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.