par\pard\ql \li1625\sb167\sl-264\
slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf1\f2\fs23 63
}
}}
}
}}
{\shp {\*\shpinst\shpleft1519\shptop678\shpright8689\shpbottom698\shpfhdr0\shpbx
page\shpbypage\shpwr3\shpwrk0\shpfblwtxt1\shpz58\shplid2
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MNC Eco Notes

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MNC Eco Notes

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ited by the prevailing low level of \line \up0 \expndtw0\charscalex104 income,

ith a high investment \up0 \expndtw0\charscalex104 component open up new opportu

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e areas crucial in the \up0 \expndtw0\charscalex100 development strategy of

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an hope to get from MNC operations. These benefits \up0 \expndtw-3\charscalex100

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attitude \line\tab \up0 \expndtw0\charscalex101 towards foreign capital. Many c

.\par\pard\ql \li2131\sb109\sl-264\slmult0 \up0 \expndtw-2\charscalex100 ii) Che

r\pard\ql \li1899\sb0\sl-259\slmult0 \up0 \expndtw-3\charscalex100 capital.\par\

ar\pard\ql \li2127\sb195\sl-241\slmult0\tx4415 \up0 \expndtw-3\charscalex100 Yea

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d Need for Corrective Action\par\pard\qj \li20\ri1327\sb113\sl-259\slmult0 \up0

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o recent policy initiatives is considered as\par\pard\ql \li372\sb1\sl-259\slmul

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\sn geoRight}{\sv 7170}}{\sp{\sn geoBottom}{\sv 20}}

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