A multinational corporation (MNC) or enterprise (MNE),[1] is a corporation or an enterprise that manages production or delivers services in more than one

country. It can also be referred to as an international corporation. The International Labour Organization (ILO) has defined[citation needed] an MNC as a corporation that has its management headquarters in one country, known as the home country, and operates in several other countries, known as host countries. The Dutch East India Company was the first multinational corporation in the world and the first company to issue stock.[2] It was also arguably the world's first megacorporation, possessing quasi-governmental powers, including the ability to wage war, negotiate treaties, coin money, and establish colonies.[3] Some multinational corporations are very big, with budgets that exceed some nations' GDPs. Multinational corporations can have a powerful influence in local economies, and even the world economy, and play an important role in international relations and globalization. Multinational corporations because of their enormous size, enjoy massive economic and political power which enables them to dictate terms to the under-developed countries. They are able to manipulate prices and profits and restrict the entry of potential competitors through their dominant influences over new technology, special skills, ability to spend enormous fund on advertising etc. MNCs organize this operation in different countries through any of the following five alternatives: 1) Branches: The simplest form of extending business operations is to set up branches in the developing countries. Such branches bring with them the technology of the parent company and are linked up with it. 2) Subsidiaries: Multination also operates by setting up national affiliates as subsidiary companies. A subsidiary in a particular country is established under the laws of the country. Such subsidiary companies take advantage of the financial, managerial and technical skills of the holding company and also benefit by the international reputation that latter enjoys. 3) Joint Venture Company: a joint venture is the establishment of a firm that is jointly owned by two or more otherwise independent firms. Most joint ventures are 50:50 partnerships. At times, multinationals enter into a joint venture with an indigenous firm or agency. Under this arrangement of MNC makes available machinery, capital goods and technological expertise to the indigenous firm. This form of organization is adopted in those countries where the law requires control by nationals. Joint ventures are attractive because: They allow the firm to benefit from a local partners knowledge of the host countrys competitive conditions, culture, language, political systems, and business systems. The costs and risks of opening a foreign market are shared with the partner. When political considerations make joint ventures the only feasible entry mode.

The firm risks givingJoint ventures are unattractive because: The firm may not have thecontrol of its technology to its partner. tight control over subsidiaries need to realize experience curve or Shared ownership can lead to conflicts and battleslocation economies. for control if goals and objectives differ or change over time. 4) Franchise Holders: This is a special kind of arrangement by which an affiliate firm produces or markets the product of a multinational firm after obtaining a license from that firm. A formal contract is entered into between the affiliate firm and the multinational firm which specifically mentions the rights that are transferred to the affiliate firm and lays down the compensation (usually in the form of royalties) that it has to pay to the parent firm. Firms avoid many costs and risksFranchising is attractive because: Firms can quickly build a globalof opening up a foreign market. presence.
Franchising is unattractive because:

It may inhibit the firms ability to take profits out of one The geographiccountry to support competitive attacks in another. distance of the firm from its foreign franchisees can make poor quality difficult for the franchisor to detect. 5) Turn key Projects: under this organizational form, the multinational undertakes to complete the project form scratch to the operational stage. When the project is ready it is handled over to the host country. In a turnkey project, the contractor agrees to handle every detail of the project for foreign client, including the training of operating personnel. At completion of the contract, the foreign client is handed a key to the plant that is ready for full operation. They are a way of earningTurn key projects are attractive because: economic returns from the know-how required to assemble and run a They can be less risky thantechnologically complex processes. conventional FDI.
Turn key projects are unattractive because:

The firm that enters into a turnkey deal will have no long-term The firm that enters into a turnkeyinterest in the foreign country. project may create a competitor. Through these various methods of operations, MNCs carry their technology to the developing countries. If MNCs set up a branch or a subsidiary company, it is claimed that there is a direct injection of foreign experience and expertise in the developing country. The branch or the subsidiary company can provide a channel for the transmission of the latest improvements from the developed to the underdeveloped countries. In the words of A.K. Cairecross, There is a no question that the branch factory is a highly effective way of improvement technology. It usually provides, along with the technical expertise, the capital that is not easily mobilized in underdeveloped countries for new industrial countries for new industrial ventures and the managerial experience that can so rarely be supplied by them.

The modus operandi of the multinationals in spreading there is very interesting. Like the East India Company which came to India as a trading company and then spread its net throughout the country to become politically dominant, these multinationals first start their activities in extractive industries or control raw materials in the host countries and then slowly enter the manufacturing and service sectors.

Contents
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1 Market imperfections 2 International power o 2.1 Tax competition o 2.2 Market withdrawal o 2.3 Lobbying o 2.4 Patents 3 Culture 4 Different methods of communication across different cultures 5 Seven Methods of managing across cultures 6 Advertisement in different countries 7 Companies that adapted to foreign market successfully 8 Companies that failed to adapt to foreign culture 9 Transnational Corporations 10 Micro-multinationals 11 Criticism of multinationals 12 See also 13 References 14 External links

[edit] Market imperfections

It may seem strange that a corporation can decide to do business in a different country, where it does not know the laws, local customs or business practices.[1] Why is it not more efficient to combine assets of value overseas with local factors of production at lower costs by renting or selling them to local investors?[1] One reason is that the use of the market for coordinating the behaviour of agents located in different countries is less efficient than coordinating them by a multinational enterprise as an institution.[1] The additional costs caused by the entrance in foreign markets are of less interest for the local enterprise.[1] According to Hymer, Kindleberger and Caves, the existence of MNCs is reasoned by structural market imperfections for final products.[4] In Hymer's example, there are considered two firms as monopolists in their own market and isolated from competition by

transportation costs and other tariff and non-tariff barriers. If these costs decrease, both are forced to competition; which will reduce their profits.[4] The firms can maximize their joint income by a merger or acquisition, which will lower the competition in the shared market.[4] Due to the transformation of two separated companies into one MNc the pecuniary externalities are going to be internalized.[4] However, this does not mean that there is an improvement for the society.[4] This could also be the case if there are few substitutes or limited licenses in a foreign market.[5] The consolidation is often established by acquisition, merger or the vertical integration of the potential licensee into overseas manufacturing.[5] This makes it easy for the MNE to enforce price discrimination schemes in various countries.[5] Therefore Hymer considered the emergence of multinational firms as "an (negative) instrument for restraining competition between firms of different nations".[6] Market imperfections had been considered by Hymer as structural and caused by the deviations from perfect competition in the final product markets.[7] Further reasons are originated from the control of proprietary technology and distribution systems, scale economies, privileged access to inputs and product differentiation.[7] In the absence of these factors, market are fully efficient.[1] The transaction costs theories of MNEs had been developed simultaneously and independently by McManus (1972), Buckley & Casson (1976) Brown (1976) and Hennart (1977, 1982).[1] All these authors claimed that market imperfections are inherent conditions in markets and MNEs are institutions that try to bypass these imperfections.[1] The imperfections in markets are natural as the neoclassical assumptions like full knowledge and enforcement do not exist in real markets.[8]

[edit] International power

[edit] Tax competition
Multinational corporations are important actors in processes of globalization. National and local governments often compete against one another to attract MNC facilities, with the expectation of increased tax revenue, employment, and economic activity. To compete, political entities may offer MNCs incentives such as tax breaks, pledges of governmental assistance or subsidized infrastructure, or lax environmental and labor regulations. These ways of attracting foreign investment may be criticized as a race to the bottom, a push towards greater autonomy for corporations, or both. On the other hand, economist Jagdish Bhagwati has argued that in countries with comparatively low labor costs and weak environmental and social protection, multinationals actually bring about a 'race to the top.' While multinationals will certainly see a low tax burden or low labor costs as an element of comparative advantage, Bhagwati disputes the existence of evidence suggesting that MNCs deliberately avail themselves of lax environmental regulation or poor labor standards. As Bhagwati has pointed out, MNC profits are tied to operational efficiency, which includes a high degree of standardisation. Thus, MNCs are likely to adapt production processes in many of their operations to conform to the standards of the most rigorous jurisdiction in which they operate (this tends to be either the USA, Japan, or the EU). As for

labor costs, while MNCs clearly pay workers in developing countries far below levels in countries where labor productivity is high (and accordingly, will adopt more labor-intensive production processes), they also tend to pay a premium over local labor rates of 10 to 100 percent.[9] Finally, depending on the nature of the MNC, investment in any country reflects a desire for a medium- to long-term return, as establishing plant, training workers, etc., can be costly. Once established in a jurisdiction, therefore, MNCs are potentially vulnerable to arbitrary government intervention such as expropriation, sudden contract renegotiation, the arbitrary withdrawal or compulsory purchase of licenses, etc. Thus, both the negotiating power of MNCs and the 'race to the bottom' critique may be overstated, while understating the benefits (besides tax revenue) of MNCs becoming established in a jurisdiction.

[edit] Market withdrawal

Because of their size, multinationals can have a significant impact on government policy, primarily through the threat of market withdrawal.[10] For example, in an effort to reduce health care costs, some countries have tried to force pharmaceutical companies to license their patented drugs to local competitors for a very low fee, thereby artificially lowering the price. When faced with that threat, multinational pharmaceutical firms have simply withdrawn from the market, which often leads to limited availability of advanced drugs. In these cases, governments have been forced to back down from their efforts. Similar corporate and government confrontations have occurred when governments tried to force MNCs to make their intellectual property public in an effort to gain technology for local entrepreneurs. When companies are faced with the option of losing a core competitive technological advantage or withdrawing from a national market, they may choose the latter. This withdrawal often causes governments to change policy. Countries that have been the most successful in this type of confrontation with multinational corporations are large countries such as United States and Brazil[citation needed], which have viable indigenous market competitors.

[edit] Lobbying
Multinational corporate lobbying is directed at a range of issues of interest to businesses, from tariff structures to environmental regulations. There is no unified MNC perspective on any of these issues. Companies that have invested heavily in pollution control mechanisms may lobby for very tough environmental standards in an effort to force non-compliant competitors into a weaker position. Corporations lobby tariffs to restrict competition of foreign industries. For every tariff category that one multinational wants to have reduced, there is another multinational that wants the tariff raised. Even within the U.S. auto industry, the fraction of a company's imported components will vary, so some firms favor tighter import restrictions, while others favor looser ones. Multinational corporations such as Wal-mart and McDonald's benefit from government zoning laws, to create barriers to entry. Many industries such as General Electric and Boeing lobby the government to receive subsidies to preserve their monopoly.[11]

[edit] Patents

Many multinational corporations hold patents to prevent competitors from arising. For example, Adidas holds patents on shoe designs, Siemens A.G. holds many patents on equipment and infrastructure and Microsoft benefits from software patents.[12] The pharmaceutical companies lobby international agreements to enforce patent laws on others.

[edit] Culture
Culture is the set of values and beliefs shared by a group. This includes groups as small as social groups, and as large as a whole country. Since multinational companies operate in more than one country, they are exposed to many different cultures. Each culture has its own beliefs and values. To be successful in these foreign countries, multinational companies must have a global mindset, and be able to recognize and adapt to the differences.

[edit] Different methods of communication across different cultures

Communication is the process of conveying messages. Successful communication in the international business environment requires not only an understanding of language, but also the nonverbal aspects of communication that are part of any community[13] (Ferraro, pg 73). Different countries are going to have different ways of communicating. If certain executives of a company want to do business with people from different countries, they need to understand how to communicate clearly with them, without mistakenly doing something wrong. The most obvious way of communicating with different people is with words, and therefore, some executives learn how to speak the language spoken in the foreign country. This act can show that the executive is truly dedicated to the work, and that he is willing to do anything to complete the deal. Greeting rituals are sometimes overlooked, but they shouldnt be because they are more important in some parts of the world than others. In Japan, failure to show respect by exchanging business cards can get negotiations off to a very bad start(Schneider and Barsoux, pg 26) .[14] While in France, greetings are highly personal and individualas workers expect to be greeted individually(Schneider and Barsoux, pg 26)[14] Another form of communicating is through hand gestures. Often goes unnoticed, hand gestures are as important as words themselves because they too have meaning behind them. Cultures located in southern Europe and the Middle East employ a wide variety of gestures frequently with purposefulness(Ferraro, pg 79).[13] Some hand gestures have different meanings in different countries. For example, the hand gesture where the index finger and thumb touch and create a zero can mean different things in different places. In the US and UK, it means ok. In Russia it means zero. In Japan it refers to money. While in Brazil, it is viewed as an insult. [15] Time is another communication system. In western cultures, people like to get to the point of the matter in business meetings and conversations. However, in other countries like Saudi Arabia and Russia, it is customary to converse first about unrelated matters before starting the business discussions for which the meeting was arranged. Barging straight into the business issue, without informal small talk at the beginning, may make them very uncomfortable and may ruin the negotiations.(Miroshnik pg 12)[16]

[edit] Seven Methods of managing across cultures

(1) Hierarchy: "This refers to the way people view how much they defer to people in authority, whether they feel entitled to express themselves and how empowered they feel to take the initiative on matters before them. For example, Canada believes in egalitarianism, while nations like India, Japan, China, Germany, Mexico are highly hierarchical." (Schachter, pg b15)[17] (2) Group focus: This refers to whether people consider that accomplishment and responsibility are achieved through individual or group effort, and whether they tend to identify themselves as individuals or members of a group. Canadians are individualists while Brazilians, Chinese, Mexicans and Japanese are group-focused.(Schachter, pg b15)[17] (3) Relationships: This is about whether trust and relationships are viewed as a prerequisite for working with someone. Canadians focus primarily on the transaction, rushing to deal, while the Chinese, Italians, and Spaniards, for example, focus on nurturing relationships first.(Schachter, pg b15)[17] (4) Communication styles: This covers matters like verbal and non-verbal expression, how directly or indirectly people speak, and whether brevity or detail is valued in communication. Israel, Denmark, Germany and Sweden use a direct style, while indirect communication styles are the norm in China, United Arab Emirates, and Japan (Schachter, pg b15)[17] (5) Time orientation: This refers to the degree to which people believe adhere to schedules. United States, Germany, Denmark and Switzerland follow schedules while countries like Saudi Arabia, Spain, Thailand, and the United Arab Emirates are unconcerned about schedules and deadlines. (Schachter, pg b15)[17] (6) Change tolerance: How people are comfortable with change, risk-taking and innovation. Along with Australians, Canadians are the most tolerant of change, while Saudi Arabia, Indonesia, Mexico and Russia are change-averse. (Schachter, pg b15)[17] (7) Motivation: work/life balance: This characteristic examines whether people work to live or live to work. Canadians are driven by work and the status it provides although not as much as people in China, Japan, and the U.S. while in Norway, Saudi Arabia, United Arab Emirates, India and Mexico, family-work balance is treasured. (Schachter, pg b15) [17]

[edit] Advertisement in different countries

Another way for multinational companies to prove that they understand the specific market is through advertisement. Advertising products in different countries requires the companies to use specific methods of advertisement that is allowed by the tradition and culture of the country. For example, in western countries, sex appeal is used a lot in advertising many different products. It is used to grab attention of customers and is used to boost sales. This strategy however wont be successful in countries that are very religious like most Arabic countries where the dominant religion is Islam. In those countries people, especially girls, are mostly covered and so wont be

wearing very revealing clothes. Therefore, ads that use sex appeal, like girls in bikinis for example, wont be used. One company that used proper advertisement was Procter and Gamble. Companies adjust advertisements to the nationality of their clients. The Japanese prefers to buy shampoo which uses Japanese girls in its advertisements. Russian housewives prefer washing powder that uses Russian housewives instead of American housewives in its advertisements.(Miroshnik, pg 8)[18]

[edit] Companies that adapted to foreign market successfully

Just because a large company is very successful in one country, it doesnt mean that it will be successful in another country, especially if that country has a completely different culture. McDonalds is one of the largest companies in the world. However, it has adapted to the different cultures to make sure it is successful. In France, McDonald's added tablecloths and candles to improve the ambience at some eateries and introduced waiter service at certain outlets because they found that most Europeans prefer leisurely rather than fast food dining (Stern, pg A07).[19] In addition to space, McDonalds has changed its menus from one country to another, offering food that locals usually eat: in France, a burger has mustard and ciabatta rolls instead of regular buns. In Japan, fried egg burgers were offered. In Saudi Arabia, in accordance with the religious beliefs there, Starbucks has changed its logo and removed the girl from the picture. In addition, Starbucks branches there usually have two sections, one for the females and one for the males. This is the case with most stores since men arent allowed to sit with women.

[edit] Companies that failed to adapt to foreign culture

In many occasions, a lot of the larger companies think that because they are a large corporation, they can succeed anywhere without changing anything. This tactic proved wrong, as many companies have failed and were forced to shutdown foreign branches. The biggest example was When Wal-Mart expanded in Germany in 1997, it hoped that Germans, like Americans, would scoop up its low-priced items. By July 2006, Wal-Mart had closed its German operations and absorbed $1 billion in losses. This was because they didnt adjust to the German culture where people preferred frequently specialty stores, not one-stop shops (Stern pg A07) .[19] Another example is Daimler AG, it failed in its acquisition of Chrysler because its disciplined, buttoneddown executives could never meld with their more freewheeling American counterparts. (Schachter, pg b15) .[17]

[edit] Transnational Corporations

A Transnational Corporation (TNC) differs from a traditional MNC in that it does not identify itself with one national home. Whilst traditional MNCs are national companies with foreign subsidiaries,[20] TNCs spread out their operations in many countries sustaining high levels of local responsiveness.[21] An example of a TNC is Nestl who employ senior executives from many countries and try to make decisions from a global perspective rather than from one centralised headquarters.[22] However, the terms TNC and MNC are often used interchangeably. A study of Dutch multi-national corporations showed that foreign expansions best unfold sequentionally, consistent with the notions of organizational learning. Firms ought to diversify

first into culturally (and less so geographically) nearby countries before they venture farther away. They do so more successfully if they also follow a learning process by mode ( e.g, greenfield based expansion versus acquisitions or equity joint ventures) or by level of ownership.[23]

[edit] Micro-multinationals
Enabled by Internet based communication tools, a new breed of multinational companies is growing in numbers.[24] These multinationals start operating in different countries from the very early stages. These companies are being called micro-multinationals. [25] What differentiates micro-multinationals from the large MNCs is the fact that they are small businesses. Some of these micro-multinationals, particularly software development companies, have been hiring employees in multiple countries from the beginning of the Internet era. But more and more micro-multinationals are actively starting to market their products and services in various countries. Internet tools like Google, Yahoo, MSN, Ebay and Amazon make it easier for the micro-multinationals to reach potential customers in other countries. Service sector micro-multinationals, like Facebook, Alibaba etc. started as dispersed virtual businesses with employees, clients and resources located in various countries. Their rapid growth is a direct result of being able to use the internet, cheaper telephony and lower traveling costs to create unique business opportunities. Low cost SaaS (Software As A Service) suites make it easier for these companies to operate without a physical office. Hal Varian, Chief Economist at Google and a professor of information economics at U.C. Berkeley, said in April 2010, "Immigration today, thanks to the Web, means something very different than it used to mean. There's no longer a brain drain but brain circulation. People now doing startups understand what opportunities are available to them around the world and work to harness it from a distance rather than move people from one place to another.

Policy framework for multinational, corporations in India-a historical, perspective

Abstract In the present times, no economy can escape the wave of globalization. As far as India's story is concerned, though it is one of the most attractive destinations of the world today (World Investment Report, 2008 and Ernst and Young, 2008), yet the origin of mncs is not new rather a three centuries old phenomenon. In view of that, the policy makers have been following different policies as required with the changing times. The present paper is an attempt to analyze policy framework concerning multinational corporations in India. The findings reveal that MNC investors are finding some hindrances and lags in the present policy framework and thereby

suggest some measures to make this [policy environment investor friendly, thereby proving to be a boon for both India as well as these MNC investors. I. INTRODUCTION The existence of Multinational Corporations (MNCs) in India is not a recent phenomenon (Belhoste and Grasset, 2008) rather such subsistence is approximately three centuries old. As such, the historical background of MNCs in India can be traced back to as early as 1600s whereby the British capital came to dominate the Indian scene through their Multinational Corporation known as East India Company in the colonial era. However, demarcation of the clear boundary lines of this history is hampered by the lack of abundant and authentic data. Moreover, such outlining is also obstructed by the discontinuity in the nature of the data relating to these MNCs. Furthermore, the data available with regard to such FDI in one secondary source do not match with that of another source (Nayak, 2006). As a result of this, researchers could not portray the complete history of Multinational Corporations and FDI pouring in India even during the post independence era. The present paper is an attempt to fill this gap and resultant policy framework to regulate these multinational corporations from time to time. SECTION II II. OBJECTIVES AND RESEARCH METHODOLOGY The present paper attempts to trace out the historical background of MNCs in India and to critically evaluate the effectiveness of existing policy framework in order to contribute in a constructive manner towards policy development in future by highlighting the hindrances faced by foreign investors in present policy regime. The rationale of the paper arises from the fact that only few studies have been conducted in this area and that too deal with the subject indirectly. Therefore, the present study is an attempt to fill up this gap. For the purpose of this study,--the Multinational Corporations (MNCs) are defined as all foreign multinational corporations existing in India as per the definition given by RBI and IMF (1). The paper has been divided into six sections. Section I introduces the paper. Section II discusses the objectives and the methodology of the paper. Section III appraises the historical background and policy of the government towards foreign multinational corporations in the pre as well as post independence era. Section IV of the paper discusses the present legal and regulatory status for the entry of the MNCs in India. Section V of the paper undertakes critical analysis of the policy framework by keeping in view the difficulties of the MNCs into account. Section VI concludes the paper along with suitable recommendations and suggestions. As far as methodological part of this study is concerned, the study is based on secondary data sources. Existing literature, reports and consultation papers of government of India, reserve bank of India and other reports have been consulted to attain the objectives of the study. SECTION III

III. INDIAN POLICY FRAMEWORK CONCERNING MNCS DURING PRE AND POST INDEPENDENCE ERA To discuss the historical background and policy framework for the MNCs, the analsysis has been divided into two periods i.e. pre and post independence era: (a) Pre Independence Era Policy According to Nayak (2006), the period from 1900s-1918 can be called as the first phase of FDI in India when there were no restrictions on the nature as well as type of FDI pouring into India. Majority of these investments at those times were exploitative in nature and were just concentrating in the sectors such as mining and extractive industries to suit the general British economic interest. It is a noticeable fact that even in the post independence era, a major pie of the FDI source of India continued to come from the same source. It is interesting to note that despite of allowance of this free flow of FDI, no other country was interested in investing in India other than U.K. and all FDI coming to India during that period were sourced through the Managing Agents from U.K. However, the period from 1919-1947 is considered to be more important when the FDI actually originated in India. This phase can be called as second phase of pre-independence FDI history in India. Import duties were introduced during this period to stimulate various British companies to invest in the" manufacturing sector in order to protect their businesses in India. Though some Japanese companies also enhanced their trade share with India, yet U.K. maintained its position as most dominant investor in India during this period. (b) Post Independence Era Policy Before if dependence, Indian government was quite comfortable with the "laissez faire" policy adopted by British government earlier; therefore, India was not having its own foreign policy. However, after independence, various issues relating to foreign capital and its accompanying expertise sought attention of the policy makers. Therefore, the government of India had to allow the operations of the MNCs on such terms that best suited to national interests during postindependence era. The following were the major objectives of policy concerning FDI: (i) to treat foreign direct investment as a medium to acquire modern advanced technology; and (ii) to mobilize resources, especially in terms of foreign exchange. With the changing times, the policy of Indian governments kept on changing as per economic and political exigencies prevailing at those times. Accordingly, it can be spilt into four phases (Kumar, 1998 and Chopra, 2003). Whereas in 1960s, these policies were quite liberal, yet these became very stringent in 1970s. However, these were again liberalized in 1980s and real liberalization occurred in 1990s. The main four phases for" Indian policy framework concerning MNCs can be classified hereunder: Phase I--1948-1966: The Period of "Cautious Welcome Policy"

Re first and unique foreign policy of India to deal with incoming FDI was pronounced by the then Prime Minister Pandit Jawahar Lal Nehru at the very dawn of independence as on 6th April, 1947 (Mathur, 1992). Despite of many critics of his world wide view, a wide national consensus had emerged for his ideas on independent foreign policy of independent India (Mohan, 2006). Nehru statement in parliament considered foreign investment as "necessary" not only to supplement domestic capital but also to secure scientific, technical and industrial knowledge and capital equipment (Kidron, 1965). Therefore, following mutually advantageous promises were made to the MNCs: * All undertakings, whether Indian or foreign will have to conform with the general requirements of the government's overall industrial policy; * No discrimination would be made by Indian policy makers between the foreign and the domestic undertakings; * As far as remittances of profits and repatriation of capital was concerned, reasonable facilities would be granted to foreign investors as permitted by foreign exchange position at prevailing time; * In case a particular industry has to be nationalized; a fair and equitable compensation would be granted to the foreign investors having a stake in that undertaking; and * By rule, major interest, ownership and effective control of the undertaking should be in Indian hands (Indian Investment Centre, 1985). After carrying out industrialization in India to a satisfactory extent, new industrial policy resolution of April, 1956 made various private domestic as well as foreign companies a part of India's public sector. As a result of new policy, MNCs had to venture through technical collaborations during that period in India. However, during the tenure of second five year plan (1956-61), government faced twos severe crisis in the form of foreign exchange and financial resource mobilization. To deal with this crisis, government liberalized its attitude towards MNCs and foreign investment in two ways: (i) A more frequent equity participation was allowed to foreign enterprises; and (ii) In lieu of royalties and fees, equity capital was accepted in technical collaborations. Further, a number of other incentives such as tax concessions, simplification of licensing procedures, double taxation avoidance agreements with certain countries and extension of agency for international development (AID) Investment guarantee to cover US private investment in India were also given to lure foreign companies (Kumar, 1998 and Chopra, 2003). This led to "ambitious" investments by many companies from countries such as UK and USA (Nayak, 2006).

In order to further combat foreign exchange crisis, government further de-reserved some industries such as drugs, aluminum, heavy electrical equipment, fertilizers, synthetic rubber etc. in 1961 (Mathur, 1992; Kumar, 1998 and Chopra, 2003). Further, the Finance Act of 1965 also made provision for certain additional tax concessions. Phase II--1967-1979: The Period of "Selective and Restrictive Policy" The liberal attitude adopted in second five year plan had to be changed in the early seventies due to significant outflow of foreign exchange in the form of remittances of dividends, profits, royalties and technical less in this period. Therefore, to put an end to this phenomenon, policy of government became highly restrictive as far as foreign exchange, type of FDI and ownership of foreign companies was concerned. Government also set up a new agency called "foreign investment board" and classified industries in order to regulate flow of foreign capital in these sectors. A new regulation called Foreign Exchange Regulation Act (FERA) was also enacted in order to tighten the scope of FDI regime in India. With the operation of FERA, all existing companies came under the direct control of reserve bank of India. FERA resulted in dilution of share of large number of companies as nearly 84 companies are reported to divest fro India during that period (Nayak, 2006). In order to review the extent of technology brought in by these MNCs, a committee called "technical evaluation committee" was formed and foreign investment proposals were now discussed with the council of scientific and industrial research (CSIR) and department of science and technology (DST). It was also specified to assign primary role to Indian consultant in case of engagement of a foreign consultant. Phase III--1980-1990: The Period of "Partial Liberalization" In this phase, a new direction was given to the history of FDI in India, especially in the mideighties. This happened due to two reasons i.e. Second oil crisis and Failure of India to give boost to its manufactured exports. As a result of this development, the balance of payment position situation was further deteriorated. Therefore, a number of policy measures were taken by the government to encourage and maintain operations of Multinational Corporations in India. The main highlights of the policy of government of India during this period were: * Firstly, liberalization of imports of capital goods and technology in order to stress the modernization of the plants and equipments; * Second, gradual reduction in import restrictions and tariffs in order to expose the Indian economy to competition; and * Thirdly, to assign an .important role to multinational corporations for promotion of export of manufactured goods on a big scale.

The Reserve Bank of India also simplified procedural formalities relating to exchange control. Further, the list of items under Open General License (OGL) was also expanded for allowing imports of raw materials and capital goods. In 1986, the tax rates on royalties were also reduced from 40 to 30 per cent. The scope of the technical development fund was also widened to include import of all kinds of capital equipments, technical know-how and assistance, drawings and design and consultancy services. Moreover, the ceiling of this fund was raised to a foreign exchange up to Rs. 20 million per year. The process of industrial policy reforms aimed at fostering greater competition, efficiency and growth in the industry through a stable, pragmatic and non-discriminatory policy for foreign direct investment. Although, the amount of FDI augmented by over 13 times during this period, foreign companies invested 'cautiously' during this period with an attitude of wait and watch (Nayak, 2006). Phase IV--1991-2001: The Period of "Liberalization and Open Door Policy" In the early nineties, the balance of payments problem of India had turned quite severe. Along with, a rapid increase in India's external debt and increasing political uncertainty made international credit rating agencies to lower both short and long term borrowing rating of India. Therefore, the new government headed by Mr. P. V. Narasimha Rao initiated a programme of macro-economic stabilization and structural adjustment programme at the behest of IMF and World Bank. This resulted into liberalization of Economic policies in order to encourage investment and accelerate economic growth (Beena et al., 2004). The scenario relating to foreign direct investment in India could also not remain unaltered by these new policy developments as in order to stabilize India's external sector and to review the declining credit rating of the country, the government gave a second thought to the foreign investment policy of India. A Foreign Investment Promotion Board (FIPB) was authorized to provide a single window clearance system in the Prime Minister's office in order to invite and facilitate MNC investment in India. For the purpose of expansion in the priority industries, the existing companies were also allowed to raise their foreign equity levels up to 51 per cent. The use of foreign brand names for products manufactured in domestic industry (which was earlier restricted) was also liberalized. India also became a signatory to the Convention of the Multilateral Investment Guarantee Agency (MIGA) for protection of foreign investments. The Foreign Exchange Regulation Act (FERA), 1973 was revised and earlier restrictions placed on MNCs in FERA were lifted. Moreover, the companies having more than 40 per cent of foreign equity were treated on par with fully Indian-owned companies. New sectors such as mining, banking, telecommunications, highways construction and management were thrown open to private as wen as foreign owned companies. Further, the international trade policy regime was also considerably liberalized with lower tariffs on various importable goods and negative list for imports was also sharp pruned. Furthermore, the Rupee was also made convertible first on trade account and finally on current account partially. SECTION IV

IV. POLICY DEALING WITH ENTRY OPTIONS FOR MNCS IN INDIA A foreign multinational corporation planning to set up its business operations in India can enter through the following modes: * As an Incorporated Entity: to become an incorporated entity, a MNC can opt for becoming an incorporated entity under Companies Act, 1956 through: (i) Joint ventures; or (ii) A wholly owned subsidiaries. Depending on the requirements of the investor and subject to any equity caps prescribed in respect of the area of activities under the Foreign Direct Investment (FDI) policy, foreign equity in such companies can be up to 100% of the total equity. * As an Unincorporated Entity: alternatively, any foreign multinational company can enter into business operations in India by opening a: (i) Liaison Office/Representative Office; (ii) Project Office; or (iii) Branch Office. Such offices of multinational corporations can undertake activities permitted under the Foreign Exchange Management Regulations, 2000. V. INVESTMENT ROUTES OF FOREIGN MULTINATIONAL CORPORATION IN INDIA (a) Automatic approval--by the Country's Central bank i.e. the Reserve Bank of India; or (b) Through the Foreign Investment Promotion Board (FIPB). Automatic approval of Reserve Bank of India can be availed if the FDI in the equity of company does not exceed: * 50 per cent in the industries given in Annexure III A of the new industrial policy; * 51 per cent in the industries given in Annexure III B of the new industrial policy; * 74 per cent in the industries given in Annexure III C of the new industrial policy; and * 100 per cent in the industries given in Annexure III D of the new industrial policy. In the above cases, the intending company is required only to report to Reserve Bank of India within 30 days of the receipt of foreign equity/allotment of the shares. For other proposals that

fail to qualify automatic approval criteria, approval of FIPB is required (Reserve Bank of India, Department of Industrial Policy & Promotion, IBEF, 2008). The sector wise detail of the permitted foreign equity limit is given in table I. VI. LEGAL POLICY FRAMEWORK GOVERNING FOREIGN CAPITAL IN INDIA The policy framework in India has been almost same for Indian as well as foreign private investment. As the motive to regulate FDI since post independence era was to ensure majority control to remain in Indian hands to the extent possible, therefore several legal rules and regulations were implemented as a part of policy framework at that time that discouraged foreign ownership in most industries for many years. Starting from Industrial Policy Regulation, 1948, this framework further included Industrial (Development and Regulation) Act, 1951 (IDRA), the features of which had their roots lying in the Second World War period. Similarly, Monopolies and Restrictive Trade Practices Act, 1969 (MRTP) was required to be adopted due to the Directive Principles of State Policy as enshrined in the Constitution of India. In addition, to give a boost to the principle of self-reliance, conservation of the limited foreign exchange resources, rational utilization of the same and to curb external liabilities for the coming generations, the Foreign Exchange Regulation Act (FERA) was also adopted in 1973. All these acts produced an array of rules and administrative norms that in turn led to creation of a wide and complex system of controls and procedures involving extensive delays and uncertainties in new investments. SECTION V VII. CRITICAL ANALYSIS OF EXISTING POLICY FRAMEWORK CONCERNING MNCS Although the early nineties free market reforms initiated were meant to spur the growth of foreign investment in India, yet the objectives have not been fully realized due to some hurdles in the way. Mr Amrit Kiran Singh, Chairman of The American Chamber of Commerce in India (AMCHAM), while submitting a compendium of position papers on key industries to the Ministries concerned pointed out "poor infrastructure, belligerent tax administration, fragmented markets, and pragmatic labour laws" as hurdles to FDI. Mr Singh opined that if these issues are resolved, multinational companies present in India and those in waiting would surely expand operations. Therefore, based on the analysis of above policy frameworks from time to time and keeping in mind the view of various renowned scholars and experts as well as potential investors, it is suggested to undertake a critical evaluation of existing impediments and remove these in order to pave the way for the further development through the mutually advantageous existence of Multinational Corporations in the country. These are: 1. Levels of Bureaucracy: Central versus State It has been observed that sometimes the rules of centre and state are in conflict with each other that lead to creation of a confusion among the foreign investors. For example, from June 2007, in liquor business, all foreign direct investments (FDI) have been allowed by Union government through the "automatic" route by abolition of the licenses earlier required for most manufacturing businesses in the 1980s. However, in spite of this change in policy measure, FDI failed to move in this sector. This happened due to continuance of the prevailing "state" laws as these laws

continued to require licensing as well as levying of a tax in the form of excise duty. Therefore, foreign multinational corporations are still preferring to enter into this business through joint ventures, partnerships, manufacturing alliances, taking leases from domestic companies, operating through "work contracts" or by acquiring domestic companies already having licenses rather than acquiring licenses from government. This was so because, these firms found the state laws to be time consuming, cumbersome and also lacking inter-state uniformity. Therefore, majority of these companies did not find any sense of the privileges granted in the form of automatic route of investment provided by the union government. This hurdle has also attracted the attention of Federation of Indian Chamber of Commerce and Industries (FICCI) (Business Line, 2002). Not only this, but some states are also charging hefty Amounts for such licenses e.g. Andhra Pradesh is charging highest license fee of 2.5 Crore rupees at present. Therefore, without the coordination of "Union-State" policies, manufacturing companies will still hesitate to invest in India in spite of its liberalized regime. 2. Exorbitantly High Tax Rate Structures India has one of the highest corporate tax rate structures as compared to other countries in the Asia-pacific region (KPMG, 2007 and ENS Economic Bureau, 2007). India's tax rates are not only higher as compared to countries in the Asia-pacific region (see table III), but also as compared to other nations and economies of the World. In a review of corporate tax rates at the beginning of 2007 in 92 countries, the average tax rate in the EU was found to be 24.2%, compared with 27.8% in the OECD countries and 28% in Latin America, whereas India's tax rate is still hovering around an exorbitantly high of above 40 per cent (KPMG, 2007). If compared to the policy structure relating to taxation of one of its closest competitors i.e. China, India lags behind in various policy measures such as: * "Two plus Three" tax holiday for Manufacturing Foreign Investment Enterprises ("FIEs") which implies that a Tax holiday for all manufacturing FIEs starting with an initial two-year exemption followed by 50 per cent reduction in tax rate for three years, beginning from the first profitable year aider adjusting for tax losses; * Attractive tax rate of 15 per cent tax rate in Special Economic Zones; 24 per cent tax rate in certain coastal cities; * Foreign investor reinvesting its share of profits for at least five years to get a 40 per cent refund of tax paid on sum reinvested (such refund may be granted up to 100 per cent if such reinvestment is made in advanced technology industries or export oriented enterprises); * For high tech FIEs, a three-year tax holiday extension is applicable. In addition, these High Tech FIEs will be taxed at a "reduced" rate of 15 per cent to 20 per cent; * Extended 50 per cent tax rate reduction for export oriented FIEs; * Preferential tax rates of 15 per cent and 24 per cent if investment is made in "certain" regions; and

* Dividends repatriated to foreign investors by FIEs with at least 25 per cent registered capital held by foreign shareholders are exempted. However, these dividends are subject to tax in Indian case. It implies that India direly needs to review its policy concerning taxes at an immediate instance and by following Kelkar Committee recommendations, India should bring, down its tax rates to compete with other nations attracting FDI in the priority sectors. Efforts should be made to amend the tax laws by incorporating new provisions such as reduced tax rates on profits, tax holidays, accounting rules allowing for accelerated depreciation and loss carry forwards for tax purposes and reduced tariffs on imported equipments and raw materials etc. 3. Lack of Developed Infrastructure Extensive and efficient infrastructure is an essential driver of competitiveness. It is critical for ensuring the effective functioning of the economy, as it is an important factor determining the location of economic activity and the kinds of activities or sectors that can develop in a particular economy (Global Competitiveness Report, 2008). However, as far as India is concerned, existence of the state-controlled physical infrastructure is often considered as the weakest link as well as major impediment to MNCs entry, (Sheel, 2001) especially in the manufacturing sector. In a survey conducted by FICCI, roughly 43 per cent of the respondents regarded India's ports and airport facilities as substandard as compared to international standards. In addition, investors also remained concerned with the lack of improvement in other infrastructural facilities such as transport, roads, power and water availability also. However, infrastructural factor is an important decider in choice of MNCs for starting their operations at state level (Badle, 1998). States such as Gujarat, Maharashtra, Karnataka, Tamil Naidu and Andhra Pradesh etc. are receiving a major pie in the share of FDI (Department of Industrial Policy & Promotion, 2008) as compared to other states that lag behind in infrastructural facilities. Therefore, policy relating to infrastructure definitely requires an immediate attention of the policy makers. 4. Corruption Kumar (2000) observes that a combination of legal hurdles, lack of institutional reforms, bureaucratic decision-making and the allegations of corruption at the top level have dragged foreign investors away from India. Treadgold (1998) also states, foreign investors find it difficult to cut a path through the paper work of overlapping government agencies. The humongous bureaucratic structure has created a fertile ground for corruption. Moreover, most foreign investors have become apprehensive of the country's past record of discrimination against foreign multinational companies and India's prior reputation of a slow, difficult, bureaucracy ridden environment to do business (Teisch and Stoever, 1999). This is evidenced by the facts of Transparency International, a global civil society organization which ranked India at a far away position as compared to other Asia-Pacific countries (see table IV) in the perception of corruption scenario by the potential investors looking for a destination to invest. 5. Political Instability

The foreign investors perceive Indian political environment to be inharmonious and peevish for creating an amicable atmosphere for foreign investment (Kapur and Ramamurti, 2001). Foreign investors hesitate to invest in India due to the political instability that in turn results in to instable policies coming in frequently and without expectations. Not only this, the multiplicity of regional political parties results into a clears majority at the centre level forming shaky and insecure coalition governments. For example, there were four general elections and six prime ministers during a short span of time. In such an environment, the much required economic reforms turn out to be sluggish as well as inadequate. Instead of opting for a clear and unshaken attitude towards reforms easing foreign investment, governments are repeatedly concerned with diluting the reforms in order to keep their coalition partners on board (Kripalani, 1999) 6. Inflexible Labour Laws Global Competitive Report, 2008-09 ranked India much behind (see table V) in terms of labor market flexibility. The causes of such inflexibility are rooted in the laws and regulations prevailing in India. Labor laws are considerably stringent in India as compared to other countries, MNC employers are generally discouraged to give a boost to labor hiring due to the inflexibility brought out by Indian laws and regulations during cyclical downturns. As a result, these companies are abandoned from closing down their inefficient and unprofitable businesses. Srinivasan (2000) views that some of the Indian labor laws are perceived to be extremely outdated, rigid and inadequate particularly Contract Labour (Regulation & Abolition) Act, 1948; Industrial Disputes Act, 1947; Minimum Wages Act, 1948; Workmen's Compensation Act, 1923; Employees' Provident Funds and Miscellaneous Provisions Act, 1952; ESI Act, 1948 and Factories Act, 1948. The main problems identified in these acts include cumbersome exit procedures, maintenance of on site records and myriad inspections etc. Ramamurthi (2000) considers one of the biggest impediments to privatization in India to be lack of an exit policy i.e. a policy to govern the dismissal of redundant workers. The present Indian labor laws forbid layoffs of workers for any reason (Kripalani, 1998). These laws protect the workers and put a stop to any legitimate attempts to restructure business. Further, to retrench unnecessary workers, firms require approval from both employees and state governments-approval that is rarely given (Kripalani, 2000). 7. Government Ceiling on Foreign Ownership United States companies represented by American Chamber of Commerce (AmCham) have cited ceiling on foreign ownership by the policy makers as the major backdrop of Indian policy. As per AmCham, due to the barriers to FDI, India is able to attract only $5 billion from the Untied States, whereas at the same tine China grabs about $60 billion (Business Line, 2006). These companies wish that the policy makers should remove the limit on foreign ownership that effectively prevents foreign control of Indian businesses (Piggott, 2003). 8. The Excessively Rigid Role of RBI The foreign investors blame Reserve Bank of India (RBI) for the slower inflow of FDI in India due to various reasons such as (i) excessive rigidity in granting permissions; (ii) delay in

allowing authorization for outward remittances; and (iii) problems with downstream investment facility under automatic route (Srinivasan, 2000). SECTION VI VII. CONCLUSION AND SUGGESTIONS The foregoing analysis leads to the conclusion that much remains to be implemented in order to improve the consistency in policy making and executing, improving quality of governance and overall regulatory framework as well. This is particularly imperative in the case of foreign investments coming in sectors such as infrastructure that are evidently critical for overall growth and development of India in the years to come. However, in spite of this, the policy makers need to deal fairly with the decision to open up various sectors for MNCs in India. The following suggestions could be a considered by the policy makers for future framework of policy in order to incorporate measures to overcome hurdles faced by multinational corporations: * The industrial policy statement of 1990 needs further changes with regard to foreign investment and technology. It fails to understand the likely impact of foreign investment on balance of payments, self-reliance, indigenous R&D, employment and India's stand on MNCs etc. Therefore, it is recommended that clear guidelines should be laid down on such issues of national importance. * The rationale for various countries to restrict FDI is to avoid the risk of foreign multinational corporations to out-compete the domestic corporations and enterprises. However, government should undertake a careful sectoral analysis for identification of the sectors where domestic players are unable to furnish the needs of growing domestic as well as export demand for goods and services or these do not inhibit the necessary ability or capacity to provide the required quality standards. This will not only result into bringing the investment into those sectors but also arousal of the sense of competition and generation of spillovers (8) to the domestic players that will ultimately lead to benefiting the domestic economy to grow in the long run. * As policy makers are interested in development of infrastructure for both domestic and foreign interests, therefore, consideration should be given for the involvement of foreign players in creation of these facilities. Even state governments are ready to welcoming infrastructural projects such as roads, rural electrification, and power generation and transmission (Pathak et al., 2000). However, care must be taken to deal with the entry and extent of investment by MNCs in certain complex sectors in order to prevent monopolies in public utilities to foreign firms. Liberalization of Indian economy needs to be a very cautious and balanced liberalization instead of a "rushed liberalization".