38. Globalization, Mncs and Foreign Capital in India – Business Environment

38

GLOBALIZATION, MNCs AND FOREIGN CAPITAL IN INDIA

This chapter deals with three important topics which are interlinked, namely, globalization, multinational corporations (MNCs) and foreign capital. Under globalization, we deal with the factors facilitating globalization, the role of the corporation in globalization and doing business in a diverse world. While studying multinational corporations, we learn their role, the excessive economic clout they enjoy, the current issues relating to multinational corporations, the advantages of MNCs to the host nation, their disadvantages, regulation of MNCs, and the MNCs in India representing most developed nations. The study of foreign capital includes the study of the need for foreign capital, kinds of foreign capital, the distinction between FDI and FII, foreign aid, response of foreign capital, kinds of foreign investments, India's policy towards foreign capital, establishment of Investment Commission and finally the disadvantages of foreign capital.

After reading this chapter, you will understand and appreciate the respective roles of globalization, multinational corporations and foreign capital in Indian economy better, and analyse them in the context of the business you are in.

In the second half of the twentieth century, international business has become an important economic force. Today few, if any, countries can claim to be economically self-sufficient. Even India, with its vast human and natural resources, cannot insulate herself from the world economy and though there was tremendous political opposition from within, she was constrained to open up her economy and join the WTO. In every country, developing or developed, international business touches people's lives daily.

With the World Trade Organization (WTO) playing an active role and its 153 members opening up their economies, globalization has extended its reach with freer movement of people, capital, jobs, trade and information. In contrast to the diminishing role of nation states, global businesses operate in an essentially borderless society and have considerable power to effect change. There are several other factors that make globalization significant: (i) World trade is growing rapidly—its share in the world GDP jumped from 25 per cent in 1970 to 46 per cent in 2006. (ii) Migration of people from one country to another, either temporarily or permanently, has become common; (iii)Transfer of money payments between countries and regions has been growing; (iv) Easier capital flows between countries facilitate production of goods and services for trade; (v) Finance too flows easily between countries; (vi) Increasing role of transnational corporations facilitate trade on a global scale; (vii) IPR-related technology is now being traded between countries with greater ease; (viii) Communication explosion has reduced distances and has facilitated the emergence of a global village; (ix) There is a great intermixing of nations especially in terms of trade in goods and services and (x) Political rivalries and cultural diversities seem to fade away in a global market place where trade takes the centre stage. In this fast-changing scenario, there is an urgent need for a sustained dialogue, initially among senior business leaders from around the world, to define the critical role of the corporation in a global society.

Most business enterprises, big or small, are drawn to doing business across national borders today. They may be purchasing raw materials from foreign suppliers, assembling products from components made in several countries, or selling finished goods or services to customers in other nations. With the passage of time and more and more countries reducing trade barriers, the number of firms affected by international competition keeps on increasing everyday. In our day-to-day life we consume goods and services that have an international character about them—clothes, books, CDs, computers and soft drinks. Many MNCs have subsidiaries, affiliates and joint venture partners in most of the developing countries so much so that, in some cases, the number of foreign employees of these corporations may exceed that of the home country.

FACTORS FACILITATING GLOBALIZATION

Many factors have come to play a facilitating role in recent times to promote and foster international trade—improved communication and transportation facilities, better infrastructure and a host of non-tariff barriers raised by many countries. The protectionist policies and huge tariff barriers for decades to protect the vulnerable home industries from foreign goods in developing countries are a thing of the past. Today, the situation is drastically different. “Business operations can be managed effectively simultaneously”. “Resources are sometimes more plentiful and less costly in other countries; labour may be cheaper; taxes may be lower. In some cases, it may be even beneficial if the weather is better”.1

At the beginning of the twenty-first century, nations are most closely linked to one another than ever before through trade in goods and services, through flows of capital, through movement of labour—though to a limited extent—and through investments in each other's economies. The following are the factors that have played a key role in promoting international trade in recent times:

  1. Trade barriers have fallen: A number of factors—free trade agreements, emergence of trade blocs and the facilitating roles played by international organizations such as the World Trade Organization, International Monetary Fund and the World Bank—have accelerated the liberalization of trade.
  2. Political reforms have opened-up new frontiers: As pointed out by James Post and co-authors the former communist nations of Eastern Europe are now open to doing business with the world. Millions of people in these countries now have access to the goods and services that global commerce provides in an open, free marketplace.2 (There have been other factors such as the reunification of East and West Germany and the enormous growth in global tourism and transport and communications that have also added to this stupendous growth in world trade.
  3. More developing nations have joined the bandwagon of global business: In addition to the industrial prowess of Japan and South Korea in the Asia Pacific region, several countries such as Taiwan, Thailand, Malaysia, Singapore and Indonesia have grown rapidly in recent years. Recently, China, India, Brazil and Russia have emerged as successful global players, inviting organizations from across the world to invest in these countries.
  4. New technologies and businesses spanning continents have emerged: New technologies and business based on them such as computer hardware and software, pharmaceuticals, and communications that have worldwide investments and markets have effected a remarkable transformation in fostering world trade. Likewise, Business Process Outsourcing (BPOs) and several IT-enabled services (ITES) have widened the horizons of international business opportunities.
MNCs AND GLOBALIZATION

The process of globalization is facilitated by the emergence and growth of multinational corporations some of which are bigger than some of the national economies. These corporations spread their wings far and wide and produce goods and offer services for the global market and population. In the following pages, we study the role of the corporation in details.

With the onset of globalization and the business corporation spreading its wings outside the home country, there is an urgent need for a sustained dialogue, initially among senior business leaders from around the world, and then including leaders of governments and other institutions, to define the critical role of the corporation in a global society. The rules of the game are changing fast. Business leaders can no longer rely solely on past traditions, established strategies or earlier expectations of society. If such dialogue were to be fruitful, there have to be a common framework and guidelines.3 The following beliefs can be considered as a framework for that discussion:

  1. Efficiency of operation: The major responsibility of a public company is to conduct its operations efficiently, i.e., to be technologically inventive, competitive and financially profitable.
  2. Proactive in serving all stakeholders: Corporations must be increasingly responsive to issues affecting the physical, social and economic environments not only because of their impact on business performance but also out of a pro-active sense of responsibility to all constituencies served.4
  3. Corporations need to balance the short-term interests of shareholders and the long-term interests of the enterprise and its stakeholders: To many economists such as Adam Smith and Milton Friedman, a corporation exists primarily to earn profit for shareholders. According to this concept, “managers should earn profit for shareholders. On the other hand, in today's world, it is generally understood that a corporation should benefit all stakeholders such as employees, vendors, creditors, civil society, environment and the state. In recent times, many social companies including Tata Steel do seek and get approval of their shareholders to spend a part of their profit on social welfare activities”.5
  4. Meeting traditional objectives and performance criteria is not sufficient: Voluntary standards which exceed the requirements of prevailing law and regulations are necessary to the development of sustainable practices. Society's “license or franchise to operate” has to be earned.6
  5. Corporations should lead by example: Corporation should follow business practices that are ethical, transparent, and such that they reflect a commitment to human dignity, political, economic freedoms and preservation of the planet.
  6. Corporations cannot act alone: Public companies should seek to address key societal issues through cooperative efforts with governments, other institutions and local communities.
DOING BUSINESS IN A DIVERSE WORLD

There was a time when corporations doing business in many countries considered the country of their origin as the major source of their capital, revenues and personnel. Under this ethnocentric perspective, the home country's laws were viewed as dominant but nowadays companies have understood that they should consider the entire world as their home and have to adopt their business practices to different environments and cultures while sticking to global identity and policies. Under this geocentric perspective, firms develop managers at all levels from a worldwide pool of talent and to seek to use the best people for all jobs regardless of where they come from. In fact, in recent times transnational corporations, which used to deploy men from their home countries in senior management positions in their subsidiaries in India and elsewhere, have started recruiting their future managers from top-notch Indian educational academies such as the IIMs and IITs to staff their units worldwide. Banking companies such as Citibank and Standard Chartered Bank and firms such as Bata and Hindustan Lever have a number of Indian managerial personnel manning not only their subsidiaries, but also their parent organizations.

In this context, James E. Post and co-authors have this to say: “Companies such as IBM, General Electric, and Exxon have long histories of bringing their managers from, around the world to meetings and workshops for the purpose of broadening everyone's understanding of the world in which their company operates. At Dow Chemical, technical specialists from plants around the world are connected by information technology and physically meet several times each year to discuss advances in science and technology. European firms such as Nestlé (Switzerland). ABB (Asea Brown Boveri, a Swedish-Swiss Company) and Unilever (Great Britain-Netherlands) have led the way towards internationally diverse corporate board membership”.7

However, in the making of the geocentric outlook, it is not the size of the firm that matters, but the geographic location and awareness of the social and cultural characteristics of the firm's stakeholders that reinforce the importance of an open approach to cultural differences. “To be a global company in the modern economy is to build a geocentric perspective into the very fiber of the business organization”.8

For instance, when Nestlé and Unilever carry on business in the Indian subcontinent, they face different political systems: India has a vibrant democracy, Pakistan a dictatorship and Bangladesh a fledgling and brittle democracy. In terms of economic systems too, there are substantial variations which are reflected in the kinds of economic policies they pursue. Though all these countries are supposed to have a common culture, their divergent religious and linguistic affinities bring in considerable variations in the manner they live and consume things. With different socio-economic and political environments, legal framework, institutional set-up, fiscal, monetary and commercial policies, factor endowments, production techniques, nature of products and consumption habits, these companies will have to not only acclimatize themselves to the existing realities of each of these countries, but also be prepared to fine-tune their policies and business strategies to the fast moving changes that occur in these dynamic societies. As commerce becomes more global, with customers, suppliers, and competitors from other nations and cultures, managers have to understand and appreciate how diverse socio-economic systems affect the markets and the socio-political environment of business and act accordingly, if they have to be successful in their global business.

MULTINATIONAL CORPORATIONS

Businesses in the present global society are carried on by multinational or transnational corporations, most of which are based in developed countries. “Multinational corporations” are business enterprises that are engaged in business in more than one country. The name “multinational corporation” is distinct from “International Corporation”. The latter name was used in the 1960s to identify a company with a strong national identification. The home market was the company's primary focus. Overseas operations were usually carried out by wholly owned subsidiaries controlled by home country nationals. By the 1980s, international corporations had evolved into more globally oriented companies. While still maintaining a domestic identity and a central office in the country where it was incorporated, a multinational corporation now aims to maximize its profits on a worldwide basis. The corporation is so large and extended that it may be outside the control of a single government. Besides subsidiaries, a multinational corporation may have joint ventures with individual companies, either in its home country or in foreign countries.

Case 38.1 MNCs Turn to India to Combat Recession

Multinational companies are increasingly focusing on emerging markets including India and launching new products and services tailor-made for these regions as developed markets are reeling under recession. India along with China had been the cynosure of MNCs even before the onset of the economic crisis. Once the recession was found to have a relatively lesser impact in these countries, it made sense to the MNCs to focus more on these booming markets rather than to be fully engaged with developed markets. Increasing per capita income, rising domestic demand for goods and services, conducive spending pattern of consumers and controlled inflation, and such other favourable economic parameters only go on to prove that a sharper focus on these economies can ensure better growth for MNCs.

LG Electronics India, for instance, believes that India is relatively less affected by recession than many other countries, and expects 15 per cent growth in 2009.

IT security company Trend Micro has recently set up three technology support labs in India as part of its Affinity Partner programme. Trend Micro intends to grow in India and to interact with its customers and partners in order to offer “the best-of-breed secure content management solutions”. In their perception, there are not too many economies that grow at 7 per cent in the world, as India.

The optimism over India is manifested in foreign direct investment (FDI) inflows. While China registered a total FDI inflow of USD 92.4 billion in 2008, up 23.6 per cent from 2007, India's FDI inflows rose from USD 19.1 billion in 2007 to USD 32.4 billion in 2008.1

The positive results are already being seen. In July 2008, IT major Sun took a strategic business decision to make its presence strengthened in fast-growing markets such as India. To closely align sales with key growth areas, it created a business division to focus on emerging markets sales region, which inter-alia included India. Producers of consumer durables, automobiles, telecom and infrastructure companies are also focusing more on emerging market in these tough times. Sun's emerging markets sales region, for instance, announced in the financial year 2008, recorded an increase in revenues of 13.8 per cent over 2007 at USD 1.969 billion. Total revenue for the second quarter of 2009 in the emerging markets region was USD 558 million, up 20.5 per cent from USD 463 million in the first quarter of 2009. Sun also is positive that governments and businesses in emerging markets would be increasingly using the latest open source technology with a view to innovate at the lowest cost. Likewise, Sun rolled out a telecoverage model in December 2008 in the emerging markets. The model is aimed to help Sun reach out to high growth small-and mid-size businesses (SMBs), start-ups and Web 2.0 companies in these economies, thus optimizing its drive to success and profitability.

The launching of a slew of new products and initiatives for emerging markets only goes on to strengthen this process. Microsoft India, for instance, showcased recently for the Indian market a host of custom-made offerings such as Language Interface Packs (LIPs) in 12 Indian languages, and Windows Live, comprising e-mail, instant messenger, online storage, photo gallery and social networking, in 7 Indian languages.

The Dutch global major and the consumer durables company Philips has created a model to scale up their presence in the emerging markets with a view of transforming itself into a focused, less-cyclical company in the coming years. In 2007, approximately 40 per cent of the company's revenues came from emerging markets. Going forward, emerging markets, especially India, will play a significant role for Philips. In 2008, Philips acquired two companies in India in the healthcare domain—Meditronics and Alpha X-Ray Technologies—with a view of stepping up its focus on emerging markets. Philips decided to focus on health care as it is a recession-proof industry, and hopes to generate maximum revenues from this sector over time.

 

Source: Swati Prasad, “MNCs Turn to India, China to Combat Recession”, ZDNet Asia, 26 February 2009.

Global business does not function in a vacuum. It operates within the context of international and where necessary regional rules and regulations set up by appropriate governmental agents. Global business is dominated by multinational corporations that have their businesses spread across continents. According to a study conducted by Sarah Anderson and John Cavanagh for Corporate Watch 2000, the world's top 2000 corporates have combined sales that are far greater than a quarter of the world's economic activity and are bigger than the combined economies of all countries minus the biggest 9, that is, they are bigger than the economies of 182 countries put together. The surprising thing about the inequities these corporations have brought about in the world economy is the fact that of the 100 largest economies in the world, 51 are global corporations; only 49 are countries. A study by the Institute for Policy Studies (IPS) indicates that 200 giant corporations, most of which are larger than many national economies, now control well over a quarter of the world's economic activity.9 For instance, Philip Morris is larger than New Zealand, and operates in 170 countries. Instead of creating an integrated global village, these firms are weaving webs of production, consumption, and finance that bring economic benefits to, at most, a third of the world's people. Two-thirds of the world (the bottom 20 per cent of the rich countries and the bottom 80 per cent of the poor countries) are either left out, marginalized or hurt by these webs of activity.10

ISSUES RELATING TO MNCs

Multinational corporations though enjoy tremendous economic clout and the influence that comes with it, face a number of problems when they enter a new country which follows different culture, political ideology, social norms and ethical mores. It is primarily a matter of acclimatizing themselves to a new society, culturally, socially and politically. The following are some of the issues they confront with and have to successfully address, if they have to succeed as an enterprise:

  1. Adapting to the trends and events of the host country: Multinational corporations face many of the same issues as domestic companies, such as maximizing profits, meeting customer demands, and adapting to technological change. In addition, multinational corporations must stay up to date with trends and events in the various countries where they operate. Political reforms in South Africa, economic liberalization in India and social trends in Europe are examples of matters that are important to corporations operating in these countries.
  2. Accountability to a larger society: Accountability is also an issue multinational corporations face. Because they are so large, multinational corporations can, and sometimes have, exert questionable political and economic power in some countries. As a result, critics view multinational corporations suspiciously and sometimes seek to have host countries impose restrictions on them. They have also aroused intense distrust among socialist-oriented parties as exploiters of the wealth of the developing countries. Since almost all the MNCs are also incorporated in USA or in the countries in Europe which were colonial powers that impoverished the colonies for centuries, they are considered as neo-colonial powers that are out to exploit the erstwhile colonies economically.
  3. Promoting free trade and protecting domestic industry: Simultaneous efforts to promote free trade and protect domestic industry from foreign competition are one of the most pressing issues in international business today. Intellectual property rights are another important issue. International business is hindered when companies fear that their patents, trademarks and industrial secrets will be violated abroad. Countries which fail to protect these rights may be shunned, and consequently may suffer from lack of foreign investment and access to cutting edge technology.
  4. Protecting the environment: Efforts at environmental protection are another international business issue. In the business context, this issue centres, in part, on the extent natural resources in less developed countries could be exploited for the benefit of developed countries. For example, should Philippines' forests be destroyed to satisfy the Japanese demand for lumber is a much debated issue? International business is business conducted across national boundaries. It is concerned, therefore, with political, economic, social, and cultural conditions in a variety of countries. As technology improves international communications and transportation links, international business and international corporate activities will expand.
ADVANTAGES OF MNCs

Multinational corporations bring in a number of benefits to the host nation. The following are some of the prominent benefits:

  1. Better access to worldwide markets: We have seen earlier that MNCs are huge in terms of their business and reach and they cater to worldwide markets. Manufacturers including Nike and traders such as Wal-Mart can provide access to very large markets. This leads to production of quality goods at low prices, because of economies of large-scale production and compulsions of fierce world competition. Better access to world markets becomes possible for the host country which will now enjoy economies of scale, greater employment, income and higher standard of living to its people. Industrial clusters such as the hosiery and knitting units in Tirupur have benefitted immensely because of widening markets for their products.
  2. Best access to capital investment: MNCs which are headquartered in developed countries have access to a large quantum of capital. Their stocks are listed in international stock exchanges. Apart from their own capital, they can also bring in considerable amounts from pension funds. This is a boon to the host country which may be short of capital.
  3. Transfer of advanced technology: MNCs with their heavy investment in technology and R&D will be able to transfer superior technology to production units located in poor countries. Low income countries cannot afford to invest in R&D. Dozens of IT giants have built dozens of R&D-driven development centres in Bengaluru and have helped scientific culture in that city.
  4. Benefit of large-scale operations worldwide in R & D: Many MNCs because of their large presence worldwide bring in several benefits as in R & D. Poor countries cannot afford heavy investments in R&D in 2007. India spent only 0.9 per cent in this vital area of technology development.
  5. Local supplier development: Multinationals because of their large needs, encourage local suppliers. For instance, MNCs such as Ford and Hyundai outsource their spare parts and components from small Indian companies, which flourish and provide employment to thousands of people.
  6. New jobs for labour: With a worldwide market to serve, MNCs prefer to establish their manufacturing units in low-income countries such as China and India and would use the cheap labour in these countries with a view of reducing cost of production and increasing their profits. This increases employment opportunities in these poor countries.
  7. Advanced training for labour: Multinational corporations offer immense opportunities for the advanced training of labour in various fields that are useful to them. Advanced training to local work force upgrades their skills.
  8. Better access to managerial talent: Big corporations with worldwide business interests recruit and train local managerial talents from wherever such talents are available. For instance, many MNCs recruit their future managers from IIMs and IITs not only for their operations in India, but also to work in their offices abroad. Incoming managers bring to the host country high quality managerial talents, fresh ideas and techniques that will broaden the host nation's capabilities. Better efficiency leads to better quality products and lesser price levels.
  9. New products for consumers: Consumers are the greatest beneficiaries when MNCs are allowed to operate in their countries. They are able to enjoy all the amenities and accessories of life their counterparts in advanced countries enjoy. They get the latest technologically superior products at affordable prices. Besides, they have a wide array of products to choose from.
  10. Lower cost products and/or better products: MNCs can produce goods on a large scale, get materials from cheapest sources and enjoy economies of scale. Thus, they can bring down prices, and help widen the market.
  11. Exports contribute favourably to the host nation's balance of payments position, additional taxes and payments for public exchequer: This is an advantage which is a great boon to poor nations. For instance, MNCs such as Hyundai export thousands of cars every month which bring in considerable amount of foreign exchange to the country and help in offsetting unfavourable balance of payments which arise due to heavy bills for importing petrol, etc. When a country has several big MNCs, the coffers of the government are enriched by direct and indirect taxes paid by them.
DISADVANTAGES OF MNCs

MNCs are not an unmixed blessing. The host nations face several problems because of them. The following are some of the disadvantages caused by the MNCs to the host nations:

  1. Loss of national sovereignty: When MNCs enter a country, the host nation cannot control the activities of MNCs in other nations, which may be inimical to its interest. MNC oil companies, for instance, can hoard oil in their own or in OPEC countries and help them to raise oil prices to the detriment of poor nations.
  2. Political interest of the home nations of MNCs may be served by them: This may act detrimental to the host nation. MNCs of the USA and Europe always are seen to promote their countries' interests in host countries, especially the poor and underdeveloped countries which look for assistance from countries where the MNCs come from.
  3. The host nation may lose its control over its own economy: This may happen if the host country is poor. For centuries, African, Asian and Latin American countries were made subservient to the colonial powers from where most of MNCs came from.
  4. Negative impact on the host's own balance of payments: This happens because of heavy imports of spares and components by MNCs. This situation, of course, can be averted if the MNCs are made to use them in final products and export them.
  5. Exploitation of hosts' irreplenishable natural resources: This leads to dwindling of these resources. Natural resources including hydrocarbons, coal and iron ore are overexploited by MNCs and when the host country needs them for their own industrial development, they may not have them.
  6. Exploitation of labour of the host country: This is one of the most common accusations against MNCs. Labour in the poor countries are underpaid, overworked and are denied rights that are given as a matter of right in developed countries by MNCs that set up factories in underdeveloped countries. But if the host country is careful, this can be averted.
  7. Indulging in harmful environmental acts: There are innumerable instances where the developing countries have suffered because of the reckless attitudes of MNCs in exploiting the local resources. The Bhopal gas tragedy and the Kodaikanal mercury waste dumping are the irrefutable examples for this.
  8. Host nation's industries may be destroyed due to unfair competition by MNCs: There are hundreds of instances worldwide, both historically and contemporarily, where MNCs have killed local industries by under-pricing, hostile takeovers, acquisitions and the like.

Industries in the host nations may not be able to enjoy a level playing field with MNCs that have their industries established much earlier, developed better expertise and are in a position to sell qualitatively superior products at cheaper prices. It has been the practice of MNCs to acquire popular brands of products of host countries and kill them to ensure their own products survive in the market place. For example, Coca-Cola acquired several popular Indian soft drinks and gradually destroyed many of them.

Much can be said regarding the positives and negatives of MNCs operating in several countries. The ethics in MNC's actions lies in making their activities beneficial both to them and the natives.

REGULATION OF MNCs

Though there is a natural fear amongst political class and some persons in civil society, especially in countries which were once colonies of the West, that MNCs could harm the country's orderly development and its consumers, there is also a perception that a sovereign country can curb the harmful effects of MNCs' operations with some amount of determination on the part of the government of the host country. After all, they are useful for a country's development with their investments, technology and managerial skills. Developing countries such as India have tapped their potential and curbed their unhealthy practices, when needed. The following are some of the measures through which MNCs can be regulated.

  1. Threat of nationalization: MNCs are kept under check through the power of a country to nationalize their units. The threat of nationalization always hangs like a Damocles' sword above their heads. The Indian government has nationalized oil distribution companies, IBM and Coca-Cola at different points of time, when it felt that these MNCs were not toeing the line of the national interest.
  2. Government's discretionary regulatory powers: The government can allow MNCs to collaborate with local partners to be engaged in specific industries and in specific regions in the overall interests of the domestic economy. Likewise, the government may refuse permission in cases where it thinks the MNCs' activities may militate against national interest.
  3. MNCs may be permitted for a specific time: Governments may allow MNCs to be engaged in an industrial activity for a specific period of time. Once the specified period lapses, they may be asked to disinvest or restrictions may be imposed on their activities.
  4. Governments may practice a dual tax system: Many countries including India levy a dual corporate tax system, MNCs being made to pay a higher percentage of corporate tax than the domestic companies. The host country may also impose export criteria for MNCs. Under this method, MNCs may be encouraged to produce mostly for exports and not for domestic market. For this purpose, special economic zones may be created and spaces allotted to them for their activities.
  5. MNCs may be directed to spend a minimum amount on R&D: MNCs may be directed by the Government to undertake a minimum fixed share of their R&D activities in the host country. Though this was not specifically told to them, California-based IT networking major, Juniper Networks which has a development centre in Bangalore has reported that they spent 22 per cent of their revenue in R&D in India.11
  6. Domestic market used as a means to attract new technologies: “Large domestic market can be used as sweetener, if not a bait, to get new technologies in areas such as agriculture, bio-technology, infrastructure and export-oriented industries which would be of more lasting benefits to host country than soaps, detergents or fried chicken.”12
MNCs IN INDIA

In the post-liberalization era, India has witnessed the arrival of a large number of multinational companies that has catapulted the country's economy to a higher trajectory of growth. MNCs represent a diversified portfolio of enterprises representing different nations. American companies account for around 37 per cent of the turnover of the top 20 firms operating in India. In recent years, more and more firms from Britain, Italy, France, Germany, the Netherlands, Finland, Belgium, etc. have outsourced their work to India. Finnish mobile handset producer Nokia has the second largest base in India. British Petroleum and Vodafone represent the British. Automobile MNCs such as Fiat, Ford Motors, Piaggio, etc. from Italy have opened their factories in India with R&D wings attached. French heavy engineering company Alstom and Pharma Major Sanofi Aventis are some of the earliest entrants to India and are expanding very fast. Oil companies and infrastructure builders from Middle East are also flocking to India to cash in on the boom. South Korean electronics giants Samsung and LG Electronics and Hyundai Motors are doing excellent business and using India as a hub for their global delivery. Japan has its host of electronics and automobile units. Companies such as Singtel of Singapore and Malaysian giant Salem Group are showing immense interest for investing in India.

  1. There are some irritants too: In spite of the huge growth experienced by MNCs, Indian industry has some bottlenecks for them, such as policies that work as huge irritants, as in tax structure and trade barriers, low investment in infrastructure, especially in physical and information technology and slow reforms that include political reforms to improve stability, privatization and deregulation, financial sector and labour reforms. A 2005 FICCI survey said 84 per cent of the respondents gave a positive assessment of India, although they highlighted the need for building brand India and showcase India's potential as an investment destination. In spite of a huge majority, 91 per cent, being upbeat about the market conditions and the potential for further FDI inflows, they articulated their concerns about the quality of infrastructure in India. The study also pointed out other issues, such as labour laws, indirect taxes and multiplicity of procedures, act as hindrances to India's attractiveness as a manufacturing base or an export platform.
  2. Stellar performance of MNCs: However, reports suggest that the performance of 70 per cent of MNC has met or exceeded internal targets and expectations. India is seen to be at par with China in terms of FDI attractiveness by MNCs. In fact, in the perception of MNCs, India ranks higher than China, Malaysia, Thailand, and the Philippines in terms of their performance. MNCs operating in India cite India's highly educated workforce, management talent, rule of law, transparency, cultural affinity and regulatory environment as more favourable than in other countries. Moreover, they acknowledge India's leadership in IT, business processing, and R&D investments. MNCs are also bullish on such favourable factors as India's market potential, labour competitiveness, macro-economic stability and FDI attractiveness. According to FICCI's annual FDI survey, 70 per cent of the foreign companies here are earning profits from their operations in India. The survey covered banking, finance, IT and BPO, chemicals, and agricultural product companies. Out of these, around 22 per cent respondents were companies with an annual turnover of more than INR 5 billion; and 30 per cent were companies having a turnover between INR 1 billion and INR 5 billion.13 As per the FICCI survey, 84 per cent MNCs were going to expand their business in India, while 90 per cent considered the IT and BPO services to be one of the most lucrative sectors for investment.14
FOREIGN CAPITAL

Foreign capital, MNCs and globalization are closely linked. Globalization is made possible by the emergence and growth of multinational corporations, which in turn, act as funnels and sources of foreign capital. Foreign capital and technology are very important to develop the hitherto untapped natural resources of developing countries. In the following sections, we will study the role of foreign capital in the developing countries.

One of the most important characteristics of developing economies is their low savings and poor capital formation. It is this feature of the developing countries that keeps them poor for ages and makes it difficult for them to get out of the quagmire of poverty in which they have been wallowing for centuries. However, this deficiency of capital has not restrained them from attending to the task of quickening the process of economic growth. It has in fact steeled their resolve to industrialize themselves fast, as in the case of India which launched an ambitious programme of industrialization during the Second Five Year Plan. Since the country did not have sufficient capital resources, it had to depend on foreign capital, as was the case with other developing countries. Foreign capital comes to a country in different forms, the most important of them being FDI. A major source of FDI is multinational corporations, which we have discussed earlier.

The need for foreign capital to a capital-scarce country anxious to fast-track its economic growth cannot be overstressed. The following are some of the factors that call for foreign capital to a developing country such as India.

  1. To sustain a high level of investment: If an underdeveloped country wants to industrialize itself quickly, it has to raise its quantity of capital resources substantially to invest in multiple industrial segments. To raise such a large amount of capital, a poor country with low savings cannot but seek foreign capital to bridge the resource gap between savings and investment.
  2. To bridge the technology gap: One of the primary reasons for an underdeveloped country to remain in a state of poverty is the low technology it uses at all levels of its productive activity. If they have to develop their economies through industrialization they have to come out of the low level equilibrium in which they find themselves. To ensure higher level of growth, it is imperative for them to import cutting edge technology from the developed countries. Foreign capital usually brings in such technology in the form of private foreign investment or as joint venture. In the Indian case, our industry was able to fill up the technology gap through (a) import of export services, (b) training imparted to Indian personnel and (c) educational, research and training institutions set up in collaboration with foreign experts.
  3. To exploit natural resources: Most of the developing countries are richly endowed with huge deposits of natural and mineral resources. India, for instance, is said to be a “Veritable darling of nature,” and possess enough and to spare of coal, iron ore, hydro carbon, etc. That is why it is said that “India is a rich country inhabited by poor people”. However, notwithstanding these huge mineral and other resources, we are not able to tap and exploit them to the benefit of the country's development. Therefore, developing countries seek the expertise and technical skills of advanced countries to prospect, exploit and make effective use of these resources.
  4. To initiate growth by undertaking initial risk: Iniating the process of economic growth in underdeveloped countries where there is an acute paucity of private entrepreneurs is a Herculean task. In such cases, foreign capital is preferred to undertake the risk of investment and provide the initial incentive for industrialization. Once foreign entrepreneurs bring in capital and technical enterprise, bear risk and uncertainty involved in the process of industrialization in an unindustrialized country and pave the way for the growth of industries, domestic entrepreneurs can take over and continue the process with greater ease.
  5. To developbasic infrastructure: Both at the beginning and during the process of economic growth of developing economies, it has been found that one of the major obstacles is lack of adequate infrastructure and the feeble attempt to develop it for want of indigenous capital and incentives. Infrastructure development, especially in power, irrigation, roads, railways, sea transport and air connectivity is absolutely essential to enable a developing economy grow. Even after almost six decades of planning economic development, India finds growth in infrastructure tardy and inadequate to meet the developmental needs of the economy. We have to depend on international financial institutions such as the World Bank, Asian Development Bank, International Development Association, etc. to help us develop our infrastructure. Even less- and medium-developed countries such as Malaysia and Singapore have come forward to invest in our infrastructure.
  6. To bridge the foreign exchange gap: While planning and executing the process of economic growth of their economies, poor countries need to have adequate foreign exchange to import plants, equipment and machinery, technical expertise and industrial raw materials. As producers of primary products, they can only export low-priced agricultural products such as food grains, tea, coffee, sugar and spices. But with an ever-increasing population, they find it difficult to create surpluses for exports after catering to the huge domestic captive market. Thus, a rising mismatch between demand and supply of foreign exchange, and the problems arising out of unfavourable balance of payments, drive the poor countries seek foreign exchange by inviting foreign capital. In the succinct words of Gerald M. Meir, “By breaking a production bottleneck and allowing the utilisation of previously underutilized capacity, the importance of strategic capital goods or foreign material provided by external aid can permit a sizable expansion of output from complementary domestic resources that would otherwise remain unused.”15
KINDS OF FOREIGN CAPITAL

Foreign capital consists of two main forms: (i) private foreign investment and (ii) foreign aid. Private foreign investment can be either (a) direct foreign investment, or (b) indirect foreign investment. When a private foreign investor either establishes a branch of his business or a subsidiary in the host country, it is called direct foreign investment. Multinational corporations which establish their subsidiaries in developing countries such as India belong to this category. Hindustan Lever, Procter & Gamble, Coca-Cola India, etc. are examples of MNCs incorporated outside India, but having their subsidiary companies in India. When these MNCs open their subsidiaries in a host country, they bring with them a number of modern industrial inputs such as technological expertise, plant, machinery, equipment, managerial skills, marketing and sales techniques which benefit the host country immensely. If a developing country absorbs these skill sets, it will permeate in its industrial structure and widen and (c) creditor capital from official sources in host country's companies. The Indian government provides data on foreign investment of the categories provided in Figure 38.1.

 

 

Figure 38.1 Categories of Foreign Capital in India

DISTINCTION BETWEEN FDI AND FII

Foreign Direct Investment is primarily a long-term investment and is limited to investment in capital assets and helps in the generation of income and employment in the host country. On the other hand, Foreign Indirect Investment (FII) is essentially a short-term investment associated with the host country's financial market. Compared to the FII, FDI has a high multiplier effect on the economy of the recipient country. Being directly involved in industry, FDI's entry and exit decisions take longer time as opposed to those of FII. The ease with which FII flows in and flows out of the host country impacts various economic parameters, both favourably and unfavourably, including the money supply, interest rates and forex reserves. After 1991, both FDIs and FIIs have been coming to India substantially.

In the year 2006-07, FDI inflows into India totalled USD 9,307 million (excluding inflows by way of acquisition by non-residents, as opposed to just USD 2,320 million in 2004-05. In the same year, portfolio investments by foreign institutional investors amounted to USD 51,967 million.16 FII investments which registered a steep fall in 2008-09, with five successive quarters of selling by FIIs at the rate of an average USD 2.7 billion per quarter, has turned positive in the quarter ending 30 June, 2009. According to a research report by Enam, FIIs have bought USD 6.4 billion worth of Indian equities in June 2009 quarter and their holding has risen by 1 per cent to 15.6 per cent of the total market capitalization of BSE 500 Index. “Experts and quicken the process of its industrial growth. This is indeed the primary advantage of direct foreign investment. Indirect foreign or portfolio investment consists of (i) equity or debenture holding by foreigners in the host country's companies; (ii) creditor capital from private sources abroad invested in the host country's companies; say one of the reasons for FIIs being positive on India is the Chinese market has reached fairly aggressive valuations (fully valued). As a result, many investors are shifting focus from China to India”.17

FOREIGN AID

Almost all developing economies of the Third World and the war-shattered economies such as those of West Germany and Japan were able to develop their economies primarily because of foreign aid. By foreign aid we mean “all official grants and concessional loans in currency or in kind, which are broadly aimed at transferring resources from developed to less developed nations on developmental and/or income distributional grounds”.18 Foreign aid to developing countries is generally given by donor countries on concessional terms in which the interest rate is lower and the grace and maturity periods longer. Normally, small part of such foreign aid is given in the form of grants carrying no obligation of repayment. Foreign aid is given either by foreign governments or Foundations or international agencies such as the International Development Association, a World Bank affiliate, World Bank, International Monetary Fund, etc.

Apart from grants and concessional loans, developing countries also sometime receive direct supplies of agricultural produce such as wheat or industrial raw materials to meet temporary shortages in the economy. The significant element in this form of aid was the U.S contribution of surplus farm produce under the provisions of Public Law 480, in 1950s and 1960s. Aid in the form of technical assistance is also made available by the developed countries including USA, West Germany and Canada. They have also helped India to build its industries and also iron and steel factories.

RESPONSE OF FOREIGN CAPITAL

The response of foreign capital to the wooing of Indian Government has been rather lukewarm till 1991 due to factors such as low productivity levels of workers, archaic labour laws, absence of an exit policy, slow economic reforms, long-winding procedural delays and all pervading corruption. However, things began to change after the adoption of New Economic Policy in 1991. In recent times, India is seen to be preferred destination for FDIs.19 India is known for its strengths in IT and ITES, auto components, readymade apparels, pharmaceuticals and jewellery Though rigid FDI policies pursued by the Government did not lead to a surge in investments initially, some favourable economic reforms, leading to the deregulation of the economy and stimulation of foreign investment, have enabled India position herself as one of the front-runners of the rapidly by growing Asia Pacific Region.20 Table 38.1 provides the data on the top 10 investing countries in FDI inflows.

An exceptionally large percentage of FDI has come through Mauritius because of the tax advantage that the country gets on accounts of its treaty with India on avoidance of double taxation. Several American companies are said to have taken the Mauritian route to India for their investment plans because of the tax advantage they get.

In 2005, India has liberalized its FDI policy that permits up to a 100 per cent FDI stake in ventures. Economic reforms have substantially reduced industrial licensing requirements and restrictions on expansion and have facilitated easy access to foreign technology and FDI. The boom in the real-estate sector owes it to a high growth booming economy and liberalized FDI regime. In March 2005, the government amended the rules to allow 100 per cent FDI in the construction business. As pointed out earlier, an automatic route has been allowed in townships, housing, built-up infrastructure and construction development projects including housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, and city-and regional-level infrastructure.

Several changes were approved by the government on the FDI policy with a view to removing the caps in most sectors. Industrial and services sectors that require relaxation in FDI caps are, inter alia, civil aviation, construction development, industrial parks, petroleum and natural gas, commodity exchanges, credit-information services and mining. But this still leaves an incomplete agenda of allowing greater foreign investment in sensitive areas such as insurance and retailing. FDI inflows into India reached a record USD 19.5 billion in fiscal year 2006-07 (April-March), according to the Government's Secretariat for Industrial Assistance. This was more than double the total of USD 7.8 billion in the previous financial year. The FDI inflow for 2007-08 has been reported as USD 24 billion and for 2008-09, it is expected to be above USD 35 billion. A critical factor in determining India's continued economic growth and realizing the potential to be an economic superpower is going to depend on how the Government can create incentives for FDI flow across a large number of sectors in India. Tables 38.2 and Tables 38.3 show the FDI investments in India during different periods.

According to the Union Commerce and Industry Minister, Kamal Nath, India remains an attractive investment destination and it will be a good parking lot for money. FDI inflows reflect growing confidence of global investors in India.21 India has received USD 24.57 billion in FDI during the financial year 2008-09. The FDI inflows in 2007-08 saw an increase of 56.50 per cent over USD 15.70 billion in the year 2006-07. India, which saw a GDP growth of 8.7 per cent in 2007-08, aims to more than double its FDI inflows. According to report, India has set an FDI target of USD 35 billion for the current financial year.

 

Table 38.1 Share of Top Investing Countries in FDI Equity Inflows

 

Notes: (i) *Includes inflows under NRI Schemes of RBI, stock swapped and advances pending for issue of shares. (ii) Cumulative country-wise FDI inflows (from April 2000 to April 2009) - Annex-'A'. (iii) Percentage worked out in INR terms and FDI inflows received through FIPB/SIA+ RBI's Automatic Route+ acquisition of existing shares only. Fact Sheet on Foreign Direct Investment (FDI), From August 1991 to April 2009 (up dated up to April 2009), http://dipp.nic.in/fdi_statistics/india_FDI_April2009.pdf.

 

Table 38.2 FDI Equity Inflows 2000–09

Cumulative amount of FDI inflows INR (in billions) USD (in millions)
From April 2000 to March 2009
3,930.20
89,819
Updated up to April 2009
4,047.28
92,158
From August 1991 to April 2009
4,653.55
108,863

Note: Fact Sheet on Foreign Direct Investment (FDI), From August 1991 to April 2009 (up dated up to April 2009), http://dipp.nic.in/fdi_statistics/india_FDI_April2009.pdf.

 

Table 38.3 FDI Equity Inflows During Financial Year 2008–09

Financial year 2008–09 (April–March) Amount of FDI inflows (in INR billion) (in USD million)
2008–09 (up to March 2009)
1,229.19
27,309
2007–08 (up to March 2008)
  986.64
24,580
% age growth over last year
(+) 25 %
(+) 11 %

Note: Fact Sheet on Foreign Direct Investment (FDI), From August 1991 to April 2009 (up dated up to April 2009), http://dipp.nic.in/fdi_statistics/india_FDI_April2009.pdf.

OTHER KINDS OF FOREIGN INVESTMENTS

Apart from FDIs and FIIs, there are other kinds of investments emanating from abroad which are discussed in the following sections:

NRI Investments

Non-resident Indians (NRI) are increasingly remitting foreign exchange to India. Presently, NRIs have replaced the Chinese as the ethnic group that sends the largest amounts to their countries of origin. Investments by NRIs are permitted liberally in the country so as to give them wider investment opportunities. RBI's policy with respect to NRI deposit schemes ensures capital flows from abroad at a low rate of interest.

Global Depository Receipts

A Global Depositary Receipt (GDR) is a financial instrument used by private markets to raise capital denominated in either US dollars or euros. GDRs are certificates issued by investment bankers to the general public against the issue of shares of some foreign country. GDRs are issued by investment bankers to the general public in more than one country against the issue of shares in a foreign company. The shares held by a foreign bank are traded as domestic shares, but are offered for sale globally through the various bank branches. If any company wants to issue GDR to raise funds from a foreign country, it follows the following steps: (i) The company contacts the merchant banker of the home country (ii) after obtaining approval from the RBI; then (iii) it contacts the investment banker of a foreign company, (iv) then the investment banker will purchase the shares from the merchant banker and (v) then issue it to public through green shoe option. These instruments are called EDRs when private markets want to obtain Euros. Reliance Industries Ltd. was the first company to raise funds through a GDR issue.

A GDR is a dollar denominated financial instrument traded in stock exchanges in USA and Europe. When such an instrument is traded only in the United States, is called American Depository Receipts (ADRs). GDR represents a given number of underlying equity shares. While the GDR is quoted and traded in dollars, the equity shares it represents are denominated in rupees. A company issues its shares to an intermediary known as Depository in whose names the shares are registered. It is the issues the GDR subsequently. The actual possession of the GDR is with another intermediary and the agent of the depository referred was the custodian. Thus, even when a GDR represents the equity shares of the issuing company, it has a distinct identity of its own. In fact, it is not even entered into the books of the issuer. Indian companies have been accessing global markets through GDRs.

The Indian Government has laid down that the total foreign investment, made either directly or indirectly, through the GDR route shall not exceed 51 per cent of the issued and subscribed capital of the issuing company. This will be apart from the maximum limit of 30 per cent equity, which can be accessed by offshore funds, FIIs or NRIs through the secondary market.

American Depository Receipts

ADRs represent ownership in the shares of a non-US company and trades in US financial markets. With the use of ADRs, the stock of many foreign companies is traded on US stock exchanges. ADRs enable US investors to purchase shares in companies of foreign countries without going through cross-border transactions. ADRs prices are marked in US dollars, pay dividends in US dollars, and are traded like the shares of US-based companies. Every ADR is offered by a US depositary bank and can represent a fraction of a share, a single share, or multiple shares of the foreign stock. One who owns an ADR is entitled to acquire the foreign stock it represents, but American investors generally find it more convenient simply to own the ADR. The price of an ADR often tracks the price of the foreign stock in its home market, adjusted for the ratio of ADRs to foreign company shares. Individual shares of a company belonging to another nation represented by an ADR are called American Depositary Shares (ADS).

One can either obtain new ADRs by offering the corresponding domestic shares of the corporation with the depositary bank that manages the ADR programme or, as an alternative one can source existing ADRs in the secondary market. The second option can be used either by buying the ADRs on an American stock exchange or through buying the particular domestic shares of the company on their primary exchange and then “swap” them for ADRs; these swaps are known as “Cross book swaps” and mostly constitute the bulk of ADR secondary trading.

Multinational use of GDRs can lead to worldwide circulation on capital markets. GDRs are issued by banks, which purchase shares of foreign companies and deposit them on the accounts. They facilitate trade of shares, particularly those from emerging markets. Prices of GDRs are often close to values of related shares.22

In recent times, the Government of India relaxed a number of norms that guide these worldwide commercial cum financial instruments with a view to enhance inflow of foreign capital. Most important of these relaxations are the following:

  • Indian bidders are now permitted raising funds through ADRs, GDRs and ECBs for getting shares of PSEs in the first stage and buying shares from the market during the open offer in the second stage.
  • ADR/GDR proceeds can be retained abroad for future needs of foreign exchange, and the limit of USD 20,000 for remittance under the employees stock option scheme (ESOP) has been removed and remittance up to USD 1 million from proceeds of sales of assets to India permitted.
  • Corporates have been permitted to invest 100 per cent of the proceeds of ADR/GDR issues for acquisitions of foreign companies and direct investments in joint ventures and wholly owned subsidiaries overseas.
  • Any Indian company which has issued ADRs/GDRs may buy shares of overseas companies engaged in the same area of core activity up to USD 100 million or equivalent to 10 times the amount of their exports in a year, whichever is higher.
  • FIIs can invest in a company up to 24 per cent of the paid-up capital of the company under the portfolio investment route. It can be increased to 40 per cent with approval through a special resolution of general body of the shareholders. This limit has now been enhanced to 49 per cent from the present 40 per cent.23

Foreign Currency Convertible Bonds (FCCB)

FCCB is a kind of convertible bond, issued in a currency different than the issuer's domestic currency, implying thereby that the money being raised by the issuing company is in the form of a foreign currency. This is a powerful instrument by which the company in particular and the country raises the money in the form of a foreign currency. A convertible bond is a blend of a debt and equity instrument. It acts like a bond by making regular coupon and principal payments, but at the some time these bonds also give the bondholder the option to convert the bond into stock.

The Ministry of Finance, Government of India, defines FCCB thus: “Foreign Currency Convertible Bonds” means bonds issued in accordance with this scheme and subscribed by a non-resident in foreign currency and convertible into ordinary shares of the issuing company in any manner, either in whole, or in part, on the basis of any equity related warrants attached to debt instruments.

These types of bonds are highly profitable instruments to both investors and issuers. The investors get the safety of guaranteed payments on the bond and are also enabled to profit from any large price appreciation in the company's stock. Bondholders, on the other hand, benefit by this appreciation by means of warrants attached to the bonds, which are activated when the price of the stock reaches a cut-off point. Due to the equity side of the bond, which adds value, the coupon payments on the bond are lesser for the company, thereby reducing its debt-financing costs.

These are the criteria for the issuing of FCCB:

  • Government of India's (i.e., The Department of Economic Affairs, Ministry of Finance) prior permission is required to any company who wish to raise foreign funds by issuing FCCBs
  • The applicant company intending to issue the FCCB should have, for a minimum period of 3 years, consistent track record
  • The FCCBs shall be denominated in any freely convertible foreign currency, while the ordinary shares of an issuing company shall be denominated in Indian rupees
  • The issuing company should, as per regulation, deposit the ordinary shares or bonds to a Domestic Custodian Bank. The custodian bank in its turn instructs the Overseas Depositary Bank to issue GDRs or Certificates to non-resident investors against the shares or bonds held by it.

The provisions of any Indian law pertaining to the issue of capital by an Indian corporation will also be applicable for the issue of FCCBs or the ordinary shares of an issuing company. The corporation issuing FCCB shall obtain the required permission or get exempted from the appropriate authority under the relevant law relating to issue of capital.

The ordinary shares and FCCB that are issued against the GDRs are treated as FDI. However, total foreign investment made either directly or indirectly shall not exceed 51 per cent of the issued and contributed to the capital of the issuing company.

In May 2007, at least 10 Indian corporations converted FCCBs into equity at a price decided when the bonds were issued to respective investors. The list includes NIIT, Bharti Airtel, Sun Pharma, Glenmark Pharma, Amtek India, Jain Irrigation Systems and Maharashtra Seamless. FCCB holders have enjoyed a significant increase in the value of their investments in these companies because of a high rise in share prices, since allotment of the bonds.

Indian companies are permitted now to raise equity capital in the international market through the issue of these instruments. These are not subject to any upper limit on investment. An applicant company requiring government's authorization in this respect should have at least, for a minimum period of 3 years, a consistent track record financially or otherwise for good performance. This condition can be waived for infrastructure projects such as power generation, telecommunication, petroleum exploration and refining, ports, airports and roads. There is no restriction on the number of GDRs/ADRs/FCCBs to be floated by a company or a group of companies in a financial year, because a company engaged in the manufacture of items covered under Automatic Route is likely to exceed the percentage limits under Automatic Route, whose direct foreign investment after proposed GDRs/ADRs/FCCBs is likely to exceed 50 per cent/51 per cent/74 per cent as the case may be.

There are no end-use restrictions on GDRs/ADRs issue proceeds, except for an express restriction on investment in real estate and stock markets. The FCCB issue proceeds need to conform to the ECB end user requirements. In addition, 25 per cent of the FCCB proceeds can be used for general corporate restructuring.

INDIA'S POLICY TOWARDS FOREIGN CAPITAL

The Government of India has been adopting a rather constantly shifting policy with regard to the role of foreign capital in the industrial development of the country. The policy pursued by the Government, of course, was contextual and as per the needs of the time in which it was enunciated. Though the Industrial Policy Resolution dictated the role of foreign capital, the emphasis has been shifting at different points of time.

  1. For instance, during the first phase between 1951 and 1965, the Indian Government adopted a pragmatic policy of welcoming foreign capital in view of the country's dire need for technology, technical and managerial skills, expertise, and entrepreneurship that normally accompanied it. Therefore, the Government adopted a liberal attitude towards foreign capital by offering several incentives and concessions.
  2. During the second phase between 1960s and till the fag end of 1970s, the Government tried to control and regulate the role of foreign capital and even tried to restrict the area of operation. Sometimes, the controls were more severe than those followed in closed economies such as the Soviet Union of 1980s and China before its economic liberalization.
  3. During the third phase that commenced around the end of 1970s and the beginning of 1990s, the Indian Governments' policy towards foreign capital was far more liberal compared to what it followed during the second phase. The policy started being FDI-friendly and FDIs came trickling down.
  4. The fourth phase commenced in 1991 with the opening up of the economy. With economic reforms easing the controls and regulations, the Government started adopting a liberal attitude towards foreign capital, both FDIs and FIIs. As a result, there was a free flow of foreign investment in the country. Overall, the Government's policy towards foreign capital has been one of (a) non-discrimination between foreign and Indian capital; (b) opportunities to earn legitimate profits out of their business; and (c) guaranteed fair and equitable compensation in case of nationalization.

Several significant measures were announced by the Government since 1991 to attract the inflow of foreign capital.

  1. Automatic permission up to 51 per cent for high-tech industries: In 1991, under the aegis of the New Economic Policy, the Indian Government released a list of high-technology industries the investment for which automatic permission was given for FDI up to 51 per cent foreign equity, raised ultimately to 100 per cent for several such priority industries.
  2. Foreign equity holdings in tourism-related industries: The new policy also permitted foreign equity holdings in hitherto closed sectors such as hotels, tourist-related activities and in international trading companies.
  3. Foreign equity participation in the power sector: The Government also permitted 100 per cent foreign equity participation for setting up power plants in the country to augment the much needed power supply. The investors in the power sector were allowed to repatriate their profits and incentives, if any. Foreign investors were allowed 100 per cent subsidiaries if they bring investment exceeding USD 50 million. Foreign investors who brought in an investible fund exceeding USD 50 million were allowed to establish 100 per cent operating subsidiaries without restrictions on their number.
  4. Use of trademarks and repatriation of royalty allowed: Moreover, foreign companies have now been permitted to use their trademarks on domestic sales effective from 14 May, 1992. They are also allowed now to pay royalty on brand name/trademark as percentage of net sales in the event of transfer of technology to Indian enterprise.
  5. Employment of foreign technicians allowed: Prior to 1991, engaging foreign technicians and testing of locally developed technology abroad required case-specific approval by the Government, causing inordinate delay. This requirement has now been dispensed with.
  6. Concessions for NRI investments: NRIs and companies owned by them have now been permitted to invest up to 100 per cent equity in high priority industrial segments. These investors are also allowed to repatriate their capital and profits. NRIs can now invest up to 100 per cent of equity in hospitals, hotels, sick industries, export houses, trading houses, star trading houses, etc. In a significant reversal of policy, NRIs are now allowed to buy dwellings without obtaining permission of the Reserve Bank.
  7. Investments in sunrise industries: FDIs are now permitted in airports, development of integrated townships, urban infrastructure, tea sector, films, advertising, insurance, telecom sector, oil refining and courier services subject to certain approvals and ceilings fixed by the Government from time to time.
  8. Concessions with regard to disinvestment: With regards to disinvestment of equity by foreign investors, it is no longer necessary to fix prices determined by the Reserve Bank. It has been now permitted at market rates on stock exchanges from 15 September, 1992 with repatriation of the proceeds of such disinvestment being now allowed.
  9. From January 2004, 100 per cent FDI permitted in petroleum and publications: With effect from January 2004, the Government of India permitted FDI limit to 100 per cent participation in the petroleum sector, and in publications such as printing scientific and technical magazines, periodicals and journals.
  10. Foreign investment in private banks raised: Foreign investment in Indian private sector banks has been raised to 74 per cent. As per this provision, the total foreign investment in a private bank will be subject to a ceiling of 74 per cent, while at all times at least 24 per cent of the paid-up capital of the banking company will be held by Indian residents except in respect of a wholly owned subsidiary of a private bank.
  11. Press Note 18 scrapped in January 2005: One of the important irritants to a surge of FDI inflow into the country was Press Note 18. According to the Press Note 18, if a foreign company has a joint venture in India, the application has to be sent through the Foreign Investment Promotion Board (FIPB). This provision implied that the foreign investors were made to give the detailed circumstances under which they found it necessary to set up a new joint venture in India or enter into new technology transfer. Naturally, foreign investors regarded Press Note 18 as an impediment that stood in the way of their investment in India. Doing away with this Note implies that now new joint ventures and collaborations will be based on the decision of partners on their own volition without any government interference.
ESTABLISHMENT OF THE INVESTMENT COMMISSION

Among the several initiatives taken by the Government of India to attract capital, both foreign and domestic, for augmenting investment in Indian industry, the establishment of the Investment commission was a significant one.

In 2004, the Government has constituted the Investment Commission, which is to interact with industry groups/houses in India and large companies abroad with a view to promote investments in the country, especially in sectors where there is a great need for investment but sufficient amount has not been attracted so far. The Commission is mandated to secure a certain level of investments every year. It will also recommend to the Government both on policies and procedures to facilitate greater FDI inflows into India.

The Commission submitted its report to the Government on 7 July, 2006, set a USD 15 billion FDI target by 2007–08 and suggested that the Government allow 49 per cent FDI in retail, contract labour in all areas and automatic route for all investments within the sectoral cap. The Commission has also recommended setting up special economic zones in areas such as auto components, textiles, electronics and chemicals. It has strongly suggested a level-playing field for the private sector in sectors where public sector dominates and for creating a special high-level fast track mechanism for priority sector projects.

DISADVANTAGES OF FOREIGN CAPITAL

Strenuous efforts at attracting foreign investments are being made by almost all developing countries so as to ensure fast-track economic growth in their countries. However, if foreign capital comes to a country with some benefits such as technical expertise, managerial and marketing skills, scientific methods of production, etc. it also brings with several disadvantages to the recipient countries. Foreign capital is not an unmixed blessing. The following are some of the disadvantages of foreign capital:

  • Several concessions given to foreign investors which are denied to domestic entrepreneurs, creating some amount of ill will among the latter
  • Payouts of dividends, royalty, capital repatriation, etc. flow out of the country
  • Concentration on production of goods and services catering to the rich and elitist sections of society
  • Multiple collaborations with restrictive clauses in agreements work out to be costly to the recipient country, especially with reference to duplication of technology transfers
  • Excessive imports of equipment, spares and components, causing adverse balance of payments to the host country
  • Agreements always favoured foreigners which go against domestic interests mainly because of the unequal bargaining strengths of the parties
  • Distortion of domestic economic structure caused by MNCs, suppressing indigenous entrepreneurship, bringing in oligopolistic practices, unsuitable products and often obsolete technology
  • Foreign investments used to acquire existing assets through mergers and acquisitions leading to wastages arising out of duplication, rather than entering into new areas of production
  • Promotes regional disparities by concentrating in already developed and industrially crowded regions drawing on external economies of scale
  • Political interference in economic decisions of host countries by foreign powers wherefrom MNCs come and thereby threatening the sovereignty of these low-income countries
  • Passing on obsolete technology to developing countries make it costly and useless in the long run to the recipient countries
  • Too much crowding host countries in certain sunrise and profitable industries such as automobiles, consumer durables, and cellular, mobile and electrical hardware and totally ignoring basic industries such as agriculture

 

Table 38.4 Sectors Attracting Highest FDI Equity Inflows

 

Note: Cumulative sector-wise FDI inflows (from April 2000 to April 2009) - Annex-'B'. Fact Sheet on Foreign Direct Investment (FDI), From August 1991 to April 2009, (up dated up to April 2009), http://dipp.nic.in/fdi_statistics/india_FDI_April2009.pdf

 

Global business opportunities have grown tremendously in recent times, thanks to the opening up of the hitherto fettered markets of socialist and developing countries and the active role played by international organizations such as GATT, WTO, IMF and the World Bank. Stupendous growth in transport and communications and cutting edge technologies in IT and ITES has added their own dimensions to this growth process.

But if this process of global trade in goods and services is to continue and sustain itself, the important players in this game, namely, corporations, have to play their parts fairly and honestly. Corporations that are involved in the production and distribution of goods and services for a worldwide market should not only live by and exhibit sound principles and good corporate governance practices, but also should practice them. This alone will provide them a foothold in advanced as well as emerging markets. No corporation found to be unethical and wanting in terms of corporate governance will have a future. If transparency, honesty, fairness, integrity and ethical behaviour along with protection of all the stakeholders' interests are commendable virtues within a country, they are far more preferred outside. The wide popularity of CRT Principles of Business bears ample testimony to the fact that the world likes and prefers to deal with a good and reliable corporate than do it otherwise. The growth or otherwise of corporations in a global society is very much dependent on how good they are and perceived to be so by all their stakeholders.

Case 38.2 India Is Fast Becoming the Hub of Low-Cost Drugs for Markets Worldwide

During the past one year or so, three Indian generic companies sold out to global majors who would use India as their global manufacturing hub for low-cost drugs. Global majors that have accepted that low-cost versions of off-patented drugs have now become an internal part of their business, are seeking to acquire/collaborate with Indian companies that were once supplying them generic drugs. Led by Ranbaxy, Reddy's, Cipla, Sun Pharma, Glenmark and Zydus Cadila, Indian companies have become a force to reckon with after they became the first to revoke patents of innovator companies and launch their own low-cost generic drugs. In June, Reddy's, in the first ever agreement for any Indian generic company, allied with the UK major, GSK, to supply over 100 branded drugs to be marketed in Asia Pacific, Latin America, Africa, and the Middle East. Claris Lifesciences of Ahmedabad signed a similar deal for 15 injectible products with Pfizer. Pfizer, the world's largest drug maker, also inked a similar deal with Hyderabad-based Aurobindo, under which it would now sell Aurobindo's 65 drugs worldwide.1 The Indian drug industry is expected to perform exceedingly well and earn huge profits as over USD 70 billion worth of drugs are likely to become off-patent in the United States within the next 3 years. At present, generic drugs account for 15 per cent or USD 90 billion of the USD 650-billion global drug market, but have come out into a larger pie as global pharmaceutical corporations look for alternative revenue through generics, resulting in further consolidation. After these developments, according to Swati Piramal of Piramal Healthcare, “the difference between a global innovator company and an Indian generic company is getting blurred. While one arm is filing patents, the other arm is busting them.”2

Indian companies that have earned the reputation of being the most generic firms globally have, in 2008 alone, filed more than 900 abbreviated new drug applications (ANDA), which is the first stage approval for launching the drugs with US health regulator, and have got around 300 approvals. Industry experts says that Indian firms account for the largest number of FDA approvals gained in 2008 and also the number is set to rise in future as there is huge backlog of pending approvals.3 Pfizer Inc. is to raise its stake in Indian arm, by at least, to 75 percent from the current 41 per cent. Earlier in March 2009, the USD 41.5-billion Swiss drug-maker Novartis AG said it would buy an additional 39 per cent stake in its Indian subsidiary, Novartis India Ltd., through an open offer to public shareholders spending about USD 87 million. Other leading MNCs such as Merck and Sanofi-Aventis have already announced that they have big plans for India.

In addition to a large consumer base, a higher level of sophistication in manufacturing and research by the Indian firms is another lure for the MNCs. Apart from these, there is also supply chain advantage in as much as pharma MNCs can leverage the India platform to reach out to other countries in the region. While in the process of buying a controlling stake in India's top drug maker Ranbaxy in June 2008, Daiichi Sankyo clarified how the emerging markets are going to be a matter of great interest for the Japan's third largest player. This partly explains why pharma MNCs are getting more aggressive about India despite concerns about patents high competition and pricing.

 

Sources:

1 Khomba Singh, “‘Copycat’ Indian Drug Cos Turn MNC Partners”, The Economic Times, 3 August, 2009.

2 Khomba Singh, “Low-Cost Versions Integral Part”, The Economic Times, 3 August, 2009.

3 PTI, “Indian Pharmas on a High as $70-b Drugs Go Off-Patent in US”, The Economic Times, 3 August, 2009.

A balanced analysis of the benefits and disadvantages of foreign capital to an underdeveloped country clearly reveals that the merits outweigh the demerits. A country cannot remain poor for ever in the modern world. No growth can ever be achieved without huge investments to break the vicious circle of poverty. To achieve this objective and realize the goal of fast-track development, developing countries have no option but to seek foreign capital and along with it technology and skills in production, marketing and management at as best terms as possible. It is left to the country concerned that it adopts an economic and political policy to confine the providers of capital and MNCs within their limits. India, so far, has been successfully managing this task, at times even going to the extent of making it should be otherwise in future.

SUMMARY
  • Today most business enterprises are drawn to doing business across national borders. Many factors such as falling trade barriers, newer technology and political reforms have come to play a facilitating role in recent times to promote and foster international trade.
  • Businesses in the present global society are carried on by multinational or transnational corporations, most of which are based in the developed countries. Global business operates within the context of international and, where necessary, regional rules and regulations set up by appropriate governmental agents. It is dominated by multinational corporations that have their businesses spread across continents. It is concerned, therefore, with political, economic, social and cultural conditions in a variety of countries. As technology improves, international communications and transportation links, international business and international corporate activities will expand.
  • Global business opportunities have grown tremendously in recent times, thanks to the opening up of the hitherto fettered markets of socialist and developing countries and the active role played by the international organizations such as GATT, WTO, IMF and the World Bank. Stupendous growths in transport and communications and cutting-edge technologies in IT and ITES have added their own dimensions to this growth process.
  • Corporations that are involved in the production and distribution of goods and services for a worldwide market should not only live by and exhibit ethical principles and good corporate governance practices, but also should practise them. No corporation that is unethical and wanting in terms of corporate governance will have a future. If transparency, honesty, fairness, integrity and ethical behaviour along with protection of all the stakeholders' interests are commendable virtues within the country, they are far more preferred outside.
  • Though multinational corporations enjoy tremendous economic clout and the influence that comes with it, they face a number of problems when they enter a new country which has a different culture, political ideology, social norms and ethical mores. The following are some of the issues (i) MNCs have to adapt to the trends and events of the host country; (ii) Accountability to a larger society is also an issue multinational corporations face; (iii) Efforts to promote free trade and to protect domestic industry from foreign competition is one of the most pressing issues in international business today; (iv) Efforts at environmental protection is another international business issue.
  • With the onset of globalization and the business corporation spreading its wings outside the home country, there is an urgent need for a sustained dialogue, initially among senior business leaders from around the world, and then including leaders of governments and other institutions, to define the critical role of the corporation in a global society. The following beliefs can be considered as a framework for that discussion (i) Efficiency of operation; (ii) Proactive in serving all stakeholders; (iii) Corporations need to balance the short-term interests of shareholders and the long-term interests of the enterprise and its stakeholders; (iv) Meeting traditional objectives and performance criteria is not sufficient; (v) Corporations should lead by example and (vi) Corporations cannot act alone.
  • Multinational corporations bring in a number of benefits to the host nation. Some of the prominent benefits are: (i) Better access to worldwide markets; (ii) Best access to capital investment; (iii) Transfer of advanced technology; (iv) Benefit of large-scale operations worldwide in R&D; (v) Encouragement of local supplier development; (vi) New jobs for labour; (vii) Advanced training for labour; (viii) Better access to managerial talent; (ix) New products for consumers; (x) Lower cost products and/or better products due to increase in efficiency and (xi) Exports contribute favourably to the host nation's balance of payments position, additional taxes and payments for public exchequer.
  • The disadvantages caused by MNCs to the host nations include (i) Loss of national sovereignty; (ii) Political interest of the home nations of MNCs may be served by them; (iii) The host nation may lose its control over its own economy; (iv) Negative impact on the host's own balance of payments; (v) Exploitation of hosts' irreplenishable natural resources; (vi) Exploitation of labour of the host country; (vii) Indulging in harmful environmental acts and (viii) Host nation's industries may be destroyed due to unfair competition by MNCs.
  • MNCs can be regulated by the following means: (i) Threat of nationalization; (ii) Government's discretionary regulatory powers; (iii) MNCs may be permitted for a specific time; (iv) Governments may practice a dual tax system; (v) MNCs may be directed to spend a minimum amount on R&D and (vi) Domestic market used as a means to attract new technologies.
  • In the post-liberalization era, India has witnessed the arrival of a large number of multinational companies that has catapulted the country's economy to a higher trajectory of growth. MNCs represent a diversified portfolio of enterprises representing different nations. American companies account for around 37 per cent of the turnover of the top 20 firms operating in India. In recent years, more and more firms from Britain, Italy, France, Germany, the Netherlands, Finland, Belgium, etc. have outsourced their work to India.
  • In spite of the huge growth experienced by the MNCs, Indian industry has some bottlenecks for them, such as policies that work as huge irritants, as in tax structure and trade barriers, low investment in infrastructure, especially in physical and information technology and slow reforms that include political reforms to improve stability, privatization and deregulation, financial sector and labour reforms. However, reports suggest that performance of 70 per cent of MNC has met or exceeded internal targets and expectations. India is seen to be at par with China in terms of FDI attractiveness by MNCs. In fact, in the perception of MNCs, India ranks higher than China, Malaysia, Thailand, and the Philippines in terms of their performance.
  • The following are some of the factors that call for foreign capital to a developing country such as India: (i) To sustain a high level of investment; (ii) To bridge the technology gap; (iii) Exploitation of natural resources; (iv) Initiating growth by undertaking initial risk; (v) Developing basic infrastructure; and (vi) Bridging the foreign exchange gap.
  • Foreign capital consists of two main forms (i) Private foreign investment and (ii) Foreign aid. Private foreign investment can be either (a) direct foreign investment, or (b) indirect foreign investment. When a private foreign investor either establishes a branch of his business or a subsidiary in the host country, it is called direct foreign investment. Indirect foreign or portfolio investment consists of equity or debenture holding by foreigners in the host country's companies.
  • FDI is primarily a long-term investment and is limited to investment in capital assets and helps in the generation of income and employment in the host country. FII is essentially a short-term investment associated with the host country's financial market. Almost all developing economies of the Third World and the war-shattered economies such as those of West Germany and Japan were able to develop their economies to the extent they made it primarily because of foreign aid.
  • By foreign aid we mean “all official grants and concessional loans in currency or in kind, which are broadly aimed at transferring resources from developed to less developed nations on developmental and/or income distributional grounds”. Apart from grants and concessional loans, developing countries also sometime receive direct supplies of agricultural produce such as wheat or industrial raw materials to meet temporary shortages in the economy.
  • The response of foreign capital to the wooing of Indian Government has been rather lukewarm till 1991 due to factors such as low productivity levels of workers, archaic labour laws, absence of an exit policy, slow economic reforms, long-winding procedural delays and all pervading corruption. However, things began to change after the adoption of New Economic Policy in 1991. In recent times, India is seen to be preferred destination for FDIs.
  • Apart from FDIs and FIIs, there are other kinds of investments emanating from abroad such as the following: (i) NRI investments; (ii) Global Depository Receipts (GDRs); (iii) American Depositary Receipts (ADRs) and (iv) Foreign Currency Convertible Bonds (FCCBs). Several significant measures were announced by the Government since 1991 to attract the inflow of foreign capital. (i) Automatic permission was granted up to 51 per cent for high-tech industries; (ii) Foreign equity holdings in tourism-related industries; (iii) Foreign equity participation in the power sector; (iv) Use of trademarks and repatriation of royalty allowed; (v) Employment of foreign technicians allowed; (vi) Concessions for NRI investments granted; (vii) Investments in sunrise industries; (viii) Concessions with regard to disinvestment; (ix) From January 2004, 100 per cent FDI permitted in petroleum and publications; (x) Foreign investment in private banks raised and (xi) Press Note 18 scrapped in January 2005.
  • Among the several initiatives taken by the Government of India to attract capital, both foreign and domestic, for augmenting investment in Indian industry, the establishment of the Investment commission was a significant one. The Government has constituted in the year 2004 the Investment Commission, which is to interact with industry groups/houses in India and large companies abroad with a view to promote investments in the country, especially in sectors where there is a great need for investment but sufficient amount has not been attracted so far.
  • The following are some of the disadvantages of foreign capital: (i) Several concessions given to foreign investors which are denied to domestic entrepreneurs, creating some amount of ill will among the latter; (ii) Payouts of dividends, royalty, capital repatriation, etc. flow out of the country; (iii) Concentration on production of goods and services catering to the rich and elitist sections of society; (iv) Multiple collaborations with restrictive clauses in agreements work out to be costly to the recipient country, especially with reference to duplication of technology transfers; (v) Excessive imports of equipment, spares and components, causing adverse balance of payments to the host country; (vi) Agreements always favoured foreigners which go against domestic interests mainly because of the unequal bargaining strengths of the parties; (vii) Distortion of domestic economic structure caused by MNCs, suppressing indigenous entrepreneurship, bringing in oligopolistic practices, unsuitable products and often obsolete technology; (viii) Foreign investments used to acquire existing assets through mergers and acquisitions leading to wastages arising out of duplication, rather than entering into new areas of production; (ix) Promotes regional disparities by concentrating in already developed and industrially crowded regions drawing on external economies of scale; (x) Political interference in economic decisions of host countries by foreign powers where from MNCs come and thereby threaten the sovereignty of these low-income countries; (xi) Passing on obsolete technology to developing countries make it costly and useless in the long run to the recipient countries and (xii) Too much crowding in host countries in certain sunrise and profitable industries such as automobiles, consumer durables, and cellular, mobile and electrical hardware and totally ignoring basic industries such as agriculture.
KEY WORDS
ADR domestic identity economic clout
FCCB GATT GDR
geocentric perspective global corporations hub
IMF joint venture partners multinational corporations
negative impact NRI threat of nationalization
unmixed blessing World Bank WTO
DISCUSSION QUESTIONS
  1. Why is it that even countries with abundant natural and human resources cannot afford to insulate themselves from others?
  2. Discuss the factors that facilitate the integration of the global economy.
  3. What are the benefits and disadvantages that MNCs bring to the host country?
  4. Explain the background under which the Caux Round Table was established. What are its objectives and the issues it seeks to address?
  5. Discuss the various initiatives of global organizations to ensure ethical business worldwide.
  6. Critically examine the role of MNCs in a developing economy. In this context. would you advocate a policy of encouraging investment by multinationals in India?
  7. What are the arguments advanced against transnational corporations operating in India? Are these arguments valid for the short run and the long run?
  8. Discuss the role of foreign assistance and foreign collaboration in the development of industries in India.
  9. “It is wise to open the Indian economy to free and unrestricted entry by multinational corporations, as by bringing into the country new products, fresh capital and modern technology, the MNCs will help in decreasing out, dependence, reduce disparities and boost the rate of growth.” Explain.
  10. “By keeping her doors wide open to transnational corporations (TNCs), India will be able to proceed along the desired path of development.” Comment.
  11. Examine the need for foreign collaboration in a developing economy. What are the present policies of the Government of India towards private foreign investment?
  12. Critically examine the case for foreign direct investments in India. Also examine the extent and pattern of such investments since 1981.
  13. Critically examine the role of multinational corporations in developing countries such as India in the framework of World Trade Organization.
SUGGESTED READINGS

Lall, Sanjaya. “Less-Developed Countries and Private Foreign Investment,” Economic and Political Weekly, 3 August 1974.

Meier, Gerald M. (Ed.). “Benefits and Costs of Private Foreign Investment-Note”, in Leading Issues in Economic Development. Sixth edition. New York, NY: Oxford University Press, 1995; Nurkse, Ragnar. Problems of Capital Formation in Underdeveloped Countries. Oxford: Blackwell, 1953; New Delhi: Oxford University Press (Reprint edition).

Meier, Gerald M. The International Economics of Development. New York, N.Y.: Harper & Row (Harper International Edition), 1968.

Mokhiber, R and R. T. Weissman, “The Criminal Element”, Focus on the Corporation, 6 September 1999. http://lists.essential.org/corp-focus.

Nagaraj, R. “Foreign Direct Investment in India in the 1990s: Trends and Issues”, Economic and Political Weekly, April 26, 2003.

Todaro, Michael P. and Stephen C. Smith. Economic Development. eighth edition. Singapore: Pearson Education Asia, 2003.

United Nations Global Compact, Corporate Citizenship in the World Economy, 2008 Available online at http://www.unglobalcompact.org/docs/news_events/8.1/GC_brochure_FINAL.pdf www.unglo-balcompact.org/AboutTheGC/TheTenPrinciples/index.html.

Weissman, Robert. “Environmental Bad Guys”, 1999. http://lists.essential.org/corp-focus.

www.unglobalcompact.org/docs/news_events/8.1/Making_the_connection.pdf.