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The Rediff Business Special: Bimal Jalan

Multinationals: Demons or angels?

In India, till the mid-1940s, foreign capital dominated industrial and financial fields. The foreign trade network, as also part of the internal trade that fed into exports, was controlled by foreign capital. British companies dominated coal mining, the jute industry, shipping, banking, insurance, and tea and coffee plantations. Moreover, through their managing agencies, British corporations controlled many of the Indian-owned companies. After 1920, the British giant companies - Unilever, Imperial Chemical Industries -- were joined by several American multinationals, among them General Motors.

The large presence of foreign companies before Independence, however, did not contribute to the growth of income in the country. In fact, it may have been a cause of India's underdevelopment as foreign investment was concentrated in production and export of raw materials and foodstuffs. There was practically no transfer of capital to Indian and India was a net exporter of capital to the UK. There was no scope for transfer of technology as most of the investment was concentrated in low technology extractive industries.

Against this background, it is no wonder that after Independence in 1947, an important plank of India's development policy was to discourage inflows of foreign capital. Foreign shareholding in existing companies was also reduced drastically by forced or voluntary transfer of capital into Indian hands. By the beginning of the 1980s, the share of foreign direct investment in gross capital formation was among the lowest for India among all developing countries (only 0.2 per cent as against the average of about 6 per cent for developing countries as a group).

The highly restrictive policies towards foreign equity investment continued, without any significant change, until mid 1991. In the last four years, rules governing foreign investment have been liberalised greatly and India is once again, after a gap of nearly forty years, actively seeking foreign investment. In other developing countries too, as well as in countries in Eastern Europe, there has been a change in the attitude of foreign investment.

All countries, including China and the former Soviet Union, are now actively canvassing for such investment. Cuba, under Fidel Castro, is a later convert. Towards the end of 1995, it too announced its intention to seek foreign direct investment.

Since 1970, there has been a dramatic transformation in the sectoral composition of both the flows and the stock of foreign direct investment. Foreign investment is no longer going into primary products or resource-based manufacturing. Today, the concentration is mainly in services and technology-intensive manufacturing. The past investment of transnational corporations in extractive sectors (including petroleum and natural gas) has been substantially reduced through nationalisation.

There are also strong interlinkages between flows of direct investment on the one hand and trade, financial flows and technology transfers on the other. In the case of the United States, for example, at least 80 per cent of the trade is undertaken by transnational corporations. As regards technology payments by developing countries to Germany and the United States took the form of payments from affiliates to their parent companies and were directly associated with foreign direct investment.

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