In the present times, no economy can escape the wave of
globalization. As far as India's story is concerned, though it is
one of the most attractive destinations of the world today (World
Investment Report, 2008 and Ernst and Young, 2008), yet the origin of
mncs is not new rather a three centuries old phenomenon. In view of
that, the policy makers have been following different policies as
required with the changing times. The present paper is an attempt to
analyze policy framework concerning multinational corporations in India.
The findings reveal that MNC investors are finding some hindrances and
lags in the present policy framework and thereby suggest some measures
to make this [policy environment investor friendly, thereby proving to
be a boon for both India as well as these MNC investors.
The existence of Multinational Corporations (MNCs) in India is not
a recent phenomenon (Belhoste and Grasset, 2008) rather such subsistence
is approximately three centuries old. As such, the historical background
of MNCs in India can be traced back to as early as 1600s whereby the
British capital came to dominate the Indian scene through their
Multinational Corporation known as East India Company in the colonial
era. However, demarcation of the clear boundary lines of this history is
hampered by the lack of abundant and authentic data. Moreover, such
outlining is also obstructed by the discontinuity in the nature of the
data relating to these MNCs. Furthermore, the data available with regard
to such FDI in one secondary source do not match with that of another
source (Nayak, 2006). As a result of this, researchers could not portray
the complete history of Multinational Corporations and FDI pouring in
India even during the post independence era. The present paper is an
attempt to fill this gap and resultant policy framework to regulate
these multinational corporations from time to time.
II. OBJECTIVES AND RESEARCH METHODOLOGY
The present paper attempts to trace out the historical background
of MNCs in India and to critically evaluate the effectiveness of
existing policy framework in order to contribute in a constructive
manner towards policy development in future by highlighting the
hindrances faced by foreign investors in present policy regime. The
rationale of the paper arises from the fact that only few studies have
been conducted in this area and that too deal with the subject
indirectly. Therefore, the present study is an attempt to fill up this
gap. For the purpose of this study,--the Multinational Corporations
(MNCs) are defined as all foreign multinational corporations existing in
India as per the definition given by RBI and IMF (1).
The paper has been divided into six sections. Section I introduces
the paper. Section II discusses the objectives and the methodology of
the paper. Section III appraises the historical background and policy of
the government towards foreign multinational corporations in the pre as
well as post independence era. Section IV of the paper discusses the
present legal and regulatory status for the entry of the MNCs in India.
Section V of the paper undertakes critical analysis of the policy
framework by keeping in view the difficulties of the MNCs into account.
Section VI concludes the paper along with suitable recommendations and
As far as methodological part of this study is concerned, the study
is based on secondary data sources. Existing literature, reports and
consultation papers of government of India, reserve bank of India and
other reports have been consulted to attain the objectives of the study.
III. INDIAN POLICY FRAMEWORK CONCERNING MNCS DURING PRE AND POST
To discuss the historical background and policy framework for the
MNCs, the analsysis has been divided into two periods i.e. pre and post
(a) Pre Independence Era Policy
According to Nayak (2006), the period from 1900s-1918 can be called
as the first phase of FDI in India when there were no restrictions on
the nature as well as type of FDI pouring into India. Majority of these
investments at those times were exploitative in nature and were just
concentrating in the sectors such as mining and extractive industries to
suit the general British economic interest. It is a noticeable fact that
even in the post independence era, a major pie of the FDI source of
India continued to come from the same source. It is interesting to note
that despite of allowance of this free flow of FDI, no other country was
interested in investing in India other than U.K. and all FDI coming to
India during that period were sourced through the Managing Agents from
However, the period from 1919-1947 is considered to be more
important when the FDI actually originated in India. This phase can be
called as second phase of pre-independence FDI history in India. Import
duties were introduced during this period to stimulate various British
companies to invest in the" manufacturing sector in order to
protect their businesses in India. Though some Japanese companies also
enhanced their trade share with India, yet U.K. maintained its position
as most dominant investor in India during this period.
(b) Post Independence Era Policy
Before if dependence, Indian government was quite comfortable with
the "laissez faire" policy adopted by British government
earlier; therefore, India was not having its own foreign policy.
However, after independence, various issues relating to foreign capital
and its accompanying expertise sought attention of the policy makers.
Therefore, the government of India had to allow the operations of the
MNCs on such terms that best suited to national interests during
post-independence era. The following were the major objectives of policy
(i) to treat foreign direct investment as a medium to acquire
modern advanced technology; and
(ii) to mobilize resources, especially in terms of foreign
With the changing times, the policy of Indian governments kept on
changing as per economic and political exigencies prevailing at those
times. Accordingly, it can be spilt into four phases (Kumar, 1998 and
Chopra, 2003). Whereas in 1960s, these policies were quite liberal, yet
these became very stringent in 1970s. However, these were again
liberalized in 1980s and real liberalization occurred in 1990s. The main
four phases for" Indian policy framework concerning MNCs can be
Phase I--1948-1966: The Period of "Cautious Welcome
Re first and unique foreign policy of India to deal with incoming
FDI was pronounced by the then Prime Minister Pandit Jawahar Lal Nehru
at the very dawn of independence as on 6th April, 1947 (Mathur, 1992).
Despite of many critics of his world wide view, a wide national
consensus had emerged for his ideas on independent foreign policy of
independent India (Mohan, 2006). Nehru statement in parliament
considered foreign investment as "necessary" not only to
supplement domestic capital but also to secure scientific, technical and
industrial knowledge and capital equipment (Kidron, 1965).
Therefore, following mutually advantageous promises were made to
* All undertakings, whether Indian or foreign will have to conform
with the general requirements of the government's overall
* No discrimination would be made by Indian policy makers between
the foreign and the domestic undertakings;
* As far as remittances of profits and repatriation of capital was
concerned, reasonable facilities would be granted to foreign investors
as permitted by foreign exchange position at prevailing time;
* In case a particular industry has to be nationalized; a fair and
equitable compensation would be granted to the foreign investors having
a stake in that undertaking; and
* By rule, major interest, ownership and effective control of the
undertaking should be in Indian hands (Indian Investment Centre, 1985).
After carrying out industrialization in India to a satisfactory
extent, new industrial policy resolution of April, 1956 made various
private domestic as well as foreign companies a part of India's
public sector. As a result of new policy, MNCs had to venture through
technical collaborations during that period in India. However, during
the tenure of second five year plan (1956-61), government faced twos
severe crisis in the form of foreign exchange and financial resource
mobilization. To deal with this crisis, government liberalized its
attitude towards MNCs and foreign investment in two ways:
(i) A more frequent equity participation was allowed to foreign
(ii) In lieu of royalties and fees, equity capital was accepted in
Further, a number of other incentives such as tax concessions,
simplification of licensing procedures, double taxation avoidance
agreements with certain countries and extension of agency for
international development (AID) Investment guarantee to cover US private
investment in India were also given to lure foreign companies (Kumar,
1998 and Chopra, 2003). This led to "ambitious" investments by
many companies from countries such as UK and USA (Nayak, 2006).
In order to further combat foreign exchange crisis, government
further de-reserved some industries such as drugs, aluminum, heavy
electrical equipment, fertilizers, synthetic rubber etc. in 1961
(Mathur, 1992; Kumar, 1998 and Chopra, 2003). Further, the Finance Act
of 1965 also made provision for certain additional tax concessions.
Phase II--1967-1979: The Period of "Selective and Restrictive
The liberal attitude adopted in second five year plan had to be
changed in the early seventies due to significant outflow of foreign
exchange in the form of remittances of dividends, profits, royalties and
technical less in this period. Therefore, to put an end to this
phenomenon, policy of government became highly restrictive as far as
foreign exchange, type of FDI and ownership of foreign companies was
concerned. Government also set up a new agency called "foreign
investment board" and classified industries in order to regulate
flow of foreign capital in these sectors.
A new regulation called Foreign Exchange Regulation Act (FERA) was
also enacted in order to tighten the scope of FDI regime in India. With
the operation of FERA, all existing companies came under the direct
control of reserve bank of India. FERA resulted in dilution of share of
large number of companies as nearly 84 companies are reported to divest
fro India during that period (Nayak, 2006).
In order to review the extent of technology brought in by these
MNCs, a committee called "technical evaluation committee" was
formed and foreign investment proposals were now discussed with the
council of scientific and industrial research (CSIR) and department of
science and technology (DST). It was also specified to assign primary
role to Indian consultant in case of engagement of a foreign consultant.
Phase III--1980-1990: The Period of "Partial
In this phase, a new direction was given to the history of FDI in
India, especially in the mid-eighties. This happened due to two reasons
i.e. Second oil crisis and Failure of India to give boost to its
manufactured exports. As a result of this development, the balance of
payment position situation was further deteriorated. Therefore, a number
of policy measures were taken by the government to encourage and
maintain operations of Multinational Corporations in India. The main
highlights of the policy of government of India during this period were:
* Firstly, liberalization of imports of capital goods and
technology in order to stress the modernization of the plants and
* Second, gradual reduction in import restrictions and tariffs in
order to expose the Indian economy to competition; and
* Thirdly, to assign an .important role to multinational
corporations for promotion of export of manufactured goods on a big
The Reserve Bank of India also simplified procedural formalities
relating to exchange control. Further, the list of items under Open
General License (OGL) was also expanded for allowing imports of raw
materials and capital goods. In 1986, the tax rates on royalties were
also reduced from 40 to 30 per cent. The scope of the technical
development fund was also widened to include import of all kinds of
capital equipments, technical know-how and assistance, drawings and
design and consultancy services. Moreover, the ceiling of this fund was
raised to a foreign exchange up to Rs. 20 million per year. The process
of industrial policy reforms aimed at fostering greater competition,
efficiency and growth in the industry through a stable, pragmatic and
non-discriminatory policy for foreign direct investment. Although, the
amount of FDI augmented by over 13 times during this period, foreign
companies invested 'cautiously' during this period with an
attitude of wait and watch (Nayak, 2006).
Phase IV--1991-2001: The Period of "Liberalization and Open
In the early nineties, the balance of payments problem of India had
turned quite severe. Along with, a rapid increase in India's
external debt and increasing political uncertainty made international
credit rating agencies to lower both short and long term borrowing
rating of India. Therefore, the new government headed by Mr. P. V.
Narasimha Rao initiated a programme of macro-economic stabilization and
structural adjustment programme at the behest of IMF and World Bank.
This resulted into liberalization of Economic policies in order to
encourage investment and accelerate economic growth (Beena et al.,
The scenario relating to foreign direct investment in India could
also not remain unaltered by these new policy developments as in order
to stabilize India's external sector and to review the declining
credit rating of the country, the government gave a second thought to
the foreign investment policy of India.
A Foreign Investment Promotion Board (FIPB) was authorized to
provide a single window clearance system in the Prime Minister's
office in order to invite and facilitate MNC investment in India. For
the purpose of expansion in the priority industries, the existing
companies were also allowed to raise their foreign equity levels up to
51 per cent. The use of foreign brand names for products manufactured in
domestic industry (which was earlier restricted) was also liberalized.
India also became a signatory to the Convention of the Multilateral
Investment Guarantee Agency (MIGA) for protection of foreign
The Foreign Exchange Regulation Act (FERA), 1973 was revised and
earlier restrictions placed on MNCs in FERA were lifted. Moreover, the
companies having more than 40 per cent of foreign equity were treated on
par with fully Indian-owned companies. New sectors such as mining,
banking, telecommunications, highways construction and management were
thrown open to private as wen as foreign owned companies. Further, the
international trade policy regime was also considerably liberalized with
lower tariffs on various importable goods and negative list for imports
was also sharp pruned. Furthermore, the Rupee was also made convertible
first on trade account and finally on current account partially.
IV. POLICY DEALING WITH ENTRY OPTIONS FOR MNCS IN INDIA A foreign
multinational corporation planning to set up its business operations in
India can enter through the following modes:
* As an Incorporated Entity: to become an incorporated entity, a
MNC can opt for becoming an incorporated entity under Companies Act,
(i) Joint ventures; or
(ii) A wholly owned subsidiaries.
Depending on the requirements of the investor and subject to any
equity caps prescribed in respect of the area of activities under the
Foreign Direct Investment (FDI) policy, foreign equity in such companies
can be up to 100% of the total equity.
* As an Unincorporated Entity: alternatively, any foreign
multinational company can enter into business operations in India by
(i) Liaison Office/Representative Office;
(ii) Project Office; or
(iii) Branch Office.
Such offices of multinational corporations can undertake activities
permitted under the Foreign Exchange Management Regulations, 2000.
V. INVESTMENT ROUTES OF FOREIGN MULTINATIONAL CORPORATION IN INDIA
(a) Automatic approval--by the Country's Central bank i.e. the
Reserve Bank of India; or
(b) Through the Foreign Investment Promotion Board (FIPB).
Automatic approval of Reserve Bank of India can be availed if the
FDI in the equity of company does not exceed:
* 50 per cent in the industries given in Annexure III A of the new
* 51 per cent in the industries given in Annexure III B of the new
* 74 per cent in the industries given in Annexure III C of the new
industrial policy; and
* 100 per cent in the industries given in Annexure III D of the new
In the above cases, the intending company is required only to
report to Reserve Bank of India within 30 days of the receipt of foreign
equity/allotment of the shares. For other proposals that fail to qualify
automatic approval criteria, approval of FIPB is required (Reserve Bank
of India, Department of Industrial Policy & Promotion, IBEF, 2008).
The sector wise detail of the permitted foreign equity limit is given in
VI. LEGAL POLICY FRAMEWORK GOVERNING FOREIGN CAPITAL IN INDIA
The policy framework in India has been almost same for Indian as
well as foreign private investment. As the motive to regulate FDI since
post independence era was to ensure majority control to remain in Indian
hands to the extent possible, therefore several legal rules and
regulations were implemented as a part of policy framework at that time
that discouraged foreign ownership in most industries for many years.
Starting from Industrial Policy Regulation, 1948, this framework further
included Industrial (Development and Regulation) Act, 1951 (IDRA), the
features of which had their roots lying in the Second World War period.
Similarly, Monopolies and Restrictive Trade Practices Act, 1969 (MRTP)
was required to be adopted due to the Directive Principles of State
Policy as enshrined in the Constitution of India. In addition, to give a
boost to the principle of self-reliance, conservation of the limited
foreign exchange resources, rational utilization of the same and to curb
external liabilities for the coming generations, the Foreign Exchange
Regulation Act (FERA) was also adopted in 1973. All these acts produced
an array of rules and administrative norms that in turn led to creation
of a wide and complex system of controls and procedures involving
extensive delays and uncertainties in new investments. The key policy
measures adopted over the years are summarized in Table II.
VII. CRITICAL ANALYSIS OF EXISTING POLICY FRAMEWORK CONCERNING MNCS
Although the early nineties free market reforms initiated were
meant to spur the growth of foreign investment in India, yet the
objectives have not been fully realized due to some hurdles in the way.
Mr Amrit Kiran Singh, Chairman of The American Chamber of Commerce in
India (AMCHAM), while submitting a compendium of position papers on key
industries to the Ministries concerned pointed out "poor
infrastructure, belligerent tax administration, fragmented markets, and
pragmatic labour laws" as hurdles to FDI. Mr Singh opined that if
these issues are resolved, multinational companies present in India and
those in waiting would surely expand operations. Therefore, based on the
analysis of above policy frameworks from time to time and keeping in
mind the view of various renowned scholars and experts as well as
potential investors, it is suggested to undertake a critical evaluation
of existing impediments and remove these in order to pave the way for
the further development through the mutually advantageous existence of
Multinational Corporations in the country. These are:
1. Levels of Bureaucracy: Central versus State
It has been observed that sometimes the rules of centre and state
are in conflict with each other that lead to creation of a confusion
among the foreign investors. For example, from June 2007, in liquor
business, all foreign direct investments (FDI) have been allowed by
Union government through the "automatic" route by abolition of
the licenses earlier required for most manufacturing businesses in the
1980s. However, in spite of this change in policy measure, FDI failed to
move in this sector. This happened due to continuance of the prevailing
"state" laws as these laws continued to require licensing as
well as levying of a tax in the form of excise duty. Therefore, foreign
multinational corporations are still preferring to enter into this
business through joint ventures, partnerships, manufacturing alliances,
taking leases from domestic companies, operating through "work
contracts" or by acquiring domestic companies already having
licenses rather than acquiring licenses from government. This was so
because, these firms found the state laws to be time consuming,
cumbersome and also lacking inter-state uniformity. Therefore, majority
of these companies did not find any sense of the privileges granted in
the form of automatic route of investment provided by the union
government. This hurdle has also attracted the attention of Federation
of Indian Chamber of Commerce and Industries (FICCI) (Business Line,
2002). Not only this, but some states are also charging hefty Amounts
for such licenses e.g. Andhra Pradesh is charging highest license fee of
2.5 Crore rupees at present. Therefore, without the coordination of
"Union-State" policies, manufacturing companies will still
hesitate to invest in India in spite of its liberalized regime.
2. Exorbitantly High Tax Rate Structures
India has one of the highest corporate tax rate structures as
compared to other countries in the Asia-pacific region (KPMG, 2007 and
ENS Economic Bureau, 2007). India's tax rates are not only higher
as compared to countries in the Asia-pacific region (see table III), but
also as compared to other nations and economies of the World. In a
review of corporate tax rates at the beginning of 2007 in 92 countries,
the average tax rate in the EU was found to be 24.2%, compared with
27.8% in the OECD countries and 28% in Latin America, whereas
India's tax rate is still hovering around an exorbitantly high of
above 40 per cent (KPMG, 2007).
If compared to the policy structure relating to taxation of one of
its closest competitors i.e. China, India lags behind in various policy
measures such as:
* "Two plus Three" tax holiday for Manufacturing Foreign
Investment Enterprises ("FIEs") which implies that a Tax
holiday for all manufacturing FIEs starting with an initial two-year
exemption followed by 50 per cent reduction in tax rate for three years,
beginning from the first profitable year aider adjusting for tax losses;
* Attractive tax rate of 15 per cent tax rate in Special Economic
Zones; 24 per cent tax rate in certain coastal cities;
* Foreign investor reinvesting its share of profits for at least
five years to get a 40 per cent refund of tax paid on sum reinvested
(such refund may be granted up to 100 per cent if such reinvestment is
made in advanced technology industries or export oriented enterprises);
* For high tech FIEs, a three-year tax holiday extension is
applicable. In addition, these High Tech FIEs will be taxed at a
"reduced" rate of 15 per cent to 20 per cent;
* Extended 50 per cent tax rate reduction for export oriented FIEs;
* Preferential tax rates of 15 per cent and 24 per cent if
investment is made in "certain" regions; and
* Dividends repatriated to foreign investors by FIEs with at least
25 per cent registered capital held by foreign shareholders are
exempted. However, these dividends are subject to tax in Indian case.
It implies that India direly needs to review its policy concerning
taxes at an immediate instance and by following Kelkar Committee
recommendations, India should bring, down its tax rates to compete with
other nations attracting FDI in the priority sectors. Efforts should be
made to amend the tax laws by incorporating new provisions such as
reduced tax rates on profits, tax holidays, accounting rules allowing
for accelerated depreciation and loss carry forwards for tax purposes
and reduced tariffs on imported equipments and raw materials etc.
3. Lack of Developed Infrastructure
Extensive and efficient infrastructure is an essential driver of
competitiveness. It is critical for ensuring the effective functioning
of the economy, as it is an important factor determining the location of
economic activity and the kinds of activities or sectors that can
develop in a particular economy (Global Competitiveness Report, 2008).
However, as far as India is concerned, existence of the state-controlled
physical infrastructure is often considered as the weakest link as well
as major impediment to MNCs entry, (Sheel, 2001) especially in the
manufacturing sector. In a survey conducted by FICCI, roughly 43 per
cent of the respondents regarded India's ports and airport
facilities as substandard as compared to international standards. In
addition, investors also remained concerned with the lack of improvement
in other infrastructural facilities such as transport, roads, power and
water availability also. However, infrastructural factor is an important
decider in choice of MNCs for starting their operations at state level
(Badle, 1998). States such as Gujarat, Maharashtra, Karnataka, Tamil
Naidu and Andhra Pradesh etc. are receiving a major pie in the share of
FDI (Department of Industrial Policy & Promotion, 2008) as compared
to other states that lag behind in infrastructural facilities.
Therefore, policy relating to infrastructure definitely requires an
immediate attention of the policy makers.
Kumar (2000) observes that a combination of legal hurdles, lack of
institutional reforms, bureaucratic decision-making and the allegations
of corruption at the top level have dragged foreign investors away from
Treadgold (1998) also states, foreign investors find it difficult
to cut a path through the paper work of overlapping government agencies.
The humongous bureaucratic structure has created a fertile ground for
corruption. Moreover, most foreign investors have become apprehensive of
the country's past record of discrimination against foreign
multinational companies and India's prior reputation of a slow,
difficult, bureaucracy ridden environment to do business (Teisch and
Stoever, 1999). This is evidenced by the facts of Transparency
International, a global civil society organization which ranked India at
a far away position as compared to other Asia-Pacific countries (see
table IV) in the perception of corruption scenario by the potential
investors looking for a destination to invest.
5. Political Instability
The foreign investors perceive Indian political environment to be
inharmonious and peevish for creating an amicable atmosphere for foreign
investment (Kapur and Ramamurti, 2001). Foreign investors hesitate to
invest in India due to the political instability that in turn results in
to instable policies coming in frequently and without expectations. Not
only this, the multiplicity of regional political parties results into a
clears majority at the centre level forming shaky and insecure coalition
governments. For example, there were four general elections and six
prime ministers during a short span of time. In such an environment, the
much required economic reforms turn out to be sluggish as well as
inadequate. Instead of opting for a clear and unshaken attitude towards
reforms easing foreign investment, governments are repeatedly concerned
with diluting the reforms in order to keep their coalition partners on
board (Kripalani, 1999).
6. Inflexible Labour Laws
Global Competitive Report, 2008-09 ranked India much behind (see
table V) in terms of labor market flexibility. The causes of such
inflexibility are rooted in the laws and regulations prevailing in
India. Labor laws are considerably stringent in India as compared to
other countries, MNC employers are generally discouraged to give a boost
to labor hiring due to the inflexibility brought out by Indian laws and
regulations during cyclical downturns. As a result, these companies are
abandoned from closing down their inefficient and unprofitable
Srinivasan (2000) views that some of the Indian labor laws are
perceived to be extremely outdated, rigid and inadequate particularly
Contract Labour (Regulation & Abolition) Act, 1948; Industrial
Disputes Act, 1947; Minimum Wages Act, 1948; Workmen's Compensation
Act, 1923; Employees' Provident Funds and Miscellaneous Provisions
Act, 1952; ESI Act, 1948 and Factories Act, 1948. The main problems
identified in these acts include cumbersome exit procedures, maintenance
of on site records and myriad inspections etc. Ramamurthi (2000)
considers one of the biggest impediments to privatization in India to be
lack of an exit policy i.e. a policy to govern the dismissal of
redundant workers. The present Indian labor laws forbid layoffs of
workers for any reason (Kripalani, 1998). These laws protect the workers
and put a stop to any legitimate attempts to restructure business.
Further, to retrench unnecessary workers, firms require approval from
both employees and state governments-approval that is rarely given
7. Government Ceiling on Foreign Ownership
United States companies represented by American Chamber of Commerce
(AmCham) have cited ceiling on foreign ownership by the policy makers as
the major backdrop of Indian policy. As per AmCham, due to the barriers
to FDI, India is able to attract only $5 billion from the Untied States,
whereas at the same tine China grabs about $60 billion (Business Line,
2006). These companies wish that the policy makers should remove the
limit on foreign ownership that effectively prevents foreign control of
Indian businesses (Piggott, 2003).
8. The Excessively Rigid Role of RBI
The foreign investors blame Reserve Bank of India (RBI) for the
slower inflow of FDI in India due to various reasons such as (i)
excessive rigidity in granting permissions; (ii) delay in allowing
authorization for outward remittances; and (iii) problems with
downstream investment facility under automatic route (Srinivasan, 2000).
VII. CONCLUSION AND SUGGESTIONS
The foregoing analysis leads to the conclusion that much remains to
be implemented in order to improve the consistency in policy making and
executing, improving quality of governance and overall regulatory
framework as well. This is particularly imperative in the case of
foreign investments coming in sectors such as infrastructure that are
evidently critical for overall growth and development of India in the
years to come. However, in spite of this, the policy makers need to deal
fairly with the decision to open up various sectors for MNCs in India.
The following suggestions could be a considered by the policy makers for
future framework of policy in order to incorporate measures to overcome
hurdles faced by multinational corporations:
* The industrial policy statement of 1990 needs further changes
with regard to foreign investment and technology. It fails to understand
the likely impact of foreign investment on balance of payments,
self-reliance, indigenous R&D, employment and India's stand on
MNCs etc. Therefore, it is recommended that clear guidelines should be
laid down on such issues of national importance.
* The rationale for various countries to restrict FDI is to avoid
the risk of foreign multinational corporations to out-compete the
domestic corporations and enterprises. However, government should
undertake a careful sectoral analysis for identification of the sectors
where domestic players are unable to furnish the needs of growing
domestic as well as export demand for goods and services or these do not
inhibit the necessary ability or capacity to provide the required
quality standards. This will not only result into bringing the
investment into those sectors but also arousal of the sense of
competition and generation of spillovers (8) to the domestic players
that will ultimately lead to benefiting the domestic economy to grow in
the long run.
* As policy makers are interested in development of infrastructure
for both domestic and foreign interests, therefore, consideration should
be given for the involvement of foreign players in creation of these
facilities. Even state governments are ready to welcoming
infrastructural projects such as roads, rural electrification, and power
generation and transmission (Pathak et al., 2000). However, care must be
taken to deal with the entry and extent of investment by MNCs in certain
complex sectors in order to prevent monopolies in public utilities to
foreign firms. Liberalization of Indian economy needs to be a very
cautious and balanced liberalization instead of a "rushed
* As it is difficult to assess the impact of liberalization in a
particular industry employing a large number of unskilled people,
therefore, in such cases, it becomes imperative to carry out an in-depth
securitization of policy prior to take a decision on allowing the
multinational corporations in such sectors.
* The policy statement must be more analytical of foreign
investment as if MNCs are given an entry in a rushed manner as a key to
the problems such as foreign exchange, inflation, unemployment, then the
policy makers need to act in a very cautious manner. This is so because,
the prime motive of any multinational, be it Indian or foreign is always
profit not society.
* Policy efforts may be made to invite MNCs in the sectors where
India wishes to augment its exports. This is because, this objective
will be mutually advantageous to Indian economy as well as MNCs. Export
objective is commensurate with the MNC objective of profit-maximization.
At the same time, exports will result into generation of foreign
exchange. This foreign exchange can be further utilized to import
capital equipments for growth and development of other sectors.
* Policy efforts must be directed to encourage MNCs to invest in
agricultural sector. This is because; majority of Indian population is
dependent on agriculture. However, due to lack of investment,
productivity in this sector remains to be much low. Encouraging foreign
investment in this sector particularly infrastructure will not only give
a push to productivity but also lead to creation of employment and
development in rural India. Further, if policy efforts are made to set
up ties between domestic companies, then it will again lead to spillover
benefits to the domestic companies in the long run.
* An attempt must be made to identify sectors where MNC investment
will lead to realization of economies of scale which domestic firms are
unable to carry out due to lack of capital and technological know-how.
This will result in effective capacity utilization of those sectors.
This will also lead to reduction in prices of goods for domestic
customers and enhancement of quantity of exports due to lower prices.
Badale (1998), "Putting India on the Map", Across the
Board, Vol. 35, No. 3, March, p. 38.
Beena P. L., Laveesh Bhandari, Sumon Bhaumik and Subir Gokarn
(2004), "Foreign Direct Investment in India?", in Saul Estrin
and Klaus Meyer (Eds.), "Investment Strategies in Emerging
Markets", Chapter 5, Edward Elgar.
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HARPREET DUSANJH AND A.S. SIDHU
Guru Nanak Dev University, Punjab, India
(1.) In India, a foreign controlled company used to be defined as a
company in which 25 per cent of the equity was held by a single investor
or if 40 per cent of the equity was held in any one of the foreign
country. But with effect from the year 1992, Reserve Bank of India has
also adopted the criteria followed by IMF i.e. a firm is treated as
foreign controlled firm if 10 per cent of its voting stock is held .by a
(2.) 0% for NT$50,000 or less; 15% for NT$50,001--100,000; 25% for
over NT$100,000. An additional 10% on retained earnings kept for more
than one year.
(3.) 14.3% for the first 100 million Won of taxable income and
27.5% on taxable income in excess of that (inclusive of the resident tax
surcharge of 10%).
(4.) Where taxable income is SLR 5 million or less, 15% rate
applies. Corporate tax rate is 33 113% for quoted public company for the
first 5 years and 35% for other companies. Lower rate of 15% also
applies to companies engaged in non-traditional exports, agricultural
undertakings; promotion of tourism, construction works etc.
(5.) For companies with paid-up capital of RM2.5 million or less,
20% on the first RM500,000 of chargeable income and 28% on any balance
in excess of RM500,000. For companies with paid-up capital of more than
RM2.5 million, rate will be 28%.
(6.) India is criticized by MNCs for making discrimination between
domestic companies and MNCs as far as tax policy is concerned as
domestic companies in India are taxed at a lower rate of 33.66%.
(7.) Corruption Perception Index ranks countries in the ascending
order starting from giving number "1" rank to the "Least
Corrupt Country" as perceived by investors.
(8.) MNCs have both direct as well indirect effects on the economy
of the host nations. In a direct manner, MNCs influence by providing
benefits such as technology transfer, licensing and exporting thus in
turn creating employment and transferring R&D. Besides these direct
effects, MNCs also exert certain indirect effects on host countries
referred to as spillover effects. The term "spillover" has not
been defined aptly in the literature anywhere when referred to MNCs
except by a few researchers such as Globerman(1979), Blomstrom and Kokko
(1993) and Meyer (2003). In their view, spillovers are said to take
place when the firm-specific assets of the advantages of the company can
not be fully internalized, thus making the uncompensated benefits to
leak from these MNCs to domestic companies, customers as well as
suppliers in the host nation. In other words, the spillovers exist when
"The MNCs cannot reap all the productivity or efficiency benefits
that follow in the host country's domestic firms as a result of the
entry or presence of MNC affiliates."
FDI Permitted in Various Sectors/ Activities
Sr. No. Extent of Allowed FDI Sectors
I. Sectors where i. Retail Trading (except Single
FDI is Prohibited Brand Product Retailing)
ii. Atomic Energy
iii. Lottery Business
iv. Gambling and Betting Sector
II. Sectors where FDI i. Broadcasting
up to 26% allowed
(a) FM Radio--FDI + FII
investment up to 20% with prior
Government approval subject to
guidelines by 'Ministry of
Information & Broadcasting.
(b) Uplinking a news and current
affairs TV Channel -up to 26% (FDI
+ FII) with prior FIPB approval.
ii. Print Media
Publishing newspaper and
periodicals dealing with news and
current affairs--FDI up to 26% with
prior Government approval
iii. Defence Industries
FDI up to 26% with prior Government
Foreign equity (FDI+FII) up to 2646
under the automatic route
v. Petroleum and Natural Gas Sector
Refining in case of PSUs: up to 26%
with prior FIPB approval.
III. Sectors where i. Broadcasting
FDI up to 49% allowed
a. Setting up hardware facilities
such as up-linking, HUB,
etc.--FDI+FII equity up to 49% with
prior Government approval subject
to up-linking Policy notified by
Ministry of Information &
b. Cable network--Foreign equity
(FDI+FII) up to 49% with prior
Government approval subject to
Cable Television Network Rules
(1994) notified by Ministry of
Information & Broadcasting. c.
DTH--Foreign equity (FDI+FII) up to
49% with prior Government approval.
FDI can not exceed 20% subject to
guidelines by Ministry of
Information & Broadcasting.
ii. Domestic Scheduled Passenger
Airline Sector FDI up to 49% under
the automatic route with no direct
or indirect participation of
iii. Asset Reconstruction Companies
up to 49% (only FDI) with prior
iv. Petroleum refining by PSUs
No divestment of domestic equity in
existing PSUs would be permitted
for increasing the FDI up to 49%.
v. Commodity Exchanges
FDI +FII up to 49% with a sub-
limit for FII at 23% and for FDI at
vi. Stock Exchanges
FDI +FII up to 49% with a sub-
limit for FII at 23% and for FDI at
vii. Credit Information Companies-
-FDI +FII up to 49% with
a sub-limit for FII at 24% in the
CICs listed on the Stock Exchanges.
IV. Sectors where Single Brand Product Retailing--
FDI up to 51% with prior Government approval
is allowed subject to:--
a) Products being sold under the
same brand internationally.
b) Products sold being of a single
brand. Retailing of multiple
products sold under different brand
names, even if produced by the same
manufacturer, would not be allowed.
c) Single Brand product retailing
would cover only such products as
are branded at the manufacturing
V. Sectors where Telecommunication services: Basic
FDI up to 74% and Cellular--FDI up to 74%
a) FDI up to 49% is under automatic
b) Beyond 49% and up to 74% requires
Foreign equity includes FDI, FII,
NRI, FCCBs, ADRs, GDRs, convertible
preference shares, and
proportionate foreign equity in
Indian promoters/ Investing
VI. Sectors where i. Development of Existing Airports
FDI up to 100%
allowed subject FDI up to 74% under automatic route
to conditions and beyond this under FIPB route
ii. Exploration and Mining of Coal
and Lignite for Captive Consumption
FDI up to 100% under automatic
route subject to provisions of Coal
Mines (Nationalization) Act, 1973
Trading of items sourced from small
scale sector under Govt approval
Test marketing of such items for
which a company has approval for
manufacture under Govt approval
v. Courier Services for Carrying
Packages, Parcels and Other Items
which do not come within the ambit
of the Indian Post Office Act, 1898
prior Government approval subject
to existing laws and subject to
existing laws and exclusion of
activity relating to distribution
of letters, which is exclusively
reserved for the State.
vi. Tea Sector, including Tea
prior Government approval subject
to divestment of 26% equity within
vii. Non Banking Finance Companies
FDI up to 100% under the automatic
route subject to minimum
viii. Construction Development
FDI up to 100% on the automatic
route subject to minimum
capitalization norms; minimum area
development and lock-in on original
ix. ISP without Gateway,
Infrastructure provider providing
Dark Fibre, Right of Way, Duct
Space, Tower (Category I);
Electronic Mail and Voice Mail
a) FDI up to 49% under automatic
b) Beyond 49% and up to 100%
subject to FIPB approval subject to
divestment of 26% equity in 5 years
if the investing companies are
listed in other parts of the world.
x. Domestic Scheduled/
Non-Scheduled & Chartered Airlines/
Air Transport Services
NRI investment up to 100% permitted
under the automatic route with no
direct or indirect participation of
xi. Power Trading
up to 100% subject to compliance
with Regulations under the
Electricity Act, 2003
xii. Cigars & Cigarettes
up to 100% with prior FIPB approval
and Subject to industrial license
under the Industries (Development &
Regulation) Act, 1951.
xiii. Alcohol Distillation and
100% FDI under automatic route
subject to license by appropriate
Source: Department of Industrial Policy & Promotion, Ministry of
Commerce & Industry, Government of India in 'Investing in
India-Foreign Direct Investment--Policy and Procedures'
Legal Policy Framework Governing Foreign Capital in India
a Companies Act, 1951 Restrictions on the operations of managing
agencies that resulted in affecting
functioning of various British companies in
b. Industries To regulate the industrial licenses, With
(Development & progressive liberalization and deregulation
Regulation) Act, 1951. of the economy the requirement of
industrial licensing have been
substantially reduced. At present
industrial license for manufacturing is
required only for the following:
i. industries retained under compulsory
ii. manufacture of items reserved for small
iii. when proposed location attracts
c. Corporate Tax Corporate tax rates on foreign companies
policies, 1957 to 1991 were intentionally kept about 15 to 20 per
cent higher than the rates charged for
large Indian companies for the period 1956
d. Monopolies and All applications for obtaining license for
Restrictive Trade companies belonging to big business houses
Practices Act, 1969 and subsidiaries of foreign companies had
to be referred to 'MRTP Commission', which
invited objections and held public hearings
before granting a license.
e. Industrial Policy Hereby, Appendix 1 clearly specified the
Statement, 1973 industries where foreign firms were allowed
to operate (generally, these were
industries whose products were not produced
in India or where the domestic sector was
being dominated by a single (usually
f. Foreign Exchange Hereby, foreign companies operating in
Regulation Act, 1973 India asked to reduce their share of equity
capital invested in any Indian company to
less than 40 per cent, unless they were
engaged in specified 'core' activities
(Appendix I, IPS, 1973), and were using
sophisticated technology or had met certain
export commitments (led to the withdrawal
and/or sale of various foreign companies).
g. Amendment to Set a lower limit of Rs 1 billion in assets
MRTP Act, 1985 for referring company to the MRTP
h. Foreign Exchange Commission, limiting the applicability of
Management Act the Act. Regulates repatriation of capital,
(FEMA), 1999 profits and dividends etc. and current
Source: Compiled from Different Sources.
Tax Rates for Asia-pacific Region
Sr. No. Country Tax Rates/Slabs
1. Taiwan 0-25% (2)
2. Indonesia 10-30%
3. Korea 14.3%-27.5% (3)
4. Sri Lanka 15%-35% (4)
5. Hog Kong 17.5%
6. Singapore 18%
7. Malaysia 20%-28% (5)
8. China 25%
9. Vietnam 28%
10. Thailand 30%
11. Japan 30%
12. Australia 30%
13. New Zealand 33%
14 Philippines 35%
15. India 41.82% for Foreign
Source: Compiled from Different Sources.
Corruption Indices for Asia-pacific Region
Sr. No. Country Rank in Corruption
Perception Index (7)
1. New Zealand 01
2. Singapore 04
3. Australia 09
4. Hong Kong 12
5. Japan 18
6. Taiwan 39
7. Korea 40
8. Malaysia 47
9. China 72
10. Thailand 80
11. India 85
12. Sri Lanka 92
13. Viet Nam 121
14. Indonesia 126
75. Philippines 141
Source: Compiled from Corruption Perceptions Index,
2008, Transparency International
Labor Market Flexibility for Asia-pacific Region
Sr. No. Country Rank
1. Singapore 2
2. Hog Kong 4
3. Australia 9
4. New Zealand 10
5. Japan 11
6. Thailand 13
7. Malaysia 19
8. Taiwan 21
9. Korea 41
10. Indonesia 43
11. Viet Nam 47
12. China 51
13. India 89
14. Philippines 101
15. Sri Lanka 115
Source: Compiled from Global Market Competitiveness