Kumar, Nagesh;
Multinational Enterprises in India: Industrial Distribution, Characteristics, and Performance
Routledge (International Business Series), 1990, 141 pages
ISBN 0415043387, 9780415043380
topics: | india | business | history | kanpur | policy | global |
This volume, written at the start of the liberalization period in 1985, presents a history of Indian industrial policy (focused on FDI) from independence till about 1987. The author, who is an economist with an international economics bureau in Delhi, follows this up with a number of econometric analyses which at least I found less interesting than the lucid presentation of the policies and their reasons presented in chapters 1 and 2. Before reading this book, I was rather ignorant, and used to credit Manmohan Singh with the liberalization regime in India. But it turns out that FDI liberalization started well before, around 1983-84, when Pranab Mukherjee was FM, and was carried forward by VP Singh, (FM 1984-87). But subsequent years did much damage to the balance of payment situation, so that the country faced a crisis when the Rao government took over in 1991. Narasimha Rao and Manmohan had to turn to international lending bodies, and it was under their intense pressure that they instituted the large-scale dismantling of the socialist economy starting in 1993.
The story of India's policies towards foreign investment reads like a
roller-coaster - liberal at independence, when foreign knowhow was being
wooed, to a severe tightening in the early 70s, to the big opening up in the
mid-80s (Finance minister: VP Singh)
The policies of the Indian government were more often reactions to events
and crises, rather than a proactive policy. Crises seem to have come up at
gaps of about a decade starting at independence, and the responses to these
crises were often completely opposed. Thus, the 1957 FX crisis led to a
greater invitation to FDI, whereas the 1968 FX crisis resulted in a
tightening of FDI.
1948-1958: restrictive policy, socialism: FDI's approved: 50 per
year.
1957 foreign exchange crisis: opening up, inviting greater FDI.
FDI's approved: 297 per year during 1959–66. High fraction (36%) of
these w financial participation (brought in FX).
1968 FX crisis : remittances to foreign investors were felt to be too
high, and the belts were tightened. imports were severely restricted.
Average number of FDI approvals per year came down, 1967–79: 242. Under FERA
(1973), Foreign financial collaborations dwindled more drastically, from
36.36% during 1959–66 to just 16.11% during 1967–79. [p. 19]
1979 oil crisis (second oil shock): realization that the country is
doing very poorly in exports. 100% export-oriented units welcomed.
average FDI approvals shot up to 744 over 1980–8. 22.8% of these
involved financial investment, and FX investment went up nearly 20x -
from Rs 5.3 crore to 93 crores.
It was the awareness that goods produced in India were inferior to the
west, common knowledge by then for several decades, but policified in
the Tandon Committee report to the Ministry of Commerce, 1980,
eventually led to the opening up of 1985.
1991 FX crisis (my notes): FX reserves were $1 bn (less than 1%
of what it would become ten years later). Rao and Singh had to turn to
IMF for help, and it was pressure from the international bodies that
catalyzed the most recent liberalization of India.
Reading this in the 2010s makes you aware of what a long journey India has
had. But sadly, it also reinforces how despite being a democracy, our
"policy initiatives" have been largely reactions to a series of crises, more
fire-fighting than any internally motivated drive.
This is further emphasized in texts such as Vivek Chibber's
Locked in Place: State-Building and Late Industrialization in India,
a more perceptive description (benefitting from an extra decade+ of insights)
contrasting the Indian industrial policy, a which focused more on "import
substitution" vs the Korea policy, focused on "export-led industrialization".
Both nations were equally de-industrial around 1950. Chibber argues that the
Korean policy was able to draw in a greater majority from the business
community. While both these govt policies eventually withered, the Korean
approah led to greater and more long-lasting changes.
Three distinct phases in the evolution of the government’s policy towards foreign investments: - from Independence up to the late 1960s, marked by a radual liberalization of attitude; - from the late 1960s through to the 1970s, characterized by a more selective stance - the 1980s, which heralded once again a liberal policy.
The Industrial Policy Resolution of April 1948: recognized the role of foreign capital in the rapid industrialization of the country. However, [a need was felt] to regulate foreign capital in the ‘national interest’. proposed: ensure that majority ownership and effective control remained, as a rule, in Indian hands. But the Foreign Investment Policy Statement (Apr 1949, Nehru) showed no intention of adopting legislation for the regulation of foreign capital. Indeed, foreign investment was considered necessary (earlier merely important) in supplementing Indian capital and for securing ‘scientific, technical and industrial knowledge and capital equipment’. Foreign investment was encouraged on mutually advantageous terms. Though the majority ownership in local hands was still preferred, it was no more to be a rule. Foreign investors were assured of no restrictions on the remittances of profits and dividends, fair compensation in case of acquisition, and were promised a ‘national treatment’. The non-discriminatory treatment accorded to foreign capital was, however, strongly resented by the domestic capital. Domestic enterprises found it difficult to compete with the foreign competition in consumer goods industries such as soaps by Lever Brothers, and fountain pen inks by the Parker Pen Co., and wanted the entry of the foreign enterprises to be restricted to certain areas in which domestic enterprise did not have the capability.2 Industrial Policy Resolution (April 1956): earmarked a number of important industries for future exploration by the public sector [these may eventually be reservedn for state industries]. But did not make any distinction within the private sector, or between domestic and foreign enterprises. This was in line with the adoption of a ‘socialistic pattern’ of society as the country’s goal, (Parliament 1954).
further liberalization : incentives and concessions for foreign capital. - the Indo- US Convertibility Agreement (1957) - tax concessions to foreign firms affecting salaries, wealth tax, and supertax - reductions in corporate tax on income and royalties were extended in the 1959 and 1961 budgets. - Double tax avoidance agreements signed with many source countries: United States, Sweden, Denmark, West Germany, and Japan. 1961: - Indian Investment Centre, with offices in major investor countries, set up. - list of industries with gaps in capacity in relation to Third 5-year plan targets. Included some of the more profitable industries earlier reserved for the public sector, such as drugs, aluminium, heavy electrical equipment, fertilizers, synthetic rubber, etc. - Officer on Special Duty at Ministry of Commerce and Industry to provide prompt and reliable guidance to foreign investors - foreign investment to cover the foreign exchange cost of plant and machinery in the approved projects would be welcome. - proportion of foreign held equity was to depend upon the sophistication of technology and requirement of foreign exchange; local majority ownership, though welcome was not to be insisted upon. In fact, as documented in certain studies, proposals involving foreign financial collaborations enjoyed a premium in government approvals during those years (Kidron 1965:262; IIPA 1983, chap 4). 1960s: Western multinational enterprises started showing real interest in India. In the early 1950s: only investment was in oil refineries (Kidron 1965:102, 157). 1957–63: 45 per cent of consents for new capital issues involved foreign investments, while the proportion for the period from 1951 to 1963 was 34 per cent (Kidron 1965:258). The Hathi Committee (1975) noted that it was in this period when most of the foreign drug firms set up their manufacturing subsidiaries in the country.
The liberalization of the policy towards foreign capital continued
till mid-1960s: liberal policy
==> outflow on account of remittances of dividends, profits, royalties, and
technical fees, etc., grew sharply and became a significant proportion
of the foreign exchange account of the country.
foreign exchange crisis in late 1960s: prompted a more restrictive attitude.
Mudaliar Committee on Foreign Collaborations (1966): new agency
called Foreign Investment Board (FIB) created, 1968.
- to deal with all FDI w > 40% foreign equity, except those with total
share capital > Rs 2 crore (to be referred to the Cabinet
Committee)
A sub-committee of FIB to approve cases where foreign held equity < 25% and
total equity investment up to 1 crore.
foreign investments unaccompanied by technology not to be favoured.
Three illustrative
lists of industries were issued which demarcated industries:
(a) foreign collaboration considered necessary,
(b) only technical collaboration could be permitted, and
(c) other areas where foreign investment might be permitted.
- royalty payments: generally did not exceed 5% (mainly in b and c)
- duration of collaborations reduced from ten to five years.
- restrictions on renewals of agreements
- restrictive clauses on sub-licensing of technology and exports (except to
countries where the technology supplier already had affiliates)
(Ministry of Industry 1982).
In 1976, a Technical Evaluation Committee set up to assist the FIB
in screening foreign collaboration proposals. Included representation
scientific agencies CSIR / DST.
wherever Indian consultancy was available it was to be utilized exclusively. If
foreign consultants were also required, the Indian consultants were to be given
a primary role.
Patent Act 1970: abolished ‘product’ patents in food, chemicals, and drugs, and
reduced the life of process patents from 16 to 7 years, and to 14 years
in other cases. It contained provisions of a world-wide search of
patent literature to establish the novelty of a product or process, and
compulsory licensing after three years.
implication: proposals with more than 40% foreign equity to be referred to the
Cabinet Committee ==> encouraged restriction of foreign participation
to 40 per cent.
From February 1972 the government began approving the expansion plans of those
companies with majority foreign equity, subject to their accepting a dilution
of foreign equity by raising a certain proportion of the estimated cost of
expansion through issues of additional equity to Indian nationals.
industrial policy (1970, made more concrete in 1973): restrict further
activities of foreign companies (along with those of local large industrial
houses) to a select group of core industries of ‘basic, critical and
strategic importance’.
Foreign Exchange Regulation Act (FERA) 1973, new act w far more bearing on the operations of foreign firms... has become the cornerstone of the regulatory framework for foreign investment in the coming years. [The FERA is] an Act to consolidate and amend the law regulating certain payments, dealings in foreign exchange and securities, transactions indirectly affecting foreign exchange and the import and export of currency and bullion, for the conservation of the foreign exchange resources of the country and the proper utilization thereof in the interest of the economic development of the country - preamble, FERA when the FERA came into force on 1 January 1974 all non-banking foreign branches (FBs) and companies with more than 40 % foreign equity were required to obtain the permission of Reserve Bank of India (RBI), which was to be granted subject to their accepting to Indianize or dilute their foreign equity as per the guidelines issued by the government for the implementation of the Act in 1973 and amended in 1976. Companies operating in the core sector (or Appendix I industries), tea plantations, and those engaged in manufacturing activities based on sophisticated technology or predominantly producing for exports were, however, permitted to retain up to 51 or 74 per cent foreign equity. FERA, therefore, put a general ceiling of 40 per cent on the foreign equity participation in the country. FERA brought a drastic change to the organizational structure of the foreign controlled sector in India. - all companies operating in the country (except the foreign airline/ shipping and banking companies) are now incorporated under the Indian Companies Act. This puts a stop to the alleged tax free outflow of profits in the form of ‘head-office expenses’ by the FBs. This provision vitally affected the tea plantation industry which was dominated by 114 British tea companies (FBs). Since the reorganization, the business of these FBs has been taken over by forty-five companies incorporated in India with up to 74 per cent foreign equity. A number of multinational enterprises that were maintaining branch offices in India - to monitor investment opportunities and oversee their investments in other companies but without any manufacturing activity -- had to wind up. Therefore, the branch form of operation by foreign companies became virtually extinct except in the service sectors. Of the 881 companies which sought permission of RBI to continue their business only about 150 (including tea companies) were permitted to retain higher levels of foreign equity. [Lok Sabha Unstarred Questions 2100 and 2214, 9 March 1984.] Only these companies remained within the ambit of FERA. Others had their foreign equity diluted to 40 per cent in agreement with the directives of the RBI. These companies were now able to operate, expand, and diversify in any industry open to other local private firms. Thus for most foreign companies FERA provided an opportunity to become ‘Indian’ and to expand. Hence most of them readily agreed to dilute the foreign equity to 40 per cent. But in most cases, control remained w the foreign investor: - effective control over a joint stock company can, sometimes, be exercised with as little as 10 per cent block shareholding. The MRTP Act and the RBI consider 25 per cent equity holding to be adequate for exercising effective control. - the FERA dilutions in most of the cases have been effected not by the sale of foreign held shares to Indian nationals but through the issue of fresh shares. The process of share allotment has ensured that the new shareholdings are as widely dispersed as possible. - also, clauses inserted in the ‘Articles of Association’ just before the dilution of shares gave special rights to the foreign shareholders. Therefore, the dilution of foreign shareholding did not necessarily imply a reduction in foreign management control. p.13 Chaudhuri (1979), Goyal (1979), and Kumar (1982).
1970s : government focused on enforcement of FERA directives.
end 1970s: second Oil Price Shock -> focus on failure to step up manufactured
exports. realization that international competitiveness of Indian
goods was poor because of growing technological obsolescence and
inferior product quality, limited range, and high cost. These were in
part due to the highly protected local market. (Ministry of Commerce,
Committee on Export Strategy (Tandon Committee, 1980)
Also: marketing channels in the industrialized countries were substantially
dominated by MNEs.
Measures: (i) emphasis on the modernization of plants and equipment
through liberalized imports of capital goods and technology,
(ii) exposing the Indian industry to competition by gradually reducing
the import restrictions and tariffs, and
(iii) encourage MNEs in manufactured exports by setting up
export-oriented units.
The Industrial Policy Statements of 1980 and 1982: many incentives and
liberalized licensing rules for 100 per cent export-oriented units.
1985:
severe curtailment of MRTP Act (1984): 25 industries de-licensed in 1985.
set up four more export processing zones (EPZ) in addition to
Kandla (since 1965) and Santacruz (1972).
Import liberalization (Open General License, OGL): Nearly 150 items in 1984 and
200 capital goods in 1985 added to OGL.
tariff rates on imports of different types of capital goods slashed (1985).
Restrictions on imports of designs and drawings removed.
Parallel to the liberalization of trade policies there has been an
increasingly receptive attitude towards foreign investments and
collaborations. [Business America, 7 February 1983.]
Policy guidelines November 1980, and
subsequently, to streamline the foreign collaboration approvals.
power to approve foreign collaborations not involving an outflow of more than
Rs50 Lakh in foreign exchange (raised to Rs1 crore 1987) and without any
foreign equity participation was delegated to the administrative ministries.
Tax rates on royalties were reduced from 40 per cent to 30 per cent in the 1986
budget.
To facilitate the flow of high technology to existing industry the Cabinet
Committee on Economic Affairs decided in December 1986 to permit foreign equity
participation even in existing Indian companies employing high technology.
The employment of foreign nationals made much easier.22
Japanese investments:
May 1988 : ‘fast channel’ for speedy clearance (initially for Japanese private
investments and technology, then for West Germany)
measures to streamline the remittance process and the exemption of export
profits from income tax in order to attract Japanese corporations to
produce in India for export, in the context of the strong yen.
These variations in policy are reflected in the trends and patterns of FDI in India and on the approvals of foreign collaborations. 1948 total FDI: Rs. 256 crores, mostly of British origin. [first survey of India’s international assets and liabilities undertaken by the Reserve Bank of India (RBI),] bulk of the FDIs were concentrated in export-oriented raw materials, extractive, and service sectors. - over 25%: Tea plantations and jute accounted for a little over a quarter of total FDI which together contributed half of India’s exports; - 32 per cent : trading and other services, - 9 per cent in petroleum, - only ~ 20% in manufacturing other than jute (Kidron 1965:3). By 1980, the latest year for which comparable official estimates are available, the stock of FDI in India had gone up to Rs933 crores (RBI 1985). Table 1.1: sectoral distribution of FDI at end of FYs 1964, 1974, 1977, and 1980. The most fundamental trend: increasing importance of the manufacturing sector. The manufacturing sector, which accounted for only about a quarter of FDI stocks at Independence and 40 per cent in 1964, now accounts for nearly 87 per cent of them. Almost all the inflows of FDI to the country after 1964 came to the manufacturing sector while disinvestment took place in other sectors. Though the total stock of FDI in the country stagnated during the late 1970s, in the manufacturing sector it steadily increased. Fourteen major banks, including one foreign owned bank, the Allahabad Bank (Standard Chartered Group), were nationalized in 1969, general insurance companies were nationalized in 1971, a number of which were British controlled. Petroleum investments were nationalized between 1974 and 1976. Within the manufacturing sector, the new investments were directed to technology-intensive sectors such as electrical goods, machinery and machine tools, and chemical and allied products (in particular, chemicals, and medicines and pharmaceuticals). These three broad sectors accounted for nearly 58 per cent of total FDI in manufacturing in 1980 in contrast to 41 per cent in 1964. The shares of metals and metal products, and transport equipment, showed a decline over the 1964–74 period, but have picked up during 1974–80. p.17