business envioronment

8/7/2019 BUSINESS ENVIORONMENT

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Five Different Types of Foreign Direct Investment(FDI)

According to Chryssochoidis, Millar & Clegg, 1997 there are five different types of foreign

direct investment (FDI).

The first type of FDI is taken to gain access to specific factors of production, e.g. resources,technical knowledge, material know-how, patent or brand names, owned by a company in the

host country. If such factors of production are not available in the home economy of the

foreign company, and are not easy to transfer, then the foreign firm must invest locally in

order to secure access.

The second type of FDI is developed by Raymond Vernon in his product cycle hypothesis.

According to this model the company shall invest in order to gain access to cheaper factors of

production, e.g. low-cost labour. The government of the host country may encourage this type

of FDI if it is pursuing an export-oriented development strategy. Since it may provide some

form of investment incentive to the foreign company, in form of subsidies, grants and tax

concessions. If the government is using an import-substitution policy instead, foreign

companies may only be allowed to participate in the host economy if they possess technical or

managerial know-how that is not available to domestic industry. Such know-how may be

transferred through licensing. It can also result in a joint venture with a local partner.

The third type of FDI involves international competitors undertaking mutual investment in

one another, e.g. through cross-shareholdings or through establishment of joint venture, in

order to gain access to each other's product ranges. As a result of increased competition

among similar products and R&D-induced specialisation this type of FDI emerged. Both

companies often find it difficult to compete in each other's home market or in third-country

markets for each other's products. If none of the products gain the dominant advantage, the

two companies can invest in each other's area of knowledge and promote sub-product

specialisation in production.

The fourth type of FDI concerns the access to customers in the host country market. In this

type of FDI there are not observed any underlying shift in comparative advantage either to or

from the host country. Export from the companies' home base may be impossible, e.g. certain

services, or the capability to request immediate design modifications. The limited tradability of

many services has been an important factor explaining the growth of FDI in these sectors.

The fifth type of FDI relates to the trade diversionary aspect of regional integration. This type

occurs when there are location advantages for foreign companies in their home country but

the existence of tariffs or other barriers of trade prevent the companies from exporting to the

host country. The foreign companies therefore jump the barriers by establishing a local

presence within the host economy in order to gain access to the local market. The localmanufacturing presence need only be sufficient to circumvent the trade barriers, since the

foreign company wants to maintain as much of the value-added in its home economy.

Trend


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Flow of Foreign Direct Investment has grown faster over recent past. Higher flow

of Foreign Direct Investment over the world always reflect a better economic

environment in the presence of economic reforms and investment-oriented

policies.

Global flow of foreign direct investment reached at a record level of $ 1,306

billions in the year 2006. Increase in FDI was largely fuelled by cross boarder

mergers and acquisitions (M&As). FDI in 2006 increased by 38% than the

previous year.

Most of the developing and least developed countries worldwide equally

participated in the process of direct investment activities.

FDI inflows to Latin American and Caribbean region increased by 11

percent on an average in comparison to previous year.

In African region FDI inflows made a record in the year 2006.

Flow of FDI to South, East and South East Asia and Oceania maintained

an upward trend. Both Turkey and oil rich Gulf States continued to attract maximum FDI

inflows.

United States Economy, being worlds largest economy also attracted

larger FDI inflows from Euro Zone and Japan.

The following diagram shows the annual Growth of

FDI inflows over the world:
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Higher inflows of FDI to a country largely generates employment in the nation.

FDI in manufacturing sector creates more employment opportunities than to any

other sectors.

For the year 2006, countries such as Luxembourg, Hong Kong China,

Suriname, Iceland and Singapore ranked in the top of Inward performance

Index Ranking of the UNCTAD.

Over recent years most of the countries over the world have made their

business environment investment friendly for absorbing global opportunities by

attracting more investable funds to the country.

Determinants of Foreign Direct Investment

One of the most important determinants of foreign direct investment is the size as

well as the growth prospects of the economy of the country where the foreign

direct investment is being made.

It is normally assumed that if the country has a big market, it can grow quickly
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from an economic point of view and it is concluded that the investors would be

able to make the most of theirinvestments in that country.

In case of foreign direct investments that are based on export, the dimensions ofthe host country are important as there are opportunities for bigger economies of

scale, as well as spill-over effects.

The population of a country plays an important role in attracting foreign direct

investors to a country. In such cases the investors are lured by the prospects of a

huge customer base.

Now if the country has a high per capita income or if the citizens have reasonably

good spending capabilities then it would offer the foreign direct investors with the

scope of excellent performances.

The status of the human resources in a country is also instrumental in attracting

direct investment from overseas. There are certain countries like China that have

taken an active interest in increasing the quality of their workers.

They have made it compulsory for every Chinese citizen to receive at least nine

years of education. This has helped in enhancing the standards of the laborers in

China.

If a particular country has plenty of natural resources it always finds investors

willing to put their money in them. A good example would be Saudi Arabia and

other oil rich countries that have had overseas companies investing in them in

order to tap the unlimited oil resources at their disposal.
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Inexpensive labor force is also an important determinant of attracting foreign

direct investment. The BPO revolution, as well as the boom of the Information

Technology companies in countries like India has been a proof of the fact thatinexpensive labor force has played an important part in attracting overseas direct

investment.

Infrastructural factors like the status of telecommunications and railways play an

important part in having the foreign direct investors come into a particular

country.

It has been observed that if the infrastructural facilities are properly in place in a

country then that country receives a substantial amount of foreign direct

investment. If a country has extended its arms to overseas investors and is also

able to get access to the international markets then it stands a better chance of

getting higher amounts of foreign direct investment.

It has been observed in the recent years that a couple of countries have altered

their stance vis-a-vis overseas investment. They have reset theireconomic

policies in order to suit the interests of the overseas investors.

These companies have increased the transparency of the legal frameworks in

place. This has been done so that the overseas companies can understand the

implications of their investment in a particular country and take the appropriate

decisions.
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T re nds in Fo re ign D irec tInves tment

Global foreign direct investment (FDI)

inflows rose substantially in 2005.

This growth was spurred by cross-

border mergers and acquisitions.

"Current growth is broad-based

with inflows rising in 126 - out of

some 200 - economies. This

reflects high economic growth and

strong economic performance inmany parts of the world"

Supachai Panitchpakdi,Secretary-General of UNCTAD

Global FDI inflows were 29% higher

than in 2004 - a total of $916 billion.

Flows to developing countries in 2005

rose by 22% to reach a record high of

$334 billion. Developed countries also

saw increased flows. They saw a rise

of 37% to $542 billion.

In recent years FDI carried out by

transnational corporations (TNCs) has

mainly been through cross-border

mergers and acquisitions (M&As).

M&A activity in 2005 rose to a level

approaching that of the M&A boom at

the end of the 1990s.


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Among developing regions, the highest

growth rate in inward FDI was seen in

West Asia (85%) which received

record inflows of $34 billion. The

second highest growth was in Africa

which saw a 78% increase to $31

billion. FDI inflows in the 50 least

developed countries also recorded a

historic high of US$10 billion.

Higher prices for many commodities

have further stimulated FDI in

developing countries rich in natural

resources. This has influenced FDI by

developing country TNCs, both by

companies aiming to secure supplies

of natural resources and those able to

take advantage of high revenues from

commodities. The most notable

growth in developing-country FDI

outflows was from China and West

Asia.

A key driver of Chinese outward FDI is

the countrys growing demand for

natural resources, as suggested by its

investment projects in this sector in

Latin America and Africa. The

emergence of developing countries

and the transition economies of South-

East Europe and the CIS as significant

outward investors is examined in


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detail in this report.

Consistent economic growth, de-regulation, liberal investment rulse, and

operational flexibility are all the factors that help increase the inflow of

Foreign Direct Investment or FDI.

FDI or Foreign Direct Investment is any form of investment that earns interest in

enterprises which function outside of the domestic territory of the investor.

FDIs require a business relationship between a parent company and its foreign

subsidiary. Foreign direct business relationships give rise to multinational

corporations. For an investment to be regarded as an FDI, the parent firm needs

to have at least 10% of the ordinary shares of its foreign affiliates. The investing

firm may also qualify for an FDI if it owns voting power in a business enterprise

operating in a foreign country.

Types of Foreign Direct Investment: An Overview

FDIs can be broadly classified into two types: outward FDIs and inward FDIs.

This classification is based on the types of restrictions imposed, and the various

prerequisites required for these investments.
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An outward-bound FDI is backed by the government against all types of

associated risks. This form of FDI is subject to tax incentives as well as

disincentives of various forms. Risk coverage provided to the domestic industriesand subsidies granted to the local firms stand in the way of outward FDIs, which

are also known as 'direct investments abroad.'

Different economic factors encourage inward FDIs. These include interest loans,

tax breaks, grants, subsidies, and the removal of restrictions and limitations.

Factors detrimental to the growth of FDIs include necessities of differential

performance and limitations related with ownership patterns.

Other categorizations of FDI exist as well. Vertical Foreign Direct Investment

takes place when a multinational corporation owns some shares of a foreign

enterprise, which supplies input for it or uses the output produced by the MNC.

Horizontal foreign direct investments happen when a multinational company

carries out a similar business operation in different nations.

Foreign Direct Investment is guided by different motives. FDIs that are

undertaken to strengthen the existing market structure or explore the

opportunities of new markets can be called 'market-seeking FDIs.' 'Resource-

seeking FDIs' are aimed at factors of production which have more operational

efficiency than those available in the home country of the investor.

Some foreign direct investments involve the transfer of strategic assets. FDI

activities may also be carried out to ensure optimization of available opportunities


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and economies of scale. In this case, the foreign direct investment is termed as

'efficiency-seeking.'

Benefits of Foreign Direct Investment

One of the advantages of foreign direct investment is that it helps in the

economic development of the particular country where the investment is being

made.

This is especially applicable for the economically developing countries. During

the decade of the 90s foreign direct investment was one of the major external

sources of financing for most of the countries that were growing from an

economic perspective. It has also been observed that foreign direct investment

has helped several countries when they have faced economic hardships.

An example of this could be seen in some countries of the East Asian region. It

was observed during the financial problems of 1997-98 that the amount of foreign

direct investment made in these countries was pretty steady. The other forms of

cash inflows in a country like debt flows and portfolio equity had suffered major

setbacks. Similar observations have been made in Latin America in the 1980s

and in Mexico in 1994-95.

Foreign direct investment also permits the transfer of technologies. This is done

basically in the way of provision of capital inputs. The importance of this factor

lies in the fact that this transfer of technologies cannot be accomplished by way

of trading of goods and services as well as investment of financial resources. It

also assists in the promotion of the competition within the local input market of a


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country.

The countries that get foreign direct investment from another country can also

develop the human capital resources by getting their employees to receivetraining on the operations of a particular business. The profits that are generated

by the foreign direct investments that are made in that country can be used for

the purpose of making contributions to the revenues of corporate taxes of the

recipient country.

Foreign direct investment helps in the creation of new jobs in a particular country.

It also helps in increasing the salaries of the workers. This enables them to get

access to a better lifestyle and more facilities in life. It has normally been

observed that foreign direct investment allows for the development of the

manufacturing sector of the recipient country. Foreign direct investment can also

bring in advanced technology and skill set in a country. There is also some scope

for new research activities being undertaken.

Foreign direct investment assists in increasing the income that is generated

through revenues realized through taxation. It also plays a crucial role in the

context of rise in the productivity of the host countries. In case of countries that

make foreign direct investment in other countries this process has positive impact

as well. In case of these countries, their companies get an opportunity to explore

newer markets and thereby generate more income and profits.

It also opens up the export window that allows these countries the opportunity to

cash in on their superior technological resources. It has also been observed that

as a result of receiving foreign direct investment from other countries, it has been

possible for the recipient countries to keep their rates of interest at a lower level.


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It becomes easier for the business entities to borrow finance at lesser rates of

interest. The biggest beneficiaries of these facilities are the small and medium-

sized business enterprises.

.10 Costs of FDI to the host country

As we saw in the previous section, there are three classes of benefits of FDI to the hostcountry. There are also three classes of potential costs:

adverse effects on domestic producers

adverse effects on BOP

surrender of national sovereignty

4.10.1 Adverse effects on domestic firms

Adverse effects arise from the impact that a well-financed MNE will have on indigenous

companies in the same industry. Economies of scale, superior technology and managerialexpertise can be expected to drive existing local companies out of business. It will also

inhibit the growth of infant industry

.10.2 Adverse effects on BOP

These adverse effects may arise from two sources. After the initial capital inflow therewill be a continuing outflow of earnings from the FDI which will be shown as debits on

the capital account. The second source is imports of components by the MNE from other

countries as part of its total production process. These imports register as debits on thecurrent account.

10.3 Surrender of national sovereignty

The presence of an MNE in a host country often evoke an emotional reaction by thecountry's inhabitants to apparent economic domination and loss of national identity.

Suffice to say that this is an emotional reaction. There is considerable British, New


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Zealand , US and Japanese FDI in Australia , but there is little evidence of Australia

having lost its national identity and considerable evidence to support the contention that

Australia 's material standard of living owes a great deal to this FDI. Your textbook dealswith these three costs in more detail.

.11 Benefits of FDI to the home countryWe saw in the previous two sections that benefits and costs to the home country eacharise from three sources. So it is with benefits to the home country. These three are:

BOP benefits

employment benefits

the reverse resource-transfer effect.

Previous Page -Next Page

12 BOP benefits

Benefits arising from BOP tend to be due to the repatriation of earnings from FDI

.13 Employment benefits

FDI creates jobs in the host country and

may give rise to the claim that jobs arebeing exported from the home country.

At some level this may be the case, but

jobs lost are usually compensated by

increased employment in the

production of capital equipment, com.13.1 Reverse resource-transfer effect

The host country benefits from the transfer of capital, technology and management skills.

This can be a two-way street, especially in the fields of marketing and management. AnMNE can often benefit by exposure to conditions in the host country. This has been
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especially true for US companies such as Ford and GM, which have part ownership of

Mazda and Isuzu respectively (Hill 2005, p. 253). These MNEs have learned a great deal

from the Japanese about management and production techniques.

plementary products and the like

13.1 Reverse resource-transfer effect

The host country benefits from the transfer of capital, technology and management skills.

This can be a two-way street, especially in the fields of marketing and management. AnMNE can often benefit by exposure to conditions in the host country. This has been

especially true for US companies such as Ford and GM, which have part ownership of

Mazda and Isuzu respectively (Hill 2005, p. 253). These MNEs have learned a great dealfrom the Japanese about management and production techniques

.13.2 Costs of FDI to the home country

Potential costs of FDI to the home country arise from two sources:

balance-of-payments employment effects

13.3 bOP effectsThere are three possible effects on the home country's BOP:

the initial investment is a capital outflow the current account suffers if the FDI is designed to serve the home market from a

low-cost production base (that is, people in the home market buy the exports of

the country in which the FDI has been made)

the current account suffers if the FDI is a substitute for direct exports (that is, the

exports cease to exist as a source of credit for the current account).

Previous Page-Next Page

.13.4 Employment effects

Jobs are created in the host country. Notwithstanding the possibility of compensatory

rises in employment in the production of capital goods and complementary products, the

fact is that jobs at the same skill level as those created in the host country will be lost to
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the home country. This was one of the fears of the union leaders in the US with the

inauguration of NAFTA (North American Free Trade Agreement) - that jobs would be

lost to both Canada and especially to Mexico .

This is an appropriate spot to pause and read from Hill (2005) on benefits and costs of

FDI to the home country.

In your text

Hill 2005, Chapter 7, pp. 252-254.

To conclude the discussion of the benefits and costs of FDI, see the summary matrixshown in Table 4.2.

Table 4.2 Benefits and costs of FDI

Benefits Costs

Host country

Financial resources of MNEs

Access to new technology

Training of local managers

Job creation

Capital inflows

BOP credits from exports

BOP credits from local

production of parts

Competition of local

producers

BOP debits on repatriated

earnings

BOP debits on MNE imports

on components

Perception of loss of national

identity

Home country

BOP credits from earnings

Creation of jobs in higher skill

categories

Exposure to new markets,

managerial expertise and

technology

Protects market share in

competition with other MNEs

Initial investment a capital

outflow

BOP debits from input of low-

cost goods

Loss of exports for which FDI

is a substitute

Job losses in low skill areas


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CHAPTER 5:

POLICY INSTRUMENTS AND OPTIONS

The numerous challenges to the Canadian manufacturing sector posed by the profound structural chanin the Canadian economy that were described in the previous four chapters necessitate policy responsfrom the Government of Canada. Industrial policy in Canada must change to reflect the new economcircumstances. In this chapter, the Committee analyses the recommendations offered by witnesses (sAppendix D). We traverse a policy landscape that includes monetary, taxation, energy, labour, tradprotection of intellectual property rights, infrastructure, regulatory, and research, development a

commercialization in the search for a new, federal industrial policy framework that would assist acomplement the Canadian manufacturing sector's productivity and competitiveness agenda.

Monetary Policy

In assessing Canadian monetary policy over the past six years, one must first understand its institutioframework which rests on two pillars: a flexible currency exchange rate and the Bank of Canadindependent exercise of its inflation-control targeting tactics. The current floating currency exchange rregime was adopted by the Finance Minister of the day in May 1970 in the midst of a positive terms trade shock (in this case, a worldwide resource commodities boom that resulted in soaring Canadexport prices relative to import prices) that put upward pressure on inflation. To relieve these inflationa

pressures, the dollar was allowed to float; market forces (which were very strong and positive at ttime not unlike those that prevail today) were to determine its external value.

After a period of targeting the narrowly defined monetary aggregate known as M1[30](1970-1982) anreturn to its operational target for the Bank Rate[31] (1982-1991), the Bank of Canada has pursuedstrategy of inflation-control targeting. In February 1991, the Government of Canada and the BankCanada agreed to introduce targets aimed at reducing the rate of inflation. The objective was to achieve3% inflation rate, as measured by the consumer price index (CPI), by the end of 1992 and to graduareduce the rate of inflation to 2% by the end of 1995. This last target was extended four times agreement and all extensions also involved maintaining a target range of 1% to 3%. The latGovernment of Canada-Bank of Canada inflation-control target agreement commenced in January 20

and will continue until 31 December 2011.

The Bank of Canada Governing Council's main tool for implementing monetary policy is the target for tOvernight Rate.[32] This rate is normally set on eight fixed dates per year.[33] Prior to the appreciatof the Canadian dollar, the Bank of Canada's Overnight Rate was set at slightly more than a hpercentage point above that of the U.S. Fed Rate. This gap increased to as much as 2.2 percentage poiin July 2003 but has averaged slightly more than a full percentage point between February 2002 aFebruary 2005. Since that time, the Bank of Canada's Overnight Rate has been almost a full percenta
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point below that of the U.S. Fed Rate (see Figure 21).

Figure 21

Source: Bank of Canada

Monetary policy is, of course, pan-Canadian in scope and cannot be manipulated to address the speccircumstances of either one sector of the economy or one region of the country. It is also important recognize that it is not possible for a central bank to successfully control both domestic and external valu

of its currency at the same time. With only one policy instrument the Overnight Rate a central bacan have only one target: the rate of inflation (i.e., the domestic value of the currency). The external vaof the currency is determined by the market, and thus a floating currency exchange rate regime hmanaged the adjustment necessitated by both improving and deteriorating terms of trade in the padecade.

The Committee recognizes that the Bank of Canada has been within its 1-3% inflation target range times in the past 40 quarters. Furthermore, the Bank of Canada's setting of the Overnight Rate adiscount to that of the U.S. Fed Funds Rate in the past two years indicates that the Governor of the Baof Canada is accounting for the rising value of the Canadian dollar in its policy decision-making. TCommittee acknowledges:

The Government of Canada's decision to renew its inflation-control target agreement with the BankCanada that would allow it to target the consumer price index (CPI) rate of inflation at the 2% midpoint o1% to 3% range for a period of five years ending in 2011 .

Taxation Policy

Tax relief in various forms was suggested by most witnesses and was not limited in its application to t


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manufacturing sector. The tax measures recommended most often included: an increase in the capital callowance (CCA) rates for machinery and equipment used in manufacturing and processing activities, arailway rolling stock, locomotives and inter-modal equipment; a lowering of the corporate tax rate beyothe current schedule[34]; and an expansion of the Scientific Research and Experimental Developme

(SR&ED) Tax Incentive Program. These recommendations would apply not solely to the manufactursector but to the business sector at large.

1. The Capital Cost Allowance Regime

The Committee deliberated extensively on a number of recommendations for change of the CCA raapplicable to certain equipment made by witnesses, with particular attention paid to two of them:

A two-year write-off period for investments in new manufacturing and processing (M&P) equipmenand equipment associated with information, energy and environmental technologies; and

A capital cost allowance rate of 30% for rolling stock, locomotives and inter-modal equipment.

To fully appreciate the novelty of these suggested treatments and the additional costs (in the formrevenue cost) they would imply for the federal treasury, a review of the current CCA regime is in ordPresently, capital investment expenditures cannot be written off entirely in the year incurred for income tpurposes. Rather, this expenditure/cost may be written off at the CCA rates that are permitted under tIncome Tax Act, similar to the concept of depreciation used in financial statements. In time, these annudeductions that may be claimed under the CCA regime will result in virtually the entire capital cost beiallowed as a deduction from income by the taxpayer. In the case of specific equipment that depreciatesa faster rate than implied by the CCA rate for the class of equipment to which it belongs, taxpayers cmake an election for terminal loss to be claimed upon disposition of the equipment. Finally, Finan

Canada's approach in setting the CCA rate for a particular class of assets is based on the general princithat this rate reflects the "useful life" of the asset in question this ensures investment decisions refleconomic and not tax considerations.

The Committee understands that the current CCA regime allows for most M&P equipment to depreciated at the declining balance rate of 30%. An expected benefit of accelerating the write-off periodtwo years would be a faster turnover of capital and a higher rate of investment. Finance Canada indicatthat the revenue cost of permitting machinery and equipment used in manufacturing and processing to fully deducted in two years actually, three years because of the half-year rule is estimated to cost tGovernment of Canada approximately $2.3 billion over five years. Such a change would also havesignificant revenue cost for provinces that have signed a tax collection agreement with the fede

government. The revenue cost of providing the same treatment for equipment associated with informatienergy and environmental technologies could not be determined without further details on the specdesign of such a measure, including the specific types of assets that would be eligible.

The Committee concludes that the benefits of accelerating the CCA rates for M&P equipment aequipment associated with information, energy and environmental technologies are likely to exceed costs. The Committee further believes that this special treatment should be extended to the businesector as a temporary measure and would be renewable based on periodic review and assessment of
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benefits and costs. The Committee, therefore, recommends:

That the Government of Canada modify its capital cost allowance for machinery and equipment usedmanufacturing and processing and equipment associated with information, energy and environmen

technologies to a two-year write-off (i.e., 50% using the straight-line depreciation method) for a periodfive years. This measure would be renewable for further five-year periods upon due diligence review bparliamentary committee.

The Committee was made aware by the Canadian Association of Railway Suppliers (CARS) that tcurrent federal CCA rates governing the depreciation of rail's rolling stock (15%) and track infrastructu(10%) are significantly lower than those of the United States. With these rates, it takes Canadian railwamore than 20 years to fully depreciate their rolling stock assets. In contrast, U.S. tax rules allow railwcompanies to fully depreciate their rolling stock assets in seven years. As such, CARS claims that identirail investment projects require a 23% higher level of earnings in Canada than in the United States to yiethe same rate of return. Consequently, and particularly since continental free trade, a U.S. company t

leases equipment to a Canadian railroad will likely buy this equipment from a U.S. supplier, not a Canadsupplier.

The Committee is convinced that the U.S. government's CCA rates for railway rolling stock ainfrastructure, which deviate significantly from those that would reflect the "useful life" of these assecreate an uneven playing field between Canadian and U.S. railway equipment suppliers that must be min kind. The Committee, therefore, recommends:

That the Government of Canada raise the capital cost allowance rate for rolling stock, locomotives ainter-modal equipment to 30% using the declining-balance depreciation method.

2. The Scientific Research and Experimental Development (SR&ED) Tax Incentive Program

Canada's SR&ED tax incentive program is one of the most advantageous in the industrialized worproviding more than $2.6 billion in deductions or credits to Canadian businesses in 2005. The incentives for SR&ED come in two forms: (1) income tax deductions and (2) investment tax credits (ITCfor SR&ED conducted in Canada. In terms of income tax deductions, current expenditures (e.g., salariesemployees directly engaged in SR&ED, the cost of materials consumed in SR&ED, overhead) and capexpenditures on machinery and equipment are fully deductible in the year incurred. Unused deductiomay be carried forward indefinitely. In terms of ITCs, there are two rates under SR&ED:

the general rate of 20%; and

an enhanced credit rate of 35% for smaller Canadian-controlled private corporations (CCPCs) ontheir first $2 million of eligible expenditures; these ITCs are refundable to smaller CCPCs at a rate100% on current expenses and 40% on capital expenses.

ITCs may be deducted from federal taxes otherwise payable. Unused ITCs may be carried back 3 yearscarried forward 20 years.


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The Committee deliberated on a number of suggestions for change to the SR&ED tax incentive programade by witnesses. In the end, the Committee focused on the impact of one recommendation thcombined most witnesses' suggestions along the following lines:

An improved SR&ED Tax Incentive Program that would make the tax credits refundable to all firmexclude them from the calculation of the tax base, provide an allowance for internationalcollaborative R&D, and extend the tax credit to cover patenting, prototyping, product testing, andother pre-commercialization activities.

The Committee understands that business R&D intensity (expenditure as a percentage of GDP) in Canais lower than the OECD average, and that the business sector both funds and performs a lowpercentage of total national R&D than does the business sector in other OECD countries. [35] The aborecommendation addresses virtually all of the barriers of access to the SR&ED tax incentive programentioned by the witnesses and would likely encourage more R&D activities by the private sectorCanada.

Finance Canada suggests that the cost of extending full refundability of SR&ED ITCs to all firms andtypes of expenditures would depend on the treatment of existing pools and unused ITCs. Depending whether the application of ITC pools to current taxes would affect the refund available, the fiscal costrefundability is estimated to be between $5 billion and $10 billion over five years.

Finance Canada indicates that the cost of excluding SR&ED ITCs from the tax base would depend whether the proposal would apply only to federal ITCs, or include provincial ITCs for R&D, and whether tchange in allowable expenditures for the purpose of the tax deduction would also flow through to qualifexpenditures for the ITCs. Depending on how the change is implemented, the fiscal cost is estimated to between $1 billion and $4 billion over five years.

Finance Canada concludes that the cost of providing an allowance for international collaborative R&would depend on the definition of this activity and the type of allowance provided. Based on StatistCanada data on industrial payments for R&D and other technical services abroad, and assuming tallowance would be provided by including expenditures for such activities in the base for the ITC, the fisccost of this proposal is estimated to be $2.2 billion over five years.

Finance Canada did not provide the Committee with an estimate of the cost of extending the tax creditcover patenting, prototyping, product testing, and other pre-commercialization activities because there wno data readily available on the size of corporate expenditures on these items.

Excluding the proposal to extend the tax credit to cover these other activities, the fiscal cost implementing the above SR&ED measures would vary from $8.2 billion to $16.2 billion over five years. TCommittee believes that increased R&D will lead to increased employment levels in the manufactursector. Given the extent of the fiscal costs to the above suggested changes, the Committee recommends

That the Government of Canada improve the Scientific Research and Experimental Development (SR&ETax Incentive Program to make it more accessible and relevant to Canadian businesses. The governme


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should consider making the following changes:

1. make the investment tax credits fully refundable;

2. exclude investment tax credits from the calculation of the tax base;3. provide an allowance for international collaborative research and development; and

4. expand the investment tax credits to cover the costs of patenting, prototyping, product testing, andother pre-commercialization activities.

Energy Policy

Industrial[36] energy use is the biggest single component of energy demand in Canada (39% of todemand in 2002). Of that demand, 30% is from energy industries themselves (mostly the upstream oil agas industry), and 27% from the pulp and paper sector (2002 data). Industrial energy use increased approximately 17% between 1990 and 2002. This increase was the result of an increase in industactivity, which grew by about 44%. Gains in energy efficiency (between 1996 and 2002, energy intensdecreased by 11%) and structural changes in the economy (the relative increase in the activity of leenergy intensive industries) have partially offset increased demand for energy. Greenhouse gas (GHemissions from the industrial sector increased by 15% between 1990 and 2002. However, a significashift towards the use of less GHG-intensive fuels in the industrial sector has meant that the level of GHemissions is lower than it would have been otherwise.[37]

Abundant, secure supplies of energy are essential for the manufacturing sector. The key energy sourcfor industry are natural gas (30%); electricity (26%); refinery fuel oils, coke and still gas (23%); wood wasand pulping liquor (14%); and coal, coke oven gas, liquid petroleum gas and gas plant natural gas liquisteam and waste fuels (8%).[38] Data presented to the Committee by the Canadian FederationIndependent Business and the Canadian Manufacturers and Exporters suggest that rising andunpredictable energy prices are one of the major business factors adversely affecting firms in manufacturing sector. This is especially true for energy-intensive industries such as pulp and papchemical, petroleum refining and primary metal, which make up about 29% of Canada's manufacturiGDP.

Canada, with its large oil sands deposits as well as coal and natural gas resources, has one of the largesupplies of hydrocarbons in the world. In addition, Canada has significant capacity for hydroelectric anuclear production. Despite this abundant supply of energy, there are problems in Canada's overall futuenergy picture. Given increasing geopolitical tensions, supply disruptions (e.g., because of natudisasters or weather problems), environmental and climate change problems, and increased market aprice instability, a "business as usual" approach with respect to energy consumption and supply is nsustainable. Required changes include: development of lower carbon footprint energy sources; integratof energy sources, distribution and markets; accelerated development of renewable and alternative enersources; emphasis on the development and deployment of new technologies; a responsive regulatoenvironment; and a more certain and stable business environment.[39]

Many witnesses appearing before the Committee called on the federal government to work with t
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provinces to implement an energy framework that would articulate a national energy vision for CanadThis vision would provide a clear policy framework on regulation, energy R&D, commercialization, eneefficiency, and environmental issues, among other items, and would indicate how the various componeare tied together.

The provinces have the constitutional responsibility for natural resources and are responsible for maspects of the regulation and promotion of the energy sector within their borders. The federal governmis responsible for inter-provincial facilities and international and inter-provincial trade. Through regulatand fiscal measures, it can facilitate and support research, development and investment in the enersector.

The Committee recognizes the importance of energy to the future of manufacturing and the needdevelop cleaner energy sources. It has also duly noted the comments and findings included in the reportthe National Advisory Panel on Sustainable Science and Technology. The Panel called for an increasfocus on energy science and technology (S&T) to ensure long-term growth and sustainability in t

Canadian economy. In particular, the Panel recommended increased funding support for innovation frgovernments (both federal and provincial), and the private sector. It also defined a number of key prioritfor sustainable energy S&T in Canada. They include bio-energy; gasification; CO 2 capture and storaelectricity transmission, distribution and storage; and fuel cells.[40]

The Committee has noted five recommendations in particular made by the Panel that pertain specificallythe federal government:

Double the federal government's investments in real terms in energy research and development within tnext 10 years.

Provincial and Federal governments should work together to develop clear and consistent long-temarket signals to address environmental issues such as climate change.

In large, commodity-based energy industries, governments should consider using regulation or financincentives to stimulate private sector funding for research to address common, long-term economic aenvironmental issues.

The federal government should provide $30 million to leverage investment in a reputable and visionaprivate sector investment in a Canadian venture capital fund that is focused on energy technologies. Sua strategic investment should be made on a recurring basis to support the ongoing development agrowth of innovative, knowledge-based Canadian energy technology companies;

Federal energy research labs should conduct a systematic review of their mission, roles and objectivesthe context of a federal energy strategy. They should then undergo a review of their activities, by exterpeers among others, to evaluate their ability to deliver on these goals and objectives, and to assess teffectiveness of existing structures and programs in advancing an energy strategy.

Like the National Advisory Panel on Sustainable Science and Technology, the Committee recognizes need to develop sustainable energy in Canada and sees this as an outstanding opportunity


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technological innovation and economic development. The development of clean and renewable enesources is an unavoidable challenge for Canada. As such, the Committee recommends:

That the Government of Canada review its policies and regulatory and fiscal measures to ensure that th

make a greater contribution to the development of clean and renewable energy sources, foster researand development in this area and provide greater support to companies and provinces engaged in theactivities.

The Committee also endorses the National Advisory Panel's recommendation that the energy secincrease its R&D spending.

Labour Policy

Over the past decade, three main factors have shaped Canada's workforce: (1) an increasing demand skills in the face of advanced technologies and the "knowledge based economy"; (2) a working-a

population that is increasingly made up of older people; and (3) a growing reliance on immigration asource of skilled labour. Added to this mix of long-term trends is a recent structural development thatforcing a reallocation of labour both from one sector of the economy to another and from one region of tcountry to another.

Data from the 2001 Census (2006 Census data are not yet available) indicate that between 1991 a2001, the number of people in the labour force increased by 1.3 million. Almost half of this growth occurrin highly skilled occupations that generally require university qualifications, whereas low skiloccupations requiring a high school (or less) education accounted for only a quarter of the increase.[4The data also show that Canada's workforce is aging, and that the median age of retirement hdecreased (falling from 62.0 between 1992 and 1996 to 60.8 between 1997 and 2001).[42]

The combination of an aging population, a lower retirement age, fewer young people entering the workiage population (because of low fertility rates), increased demand for workers with specialized skills, ainternational worker mobility has led (or may lead) to labour shortages in some areas of the economCanada has increasingly turned to immigration as a source of skilled labour. Data from the 2001 Censshow that immigrants who arrived in Canada during the 1990s, and who were in the labour force in 20represented almost 70% of the total growth of the labour force over the decade. If current immigratirates continue, it is possible that immigration could account for virtually all labour force growth by 201[43]

The rapid and significant appreciation in the value of the Canadian dollar since 2002 has made ma

manufacturers less competitive relative to foreign competitors. They have had to both shed employees ainvest more in capital machinery and equipment to raise their labour productivity levels and, in tustabilize their production levels and competitiveness. Given that national employment levels have risenall-time highs and national unemployment rates have declined to modern day lows (i.e., lowest levels in years), primary commodities and services sectors are engaging many of the skilled workers laid-off by tmanufacturing sector. Despite the fact that manufacturing firms have been laying-off workers, many firm(sometimes the same ones) are faced with a lack of skilled labour for certain work (see Chapter 2).
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Slower economic growth induced by a labour skills shortage can be mitigated or countered by takiactions to: (1) increase the participation rate of those not fully participating in the labour force; (2) increathe value of work performed per person of those already in the labour market; and/or (3) increase the slevels of those entering the labour force. Individuals falling within this first category include, amon

others, older skilled workers who are considering retirement in the immediate or near future, and immigraworkers whose skills accreditation are not recognized or who, along with Aboriginals, are not fuintegrated into the labour market for reasons such as language or cultural barriers. Individuals falling witthe second category include (employed and unemployed) workers whose skills can be upgraded throufurther training or education. Individuals falling within the third category include Canadian youth who apursuing further education or vocational training and new working-age immigrants to the country. [44]

In the following sections, the Committee addresses three government policy instruments that could employed to supplement measures used by employers (e.g., higher wages) to deal with the actual potential) shortage of skilled labour across different sectors of the economy.

1. Accreditation of Skilled Immigrants

Many immigrants to Canada, though well-educated and highly skilled, face barriers in obtaining recognitof their qualifications, training and experience. A survey of 2000 Canadian employers, conducted at tend of 2004, indicated that although Canadian employers generally have positive attitudes towaimmigrants and immigration, many continue to overlook immigrants in their human resource planning, not hire immigrants at the level at which they were trained, and face challenges trying to integrate recimmigrants into their workforce.[45]

The Government of Canada, led by the Minister of Human Resources and Social Development,consultations with the provinces and territories and other stakeholders, has recently begun work

deciding on the mandate, structure and governance of a Canadian agency for the assessment arecognition of foreign credentials. The agency would be devoted to ensuring foreign-trained immigranmeet Canadian standards and helping foreign-trained immigrants secure jobs in their areas of expertmore quickly. The government's Budget Plan 2006 set aside $18 million over two years for establishment of such an agency.

Given that immigration could account for virtually all labour force growth by 2011, and that many sectorsthe economy will likely experience skilled labour shortages over the next decade, the Commitrecommends:

That the Government of Canada, with the consent of the Council of Ministers of Education, place a hi

priority on establishing the agency responsible for the assessment and recognition of foreign credentials.

2. Temporary Foreign Worker Program

The Temporary Foreign Worker Program allows employers to hire foreign workers to meet their humresource needs when Canadian workers are not readily available. The Program is jointly administered
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Citizenship and Immigration Canada and Human Resources and Social Development Canada/ServCanada, and operates under the authority of the Immigration and Refugee Protection Actand Regulation

In November 2006, the federal government announced improvements to the Temporary Foreign Wor

Program to make it easier for employers in Alberta and British Columbia to hire foreign workers when theare no Canadian citizens or permanent residents available to fill the position. The federal government hindicated that it plans to expand the program to include "occupations under pressure" in other regionsthe country as well.[46] Although Western Canada has been hit particularly hard by shortages of all typof labour, other areas of the country are also experiencing labour shortages. The Committee thereforecommends:

That the Government of Canada immediately expand improvements to the Temporary Foreign WorProgram to make it easier for employers across Canada to hire foreign workers when there are Canadian citizens or permanent residents available to fill the position. The Government of Canada shorequire that employers taking advantage of this program provide working conditions that are consiste

with federal and/or provincial standards for the occupation and workplace.

3. Tax Credits for Employer-financed Workforce Training

The reallocation of labour described above has, in some cases, been insufficient in terms of the numberpotential employees available or in matching skill sets with demand, and has prohibited some companand industries from meeting rising demand for their goods. Improving employee skills through on-straining or by sending employees to training programs are ways for firms to deal with a lack of skilllabour. Employees with enhanced skills not only help the company providing the training, but they amore marketable in the long term, and less likely to draw Employment Insurance, or to draw it for shorperiods of time, in the future.

The cost of paying for training and temporarily losing employees while they are participating in trainiactivities often prohibits companies, especially small and medium-sized enterprises, from providing trainto their employees. Furthermore, since employees that have upgraded their skills are more marketabthey may seek other, more lucrative employment opportunities, especially in tight labour markets, ontheir training is complete; the company providing the training may therefore reap little or no benefit from ttraining for which it has paid.

As an incentive to encourage companies to provide employer-financed training, the Commitrecommends:

That the Government of Canada provide tax credits and/or other measures to companies providemployer-financed training to their employees.

4. Support for Postsecondary Students Conducting Research in Conjunction with Industry

Some of the witnesses who appeared before the Committee noted that university and college graduatlooking for work in the manufacturing sector do not always have the required research or business skillswork in the sector. Although Constitutional jurisdiction for education rests with the provinces, there a


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ways that the federal government supports higher education: through the Canada Social Transfer; providing support for infrastructure, research and scholarship in universities and colleges; by offerstudent loans; and by supporting international education. The Committee recognizes these jurisdictioboundaries but notes that there are appropriate avenues that the federal government can pursue

respond to the specific concerns raised by the manufacturers.

For example, two federal granting agencies (the Canadian Institutes for Health Research and the NatuSciences and Engineering Research Council of Canada) offer programs that support postsecondstudents and postdoctoral fellows conducting research in industry. These awards generally consist oscholarship or fellowship from the granting agency, and a minimum cash supplement from the compahosting the student or fellow. Depending on the level (i.e., undergraduate, postgraduate or postdoctoral)the award, the programs' goals include encouraging graduates in science and engineering to gexperience and seek careers in Canadian industry, and facilitating the transfer of expertise and technolobetween academia and industry.

The Committee believes that programs that provide support to students and postdoctoral fellows who hainterests in industrial research and who will gain the necessary skills to contribute to and enhance R&DCanadian industry are very valuable. As such, the Committee recommends:

That the Government of Canada, complying with the constitutional division of powers, provide increasfunding to programs that support postsecondary students and postdoctoral fellows conducting researchindustry.

5. Labour Mobility

Unimpeded labour mobility is an important component of an efficient labour market. The Agreement

Internal Trade (AIT), signed in 1994, requires that provinces and territories eliminate barriers to labomobility such as residency requirements for registration and unnecessary fees and delays. It also requigovernments to: mutually recognize the qualifications of workers already qualified in otprovinces/territories; reconcile differences in occupational standards; and put in place accommodatmechanisms to help workers acquire any additional competencies they need related to differencesscope of practice across jurisdictions.

Despite this agreement there continue to be inter-provincial barriers to labour mobility; progress is bemade in removing these barriers but it has been slow. In September 2006, the Committee of FederProvincial-Territorial Ministers Responsible for Internal Trade came to an agreement on an action plan internal trade. A key component of the action plan is a strategy to improve labour mobility so that by 1 A

2009, Canadians will be able to work anywhere in Canada without restrictions on labour mobility (i.e., compliance with the labour mobility provisions of the AIT). The Committee supports:

Agreements recently concluded on construction labour mobility between Quebec and Ontario and trade, investment and labour mobility signed by Alberta and British Columbia. The Committee believes tremoving all additional barriers to labour mobility within Canada is an important means of dealing wregional shortages of skilled labour and ultimately leads to a better allocation of labour within the country


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Trade Policy

1. Canada-South Korea and Canada-EFTA Free Trade Agreements

As a trading nation, Canada remains committed to multilateral trade and its rules-based system thunderpin commercial relations with the 148 other member countries of the World Trade Organizati(WTO). Canada's first priority on matters of trade continues to be the enhancement of the multilateral trasystem, including the conclusion of an agreement based on the "Doha Development Agenda" launchedNovember 2001. As part of its prosperity initiative, Canada has also negotiated a bilateral free traagreement with Chile, Costa Rica, Israel and the United States and a regional free trade agreement wMexico and the United States.

To further its prosperity initiative, Canada is currently negotiating bilateral free trade agreements with Dominican Republic, the Republic of Korea and Singapore, and regional free trade agreements with tAmericas (Free Trade Agreement of the Americas), the Andean Community Countries (Bolivia, ColombEcuador, Peru and Venezuela), CARICOM (the Caribbean Community), the Central American Four Salvador, Guatemala, Honduras and Nicaragua), and the European Free Trade Association (EFTA), whincludes Iceland, Liechtenstein, Norway and Switzerland.

In particular, Canada's trade initiatives with South Korea and EFTA are advancing, with a numberimportant issues and details left to be negotiated. The Department of Foreign Affairs and InternatioTrade (DFAIT) views South Korea as a gateway to Northeast Asia, a region of strategic importance Canadian manufacturers that have established global value chains, and a free trade agreement with tEFTA countries as a strategic platform for expanding commercial ties with these countries in particular athe European Union in general. Moreover, the latter would put Canada ahead of the United States and an equal footing with competitors, such as Mexico, Chile, Korea and the European Union (EU) that alreahave a free trade agreement with EFTA.

In terms of South Korea, with a population of 48 million and a GDP approaching $1 trillion, it is the largeof the four "Asian tigers" and is the world's eleventh largest economy. In terms of EFTA, when thenations are combined and treated as one, this group would rank as Canada's 8th largest merchandiexport destination. Norway and Switzerland are ranked as Canada's 13th and 19th most important tradpartners in terms of merchandise exports.

These two trade initiatives were raised by witnesses who appeared before the Committee, winning tsupport of a number of manufacturers. Yet automobile, tool, die and mould manufacturers hareservations on a free trade agreement with South Korea, and shipbuilders and labour unrepresentatives have reservations on both initiatives. Their preoccupations focus on matters relating

non-tariff barriers in both South Korea and EFTA countries that make market access for Canadian firdifficult; Norwegian shipbuilding subsidies and rules of origin for ship sub-assembly components that wolead to an uneven playing field in the Canadian market; and the absence of "fair" labour and environmenstandards in South Korea.

These same witnesses also complained about the lack of available information and analyses on the impthat these two free trade agreements would have on particularly vulnerable industries and employmeThey claim that either DFAIT has not done the necessary work, or when it has been done, DFAIT heither not disclosed it to the public or has done so only belatedly. The Committee therefore recommends


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importance

Globalization" is a term that came into popular usage in the 1980's to describe the

increased movement of people, knowledge and ideas, and goods and money acrossnational borders that has led to increased interconnectedness among the world's

populations, economically, politically, socially and culturally. Although globalization is

often considered as economic term (i.e., "the global marketplace"), this process has manysocial and political implications as well. Many in local communities associate

globalization with modernization (i.e., the transformation of "traditional" societies into

"Western" industrialized ones). At the global level, globalization is thought of in terms ofthe challenges it poses to the role of governments in international affairs and the global

economy.

There are heated debates about globalization and its positive and negative effects. While

globalization is thought of by many as having the potential to make societies richer

through trade and to bring knowledge and information to people around the world, there

are many others who perceive globalization as contributing to the exploitation of the poorby the rich, and as a threat to traditional cultures as the process of modernization changes

societies. There are some who link the negative aspects of globalization to terrorism. To

put a complicated discussion in simple terms, they argue that exploitative or decliningconditions contribute to the lure of informal "extremist" networks that commit criminal or

terrorist acts internationally. And thanks to today's technology and integrated societies,

these networks span throughout the world. It is in this sense that terrorism, too, is

"globalized."In the following topic we will discuss about globalization, its impact on economic,

political, social, natural, technological and other fields, its positive and negative aspects.

Drivers of Globalization: Integration of Theories and Models

by: Markus Bauernfeind

Table of contents

1 Introduction 3

2 Drivers of Globalization 3
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3 Theories and Models of Gobalization and International Trade 4

3.1 From mercantilism to Smith and Ricardo 43.2 Ricardo to the next step: Factor Proportions Theory and the Leontief Paradox 5

3.3 Vernon Life-Cycle Theory 5

3.4 Porters Diamond Approach 63.5 Monopolistic Advantage Strategy 6

3.6 Eclectic Theory 7

4. Discussion of Theories and Drivers 7

4.1 Ricardo-Mill and outsourcing 7

4.2 Dunning, Cantwell and the influence of technology 10

5 Bibliography 12

1 Introduction

"Globalization is not something we can hold off or turn off . . . it is the economic

equivalent of a force of nature -- like wind or water." Bill Clinton (American 42nd US

president (1993-2001)) The first part of this research paper will define the major driversof globalization and then introduce some of the basic and advanced theories of

international trade and business. With this foundations it will then try to integrate theoriesand drivers and compare them to the actual situation and discuss if they are appropriatelydescribing what we are seeing today.

2 Drivers of Globalization

The media and almost every book on globalization and international business speak about

different drivers of globalization and they can basically be separated into five differentgroups:

1) Technological drivers

Technology shaped and set the foundation for modern globalization. Innovations in thetransportation technology revolutionized the industry. The most important developmentsamong these are the commercial jet aircraft and the concept of containerisation in the late

1970s and 1980s. Inventions in the area of microprocessors and telecommunications

enabled highly effective computing and communication at a low-cost level. Finally therapid growth of the Internet1 is the latest technological driver that created global

ebusiness and e-commerce.
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2) Political drivers

Liberalized trading rules and deregulated markets lead to lowered tariffs and allowed

foreign direct investments in almost all over the world. The institution of GATT (GeneralAgreement on Tariffs and Trade) 1947 and the WTO (World Trade Organization) 1995

as well as the ongoing opening and privatization in Eastern Europe are only some

examples of latest developments.

3) Market driversAs domestic markets become more and more saturated, the opportunities for growth are

limited and global expanding is a way most organizations choose to overcome this

situation. Common customer needs and the opportunity to use global marketing channelsand transfer marketing to some extent are also incentives to choose internationalization.

(Ferrier, 2004)

4) Cost drivers

Sourcing efficiency and costs vary from country to country and global firms can take

advantage of this fact. Other cost drivers to globalization are the opportunity to buildglobal scale economies and the high product development costs nowadays. (Ferrier,

2004)

5) Competitive driversWith the global market, global inter-firm competition increases and organizations are

forced to play international. Strong interdependences among countries and high

twoway trades and FDI actions also support this driver.

3 Theories and Models of Gobalization and International Trade

Theories of International Trade extend to the 15th century and the age of mercantilism.This next paragraph will provide a brief summary of the most important theories and also

cover two less popular theories, the monopolistic advantage theory (Kindleberger /Hymer) and the integrated eclectic theory (Dunning).

3.1 From mercantilism to Smith and Ricardo

Mercantilism spanned about a period of 300 years from around 1500 to 1800. The core of

mercantilism is that gold and silver are the mainstays of national wealth and essential to

vigorous commerce. The objective of a country is to reach a trade surplus and thereforeaccumulate an increasing amount of currency, which was gold and silver. 1776 Adam

Smith and his theory of absolute advantage attacked the mercantilist philosophy byproving that trade could be more than a zero-sum game.

[...]

1 evolved from the military ARPA (Advanced Research Projects Agency) network 1969,

which was extended to an university network 1986 and finally became public as the
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world wide web in 1990, due to Tim Berners-Lee at the CERN institution (Wikipedia,

2005)

Trend in new MNCs in India

ET Bureau, Feb 22, 2011, 07.55am IST

Tags:

Samsung|

Nokia

The profile of top multinationals that operate in India has changed over the last decade or

so, highlighting three big trends. On top is Maruti, India's largest carmaker, now mostly

owned by Japan's Suzuki. That's followed by Finnish handset-maker Nokia, mobile

services company Vodafone and South Korean carmaker Hyundai.

Two carmakers and two mobile phone companies hog the top four positions in a list of

10, showing how consumer preferences have changed dramatically over time. The typical

Indian still uses detergents and shampoos made by Hindustan Unilever (HUL), now No.

6 on the list, but she can now buy or aspire for cars, talk boldly on India's super-cheapmobile networks on a new handset.

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For consumer preferences to change, away from relatively cheap, daily-use stuff, towardscars and handsets needs money, and Indians now do have more to splurge. What else

explains the presence of Samsung and Hyundai, two South Korean electronics giants, in

the top-10 multinationals list? When we're not driving in our new compacts while

chatting on new handsets, we're sitting in front of new TVs, watching movies and cricket.

Finally, the list makes apparent India's slow, but gradual, openness to foreign investment.

Apart from HUL, which has been in India from pre-Independence days, each of the

multinationals in the list is a relatively new entrant, or the offspring of an internationaltakeover.

Maruti Suzuki exemplifies this best, starting out as a joint venture where the government

held almost all equity, now majority-owned by its Japanese partner. Multinationals have

thrived in manufacturing or IT products and services, which are lightly regulated, so it'sno surprise to see 100%-owned arms of Nokia, Hyundai, HP, Samsung, LG and IBM

flourishing.
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Two of India's largest cement-makers, ACC and Ambuja, are controlled by Swiss

cement-maker Holcim, which acquired these companies from their Indian owners. These

are welcome trends: changing consumption patterns, incomes that are rising and policythat's giving more room for global companies to bring new jobs and technologies to

India.

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Growth of Indian mnc worldwide

The growth of Indian companies from around the world is nothing short of staggering, and its

not even necessarily because of business process outsourcing

business envioronment

Documents