LESSON I
INTERNATIONAL BUSINESS ENVIRON'MENT
The important objective of this lesson is to study the factors influencing international business.
o International BUSINESS
• International business is a process of marketing goods and' services in the international market. Exploring marketing opportunities in the overseas market is the primary objective of export marketing. Exporters should study emerging markets and adapt products to fulfill the specific needs of the overseas customers. Alan M: Rugman and Richard M. Hodgetts have defined International Business as "The study of transactions taking place across national borders for the purpose of satisfying the needs of individuals and organisations. International marketing deals with the transactions that take place between the citizens and corporate of different countries.
o INTERNATIONAL MARKETING ENVIRONMENT•
• International market is a competitive market. It is influenced by not only demand arid 'supply forces of goods' and services, but also various marketing environmental' factors. In 'international market consumers from different countries' buy the products they desire and marketers from different countries sell their products they produce Japan dominates in electronics and automobiles in the global market. The United States have become leader in information technology, China; Philippines and' Taiwan are potential competitors 'to textiles exporting countries: South Korean' companies have entered into Indian market and try to capture with goods market of India. South Korean companies do their business 'globally. In global shipbuilding industry, Haundai Heavy Industries (HHI) of South Korea stands first The HHI has secured a place in the Guinness Book of World" Records for its 'ship building activities. All countries are not Competitive in all type of products in the international market
o CONCEPT OF BUSINESS ENVIRONMENT
• Business environment is the 'sum total' of forces and factors •that are external to the business and which influence the business in a variety of spheres. Production technology, financing means, personnel systems, marketing efforts and public relations activities, of a business are all influenced by the environmental factors. In a country with restriction on import of labour-saving technologies, production technologies; remain mostly labour-intensive. With risk and venture capital available in plenty, businesses assume more risk and enter into hi-tech unnavigated areas. With abundant labour supply in a country businesses benefit by inexpensive labour, but trade unionism might pose challenge t6 the' businesses. Price restrictions, market" demareations and distributional limitations might be suffered by businesses operating, in a highly restrictive society.
• Thus business environment refers to the totality of politico-legal systems, the socio-cultural, systems, ,the techno-infrastructural system, the geo-natural systems, the economic systems, the, demographic entrepreneurial systems and the functioning of other businesses in relation ,to a particular business as competitors, as suppliers, as consumers and the like.
• Business environment can be seen bifocals - the immediate and the distant or as the micro and the macro. The immediate' or macro environment refers to the firm-specific environmental factors. The 'macro or the 'distant' environment refers to 'the general environmental factors generally, firm ¬specific environmental factor are due to location and, geo-natural factors. Hotel industry in an industrial, City, has round' the year business with occasional 'ebbs and troughs, while the same industry' in hill resort he has only seasonal business, with economic, cultural and political dimensions prevailing in the international market determine the level of competitiveness of the countries participate in the international market. International business E.nvirol'L'i1ent should be carefully studied to assess, the role of economic, cultural and political dimensions in international market.' the extent of international market of a company depends upon the economic cultural and political roots of int~rnatioria1 marketing system and it becomes essential to study their importance in international marketing. The various dimensions of international marketing systems are given below. Occasional demand in the off-season. Thus locational and go-natural forces are mostly firm specific, But economic fiscal and monetary policies, political ideologies 'and systems, etc are macro affecting' all businesses mostly alike. A reduction 'in interest rate inflow of foreign capital and the like are macro environmental factors.
• Business environment is also classified 'into market and ,non-market environment. When a business's operations are influenced by market forces like demand, supply, consumer fashion, extent of competition among firms in the industry, etc., it is said that market environmental factors are dominant in so far as the business is concerned. Non-market environment refers to governmental policies and programmers, social values and cultural practices and the like.
• Business environment in another perspective is divided into 'economic' and non-economic environment. Economic environment refers to the economic systems, economic policies including the fiscal, monetary, labour and sectoral policies adopted, the trends and currents 'of the national economic factors and variables" economic peculiarities and problems' and prospects state of the economic developments, economic legislations and the like that affect businesses in general and specially. Non-economic environment refers to the rest of the environmental factors viz., social, cultural, political, marketing, technological ecological and others. But economic environmental forces and non-economic environmental factors influence one another and the resulting environment influences business in the domestic and International market.
1.4 NATURE OF INTERNATIONAL MARKETING ENVIRONMENT
Export business environment has certain dimensions. These are described below:
(i) International marketing environment varies from country to country as countries differ in their economic, social, political and other factors and factors, local political situations, law and order factors and so on perspectives:
(ii) Within the country different regions may differ in business environment due to differences in resource endowments, demographic factors, cultural factors, local political, situations, law and order factors and so on.
(iii) International marketing environment has temporal characters as well. Past present and the future environment aren't or won't be all alike. As economic advances are made, as social values change as political ideologies change and so on, so does the business environment in the world market.
(iv) Marketing environment in existing global market provides both opportunities and challenges, both accelerators and brakes; leverages and limitations. .pa.
(v) The different environmental dimensions, namely political Climate, cultural diversity, etc" with different level of influence on' different, businesses at different places and at different times.
(vi) International marketing dimensions do not pull in the same direction. There is conflict between governmental factors and market forces, between economic factors and social factors and so on, Businesses find it difficult to cope with the diverse demands of the diverse environmental dimensions.
(vii) Politico-government dimensions seem to dominate the
environment for political ideology and stability set the tone and background for, businesses. Government as a regulator of businesses, as a coordinator of businesses, as a facilitator of businesses, as a protector of business and as an entrepreneur itself have assumed greater significance than other environmental factors.
(viii) International marketing dimensions are is no longer confined to
factors within the boundaries of a nation. Transnational factors like international investment, trade, employment and multilateral institutions like the World Bank, International Monetary Fund, World Trade Organisation etc influence international marketing environment.
(ix) International marketing system and environment is dynamic,
complex and multi - dimensional.
1.5 SIGNIFICANCE OF INTERNATIONAL MARKETING ENVIRONMENT
What a business is partly due to its environment. In other words every ness is a product of its environment. The influence of environment on business is significantly significant. Take the case of Indian business undertakings. Until 1991, they enjoyed a protective environment. They did not Ice interest in exports, in building competitive strength, in' Researeh and development and the like. Now as economic liberalization is taking place, businesses address issues relating to 'total quality management', 'strategic like' to meet competition, and so on, Thus as environment changes businesses change their perspectives, strategies, etc. There is no choice, but compulsion.
Environment influences international• marketing in four ways - it provides opportunities to businesses, it poses threats, it strengthens and also it weakens businesses. Hence the significance of business environment.
Opportunities are provided by environment. When the culture of a society needs rites, rituals and festivals, industries catering to these needs flourish. When home entertainment culture spreads, businesses in home-entertainment, viz. television, tape record players, etc make good advances. When monetary policy is relaxed more capital at lesser cost is made available. When laws restricting foreign investment are relaxed, businesses can raise easy capital abroad, as some Indian businesses are doing now through issue of global depository receipts, Euro bonds, etc. Thus it is environment that provides opportunities. Opportunities must be seized timely and regularly.
Threats are also. posed by environment. When finance related laws are relaxed allowing businesses to raise capital freely, loca1 banking businesses find no takers for credit. Whim foreign companies set up businesses, local firms find the going difficult. The entry of foreign brands of soft drinks, TVs, etc., is a threat to local brands. The entry of Sony and Panasonic in India in 1995: is a threat to the local brands like BPL, Videocon, etc.
Environment also strengthens businesses. An environment that nurtures the culture of efficiency, "competitiveness, innovation and growth makes businesses strong. Withdrawal of agri-subsides in rich countries, strengthens the agro-export industries in LDCs.
And, environment can also weaken businesses. A policy of the government to protect businesses in effect makes them weak. Withdrawal of fertilizer-subsidy has weakened both the fertilizer and the agri-industries as they were earlier used to the comforts of protection.
Components of internatiec.1al marketing environmental dimensions are listed below:
International Business Environment Factors
Sr. No Factory Components
1 Political Environment Political system, Political Installation, Political ideologies of parties political stability, political culture etc.
2. Government Environment System of government, distribution of power between national and local government culture of civil servants government policy on business, etc.
3. Legal Environment Business related laws governing competition, consumer protection contractual obligations regulation of foreign participation; respect fopr judiciary efficiency of the same etc.
4. Economic Environment Size of the economy, composition of the economy economic health, economic policies-fiscal inventory and entrepreneurial, foreign capital etc.
5. Technological Environment Technological orientation, Researeh & Development Technology Import and absorption technological obsolescence, etc.
6. Ecological Environment Natural resources and reverses, need for protection of fragile zones, pollution control etc.
7. Geographical Environment The geo-graphical of a region like the terrain, vegetation cover, location, attitude, rainfall, climate etc.
8. Cultural Environment Cultural life of people, rites, rituals, festivals, heritage invasion of aliem culture, business culture, roles, etc.
9. Social Environment Social Practices, social classifications like case, religion and community, social institutions like family marriage etc.
10. Demographic Environment Size of population, composition of population, family size and cycle, language, educational attainments entrepreneurial talents, etc.
A brief description of different environmental dimensions, seen above, is below.
Political Environment
Political dimensions consist of the political system (ie., democracy, autocracy, etc), the political institutions (the national and regional party., their structure and their style of functioning, etc), the political ideologies of the pardes (ie., commitment to socialism, 'capitalism, large industries, domestic industries vis-à-vis multinationals; etc) . Political stability (continuance of same party in power, continuance of saine policies perused by the party in power previously by the new party in power, etc), strength' of opposition and political culture of parties.
Political dimension E. a basic reason for the delay in privatizing insurance sector in India Even in the liberaIised environment Communist Parties do not accept permitting International enterprises to do business in India.
Needless to say, political dimension influences the legal and governmental environmental factors, which in turn affect businesses. It is the political ideologies of Smt Indira Gandhi that resulted in vast role for public sector, bank nationalization, etc. Political stability and opposition unity affect business environment Investment policies of businesses, etc depend on political stability. With political stability foreign capital can be wooed. Politics-business nexus is always there throughout the world, through election funding, etc.
GOVERNMENTAL ENVIRONMENT
In theory, at least, there is difference between Government and ruling political party. Hence a separate discussion of Governmental environment is made.
The factors include the system of government (parliament, presidential. etc), power distribution between Union Government and State Governments and the local bodies, the culture of the civil servants (their ability, straightforwardness, speed of action, etc), Governmental institutions like the Parliament, Council of Ministers, Ministries, etc and their relative role and efficacy, the Governmental Policy on Business (laissez-faire policy or control), etc.
Stable governmental policies, efficiency of and timely action by the civil servants, greater understanding among different ministries, etc have a definite influence on export business. A responsive government, is a boon to businesses and vice-versa.
Economic environment influences export business and investment opportunities. India and Mauritius have entered into Double Taxation Avoidance Agreement (DTAA). As per the agreement, a resident company of Mauritius investing in India will pay income tax and other taxes as per the taxation rules of the Mauritius. Many global enterprises invest in India though Mauritius because tax rate in Mauritius is less than the tax rate in India. Tax policy of Mauritius
Government influences investment in India.
Importing countries may levy anti-dumping duties on a specific commodity, if the import of such commodity damages domestic industry producing the same commodity. Anti-dumping duty is levied to reduce cheaper imports. Removing quantitative restrictions, reducing /increasing import duties etc., influence export business. The prosperity of the export business is based on the Export-Import Policy of the Government Export incentives and concessions provided by the Government influence export business. The European' Union provides enormous incentives to the dairy industry. So their share in global dairy market is on increasing trend.
Unilateral, bilateral and multilateral agreements will, influence export business. The GSP Globalised System of Preferences), and GSTP (Glob a System of Trade Preferences) concessions influence export business Under GSP importing countries give concessions in import duty for the products importee from the listed countries in GSP. It is unilateral agreement. Under this, duty concession is given by the developed countries to developing countries. Under GSTP countries entering into agreement should exchange duty concession: mutually. It is bilateral agreement.
Investment and exchange rate policies of the Government influence export opportunities of a business. Currency depreciation makes exports competitive and imports costly. South Korean companies are permitted to invest in automobile sector in India that will pave the way to increase automobile exports in India in the near future.
Legal Environment
The legal system (the Supreme Court, High Court. District and Taluk Courts, Ombudsman Organisations, Labour Courts and Tribunals, Consumer Courts and Tribunals), the legislative frameworks (the different economic and commercial legislations, the provisions and interpretations), the speed of disposal of case, the independence of the judicial system, etc in India and emerging markets constitute the legal environmental factors for export business.
Legal procedures relating to' import of goods, packaging, export price regulations (minimum export price), anti-dumping and international advertising are discussed under legal environment of export business.
A clear-cut legislative frame work reduces the scope for diverse interpretations and needless dragging of cases. An efficient judiciary disposes of pending cases sooner than later. Too much of business legislations instead of creating ground for orderly relations among businesses, curtail freedom of enterprise. Hence the influence of legal system on businesses.
Legal environment influences export business greatly. The WTO insists the member countries to adopt labour standard and environment standard. The United States put ban on the import of products made by child labour. The US insists to avoid child labour. We have to give provision in our Labour Law to avoid child labour in Indian industries whether small scale or large• scale. Environmental aspects and Law also are seriously considered in export -business. The Government of India has stated that the industrial units of foreign countries getting permission to establish their industries in Special Economic Zones (SEZ) Should follow Indian Labour Law. Foreign companies may hesitate to establish their units in SEZ. Because they prefer hire and fire labour policy and not the protected one like Indian Labour Policy. This may reduce exports of SEZs. Hence labour policy 'influences export business.
Legal procedures for payments in the importing countries, and dispute settlement mechanism in the importing countries also have a bearing on international business.
Economic Environment
The economic dimensional factors are• indeed numerous and more influenced. The gross national product and its composition arid trend, the gross national savings and investment, the size and scope of public sector, the economic policy of the land consisting of control on big businesses, tax policy, policy in fiscal deficit, interest rate policy, policy on foreign finance for development; monetary policy, trade policy, reservation of industries for small businesses, incentives for selected industries/regions etc influence export businesses vastly.
The economic system, nature of the economy, composition of the economy, functioning of the economy, health of the economy, economic policy, strategy, programs and procedures adopted, economic 'controls and regulatio:1s, economic trends, economic problems arid prospects influence businesses in the international market.
Economic factors of a country will influence export business. The, economic factors such as, standard of living of the people, progress in economic development, rate of foreign exchange, trade-barriers, trade blocks, bilateral and multilateral agreements with multinational agencies and other developed and developing countries influence international business bf a country.
In a capitalistic society private enterprises develop. In an industrial economy the economic health is better than in an agrarian economy the structural pattern and .interface among various sectors of the economy mean much for individual businesses. Structural rigidities are being reduced through liberalization giving increased scope for innovative businesses in the global market.
Technological Environment
Technology is the invisible input in domestic and export business. Science and Technology make lot of differences in economic arid social life. Industrial and agrarian development in the present era are technology driven. Technology is all pervasive. Small and big industries, agricultural and secondary sectors, service and infrastructural sectors, rural and urban sectors an need technology.
Availability of appropriate technology, technology development, technology absorption and technology up gradation influence export businesses very much. Import of technology and development of indigenous technology are the two eyes for industrial and business development. Businesses must manage technology, instead of being dictated by technology. That is technology should be used for human and business development together. Modemisation of businesses through planned obsolescence is one aspect of technology management. Development hinges on technology. Hence the relevance of technological environment. Technology forecasting is needed so that businesses can plan for future in a firm way. If in a country technology is not given' due importance, its businesses will stand no ground in the competitive world.
Technology development in 'food processing industry will increase processed foods exports. Software technology contributes to increase in software exports in India. Technology will create alternatives' for the scared or limited resources. Technology is' a weapon to fight in the global market and it is a stepping stone to maximize export business in the global market.
Ecological Environment
Businesses including international business are influenced, by the natural resources available in the regions and balanced exploitation of the natural resources. Lopsided or over exploitation of one 'or other resources, beyond the balancing or regeneration capacity of the l!~ture, will sp,elldoom for the businesses.' Large dams via-a-vis small dams,bio-fertiliseis via':'a-v'is chemical fertilizers, ,conventional energy vis-a-vis non-conventional energy and the like issues are nothing but intimately woven with the ecology. Uniess fuel 'efficiency is ensured right from the village homes using firewoods to big industries using fossil fuels, the world, would suffer serious ecological hazard with alround pollutions. Businesses, have to, therefore, be concerned with the ecology and natural environment. Now, ecological audit is made part of project appraisal. Stem ecological laws ,are in vogue nowadays.
Geographical Environment
International businesses are affected by the kind of terrain, the soil and <;ub-soil characters of the area where these are functioning, the climatic factors. nearness to seaports, the rainfall, the winu level, etc. in fact the type of business that can be developed in a place is influenced by the geographical environment. In a rocky region rose cannot be grown, but granite industry can be developed. In a hilly region rice cannot be grown but coffee or tea or other plantation crop can be. Brazil is a leader in the world coffee market. india is a leader in the world tea market and spices market and cashew market. New Zealand is a market leader in the world dairy products market. Malaysia is a leader in world rubber and palmolein oil market. The Geographical environment in the concerned countrj make them to become leaders in the specific product in the world market. Hence geographical environment influences export business. Cold countries will import leather garments. it is the opportunity to the other countries to export leather garments to the cold countries. Cotton industry is concentrated in Bombay region, which is due to the hinterland soil-type and climate suited for cotton cultivation and spinning. Bombay is the business capital'of India. This is again due to its geographical features. A natural sea-port, good rainfall, the rich soil, etc make Bombay a unique land of businesses. Cultural Environment Warren J. Keegan, in his book 'Global Marketing Management' has expressed the concept culture as "the ways of living built up by a group of human beings that are transmitted from one generation to another, culture includes both conscious and unconscious values, ideas, attitudes and symbols that shape human behavior and that are transmitted from one generation to the next". Cultural [actors are important influences of the export marketing of goods, and services. Religion, family set-up, education and language are important Cultural factors influencing export marketing. Businesses are social sub-systems. Businesses exist to cater to people's needs. People's needs depend on their culture. Rites, rituals values, beliefs, norms, symbols, festivals, leisure activities, works preferred, etc are all cultural or culture-dependent. Culture changes, but basic characters remain the same as" ever. Culture varies from region to region and society to society. Depending on the cultural heritage of the people, people economic, social, educational, work and leisure needs differ. Businesses try to meet these needs of different people. As Cultural changes, the businesses have to change themselves now a day’s cultural change is taking place on a large scale due to exposure to alien Cultures through media or movement. This has enormous business implications in the export market 'Ready to use' products are popular in the world market. Exporters should supply ready to use food products to maximise their export business. In some countries consumer may prefer neatly packed products in small quantities, rather than in bulk form. Exporters have to observe colour preference of the buyers in textiles and other products in the world market and important festivals in the emerging markets to capitalise the cultural environment' and to maximising export business. Changes are witnessed in Indian cultural environment. Industrial and consumer products of western world are marketed in India and is market goes on increasing trend. Social Environment Social environment refers to the social classification of people, upper, middle and lower classes on economic basis, caste based classification and community based classification, social institutions like family, marriage, societal values like honesty and cleanliness in public life, various tolerances, etc. Again, as businesses serve and get served by the society, social environment affects businesses. In family life the purchase decisions are generally made by the elders who consider value for money as the most important criterion of buying decision. Businesses have to keep this in mind. At the same time, as social changes are common, youngsters have been now taking purchase and investn1.ent decisions. Now businesses articulations have to be different. The middle class is the burgeoning one in most countries. Two bed room houses flats, TV s, VCRs, Washing Machines, Electronic Typewriters etc are the status symbol of this social group. Indian and multinational companies mostly cater to this social group. Demographic Environment The size of population, age, education, linguistic and religious composition of population, trend in these factors, entrepreneurial aspiration of the people, educational and, skill levels of population, political ideologies and awareness of the people, values and attitude of the people, etc constitute demographic environment. Growing population has both positive and negative impacts on the nation and its businesses. Baby boom in a land would mean more hay days for baby food and health business similarly, burgeoning old age people in a land will lead to more hay days for health-care industry, home for the elders like crèche for children and so on. If people are entrepreneurial more innovative businesses will come up. Job providers will increase and unemployment will decrease or vanish. Small family norms are nowadays stressed. In China 'one-family-one¬ child' norm is enforced. This, it is reported, leads to much more "pampered childhood". It may have social repercussions later. Business opportunities and challenges, in domestic and international markets are, thus influenced by the demographic factors and the trend in them. Largest educated population; largest uneducated (illiteracy) population, and largest middle income group population in the world are in India. It attracts multinational companies to enter into Indian consumer goods market. The Hindustan Lever, Nestle, Smith lime Beecham etc., have exploited consumer goods market in India. Hence demographic environment influences international business. Computer literacy is •on increasing in India. It increase number of computer training institutes and India becomes leader in the world software market. Growth of computer literacy creates opportunities to Indian Information Technology companies to penetrate in the world market. 1.6 QUESTIONS 1) What is economic environment in International Business? 2) What do you understand by cultural environment? 3) Explain the importance of political environment in international business. 4) Discuss international business environment and the impact on international business. 1.7 FURTHER READINGS Francis Cherunilam, "Global Economy and Business Environment". Himalaya Publishing House, Bombay. S. Neelamegam (Editor), "Competing Globally Challenges and Opportunities", Allied Publishers Limited, New Delhi. LESSON – II MULTINATIONAL CORPORATIONS Objectives of the lesson are, (i) to study the concept, strategy and organisation of MNCs, (ii) to study the marketing management and (iii) to study the importance of technology in the business of MNCs. 2.1 MULTINATIONAL CORPORATION Multinational Corporation is defined by Leonard Gomes, as, "a corporation that controls production facilities in more than one country, such facilities having been acquired through the process of foreign direct investment. Firms that participate in international business, however large they may be, solely by exporting or by licensing technology are not multinational enterprises". MNC is explained by ILO in its report (Multinational Enterprises and Societal Policy as ''the essential nature of the multinational enterprises lies in the fact that its managerial headquarters are located in one country (home country) while the enterprises carries out operations in a number of other countries (host countries) as well. MNC is defined by Jacques Maisonrogue, President of IBM World Trade Corporation as, "an MNC as a company that meets five criteria (i) it operates in many countries at different levels of economic development, (ii) its local subsidiaries are managed by nationals, (iii) it maintains complete industrial organisations, including R & D and manufacturing facilities in several countries, (iv) it has multinational central management and (v) it has multinational stock ownership. Alan C. Shapiro, in his book Multinational Financial Management has defined MNC as, "a company engaged in producing and selling goods or services in more than one country. It ordinarily consists of a parent company located in the home country and at least five or six foreign subsidiaries, typically with a high degree strategic interaction among the units". James C. Baker has defined MNC as. "a company (i) Which has a direct investment base in several countries, (ii) which generally derives from 20 percent to 30 percent or more of its net profits from foreign operations and (ill) whose management makes policy decision based on the alternatives available anywhere in the world". Different scholars have used different attributes to characterize the MNE Such attributes include the geographic scope of the firm's value chain (that is, the sequence of value-adding activities or functions within the firm), management styles, ownership of productive assets, communality of strategy formulation and implementation worldwide, and organizational structure: -:- A distinction is made between "global" and "multi domestic" MNEs based on coordination and geographic configuration of the firm's value chain. MNEs with high coordination among and concentrated configuration of the different parts of the value chain are called "global", while those with low coordination among and dispersed configuration of the different parts of the value chain are called "multi domestic". -:- A distinction is made on the basis of management styles in the MNE ¬geocentric (world oriented), polycentric (host-country oriented), or ethnocentric (home-country oriented). A firm's true degree of multi nationality is measured by the extent to which its top executives think geometrically. -:- The MNE is defined as an organisation that owns productive assets in "¬different countries, and has common strategy formulation and implementation across borders. -:-The MNE is defined as any firm that "owns" outputs of goods and services originating in more than one country. -:- A distinction is made based on organisational structure: "global" (tightly controlled with a centralized hub structure), "multinational" (decentralized federations), and "transnational" (structures that permit retaining local flexibility while simultaneously achieving global integration). MNE is defined as "any enterprise that carries out transactions in or between two sovereign entities, operating under a system of decision making permitting influence over resources and capabilities, where the transactions are subject to influence by factors exogenous to the home country environment of the enterprise. “ 2.2 Organising F. amework for MNE Definitions Source Attribute Global Transnational Multi Domestic Perimeter Management style Ethnocentric Geocentric Geocentric Polycentric Kindleberger (1973) Various Functional and attitudinal attributes National Corporation with region operations International - Multinational Porter (1986) Coordination configuration Global Complex Global - Multi domestic Barlett and Ghosas (1989) Network/interorganizational Global Transactional International Multi – National Global Bartlent (1990) and Organisation and structure Centralized Networks Net works Ceneralized Hedium (1986) Organisational Structure Hierachy ( H- Form) Heterar city Heterar city Hierarehy (M-form) ___________________________________________________________________________________ Source : Alert Stewart and Sundaram, International Business Environment Prentice Hall India, New Delhi. The company will across the following four stages to become transnational company. The stages are: (i) Domestic company, (ii) international company, (iii) multinational company, (iv) global company" After crossing the status of global company, companies will become transnational companies. Warren J. Keegans, in his book Global Marketing Management has explained the above four stages that a company has to cross to achieve the sta:'J.5 of transnational. The explanation is given below. The stage one company is domestic company. It concentrates and focuses on domestic market, suppliers and competitors. It does not consider the alternative of going global. The stage two company is known as international company. It attempts to extend its manufacturing marketing and other activities outside the home country. International companies adopt ethnocentric approach. The style of doing business in domestic or home market is followed in the foreign market also by the international companies. They are home market oriented International companies adopt the same marketing mix in foreign market which has been followed in the domestic market The stage three company is known as multinational company. Over a period of time the stage two company will try to observe the differences in market in home country and foreign country and markets around the world. Then it will change its marketing mix suitable to the changes observed. The company which responds market differences in the global market becomes multinational company. Warren J. Keegan has rightly pointed out that multinational company formulates a unique strategy for each country in which it conducts business.' Multinational companies follow polycentric approach. It means that they try to change their marketing mix suitable to meet buying preferences and practice of consumers in the foreign market. Consumer durables are designed by the multinational company, based on the needs and requirements of the consumers and designs will vary country to country, Electrical goods and automobiles are manufactured in different designs in order to adopt the local conditions. The stage, four company - global company follows either a global marketing strategy or global sourcing strategy. Global company will produce products in the home country and market the products in the global market. It will invest in foreign markets to create marketing infrastructure. On the other hand some global companies will procure required raw materials and components from the global market and produce finished output in home country and supply to the consumers of the home country. The business of global company will be either selling the products produced in the home country in the global market or procuring materials from the global market for domestic production. The stage five company-transnational company will do its business in many countries. It's sales, investments, production, R & D activities and other business related operations are carried out in many countries. Transnational company will dominate in the world market. It is an integrated company integrating global sourcing and global marketing. Its marketing approach is geocentric. It considers the prevailing similarities and differences in the various centers of the global market and takes steps to supply goods and services matching the requirements of the global market. Transnational companies do not adapt for the sake of adaptation. They will not react to the exact requirements of the market immediately. They make attempts to adapt in order to add value to their offer and their aim is value addition and providing value added products to customers. Stages of Development of domestic company, international company, multinational company, global company and transnational company as explained by Warren J. Keegan are given below: 2.3 Stages of Development I Stage and Domestic Inter Multi Global "- Trans Company national National national Strategy Domestic International Multidomes Global Global Model NA Coordi tic Decen Centralised Integrated nated tralised Hub Network Federation Federation View of Home Extension National Global Global World Country Markets Markets Markets or Markets md Resources Resources Orientation Ethnocen Ethnocentr Polycentric Mixed Geocentric tric IC Source: Warren J. Keegan, Global Marketing Management, p. 52. 2.4 Stages of Development 11t Organisational Characteristics State and Company Domestic International Multi national Global Transnational Key Assets Located in home Core Centralized others disposed Decentralized and self sufficient All in home Country except marketing of Source Dispersed inter dependent and specialized Role of country units Single country Adapting and leveraging competencies Exploiting local opportunities Marketing of sourcing Contributions to company worldwide Knowledge Home Country Created at center and transferred Retained within operating units Marketing developed jointly and shared All function developed jointly shared Source Warren J. Keegan, Global Marketing Management, p.52, 2.5 Multinational Corporation Hitachi Japan Mitsubishi Japan Fujitsu Japan Toshiba Japan Sanyo Japan Suzuki Japan Rollys –Roycee UK Ansaldo Italy Fanuc Italy Jaguar UK General Motors US General Electric US AT & T US Nestle Switzerland Reebok US (Boston) 2.6 The World’s Largest Corporations Rank 1997 Corporation Country Revenue ($ Billion) Profits ($ billion) Employees 1 General Motors US 178.2 6.78 608,000 2 Ford Motor US 153.6 6.92 363,892 3 Mitusi Japan 142.7 0.27 40,000 4 Mitsubishi Japan 128.9 0.39 36,000 5 Royal Dutch/Shell Group UK/The Netherlands 128.1 7.76 105,000 6 Itochu Japn 126.6 -7.76 6.675 7 Exxon US 122.4 8.46 80,000 8 Wall – Mart Stores US 119.3 3.53 825,000 9 Marubeni Japan 111.1 0.14 64.000 10 Sumitomo Japan 102.4 0.20 29,000 11 Toyota Motor Japan 95.1 3.70 159,035 12 General electric US 90.8 8.20 276,000 13 Nissbo Lwai Japan 81.9 0.02 18,158 14 IBM US 78.5 6.09 269,465 15 Nippon Telegraph & Telephone Japan 77.0 2.36 226,000 16 AXA France 76.9 -1.36 80,613 17 Daimler – Benz Germany 71.6 4.64 300,068 18 Daewoo Japan 71.5 0.53 265,044 19 Nippon Life Insurance Japan 71.4 2.11 75,851 20 British Petroleum UK 71.2 4.04 56,450 287 Indian Oil India 14.2 0.46 33,832 Source Business Today, September 7-21, 1998 give by Francis Cherunilam in his book ‘Global Economy and Business Environment. Indicators of FDI, International Production and Exports Item Annual Growth Rate (Per cent) 1986-90 1991-95 1996-99 FDI Inflow 24.0 20.0 31.9 Gross Product of Foreign Affiliates 16.4 7.1 15.3 Assets of Foreign Affiliates 18.0 13.7 16.5 Exports of Foreign Affiliates 13.2 13.9 8.3 Employment of Foreign Affiliates 5.6 5.0 8.3 GDP 11.7 6.3 0.6 Exports of Good and Services 15.0 9.5 1.5 Source: World Investment Report, 2000, given by Francis Cherunilam in his book 'Global Economy and Buinsess Environment'. Perlmutter has suggested that firms involved in overseas business can be driven by a specific philosophical approach. Traditionally firms who are either small or unfamiliar with overseas marketing pursue an ethnocentric approach to international business. This implies that they see foreign markets as identical to their domestic markets. There is no necessity to change the design of the product nor any of the associated marketing activities. The whole of the marketing mix can be standardised allowing a company to reap the rewards of economies of scale and to minimise the amount of time and expertise devoted to individual markets. As firms become more committed to overseas markets they realize that individual countries may require a degree of customization which the ethnocentric approach does not permit. Firms then frequently move to the other end of the spectrum and become polycentric in orientation. Each individual market is seen as distinctive and so products and marketing activities (distribution, promotion and price) are all individually customised. This usually results in sales increases but often at the expense of profit. Customization inevitably results in increased costs, as there is a limited application for scale economies here. (In reality few organisation are totally polycentric but many do have a multiplicity of foreign operations, which do curtail their profitability. There is a tendency in certain literature to describe organisations which are pokycentric in philosophy as multinational companies. This is a more specific description of what was originally a generic concept. There obviously needs to be a 'happy medium' where customisation can sit comfortably with standardisation. The popular slogan 'think global act local' springs to mind. Kenichi Ohmae has argued that firms that cannot amortise their capital costs over a large volume of customers are unlikely to be able to survive in the long-term. Firms need to be able to take advantage of economies of scale. Firms need to be regiocentric (that is, focused on a specific geographic are such as Europe or Latin America, or geocentric where the market is seen to be global). According to Ohmae, a geocentric company will centralise functions where localisation is inappropriate and will customise those areas where localisation is a benefit Functions suitable for centralisation may include manufacturing, R&D. some marketing areas such as branding where a global brand name may be advantageous and certain financial operations such as investment and retrenchment where localised decision-making may be biased. However, certain functions may still need to be localised. For example, the design of certain products and advertising may have to reflect local needs and customs. Similarly sales promotions may need to be localised. By being geocentric, the company obtains the benefits of economies of scale whilst also being able to respond to local needs. Furthermore, unlike ethnocentrically oriented companies, a geocentric company is seen to be demand-given whereas the former style (ethnocentric) is more supply-driven. The move towards standardisation in a geocentric company is encouraged by a market convergence increasingly; transnational segments are being developed, whereby consumers in different countries may have similar tastes which are more convergent than those of different segments within the same geographic market. For example, the youth segment has similar tastes in music and fashion goods. The youth markets in Tokyo. Munich, New York and London have almost certainly, a closer affinity with each other than they do with their parents or with segments of that older age group. These geocentric companies are now frequently referred to as global companies. 2.8 Why firms are moving towards globalisation Kenichi Ohmae, in his book The Borderless World, has identified a number of reasons which might encourage a firm to act geocentrically (globally). He has listed these under a simple 5 Cs model. The first C is the customer. As has just been noted there has been a movement towards market conversion. More and more customers throughout a variety of countries are looking for products with similar characteristics. Where there has always been a financial incentive to standardize products there is now often a demand-led requirement. This leads to a second C - the company. By selling identical products to a number of markets, a company can spread its fixed costs over a larger volume of sales, enabling that company to lower its costs and become more competitive, which brings us to the third C - competition. If other competitors are already reaping the benefits of global commitment, then the company must compete the same 'playing field' otherwise it will operate with a serious disadvantage. It must also become a global player. If it is seen as only a regional or local player its image may be degraded. Furthermore, the costs of operating on a global scale can be enormous, It could be advantageous to attempt to reduce costs by forming strategic alliances with the previously considered dangerous competitors. The fourth C is currency. With the current volatility of exchange rates it may be sensible for a company to set up manufacturing or assembly operations overseas rather than to rely entirely on exporting products. A slight variation in a currency value could more than cancel out any profit from exporting. Additionally, such a move also eradicates the dangers which trade barriers can pose to an exporting company, . The final C is country. If a company seeks to locate its business activities (other than exporting) overseas, it can gain several benefits - access to cheap labour, raw materials or even finance. It can also be seen to operate as a local company so attracting the goodwill of host governments as well as the goodwill of customers who often prefer to buy from what they consider to be local companies. These five Cs can all be seen as persuasive factors in influencing organisations to become more global in their philosophy. These factors should not be considered to be the seen as the influences that encourage companies to operate overseas. A global company is generally more committed to overseas markets and its commitment is usually more long-term and expensive than those which are mainly export-driven. (Source: The Hindu Business Line various issues). 2.9 Global and multinational company strategies Because of their differing orientations it is not surprising that the two types of companies use different approaches to implement strategies or pursue objectives. Now, a strategy is identified to show the difference in the ways they are likely to be implemented. Maximise world-wide performance: MNC by using local competitive advantage to gain profits: Global: through the application of corporate sharing and integration. Seek to benefit from the location of value-added activities: MNC: all or most aspects of the value chain will be reduced in each country: Global: costs will be reduced by breaking up the value chain so that each activity may be produced optimally in different countries. Which countries will be participants in a world wide trading enterprise? • MNC: countries are selected for their individual potential for generating profit • Global. countries are chosen to reflect their integrative abilities• and their potential contribution for globalization benefit. • Product offering: MNC: products are tailored to suit local preferences; • Global: core products are standardized to minimise need for local daptation. • Marketing approach: MNC: this function is fully tailored for each country being locally and individually developed; • Global: there is a uniform approach to marketing with only minor changes. • Competitive approach: MNC: the managers decide on a strategic response without considering other markets: • Global: the competitive strategy is integrated across the various countries. 2.10 Competitiveness of MNCs How does one measure the competitiveness of a company? Incremental capital-output ratio? Growth in labour productivity? Profitability ratios or the market capitalization? They all help to measure the competitiveness. But most important probably is the extent of net value a company adds over and above the raw materials used in the production. That is, the net value added. A company's competitive power can be measured by estimating the share of net value added in its value of output. This share will indicate the productivity of raw materials and will measure the net value addition of per unit output generated. This is important for while the magnitude of input -output ratio is influenced largely by the size of the capital (much of which may not be in use) or the size of the market capitalization by exogenous factors, the magnitude of this share will almost exclusively depend on the working efficiency of the company. The empirical results are not surprising. An Economic Times survey of 250 large private sector companies finds that during the last five years, between 1996-97 to 2000-01, their share of net value added in output has declined from 23.11 per cent to 21.32 per cent. But, of course, the story was different for the MNCs. Like in many other indicators of corporate excellence, here too the MNCs have managed to in1prove their own performance despite a general deceleration. The "hare of net value added in output of the 48 MNCs in the list has increased from 21.47 per cent in 1996-97 to 23.18 per cent in 2000-01. Their Indian counterparts in contrast witnessed a sharp decline - down from 23.11 per cent in 1996-97 to 20.92 per cent in 2000-01. In actual terms, aggregate net value added of the sample MNCs increased by about 55 per cent during the period compared to 43 per cent of 202 sample Indian companies. In contrast, the aggregate value of output of the MNCs during the same period increased by 43 per cent as against 61 per cent increase of the Indian companies. This was probably due to the sharp rise in capacity after the liberalisation. Most of our big companies added to their capacity in the early nineties and their production increased rapidly, often at the expense of higher inventory accumulation 2.11 MNCs AND TECHNOLOGY MNCs are technology driven enterprises. Their production strength and cost cutting exercises are depend upon their technology strength. The extent of technology strength paves the way to them to introduce value added products providing added consumer value. Electr0nics products are standardised worldwide of late, consumer durables are also standardised. MNCs are heavily concentrating to penetrate their market in the world electronic market and consumer durables market. Product standardisation needs ever cost reducing and productive oriented technology. MNCs cannot survive without updated and sophisticated technology. So it can be concluded that their core strength and con: competency is technology. Korean companies are building its technology strength and productivity and come forward to provide colour television at the price of black and white television. It shows their inbuilt strength in technology that paves the way to reduce cost of output. "LG now claims to have attained the top slot in the semi-automatic washing machines segment. Mr. Jogesh Jaitly, product group head, washing machines, LG says, "our continued efforts to .PA provide new and technologically superior products has boosted sales manifold and is responsible for LG's leadership position in the semi-automatic washing machine category". (The Economic Times, 22nd October 2002). It has been observed that technology is the accelerator for increasing market share of LG in wasi1ing machine market in India. 2.12 UN Code of Conduct of MNCs As the Brandt Commission observes, there is now much interest in trying to formulate international codes of conduct for the transfer of technology, for restrictive business practices and transnational corporations. Definite progress has been made in some of these negotiations. Any code, of course will only work if it can influence the actual behavior of home and host governments, and of investors. The major elements of any effective code should be capable of being eventually translated into agreements between Governments. Such an overall regime will have to have elements of both persuasion and effective implementation, with flexible approaches and attitudes on all sides. The participating governments will have to consult with labour and business to rind the means to reconcile interests and to monitor and implement the agreements. The ILO has created a committee for consultation and monitoring the code or conduct relating to multinational enterprises. This offers one model. According to the Brandt Commission, the principal elements of an international regime for investment should include: 1. A framework to allow developing countries as well as transnational corporations to benefit from direct investments on terms contractually agreed upon. Home countries should not restrict investment or the transfer of technology abroad, and should desist from other restrictive practices such as export controls; not restrict current transfers such as profits, royalties and dividends, or the repatriation of capital, so long as they are on terms which were agreed top when the investment was originally approved or subsequently negotiated. 2. Legislation promoted and co-coordinated in home and host countries to regulate the activities of transnational corporations in such matters as ethical behavior, disclosure of information, restrictive business practices, cartels, anti-competitive practices and labour standards. International codes and guidelines are a useful step in that direction. 3. Co-operation by governments in their tax policies to monitor transfer pricing and to eliminate the resort to tax havens. 4. Fiscal and other incentives and policies toward, foreign investment to be harmonized along host developing countries, particularly at regional and sub-regional levels to avoid the undermining of the tax base and competitive position of host countries. 5. An international procedure for discussions and consultations' on measures affecting Correct L'1Vestment and the activities of transnational corporations. (Source: Francis Cherunilcam, Global Economy and Business Environment). 2.13 QUESTIONS 1. Define 'Multinational Corporation'. 2. Explain organising framework for multinational enterprises. 3. Explain the business prospects of a selected multinational enterprises In India. 4. What are the four stages a company has to cross to become a transnational company? And explain the stages of development. S. Why firms are moving towards globalisation? Explain. 6. What are the strategies followed by multinational companies in maximising 'their market share? 2.14 FURTHER- HEADINGS I) Fracis Cherunilam, 'Global Economy and Business Environment', Himalaya Publishing House, Bombay. 2) Warren J. Keegan, 'Global Marketing Management', Prentice Hall of India Pvt. Ltd., New Delhi. 3) Alan M.Rugman and Richard M.Hodgetts, 'international Business A Strategic Management Approach', McGraw Hill Inc., New York. LESSON - III ECONOMIC INTEGRATION AND TRADING LOCKS Objective of this lesson are: (i) To study economic integration and regional arrangements, (ii) To understand the concept of Free Trade Area, (iii) To learn the importance of Customs Union and Common Market in International trade. (iv) To understand the concept of Economic Union and (v) To study the procedure and impact of Economic Integration and Trading Blocks on the trading activities of the member states. 3.1 INTRODUCTION Economic Integration and regional groupings are created In different forms or degree of integration between the members of the group. The urge for a liberalised trading regime compelled nations to form regional trading arrangements. Repeatedly it has been pointed out that the slow progress of the multilateral trade liberalisation process led to the increased popularity of the regional trading arrangements. Regional trading arrangements, being agreements among a limited number of nations and having mostly common interests are a safer process for liberalising trade within a small arena. A regional trading arrangement (RT A) gives increased market access to the member countries of the same. This increased market access comes through lowering of tariff and non-tariff measures for the members. This leads to a decrease in the protection level for the domestic producers, ultimately leading to an increase in the market share of the R T A member countries in the domestic market. Thus, some inefficient producers give space to efficient producers, a movement toward" efficient allocation, thereby increasing the welfare. This creates trade c imports coming from RT A members into the domestic economy replacing the inefficient domestic production - the trade creation aspect of all RTA. As is seen, this is welfare increasing. The increased market access to members comes through the decreased tariff and non-tariff measures; however, the same are left untouched for the non members of the RTA, members of WTO majority cases. So, a distortion sets in the trading scenario. The non-members of the RTA are thrown into a disadvantageous position; their competitiveness in the domestic markets of the RT A members gets eroded away to a certain extent because of the discriminatory treatment. There arise incidences where the comparative competitiveness of the RTA member countries in the region's market increases visa-a- is. the non-members only because of the preferential market access received by the members. This leads to an increased penetration of the members in the region's' market, displacing the non-members - the case of trade diversion. Trade diversion is thus the displacement of the more efficient producers by the lesser efficient ones. This is the welfare decreasing aspect of an RTA. Paragraph 4 of Article XXIV of GAIT 1994 reads "The contracting parties recognise the desirability of increasing freedom ' of trade by the development, through voluntary agreements, of closer integration between the economies of the countries parties to such agreements. They also recognise that the purpose of a customs union or a free-trade area should be to facilitate trade between the constituent territories and not to raise barriers to the trade of other contracting parties with such territories". Paragraph 5 of Article XXIV of GATT 1994 reads "Accordingly, the provisions of this Agreement shall not prevent. as between the territories of contracting parties, the formation of a customs union or of a free-trade area or the adoption of an interim agreement necessary for the formation of a customs union or of a free-trade area Provided that: (a) With respect to a customs union, or an interim agreement leading to a formation of a customs union, the duties and other regulations of commerce imposed at the institution or any such union or interim agreement in respect trade with contracting parties not parties to such union or agreement shall not on the whole be higher or more restrictive than the general incidence of the duties and regulations of commerce applicable in the constituent territories prior to the formation of such union or the adoption of such interim agreement, as the case may be, (b) With respect to a free-trade area, or an interim agreement leading to the formation of a free-trade area, the duties and other regulations of commerce maintained in each if the constituent territories are applicable at the formation of such free-trade area or the adoption of such interim agreement to the trade of contracting parties not included in such area or not, (c) Parties to such agreement shall not be higher or more restrictive than the corresponding duties and other regulations of commerce existing in the same constituent territories prior to the formation of the free-trade area, or interim agreement as the case may be; and (d) Any interim agreement referred to in sub-paragraphs (a) and (b) shall include a plan and schedule for the formation of such a customs union or of such a free-trade area within a reasonable length of time". Paragraph 8 of Article XXIV of GAIT 1994 reads "For the purposes of this Agreement: (a) A customs union (CD) shall be understood to mean the substitution of a single customs territory for two or more customs territories, so 'that (i) duties and other restrictive regulations of commerce (except, where necessary, those permitted under Articles XI, XII, XIII, XIV, XV and XX) are eliminated with respect to substantially all the trade between the constituent territories of ~he union or at least with respect to substantially all the trade in products originating ill such territories, and (ii) subject to the provisions of paragraph 9, substantially the same duties and other regulations of commerce are applied by each 0:- the members of the unit to the trade of territories not included in the union; (b) A free-trade area shall be understood to mean a group of two or more customs territories in which the duties and other restrictive regulations of commerce (except, where necessary, those permitted under Articles XL XII, XIII, XIV, XV' arid XX) are eliminated all substantially all the trade between the constituent territories in products originating in such territories". Thus the main conditions discussed above imply that (1) Free Trade Areas and Customs Unions should cover "substantially all trade". (2) Free Trade Areas and Customs Unions should not raise the average level of protection against excluded countries. (3) In case of an interim arrangement, the member countries should reduce internal tariffs to zero and remove internal quantitative restrictions other than those justified by other GAIT Articles within a reasonable time¬frame. Paragraph 8 of Article XXIV of GAIT 1994 reads "(a) Any contracting party deciding to enter into a customs union or free¬ trade area, or an interim agreement leading to the formation of such a union or area, shall promptly notify the CONTRACTING PARTIES and shall make available to them such information regarding the proposed union or area as will enable them to make such reports and recommendations to contracting parties as they may deem appropriate". The multilateral body retains the right to judge the compatibility of the RTA; in case it is found incompatible to Article XXIV, recommended changes have to get incorporated into the regional trading agreements. As has been pointed out by the WTO report (1995), three broad trends can be traced in the RTAs formed during the post-war period. In the first place, the RTAs have been primarily centred around Western Europe. Among the 109 regional trading agreements notified under GAIT between 1948 to 1994, 76 are between Western European countries. The trend continues and going by the latest data available, around 50 per cent of the RTAs currently in force are situated in the Euro-Mediterranean region. However, at present, it is worth noting that the number of RTAs coming up in America is not far behind that of the European region. Even for non-European countries, preferential trading arrangements featured in their trade policy. Consequently, when the World Trade Organisation came into operation on January 1995, majority of its members were parties to at lease one regional trading arrangement notified under GAIT. The notable exception turned out to be Japan. (Source: WTO occasional papers, 11FT). There are several forms of economic integration representing different degrees of trade discrimination against the outside members. Vaish M.C. and Sudama Singh have explained that "economic integration is a process and a state of affairs also. As a result it covers measures aiming at abolishing the discrimination between economic units belonging to the different national states. As a state of affairs, it can be treated as an area or region comprising different national states marked by the absence of different forms of discrimination between member states". 3.2 Regional Arrangements Regional arrangement refers a trade block created by two or mort' countries for their mutual benefit in World trade. These countries will be member countries of the regional arrangement. The member countries will abolish all tariff duties on their mutual trade and maintain their individual tariffs against tl1e non-member countries (i.e. rest of the world). Regional arrangement is created for the purpose of trade maximisation, import liberalisation, tariff unitisation reduction and free flow of goods, services and capital among the member countries. There are four types of regional arrangements. They are given below: (i) Free Trade Area (ii) Customs Union (iii) Common Market and (iv) Economic Union 3.3 FREE TRADE AREA A free trade area consists of a group of countries which criminate all tariffs lli'1d qUlli'1titative restrictions anl0ng themselves but each members can impose tariffs and quantitative restrictions against the non-member countries of the free trade area (countries in the rest of the union). Two or more countries join together and form a free trade association or area. The member countries the free trade area abolish all tariffs on their mutual trade in all goods and services but retain their individual tariff against the non-member- countries. There are four types of regional arrangements. They are given below 1. European Free Trade Area 2. Latin American Free Trade Area. European Free Trade Area (EFTA) was formed in November 1959 after the Stockholm Treaty. It was formed by the England with six other nations. Member countries of the European Free Trade Area are, England, Denmark, Norway, Sweden, Austria, Switzerland and Portugal. At the time of formation of the European Economic Community (EEC), the UK did not join the community and attempted to form EFT A as arrival association. The member countries of EFT A were not closely located with the EEC and scattered in an enormous circle around the EEC, so they were called "outer seven". The purpose of forming European Free Trade Area was to eliminate tariffs on trade in all goods and services among the member countries. But member countries are permitted freely to retain their own tariffs against the rest of the world. In 1973, the UK, Ireland and Denmark withdrew their membership in EFT A and joined European Economic Community. Latin American Free Trade Association (LAFTA) Latin American Countries initiated negotiation in 1954 for the purpose of stimulating intra-area trade and contributing to regional economic development. In 1960 (February 18) Treaty of Monte Video was signed and this Treaty came into operation in 1961 (July 1). Seven Latin American Countries such as Argentina, Brazil, Chile, Paraguay, Peru and Urugway in South America and Mexico in North America signed the Monte Video Treaty. Later Colombia, Bolivia and Eq'lador joined later with the seven countries. The important purposes of the Monte Video Treaty are. (i) To liberalise intra-Latin American trade, (ii) to promote complimentarity or industrial production, (iii) and to coordinate agricultural development and trade among the member countries. Monte Video Treaty paved the way for the formation of a common market for all Latin American Countries Central American Common Market (CACM) Central American Common Market is a regional group established in 1966. CACM comprises of Costa Rica, EI Salvador, Guatema, Honduras and Nicargua. CACM is a free trade area which established common tariff among the members and free trade prevailed among the member countries of this free trade area. Free trade among them increased intra-regional trade. Economic Community of West African States (WCOW AS) It is a regional arrangement established in 1975. This was formed to create a customs union among the Anglophone and Francophone member states. Andean Group The member countries of the Andean Group are, Bolivia, Colombia, Ecuador, Peru and Venezuela. The objective of this group is to accelerate harmonious development of its member countries through economic and social integration. Warren J. Keegan in his book 'Global Marketing Management' has given the objectives of Andean Group. They are, (i) development of member countries through economic and social integration and cooperation, (ii) elimination of interregional trade barriers through gradual tariff reductions and a common external tariff, (iii) approval of a common approach to foreign investment, (iv) creation of Andean multinational enterprises and (v) establishment of basic agreements for industrial programs PA Andean group became the first sub regional free trade zone in Latin America in 1992. In accordance with the Andean Pact financial and foreign exchange incentives and trade subsidies were eliminated in the year 1992 Unfair trade practices were curtailed among the member countries and in 1995 it was planned to unify the customs systems of the member countries it was also planned to adopt common external tariffs at different levels depending upon the nature and type of products ASSOCIATION OF SOUTH EAST ASIAN .NATIONS (ASEAN) ASEAN was formed in 1967 by Bangkok Declaration. There are six member countries in ASEAN. They are, Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand. ASEAN is an organisation for economic, political, social and cultural cooperation among the six member nations. North American Free Trade Area (NAFT A) In the year 1988, the US signed a free trade agreement with Canada. It was known as Canada Free Trade Agreement (CFTA). In 1993 Mexico was included and it was enlarged to a North American Free Trade Area (NAFTA). The NAFTA enabled its member countries to face any type of economic challenges in the world market. Elimination of trade and tariff barriers and strengthening free trade in goods and services and free flow of investments helped its member countries to achieve prosperity in trade and overall economy. Canada and Mexico are the important trading partners with the US. South African Development Coordination Conference (SADCC) It was formed in the year 1980 by the region's black-ruled states. The important objective of the free trade area is to promote trade and cooperation among the member countries. Black-ruled 'States,' Angola, Botswana, Lesotho, Malawi; Mozambique, Namibia, Swaziland, Tanzania, Zambia and Zimbabwe. Cooperative Council for the Arab States of the Gulf or Gulf COOPERATION COUNCIL FOR THE ARAB STATES OF THE GULF OR GULF COOPERATION COUNCIL It was established in the year 1981. The member countries of the Council are, Bahrain "Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates The Europe Year Book reveals that Gulf Cooperation Council provides a means of realising coordination, integration and cooperation in all economic, social and cultural affairs. This council has prepared a detailed agreement on economic cooperation covering investment, petroleum, abolition of customs duties. harmonization of banking activities and regulations and financial and monetary coordination. Various committees have been constituted by the Gulf Cooperation Council to monitor trade development, industrial strategy and uniform prices and policies among the member nations. European Union (E.U) It was established by the Treaty of Rome in January 1958. Belgium. Francl:, Holland, Italy, Luxembourg and West Germany were the founder members of the European Union. Britain, Denmark and Ireland joined the union in 1973, Greece in 1981 and Spain and Portugal joined the European Union in 1986. All these countries of the union created a single market for goods, services and capital. The European Union has created a single European Currency and bank. It is popularly known as Euro dollar. In 1991, the European Community (EC) and European Free Trade Association (EFTA) entered into an agreement on t!)e creation of European Economic Area. It's aim was to achieve free movement of goods, services, capital and Iabour between the EU and EFT A from 1993. Czechoslovakia. Hungary and Poland joined European Union in 1991 as associate members and systematic arrangements were made to eliminate tariffs and quantitative restrictions or bilateral trade in industrial goods. European Community has created single market in 1992 and it was a major programme of the European Community. 3.4 COMMON MARKET A Common Market is created when two or more nations establish a customs union for free and unrestricted trade (movement of all factors of production) among the member nations. Tariffs are eliminated for the trade among the member countries and trade related quantitative restrictions are also removed. Central American Common Market (CACM) Central American Common Market was established in 1960s. It dismantled in 1969 due to war between Honduras and El Salvador. The five member countries of the CACM, Costa Rica, Honduras, Guatemala, Nicaragua and EI Salvador have taken efforts to reestablish Central American Common Market. The important objective of this common ml1Iket is to achieve economic integration and regional development. Caribbean Community and Common Market (CARICOM) Caribbean Community and Common Market was established in the year 1973. It was formed as a movement establishing unity among the Caribbean Countries. Caribbean Free Trade Association established in 1965 is replaced as Caribbean Community and Common Market. Member countries of this common market are Antigua and Barbuda. Bahamas, Barbados, Belize, Dominica. Grenada Guyana, Jamaica, Montserrat. Saint Christopher and Nevis, Saint Lucia., Saint Vincent and the Grenadines, Trinidad and Tobago. Establishing economic integration, among the Caribbean countries through common market is an important objective of Carribean Community and Common Market. Single market economy is also targeted by this common market. Southern Cone Common Market Southern Cone Common Market was established by Argentina, Brazil, Paraguay and Uruguay in 1991. The objective or the common market was to create free trade for goods, services and free movement of labour and capital among the member countries. Non-tariff barriers were eliminated and common external tariff was implemented. Formation of the common market made the member countries to follow common and uniform policies on trade, agriculture, transport and communication. Regional cooperation is the main aim of this common market. 3.5 ECONOMIC UNION Fom1ing Economic Union shows the highest degree of economic integration among the member countries. Economic Union aims to establish a common currency and a banking system among the member countries. BENELUX is a valid example for customs union. It was formed as a customs union by the Belgium, the Netherlands and Luxemburg in 1948. Later in 1960 it was converted into economic union. BENELUX Treaty signed in 1958 paved the way to form economic union. Warren J. Keegan in his book Global Marketing Management has explained that "an economic union builds upon the elimination of the internal tariff barriers and the establishment of a common external barriers It seeks to coordinate economic and social policy within the union to allow free flow of capital and labour from country to country. Thus, an economic union is a common market place not only for goods but also for services and capital. The full evolution of an economic union would involve the creation of a unified central bank, the use of a single currency and common policies in agriculture, social services and welfare, regional development, transport, taxation, competition and mergers. A fully developed economic union requires extensive political unity, which makes it similar to a nation". Warren 1. Keegan has rightly pointed out that though there are many member countries in the economic union, the political unity will make the union as a single country. Single political framework creates integration among the member countries of the economic union. European Union is known as a full economic union. Member countries of the European Union have agreed to establish a common currency (Euro dollar) for them and the common currency was introduced since 1st January 1999. GATT The important objective of GAIT (General Agreement on Tariffs and Trade) is to promote trade among member countries. The GATT concentrates on non-tariff measures, agriculture policy, trade in services, trade related intellectual property rights and trade related investment measures. The GATT makes the countries who have signed the GUNKEL draft to implement trade regulator; measures accepted by them during the Uruguay Round negotiations and Marrakesh declarations. The World Trade Organisation has been established to monitor the trade and investment agreement made in various stages of negotiation under GATT. Though the WTO is a organised body of a large number of member countries, it is not considered as a full fledged regional arrangement like free trade area or common market referred under economic integration and regional groupings. 3.6 CUSTOMS UNION Customs Union is a form of economic integration in the international market. Customs Union is an organisation or a association of two or more countries and the member countries agree to eliminate tariffs on import among them. Tariff will be levied for the imports from the other countries. Countries participating in Customs Union agree to eliminate duty on imports from each other or levy lower rate of import duty. The important objectives of the Customs Union are to create free trade among the member countries and to levy a prescribed duty against the rest of the world. Customs Union aims to increase trade among the member countries. Import duty is eliminated for the imports among the member countries. This makes their output cheaper 'comparing the countries paying high level of import duty. Member countries of the Customs Union enjoy price competitiveness and try to penetrate their market in the global trade. Customs Union a form of economic integration trys to integrate the potential resources available with the member countries for the purpose of increasing their share in the global trade. In World Trade, it is common to levy import duty at different rates for the different products and this duty will differ from one country to another country. Country discrimination and product discrimination are taken into account while levying duty for imports in a country. But in Customs Union there is no such discrimination and no duty for imports. Customs Union paves the way for free trade and tariff protection. It aims to maximise welfare of the member countries Customs Union is considered as a form of preferential trading arrangements. The concept of Customs Union was introduced by the economist Jaco Vines in 1950. He has introduced a trade concept which combines free trade and tariff protection. Maximizing Welfare among member countries of the Custom Union Manner H.G., in his book International Economics has stated that the co¬existence of free trade and tariff protection mayor may not increase the welfare of the member countries of the Customs Union. "Viner has argued that a Customs Union on the one hand tends to increase competition and trad~ among the member-countries and on the other hand tends to provide greater protection against trade and competition from the non-member countries of the world". Jacob Viner put forth partial equilibrium approach in Customs Union while analysing the effect of wealth maximisation among the member countries. J.E. Meade, R.G.Lipsey, Harry Johnson, Jaroslav Vanek, Cooper and Massell and Murthy Kemp have also contributed to the theory of Customs Union. Lipsey R.G. has defined Customs Union as "that branch of tariff theory which deals with the effects of geographically discriminatory changes in trade barriers". Vaish M.C. has pointed out that Customs Union concentrates on substantial elimination of all tariffs and other forms of restrictive trade practices among the members and establishing uniform tariff and other regulations on foreign trade with the non-member countries. Customs Union involves not only the abolition of tariffs on imports and other trade restrictions among the member countries but also concentrates on establishing uniform tariff and other trade restrictions against the non-members outside the countries (rest of the world). It is assumed that Customs Union leads to free trade and maximising welfare of the' member countries. Trade Creation and Trade Diversion are the importai1t concepts testing the validity of the theory of Customs Union. Concepts of Customs Union There are two important concepts of Customs Union. They are, i) Trade Creation and ii) Trade Diversion The Table given below explains the concept of Table Creation under Customs Union. Trade Creation Country Production Cost Singapore imposes 100% uniform duty on imports Singapore removes duty on import from Philippines but not from Indonesia US$ per unit US$ per unit US$ per unit Singapore 1000 1000 1000 Philippines (Members in Customs Union) 800 1600 800 Indonesia not a member Country 600 1200 1200 In the above table there are three countries, Singapore, Philippines am Indonesia, Singapore and Philippines have formed Customs Union and they are member countries of the Union. Indonesia is not a member of the Customs Union. Production cost of a personal computer in the three countries are given in this table. Comparing the production cost of the three countries. Singapore is least efficient, (cost of production of a personal computer is US $ 1000), Philippines is the more efficient producer (cost is US $ 800 per unit) and Indonesia is the most efficient producer, cost of production of a personal computer is US $ 600. (1) Assume that the Customs Union is not formed and free trade is prevailed. In this situation, Indonesia will export personal computers to Singapore and Philippines Because Indonesia is the most efficient producer of personal computer and enjoys price competitiveness in the world market. Singapore and Philippines will stop production of personal computers and import from Indonesia in the free trade regime, (2) Assume there is no free trade Singapore levies 100 percent import duty on all imports. In the situation cost production of a personal computer is US $ 1000 in Singapore, whereas cost importing personal computer from Philippines (US $ 1(00) and Indonesia (US will increase due to levying import tariff 100%. Here, Singapore will produce personal computer instead of importing it from the other, two computers in the earlier assumption Singapore imported personal computer from Indonesia. Tariff becomes an important factor for import or production decision. (3) Assume that Singapore and Philippines have formed a Customs Union and eliminated all import tariffs on import from each other, [But import tariff is not eliminated for Indonesia, After forming the Customs Union, cost of production of personal computer in Singapore remains the same US $ 1001) and can import personal –computer at US $ 800 from Philippines, because import tariff is eliminated from Indonesia, so cost of import of personal computer from this country is US $ 1200. After forming the Customs Union, Singapore will not produce personal computer and import is cheaper than the: cost of production. It refers trade creation under Customs Union which improves resource allocation and welfare of Singapore. Trade Diversion The following table explains the concept of trade diversion which may occur after the formation of the Customs Union, Trade Diversion Country Production Cost (Personal Computer) Singapore imposes 50% import Duty uniformly Singapore removes duty on import from Philippines but not from Indonesia US$ per unit US$ per unit US$ per unit Singapore 1000 1000 1000 Philippines (members Customs Union) 800 1200 800 Indonesia (Not a member country) 600 900 900 Before forming the Customs Union Singapore Imported personal computers from Indonesia where the production cost is cheaper. After forming the Customs Union Singapore stopped import from Indonesia and started trading, (import) with Philippines, since Philippines is the member country in Customs Union. In the above table it is revealed that cost of production of personal computer in Indonesia is cheaper than the cost of production in Singapore and Philippines. Tariff (50% import duty) makes Indonesia’s personal computer costly. Levying common tariff for the rest of the world is a specific feature of Customs Union. If the Customs Union is not formed among Singapore and Philippines). Singapore will import personal computer from Indonesia cheaply that will maximise welfare of the people in Singapore. Import from Philippines will reduce welfare of the people in Singapore. After forming the Customs Union, Indonesia is Elli mated. Import is not done from Indonesia though its production cost is cheaper. Singapore will import personal computer from Philippines, a member country in Customs Union where cost of production is a higher than the Indonesia. It refers Trade Diversion under Customs Union Manner has expressed that Customs Union is a form of price-discrimination directed against the most efficient producer and accordingly it reduces the welfare of the country forming the Customs Union. Vaish M.C. and Sudama Singh in their book International economics have observed that "the concept of trade creation and trade diversion refer to the static effects of the formation of a Customs Union under the assumption of fixed resources and given technology. Trade creation refers to "the expansion of trade between the member countries of a Customs Union while trade diversion refers the volume of trade that is diverted due to the formation of a Customs Union from the foreign country to the union partners due to the elimination of Infra - ¬union tariff. Trade diversion occurs when imports from more efficiently producing country are switched over to a less efficiently producing country due to the formation of a Customs Union resulting in the lowering of welfare as involves less efficient allocation of resources. Trade creation occurs as a result of the formation of Customs Union and production of goods takes place In the more efficient member country instead of' taking place in both the countries". 3.7 Foreign Trade Policy's impact Michael J. Mazarr in his book 'Global Trade 2005' has highlighted impact of liberalisation on regionalism and trade blocks. He has expressed that an important qualification to economic globalism is that the majority of world trade - an increasing majority - goes or, within the three major trading blocks in Europe, the Americas, and East Asia rather than between them. Between 1985 and 1995, U.S. exports and imports from North America grew relative to trade in other areas. European Union (EU) trade within Europe grew relative to other trade (an amount that seems set to increase with the introduction of the Europe and Japanese trade within East Asia rose relative to other trade. In Europe intra¬regional trade accounts for almost 70% of the total. The trends are similar for foreign investment: from 1986 to 1992 almost 70% of investment in East Asia came from within the region; overall, some 80 to 90% of FDI outlaws from any given region stayed within that region. In fact, important economic currents are dictating a focus on areas much smaller than regions. Paul Krugman points' to the "localization of the world economy"; although "we talk a lot these days about globalisation .. , when you look at the economies of modem cities what you see is a process of localization; a steadily rising share of the work force produces services that are sold only within that same metropolitan area". This probably understates the real importance of economic globalization, but it is certainly true - as we shall sec ¬that localization and micromarketing are key aspects of modern corporate thinking. The key question about economic regionalism is: Where is it heading? Will deepened regional economic integration occur at the expense of true globalism, or serve as a stepping-stone toward global integration? The obvious answer - and the correct one - is that it is too early to tell. Policy decisions by the major trading states will crucially effect the outcome; the conclusion of the Uruguay Round of the General Agreement on Tariffs and Trade (GAIT), for example, builds a firewall against a dangerously intense regionailsm in trade. Regional groupings could, for example, promote a broader global trade regime through gradual expansion: As the European Union spreads east, NAFTA south, and Japan's trade sphere south and west, the three regions could eventually blur and merge together. One current proposal would do exactly that between Europe and North Amercia, creating a giant free trade area among all the EU and NAFTA members But the key underlying trend is that regional trade blocs are shifting the locus of economic activity away from the insularity and toward a more cosmopolitan awareness. The North-East Asia region comprises Japan. China Republic of Korea. Hong Kong, Taiwan, Democratic People's Republic of Korea and Mangolia. In recognition of the fact that our geographical proximity. cultural and religious affinity and economic synergies can be used to our-mutual benefit the seven countries of South Asia viz., India, Nepal, Pakistan. Bangladesh. Sri Lanka, Bhutan and Maldives have organised themselves into an association called the South Asian Association for Regional Cooperation (SAARE). The SAARE countries celebrated the completion of first decade of their existence on 7th December 1995. The major achievements in the first decade was the operationalisation of the Agreement for Preferential Trading Arrangements known as (SAPTA). As a result of the First Round of negotiations for the exchange of trade concessions among the member-States, India. being the major participating economy in the region, has given deeper cuts (upto 50%) in the MFN tariff rates on imports of maximum number of commodities (106) from the countries in the region, followed by Pakistan (10% to 20% in 35 commodities), Maldives (7.5% in 17 commodities), Nepal (10% in 14 commodities), Bangaladesh (10% in 12 commodities) and Bhutan (15% in 11 commodities). The Second round of SAPT A negotiations has also been concluded. It has resulted in exchange of tariff concessions on 1972 tariff lines. Out of this, India has offered concessions on 911 tariff lines and received concessions on 456 tariff lines at the six digit level. The Third Round of SAPTA negotiations has also been started to further deepen and enlarge exchange of tariff concessions and removal of non-tariff barriers. The ultimate objective, as mandated by the Leaders of the SAARE member-countries to establish a Free Trade Area in the region (SAFTA) by 2001 A.D. Special bodies have been constituted by the SAARE administration to monitor the timely achievement of this objective. (Annual Report, Ministry of Commerce, Government of India). The committee on Economic Cooperation (CEC) is the forum under SAARE to deliberate upon the measures to be taken to promote intra-regional trade and economic cooperation. The meetings of CEC are held in the country holding Chairmanship of SAARE. From May 1995 to May 1997. the chairmanship of SAARE was with the Government of India. The 6th 7th and 8th meetings of the committee were held in New Delhi. The 6th meeting was held in November 1995 and the 7th meeting was held on 28-29 October, 1996 and the 8th meeting was held on April 21-22, 1997. In May 1997. the Chairmanship of SAARE was assumed by Maldives and the 9th meeting of the CEC was held in Male on November 16-17, 1997. Steps have been taken to facilitate movement of the trading community within the region by improving the visa procedures, Customs procedures are being simplified through regular inter-action of the participating Members and harmonisation of standards of export manufactures and their quality control is: also under the active consideration of the SAARE forum. Steps are being taken: to create a congenial environment for promotion and protection of intra-regional; investments. In addition to the meetings of SAARE bodies constituted in. the SAARE Charter, the Commerce Ministers of SAARE member-States also hold meetings in order to monitor the progress of SAARE intra-regional trade and other economic activities. 3.8 QUESTIONS I. What do you understand by Economic Integration? 2. What are the objectives of Regional Arrangements? 3. What is Free Trade Area? Give Examples. 4. What is Customs Union? 5. What is Common Market? Give Examples. 6. Explain Economic Union with an Example. 7. Explain the impact of Economic Integration and Trading Blocks on the trading activities of the member countries. 3.9 FURTHER READINGS ." 1) Vaish M.C., Mony, Banking, Trade and Public Finance, New Age International Private Limited, New Delhi, 1996. 2) Warren lKeegan, Global Marketing Management, Prentice Hall of India (p) Ltd, New Delhi, 1995. 3) Mithani, D.M., Money, Banking, International Trade and Public Finance, Himalaya Publishing House, Mumbai, 1998. LESSON - IV FOREIGN COLLABORATION AND JOINT VENTURES Objectives of the lesson are, (i) to study the importance of foreign collaboration, (ii) to study the policies and flow of foreign direct investment, (iii) to review the Indian joint ventures abroad, (iv) to discuss the restrictive clauses in the foreign collaboration joint venture, and (v) to discuss UN code of conduct of transfer of technology 4.1 Foreign Collaboration The New Industrial Policy announced in the year 1991 paved the: way to accelerate industrialization and to enhance international competitiveness. The Industrial policy aims at better macro economic management and maximum realisation of the country's economic potential. The New Industrial policy followed by financial sector reforms gave a fresh approval towards foreign Investment and technology tie-ups. The New Industrial Policy aims to attract a substantial capital flows into India on a sustained basis. Strategic alliances, joint ventures and technology collaboration are also the outcome of the Industrial Policy announced in the year 1991. Foreign investors are encouraged to invest upto 51 percent in the high Priority area Automatic approval is given by the Reserve Bank of India for the foreign investment in the high priority areas. In order to encourage foreign investments and' foreign collaborations, the Reserve Bank or" India relaxed Design exchange remittance norms for certain transactions to facilitate foreign investments and collaborations: The RBI has removed the ceilings for the remittance for the following purposes: (The RBI prior approval is not needed). • Maintenance expenses of representatives posted abroad by Indian news papers, agencies and periodicals. • Charges incurred towards electronic database costs, including charges for computer connections/time, software. • The charges incurred towards the feasibility and pre-feasibility studies. • Annual maintenance and service charges for imported machinery and software, • Actual cost of advertisement in print media aboard. • Initial expenses for opening of overseas non-trading offices by eligible exporters. • Actual cost of imports of design and drawings. • Actual cost of goods imported through post pareel. • Expenses incurred towards legal services relating to import transactions. • Amount of retainer’s fees payable to the overseas agents • Remittances towards solicitors fees/average adjusters fees by Indian Shipping companies Indian capital market is also opened to• global investors. Foreign Institutional investors are permitted to invest in the India capital- market Indian companies are allowed to float Global Depository Receipts and they •are traded in the reputed international stock exchanges. Delicensing and deregulation are' introduced to facilitate foreign collaboration and investment Private sector is permitted to operate in all areas except defense, railway transport, atomic energy etc. The need of giving industrial license is limited to 16 industries only. Other' industries are deli censed subject to certain restrictions imposed by t" e local' administration. In order to encourage foreign collaboration the Government of India has simplified the procedure for approval of foreign investment. Foreign investment proposals satisfying the specified conditions are given automatic approval by the Reserve Bank of India within two weeks. Automatic approval is given for the foreign technology agreement also. Foreign Investment Promotion Board (FIPE) and Secretariat for Industrial Approval (SIA) are the other agencies clear and sanction the foreign collaboration proposals in India. 4.2 Foreign Collaboration and Trade Policy The new trade policy emphasizes the need for foreign collaboration in India. The trade policy aims globalise India's foreign trade by providing greater transparency and simplified trade' procedures. Removal of licensing requirements for industrial inputs, following free access to capital goods, raw materials and other components are the salient features of the new trade policy. Negative list of imports is pruned down. Import and export of all industrial inputs is freely permitted. Capital goods are no longer listed in the negative list of imports. Even second hand capital goods are permitted to import. Efforts are made in the trade policy to reduce import duties drastically and offer incentives to the exporters. 4.3 Investor Protection and Foreign Collaboration India is the signatory to the Multilateral Investment Guarantee Agency (MIGA). The Government of India became the signatory of MIGA on April 13, 1992. Being a signatory of the MIGA, 'Government of India should provide security to the overseas investors against non-commercial risks. Foreign investment is duly protected by the Indian Government against non-commercial risks. Foreign investors expect such protection when they come forward for foreign investment. The Government of India has expressed its willingness to sign bilateral investment promotion and protection agreements with other countries in order to ensure guaranteeing protection of foreign investments. Rajiv Jain, in his book, 'Foreig Collaboration - Policies and Procedures' ~ -defined foreign collaboration, as 'a venture seeking participation in collaboration for industrialization, modernization and rationalization of industries. 4.4 Need for Foreign Collaboration In the pioneer stage of industrialization it is very difficult to provide adequate capital investment, plant and machinery, raw material of good quality and technical know how for establishment of industries from internal resources of an under developed and poor country. The developing countries have to rely on the external resources and take steps for foreign collaborations for development and expansion of industry. Even the developed countries come forward ai1d volunteer collaborations for inflow of labour and technical experts advices, services, procurement of scaree raw materials of good qualities etc. and outflow of their capital goods and other surplus in the international market. Foreign collaboration paves the way for the economic development of a country and it enables the industries to increase core competency and compete in the global market. Foreign collaboration will attempt to utilize natural resources of a country, through well built technical researeh and development, thereby poverty will come down in the short gesture of time. 4.5 Field of Foreign Collaboration Foreign collaboration is invited in the sectors where capital and technology are badly needed. Foreign collaborations are permitted and approved based on the requirements of capital, technical and skilled labour, machines and raw materials alongwith the scientific and technical skills and know-how, drawings and designs etc. Foreign collaboration is invited in the following fields: • Foreign Investment - When stock market is not encouraging • Import of capital goods. and other machineries - for up gradation and modemisation of Indian Industry • Transfer of technology and import of designs, drawings and know how - for keeping Indian industries globally competitive. Fin dings and Suggestions of the Mudaliar Committee on Foreign Collaboration Bhargava B.P., (General Editor) in his book, 'Guide on Foreign Collaboration - Policies and Procedures' has given the findings and suggestions of the Mudaliar Committee on foreign collaboration. They are given below; Industries where substantial import on capital goods is involved and where the Government policy allows foreign capital participation, joint ventures involving foreign equity are more beneficial, compared with other form of collaboration. This was the distinct advantage of ensuring that payment commences when the Indian ventl1re become profitable and declares dividends. Further, the overseas collaborator is directly interested in the progress of the Indian venture. The transmission of know-how is more complete in the case of joint venture involving financial participation than in other types of Collaboration. There is need for prior discussion between the Directorate General of Technical Development (DGTD) and the Council of Scientific and Industrial Researeh (CSIR) regarding need for foreign collaborations and terms thereof. There is need for the central co-ordinating unit in the Ministry of Industry Development and Company Affairs to watch the progress of disposal of applications of foreign collaboration. A liberal approach would be worthwhile in regard to foreign collaborations in case of substantially export oriented industries. The Committee does not believe that foreign collaboration has killed indigenous initiative nor does it accept that these agreements have placed us at the mercy o{ other countries for raw materials for raw materials and components. The suggestions of the Committee on Foreign Collaboration A positive approach is needed to the problem of import know-how, particularly of process know-how, or product design. A .PA distinction may be made for this purpose between the Veil-established industries and the new and more sophisticated industries. Generally speaking, in industries where substantial import of capital goods is involved and where the Government's policy allows foreign capital participation, joint ventures involving foreign equity participation are more beneficial as compared to other forms of collaboration. No rigid rules should be followed in the matter of duration of technical collaboration agreements. Norn1ally, the duration of the original agreements should be between 5 to 10 years from commencement of production. On the question of avoidance of repetitive import of technology where a number of collaborations, say 5 or 6 has already been approved in a particular field of industry, it would be more appropriate to consider the likelihood of an existing unit giving the process know-how of product design to a consultancy firm on the basis of a negotiated agreement. Fiscal incentives should be given to existing units which pass on their know-how to others. A liberal approach would be worthwhile in regard to foreign collaborations in the case of substantially export-oriented industries. Government's Guidelines on recommendations made by Mudaliar Committee Having consideration of recommendations made by Mudaliar Committee, Government issued the following guidelines to various administrative Ministries/Departments and Technical Authorities regarding policy and procedures for granting approvals for foreign collaboration: Even when the principles of foreign investment in a particular industry• is accepted, foreign equity participation will be allowed in such a manner and subject to such conditions that effective control in the joint venture rests in Indian .hands. Foreign equity holding exceeding 49 per cent is allowed only in exceptional cases and all cases with foreign equity participation above 40 per cent are examined carefully regarding whether the foreign equity holding belongs to a single or closely related groups of management or whether it is shared with foreign financial institutions including international institutions. One of the criteria to grant approval would be profitability of a particular industry and likely earning or saving of foreign exchange. Import of capital goods should not be allowed on the ground of foreign investments, if fabrication of indigenous machinery is feasible. Investment should generally be in cash with purchase of equipment from the cheapest source. In case of investment in the form of equipment care should be taken to see that the prices charged are reasonable. Where the capital participation exceeds the value of imported machinery, the balance should be brought in cash. There should be no stipulation that raw material, components etc. will be obtained only from the foreign collaborator. The Indian partners should have freedom of choice in this regard. With a view to promote exports of non-traditional product the following points should be kept in view: (a) When existing collaboration agreements which limit exports franchise come up for removal, the restrictions should be totally eliminated or substantially removed and if foreign collaborator does not agree to this, renewal of agreement should not be permitted. (b) Further agreements should be stringently scrutinised to eliminate export restrictions and allow free export to all countries except perhaps the country of foreign collaborator or where the foreign collaborator is having joint venture in the san1e field of production. (c) In low priority or non-essential fields of production, foreign collaboration may be allowed only where foreign collaborator agrees to undertake a major share of the production for exports, and (d) Foreign collaboration in trading activities may be allowed where such collaboration is exclusively aimed at augmenting our export sales. 4.6 Approval for foreign technology agreements (i) Automatic permission will be given for foreign technology agreements in high priority industries up-to a lump-sum payment of Rs. 1 crore, 5 per cent royalty for domestic sales and 8 per cent for exports, subject to total payments of 8 per cent of sales over a 10 years period from the date of agreement or 7 years from commencement of production. The prescribed royalty rates are net of taxes and will be calculated according to standard procedures. (ii) In respect of industries other than those in list of high, priority industries, automatic pem1ission will be given subject to the same guidelines as above if no free foreign exchange is required for any payments. (iii) All other proposals will need specific approval under the general procedures in force. (iv) No permission will be necessary for hiring of foreign technicians, foreign testing of indigenously developed technologies. Payment may be made from blanket permits or free foreign exchange according to RBI guidelines. Foreign collaboration in the fom1 of equity investment, import of plant and machinery, technology and employment of foreign tec1micians and exports is the felt need of the hour to upgrade and modemise the Indian industry and to keep our industry globally competitive. 'The foreign collaboration is invited and insisted to bridge the gap in the requirements of capital investment, capital goods, technical and mechanical skills and know-how in India. Foreign collaboration is considered as a vehicle for transfer of technology. It is approved where it is accompanied by transfer of technology needed in the country confim1ing to the interest of the nation and in the export oriented industries. The policies of the foreign collaboration and it~ approval are based on the national priorities. 4.7 .Joint Ventures Liberalisation has created new avenues for foreign investment, technology collaboration and joint ventures, Among these three, joint venture is the easy way to enter into the business by the domestic industries and the foreign counterparts. Joint ventures benefit the investing firm, investing country and the host country. Joint venture aims to achieve collective self-reliance and mutual cooperation among the developing countries. The basic objectives of the joint venture are summarised below: • To increase export of capital goods, spare parts and components from India To increase the export of technical know how and consultancy services • To project India's image abroad as a supplier of capital goods and updated technology to the global market • To utilise the idle capacity ill the capital goods sector in particular and industrial sector in general Foreign countries prefer to enter into joint venture with the Indian industries, because the labour intensive nature of the Indian industries is suited to) fulfill, the requirements of the foreign counterparts. While Indian companies enter into joint venture with the developed countries Indian companies are getting the opportunities to avail the technology of the developed countries. This will reduce the operational cost and increase productivity. Indian industries are also expected to invest in the foreign countries and enter into foreign market through joint ventures. Requirements for Indian direct investment ill joint ventures abroad Transparent policy is required to enable Indian industries to plan their business activity and to negotiate with the potential foreign counterparts for collaboration. Financial support or the financial institutions and banks are also required or entering into joint venture with the collaborator outside the country. Many developing countries offer incentives such as tax holiday, export incentives, guarantee against expropriation, freedom to remit profits and repatriate capital and protect i.e. tariff to encourage joint ventures by foreign collaboration in their country. The developing countries prefer joint ventures from India. Because the labour' intensity of the Indian industries is suited to the requirements of the Developing nations. The developing countries having limited domestic market may not be in a position to absorb the capital intensive technology provided by the developed countries. So they prefer medium scale technology with labour intensive developed by India. Varshenoy and Bhattacharya in their book, International Marketing have pointed, out some factors influencing the selection of a country for the establishment of joint ventures. The factors are given below: 1) Market for the Products concerned a. Size of the market b. Market the Growth c. Existing completion local and foreign 2). Government Regulations a. Tax concession and incentives b. Price controls and their severity c. Local content requirements d. Export Obligations e. Extents of equity holding permitted f. Degree and nature of protection g. Degree and nature of protection 3). Economic Stability a. Economy and management b. Fiscal Policies c. Growth Rate d. Degree of inflation e. Trade balance and balance of payments f. Balance of indebtedness g. Import and debt service cover 4). Political Stability Institutions a. Sound Political b. Mechanism for orderly transfer of power c. Acceptance of the obligations of the previous Government d. Political relations with India 4:8 Joint Ventures Abroad Many Indian companies have entered into joint ventures abroad. There were 524 joint ventures as on 31st December 1994. Out of the 524 joint ventures, 177 were in operation and the remaining 347 were at different stages of implementation. The Government of India has approved 216 joint ventures in 1995 and 255 in 1996. The total Indian equity in the 177 joint ventures in operation abroad was at Rs. 179.04 crore and the approved equity for joint ventures under various stages of implementation is amounted to Rs. 1398.96 crore. Of the 177 joint ventures which are in operation, 99 (56%) are in the field of manufacturing and the remaining 78 (44%) are sanctioning in the non ¬manufacturing sector. Indian equity in joint venture has been mainly through export of machinery and equipment' technology/ or capitalization of earnings of the Indian company through provision of technical kil0W how or other services. " The scale of operations of the Indian joint ventures abroad is generally small. The shareholding of the Indian joint venture is less than Rs. 50 lakhs in most of the operating joint ventures. Of late, projects under joint venture with large equity base are coming up. The Governmental policies and guidelines for joint venture encourage Indian joint venture abroad with large equity base and insist the Indian enterprises to carefully select the economically viable projects capable of not only coming higher but also projecting better image of Indian expertise and technology in the oversea:; market. Indian joint ventures abroad are engaged in the manufacturing and non ¬manufacturing sectors. The Indian joint ventures
(1) Exclusive grant back provisions.
(2) Unquestionable validity of the patents and inventions.
(3) Obtaining similar or competing technologies.
(4) Researeh and development programs for absorbing or adapting the technology.
(5) Use of personnel.
(6) Unjustified imposition on price fixations.
(7) Adaption of imported technology to local conditions or introducing innovations in it.
(8) Exclusive sales or representation agreements.
(9) Typing arrangements.
(10) Exports.
(11) Patent pool or cross-licensing agreements.
(12) Publicity.
(13) Payments and other obligations after expiration of industrial property rights.
(14) Expiration of arrangements.
(15) Scope, volume and capacity of productions.
(16) Quality control methods.
(17) Obligations to use trade marks, service name or trade name.
(18) Participation in equity and management.
(19) Unlimited or unduly long term duration.
(20) Limitations upon the diffusion and/or further use of technology already imported.
The code also provides for the guarantees/ responsibilities/obligations of the supplier and recipient of technology. Here specific provisions have been made for use of locally available resources, tendering of technical service, unpack aging fair and honest business, practices and mutually acceptable contractual obligations on the following:
(i) Access to improvements,
(ii) Confidentiality,
(iii) Disputes sentiment, arrangements and applicable law, (iv)Rights to the technology transferred,
(v) Suitability for use,
(vi) Quality levels and goodwill,
(vii) Achievement of pre-determined results, (viii) TraI1smission of documentation,
(ix) Training of personnel,
(x) Provisions of spare parts, components etc.
(xi) Consideration for the technology transferred,
(xii) Purchase of input,
(xiii) Sale of output,
Specimen Clauses in Joint Venture Agreement
1. Formation of Joint Venture Company
(I) Local and foreign (or else Local alone) shall take all necessary steps for the incorporation of a (type of corporation to be formed) Corporation under the laws of (jurisdiction of incorporation)~ which said corporation shall be hereinafter referred to as the' Joint Company'.
(2) Local and Foreign (or else Local alone) shall cause the Joint Company to be duly organized in accordance with the terms of this Agreement, with (name for the documents of incorporation under the law of the jurisdiction of incorporation,. such as• "Statutes.", "Letters patient of Incorporation", "Memorandum and Articles of Association etc.); while in the English translation shell read in substantially the form in Schedule attached hereto.
(3) The costs of incorporating the Joint Company shall be borne equally (or according to some other formula) by Foreign and Local.
(4) If any of the provisions contained in the said Schedule should not be approved by the appropriate authority for inclusion in the documents of incorporation of the Joint Company, then the parties agree to make such amendments thereto as shall be acceptable to. the said appropriate, authority without altering their purpose or intention, or failing such amendment, to take all such other steps and do such other things, including the execution of any other agreements as maybe• necessary, to achieve the interest and purpose of such of the provisions. As may not have been found acceptable by the said appropriate authority:
2, Payment for Equity Participation
In payment for the shares of the Joint Company to be acquired by Foreign (Local) at the time of the incorporation of the Joint Company (or, within days after the incorporation of the Joint Company), Foreign (Local) shall assign and transfer to the Joint Company:
1. Cash: (Amount) in cash.
2. Machinery and Equipment:
All the machinery and equipment set forth in the schedule annexed hereto, which said machinery shall become the sole property of the joint company, free and clear of all lines, charges and claims of any kind whatsoever.
3. Land:
The, absolute title, free and clear of all liens charges and of any kind whatsoever, to the real property and all buildings and other structures thereon including all fixtures, equipment and machinery located therein situated at (municipal address), which said-real property, buildings, structures, fixtures equipment and machinery are more specifically described in the Schedule annexed thereto.
4. Industrial Property:
(a) Assignments:
(i) Foreign’s entire right, title and interest in and to all unexpired patents and patent applications theretofore issued or assigned to' or filed by Foreign anywhere in the world to the Licensed Products or to the production, manufacture or use thereof (a list Of such patents and patent applications heretofore issued or assigned to be filed by Foreign being se out in the attached Schedule); together with all rights which Foreign then has to apply for patents in the territory on inventions relating to the Licensed Products or to their production; manufacture or use, and including all of Foreign rights with respect to patents which may thereafter issue anywhere in the territory or any such patent applications and with respect to divisions, .patents of addition, continuation renewals, reissues 'and extensions of all such patents, patent applications and patents which may is we on such patent applications.
(ii) Trade Marks and Trade Names: Foreign entire right, title and interest in and to all rights in the territory which it then has to all of the following trade marks and trade names, namely: (to all the trade marks ''and trade names set out in the attached Schedule);
(a) Licenses: Foreign shall enter into a Licence Agreement with the Joint Company in the form as set out in the Schedule hereto annexed, under which said Licence Agreement, the Joint Company shall become the exclusive licensee for the world for all unexpired patents and patent applications of Foreign for the Licensed Products or to the production, manufacture or use thereof, together with all rights which Foreign then has to apply for patents in the territory on inventions relating t') the Licensed Products or to their production, manufacture or use, and including all of Foreign rights with respect to patents which may thereafter issue anywhere in the territory or any such patent applications and with respect to divisions, patents of addition, continuations, renewals, re-issues and extensions of all such patents, patent applications and patents which may issue 0n such patent applications;
(b) Sub-licences: Foreign entire right, title and interest in and to all rights in the territory which it then has under patents owned by others relating to the Ljcensed Products or to their production, manufacture or use, a list of Foreign present rights under such patents being set out in the attached Schedule.
5. Technical Data:
Foreign's entire right, title and interest in and to the use in the territory of all Technical Data which Foreign is then entitled to use anywhere in the world; and thereafter during the term of this Agreement, Foreign shall assign and transfer promptly to the Joint Company any and all rights in the territory with respect to Technical Data relating to the Licensed Products and all other products being manufactured by the Joint Company, which Foreign shall acquire during such term incidental or relating to such products;
Foreign shall take all such action and shall execute all such documents as the Joint Company may deem necessary or desirable to effect, perfect or confirm, record or otherwise, the transfers and assignments to the Joint Company referred to above, including, without limitation, the full and complete disclosure to the Joint Company of Foreign Technical Data, and lists of Foreign distributors and customers for all of the Licensed Products and other products produced or sold by Foreign which may be similar to the products manufactured or sold from time to time by the Joint Company;
In the above sections, the term "Technical Data" shall mean fOffi1llla, Inventions, whether or not patentable, secret processes and technical information relating to the products and to the production, manufacturing, engineering and test data, specifications, application instructions, information regarding uses, raw materials and methods for controlling and analysing quality, and sample copies of advertising and publicity materials, except that information received in confidence from others or information f0rbidden to disclosed by virtue of any law or governmental regulations restricting the dissemination of such information shall not be included.
3. DECISIG8 BY BOARD OF l)IRECTORS A. Simple majority:
All decisions of the Board of Directors shall require an affirmative vote of at least (number - it should be half of the total number of directorships plus one) directors.
or
B. Special majority:
All decisions of the Board of Directors shall require an affirmative vote of at least (number it should be half of the total number of nominees of the partner with the largest number of nominees on the Board, plus one for each of the other partners) directors.
and/or
C. No casting vote:
The Chairman shall not have a casting or second vote in the event of a deadlock.
4. DISTRIBUTION OF PROFITS
A. The part)' hereto recognize that their own and the best interests of the Joint Company will be best served by taking all responsible steps to ensure the expansion of the production facilities of the joint Company as rapidly as market conditions permit, and to this end, agreed to retain sufficient earnings in the Joint Company before distributing profits to the shareholders, as shall be reasonably required in the circumstances to provide for such expansion and for the other requirements of conducting the affairs of the Joint Company according to sound business practices. .
or
B. Before any profits of the Joint Company shall be distributed dividends to the shareholders thereof - percentage of each year's net after tax profit shall be set aside to meet the capital and other requirements of the Joint Company.
5. GRANT OF LICENCE
(1) The Licensor shall make available to the licensee without charge and as required by the licensee all such technical data and information as shall be necessary for the Licensee to manufacture, sell aI5d service the licensed products and all products relate thereto.
(2) If the Licensee shall desire technical assistance in connection with the manufacture, sale, application or servicing of the licensed products and all products related thereto, the Licensor shall make available• to the Licensee the services of trained personnel for and during such periods as the Licensee shall reasonab1y require.
(3) Representative of Licensor and the Licensee shall from time to time consult with each other regarding researeh, production, sales, servicing advertising and promotion pertaining to the manufacture and sale of the licensed products, and including all developments in respect thereof as the Licensee shall request in accordance with the terms of two proceeding paragraphs.
6. GRANT OF SUB-LICENCE
The Joint Company shall have the right to assign the benefits• to this Agreement, and to sub-license the rights to the trade names and trade marks, to such other parties and upon such terms and conditions as it shall in its absolute discretion determine, provided, however, that it remains responsible to Foreign for its obligations hereunder and provided that such assignment or sub-license shall apply only to the designated territory.
7. TRADE MARK
(I) Foreign hereby grants to the Joint Company the right during the continuance and subject to the provisions of this Agreement to use each and every of the trade marks and trade names upon or in connection with the autborised products manufactured and/or assembled by or on behalf of the Joint Company within the territory and which comply with the relative standards, and the Joint Company agrees that it will use the trade marks and trade names upon or in connection with all authorised products so manufactured and/or assembled.
(2) The right of the Joint ,Company to use the trade marks and trade name as aforesaid is an exclusive right for the whole of the territory.
8. GRANT OF TECHNICAL ASSISTANCE
(1) Foreign shall furnish to the Joint Company detailed : plans, specifications, blueprints and other data and information sufficient to enable a qualified contractor or contractors to consist production facilities at (address of site in host country) capable of producing (quantity) per year of (list products) which' said production facilities shall be capable of being altered, added to or expended in an economical fashion so as to increase the production of the aforesaid products or to adopt the facilities for the production of other related or similar products as the business exigencies of the Joint Company may from time to time require, and shall be of the' latest, most modem and most economical design, and shall be capable of producing the said products in the efficient and economical fashion.
(2) Foreign hereby warrants and guarantees that the said production facilities shall satisfying all the above requirements.,
9. INSTALLATION OF PLANT AND MACHINERY
Foreign shall furnish to the Joint Company all the necessary technical assistance to assemble and install the equipment and machinery in the plant so that it will function in the manner required in the specifications.
10. MAINTENANCE FACILITIES
Foreign shall furnish to the Joint Company all the technical data, information and assistance necessary to ensure the effective operation and maintenance of the machinery and equipment, including:
(a) A list of recommended plant spares:
(b) Lubrication and maintenance manuals;
(c) Details operating instructions;
(d) Detailed manuals indicating the construction and assembly of each model and type of machinery and equipment;
(e) Instructions regarding start up and shutdown.
11. OPERATION OF FACILITIES
Foreign shall furnish to the Joint Company technical assistance .and advice on all aspects of plant operations including but without limiting the generality of the foregoing:
(a) Scheduling, material specifications and ordering, and production techniques relative to the manufacture of the products;
(b) Quality control and production planning;
(c) Methods, studies and other industrial engineering activities In
connection with the organisation, planning, training of personnel and development of operating practices and procedure to obtain the most efficient use of the production facilities;
(d) Recommended safety procedures.
12. TESTING FACILITIES
(1) The Joint Company shall not be required to accept the plant or production facilities until such time as it shall be wholly satisfied that the said production facilities are capable of producing the required products in the required quantities.
(2) Accordingly, before such acceptance, representative samples of each' type of product to be produced by the Joint Company shall be sent to (name of independent testing agency or [in11; or to Foreign main production plant) for testing to ensure their 'compliance with the required standards and specifications and that they have been constructed in a good and workman-like manner, and the Joint Company shall have been furnished with a guarantee and warranty of the satisfaction of such conditions.
13. RESEAREH AND DEVELOPMENT
Foreign shall during the term of this Agreement, provide to the Joint Company all technical information and assistance as shall be necessary to keep the Joint Company aware of current with, and able effectively to use, the latest development in technology applicable or relating to the manufacture, sale or use of the products to be produced by the J0int Company.
14. TRAINING
Foreign hereby undertakes to provide training and technical assistance to the Joint Company upon the following terms and conditions:
l.
(a) Prior to the start-up of production, Foreign agrees to accept for training up to maximum number) operating employees of the Joint Company at its plant located (site of Foreign 's plant) for periods of at least months each.
(b) It is understood that the maximum number of such employees to be trained by Foreign at any one time shall be - and that they shall be made familiar with all operational and technical aspects of production as relate to or are similar to the production operations to be undertaken by the Joint Company.
(c) The Joint Company shall have no obligation to pay for the costs of such training, than other to pay for their traveling expenses to and from (Foreign's Country) and their salaries, if any.
Its best efforts to assist in arranging for immigration visa' for such trainees and in finding suitable living accommodations at reasonable prices for such trainees while they shall be in (Foreign's country).
2. For a period prior to the start-up production and during the initial operating period, which initial operating period shall not last longer than - days. Foreign agrees to provide to the Joint Company:
a) One qualified production supervisor. and - assistance, all of whom shall be graduate engineers, who, besides their responsibilities in respect of readying the plant and operating facilities for the start-up production and the initial operating period, shall assume responsibility for training all the operating employees of the Joint Company in their operating functions,
(b) One qualified individual who will assist in the recruitment and hiring of the' necessary employees and in the development of personnel and labour relations skills in the Joint Company.
(c) The Joint Company agrees to reimburse to Foreign all expenses in respect of such individuals, including their salaries travel expenses and living expenses while in (host country), provided that such expenses, inclusive of all taxes but exclusive of travel to and from (host country), shall not exceed - per man per month.
(d) Local agrees to use its best efforts to arrange for their immigration visas into (host country) and suitable accommodation while they should be in (host country).
3. (a) The Joint Company shall be entitled, from time to time and as it shall consider necessary, to require Foreign to send to (host country) such personnel or individuals as it shall consider necessary to assist the Joint Company in finding solutions to any of its problems and in training employees of the Joint Company to cope with such problems.
(b) The Joint Company shall reimburse to Foreign the expenses of such employees for its period during which they shall be absent from their regular business duties with Foreign, including their travel to and from the (host country) by economy fare air passage, their salaries and their Living expenses, provided that the total of such expenses including all taxes but, excluding the, said air passage, shall not exceed - per man per month.
4. During such time as said personnel supplied by foreign shall be rendering technical assistance and training to the Joint Company, they shall not be regarded as employees of the Joint Company, for any purposes nor shall Foreign make tiny claim on behalf as such personnel arising from accident or any other cause.
15. RESTPJCTION ON SALE OF SHARES
Foreign and Local agree that neither will sell, transfer, assign, mortgage, pledge or otherwise encumber or deal with any or all shares of the capital stock of the Joint Company without the prior written consent of the other, except as is 1creinafter provided and provided that the provision shall not apply to transfer) [directors' qualification share so long as the beneficial ownership of such shares is retained by Foreign or Local as the case may be.
16. BUY-SELL ARRANGEMENT
Complex Agreement
1. Either Foreign or Loca1(hereafter in this clause called the "offer or") shall have the right at any time-after-years from the execution of this Agreement by notice in writing (hereafter called the '''original notice) to the other to offer to sell to the other (hereafter in this clause called the "offeree") all but not less than all of the outstanding shares of the 'Joint Company then owned by the offer or at a price and terms to be specified in the original notice, provided, however, that. the price shall be payable on the "closing date", as hereinafter defined, arid the balance shall be payable in no more than (number) annual installments and provided further that the original notice shall provide that the offeree shall have the right to elect to sell to the offer or all of the shares of the Joint Company then owned by the offeree at the price and then on the terms set forth in the original notice.
2. Within 90 days after receipt of the original the offeree shall advice the offeror by notice in writing (hereinafter called the "notice of election") whether the offeree accepts the offer or the offeror to sell all but not less than all of the outstanding shares of the Joint Company owned by the offer or elects to sell to the outstanding Joint Company owned by the offeree.
3. If the offeree does not advice the offeror by notice in writing within the said period of 90 days as hereinbefore provided then the offeree shall be ¬deemed to have accepted the offer of the offeror to sell all but not less than all of the Joint Company owned by the offer or in accordance with the original notice.
4. The purchase aI1d sale of the shares of the Joint Company resulting from acceptance or deemed acceptance by the offeree of the offer of the offeror to sell contained in the original notice as aforesaid or the election by the offeree to sell to the offeror all but not less than all of the shares of the Joint Company owned by the offeree or the offeror, as the case may be aforesaid, shall be completed on a date (hereinafter called the "closing date") not later than - days after receipt by the offeror of the notice of election, or if the offeree does not deliver a notice of election of election as aforesaid - days after receipt of the original notice by the offeree, at which time the nominees of the party whose shares are to be sold. (hereinafter called the "vendor") shall resign as directors, officers and. employees of the company and the other party who is purchasing the vendor's shares (hereinafter called the "vendor") shall resign as directors, officers and employees of the Company and the other party who is purchasing the vendor's shares (hereinafter called the "purchaser") shall and will pay the vendor the price or the portion thereof set forth in the original notice by cash or certified cheque.
If, on the closing date, the vendor shall fail or refuse to complete the transaction, the purchaser shall have the right on payment of the purchase price (or the portion thereof then due) to the credit of the vendor in any chartered bank in the city of (name of city) and on giving notice thereof to the vendor to execute and deliver all such transfer, resignations and other documents and instruments which may be necessary or advisable in order to complete the transaction and the purchaser is hereby irrevocably appointed attorney of the vendor for and in the name of and on behalf of the vendor to execute and do any deeds, transfers. conveyances, assignments, assurances and things which the vendor ought to execute and do under the covenants herein contained.
In, on the closing date, the purchaser shall rail or refuse to complete till transaction, the vendor shall have the right to purchase the purchaser's shares and on payment to the purchaser of an amount equal to 75 per cent of the purchase price, to execute and deliver all such transfers, resignations and other documents and instruments which may be necessary or advisable in order to complete the transaction and the vendor is hereby irrevocable appointed the attorney of the purchaser for and in the name of arid on behalf of the purchaser to execute and do any deeds, transfers, conveyances, assignments,' assurances and things which the purchaser ought to execute and do under the covenants herein contained.
It is understood and agreed that neither party hereto shall make or assist in making any application to wind up the Joint Company after an original notice shall have been delivered pursuant to the provisions of this section.
4.14 QUESTIONS
1. What is foreign collaboration? Explain' its significance in the liberalized economic environment.
2'. Discuss recent trends in India's foreign direct investment'
3. What do you understand by international joint venture? Explain is special features?
4. Critically comment on the progress of Indian joint ventures abroad:
5. Write a short note on UN code of conduct of transfer of technology.
4.15 FURTHER STUDIES
1) Manner, International Economics.
2) Francis Cherunilam, International Economics.
3) Economic Survey, Government of India
LESSON- v
WORLD TRADE ORGANISATION
Objectives of the lesson are,
i) to study the structure, functions and areas of operations of WTO
ii) to discuss dispute settlement under WTO,
iii) to study the procedure to levy anti-dumping and county-
willing duties,
iv) to review environmental aspects of International trade,
v) to discuss provisions relating to Intellectual property rights and
vi) to discuss the competition and trade in services.
5.1 The United Nations Conference on Trade and Development (UNCfAD) is a permanent organ of the UN Assembly, established. in the year 1964. It is serving as a platform to discuss the issues related to trade in the global market. It guides to negotiate trade related disputes and paves the way for dispute resolution and negotiating multinational trade agreements. The conference is a plenary body of a large number of countries. Conference meets at an interval of fours normally.
Functions of UNCT AD are listed below:
(i) Promoting international trade In order to accelerate economic development,
(ii) Formulating policies and principles for the smooth flow of international trade and solving problems; and
(iii) Negotiating multinational trade agreements
The spectrum of activities of UNCT AD includes providing support for negotiations for commodity agreements, technical collaboration of new trade activities and research support. These activities are especially designed for the development of trade and investment in developing countries.
Various recommendations are given to streamline the functioning of• UNCTAD in various conferences. The first conference held in 1964. The recommendations are based on the following basic principles:
(i) Every country has the sovereign right freely to dispose of its natural
resources in the interest of the economic development and well-being or f its own people and freely to trade with other countries:
(ii) Economic relations between countries, including trade relations, shall be based on respect for the principles of sovereign equality of states, self ¬determination of people, and non-interference in the internal affairs of other countries, and
(iii) These should be no discrimination on the basis of differences in socio¬economic systems and the adoption of various trading methods and trading policies shall be consistent with this principle.
Eight conferences have been so far held under the auspices of UNTCAD.
Given the important role of primary commodities and natural resources in the external sectors of developing countries, the initial factors of UNCT AD was on commodity policy and effort to stabilize and expand the export earnings of these countries. In the process, UNCT AD adopted a group approach to negotiations with OECD countries (i.e., the industrial economies) lining up together (Group B), the centrally planned economies of Central. and Easter Europe and the Soviet Union plus a few other similar economies forming their own grouping (Group D), and developing countries coming together under .the ages of the Group 77 to coordinate their positions. China formed a separate group.
Despite the debates and disagreements over the years, UNCT AD played key role in the emergence of:
1. The Generalised system of preferences (GSP)
2. A maritime shipping cede
3. Special international programs to help the least developed countries
4. International aid targets
During the 1970s, in line with the major changes in the international economic environment - the breakdown of the Bretton Woods System, oil price shocks, inflation and accumulation of debt by many developing countries ¬UNCTAD because a central forum for debates between the North and the South.
Its negotiations became politically charted and most of its sessions during the 1970s and 1980s reflected sharp divisions between participants, even as global consensus seemed to be emerging in the 1980s. (Source: Grant B. Taplin, 'Revitalizing UNCTAD', Finance and Development, June 1992, pp. 36-37, quoted by Francis Cherunilam, 'Global Economy and Business Environment').
5.2 Oza, A.N., in his article "General Agreement on Tariffs and Trade, 1994: An Explanatory Note" published in Vikalpa, July - September, 1995 has stated that the Uruguay Round Agreement envisage the establishment of an institution called the World Trade Organisation (WTO) to provide a common institutional a framework to conduct trade relations among number relations in accordance with the provisions of these agreements. It will encompass: (i) all agreements and arrangements, concluded so far under the auspices of GAIT, and the GATT agreements as modified by the Uruguay Round. At the head of the structure of WTO will be the Ministerial conference, which will meet at least once every two year to work towards greater coherence in economic policy making at the global level.
The WTO will set up a general council to serve four main functions. They are, (i) to supervise on a regular basis the operations of the revised GATT agreements and ministerial declarations, (ii) to act as a Dis!1ute Settlement Body; ; (iii) to serve as Trade review mechanism and (iv) to establish the goods council, services council and TRIPs council as subsidiary bodies.
The WTO was established on 1st January 1995 as successor to the GAIT. The implementation problems of WTO agreements are partly linked with the organizational structure and partly to the specific features of the agreements. The main difference between the WTO and GATT is as follows:
The GAIT was a set of agreements and not an organization. The role of the GAlT was in the area of the export and import of goods, in particular the reduction of tariff and elimination of non-tariff barriers. Agriculture was under a very soft discipline in the GAIT and textile was under a special regime in derogation of the normal GATT rules.
The WTO, on the other hand, is a full-fledged organization with a permanent secretariat and well-defined structure. Besides, the trade in goods, its area of operation extends to the intellectual .pa
property rights and services. It contains enhanced disciplines ill the areades agricultural and textiles.
The dispute settlement mechanism of the GAIT was relatively weak
to deal with the effective implementation of the decisions. The dispute settlement mechanism of the WTO is much more efficient and comprehensive than the GAIT. It has better mechanism for the enforcement of rights and obligations and also by ensuring acceptance of the decisions. The dispute settlement process has several problems for India.
5.3 WTO Agreements
Elaborate Agreements on 12 subjects in the area of trade in goods, viz.,
Agriculture
Textiles and Clothing
Trade Related Investment Measures (TRIMS) Sanitary and Phyta-sanitary Measures (SPS) Technical Barriers to Trade (TBT)
Anti-dumping
Customs Valuation
pre-shipment Inspection
Rule; of Origin
Import Licensing
Subsidies and Countervailing Measures Safeguards
Besides Trade in goods, WTO also covers agreements in specific areas, viz.,
• The General Agreement on Trade in Services (GATS)
• The Agreement on Trade-Related Aspects of Intellectual Property Right~ (TRIPS)
• The Trade Policy Review Mechanism (TPRM)
• Agreement on the Dispute Settlement Undertaking
The implementation of WTO agreements require immediate action in the following four broad areas:
Formulation of legislation and procedures
Establishment of institutions
Elimination of some trade measures within specified time limit
Notifications to the WTO
The WTO was established in 1994 and came into force in January 1995.It is not a simple extension of GATT 1947 but it is a complete replacement, it is primarily responsible for enforcing the Trips agreement which was designed to reduce barriers to World Trade. It is a formal international institution that has joined the rank of World Bank and lMF. It is regarded as a market through which nations attempts to create and alter rules governing the trade policies of members countries. Earlier the development of trade and economy of each country depended on the market power of the country and a small country could not impose legal obligations on other countries for implementing their trade policies. To correct this lacunae and to provide free flow of trade and regulate international prices, the WTA is emerged as a democratic institution having representatives of the member countries in their administrative bodies- the ministerial conference and in the general council. The representatives of WTO members are obliged to meet at least every two years to review the implementation of this agreement and undertake reviews in the light of any relevant new developments which might warrant modification or amendments to this agreement on all matters relating to the development of intellectual property rights and on all other trades related aspects. The other important body of the WTO is the general council that carries out the day today works of the WTO. It has two subsidiary bodies the dispute settlement body and the trade policy review body that promotes trading systems that are nondiscriminatory, reciprocal, liberalized, predictable but not necessarily fair and helpful to the needs of developing countries. It is true that transparency provisions in relation to the acts of the WTO and the actions of the members is essential to reduce tensions between countries and help in examining the trade policies of the member countries. However, it cannot be considered as a long term measure for the protection and development of intellectual property rights. Mere surveillance activities will not serve any purpose unless WTO conducts periodical reviews of trade policy of member countries and make suitable amendments to suit the needs of developing and least developed countries so as to achieve the objectives laid down in article 7 of the Trips agreement in letter and spirit.
5.4 Objectives of WTO are given below:
i) Raise the living standards and the incomes of the world people,
ii) Expand world production and trade,
iii) Optimal utilization of the world's resources,
iv) Help trade flow smoothly, freely, fairly and predictably.
The principles and functions of the WTO aim to protect and promote the interests of the developing countries by providing more time to adjust, greater flexibility and special privileges. The WTO provides a forum for continuous negotiations among the members, which include the efforts for further liberalisation of trade in goods and services and also for developing discipline in ot.'1er trade related areas. The WTO further provides procedures and rules to settle trade disputes among members when infringements occur.
After centuries of economic, political and emotional exploitation, the World Trade Organisation has brought one hundred and forty three countries of the world on a single platform to design common policies to market their goods and services freely without any fear or favour at a best possible price.
The activities of the WTO' are listed below:
(i) Administering trade agreements,
(Ii) Acting on a forum for trade negotiations,
(iii) Settling trade disputes,
(iv) Reviewing national trade policies,
(v) Assisting developing countries with trade 'policy issues through technical assistance and training programs, and
(vi) Cooperating with other international organisations.
5.6 Dispute settlement under WTO
The Understanding on Rules and Procedures Governing the Settlement or Disputes (OSO) , was the agreement through which the dispute settlement mechanism under the new WTO was established. Sometimes termed as the central pillar of the multilateral trading system and the WTO's most individual contribution to the stability of the global economy, xii its function is to provide security and predictability to the multilateral trading system, preserve the rights and obligations of the Members under the covered agreements, and to clarify the existing provisions of those agreements in accordance with customary rules of interpretation of public international law, xiii. Though all defects of the previous GAIT have not been corrected, the' DSU has in many ways been an improvement. The important source of this part of the chapter is WTO seminar papers of IIFT, New Delhi.
1. It establishes a unified dispute settlement system for all parts' of the GATT/WTO system, including the new subjects of services and intellectual property. Thus controversies over which procedure to use will not occur .
2. It clarifies that all parts of the Uruguay round legal text relevant to the matter in issue and argued by the parties can be considered in a particular dispute case.
3. It reaffirms and clarifies the right of a complaining government to have a panel process initiated, preventing blocking at that stage.
4. It establishes a unique new appellate procedure which will substitute ¬some of the formal procedure of council approval of a panel report. Thus a panel report will effectively be deemed adopted by the new dispute settlement body (DSB), unless it is appealed by one of the parties to the dispute. If appealed, the dispute will go on to an appellate panel. After the appellate body has rules, its report will go to the DSB, but in this case, it will be deemed adopted unless there is a conscious against adoption, and presumably that negative consensus can be defeated by any major objector. Thus the presumption is reversed, compared to the previous procedures, with the ultimate result that the appellate report will come into force as a matter of international law is virtually every case. The opportunity of a losing party to block adoption of a panel report will no longer be available.
Though the least Developed countries are yet to bring a case before the. WTO, a trend that is visible is the large number of appearance by developing countries especially against each other. In the year 2001, 9ut of the 27 matters bought before the DSB, 14 were bought by developing countries and in each of these 'matters, other' developing countries were the respondents. Totally they were defending in 22 of the 27 matters. In the year 2000, of the 29 matters, 'they are complainants in 18 of them and respondents in 14.10 of these matters were against each other. Between 1995 and 2600, the most active user of the DSM was the USA, having been the complainant in 45 of the 191 requests, which IS 29%. This 'is well above the share of world exports of the USA which in 1998 was 17%. On top of this the USA had' reserved its' right as third Party in every other case. In particular there has been no case against the EU where USA has not been the complainant or the third party. EU is also catching up with the USA, with 49 (25%) complainants raised by it. Dispute settlement forum of the WTO is one forum where one witnesses strange combination of countries pitted against each other in even stranger partnerships. India and Pakistan united against the USA, US v EU, US v Canada, tiny banana republics against major powers, developing v developed, developing v developing. What is said about international relations that there are no permanent friends only permanent interests appears accurate in relation to international trade.
The working of the DSU has no doubt created an efficient forum for countries to resolve their differences, it permits countries to pursue their rights independent of considerations of economic power, but its working in a'• way seems to have resulted in the countries having. got more than they had asked for. Sovereignty has been the touchiest issue, which the DSU has been charged to have undermined. The debate as to how much deference must the panel and the Appellate Body show to national interest or aspirations of domestic constituency or even decisions of national courts remains a matter of controversy. Many countries seem to be unhappy that they have to perforce get their legislations and policies modified in line with WTO rulings. There is also a vehement criticism that, dispute settlement under the GAIT seems to give an overriding importance to free trade trumping legitimate interests such as environment, biodiversity, culture, balance of payment.
Has Sovereignty been Mortgaged
One of the major criticisms against the WTO arrangement itself is that' it has led to the negation of several sovereign rights of "actions. Agreeing to measures is one thing, but actual implementation, being cragged into litigation, and forced to change policies based on decisions and under surveillance of the Dispute Settlement Body is quite another thing. The biting reality may be in certain areas, extremely delicate for nations, where loosing a case like the Tuna Dolphin -Dispute (Here the court ruled that trade agreement trumped over environment protection measures of USA) or the Beef Harmone Case (here EU's ban on hormone treated USA beef was held wrong) cannot ever be justified to local constituency. Needless to say, these decisions of the court were never implemented. It has been opined that the need at this time is for the DSU to produce rulings that have legitimacy with, stakeholders. Few cases discussed. Under dispute settlement are given below: (Source: WTO seminar papers, Seminar organised by IIFT, New Delhi).
Turtle-Shrimp Case
The USA prohibited importation to the U.S. of shrimp harvested, with commercial fishing technology that may adversely affect sea turtles. Several countries including India challenged the measure on the grounds that it violated the GAIT agreement and it was upheld by the Panel on the ground that the measure to protect "exhaustible natural resources" to be excepted under Art. XX of the GAIT must not "undermine the multilateral trading system". The USA' appealed challenging this uncompromising allegiance to the international trading system - this undimensional teleological method of interpretation ¬contradicts the clear intent of art. XX". Though the Appellate Body recognised the importance of environmental interests, it upheld this decision but on different grounds. Using the means-ends analysis and a least trade restrictive alternative test analysis it observed other measures could have been adopted to obtain similar results which did not violate the GAIT provisions. Presently the Appellate Body also found that the US in implementing its Rule had also' discriminated between countries.
Canadian Periodicals
Canada imposed certain excise duties on split run US periodicals i.e. Periodicals with US based reports with local advertisements and also excluded them for some other benefits. These measures, were taken with the interest of giving a boost to local periodicals against US based magazines that were totally flooding the Canadian market. Canadian magazines accounted for only 18% of those in new stands as against 81.4% foreign magazines and therefore an important interest was also to protect Canadian culture. The US challenged these, conditions as being volatile of WTO agreements and this was upheld by the' Appellate Body. Here the AB seems to have treated periodicals as any other trading good and not as carriers of culture, communication and propaganda. The. AB failed to consider that cultural diversity in itself is crucial even for free trade as it ensures comparative advantage and different cultural backdrops. If distinct culture do not remain, one could very well imagine a situation where all Canadians and Mexicans under the extraordinary powerful influence of the US media, begin to think, act, buy and consume everything American.
Japan-Taxes on Alcoholic Beverages and chile-Taxes on Alcoholic Beverages
Though concerned with liquor, these two cases bought to .the fore questions of economic sovereignty and fiscal choice. In the •Shochu case the contention of US, EU and Canada was that Japanese Liquor Tax Law violated Japan's obligations under Article III : 2 of GATT 1994 by taxing Shochu at a lower rate than other liquors. Article III:2 prohibits imported products from being subject to internal taxes in excess of taxes levied on "like" domestic products. Imported products that are "directly competitive" with domestic products cannot be taxed dissimilarly, as stated in the interpretive note to Article and Canada argued that the other liquors are either "like" Shochu or, alternatively, "directly competitive" with Shochu and therefore must be similarly taxed. The panel and the Appellate Body agreed with the contention of the petitioners. Similarly in case of the Chilean Pisco excess taxation of similar foreign liquor was held by these bodies to be against the provisions of GAIT.
In these cases the bodies failed to recognise that government make fiscal choices for various consideration like for instance, promotion of a backward region; encouragement to a certain sector of the economy, promotion of small scale industries to. Holding such classification bad merely because the products in issue were "like" or "directly competitive" may be missing the point. For instance, if a government wants to support small breweries by taxing them less than large breweries, it would be difficult for a panel to decide that beer from small end large breweries are not "like" or "directly competitive". Also it could be quite difficult to hold that the beers have different characteristics, different end uses, and different consumers. Therefore panels must look more to the policy behind the discriminatory taxation. It is only this policy that can guide a . panel as to which criteria it should single out to determine if products are "like" or "directly competitive" for the purposes of Article III:2. As the Panel In Malt 'Beverages stated, "the purpose of Article III is not to prevent contracting parties from differentiating between different product categories for policy purposes unrelated to the protection of domestic production.
To preserve their fiscal sovereignty, the Contracting Parties must have the opportunity to distinguish valid exercises of fiscal sovereignty• from policies intended to undermine the goals of the GAIT.
Thai Cigarette Case
America challenged L.1.e ban on imports of all cigarettes by Thailand before the Panel 0; the GAIT. Thailand was worried that lifting of the ban would flood the market with American Cigarettes, which if allowed would bring down the price of cigarettes from influencing people into more smoking. It also used a WHO expert to depose on the quality of American cigarettes which due to the special nature by which the tobacco was grown, was opined to be more addictive. Thailand cited that the aggressive advertisement and sale techniques adopted by American companies would go totally against the health concerns of the government. In 1987 alone, in Asia the sale of American cigarettes had gone up by 76%. The panel rejected That government in support of the decision taken by her under Article XX (2) of the GA IT on the grounds that there were other effective means of promoting it than by import bans. It had in mind non-trade measures like education of the people.' The WTO is also many times though to be reflecting the interests of big transnational business. Many countries too loose out to large companies supported by their governments. See for instance the Dole and Chiquita led American supported claims against the EU in the Banana Case. In this case several states in the Caribbean' whose main revenue was. through' export of Bananas, suffered a lot through this litigation.
5.7 The Dispute Settlement Mechanism under the WTO is the subject matter of Chapter 27 under Section V. Articles XXII and XXIII of GAIT '1947, which formed the core rules on dispute settlement have been carried over to GA 1T . 1994 but with stronger teeth The extended dispute settlement provisions are the main institutional innovations of the Uruguay Round. The dispute settlement panels have powers equivalence to those of judicial benches. The power to enforce an international law is a major breakthrough in international affairs (Chadha, 2000). The case law provides a listing of 179 cases of dispute brought before the WTO during the period January I, 1995 to August 31, 1999.
The dispute settlement mechanism of the WTO works as follows. First, when one country believes that another is violating any aspect of the agreement (including GATS and TRIPS, as well as GAIT), the complaining country first requests consultation with the offending country, and the two seek to resolve the dispute on their own. If consultation fails, then the complaining country requests establishment of panel, consisting of three persons with appropriate expertise from countries not partly to the dispute. This panel assesses the evidence in the context of its interpretation of the WTO members, acting through their Dispute Settlement Body (DSB), decide by consensus against its adoption, or if one of the parties to the dispute voices its intention to appeal. Therefore, the process requires unanimity among WTO members not to accept a panel report, in marked contrast to the procedures of the old GAIT, where a panel report could be blocked by anyone country, including the country that was complained for.
To hear appeals, the WTO has established an Appellate Body, composed of seven members of which three will serve on any given case. This Appellate Body is to consider only issues of law and legal interpretations by the panel, and It too issues a report which must be accepted by a unanimous decision of the I DSB.
Once this process is completed, countries are expected to implement any recommendations of the panel report. If they do not, then complaining countries U"C entitled to compensation from them, or to use suspension of Concessions (usually increased trade barriers) against them. If suspension of concession occurs, it is to be done preferably in the same Elector as the dispute or failing that under the terms of the same Agreement (GAIT, GATS or TRIPS). But if this 100 is impractical, suspension can come under another agreement Thus, in particular, violations of the TRIPS agreement can lead to increased barrier to trade in goods if the violations are not corrected in accordance with the recommendations of a panel report. This ability to extend' dispute settlement across agreements is one of the strengths of the WTO, and in no doubt is one of the things that motivated advocates of extended intellectual property protection to incorporate it into the Uruguay Round negotiations (Deard off, 1996). However; there is a possibility that countries retaliate• by. withdrawing concessions or commitments even before the panel gives its report. This issue needs to be addressed under the dispute settlement mechanism .of the WTO (dealt earlier in the section on, intellectual property rights). Also, there is a possibility that ultimate reliance on suspension of concession by trading nations either (1) would be defeating the purpose of the WTO in case the• cases do not get, settled either by implementing the panel recommendations or by compensation or (2) expedite the test of the process work and lead to cooperation if there is a threat of suspension. Deard off (1996) notes that the threat of expulsion from WTO membership in case of violation of rules will" not be effective because members will be reluctant to set a precedent by expelling another lest the same thing later happen to them.
It is to be noted that most developing countries, partly because they are small and partly because of lack of experience are finding it difficult to cope with the WTO new dispute settlement mechanisms. Blackhurst (1997) points tit that two thirds of the least developed countries in the WTO have no representation. For the other third, there is typically only one person covering all 'he international organizations. Given the active participation of members in the work of the WTO, this inevitably leads to under representation of their interested.
and their inability to participate and have any influence on WTO decisions. An enlargement of the WTO Secretariat to permit the establishment of a service which could provide legal advice on procedures and other aspects of dispute settlement would benefit not only developing countries but also some of the smaller developing countries.
In response to criticism being leveled against the dispute settlement understandings (DSUs) own rules and procedures from NGOs, President Clinton has proposed that "hearings by the WTO be open to the public, and all briefs by the parties be made publicly available and that the WTO provides the opportunity for stakeholders to convey their views ... to help inform the panels in their deliberations". Most WTO members, including India are expected to resist such proposal of transparency in the dispute settlement process on the grounds that NGOs may not be expected to interfere in the policy decisions of the member states.
Under GATT, India was involved in one dispute with' Poland. India requested consultations under Article XXII of GATT 1947, concerning a 'modification of Po lands tariff structure on motor car imports from countries \ outside European Economic Community. A mutually agreed solution was notified in September, 1996. India has used the WTO' s dispute settlement - mechanism four times between 1995 and 1998. Recently US has requested the establishment of a panel to examine India's trade related measures (TRIMs) in the motor vehicle sector. 'it claimed that under these measures, manufacturers could not obtain import licenses for automobile components unless they agree, to a series of local content, trade and foreign exchange balancing requirements that contravene provisions of the GATT 1994 and the TRIMs Agreement. India maintained that the measure in question were not TRIMs and that they were not inconsistent with the GATT and TRIms Agreement. If these measures were to be considered as TRIMs, India recalled the May decision of the General Council for the GoC'ds Council Chairman to carry out consultations regarding the issue of TRIMs extension Philippines and Cuba said the US panel request was premature pending the completion of the TRIMs consultation. The Dispute Settlement body agreed to revert to the US panel request. Table X tabulates the complaints that have been notified in the WTO.
Table X
Summary indicators of wto Disputes
All complaint
Complaint Defendant
Developed Developing Total
Developed 63 42 105
Developing 21 11 32
Total 84 53 137
Completed pancls
Complainant Defendant
Developed Developing Total
Developed 9(7) 7 (7) 16 (14)
Developing 8 (8) 2 (0) 10 (8)
Total 17 (15) 9 (7) 26 (22)
Source : WTO and seminar papers of IIFT, new Delhi
B figures in brackets refer to number of cases in which complaints were successful.
Developing countries account for about one fourth of ail complaints and have been defendants in forty percent of the complainants. Developing countries have won all the cases that have been brought against the developed countries. India has successfully prosecuted all three cases against developed country partners. The fact that developing countries have been defendants in. a lot of cases,' is actually reaffirmation of the usefulness of the system as a safeguard at least in so far as it reflects reduced extra-systematic pressure. To settle disputes with in, the system affords greater protection to the weaker party than settling outside it. However, it will not be out of place to suggest that dispute settlement process should be simplified.
5.8 Anti-dumping Measures
In international trade, "dumping" occurs when an exporting country/exporter "drops" or sells goods in the importing country at a price lower than their costs in the exporting country.
1. According to GAIT, 1994, member nations have a right to impose anti¬dumping measures under two conditions: (i) a product is supplied at an export price which is below "normal" value, i.e., a price which is lower than the domestic cost in the exporting country and (ii) the "dumped" imports are shown to cause serious damage to a domestic industry located in the importing country.
2. Rules for determining "dumping" are provided by G A TI. Criteria are provided for allocating costs for determining normal value and for determining the causal relation between "dumped" imports and injury to a domestic industry.
3. Procedures are set out in detail to deal with anti-dumping cases.
4. Anti-dumping measures should expire after five years.
5. Anti-dumping measures are not allowed to be applied when the price of "dumped" imports is lower by 2 per cent or less of the normal value 'or when the quantity of imports dumped is negligible, i.e.-, 3 per cent or less of total imports of the product imported by a country.
Anti-Dumping Initiations by Economy Taking Action
Number of anti-dumping actions
Economy 1991-1994 1995-98 Index ofanti-dumping initiations 1995-98 per dollar of imports USA=100a.
Australia 215 77 1096
Canada 84 39 199
EU 135 122 210
US 226 94 100
All developed 678 353 74
Economics
Argentina 59 72 2627
Brazil 59 54 871
India 15 78 1875
Korea 14 34 204
Mexico 127 31 275
South Africa 16 72b/ 2324
All developed 394 509 313
Economics
Note a/.Based on numbers of antidumping 1995-98 and values of merchandise imports for 1996
b/. 1995 – 1997 figure
source : WTO secretarial, Rules Division, Antidumping Measures Database
Antidumping Initiations by Exporting Economy
Number of Anti- Dumping Initiations
Economy 1992-1994 1995-1997 Index of anti dumping initiations per dollar of exports USA = 100
France 26 8 34
Germany 35 30 70
Italy 16 16 77
Japan 32 23 67
UK 20 16 74
US 70 48 100
Brazil 50 23 585
China 115 94 751
India 24 21 779
Korea 50 40 385
Taiwan 31 30 323
Thailand 26 21 451
Source: WTO Secretariat, Rules Division, Antidumping Measures Database
5.9 Environmental aspects of in International trade
The World Trade Organisation has been under intense pressure to
legitimise the use of trade measures for environmental purposes as they are _ perceived as effective tools for ensuring compliance with environmental standards. However, the WTO may not be an appropriate forum to deal with global environment issues.
from a trade perspective, environmental issues can be divided into
trading in commodities that affect the environment of:
* importing country
* exporting country and
* global (or trade-boundary) environment
As far as the environment of an Importing country is concerned, the built ¬In provisions of the VITO allow member countries to impose a ban on the import 01' a commodity if it contains harmful chemicals that adversely affects the health <)1' its citizens and damages the environment. Also trade restrictive measures (suspension of MFN treatment) are allowed to protect human, animal or plant life and save exhaustible natural resources under GATT Article XX, otherwise known as the general exception clause_ It is the second aspects of Environment, namely, one that adversely affects the environment of an exporting country, that is sought to be brought within the purview of the WTO through eco-labeling and harmonisation of standards, Developing countries are objecting to this as they fear that Environment would sense as another protectionist device in the hands of developed countries to be used against them where environmental standards are understandably lower. On the other hand, if trading in a particular commodity affects the global environment, an importing country can "now" impose a ban on the import of that commodity and, in effect, dictate the process by which a product is made. "Now" because the WTO was silent on this till recently, But the dispute settlement body (DSB) of the WTO, in its ruling in the Shrimp-Turtle Case has main-streamed this aspect in the WTO. A brief survey of the landmark Shrimp¬ Turtle Case is pertinent here. In 1996, the US imposed a ban on import of shrimp, caught with a method that endangered the lives of endangered species of sea turtles, on all countries exporting shrimp to the US (earlier applied to 14 countries only) unless certified to be using the Turtle Excluder Device (TED). Thailand, Pakista-"1, India and Malaysia objected to the ban and went to the DSB. Their main objections were: • The imposition of a ban on shrimp exports per se; • Discriminatory treatment in terms of greater time allowed in countries of the Gulf of Mexico/Caribbean/Western Atlantic; and • Imposition of process-related environmental requirements. The DSB upheld the second point, turned down the first0 and gave a far ¬reaching interpretation on the third. It interpreted exhaustible natural resources (within the meaning of GATT Article XX) to include living species. It also justified the use of market access requirements to protect the endangered species and hence, Iegitimised process-related requirements. The Shrimp-Turtle highlighted that countries that are arm-twisted through trade sanctions to follow particular conservation pla.l1 can bypass the issue without any positive durable impact. For example, in India. TED is still not being used which even though Its ex ports to the US has increased, probably because India too redirected its caltered shrimr, exports (on which no ban was imposed) to the US and captured shrimps exports to other markets. Can't Universal ban prevent this redirection? Perhaps, but the WTO can't make it mandatory. Moreover, protection of the Environment is heeded ,even if the countries do not trade with each other. Thus, there must be an arrangement outside the WTO forum to address environmental concerns. Also, environmental concerns tend to get addressed with increase in income levels. While trade sanctions can have a limited role in the conservation and protection of Environment, sanctions can delay the positive impact that increase in income, resulting from trade, would have. Finally, environmental protection must be taken on its own merit, and not prompted by fear of trade sanctions. . Trade sanctions could be of strategic value and the threat of sanction can be effectively channeled by a country for mitigating domestic opposition to its conservation program which may otherwise be difficult. Likewise, trade sanctions can be used to encourage/coerce a defiant country to become as part of a multilateral environmental agreement all though given the unidirectional exports' to the developed economies, the odds against developing countries are high. It is a test of human ingenuity on how to exploit positive aspects of trade sanctions without letting the sanctions be used as a protectionist barrier. This. at least, calls for the opening a genuine dialogue. In the past, developing countries' reluctance to discuss environmental issues in trade forums led the DSB to mainstream environmental issues within the WTO. The new round at Doha allows discussion and debate on substantive aspects of the trade and environment linkage, the success of which depends on the genuineness on the part of the developed and~ developing countries alike. 5.10 Trade Related Intellectual Property Rights (TRIPS) and GATT, 1994 Intellectual Property Rights (lPR) cover trademarks, copyrights, and patents. Like most other countries of the world, India has her own national laws to regulate the rights and obligations of the holders of copyrights (literary and artistic works), trademarks (trademarks, brand names. and logos) and patents (inventions of products and processes). The proposal to bring a multilateral lPR agreement within the scope of GAIT agreements during the UrugUi1.y Round originated from the Des, particularly from USA, Japan and the European nations who control an overwhelming proportion of the world ~l()Lk of patents. This proposal was strongly resisted by the LDCs as the revision or their national patent laws on the lines of the patent laws of DCs would greatly hamper development of their technological capability. WTO has come up with various dimensions and one of the most significant dimensions of WTO is the agreement on Trade Related Aspects of Intellectual Property Rights (TRIPs) which has a bearing on the Indian Pharmaceutical Industry. Intellectual properties should be protected as the creation of intellectual properties is crucial for the development and growth of mankind. With assured arrangements for the protection of intellectual properties, the scientists and researchers would feel motivated and would be more inclined towards world-class inventions. In order to get advantage from the new directions consequent upon the. TRIPs Agreement, developing countries like India need to improve their regulatory framework, laws and service, which will facilitate research and incentive activities (Chakravarthy, 1999). Intellectual Property Rights Intellectual property is described as a creation of mind that is of value to the mankind. Intellectual property Rights (lPRs) are the rights granted to persons (inventors) for creations of their mind (Mehta, 1999). IPRs provide incentive to the creator for taking initiatives to create property, which in turn will be helpful for the development of the society. Protection of intellectual property is essential to encourage and motivate inventors for taking up incentive activities (Venna. 20C-('). TRIPs provide the norms and standards for protection of intellectual property. The TRIPs Agreement provides minimum norms and standards 01' protection for seven forms of intellectual property those are copy right & related rights, trademarks, geographical indications industrial designs layout designs for 'integrated circuits, undisclosed information and patents. In case of patents, Indian laws do not meet the standards and requirements prescribed by WTO (Patihasarathy, 1998). Developing countries were given time until 2000 to introduce protection norms for TRIPs other than patents. For patents, the deadline was extended to 2005. In the new patent regime, patents shall be granted for inventions or discoveries, whether products or processes, in all fields of technology, provided inventions are new, involve an incentive step and are having industrial Jurisdiction a patent includes products processes apparatus and articles that are capable of industrial applications. Indian Patent Act in the New Regime The Indian Patent Act, 1970 that came into force from April 20. 1972, has become outdated as new patent regime with different requirements has emerged. Under the new patent regime, there will be product patent and The duration of patent will be 20 years. Certain features of Indian Patent Act. 1970 which are applicable on pharn1aceutical industry are not suitable to the new patent regime. IPA provides patents for a shorter term of 7 years in case of pharmaceuticals from the date of filing the application or 5 years from the date of obtaining the patent (Debroy, 1999). The Drug Price Control Order under the Patent Act 19)0 implemented by the Government did not allow the industry to have returns on investment in R & D. It could not encourage much foreign investments and transfer of latest technologies by multinational drug companies in India (Chitme and Gupta, 2000). Our country cannot be a global leader under such conditions where there is no real intellectual challenge. If Indian pharmaceutical industry has to survive in the global competition. We have to encourage inventiveness" by making necessary changes in our IPR systems. A serious thought must be given to the, complete restructuring of the Indian Patent Act and the patent office without sacrificing in any way India's long tern1 national interests (Hegde, 1997). Indian Government has initiated the process of change by enacting Indiat1 Patents (Amendment) Act, 1999 pa It is estimated "'that out of the total world stock of about 3.5 million patents, only about 2,00,000 or 6 per cent of patents in the world are granted by the LDCs under their national laws. Out of these 2, 00, 000 patents registered in the LDCs, nearly 85 per cent (i.e. 1,70,000) are owned by foreign individuals, multinational corporations, and foreign subsidiaries mostly from the five DCs, viz., US, UK, Germany, Switzerland, and Japan. And only 15 per cent patents are owned by nationals of LDCs. Moreover, about 90 per cent of the foreign¬ owned patents in LDCs are '•non-working'-. So far as patents granted in India are concerned. in 1989, out of 13,600 patents in force, only 20 per cent were owned by Indians and 2 per cent by other LDCs. whereas 78 per cent of patents were held by developed countries of which 29 per cent were held by US, 34 per cent by European nations and 6 per cent were owned by Japan. Thus, not only in the world as a whole but even in India and other LDCs, ownership and control of the patent system is heavily concentrated in the hands of rich DCs. lPR is brought within the purview of GATT on the following two grounds: The need to control the growth of international trade in "counterfeit" goods which creates tensions in economic relations between the concerned countries. Such trade is supposed to be facilitated by widely varying national laws and standards for protection and enforcement of IPR and absence of any multilateral framework of principles, rules, and disciplines to deal with this problem. * The need to extend to the sphere of IPR the GAIT objectives of reducing tariffs and non-tariff barriers to cross-border trade, obliging every nation to accord most favored nation treatment to all 'Trading partners and reducing discrimination between domestic and foreign enterprises. GAIT Agreements on Copyright • Member countries are required to comply with the substantive provisions .of the last Berne Convention of 1971 on copyright for protection of rights on literary and artistic works. • Computer programs to be protected in the same way as literary works under the Berne convention. •.. Authors of computer programs and producers of sound recording to be given' rights to authorize or prohibit the commercial rental of their works to public. Similar rights to films. The provisions relating to protection of rights of foreign authors of computer programs will ,have serious implications for the growth and exports of Indian software industry. Trademarks + The TRIPS agreement of GAIT, 1994 defines the types of trade marks and signs which are eligible for protection and also defines the minimum rights of owners of trademarks. Other countries are returned to prom bit that foreign trademarks be used in conjunction with local trademarks, lTil1 recently, Indian licensing and foreign brand names and trademarks). + Industrial designs are also protected for ten years under TRIPS reement. Member nations are obliged to enable owners of protected designs to prevent manufacture, sale of importation of copied designs. Patent System under TRIPS Agreement of GATT, 1994 A "patent" means legal right granted by the government to investors of products and processes to exclude for a fixed period other persons from imitating, rl1anufacturing, using or selling the patented product or process without the authorization of the patent-holder. Thus, a patent confers a legal monopolistic right to the inventor of a product or a process for a fixed period. The conferment of such monopoly power to the patent-holders affects a variety of interest-groups, namely, the patent-holders. the users of patented products or processes, the patent granting country, the foreign patent-holder and his country and the public in general as the beneficiary of technological development. The patent-owner can authorize another party to produce or use the patented product or process by issuing a licence against payment of a fee or royalty or any other consideration. National Patent Laws to Conform to Paris Convention on IPR As regards patents, under new GATT 1994 there is [ general obligation on all signatory nations like India to comply with the substitution provisions of the Paris Convention as revised ill 1967. Till the signing of the GATT agreement in December 1993, has strongly resisted the pressures to be a party to the Paris Convention and asserted her right to frame her own patent law to promote development of indigenous technology and self-reliance. Period of Patent The TRIPS agreement of GATT 1994 requires that member nations should grant patent protection for 20 years to ill1 inventions, whether products or processes, in almost all fields of technology, Exclusion from Patentability The TRIPS agreement permits member nations to exclude from patentability inventions in the following spheres: • Diagnostic, therapeutic, and surgical methods. • Plants and animals other than micro organisms. That is, n1'icro organisms like bacteria, virus, cells, etc., are patentable user GATT, 1994. • Biological processes for production of plants and animals other than microbiological processes. That is,' microbiological processes, involving genetic engineering and application of biotechnology are patentable under GATT 1994. A member country must, however, provide protection to inventions/discoveries in plant varieties or seeds either under its patent system or a sui generis system. Sui generis means a system which covers a unique class of inventions/discoveries which are not classifiable with other patentable inventions such as industrial products and processes. Inventions or discoveries in plant varieties and seeds and biological processes may be considered of such nature that they cannot be encompassed by the general patent law and, hence, require a specific law to protect the exclusive rights of inventors in these fields. For instance, the Plant Breeders Act in USA protects the rights of inventors in the field of seeds and plant varieties, TRIPS 'agreement under GAIT, 1994, sets out very restrictive - almost prohibitive conditions for compulsory licensing or governmental use of patents without authorization of patent owners because the objective in GAIT is to protect the monopoly right of patentees. TRIPS agreement stipulates that member countries should revise their national patent laws in conforn1ity with Trips agreement within a prescribed transition period which is one year for DCs and five years for LDCs and former centrally planned countries (of Soviet Union Eastern Europe). Indian Patent Law and TRIPS Agreement under GATT, 1994 There are significant differences between the existing Incfial1c Patent Act, 1970, and the patent system prescribed by GAIT, 1994, on the basis of Paris Convention (1967). The Indian Patent Act was designed to strike a balance between the monopolistic rights of the inventor and the objective of developing indigenous technological capabilities in a manner that would sub serve the wider public interest. In contrast, the patent system based on the Paris Convention and prescribed by TRIPS agreement under GAIT, 1994 is concerned only with protecting the monopolistic rights of the patentees regardless of the potential adverse effects of such protection on the technological development in LDCs and the interests of the wider public as beneficiaries of technological progress. The basic differences between the existing Indian Patent Act (1970) and the patent law envisaged under TRIPS agreement are given in Exhibit 1. Exhibit Basic differences between Indian Patent act (1970)and TRIPS under Graft. Indian Patent Law Trips under Gatt Only process Patents in fields of food, medicine, drugs and chemical substances Product patents in all areas other than those mentioned above Product patents in all areas including food, medicine, drugs and chemicals The following are not patentable Only plants seeds animals and biological processes are not Agricultural products including seeds and plants Patentable but agricultural/products, micro organisms and Animal and all life forms including micro organisms Microbiological processes are patentable. Rights of inventors of Biological and microbiological processes Plant and seed verities to be protected through a sui generis system like the Plant Breeders Act No. Sui generic system existing to protect rights of inventors of plant and seed varieties. Processes for treatment of Human beings and animals are not patentable Of us processes / methods for treatment of human being and animals not patenable Patent expiry period: 5to 7 years in case of patents for food, medicine, drugs and chemical substances 14 years in case of other patents Patent expiry period is required to be 20 years for all patents (presently the term of any patent is 20 years in UK and US and 15 years in japan) Compulsory licensing of any patent is granted after 3 years if requirements of public interests such as sufficient availability or reasonable prices are not satisfied Compulsory licensing of any patent allowed only under exceptional, very strict conditions which are not related to criteria of public interest like availability of prices A patent is treated as “working” only when it is used in local manufacturing (i.e. used for production in India) importation of a petended product is not treated as a “working” paten. A patent product can be imported from any source other than the patentee can be revoked if it is found non-working in the above sense A patent is treated as “working” even when it is not used in local manufacturing A patent is considered “working” even when the panted product is only imported. A patent product can be imported only from the pentent holder A patent cannot be revoked because it is non-working (i.e even when it is neither locally produced nor imported by the patentee) Revocation order issued in one year if a patent is notworked in two years after grant of compulsory license Revocation proceedings instituted two years after compulsory license is granted. But issue of revocation order may take any length of time. Provisions for license of Right under which After 3 years the government may suo moto (on its own initiative) apply for endorsement of (automatic) license for any patent on grounds of public interest. In respect of patents No provisions for licenses of right are to be permitted. However the government can use any patent without authorization of owner under exceptional conditions (which do not include the criteria of Public Interest as set out in the Indian patent law For food, medicines, drugs and chemical substances licenses of right (automatic license) is deemed to have been endorsed after 3 years Infringement proceedings are permitted under Indian patent law. Infringement action or effective protection against unfair, dishonest practice to be assured by patents law of all members countries Under the Indian law the onus of proof of infringement is on the patience. He has to establish a prima facie case of infringement of his patent. Thus the guiding principle is “innocent till provided guilty” there is a ceiling ion the royalty or free that the patent holder can demand from a license Under Trips agreement a patentee has only to make an accusation of infringement and the onuis is on the accused to prove he has not infringed the concerd patent. Thus the guiding rule is reversed viz. “guilty till proved innocent there can be no ceiling on the fee or royalty that can be deemed from a licensee by the patent holder. Source: Vikalpa, July - September, 1995. 5.11 India has emerged as one of the top developing nations applying for patent to the World Intellectual Property Organisation (WIPO) during the January-June period this year. According to a CII study, India is at number three behind Republic of Korea and China. The number of international patent applications from developing countries has more than quadrupled in the last four years and for the first six months of this year more than 84% of the Patent Cooperation Treaty (PCT) applications from developing countries received by WIPO organised in the Asia-Pacific region, followed by Africa, Latin America and the Caribbean. In India the majority of applications are from pharma and chemical companies. Of the total 2,593 applications received by WIPO in the first half of 2002.' India's share was at 9.3% after Republic of Korea and China who constituted 46.3% and 22.1 % respectively. According to the latest figures available, while PCT applications from India were 61 in 1999, as compared to 790 from Korea, and 2040 from China, it touched a figure of 316 in 2001, Korea and China filed for 2,318 and 1,670 PCT applications respectively in 2001. Another major PCT applicant is South Africa which constitute 8.4% of applications from developing countries and has filed 217 application in January ¬June period. In the Latin American and Caribbean region, 3.7% of PCT applications were filed by Brazil followed by 1\1exico with 2.1 % of the total. 5.12 Trade related investment measures The inclusion of TRIMS within the purview of GAIT agreements is one of the most controversial features of the Dunkel Draft. Since the intention of agreement on TRIMS is to significantly curtail a country's freedom to decide her policies and priorities for investment allocation, it will have far reaching effects on the political economy of development in the LDCs. 1.The Dunkel Draft assumed that policy measures instituted by member nations to regulate investment for the purpose of attaining objectives of import substitution, export expansion, controlling foreign exchange outflow, etc., are against the objectives of GAIT because such regUlatoryT'1easures act as ol~tac1es to promotion of free trade. 2. Types of investment regulation measures which are considered inconsistent with the objectives of GATT, 1994 and, therefore, required to be gradually removed by member countries under the TRIMS agreement are listed below: Measures which stipulate investing enterprises to procure specified levels of locally produced material (or equipment). • Measures which restrict volume/value of imports be investing enterprises (e.g. in India, investment in a new unit or expansion involving capital goods imports above 30% required an industrial licence). • Measures which link imports of an investing enterprise t6 its exploit. • Measures which impose minimum export obligation (e.g., stipulation or certain minimum export obligation on investor enterprise was quite common under the Indian Industrial licensing system). • Measures which limit remittances of profits by a foreign company. • Measures which impose barriers to entry in certain fields. 3. In respect of the above types of non-conforming trade related investment measures, the member nations have to accept the following obligations: • to notify the WTO about the operation Of investment measures, and to make a commitment to eliminate such investment measures within a specified period which is two years for DCs an:1 five years of LDCs. 4. As regards the implications of TRIMS agreement for India, the point that needs to be stressed is that in the last 40 years, India has been able to achieve highly diversified and self-reliant industrial growth mainly by adopting those very investment measures which under the TRIMS agreement are required to be eliminated. Thus, India will be required to completely change the basic objectives of her industrial development strategy on account of the commitments made under the TRIMS agreement of GAIT, 1994. 5.13 WTO and FDI Policies FDI is very much a part of the WTO, as it already exists in the form of agreements on TRIP's. TRIM's and trade in services. Furthenl1ore, much of international trade which the WTO oversees is generated by FDr. By the end of 1994, among the four categories of agreements reached under the GAIT (evolving into WTO) on (a) goods, (b) services, (c) intellectual property rights and (d) dispute settlement, only wo i.e., (a) and (b), contained some disciplines on FDI. In the category (a), the agreement on FDI was called TRIM's. They a1tcmptto abolish fDI policies that hamper trade the goods. The main features of TRIM's are: • All restrictions on foreign capital be removed. • Same rights to foreign investors as a national investor. • No restrictions on any area of investment. • Export or pan of 'the output will no longer be mandatory. •• Foreign investor will not be obliged to use local products and materials. o Imports of raw materials and components will be allowed freely. e Restrictions on repatriation of dividend interest and royalty will be eliminated. It also provides that no contracting party shall apply any TRIM's inconsistent with Articles III (National treatment) and. XI (Prohibition of qualititative restrictions) of the GArr. . Developed countries had two years (end of 1996) to eliminate these. Developing countries five years (1999) and the Least Developed Countries have seven (2001). The incidence of TRlM's is high in India. The: Agreement on trade in services: defined for modes of international trade in services. A. Cross-border supply (ex-provision of a technical report by a foreign national by fax, :e1ephone) B. Commercial presence (foreign banks operating in a host country) C. Movement of business persons to' impart services (software engineers,' fashion designers, engineers, doctor D. Consumption abroad (tourism) Among these, category (B) involves FDI naturally. TRlM's prohibit countries from Imposing 'restrictions foreign investment. TRIM's would have direct impact on the industrial policy, foreign investment and foreign exchange. 5.14 GOI has taken a series of steps to ensure a liberal FDl policy. 1. Automatic Route 2. Foreign Investment Promotion Board/Government route. • All items/activities, except a small negative list quality for automatic approval as per sector policy for FDI • The ruminating activities, require approval of FlPB Government. FIPB endeavors to dispose of applications for FDI within a time frame of 30 days. The policies and procedures pertaining to FDI have been progressively liberalized. Some recent policies in the wake of liberalization of FDI policy art 100% FDI permitted for B to B commerce 100% FD1 permitted In oil-refining. Removal of cap on (power sector) foreign investment. Automatic Route is available to proposals in IT sector even when the Applicant company has a previous joint venture or technology transfer agreement in the same field. Defense-Arms and ammunition, explosives and allied items of defense equipment, defense aircraft, and worships Cigarette/cigars and manufactured tobacco substitutes (100%). 100% FDI in Telecom Sector. (with certain conditions) Electronic Mail, Voice Mail. FDI up to 26% is eligible under the automatic route in the Insurance sector, as prescribed in the Insurance Act 1999 subject to their obtaining license from Insurance Regulatory and Development Authority (IRDA). 5.15 Safeguard Measures Safeguard measures refers to the temporary/emergency measures introduced by a country to safeguard against unexpected changes in trade and/or unfair practices adopted by a trading partner. • GAIT, 1994, stipulates that a member country cannot unilaterally introduce safeguard measures such as "voluntary export restraints", "orderly marketing arrangement" or any such "safeguard" measures to expand exports or to control imports, These measures are a common feature in the textile and clothing trade under the MF A. • In areas of trade not covered in phase out such safeguard measures 1995. • Temporary safeguard action is determined from a country cause various injury to the domestic public interest. 5.16 GATT and "Super 30" or USA It is justifiably argue that Section 301 of the US trade bill popularly known as "Super 301" violates the objectives of GATT, 1994 under Section 301, the US government can act unilaterally to safeguard the interest of American exporters against foreign restrictions by imposing more restrictions on access to the US market. By resorting to tile use of Super 301. USA is actually' increasing and not reducing the barriers to trade between USA and other nations. Thus, as a "safeguard" measure, Section does not confirm to the objectives rules and norms set out in GA T1, 1994. The use of Super 30 I as a trade weapon should, therefore, be discontinued from 1995. Section 301 of US Trade Bill is instituted as an instrument to tackle on a nation-to-nation basis the complaints of US exporters of "unfair" treatment received in foreign markets. Scetion301 or super 301 authorizes the concerned, US official to act against foreign trade partners under the following situations: Certain traded practices of the concerned trading partner violates, US rights under international agreements such as GATT. • Certain trade practices or any discriminatory action or policy of the concerned trading partner are unreasonable or unjustifiable because' they burden or restrict US commerce. • Unfair trade practices or discriminatory actions referred to above related to those very aspects of a country's national laws/policies for services, investment and Intellectual! property rights which are covered by GATT under Services, TRIMS and TRIPS, Since the area covered by Super 30] is now covered by the enlarged scope of GAIT, 1994, through multilateral agreements, oil TRIMS. TRIPS, and services, there is little Justification for the US to continue with Super. 301 However, it has so far not conceded to the demand for abolition of Super, 301 and powerful industrial lobbies and not likely to allow the Senate to easily give in on this issue. 5.17 India's Commitment to WTO related to automobile sector The government withdrew the export obligation on auto companies against imports of auto kits. India is committed to such reform as per its undertaking to the world Trade Organisation. The domestic auto company that stands to gain the most is Hyundai Motors India. This along with Daewoo Motors India have the largest 'export obligations as well as the largest short fail from the export target. While other manufacturers also gain, the impact is much less. Ford has been well on course to meet its target and General Motors India has a low target to meet. A notification issued by the Directorate General of Foreign Trade (DGFT) said that the joint venture auto companies which had signed memorandum of understanding would no longer have to fulfil this export obligation against imports of completely knocked down and semi-knocked down kits or components. This follows India's commitment to the WTO that it would issue necessary notifications in this regard before September this year. India had on March 2002 withdrawn its appeal against the WTO ruling on its Auto Policy which stated that New Delhi had acted inconsistently with its obligations by imposing conditionality on auto makers under the MoU. The ruling was in response to complaints by the US and the European Union to certain aspects of India's automotive components licensing policy. Prior to the lifting of quantitative restrictions in April 2001 auto companies were required to sign an MoU with the DGFT under which they were obliged to achieve indigenization of a minimum of 50% by the third year and 70% by the fifth year from the date of its imports of CKD and SKD kits. Thereafter, the MoU and the import licensing would abate. 5 .18 Importance of Doha Ministerial Conference The developed world believes there is a need for more areas to be brought under global trade rules. The negotiation3 for these rules were to be launched at the WTO ministerial (a meeting of ministers) in Settle 1999 but the members failed to reach an agreement. It was widely believed that if the Doha ministerial too failed, the developed countries would take other routes to create these rules, such as agreements between regional blocs. This pressure for a new round of trade negotiations gained further momentum after September I I. The US argued that a new round would help rebuild business confidence that had been shattered by the terrorist attacks. India argued that the developing countries were not in a position to begin a new round of trade negotiations. The agreements reached during the Uruguay round had itself not been fully implemented. If such a round was to be contemplated, new issues - particularly investment, competition and government procurement - must not be included. And there was an urgent need to clarify that the commitment to patents would not come in the way of countries protecting public health. To this end, there must be a further extension of the transitional period for developing countries to accept the new patent regime. The ministerial made a separate declaration clarifying that countries could license domestic producers to manufacture patented drugs in the case of all epidemic And the transitional period to introduce the new drug patent regime was extended, but only for the least developed countries, which does not include India, for which the deadline remains 2005. These countries were given time till January 2016 to implement patent laws for pharmaceuticals. The ministerial also decided on "round 40 implementation issues and the other issues that would be considered by the relevant WTO bodies. These bodies would report to the Trade Negotiating Committee by the end of 2002 for appropriate action. The main task of the trade negotiating committee would however, be to launch fresh negotiations. These negotiations would also cover issues like investment, competition, government procurement and measures facilitating trade, as well as the link between trade and the environment. How much has India gained in Doha Ministerial Conference? The major beneficiaries of the decisions on implementation issues are the least developed countries. But, India has succeeded in getting some of its concerns addressed. India believes the protection or geographical indications offered to products like champagne must b~ extended to basmati. The Doha ministerial decided that the question of extending the protcc1ion or geographical indications will be addressed by the Council for TRIPs. India argued that while the convention on bio- diversity recognises the sovereign rights of individual countries over their bio-resources the TRIPS agreement does not. TRIPS also does not protect traditional knowledge the Doha ministerial instl1lctcd the Council for TRIPS to examine the relationship between the TRIPS agreement and the Convention on biological, university, as well as the issue of protecting traditional knowledge and folklore. India has consistently argued that the time-table for removing quotas in the textile markets in the developed world was not fair. This opening up was to he done in three phases. In each of the three phases, some commodities were to he taken out of the quota system and the quantities of those that remained under quotas were to glow at an increasing rate. In practice, this system allowed for the bulk of the removal of restrictions to take place in the last phase between 2002 and the end of 2004 India wan
5) Speed and cost
Arbitration is more speedier and less costly than litigation.
6) Finality
Arbitration award is more or less final in court of law. Reviewing arbitration award is strictly limited and further restricted by the agreement of the parties pre or post the dispute arising.
7) Enforceability
Arbitration awards are final and they are readily enforceable as a means of dispute resolution.
6.3 Disadvantages of Arbitration
Disadvantages of Arbitration are given below:
1) Pre-emptive Remedies,
2) Joinder of Parties,
3) Procedural/Substantive Uncertainty 1) Pre-emptive Remedies
Limited powers are given to an arbitrator to grant pre-emptive remedies," Arbitral rules will differ relating to powers given to arbitrators.
2) Joinder of Parties
Nabi states that,' "the existing arbitration rules are not suited to multi¬party arbitration, under some rules' such as the ICC Rules of Arbitration" it is arguable that it is not possible' (0 have multi-party arbitrations unless all the parties consent. Some national legal systems allow the parties to apply to the court to order a thirty party to be joined to the arbitration, e.g., HollanG, But this is unusual.
3) Processor / Substantive Uncertainty
Nabhi's Manual for Foreign Collaboration and InvestmeI1t' it India highlights that, "the flexibility give to arbitrators in deciding the procedure sometimes choosing the governing law, often creates uncertainly and allows lawyers to make a lot of ingenious arguments, thus increasing the time and cost In addition, often a arbitration tribunal will allow a party to make "whatever arguments its likes even when they have no merit so that it cannot be alleged later that the arbitrator breached natural justice. Further, arbitrators are often less rigorous in their awards than judges an-': there is sometime" the feeling that tribunal prefer that both sides go away equally unhappy rather than make bold decisions in favour of one".
6.4 International Arbitration Institutions
Arbitration institutions have their own rules of procedures for arbitration. They will help to the parties in appointment of arbitrators, fixing of costs, approval of the award and general administration of the arbitration.
The prominent international arbitration institutions are listed below:
I) International Chamber of Commerce,
2) London Court of International Arbitration, and
3) international Culture for Settlement of Investment Disputes.
International Chamber of Commerce
The arbitration institution of the International Chamber of Commerce is known as International Court of Arbitration. It is situated in Paris. 'I1Jis is the most widely known and popular international arbitration institution. International Court of Arbitration appoints arbitral tribunal, either chosen by the parties or by the International Chamber of Commerce. The arbitration tribunal may meet in Paris or in any other places as per the agreement made by the parties. The International Chamber of Commerce (ICC) may fix the place if the agreement does not specify the place where parties meet for arbitration proceedings. The arbitrators have complete discretion within the rules of International Court of Arbitration as far as the arbitration procedures are concerned. Arbitration fees and charges levied by the International Chamber of Commerce are based on th.e value of the claim and counterclaim if any.
2) London Court of International Arbitration
London Court of International Arbitration (LCIA) is second popular and leading international arbitration institution in Europe after International Chamber of Commerce is. It is situated in London. There is no condition to conduct the arbitration in London. It can be conducted in any place as per the agreement of the parties involved in arbitration. Its Arbitration fee depends upon the amount of time actually spent by the secretariat of LCIA in dispute resolution.
3) International Centre for Settlement of Investment Dispute~ (lCSJD) SID is functioning under the auspices of the World Bank. It is situated on Washington. It has been established in pursuant to the Washington Convention held in 1965 on the Settlement of Investment Disputes between States and nationals of other States. The scope and jurisdiction of ICSJD are limited to disputes arising directly out of an investment between a contracting State and the national of another contracting State.
International Arbitration Institutions are situated in New York. Geneva and Zurich, Stockholm, Vienna. , Hong Kong Singapore and Kuala Lumpur.
The Indian Council of Arbitration is also providing arbitration facilities to both domestic and foreign trade related disputes.
Adhoc arbitration can also be utilised where the PUIlILS choose to apply just the procedural rules of arbitration rather than supervised by any international arbitration institution. The parties can choose and follow the Arbitration Rules and Procedures of the International Chamber of Commerce or London Court of International Arbitration or an)' other widely recognised arbitration institutions in their arbitration proceedings and dispute resolution. The institutions will not• interfere or supervise the arbitration proceedings. The rules and procedures prescribed by the United Nations Commission on International Trade Law (UNCITRAL) of 1976 are, widely used in Adhoc' arbitration. UNCITRAL' Arbitration Rules are incorporated. P A
in arbitration clauses in contracts between Indian governmental agencies and foreign companies.
6.5 Procedure for International Commercial Arbitration and Drafting of Arbitration Agreements•
Given below are the arbitration clauses recommended by the International chamber of Commerce. London Court of International Arbitration and 'Indian, council of Arbitration together with an example of an ad hoc choose (Source: NABI's Manual for Foreign Collaboration & Investment India)
A. ICC Recommended Arbitration Clause
"All deputes arising in connection with the present contract shall. be finally settled under the Rules of Conciliation and Arbitration 'of 'the international Cha.ll1ber of Commerce by one or more arbitrators appointed in accordance with the said Rules.
Parties are reminded that it may be desirable for them to stipulate in' the arbitration clause itself the law governing the contract, the number of arbitrators and the place and language of the arbitration. The parties' free choice of the law governing the contract and of the place and language of the arbitration is not limited by the ICC Rules of Arbitration.
Attention is called to the fact that the laws of certain countries require that parties to contracts expressly accept arbitration clauses. sometimes in a precise and particular manner".
B.ICA Recommended Arbitration Clause
"All disputes or differences whatsoever arising between the parties out of or relating to the construction, meaning and operation or effect of ):bios contract or the breach thereof shall be settled by arbitration in accordance with the Rules of the Indian Council of Arbitration".
C. Example or Indian Collateral Agreement
"All disputes and differences arising out of or in relation to the contract dated entered into by the parties hereto, and all or any questions concerning the existence and/or validity of the said contract (or any of its terms) shall be referred to and settled by arbitration in accordance with' the Rules of Arbitration
of " .
D. LCIA Recommended Arbitration Clause
Parties to an international contract who wish to have any, disputes referred to arbitration under ~he LCIA Rules are recommended to insert in the contract an arbitration clause in the following form:
"Any dispute arising out of or in connection with his contract, including any question regarding its existence, validity. or termination, shall be referred to and finally resolved by arbitration under the Rules of the London Court of International Arbitration, which Rules are deemed to be incorporated by reference into his clause".
Parties are also reminded that difficulties and expenses may be avoided if they expressly specify the law governing their contract. The parties if any if they wish also specify the number of arbitrators, and the place and language of the arbitration. The following provisions may be available:
The governing law of this contract shell be the substantive law of." 'The tribunal shall consist of ... (n sole or three) arbitrator(s)"
In the case of a three-member tribunal, the following words may be added: two of them be nominated by the respective parties"
"The place of the arbitration shall be .... (city)"
'The language of the arbitration shall be ... "
E, Example of an Ad hoc Arbitration Clause
"Any dispute, controversy ,or claim arising out of or in relation to this contract or its breach, termination or invalidity shall be settled by arbitration in accordance with the UNCITRAL Arbitration Rules, and the appointing authority' shall b~ the President at the time of the Indian Chamber of Commerce.
These clauses should not be blindly copied without having regard to the following:
(a) The parties should consider what disputes they want to refer (0 arbitrate. The clauses recommended by the IJ1Iternational arbitration institutions are drafted widely, such as "any dispute arising out of or in connection with this contract including any question regarding its existence, validity or termination and with good reason. It is surprising how much litigation there has been ill' respect of clauses which vary slightly for example, does "arise out of' mean something
different to "in connection with"
The doctrine of the separability of the arbitration clause is now generally accepted, and under many legal systems, arbitration tribunals can determine their own jurisdiction. Under English' Law, the tribunal, has jurisdiction to determine a dispute' where the claimant is alleging that •the' contract including the arbitration clause) is illegal 0, invalid, save where the Claimant is alleging that the arbitration clause itself was entered into on the basis of fraud However, under Indian law, the tribunal does not• have such power, . unless. it, has' been expressly given to it by a collateral or separate agreement.
There is an ongoing debate whether the parties can refer to' arbitration ' disputes in respect of statutory rights and obligations. In lndia, the following matters are not arbitral, inter alia: anti-trust or competition issues patents and trademarks; and bankruptcy. It is important to consider whether such issues are arbitral and, if so whether they should be expressly included or' excluded from the scope of the arbitration clause.
(b) Number of Arbitrators: Disputes ate generally referred to one of these arbitrators, depending upon the value and complexity of the dispute. Open this question is left open to be decided once the dispute has arisen. In some jurisdictions, it is a mandatory requirement that the tribunal consist of an uneven number of arbitrators.
Ie) Appointment of Arbitrators: The commonly used arbitration rules provide a mClnod of appointing arbitrators, e.g. the parties should agree, but if they cannot, then the arbitrators will be appointed by the chosen arbitration institution or other appointing authority. If any deviation from this procedure is required, it should be stated. If the arbitrator(s) should be chosen from a certain profession or have certain qualities (e.g. not of the same, nationality as any of the parties this should be stated.
(d) Procedural Rules: The preferred procedural rules should be expressly stated e.g. arbitration rules of the ICC or whatever body or UNCITRAL. Thought should be given to whether any amendments should be made to fit the circumstances of the parties, the contract or the chosen venue.
The arbitration must also comply with any mandatory procedural arbitration rules of the seat of the arbitration, and any gaps in the adopted procedural rules may be filled by looking to the rules governing the conduct of arbitration laid down by statute (01' precedent) of the seat. The Supreme Court of India has held, however, that if the substantive governing law of the contract is Indian Law, then the competent courts in respect of all subtractive matters arising under the arbitration agreement are the Indian could and that "the jurisdiction exercised by the Court of the seat of the arbitration is merely concurrent and not exclusive, and strictly limited to matters of procedure".
(e) Venue: It saves time and costs once a dispute has arisen if the preferred venue of any arbitration is expressly stated :, the contract. The main factors to consider when choosing the venue is whether it is in a New York Convention country, the quality of the local legal advice, the nature of any likely intervention by the to Courts, costs and convenience.
({) Language: Again to save time and costs, the language of the arbitration should be expressly stated. It should be the same as that of the contract and the likely language of the most relevant documentation and correspondence
g) Interim Measures: The courts generally have power to make orders in respect of the preservation, in crime custody or sale of any subject detention of the dispute, securing the amount in dispute; detention innervations or inspection of any property or things which are take subject of the dispute; interim injunctions and appointment of a receiver. Under most institutional arbitration rules the arbitration tribunal has similar (but usually more limited) powers. If the arbitration is subject to the Indian Arbitration Act, 1940 the arbitration agreement may vest in the arbitrators a power to make orders akin to those which may be made by the Indian courts (see provision to section 41 (b)),
(h) Right of Appeal: In some Jurisdictions, a dissatisfied party has the right to appeal any aribtal award to the courts save where that right has been waived. Choosing the ICC Rules as the procedural rules of the arbitration is deemed by the English courts to be a waiver of the right to appeal (because the ICC Rules state that the arbitral award shall be final and that by submitting the dispute to arbitration by the ICC the parties shall be deemed to have undertaken to carry out the resulting award without delay and to have waived their right to any form of appeal insofar as such waiver can validly make - Article 24) .. PA
However, it is prudent expressly to waive the right hy including some wording such as "reff'er finally to arbitration".
(i) Multiparty: Often contracts are made between more than two parties (A,B and C) or there is a chain of contracts (whereby D supplies goods to E, who supplies them to F). In these circumstances, consideration needs to be given to whether the arbitration or allow E to join F to proceedings brought by D.
Three issues require particular consideration. First, the appointment of the arbitral tribunal. If there is to be a sole arbitrator, all the parties must agree on his identity, otherwise the designated appointing authority will' appoint him. However, if there is to be a tribunal of three, questions arise as to how a number of defendants should appoint their arbitrator. The Paris Court de Cessation has held that it is contrary to French public policy to be require two defendants with separate interests to agree on one arbitrator (on a panel of three). This issue can be avoided by providing in the arbitration clause that there be a sole arbitrator or by prescribing how joint defendants should appoint their arbitrator.
The second issue is whether a third party can be joined to an arbitration. If the parties agree, there is no problem. It is possible to provide for joinder of a third party in the arbitration clause, but this will only apply to parties to the contract. Where there are a number of contracts between different parties, all relating to one project, it may be sensible to executed separate 'umbrella' arbitration agreement. A third issue is whether separate, but related, arbitrations can be consolidated. This may be specifically provided for in the contract PA Given below is an example clause providing for arbitration involving several parties to the same contract, and an extract from the JCT Management Contract 1987 standard clause which provides for arbitration between several parties in a chain of contracts.
A. Example of Multiparty Arbitration Clause
1. Any dispute, controversy or claim arising out of or relating to this agreement or the breach, termination, existence or invalidity thereof (a "Dispute"), shall be finally resolved by arbitration in accordance with the UNCITRAL Arbitration Rules as at present in force, which Rules are deemed to be incorporated by reference into this clause. The Tribunal shall consist 0 f a sole arbitrator to be appointed by the President of the London Court of International Arbitration. The place of arbitration shall be New Delhi. 1l1e language to be used in the arbitration proceedings shall be English.
2. If any dispute raises issues which are substantially the same as or connected with issues raised in a Dispute which has already been referred to arbitration (an "Existing Dispute"), or arises out of substantially the same facts as are the subject of an Existing Dispute (a "Related Dispute"), the arbitrator appointed or to be appointed in respect of :my such Existing Dispute shall also be appointed as the arbitrator in respect of any Related Dispute.
3. In the event that the arbitrator dies or is or becomes unable to act, a replacement arbitrator shall be appointed pursuant to clause 1 above. The parties agree that if the Dispute referred to arbitration here as under is a Related Dispute, the replacement arbitrator shall also become the arbitrator in respect of any Related Dispute.
4. The Tribunal, upon the request of a party to a Dispute or a party to this agreement which itself wishes to be joined in proceedings in relation to a Dispute, shall join any party to this agreement to proceedings in relation to that Dispute and may make a sl!1gle, final award terminating all Disputes between them. Each of the parties to this agreement hereby consents to be joined to proceedings in relation to any Dispute at the request of a party to that Dispute.
5. Where, pursuant to the above provisions, the same arbitrator has been appointed in relation to two or more Disputes, the arbitrator may, with the agreement of all the parties concerned or upon the application of one of the being a party to each of the Disputes or that the whole or part of the matters at issue shall be heard together upon such terms or conditions of the arbitrator thinks fit. The arbitrator shall have power to make such directions and any interim or partial award at the arbitrator considers just and desirable,
6, 'The parties hereto undertake to carry out any award of the Tribunal without delay, and waive their right to any form of appeal or recoyrse to a court of law or other judicial authority, insofar as such waiver may be validly made, Awards shall be final and binding on the parties as from the date they are made,
B. Example of Multiparty Arbitration Clause recommended by JCT Management Contract 1987
"Provided that if the dispute or difference to be referred to arbitration under this Contract raises issues which are substantially the same as or connected with issues raised in a related dispute between:
the Employer and the Works Contractor".
the Management Contractor and any Works Contractor the Works Contractor and any Nominated Supplier
and if the related dispute has already been referred for determination to an Arbitrator, the Employer and the Management Contractor hereby and that.
(1) the dispute '" shall he referred to the Arbitrator appointed to determine the related dispute; and
(2) such Arbitrator shall have power to' make such directions and all necessary awards in the same way as if the procedure of the High Co un as to joining one or more defendants joining co-defend of third parties was available to the parties and to him ...
U) Equity clauses: It is possible to provide in the contract that an arbitrator should determine any dispute, not according to strict law, but according to equity or fairness. Such clauses will often provide that the tribunal acts as amiable compositor or ex aequo et bono. Such clauses are more common in Europe than in Anglo-American contracts.
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(k) Mandatory Requirements: finally, consideration should be given to whether the, there are any mandatory requirements prescribed by the governing law of the• arbitration clause and by the designated place of arbitration. For example, it may be a requirement that the arbitration agreement be in writing (as prescribed by the Indian Arbitration Act, 1940) or be signed. If a government is involved. often special requirements apply; for example when one of the parties is the Government of India or the government of a State in India, the entire contract, including the arbitration clause, must be ill a formal written instrument. If with the Government of India, for example, the contract must be expressed to be made by the President of India and executed on behalf of the President of Indi2. by a person duly authorised. As another example, it used to be the case or contracts between Indian and foreign parties that involved the payment or receipt of foreign exchange which required the approval of the Government of India. (Source:).
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