ORGANIZATIONAL MODELS• MULTINATIONAL CORPORATIONS: A corporation thathas its facilities and other assets in at least one countryother than its home country. Such companies haveoffices and/or factories in different countries and usuallyhave a centralized head office where they co-ordinateglobal management. Very large multinationals havebudgets that exceed those of many small countries• INTERNATIONAL ORGANIZATIONAL MODEL: Theheadquarters transfers knowledge and expertise tooverseas environments that were less advanced intechnology or market development• GLOBAL ORHANIZATIONAL MODEL: it is based oncentralization of assets, resources and responsibilities,overseas operations are used to reach foreign marketsin order to build global scale, the local subsidiaryassemble and sell the products
Merits of MNC’s• investment level increased• up gradation in technology in the host country• management techniques, professionalmanagement• increase in exports and decrease in imports• integration of national economy
Demerits of MNC’s• can retard the growth of employment inthe home country• destroy competition and acquiremonopoly power• can evade the national economy in termsof activities which might not be in interestof the particular countries
INTERNATIONAL INVESTMENTS• TYPES OF INVESTMENTS:1. FOREIGN DIRECT INVESTMENTS• PORTFOLIO INVESTMENTS: The majorconstituents of Portfolio investment (FII investment) in India arefund flows and resource mobilization by Indian companiesthrough American Depository Receipts (ADRs) and GlobalDepository Receipts (GDRs). These inflows are indicative ofrobustness of Indian capital market and overall macroeconomicconditions.
Q.2. What is the procedure for receiving Foreign Direct Investment in an Indiancompany? Ans. An Indian company may receive Foreign Direct Investment under thetwo routes as given under:• i) Automatic RouteFDI is allowed under the automatic route without prior approval either of the Governmentor the Reserve Bank of India in all activities/sectors as specified in the consolidated FDIPolicy, issued by the Government of India from time to time.• Ii) Government RouteFDI in activities not covered under the automatic route requires prior approval of theGovernment which are considered by the Foreign Investment Promotion Board (FIPB),Department of Economic Affairs, Ministry of Finance. The Indian company havingreceived FDI either under the Automatic route or the Government route is required tocomply with provisions of the FDI policy including reporting the FDI to the Reserve Bank.
AS PER RBI NORMS……• Foreign investment is reckoned as FDI only if the investment is made in equity shares , fullyand mandatorily convertible preference shares and fully and mandatorily convertibledebentures with the pricing being decided upfront as a figure or based on the formula that isdecided upfront. Any foreign investment into an instrument issued by an Indian companywhich:• gives an option to the investor to convert or not to convert it into equity or• does not involve upfront pricing of the instrument• as a date would be reckoned as ECB and would have to comply with the ECB guidelines.• The FDI policy provides that the price/ conversion formula of convertible capital instrumentsshould be determined upfront at the time of issue of the instruments. The price at the time ofconversion should not in any case be lower than the fair value worked out, at the time ofissuance of such instruments, in accordance with the extant FEMA regulations [the DCFmethod of valuation for the unlisted companies and valuation in terms of SEBI (ICDR)Regulations, for the listed companies
FDI’S NORMS 2009-10• 100% Foreign investment will henceforth be permitted inmining of titanium bearing minerals and up to 49 per cent incredit information companies. However, for investment in creditinformation companies, the permission of the Reserve Bank ofIndia (RBI) will be necessary.• Revised FDI policy would now permit 100 per cent foreigninvestment in maintenance, repair and overhauling (MRO)facilities for aircraft as also aviation training units.• The new FDI policy has also done away with the norms of 26per cent compulsory equity divestment in fuel and gas tradingventures.
Restricted AreasVirtually all the sectors are opened for the foreign investors but thereare certain sectors in which foreign investors are not allowed toparticipate. These are• Arms and ammunition.• Atomic Energy• Railway Transport• Coal and lignite• Mining of iron, manganese, chrome, gypsum, sulphur, gold,diamonds, copper, zinc
• Example of FPI: John Yamashita, a Japanese citizen, purchases onehundred shares of stock in General Motors (GM). John now owns part of aU.S. corporation, the shares of which are part of his personal investmentportfolio. John is eligible to receive dividend payments from GM, participatein shareholder decisions, or sell the stock for a profit/loss. John’s share ofGM is very minor, and his chief concern is not the long-term profitability ofthe company but the short-term value of his stock. He might therefore sellhis share quickly if the share price goes up or down significantly.• Example of FDI: Hungry Dragon Toys, a Chinese company, is sitting on alot of cash. The company’s board of directors decides to take some of thatmoney and purchase Cooperative Chemical, a plastics company in NewJersey. Hungry Dragon, a foreign investor, now owns a U.S. subsidiarycompany. Unlike John Yamashita’s small investment in GM, HungryDragon’s ownership of Cooperative Chemical is substantial and more likelyto be long term. Hungry Dragon is unlikely to sell if the U.S. economy facesa temporary downturn.
Significance of Foreign InvestmentForeign capital and technology can play a veryimportant role in the socio-economic development of anation.1. Helps economic growth by facilitating essentialimports.2. Foreign Investment (FI) may also help increase acountry’s exports and reduce import.3. FI also increases jobs and domestic labour may gethigher wages.4. Consumer get cheaper goods.5. FI may also bring in a lot of indirect gains.
Limitations and Dangers of ForeignCapital1. Mostly FI is in high profit areas and not in priorityareas.2. Unfavourable effect on balance of payment.3. Sometimes interfere with national politics.4. Danger of creation of monopolies or oligopolisticstructures.
Foreign Investment in India• The flow of direct foreign investment to India has beencomparatively limited because of the type of industrialdevelopment strategy and the very cautious foreigninvestment policy followed by the nation.• Direct foreign investment (private) in India was adverselyaffected by the following factors.1.The public sector was assigned a monopoly or dominantposition in the most important industriesand, therefore, the scope of private investment, bothdomestic and foreign, was limited.2.When the public sector enterprises needed foreigntechnology or investment, there was a marked preferencefor the foreign government sources.
3. Government policy towards foreign capital was veryselective. Foreign investment was normally permittedonly in high technology industries in priority areas and inexport oriented industries.4. Foreign equity participation was normally subject to aceiling or 40 per cent, although exceptions were allowedon merit.5. Payment of dividends abroad, repatriation of capital, etc.,as well as inward remittances were subject to stringentlaws like the Foreign Exchange Regulation Act (FERA),1973. These discouraged foreign investment.6. Corporate taxation was high and tax laws andprocedures were complex.7. These factors either limited the scope of or discouragedthe foreign investment in India.
International Economic Institutions• Three global organizations play major rolein international economic relations:– International Monetary Fund (IMF)– World Bank (WB)– World Trade Organization (WTO)• WTO is successor to GATT (GeneralAgreement on Tariffs and Trade)
Bretton Woods Conference, 1944• Bretton Woods, New Hampshire• 44 nations participated, led by U.S., U.K.• Established IMF, World Bank• GATT started up soon thereafter
International Monetary Fund (IMF)• Over 180 members• Oversees exchange rate policies• Monitors international paymentsimbalances• Provides temporary loans for balance-of-payments financing
International Monetary Fund• Main function: help countries overcomeinternational payments crisis• Crisis occurs when country runs out offoreign exchange reserves – a majorcurrency or gold that can be used to pay forimports and international borrowings• IMF conditionality – requirement for theborrowing member to carry out economicreforms in exchange for a loan
World Bank• Founded as the International Bank forReconstruction and Development (IBRD)• Over 180 members• Main functions: provide loans to developingcountries for projects aimed at:– poverty reduction– improvement of health and education systems– infrastructure for private sector development(bridges, dams, etc.)
During great depression of 1930’s theinternational trade was badly affected andvarious countries imposed import restrictionsfor safeguarding their economies.It resulted in sharp decline in world trade.1n 1945, USA put forward many proposals forextending international trade and employment.On October 30th, 1947; 23 countries atGeneva signed an agreement related to tariffsimposed on trade.BACKGROUND
GATT/WTO• WTO principles and agreements are a very importantcomponent of the global business environmentsignificantly impacting domestic as well as globalbusiness, includes around 150 signatory nations.• The General Agreement on Tariffs and Trade (GATT),the predecessor of WTO, was born in 1948 as resultof the international desire to liberalize trade.• The GATT was transformed into a World TradeOrganization (WTO) with effect from January, 1995.• India is one of the founder members of the IMF, WorldBank, GATT and the WTO.
• Raising standard of living.• Ensuring full employment and a large andsteadily growing volume of real income andeffective demand.• Developing full use of the resources of theworld.• Expansion of production and international trade
Objectives• Raising standard ofliving.• Ensuring fullemployment and a largeand steadily growingvolume of real incomeand effective demand.• to strengthen & clarifyrules for agriculture trade• Expansion of productionand international trade• Developing full use of theresources of the world.
Function• GATTs main function is to promote fair tradeamong member nations by reducing andregulating trade tariffs and by providing acommon way to solve any sort of trade dispute.More recently, the GATT has becomeconcerned with how global trade is impactingthe environment as well as intellectual propertyrights.
NON DISCRIMINATION• A contracting party’s trade policies must treat allGATT members equally.• No member country shall discriminate between themembers of GATT in the conduct of internationaltrade.• tariff concessions, once made, cannot be rescindedwithout compensating trade partners, and newbarriers cannot be erected in place of lowered tariffs.• trade disputes to be settled by consultation.• national treatment – imported goods treated same asdomestic goodsPRINCIPLES ADOPTED BY GATT
Uruguay Round, 1986-93• Over 100 Nations Participated• Very Contentious Because Issues Went FarBeyond Tariff Reduction– Nontariff Barriers, Intellectual Property Rights,Services Trade, Agriculture Polices, Improving HowGATT Functions• Created WTO as successor to GATT, beginningin 1995
GATT WTOGATT was ad hoc and provisional WTO and its agreements are permanentGATT had contracting parties WTO has membersGATT system allowed existing domesticlegislation to continue even if it violated aGATT agreementWTO does not permit thisGATT system was less powerful, disputesettlement system was slow and lessefficient, its ruling could easily blockedWTO is more powerful than GATT,dispute settlement mechanism is fasterand more efficient, very difficult to blockthe rulings.Following the UR agreement, GATT was convertedfrom a provisional agreement into a formalinternational organization called World TradeOrganization (WTO), with effect from January 1, 1995FROM GATT TO WTO
World Trade Organization (WTO)• The World Trade Organization (WTO) deals with the globalrules of trade between nations. Its main function is to ensurethat trade flows as smoothly, predictably and freely as possible.• WTO is an organization for liberalizing trade, a forum forgovernments to negotiate trade agreements and a place forthem to settle trade disputes• At the heart of the system — known as the multilateral tradingsystem — are the WTO’s agreements, negotiated and signedby a large majority of the world’s trading nations, and ratified intheir parliaments.• The WTO has larger membership than GATT, with the numbersbeing 153. India is one of the founder members of GATT.
Functions of WTO:WTO is based in Geneva, Switzerland. Itsfunctions are:Administering the multilateral trade agreementswhich together make up the WTOActing as a forum for multilateral tradenegotiationsSeeking to resolve trade disputesWTO is not a ―Free trade‖ institution. It permitstariffs and other forms of protection but only inlimited circumstances.
Principles of WTO• Non discrimination• Free Trade: Promote free trade between nationsthrough negotiations.• Stability in the trading system: Member countriesare committed not to raise tariff and non tariffsbarriers arbitrarily.• Promotion of Fair Competition: WTO providesfor transparent, fair and undistorted competition.• It discourages unfair competitive practices suchas export subsidies and dumping.
TRIPS (Trade Related Intellectual PropertyRights Agreement)• The agreement requires member countries toprovide patent protection to all products orprocesses in all fields. The protection is grantedsubject to the following three conditions:– The product or process is a new one.– It contains an inventive step.– It is capable of industrial application for 20 yearsfrom the grant of the patent
TRIPS (Trade Related IntellectualProperty Rights Agreement)• TRIPS agreement covers the following sevenintellectual properties:– Patents– Copyright and other related Rights– Geographical Indications– Industrial Designs– Trade marks– Layout design of integrated circuits– Undisclosed information including trade secrets
TRIMS (Trade Related InvestmentMeasures)• TRIMS refers to certain conditions or restrictionsimposed by a government in respect of foreigninvestment in the country.• In the late 1980s, there was a significant increasein foreign direct investment throughout the world.• TRIMS are widely employed by developingcountries. The Agreement on TRIMs provides thatno contracting party shall apply any TRIM which isinconsistent with the WTO articles