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The Rediff Business Special: Bimal Jalan

Multinationals: Demons or angels?

One clear exception is defence and security-related industrial units (eg, manufacture of armaments), where ownership and investment must be restricted to domestic corporations. Secondly, there may be certain industries or activities which employ a large number of persons, but which have become uncompetitive because of technological changes or shifts in comparative advantage. If entry of foreign companies in these traditional activities (or new substitutes) is likely to render a substantial number of persons unemployed, then there is a case for restricting foreign investment in these areas.

Domestic large scale firms can also cause injury to these industries, but their resource base is not as large as those of multinationals. Some agro-based activities, which employ millions of persons throughout the country, would deserve protection from foreign investment on this ground. However, it is important to ensure that such cases are considered exceptional and do not become generalised to cover uncompetitive and technologically outdated units in the modern industrial sector, where the employment angle is not very significant, as in electronic hardware.

Over a period of time, as employment opportunities in the economy expand, workers may be expected to move out of low-productive jobs in the traditional sector to new industries and services. A third exception, which is less clear-cut, is discrimination against foreign investment on cultural grounds. A case can be made to prevent entry of, say, foreign films, or to restrict foreign investment in radio or television stations in order to protect Indian culture and Indian values. This, however, is a very slippery area.

In a free and secular society, the determination of what are Indian values and what values deserve to be protected cannot be left to bureaucrats or to a political party in power. An independent supervisory or regulatory body should perhaps be empowered to lay down standards and criteria which protect the country's interest and which have to be observed by domestic as well as foreign producers or investors.

Although foreign investment policies have been liberalised in recent years, there is by no means a unanimity of views among experts, and indeed the public, on the effects of such investment in India. Three different sets of arguments have been advanced against foreign investment. The first is the political argument that large scale foreign ownership of industrial assets could pose a threat to national sovereignty or or mortgage the national interest to foreigners (as indeed was the case during the colonial period).

While it is argued that it could become real in the future if there is a large flow of funds from abroad for a number of years. There is no rational way of discounting such fears about the distant future. The only practical way of preventing such a possibility from arising is to ensure that foreign investment is subject to domestic laws and domestic industrial policies. In view of the large size of the economy and the substantial volume of domestic investment, it is unlikely that foreign investment will ever become the predominant form of capital formation in India or exceed prudent limits.

According to official estimates, direct foreign investment in India is only Rs 620 crores (Rs 6.2 billion in 1993-94. Gross capital formation in the economy in that year was Rs 160,000 crores (Rs 1,600 trillion). It will take a fairly long time before foreign investment reaches even 5 or 10 per cent of gross capital formation. In any case, foreign investment policies can always be reconsidered if the stock of investment from abroad rises so rapidly that it threatens to swamp domestic enterprise.

A second set of arguments against foreign investment concerns possible welfare-retarding cross-border transactions between the parent company abroad and the subsidiary company at home (eg, transfer pricing leading to transfer of capital abroad). This, in effect, was a widely used method of transferring capital during the colonial period. In the post-colonial period, in some countries, this method was also used to transfer profits by companies which were subject to price controls (eg, drug companies) or companies which were not allowed to expand domestically (eg, companies in the consumer goods sector).

In recent years the picture has changed. The world markets have become competitive and there is a struggle among all companies to maintain or increase their market shares. It is no longer in a company's interest to increase costs by resorting to transfer pricing, unless domestic markets are sheltered and protection levels are unduly high.

In India, with the lowering of tariff levels and the removal of domestic investment restrictions, the temptation to raise costs artificially should now be less. The correct answer to the problem of 'transfer-pricing', under present circumstances, is to encourage competition and further reduce barriers to new investment.

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