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UNIT 10 CORPORATE STMTEGY AND
FOREIGN DIRECT INVESTMENT

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Structure
Objectives
Introduction
Meaning and Theory of Multinational Corporations
Strategies of Multinational Corporations
Meaning and Rationale of Foreign Direct lnvestment
Corporate Strategy, Joint Ventures and Global Expansion
lndian Regulation of Foreign Direct lnvestment and Guidelines
Foreign Exchange Regulation : FERA and FEMA
Let Us Sum Up
Key Words
Answers to Check Your Progress
Terminal QuestionslExercises

10.0 OBJECTIVES
After studying this unit you should be able to :
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explain the meaning, strategy and rationale of multinational corporations
discuss the rational of foreign direct investment
analyse corporate strategy regarding joint ventures and global expansion
throw light on Indian regulation of foreign direct investment and FERA and FEMA

10.1 INTRODUCTION .
As you know the companies and customers have become international. Therefore, the
n~imberof investors has been increasing. They are buying the shares of multinational
corporations. Multinational corporations try to create the value of their shareholders by
investing in the projects abroad which have positive net present value. In order to earn
return on their projects, multinational corporations must be able to transfer abroad tlrcil.
sources of domestic competitive advantage. For this, they have t o plan a strategy for
global expansion and joint venture which they undertake abaord.
In this unit, you will letirn about the meaning and strategy of multinational corporations
and rationale of foreign direct investment. You will also learn about the corporate stratcgy
joint ventures and global expansion and Indian regulation and guidelines of foreign dircct
investment and foreign exchange regulation - FERA and FEMA.

10.2

MEANING AND THEORY OF MULTINATIONAL
CORPORATIONS

The history of multinational corporations (MNCs) can be traced to ancient times when
lndia was a leading player in international commerce.
According to Kautilya's Arthasastra, hundred per cent quality control on exports, as wcll

as imports, was the watch word in that regime. That can be described as the first stage in
the development of multinational corporations, The second stage can be identified with
the appearance of commercial revolution in England, alongwith the craze for colonisation
on the part of several European countries, some five hundred years back (around 1500
A.D.) in the wake of the then time-honoured doctrine of Mercantilism. It implied
augmentation in the stock of precious metals like gold and silver through favourablebalances of trade. The East lndia Company belonged to that genus, though it soon
turned political.

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The third stage. The term Transational Corporation (TNC) has been' in vogue so far as some international official documents are concerned. Budapest) : "MNC is a corporate undertaking whose industrial operations are based in more than two countries and whose decision-making process is based on an overall strategy. as follows (at the fourth world congress of economists. such as "India and Nepal" or "USA and Canatla". I don't think that a company doing business in two or three countries can be considered multinational. lllvcsting i n Foreign Operations ." The new slogan is "Think Global. having developed countries as their "home". 1843-60 for the United States. the global sales of 250. Mr. so one nationality does not dominate the organisation too much. 1 830-60 for France. most relevant to current international business. so as to subserve a high degree of economic complementarity.ongst the top ten. about one-third (162) had USA as their home country. and so on. according to Rostow. while roughly one-fourth (126) had their origin in Japan.000 TNCs exceeded $5. The sales of the four biggest TNC exceeded the GDP of all African countries. Germany (41) and Britain (34) put together accounted for another (close to) one-fourth of the Fortune 500 (1997) list. In the 1997 list.?ritain. and Mitsui .they understand the local scene better than anybody else. no less than six were of Japanese origin. According to UNCTAD World Investment Report 1995. Maisonrouge concedes that. 1850-73 for Germany. So. any corporation which transcends a national boundary can be called a TNC.Am. 6' -- According to Fortune (American) 1997 list of 500 Global Corporations. Act Local". Moreover. President of IBM World Trade Corporation (a subsidiary of International Business Machines Corporation) : 1) It nlust do business in many countries.P. and this lielps promote good citizenship. this would lead to the Theory of Equi-distance amongst various countries covered by the International (Multinational) Corporation.. too. They controlled over 80 percent of world trade and 90 percent of patents worldwide. n TNC is much more than a Binational Corporation (BNC) whose activities are confined to just two countries. Jacques G Maisonrouge. 1783. Professor C. 5) There must be multinational stock ownership the stock must be owned by people in different countries.1802 for Great. Ford (USA). MNCs." In an ideal situation. As many as 405 (over 80 per cent) of these MNCs belonged to these five countries. the overall complexion of the MNC must not appear to be the replica of any one nationality. staffed with people coming from different countries. in spirit. Again. mere selling agencies do not amount to inultinational corporations which must have sufficiently strong 'production base' of a comparablc character in a number of countries. but even some of those which are deemed to be advanced. that a true national entity has. Of late. In this game. have tried to replicate their manufacturing and service activities in other countries. have often extended their industrial aclivity through their subsidiaries to "host" countries of the developing world. This supports the first criterion that the MNC must bring within its ambit many countries that are in different stages of economic development. while three were Americans and only one European. there is no truly multinational company. Kindleberger of MIT. But. In letter. 3) There should be nationals running those local co~npanies. some MNCs of Indian origin. The approximate take-ofydates were.'not only the less-developed ones. 2) It must have foreign subsidiaries with the same R & D. The following five basic criteria were laid down for a multinational company by Mr. the first three positions were held by General Motors (USA). had used the term Internatioqpl Corporation "which has no country to which it owes more loyalty than any other to which it feels completely at home. You can't prepare general managers if you have only a sales organisation. 4) There must be a multinational head quarter. in perfect fulfilment of these criteria. is a Post-Industrial revolution phenomenon which has blossomed largely in the twentieth centuly. it must be in many countries that are in different stages of econo~nicdevelopment. France (42). sales services.manufacturing.000 billion.000 foreign afliates of 40. India (which is said to have entered the take-off stage: in 1952 alongwith China) and many other developing cor~ntrieshave been largely at the receiving end. a more pragmatic definition has been offered by Professor Om Prakash of Jaipur. in his lectures on direct investment. 1878-1900 for Japan. and 1890-1914 for Russia.

H. The gross turnover of Indian Oil Corporation. Europe and Japnn) ' E. L and bI are subsldlnry companies.000 . . Commercially (in an operational sense).3 STRATEGIES OF MULTINATIONAL CORPORATIONS What are the vital strategies adopted by MNCs? And. in their turn (second stage). with an annual turnover of $176 billion.. C. Both in 1995 and 1997. C and D are Intermediate Holding Compnnles (say. J. I. on the basis of 1994 revenues. F. the latter. presu~nmingthat three companies are controlled by each intermediate holding company. Earlier.(Japan). i n An~erlcn. American MNCs were able to recover much of their lost ground. By 1997. a holding company (holding corporation) is one which holds major ownership interest (5 1 per cent) in another company which is called the subsidiary company (subsidiary corporation). Royal Dutch Shell was the only MNC of European origin appearing amongst the top ten.1 : Here 'A' is Apex Holding Compa~ly(vertex of the Multlnntlonrl Croup). the Japanese MNC Mitsubishi had occupied the first rank. In this process. The Strategy of PYRAMIDING Fig. in the Fortune 500 list of 1995. would be able to control anothei nine companies. the leading Indian major finding a place amongst Global 500. it implies the use of holding company device. the top four MNCs being all from Japan. 10. close to USA's record of 151. in the first stage. the primary holding coinpany controls three intermediate holding companies. 5. 10. Thus if. the number of (directly or indirectly) controlled companies grows by geometric progression. K. 10. multinational corporation may be able to reap tlie major benefits of holding company control even with small minority stakes. Legally. over ten times. The following figure (Fig. n. .I . Corpc~rateStrntesy and Iiorcign Direct lnvcstment . I) illustrates the position. on what theories are these strategies based? Let us start with the strategy of PYRAMIDING which aims at maximal clout with mininial investment.88. crore). The Japanese MNCs had been at the height of their glory in the Fortune 500 of 1995when they numbered 149. In legal as well as conlmercial parlance. The annual turnover of USA's General Motors in 1996 (basis for its first rank in the 1997 Fortune 500 list) amounted to $168 billion (Rs.

In the public sector.Investing in Foreign Oper~tions It1 all. this may be niore of myth than reality.S: economy since 1977. it has provided no st . The pyramidal magic works ~nuchfaster if a company call be controlled with a stake much less than 51 per cent. Here the charm of socio-political gains (such as winning the vote banks of trade unions tlirough employee stock ownership) may dominate over economic considerations as such. Even if this is not so precisely. and that 5 I pel. please do not think that there is any sanctity attached to a ratio of three. It could be two. by a consolidated block of 26 or even lower percentage. there may be an in-built element of uncertainty in such operational arrangements. be allowed to appear at a medium level. five or any other lumber. with its roots in Sweden and Switzerland. Taking of total view of second and third stages. the marginal rates of income tax (corporate tax) are 45 per cent in Sweden. may be. please remember that different ratios may operate at dit'ferent stages. For example. there may be a general belief that "big is beautiful" or "more powerful". If. 10. a few success stories and the psychosis of numbers continue to stimulate (crossfrontier) friendly. ABB's strategy would be to disclose maxitnum profit in Switzerland and minimum profit in Sweden. at a certain point of time. there would be 31 companies at the third stage and 156 companies at the fourth stage in this chain. Again. of strategic amalgamations. 35 per cent in India. the combined value of companies. the Apex Multinational may hold only two companies while one of these Intermediate Holding Companies controls tc~i(and another such compaliy controls five) subsidiary companies. some of the recent strategies have symbolised diverstiture. is operating in India to supply wagons to Indian Railways. As . Synergy may be tlie theory often guiding the strategy of pyramiding. and so on. So to say. If the pyraniidal chain were prolonged further (next stag?) in the same ratio. Tlie biggest companies were reported to be most profitable. sixteen times at the sixth stage. 10. acquisitions. on the basis of return on equity.of the innovation. Suppose that Asea Brown Bover (ABB). However. Thus.cent share holding is necessary for the purpose.1 let us try to find out the amount of investment which the Apex Multinational would be required to make for controlling (he other (one dozen) companies in tlie Group. So. If this ratio is taken to be five. Within the orbit of indirect control would fall the remaining nine companies with an aggregate share capital of % 900 millbn. there may be 18 companies in the Multinational Group. there would be an addition of 27 (sub) subsidiary companies. mergers. However. presuming that shares are sold at par. unfriendly and even hostile take-overs. as also the strategies of mergers and acquisitions. in all. 300 million). mixed marriages. say. privatisation and all that. integrated in any of these ways. Coming back to Fig. I00 rnillio~i+I00 million may be equal to more than 200 million. The Apex Multinational would now need $459 million to (directly) control these three companies (with the same two assunlptions) having an aggregate share capital of $ 900 million. For the sake of convenience in calculation. there are 13 co~npaniesin the Multinational Group. That is. Transfer pricing is another well-known strategy adopted hy MNCs. not only has small business provided most of the 20 million jobs added in the U. carrying the total tally of the ~ultinational Group to 40.1. is supposed to be higher tllan the arithmetic total of tlie values of those companies (say. joint ventures and other ma~~ifestations integration. the share capital of each such company may be taken to be $ 300 million. It aims at minimising tax (and other burdens) and maximising profit (and other benefits). in only four out of 67 industries covered by a Business Week study. each one of the tliree intermediate liolding companies would be called upon to make an investment of $153 (51 x3) million. with India as a midway zone where profits can.800 million with an investment of just about one-fourth ($459 million).Elvill 'roffler records in his Powershift (1992) tliere is mounting evidence that giant firms are too slow and maladaptive for today's high-speed business world. How can this be achieved? . let us assume that the nine subsidiaries (third stage) have a share capital of $100 million each. the Apex Multinational is able to control share capital amounting to $ 1. However. Keeping in view other needs of these three conipanies (second stage). disinvestment. and 25 per cent in Switzerland. four. a Yet. as depicted in Fig. the MNC's controlling power is about four times at the third stage. and even within the same stage. eight times at the fifth stage.

If tlie Apex Multinational liolds shares of the face value o f $ 800 million. 300 crore. Alternatively. it may call for review from time to time so as to be in tutie with tlie instant situation. . Thus the ABB (MNC) pays a tax o f Us. 200 csore on a contract cost of Us. or more than counter balanced. and all transactiolis have takcri place at par.e. In case the erstwhile margin of (on cost) was 30 per cent (say. i. But the feasibility o f such strategies. all tliese put together lead to built-in incotnpatibility of attitudes. transport bottle necks. 75 crore in tl~at country. Therc may be other constraints too impinging against the benefits o f transfer pricing. For example.. may create serious c~notional conflict throughout the multinational group o f companies. interest rate fluctuations.ABB (India) can import sonie coniponents fi'om ABB (Switzerland) at an inflated cost. Other constraints may include vulnerability o f foreign exchange rates. supplies froni abroad tilay be impeded by transpoll bottle necks. state o f health. food habits. in their turn. or tlie Government o f India.. 70 crore (assuming a Hat rate) in lndia as against 12s. thus. 01. Second. 1. at times.000 crore). In fact. At any rate. -- How about transferring taxable incollie from ABB (Sweden) to ABB (Switzerland) or to ABB (India)? High-paid managers may be transferred from Switzerland and India to Sweden. wlictlier the likely gain outweighs the likely risk. what is tlie aggregate parvalue of the share capital of 20 coml~aniescontrolled by it. This strategy o f transfer pricing will swell profits of ABB (Switzerland) and ABB (India). a manager (with family) brought up in India's cultural traditions may feel uncomfortable in the premissive environment o f Sweden (aod vice versa). 10 crore. Moreover. tlie profits declared under tlie Swedish regime will be pushed down. may no1 permit the import o f such components: they may insist on a high degree o f indigenisation. in a reverse process. with respect to tlie transfer o f managerial servtces. directly and indirectly? Presilme that intermediate holding companies use only half o f their capital for controlling subsidiary companies. this gain may stand reduced. low-paid nianagers may be transferred from Sweden to Switzerland and India. Two broad conclusions seem to emerge from this discussion. Even though multinational managers are supposed to have developed a highly-adjustable global culture. Swedish steel or iron) from ABB (Sweden) at low cost. 1. be averse to inter-cotlntry transfers. ABB (Switzerland) and ABB (India) may import mw material (say. atid (or). I f tliese components constitute 50 per cent o f tlie total cost. Thus (as betweeti India and Switzerland) there may be a net gain of Rs. these. lang~~age and coliimunication problems niay be other factors responsible for hindering human mobility. in view of tlie constant change in econolnic (and other) variables. technical and human limitations may turn out to be formidable constraints.'anies who. For example. tlie MNC has to decide whether the game o f transfer pricing is wort11 the candle. can control I 6 subsidiary companies with a stake o f 25 perccnt in each one. l'lie profit o f Us. 300 crol-e on an owra11 contract cost o f Rs. Rs. However. may be seriously jeopardiscd if the country losing tax revenue (Sweden in this case) mounts an offensive to l~psettlie apple-cart (say. As such. high costs and other risks may impede the flow o f raw materials. Again. I n fine. it may not be feasible to sustain a long-term strategy o f transfer pricing.000 crore). First. Indian Railways. a 20 per cent escalation therein would pusli up the total cost in llidia by 10 per cent. the overall (global) tax liability o f ABB (MNC) could. 105 crore which would have beeti the tax liability in India on a profit o f Rs. Rs. Check Your Progress A 1 An Apex Multi~iatio~ial needs 50 per cent ownership interest in each one of its four Intermediate holding rn!r. and changes in gover~imentalrcgulatiuns (as also their interpretations) at both ends lndia and Switzerland. high costs and similar risks. the same is now reduced to 20 per cent (say. some o f then may.. be minimised. whether witli regard to the transfer o f managerial services or raw materials. still. by the burden o f customs duties on components imported from Switzerland. 100 crore transferred to Switzerland (through the strategy o f transfer pricing) would attract a tax liability o f only Rs. Faniily circumstances. while tliose under tlie Swiss and Indian regimes would be overstated. or punitive taxation). through blanket bans. while understating the level o f profits at ABB (Sweden) which is subject to tlie highest rate o f tasatioli amongst the three countries (units) under reference.

and imposes a lax of 25 per cent on the profits earlied by Matsushita.but the Government of that country withdraws the tax holiday atler four years. The overall profitability position is expected to be as follows (Rupees of these three countries being treated at par): 2 Year Production Cost (Rupees) Crore LOSS(-) Profit (+) Break-even (00) RupeesICror'e Nepal has offered a tax holiday for five years without any facility of tlie cal-ry-forward of losses.imary holding companylapex multinational).4 MEANING AND RATIONALE OF FOREIGN DIRECT INVESTMENT Foreign Direct Investment (FDI) often involves the setting up of subsidiaries in foreign countries for tlie domestic production of co~ninoditieslserviceswhich previously were impel-red. from the parent company (pl. say. 10. there is a flat rate of 3 0 per cent tax on profits. You are required to work out overall tax liability of Matsushita (MNC) for the first five years : on the basis of proportions of production cost appertaining to the three countries i) (Sri Lanka. India and (Nepal): ii) if all the profits and losses are declared in Sri Lanka alone. It can be distinguished from Portfolio Investme~lt(PI) as follows : $. d) e) d g) PI lrivest~ne~lt in financial assets Tends to bc short-term Easy to withdraw Tends to be speculative No expectation of technology transfer No direct inipact on e~nploymerlto f labour and wages Fleeting interest in managanent . iii) if all the profits and losses are declared in lndia alone: iv) if all the profits a~ldlosses are declared in Nepal i~lone. Sri Lanka imposes 70 per cent tax on profits willlout any facility regarding carry-forward of losses. India permits carry-forward of losses without any tax holiday. b) C) d) e) f) g) FDI l~lvest~nent in physical assets Tetlds to be long-term ~ifticulftl'tbwithdraw a) b) * Does not tend to be speculative Expectation of technology transfer Direct impact on e~nployment o f labour and wages Abiding interest in Inanagemerit C) . lndia (5096) and Nepal (20%).Matsushita of Japan has set up a vertically integrated rnanufacturi~igfacility for electrical equipment in Sri Lanka (30%).

and promoting peace. it is held out in many quarters that. Iiuriian. be such a positive or even innocent affair. in course of time.592 rnillioll in 1995 ~lhen'lndia. high per capita income or any other factors) and shortage of capitallforeign exchange resources in poor countries. In the ultimate analysis. as we find that its volunle rose from $1. time and interest costs are impol-tant.732 millioti in 1980to $44. The conquest of emerging markets comes to tlie centre-stage as developed regions (say. North America. x) Influencing the physical. . whe~i her population stood at 1. xiii) Strengthening socio-economic infiastructurc such or health services. not infrequently. the adoption of a village by a foreign illvestor may not. Again. be nlore efficient lhan tliose of domestic players. so that FDI in populous but less developed countries of Asia. Some of the (relatively) less efficient MNCs in economic terms may come to command clout on account of political geographical. but for the support through FDl. in spite of pompous protestations. viii) Lower rates of interestlreturn in developed countries and higher rates of interest (guaranteed) return in developing countries. poverty alleviation or soundness of socio-economic overheads. and xiv) Maintaining ecological balance. Yet. China can be said to be tlie most attractive destination for net private capital flows. high custolns duties or blanket bans: v) Saving in time and tra~isportcosts. financial a~id'otlierresourccs in a global context for alleviation of poverty. Europe and Japan) begin to experience some kind of a saturation point. far from restoring the original ecological balance. vii) Surplus capital in rich countries (emanating from favourable balance of paymetits. So. may not. a less efficient foreign player may have greater chance of getting guaranteed return and such other benefits from tlie governmetit and busitless doyens in a host country. Again. harmony and good neighbourly relations. but also as a matter of necessity by foreign investors. By way of contrast. net private capital flows rose dust from % 868 million in 1980 to $ 3. necessarily. such as making poor -'Villagers used to cosmetic life and dependent on the products of Multinational Corporation. though expanded. Africa and South America is looked upon not only as an opportunity. xii) Prolnoti~igtlie optimal utilization of physical. transport.The rationale of FDI may be based. Their operations.339 million in 1995. they might have. ii) iii) Economies of large-scale operation emanating from technological explosion: iv) Import barriers in host couptries elnanating from tlie spirit of Swadeslii (patriotism). several of the Qeveloping countries would have lagged far behind in the instant race for economic development. the outcome lnay be negative. while Inany foreign players may succeed in overcorni~ig inlport barriers (whether created by government or people's psychological preference for domestic goodlservices). on the following consideratiolis : 0' Conquest of emerging markets with sizeable population living in the midst of identifiable gaps in development.200 million. In fact.will1 a population of' . racial and otlier exterior considerations. While trailsport costs. many foreign investors nlny be more interested in building up monopolies through cultural conquest than in optimal utilisation of resources. infornial and brand ~nonopoliesin a global context. xi) Creating formal. the real life story (success or failure) may be different from the economic rationale as anticipated. economic efficiency alone may not provide sufticient conditio~i for survival or success. labour costs. inter aha. controlling pollution (both physical and intellectual). added substantially to the nefarious level of donrestic pollution. Lower level of econo~nicefficiency in host countries. communication arid education. vi) Shortagelhigh cost of labour in capital exporting countries and cheaplabundant labour in capital importing countries. roads. political. socio-economic and cultural milieu of capital importing countries. (i) Internationalisation of patents (intellectual property rights) and cross flows of technology.

Czech Republic. a near-permanent state of subservience rnay be created. In India.443 million in 1995. there is the contra-conventional (minority) view that FDI should be discouraged in the core sector if powerful MNCs are to be prevented froin acquiring over-riding politico-economic power over the host country. negligible or negative. 50 per kilogram). Third. Poland. On the other side of this coin. Indonesia. Philippines and Chile. partly because of the double taxation treaty between the two countries. Argentina. was a close second to China in the matter of manpower. there has been serious disparity between "Approvals" and "Actual Inflows" of FDI as indicated below: Foreign Direct lnvestme~~t Year Approvals U S $ million Actual lnflows US $ million 19% 11142 2383 3 105 1997 14858 (up to November) Total (I991 to November 1997) 47. Malaysia. oil exploration. where domestic industry's state-ofthe-art is q~titevenerable. discouraged or left to itself? Three broad approaches can be identified in this regard. USA. A national government trying to get rid of domineering foreign investors niay. if at all. even such a stipulation may not be quite feasible. Second.Actual Inflows as Percentage of approvals 21. in practice. Thailand. Bangladesh and Nepal. To which sectors of the economy should tlie flow of FDI be encouraged. Mexico. than seven times that of Pakistan.9 -9. if and when these foreign investors clioose to withdraw from the scene. financial credc3ises. 300 per kilogram. the conventional outlook is to encourage FDI in the core (hi-tech) sector like power (in particular. have severely gripped some of these countries. On per capita basis. So. However. in cvery case. Once these foreign interests get errrenched in the key areas of that country's economy. 15 for a packet of 50 grams (working out to Rs. FDI may be permitted only in the (light) consumer goods sector only. get toppled down. Countries witnessing a high water mark of net private flows include Brazil. say. like the one of 1997-98. it is tlie type of approach being adopted by India since 1991. ilself. For Sri Lanka. so that these foreign investors can be packed off wllen tlie national government so signals. these flows were static. the economy of the host country may not be subjected to any big jerk. FDI rnay be discouraged (or left to itself) in food processing and other consumer goods.508 -- 20. Net private capital flows ro Pakistan rose from $230 million in 1980 to $ 1. non-conventional energy). niore particularly in tlie wake of nuclear tests conducted in May 1998. these flows were higher than those in India with a population morc. these flows cannot be takcn to be a sign of strength. and there is not much point in importing foreign technology.1 A large proportion of FDI flow to India has been routed through Mauritius. Germany and Netherlands have been other iniportant sources.242 . arid followed by freezing of foreign aid II . as against cotnparable domestic product priced at. Some MNCs in the consumer sector may come to acquire greater clout than those in tlie core sector. speciatly when a host country's ecoliolny is largely dependent on a single consulner produce (product) like tea or watches.4 20. Rs.'Investing in Foreign Operations 929 million. water resources and bio-technology. However. Moreover. The oft-quoted example is that of "Uncle Chips" priced at Rs. First. teleconimunications.

in tlie well-known "SEVEN S's MODEL" given below (Fig. say.2) THE SEVEN S's MODEL SKILLS 'STYLE STRUCTURE SYSTEMS Fig.2 Corporate strategy. 400th. foreign investment is welco~nein alniost any (core or consumer) sector. export perfol*niance. for. staff. 300th and 200th position in that honours list. market share. Here. with a few exceptions (like the controversial dotnestic sector of civil aviation).5 CORPORATE STRATEGY7 JOINT VENTURES AND GLOBAL EXPANSION Corporate strategy can be defined as a proposed course of action or sequence of actions designed to have a far-reaching effect on an organisation's ability to achieve its leading objective(s). though this may not be so in many real life situations that strategy. pencils and other stationery items nor~nallyreserved for the cottage land small scale industries. The model assumes. particularly in India. e. head of tlie McKinsey office in ~ o k ~ o . "trilateral consortia" are beins forlned in tiearly every area of leading edge industry .and the ilnposition of sanctions at the instance of some developed countries. For example. "Strategy" lias been depicted as the base of a cold triangle (three hard elements). say at 475th rank. 10. structure and systems tend to be more rigid (less amcnable to change) than skills. Strategic alliances often take the form of joint ventures (JVs). tlie United States and Europe. For General Motors Corporation.. There has been phenomenal growth of triangular JVs involving companies or parts of companies in Japan. is supposed to achieve superordinate goals (significant objectives/guiding concepts) through skills (distinctive capabilities).g. price. cost.out to be the most stubborn element for management to be able to effect any meaningful change. the challenge may be to maintain its first rank in Fortune 500. country or region. I t is often used in tlie context of a company's plan of action that causes it to allocate its scarce resources (specially finance) over time "to get fiom where it is to where it wants to go". other superordinate goals may relate to dominant position (on the basis of asset size. Likewise. FDI has been permitted even for the ~nanufacturingof pens. in certain situations. diversification versus reduction in product range. According to KenEchi Ohmae. Actually. it had lost to some of the Japanese companies. in association with structure (organisation chart) and systems (procedures). style and even super ordinate goals. in the post. vertical integration versus horizontal combination. 10. superimposed by four soft elements. Once it is achieved. innovation. What can be the superordinate goals for an organisation? Dliirubhai Ambani's Reliance . the goal may be revised to. 10. staff may turn . The pendululn of goals tnay move in opposite directions from time to time. fattening versus slilnming exercises. employee strength. staff (personnel) and style (organisational culture). profitability.Industries Limited (RIL) may have an entry into Fortune (USA)'s Global 500 as the top most goal. or some other criterion) in any industry.

including bioteclinology. real consumer spending was ahead of industrial production in Europe. computers. 'The USA. such as . It. while France Fell froin 19th to Zlst position. Indonesia. Smaller market shares were clait~iedby Honda . and Toyota. tlie Italian firm. alone. autoniobiles.9%. China improved her rank from 27th in 1997 to 24th in 1998.74) per cent. as worked out on the basis of November 1997 sales. on an average. Thus one out of every 18 residents of the United States (or one out of every tburlfive faniilies of fiverfour ltielnbers each) is. Ford. semiconducttrl~s. carbon fibres. Germany remained stable at 14th rank in botli the years. consumption fell behind production in all these regions during 199597. The first twelve ranks were held by the following countries in 1998 (their relative position in 1997 being stated within brackets) : United States (1) Singapore (2) tlong Kong (3) Tlie Netherlands ( 6 ) Finland (4) No~way(5) Switzerland (7) Denmark (8) Luxembourg ( 12) Canada (I 0) Ireland (15) Britain (I I) The third criterion of global expansion may be based on a specific industry. whereas the Japanese partner (Suzuki) was allowed to enhance its shareholding to an equivalent level. By way o f striking contrast. while net private capital outflows to large emerging econo~nies(globally) had actually gone up fro111$ 202 billion in 1996 to $ 212 billion in 1997. 7. During 1994-95.6%) controlled 80 per cent of the U. In 1996. Cliryster.S. research and teclinical cooperation. q u i t e ~ f e wJVs tend to be rather fragile. the-USA is installed strongly in its position as the most competitive nation in tlie world. 24.jet engines.4%. AsiaIPacific (23%) and Africa~MiddteEast (07%). 3 1. Russia ranked still lower at 46th position. the majority stake of tlie Government of India was watered down to 50 (49. going in for a nelv autolnobile every year. According to the World Competitive Year Book (1998).ver. Latin America (45%) was the most attraclive destination. South Korea and Thailand were tlie five econooiies most affected by tlie Asian financial crisis at this stage. witnessed sales of some fifteen nill lion cars and light trucks in 1997. and controversy raged over the key appointment(s) of chair~nanlinanagingdirector. the Philippines.agreeliielits. MUL ceased to be Governnient company. ouclear po\. Thus. has conceiitrated on "networking of companies" based on alliances. No doubt. Malaysia. A few years back. I In a list of 46. market. Sikander Baklit. By way of contrast. the issue was amicably settled in June 1998 tlirougli the good offices of Ms. Global expalision can be looked at from several stand points. pannersli~ps. Competitive efficiency could be taken as the second yardstick of global eupanslon. Suzuki carried the matter to all inleynational court of arbitration. Maruti Udyog Lilnited (MUL) has been a prominent Joint venture between tlie Government of India and Suzuki Motor Corporati011of Japan. falling froin 9th rank in 1997 to 18th rank in 1998. these countries had received total net capital inflows of $ 93 billion. Latin America and USA.1%. Tlie first four players (General Motors. while Jnpan has suffered the most serious setback. they suffered a net outflow of $ 12 billion during 1997. where several MNCs at the top have been ~ubbingtheir shoulders. lndia stood as low as 41st in both the years. and other new materials. The first basis rnay be percenrage annual growtli of consumption and production. This was the position depicted by Asian Developing countries botli d u r i ~ ~1994-95 g and 1995-97. had entered into some tiiiy such arrangements by 1990 or so. robots. Industries Minister in the Government of India. 16. Olivetli. However. Japan. with a population of about 268 niillion. followed by Europe (25%).

too. which had upset the apple-cart o f the American market some two decades back. 10.6 INDIAN REGULATION OF FOREIGN DIRECT INVESTMENT AND GUIDELINES Tlie role of foreigti investment in the Indian economy was very limited prior to 199 1 . Sabaru ( I 2%). as also in marketing o f gas. and that too witliin the normal ceiling o f 40 per cent. the Reserve Bank o f India allowed automatic approval of FDI up to 74% in nine categories : i) Electricity generation and transmission: 6) Non-conventional energy generation and transmission. FDI was also allowed in exploration. . Captive coal nines could also be owned and run by private investors in power.3%). Mazda ( 1. two coriditiolis were attached to this approval : first. On a miniature scale. During five years 1986-90. Under this restrictive regime. . On April13. the Japanese miracle. Foreign companies werc allowed to ~lscIlicir trade marks on dornestic sales. provis~onwas made for automatic approval o f FDI up to 51 per cent in 34 specified (Iiigh priority. Volkswagen. iii) Maintenance of roads. and second. Nissan (4.1%). To prolnotc professional marketing activities. capital intensive and high technology) industries. was on tlie wane. waterways. Firms werc lei1 free to tiegotiale the ter~iiso f teclinology transfer on tlie basis o f their own comniercial judgement. as against only 10% in the case of General Motors. tlie Geniii~n automobile offensive appeared to be on the ascendancy. Noo-resident Indialis (NRls) were permitted to invest up to 100 per cent equity it1 high-priority industries (with repatriability of capital and incoliie). that outflows on ztccount of dividelid payments arc balanced by esport earnings over a period o f seven years from tlie coniiiiencenient of production. presented a 13% increase. bridges. In December 1996.1%). . aiid Mitsubislii liad lost 10%. foreign equity holding LIP to 5 1 per cent was perniitted for trading companies as well. In tlie wake of economic rcforms. v) ' Water transport: . prodilctio~iatid refining o f oil. or if tlie Qoint) vcnture was largely export-oriented. subject to certain prescribed guidelines. However. FDI approvals figured at Rs.and Mitsubishi ( I. runways. raise it to 51 pcr cent. 'The remaining o f the first one dozeti players were Mercedes (1. the Government established a more liberaliscd foreign investment regime as part o f tlie new indus~rialpolicy announced in July 199 1. that the foreign excliange involved in importing capital goods is covered by foreign equity. hospitals. Thus. global expansion tends to be a zigzag affair. 1992. pipelines.2%). and willioilt tllc need for prior Government approval for hiring foreign teclinicians and for foreign testing 01' indigetiously developed technologies. As against case-by-case consideration. India sigried the Multilateral lnvestrnent Guarantee Agency Protocol for protection o f foreigti investmcnls. tunnels. Existing companies wit11 foreign equity could. A higher percentage could be considered in priority industries if the teclinology was sophisticated atid not available In the country.9%) and BMW (0. 180 crore per year. In course o f time. harbours. tlie normal ceiling for foreign investtne~itwas 40 per cent o f the total'equity capital. esportltrading houses. oil and l~tbricanls)atid gas. In fine. further relaxalions weregranted. ports. Volks\vagen (0.3%). Rs. Foreign techtiology agreements were also liberalised for the 34 industries. A Foreign Investment Promotion Board (FIPB) was set up to look into large foreign investment projects where more tlia~i 51 per cent foreign equity might be permitted. while Ford had esperienced a marginal decline in the number o f vehicles sold. The dividend-balancing condition attached to foreign i~ivestn~elits upto 5 1 per cent was no longer applied except for consulner goods industries. on an average). with Mercedes claiming a 67%) spurt in the US market (the highest amongst the first twelve) in November 1997. industrial and power plants: iv) Pipeline transport except POL (petroleum.< : t ~ r p ~ ~ rStrategy rtc :tnd Furcign I j i r c c t I l ~ \ ~ r s t l e c l ~ t (6.8%). hotels and tourism-related industries. 900 crore (or.

hydrological and ultrasoundi~iginstruments. 50 per cent in mining (excluding gold. Recently. and exploration and productioll of POL and gas: viii) Manufacturing of iron ore pallets. geophysical. and ix) Items based on solar energy. pig iron. or sophisticated \ technology is south to be brought in. Priority areas included : a) Infrastructure. the insurance sector has been included in autol.tlatic approval list. . and all downstream invest~nentsare to be carried out need prior approval: Where proprielory technology is sought to be protected. and technical testing research and development services. 4) Where there are consultancy projects. 24 per cent in small scale industries. parts. The guidelines of January 1997 also allowed foreign companies to set up 100 per cent subsidiaries on the basis of the following criteria : I) 2) - Where only holding operation is involved. except for gold. In January 1997. power. and ~nanufacturingof navigational. the list of industries eligible for automatic approval of foreign equity up to 5 1 per cent was further expanded so that some tifty industries were covered under this category. and 51 per cent in non-banking tirianc~al colnpanies and drugs. the Gover~lmentof India announced the first-ever guidelines for FDI to ellsure 'expeditious approval of foreign investment in areas not covered under automatic approval. diamonds and precious stones). Foreign equity could go up to 100 per cent in petroleum. meteorological. silver.11ivcsiing ill F o r c i g ~ ~ Opel-ntioas I vi) Cold storage and warehousing for agricultural products: vii) Mining services. 3) Where at least 50 per cent o f prodoction is exporlecl. ports atid industrial townstestates. New doors sought to be opened (or existing doors souglit to be widened) in respect of foreign investnlent (room by room) included inter alia : i) FDI in housing and real estate (urban affairs). 40 per cent in domestic airlines ( 100 per cent for NRls): 49 per cent in teleco~nlnu~licatio~is. following the nuclear tests conducted by India on May I I and 13.The new areas. semi-finished iron and steel. healtfl care and medicines: and f) Proposals that lead to induction of technology and infusion of capital. imposed by the USA and sollie other developed countries. particularly for rural areas: d) Items having linkages with the farm sector: e) Social sector projects like hospitals. However. b) Export potential C) Large-scale etnploy~nentpotential. ii) Encouraging 100 per cent FDI in recombinant DNA technology-based units. also strengthening patent reginie to help FDI inflow. include health and lnedical services. inter alia. and 5) Where there are projects in power. A long with that. subject to the condition that the foreign investor would divest at least 26 per cent of the equity (so that the ceiling for the foreign partner would be 74 per cent) in favour of Indian parties within three to five years. roads. tourism and venture capital funds. silver and precious stones. "FDI free for all" emerged as the watchword in the wake of the freezing of foreign aid and the i~npositionof economic sanctions. 1998. The FlPB could also allow 100 per cent foreign equity in those cases where the foreign company had expressed inability to tind a suitable Indian joint venture partner. certain sectoral ceilings were retained : 20 per cent in the banking sector (40 per cent for NRls). oceanographic.

2) Appellate Board under FERA has been dissolved and replaced by Appellate Tribunal and Special Director (ztppeals). 5) 5-8% royalty payment per~iiittedto parent foreign companies by their wholly owned subsidiaries operating in India. co~npiiniesallowed to invest in Indian venture capitalists and corporates. The proceedings under FERA are quasi-crimina1. rationalisation of tariffs. The Directorate has the power to call for information. telecom infrastructure providers. growth in foreign trade.2000) was enacted. Let us now study about the foreign exchange regulation in India. 3) Every Adjudicating Authority now has the powers of a civil cou~t. v) Liberalising FDI policy in coal sector to attract investment and technology. iv) Across tlie board 100 per cent automatic FDI in non-conventionall energy (welcome. up to Rs. voice mail.A Directorate of Enforcement was constituted under the Act. 1. ? The FERA 1973. e-mail.lot under this Act. 1 ' 17 .500 crore limit). the entry of forieign capilal in the form of branches and concerns with substantiil non-resident interest in them and the enlployment of foreigners in lndia the Foreign Exchange Regulation Act (FERA) 1973 was enacted on the recommendation of 47th report of Law Commission. Except in case of import and export of certain currency and bullion. The objective of the Act is to facilitate external iadu . formed. FEMA was enacted because significant developlnents have taken place such as substantial increase in India's foreign exchange resources. increai$d access to external com~nel. and payment and to promote tlie orderly development and maintenance of foreign exchange market in India. was reviewed in 1993 and a new Act called Foreign Exchange Management Act (FEMA) 1999 (enforced w. 4) 1-2% royalty payment on foreign brand names.6.Corporate Strnteg) rl~d I:orei~t~1)irect I n v c s t ~ l l r ~ l t iii) Making water resources Inore attractive for FDI inflow. 2) No sectoral FDI caps in manufacturing units set up in SEZs (special economic zones) 3) Off shore VCFs. say.cialborrowings by Indian Corporates and participation of foreign institutional investors in Indian Stock markets. the penalty under the Act is five times the amount or value involved. but was placed on statutory book in 1957.f. to arrest. In the light of the experience gained. The salient features of the Act are : I) Cases already in courts under FERA shall be governed by FERA . Following are high lights of the policy change : . 10. curretit account covertibility. On 30th August 2000.7 ' FOREIGN EXCHANGE REGULATION : F E U AND FEMA You learnt about FDI and its rationale.The defaillters under the Act shall be liable ta civil i~nprisonment. The first foreign exchange regulation Act in lndia was enacted as a temporary measure in 1947. Bharat Sanchar Niga~nLtd.e. 1. The RBI is empowered to authorise any person to deal in foreign exchange or appoint foreign currency money changers. libralisation of lndia investment abroad. trade marks allowed. to search suspected persons and premises and to examine persons.and . 1) 100% FDI allowed on automatic route in internet. and vi) Raising cap on non-SSI food products to 74 per cent. tlie Government opened more gates to foreign investors in the new economy. removing 74 per cent cap. G) Telecom department corporatisation complete.

.................. mergers and acquisitions (guided by the theory of synergy)....... I-iowever... viii) The MNC tries to transfer costly inputs to the country with the lowest rate of tax. 5000 for everyday if contravention o f the Act contines......... Germany and Britain).......in view o f the constant change in econotnic and other variables. iii) Foreign direct investment (FDI) i s made in financial assets............. Amongst tlie Global 500 (Fortune. 1997)..... The principal strategies adopted by multinatio~lalcorporation include pyramiding. over 80 per cent multinational corporations had their origin in just five countries (USA....... vi) 'The annual turnover o f USA's General Motors in 1996 (basis for its first rank in the 1997 Fortune 500 list) was over hundred tinies the gross turnover o f Indian Oil Corporation...............P. Maisonrouged feels that the multinational company must operate in many (not just two ortliree) countries that are in different stages o f economic development... X) Net private capital flow to china in 1995 was more than ten times the figure flowing to India. while sotile UN agencies have chosen to talk o f "transnational corporations"... Japan. Jacques G....... 5) Reserve Bank o f India has been given niore powers for management o f foreign exchange.. FDI involves investment in physical assets for productioa of comniodities/services in the host country. France. ii) In June 1998... 2 Differentiate between foreign direct investment ant1 portfolio investment.. Professor C.......levcstinp in ~ o r c i g n Operations 4) The penalty is thrice the sum involved or upto two lakh rupees where amount is not quantifiable............ However..... Check Your Progress B I What do you mean by foreign direct investment? ......'.... 3 Tick the correct alternative on the following : 10. conceding ultimtely that there is no truly niultinational company providing overall fulfilment o f his five criteria... Mr... Further penalty o f Rs.. I t tends to be long-term and is diffi&lt to withdraw (unli... RBI can issue directions or inspect autliorised persons.*...... USA. He also lays down four other rigid conpitions..... v) Mitsubishi o f Japan occupied the first rank in the Fortune 500 list o f 1995. Maruti Udyog Limited (MUL) was a Gove~nmentcompany.. every strategy may call for review from time tcr time. LET US SUM UP MNC is a corporate undertaking whose industrial operations are based in more than two countries and whose decision-making process is based on an overall strategy". but all TNCs are not BNCs.. and transfer pricing (guided by tlie motives o f rnaximising prdfits and minimising taxeslotlier liabilities in llie global context). iv) Portfolio investment made by foreign institiltional investors (Flls) tends to be short-term. Kindleberger prefers to use the term "international corporation"...... vii) Royal Dutch Shell was the biggest European MNC in the Fortune 500 list o f 1995 and 1997....kc portfolio . k) sugar is core sector industry.....8 i) A l l binational corporations (BNCs) are transnational corporation (TNCs).

include Brazil. FDI in housing and real estate (urban affairs) and (100 per cent) foreign investment in recombinant D N A technology (along witli strengthening o f patent regime to help FDI inflow) are some oi'tlie newer dimensions being brought into focus. prominent on this score. Other countries.AForeign Investment I'romotion Board (FIPB) was s c ~up ro look Into projects where more than 5 1 per cent foreign equity might be pertnitted. appropriation o f augmented profits through monopolistic control andlor sophisticated technology. Thailand. atch as inft4astl.5 billion) were only about 20 per cent o f F D I approvals ($47. In lndia actual inflows of F D I between 1991 and November 1997 ($9. lie Governmnet of India made fu~tlierconcessing and relaxation to attract FDI. 'The financial crisis o f 1997-98 severely gripped some o f these countries.investment. internationalisation o f patents. Maruti Udyog 1. utilisation o f cheap labour in capital. A large proportion o f FDI flow to India has been routed through Mauritius. USA. over" another company either completely or partly tlirough controlling ownership interest. inter alia. Tlie Foriepl~ Exchange Regulation Act (FEIEA) was reviewed in 1993 and a new act called Foreign Exchange Management Act ( 1 999) was enacted to facilitate external trade and payamenl and to promote the development and maintenance o f foreign exchange market in India. Strategic allia~icesoften take the form o f joint ventures (JVs). automatic approval o f FC)I up to 5 1 per cent was pel-mitted in specified (liigli priority. Corporate strategy car1 bc defined as a proposed course o f action or serluence o f actlolls designed to have a far-reaching effect on tlie organisation's ability to achieve its leading objective(s). tlie Goveriiment o f India announced tlie first-ever guidelilies for I'D1 to expedite decisions in areas not covered under automatic approval. expectation of technology transfer. Amalgamation : When two (or more) colnpanies combine and agree to operate under a third (or different) name. . F D I involves abiding interest in management. 'The rationale o f FDI lies. 111 January 1997. prior to 1991. Automatic approval : Where approval is granted without any case-by-case scrutiny. Crech Republic. Captive mines : In-house mines intended to provide raw material to a company (or group's) own plants. Under the restrictive regime. "FDI free for all" emerged as the watcliword in tlie wake o f thc freezing o f foreign aid and the imposition o f econo~nicsanctions at the instancc o f sonic developed countries. involving mere buying and selling o f securities which tends to be speculative).on which the development of other sectors is Gased. which witnessed large-scale outflow o f foreign capital. Indonesia. In Deccmher 1996. and direct impact on employment o f labour.A top-level controversy regarding the choice o f ChairmanIMD was amicably resolved in June 1998. Again. In July 1991. capital intensive and high technology) industr~es. While certain sectorill ceilings were retained. It is ofton used in the context o f allocation o f scarce resources (like finance) over time.tlcrure.itnited (MUL) has bcen a prominent joint vcnture bctweeri the Government o f lndia and Suzuki Motor Corporation o f Japan. China can be said to be the most attractive destination for net private capital flows. Core sector : Central or most important sector. Malaysia. In August 2000.2 billion). these gilideliries permitted foreign companies subsidiaries on the basis o f certain criteria. and creation o f sociopolitico-economic clout over less-developed regions. Binational Corpol+ation (BNC) : Whose operatio~isare confined to two countries. in the conquest of emerging markets. 10. Poland. Nexico. following tlie nuclear tests conducted by India on May I I and 13. tlie RBI allowcd auto~iiaticapproval o f FDI tipto 74 per cent in ninc categories.9 KEY WORDS Acquisition : One compauy "Taking. the nonnal ceiling for foreign investment in India was 40 per cent o f tlie total equity capital. Philippines and Chile. Argentina. Germany and Netherlands have been other important sources. 1998.deficient countries.

copyrights. thougli somewhat inaccurately. is used interchangeably. J' k . ii Networking : Complex system o f inter connection. another name for multinational corpor'ation. international agency.absorption is another name for merger (while tlie term amalganiiltion. Joint venturc: Sharing o f ownership interest and other ork king arrangements between two (or niore) co~iipanies(or other operating units). Economic sanctions : Restrictions imposed by a country. tilay be any smaller solid block in commercial parlance) in another company (subsidiary). Emerging markets : Newly-discovered or growing centres o f consumption. intellectual Property Rights (IPRs) : Legal protection o f inventions or other creative work through patents. so tliat no new company i s set up. I Government Company : A company where ownership incerest o f the Government (Central1 Stive) is 5 1 per cent or more in tertns o f the Companies Act. I t ~ f r a s t r t ~ c t u r:cTlie basic inner s t ~ ~ ~ c r (like u r e tralisport and communication) on which' otlier developmental activities are dependent. Merger : A coniplete combination between two (or more) companies. Dividen. it1 represented by stocks or shares not bearing any fixed Equity : Ownership interest ~~sually illrerest obligation. trade or other commercial relationships with i~notliercountry. F o r t ~ t u e500 : The list o f top 500 Global Corporations (companies) published annually in tlie USA by Fortune magazine. Multinational Corporation (MNC) : A corporale undertaking wliose industrial operating are based it~. itself. specially developing countries. 1956. Host country : Tlie country to which a multinational goes lor making investment and estending its operations abroad. - 1 1 Home country : The coulitry o f origin o f a multinational. is controlled by another holding company. on aid. o f dividend payments would be balanced ( f i ~ l l ycovered) by export earnings o f an enterprise established in -this country with investment inllows frotn abroad. while one o f the existing companies takes over all tlie operatiolis o f the other company (or co~iipanies).Divestiture : Giving up ownership interest. lntermcdiate holding company : A holding compaliy wliich.usually for some specified period. securities or I-eceivables indicating entitlement to money or ownership interest. Financial assets : Shares. . Foreign direct iuvestment (FDI) : Investment used for doniestic production in another country. too. effectively.nmre tlian two countries and whose decision making process is based on an overall strategy. investment. lnllovation : Sometliing new put into practice commercially or. but. trade marks and otlier system o f exclusive recognition. 01. Ecological balance : Natural adjustliient between living things in rclation to their surroundingslenvironment. I ' I I Holding company : A cotlipany wliich holds controlling inlerest (51 per ccnt or more in legal parlance. in coliilnon parlance).d balancing condition : A condition tliat outflows to foreign countries on account. whellicr belonging to tlie satlie 4 country or to different countries. International corporation : A corporatioli operating in a number o f countries with equal loyalty to all. otherwise.

Synergy : Where. iii) Rs. How does pyramiding lead to the expansion of a multinational group? How would you interpret the size (height and breadth) of a pyramid? 6 What is the ditTerence between 'Amalgamation' and 'Merger'? 7 Explain the technique of transfer pricing through an illustration (original or imaginary case study) of your own. Superordinate goals : Objectives of higher grade.90 crore. I . Corporate Straficgy and Foreign Direct Investment Portfolio investment : Acquiring financial assets like shares and securities (without any direct involvement in the process of production). an activity often undertaken by both domestic and foreign financial institutions. Primary holding company :A company which controls another company (or companies) but which. and c) the least important criterion. ' Strategy : A proposed course of action or sequence of actions designed to have a farreaching effect on an organisation's ability to achieve its leading objective(s). viii) False. is not controlled by any other company. 13. 3 Can a binational corporation be called transnational corporation ? Explain clearly. Transfer Pricing : Technique of pricing inputslproducts between holding companies and subsidiaries with a view to maximising profit. it is often used for the allocation of scarce resources (specially finance) over time. it stands at the head (apex). b) the most important criterion. v) True. itself. 4 Distinguish between 'Primary Holding Company' and 'Intermediate Holding Company'. status or importance. Transnational corporations (TNCs) : Corporations or companies whose operations extend beyond national boundaries. iv) True. another name for multinational corporations (Multinational Corporation).10 ANSWERS TO CHECK YOUR PROGRESS A) 'I $4. ' Subsidiary company : A co~ilpanycontrolled by another (holding) company. x) True 1 Identify principal stages in the development of Multinational Corporation. 12.50 crore B) 3 i) True. ix) False. 15 crore. vii) Ture. 2 a) Briefly enumerate the five criteria for a truly multinational company. the co~r~bined value' of integrated companies is higher than the arithrnatic total of the values of those companies. 10. 5 . Pyramiding : A pyramid (triangle) like structuie designed to extend the sphere of control of an apex institution through a set of holding companies and subsidiaries. iii) False. ii) Rs.. vi) False.800 million 2 i) Rs. 13 crore. ii) False. Physical assets : Machines and other assets used directly in the process of production. R & D : Research and Development (an index of the comparability of the levels of productionloperation attained by various companies). with concise arguments. Also indicate. iv) Rs.\ion-resident Indians (NRlls) : People of Indian origin settled in foreign countries.

I d) Low profits with low growth.What is the most important rationale of Foreign Direct Investment'! What is its greatest danger ? What kind of corporate strategy should transnational group apply in respect o f the following four categories o f enterprises ? I a) High profits with high growth. b) High profits with low growth: II c) Low profits with high growth. I Critically exanline the attitude o f the Government of India toward FDI eliflow since 1991. What kind o f a policy would you suggest to meet econo~nicsanctions imposed after the nuclear tests of May 1998? i II I I I .

I t is for this reason that capital investment decisions need to be carefully thought through and appraised before committing funds.r the do~ncsticas well as international projects? Ifnot.8 11. project cash flows. So.4.1 Non-DCF Techniques 1 1. But to be able to answer tliis question.4. Once committed.3 11. sllould an international investor appraise a 'project as 'stand alone' or as a constituent o f a .10 11.9 11. parents vs.11 11. 1 1 . inflation. first take up the questions viz. Let Us Sum Up Key Words Answers to Check Your Progress Terminal Questions/Exercises 11. parent vs.3 Pro-ject Apprnisal Under Risk and Uncertainty Issues in International Project Appraisal Adjusted Present Value Technique Beyond APV : Real Option Value Portfolio Approach Case Study : lnternatio~ialNew Technologies (INT) Ltd.13 -- 11.7 11. parent vs.0 OBJECTIVES After studyi~igthis unit you should be able to : explain the nature o f international projects 0 differentiate between international and domestic projects 0 explain and illustrate various techniques o f projects appraisal 0 explain and illustrate the concept o f project appraisal under conditions o f certainty and uncertainty a discuss real option value in project appraisal a "describe portfolio approach to project appraisal @ discuss a'co~nprehensivecase study on international project appraisal..5 11. An important characteristic of projects as distinct from dayto-day working capital type expenditure is that it is irreversible.4.? For an international investor.6 11. the amount of expenditure being generally large. Committing _funds abroad will definitely pose additional issues. project discount rates. it i s difficult to liquidate wifhout substantial loss.12 11. why and how not? What is robust frame work o f analysis for international projects appraisal? How would you deal with distinct issues in international investment analysis viz. How do international projects differ from domestic projects? What are the basic tecliniques o f Project Appraisal? Could the techniques of Project Appraisal be same f0. political risk. An obvious implication o f it i s that the cost o f error of judgement in case o f projects is very high.1 112 11.UNIT 11 INTERNATIONAL PROJECT APPRAISAL ' Structure 1 1. INTRODUCTION Projects signify co~n~nitnrent and allocation o f large sums benefits which will accrue ovcr a long period o f time in future. project country currency. we need to. etc.. world could be one market offering a universe o f projects.2 DUI: Techniques 11.4 Objectives lntroduction International Projects Project Appraisal : Meaning and Scope Techniques o f Project Appraisal 1 1. Projects thus involve long term expenditure. I-low to appraise an international projects? This is the main question being attempted in this unit.0 I 1.