DEFINITION OF TNCs (Transnational Corporations)

At the outset it must be made clear that very often the term ‘Multinational Corporations’ is used in the literature for the TNCs. There is, however, according to some, a difference between MWCs and TNCs. According to some experts, MNCs produce commodities/products for domestic consumption of the countries in which they operate. The TNCs, on the other hand, concentrate on producing products/commodities to meet the markets of third countries; this difference is not normally made while referring to either MNCs or TNCs. Therefore, in our context MNC can also be called TNC.

Transnational corporations are defined as an organization that owns productive assets in different countries, and has common strategy formulation and implementation across borders. They are engaged in international production under the common governance of their head- quarters. Factors of production move among units located in different countries. These systems increasingly cover a variety of activities ranging from research and development to manufacturing to service functions. They are also increasingly established through mergers between existing firms from different countries or the acquisition of existing firms in the countries by firms from other countries. 

UNCTAD defines Transnational Corporation as incorporated or unincorporated enterprises comprising parent enterprises and their foreign affiliates. A parent enterprise is defined as an enterprise that controls assets of countries other than its home country usually by owning a certain equity capital stake. An equity capital stake of 10 per cent or more of the ordinary Shares or voting power for an incorporated enterprise as its equivalent for an unincorporated one is normally considered as a threshold of the control of assets. Consequently, a TNC has central control with the objective of profit maximization. Central decision making is an important feature.

Subsidiary: An incorporated enterprise in the host country in which another entity directly owns more than a half of the shareholder's voting power and has the right to appoint or remove a majority of the members of the administrative management and supervisory body. 

Associate: An incorporated enterprises in the host country in which an investor owns a total of at least 10 per cent but not more than a half of the shareholder's voting power. 

Branch: A wholly or jointly owned unincorporated enterprise in the host country which is one of the following: (i) a permanent establishment or office of the foreign investor; and (ii) an incorporated partnership and joint-venture between the foreign direct investor and one or more third parties. 

It may be added here that recently some TNCs have decentralized some of their decision making. Some TNCs do have decentralized decision making and profit centers. Yet all the final decision on a number of important issues rest with the parent. If there is no central decision, making features, the TNC does not exist, as K. Ohame once puts it.

FOREIGN DIRECT INVESTEMENT (FDI) IN INDIA

India had a selective foreign direct investment policy since its independence. It wanted FDI mainly as a source of supply of technology. While the Government of India considered aid as the main form of capital inflow FDI flow into India was very limited. Since 1991, India has liberalized its FDI policy. Several initiatives have been taken to enhance the flow of FDI into the country. Let us analyze here the trends of FDI in India. Look at Table 6.3 which shows inflows of foreign investments. There has been remarkable progress in the inflows of foreign investment. The country has witnessed significant growth in the inflows up to the year 1996-97. The inflows of foreign investment have decelerated during the year 1997-98 and 1998-99.

The county wise analysis of FDI inflows shows that Mauritius continued to be the largest source of FDI inflows followed by the USA for the year 1998-99. There has been substantial decline in inflows from these sources for the last two years. Japan, Italy and Germany were the third, fourth and fifth largest sources of FDI in the year 1998-99. Look at Table 6.4 which shows country wise FDI inflows.

The sector wise analysis of FDI inflows shows that during the year 1998-99 engineering sector continued to remain at the top of the list among the FDI recipients followed by the chemicals and allied products. Services sector were the third and Electronics and Electrical equipment were the fourth largest recipients of FDI for the year, 1998-99. Look at Table 6.5 which shows sector-wise FDI inflows.

Multilateral Investment Guarantee Agency (MIGA)

The International Bank for Reconstruction and Development or the World Bank wanted to promote foreign direct investment flows specially to developing countries. The MIGA was therefore established by the,World Bank in 1988 with a specialized mandate to: 

(a) encourage equity investment and other direct investment flows to developing countries through the  mitigation of non-commercial risks; 

(b) advice developing member governments on the design, implementation of policies, programmes and procedures to related foreign investments; and 

(c) sponsor a dialogue between the international business community and host government on investment issues. 

One hundred thirty four countries have become members of MIGA by 1996. Twenty are developing countries and countries in transition have applied for membership. India had ratified MIGA in 1995.

Various Measures for Consideration for Multilateral Investment Agreement (MIA)

Measures relating to admission and establishment

• Closing certain sectors, industries or activities to FDI 
• Quantitative restriction on the number of foreign companies in specific sectors, industries or activities. 
• Minimum capital requirements. 
• Subsequent additional investment or reinvestment requirements
• Screening, authorization and registration of investment. 
• Conditional entry upon investment meeting certain development or other criteria (e.g. environmental responsibility). 
• Investment must take certain. Legal form (e.g., incorporated in accordance with local company law requirements). 
• Restrictions on forms of entry (e.g. mergers and acquisitions may not be allowed, or must meet certain additional requirements). 
• Special requirements for non equity forms of investment (e.g., build operate transfer (BOT) agreements, licensing of foreign technology). 
• Investment not allowed in certain zones or regions within countries. 
• Restrictions on import of capital goods needed to set up an investment (e.g. machinery, software). 
• Investors required to deposit certain guarantees (e.g. for financial institutions). 
• Admission to privatization bids restricted or conditional on additional guarantees, for foreign investors. 
• Admission fees (taxes) and incorporation fees (taxes).
• Investors required complying with norms related to national security, policy, customs, and public morals requirements as conditions to entry. 

Measures relating to ownership and control

• Restriction on foreign ownership (e.g. no more than 50 per cent of foreign owner capital allowed). 
• Compulsory joint ventures, either with state participation or with local private investors. 
• Mandatory transfers of ownership to local firms, usually over a period of time. 
• Nationality restrictions on the ownership of the company or shares thereof. 
• Restrictions on the use of long term (5 years or more) foreign loans (e.g. bonds). 
• Restrictions on the free transfer of shares or other proprietary rights over the company held by foreign investors (e.g. shares cannot be transferred without permission).
• Restrictions on foreign shareholders rights (e.g. on payment of dividends, reimbursement of capital upon liquidation; on voting rights; denial of information disclosure on certain aspects of the running of the investment). 
• "Golden” shares to be held by the host government allowing it, e.g., to intervene if the foreign investor captures more than a certain percentage of the investment. 
• Government reserves the right to appoint one or more members of the board of directors. 
• Restriction on the nationality of directors, or limitation on the numbers of expatriates in top managerial positions. 
• Government reserves the right to veto certain decisions, or requires that important board decisions to be unanimous. 
• Government must be consulted before adopting certain decisions. 
• Management restrictions on foreign controlled monopolies or upon privatization of public companies. 
• Restrictions on land or immovable property ownership and transfers thereof. 
• Restrictions on industrial or intellectual property ownership or insufficient ownership protection. 
• Restrictions on the licensing of foreign technology.

Arguments in Favour of a Comprehensive Multilateral Framework

The overreaching rationale for a comprehensive investment framework is that it would create a stable, predictable and transparent enabling framework, which would facilitate the growth of investment flows and their contribution to development. In fact, the globalization of business, the increased volumes and growing importance of l31, the extent to which FDI and trade are inextricably intertwined and the emergence of an integrated international production system require a similarly global poIicy framework. A global economy requires a global policy framework consistent for trade and investment issues. 

What exists now, however, is a patchwork of bilateral, regional and multilateral agreements that contains overlaps, gaps and inconsistencies. And these pollens are bound to increase as the number of bilateral and regional agreements continues to proliferate. 

Apart from regional groupings investment agreements, there are more than 1 100 bilateral investment agreements. Even a complete network of BITS covering all pairs of countries which would require some 20,000 treaties requiring a very long period of time to negotiate.

A comprehensive multilateral investment framework is seen by its proponents as the appropriate response to the need for a global policy framework: 

The following section gives the views of the proponents of MIA. 

Governments expect increased FDI flows to contribute to development, directly as well as indirectly (as they increase trade. They also expect that conflicts arising from FDI are more likely to be the subject to an effective dispute settlement process in the context of a rule based, not power-based, framework; smaller countries, in particular, benefit from a rule based system not only because they are more protected but also because they can participate in policy formulation and implementation. 

Firms - large and small -expect that a multilateral investment framework should remove ' impediments to investment, establish high and coherent standards, provide protection for investment and put in place a mechanism for ;resolving disputes. A stable, predictable and transparent framework is particularly important for large-scale, long term infrastructure projects and for internationally integrated production networks. 

Trade unions expect effective rules on FDI which would incorporate the principles of the ILO Tripartite Declaration, thus alleviating the danger of downward pressure on basic labour standards resulting from policy competition and contributing to a stable labour regime, which is essential for integrating TNCs in development strategies.

Other groups, in particular the consumer movement, expect a rule based system for international economic relations, which would also include effective consumer, competition and environment policies, and which would not marginalize some groups of countries but rather complement global liberalization. 

Beyond that, it is expected that the existing multilateral economic institutions would benefit because they would be able to function more effectively if FDI were brought into the purview of the multilateral system governing international economic relations. 

A comprehensive multilateral agreement, especially if it is linked to the international trade framework, would contribute more to increasing international investment flows. Not only would it entail a worldwide reciprocal lowering of barriers to the inflow and outflow of investment, but the consolidation of commitment of countries to an open investment regime would give greater credibility to such policies in the eyes of investors. It should thus enable countries to attract greater inflows of investment at a lower cost, and subscribing to it would become a "good housekeeping" seal of approval. The stronger the agreement, and the higher the standards, the more it would contribute to investment flows and hence development. 

They are:

Investment measure that effect the entry and operations of foreign investors 

The application, with respect to FDI, of certain positive standards of treatment, 

Measures dealing with broader concerns, including setting appropriate standards of behaviour for investors and ensuring the proper functioning of the market. 

The elimination (or reduction) of non-business risks through provisions on investment protection and settlement of disputes. 

The MIA is expected to have Most Favored Nation Treatment and National Treatment to be accorded to foreign investor.

MCTLTILATERAL INVESTMENT AGREEMENT (MIA)

Agreement on TRIMS under Marrakesh Treaty, the culmination of the Uruguay Round of Trade Negotiations was the first step towards considering a Multilateral Investment Agreement. The developed countries are keen to establish a multilateral investment regime similar to multilatera1 trade regime. The developed countries have already done this in their draft agreement prepared by the Organization of Economic Cooperation and Development (OECD) a largely developed countries grouping. They now would like MIA to be brought under WTO. 

In fact in Singapore, WTO’s interministerial meeting (1995) considered this issue. India opposed it for she believes that FDI policy is primarily a national concern. Hence, it was proposed in the meeting that a study would be made on the subject and any decision to negotiate a multilateral investment agreement must have explicit consensus of all. The Multilateral Investment Agreement is to standardize various provisions and bring it under the control of a multilateral institution with an effective dispute settlement mechanism. The WTO is considered to be the most suitable organization which has an effective dispute settlement mechanism possessing cross retaliation. However, it will take considerable amount of time to finalize this agreement.

TRADE RELATED INVESTMENT MEASURES (TRIMS)

Many host developing countries want the FDI flow to be consistent with their development priorities. They also wanted multilateral measures to protect their interests. Thus the UN Centre for Transnational Corporations was established to educate developing countries and also build a code of conduct for TNCs. The code was not approved. Hence it is called Draft Code of TNCs. Issues covered by the Draft included issues of national sovereignty, observance of national laws, and adherence to the socio-economic objectives of host countries, appropriation of foreign assets and compensation and regulation of the restrictive business practices of foreign enterprises. In the eighties, the US wanted a Multilateral Investment Agreement preventing national policy discretion on FDI. The main arguments of the US were that performance requirements imposed by the host countries on foreign investor had led to distortions in world trade. Further, the investing countries lost the opportunity of exporting their export potential on the one hand and constrained to buy products and services from costly and inefficient sources of supply on the other. Hence it brought the issue of investments under Uruguay Round of multilateral trade negotiations. Although investment is not a subject matter of the GATT regulations, the Punta Del Este Negotiating Mandate on Trade Related Investment Measures stated: "Following an examination of the operation of the GATT rules related to trade restricting and distorting effects of investments measures, the negotiation should elaborate as appropriate, further provision that may be necessary to avoid such adverse effects on trade". Thus in the Uruguay Round of Multilateral Trade Negotiations for the first time that some investment issues were directly introduced as part of the discipline of the multilateral trading system.

GATT's article on national treatment, Art-III.4, and quantitative restrictions, XI. 1, were invoked to bring TRIMS under negotiations. 

Investment Measures Prohibited in the Agreement on TRIMS under the Marrakesh Agreement 

TRIMS inconsistent with Article 111.4 of GATT 

a) The purchase or use by an enterprise of products of domestic origin or from any domestic source, whether specific in terms of particular products, in terms of volume or value of products, or in terms of a proportion of volume or value of its local production; 

Or

b) That an enterprise’s purchases or use of imported products be limited to an amount related to the volume of local products that it exports. 

TRIMS Inconsistent with Article XI of GATT 

a) The importation by an enterprise of products used in or related its local production, generally or to an amount related to the volume or value of local production that it exports.

b) The importation by an enterprise of products used in or related to its local production by restricting its access to foreign exchange to an amount related to the foreign exchange inflows attributable to the enterprise; or 

c) The exportation or sale for export by an enterprise of products, whether specified in terms of particular products, in terms of volume or value of products, or in terms of a proportion of volume or value of its local production.

According to the TRIMS Agreement, all specific measures in the above five categories being applied by any member will have to be notified within 90 days of the entry into force of the Agreement establishing the World Trade Organization (WTO). They will have to be eliminated within two years - within five years by the developing countries and 7 years by the least developed countries. A developing member country shall be free to deviate temporarily from the obligation to eliminate such measures, on balance of payment grounds. The operation of this discipline shall be reviewed after five years. A Committee on Trade-Related Investment Measures has been set up to monitor the operation and implementation of this Agreement in WTO.

Sectoral Distribution of FDI

FDI flows in the primary sector have been declining fast. The share of FDI in the manufacturing sector has remained stable and it is the single most important sector in the developing countries. The share in services sector has been increasing in both developed and developing countries. The industry with the largest share of inward FDI in the world is finance followed by trade. The services like banks, insurance securities and other financial services, has remained top recipient of FDI over the past decade. The m3I in the services sector has been growing over the past years at a faster rate than the FDI in other sectors. 

Cross Border Mergers and Acquisitions 

Cross border mergers and acquisitions are another major trend in FDI, for the past several years, mergers and acquisition involving firms located in different countries have increased significantly. Cross-border mergers and acquisitions are primarily concentrated in developed countries, but there is also a trend towards an increase in such deals in some developing countries. The number and value of total cross-border mergers and acquisitions have increased significantly worldwide. The absolute value of all cross-border mergers and acquisitions sales and purchases amounted to 544 billion dollar in the year 1998. This witnessed 60% increase over the year 1997. Mergers and acquisitions represent a significant share of FDI flows, at least in the developed countries. In the year 1998, there were 89 mega cross border mergers and acquisitions deals. These mega deals accounted for nearly three- fifths of the total of all cross-border mergers. 

Recent cross-border mergers and acquisitions have been concentrated in industries that are losing comparative advantages. In the year 1998, the largest cross-border mergers was in the oil Industry followed by the automobile industry and the banking and telecommunication industry, The non-petroleum mining and refining industries also witnessed good mergers and acquisitions.

Limitations of Foreign Direct Investment (FDI)

Besides, these favorable impacts of FDI, there are some limitations which have been discussed as follows. 

Foreign Enterprises Depend on Domestic Capital: Very often foreign enterprise brings very limited capital. It takes recourse to borrowing from domestic capital markets and banks. It has been the experience of a number of developing countries where foreign enterprises have depended to a large extent on domestic capital markets and have heavily borrowed from the national financial institutions. Thus, they compete effectively with the national firms for scarce capital available domestically. Very often they deprive national firms of the needed capital. Thus, the argument that they bring sufficient capital is spurious. 

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

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

Does Not Transfer Technology Effectively: Foreign enterprise very often keeps control of technology. Therefore, effective transfer of technology and management skill does not take place. What it does is to transfer technology relating to adaptation to local conditions otherwise one has to deal with trouble shooting technologies. Fundamental aspects of technology are strictly kept with the parent company. Thus the host economy, specially the developing countries, may not have effective transfer of technology arising out of FDI. 

FDI is not a Provider of Additional Employment: It is argued that this will arise when FDI does not substitute national investment. When FDI Substitutes national investment, what exactly happens is that it replaces employment opportunities that could have been created by the national enterprise. Thus the net employment opportunities generated will be insignificant. Further, there are no effective backward linkages for the Transnational Corporations. The operations of TNCs would depend on imports for getting their supplies rather than depending on domestic sources of supply of host countries. 

Does Not Create Higher Wages: Most often FDI indulge in exploiting the wages in host, developing countries. Hence the argument that they generate higher wages is not correct. Further, the employment of local personnel in high paid jobs is less for it is very often taken by foreign nationals.

Does Not Create Additional Exports: Most often FDI comes to exploit the domestic market. Barring a few export processing zones, the foreign enterprises most often exploit the domestic market. 

Does Not Create Competitive Environment: The TNCs through their market power always create oligopolistic or monopolistic market conditions. Three or four TNCs control the market. 

The present consensus has been that despite this debate, the FDI has a net positive impact on the development of developing countries. It may, however, be noted here that for growth and development of an economy it is not necessary for the economy to depend an FDI flows There are a number of cases of countries which have developed without large inflows of FDI. Notable examples are Japan and South Korea.

Advantages of Foreign Direct Investment (FDI)

FDI helps in the development of the host countries. In specific term, the major advantages are discussed as follow:

FDI as Capital Supplier: Foreign Direct Investment is expected to bring needed capital to developing countries. The developing countries need higher investment to achieve increased targets of growth in national income. Since they cannot normally have adequate savings, there is need to supplement savings of these countries from foreign savings. This can be done either through external borrowings or through permitting and encouraging Foreign, Direct Investment, Foreign Direct Investment is an effective source of this additional capital and comes with its own risks.

FDI a Remover of Balance of Payments Constraint: FDI provides inflow of foreign exchange resource and removes the constraints on balance of payment. It can be seen that a large Nurnberg of developing countries suffer from balance of payments deficit? For their demand on foreign exchange is normally far in excess of their ability to earn. FDI inflows by providing foreign exchange resources remove the constraint of developing countries seeking higher growth rates.

FDI has a distinct advantage over the external borrowings considered from the balance of payments point of view. Loans create fixed liability. The governments or corporations have to repay, the resulting international debt of the government and the corporation parts a fixed liability on balance of payments. This means that they have to repay loans along with interest over a specific period. In the context of FDI this fixed liability is not there. The foreign investor is expected to generate adequate resources to finance outflows on account of the activity generated by the FDI. The foreign investor will also bear the risk. 

FDI as a Vehicles of Technology Transfer: FDI brings along with it assets which are crucially either missing or scarce in developing countries. These assets art: technology and management and marketing skills without which development cannot take place. This is the most important advantage of FDI. This advantage is more important than bringing capital which perhaps can be had from the international capital markets and the governments. 

FDI as a Promoter of Exports of Host Developing country: Foreign direct investment pro- motes exports.' Foreign enterprises with their global network of marketing, possessing marketing information are in a unique position to exploit these strengths to promote the exports of developing countries.

FDI as a Provider of Increased Employment: Foreign enterprises by employing the nationals of developing countries provide employment. In the absence of this investment these employment opportunities would not have been available to a tot of developing countries, Further; these employment opportunities are expected to be in relatively higher skills areas. FDI not only creates direct employment opportunities but also through backward and forward linkages, it is able generate indirect employment opportunities as well.

FDI Result in Higher Wages: Foreign Direct Investment has also promoted higher wages. Relatively higher skilled jobs would receive higher wages. 

Generates Competitive Environment in Host Country: Entry of foreign enterprises in domes-tic market creates a competitive environment compelling national enterprises to compete with the foreign enterprises operating in the domestic market. This leads to higher efficiency and better products and services. The Consumer may have a wider Choice.

NATURE AND TYPES OF INTERNATIONAL INVESTMENT

The growing international production and trade require increased amount of international investment. As a result, the flow of international investment has been increasing. The country requires international investment for enhancing the production, trade and distribution capabilities. The need for international investment is more pronounced in the developing countries where the capital is in scarce. World Investment Report, 1999 has advocated the need of foreign investment. It says that the development priorities of developing countries include achieving sustained income growth for their economies by raising investment rates, strengthening technological capacities and skills, and imposing the competitiveness of their exports in world markets, distributing the benefits of growth equitably by creating more and better employment opportunities, and protecting and conserving the physical environment for future generations. The international investment plays an important role in the above effort of the developing countries. There are two major types of international investment. They are Foreign direct Investment and Portfolio Investment. Let us first learn about them.

Foreign Direct Investment 

Foreign Direct Investment occurs when an investor based in one country (the home country) acquires an asset in another country (the host country) with the interest to manage the asset. The company investing in this country also transfers assets such as technology, management and marketing. Further, the investing company also seeks the power to exercise control over decision making in a foreign enterprise - the extent of which has to vary according to its equity participation. Foreign Direct Investment also includes reinvested earnings which comprise the direct investor's share of earnings not distributed as dividends by affiliates or earnings not remitted to the direct investor. Such retained profits of affiliates of foreign enterprise are reinvested.

Recent1 y there has been tremendous expansion of FDI. There are four main characteristic features of growth of foreign direct investment. These are: 

The bulk of investment flows is among the developed countries. 

The growth of investment has been substantial. 

The developing countries have increasingly become recipients of FDI. 

The flow of FDI to developing countries, however, is concentrated in approximately ten countries.

Foreign Direct Investment especially in developing countries has been a very controversial subject. Historically, FDI is associated with the domination of metropolitan powers over the colonies. It was believed that these investments were instruments of suppression of national enterprises and exploitation of these economies for the benefit of foreign investors. However over the years this historical assessment has given place to an important role to FDI. A consensus has developed since the eighties that FDI is essential for economic development.

Portfolio Investment 

Portfolio capital normally moves to investment in financial stocks, bonds and other financial instruments. Further, the portfolio capital moves to the recipient country which has revealed its profitability and has a comparative advantage over the counterparts in investing country. Portfolio capital unlike FDI is affected largely by individuals and institutions through the mechanism of capital market. Portfolio investment to a large extent is expected to be speculative and footloose in its character. Very often depending on the confidence of the investor, the investment is made. In the event this confidence is shaken, the capital has a tendency to shift from one country to another very fast occasionally creating a crisis for the host country.

Equity capital is the value of the Multinational Corporations (MNCs) investment in shares of an enterprise in a foreign country. An equity capital stakes of 10 per cent or more of the ordinary shares or voting power in an incorporated enterprise is normally considered threshold for the control of assets. This category includes both mergers and acquisitions and green field investments (the creation of new facilities). Mergers and acquisitions are important sources of investment in developed countries. .

Mergers and acquisitions are a popular mode of investment for firms wishing to project, consolidate and advance their global competitive positions by selling off divisions that fall outside the scope of their core competence and acquiring strategic assets that enhance their competitiveness. For these firms, the "ownership” assets acquired from another firm, such as technical competence, established brand names and existing supply networks and distribution systems can put to immediate use towards serving global customers, enhancing projects, expanding market share and increasing corporate competitiveness by employing international production network more efficiently.

GLOCALIZATION

The alternative to the Globalization strategy is dubbed as 'Glocalizatjon'. The objective of glocalization is to establish a geographically concentrated inter-firm division of labour in the three major bonding blocks. Manufacturers strive to build their competitive advantage in a combination of vertical de-integration of production to local supplies and sub-contractors. And structural control over local suppliers, dealers, workers, and governments. As Glocalizatjon aims to establish production within the major markets international trade may decline. Glocalizatjon pertains to a company's attempt to become accepted as a local citizen in a different trade bloc. 

Glocalization also leads to the concept of global firms meaning that large firms cease to be national firms. Therefore, they can be treated as stateless Corporations. It is argued that time has not yet arrived to think of global firms. This is for a number of reasons. 

(a) Even the large multinational corporations are still tied to apparent country 

(b) The ownership and control of the firm is still retained by the parent firm. Me subsidiaries profit accrue to the parents 

(c) There are very few non-nationals on the boards of parent company 

(d) The legal nationality of the parent firm is still the nation state where it is registered 

(e) In most cases technological activities are concentrated in the parent company.

CROSS BORDER MERGERS AND ACQUISITIONS

The process of globalization of the economy has been strengthened at the global economy and firm’s level as the phenomenon of cross border mergers and acquisition. These affect the foreign direct investment flows, the World economy and competition.

Merger and acquisitions are a popular mode of investment for firms wishing to project, consolidate and advance their global competition position by selling off divisions that fall outside the scope of their core competence and acquiring strategic assets that enhance their competitions. For these firms, the ‘ownership’ assets acquired from another firm, such as technical competence, established brand names and existing supplier networks and distribution systems can be put to invertible use towards better serving global customers, enhancing projects, expanding market share and increasing corporate competitiveness by employing international production networks more efficiently.

For the past several years, cross border merger and acquisitions worldwide have increased significantly. The absolute value of all crosses border M & A sales and purchases amounted to $544 billion in the year 1998 representing an increase of about 60% over the year 1997. The amount was $342 billion in the year 1997. Cross-border M & A are primarily concentrated in developed countries, but there is also a trend towards an increase in such deals in some developing countries. In the year 1998, there were 89 mega cross-border M & A deals, each with more than $1 billion value. These mega deals accounted for nearly three-fifths of the total all cross-border M & A in the year 1998. Recent cross-border M & A have been concentrated in industries that are losing comparative advantages. In the year 1998, the industry that recorded the largest cross-border M &as include: oil industry, automobile industry, banking and telecommunication industry and non-petroleum mining and refining industries.

GLOBALIZATION AT THE FIRM/CORPORATE LEVEL

From the point of view of international business globalization of the firm is very important. There have been a number of approaches to globalization of the firm. A few important approaches are discussed below: 

1. The term globalization was first used by Professor Theodore Levitt of Harvard Busine.ss School. Globalization according to him was referred to as an alleged consequence of markets in the world. 

Globalization in Levitt's view is the emergence of global markets for standardized consumer products enabling a firm to benefit from enormous economics of scale in production, distribution, marketing and management. The impact of technology would be toward further standardization. According to Levitt a successful globalized corporation does not abjure customerization or differentiation and for the requirements of markets that differ in product preferences, spending patterns and shopping preferences. Global Corporations accept these differences only reluctantly. For instance, Ford. The US car maker has at several points in history tried to launch a world car.

2. In the Japanese view as presented by Ohame Kenichi Globalization is understood as a 'business chain'. A business chain comprises a firm’s main activities such as. Research and Development, engineering, manufacturing, marketing and sales and services. He distinguishes five steps in globalization of a firm. Each of these steps involves the transfer of activities in the business chain to a foreign location. It is in reference to development in the 1980s. Since 1980s had been dominated by unprecedented flows of foreign direct investment as has been seen, mergers and acquisitions and strategic alliances as well as by ever-fiercer competition from Japanese and South East Asian firm.; Ohame argued that these developments would constitute a new era in international business. Companies and customers horizons would stretch, ‘beyond national borders’, they would become global citizens.

1. Export: The entire range of activities is performed at home. Exports are often handled by an exclusive local distributor. 
2. Direct Sales and & Marketing: If the product is accepted in the overseas market, it will lead to establishment of an overseas sales campaign to provide better marketing, sales and service & functions to the customers. 
3. Direct Production: This step involves the establishment of local production activities. 
4. Full Autonomy: All activities of the business chain as mentioned above are transformed to the key national markets. 
5. Global Integration: In the ultimate stage of globalization. According to Ohame, companies conduct their R & D and finance their cash requirements on a worldwide scale and recruit their personnel from all over the world.

3. Globalization is also presented in management centered concepts especially of Japanese firms (i) Management Centered around the head office; (ii) Management delegated to overseas operating units (iii) Management centering overseas operating units with regional coordination; and (iv) Management with a global perspective and conscious integration of total system and sub-system.

4. The fourth globalization strategy that of global supplies is one of export centered global expansion. All systems such as R & D, procurement, sales, marketing. Distribution and the organizational structure are designed so as to enhance export of products manufactured in the home country in such an operation. 

This process consists of four stages: (i) creation of a global vision, (ii) integration of overseas organization and establishment of multiple corporate headquarters; (iii) promotion of a global hybridization process; and (iv) globalization of personnel administration and the cultivation of entrepreneurial middle management.

5. Porter’s View of Globalization: An industry can be defined as global if there is some competitive advantage to integrating activities on a worldwide basis. To diagnose the sources of competitive advantage in any context, domestic or global, it is necessary to adopt a disaggregated view of the firm which Porter calls ‘Value Chain’. "Every firm is a collection of discrete activities performed to do business in its industry", which he calls ‘value activities'. The activities performed by a firm include such things as sales people selling the product, service technicians performing repairs, scientists in the laboratory designing products, processes or accountants keeping books. These functions are technical and physically distinct. The firm's value chain resides in a larger stream of activities termed as value system. Suppliers have value chains that provide the purchased inputs to the firm's chain, buyer's have value chains in which the firm's product or service is employed, channels have value chains through which the firms’ product or service passes. The connections among these activities become essential to competitive advantage. Value chain concept needs the notion of competitive scope. Competitive scope is the breadth of activities the firm performs in competing in an industry. There are four basic dimensions of competitive scope. They include: Segment scope, industry scope, vertical scope and geographic scope. Segment scope refers to the range of scope the firm serves, for example product varieties, customers’ types, etc. Industry scope refers to the range of related industries the firm competes in with a coordinated strategy. Vertical scope refers to the activities that are performed by the firm versus suppliers and channels. The geographic scope refers to the geographic regions in which the firm operates with coordinated strategy. Competitive scope is vital for competitive advantage. It shapes the configuration of the value chain how activities are performed and whether activities are shared among units. International strategy is an issue of geographic scope. A firm that competes internationally must decide how to spread the activities in the value chain among countries. The distinctive issues in international, as contrasted to domestic, strategy can be summarized in two key dimensions of how a firm competes internationally. Porter calls the first the configuration of n firms* activities worldwide, or the location in the world where each activity in the value chain is performed including how many places. The second dimension is called by Porter 'coordination' which refers to how liked activities performed in different countries are coordinated with each other.

Industries globalize when the benefits of configuration and/or coordination globally exceed the costs of doing so. The way in which an industry globalizes reflects the specific benefits and costs of global configuration and/or coordination of each value activity. Further, in global competition, a country must be viewed as a platform and not as the place where all activities of a firm are performed.

6. Michael Taylor and Nigel Thrift considered that the emerging global corporation was the result of the complex process of interlocking between the relatively autonomous development sequences of subsidiaries, branches and affiliates. These firms grow into complex international economic network. 

7. Globalization: A Macro-Fordist view: This approach has been developed by Wisse Dekker, former president of Philips who calls it "transationalization of business". Dekker defines. Globalization as a relatively early stage in the internationalization of the firm. According to him transnationalization takes place in the following steps.

• The local enterprise produces and sells in one and the same country. 
• The international enterprise still produces entirely or predominantly in the parent country but establishes sales in foreign markets. International firms are characterized by a strong central organization. 
• The global enterprise is transcending part of its production process abroad - often limited to assembling - to circumvent input barriers or because of transportation costs; 
• Multinational enterprise bas complete production facilities, sometimes even R & D in a host of countries. The MNC often has a federal structure, a network organization in which synergy plays an important role. Production in many cases is no longer local for local.

EFFECTS OF GLOBALIZATION ON THE WORLD ECONOMY

The impact of this level of globalization has undoubtedly led to economic growth. In specific terms, the effect of globalization are as follows: 

i) The major effect of globalization is that the global economy is,becoming more integrated day by day. 

ii) The volume of world trade has grown at a faster rate than the volume of world output. 

iii) There has been a trend of lowering the barriers to the free flow of goods, services and capital among countries.

iv) Foreign direct investment has been playing an important role in the global economy.In order to become competitive, company have started investing in overseas operations. 

v) Global operations have led to the emergence of Multilateral Trading Systems.

vi) Imports are penetrating deeper into the world's largest economies as well. 

vii) The growth of world trade, foreign direct investment and imports leds to more foreign competition in the domestic markets. 

viii) In order to compete with the foreign players, domestic firms are required to enable the production and distribution capabilities. 

ix) companies have started looking the wodd as a market for their products. . 

x) Companies have started dispersing their manufacturing, marketing and research facilities around the globe where cost and skill conditions are most favourable. 

xi) Opportunities have been increasing for the firms. 

xii) Innovations have started spreading faster.

MAJOR FORCES OF GLOBALIZATION

Globalization is not a new phenomenon either at the firm level or at the national/world economy level. Around 1880, the process of globalization of the economy and the firm began. This was the recognition of comparative advantage. Many firms went global. They included Ford, Singer, Gillette, National Cash Register, Otis and Western Electronics. This was because of enjoyment of scale of economies due to the advancement of technology. In the interwar period, the thrust of globalization declined. But the post war period witnessed once again tremendous growth of globalization. Let us learn some of the important forces of globalization.

International Trade and Globalization 

International trade has grown substantially over the years. The growth experienced is in the range of 4-10 per cent per annum. In fact, international trade has grown faster than the world economy in recent years. For developing countries, trade is the primary vehicle for realizing the benefits of globalization. Growing trade has contributed to the ongoing shift of some manufacturing and service activities from industrial to developing countries, which further accelerates the process of globalization. The creation of World Trade Organization in 1995 is another step toward creating an environment conducive to the exchange of goods and services. Another significant and more important indicator of globalization is the rate of growth of Gross Domestic Product (GDP) of the world. The world merchandise trade and the world GDP have been steadily growing since 1990. The rate of growth in merchandise exports is faster than the rate of growth in the world GDP. Look at Table 5.1 which shows that world merchandise exports and world GDP have been. Steadily growing till the year 1997. The world merchandise trade has been also growing faster than the world merchandise production... Of course, world merchandise trade, world merchandise production and world GDP have decelerated sharply in the year 1998 due to oil crisis, fall in prices of international trade of goods and services and several other factors.

Trade expansion does not confine to merchandise trade alone. Even international trade in services has grown tremendously. Trade in commercial services continued to be stronger than the merchandise trade throughout the entire 19904 998 period. .

The world merchandise exports, world merchandise. Production, world GDP and international trade in services have Witness substantial growth as a result of the globalization.

International Capital Flows 

Apart from expansion of international trade, the massive capital flows among countries has further strengthened globalization of capital by a large number of countries. The catalyst for globalization in the late eighties and nineties is not international trade, but cross border international finance flows. World inflow and outflow of FDI have been growing significantly. The inflow of FDI has increased from 359 billion dollar in the year 1996 to 644 billion dollars in the year 1998. Likewise the outflow of FDI has also increased from 380 billion dollar to 649 billion dollar. These levels were reached despite the unfavorable conditions in the world economy. FDI flows grew in 1998 by 39% in case of inflows and 37% in case of outflows. This is the highest growth rate attained in FDI since 1987.

On an average, virtually all of the increase in FDI in the year 1998 was concentrated in, developed countries, FDI inflows to and outflows from developed countries reached new heights of 460 billion dollar and 595 billion dollar. In case of developing countries, FDI inflows decreased slightly from 173 billion dollar in 1997 to 166 billion dollar in the year 1998. Most of the FDI is located in the developed world. Although the share of developing countries had been growing steadily until the year 1997, when it reached to 37%. It subsequently declined to 28% in the year 1998 due to the strong performance of the developed countries. The flows to the economies in transition of Central and Eastern Europe remained almost stable. The continuous growth in FDI will further accelerate the process of globalization. Look at Table 5.2 which shows the world FDI inflows and outflows.

Globalization and Technology 

Technological revolutions in transport and communications over the last three centuries, have integrated the world economy. The advances of technology in transport and communication have also brought peoples of the world nearer,

The revolution of technology that has taken place in transport, communication and information is of qualitative difference during the last ten years from that of previous-generation of technology. It is not only integrating but also bringing into existence a common culture, common political system est. It has also led experts like Ohame think that there is not concept of national consumer. Consumer preference can be global and regional.

Technological revolution has been rapidly transforming all productive systems and facilitating the process of globalization. Technology has become one of the most important elements of the competitiveness. In modern production activities, competitiveness entails new, more rapid product innovation, flexible response, greater networking and closely integrated production systems across firms and regions. The leaders of technological change are evolving new strategies in response. Apart from investing heavily in innovation they are moving their technological assets around the world to match them to immobile factors, entering new alliances and reorganizing production relations. This has further facilitated the process of globalization.

At the corporate level also technology is getting globalized. This is at two levels. First technology is being sold in the world market. Although the market of technology is governed by slightly different rules such as relative importance of information, a few sellers and large number of buyers leading to oligopolistic market structure, the market for technology is vibrant. Consequently many countries derive benefits from this. For instance, the US earns substantially from technology trade. The mechanisms of technology sale are outright purchases and technology collaboration agreements. There has been substantial increase in technology collaboration over the last two decades. Second, the globalization of technology is also taking place in establishment of R & D centers. A large number of TNCs are establishing their R & D in various countries thus globalizing their R & D operations.

WHAT IS GLOBALIZATION?

Globalization is the process by which an activity or undertaking becomes worldwide in. scope. It refers to the absence of borders and barriers to trade between nations. Globalization is defined as increased permeability of traditional boundaries of almost every kind, including physical borders such as time and space, nation states and economies, industries and organizations and less tangible borders such as cultural norms. As a consequence of increased global operation, the global economy is becoming more integrated than ever before. This gradual integration leads to the emergence of global village.

UNCTAD defines globalization at the macro level as follows : "The concept of globalization refers to both an increasing flow of goods and services and resources across national borders and to the emergence of complementary set of organizational structure to manage expanding network of international economic activity and transaction: Strictly speaking, a global economy is one where firm and financial institutions operate transnationally, i.e., beyond the confines of national boundaries. In such a world of goods, factors of production and financial assets would be almost perfectly substitutes everywhere and it would no longer be possible to consider nation states as distinct economic identities with autonomous decision making power in the pursuit of national objectives. The public goods that are needed to maintain an open market system, such as secure property rights and stable monetary system would become a global responsibility"

However, he World economy has not reached this level. Although, the nation state is having less control as the forces regulating trade, finance and technology, it has still not given way to a new set of institutions with global responsibility. Hence, the current situation is termed by some as ‘global interdependence’.

BALANCE OF PAYMENTS ADJUSTMENTS

When we discuss import licensing policy or exchange control we assume that the objective of the government is to restrict import so that the domestic import competing industries are given encouragement to expand and replace imported goods. Very often, however, the government’s objective is not so much to promote import substitution (because the country may not even produce the goods that are imported) but to reduce the import bill. This takes us to the concept of the balance of payment. Every country is like a company vis-a-vis the rest of the world and it has to settle accounts with the other countries. The statement of a country's financial transactions with the rest of the world is called the balance of payment statement. You may look at any issue of Economic Survey for India’s balance of payment statement. You have also learnt the balance of payment in Unit 3. To recapitulate, the statement is divided into three parts: the current account, the capital account and the official account, the entries in the current account show values of exports and imports during the financial year. The difference between the value of export and the value of imports (in rupees or dollars) is the balance on trade account. So we have a trade surplus or a trade deficit depending on whether the balance on trade account is positive or negative. There are other entries in the current account, like travel or tourism which are called invisibles. The invisibles are also like exports and imports of goods. When a foreign traveler comes to India and purchases hotel services, it is our invisible export. When our tourists go abroad and do the same thing, it is our invisible import. The balance on invisible trade (export minus import) plus the balance on trade account (trade deficit or surplus) is called the current account balance. Then we come to the capital account of the balance of payment statement. The transactions here are in the nature of capital import or export. If the government of India or an Indian company makes an investment abroad, say by purchasing a financial asset, it is capital export. If the foreigner invests in India it is capital import. The foreign investment may be either direct investment or portfolio investment. If a foreign company comes to India and sets up a factory or a shop to do business directly with the Indian people, it is direct investment. On the other hand, if the foreigner simply invests in shares and bonds floated by Indian companies, it is portfolio investment. There is an element of asymmetry between current account and capital account. In current account imports are items for which we make payments to the foreigners and exports are our receipts from the foreigners. In the capital account import of capital is a receipt item and the export of capital is a payment item. Therefore the balance on capital account is total capital import minus total capital export and a positive balance is a surplus and a negative balance is a deficit.

The total balance, i.e., the balance on current account plus the balance on capital account is called the balance of payment which may show an overall deficit or surplus. A country may have a deficit in the current account but a surplus in the capital account and an overall deficit in the balance of payment. This was precisely the position in India’s balance of payment in the last financial year. A balance of payment deficit simply means that certain payments are due to the foreigners and a surplus means that the foreigners are indebted to us in respect of certain payments. Since a deficit or a surplus needs adjustment, we have an official account showing how this adjustment is made. A BOP deficit may be adjusted by the Reserve Bank of India through sale of foreign currencies released from the foreign exchange reserves, or by borrowing from the International Monetary fund or by foreign aid. A surplus may be adjusted by increasing the foreign exchange reserves. When all these official transactions take place, the grand balance, i.e., balance on current account plus balance on capital account plus balance on official account, becomes zero and this has to happen by the law of accounting.

NON-TARIFF BARRIERS TO TRADE

As mentioned earlier tariff is not the only instrument to restrict trade and give protection to the domestic import competing industry. The non-tariff instruments are numerous. Recently, United States of America has decided to ban import of carpets from India on the ground that child labour is used in the Indian carpet industry to which the human rights activists have serious objections. In the past on many occasions consignments have been returned by USA on the ground that the goods pose health hazards to the citizens of the country. Thus, human rights, damage to environment, health considerations, injury to domestic industries etc, are the excuses offered by the importing country to restrict or prohibit imports. such restrictions are called non-tariff barriers. 

Various non-tariff barriers are imposed by the government to discriminate against imports or in favour of exports. Let us discuss briefly major kinds of non-tariff barriers and their implications for international trade.

Customs classification and valuation: The duty imposed on a particular import good depends on how it is classified in the tariff schedule and how it is valued by the customs authorities. This ambiguity provides customs authorities opportunity for arbitrary classification and determining value of imported goods. Customs authorities usually charge higher duties which may act as a deterrent to trade. 

Subsidies: Subsidies are provided by the government to domestic producers or exporters to stimulate the expansion of such industries. For example tax exemptions, cash disbursements, preferential exchange rates, government contracts with special privileges or some other favorable treatment. Subsidies help companies to be cost competitive. Government provides various types of export assistance to exporters to make the export business more profitable and attractive. 

Local content and Foreign investment performance requirement: Local content regulations are imposed on certain industries to promote import substitution and encourage the domestic producers, According to these regulations certain percentage of inputs used in the manufacture of goods are required to be procured from the domestic suppliers. In the same way, foreign investors are required to export a certain proportion of its output from the domestic country under the foreign investment performance requirement.

Technical Standards and Health Regulations: Many regulations are imposed on imports with respect to safety, health, marking, labeling, packaging and technical standards, quality standards and natural environment. Such regulations pose hardships and create barriers on foreign produced goods. .As a result, some products may freely enter in one country and may be banned in another country. For example Japanese government requires that some import goods be tested in Japan even when they have already been tested in the domestic country. USA prohibits imports of many types of agricultural products on these grounds. 

Government Procurement: According to this policy, government purchases give preference to domestically produced goods. For example, buy American regulation of USA government provide US producers Price advantage on Defense department contracts. 

Restrictions on Services: Non-tariff barriers are imposed to curtail trade in services. For example restrictions are imposed on transportation, banking, insurance, advertising, accounting, law, engineering, construction, franchising, tourism, education, health, business services, etc. on various grounds. 

Besides above restrictions, there may be voluntarily export restraint, anti-dumping restrictions, specific permission requirements, administrative delays and procedures, etc.