MCom I Semester Environment Multinational Corporations World Trade organization Study Material Notes

MCom I Semester Environment Multinational Corporations World Trade organization Study Material Notes : Characteristics of Multinational Corporations Roleadvantages Importance Utility of Multinational corporations Forms of Multinational corporations Demerits Expected Threats o Multinational corporations Arguments Against Multinational Corporations Suggestions for Regulating MNCs Objectives or world Trade Organisation Long Answer Questions Short Answer Questions Objectives Questions :

CTET Paper Level 2 Language I English Question Model Paper

Multinational Corporations and World Trade Organisation

Multinational Corporations (MNCs) are huge industrial organisations which extend their industrial and marketing operations through a network of their branches or their Majority Owned Foreign Affiliates (MOFAs). MNCs are also known as Transitional Corporations (TNCs). Instead of aiming for maximisation of their profits from one or more products, the MNCs operate in a number of fields and from this point of view, their business strategy extends over a number of products and over a number of countries. In fact, because of their huge capital resources, latest technology and world wide goodwill, MNCs are in a position to sell whatever product they choose to manufacture in different countries. The fact is that people in underdeveloped countries are crazy for the products of these corporations and perfer their products to the products produced indigenously.

Meaning of Multinational Corporations: A multinational corporation is one which undertakes foreign direct investment, i.e., it owns or controls income generation assets in more than one country, and in so doing produces goods or services outside its country of origin, i.e., engages in production at international level.

The multinational corporation is the first institution in human history to plan on a global scale. Its purpose is to organise and integrate economic activity around the world in order to maximise profit. Its failures and successes are measured through growth in global profit and market share.

Definitions of Multinational Corporations : The various definitions of MNCs are as follows:

(1) The United Nations defines MNCs as, “Enterprises which control assetsfactories, mines, sales offices and the like in two or more countries.”

(2) According to Lonard Games, “A corporation that controls production facilities in more than one country, such facilities have 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 hunting technology are multinational enterprises.”

(3) According to ILO Report, “The essential nature of multinational enterprises lies in the fact that its managerial headquarters are located in one country (home country) while the enterprise carries out operations in a number of other countries as well (host countries).”

In brief, “a corporation incorporated in a foreign country shall be deemed to be multinational corporation if such corporation is a subsidiary or a branch or has place of business in two or more countries or carries on business in two or more countries.” Actually for an enlarging business firm, multinational is a beginning step, as it gradually becomes transactional and then turns into a global corporation.

Multinational Corporations World Trade

CHARACTERISTICS OF MULTINATIONAL CORPORATIONS

Main characteristics of multinational corporations are as follows:

1. Multinational management: Multinational corporations are managed at international level. Its managerial body consists of the experts from various countries.
2. Multinational ownership : The capital of multinational corporations is owned by the citizens of different countries. Their shares are bought and sold at the international level.
3. Giant size: Multinational corporations are predominantly large sized and exercise a great degree of economic dominance. They have wide control over their capital, sales, profits, production, management, administration, ownership.
4. Spontaneous evolution : MNCs usually grow in a spontaneous and unconscious manner. There is no need of any pre-planning. Very often they develop through creeping incrementalism. Many firms have become international by accident. At times, firms have also established subsidiaries abroad due to wage differentials and better opportunities in host countries.
5. Transfer of resources : An MNC facilitates a multilateral transfer of resources. Usually this transfer takes place in the form of a ‘package’ which includes technical know-how, equipments and machinery, raw-materials, finished products, managerial services and so on.
6. International operation : In an MNC control resides in the hands of single institution, but its interests and operations sprawl across national boundaries. An MNC operates through a parent corporation in the home country. It may assume the form of a branch or a subsidiary in the host country. The branches and subsidiaries of an MNC operate under the united control of the parent country.
7. Oligopolistic operation : Through the process of merger and takeover, an MNC acquires awesome power. This coupled with its giant size makes it oligopolistic in character.
8. Other activities : MNCs also perform various other activities. They transfer corporation’s capital and technical know-how. They provide informations related to sales of goods, foreign trade, packing and research and development.
   

   Multinational Corporations World Trade

ROLE/ADVANTAGES/IMPORTANCE/UTILITY OF – MULTINATIONAL CORPORATIONS

OR

ARGUMENTS IN FAVOUR OF MULTINATIONAL CORPORATIONS

The MNCs have a revolutionary effect on the international economy. It is only due this reason that the MNCs have affected the traditional form of capital flows and international trade for many economies. They constitute a powerful force in the world economic system. Following arguments are advanced in favour of multinational corporations:

1. Development of fundamental arene. It has been observed that the domestic capital of the underdeveloped countries is often too inadequate to build up the economic infrastructure of its own. Multinational companies have made substantial capital available to the governments of these countries to develop their system of transport and communications, generation and distribution of electricity, water supply etc.
2. Increase in foreign direct investment and inflow : After the announcement of liberalisation policy, there has been an acceleration in the flow of foreign capital in India. Unfortunatly, the actual flows as a proportion of approvals has been ranged between 17 to 60 percent. This is rather low.
3. Optimum use of natural resources: India is rich in natural resources. Multinational corporations help in the full utilisation of natural resources.
4. Role in employment : All round diversification by MNC increases employment and income and helps to raise living standards in underdeveloped countries. By creating employment opportunities, MNCs help in the solution of unemployment problem.
5. Foreign exchange earning : As a result of liberalised foreign investment policy announced in 1991, there has been an increased flow of foreign direct investment.
6. Technical knowledge and training: The main reason why MNCs have been encouraged by the under developed countries to participate in their industrial development is on account of technical knowledge. They also help to enlarge technical resources through expert services, training of Indian personnel or helping the establishment of educational research and training institutions in the country.
7. Increase in managerial efficiency: Indian companies are benefited by the managerial efficiency of multinational companies. They serve as carriers of knowledge and experience in different spheres. It has improved the competitive efficiency in Indian companies.
8. Role of entrepreneur : Though Indian industrialists are rich and powerful, yet they lack in risk undertaking. On the other hand, MNCs undertake greater risk in investing their funds in LDCs in the face of imperfect infrastructural facilities like power, transport, communication, skilled labours etc., low market demand and short supply of inputs.
9. Role of marketing in consumer’s market: Multinational companies find good market for their products in India. They earn good profit by selling their products in Indian market. As a result the government receives revenue from the taxes and exports are also promoted.
10. Increase of industrialisation : An MNC contributes a lot in the industrial development of a country. MNCs possessed staggering of the giant size of these MNCs can also be had from the revelation made in a study conducted by the Washington based Institute of Policy Studies (IPS) that of the 100 largest economies in the world, 51 are corporations, only 49 are countries. They establish the industries in developing countries and promote industrialisation.

According to the ILO report, “For some, the multinational companies are an invaluable dynamic force and instrument for wider distribution of capital. technology and employment, for others their are monsters which are present as institutions, national or international, cannot be adequately controlled, a law as to themselves, with no reasonable concept, that the public interest or social policy can accept.

Multinational Corporations World Trade

CAUSES OF DEVELOPMENT OF MULTINATIONAL CORPORATIONS

Multinational corporations exercise massive control on world economy They possess huge capital resources, modern and up-to date technology. They hold good position in the world market. They have good market for their products in the world market. That is why they spread their business in underdeveloped countries. The reasons for the growth of multinationals are manifold, some of them are as follows:

1. Technical superiority : The main reason why MNCs have been encouraged by the underdevloped countries to participate in their industrial development is on account of their technological superiorities which these firms possess as compared to national companies. The underdeveloped countries regard transfer of technology from MNCs useful on account of following reasons(a) Industrialisation represents the most important way out or under development and the resources of these countries are insufficient to sustain the industrial progress on their own; (b) local manpower, materials, local capital equipments etc. have to be optimally exploited and these countries are unable to accomplish this; (c) depending totally on local companies would require heavy imports of raw-materials, capital equipment, machinery and technical knowledge whereas MNCs bring these on their own; and (d) the underdeveloped countries have to face stiff competition for selling their products in the international markets. Unless their goods meet international standards and quality specifications, they can not sell. MNCs help them in producing such goods.
2. Better research and development facility : MNCs have research and development departments engaged in the task of developing new products and superior designs of existing products. Therefore, their product qualities are far greater as compared to national companies.
3. International image : As the operations of a large-sized firm expands and as its international image builds up, it seeks more and more extension of its activities beyond the physical boundaries of the country in which it is incorporated.
4. Financial superiority: A multinational firm has huge financial resources with which it can easily turn all circumstances in its favour. It maintains a high level of funds utilisation by generating funds in one country and using them in other. It has easier access to external capital market. Further, because of its international reputation it is able to raise more international resources.
   

   Multinational Corporations World Trade

FORMS OF MULTINATIONAL CORPORATION

A common form of MNC participation in Indian industry is through entry into collaboration with Indian industrialists. These collaborations may be in the following forms:

1. Financial collaboration : In recent years, there has been joint participation of foreign and domestic capital. India has been encouraging this form of import of foreign capital. This form of investment is also known as foreign direct investment. In India domestic capital is inadequate for the purposes of economic growth and it is necessary to invite foreign capital.
2. Technical collaboration : Foreign capital brings with it other source of productive factors such as technical know how, business experience and knowledge which are equally essential for economic development. This was followed by Technology Policy Statement (TPS). The objective of the policy was to acquire imported technology and ensure that it was of the latest type and appropriate to the requirements and resources of the country.
3. Setting up subsidiaries in India : Multinational companies start their subsidiary offices or branches and affiliates in India. These companies possess the management and controls of these subsidiaries in their hands. A number of consumer goods companies are setting up holding companies and subsidiaries. For instance, Hindustan Lever has recently taken over a number of Indian firms and created a subsidiary Unilever.
4. Acquiring domestic companies by way of purchasing, controlling shares: Foreigners may subscribe to stock and debentures of concerns in India. This is known as portfolio investment. Foreign institutional investors can invest in a company under the portfolio investment route beyond 24 percent of the paid up capital of the company with the approval of general body of the shareholders by a special resolution.

DEMERITS/EXPECTED THREATS OF MULTINATIONAL

CORPORATIONS

OR

ARGUMENTS AGAINST MULTINATIONAL CORPORATIONS

The operations of MNCs open up the possibilities of interference in the industrial activities of the recipient country and are thus resented by the ‘nationalist’ thinkers. Their arguments against the operation of MNCs can be summed up as follows:

1. Fear of regional imbalance : Multinational companies are not interested in establishing industries in backward areas. In this way, it encourages regional imbalance.
2. Exploitation of consumers : MNCs are catering to the needs to the upper middle and affluent classes. In this sense, they feel a new consumer culture of colas, jams, processed foods and the acquisition of durable consumer goods. In this way, they earn supernormal profits.
3. Cut-throat competition : Due to huge capital resources, multinational corporations are able to reduce the cost of production and give stiff competition to the national products. In this way economy of the country is in danger.
4. Profit earning by transfering price: MNCs purchase raw materials from own foreign subsidiary companies at higher rates and sell the goods to other subsidiaries at lower rates. In this way, they evade the taxes and earn profits.
5. Increase in consumerism : By the massive, aggressive and sustained publicity, they can create demands and evolve market for their products. They have resources to spend and art to attract customers. Eatables like KFC, soft drinks, junk foods outlets etc. are examples of how the MNCs have created a taste for their products and ensured wider market for sale.
6. Adverse effect on balance of payments : MNCs can have an unfavorable effect on the balance of payments of a country. They are more interested in imports rather than exports. It results in large drain on the scarce foreign exchange resources of a developing country.
7. Political corruption : Multinational Corporations have huge financial and economic resources. They are capable to influence the decisions of other countries by the means of diplomacy.
8. Foreign dependency of country: In the beginning MNCs adopt the policy of dumping, i.e., to sell the products below the cost price. When they capture the market, they sell these products at higher prices. In this way they encourage economic slavery.
9. Unfair trade practice : The MNCs also use unfair trade practices. They may manipulate their accounts to evade the taxes in host countries. They may create their monopolies in the markets and eliminate local competitors. To save the corporate tax, they over-invoice the imports and under-invoice the exports.
10. Non-essential products : MNCs produce non-essential products. In other words, production instead of benefitting the masses is only catering to the needs of the upper classes. In this sense, the MNCs are interested in producing goods like potato chips, wafers, bakery products etc.
11. Competition with small sector : Productions of the multinational corporations are rapidly displacing labour working in the small sector since such units are faced with stark prospects of closure being unable to compete with MNCs. Thus, both from the point of view of the pattern of production and employment, the unrestricted entry of multinationals in soft areas has dangerous implications.
12. Encouragement of demonstration effect: The MNCs make heavy expenditure on advertisement and publicity. MNCs are producing for the needs of rich and affluent classes. In this sense, they develop a new consumer culture. Consequently, there is an utter neglect of the wage earners’ sector. It resulted in wasteful expenditure whose burden is ultimately to be borne by customers.

GOVERNMENT CONTROL ON MULTINATIONAL CORPORATIONS

In view of the fact that MNCs do possess a potential that can be gainfully exploited, most of the under developed countries have chosen to regulate their activities rather than to dispense with them altogether. These regulations are as follows:

(1) MNCs have to follow the rules and regulations enumerated in industrial policy and foreign policies.

(2) Some industries were not allowed to import technology at all, the underlying principles of the policy being that.

(a) No inessential articles should be produced with fresh imports of technology (this gave the existing domestic and foreign producers automatic protection against fresh imports of technology.)

(b) Where domestic capacity was ‘adequate’ no technology should be imported.

(3) Fixing maximum limit of payment of royalty to 5% of sales.

(4) In some designated industries, foreign investment was allowed in principle, but sanction in individual cases was a matter of administrative decision

(5) The normal permissible period of agreements was reduced from 10 years to five and renewals were generally frowned upon.

(6) Exports and other marketing restrictions were generally not allowed, and often an obligation to export a certain proportion of the output was insisted upon.

(7) A clause was often inserted in the agreements granting permission to the importer to sub-license the technology.

(8) Equity participation of MNCs is allowed upto 100% in certain areas.

(9) For export oriented industries, high technology industries and basic infrastructure, the MNCs will be given special incentives.

(10) For attracting MNCs in desired areas, Foreign Investment Promotion Board has been set up and MNCs will have to follow the guidelines issued by the board.

(11) Finally, MNCs may be asked to carry out a minimum fixed share of their total research and development activities within the host countries.

SUGGESTIONS FOR REGULATING MNCs

Suggestions to regulate MNCs are as follows:

1. Supervision : Government and non-government organisation should monitor the activities of MNCs. So that their unhealthy activities should be controlled.
2. Check on monopolistic tendencies : Multinational companies have helped the growth of monopolies and concentration of power. It should be considered that they should not exploit the consumers and local producers.
3. Setting up basic and heavy industries: MNCs should be encouraged to establish basic and heavy industries with the participation of local industrialists.
4. Beneficial collaborations : To exercise control over multinational corporations, the government should permit the collaboration in those industries only which are beneficial for the country.
5. Location: Multinational corporations should be encouraged to establish industries in backward areas. It would reduce regional imbalance and would promote balanced regional growth.
6. Substitution of technology and research : The government recognised the need for securing the participation of foreign capital and technology particularly as regards industrial technique and knowledge so as to foster the pace of industrialisation of the Indian economy. The resolution makes it amply clear, “that as a rule, the major interst in ownership and effective control, should always be in Indian hands. In all cases, however, the training of suitable Indian personnel for the purpose of eventually replacing foreign experts will be insisted upon.” Thus, while recognising the need for foreign capital, technology and, research in the industrialisation of the economy, the government insisted upon the progressive Indianisation of foreign concerns.”
7. Government control : The governments of various countries have sought to restrict the activities of MNCs in their economies through a battery of administrative controls and legal provisions. In their board of directors, government representation is necessary. Further the fear of nationalisation would control unfair trade practices of MNCs.
   

   Multinational Corporations World Trade

INDIA AND MULTINATIONAL CORPORATIONS

The pressure for economic development in India necessitated a realistie! approach towards foreign capital. A common form of MNC participation in Indian industry is through entering into collaboration with Indian industrialists. Foreign collaboration agreements are made between Indian companies and foreign parties, involving sale of technology, as well as use of foreign brand names for the final products. It may be described as follows:

1. Working area of multinational corporations : There are a number of multinational corporation working in the field of trade and banking sector. 76 percent of total assets of MNCs is invested in energy, communication, banking services etc.
2. Sources of capital : MNCs and foreign companies have raised the funds from Indian capital market.
3. High rate of profit: In comparison to Indian companies profitability of multinational corporations is very high.
4. Increasing the investment ceiling: In pre-1991 industrial policies, permission was to be made available for direct foreign investment upto 50 percent foreign equity. The limit was subsequently raised to 100 percent for many of the industries.
5. Limited transfer of high technology : MNCs which generally command a monopolistic position in their product lines do not transfer their first line or most advanced technology. Their R and D efforts are concentrated in laboratories in the home country and their Rand D activities continue to be centralized in the parent countries.
6. Subsidiaries : In India, subsidiaries of MNCs are those in whose paid up share capital share of MNCs are more than 50 percent. Currently, there are 125 subsidiaries of MNCs in India.

The main arguments put forth by protagonists of liberalisation to permit larger dose of foreign collaborations are that the days of East India Company are over. The inflow of foreign collaborations through MNCs or their subsidiaries does not imply subjugation. Transfer of technology can be effected with more investment made by MNCs. These gains are not disputed by critics, but the fact of matter is that there are aspects of foreign direct investment which seriously impinge on people’s welfare and national sovereignty. It is these aspects which need serious consideration, Moreover, the country is witnessing the growth of a vast non-banking financial and intermediate sectors which may include foreign financial companies and mutual funds. If this sector grows at a very fast rate as is happening in India, it may render any efforts of monetary management made by the Reserve Bank of India ineffective. To sum up, while capital inflows may be permitted, but this should not be allowed at the cost of Indian national interest. The government should, therefore, not have an open door policy but should be more selective in its approach.

OBJECTIVES OF WORLD TRADE ORGANISATION

The agreement while establishing the WTO adopted the following objectives in its preamble of WTO :

(1) The primary objective of WTO is to implement new trade policy in agreement.

(2) To eliminate discriminatory treatment in international trade relations.

(3) To improve standard of living of people in the member countries.

(4) To enhance production and trade of goods.

(5) To develop multilateral organized trade system.

(6) To ensure full employment and broad increase in effective demand.

(7) To ensure the reduction of tariffs and other barriers of trade.

(8) To facilitate the optimal use of the world’s resources for sustainable development.

(9) To ensure optimum utilization of world resources.

(10) To enlarge production and trade of services.

(11) To protect environment.

Multinational Corporations World Trade

CHARACTERISTICS OF WORLD TRADE ORGANISATION

The following are the salient features of the WTO :

(1) The existence of WTO is legal.

(2) It has replaced GATT.

(3) It is an international trade organization.

(4) It is based on multilateral trading system. The ultimate aim is to establish a rule based global system of free trade.

(5) Its statue is equal to IMF and IBRD.

(6) It includes trade in goods, trade in services, protection of intellectual property rights, trade-related investment measures etc.

(7) Agreements agreed by member-countries are binding on all members of WTO and if any member does not follow such agreements, then its complaint can be lodged with the Dispute Settlement Body of WTO.

(8) It has wider scope than GATT. It covers GATT agreements and agreements on trade service, intellectual property rights and investment.

(9) Unlike International Monetary Fund (IMF) and the World Bank, it is not an agent of United Nations.

(10) Unlike IMF and World Bank, there is no weighted voting, rather all the WTO members have equal voting rights. (one country, one vote).

(11) The decision-making under WTO is carried out by consensus. Each member has one vote.

(12) WTO has a large secretariat and huge organizational set up.

FUNCTIONS OF WORLD TRADE ORGANISATION

It has the following functions as set out in Article III:

(1) The WTO, shall facilitate the implementation, administration and operation and further the objectives, of this agreement and of the multilateral Trade Agreements, and shall also provide the framework for the implementation, administration and operation of the Plurilateral Trade Agreements.

(2) The WTO’shall provide the forum for negotiations among its members concerning their multilateral trade relations in matters dealt with agreements in the Annexes to this agreement’.

(3) The WTO’shall administer understanding on Rules and Procedures Governing the Settlement of Disputes’.

(4) The WTO shall administer the trade policy Review Mechanism.

(5) With a view to achieving greater coherence in global economic policymaking the world trade organization shall cooperate, as appropriate, with the international monetary fund and with the International Bank for Reconstruction and Development and its affiliated agencies.

STRUCTURE OF WTO

The organisational structure of the WTO is outlined as follows:

Structure of WTO

Multinational Corporations World Trade

1 Ministerial Conference: It is the highest decision making body in the organisational structure. It is composed of representatives of all the members which meet at least once in every two years. It is the policy and strategy-making body. The ministerial conference can take decisions on all matters.

1. General council: It is the executive body of the WTO. The ministerial conference gets the policies and strategies implemented and executed through All the member countries of the WTO have their representatives council. It also acts as the dispute settlement body as well as the Trade Policy Review Body.
2. Multilateral Agreement Councils. There are various functional councils under the WTO. They are as follows:

(1) General agreement on trade services.

(2) Council for trade related aspects of intellectual property rights. (TRIPS)

(3) Council for trade related investment measures. (TRIMS)

(4) Council for agreement on trade in textiles and clothing.

4. Committees : There are various committees such as:

(i) The Committee on trade and development.

(ii) Committee on trade and environment.

(iii) The Committee on budget, finance and administration.

(iv) The Committee on balance of payment restrictions.

5. Secretariat: The administration of WTO is conducted by the secretariat which is headed by the Director General appointed by the ministerial conference for the tenure of four years.
   

   Multinational Corporations World Trade

WTO AGREEMENTS

The Agreement establishing the WTO consists of the following which embodies the results of the Uruguay Round of the Multilateral Trade Negotiations :

(1) Agreement on Agriculture (AOA),

(2) Trade in Textile and Clothing (Multi-Fibre Arrangement),

(3) Trade Related Intellectual Property Rights (TRIPS),

(4) Trade Related Investment Measures (TRIMs),

(5) General Agreement on Trade and Services (GATS),

(6) Dispute Settlement,

(7) Agreement on Anti-dumping,

(8) Trade Policy Review Mechanism (TPRM).

(1) Agreement on Agriculture (AOA): As far as agriculture is concerned, the Agreement on Agriculture provides framework for the long-term reform of agricultural trade and domestic policies over the years to come with the objective of introducing increased market orientation in agricultural trade. AOA deals specifically with the following:

(i) Market Access : This includes tariffication, tariff reduction and access opportunities. Tariffication means that all non-tariff barriers such as (a) quotas, (b) variable levies, (c) minimum import prices, (d) discretionary licensing, (e) state trading measures.

(ii) Domestic Support: It measures that have a minimum impact on the trade also known as green box policies. It includes general government services like: As in the areas of research, disease control, infrastructure and food security.

Also includes direct payments to producers in form of income support etc.

Export Subsidies : The Agreement contains provisions regarding members, commitment to reduce export subsidies. Developed countries are required to reduce their export subsidy expenditure by 36%.

For developing countries the percentage cuts are 24%.

(2) Trade in Textile and Clothing (Multi-Fibre Arrangement) : This provides for phasing out the import quotas on textiles and clothing in force under the Multi-Fibre Arrangement since 1974, over a span of 10 years i.e., by the end of the transition period on January 1, 2005. As a result, quotas on textiles and clothing have now been abolished.

(3) Trade Related Intellectual Property Rights (TRIPS) : The WTO agreement on trade-related aspects of Intellectual Property Rights (TRIPs) is an international treaty which sets down minimum standards for most forms of intellectual property regulation within all member countries of the WTO.

The TRIPs Agreement pertains to the protection of following categories of intellectual property rights : (i) copyright; (ii) trademarks; (iii) geographical indications; (iv) industrial designs; (v) patents; (vi) integrated circuits and (vii) trade secrets.

Regarding copyrights it is specified that the Berne convention should be complied for the protection of liberally, artistic works including computer programming.

The owner of the registered trademark possess exclusive rights for its use.

The geographical indication relate to the identification of a product originating in the territory of the member state; and it should be legally protected.

Industrial designs are to be protected for at least 10 years and patents for 20 years.

Patents shall be available for any inventions. Whether products or processes, in all fields of technology, provided they are new, involve an inventive step and are capable of industrial application.

Requirements of TRIPs: TRIPs require member states to provide strong protection for intellectual property rights. For example, under TRIPs :

(i) Copyright terms must extend to 50 years after the death of the author (although films and photographs are only required to have fixed 50 and 25 year terms, respectively).

(ii) Copyright must be granted automatically, and not based upon any

‘formality’, such as registrations or systems of renewal.

(iii) Computer programs must be regarded as ‘literary works’ under copyright law and receive the same terms of protection.

(iv) National exceptions to copyright (such as “fair use in the United

States) must be tightly constrained.

(v) Patents must be granted in all “fields of technology” (regardless of whether it is in the public interest to do so).

(vi) Exceptions to patent law must be limited almost as strictly as those to copyright law.

(vii) In each state, intellectual property laws may not offer any benefits to

local citizens which are not available to citizens of other TRIPs signatories (this is called ‘national treatment’). TRIPs also has a most favoured nation clause.

(4) Trade Related Investment Measures (TRIMs) : Like subsidies, certain track related investment measures are regarded as a ‘form of protection! which enhance inefficient investment. TRIMs provide for abolition of all such restrictions, measures and conditions imposed on foreign investors.

TRIMs are investment related measures proposed by WTO to ensure free flow of investment all over the world. In these measures, foreign investment is treated as per with domestic investment. It will abolish all forms of protection to domestic investment.

The main features of TRIMs are:

(i) Foreign investors are to be treated as per with domestic investors.

(ii) Abolition of restrictions imposed on foreign capital.

(iii) No limitation or celling on the quantum of foreign investment, i.e., foreign equity to be allowed upto 100 percent.

(iv) No restrictions on any area of investment.

(v) Exports of the part of the final products will not be mandatory.

(vi) No force on the foreign investors to use the total products or materials.

(vii) Granting of permission without restrictions to import raw materials and other components.

(viii) Restrictions on repatriation of dividend, interest and royalty will be removed.

(ix) Phased manufacturing programme will be introduced to increase the domestic content of manufacture.

In short, this provision of TRIMs under WTO open up the opportunity to foreign investors to invest anywhere in the world in any economic activity. The Agreement further ensures that all the units whether ‘indigenous’ or ‘foreign’ shall be treated at par without any discrimination in terms of regulations and policies.

(5) General Agreement on Trade and Services (GATS): The General Agreement on Trade and Services (GATS) is the first multilateral agreement in services whose objective is progressive liberalisation of trade services. The treaty was created to extend the multilateral trading system to services, in the same way the General Agreement on Tariffs and Trade (GATT) provides such a system for merchandise trade. All members of the WTO are signatories to the GATS.

Trade in services includes insurance, travel tourism, hotel, banking, shipping, telecommunication, media services etc. Trade in services has been brought within the purview of WTO for the first time. Now foreign services will be treated at par with domestic services.

Sectors addressed: The GATS agreement covers four ‘modes of supply’:

(i) Cross border trade, which is defined as delivery of a service from the territory of one country into the territory of other country;

(ii) Consumption abroad, this mode covers supply of a service of one country to the service consumer of any other country;

(iii) Commercial presence, which covers services provided by a service supplier of one country in the territory of any other country, and

(iv) Presence of natural persons, which covers services provided by a service supplier of one country through the presence of natural persons in the territory of any other country.

Countries can freely decide where to liberalize on a sector-by-sector basis, including which modes of supply they want to cover for which sector.

(6) Dispute Settlement: The WTO dispute settlement mechanism is fastes and binding in the parties. WTO has set up Dispute Settlement Body (DSB). The first stage in the settlement of disputes is the holding of consultations between the members concerned. If consultations fail and if both parties agree, the Director General of WTO offers good offices, conciliations and mediation. The complainant member can ask the DSB to establish a panel of three experts within 30 days. This panel will have to give its report within 60-90 days. The DSB will adopt the report within 30 days.

(7) Agreement on Anti-dumping : The term ‘dumping describes the practice of selling a product in one national market at a lower price than it is sold in another national market. Therefore, ‘dumping’ is price discrimination between national markets. Haberler defines as, “The sale of goods abroad at a price which is lower than the selling price of the same goods at the same time in the same circumstances at home, taking account of difference in transport costs.”

The WTO Agreements stipulate that dumping measures will be curbed and no country will be allowed to dump its products in another country but if volume of dumped imports from a particular country is less than 1% of domestic markets sale of that product, then this dumping will be treated an insignificant and WTO will not entertain such complaint of dumping.

(8) Trade Policy Review Mechanism (TPRM): The TPRM aims to carry out reviews of the trade policies and practices under the Multilateral Trading Agreements and PTAs for the smooth functioning of Multilateral Trading System. The Trade Policy Review Body (TPRB) was established for the purpose.

In order to achieve full transparency, each member shall report regularly to the TPRB about the trade policies and practices pursued by it. An annual overview of developments in the international trading environment having an impact on the multilateral trading system shall also be undertaken by the TPRB.

The overview shall be assisted by an Annual Report by the Director General setting about major activities of the WTO and highlighting significant policy issues offer affecting the multilateral trading system.

Multinational Corporations World Trade

ADVANTAGES OF WTO FOR INDIA

Or

ARGUMENTS IN FAVOUR OF WTO

The following benefits are available to India from WTO:

(1) Benefits from Expansion in Trade : World Bank, OECD and the GATT Secretariat have estimated that the income effects of the implementation of the Uruguay Round package will add between 213 and 274 billion U.S. dollars annually to world income. The GATT Secretariat further projects that the largest increases will be in the areas of clothing (60%), agriculture, forestry and fishery product (20%) and processed food and beverages (19%). India’s competitive advantage lies in these fields. Hence, it is logical to believe that India will obtain large gains in these sectors.

(2) Improved Prospects for Agricultural Exports: The second benefit that India expects relates to the improved prospects for agricultural exports. There are two specific reasons. Firstly, with restrictions on the import of agricultural goods reduced in developed countries, India will be able to its exports of agricultural products in which it has tremendous comparat advantage, by virtue of good and very large variety of soils and cheanlah

Multinational Corporations and World Trade Organisation Secondly, the agro-based industries will also export much and earn much of foreign exchange as these are little/nil import-intensive.

(3) Benefits from Phasing Out of MFA: Many observers argue that in the new quota-free regime in textiles and clothings that is now in vogue (since January 1, 2005) India’s exports of textiles and clothing will increase considerably and Indian exports of these products will ‘flood’the U.S. and European markets.

(4) Benefits from Multilateral Rules and Disciplines: The Uruguay Round Agreement has strengthened multilateral rules and disciplines. The most important of these relate to anti-dumping, subsidies and countervailing measures, safeguards and disputes settlement. This will ensure greater security and predictability of internation trade. This would also be favourable for India’s international business.

(5) Market Access : India along with other developing countries has the market access to a number of advanced countries due to the imposition of the clauses concerning to trade without discrimination.

(6) TRIPs: The Agreement of TRIPs provides for 10 years transition period for introduction of product patent in drugs, chemicals and food products. Product patents would not affect majority of drugs and for the others, the Govt. can undertake compulsory licensing for non-commercial public use as well as to prevent the situations like exorbitant prices or inadequate availability.

(7) Services : By including trade in service sector under WTO proposals, developing countries like India will stand to gain. According to WTO, developed countries will establish large number of trade and service establishments like banking, insurance, transport, hotel, etc. India will gain in skilled services export like computer software, consultancy, medical services, etc. The cross border migration of trained manpower is allowed under the agreement. It shall also help India in reducing unemployment in the country.

(8) Gains in Efficiency: An important aspect of benefits will be a large improvement in the efficiency of the economy. This will happen because of three following factors :

(i) There will be an increase in competitive efficiency. There will be large many units, both from foreign sources and domestic sources, which will be competing to reduce costs of production.

(ii) A free trade in the external sector, coupled with the present domestic policy of marketisation of the economy, will bring about allocative efficiency.

(iii) The easy entry of foreign direct investments will also improve economy’s efficiency in more than one way. It will bring with it most modern technology.

Multinational Corporations World Trade

DISADVANTAGES OF WTO TO INDIA

The main disadvantages and challenges that India faces under the new international economic order that is taking shape under WTO are as follows:

(1) Indian Export will not Expand : Removal of trade barriers will not guarantee expansion in world trade. Flow of goods and services across the globe depends not much on trade restrictions but on factors like infrastructure, political environment, technology, assured supply of exportable goods and quality consciousness of producing countries. It may, be observed that India is short, to some extent, in all these requisites.

(2) Service Sector: Service sector like insurance, banking, telecommuni canons, transportation is backward in India compared to that of developed countries. The developed countries have a decisive advantage over others in these services, because of the use of most advanced technology and the economies of large scale. The services in which India enjoys comparative advantage have not been included. These services are, for example, consultancy services professional skills, labour services etc.

(3) Trade Related Intellectual Property Rights (TRIPs). Rule regarding protection of intellectual property rights, such as patents, trademarks and copyrights, etc., have been made stringent. It is argued that the TRIPS agreement goes against the Indian Patents Act, 1970. Only process patents can be granted in food, chemicals and medicines under the Indian Patents Act. TRIPS agreement provides for granting product patent also. Under TRIPs patent can be granted to methods of agriculture and horticulture, biotechnological process including living organisms like plants and animals. The duration of patents under TRIPs is 20 years.

(4) Patent of Indian Herbs by Foreign Companies : Some foreign companies have taken patent of Indian herbs/foodgrain like Haldi, Neem, Tulsi, Basmati rice etc. An American company has been granted a patent right for neem as a pesticide. Basmati rice has been patented as Kasmati and Texmati. Danger lurks with regard to Tulsi plant also. There are a few cases of biopiracy of India’s herbal wealth.

(5) Trade Related Investment Measures (TRIM): The agreement on TRIMs is a weak one. Article IV of the agreement provides that developing countries can deviate from the above provisions temporarily. The TRIMS agreement would remove restrictions on foreign investments. Therefore, it is feared that MNCs would try to control high priority areas in developing countries like India.

Protection of IPRs (intellectual property rights) is, in itself, anti-competition and anti-liberalization and goes against the spirit of opening up the world economy and global integration. It amounts to ‘legalising the ‘monopoly’ of MNCs. Thus protection of IPRs is, itself, a barrier to trade.

(6) Dispute Settlement Mechanism : The most disturbing aspect of the functioning of WTO is that the disputes settlement mechanism of WTO is by its very nature biased in favour of the rich and against the poor. As argued by Harish Rao, the settlement mechanism is best suited for disputes between equally strong trading partners. This is due to the reason that in case of any dispute, the WTO can only recommend retaliation by the affected member and there is no provision for collective retaliation by all WTO members against the erring member. Nor is there any provision for providing compensation to the affected member for the losses suffered.”In such a lopsided structure, a weak complainant may prefer to remain silent rather than retaliate against a powerful developed country.

(7) Adverse Effects on Indian Industry : Since India scrupulously followed the agreement, with the WTO provisions. As the protection afforded by import duties gradually disappeared, Indian industry had to face increasing competition from foreign goods. Confederation of Indian Industry (CII), the apex body expressed its disapproval against duty free status of capital goods sector

As a result, C. I. I. estimated that indigenous capital goods industry on a conservative estimate lost orders worth 5,000 crores from countries.

(8) Adverse Impact on Small Scale Industry Units: WTO agreements do not discriminate on the basis of size of industries or enterprises. In the WTO regime, reservations may have to be withdrawn, preferential purchase and other support measures may not be available and thus SSIs have to compete not only with the large units within the country, but also with cheap imported products, SSIs are thus losing their markets to cheap imported products. Consequently, a very large number of SSI units are becoming sick or have closed down.

(9) Disadvantage to Agricultural Sector:

(i) WTO agreement on Agriculture stipulated that developed countries would reduce their subsidies by 20% in six years and developing countries by 13% in 10 years. But as facts stand today, the developed countries have not shown any willingness to cut down subsidies. For instance, the U.S.A. provided $ 51,256 million support to farmers in the base period 1999-2001. Earlier, Indian agricultural prices were lower than international prices mostly. But as a result of the heavy subsidization of agricultural exports by developed countries, the situation undertook a dramatic about-turn. The Indian farmers have been put to serious disadvantage. The phenomenon of farmers’ suicides and the growing unrest in several states because of the distress of farmers specialising in agricultural commodities and their exports is a very serious human problem.

(ii) There is very little for the small farmers of the country. Their number is very large, accounting for 78% of the total holdings in the country. Most of these farmers grow crops on marginal land of poor quality. There could be higher subsidy for them, and still more subsidy for crops grown on poor quality land. These subsidies could be in the form of input subsidies. But no flexibility in respect of the provision for subsidy has been provided for in the Dunkel Draft.

(iii) According to WTO, protection of breeding has been determined by Sui-Generis system. Indian farmers will have to spend large amount of money to get new and improved variety of plants and their dependence on multinational companies will further increase.

(10) Issue of Social Clause, Environment Clause and Labour Cost: Developed countries are trying to link these matters. Developed countries argue that social cost, labour cost and environment cost are high in developed countries in comparison to developing countries. So developed countries should be allowed to impose tariff on imports to neutralise the difference in such cost. Experts in developing countries were shocked by this proposal since it aimed at blunting the only competitive edge of the Third World Countries. If this clause is introduced. Indian products will become unsaleable in the USA and the other countries of the European Community. Ironically, it would imply that the poorer nations will be forced to pay for the fact that they are poor,

(11) Issue of Food Security: An issue of specific concern to the develop Countries like India is the issue of food security. The AOA does not address equate to this question. The public distribution system (PDS) has also been given inadequate attention. The provision that the purchases for the PDS and the sales through it at the market prices, will be of little help in times of scarcity like droughts etc.

Another difficulty will arise because the Dunkel Draft requires that supply of food to the poor should be in terms of “Clearly defined criteria related to nutritional objectives.” In a country like India ‘hunger’ of the many is the most immediate concern. To think of the nutritional standards for the PDS will be going off the centre-theme of the food-security system of the country at this low stage of development.

Multinational Corporations World Trade

INDIA’S COMMITMENTS TO WTO

The Govt. of India has made a number of commitments to WTO. The main commitments are in the following fields:

1. Tariff Lines: As a member of the WTO, India has bound about 67% of its tariff lines whereas prior to the Uruguay Round, only 6% of the tariff lines were bound. For non-agricultural goods, with a few exceptions, ceiling, binding of 40% advalorem on finished goods and 25% on intermediate goods, machinery and equipment have been undertaken. The phased reduction to these bound levels was to be undertaken over the period of March 1995 to the year 2005.
2. Quantitative Restrictions (QR): In 1997, India imposed quantitative restrictions (QR) on the import of 2,714 goods on the grounds of balance of payments. According to agreement with WTO in 1999, quantitative restrictions on imports were confined to 1,429 goods. In Export Import Policy 2000-01. quantitative restrictions on imports have been restricted to 715 goods. So, India is reducing quantitative restrictions on its imports.
3. Trade Related Investments Measures (TRIMs): To adopt the TRIMS clause of WTO, India has allowed 100 percent foreign equity participation in many areas like advertising sector, tea sector, power, oil refining, coal processing plants, hotels, resorts, ports, airports, development of townships, drugs and pharmaceuticals etc. It has resulted in inflow of huge foreign investment.
4. Trade Related Intellectual Property Rights (TRIPS) : An Ordinance on Patents (Third) Amendment was promulgated by the Government on December 26, 2004 to make the Indian patents law. WTO compliant and to fulfil India’s commitment under TRIPS to introduce product patent protection for drugs, food and chemicals with effect from January 1, 2005.
5. GATS : Under the General Agreement on Trade in Services (GATS), India has made commitments in 33 activities. Foreign service providers will be allowed to enter these activities. According to the Govt. of India the choice of the activities has been guided by considerations of national benefit (viz., the impact on capital inflows, technology and employment).
6. Customs Valuation Rules : India’s legislation on Customs Valuation Rules 1998, has been amended to bring it in conformity with the provisions of the WTO Agreement on implementation of Article VII of GATT 1994 and the Customs Valuation Agreement.
7. Agreement on Textiles and Clothing (ATC) : Another significant development in world trade is the expiry of the Agreement on Textiles and Clothing (ATC) at the end of 2004, ending a historic anomaly in the world trading by putting textiles and clothing on the same footing as other industries under the WTO.
8. Negotiating Group on Rules (NG Rules) Various proposals submitted to the Negotiating Group on Rules (NG Rules) under Anti-dumping and Subsidies Agreements have generally sought strengthening of disciplines. India has made three submissions to the NG Rules. Apart from negotiations on Anti-dumping Agreement and the Subsidies Agreement, the NG Rules has also been discussing issues relating to Regional Trade Agreements (RTAs) and Fisheries Subsidies. The focus under RTAs has been to reach some agreement that would improve the transparency of such agreements.

MINISTERIAL CONFERENCE OF WTO

As stated earlier, the trade ministers of WTO members meet once in two years and this is known as the Ministerial Conference. While preliminary work goes on at the Geneva headquarters of WTO with members providing key inputs, key decisions are taken at the Ministerial Conference. Table depicts the brief of various ministerial conferences of WTO.

Table 1 : Ministerial Conferences of WTO 

Multinational Corporations World Trade

We shall discuss here the ninth and tenth ministerial conferences of WTO in detail.

NINTH WTO MINISTERIAL CONFERENCE

The Ninth Ministerial Conference of WTO under the Doha round of trade negotiations was held in Bali, Indonesia on December, 3-6, 2013.

The Bali decisions include:

(i) A strong political statement to keep export subsidies low (along with policies with equivalent effects, known collectively as “export competition”).

(ii) A commitment on how to deal with a certain type of quota (know as a tariff quota) when imports repeatedly fall significantly below the quota limit.

(iii) An agreement that the cost of building up food stocks by developing country governments, for food security need not be counted against the country’s domestic support limits, provided certain conditions were met.

The agreement at Bali is claimed as historical achievement of WTO. This was for the first time in the 18 years history of WTO that it has scored a major success to fulfil its mandate.

TENTH MINISTERIAL CONFERENCE

The Tenth Ministerial Conference of the WTO will be held in Nairobi Kenya from 15 to 18 December, 2015.

WTO members are engaged in discussion to finalise the work programma to conclude the remaining issues of the Doha Development Agenda.

Multinational Corporations World Trade

EXERCISE QUESTIONS

Long Answer Questions

1 What are multinational corporations ? Explain the importance of it.

2. What are multinational corporations ? Explain their salient features and also their drawbacks and benefits.

3. Critically analyse the role and importance of MNCs in the Indian economy.

4. Define MNCs. Throw light on their nature and reasons for their growth.

5. Define MNCs and also explain the government policy to regulate MNCs.

6. What do you mean by World Trade Organisation ? Discuss its objectives, scope and functions.

7. Briefly throw light on the organisational structure of the WTO.

Multinational Corporations World Trade

Short Answer Questions

1 What do you understand by multinationl corporations ? Explain.

2. Explain the advantages of multinational corporations.

3. State the disadvantages of multinational corporations.

4. Explain the chief characteristics of MNCs.

5. State any three reasons for growth of multinational corporations.

6. Write the measures of control exercised by the government on multinational corporations.

7. Write down the suggestions for regulating multinational corporations.

8. What do you understand by the World Trade Organisation (WTO)?

9. Describe the main objectives of the WTO.

10. What are the main functions of the WTO?

11. What are the features of WTO?

Multinational Corporations World Trade

Objective Questions

Select the Correct Alternatives :

1 Among following which objective of GATT is included in the preamble of WTO:

(a) to improve standard of living.

(b) to enlarge production and trade.

(c) to ensure full employment and broad increase in effective demand,

(d) all of above.

2. The main function of the WTO is:

(a) to regulate trade in goods.

(b) to supervise trade-related aspects of intellectual property.

(c) both (a) and (b).

(d) none of these

3. The branches of multinational corporations extend over:

(a) only one country.

(b) a number of countries.

(c) underdeveloped countries only.

(d) developing countries only.

4. Among the following which statement is not true:

(a) IBM is an MNC.

(b) MNCs are large sized.

(c) MNCs’ interests and operations sprawl over national boundries.

(d) MNCs do not help in the industrial growth of developing countries.

5. Among following which statement is true:

(a) MNCs are the agents of development.

(b) MNCs are the agents of exploitation.

(c) (a) and (b) both.

(d) none of these.

6. Among following which statements are true:

(a) Scope of the WTO is different from GATT.

(b) Scope of the WTO and GATT are same.

(c) Scope of WTO is narrower than GATT.

(d) Scope of WTO is wider than GATT.

[Ans.(1) d, (2), (3) b, (4) d, (5), (6) d.)

Multinational Corporations World Trade