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Team No-1

Ajo Francis N.Balakumar Midhun K.Nirmalkumar Sathya Syamkumar

The new Industrial and Foreign Investment Policy announced on May 31, 1990 proclaims to release the Indian industry from "unnecessary bureaucratic shackles by reducing the number of clearances required from the Government".

Strengthening India's own administrative frame and building the capacities to pick what we need and at a price not only that India can afford but that is the lowest in the international market, is the first step in the right direction. It is only through a strong public system one can attempt to keep the MNCs under check.

Sales of foreign affiliates larger than total world exports MNCs account for 2/3 of world trade FDI is growing faster than world production or world trade = Capital, jobs, technology, exports?

Expansion driven by international trade liberalization, regional integration, technical progress

Understanding what is special about MNCs helps understand their behavior and predict their effects Older explanations

market disequilibrium and distortions market failures and market imperfections

Newer explanations

Temporary disequilibria in markets

Differential rates of return Cost differentials Valuation of currencies

Government imposed distortions

Trade barriers Tax rules Investment incentives


Consumer preferences, markets, production factors, rules and regulations

Investment and profit repatriation guarantees Beneficial tax rules - tax holidays, reduced rates, investment allowances, and other fiscal incentives Tariff protection Subsidies and grants Provison of infrastructure - industry parks and export processing zones

External effects and scale economies could mean that doing A makes you better at B.
If R&D makes you a more efficient producer, then you should expand through FDI. Licensing will not be a good alternative, because other firms (with no R&D) will never be as efficient as you can be.

Markets for intangible assets - technology, trade marks, marketing - often fail. The transactions costs for finding a price that satisfies both seller and buyer are very high. Firms based on intangible assets tend to expand through FDI rather than licensing.

Many different types of FDI Older explanations are not sufficient, because FDI continues when disequilibria and distortions disappear New theories suggest that intangible assets technology, trade marks, marketing skills are central to MNCs.

Resource transfer effects: capital and technology Trade and balance-of-payments effects Competitive and anti-competitive effects Sovereignty and autonomy effects

MNCs have plenty of capital and access to international capital markets MNCs may help mobilize local savings MNCs may stimulate aid flows

not much capital transfer going on, most of investments financed locally FDI is an expensive source of funds profits are repatriated

most commercial technology owned by MNCs few countries can afford comprehensive R&D programs on their own benefits possible even if MNCs keep ownership of technology: spillovers

MNC technology may be too expensive MNC technology may not be appropriate

When locals benefit from the presence of MNCs without paying the full price. Several possible channels:
Demonstration effects, copying MNCs Training of employees who may leave the MNCs for jobs in local firms Forward and backward linkages Local firms are forced to work harder because of tougher competition

Lots of case studies showing that locals learn from MNCs Spillovers are not automatic. Effects are determined by the local environment:
Technological capability and labor skills Level of competition Trade policy

shortage of forex for imports of investment goods a common development problem both export-oriented and import-substituting FDI should improve BoP

MNCs import a lot. Import-substituting MNCs, in particular, may create import dependence MNCs repatriatiate profits

MNC entry may stimulate competition, efficiency, and development MNCs often enter industries where entry barriers for local firms are high


MNCs are stronger and may outcompete local firms. Risk for foreign oligopolies and monopolies


Foreign ownership always carries a cost. Foreign MNCs may push for policies that are good for them but not necessarily for the host country Who cares if the Americans own our factories, as long as we get jobs and tax revenue


Negative externalities from FDI, e.g. on the environment? Cultural imperialism? Inappropriate consumption patterns Camel, Heineken, and Yves St. Laurent in poor countries? FDI may create dependence on foreign capital

To acquire

capital and jobs technology, production, and R&D skills organizational and managerial skills marketing and exporting skills

To retain national control over strategc industries and strategic decisions

Investment promotion - to attract foreign MNCs Market access restrictions - to retain national control Regulation of MNC operations - to make the foreign MNCs behave in the right way

Used by almost all countries Probably becoming more important for corporate decision making

WTO membership makes other policies more similar across countries

but also risk for excessive subsidization

politically attractive competition between host countries uncertainty about spillover benefits

Licensing requirements (where applications are individually screened) Outright prohibitions

military industries mass media air and land transports

banking and finance telecommunications

Performance requirements
technology transfer exports employment local content

Requirements for joint ventures

to secure transfer of technology to local industry

Prohibitions work Performance requirements not very efficient - easy to get around

and increasingly in conflict with WTO rules

Investment incentives increasingly important, but mainly because everyone else is offering them
fundamentals like political stability, market size, and growth rate more important risk for bidding wars between host countries better to focus on industrial policy?

technology transfer technology diffusion limitations on foreign ownership save foreign exchange national independence priority sectors employment creation

avoid concentration diversification local content export promotion advancement of Indians local R&D regional development capacity utilization

Very little FDI until early 1990s Major MNCs left because of regulations Reform recommendations in late 1980s
liberalize and simplify bureaucracy focus on employment creation and laborintensive industry allow foreign majority ownership

Reforms and somewhat increased inflows of FDI from early 1990s

but still only a fraction of that directed to China