1.

4 FORMS OF INTERNATIONAL BUSINESS (reference for unit 3 first topic)

International business can take different forms. The choice of form is very important. The desire
to be close the market, the need for do it yourself, tariff barriers, risk diversification and
increased potential to reach other neighbouring markets in due course will make a firm choose
ownership forms. In the absence of these requirements, non-ownership forms may be followed.
Table .! gives a brief sketch of the same. "nd these are e#plained briefly below.
T!"e 1.# Interntion" Business For$s
1.4.1 Non%o&ners'ip for$s
$on-ownership forms involve doing international business without ownership interests in the
foreign countries concerned. These are %a& 'erchandi(e e#port, import ) counter trade, %b&
*ervice +#port and Import, %c& ,icensing and -ranchising, %d& .ontract 'anufacturing, %e&
'anagement contracts and %f& Turnkey .ontracts. These forms are less risky as pull out is easy in
times need.
a. Merchandize Exporting, Importing and counter trade/ In economics, e#change of physically
tangible goods between countries, involving the e#port, import, and re-e#port of goods at various
stages of production is referred to trade in merchandi(e or tangible or visible items. The section
of the balance of payments %012& dealing with this is called balance on trade. 'erchandi(e
trade is distinguished from invisible trade, which involves the e#port and import of physically
intangible items such as services %covering receipts and payments arising from activities such as
customer service or shipping, income from foreign investments, etc&.
+#porting and importing are the basic and fundamental limbs of international business by a firm.
These are the most traditional mode of entering the international market. 3esulting international
trade has been growing much faster than the world output resulting in greater world economic
integration.
i.. E(portin) is the appropriate strategy when one or more of the following conditions prevail.
The volume of foreign business is not large enough to 4ustify overseas production.
.ost of production in the foreign market is high
The foreign market is characteri(ed by production bottlenecks like infrastructural
problems, problems with materials supplies etc.
There are political or other risks of investment in the foreign country.
The company has no permanent interest in the foreign market concerned or that there is
no guarantee of the market available for a long period.
-oreign investment is not favoured by the foreign country concerned.
,icensing or contract manufacturing is not a better alternative. *trategic advantages of
e#porting/ 5sing e#cess capacity, cost reduction, risk spreading, higher top and bottom
lines, leveraging brad equity overseas, e#ploring possibilities for production overseas,
endearing the overseas environment prior to big scale launching, etc important
advantages of e#porting.
ii. I$portin) is favoured rather than home production when the following conditions e#ist/
The volume of domestic requirement is not large enough to 4ustify home production.
.ost of production in the home market is high.
The home market is characteri(ed by production bottlenecks like infrastructural
problems, problems with materials supplies etc.
The company has permanent interest in the foreign market concerned or that there is a
possibility overseas production may be resorted to soon.
-oreign investment is favoured by the foreign country concerned with ta# breaks and
other sops.
*trategic advantages of importing/ 0etter quality supplies6components6products,
complementing home production6product range, taking up import competition in the
home market through cost-effective or quality enhanced imports, spreading risks of
supply concerns important advantages of importing.
iii. *ounter tr+e, .ounter trade is used as a strategy to increase e#ports, particularly by the
developing countries. .ounter trade has been successfully used by a number of companies as an
entry strategy. -or e#ample, 2epsi .o gained entry to the 5**3 by employing this strategy.
.ounter trade is a form of international trade in which certain e#port and import transactions are
directly linked with each other and in which import of goods are paid for by e#port of goods,
instead of money payments.In the modern economies, most transactions involve monetary
payments and receipts, either immediate or deferred. "s against this, 7counter trade refers to a
variety of unconventional international trade practices which link e#change of goods - directly or
indirectly - in an attempt to dispense with currency transactions8.
. Ser-ice E(port n+ I$port
'ost manufacturing firms indulge in service imports when they hire a foreign cargo ship to
e#port their goods abroad or to bring home an imported machinery or a load of raw materials.
*imilarly insurance service on e#port or import cargo get e#ported or imported depending on
whether domestic or foreign insurer is involved. 9hen a firm sends its e#ecutives abroad for
conference or trade negotiation, service imports are involved when foreign airlines6hotels are
used. 9hen a firm brings e#ecutive personnel from abroad for conference or trade negotiation to
home country, service e#ports are involved when foreigners use domestic airlines 6 hotels are
used. Thus tourism, transportation, insurance, banking, education, consultancy, etc involve
service e#ports and imports depending on whether foreign e#change is ultimately earned by the
firm or spent. $owadays manufacturing firms themselves have their financial6insurance
subsidiaries and that their visible trade transactions give rise to invisible trade actions as well.
c. Licensin) n+ Frnc'isin)
,icensing and -ranchising, which involve minimal commitment of resources and effort on the
part of the international marketer, are easy ways of entering the foreign markets. 5nder
international licensing, a firm in one country %the licensor& permits a form in another country %the
licensee& to use its intellectual property %such as patents, trade marks, copyrights, technology,
technical know-how, marketing skill or some other specific skill&. The monetary benefit to the
licensor is the royalty or fees which licensee pays. In many countries, such fees or royalties are
regulated by the government: it does not e#ceed five per cent of the sales in many developing
countries. " licensing agreement may also be one of cross licensing, wherein there is a mutual
e#change of knowledge and6or patents. In cross;licensing, a cash payment may or may not be
involved.
+. *ontrct Mnufcturin)
5nder contract manufacturing, a company doing international marketing contracts with firms in
foreign countries to manufacture or assemble the products while retaining the responsibility of
marketing the product. This is a common practice in international business. .ontract
manufacturing has the following advantages.
The company does not have to commit resource for setting up production facilities.
It frees the company from the risks of investing in foreign countries.
If idle production capacity is readily available in the foreign country, it enables the
marketer to get started immediately.
e. Mn)e$ent *ontrctin)
5nder the management contract, the firm providing the management know-how may not have
any equity stake in the enterprise being managed. In short, in a management contract the supplier
brings together a package of skills that will provide an integrated service to the client without
incurring the risk and benefit of ownership. Thus, as <otler observes, management contracting is
a low-risk method of getting into a foreign market and it starts yielding income right from the
beginning. The arrangement is especially attractive if the contracting firm is given an option to
purchase some shares in the managed company within a stated period. 'anagement contract
could, sometimes, bring in additional benefits for the managing company. It may obtain the
business of e#porting or selling otherwise of the products of the managed company or supplying
the inputs required by the managed company.
f. Turn.e/ *ontrcts
Turnkey contracts mean that the contractor will do all the work needed to fi# up a working
network for you. "ll you have to do is open the door or Turn the key and step into a working
system. Turnkey contracts are common in international business in the supply, erection and
commissioning of plants, as in the case of oil refineries, steel mills, cement and fertili(er plants
etc: construction pro4ects and franchising agreements. 7" turnkey operation is an agreement by
the seller to supply a buyer with a facility fully equipped and ready to be operated by the buyers
personnel, who will be trained by the seller. The term is sometimes used in fast - food franchising
when a franchiser agrees to select a stone site, build the store, equip it, train the franchisee and
employees and sometimes arrange for the financing8. Turnkey pro4ect contracting firms have
rich e#perience in the field, provide complete solution = from lay-outing to handing over to
production and are the single source responsibility. In >ec ?;;@, +ricsson has signed turnkey
contracts as the total solution provider and prime integrator of 'etropolitan "rea $etworks
%'"$& to support the launch of seven digital cities across Areece. 5nder the agreements
+ricsson will supply and install fiber optic telecommunications networks in the municipalities of
"grinio, .hania, +rmoupolis, Ierapetra, Iraklio, <o(ani and 3ethymno. The networks will
initially link municipal buildings, such as the general hospital, town hall, schools and
universities.
1.4.0 O&ners'ip or Forei)n 1irect in-est$ents for$s
1wnership form involvewhen the firm decides to own production6distribution facility in the
foreign land. +ventually foreign investment gets involved. There are many alternatives like
wholly owned subsidiaries, BCs, *trategic alliances, ')", etc..
. 2'o""/ O&ne+ Mnufcturin) Fci"ities,
.ompanies with long term and substantial interest in the foreign market normally establish fully
owned manufacturing facilities there. "s >rucker points out, 7it is simply not possible to
maintain substantial market standing in an important area unless one has a physical presence of a
producer8. " number of factors like trade barriers, differences in the production and other costs,
government policies, etc., encourage the establishment of production facilities in the foreign
markets.
b. "ssembly 1perations/
"s 'iracle and "lbaum point out, a manufacturer who wants many of the advantages that are
associated with overseas manufacturing facilities and yet does not want to go that far may find it
desirable to establish overseas assembly facilities in selected markets. In a sense, the
establishment of an assembly operation represents a cross between e#porting and overseas
manufacturing. 3- 'icro >evices, Inc. has established an assembly facility at its 0ei4ing, .hina,
location to provide internal module packaging capabilities. The new facility is e#pected to help
streamline 3-'>s manufacturing supply chain and contribute directly to the companys
ongoing gross margin improvement plan. 3-'> e#pects to lower its overall manufacturing cost
structure, provide for guaranteed assembly capacity and enable cycle time reductions. .ycle time
reductions will be driven by both reduced time in transit to third-party suppliers as well as
enhanced pro#imity to handset production, which is increasingly located in "sia. "dditionally,
by housing its new assembly operations in its e#isting 0ei4ing facility, 3-'> significantly
strengthens its position as a one-stop shop for semiconductor assembly, test and tape and reel.
!. 3oint 4enture,
Boint venture is a very common strategy of entering the foreign market. In the widest sense, any
form of association which implies collaboration for more than a transitory period is a 4oint
venture %pure trading operations are not included in this concept&. There are different types of
4oint ventures. These are as follows/
Boint ventures by adoption/ "cquisition of part of the equity in a foreign entrepreneurial
company, whereby the foreign company becomes adopted unit of the 4oint venturer along
with the promoter.
Boint ventures by rebirth/ 9hen the foreign partner transfers technology to an ailing
domestic business and takes equity stake in the revived business.
Boint ventures by procreation/ " truely new venture is born out of a marriage between the
technical and6or market-know how of the partners.
Boint ventures through family ties/ This occurs when suppliers 4oin together with each
other or when a manufacturer takes an equity position in a supplier business.
Boint ventures are good as these involve strengths of the partners mingled and magnified and
synergies emanate. Boint ventures lead to synergies driven through core-competencies. There are
technical, financial, production, marketing and managerial synergies to drive from 4oint ventures.
'ultinational companies enter foreign countries through 4oint venture when a BC is viable, i.e.,
the local firms profits under a BC always e#ceed the corresponding levels under direct ->I.
Dowever, when protection of I23s %intellectual property rights& is important, ->I may be
preferred to a BC. This is one of the reasons when IT and 2harma '$.s enter third worlds with
poor protection of I23s, they take a wholly owned subsidiary rather than a BC. *trengthening the
I23 regime serves as a priority to induce a BC and with it technology transfer. 0ut sometimes, the
host government may press for BC instead a ->I. In the !E;s and !!;s, 4oint ventures were
required by the .hinese government. 0ut now there are no restrictions for most sectors of the
manufacturing industry, he said.
c. T'ir+ *ountr/ Loction,
Third country location is sometimes used as an entry strategy. 9hen there are no commercial
transactions between two nations because of political reasons or when direct transactions
between two nations are difficult due to political reasons or the like, a firm in one of these
nations which wants to enter the other market will have to operate from a third country base. -or
e#ample, Taiwanese entrepreneurs found it easy to enter 2eople of 3epublic of .hina through
bases in Dong <ong.
d. Mer)ers 5 Ac6uisitions/
'ergers ) "cquisitions %' ) "& have been a very important market entry strategy as well as
e#pansion strategy. " number of Indian companies have also used this entry strategy. 'ergers )
acquisitions have certain specific advantages. It provides instant access to markets and
distribution network. "s one of the most difficult areas in international marketing is the
distribution, this is often a very important consideration for ' ) ". "nother important ob4ective
of ' and " is to obtain access to new technology or a patent right. ' and " also has the
advantage of reducing the competition.
e. Strte)ic A""ince,
*trategic alliance has been becoming more and more popular in international business. This
strategy seeks to enhance the long term competitive advantage of the firm by forming alliance
with its competitors, e#isting or potential in critical areas, instead of competing with each other.
7The goals are to leverage critical capabilities, increase the flow of innovation and increase
fle#ibility in responding to market and technological changes8. *trategic alliance is also
sometimes used as a market entry strategy. -or e#ample, a firm may enter a foreign market by
forming an alliance with a firm in the foreign market for marketing or distributing the formers
products. " 5.*. pharmaceutical firm may use the sales promotion and distribution infrastructure
of a Bapanese pharmaceutical firm to sell its products in Bapan. In return, the Bapanese firm can
use the same strategy for the sale of its products in the 5.*. market. *trategic alliance, more than
an entry strategy, is a competitive strategy.
1.7 IN1IA8S TRA1E 9OLI*:
Trade policy contains guidelines for action. Trade policy is the official pronouncement released
by the Aovernments of respective nations periodically containing the priorities, assistances,
concessions, preferences, etc for e#porters and importers, norms and eligibilities for availing the
concessions and assistances, regulations and rules, procedures and documents, etc. In India, trade
policy is released once in F years, with annual supplements. Trade policy regimes have national
priorities in mind, but of late 9T1 requirements, 3egional Trade bloc requirements, etc need to
be accounted for.
1.7.1 A)encies in t'e for$u"tion n+ i$p"e$enttion Tr+e po"ic/
Trade policy formulation and implementation remains with the >epartment of .ommerce, in the
'inistry of .ommerce and Industry, in consultation with other key ministries such as the
'inistry of -inance, 'inistry of "griculture, as well as ministries relating to services, and the
3eserve 0ank of India. Trade policy is formulated and drafted in consultation with *tate and
5nion territory governments, industry and farmers associations, trade bodies, research and
academic institutions, and other stakeholders.
The policies are announced for a five-year period, along with annual reviews, in the -oreign
Trade 2olicy %previously known as the +#port-Import 2olicy&, which is accompanied by the
Dandbook of 2rocedures. The -oreign Trade 2olicy and 2rocedures are implemented by the
>irectorate Aeneral of -oreign Trade %>A-T&, while advice on tariff and related issues is
provided by the Tariff .ommission, both based in the 'inistry of .ommerce and Industry.
1ther key departments of the 'inistry of .ommerce and Industry include the >irectorate
Aeneral of "nti-dumping and "llied >uties, which deals with investigations and recommends
action to be taken on anti-dumping and countervailing measures: and the >irectorate Aeneral of
.ommercial Intelligence and *tatistics %>A.I)*&, responsible for collecting, compiling, and
disseminating data on trade. .oherence and consistency between trade and other economic
policies is maintained through inter-ministerial consultations prior
to any key .abinet decisions on policy.
The >epartment of .ommerce also deals with trade policy relating to plantation crops %tea,
coffee, rubber, cardamom, and tobacco&, special economic (ones, and e#port promotion and
credit guarantee schemes through a number of autonomous bodies and state-owned enterprises
%*1+s&. The *1+s are the *tate Trading .orporation of India %*T.&, *T., ,imited, ''T.
limited, 2+. ,imited, +#port .redit Auarantee .orporation of India ,imited %+.A.&, and the
India Trade 2romotion 1rgani(ation %IT21&. The
*T., *T.,, and ''T. are also involved in state-trading activities.
+#ports have been a ma4or policy focus in recent years and the >epartment of .ommerce is
assisted in this function by several advisory bodies. These include the 0oard of Trade,
reconstituted in ?;;F to maintain dialogue with traders and industry to promote e#ports, and the
+#port 2romotion 0oard to provide policy and infrastructural support for increasing e#ports. The
Aovernment also, from time to time, sets up ad hoc groups for advice, including on trade and
related policies. >ialogue is also maintained directly with industry, through for e#ample, the
.hambers of .ommerce, including the .onfederation of Indian Industry %.II&, the -ederation of
Indian .hambers of .ommerce and industry %-I..I& and the "ssociated .hambers of
.ommerce %"**1.D"'&. The Internet is also increasingly used for soliciting stakeholders
views and comments when formulating laws or policies.
"lthough India does not have an independent authority to review government policy, policy is
e#amined on a regular basis through mechanisms such as parliamentary committees. The
.omptroller and "uditor Aeneral %."A& of India, who is appointed by the 2resident and is
independent of both the +#ecutive and ,egislative branches of government, audits government
accounts both at the central and state levels, including those of public sector enterprises and
individual government programmes. The ."A audits include a report on whether government
programmes have achieved their ob4ectives and provided the intended benefits. The reports are
presented to the 2resident %or the 2residents representative in a *tate& and then referred to
parliamentary committees such as the 2ublic "ccounts .ommittee %2".& or the .ommittee on
2ublic 5ndertakings %.25& who present their findings and recommendations to 2arliament.
Aovernment policies are also analysed by taskforces and committees established on an ad hoc
basis.
1.7.0 Tr+e 9o"ic/ O!;ecti-es
Trade policy is not as an end in itself, but is a tool to further economic growth and development.
The -oreign Trade 2olicy aims to double Indias share of global merchandise trade by ?;;!, over
the ?;;G level, and to use trade to generate employment. 9hile e#ports are a key goal, the
-oreign Trade 2olicy acknowledges the importance of facilitating imports required to stimulate
the economy and calls for a simplification of import procedures and reduction of import barriers,
and coherence and consistency between trade and other economic policies.
$evertheless, e#ports continue to be a key focus. The Aovernment in its 'edium-term +#port
*trategy, issued in Banuary ?;;?, targeted compound annual e#port growth of almost ?H over
?;;?-;@, in order to achieve H of world e#ports by ?;;I-;@. The +#port *trategy called for,
inter alia, further rationali(ation of tariffs, ta# rebates, reducing transaction costs, improving
e#port infrastructure, e#panding free-trade agreements, and enhancing the use of e#port
promotion programmes to increase e#ports further. The goal of doubling Indias share of global
merchandise trade by ?;;! is to be achieved, inter alia, through further liberali(ation of controls
and simplification of e#port procedures, and by 7neutrali(ing the incidence of all levies and
duties on inputs used in e#port products based on the fundamental principle that duties and levies
should not be e#ported8.
To implement this policy, there are a number of duty-neutrali(ing schemes. In addition to
measures such as the e#port promotion capital goods scheme, e#port-oriented units, technology
parks, free-trade (ones and duty drawback, new schemes have been added. These include
sectoral initiatives in agriculture and village industries, handicrafts and handlooms, gems and
4ewellery, and leather and footwear. 0y reducing import barriers, through improved and faster
customs clearance and reduced or no import duties, it is likely that these schemes are facilitating
e#ports of the targeted products. Dowever, duty forgone from e#port promotion schemes in
?;;G-;F was estimated at over 3s JFG billion, suggesting that their cost is high. The new
schemes add to the already comple# network of measures, which, according to a report by the
2lanning .ommission, resulted in 7administrative difficulties in monitoring8.
1.7.3 Tr+e A)ree$ents
Trade agreements present the rights, responsibilities, privileges, grievance systems, etc of parties
to the trade agreement. These could be multilateral %as with 9T1&, regional %as with regional
trade blocs&, bilateral %with the two participating countries&. Trade policy of countries actually
must reflect the agreements reached under trade policy.
1.7.3.1 2or"+ Tr+e Or)ni<tion
India is an original 'ember of the 9T1 and provides '-$ treatment to all 'embers and other
countries. It has accepted the -ourth and -ifth 2rotocols and is a 'ember of the Information
Technology "greement. It is not a party to the 9T1 Aovernment 2rocurement "greement
%A2"&. ,ike all 'embers, India is required to make regular notifications on its trade-related laws
and measures.
India is an active 'ember of the 9T1. In the current negotiations, it has submitted proposals
relating to, inter alia, agriculture, non-agriculture market access %$"'"&, services, disputes,
competition policy, trade facilitation, rules, T3I2*, and special and differential treatment. "
number of these proposals were made 4ointly with other 'embers and in many instances with
developing countries, including the A-?;, A-JJ, and $"'" groups. Indias position prior to
the launch of the >oha 3ound of negotiations placed emphasis on securing the ob4ectives
outlined in the mandated negotiations and the implementation issues raised by a number of
developing countries. "t the 'inisterial .onference in .ancun, in *eptember ?;;J, and in Dong
<ong, .hina in >ecember ?;;F, India stressed the need to address agricultural subsidies in rich
countries and tariff and non-tariff barriers maintained by these countries on products of e#port
interest to developing countries. India believes that the interests of its IF; million rural poor,
who are dependent on agriculture for a livelihood, cannot be 4eopardi(ed. It is therefore
emphasi(ing special and differential treatment through proportionately lower overall bound tariff
reduction commitments by developing countries, coupled with a special safeguard mechanism
and a list of special products vital to ensuring livelihoods and food security of farmers in
developing countries.
9ith regard to $"'", %$"'" products include fish and fishery products, wood and forestry
products, electronics, manufactures, automotive products, machinery, te#tiles, clothing, leather,
chemical products, and mining products& India, along with its coalition partners, believes that/
progress must be made on achieving a fair, balanced, and development-oriented set of modalities
based on the mandated principles of placing development concerns at the heart of the
negotiations: ensuring less than full reciprocity in reduction commitments for developing
countries: achieving a comparable level of ambition with regard to agricultural market access:
and appropriate fle#ibilities to manage ad4ustment costs and address development needs. 1n
services, India seeks increased market access especially through liberali(ation of professional
services trade in modes and G, while securing a balance in the outcome of commitments across
all modes and sectors and the negotiations on domestic regulations. India emphasi(es that
meaningful and effective special and differential treatment must be integral to the negotiations in
accordance with the mandate, and that issues of particular concern to developing countries
should be addressed.
*ince ?;;?, India brought complaints with regard to 'embers anti-dumping and countervailing
measures, rules of origin, and tariff preferences to developing countries in the 9T1. It has also
been involved in five cases as defendant covering issues relating to the automotive sector, import
restrictions, and anti-dumping measures %Table "II.?&. In addition, India has been involved as
third party in I cases brought to the >*0 since ?;;?.
The government, in particular, needs to focus on the services sector. This is an area of dynamic
comparative advantage. India need to ensure it has a clear strategy for e#pansion of trade in
healthcare, education and tourism, in addition to IT and ITe*. India needs to seek involvement of
the private sector in strategy formulation. In con4unction with the above trade policy measures,
complementary policies such as a modern infrastructure network %especially airports and ports&,
reliable access to water and electricity, fle#ible labour laws and de-reservation for the small-scale
sector need to be in place. -inally, focus on maintaining sound macroeconomic policies, with an
emphasis on reducing the overall fiscal deficit is needed.
1.7.3.0 Re)ion" tr+e )ree$ents
"lthough India has been a firm supporter of multilateral liberali(ation, it has also sought out
regional trade agreements in recent years. 9hile India continues to attach primacy to the
multilateral trading system to improve living standards, it believes that 3T"s are building blocks
that supplement the gains from multilateral trade liberali(ation. *ince signing the 0angkok
"greement in !@F, India has signed agreements mainly with other developing countries %such as
the A*T2& and within the region %*"-T"&, and with some of its neighbours. .urrent
negotiations include strengthening regional ties, for e#ample, through the *outh "sian
"ssociation for 3egional .ooperation and the 0I'*T-+., but India is also seeking to develop
ties with other regional groupings, such as "*+"$ and '+3.1*53. 3ecent trade agreements,
including with *ingapore, go beyond negotiations on goods, to include services and investment.
i. Sout' Asin Assocition for Re)ion" *o%opertion (SAAR*)
The *""3., an agreement for regional cooperation among 0angladesh, 0hutan, India,
'aldives, $epal, 2akistan, and *ri ,anka, was established at the first *""3. *ummit in >haka
on @ E >ecember !EF. In "pril !!J, the members of *""3. signed the *""3. 2referential
Trading "rrangement %*"2T"&, which provided limited preferential market access. The
"greement on a *outh "sia -ree Trade "rea %*"-T"& was signed during the ?th *""3.
*ummit, held in Islamabad, on G-I Banuary ?;;G. The preferences e#changed under *"2T" will
continue to be available to *"2T" members until the tariff liberali(ation under *"-T" is
complete %?;;E for non-,>. member preferences for ,>.s and ?;? for ,>. members&.
-ollowing three rounds of *"2T" negotiations, in which India offered tariff concessions at the
D* si#-digit level on ?,F@I lines, additional concessions were given on JIG D* si#-digit level
lines in the fourth round. *pecial concessions are granted for least developed country members
%0angladesh, 0hutan, 'aldives, and $epal&. Tariff reductions under the *"-T" are e#pected to
be phased in by ?;;E for non-,>. member preferences for ,>.s %including India& and by ?;?
for ,>. members of *"-T". *"-T" members have also e#cluded certain products from tariff
reductions/ India has notified @GG imports from ,>. members and EIF from non-,>. members.
Tariff reduction under *"-T" came effective on -@-?;;I.
ii. Asi 9cific Tr+e A)ree$ent
The "sia 2acific Trade "greement %"2T"&, originally known as the 0angkok "greement, was
signed on J Buly !@F by 0angladesh, India, ,ao 2>3, 3epublic of <orea, 2hilippines, *ri
,anka, and Thailand: .hina acceded to the "greement in "pril ?;;. The "2T" entered into
force on *eptember ?;;I under an amendment to the original agreement. India offers tariff
preferences on some F@; tariff lines at the si#-digit level, and an additional GE tariff lines to ,>.
members.
iii. BIMST%E*
The 0ay of 0engal Initiative for 'ulti-sectoral, Technical and +conomic .ooperation %0I'*T-
+.&, originally known as 0I*T-+. was signed on I Bune !!@ by 0angladesh, India, *ri ,anka,
and Thailand: 'yanmar 4oined the agreement in !!@, and $epal and 0hutan 4oined in ?;;G. In
-ebruary ?;;G, 0I'*T-+. members signed a -ramework "greement to form a free-trade area
by ?;?. "lthough this agreement provides for negotiations to be concluded on goods by
>ecember ?;;F, and on services and investment by ?;;@, these deadlines have not been met due
to the comple#ity of issues involved and economic and political developments in member states.
i-. A)ree$ent &it' Sri Ln.
India signed a free-trade agreement with *ri ,anka on ?E >ecember !!E, which entered into
effect on 'arch ?;;;. 5nder the -T" India reduce tariffs in phases, and eliminate them
completely in 'arch ?;;J, e#cept for a negative list comprising G?! items including garments,
plastics and rubber, alcoholic spirits, and coconut oil. India also maintains tariff quotas on tea
and garments under the -T". The tariff quota for tea is currently F million kg per year, at a
preferential rate of F;H of the '-$ duty. The tariff quota for garments is E million pieces per
year, of which I million should be manufactured using fabrics of Indian origin and enter at (ero
rates of duty: the remaining two million pieces receive a margin of preference of @FH of the
'-$ rate. In addition, imports of tea may only enter through the ports of <ochi and <olkata,
while garments may be imported only through the ports of .hennai, 'umbai, and Bawaharlal
$ehru 2ort, 'umbai. -urthermore, according to a 2ublic $otice issued by the >irectorate
Aeneral of -oreign Trade on ? $ovember ?;;I, imports of vanaspati, including bakery
shortening and margarine, are sub4ect to an 7overall quantitative limit8 of ?F;,;;; tonnes per
year under the Indo=*ri ,anka -ree Trade "greement. The agreement also has provisions for the
use of antidumping and safeguard measures as well as provisional suspension of preferences in
case of balance of payments difficulties.
India and *ri ,anka are currently negotiating a .omprehensive +conomic 2artnership "greement
%.+2"&, which would include trade in services and economic cooperation in other areas.
"ccording to the authorities, no date has been set for completion of the negotiations.
-. *o$pre'ensi-e Econo$ic *oopertion A)ree$ent &it' Sin)pore (*E*A)
The .+." was signed on ?! Bune ?;;F and became effective on "ugust ?;;F. The agreement
was the first signed by India that covered not only goods, but also services and investment. Tariff
concessions are to be phased in between "ugust ?;;F and "pril ?;;! %Table II.&. 2roducts
e#cluded from commitments, including agricultural products, alcoholic beverages, minerals,
chemicals, rubber products, and te#tiles and clothing products %I,FF tariff lines or over half of
the tariff&, will remain sub4ect to '-$ duties. .urrently, India offers tariff preferences at the D*
eight digit level on some F, lines, although the '-$ tariff on several of these lines is already
(ero, implying that preferences are effectively offered on only G,EEG tariff lines.
Indias commitments on financial services go beyond its commitments in the A"T*, including
commitments in life insurance services, additional commitments in non-life insurance,
commercial presence for three banks from *ingapore including up to F branches over four
years, sub4ect to certain limitations and higher equity limits in local banks. In the investment
chapter, commitments were made to protect investment, including through specific commitments
on e#propriation and compensation for any e#propriation. The .+." also e#empts investment
from *ingapore from capital gains ta#ation.
-i. Fr$e&or. A)ree$ent for Est!"is'in) Free Tr+e Are &it' T'i"n+
The -ramework "greement for establishing a -ree Trade "rea was signed by India and Thailand
on ! 1ctober ?;;J. "lthough the te#t of the agreement covers trade in goods, services and
investment, specific commitments were made only with regard to trade in goods. "n early
harvest scheme includes phased tariff elimination for E? products at the D* si#-digit level, by
*eptember ?;;I.
-ii. Ot'er re)ion" tr+e rrn)e$ents
.onsultations between India and "*+"$ +conomic 'inisters were held on F *eptember ?;;?
when it was decided to establish an "*+"$=India +conomic ,inkages Task -orce %"I+,T-& to
prepare a draft -ramework "greement to enhance bilateral trade. The first "*+"$=India
*ummit was held on F $ovember ?;;? in .ambodia, where India committed, inter alia, to
provide special and differential treatment to "*+"$ members based on their level of
development, and to aligning its peak tariffs to +ast "sian levels by ?;;F.
The -ramework "greement on .omprehensive +conomic .o-operation was signed by India and
"*+"$ heads of state on E 1ctober ?;;J. The agreement includes trade in goods, services, and
investment. The early harvest programme, including e#change of tariff concessions, was
e#pected to commence on Banuary ?;;@. .loser trade and investment ties are also sought with
the +uropean 5nion and the 5nited *tates, through the India=+5 *trategic 2artnership signed on
@ *eptember ?;;F and the 5*=India Trade 2olicy -orum, which held its first meeting on ?
$ovember ?;;F. 5nder the former, a Digh ,evel Trade Aroup was established to e#plore ways
to deepen trade and investment relations and reported to the ne#t summit meeting in 1ctober
?;;I to negotiate a broad-based trade and investment agreement. The first meeting of the 5*=
India Trade 2olicy -orum discussed tariffs and non-tariff barriers to trade, agriculture,
investment, services, intellectual property, and the >oha 3ound. It agreed to establish focus
groups on agriculture, tariffs and non tariff barriers, services, investment, and innovation and
creativity. The meetings of the Trade 2olicy -orum are held at regular intervals several times
during a year.
India is e#ploring the possibility of establishing a .omprehensive +conomic .ooperation
"greement with the *outhern "frican .ustoms 5nion %0otswana, ,esotho, $amibia, *outh
"frica, and *wa(iland&, and has signed preferential agreements with "fghanistan %I 'arch
?;;J&, '+3.1*53 %! 'arch ?;;F&, and .hile %E 'arch ?;;I&.
Indias commitments under the 2T" with "fghanistan include JE tariff lines at the D* si#-digit
level, with preferences ranging from F;H to ;;H of the '-$ tariff rate. The 2T" has been in
operation since J 'ay ?;;J. " -ramework "greement to 2romote +conomic .o-operation,
which aims to identify the potential for cooperation in trade in goods and services, investment,
and other areas, was signed with '+3.1*53 on ?F Banuary ?;;G. "s a first step, India has
offered commitments on GF; tariff lines at the D* eight digit level, with preferences ranging
from ;H to ;;H of the '-$ rate. 5nder a -ramework "greement to 2romote +conomic .o-
operation signed with .hile, on ?; Banuary ?;;F, Indias offer includes @E tariff lines at the D*
eight-digit level, with preferences ranging from ;H to F;H of the '-$ rate. In parallel, a
meeting of the 4oint study group was held during the preferential trade agreement negotiations in
$ovember ?;;F to e#plore the possible ne#t steps. The 2T"s with '+3.1*53 and .hile are
not yet in force.
The bilateral agreement with $epal was e#tended up to F 'arch ?;;@, apparently without
change. Indias free-trade agreement with 0hutan, conducted in local currency, was e#tended on
?! Buly ?;;I for ten years, while its bilateral trade cooperation agreement with 0angladesh was
e#tended for three years, from "pril ?;;I. India also maintains transit agreements with
0angladesh and $epal.
India is negotiating a number of trade agreements including with the 3epublic of <orea,
'auritius, and the Aulf .ooperation .ouncil, and has also set up 4oint study groups to e#plore
the feasibility of comprehensive economic cooperation agreements with .hina, Bapan, Indonesia,
'alaysia, "ustralia, and the 3ussian -ederation.
-iii. Ot'er tr+e rrn)e$ents
India is a participant in the Alobal *ystem of Trade 2references %A*T2& among developing
countries. 5nder the A*T2, which entered into force in India on ! "pril !E!, India offers tariff
preferences for a limited number of products. Two rounds of negotiations have been completed
and a third is e#pected to be completed by ?;;@. It appears also that India is considering giving
duty-free and quota-free market access to least developed countries, but no further details are
available. 5nder the Aenerali(ed *ystem of 2references %A*2&, India receives preferential access
to the markets of 0ulgaria, .anada, the +uropean .ommunities, Bapan, $ew Kealand, $orway,
3ussian -ederation, Turkey, *wit(erland, and the 5nited *tates.
1.7.3.0 Forei)n In-est$ent Re)i$e
India has continued to liberali(e its foreign investment regime gradually. 2rocedures
for applying for and obtaining ->I approval are essentially unchanged: the main changes in
policy have been to the entry route and a rela#ation in equity restrictions in a number of sectors.
->I policy is formulated by the >epartment of Industrial 2olicy ) 2romotion %>I22& in the
'inistry of .ommerce and Industry. The Investment 2romotion >esk and the -oreign
Investment Implementation "uthority, under the *ecretariat for Industrial "ssistance %*I"& in the
>I22, are concerned with investment promotion and facilitating implementation of approvals.
The -oreign Investment 2romotion 0oard %-I20&, based in the 'inistry of -inance, is
responsible for granting approval for ->I in sectors6activities where prior government approval
is required.
" 'ay ?;;? report on reforming the investment approval and implementation procedures
concluded that, despite economic liberali(ation, ->I had not entered India to the degree
e#pected: and this was due to several constraints, including in the comple#ity of procedural
requirements of several laws and regulations, as well as transparency in the approval procedures.
In response, the -oreign Investment Implementation "uthority %-II"& was established in "ugust
!!I. The -II", which is based in the >I22, provides assistance to foreign investors
encountering approval or operational difficulties. The -II" is assisted by a -ast Track "uthority
in each sector, and includes representatives across the Aovernment, including state governments,
and agencies involved in the particular pro4ect. India also continues to streamline foreign
investment regulations, and reduce or remove equity restrictions. In the latest move to rationali(e
policy further, in -ebruary ?;;I equity restrictions were lifted in several activities, including
brewing and distillation of alcohol: manufacturing activities in products sub4ect to industrial
licensing within ?F km of large cities: and in sensitive sectors such as the manufacture of
e#plosives and ha(ardous chemicals, and 7greenfield8 airports, where investment has been
permitted under the automatic route sub4ect to sectoral regulations and, where applicable, an
industrial licence under the Industries %>evelopment and 3egulation& "ct.
1.7.3.3 Le)is"tion n+ ppro-" proce+ures
"lthough there is no specific ->I legislation, ->I policy is incorporated in the -oreign +#change
'anagement %Transfer or Issue of *ecurity by a 2erson 3esident 1utside India& 3egulations,
?;;;, notified under the -oreign +#change 'anagement "ct, !!!. -oreign investment is at
present permitted up to varying levels of equity in most sectors, but it is prohibited in/ retail
trading %e#cept single brand product retailing&: atomic energy: lottery business: and gambling
and betting.
There are two routes for ->I. ->I up to ;;H may take place through the automatic route,
requiring only a notification to the regional office of the 3eserve 0ank of India %30I& within J;
days of receipt of the investment and within J; days of issuing shares to foreign investors. The
automatic route is permitted for all activities e#cept/ investment in two industries sub4ect to
compulsory industrial licensing %manufacture of cigars and cigarettes of tobacco products, and
defence-related items&: equity investment above ?GH for manufacture of items reserved for the
small-scale sector: where the foreign partner has an e#isting venture in India in the same field on
? Banuary ?;;F %e#cept where investment is by a venture capital fund registered with the
*ecurities and +#change 0oard of India %*+0I&: where investment by either party is less than JH
in the e#isting 4oint venture: and if the e#isting 4oint venture is defunct or sick&: and investment
in certain sectors, as specified, above the overall permitted foreign equity ceilings.
In such cases, prior approval is required by the Aovernment. 2roposals are considered by the
-I20 in the 'inistry of -inance, >epartment of +conomic "ffairs %>+"&. "pplications seeking
-I20 approval are received in the >+", e#cept for investment proposals by non-resident Indians,
for single brand product retailing or in an e#port-oriented unit, which are received and processed
by the >I22. Investments in an Indian company under the 2ortfolio Investment *cheme are not
covered by the ->I policy and require prior approval from the *ecurities and +#change 0oard of
India %*+0I&, while foreign investors setting up branches, liaison or pro4ect offices would be
covered by the provisions of the -oreign +#change 'anagement %+stablishment of a
branch6liaison office or pro4ect office in India& 3egulations ?;;;, under the -oreign +#change
'anagement "ct %-+'"&.
-oreign investment proposals must be accompanied by details of all investors: e#isting or
proposed activities: details of the pro4ect, including cost, proposed employment, and e#ports and
foreign e#change requirements: and financial details of the company, such as paid up capital,
percentage held by foreign or non-resident investors, and any shares to be issued or already
issued. -I20 decisions must normally be made and communicated to the investors within G-I
weeks unless additional information on the proposal is required.
"ccording to the authorities, normally these deadlines are met on !;H of proposals, provided
information is complete. The -I20 works within established guidelines, considering, inter alia,
whether the pro4ect meets certain norms such as value added or e#port earnings %for e#port-
oriented units or the small-scale sector&, and whether it involves technical collaboration, along
with the nature of the technology to be transferred. "pproval by the -I20 is sub4ect to clearance
being obtained under relevant national and state laws and regulations. 1nce approval has been
granted, the investor must obtain clearance from other central or state government agencies,
including those responsible for foreign e#change, pollution control and environmental clearance
as well as land acquisition, power, etc. The number of clearances required from individual
agencies, and the time taken for each, were among the ma4or bottlenecks identified by the
.ommittee to e#amine investment procedures and implementation in *eptember ?;;. To
address this problem, several states have established single-window approval systems for
investment proposals made within the state. -urther, sectoral guidelines are reviewed to
streamline them and render them more transparent.
1.7.3.4 Incenti-es
9hile no incentives are targeted specifically at foreign investors, both central and state
governments provide investment incentives for domestic and foreign investors. The .entral
Aovernments incentives include a ;;H ta# e#emption on profits for infrastructure development
and operation: a ta# e#emption for e#ports for a period of ten years: a ta# e#emption for the first
five years and a F;H e#emption for the ne#t five years, for investor in the *pecial +conomic
Kones. There are also capital investment subsidies for new industrial units and for e#pansion of
these units in the north-eastern region and states that are covered by a special package scheme,
introduced in Banuary ?;;J: the incentives include a subsidy of FH of investment in plant and
machinery, up to a ma#imum of 3s J million for all new units and for e#pansion of e#isting
units. *imilar schemes also e#ist for the state of Bammu and <ashmir. *tate governments offer
investment incentives mainly in the form of e#emptions on the payment of charges for electricity,
registration fees, and stamp duty, as well as reservation of land, inter alia, for e#port-oriented
units and foreign investors.