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Ownership and control of foreign direct investment : India and Canada Sharma, Kavita A. 1986

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c OWNERSHIP AND CONTROL OF FOREIGN DIRECT INVESTMENT: INDIA AND CANADA BY DR. KAVITA A. SHARMA A THESIS SUBMITTED I N PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF LAW IN THE FACULTY OF LAW We a c c e p t t h i s t h e s i s as c o n f o r m i n g t o t h e r e q u i r e d s t a n d a r d THE UNIVERSITY OF B R I T I S H COLUMBIA F e b r u a r y 1986 ( ? ) D r . K a v i t a A. Sharma, 1986 In p resen t ing this thesis in partial fu l f i lment of the requ i rements fo r an a d v a n c e d d e g r e e at the Univers i ty of Brit ish C o l u m b i a , I agree that the Library shall m a k e it f reely avai lable fo r re fe rence a n d study . I further agree that p e r m i s s i o n for ex tens ive c o p y i n g o f this thesis for scho la r l y p u r p o s e s may be g ranted by the h e a d o f m y d e p a r t m e n t o r by his o r her representat ives . It is u n d e r s t o o d that c o p y i n g o r p u b l i c a t i o n o f this thesis for f inancia l gain shall not b e a l l o w e d w i t h o u t m y wr i t ten pe rm iss ion . D e p a r t m e n t of OCJXKAJ T h e Un ivers i ty o f Brit ish C o l u m b i a 1956 M a i n M a l l V a n c o u v e r , C a n a d a V 6 T 1Y3 D a t e tk¥r\M. 'EG i i ABSTRACT The a i m o f t h i s t h e s i s i s t o e x a m i n e i s s u e s p e r t a i n -i n g t o o w n e r s h i p and c o n t r o l o f f o r e i g n d i r e c t i n v e s t m e n t i n two c o u n t r i e s , I n d i a and C a n a d a . The f i r s t i s a d e v e -l o p i n g c o u n t r y w i t h a b r o a d i n d u s t r i a l b a s e . The s e c o n d i s a d e v e l o p e d c o u n t r y w h i c h i s s t i l l e s s e n t i a l l y r e s o u r c e -e x p o r t i n g i n s p i t e o f i t s s o p h i s t i c a t e d t e c h n o l o g y and i n d u s t r y . A p l e a has b e e n made f o r i n t e r n a t i o n a l r e g u l a -t i o n o f f o r e i g n d i r e c t i n v e s t m e n t i n o r d e r t o make i t a t r u l y e f f e c t i v e t o o l o f e c o n o m i c g r o w t h and d e v e l o p m e n t . The c o s t s and b e n e f i t s o f f o r e i g n d i r e c t i n v e s t m e n t have b e e n e x a m i n e d i n C h a p t e r 1 w i t h s p e c i a l e m p h a s i s • on d e v e l o p i n g c o u n t r i e s . A t t e m p t s have b e e n made i n v a r i o u s i n t e r n a t i o n a l f o r u m s t o d e v e l o p a mechanism t o r e g u l a t e f o r e i g n d i r e c t i n v e s t m e n t . UN h a s made t h e most c o m p r e h e n -s i v e e f f o r t w i t h t h e a p p o i n t m e n t o f t h e Gr o u p o f E m i n e n t P e r s o n s i n 1972. T h e i r r e c o m m e n d a t i o n s and t h e accompany-i n g comments h a v e b e e n d i s c u s s e d t o h i g h l i g h t t h e d i v e r g e n c e o f v i e w s b e t w e e n d e v e l o p i n g a n d d e v e l o p e d c o u n t r i e s . The i m p a c t o f c o l o n i z a t i o n on d e v e l o p i n g c o u n t r i e s w i t h i t s c o n s e q u e n t p r o b l e m s l i k e f o r m a t i o n o f r e s o u r c e -b a s e d e c o n o m i e s h a s b e e n d i s c u s s e d i n C h a p t e r I I . C a n a d a b e i n g a l a r g e l y r e s o u r c e - e x p o r t i n g economy i n e x t r i c a b l y i i i linked with USA has several p a r a l l e l s with developing countries. In Chapter 3 I have discussed the h i s t o r i c a l back-ground of foreign d i r e c t investment i n India and i t s perceived costs. Provisions of Foreign Exchange Regulation Act, 1973 have been examined to assess India's attempts to regulate foreign d i r e c t investment. Chapter 4 has dealt with the role of foreign d i r e c t investment i n Canadian economy and i t s perceived costs and benefits. Foreign Investment Review Act, 1973 and Investment  Canada Act, 1985 have been analysed to understand Canada's attempts at regulation of foreign d i r e c t investment. The Draft Code of Conduct produced by the UN Comission on Transnational Corporations has been discussed in Chapter 5. Areas of international agreement and disagree-ment have been c l a s s i f i e d and possible solutions seen to make this a un i v e r s a l l y acceptable code. I have concluded that i t would be b e n e f i c i a l to adopt a u n i v e r s a l l y acceptable international code of conduct. This can eventually acquire the force of customary i n t e r -national law and provide guidelines for national l e g i s l a t i o n to make foreign d i r e c t investment an e f f e c t i v e tool i n economic development. i v TABLE OF CONTENTS Page Abstract i i Introduction i Chapter I : Costs and Benefits of Foreign  Direct Investment (i) Introduction 11 ( i i ) P o r t f o l i o and Direct Investment 12 Costs of Foreign Direct Investment 15 (i) Exploitation of Natural Resources 15 ( i i ) Exployment 15 ( i i i ) Labour 17 (iv) Technology 18 (v) Research and Development 20 (vi) Inappropriate Products 20 ( v i i ) E x t r a t e r r i t o r i a l i t y 20 ( v i i i ) Intra-Company Transactions 22 (ix) Administrative Control of the Enterprise 23 (x) Disclosure of Financial Information 24 (xi) Transfer Pricing 25 ( x i i ) Effect on Capital Flow 26 ( x i i i ) Consumer Protection 28 Rise of Nationalism 29 International Regulation of Transnationals - U.N. 29 Areas of Agreement of Agreement in the Recommendations 31 (i) National Treatment 31 ( i i ) Non-interference in i n t e r n a l a f f a i r s of host country 31 ( i i i ) . Labour Standards 32 (iv) Consumer'Protection 33 (v) Tax Treaties 33 Disagreements 34 (i) Guidelines for Multinationals 34 ( i i ) Ownership and Control 35 ( i i i ) Dispute Situations 38 (iv) Technology 39 (v) Competition, C o n f l i c t s and Intra-corporate A f f a i r s 41 (vi) Screening Process 43 ( v i i ) Other Areas of Disagreement 45 Evaluation 46 Conclusion 52 V Page Chapter II : Foreign Direct Investment i n  Perspective Introduction 54 What i s Development 55 Differences Between Developed and Developing Countries 57 (i) Colonization and Time of . , . ~ I n d u s t r i a l i z a t i o n : 57 ( i i ) Population 60 ( i i i ) Technology 61 (iv) Psychology 63 Problems Faced by Developing Countries 64 Special Features of Canada 67 (i) Canada, a resource-based country 67 ( i i ) - Influence of USA 71 Conclusion 77 Chapter III : India and Foreign Investment H i s t o r i c a l Background 79 1949 Policy Statement on Foreign Direct Investment in India 86 Costs and Benefits of Foreign Investment as Perceived in India 90 (i) Technology 91 ( i i ) Duplication of Technology 94 ( i i i ) E f f o r t s to Augment Capital 95 (iv) Monetary Costs 96 (v) Unemployment 98 (vi) Under and Over-Invoicing 99 Foreign Exchange Regulation Act,1973 100 (i) Salient Features of Section 29 101 Guidelines for Administering S.29 of FERA 104 (i) Scope 104 ( i i ) Companies with more than Forty Percent Shareholding 105 ( i i i ) Trading A c t i v i t i e s 107 (iv) Other A c t i v i t i e s 109 O i l Exporting Developing'Countries 110 v i Page Non-Resident Indians and Persons of Indian Origin 112 (i) Direct Investment 112 ( i i ) P o r t f o l i o Investment 113 Free Trade Zones 114 Impact of S.29 115 (i) Coca-Cola Case 117 ( i i ) IBM Case 119 Legal Implications of S.29 and Pivotal Role of Reserve Bank of India 121 (i) Dilution of Equity Holding 121 ( i i ) Reasonable Opportunity to Make a Representation 126 ( i i i ) Permission of Reserve Bank of India 128 Conclusions 131 Chapter IV : Canada and Foreign Investment Factors Shaping Canada's Investment Policy 137 Development of Economy in Canada 138 Benefits and Costs 140 Predecessors of FIRA 144 Foreign Investment Review Act, 1973-74 147 D i f f i c u l t i e s Caused by FIRA 149 (i) Negotiating Process 149 ( i i ) E x t r a - t e r r i t o r i a l Implications of FIRA 151 : ( i i i ) S i g n i f i c a n t Benefit C r i t e r i o n 153 (iv) Reviewable Investments 154 (v) Delays 154 (vi) Third-Party Representations 156 ( v i i ) Unwieldiness of the Process 156 ( v i i i ) C o n f i d e n t i a l i t y 157 (ix) Compliance with the Act 157 (x-) Other Problems 158 FIRA to Investment Canada 158 Report of the Macdonald Commission 162 The Other Macdonald Report 172 Investment Canada and FIRA 173 (i) Purpose 173 ( i i ) R e s p o n s i b i l i t i e s of the Minister 174 ( i i i ) S i g n i f i c a n t Benefit 175 v i i Page (iv) Who can Invent 176 (v) Acquisition of Control 178 (vi) New Business 180 ( v i i ) The Review Process 181 Conclusions 184 Chapter V : Towards An International Code of  Conduct Introduction 188 Need for a Universally accepted code 188 Steps Twoards Formulation of the code 192 Areas of International Agreement 194 (i) Co-operation with Host States 194 ( i i ) Intergovernmental Co-operation 195 ( i i i ) Ownership and Control 196 (iv) Export Objectivew 197 (v) Consumer Protection 198 (vi) Disclosure of Information 199 ( v i i ) C o n f l i c t of J u r i s d i c t i o n 199 ( v i i i ) Implementation of the Code 200 Outstanding Issues 202 Preambles and Objectives 202 (i) D e f i n i t i o n and Scope 203 ( i i ) Non-collaboration with r a c i s t regimes i n Southern A f r i c a 206 ( i i i ) Nationalization 207 (iv) National Treatment 211 (v) Dispute Settlement 213 (vi) Non-interference i n i n t e r n a l a f f a i r s 215 Basis for Concluding Document 215 Conclusion 219 Conclusion 22 3 Notes 228 Annexures 2 70 Select Reading 2 76 v i i i LIST OF TABLES Page 1. Estimated foreign-controlled shares 16 of output and employment i n manufacturing, Argentina, 1955-1972 2. Degree of I n d u s t r i a l i z a t i o n and 68 Finished Manufactures as a Proportion of Trade: 1913, 1929, 1955 and 1980. 3. Total (cumulative) Investment i n Canada 75 4. Foreign Companies in India 132 1 INTRODUCTION Economic interdependence i s an indisputable part of modern world economy. Developing countries need foreign investment and technology for rapid economic growth and development. For the developed countries too, as the Brandt Commission report points out, i t i s not a question of "enlightened charity."^ It i s necessary for their own conti-nued economic growth that the developing countries improve their purchasing power through i n d u s t r i a l i s a t i o n i n order to provide markets for the valuable imports from the deve-loped countries and be able to repay their loans thus main-taining stable economic conditions i n the world. Foreign d i r e c t investment has been recognized as an important tool for economic growth and development. Trans-national corporations with their capacity to move c a p i t a l , technology and entrepreneurship are the chief means of foreign d i r e c t investment. There i s no agreement i n various international forums about the precise legal d e f i n i t i o n and 2 scope of transnational corporations. Broadly speaking, an enterprise becomes transnational when i t makes an invest-ment i n another country while i t i s incorporated i n one country and includes e n t i t i e s l i k e j o i n t ventures, co-opera-2 tives and State-owned a c t i v i t i e s . The decision to invest abroad i s taken because of superior business alternatives presented elsewhere which would resu l t i n an increase of p r o f i t s and i n the expansion and growth of the enterprise. Hence, i t i s not per se geared to economic growth and deve-lopment of that place and may lead to a c o n f l i c t of interest between the host country and the enterprise. The "package" of product, technology, management, ca p i t a l and market access brought by transnationals can lead to several economic benefits for the host country, l i k e improvement i n balance of payment position because of increase i n exports combined with reduction i n imports due to import substitution; augmentation of c a p i t a l resour-ces, creation of jobs; access to l a t e s t technology and markets; improvement i n managerial s k i l l s ; a boost to the growth of domestic enterprise; and p l e n t i f u l a v a i l a b i l i t y of consumer goods leading to better standards of l i v i n g . On the other hand, i t can bring with i t certain costs. Easy access to markets does not necessarily mean the best price. The technology used may not be appropriate for the host country and consumer goods quite unsuitable for that economy may be introduced. The very ease with which techno-logy and managerial s k i l l s can be imported may be a d i s i n -centive for the development of indigenous know-how. Hence, 3 while there i s an indisputable need for foreign d i r e c t investment, there i s also a need to regulate i t so that i t can be geared to economic growth and development. Although d i f f e r e n t countries attach d i f f e r e n t degrees of importance to the costs and benefits of foreign d i r e c t investment, certain perceptions are common to deve-loping countries and others to developed countries as a whole, mainly because the majority of developing countries have been former colonies and have thus missed the indus-t r i a l revolution. They are now trying to i n d u s t r i a l i z e long after the developed countries and the loss of time has had serious consequences. They have been l e f t far behind i n acquiring technical knowledge, the technology available i s adapted to the needs of i n d u s t r i a l i z e d nations because a l l the research and development has taken place there; they are faced with population explosion because of improved health standards; and they have neither the time nor the resources and s k i l l to catch up with the indus-t r i a l i z e d nations without help. Foreign d i r e c t investment can be an important means of acquiring c a p i t a l , technology and managerial and entre-preneurial s k i l l s , but, as the Brandt Commission Report 3 recognizes, the i n d u s t r i a l i z e d nations with over ninety per cent of the world's manufacturing industry from where 4 f o r e i g n d i r e c t i n v e s t m e n t o r i g i n a t e s have immense e c o n o m i c power and t e c h n i c a l s u p e r i o r i t y and t h e y a r e o f t e n r e l u c t a n t t o s u r r e n d e r c o n t r o l o v e r e c o n o m i c d e c i s i o n s . The d e v e l o p i n g c o u n t r i e s , w h i l e t h e y want t o b e n e f i t f r o m f o r e i g n d i r e c t i n v e s t m e n t , do n o t want t o l o s e c o n t r o l o v e r t h e i r e c o n o m i e s e s p e c i a l l y i n t h e l i g h t o f t h e p a s t c o l o n i a l e x p e r i e n c e and want t o be a b l e t o t r e a t on f a i r terms and w i t h e q u a l e x p e r t i s e w i t h t r a n s n a t i o n a l c o r p o r a t i o n s . Hence, a p o t e n -t i a l c o n f l i c t s i t u a t i o n d e v e l o p s w h i c h t h e d e v e l o p i n g c o u n -t r i e s t r y t o r e s o l v e t h r o u g h n a t i o n a l l e g i s l a t i o n f o r r e g u l a -t i n g f o r e i g n d i r e c t i n v e s t m e n t . I n d i a and Canada have been t a k e n as examples o f a d e v e l o p i n g and a d e v e l o p e d c o u n t r y r e s p e c t i v e l y and t h e i r e f f o r t s t o maximize t h e b e n e f i t s and a t t h e same t i m e , t o m i n i m i s e t h e c o s t s by r e g u l a t i o n o f t h e o w n e r s h i p and c o n t r o l o f f o r e i g n d i r e c t i n v e s t m e n t t h r o u g h n a t i o n a l l e g i s l a t i o n have been examined. Canada and A u s t r a l i a a r e t h e o n l y two d e v e l o p e d n a t i o n s w h i c h have a f o r m a l s c r e e n i n g a g e n c y f o r f o r e i g n d i r e c t i n v e s t m e n t . As was s t a t e d by t h e H o n o u r a b l e Mark MacGuigan, S e c r e t a r y o f S t a t e f o r E x t e r n a l A f f a i r s , i n an a d d r e s s t o t h e S o c i e t y f o r I n t e r n a t i o n a l D e velopment, Canada i s " a t once i n d u s t r i a l i z e d and r e s o u r c e - b a s e d , s o p h i s -4 t i c a t e d , y e t i n some ways u n d e r - d e v e l o p e d . " I t , t h e r e f o r e , s h a r e s "many o f t h e p e r s p e c t i v e s " o f t h e i n d u s t r i a l i z e d n a t i o n s and i t s " p o s i t i o n as a major e x p o r t e r o f raw m a t e r i a l s 5 and net importer of c a p i t a l and technology i s similar to the s i t u a t i o n of many developing countries. Canada has been characterized both as the world's smallest i n d u s t r i a -5 l i z e d country and as i t s largest developing country." Since Canada with i t s unique position can appreciate both points of view, i t has consistently t r i e d to " c o n c i l i a t e the c o n f l i c t i n g views of i n d u s t r i a l i z e d and developing countries."^ India, a country with a c o l o n i a l past, started indus-t r i a l i z a t i o n only after independence i n 1947. It has deve-loped a broad i n d u s t r i a l base by a judicious use of foreign investment c h i e f l y as an instrument of transfer of techno-logy while i t has attempted to re t a i n ownership and control over i t mainly through equity ownership. Ordinarily, not more than 40% of equity holding i s allowed to foreigners though where a certain technology has been considered impor-tant for the country, higher percentage of foreign equity holding even upto 74% has been allowed. Pragmatic p o l i c i e s have been evolved for the purpose of augmenting foreign exchange resources. Export-oriented industries can be allowed even upto 100% foreign equity holding. Besides, investment schemes have been formulated for non-resident Indians and for o i l exporting developing countries who have the c a p i t a l but not necessarily the technology. Hence, India has t r i e d 6 to guide foreign investment i n a way that i t can provide maximum benefits while i t has attempted to retain control with a f a i r measure of success. Of course, the investment scheme i s not perfect and c o l l u s i o n can take place between the l o c a l partner and the transnational r e s u l t i n g i n econo-mic costs to the country. Besides, the growth could possi-bly have been faster i f multinationals had been allowed free entry, but i t i s also a question of developing i n d i -genous industry to ensure economic independence, c u l t u r a l i d e n t i t y and a strong base for future growth. The Canadian experience demonstrates how economic development and rapid i n d u s t r i a l i z a t i o n leading to high standards of l i v i n g can take place with the help of foreign investment. Capital for infrastructure l i k e the St. Lawrence Canal System and the construction of railways took place with the help of p o r t f o l i o investment mainly from Great B r i t a i n . Direct investment from USA took place i n both natural resources and i n manufacturing t i l l gradually USA became the main investor i n Canada and also Canada's main trading partner. Although foreign investment has brought obvious benefits to Canada, concern has also been expressed about the costs of this investment l i k e irrevocable depletion of natural resources; truncation of industries leading to 7 a branch plant economy; r e p l i c a t i o n of technology of the parent plant r e s u l t i n g i n lesser research and development in Canada; import and export r e s t r i c t i o n s imposed by the parent company on i t s subsidiaries; and the e x t r a - t e r r i -t o r i a l extension of US laws i n Canada. Further, Canada being a resource-based country and having an economic power l i k e the US as i t s neighbour, has also f e l t concerned about i t s independent c u l t u r a l i d e n t i t y . Canada has not been so concerned about the aggregate amount of foreign investment as with the large measure of r e s u l t i n g non-resident control and that, too, of lar g e l y one country, the US, over some of i t s most important indus-t r i e s and i n d u s t r i a l a c t i v i t i e s . This i s not to suggest that such a control has been or i s l i k e l y to be used to the detriment of Canada, but there i s a consciousness that companies controlled by non-residents may not always be aware of the Canadian point of view and may not be adequately sensitive and responsive to Canadian economic aspirations. The e f f o r t has been to maximize the benefits of US invest-ments i n Canada by ensuring that the investment i s of " s i g n i f i c a n t benefit" formerly under FIRA or of "net benefit" now under Investment Canada to Canada and, at the same time, to maintain an independent and separate c u l t u r a l i d e n t i t y . Protests over the r e s t r i c t i o n s imposed under FIRA and i t s cumbersome procedures f i n a l l y led to the enactment of 8 Investment Canada which has considerably l i b e r a l i s e d foreign investment but has s t i l l t r i e d to ensure that the invest-ment i s of net benefit to Canada and i n accordance with Canadian p o l i c i e s and aspirations. Thus we see, that though they are so d i f f e r e n t from each other, both India and Canada have t r i e d to regulate foreign investment according to their own perceived needs. In fact, r e s t r i c t i o n s on foreign investment exist i n every country whether overtly through a screening agency, or more d i f f u s e l y i n d i f f e r e n t statutes. Therefore, economic interdependence i s an inescapable fact; the developing countries cannot be ignored without causing economic i n s t a b i l i t y ; and foreign di r e c t investment can, i f j u d i c i o u s l y used, be a powerful tool for economic development. As the s i t u a t i o n i s today, the "home countries are concerned with the undesirable effects that foreign investments by transnationals may have on domestic employ-ment and on balance of payments. Most countries are worried about issues of ownership and control of key economic sectors by foreign enterprises, the extent of their encroachment on their p o l i t i c a l sovereignty and their possible adverse influence on s o c i o - c u l t u r a l values. Labour interests are concerned about the impact of multinational enterprises on employment and workers' welfare and on the bargaining 9 strength of trade unions. Consumer interests are concerned about the appropriateness, q u a l i t y and price of the goods produced by the multinational corporations. The multi-national corporations themselves are concerned about the possible n a t i o n a l i z a t i o n or expropriation of their assets without adequate compensation and about r e s t r i c t i v e , unclear 7 and frequently changing government p o l i c i e s . " Therefore, the need for a universally acceptable international code i s obvious by which the interests of a l l the parties can be safeguarded. That this need has been f e l t i s apparent from the e f f o r t s made i n several international forums includ-ing the UN to formulate such a code. The OECD Guidelines for Multinational Enterprises,  the ILO T r i p a r t i t e Declaration of Pri n c i p l e s concerning  Multinational Enterprises and Social Policy, the Set of  M u l t i l a t e r a l l y Agreed Equitable P r i n c i p l e s and Rules for the Control of R e s t r i c t i v e Business Practices, the Draft Code of Conduct on the Transfer of Technology and the Inter-national Code of Marketing of Breast-Milk Substitutes are some of the important instruments that have resulted. A l l of these are, however, inadequate because they are limited in scope. The only e f f o r t to formulate a unive r s a l l y accept-able code of conduct has been made by the UN through the Commission on Transnational Corporations meeting annually 10 since 1975, and a major part of i t has been agreed upon. Disagreement s t i l l p e r s i s t s on certain v i t a l issues deal-ing with n a t i o n a l i z a t i o n and compensation and on the d e f i -n i t i o n and scope of transnational corporations. There i s also a difference of opinion on whether the code should be voluntary or mandatory. There are three p o s s i b i l i t i e s : to abandon the e f f o r t s ; to wait t i l l there i s agreement on a l l the remaining issues, or to adopt the code as i t i s . A l o t of ground remains to be covered and genuine p o l i t i c a l commitment w i l l be required before any univ e r s a l l y acceptable solution can be found. 11 CHAPTER I COSTS AND BENEFITS OF FOREIGN DIRECT INVESTMENT Introduction In the period after the Second World War a dramatic increase i n the number of independent, sovereign, p o l i t i c a l States with their own economic aspirations took place as a r e s u l t of decolonization. With this the international system became more complicated, but also more interdepen-dent. Increasingly, i t has been found necessary to f i n d m u l t i l a t e r a l solutions and i n this context the importance of co-ordination of economic a c t i v i t y among nations cannot be overlooked. This period has also witnessed an increase in the prominence of foreign d i r e c t investment primarily through transnational corporations. These corporations, with their a b i l i t y to move c a p i t a l , technological and human resources round the world, and with their a b i l i t y to trans-fer this movement into economically useful and commercially p r o f i t a b l e a c t i v i t i e s , have become important actors on the stage of world economy. The transnational character of their a c t i v i t i e s has emphasized the economic interdependence among nations. 12 Po r t f o l i o and Direct Investment Foreign investment can take place either as p o r t f o l i o investment or as direc t investment. The two have d i f f e r e n t implications. P o r t f o l i o investment results i n the pure flow of savings from a foreign country. Domestic business or governments decide that some project, example, expansion of a business or the undertaking of a development project, i s necessary. In order to finance the undertaking, debt instruments are sold to foreigners. These debt instruments may be i n the form of bonds, debentures or non-voting shares. Usually, the debtor pays an yearly interest to the purchaser of the security and the purchaser i s presumed to have pur-chased the security because i t yielded more than any other security. Debt instruments such as these are usually for a fixed term. Therefore, i n this case the decision with regard to investment l i e s with the country r a i s i n g the c a p i t a l . Hence, i n p o r t f o l i o investment the investor does not acquire control of the assets of the issuing corporation. Direct investment takes place as a re s u l t of a deci-cion made i n a foreign country. Foreign business decides that a p a r t i c u l a r country presents superior business a l t e r -natives and, therefore, locates i t s business i n that country to exploit those opportunities. Since i t i s foreigners who i n i t i a t e the c a p i t a l flow, they also control the real 13 c a p i t a l formation financed by that inflow. Share ownership maintains the control. The most common form of foreign d i r e c t investment i s a subsidiary corporation incorporated in the host country, but controlled by i t s parent i n the home country. Legally, ownership of 51% of the shares would be required to control the enterprise, but i t i s well-established that a far smaller percentage of shareholding can r e s u l t i n control. The degree of control by the parent corporation may vary but even where the subsidiary enjoys a large degree of autonomy, the head o f f i c e has to be consul-ted at least on major policy changes. Increasingly, foreign d i r e c t investment i s taking the form of j o i n t ventures as many host countries, e s p e c i a l l y the developing countries, are now i n s i s t i n g that some of the new business 1s equity be held by indigenous businessmen. Co-operatives and State-owned enterprises have also been included under the broad framework of foreign d i r e c t invest-ment. While foreign p o r t f o l i o investment i s e s s e n t i a l l y a movement of c a p i t a l , foreign d i r e c t investment made by transnational corporations results not only i n movement of c a p i t a l but also i n that of technology, and managerial and enterpreneurial s k i l l s . Moreover, i t provides access to new markets. Hence, i t i s a powerful instrument of change 14 and can be used for economic growth and development. But since foreign d i r e c t investment, unlike p o r t f o l i o invest-ment, s h i f t s the focus of control outside the country, i t becomes not only an economic but also a p o l i t i c a l pheno-menon. While host countries are concerned with economic development and growth i n their own countries, the goals of transnationals l i k e of a l l business enterprises, are p r o f i t and growth. The difference i n objective suggests that their respective decisions may not always be i n har-mony . Thus, foreign d i r e c t investment may be perceived as bringing costs together with benefits for the host country. The developing countries with their weak econo-mies want the benefits of foreign d i r e c t investment, but try to minimize the costs through national l e g i s l a t i o n . The costs of foreign d i r e c t investment have been discussed with special reference to developing countries. Some of these concerns have also been a matter of debate i n Canada which, being c h i e f l y a resource-exporting country and a neighbour to a powerful economy l i k e USA, shares some concerns i n common with developing countries. This i s also evident from the fact that Canada unlike most other deve-loped countries, has found i t necessary to establish a screening agency for foreign d i r e c t investment. 15 Costs of Foreign Direct Investment  Exploitation of Natural Resources The e a r l i e s t motivation to invest abroad was the desire to develop and control the sources of raw materials. In the second half of the nineteenth century, Europeans and North American businessmen l a i d the foundations of many of today's major transnational corporations concerned p r i -marily with the extraction, transportation and processing of raw materials. The host countries would naturally want to secure f a i r prices for the commodities sold and would also want as much of the processing of raw materials as possible to take place i n their countries. This may not be the objective of the transnational corporations follow-ing a global strategy.' Employment Transnational corporations often concentrate on high technology industries with c a p i t a l - i n t e n s i v e techniques. Such industries may lead to the eventual modernization of the i n d u s t r i a l structure of the host country but may not serve one of the immediate prime requirements, namely, to increase employment opportunities because the increase may be marginal in r e l a t i o n to the massive employment problem. As has been pointed out in Multinational Corporations i n  World Development,"^ this problem arises p a r t i c u l a r l y i n r e l a t i o n to foreign a f f i l i a t e s p a r t i c i p a t i n g i n extractive 16 industries which, when operated on a large scale, are highly c a p i t a l - i n t e n s i v e . In Venezuela and Chile, for example, despite the importance of o i l and copper, labour employed in the combined petroleum and mining sectors was only 2.3% and 4.1% respectively of the t o t a l economically active population i n 1960. The following table i n Transnational Corporations i n World Development: A 2 Re-examination, shows that while the estimated percen-tage of output i n Argentina i n manufacturing has gone up from 18% of t o t a l output i n 1955 to 31% i n 1972, the e s t i -mated percentage of employment remains constant at 11%. Table I Estimated foreign-controlled shares of output and employment i n manufacturing, Argentina, 1955-1972 Year Estimated percen-tage of output Estimated per-centage of employment 1955 18 11 1960 21 12 1965 26 11 1970 27 11 1972 31 11 Source: United Nations Centre on Transnational Corporations, based on Banco Central and Censo Industrial of Argentina in International Labour Organisation, E l impacto de las  empresas transnacionales sobre e l empleo y los ingresos: e l case de Argentina, prepared by J. S o u r r o u i l T e (Geneva, 1976) as quoted i n "Transnational Corporations i n World Development: A Re-Examination" by United Nations. 17 Also, according to International Labour Organization, the t o t a l number of people employed by transnationals in 1976 i s approximately 13 to 14 m i l l i o n , with about 2 m i l l i o n 3 being employed i n developing countries. However, 26% of the t o t a l stock of foreign d i r e c t investment was i n deve-loping countries. From this i t follows that about 26% of to t a l employment should also have been i n developing coun-t r i e s . But this i s not the case as i s evident from the above figures. While these enterprises may not generate large-scale employment on a national scale, however, they do generate employment i n s p e c i f i c l o c a l i t i e s which i s a major attrac-t i o n . This i s es p e c i a l l y true of depressed areas where the location of a plant can make a s i g n i f i c a n t contribution to solving l o c a l unemployment problems. Some countries have t r i e d to solve this problem by r a i s i n g percentage of l o c a l employment by using precise employment programmes or schedules requiring certain employment levels to be reached within certain time periods. These requirements have been written into i n i t i a l agreements with transna-t i o n a l corporations. Labour The r e l a t i v e l y high labour standards generally adopted by foreign a f f i l i a t e s prove to be a mixed blessing. 18 In some cases, the wage rates paid by the transnationals are several times higher than the prevalent l o c a l wage rates i n the host countries leading to the creation of e l i t e labour groups. Technical personnel prefer the foreign enterprise over the l o c a l one. Further, i t accen-tuates wage d i s p a r i t i e s between s k i l l e d and unski l l e d labour. The higher wages also gradually tend to be adopted as the national norm although they may be beyond the means of less-developed host countries. Technology A problem with the importation of high technology i s that i t may not necessarily be suitable for a less developed country. Not only that, the host country may have to pay a very high price for the technology so acqui-red . Developed countries serve as both home and host coun-t r i e s , so the impace of foreign technology for them i s not as great because technology flows and payments move i n both di r e c t i o n s . For developing countries, on the other hand, the flow i s predominantly or exclusively i n one d i r e c t i o n . The significance of this one-sided flow i s i l l u s t r a t e d by data on six developing countries -- Argentina, B r a z i l , Colombia, Mexico, Nigeria and S r i Lanka -- i n the 1960's. Payments made by these countries for patents, licences, 19 know-how and trademarks amounted to approximately 7% of management and service fees of their combined exports and to a l i t t l e more than half of 1% of their combined gross domestic product. The t o t a l cost for such payments for thirteen developing countries which accounted for 65% of the t o t a l population and 56% of the t o t a l gross domestic product of developing countries was estimated at more than half of the flow of d i r e c t private foreign investment to developing countries.^ Transnational Corporations i n World Development:  A Re-examination indicates measures taken by several coun-t r i e s to ensure as far as possible favourable contractual 5 provisions for the licences. The Foreign Investment Board i n India, for example, exercises second-check func-tions. In some countries o f f i c i a l approval i s required for l i c e n s i n g agreements. Countries l i k e Mexico have pres-cribed 3% of net sales as a c e i l i n g l i m i t for royalty pay-ments. The l i m i t i s ar b i t r a r y but i t ensures that unduly high royalty payments are not made. The question of technology payments i s clos e l y linked to the duration of agreements. A number of countries have prescribed maximum duration periods. In India, usually a five-year l i m i t i s imposed. Many Latin American countries impose a maximum l i m i t of 10 years. Thus, an e f f o r t has been made to reduce the cost of technology being acquired. 20 Research and Development Foreign a f f i l i a t e s do not carry out a l l the func-tions -- from the o r i g i n a l research required through to a l l the aspects of marketing -- necessary for developing, producing and marketing their goods. One or more of these functions are carried out by the foreign parent. Thus, research and development, components and services, espe-c i a l l y the more sophisticated aspects, may be c a r r i e d out by the foreign parent. This may lead to "truncation" of the foreign a f f i l i a t e . These practices may be r a t i o n a l from the point of view of the global strategy of the trans-nationals but the host country may see i t s e l f becoming dependent on the foreign company. Inappropriate Products Many of the products developed by transnationals cater to demands in high income countries. Thus, they may introduce patterns of consumption which are not conducive to sustained development and do not benefit the vast majo-r i t y of population i n developing countries. This i s e s p e c i a l l y true of luxury a r t i c l e s for the few which have l i t t l e impact on the economy as a whole. E x t r a t e r r i t o r i a l i t y The most apparent cost for the host country of foreign ownership results from e x t r a t e r r i t o r i a l i t y --21 intrusion of j u r i s d i c t i o n of one country into another, or the subjection of residents of one country to the laws and p o l i c i e s of another country. A di r e c t investment subsi-diary resident i n one country and owned and controlled by residents of another i s a vehicle through which extra-t e r r i t o r i a l i t y can be exercised. In theory this can run both ways -- the host country can subject the parent of the subsidiary to i t s own laws i n addition to the subsi-diary. But laws of property and also the fact that the host country i s often smaller than the country of o r i g i n , usually r e s u l t s i n the home country exercising e x t r a t e r r i -t o r i a l i t y i n the host country. Hence e x t r a t e r r i t o r i a l i t y usually works against the host country. The government of the host country, too, sometimes f e e l reluctant to pur-sue p o l i c i e s i n respect of transnational corporations that are desirable from i t s national point of view because of i t s concern for repercussions, apparent or r e a l , a r i s i n g from the reactions of the home country government. Thus in actual terms, sovereignty, the essence of which i s the capacity to make independent legal decisions, may be eroded. The subsidiary i s i n a d i f f i c u l t position because i t i s expected to meet the standards of good corporate behaviour in the host country but i t finds i t i s being subjected to overlapping or even divergent j u r i s d i c t i o n 22 -- legal constraints i n the host country and legal con-s t r a i n t s from the home country which are i n c o n f l i c t with each other. Confronted with two peaks of sovereignty i t g i s l i k e l y , as i s pointed out i n the Watkins Report, to defer to the higher peak where i t s parent resides. The position of the parent i s even more ambiguous. As a corporation pursuing p r o f i t and growth, i t i s i n i t s interest to allow the subsidiaries to comply with l o c a l j u r i s d i c t i o n i f possible. However, i t s directors and managers are c i t i z e n s of the home country subject to the laws of the home country, sharing i t s objectives e s p e c i a l l y in matters of defence and foreign policy, the areas i n which e x t r a t e r r i t o r i a l i t y i s most l i k e l y to occur. Intra-company Transactions It has been argued that a l l firms s t r i v e to maximize p r o f i t s and that the host country should be i n d i f f e r e n t to whether a firm i s a separate national enterprise or an a f f i l i a t e of transnational enterprise. This i s not neces-s a r i l y correct. The parent firm may expect the subsidiary to behave in a way that the global p r o f i t s of the trans-national are maximized rather than the p r o f i t s of the subsidiary i t s e l f . The intere s t of the host country, however, l i e s i n maximizing the p r o f i t s of the subsidiary in i t s domain as i t i s concerned with the growth of i t s 23 own economy and not with the transnational as a whole. In some cases this may make l i t t l e difference but i n others i t may make more. The parent may f i n d i t i n i t s interest to l i m i t the subsidiary in i t s freedom to export. It may require that the subsidiary s e l l only to i t s a f f i -l i a t e s or the subsidiary may be required to observe the market sharing arrangements made by the parent. According to the Watkins Report, i t was found that a large number of foreign a f f i l i a t e s i n Canada were following export-r e s t r i c t i v e p o l i c i e s apparently a r e f l e c t i o n of the market-ing strategies of the parent companies which try to protect 9 export markets for themselves or for their a f f i l i a t e s . The parent may also impose r e s t r i c t i o n s on procurement. The subsidiary may be required to buy from a f f i l i a t e or to import rather than buy from l o c a l sources. Where such r e s t r i c t i o n s exist, they may not be i n the interest of host country. But where such r e s t r i c t i o n s do not exist or work to the advantage of the subsidiary, i t may be of benefit to the host country. Administrative Control of the Enterprise Sources of tension may also exist i n the administra-tive structure of the transnational firm. Corporations going abroad prefer to invest i n a branch or subsidiary 24 rather than to go i n for l i c e n s i n g arrangements or j o i n t ventures with l o c a l firms. This i s because they are reluctant to share the returns that r e s u l t from their investment or because they do not want to d i l u t e ownership in a way that makes i t more d i f f i c u l t to maintain control over the subsidiary, or because they want to avoid the incon-venience of l e t t i n g outsiders have a say i n how the firm should be run. The host country may prefer j o i n t ventures and l i c e n s i n g agreements which support domestic firms; create potential areas of growth for domestic entrepreneurs i n spite of certain i n e f f i c i e n c i e s in such arrangements; permit host country to share i n the returns; and ensure that the host country has a voice i n the running of the firm so that their interests are not jeopardized. Disclosure of Financial Information When the subsidiary i s not an e n t i t y f u l l y d i s t i n c t from the parent, i t can create problems with respect to meaning and a v a i l a b i l i t y of f i n a n c i a l information about the operations of the subsidiary. Since transactions take place between the parent and the subsidiary rather than in the open market, there may be considerable scope for a r b i t r a r y valuation of i n t r a - f i r m transactions. In Canada, three-fourths of a l l exports of foreign a f f i l i a t e s were accounted for by intra-company sales i n 1 9 6 9 . N o t only 25 that, i n Canada, three-fourths of the imports of foreign a f f i l i a t e s which amounted to one-third of their t o t a l pur-chases were from other a f f i l i a t e s and almost a l l the imports of US a f f i l i a t e s originated i n the home country. This leaves a large scope for transfer p r i c i n g and also the host country's economy becomes vulnerable to foreign governmental or corporate p o l i c i e s . Further, i n such a si t u a t i o n , the public i s denied important information and the government of the host country has to decide important policy matters without adequate s t a t i s t i c s . Moreover, providing inadequate information to the host country can circumvent national p o l i c i e s render-ing them i n e f f e c t i v e . The transnational character of these enterprises enables them to move their incomes to tax havens. The s i t u a t i o n i s aggravated by developing countries enga-ging i n competitive granting of tax concessions to trans-nationals and giving other incentives to attra c t foreign investment. These involve a measure of s a c r i f i c e on the part of developing countries because resources from poor host countries are transferred to r i c h home countries redu-cing the benefits that flow from the operations of the trans-nationals . Transfer P r i c i n g In transactions between the parent corporation and i t s subsidiaries, the normal market forces do not come into 26 play. Hence goods and services i n these transactions can be overpriced or underpriced. Often the flow of techno-logy from a parent to i t s subsidiary i s linked with the sale of intermediate products and c a p i t a l goods from the subsidiary to the parent. In such a si t u a t i o n , the techno-logy may be overpriced and the goods may be underpriced r e s u l t i n g i n a benefit to the enterprise as a whole, but loss to the host country both i n the p r o f i t s that the subsidiary should have earned and i n tax. Effec t on Capital Flow Foreign investment can be seen as movement of c a p i t a l between two countries. If c a p i t a l i s scarce at home, i t can be imported. Therefore, foreign c a p i t a l can add to the country's stock. Foreign investment not only provides c a p i t a l but also foreign exchange to the extent that the borrowing country i s short of foreign exchange. But the cost to the capital-importing country consists of future interests and dividends that i t must pay abroad. The servicing of debt and i t s repayment or re p a t r i a t i o n means that the c a p i t a l importing country must forego consumption or investment and adjust i t s balance of payments to effect the transfer of funds. When these adjustments are made with d i f f i c u l t y because of foreign exchange constraints, foreign investment imposes an additional burden on the 27 c a p i t a l importing country just as i t provided an addi-t i o n a l benefit of making foreign exchange available at the time of loan. For the developing countries as a whole, d i r e c t investment amounted to $4 b i l l i o n i n 1971 which was almost half the t o t a l o f f i c i a l b i l a t e r a l and m u l t i l a t e r a l flows. But i f the earnings generated by past investment accrued to the foreign a f f i l i a t e s are deducted from that flow, the net flow i s generally negative for host countries. Between 1965 and 1970, net foreign d i r e c t investment i n -flow into 43 developing countries was 30% of the invest-ment income outflow. If the oil-producing countries i n the sample are excluded, inflow was 68% of the outflow. Another c a l c u l a t i o n adjusted for petroleum, shows that between 1964 and 1968, the US and the UK, representing 80% of t o t a l foreign d i r e c t investment, received approxi-mately $5.8 b i l l i o n from developing countries i n invest-ment income and paid $3.2 b i l l i o n i n c a p i t a l f l o w . ^ A 1981 Report of the Secretariat of the Commission on Transnational Corporations also comes to the conclu-sion that "despite the considerable measurement problems involved, home and host country studies point to the tentative conclusion that d i r e c t investment by trans-national corporations tends to have a negative d i r e c t 28 e f f e c t on the balance of payments of host countries and 12 a positive one on that of home countries." In developing countries where the supply of foreign exchange i s often a problem, the excess of this outflow over inflow has been a fam i l i a r source of tension with the transnationals. Such tension i s p a r t i c u l a r l y l i k e l y to occur i n cases where a transnational has operated i n the host country to an extended period of time and where the outflow of investment income exceeds the inflow of new c a p i t a l . The tension becomes aggravated i f the trans-national i s dealing with a product which the host country does not consider e s s e n t i a l . In India, for example, Coca-Cola was seen as a c l a s s i c example of multinational operat-ing i n low p r i o r i t y but high p r o f i t area, because i t d i s -placed indigenous industry and caused an outflow of precious foreign exchange instead of inflow. The re s u l t was that 13 Coca-Cola had to leave i n 1977. Consumer Protection Another source of tension, e s p e c i a l l y in developing countries, i s that i n many cases multinationals have taken advantage of the more lenient consumer protection laws in these countries to s e l l p o t e n t i a l l y harmful or dangerous products which they could not s e l l in their own countries or i n other developed countries. Several cases have been 29 c i t e d by Prof. Sangal i n which drugs have been sold i n 14 developing countries without adequate warnings. Rise of Nationalism F i n a l l y , the role of transnationals and their impact i s also related intimately to the r i s e of n a t i o n a l i s t i c feelings whcih are p a r t i c u l a r l y pronounced i n host deve-loping countries that have been under c o l o n i a l rule. The mere presence of powerful foreign enterprises may serve as a reminder of past foreign domination. Besides, many host countries no longer want to play a peripheral role quite apart from the economic consequences. International Regulation of Transnationals Thus we have seen that the a c t i v i t i e s of the trans-nationals can impose costs on the economies of the host country. Yet, i t i s equally true that the transnationals have the a b i l i t y to make the hoped for new international economic order a r e a l i t y . It i s , then, a question of guidng and regulating their a c t i v i t i e s to maximize the benefits and minimize the costs i n a way that the interests of a l l concerned parties, including the transnationals, are safeguarded. The United Nations Economic and Social Council unanimously adopted Resolution 172KLIII) of 2nd July, 1972 30 to establish a Group of Eminent Persons to investigate the impact of transnational corporations i n various national jurisdictions."*""^ The recommendations of the Group of Eminent Persons are important because they resulted i n the establishment of the Commission on Transnational Corporations to deal with the f u l l range of issues regarding transnational corporations and to work out a universally acceptable draft code of conduct to regulate foreign d i r e c t investment. Other attempts have also been made to bring forward a universal convention on transnational corporations beginning with the Charter of the Inter-national Trade Organization signed at Havana i n 1948. But this never came into e f f e c t . The OECD Guidelines for Multinational Enterprises are important in this context but they are r e s t r i c t e d i n scope since they only apply to member-countries. The recommendations of the Group of Eminent Persons provide a point of reference for the work of the Commission on Transnational Corporations but i f they are read together with the comments of the representatives of some developed countries attached to them, there appears to be an almost unbridgeable gulf between the developing and the developed countries. 31 Areas of Agreement i n the Recommendations National Treatment: The members of the Group agreed that national treatment should be given to a l l foreign investments unless s p e c i f i c exceptions were made 16 17 in national i n t e r e s t . Mr. Javits pointed out that transnationals had, i n fact, played a greater role i n development than had been recognized and had often been victims of unfair and a r b i t r a r y p o l i c i e s of host govern-ments which had resorted to n a t i o n a l i s a t i o n without ade-quate compensation. He said that compensation should not only be f a i r and adequate, but also prompt. Long delayed compensation was of l i t t l e value. While he agreed that some countries had serious balance of payment problems which could delay payment of compensation, but he was not very sympathetic to this problem. He stated that deve-loped countries could hardly be expected to sanction soft long-term loans to these countries i f , instead of using those loans for developing new productive capacities or infrastructure, they were going to use them for nationa-l i s i n g transnational corporation properties. Their limited resources of c a p i t a l should make them more cautious about using them for acquiring ownership over e x i s t i n g assets. Non-interference i n int e r n a l a f f a i r s of host country: The Group condemned subversive p o l i t i c a l i n t e r -32 vention on the part of transnational corporations directed towards the overthrow or substitution of a host country's government or the fostering of inter n a l or international 18 situations which would lead to such actions. The host countries were recommended to impose s t r i c t sanctions i n case of such an eventuality and the home countries were urged not to make these sanctions i n e f f e c t i v e through their investment guarantee schemes. Thus, transnationals were not to be used by governments to further their foreign policy goals. Both host and home countries were c a l l e d upon to ensure that multinationals did not vi o l a t e the sanctions imposed by the Security Council. There was no problem about this recommendation. Labour Standards: In the case of p o l i c i e s concern-ing labour r e l a t i o n s , too, there seems to have been agree-ment. Home and host countries were asked to c l a r i f y their 19 employment objectives to the transnationals. In case of workers displaced because of production decisions taken by the transnationals, the home and host countries could provide them with f u l l compensation through general budge-tary support, or through s o c i a l security system or through the establishment of s o c i a l funds. An international s o c i a l fund could be created for this purpose for the use of deve-loping countries without adequate funds. Also, workers and their unions were to be involved i n the decision-making 33 process of transnationals both at the l o c a l and interna-t i o n a l l e v e l . The home and host countries were also recommended to allow free entry to unionists from other countries representing national or international organi-sations engaged i n legitimate investigations or other union missions including negotiations with the transna-tionals on behalf of the workers. Transnationals were required to adopt a l l the safeguards and to provide the special working conditions followed by them in their home countries adapted to the needs i n host countries to ensure the health and safety of workers. Consumer Protection: There was no controversy on measures regarding consumer protection. Transnationals should reveal to the host countries any sales prohibitions and r e s t r i c t i o n s i n manufacturing imposed by home or by other host countries to protect the health and safety of 20 the consumers. It was for the host countries to decide whether si m i l a r warnings or r e s t r i c t i o n s should be imposed on the sale and manufacture of those products i n their countries. S i m i l a r l y , prohibitions and r e s t r i c t i o n s on products or their ingredients to be imported into host countries by transnationals should be made known to them. Tax Treaties: F i n a l l y , there seems to have been l i t t l e disagreement on the recommendation that developed 34 countries should enter into b i l a t e r a l tax treaties with developing countries and that the work of the Group of Experts on Tax Treaties should be speeded up to prepare 21 the way for an international tax agreement. Disagreements There were other recommendations of the Group with which the representatives of developed countries l i k e the United States, Switzerland and Japan d e f i n i t e l y disagreed. 22 Mr. Ryutaro Komiya of Japan, however, did not take the 23 extreme position adopted by Mr. Jacob Ja v i t s and Mr. Irwin 24 25 M i l l e r of USA and Mr. Hans Schaffner of Switzerland. Although the Group arrived at these recommendations through consensus, the comments, es p e c i a l l y those of Mr. M i l l e r and of Mr. J a v i t s emphasize the high degree of divergence in the points of view of developing and of developed coun-t r i e s . Guidelines for Multinationals The Group recommended that host developing countries should specify as pr e c i s e l y as possible what the transna-tiona l s were expected to achieve and the conditions under 2 6 which they were to operate. They should also indicate the ways in which they would l i k e the transnationals to integrate into, the l o c a l economy and f i t into the o v e r a l l 35 p r i o r i t i e s of the country. To ensure maximum benefit to the host countries, the Group recommended that the host countries must define the areas i n which they were ready to accept foreign investment and conditions upon which 2 7 this investment would be allowed. The Group f e l t that generally developing countries should be encouraged to reta i n ownership of their natural resources and also to control the use of them. Mr. J a v i t s disagreed with these recommendations because he found them impractical and even counter-produc-t i v e . The only thing that the government of the host country, i n his opinion, could do was to establish general guidelines for the more detailed aspects of transnationals operations. In any case, he f e l t , that governments did not always know best or act i n the best interests of their c i t i z e n s . Ownership and Control Most countries often sought to control the enterprise through l o c a l ownership, of equity, but majority ownership was not r e a l l y e ssential for control. Control could be exercised by a minority where the majority of the shares were held by investors who had no common purpose and were not interested i n exercising control; or i f the views of 36 the minority and of the majority were s i m i l a r . However, host countries could want a majority shareholding not only to strengthen their influence over the p o l i c i e s of the a f f i l i a t e , but also to secure a larger share of the p r o f i t s 29 of the corporation. The Group f e l t that where the host country saw owner-ship as an important objective, consideration should be given to the setting up of jo i n t ventures. Alternatively, host countries could make provision for the review of the terms of agreemetn on the request of either side after suitable i n t e r v a l s . Not only that, provisions could be included i n the i n i t i a l agreements permitting the po s s i b i -l i t y of reduction over time of the percentage of foreign ownership. But i t was important that such provisions be included i n the agreement at the very beginning i n order to avoid future c o n f l i c t s . Mr. J a v i t s contended that inclusion of such provi^ sions would discourage many investments p a r t i c u l a r l y i n high technology areas. It could also encourage transna-tionals to try to amortize a l l their investments during the early years of the investment r e s u l t i n g i n higher prices and more wasteful development of r e s o u r c e s . ^ 3 7 Mr. Schaffner of Switzerland was apprehensive about the f e a s i b i l i t y of j o i n t ventures i n many sectors because he f e l t that the success of a j o i n t venture depended larg e l y on whether the l o c a l partner could make 32 any v a l i d contribution or not. In certain sophistica-ted technology industries, he could not because they required a continuous flow of technical assistance and innovative services. Therefore, i n such f i e l d s j o i n t ventures were uneconomical and uncompetitive. Also, there was evidence that j o i n t ventures had to pay larger r o y a l t i e s and fees for know-how and management than the wholly owned subs i d i a r i e s . Further, i n many cases, a transnational did not want to open the equity of i t s a f f i l i a t e because i t did not want any interference i n i t s management. Moreover, a new invest-ment usually did not have substantial p r o f i t s i n the i n i t i a l years of i t s existence. The parent company as the stock-holder could accept this because i t was interested i n the long-term prospects of i t s a f f i l i a t e . The i n d i v i d u a l non-i n d u s t r i a l stockholder on the other hand, would want imme-diate returns. Again, when p r o f i t s were f i n a l l y r e a l i z e d , the parent company might want to reinvest them while the l o c a l stockholders might prefer a steady flow of dividends. 38 In fact, Mr. Schaffner f e l t that the parent company would l i k e to keep a l l policy matters l i k e q u a l i t y standards, promotional p r i n c i p l e s , r o y a l t i e s , transfer prices and others in the hands of i t s own management. Dispute Situations In case of disputes between the transnational and the host countries, the Group recommended that home coun-33 t r i e s should r e f r a i n from getting involved in them. If serious damage to their nationals was l i k e l y , the home countries should confine themselves to normal diplomatic representations and not use international agencies to exert pressure on the host countries. The host countries on their part must ensure that whenever assets of a transnational corporation were nationalized, f a i r and adequate compensa-tion was given according to the due process of the law of their countries or i n accordance with any a r b i t r a t i o n agree-ment between the parties. This recommendation was not acceptable to either the American representatives or to Mr. Hans Schaffner, or to Mr. Komiya of Japan. Both Mr. Jav i t s and Mr. Komiya found i t e n t i r e l y proper for the home country to review i t s aid programmes i n the case of a country that has u n f a i r l y expropriated the property of home country 39 nationals. But Mr. J a v i t s conceded that such a step 34 should only be taken when a l l other means had f a i l e d . Technology The Group recommended that before a transnational was permitted to introduce a p a r t i c u l a r product in the domestic market, the host government should evaluate i t s s u i t a b i l i t y for l o c a l needs. Not only that, the host countries should i n s i s t on transnationals making a reaso-nable contribution towards product and process innovation so that they could serve the national or regional needs. Therefore, they should encourage their a f f i l i a t e s to under-take the necessary research. The technology so developed should be exported to others at appropriate prices. Inter-national organizations should also evolve an o v e r a l l regime under which the cost of technology provided by transnational corporations to developing countries could be reduced. The Group recommended the establishment of a world patents or technology bank to which any public i n s t i t u t i o n could donate patents which i t owned or purchased for the purpose for use i n developing countries. F i n a l l y , the Group suggested that transnationals were not the only way of importing technoloty. The developing countries could explore alternative means of acquiring suitable technology."^ 40 Once again, the difference i n the positions of developing and developed countries came sharply into focus when Mr. Schaffner, echoing Mr. M i l l e r , l e f t no room for discussion by commenting that i f developing countries preferred alternative ways of acquiring techno-logy, the transnationals would be happy to step back and concentrate on investments i n i n d u s t r i a l i z e d countries where the market potential tended to be higher and where 3 6 the r i s k s were much lower. A possible compromise bet-ween these two extreme positions was offered by Mr. Komiya by suggesting that lowering the price of technology for developing countries should not be a major point of debate. What was more important was that developing countries should get superior technology, the kind most appropriate for their needs and one which benefited them most. If the technology was b e n e f i c i a l even buying i t at a higher price was to the advantage of the buyer. Buying cheap but inappropriate technology would be just a waste of money. Japan, he pointed out, had imported a great deal of techno-logy and had paid large sums of royalty. Not only that, 70% of a l l contracts for the import of technology had been accompanied by some t e r r i t o r i a l r e s t r i c t i o n s . Yet, the benefits derived from this technology had been far greater than the large r o y a l t i e s paid f o r . 41 Competition, C o n f l i c t s and Intra-Corporate A f f a i r s The Group recommended that host countries should ask transnationals to declare their import and export p o l i c i e s and to make clear the extent, duration and j u s t i -f i c a t i o n of any possible r e s t r i c t i o n s . The Group also f e l t that host and home governments, through international agreements, should prohibit the market a l l o c a t i o n of exports by transnational corporations unless such a l l o -cations were essential for other benefits to the countries concerned. The Group recommended countries of a region to group together to be i n a better bargaining position with the transnationals. R e s t r i c t i v e clauses and market allocations were a serious hindrance to the f u l l flow of goods and to i n d u s t r i a l restructuring in that area. Hence, there should be no such clauses at least within the 3 8 regional groups of countries. R e s t r i c t i v e clauses were included by transnationals not only as part of their global marketing strategy but also because of d i f f e r e n t a n t i - t r u s t provisions i n d i f f e r e n t countries. In order to r a t i o n a l i z e c o n f l i c t i n g laws, the Group f e l t i t was necessary to adopt an international a n t i -trust agreement. T i l l such time as an international agreement could be worked out, the home countries should show r e s t r a i n t i n applying their a n t i - t r u s t p o l i c i e s i f 42 other governments were affected and u n i l a t e r a l action should only be taken on a provisional basis pending consul-tations with the concerned governments. Further, a large number of transactions took place within the transnationals between the a f f i l i a t e s or bet-ween the parent and the subsidiaries which had potential for price d i s t o r t i o n s . Varying degrees of ownership i n the subsidiaries could induce the parent company to make p r o f i t s appear where i t s ownership was r e l a t i v e l y large. Or a f f i l i a t e s might show a reduction i n p r o f i t s for wage bargaining. Transfer p r i c i n g may also be a way of a l l o c a -ting markets i f the prices charged to an a f f i l i a t e made i t s exports non-competitive. In order to avoid such d i s -tortions, the Group recommended that host and home coun-t r i e s should enforce "arm's length" p r i c i n g where appro-. . 34 priate . The Group recommended international standards of disclosure, accounting and reporting which would i n i t s e l f be a hindrance to manipulations within the transnationals. Also, the Group f e l t , that the p r i n c i p a l terms of agree-ments between host governments and transnational corpora-tions should be disclosed and deposited with the proposed centre for information and research on transnational cor-porations which could prepare digests and summaries of such 43 information and make them available to countries to f a c i l i t a t e their working out terms of agreement with t r a n s n a t i o n a l s . ^ Mr. Schaffner, disagreed with these recommenda-tions because he f e l t that the disclosure of information desired would normally be within the company's private 41 sphere and not meant for public exhibition. Again, there were transnational corporations with tens of thousands of commodities which were supplied to a f f i l i a t e s over the entire world. There could be innumerable reasons for price differences: divergent market conditions, quantities, discount rebate clauses, q u a l i t y s p e c i f i c a t i o n s , terms of payment, invoice currency, transaction l e v e l of the importer, services rendered i n addition to goods shipped and others. Routine disclosures of transfer prices with-out exhaustive explanations would not serve any useful purpose. Besides, many of these elements varied from day to day and i t would not be proper or r e a l i s t i c to expect transnationals to disclose a l l the d e t a i l s . Screening Process In order to ensure maximum benefits for the host country the Group recommended the setting up of centra-l i z e d negotiating services or co-ordinating groups to deal with a l l proposals for foreign investment especially from 44 transnationals. The negotiating services or coordinat-ing groups could also simultaneously evaluate the propo-sal to see that appropriate technology was being trans- . f e r r e d . ^ Mr. J a v i t s disagreed with the idea of setting up of any such machinery for screening and handling foreign d i r e c t investments because, he f e l t , that government o f f i -c i a l s were not l i k e l y to be q u a l i f i e d to pass judgement on the technology being presented by transnationals and might opt for labour-intensive technology for domestic p o l i t i c a l reasons thereby shutting off more advanced technology inflows. He also had reservations of the rights of governments to discourage or even prohibit i n some cases the importation of certain products or their l c o a l manufacturing which they considered s o c i a l l y unde-43 s i r a b l e . Therefore, he did not think that any screen-ing process was r e a l l y necessary. He, of course, did not consider the p o s s i b i l i t y that the .-.screening agency could take expert advice on technological and other matters. Mr. Schaffner reinforced Mr. J a v i t s 1 contention when he contended that nobody could have his bread buttered on both sides. If the host country preferred an i n t e r -mediate l e v e l of technology, which was not very economical but which created a large number of jobs, instead of highly 45 ca p i t a l - i n t e n s i v e competitive automation, i t had already made a choice which ine v i t a b l y excluded competitiveness 44 on the export side. Other Areas of Disagreement Even i n those areas i n which there was agreement, there were ambiguities. Mr. Komiya for instance found the recommendations themselves to be contradictory. On the question of j u r i s d i c t i o n and e x t r a t e r r i t o r i a l i t y for instance, i t was not for the home country, as suggested by the Group, but for the host country to regulate the 45 behaviour of the multinationals. On the one hand, Mr. Komiya pointed out, the Group did not want the home country to govern the behaviour of an a f f i l i a t e of a trans-national once i t was established i n another country. On the other hand, when the end was desirable, the report required the home country to exercise j u r i s d i c t i o n . For example, home' countries were required to i n s i s t that trans-nationals follow c e r t a i n i n t e r n a t i o n a l l y accepted labour standards as conditions of. foreign investment. They were also required to impose sanctions on corporations that disregarded them; prevent transnationals from investing in countries where workers' rights were not respected; to take s t r i c t measures against their nationals giving bribes or indulging in'-other corrupt practices i n host countries; 46 and to u n i l a t e r a l l y prohibit export of products prohibi-ted i n home countreis for reasons of consumer protection. But Mr. Komiya argued, matters concerning labour standards, labour r e l a t i o n s , consumer protection, p o l l u t i o n control and punishment for bribery were a l l i n t e r n a l a f f a i r s of the host countries and should, therefore, be their j u r i s -d i c t i o n . At best, what the home country could do was to lay down voluntary guidelines for i t s transnationals. Evaluation Thus, there were major differences between developed and developing countries i n areas of ownership and control of transnationals, regulation of products to be manufactured, dispute settlement process between host countries and trans-nationals, technology transfer, regulation of intra-corporate a f f a i r s , disclosure of information by transnationals and in the setting up of screening process for transnationals. The areas of agreement were national treatment, use of transnationals for other than economic purposes, consumer protection and labour standards. But a l l of these are not necessarily matters of top p r i o r i t y concern for host coun-t r i e s . For instance, labour relations would not be the most important objective for developing countries. As Mr. Komiya r e a l i s e d , i t was important for developing coun-t r i e s , which were mostly overpopulated, to take advantage of labour, an important and abundant resource. They had to develop and export labour-intensive products, taking advantage of low wages i n their countries. Conse-quently, i t was necessary for them to keep wages as close as possible to levels commensurate with the standards i n the country. A r t i f i c i a l l y high wages would l i m i t employ-ment opportunities i n industry because the country would not be able to afford i t . Developing countries had r e a l l y to use low wage labour with high-productivity technology to r e s u l t , not in high p r o f i t s , but i n low product prices which would bring more products within the reach of average man and raise standards of l i v i n g , or which could be competitive for exports and thus improve the economy. Hence i t was essential for governments to ensure that excessively high p r o f i t s were not earned by transnationals because of their monopolistic position. The attitude of developed countries as i t became evident i n the comments of representatives from USA and Switzerland was, that i t was i n the inte r e s t of the host countries to have transnational investment and, therefore, they had to allow them to make s u f f i c i e n t p r o f i t s to make their investment a t t r a c t i v e . 48 Taken on the whole, the point of view of developed countries seemed to be that host countries should exercise only minimal control at a l l over transnationals. They should not screen the investment plans for the transnationals; which they considered s o c i a l l y undesirable. Guidelines were s u f f i c i e n t for the transnationals but more detailed instructions or control would be perceived as suffocating surveillance and as an attempt to reduce the p r o f i t s of the transnationals which would make investment i t s e l f unattractive for them. Terms and conditions such as gradual reduction i n equity would also be an i n h i b i t i n g factor. In any case, the government of the host country did not always know best or would i t always act i n the best interests of their people. Indeed, a very high degree of freedom was demanded for the transnationals. Mr. Irwin M i l l e r ' s comments made this attitude p a r t i -c u l a r l y . clear • when he explained that transnationals had a v a l i d though a limited role i n development, and with the exception of extractive industries, i t was not at a l l clear that they had been or would be eager to invest i n developing countries ^ Many of the recommendations of the Group, he said, c a l l e d on one way or another for constraint, regulation or special conditions for operations of the transnationals and the cumulative e f f e c t of these recommen-49 dations would be the control of the transnationals. But, he f e l t , that the developing countries were wrong to assume that thetransnationals were a l l extremely eager to invest in their countries. Developed countries with their larger markets, greater per capita consumption, and sometimes more stable governments, usually offered more a t t r a c t i v e homes for the transnationals than developing countries. Hence, he reiterated, i t was important for the host countries to offer a t t r a c t i v e conditions for entry i f they wanted to a v a i l of the benefits of those s p e c i f i c services which they wanted from the transnationals. The bargaining power of the host country 1 lay mainly i n the quality, size and s t a b i -l i t y of the market i t offered. The more a t t r a c t i v e and important the opportunity, the more e f f e c t i v e was the bargaining position. Without detailed insight and knowledge about how a transnational operated, a host government could not hope to establish sound policy and so should not attempt to regulate or control them. The implication of these comments was that i f the developing countries wanted the benefits which transnationals brought with them, they had better make i t as a t t r a c t i v e as possible for transnationals to invest i n their countries. And the way to make i t a t t r a c t i v e was to have the minimum possible interference i n the a c t i v i t i e s of the transnationals. 50 Mr. Schaffner further reinforced this view by pointing out that i t was wrong to assume that s o p h i s t i -cated high-technology manufacturing transnationals were keen to invest i n developing countries because of cheap labour.' In fact, a survey of the investment policy of US trans-nationals showed that they preferred to invest in the advanced, more highly i n d u s t r i a l i z e d higher-wage coun-t r i e s where economic conditions most c l o s e l y resembled those i n the US. Cheap labour was only a comparative advantage which developing countries could offer to multi-nationals dealing with very s p e c i f i c labour-intensive branches. The more ca p i t a l - i n t e n s i v e the industry and the more advanced the technology, the less j u s t i f i c a t i o n was there *o assume that the.:.transnational had invested i n a pa r t i c u l a r country to take advantage of low labour costs. Labour and land costs were the only two elements i n the whole enterprise which were cheaper i n developing countries but these advantages were outweighed by the lower producti-v i t y of this labour. Thus, while wages per capita were lower i n developing countries, the labour cost per manufac-tured unit and, even more, the ov e r a l l costs per unit could be higher. And the v a l i d c r i t e r i o n for an enterprise was the o v e r a l l cost per unit and not the per capita wage. Of course, Mr. Schaffner did not explain why the trans-nationals had invested i n developing nations i f there were 51 no benefits or i f there were any benefits, what those benefits were. Mr. Komiya did not take such an extreme position. He advocated a selec t i v e approach to foreign investment and importation of technology for developing countries as 49 an i n t e g r a l part of their development p o l i c y . The degree and kind of government intervention depended on the stage of development of the country, the area of investment and the kind of technology transferred. Moreover, some coun-t r i e s , he acknowledged, might prefer a certa i n degree of economic and c u l t u r a l independence even at the cost of immediate economic gains. Short-term losses because of r e s t r i c t i v e p o l i c i e s towards the multinationals might be offset i n the long run i f they helped to b u i l d up domestic managerial experience and to strengthen the self-confidence of a country's c i t i z e n s . Mr. Komiya f e l t that there was no reason for host countries to f e e l i n a weak bargaining position with the multinationals because no matter how small a sovereign State was, i t r c o u l d always be more "powerful" than the 50 transnational and thus regulate or control i t . It could lay down conditions under which the transnational was to establish subsidiaries within i t s borders, or r e s t r i c t and regulate the operations of transnationals when they were 52 established, or nationalize them. He was, however, being u n r e a l i s t i c because i t was against these very powers that members from the USA and from Switzerland were protesting. The use of these powers, they claimed, could make the investment so unattractive that the transnationals would not invest and hence the host countries would be deprived of the benefits that could accrue from them. The host developing countries could hardly ignore these views expressed by the representatives of developed nations since the major part of foreign investment came from developed countries. Conclusion The impression created by the comments of the repre-sentatives from USA and Switzerland was that the trans-nationals would be doing the developing countries a favour by investing there. The position of the Japanese represen-tative was not as extreme but what was generally implied by the developed countries was that i f the host developing countries wanted the benefits from foreign d i r e c t investment, they had to go out of their way to woo i t . A more objective position was taken by Mr. L.K. Jha, Chairman of the Group of Eminet Persons, and also the Indian representative. While he accepted that "the great contribution of multi-53 national corporations" could not be "doubted" i n " r a i s i n g the levels of world production." He also pointed out that i t would be "naive" to believe that multinational corporations would go to developing countries i f their earnings and growth are not as good as they are i n deve-52 loped countries..":, In e f f e c t , transnationals invest i n developing countries because they f i n d i t commercially a pro f i t a b l e proposition. Through their investments they also contribute to the development and economic growth of host developing countries. What i s r e a l l y necessary i s to devise p o l i c i e s on an international l e v e l that can be n e n e f i c i a l to a l l parties concerned: the host countries, the home countries and, of course, to the transnational corporations themselves. A l l concerned can benefit i f the transnationals can invest confidently in the developing countries and i f these coun-t r i e s , i n turn, can have more confidence i n the behaviour of the transnationals. 54 CHAPTER II FOREIGN DIRECT INVESTMENT IN PERSPECTIVE Introduction The divergence of views between developed and developing countries i s mainly because of two factors: the majority of developing countries are erstwhile colo-nies, and they have missed the i n d u s t r i a l revolution which was also a technological revolution. They are s t a r t i n g on the process of development as late-comers with i t s accompanying disadvantages. It i s essential to appreciate the impact of these factors on their development. Canada i s i n a unique position. It i s a developed country with a broad i n d u s t r i a l base and highly s o p h i s t i -cated technology. At the same time, i t i s e s s e n t i a l l y a resource exporting country. Besides, i t has a powerful neighbour, the United States, which i s Canada's chief trading partner and also i t s main source of foreign d i r e c t investment. This makes Canadian economy very i n t e r l i n k e d with that of the US and, to a large extent, dependent on i t . Being an e s s e n t i a l l y resource-based country and having US, the more dominant economy as i t s neighbour, generates a sense of inse c u r i t y i n Canada which manifests 55 i t s e l f i n some concerns similar to those of developing countries with regard to foreign d i r e c t investment. Thus, Canada can understand the points of view of both the deve-loping and the developed countries. The basic problem in Canada has been how to take advantage of the benefits emanating from investment from USA while, at the same time, achieving the objects and purposes of an independent, s e l f — respecting nation. The issue i n India, as i n a l l developing countries, i s a more economic one. It i s the use of development to atta i n a minimum l e v e l of subsistence for millions of people who are subject to d a i l y privations a f f e c t i n g their l i v e s and human dignity more profoundly than any s t a t i s t i c s can show without compromising the interests of an independent State. What i s Development Three important c r i t e r i a can be used to define deve-2 lopment. The f i r s t i s the f a i l u r e to u t i l i z e f u l l y the potential economic output possible by the application of exist i n g technical knowledge because of obstacles inherent in " s o c i a l " i n s t i t u t e s i n t e r n a l or external to the country. In this sense, a l l countries are "underdeveloped" because no country i s able to f u l l y u t i l i z e i t s productive poten-t i a l . I t i s even more d i f f i c u l t to do so i n a country as 5 6 diverse as India with i t s m u l t i p l i c i t y of r e l i g i o n s , languages, and s o c i a l customs. Besides, time-worn i n s t i -tutions l i k e caste coupled with ignorance and i l l i t e r a c y also prevent the f u l l u t i l i z a t i o n of the available econo-mic output. In this sense, development i s a s o c i a l problem. The second c r i t e r i o n i s that a country may be under-3 developed compared to another country. In this sense, development i s a r e l a t i v e phenomenon and underdevelopment only a question of degree. Economic attainment brings with i t both economic and p o l i t i c a l power. This, i n the comparatively less developed country, generates a f e e l i n g of i n s e c u r i t y and a f e e l i n g of dependence, rea l or imaginary. This phenomenon i s r e f l e c t e d i n the foreign di r e c t invest-ment p o l i c i e s of Canada. It shows Canada's essential f e e l -ing of inse c u r i t y with respect to USA, a much higher and more powerful neighbouring economy, the single most important trading partner. The uncertainty i n Canada i s not about the d e s i r a b i l i t y for foreign di r e c t investment per se but about the consequent control over large sectors of economy by one country. Accompanying i t i s the fear of losing a certa i n degree of sovereignty and c u l t u r a l i d e n t i t y . The t h i r d c r i t e r i o n i s the f a i l u r e to provide acceptable standards of l i v i n g to a large percentage of 5 7 the country's population who l i v e i n conditions of misery 4 and material deprivation. These conditions can only be a l l e v i a t e d by rapid i n d u s t r i a l i z a t i o n through the a p p l i -cation of technology available mainly i n developed coun-t r i e s . Thus, f a i l u r e to u t i l i z e the f u l l technological potential for economic development does not pose a serious problem i n developed countries, but results in large scale want and poverty i n developing countries. This i s the most serious consequence that developing countries face of having missed the i n d u s t r i a l revolution and the accompanying techno-l o g i c a l explosion. Differences Between Developed and Developing Countries  Colonization and Time of I n d u s t r i a l i z a t i o n While the developed nations of today were i n d u s t r i a -l i z i n g , colonized countries l i k e India were kept i n the p r e - i n d u s t r i a l i z a t i o n stage. The time l o s t had serious consequences as has been demonstrated by writers l i k e Barbara Ward and S. Kuznets.^ Most of the "southern" econo-mies were introduced to modernisation by Western i n d u s t r i a l countries but since they were not i n command of their own economies, they could not take several v i t a l decisions which could have changed the pattern and q u a l i t y of their econo-mic l i f e . They were stimulated to the beginnings of econo-mic growth by the need of the North A t l a n t i c for raw 58 materials, t r o p i c a l products and certain temperate food supplies. The world market was, thus, organized to exchange "southern" primary products for "Northern" manu-factured goods. This led to the development of the l o c a l import-export sector but did not have much of an eff e c t on the rest of the economy, because i t was largely under foreign control. For example, t e x t i l e industry which had t r a d i t i o n a l l y been strong i n India was crippled instead of being strengthened by the policy of the B r i t i s h Govern-ment of taking Indian cotton for the Lancashire m i l l s and bringing i n cheap finished cloth for sale i n India. The breakup of t r a d i t i o n a l Indian industry continued through-out the nineteenth century as old industries of ship-building, metal working, glass, paper and many t r a d i t i o n a l c r a f t s suffered. The export of raw materials paid f i r s t for the i n i t i a l investment required to extract the raw materials and to transport them and then whatever purchasing power they generated was used to buy the manufactured fi n i s h e d products imported through large Western trading companies. What was needed was strong governmental intervention to modernize agriculture, mobilize savings and b u i l d up protec-tive t a r i f f s to stimulate the growth of l o c a l enterprise but since there was no government w i l l to break the bot,tle-59 necks, the barrie r s to wider modernisation remained. From this point of view, as Barbara Ward points out, India and Japan present a s t r i k i n g contrast.^ In c o l o n i a l India, some i n d u s t r i a l development took place where entre-preneurial talent was l o c a l l y strong, as i t was around Bombay but the i n d u s t r i a l growth i n India was very slow compared to that i n Japan mainly because India did not have p o l i t i c a l independence to carry out reforms and stimulate the process of growth. Japan took important steps for development l i k e reform i n which compensation was given to landlords i n government bonds which could only be inves-ted i n government-established industries; mobilisation was done of cr e d i t i n country and town; l i t e r a c y drive was under-taken; and the government sponsored overseas tr a i n i n g of personnel. In India, on the other hand, there was no sponsorship of industry, land reform was not touched, there was no e f f o r t to increase the general education, and the governemnt did not even impose a t a r i f f for the protection of new industry t i l l 1920. It was only i n 1947 with the establishment of an independent government that India began to tackle economic problems that Japan had been dealing with since the 1870s. Of course, i t i s not necessary that a l o c a l government as opposed to a c o l o n i a l government w i l l take the right economic decisions but at least i t has the 6 0 potential to do so. A co l o n i a l government has no w i l l to take these decisions because i t l i e s i n i t s i n t e r e s t to keep i t s colonies a ready source of cheap raw materials and markets for i t s manufactured goods. Population The late i n d u s t r i a l i z a t i o n has had an impact on population. S c i e n t i f i c advances have led to the doubling of the expectancy in the developing countries even with the moderate health measures available. The l i f e expect-ancy i n India, for example, was twenty: seven years at the time of independence. It i s now, f i f t y seven years. This, together with the t r a d i t i o n a l rate of f e r t i l i t y and lowering of infant mortality has made population a major hurdle i n any process of modernization of the economy. The rapid increase of population because of health measures before modernisation i n other spheres has created dilemmas for the developing world which the A t l a n t i c World largely avoided. When growth of population takes place after a breakthrough into greater mechanisation and productivity, i t acts as a spur to further growth because i t stimulates the economy to further expansion to meet the increase i n demand. Technology has increased productivity i n such a s t a r t l i n g way that p r o f i t s and wages go up together. The a b i l i t y to consume and the incentive to invest are not 61 contradictory. They reinforce each other i n the modern mass-consumption economy. The outlook reverses when population expands ahead of productivity. To introduce rapidly changing modern technology i n farming and industry requires greater saving. But longer l i v e s and more months to feed push up consump-tion at the expense of saving. In Canada, for example, an increase i n population means larger markets for indus-7 t r i a l output. In India, population i s a major stumbling block i n development. Hence the time-factor i n i n d u s t r i a -l i z a t i o n -- industry f i r s t , health l a t e r or health f i r s t and industry l a t e r -- has a profound impact. Technology Further, technology has developed according to the needs of the developed world and i s not necessarily the one suitable for developing countries. The whole weight of economic research and of investment i n further research i s confined to developed countries who have spent most of the time trying to f i n d labour-saving methods of production. That i s , the e f f o r t has been to substitute machines for manpower. In addition, i t i s designed for large units and for large markets. But large scale labour-saving methods are not the most suitable for developing countries where labour i s abundantly available. 62 This dilemma was not faced by the developed world because i t invented and adapted technology for i t s own needs as the process of development went on. The develop-ing countries have neither the time, the resources nor the knowledge-pool with which to develop technology for their own needs. Technology i s now already available and can be purchased. It i s this technology which the developing countries purchase in their e f f o r t to hasten the develop-ment process. Thus advanced i n d u s t r i a l technology i s often used i n countries where there i s neither the market nor the s k i l l s nor the managerial capacity and the required infrastructure to make this technology work successfully. The s i t u a t i o n i s aggravated by the high cost of purchasing this inappropriate technology. It also leads to imbalance in the development of industry because fa c t o r i e s are set up which produce goods which nobody can buy l o c a l l y either because they are much too expensive or they are not suitable for the l i v i n g conditions in that country but which, because of inadequate expertise cannot q u a l i t a t i v e l y compete i n the world market. Products which are useful for developed countries are not necessarily the ones which are required by the g developing countries. Barbara Ward gives an example. If , as a cheap by-product of petro-chemicals, Western 63 industry can produce a substitute for binder twines which are only half the price of " s i s a l " , the consequences from the point of view of petro-chemical interests are benefi-c i a l but for Tanzania and for large parts of Kenya, i t i s a disaster because " s i s a l " i s an important export for them in their limited range of exports. Psychology The r e s u l t of being late-comers i s that the aims and ambitions of developing countries tend to be deter-mined not by l o c a l experience but by what they can see has been achieved by the developed countries. Countries which have just acquired the means of p o l i t i c a l and economic decision-making want to quickly command the whole range of opportunities which they know the developed countries 9 already have. They want to take one"big leap forward" to bridge the gap between their own r e s t r i c t i o n s and other nations' opportunities. Their people want i t too. The d i s s a t i s f a c t i o n i s heightened by the past c o l o n i a l exper-ience because the argument that f i r e d the popular imagina-tion was that poverty was the re s u l t of colonization and that once the c o l o n i a l rule was abolished, prosperity would return. In an average mind, the fact that development process l a s t s several decades and that i t depends on several inputs i s overlooked or forgotten, or viewed with resistance and 64 and resentment. This disproportion between what people want and what hey can actually quickly have causes frus-t r a t i o n and unrest. Further, as Kuznets points out, the t o t a l economy can only grow as rapidly as the society i s able to adjust i t s e l t to i t s continuous expansion. If an economy i s a slow-growing one, i t s i n s t i t u t i o n s are geared to a low rate of growth and require substantial modification i f the pace of growth i s to be accelerated. But this requires the breaking of old customs, t r a d i t i o n s , modes of working and psychological adjustments which the people f i n d hard to make. Problems faced by developing countries Kuznets has demonstrated"'""'" that colonization and consequently the time of i n d u s t r i a l i z a t i o n have increased the problems faced by developing countries today. If we judge by the per"capita income i n the post-Wordl War II period pr i n the period between the two world wars, the leading countries were the United States, Canada, Australia, New Zealand, the United Kingdom, Switzerland, the Scandi-navian countries, Germany, Netherlands, France and Belgium. The question arises whether at any point of time these countries lagged behind any leading economies of their time as do the developing countries today. For the r e l a t i v e l y 6 5 "empty" countries l i k e the United States, Canada, Australia and New Zealand, the question does not have much relevance because i t involves only pioneers who suffered material deprivations compared to the deprivations i n the develop-ing countries today. But these hardships were because of pioneering and not because of economic backwardness. Once the s e t t l e d groups were s i g n i f i c a n t l y large, these countries did not much lag behind the economic leaders. Thus, Canada was developed through foreign investments from Great B r i t a i n and United States. There i s no comparable s i t u a t i o n when the developed countries of today had per c a p i t a l incomes so far behind the economic leaders of their time and at such low levels as do the developing countries of today. The technological and economic revolutions i n most countries at the top today dates back to about a century and a half or to about two centuries. Thus the older members of the European community which are developed today had a long period of learning process which ripened them for the i n d u s t r i a l technological revolution and during this period, the p o l i t i c a l independence and i n i t i a t i v e of these countries was preserved. Most developing countries of today remained outside the or b i t of this process of learning, missed the i n d u s t r i a l revolution, and now face the problems of development after decades i f not centuries of p o l i t i c a l 66 subjugation which has l e f t a heritage against which they have to struggle. They have to use the available knowledge not from a position of near leadership where they can adapt this knowledge to their own needs but from the position of laggards whose in t e r n a l organization has often been distorted by p o l i t i c a l subjection. The essence of development i s the application of science to problems of economic production which produces both an a g r i c u l t u r a l and i n d u s t r i a l revolution so that the a g r i c u l t u r a l needs can be met by a fewer people occupied 12 in i t . As Kuznets points out i n developing countries today, t h r e e - f i f t h s or more of the labour force i s occu-pied i n agriculture whereas only o n e - f i f t h or less i s occu-pied i n developed countries. We have to go back a century or a century and a half when t h r e e - f i f t h s of the labour force i n developed countries of today was occupied i n a g r i -culture. Not only that, the per capita i n these countries around 1850 ranged from $150 to $300. At constant prices, according to US estimates i n 1949, the per capita income in developing countries was $30-$60. Thus, i n 1949, the per capita income i n developing countries was about one-t h i r d to one-sixth of what was the per capita income of presently developed countries i n the 1850s. Therefore, the developed countries of today were economically several 67 13 t i m e s b e t t e r o f f t h a n t h e d e v e l o p i n g c o u n t r i e s o f t o d a y . S p e c i a l F e a t u r e s o f C a nada T h e ' d i f f e r e n c e s d i s c u s s e d above e x i s t b e t w e e n Canada and I n d i a as r e p r e s e n t a t i v e s o f a d e v e l o p e d and a d e v e l o p i n g c o u n t r y . However, Canada s h a r e s some c o n -c e r n s s i m i l a r t o t h o s e o f d e v e l o p i n g c o u n t r i e s b e c a u s e a m a j o r p a r t o f i t s e x p o r t s a r e s t i l l r e s o u r c e - b a s e d l i k e t h o s e o f d e v e l o p i n g c o u n t r i e s o r " s e m i - i n d u s t r i a l " c o u n -14 t r i e s , as A l f r e d M a i z e l s c a l l s them; and a l s o b e c a u s e i t h a s f e e l i n g s o f i n s e c u r i t y b e i n g n e i g h b o u r t o t h e most p o w e r f u l economy i n t h e w o r l d , t h e USA. C a n a d a , r e s o u r c e - b a s e d c o u n t r y 1 As h a s b e e n p o i n t e d o u t i n C a n a d a and t h e I n t e r n a - t i o n a l P o l i t i c a l / E c o n o m i c E n v i r o n m e n t , C a n a d a ' s m e r c h a n d i s e e x p o r t s c o n t a i n s o n l y a s m a l l p r o p o r t i o n o f f i n i s h e d g o o d s c o m p a r e d t o o t h e r d e v e l o p e d c o u n t r i e s . By t h e m i d - 1 9 6 0 s , C a n a d a ' s p o l i c y - m a k e r s became aware and c o n c e r n e d t h a t d e s p i t e t h e A u t o P a c t w i t h US, C a n a d a , u n l i k e o t h e r d e v e -l o p e d c o u n t r i e s w h i c h r e l i e d on f i n i s h e d g o o d s f o r a t l e a s t 5 0 % o f e x p o r t s , was s t i l l p r e d o m i n a n t l y an e x p o r t e r o f raw 15 and s e m i - p r o c e s s e d g o o d s r a t h e r t h a n o f f i n i s h e d g o o d s . Some w r i t e r s went t o t h e e x t e n t o f c a l l i n g C a n ada a " r i c h i n d u s t r i a l i z e d u n d e r - d e v e l o p e d c o u n t r y . 68 In d u s t r i a l i z a t i o n has been associated with econo-mic development because i t leads to an increase i n labour productivity and i n rea l incomes. Industrial growth also enhances trade p o t e n t i a l . Thus, the i n d u s t r i a l growth rates of various countries can be measured by their share of world export market i n manufactures. According to Williams, a high-level of manufactured exports i s a c h a r a c t e r i s t i c of economic development whereas an export structure consis-ting largely of primary products and intermediate or semi-manufactured products indicates underdevelopment. Alfred 18 Maizels -..has divided countries into three groups: indus-t r i a l , semi-industrial, and non-industrial, based on the value of their production of manufactured goods per head and the proportion of manufactured goods i n their exports. The following table shows the export performance of coun-t r i e s as c l a s s i f i e d by Maizels: Table II .Degree of I n d u s t r i a l i z a t i o n and Finished Manufactures as a Proportion of Trade: 1913, 1929, 1955, and 1980 (percent of t o t a l trade) Exports Imports 1913 1929 1955 1980 1980 Indu s t r i a l Countries Japan I t a l y Germany(Federal) Sweden 31 31 46 23 43 41 54 26 64 47 65 33 71 61 60 53 11 28 34 45 Table II contd. 6 9 T a b l e I I ( c o n t d . . . ) U n i t e d S t a t e s 2 1 3 7 4 8 5 2 3 8 G r e a t B r i t a i n 5 8 4 9 6 2 5 0 3 9 F r a n c e 4 4 4 7 3 8 5 0 3 5 Canada 5 1 4 1 1 3 2 5 9 S e m i - i n d u s t r i a l C o u n t r i e s I n d i a 1 3 B r a z i l A r g e n t i n a A u s t r a l i a T u r k e y 1 9 3 1 . 0 2 3 * * 2 7 * * 0 . 4 2 2 * * * 2 9 * * * - 0 . 4 1 4 * * 4 9 * * 6 . 0 1 0 5 4 _ 0 . 4 7 * * * 3 9 * * * N o n - i n d u s t r i a l C o u n t r i e s E g y p t - - 3 . 0 4 . 0 * * * 3 5 * * * Z a i r e - - 0 . 8 0 . 6 * * 4 8 * * Burma - - 0 . 4 0 . 3 * 5 5 * * -k -k *k ~k ~k 1 9 7 6 1 9 7 8 1 9 7 9 S o u r c e : G l e n W i l l i a m s , N o t f o r E x p o r t : T o w a r d s a P o l i t i c a l  Economy o f C a n a d a ' s A r r e s t e d I n d u s t r i a l i z a t i o n , T o r o n t o : M c C l e l l a n d a n d S t e w a r d , 1 9 8 3 . As t h e t a b l e shows, i n t h e i n d u s t r i a l i z e d c o u n t r i e s f i n i -s h e d m a n u f a c t u r e s a c c o u n t f o r a t l e a s t h a l f o f t h e i r t o t a l e x p o r t s . I n t h e s e m i - i n d u s t r i a l c o u n t r i e s , 1 0 t o 2 5 p e r c e n t o f e x p o r t s c o n s i s t o f f i n i s h e d m a n u f a c t u r e s ; a n d i n t h e n o n - i n d u s t r i a l c o u n t r i e s , t h e s h a r e o f m a n u f a c t u r e s i s l e s s t h a n 1 0 % . A c o r o l l a r y t o t h e p r o p o s i t i o n t h a t h i g h e x p o r t s o f f i n i s h e d m a n u f a c t u r e s i n d i c a t e h i g h l e v e l s o f i n d u s t r i a -70 l i z a t i o n , suggested by Maizels i s that the larger indus-t r i a l countries are less dependent on imports of manu-factures than the smaller i n d u s t r i a l countries and the 19 semi-industrial and non-industrial countries. A l l i n d u s t r i a l countries except Canada, as shown i n the table, have posit i v e trade balances i n finished products. Even in 1984, Canadian exports of fi n i s h e d products account for 42.1% of t o t a l exports well below the desired 50%. Not only that, 66% of t o t a l imports by Canada are of finished manufactures. 20 A further point has been made by Williams. He feels that Auto Pact exchanges can be l e f t out from Canada' external trade picture when i t i s seen as an indicator of a nation's a b i l i t y to compete i n d u s t r i a l l y within the world economy. Export of manufactures was stimulated by the Automative Products Trade Agreement with USA i n 1965. In 1954, automobiles and parts comprised of only 1% of Canada' exports but i n 1984, they account for 26.5%. As a r e s u l t , the t o t a l exports of finished products jumped to 38% i n 1970s. Even i n 1984, when 42.1% of t o t a l exports was of finsihed products, automobiles and parts consisted of 26.4% 21 This leaves Canada " i n the company of B r a z i l and India1.' Of course, as Williams accepts, there are other elements l i k e " r e l a t i v e l y high value of Canada's per capita produc-22 tion" which places i t among i n d u s t r i a l nations rather 71 than semi-industrial nations. But the fact that Canada i s e s s e n t i a l l y a resource-based country does make i t share some concerns with developing countries. Many explanations have been given for Canada's weak export performance i n the manufacturing sector l i k e : comparative trade advantages i n resources rather than i n developing i n d u s t r i a l s p e c i a l i z a t i o n , a high degree of foreign control over industry; protective t a r i f f p o l i c i e s which protected Canadian manufactures unable to compete in world markets; small domestic market which i s a hindra-nce to economies of scale; and the i n t e r l i n k i n g of Canadian economy to a far more powerful economy which has relegated 23 Canada to "a resource hinterland r o l e . " These are the very factors which, as we s h a l l see l a t e r , which have been cit e d as costs that Canadian economy has paid for the high degree of foreign d i r e c t investment. Influence of USA Chiefly because of geographical proximity, i t i s but natural that the relationship between Canada and US i s probably closer than between any other two countries in the world and the impact of the influence of the United States, the more powerful neighbour, extends into v i r t u a l l y 24 every aspect of the national l i f e of Canada. People have se t t l e d i n a narrow band of t e r r i t o r y north of US because 72 of climate and topography. There are personal and family connections across the border. There i s s i m i l a r i t y i n culture, i n r e l i g i o n ; i n the professions, i n business, i n labour, i n education and i n the arts. Stretching p a r a l l e l with US across the Continent, i t was l o g i c a l and almost inevitable i n many ways for Canada with i t s r e l a t i v e l y empty huge land mass to draw on the experience, knowledge and accomplishments of the 2 5 US. As has been pointed out i n the Wahn Report, Canada naturally drew upon the c a p i t a l of the United States, their people and their s k i l l s i n i t s development. For example, in coping with the communication and transportation problems the same techniques were used which had been developed i n the US e a r l i e r . When i t came to the settlement of the vast empty spaces of the west, the techniques of settlement which had been used i n the US were copied exactly in the Canadian case a good many years l a t e r . The techniques used for developing the big and greatly sp e c i a l i z e d indus-t r i e s l i k e the a g r i c u l t u r a l industries, mining and others, were copied exactly from what had been done e a r l i e r i n US. In areas of pulp and paper, mining, iron ore, o i l and gas, and potash, vast amounts of c a p i t a l and high technical s k i l l s had to be developed and used. At the same time, very large markets were needed i f they were going to be successful. 73 The requirements of the United States, e s p e c i a l l y after Second World War, opened up large markets for many of these items which made i t possible to develop these huge industries i n Canada. Thus, a l l the required ingre-dients for development -- large markets, finance, manage-ment, application of technology -- were available i n the United States which naturally led to a very large amount of American p a r t i c i p a t i o n i n Canadian economy. The techni-c a l and s c i e n t i f i c pre-eminence of USA after the Second World War has l e f t i t s impact over the industries of the whole world because the essence of development after the Second World War has been the rapid expansion of science and technology and i t s application to industry. Canada being so close to USA, ine v i t a b l y f e l t the impact of this on i t s own i n d u s t r i a l developments. Of course, together with technology came investment and management s k i l l s but the fundamental factor was predominance i n technological and s c i e n t i f i c areas. USA i s a natural market for Canada and this has made i t Canada's biggest trading partner. The trade bet-ween the two countries i s the largest between any two countries i n the world. Access to the US c a p i t a l market has been of v i t a l importance to the Canadian economy and private US investment has played and continues to play a 74 s i g n i f i c a n t role i n Canadian growth. There are no two countries i n the world between which economic relations are more massive and more all-embracing than they are between Canada and USA. Each country i s the other's chief customer. The majority of Canada's exports go to USA, and the majority of imports to Canada come from USA. The two-way trade between the two countries has increased and not decreased over the years. In 1954, imports from USA into Canada accounted from 72.4% of t o t a l imports. In 1984, they are s t i l l 72%. However, exports from Canada to USA have shown a remarkable increase. In 1954, Canadian exports to USA accounted for 59.8% of t o t a l exports. In 1984, 76.3% of Canada's t o t a l exports go to USA. 2 6 The Report of the Macdonald Commission focuses on the impor-tance of access to the American market for Canada's econo-mic growth and plea for freer trade with US turns mainly on this argument. Not only are there close trade t i e s between Canada and USA, the major portion of investment in Canada also comes from USA. As can be seen from the tables below, USA i s the single largest investor i n Canada and accounts for over 50% of foreign investment. The second largest 75 investment i s by UK -- about 10% -- which i s far less than that of USA. Table III TOTAL (CUMULATIVE) INVESTMENT IN CANADA: IN PERCENT: BY COUNTRIES The USA - Over 50% The UK ' - About 10% West Germany - Less than 10% Japan - Less than 10% France - Less than 10% Sweden - Less than 10% Switzerland - Less than 10% Ital y , - Less than 10% TOTAL (CUMULATIVE) INVESTMENT IN CANADA AS OF END OF 1984 Direct Foreign-controlled C$ C$ Tax ( Havens ( The USA 48. 6 b i l l i o n 64 b i l l i o n The UK 5. 3 b i l l i o n 8. 6 b i l l i o n West Germany 1. 7 b i l l i o n 2. 7 b i l l i o n Japan 603 mi l l i o n 611 mi l l i o n France 812 mi l l i o n 1. 8 b i l l i o n Sweden 322 m i l l i o n 385 m i l l i o n Swi tzerland 816 mi l l i o n 1. 3 b i l l i o n I t a l y 62 m i l l i o n 126 mi l l i o n The Netherlands 1. 1 b i l l i o n 1. 8 b i l l i o n Belgium & Luxemburg 481 mi l l i o n 1. 6 b i l l i o n Norway 322 mi l l i o n 385 mi l l i o n The Bahamas 122 mi l l i o n 168 mi l l i o n Bermuda 662 mi l l i o n 415 m i l l i o n Approximate Tota l : 60.7 b i l l i o n 83.8 b i l l i o n Source: Investment Canada, Ottawa. 76 Thus, USA i s a very important factor i n the formu-l a t i o n of Canada's trade and investment p o l i c i e s . As i s pointed out i n the Report of the Macdonald Commission, the fact that USA dominates Canada's trade picture i s extremely s i g n i f i c a n t for Canada because Canada i s a far more trade-dependent country than USA. About 20% of everything pro-duced i n Canada i s sold to USA while the comparable figure 2 7 for USA i s only 2% or less. Thus, the large degree of US investment i n Canada and prominence of trade with USA has led to a f e e l i n g of dependence on US markets. The t h i r d 2 8 option p o l i c y enunciated i n 1972 was an e f f o r t to lessen the dependence. What i t meant was that Canada must try to maximize i t s economic benefits but at the same time, reduce i t s reliance on United States by d i v e r s i f y i n g i t s markets. The policy, however, did not have much success and the report of the Macdonald Commission accepts that since dependence on American markets i s inevitable, attempt should be made to secure firm access to them. In the f i e l d of investment, too, the costs of foreign d i r e c t investment, p a r t i c u l a r l y of investment from one single country were brought to widespread public atten-tion by the Royal Commission on Canada's Economic Prospects 29 chaired by Walter Gordon, constituted i n 1955 and which tabled i t s report i n late 1957. These were even more force-77 f u l l y highlighted subsequently by the Watkins Report, Wahn Report and by the Gray Report. The cumulative e f f e c t of these reports was the enactment of the Foreign Investment Review Act and of the establishment of the Foreign Investment Review Agency. A change of outlook has again taken place as i s evident from the Macdonald Commi-ssion Report and the enactment of Investment Canada Act. Conclusion Thus, the difference i n outlook between developed countries and developing countries stems d i r e c t l y from the state of their economic development. While development in some respects i s a r e l a t i v e phenomenon -- a country may be developed i n i t s e l f but not as developed as another --for the developing countries i t i s e s s e n t i a l l y a question of r a i s i n g the standard of l i v i n g to acceptable levels for the vast majority of their populations. The developing countries, because of colonization and consequent lack of i n d u s t r i a l i z a t i o n and technical know-how are trying to make up for the lo s t time. They are working against tremendous odds i n trying to accelerate the process of development l i k e lack of resources, technology, in f r a - s t r u c t u r e , s k i l l e d manpower, and psychological pressures emanating from the co l o n i a l experience. Foreign d i r e c t investment for these countries i s a means of economic development and has to 78 be regulated to maximize benefits from i t . Canada i s a developed country with a high per capita income, broad i n d u s t r i a l base, and sophisticated technology, but i t i s s t i l l a resource-exporting country. Further, i t lake not only a large domestic market but also assured access to any other large market. Being next to a powerful economy l i k e USA, Canada's bulk of trade i s naturally with USA. The majority of investment, too, comes from USA. Thus, USA plays a v i t a l role i n Canada's economy causing a f e e l i n g of dependence and insec u r i t y i n Canada. Close c u l t u r a l s i m i l a r i t i e s with USA accentuate a search for i d e n t i t y . Thus, Canada regulates foreign d i r e c t invest-ment to prevent the most important sectors of i t s economy from becoming largely foreign owned and controlled; and to maintain i t s own economic and c u l t u r a l independence. 79 CHAPTER III INDIA AND FOREIGN INVESTMENT The policy towards foreign investment has been shaped i n India keeping the following factors in mind: sc a r c i t y of foreign exchange resources which necessita-tes a judicious use of the available exchange in sectors considered essential for development; the need for technology and, therefore, the u t i l i s a t i o n of foreign exchange resources for transfer of technology; the per-ception that i t i s necessary to have a broad i n d u s t r i a l base i f the needs of a very large population are to be met; and the firm conviction to be s e l f - r e l i a n t streng-thened by the c o l o n i a l experience which brought home the necessity of developing indigenous know-how, s k i l l e d man-power, entreneurship and managerial s k i l l s . H i s t o r i c a l Background In 1947, when India became independent, she bore the sears of c o l o n i a l e xploitation. India had been con-quered before the B r i t i s h came to India, but those invaders had "made themselves part of her life"."'" The B r i t i s h always remained a l i e n . Before the B r i t i s h rule "she had never l o s t her independence, never been enslaved. That 80 i s to say, she had never been drawn into a p o l i t i c a l and economic system whose centre of gravity lay out-side her s o i l , never been subjected to a r u l i n g class which was, and which remained, permanently a l i e n i n 2 o r i g i n and character". Having this sense of alienation, the B r i t i s h remained not an i n t e g r a l part of India but c o l o n i a l masters trying to extract what they could from 3 India. As an example, Kust has pointed out, when indus-t r i a l i z a t i o n began to gain momentum in England, heavy duties were imposed on Indian t e x t i l e s to protect the mil l s of Manchester and Paisley but there was no corres-ponding duty on English cloth exported to India. The re s u l t was that Indian t e x t i l e industry of Bengal was ruined. If India had been an independent country, she would have imposed p r o h i b i t i v e duties on English cloth which, of course, she now could not do. Those a l l i e d industries which were not i n competition with B r i t i s h industries and which were needed to supply raw materials to B r i t i s h industries were encouraged e s p e c i a l l y s e r i c u l -ture and indigo. The East India Company had been started with the object of carrying Indian manufactured goods as well as spices from the East to Europe where there was a great demand for them. With the development of i n d u s t r i a l 81 techniques i n England, the B r i t i s h market was closed to Indian products and Indian markets were opened up for B r i t i s h manufactures. Since East India Company had a monopoly i n Indian export business, this exclusion affected other foreign markets also. Duties were impo-sed which prevented the flow of goods i n the country i t s e l f too. This led to the collapse not only of the t r a d i t i o n a l l y strong Indian t e x t i l e industry but also other t r a d i t i o n a l industries. 4 Kust argues that as long as technology was depen-dent on human and animal power, India was the formost manufacturer i n the world because she had developed a socio-economic organisation and had perfected human s k i l l s and techniques for the purpose. But Indian society was s t a t i c , and just as China and the Arab world, which had not suffered similar economic rule, could not adapt to changing technological innovation, India might not have been able to adapt either. Nehru concedes that this collapse might have been inevitable as a l l t r a d i -t i o n a l techniques became outmoded, but at the same time, points out that no attempt was made to apply new techni-5 ques toclndia. In fact, every attempt was made to pre-vent this from happening. Machinery could not be impor-ted into India without heavy duties, thus creating a lu c r a t i v e market for B r i t i s h goods and at the same time 82 leading to unemployment and poverty. It was only i n 1860 that the duty on machinery was removed. It led to an economy which Nehru c a l l s a c l a s s i c modern c o l o n i a l economy by which India became an " a g r i c u l t u r a l colony supplying raw material to i n d u s t r i a l England and providing a market for England's i n d u s t r i a l goods." The artisan class, deprived of their t r a d i t i o n a l employment were driven to the land but the land could not support them. Poverty grew while i t led to an ever-grow-ing disproportion between agriculture and industry. As agriculture became increasingly the sole occupation of the people, land holdings became more and more fragmented. With poverty, the small land holdings too often passed into the hands of unscrupulous money-lenders so that the number of landless labourers increased rapidly. It was not u n t i l the end of nineteenth century that anything resembling modern industry began to develop in India. The B r i t i s h emphasized export-oriented industries of primary products l i k e indigo, tea, jute, manganese, mica and others, but had no interest i n developing basic indus-t r i e s l i k e iron and s t e e l , chemicals, and machine making. They preferred to export these to India and since these industries required c a p i t a l and know-how d i f f i c u l t for Indians to acquire, they remained under-developed. Trans-83 port and communication f a c i l i t i e s , e s p e c i a l l y railways and coal production to run the railways, were developed to move these products. India paid a heavy price for i t , but the need and d e s i r a b i l i t y of i t cannot be questioned. India's capacity to i n d u s t r i a l i s e can be seen from her attempts to do so i n spite of active discouragement. Cotton t e x t i l e industry was developed by Indians with equip-ment and technical assistance from England. The B r i t i s h were i n two minds about i t . While Lancashire m i l l s agita-ted against i t , the B r i t i s h t e x t i l e machinery manufacturers favoured i t s growth because i t served to promote their exports. One of the early founders of t e x t i l e industry was Jamshedjee Tata, a name that was l a t e r to become fore-most i n Indian business and industry. Jamshedjee Tata also established a steel m i l l for India, and i t s success was due to American technical assistance. By World War II, India, with the exception of Japan, had the foremost s t e e l industry i n Asia. It was, however, the only example of heavy industry i n India. The co l o n i a l experience l e f t an impact on the psyche of both p o l i t i c a l and business leader-ship. Indian business leaders although committee to free enterprise became wary of foreign investment. S i r Rahimtoola M. Chinpy i n the name of Indian Merchant's Association went to the extent of demanding re p a t r i a t i o n of a l l 84 B r i t i s h investments i n India "with the help of our accumu-7 lated [ s t e r l i n g ] balances." Convinced that "powerful interests" were "operating abroad for the purpose of t h r o t t l i n g further i n d u s t r i a l i -g sation of this country"; that "there was a plan -- clear-cut and thorough -- to prevent the i n d u s t r i a l i s a t i o n of 9 this country i n the post-war period"; and that " B r i t i s h policy was opposed to any rapid growth of heavy industries controlled and managed by I n d i a n s . " ^ They were keen to be r i d of B r i t i s h control. At the same time, there was also a r e a l i s a t i o n that India's industries were "pygmies in a world of giants.""'""'" The demand was that "post-war i n d u s t r i a l development of India e s p e c i a l l y i n key indus-t r i e s " would "be the exclusive sphere of Indian enterprise 12 both i n respect of ownership and control." The h o s t i l i t y manifested i t s e l f i n vehement opposi-tion to foreign companies incorporated i n India. The delegates at the eighteenth Annual Meeting of the FICCI voiced their resentment at the rapid increase i n the number of foreign companies incorporated i n India and pointed out that "the so-called India Limited companies are r e a l l y foreign companies [that] have established themselves i n this country ... and ... monopolised most of the larger industries which should otherwise have been 85 13 in our hands." The Association of Indian Industries concluded: "The remedy against such corporations being set up i n the future i s a clear straight surgical opera-tion, namely to delete the ... actions i n the Government 14 of India Act [allowing their formation]". The Indian Merchants' Chamber warned that "India would prefer to go without i n d u s t r i a l development rather than allow the 15 creation of new East India Companies i n this country." From the above statements we should not assume that Indian business was unanimously h o s t i l e to foreign c a p i t a l . The degree of h o s t i l i t y varied according to business interests of various groups. There was, however, unanimity on one point: Indians must be e f f e c t i v e l y i n v o l -ved i n Indian business and industry. As early as 1928, the Indian Merchants" Chamber had proposed that the Western Indian Match Company be registered i n India with three-quarters of i t s c a p i t a l held l o c a l l y and three-16 quarters of i t s directors Indian. Even during the Second World War, continued foreign investment seemed acceptable i f the basic conditions were s a t i s f i e d : "It should ... be a condition of the establishment of foreign companies in India that they should have ... Indian c a p i t a l and Indian representation on the board of management [and] 17 arrangement for the t r a i n i n g of technicians." 86 In 1945, when an of f i c i a l l y - s p o n s o r e d Indian indus-t r i a l Mission led by J.R.D. Tata and G.D. B i r l a went to B r i t a i n and USA, the v i s i t caused much concern and was 18 seen by many as an " i l l e g i t i m a t e marriage" between foreign and domestic big business. It was at the same time recognized that there would have to be "a l l i a n c e s , 19 agreements and contracts" between foreign and Indian i n d u s t r i a l i s t s i f the country had to be i n d u s t r i a l i s e d and the process would cost much less i f foreign technical and f i n a n c i a l co-operation could be obtained. It was, however, reit e r a t e d "that under no circumstances would India allow the control of new industries to be exercised by non-Indians. 1949 Policy Statement on Foreign Direct Investment in India The f i r s t major policy statement on foreign invest-ment was made by Prime Minister Jawaharlal Nehru on A p r i l 6, 1949. It r e f l e c t s on the one hand the government's acceptance of the need for foreign investmetn for indus-t r i a l and economic development and on the other, the convic-tion that e f f e c t i v e control must remain in Indian hands. The following conditions for foreign investment were set 21 out i n the Statement: there would be no discrimination i n the treat-ment of domestic and foreign enterprise and 87 a l l would have to conform to the i n d u s t r i a l p o l i cy of the country. foreign enterprise would be permitted to earn p r o f i t s , subject only to regulations common to a l l . there would be no r e s t r i c t i o n on the remittance of p r o f i t s or r e p a t r i a t i o n of c a p i t a l , but remittance f a c i l i t i e s would naturally depend on the foreign exchange s i t u a t i o n . i f foreign interests came to be compulsorily acquired, compensation w i l l be paid on a f a i r and equitable basis and reasonable f a c i l i t i e s w i l l be provided for the remittance of proceeds. the major inter e s t i n the ownership and e f f e c t i v e control of an undertaking should, as a rule, be in Indian hands. Indians should be trained and employed in managerial and technical posts as quickly as possible. An i l l u s t r a t i v e l i s t of industries i n which foreign c a p i t a l was p a r t i c u l a r l y welcome was also published. 88 The f i r s t four conditions r e f l e c t a desire to encourage foreign investment by promising national treat-ment; free r e p a t r i a t i o n of p r o f i t s and c a p i t a l except when there are foreign exchange problems; and f a i r and equitable compensation i n case of nati o n a l i z a t i o n toge-ther with f a c i l i t i e s for remittance of proceeds. The determination to follow an independent economic policy i s r e f l e c t e d in:the desire to keep the ownership and control of foreign investment i n Indian hands and i n the perceived need to develop l o c a l entrepreneurship, s k i l l e d manpower and managerial talent. The F i r s t Five-year Plan further elaborated on the pr i n c i p l e stated by Mr. Nehru along which foreign enter-prise was to be encouraged i n India. In view of the fact that the investment of foreign c a p i t a l necessitates the u t i l i z a t i o n of indigenous resour-ces and also that the best use of foreign c a p i t a l i s as a c a t a l y t i c agent for drawing forth large resources for domestic investments, i t i s desirable that such invest-ment should be channelled into f i e l d s of high p r i o r i t y . The broad p r i n c i p l e to be followed i s that foreign invest-ment should be permitted i n sphered where new li n e s of production are to be developed or where special types of experience and technical s k i l l are required or where the 89 volume of domestic production i s small in r e l a t i o n to demand and there i s no reasonable expectation that the indigenous industry can expand at a s u f f i c i e n t l y rapid pace. The system of j o i n t enterprises under which a number of foreign concerns have established new indus-t r i e s i n the country i n collaboration with Indian indus-t r i a l i s t s appears to be suitable for securing employment of equity c a p i t a l . Agreements for such j o i n t p a r t i c i p a -tion between foreign and Indian concerns should be sub-ject to approval of Government. The share of national c a p i t a l i n j o i n t enterprises, the f a c i l i t i e s for the tr a i n i n g of Indians, the disclosure of patented processes to Indian associates, etc. are matters whcih have to be decided with due regard to the facts of each p a r t i c u l a r 22 case. Therefore, p a r t i c i p a t i o n i n new i n d u s t r i a l under-takings i s desired but only to the extent needed. These attitudes have been an i n t e g r a l part of p o l i c i e s towards foreign investment i n India. The policy of i n v i t i n g foreign investment i n selec-23 ted f i e l d s was once again stated by Mr. L.K. Jha, the Indian representative and Chairman of the Group of Eminent Persons, but, as he pointed out, being selective did not necessarily mean being r e s t r i c t i v e or biased against multi-90 nationals. It would be naive to believe that multinationals would go to developing countries i f their opportunities, earnings and growth were not as good as i n developed coun-t r i e s . It i s , he f e l t , too s i m p l i s t i c a view to take that since developing countries need c a p i t a l and foreign exchange, they must woo private investment. Infact, i f the develop-ing countries make the right choices after taking into consideration a l l the alternatives, the r e l a t i o n s h i p they forge with the multinationals w i l l be a more healthy and a more stable one. An analysis of perceived costs and benefits of foreign investment i n India would validate a sel e c t i v e approach. Costs and Benefits of Foreign Investment as Perceived i n India It i s generally accepted that foreign d i r e c t invest-ment brings some obvious advantages to a developing country. Its importance has been recognized by the United Nations. In the Action Programme of the General Assembly for the  Second United Nation's Development Decade i t was said "Developing countries w i l l adopt appropriate measures for i n v i t i n g , stimulating and making use of foreign private capi t a l , - t a k i n g into account the areas i n which such c a p i t a l should be sought and bearing i n mind the importance for i t s a t t r a c t i o n of conditions conducive to sustained deve-91 lopment. Developed countries, on their part, w i l l consider adopting further measures to encourage the flow of private 24 c a p i t a l to developing countries." The multinational entrepreneurship are the chief means of foreign d i r e c t investment. But together with these benefits they bring with them certa i n costs. Many of the costs to developing countries of foreign d i r e c t investment pointed out by writers l i k e Simon Kuznets 2 6 and Barbara Ward and voiced i n the Report of the Group 27 of Eminent Persons have been confirmed i n the Indian 2 8 experience as can be seen from Kidron's detailed analysis of the costs of foreign investment to India. Technology It i s argued i n support of foreign investment that i t brings with i t much needed managerial and technical s k i l l s at l i t t l e or no extra cost. However, the other side to this i s that research and development are invariably conducted abroad and have to be paid for through r o y a l t i e s , fees and other payments. Even then they are not available i n t t h e i r entirety. Through their production and s t a f f i n g p o l i c i e s investing firms try to keep a continuing control of the know-how. The l o c a l investor i s assigned a narrowly spe c i a l i z e d range of functions and so a d i f f u s i o n of s k i l l s does not take place. 9 2 An under-developed country has to use the most productive techniques available i n order to raise i t s capacity to save and invest. Technology has to be impor-ted for the production of certa i n items, but not a l l techniques are equally suitable. By wholly importing a technology without adapting i t to l o c a l needs, an under-developed country can saddle i t s e l f with equipment which requires too sophisticated a network of servicing and a n c i l l a r y industries. 2 9 As has been pointed out by Eddison, often foreign-made equipment was imported i n India which was planned and constructed for use under t o t a l l y d i f f e r e n t conditions, for processing d i f f e r e n t kinds of raw mater-i a l s and with d i f f e r e n t grades of chemicals. More highly trained workers than those found i n India were supposed tq handle i t . Hence, the equipment often gave unexpected problems and operated at lower e f f i c i e n c y than i t would have i n i t s own land for which i t was designed. Further, many of these imported units had automatic devices and mechanical conveyors designed into them which could only be economically j u s t i f i e d i n countries where labour costs were much higher than i n India. Moreover, i n many cases, not only was the equipment unsuitable but i t also cost 1 5 - 2 0 % more than i n i t s country 9 3 of o r i g i n because of fr e i g h t , handling and duty charges. The suppliers, too, followed monopolistic p r i c i n g p o l i -cies taking advantage of the limited options available to the country. There was no domestic machine production and the country was trying to get the best deal possible. There were machines i n the paper industry for example from B r i t a i n , Germany, Belgium, Sweden, America, Canada and Japan with no sales and service organization i n the country. In many cases, importation of equipment i n h i b i t e d the development of a n c i l l a r y i ndustries. In the case of automobiles, for example, as most of automobile engines were assembled or manufactured with foreign collaboration, parts l i k e pistons, piston rings, and others had to conform to the design and sp e c i f i c a t i o n s of the overseas manufac-turers of engines and had to be approved by them. The T a r i f f Commission recommended that pistons of the required s p e c i f i c a t i o n s should be produced i n India and obtained by i n d i v i d u a l automobile firms from Indian sources. But this did not make much progress because the ind i v i d u a l firms had to f i r s t get their products approved from their foreign collaborators. When foreign associates introduced frequent changes i n sp e c i f i c a t i o n s the Indian manufacturers had to conform to them at considerable cost to themselves and l i t t l e benefit o the consumers. Besides, some manu-facturers preferred imported materials even when these 94 were indigenously available at reasonable prices. Thus, the development of a n c i l l a r y industries was slow. Of course, factors l i k e the general lack of i n d i ^ genous equipment, s c a r c i t y of managers, lack of s k i l l e d labour and others led to large imports from abroad but the fact also i s that the foreign investor normally has a dir e c t i n t e r e s t i n supplying equipment and know-how; i s almost always i n charge of the technical operations of the j o i n t venture; i s not very keen to import s k i l l s or development information, and may not want to introduce equipment that can be e a s i l y copied. Hence, instead of making e f f o r t s towards import substitution, he over-imports. Duplication of Technology The desire to import technology at a fast pace produced two r e s u l t s : the industry became import-oriented as opposed to development of indigenous know-how; and the sit u a t i o n became aggravated by the foreign collaborator's reluctance to give the complete know-how. International giants naturally t r i e d to take advantage of their techno-l o g i c a l monopoly. Local private c a p i t a l was discouraged from developing research i n industry because the government seemed so keen to import technology. 95 The emphasis on imported technology i n h i b i t i n g l o c a l i n i t i a t i v e can be seen by an example. An Indian firm had completed arrangements to manufacture b a l l -30 bearings and roller-bearings. Machinery had been copied and t r i a l s completed when news came of collaboration by another firm with a well known foreign firm. Knowing how d i f f i c u l t i t would be to compete with an i n t e r n a t i o n a l l y known brand, the firm entered into an agreement for techni-cal collaboration with another foreign firm only to acquire the use of i t s trade mark. Thus, the Indian firm was forced to purchase superflous rights and also the technique was duplicated within the Indian industry through additional, competitive and costly purchases abroad rather than through dissemination of the technical know-how by the o r i g i n a l importer. E f f o r t s to Augment Capital In i t s anxiety to augment' i t s foreign exchange resources, investment's were allowed i n low-priority spheres on promise of export of a proportion of the product or to bring i n a quantity of foreign exchange. It led to i n s i s -tence on collaboration with foreign c a p i t a l as a normal precondition to obtaining a licence. R e s t r i c t i v e provi-sions i n the transfer of know-how were tolerated. Plants were set up by the government which were very c a p i t a l -96 intensive thus imposing a similar structure on private plants. Further, foreign experts were in v i t e d at prohi-b i t i v e fees when equally suitable or even more suitable l o c a l ones were available. In many cases, foreign credits were available only i f the foreign design was also taken and foreign consultancy was accepted. Monetary Costs Various studies of foreign investment i n post-independence India have pointed out that foreign private investment i s expensive for a country l i k e India. Accord-ing to a few studies of the Reserve Bank, the American firms were earning an average of 13.5% of net worth i n 1953 and 12.8% i n 1955 after tax compared with 10-12% at home in both years. B r i t i s h firms earned 11.9% and 9.5% i n the two years compared with 8-9% at home-. Thus, p r o f i t s were between 6 and 35% higher i n India than at home for these 31 fxrms. To this has to be added high cost of know-how, licences and such l i k e . Studies made by US Departmetn of Commerce, Federa-tion of Indian Chamber of Commerce and Industry and Indo-American Chamber of Commerce show that foreign investment in India i s as p r o f i t a b l e as foreign investment i n indus-t r i a l l y developed nations. A FICCI study dealing with twenty-five large public limited Indo-UK ventures, with 97 a minimum c a p i t a l investment of Rs.5 m i l l i o n revealed that between 1975 and 1980, the t o t a l assets of these companies rose by an average rate of 14.2%, the net sales increased by 14%, p r o f i t s after tax were 20.4%, net p r o f i t s as percentage of net worth increased from 14.1% to 17.1% and dividends as percentage of share c a p i t a l 32 increased from 12.3% to 14.9%. A study of Indo-American Chamber of Commerce of 34 Indo-US ventures for the period of 1973 to 1981 showed a compound annual growth rate of 18%; net p r o f i t s after tax 20.3%; dividends were 14.8% and retained earnings were 22.8%. Another study conducted by US Department of Commerce shows that US companies i n India have earned better returns than 34 those operating i n some advanced countries l i k e Canada. The high p r o f i t s are because of the protection given by the government to i t s industries whethercforeign or domestically owned. The expensive nature of foreign equity 35 investment has been demonstrated thus by Kust. Accord-ing to his figures, i t i s possible to get a 400% return on equity, investment in ten years. The rapid rate of growth and high rate of dividends do not create a problem as far as domestic equity investment i s concerned. But foreign 98 equity investment does pose a problem. India, as a policy, allows free remittance of p r o f i t s and r e p a t r i a t i o n of c a p i t a l gains to foreign enterprise. Therefore, for every d o l l a r invested, the return i n ten years can be upto f i v e d o l l a r s . On the other hand, a one-year loan at 6% intere s t would require a foreign exchange repaymetn of $1.60 for every $1. It i s argued that earnings on foreign c a p i t a l are reinvested and thus benefit the economy. But p r o f i t s i n rupees generate the potential 5:1 foreign exchange o b l i -gation. Even i f the inter e s t rate i s 10%, the foreign exchange repayment burden would be $2 for every $1 invested i n ten years. Such a burden which i s incurred by foreign equity investment i s only j u s t i f i e d when the investment brings with i t c a p i t a l goods and technology needed by the country. Unemployment Foreign investments are ca p i t a l - i n t e n s i v e and this has a dampening e f f e c t on the creation of new jobs. But they may be more e f f i c i e n t and so their pattern i s followed by indigenous firms thereby increasing the o v e r a l l loss of jobs. When such investments are i n consumer goods indus-t r i e s , two contrary processes are set in motion. Traditonal producers are weakened because of mass production of cheap goods so gradually they become unemployed. On the other hand, technologically-intensive investments i n modern indus-99 t r i a l sector push up s k i l l e d wage rates and so b u i l d up further pressure i n favour of ca p i t a l - i n t e n s i v e , labour-displacing investmetn. Thus, a small number of people become high wage earners while at the same time, unemploy-ment increases i n the towns. The displaced r u r a l labour which had before been engaged i n the production of t r a d i -t i o n a l goods also migrates to towns, being displaced from their t r a d i t i o n a l employment and adds to the unemployed work force which makes the s i t u a t i o n explosive. Under and Over-Invoicing The value of many investments was i n f l a t e d by mark-ing up the prices of goods or materials or services supplied as investment i n kind. This was done mainly for two reasons: a foreign collaborator might want to exaggerate the "necessary" import content of the project so that he could get a c o n t r o l l i n g i n t e r e s t i n i t ; or he might not wish to reveal his r e a l l e v e l of p r o f i t s and so he might manipulate the value of his other payments. This leads to leakage of foreign exchange which the country cannot afford. This was the subject of a study on the Leakage 3 6 of Foreign Exchange through Invoice Manipulation which was considered before the enactment of Foreign Exchange  Regulation Act, 1973. 100 Foreign Exchange Regulation ACt, 1973 (FERA, 19 73) Exchange control was f i r s t set up i n India i n 1939 as a war measure to conserve and d i r e c t to the best uses the limited supply of foreign exchange available. The exchange control was made e f f e c t i v e through a series of rules under the Defence of India Act, 1939. These rules expired on 30th of September, 1946, but were retained in force for another six months. However, since i t was f e l t that the shortage of foreign exchange would continue, i t became necessary to continue the system of exchange control. Thus, the Foreign Exchange Regulation Act was enacted on March 25, 1947, to continue the exchange controls. The Foreign Exchange Regulation, 1947, had to be amended from time to time to meet the changing needs. It was f i n a l l y f e l t necessary to have clear provisions to regu-late the entry of foreign c a p i t a l which would incorporate Government's policy with regard to foreign investment. As mentioned before, at the time of enacting, FERA, 1973, the Government took into account the report of the study team which studied the question of the Leakage of Foreign Exchange through Invoice Manipulation. It also had before i t the 47th Report of the Law Commission on the T r i a l and 37 Punishment of Social and Economic Offences. 101 The problems as stated by the study team was the loss of foreign exchange, which the country could i l l afford, through invoice manipulation, smuggling, travel and nest-eggs abroad. The study team estimated that loss of foreign exchange per year was approximately 240 m i l l i o n 3 8 d o l l a r s . Most members of Parliament f e l t that this was 39 a gross under-estimate. One of the main objects of the Foreign Exchange Regulation Act, 1973 was "to regulate the entry of foreign c a p i t a l in the form of branches and con-40 cerns with substantial non-resident interest in them..." This was done mainly by section 29 of the Act. Salient Features of Section 29 According to section 2 9 ( 1 ) ( i i i ) , (i) any person resident outside India whether a c i t i z e n of India or not, or ( i i ) any person resident i n India but not a c i t i z e n of India, or ( i i i ) a company other than a banking company not incorporated i n India; or (iv) a company i n which the non-resident int e r e s t i s more than 40% or (v) any branch of such a company; cannot, except with the general or special permission of the Reserve Bank carry on i n India, or estab-l i s h i n India a branch, o f f i c e or other place of business for carrying on any a c t i v i t y of a:trading, commercial or i n d u s t r i a l nature other than an a c t i v i t y for the carrying 102 on of which permission of the Reserve Bank has been 42 obtained under Section 28. The above-mentioned category of "persons" cannot 43 under Section 29(1)(b) acquire the whole or any part of any undertaking i n India of any person or company carrying on any trade, commerce or purchase the shares i n India of any such company except with the permission of the Reserve Bank. Those."persons" who had already established "busi-nesses" of the kind mentioned i n Section 29(1) were under 44 Section 29(2) required to apply for permission from the Reserve Bank to carry on the a c t i v i t y within six months or such further period of time as may be allowed by the Reserve Bank within six months of the commencement of the Act. The Reserve Bank can after making such enquiries as i t may deem f i t , either reject the application or allow i t subject to such conditions, i f any, as i t may think f i t to impose. However, no application can be rejected without giving the-concerned parties a reasonable opportunity for 45 making a representation i n the matter. 103 Where an application i s rejected by the Reserve Bank, the concerned party i s to discontinue the a c t i v i t y within ninety days or such other l a t e r date as may be spe c i f i e d by the Reserve Bank from the date of receipt of the communication conveying the r e j e c t i o n . 4 ^ Where no application had been made for permission to continue the " a c t i v i t y " within six months of commence-ment of the Act, the Reserve Bank may d i r e c t the discon-tinuation of closure of the a c t i v i t y within a period speci-f i e d i n the d i r e c t i o n by the Reserve Bank. But no such d i r e c t i o n could be made without giving the concerned party 4 7 a reasonable opportunity to make a representation. The Reserve Bank may exempt some "persons" from the necessity of seeking permission to carry on an " a c t i v i t y " or to commence i t for which permission or licence has been granted by the Central Government before the commencement of the Act, provided the a c t i v i t y i s not "solely of a trad-..48 ing nature." Where any such "person" referred to i n Section 29(1) held any shares of any undertaking i n India carrying on any trade, commerce or industry then within six months from the commencement of this Act or any further period of time s p e c i f i e d by the Reserve Bank, permission has to be obtained from the Reserve Bank before these shares can continue to be h e l d . 4 9 1 0 4 The Reserve Bank can on application and after mak-ing such i n q u i r i e s as i t may deem f i t , give permission to hold the shares subject to such conditions i f any as i t may think f i t to impose. Or the Reserve Bank may reject the a p l i c a t i o n but not without giving the concerned parties a reasonable opportunity to make a representation i n the 5 0 matter. Where no application has been made seeking permission to hold the shares, the Reserve Bank may d i r e c t the "person" to s e l l or procure the sale of those shares i f i t considers i t necessary for the purpose of conserving foreign exchange. But no such d i r e c t i o n can be given to the "person" unless a notice of such a d i r e c t i o n has been given to the person for a period at least ninety days.^"*" Thus, the Reserve Bank has been given very wide powers for regulating the multinationals. But such wide powers to the executive without guidelines can be fraught with danger. Hence, Section 29 cannot be read without the elabo-rate guidelines for i t s implementation.. Guidelines for Administering Section 29 of FERA, 1973 Scope: The Guidelines apply to Indian companies having more than 4 0 % foreign holdings and branches of foreign companies operating i n India and seeking approval for carry-105 ing on any a c t i v i t y of a trading, commercial or indus-t r i a l nature or for s t a r t i n g fresh a c t i v i t i e s . The Guide-li n e s do not apply to investments made by non-resident of Indian o r i g i n provided that they do not repatriate either 52 c a p i t a l or p r o f i t s or dividends. Companies with more than Forty Percent Shareholding: In case of Indian companies which have more than 40% foreign shareholding and branches of foreign companeis which are engaged-in production of items s p e c i f i e d i n Appendix I of Industrial Licensing Policy of February 1973 or are engaged in a predominantly export-oriented industry, i . e . at least 60% of their t o t a l production i s for export, one of the following courses of action i s to be followed with regard to them. They can be allowed to continue provided they increase the Indian p a r t i c i p a t i o n to not less than 26% of the equity within s p e c i f i e d time. Branches of foreign com-panies were required to convert themselves into Indian com-panies with at least 26% Indian equity p a r t i c i p a t i o n within a s p e c i f i e d period of time. Such companies are to be subject to d i l u t i o n formula when they came up for examination. Those Indian companies which had more than 40% foreign shareholding but which had been granted i n d u s t r i a l licence after February 1970 for manufacture of items s p e c i f i e d i n 54 Appendix I of the Industrial Licensing Policy, 1973 , or at least 60% of whose production was for exports, were exempt 106 from section 29 subject to the condition that within a spe c i f i e d period, the company would have Indian p a r t i -cipation of at least 26% of the equity of the company. The extent of foreign holding in case of Indian companies with more than 40% foreign shareholding and branches of foreign companies with v a l i d i n d u s t r i a l licence, engaged i n the production of an item not s p e c i f i e d i n Appendix I of the Industrial Licensing Policy, 1 9 7 3 , but engaged i n manufacturing a c t i v i t i e s requiring sophisticated technology are to be considered i n d i v i d u a l l y subject to the condition that within a s p e c i f i e d period the Indian p a r t i c i p a t i o n i s brought up to at least 26% of the equity of the company. The branches of foreign companies are required to convert themselves into Indian companies and bring the Indian p a r t i c i p a t i o n to at least 26% of the equity holding of the company within a s p e c i f i e d period. In determining whether the technology i s s o p h i s t i -cated, the Department of Science and Technology i s , of course, be consulted but also consideration i s to be given to whether the company i s using the technology to manufac-ture products which would otherwise have to be imported; or whether the discontinuation of the manufacture of that 107 product would have an adverse impact on the company. Indian companies having more than 40% foreign share-holding and branches of foreign companies engaged i n ofher manufacturing a c t i v i t i e s would be required to bring down the foreign shareholding to the l e v e l of 40% or less within a s p e c i f i e d period. Branches of foreign companies would be required to convert themselves into Indian companies with foreign shareholding not exceeding 40% within a spec i f i e d period. A l t e r n a t i v e l y , they could change the i r character within a s p e c i f i e d period and s h i f t to manufacturing a c t i -v i t i e s s p e c i f i e d i n Appendix I of the Industrial Licensing Policy, 1973 or become predominantly export-oriented, that i s , export at least 60% of the t o t a l production. Trading A c t i v i t i e s " ^ Indian companies with more than 40% foreign share-holding or branches of foreign companies engaged predomi-nantly i n in t e r n a l trading and commercial a c t i v i t i e s , the course of action would be as follows: No fresh foreign equity p a r t i c i p a t i o n would be permitted. The Indian companies would have to bring down their foreign shareholding to 40% within a s p e c i f i e d period. The branches of foreign compa-nies would be required to convert themselves into Indian companies with not more than 40% foreign shareholding within a s p e c i f i e d period. In cases where the company had 108 developed expertise, s k i l l s or f a c i l i t i e s l i k e a d i s t r i b u -tion network which were not available r e a d i l y indigenously and were contributing s i g n i f i c a n t l y to exports, foreign shareholding of more than 40% but not exceeding 74% could be allowed depending on the merits of each case. Alternatively, within a s p e c i f i e d period, they could change their character from predominantly trading a c t i v i -t i e s to predominantly manufacturing a c t i v i t i e s i n areas sp e c i f i e d i n Appendix I of In d u s t r i a l Licencing Policy of 1973, or engage themselves i n predominantly export-oriented industries exporting at least 60% of their production. In case none of these options were acceptable, the company would be allowed to wind up within a reasonable time. Where there were manufacturing Indian companies with more than 40% foreign shareholding or branches of foreign companies engaged i n trading a c t i v i t i e s i n respect of products not manufactured by them, they would not be denied permission to continue the int e r n a l trade of those products, provided the a r t i c l e s so traded were fu n c t i o n a l l y related to the company's main manufacturing a c t i v i t i e s and constituted a r e l a t i v e l y small portion of the o v e r a l l a c t i v i t y . The companies could not use their trade marks or brand names 109 i n respect of products i n t e r n a l l y traded by them but not manufactured by them. 56 Other A c t i v i t i e s Companies engaged i n construction a c t i v i t i e s and consultancy work, Indian companies have to bring down foreign shareholding to not more than 40%. Branches of foreign companies have to convert themselves to Indian com-panies with not more than 40% foreign shareholding. In exceptional cases, the higher foreign shareholding not exceeding 74% could be allowed. Tea plantations would be treated at par with manufacturing industries s p e c i f i e d i n Appendix I of Industrial Licensing Policy, 1973, subject to the condition that Indian p a r t i c i p a t i o n was not less than 26% of the equity of the company. Branches of foreign companies would have to convert themselves to Indian com-panies with at least 26% Indian equity p a r t i c i p a t i o n . 5 7 The Explanatory Notes c l a r i f y that i n giving fresh approvals, aspects such as research and development i n i t i a -ted by the Indian company, sti p u l a t i o n s which r e s t r i c t transfer of technology from the foreign collaborator to the Indian company, r e s t r i c t i o n s on sub-licensing of techno-logy and s t i p u l a t i o n s for the a c q u i s i t i o n of raw materials and components from the foreign collaborators and ex i s t i n g regulations i n respect of patent law are to be considered. 110 Where a company has many a c t i v i t i e s , then a l l the a c t i v i t i e s have to be considered while giving i t permis-sion to continue to do i t s business. Companies changing their a c t i v i t i e s would s t i l l need to get i n d u s t r i a l l i c e n -ces for the new a c t i v i t i e s . Companies with 100% export-oriented units could be allowed more than 74% foreign equity depending on the merits of each case. Thus, the import of section 29 read together with the guidelines i s that the normal c e i l i n g for foreign equity ownership was 40% of the t o t a l equity c a p i t a l . A higher percentage of equity ownership by the foreigner investor -- upto 74% o f even 100% -- can be allowed i f the venture i s i n a sector which i s considered extremely important or which i s larg e l y or wholly export-oriented. Therefore, the country has to f i n d a venture very essential for i t s development or the venture must pay for i t s e l f through exports before foreigner ownership i s allowed. The foreign share has to be contributed by way of cash without being linked to imports or machinery and equipment or payment of know-how, trade-marks or brand names. O i l Exporting Developing Countries R e a l i t i e s of l i m i t a t i o n of foreing exchange resources have led the government to evolve methods of augmenting I l l these resources. This has been done by encouraging invest-ments by O i l Developing Countries, by non-resident Indians and by persons of Indian, and by a c t i v e l y promoting exports. Foreign investment i n India has been seen mainly as a vehicle for transfer of technology. So upto 1980, generally speaking, foreign investment not accompanied by transfer of technology was not allowed but the need for c a p i t a l and foreign exchange led to the relaxation of this p o l icy with respect to O i l Exporting Developing Countries (OEDC). A press note issued on October 28, 1980 by Ministry 5 8 of Finance allowed OED countries to invest upto 40% i n equity of new ventures without being linked to transfer of technology. That i s because these countries have large f i n a n c i a l resources but may not have the type of technology needed for India. Investment i n p r i o r i t y areas l i k e f e r t i -l i z e r s , cement, petrochemicals, paper and pulp and others involve large f i n a n c i a l outlays but their development leads to greater s e l f - s u f f i c i e n c y and even encourages exports. Within the framework of investment, the OED countries can invest upto 40% i n the equity of new or established companies, but these companies should either be export-oriented or should undertake manufacturing a c t i v i t i e s covered under Appendix I of Industrial Policy of 1973. Investment of this nature i s also allowed i n hotels and hospitals on 112 the condition that the hospital.: musthave adequate provi-sions for out-patient and emergency medical service to the general public and should provide for a minimum percentage of occupancy by Indians. Non-Resident Indians and Persons of Indian Origin Another exception to the policy of foreign invest-ment linked with transfer of technology i s the investment 59 made by non-resident Indians and persons of Indian o r i g i n . Non-resident Indians are those who stay abroad for employment or business, but are s t i l l Indian c i t i z e n s . Persons of Indian o r i g i n are those who have acquired foreign c i t i z e n -ship. Very l i b e r a l f a c i l i t i e s have been given to them to invest i n industry i n India with the prior approval of the Reserve Bank of India. Various types of investment can be made by them: Direct Investment Non-residents of Indian n a t i o n a l i t y or o r i g i n can invest i n any new or exi s t i n g company i n which the non-resident i n t e r e s t i s not more than 40% with f u l l r e p a t r i a -tion benefits. The investment can be through public issues or otherwise. In case the investment i s i n a private limited company or i n a public limited company where c a p i t a l i s raised other than through the issue of prospectus, non-residents can invest upto 40% of the new c a p i t a l issues 113 subject to a c e i l i n g of Rs.4 m i l l i o n . They can invest upto 14% of the equity c a p i t a l of a company i n any industry l i s t e d i n Appendix I to the Ministry of Industry Press Note dated 2nd February, 1973 as amended on 21st A p r i l , 1982. Such an investment can also be made i n hotel industry and i n export-oriented indus-t r i e s . P o r t f o l i o Investment Non-residents and persons of Indian o r i g i n can make p o r t f o l i o investments with f u l l r e p a t r i a t i o n benefits pro-vided (i) shares are purchased through stock exchange; ( i i ) i n any one company the non-resident investor does not exceed 1% of paid up equity c a p i t a l of the company; and ( i i i ) payment for the investment i s made either by fresh investment from abroad or from funds i n the investor's non-resident external account. There i s , however, a l i m i t of 5% on the holdings allowed to non-residents of Indian o r i g i n in the Indian companies bought through the stock exchange with or without r e p a t r i a t i o n benefits. Beyond 5%, prior approval of Reserve Bank i s necessary. If investment i s desired without right of re p a t r i a -tion, i t could go upto 100% of the issued c a p i t a l of a company provided payments are made from abroad or from the non-resident external account. A l l f a c i l i t i e s of d i r e c t 114 and p o r t f o l i o investments available to non-resident Indians and persons of Indian o r i g i n are available to overseas com-panies, partnership firms, trusts, registered s o c i e t i e s and other corporate bodies i n which the ownership inte r e s t of non-residents of Indian n a t i o n a l i t y or o r i g i n i s 60% or more. Free Trade Zones Another e f f o r t to augment foreign exchange resources 6 0 i s seen i n the establishment of free trade zones. Two such zones have been established i n India, one in Kandla and i n the State of Gujarat, known as the Kandla Free Trade Zone (KAFTZ) and another at Santa Cruz (Bombay) known as the Santa Cruz Export Processing Zone (SEEPZ). Four more free trade zones are being set up in the States of West Bengal, Tamil Nadu, UP and Kerala. They w i l l be i n Falta, Madras, NOIDA and Cochin respectively. Industrial units in these zones are meant to be wholly export-oriented units though the Government has allowed these units as an addi-t i o n a l incentive, to s e l l 25% of their output i n domestic market. Investment f a c i l i t i e s and incentives are available in these zones l i k e s i m p l i f i e d procedures and single point of clearance; no import duties or import licence required 115 for c a p i t a l goods, raw materials, components and other items imported for export processing; products manufactured in these zonea are exempt from Central Excise duties and other l e v i e s ; a l l goods supplied to these zones from the rest of the country are treated as exports and are e l i g i b l e for export benefits given to the supplier. In addition, complete tax holiday i s given to units i n these zones for a period of f i v e years. Indians, non-resident Indians, persons of Indian o r i g i n and foreigners, can a l l invest in these zones. Foreign units with 100% foreign owned equity or j o i n t ventures with majority foreign equity can be permitted ian these zones. In KAFTZ, investments i n purely trading and commercial a c t i v i t i e s i s also permitted. Provisions which prohibit foreign investment i n certain types of industries where foreign know-how and c a p i t a l are not considered necessary, do not apply to KAFTZ. Free re p a t r i a t i o n of p r o f i t s and c a p i t a l i s allowed from these zones. Impact of Section 29 FERA, 1973, and esp e c i a l l y section 29, led to uncer-t a i n t i e s i n the climate of investment to begin with, but out of 877 FERA companies only Coca-Cola and IBM chose to move out. However, the unloading of shares by the FERA companies seems to have led to some unexpected and uninten-61 ded r e s u l t s . Far Eastern Economic Review reported a 116 a scramble for shares of FERA companies by Indian business-men abroad. The general modus operandi was to have a loy a l l o c a l man, a foreign c i t i z e n , to incorporate a company abroad or to take majority shares i n a foreign company which acts as a front organisation to buy the shares of the FERA company. The financing i s done by the Indian businessman by over-invoicing and under-invoicing of imports and exports. 6 2 Another report i n the Far Eastern Economic Review focussed on the tussle among business houses for control of these FERA companies. Many major business groups wanted the shares transferred en bloc while most of the companies opted for public issue of shares. They f e l t that once these houses got a toehold i n the company, they would expand their control. Also, they did not want to l e t them into their executive management. Of course, the public issue did not guarantee that the big business houses would not get a hold but at least i t made i t harder. The requirements of section 29 c e r t a i n l y brightened the c a p i t a l market. The FERA companies, as they came to be c a l l e d , were faced with the options (1) transfer the required shares to the Indian shareholders, or (2) issue new c a p i t a l . Most of them were expected to complete the process of d i l u t i o n of shareholding by the end of 1978. Many came out with public issues. But a large number of 117 them chose to a l l o t a fixed number of shares to public f i n a n c i a l i n s t i t u t i o n s l i k e the Unit Trust of India and L i f e Insurance Corporation of India. They f e l t that this would make the companies more secure against any dr a s t i c government action. jCoca^Cola Case Coca-Cola Export Promotion Corporation, 100% Ameri-6 3 can-owned, chose to wind up. It refused both, to d i l u t e i t s equity holdings and to transfer i t s technical know-how to Indian b o t t l e r s . When notice was served to i t under FERA, i t s headquarter i n Atlanta, Georgia, responded with an offer-" to reduce i t s equity i n i t s Indian subsidiary to the l e v e l required, but i n s i s t e d that i t had to maintain an American-controlled l i a i s o n o f f i c e to protect i t s trade secrets and to ensure the qu a l i t y of the bottled drinks sold. These conditions were not acceptable to India, because they violated the guidelines set down for transfer of techno-logy to India according to which technical know-how must be f u l l y imparted to an Indian company which i s to take over the foreign concern. Coca-Cola understandably did not want to share i t s "concentrate" with others. It would be ruined i n other countries a l l over the world. George Fernandes, the then Minister for Industries, i l l u s t r a t e d Coca-Cola as a c l a s s i c 118 example of a multinational operating i n low p r i o r i t y but high p r o f i t area, s t i f f l i n g indigenous industry and caus-ing an outflow of precious foreign exchange instead of inflow. A few years before Coca-Cola actually wound up, the govern-ment had been cutting back i t s import licences which are linked with export performance. Between 1958 and 1976, Coca-Cola said that i t earned only R s . l l l m i l l i o n (about USS12.6 million) from exports;.: In 1977, the export sales were down to only Rs.180,000. The company was set up i n India i n 1950s with an investment of about Rs.660,000 i n cash, machinery and plant. B o t t l i n g companies were set up by private Indian investors a l l over the country so that Coca-Cola captured 10% of the market. Between 1958 and 1974, i t remitted Rs.68.7 m i l l i o n to US i n foreign exchange through imports, p r o f i t s , home o f f i c e expenses and service charges. It applied to remit another Rs.36.9 m i l l i o n making a t o t a l of Rs.105 m i l l i o n . Its export earnings i n the same period had been Rs.99.2 m i l l i o n so that there had been an outflow of foreign exchange. Such an outflow may be accepted with i n e v i t a b i l i t y i n high p r i o r i t y areas but not i n low p r i o r i t y areas l i k e Coca-Cola. This has been proved by subsequent development. The departure of Coca-Cola heralded a new era of growth i n domestic soft-drink manufacturing. 119 IBM Case The second foreign concern that wound up because of FERA was the US computer giant International Business Machines (IBM). 6^ It did not want the majority control of i t s marketing and maintenance to pass into Indian hands. Under FERA 1973, IBM was required to reduce i t s foreign equity holding from 100% to 40% by o f f e r i n g shares l o c a l l y . But giving concessions to New Delhi might break i t s mono-poly i n other countries. IBM t r i e d hard to re t a i n i t s Indian connection. It suggested that any company importing an IBM machine should have the option to either choosing wholly owned IBM off-shoot of some outside agency to carry out maintenance. The other compromise suggested was to s p l i t IBM India into two companies -- one of them with 100% IBM ownership carrying on export, marketing and maintenance, and the other, a 40% IBM holding i n charge of the company's service bureaux which process data from c l i e n t s who do not have their own computers. IBM also offered to support the growing technological development i n India by setting up a research centre and a f a c i l i t y for assembling and testing integrated c i r c u i t s cards and a measurement and analysis laboratory for el e c t r o n i c components. Both units were to be operated by government agencies. IBM also agreed to make selected IBM patents available to Indian organisations. 120 The offer was a t t r a c t i v e but the Indian government i n s i s t e d that requirements of FERA had to be met. It pointed out that the British-based International Computers Ltd., (ICL) had agreed to bring down i t s equity holding to 40%. While Coca-Cola i s a low-priority consumer item, IBM i s a major force i n high technology f i e l d . Qeustions were raised about how far this action was i n conformity with administration's avowed policy of foreign investment and collaboration i n selected f i e l d s where foreign techno-logy and know-how were needed. But the government pointed out that i t had neither asked Coca-Cola nor IBM to go. A l l i t had i n s i s t e d upon was that requirements of FERA be met. There were some important benefits derived from FERA. Many companies which were required to d i l u t e their 6 5 holdings d i v e r s i f i e d into other areas. WIMCO, a subsi-diary of a Swedish Company manufacturing safety matches, for example, after d i l u t i o n to 40% foreign equity d i v e r s i f i e d into manufacturing paper, chemicals, marine products, and processing of f r u i t s and vegetables. It also began promo-ting projects to produce high q u a l i t y seeds and seedlings 6 6 for quick growing trees. The Indian Tobacco Company, which was once a subsidiary of B r i t i s h America Tobacco, was o r i g i n a l l y only manufacturing cigarettes but d i v e r s i f i e d 121 after d i l u t i o n to production of paper, marine products 6 7 and constructing a chain of luxury hotels. Hindustan Lever, s t i l l holding 51% of foreign equity d i v e r s i f i e d from soaps and vegetable o i l s to chemicals l i k e phosphoric acid, caus-t i c soda, pesticides, gelatine and others. Thus, by the application of FERA, 1973, the manufacturing was strengthe-ned . Legal Implications of Section 29 and Pivotal Role of Reserve Bank of india D i l u t i o n of Equity Holding: The implications of d i l u t i o n of equity holding came to the fore i n the Needle 6 8 Industries Case. In this case, the foreign shareholder t r i e d to circumvent the d i l u t i o n of equity provisions of FERA and, i f that was not possible, to delay the d i l u t i o n of i t s equity holding for as long as possible. While the Coca-Cola and IBM cases tested the p o l i t i c a l w i l l to imple-ment FERA, Needle Industries Case was a test case i n court to see how s t r i c t l y these provisions would be enforced by the'judiciary. Needle Industries (India) Ltd. (NIIL) was a company incorporated i n India under the Indian Companies Act. It had been incorporated i n July 1949 as a wholly-owned subsidiary of Needle Industires (India) Ltd., Studley, England (NI Studley). Since then a number of changes had taken place i n the share ownership of the company so that by 1973 122 60% of NIIL was owned half by Coats and half by Newey. The remaining 40% were i n Indian hands mainly with Devagnanam group. With the coming of FERA into force on 1st January 1974, NIIL was required to bring down i t s non-resident interest from 60% to 40%. Some e f f o r t s at disinvestment were made but they did not succeed so i t was decided at the meeting of Board of Directors to issue rights shares in order to d i l u t e foreign equity holding. Rights shares means an issue of new shares by a company which are then offered on favourable terms to the ex i s t i n g shareholders of the company. At another meeting of the Board of Directors, the whole of the new issue of shares was a l l o -tted to the Indian shareholders. The majority went to the Devagnanam group. This led to the reduction of foreign shareholding to approximately 40% and an increase of Indian shareholding to about 60%. NIIL then sent a l e t t e r to the Reserve Bank informing i t that the d i l u t i o n of foreign equity holding had been done. The Holding Co., i n a p e t i t i o n i n High Court alleged that the Indian directors had abused their f i d u c i a r y posi-tion i n the company by issuing the shares at par ant a l l o t -ting the shares exclusively to Indian shareholders. They thus acted malafide i n order to gain i l l e g a l advantage for 123 themselves. It was also alleged that Devagnanam delibera-te l y delayed i n sending to the Holding Company the proceed-ings of the meeting at which i t was decided to issue shares at par; he also deliberately delayed i n giving notice of the meeting i n which the rights shares were to be a l l o t t e d . The Madras High Court upheld the contention as did the D i v i s i o n Bench on appeal. The Supreme Court, however, came to the conclusion that Devagnanam and his group had acted i n the best interests of NIIL i n the matter of issue of shares. They were under a legal compulsion to issue rights shares. In view of the provisions of section 29 of FERA, even i f the offer of the rights shares was made to the Hold-ing Company, i t could not have been accepted by i t . Further, the Holding Company also could not have renounced i t s portion of the shares i n favour of any other person because the a r t i c l e s of association of the company negated the right of renunciation. It was contended on behalf of the Holding Company that non-compliance with the conditin regarding the d i l u -tion ofnon-resident interest within i t s stipulated period could not have resulted i n the RBI d i r e c t i n g NIIL to close down i t s business or not to carry on i t s business. It was also argued that non-compliance with conditions imposed 124 for permission to carry on i t s business would not have exposed the Indian directors to any penalties or l i a b i l i -t i e s and that there was no provision which gave RBI any power to revoke the permission once granted. Therefore, even i f the conditions subject to which the permission was granted were not f u l f i l l e d , the business could not be made to close down. It;cwas argued that closing down a busi-ness which the RBI had at f i r s t allowed would have serious consequences, public and private. Why no power had been given to RBI to require the business to be discontinued even i f the conditions were not f u l f i l l e d . Where an a p p l i -cation under section 29(4)(a) for permission to continue to hold shares was rejected, section 29(4)(c) enabled RBI to d i r e c t non-residents to s e l l t heir shares or cause them to be sold. This was the only power that RBI had where a condition imposed under section 29(2) was not f u l f i l l e d . The Supreme Court f e l t i t s e l f unable to accept these contentions. The RBI gave permission to NIIL to carry on i t s business subject to certain conditions. Each of theose conditions may not have been of the same rigour or importance, e.g. condition regarding submission of quarterly reports in d i c a t i n g the progress made i n implemen-ting the other conditons could reasonably be relaxed by condonation of late f i l i n g . But the d i l u t i o n of non-resident 125 inter e s t i n the equity c a p i t a l of the company to a l e v e l not exceeding 40% within a period of one year from the date of receipt of l e t t e r was the very essence of the matter. A permission qranted subject to the condition that such d i l u t i o n s h a l l be affected would cease automatically on non-compliance with the condition at the end of the stipu-lated period or the extended period as the case may be. If the Holding Company's arguments were accepted, the granting of a conditional permission would become an empty r i t u a l . Whether or not the company performed the condition, i t would s t i l l be free to carry on i t s business. It was argued that the only sanction available to RBI was that i t could compel or cause the sale of the excess non-resident interest in the equity holding of the company under section 29(4)(c). This section, however, did not provide non-performance of conditions imposed under section 29(2)(c). Section 29(4)(c) provided for a s i t u a t i o n i n which an application for holding shares was rejected or was not made. If the conditions upon which permission to carry on business were not carried out, the only sanction could be that the business should not be allowed to con-tinue . Thus, unlike corporate giants l i k e IBM and Coca-Cola, the foreign shareholder i n the Needle Industries case t r i e d 126 to see i f i t could circumvent the provisions of FERA. The decision of the Supreme Court indicates that the Court was determined to ensure s t r i c t compliance with FERA as the . whole thrust of the Indian policy towards foreign d i r e c t , •! investment was that the ownership should be kept as far as possible i n Indian hands. Reasonable Opportunity, to Make a Representation The provisions of FERA give very wide powers to the Reserve Bank of India as a regulatory body of foreign d i r e c t investment. In order to ensure that these powers are not abused, section 29 requires that no application can be rejected without giving the applicant a reasonable opportunity to represent. 69 In Apee j ay ( P ) Ltd. , vs^ Union ojE India, the p e t i -tioner company entered into an agreement with Ludlow Jute Company Ltd., a non-resident company, to purchase i t s assets in India. According to the Agreement, Messrs. Ludlow were to work as caretaker for the petitioner company from 31st March, 1977, and the p e t i t i o n e r company was to get the requi-s i t e permission under FERA and any other rules and regula-tions i n force. The Reserve Bank of India directed the petitioner to take clearance from the Government of India for the 127 p r o p o s a l o f M e s s r s . L u d l o w t o t r a n s f e r t h e i r b u s i n e s s t o A p e j a y (P) L t d . The G o v e r n m e n t , on a p p l i c a t i o n , d i d n o t a p p r o v e t h e A g r e e m e n t . A c c o r d i n g t o S e c t i o n 2 9 ( 2 ) ( c ) o f FERA, 1 9 7 3 , b e f o r e any a p p l i c a t i o n f o r p e r m i s s i o n i s r e j e c t e d b y t h e R e s e r v e Bank, t h e a p p l i c a n t must be g i v e n a r e a s o n a b l e o p o o r t u n i t y t o make a r e p r e s e n t a t i o n . I n t h i s c a s e , t h e C a l c u t t a H i g h C o u r t h e l d t h a t t h e R e s e r v e Bank had f a i l e d t o e x e r c i s e i t s p o w e r s b e c a u s e i t had r e f e r r e d t h e p a r t i e s t o t h e C e n t r a l G o vernment s o t h a t , i n e f f e c t , t h e C e n t r a l G o v e r n m e n t h ad u s u r p e d t h e p o w e r s t o be e x e r c i s e d b y t h e R e s e r v e Bank. F u r t h e r , t h e Gove r n m e n t h ad g i v e n no r e a s o n s f o r r e j e c t i o n w h i c h must be g i v e n u n d e r s e c t i o n 29 t o e n a b l e t h e p a r t i e s t o make t h e i r r e p r e s e n t a t i o n s . The a p p l i c a n t c o u l d c h a l l e n g e t h e d e c i s i o n on g r o u n d s t h a t no r e a s o n s h a d b e e n r e c o r d e d ; o r t h a t t h e r e a s o n s g i v e n were i r r e l e v a n t , o r were c o l o u r e d b y p o l i c y o r e x p e d i e n c y . The a p p r o v a l o r r e j e c t i o n o f an a p p l i c a t i o n d i d n o t , t h e r e f o r e , d e p e n d on t h e s u b j e c t i v e s a t i s f a c t i o n or otherwise o f t h e a u t h o r i t i e s , b u t on an o b j e c t i v e c o n s i d e r a t i o n t a k i n g i n t o a c c o u n t a l l a s p e c t s o f t h e c a s e . Hence, t h e C a l c u t t a H i g h C o u r t s e t a s i d e t h e d e c i s i o n . 128 Permission of Reserve Bank of India The Needle Industries Case and the Apeejay Case established the Reserve Bank of India as the chief regula-tor of foreign d i r e c t investment i n India. The Supreme Court i n i t s interpretation of section 29 i n these two cases also indicated a determination to ensure s t r i c t 70 compliance with i t s provisions. In the Swraj Paul Case the question arose at what point of time was the foreign investor required to take the permission of the Reserve Bank; before the purchase or after the purchase of shares. Swraj Paul, a business magnate of Indian o r i g i n stationed i n London, bought shares i n the names of t h i r -teen foreign companies of Escorts (7.29% of the paid up capital) and 1,040,000 DCM shares (12.95% of the company's paid up capital) i n March 1983 through R.B. & Co., stock-brokers. The aim seems to have been to take control of these two companies. The applications for permission to purchase of these shares under section 29 of FERA were received by the Reserve Bank after the shares had been pur-chased i n March, but the permission to do so had not been obtained even by August 1983. The permission was only obtained on September 18, 1983. The Directors of Escorts refused to transfer the shares i n June 1983. On obtaining the permission from the Reserve Bank of India, R.B. & Co. 129 r e q u e s t e d t h e b o a r d o f d i r e c t o r s o f E s c o r t s t o r e c o n s i d e r t h e i r r e f u s a l t o r e g i s t e r t h e s h a r e s . L i f e I n s u r a n c e C o r p o r a t i o n ( L I C ) , a p u b l i c f i n a n c i a l i n s t i t u t i o n , t h e m a j o r i t y s h a r e h o l d e r i n E s c o r t s , t r i e d i t s b e s t t o p e r s u a d e t h e d i r e c t o r s o f E s c o r t s t o t r a n s f e r t h e s h a r e s t o S w r a j P a u l . When i t f a i l e d , i t r e s o r t e d t o r e q u i s i t i o n -i n g an e x t r a - o r d i n a r y g e n e r a l m e e t i n g (EGM) o f E s c o r t s f o r what t h e Bombay H i g h C o u r t i n a j u d g e m e n t d e l i v e r e d on November 9, 1984, c a l l e d a " c o l l a t e r a l p u r p o s e " , n a m e l y , t o u s e i t s v o t i n g s t r e n g t h t o o u s t n i n e o f t h e f i f t e e n d i r e c t o r s and t o r e p l a c e them w i t h n o m i n e e s o f f i n a n c i a l i n s t i t u t i o n s . T h i s , t h e c o u r t s a i d , amounted t o t a k i n g o v e r t h e company w h i c h t h e L I C c o u l d n o t do. U n d e r i t s A c t , i t c o u l d o n l y a c t t o p r o t e c t i t s own i n v e s t m e n t s w h i c h were i n no d a n g e r , o r t o p r e v e n t t h e company f r o m d o i n g a n y t h i n g a g a i n s t p u b l i c p o l i c y . The c o u r t u p h e l d t h e r i g h t o f t h e B o a r d o f D i r e c t o r s n o t t o r e g i s t e r t r a n s -f e r o f s h a r e s t o S w r a j P a u l and i t h e l d as i l l e g a l t h e r e m o v a l o f 9 p a r t - t i m e E s c o r t s D i r e c t o r s a t t h e i n s t a n c e o f t h e L i f e I n s u r a n c e C o r p o r a t i o n . The Bombay H i g h C o u r t a l s o h e l d t h a t u n d e r s e c t i o n 29(l_)_(b) o f FERA i t was m a n d a t o r y f o r a n o n - r e s i d e n t i n v e s t o r t o g e t p r i o r p e r m i s s i o n o f t h e R e s e r v e Bank f o r t h e p u r c h a s e o f s h a r e s i n an I n d i a n company. Hence, E s c o r t s 130 were prohibited from r e g i s t e r i n g the transfer of the shares i n question and were j u s t i f i e d i n law i n refus-ing r e g i s t r a t i o n of the transfer of those shares. The Times of India of November 12, 1984, found i n Bombay High Court's judgement a stern indictment of government's brazen bid to promote a take-over of Escorts and of DCM by the Capro group oc companies controlled by Mr. Swraj Paul. The Supreme Court, i n i t s judgement of December 19, 71 1985, set aside the judgement of the Bombay High Court. The Supreme Court held that the permission of the Reserve Bank of India required by section 29 of FERA could be ex-post facto and conditional. Also, that foreign compa-nies whose more than 60% shares were owned by persons of Indian n a t i o n a l i t y or o r i g i n could a v a i l of the f a c i l i t i e s under investment schemes for non-resident Indians even i f the same group of shareholders figured in the d i f f e r e n t companies. The Court further held that the Reserve Bank of India was not g u i l t y of any mala fides i n granting per-mission to Swraj Paul's Caparo Group of Companies. It was also not g u i l t y of not applying i t s mind i n granting permi-ssion. The Union Government, too, was absolved of mala fi d e s . Thus, the Supreme Court once again established the Reserve Bank of India as the main regulatory agency of 131 foreign d i r e c t investment under FERA. Its decisions could not be l i g h t l y overruled. This judgement of the Supreme Court i s an attempt to create s t a b i l i t y i n investment environ-ment. Otherwise, companies would be tempted to fi g h t their corporate battles i n the court using provisions of FERA which could lead to an uncertain investment climate. Whereas i n the Needle Industries case the Supreme Court had shown a determination to ensure compliance of the foreign investor was not thwarted by the Indian business, the pro-visions of FERA could not be used by the Indian investor to prevent the entry of the foreign investor. Conclusions In India, foreign investment has been mainly looked upon as a vehicle for transfer of technology required by the country. The technology i s needed to develop the indus-t r i a l base of the country i n order to make less dependent on external resources and become more s e l f - r e l i a n t . That foreign investment i s regarded as an important means of achieving this objective i s evident by the fact that more than 7,000 foreign companies have entered into collaboration agreements with Indian firms for investment and transfer 72 of technology since 1957. FERA, 1973, has encouraged collaboration as opposed i. to the establishment of subsidiaries and branches of foreign 132 firms. By o r d i n a r i l y " l i m i t i n g the foreign equity i n a j o i n t venture to f o r t y per cent, i t has sought to achieve the policy objectives of the Government of India. It has given Indians an equitable share i n the p r o f i t s . It has also given them an e f f e c t i v e say i n the management and control of the investment while i t has at the same time made the foreign investor more aware and responsive to the national economic p o l i c i e s and aspirations. Further, i t has led, as we have seen, to expansion and d i v e r s i f i c a t i o n and thus to the strengthening of industry i n India. I n i t i a l l y , FERA 1973, acquired some notoriety c h i e f l y because the e x i s t i n g foreign companies were required to d i l u t e their equity holdings and because of the Coca-Cola and IBM cases. But the figures show that FERA 1973, has not been an unduly major hurdle i n way of foreign invest-ment. The number of foreign companies which have entered into agreement with Indian firms during the l a s t f i v e years 72 has increased as can be seen from the following table: (Foreign Companies in India) Thus we can say that FERA has not been unduly r e s t r i c t i v e . Table IV Cos . 267 526 389 590 673 1979 1980 1981 1982 1983 133 Further, the approach of the government has not been r i g i d . A higher percentage of equity has been allowed i n sophisticated high technology areas and i n export-oriented industries. In case 100% export-oriented companies, even 100% foreign equity can be allowed. Investment schemes l i k e those for OED countries and non-resident Indians together with the establishment of free trade zones with l i b e r a l investment f a c i l i t i e s show an e f f o r t to raise foreign c a p i t a l without losing sight of po l i c y objectives. The encouragement of the collaboration pattern as opposed to the subsidiary pattern has also made these ventures act as catalysts to the development of l o c a l 73 enterprise. Collaboration can be i n the form of one-time purchase of know-how where the drawings and sp e c i f i c a t i o n s are handed over to the l o c a l nationals for a fee. It also involves some tr a i n i n g for the l o c a l s . It i s , then, upto the l o c a l nationals to develop their industry as rapidly as possible so as to reduce th e i r dependence on the supply of foreign components. If this development i s slow, the foreign party benefits because i f can charge monopoly price for the components. The collaboration pattern has the advan-tage that the l o c a l manufacturer t r i e s to develop alternate indigenous sources of supply instead of paying the price demanded. The product so developed may not come to world standards for a time but i f there i s a large enough domestic 1 3 4 m a r k e t t o s u p p o r t t h e l o c a l m a n u f a c t u r e r e v e n i f h i s p r i c e s a r e h i g h , t o g e t h e r w i t h p r e s s u r e f r o m t h e g o v e r n m e n t f o r r a p i d i m p o r t s u b s t i t u t i o n , t h e i n d i g e n o u s a l t e r n a t i v e d e v e l o p s . B o t h t h e s e f a c t o r s a r e p r e s e n t i n I n d i a and h e n c e t h e d e v e l o p m e n t o f i n d i g e n o u s i n d u s t r y . C o l l a b o r a t i o n c a n a l s o be t h r o u g h e q u i t y p a r t i c i p a -t i o n w h i c h i m p l i e s an o n - g o i n g r e l a t i o n s h i p b e t w e e n t h e f o r e i g n i n v e s t o r and t h e l o c a l i n v e s t o r . The i n t e r e s t o f t h e f o r e i g n i n v e s t o r i s i n t h e p r o f i t s and i f t h e r e i s a l a r g e enough d o m e s t i c m a r k e t as t h e r e i s i n I n d i a , t h e f o r e i g n i n v e s t o r i s more l i k e l y t o d i v e r s i t y t h a n t o r e p a -t r i a t e a n d p u l l o u t . I n d i a , as we ha v e s e e n , h a s a l a r g e d o m e s t i c m a r k e t and i n v e s t m e n t i s p r o f i t a b l e . When t h e r e i s an i n s i s t e n c e on r e d u c i n g t h e e q u i t y h o l d i n g as u n d e r s e c t i o n 29 o f FERA, t h e f o r e i g n i n v e s t o r i s w i l l i n g t o do so and d i v e r s i f y b e c a u s e h i s r e t u r n s a r e h i g h . Of c o u r s e , t h e FERA p a t t e r n i s n o t p e r f e c t . I t h a s o f t e n b e e n p o i n t e d o u t t h a t i n j o i n t c o l l a b o r a t i o n s t h e r e a r e c h a n c e s o f c o l l u s i o n b e t w e e n t h e m u l t i n a t i o n a l c o r p o r a -t i o n and i t s l o c a l p a r t n e r . When s u c h a c o l l u s i o n t a k e s p l a c e t h e l o c a l p a r t n e r may n o t be w i l l i n g t o d e v e l o p s u b s t i -t u t e s b e c a u s e i n i t i a l l y t h e s e s u b s t i t u t e s a r e c o s t l i e r and i t t a k e s a l o t o f e f f o r t t o d e v e l o p them. The f o r e i g n i n v e s t o r a l s o t r i e s t o e n s u r e t h a t s u c h a s u b s t i t u t i o n 135 d o e s n o t t a k e p l a c e by r e j e c t i n g t h e l o c a l p r o d u c t on g r o u n d s o f q u a l i t y o r b y s u p p l y i n g i t s own c o m p o n e n t s c l o s e t o m a r g i n a l c o s t s . T h i s , o f c o u r s e , s u i t s t h e l o c a l m a n u f a c t u r e r . C o u n t e r - p r e s s u r e s d e v e l o p b e c a u s e o t h e r l o c a l m a n u f a c t u r e r s d e v e l o p t h e s u b s t i t u t e and c l a m o u r f o r g o v e r n m e n t p r o t e c t i o n w h i c h i n I n d i a , i s u s u a l l y p r o v i d e d . T h u s , o p p o s i n g i n t e r e s t g r o u p s a r e c r e a t e d . M u l t i n a t i o n a l s c a n p l a y a p o s i t i v e r o l e i n e c o n o -mic d e v e l o p m e n t t h r o u g h i m p o r t s u b s t i t u t i o n i f t h e f o r e i g n e x c h a n g e so s a v e d c a n be u s e d f o r t h e d e v e l o p m e n t o f i n d u s -t r i a l i n f r a s t r u c t u r e . G r o w t h i n s u c h a c a s e i s i n i t i a l l y s l o w e r t h a n i f m u l t i n a t i o n a l s were a l l o w e d f r e e e n t r y b u t i t i s a l s o a q u e s t i o n o f f o r e g o i n g g r o w t h i n t h e p r e s e n t f o r t h e f u t u r e b a l a n c e d g r o w t h . I t i s p o s s i b l e t o f o l l o w t h i s c o l l a b o r a t i o n p a t t e r n i n I n d i a b e c a u s e o f a s i z e a b l e d o m e s t i c m a r k e t w h i c h i n s u l a t e s t h e m a n u f a c t u r e r f r o m i m m e d i a t e p r e s s u r e t o e x p o r t . I t h a s a l s o b e e n a r g u e d t h a t s h o r t a g e s o f f o r e i g n e x c h a n g e h a v e s o m e t i m e s l e d I n d i a n c o m p a n i e s t o i m p o r t p l a n t and e q u i p m e n t o f o b s o l e t e d e s i g n . The c o n t e n t i o n i s t h a t i f s u b s i d i a r i e s o f m u l t i n a t i o n a l s had b e e n i n v o l v e d t e c h n o l o g y m i g h t h a v e b e e n more modern and p r o d u c t i o n more r a p i d . B u t t h e n t h e r e may n o t h ave d e v e l o p e d t h e h e a l t h y 136 s e l f - c o n f i d e n c e t o a b s o r b f o r e i g n know-how and i m p r o v i s e where n e c e s s a r y w i t h i n t h e f r a m e w o r k o f e x i s t i n g i n d i -g e n o u s f a c i l i t i e s . 137 Chapter IV CANADA AND FOREIGN INVESTMENT Factors shaping Canada's Foreign Investment Policy Canada, being b a s i c a l l y a resource based country with a large US investment which i s of fundamental importance to i t s economy, shares some of the concerns of developing countries due to a basic sense of insec u r i t y v i s - a - v i s USA, which i s a f r i e n d l y but a much larger and more power-f u l neighbour. Over and over again, the fear has been ex-pressed that since non-resident control i s centred mainly in one country., namely, the US, the Canadian economy w i l l gradually become so integrated with US economy that i t might eventually lead to economic domination and even loss of p o l i t i c a l ind'enpence"1" Canada has also been concerned with costs l i k e depletion of i t s natural resources; biases i n t r o -duced i n the i n d u s t r i a l development; truncation of industries and their stunted growth; transfer p r i c i n g ; external i n -fluences on public policy l i k e export and import r e s t r i c -tions on subsidiaries and e x t r a - t e r r i t o r i a l extension of US laws i n Canada. The e f f o r t has been to reap the benefits of US investment, minimize the costs, and- at the same time, maintain an independent i d e n t i t y . 138 Development of Economy i n Canada Canada's economic development has taken place p r i m a r i l y 2 through f o r e i g n investment. Major p r o j e c t s l i k e the b u i l d i n g of St. Lawrence Canal System, c o n s t r u c t i o n of r a i l w a y s a l l took p l a c e with the help of f o r e i g n c a p i t a l . I n i t i a l l y , investment was p o r t f o l i o investment. Before 1900, c a p i t a l was mainly imported from Great B r i t a i n . A f t e r 1900 more and more investment came from USA and i n the form of new d i r e c t investment. Grea£ B r i t a i n s t i l l remained the l a r g e s t s u p p l i e r of p o r t f o l i o debt. Between 1910 and 1926, however, the r o l e s changed and by 1926, most of p o r t f o l i o investment i n Canada was from USA. A f t e r 1945, c o u n t r i e s other than Great B r i t a i n and USA a l s o i n v e s t e d i n Canada, but the major investment remains from the USA. Fo r e i g n d i r e c t investment grew from $2.7 b i l l i o n or about 40% of f o r e i g n long-term investment i n 1945 to $15.9 b i l l i o n or about/60% of f o r e i g n long-term investment i n 1964. Of t h i s , US accounted f o r 12.9 b i l l i o n or 80%, 3 while UK f o r an a d d i t i o n a l $1.9 b i l l i o n or 12%. F o r e i g n ownership and c o n t r o l of c o r p o r a t i o n s l o c a t e d i n Canada i s c o n c e n t r a t e d i n manufacturing petroleum and n a t u r a l gas, and mining and s m e l t i n g . F o r e i g n ownership of Canadian manufacturing i n c r e a s e d s u b s t a n t a i 1 1 y from 38% i n 1926 to 54% i n 1963 and f o r e i g n c o n t r o l i n -creased even more from 35% i n 1926 to 60% i n 1963. 139 Foreign ownership and control of mining and smelting expanded from 37% i n 1926 and 62% i n 1963 i n the case of ownership and from 37% to 59% in the same period for control. In addition substantial petroleum and natural gas industry has developed and has absorbed large amount of foreiqn c a p i t a l . In 1963, o i l and natural gas industry was 64% foreign owned and 74% foreign controlled. Ownership and control by US residents increased s u b s t a n t i a l l y since 1926. US ownership of the above industries rose from 19% to 28% while ownership by other non-residents f e l l from 18% to 7%. The control increased from 15% to 27% while control by other no:n-re.sidents-rose from 2% to 7%. Within the manufacturing sector there were, certain industries where foreign control was very high and i n a l l such cases ownership was mainly by US residents. In 1963 foreigners controlled 9 7% of the c a p i t a l employed in{,:.tbe manufacture of automobiles> and parts, 97% i n rubber, 75% in chemicals and 77% i n e l e c t r i c a l apparatus. The corres-pondina figures for US control were 97%, 54% and 66%. Not only;was foreign eauitv c a p i t a l concentrated in c e r t a i n industries, but i t was also concentrated i n large corporation::! o In 1963, there were 414 corporations with assets greater than $25 m i l l i o n each and with assets t o t a l l i n g $37.0 b i l l i o n . Of t h i s , $19.9 b i l l i o n or 53% 140 of the t o t a l were i n firms which were more than 50% owned by non-residents .lin'-fi-rms wl'th assets of less than $25 m i l l i o n , $10.7 b i l l i o n or only 32% of the t o t a l $34.0 b i l l i o n of assests i n these firms were i n firms more than 50% owned by non-residents. Therefore, more non-resident invest-ment was i n large coporations, which, because of their size, could exercise great economic power and control 4 the market. Benefits and Costs The benefits of foreign d i r e c t investment have been indisputable to the Canadian economy.5 Foreign d i r e c t i n -vestment was accompanied by flow of technology and entre-preneurship. It increased production which i n turn led to new investment, domestic and foreign. This led to an addi-tion to Canadian income and part of that increase went to labour. I n d i r e c t l y , the Canadian economy benefited by technological transfer which la t e r became available to domestic entrepreneurs. But d i r e c t foreign investment imposed costs on Canadian economy. The major part of US di r e c t investment was i n manufacturing firms. Often, US d i r e c t investment occurred because there was a r e l a t i v e l y high rate of growth i n a p a r t i c u l a r sector of the economy -- to begin with exploitation of natural resources. In the 1890s there was a large amount of American investment i n mining companies because of the rapid rate of growth of output i n the newly discovered mines. 141 Between October and December 1895, 35 US Mining companies were formed compared to 52 Canadian companies. When American f i r m s were c r e a t e d i n Canada f o r e x p l o i t a t i o n of n a t u r a l r e s o u r c e s , they were o f t e n responding to simple economic s t i m u l i of o b t a i n i n g n a t u r a l resources - at lower.. c o s t s and e n s u r i n g t h e i r steady supply by c o n t r o l l i n g .t them. These companies d i d not seem to r e c o g n i z e any other i n t e r n a t i o n a l boundaries except f o r b a r r i e r s to trade l i k e exchange r a t e s and t a r i f f s . T h i s had i t s own con-sequences. For example, there c o u l d be a mining company i n Canada, but i t s main r e f i n i n g c a p a c i t y would remain i n USA. T h i s happened i n the case of I n t e r n a t i o n a l N i c k e l Company which sprange from the merger of two f i r m s o p e r a t i n g i n Canada. T h e i r r e f i n e r y was l o c a t e d i n New J e r s e y . ^ T h i s was because t h e i r i n i t i a l r e f i n e r y was a l r e a d y l o c a t e d there. The only other major company i n the copper-n i c k e l i n d u s t r y was B r i t i s h and i t s r e f i n e r y c a p a c i t y was l o c a t e d i n Great B r i t a i n . T h i s f r u s t r a t e d attempts to s t i m u l a t e l a r g e manufacturing c a p a c i t y . F u r t h e r , s i n c e expansion i n t o Canadian resource s e c t o r s was o f t e n based on an attempt to c o n t r o l resources and thereby to ensure a flow of them to an i n d u s t r y i n US at r e l a t i v e l y low and s t a b l e p r i c e s , there was no reason f o r these f i r m s to develop l a r g e manufacturing i n Canada. 142 Even when manufacturing develops large foreign control over manufacturing industries can lead to certain biases. When the parent company, for example, i s located elsewhere, i t i s usually the parent company that undertakes research and development. While i t may be more e f f i c i e n t for the economy as a whole to import new technology through multinationals, i t i s necessary to develop one's own research and technology because when neither the parent company rfor the branch i s 'domestically controlled, i f for some reason the new tech-nology i s not re a d i l y available, the emergence of high-tech industries can be dampened. It can also lead to "brain-drain", that i s , s k i l l e d s c i e n t i s t s and technocrats can move out of the country to other countries where there are better research f a c i l i t i e s . Also, when one country becomes a major investor i n another country, the two economies get inex t r i c a b l y t i e d together, the case, for example, of Canada and USA and this i s bound to affe c t the smaller economy. The US t a r i f f s , for example, had a great influence on Canadian industry. They were very low for i n d u s t r i a l materials i n their raw form or i n an early stage of processing and became progressively higher on goods at a more advanced stage of manufacture. The re s u l t was that Canada could not produce fine paper economically and export i t to USA; base metals, too, could not be sent i n a more highly refined 1 4 3 or fabricated form to US; and Canada could not compete in the US markets with some of the chemicals that could be produced from o i l and natural gas. There was, thus a stunting e f f e c t of the US t a r i f f s on Canadian industry. Again, in the 1960s forced r e p a t r i a t i o n of dividends placed a s t r a i n on Canada's economy which was d i r e c t l y related to Canada's foreign indebtedness. When i n addition there i s p o r t f o l i o invesment, too, the interest payments have also to be made no matter what the state of economy. The t h i r d problem i s the loss of tax revenue which may occur because of the presence of a large number of subsi-d i a r i e s , e s p e c i a l l y from one country so that i t becomes d i f f i -c u l t to take regulatory action. The subsidiaries s e l l to other subsidiaries or to the parent across the national boundary. Multinationals pay tax on their p r o f i t s i n Canada but by transfer p r i c i n g or manipulating the cost of services provided, p r o f i t s can be transferred to places where corporate p r o f i t s tax rate i s lower, that i s to tax havens. The larger and more d i v e r s i f i e d the multinational investment, the more can be lo s t i n taxes, so that the economy suffers and control i s also l o s t . The l a s t cost and the most d i f f i c u l t to a r t i c u l a t e i s perceived as loss of sovereignty over public policy, that i s , the a b i l i t y to take decisions i n national interest unhampered by the influence of another country. The United 144 States openly accepts through l e g i s l a t i o n l i k e the Trading  with the Enemy Act that i t has e x t r a t e r r i t o r i a l power over US-owned companies and elsewhere and that these companies are required i n their a c t i v i t i e s to conform to US law. The Act i s believed to have forced many US-controlled companies to forego potential export sales to many countries with whom Canada has f u l l and c o r d i a l diplomatic r e l a t i o n s . S i m i l a r l y , exports.of certain goods which contain a high-tech component i s prohibited to certain countries. It i s d i f f i c u l t to quan-t i f y the monetary loss i n such cases, but i t can be p o l i t i -c a l l y rather embarrassing for the host government. Further, another aspect of the same problem i s that economic integra-tion often leads to c u l t u r a l integration, e s p e c i a l l y i n a case l i k e Canada and USA where s o c i a l and c u l t u r a l i n s t i t u -tions, language and r e l i g i o u s b e l i e f s are already s i m i l a r , and where USA i s far more dominant than Canada. Predecessors of FIRA The Royal Commission on Canada's Economic Prospects chaired by Walter Gordon, which was constituted in 1955 and tabled i t s report in. late 1957, f i r s t brought to the notice of the Canadian people the degree of foreign control g over Canadian economy and i t s consequent costs. Subsequent 9 studies i n t e n s i f i e d the public concern. The r e s u l t was that both federal and p r o v i n c i a l governments t r i e d to regulate and monitor the non-resident-controlled firms. 145 The idea was to prevent the increase i n foreign con-centration rather than to force i t s decline. The r e s u l t was l e g i s l a t i o n by which key sector industries were to be kept i n Canadian hands. The Watkins Report, 1968, provided a fresh analysis of foreign operations i n Canada and launched a new era of Canadian economic nationalism. It showed a great concern for the e x t r a - t e r r i t i o r i a l e f f e c t of US laws being trans-mitted to Canada through the multinationals and their d i s -couragement of greater Canadian enterpreneurship. It also questioned whether foreign investors culd not be required to guarantee greater benefits to the host country's national economy. The report recommended establishment of Canada Development Corporation to buy eguity i n and thus repa-t r i a t e Canadian business so that Canadian managment s k i l l s could be imp'royedV: , 9 l o c a l R&D could be increased and export expanded. This was to be coupled with the creation of an agency to survey and screen investments and operations of multionationals i n Canada. 1 0 As a r e s u l t Canada Development Corporation-was established in 1971. The Wahn Report i n 1970 b u i l t on the Watkins Report and was more r a d i c a l . 1 1 It c a l l e d for an eventual transfer to Canadian majority ownership of a l l firms operating i n Canada, majority Canadian representation on a l l corporate boards of d i r e c t o r s , l i m i t a t i o n s on foreign borrowing i n Canadian market, appointment of gowerinment trustee to exercise voting rights of foreign-owned shares of any 146 company affected by e x t r a - t e r r i t o r i a l assertions of foreign 1 law. New guidelines were issued by Department of Energy, Mines and Resources concerning new equity p a r t i c i p a t i o n by foreign investors i n both resource exploitation and the processing i n Canada of primary products?= In March 1970, the government assigned Herbert Gray, the task of bringing forward proposals on foreign investment policy for i t s consideration. A working group was set up to prepare background material to a s s i s t . Its report was published i n 1972, but i t was asserted that i t was not a statement of government policy nor did the government endorse a l l aspects of the analysis contained i n i t . The report recommended a mechanism of foreign investment screen-12 ing agency; found the 'key sector' approach useful, but not f l e x i b l e enough; the fixed-rule approach requiring? Canadianization of a percentage of equity i n s u f f i c i e n t assurance that the Canadian point of view would:,be> respect-ed and to involve u n j u s t i f i a b l e costs. It favoured scru-tiny of a l l foreign takeovers of Canadian firms and of a l l new investments as well as of unrelated expansion of foreign controlled companies established i n Canada. It also favouredrs.GJr1;e;e:n:in;g of l i c e n s i n g arrangements, j o i n t venture agreements and management contracts between Canadian and foreign firms. 147 The object was to ensure that new investment would enter Canada only on terms favourable to Canada. In reviewing the following factors were to be taken into consideration: nature of the investor's product l i n e ; r e lationship of the subsidiary to the parent company and to i t s international a f f i l i a t e s ; technology to be employed; plans for R&D; source of raw materials and components; Canadianization of personnel, managers and the directors; c a p i t a l structure and sources of financing; and degree of processing of primary products. These factors had to be seen i n the context of contribution to productivity and i n d u s t r i a l e f f i c i e n c y of the proposed investment; i t s compatibility with government's i n d u s t r i a l policy; i t s contribution to national l e v e l of economic a c t i v i t y and employment; i t s geographical location i n Canada and i t s competitive impact. Foreign Investment Review Act, 1973-74 Foreign Investment Review Act was fathered by the Gray Rfeport. It was not simply a matter of eliminating the perceived costs of foreign investment. If foreign investmetn only resulted in costs to the economy i t "could be simply blocked""*""^ but i t was recognized that i t had " i n the past played, and continues to play 14 an important role i n Canada's economic development." Therefore, the benefits had to be enhanced and costs minimized. 148 Further, the costs and benefits had to be considered not in general but with reference to each i n d i v i d u a l case to ensure that the p a r t i c u l a r investment would bring bene-f i t s to Canada. While approving a p a r t i c u l a r investment, the authorities were supposed to "negotiate" with the foreign firms "to improve net benefits from proposed foreign d i r e c t investment". 1 6 But the Gray Report recognized, that a comprehensive intervention was not possible "on grounds of 17 both enonomic policy and administrative f e a s i b i l i t y " . Thus, only a sele c t i v e intervention was recommended based on the "economic s i g n i f i c a n c e " 1 8 of the investment. It was 19 also emphasized that "general policy instruments" had to be evolved and the approach ought to be flexible,: keeping in mind that very d e f i n i t e benefits came from foreign d i r e c t investment. Thus, Canada should not be closed off from "new developments i n technology and management else-where" and from "access to some foreign markets for certain products." The Act i t s e l f was f a i r l y moderate i n that i t did not apply to e x i s t i n g foreign business i n Canada and i t s expansion into related a c t i v i t y or to i t s reinvestment of p r o f i t s into related a c t i v i t y . This i s a major source of foreign d i r e c t investment.' It also did not prevent foreign business from buying into other businesses i n Canada as.long as this did not r e s u l t i n acqu i s i t i o n of control over businesses. 149 Even i f a f o r e i g n b u s i n e s s wanted t o s t a r t a new b u s i n e s s i n Canada; o r expand i n t o u n r e l a t e d b u s i n e s s i n Canada; or a c q u i r e c o n t r o l o v e r a n o t h e r b u s i n e s s i n Canada, i t was n o t p r o h i b i t e d f r o m d o i n g s o . I t had t o g i v e n o t i c e to t h a t e f f e c t and u n d e r g o a r e v i e w p r o c e s s i n o r d e r t o e n s u r e t h a t i t s a c t i v i t y r e s u l t e d i n s i g n i f i c a n t b e n e f i t t o C anada. I n v e s t o r s , c h i e f l y A m e r i c a n i n v e s t o r s , f o u n d some p r o b l e m s w i t h A c t . D i f f i c u l t i e s c a u s e d by FIRA  N e g o t i a t i n g P r o c e s s USA c o m p l a i n e d t o GATT p a n e l i n 1982 t h a t t h e FIRA a g e n c y i n Canada, i n v i t s n e g o t i a t i n g r o l e 1 .was making i n v e s t o r s s i g n l e g a l l y e n f o r c e a b l e u n d e r t a k i n g s l i k e b u y i n g C a n a d i a n goods, e x p o r t i n g a s p e c i f i c amount o f t h e i r production^,''? or n o t — d i s t r i b u t i n g some o f t h e i r p r o d u c t s i n Canada w h i c h r e s u l t e d i n s e v e r e r e s t r i c t i o n s on t r a d e . The US p o s i t i o n was t h a t i m p o s i n g s u c h c o n d i t i o n s i ^ f e v i o l a t e d A r t i c l e I I I and A r t c i l e X X I I I o f GATT. A r t i c l e 111(4) 2 2 p r o v i d e s f o r n a t i o n a l t r e a t m e n t t o p r o d u c t s i m p o r t e d f r o m t h e t e r r i t o r y o f a c o n t r a c t i n g p a r t y . The A m e r i c a n agrument was t h a t t h e l o c a l c o n t e n t r e q u i r e m e n t s o t w h i c h t h e f o r e i g n i n v e s t o r s were :sl n i o s t made t o commit t h e m s e l v e s i o l a t e d - A r t i c l e I I I b e c a u s e t h e p r o d u c t s o f d o m e s t i c p r o d u c e r s were t h e r e b y f a v o u r e d . 150 Alternatively, even i f A r t i c l e III or any other s p e c i f i c provision of GATT was not violated,under A r t i c l e XXIII 2^ members could complain against measures which had the ef f e c t of " n u l l i f y i n g " or "impairing" any treaty bene-f i t . It was alleged that commitments made by non-Canadian investors under FIRA could undermine benefits which the US expected to receive after t a r i f f concessions were nego-tia t e d under the treaty. Further, the American agrument was that by reguiring an American corporation i n Canada to increase i t s exports and decrease i t s imports, i t reduced US exports to Canada and increased US imports from Canada which was d e t r i -mental to USA. Also, i f such_policies were l e f t unchallenged, they would serve as precedents for other nations p a r t i -c u l a r l y the less developed countries thus having a detrimental e f f e c t on American investment throughout the world. The Americans also argued that such undertaking contravened A r t i c l e II 2 4 of the OECD agreed upon by:;, the governments of member-countries. The answer to that was that the Declaration was only a p o l i t i c a l and not a legal document and, therefore, i t s contravention could bring no legal sanctions. Further, i n view of the extraordinary high l e v e l foreign ownership and 'control i n Canada, 151 Canada had made reservations before accepting the De-cl a r a t i o n by which i t had "continued to ret a i n i t s right 25 to take measures af f e c t i n g foreign investors." The GATT panel ruled that the undertakings being taken from foreing investors by the FIR Agency was against the provisions of GATT. This was a vi c t o r y for the US i h i i t s e f f o r t s to prompt the relaxation of FIRA requirement. At the same time, the panel ruled i n favour of Canada when i t did not f i n d any v i o l a t i o n of the GATT provisions in requiring foreign investors to undertake to increase their exports from their Canadian operations. E x t r a - t e r r i t o r i a l implications of FIRA The American f e e l i n g was that their business was being treated u n f a i r l y because of e x t r a - t e r r i t o r i a l app-l i c a t i o n of FIRA. This came to the fore i n the Dow Jones case. Dow Jones & Co. Inc. was a publicly-held US con-cern engaged i n diverse communication a c t i v i t i e s . Richard D. Irwin (irwin-US), also a US Corporation, was a major book puhlisher and Irwin-Dorsey Ltd. was i t s wholly-owned Canadian subsidiary. Dow Jones, which had acquired a substantial -interest i n Irwin-US, decided to acquire i t . As a step i n that d i r e c t i o n , Dow Jones incorporated RDI Inc., a US cor-poration as i t s wholly owned subsidiary. In 1975, Dow Jones caused RDI to merge with Irwin-US. As a re s u l t of the merger RDI acquired Irwin-Dorsey and Irwin-US ceased to exist as a corporate e n t i t y . 152 The purpose of stucturing the t r a n s a i G t r o n a s a merger of Irwin-US and RDI was to enable the shareholders of Irwin-US to excange their stock on a tax-free basis for shares of Dow Jones and not avoid the FIRA review. Since the merger came ostensibly withicitthe scope •_ FIRA, Dow Jones submitted i t s investment proposal to the agency but reserved for i t s e l f t'he right to contest - F-IRA-! s j u r i d s i c t i o n to review i t . The Agency refused to approve the transaction i n both 1975 and 1978 claiming- that i t f a i l e d to pass the s i g n i f i c a n t benefit test. Dow Jones sued i n the t r i a l d i v i s i o n of the Federal Court of Canada contesting FIRA 1s j u r i s d i c t i o n to review the transaction. The t r i a l court held that the agency had the j u r i s -d i c t i o n to review the transaction. The appellate d i v i s i o n , on appeal by Dow Jones, upheld the decision of the t r i a l court. Dow Jones then appealed to the Supreme Court of Canada which refused to hear the case. The issue raised i n the Dow Jones case that FIRA could not act e x t r a - t e r r i t o r i a l l y as that would be a vio-l a t i o n of international law was skirted by-.the court when i t said that FIRA only purported to regulate the acq u i s i t i o n of Irwin-Dorsey by Dow Jones and.not the merger of Irwin-US and RDI. Thus, the court ruled that the Act did not have an e x t r a - t e r r i t o r i a l application i n this case. In di c t a , the court indicated that even i f 153 an e x t r a - t e r r i t o r i a l application wSS involved, the Act would s t i l l be v a l i d because the Parliament could enact l e g i s l a t i o n which had an e x t r a - t e r r i t o r i a l effect,. However, by focussing on the p a r t i c u l a r case of Irwin-Dorsey, the court avoided examining the international law issue raised by Dow Jones. The Dow Jones case r e f l e c t e d the f e e l i n g among the US businesses that they were being treated u n f a i r l y by the e x t r a - t e r r i t o r i a l operation of FIRA. As oneT'Commentator put i t . " [t] his i s precisely the kind of interference which the Canadian Government would resent were a foreign government to attempt to l e g i s l a t e i n what would be regarded as a domestic transadt'iionvin Canada." ^7 S i g n i f i c a n t Benefit C r i t e r i o n The Act was further c r i t i c i s e d because the investors f e l t that .the standard for determining wh'et-frea: an investment would be of s i g n i f i c a n t benefit to Canada or not was vague. This hindered the negotiating process and made i t more d i f f -i c u l t . 28 The Commissioners of FIRA pointed out that invest-tors were more l i k e l y to agree to undertakings i f they under-stood that these undertakings were required i n consonance with c l e a r l y enunciated i n d u s t r i a l p o l i c i e s . In the absence of such an eriunoi-atapji,-- the screening process appeared t o t a l l y arbitrary, 154 The p r o b l e m was compounded by t h e f a c t t h a t t h e m a j o r i t y o f t h e g u i d e l i n e s were i n t e r n a l t o t h e g o v e r n m e n t . T h a t i s , t h e FIRA o f f i c i a l s h ad t h e g u i d e l i n e s w h i l e t h e i n -v e s t o r who was e x p e c t e d t o f o l l o w them d i d n o t . R e v i e w a b l e I n v e s t m e n t s To make m a t t e r s w o r s e , i t was n o t a l w a y s c l e a r 29 w h e t h e r a p a r t i c u l a r i n v e s t m e n t was r e v i e w a b l e o r n o t . Many p o t e n t i a l i n v e s t o r s a p p r o a c h e d t h e a g e n c y t o f i n d o u t i f t h e i r p l a n n e d i n v e s t m e n t w o u l d be r e v i e w a b l e u n d e r t h e A c t o r n o t . The a g e n c y g a v e an o p i n i o n b u t as t h i s o p i n i o n had no l e g a l b i n d i n g i t c o u l d a c t o n l y as a g u i d e l i n e " u n d e r s e c t i o n . U n d e r s e c t i o n 4 ( 1 ) i t was o n l y t h e M i n i s t e r who c o u l d g i v e a l e g a l l y b i n d i n g o p i n i o n on w h e t h e r an i n v e s t o r was a " n o n - e l i g i b l e p e r s o n " o r w h e t h e r a t r a n s a c t i o n was r e v i e w a b l e . The o p i n i o n was b i n d i n g on t h e M i n i s t e r f o r two y e a r s p r o v i d e d a l l m a t e r i a l f a c t s had b e e n d i s c l o s e d a t t h e t i m e o f t h e g i v i n g o f t h e o p i n i o n and r e m a i n e d u n c h a n g e d f o r t h a t p e r i o d o f two y e a r s . Hence e v e n i f t h e a g e n c y s a i d t h a t a p a r t i c u l a r t r a n s -a c t i o n was n o t r e v i e w a b l e , t h e - M i n i s t e r was n o t b o u n d by t h a t o p i n i o n and t h i s c r e a t e d u n n e c e s s a r y u n c e r t a i n t y . D e l a y s The s i t u a t i o n was f u r t h e r a g g r a v a t e d b y t h e l e n g t h o f t i m e i t t o o k t o g e t a d e c i s i o n . S e c t i o n 13 o f F I R A p r o -v i d e d f o r deemed a p p r o v a l i f no d e c i s i o n was t a k e n b y t h e M i n i s t e r and c a b i n e t w i t h i n s i x t y d a y s . 155 But the Minister did not necessarily have to come to a 30 decision within those s i x t y days. He could inform the applicant by notice i n writing that the applicant had the right to submit "such representations i n connection with the matter has he or they see f i t . " Thus, instead of automatic approval, such a notice was sent and then the review period could be prolonged i n d e f i n i t e l y . The concerned parties blamed each other for the delay. The agency blamed the applicants for being very slow and unwilling to provide the required information while the investors f e l t that the agency was too demanding and f u l f i l l i n g those demands was too time-consuming es-p e c i a l l y when the staturoty c r i t e r i a of " signficant benift" were vague so that they did not r e a l l y know what was expected of them. The agency f e l t that other causes of delay were that the pr o v i n c i a l governments and federal departments were too slow i n giving their opinions on the--proposed investment which the agency was s t a t u t o r i l y required to take into .account making i t s assessment. F i n a l l y , " t h i r d party" representations caused delay". 156 Third -party Representations Secrecy provisions forbade the agency to disclose the name of the applicant or the Canadian business proposed to be acquired. Hence, third-party representations were us-ual l y the re s u l t of rumours heard by a competitor or em-ployee groups. ^  The representations could al^sepbe by members of parliament relaying a concern from a constituent. Secrecy provisions also made i t d i f f i c u l t to get relevant informations in response to tfresre representations because :: the agency could not even reveal that a pa r t i c u l a r app-l i c a t i o n was being reviewed. Further, the applicant could not respond to the questions raised and c l a r i f y them because he was not aware of their existence. Unwieldiness of the Process The f i n a l decision was to be made by the Cabinet. Considering that about eight hundred cases a year had to be dealt with, i t was a time-consuming process for the Minister as well as for the Cabinet. ^  As ";bas been pointed out, i t worked out to about sixteen cases per week .for the Cabinet out of which a t l e a s t four reguired detailed d i s -cussion. Since each case had to be decided i n d i v i d u a l l y , i t l e f t l i t t l e time for evolving policy guidelines. 157 C o n f i d e n t i a l i t y If an application was disallowed, no reasons were 33 given. A l l that was said was that the application had f a i l e d to meet the s i g n i f i c a n t benefit test. The statute gave the d i s c r e t i o n to the Minister to give information on undertakings except where the Minister f e l t that such a disclosure would not serve any purpose with respect to the administration of the Act and would p r e j u d i c i a l l y affect the applicant i n his business. Since there was very l i t t l e information disclosed, a new applicant had no precedents to guide him and the evaluation of the e f f e c t -iveness of the Act'-became d i f f i c u l t . Compliance with the Act Under section <• •] 5 , the Minister could order invest-igations to f i n d out whether the terms and conditions c r u c i a l to the approval of the investment were being resp-34 ected. Of course, i t was conceded even i n the Gray Report that an investor could not:: be held responsible for non-compliance i f the market conditions changed. But the Minister seemed to have unlimited d i s c r e t i o n i n determ-ining whether the market conditions had changed. It was also not clear that upon such a determination,if the Minister decided to modify the terms of agreement^whether he had to take fresh cabinet approval. These two factors combined with the c o n f i d e n t i a l i t y surrounding the whole process made i t d i f f i c u l t to evaluate how f a i t h f u l l y the 158 the Act was being complied with by the investor and by the designated Minister and the cabinet. Other Problems F i n a l l y , US investors claimed that since FIRA was applicable to a company's extension into an unrelated area of business, they f e l t i n h i b i t e d i n d i v e r s i f y i n g and improving the p r o f i t a b i l i t y of their undertakings.-^ FIRA to Investment Canada In view of the d i f f i c u l t i e s faced by the investors, the government showed a willingness to streamline procedures. The notes accompanying Mr. Gray.'f| l e t t e r to the Canadian Bar Association indicated that guidelines could be'issued on a "regular industry sector basis to indicate the manner in which the cabinet or Review Agency i s interpreting the s i g n i f i c a n t benefit c r i t e r i a i n the l i g h t of changing economic conditions and government policy" although i t was pointed out, that these guidelines could not r e a l l y deal with a l l the d i f f e r e n t facts present i n d i f f e r e n t proposals even within the same industry l i k e the state of business being acquired, the impact on competition, the impact on technological advancement and others. The notes said that whenever the Act was amended, a p r e - n o t i f i c a t i o n procedure could be provided for and interpretation notes 159 could be issued regularly to solve problems of interpre-t a t i o n . 3 6 In June 1982, the threshold for review for new i n -vestment or d i r e c t a c g u i s i t i o n i n Canada, unde"r the Smalll Business Procedure was raised from 2 m i l l i o n d o l l a r s in gross assets and 100 employees to 5 m i l l i o n d o l l a r s and 200 employees. 3^ Further, i f a foreign-controlled Canadian company was acquired because of the a c q u i s i t i o n of i t s parent or of another foreign controlled company/ then the threshold for review under Small Business,Procedure would be 15 m i l l i o n d o l l a r s i n gross assets and 600 em-3 8 ployees. The small business investments were not be subjected to f u l l review procedure, unless they raised . f important policy issues. Only the "key elements of the investment proposal" were to be- "examined. The inte r n a l decision-making process even i n the case of f u l l 3 9 review procedure was to be s i m p l i f i e d . On August .: 23, 1982, three further measures were announced by Mr. Gray to streamline procedures: (1) the issuance of interpretation notes covering certain legal issues; (2) the i n s t i t u t i o n of a formal policy on the provision of opinions by Foreign Investment . Review Agency on legal questions Concerning the application of the Act; and ' (3) the introduction of changes to the Regulations 40 and the forms for f i l i n g notice. 160 F i n a l l y , in October 1982, Mr. Gray was replaced by Mr. Lumley as Minister of Industry, Trade and Commerce and the Minister responsible for FIRA. The Commissioner of Foreign Investment Review Agency was also changed. These moves were an attempt to reassure investors that Canada was a "safe place to do business"; 1 ^that i t was "safe to expand and modernize." 4 1 While the government showed a willingness to stream-l i n e procedures, there was no move to reform the statutory framework. Even the Canadian Bar Association, while c r i t i c i z i n g FIRA, had a few positive things to say about i t . It accepted that the Review Agency had ensured that foreign investment conformed to the economic policy object-ives of both the federal and the p r o v i n c i a l governments. Because of the Agency's involvement international product mandates had been secured for Canadian made goods and services; the amount spent on research and development had been i n -creased; Canadian-owned technology had imporved; there was increased Canadian),; p a r t i c i p a t i o n i n management and owner-ship; and new supplier industries and consultative ser-vices had been e s t a b l i s h e d . 4 2 Therefore, the Canadian Bar Association did not recommend the a b o l i t i o n of the Act but a change of approach which would project t h e " s i g n i f i c a n t 161 benefit c r i t e r i a " as "positive factors which, i f met w i l l enable foreign ivestors to be more successful i n Canada .... foreign investment review must be a positive „ 43 experience." ^ J To make the experience a pofei.tivey one, the Canadian Bar Association recommended several changes i n the invest-ment review law. The most important were issuance of guide-li n e s on industry sector basis to indicate how the s i g n i -f i c a n t benefit test would be applied while at the same time, keeping a f l e x i b l e approach. 4 4 A p r e - n o t i f i c a t i o n procedure was ' recommended to apply to a l l new businesses and take-over notices below meaningful threshold l e v e l . The threshold levels were to sharply increase'^ so that only the important investments came under the review procedure and thus could 4 S be thoroughly reviewed. Emphasis was placed on increasing the information flow so that applicants would know the government p o l i c i e s , the status of their application, the time i t would take to get a decision and the agency's dispositon towards them.4^ Third party interventions were either to be eliminated or i f allowed, then a system was required ' whereby the applicant could also respond to them.4^ F i n a l l y , i t was f e l t that emphasis should not be so much on owner-ship as on evolving methods' f ° r greater Canadian p a r t i -c i p a t i o n . Report of the Macdonald Commission 162 The change of attitude and mood i s r e f l e c t e d in the report of the Macdonald Commission which recommends l i b e r a l i z a t i o n of laws pertaining to foreign investment in spite of accepting that there i s a rather high degree of non-resident control over Canadian economy and sees free trade with USA as a means of encouraging investment 48 both domestic and American. The point of view expressed in the Macdonald Commission Report has been repudiated 49 by the Other Macdonald Report. In r e a l i t y , i t i s the 50 old debate of "nationalism" versus "continentalism." It i s only a question of which side i s dominant because of pragmatic economic r e a l i t i e s . According to the figures i n the Macdonald Commission 51 report, i n 1982 foreign companies held 49% control in Canadian manufacturing, 45% i n petroleum and natural gas, 43% i n mining and smelting; and 26% in a l l other industries including agriculture and finance. Firms controlled i n the United States owned most of these large foreign holdings and accounted for about 80% of the foreign d i r e c t investment i n Canada. The Commission accepted that few other economies, apart from those of Australia, Belgium and Ireland, had as much as 40% of their manufacturing c a p i t a l i n companies owned by non-residents. I t a l y , France, West Germany and the United 163 Kingdom had about 20% to 30% of their economies foreign owned; Sweden and Norway about 10%, and the United States and Japan about 5%. However, the Commissioners pointed out, the inward flow of foreign d i r e c t investment had decreased from the 1960s. Canada's share of global d i r e c t investment had f a l l e n from 16% i n the early 1960s to 3% i n the late 1970s and then to a negative figure i n the early 1980s. In spite of that Canada's stock of foreign investment remains high because of reinvestment of p r o f i t s by foreign controlled companies. Therefore, foreign multinational would continue to play an important role i n Canada's economy. As the Report points out, substantial benefits accrue from inward c a p i t a l flows and these benefits are l i k e l y to increase i n future. The Canadian Government espe c i a l l y gains considerable revenue by taxing gains which can be attributed to foreign investment: between 1.5% 52 and 2.5% of the gross national product. Even more impor-tant, foreign investment i s seen as a major vehicle for valua-ble technology, managerial know-how and entrepreneurship. It i s recognized that Canadian p o l i c i e s should not impede the flow of these elements. When a foreign investor has 164 equity ownership i n an enterprise, i t provides an incen-tive to apply the ideas and processes i n that enterprise. Licensing i s not as e f f i c i e n t because the licence fee i s much higher and the innovator i s tempted to take his ideas to countries where he can get more advantageous . terms The Report t r i e s to repudiate the arguments of those favouring more stringent control over foreign investment. For example, there i s the argument that multinational following a global strategy;do not conduct as many manage-r i a l and research a c t i v i t i e s as comparble Canadian controlled businesses; that they import more than they export; and that some subsidiaries are established only to serve the domestic market which leads to truncation because the subsidiaries do not try to break out of the r e l a t i v e l y small domestic market to compete i n the world market. The report points out that there i s l i t t l e evidence to show that extensive foreign control leads to these d e f i c i e n c i e s i n industry. 5^ While the domestically controlled firms may spend more on research and development, but the productivity of foreign-controlled firms was more. Again, the foreign controlled firms may be importing more because suitable "inputs" or components may not be available i n Canada or may not be competitive i n price or qu a l i t y with imports. Besides, trunc-action resulted from the National Policy of 1879, the r e l a t i v e l y small size of the domestic market and the t a r i f f 165 and n o n - t a r i f f b a r r i e r s c r e a t e d by;' i he t r a d i n g p a r t n e r s o f Canada. Hence, i t c o u l d n o t be s a i d t h a t t h e above-m e n t i o n e d d e f i c i e n c i e s were b e c a u s e o f e x t e n s i v e f o r e i g n c o n t r o l . A g a i n , a n o t h e r argument a g a i n s t f o r e i g n c o n t r o l l e d f i r m s i s t h a t i t i s d i f f i c u l t f o r t h e h o s t government t o c o n t r o l them s i n c e t h e y a r e more l i k e l y t o be r e s p o n s i v e t o the p o l i c i e s o f t h e home g o v e r n m e n t . 5 4 The C a n a d i a n c o n t -r o l l e d f i r m s a r e l i k e l y t o be more r e s p o n s i v e t o measures t a k e n by t h e government t o - p r e s e r v e c u l t u r a l autonomy and p r e s e r v e n a t i o n a l s e c u r i t y . A m e r i c a n tax p o l i c i e s a f f e c t d e c i s i o n s o f American-owned f i r m s i n Canada. F o r example, A m e r i c a n tax laws e n c o u r a g e m u l t i n a t i o n a l s t o r e p a t r i a t e t h e i r e a r n i n g s and t o expand a t home. A l s o , US-owned s u b s i d i a r i e s have o f t e n had t o c h o o s e between c o m p e t i n g p o l i c y demands o f t h e two n a t i o n a l g o v e r n m e n t s . B e s i d e s , d i s p u t e s have a r i s e n on t r a d e r e s t r i c t i o n s i m p o s e d by t h e US government on t h e i t r s u b s i d i a r i e s f o r n a t i o n a l s e c u r i t y r e a s o n s ; and on t h e a t t e m p t e d e x t r a -t e r r i t o r i a l a p p l i c a t i o n o f US a n t i - t r u s t and o;ther r e g u l a t o r y l a w s . 166 The t h i r d argument for regulating foreign investment i s that foreign multinationals often r e s t r i c t the authority of their subsidiaries to export or to export with innovative 5 5 techniques. But, the Commission finds l i t t l e evidence to support this claim i n Canada. Besides, i t i s d i f f i c u l t to determine the motivation of the management in many si t u a -tions. There i s some evidence that foreign contorlled firms in manufacturing and natural resource sectors tend to favour established suppliers i n their home countries over Canadian firms o f f e r i n g goods of comparable q u a l i t y at competitive prices. S i m i l a r l y , managers of multinationals may r e s i s t giving the Canadian subsidiaries a world product mandate that i s , the manadate to produce p a r t i c u l a r products^ as the sole corpoate source of supply for world markets^ b e c a u s e they want to maintain control over a l l aspects of the management of he s u b s i d i a r i e s . Since these potential'*, c o n f l i c t s do exist, some form of government regulation i s recommended. But the report emphasizes that the extent of government intervention that i s there i n Foreign Investment Regulation Act i s not required. Hence Investment Canada Act i s favoured. The Commission also believes that the same tax and regulatory p o l i c i e s should govern foreign controlled firms which regulate demestic firms except where c u l t u r a l and 167 national security interests demand otherwise. The pr i n c i p l e of national treatment or non-discrimination against foreign firms had emerged as customary rule of international law and had been accepted by Canada i n 1976 by giving formal assent to the Organization for Economic Co-operation and Development's Declaration on International Investment and Multinational Enterprises. The OECD recognized that equal treatment for domestic and foreign controlled firms did not preclude regulatory instruments" which would ensure that foreign controlled firms did not take decisions adverse to national i n t e r e s t s . The convention.also authorized prior screening of foreign investors and imposing of special conditions with regard to performanee.undertakin'g i n case of foreign controlled firms taking over an exis t i n g bus-iness or beginning a new business. Apart from l i b e r a l i z a t i o n of investment laws, the Macdonald Commission also sees free trade with the US as another means of increasing investment and production in Canada. It i s accepted that an important aspect of trade i n Canada i s the dependence on a single national market, that of the US. Insecurity of access to this market because of non-tariff barriers creates un-ce r t a i n t i e s which thwart r a t i o n a l i z a t i o n of production in Canada. Besides, a free access to the American market would also encourage Canadian investment i n the US. 168 Free trade is. seen as the main instrument i n the Commission's approach to the i n d u s t r i a l p o l i c y . Insecure access to the US market prevents firms from making the necessary long-term investments i n plant, technology and human re s o u r c e s . ^ Also, free trade would provide access to those areas where US "employes,, t a r i f f and non-tariff barriers l i k e Jon some s t e e l products'-and products i n the petro-chemical sector. This, i n the view of the Commission, would not increase the dependence of Canada on USA but would lead to greater d i v e r s i t y i n economic and trade re-lations . Free trade would r e s u l t i n enhancement of product-i v i t y because of the increase i n the economies of scale which would increase competitiveness i n the manufact-uring s e c t o r . 5 9 This would lead to s p e c i a l i z a t i o n and r a t i o n a l i z a t i o n of Canadian production .2 , The restructuring and r a t i o n a l i z a t i o n i n Canadian industry would increase the competitiveness of Canadian firms with US firms which would, in turn, mean a greater a b i l i t y to survive i n a more com-p e t i t i v e global trade environment. Ultimately, creating a more competitive domestic industry would give r i s e to more jobs.Ji-and thus reduce unemployment. It would enable ,w Canadian firms to eo:ncentrate-.on their most e f f i c i e n t pro-i\ duction l i n e s thus lengthening production runs and further 169 lowering costs. The r e s u l t i n g expansion of trade would increase the variety of products available to Canadian consumers because although Canadian industry might produce fewer types of each product, more types o v e r a l l would be available to c'ons.umens because of increased trade. The more e f f i c i e n t industry would increase Canada's advantage over t h i r d countries both i n the US market and in the markets of the th i r d countries. Thus, removal Qf^cbarriers would r e s u l t i n lower costs, higher wages and incomes and increased output of the economy i n general because of increased and more secure access to American markets. Removal of Canadian t a r i f f s would increase domestic competitive forces and compel r a t i o n a l i z a t i o n of domestic industry. Removal of foreign-trade b a r r i e r s would f a c i l i t a t e Cana-dian penetration of foreign markets permitting economies of scale to be more f u l l y exploited. It could be argued that removal of barr i e r s might induce s i g n i f i c a n t amount of investment to leave Canada because protection has encouraged these firms to invest i n Canada rather than to service Canadian markets from abroad.^ The Commission accepts that i f Canada were to reduce i t s barr i e r s u n i l a t e r a l l y , investors would have less incentive to remain but i f US also withdrew i t s 170 b a r r i e r s , then firms which were previously discouraged from investing i n Canada because of US trade barriers could enter Canada and produce for both the American and the Canadian market. The second argument against free trade could be that protection provided a,stimulus to manufacturing industry. The Commission again accepted that while u n i l a t e r a l move towards free trade could reduce the size of manufacturing industry, but ''bilataral.. free') trade could produce a d i f f -erent s i t u a t i o n . Increased penetration of markets abroad would i n i t s e l f be a stimulus to increased production which would of f s e t the reduction caused by removal of protection. However, as this would resu l t i n the r a t i o n a l i z a t i o n of Canadian industry, certain disruptions would take place for labour and other factors of ..production. These disruptions would be more d i f f i c u l t for Canada than for (.other- devel-oped economies because the Canadian economy was s p a t i a l l y more diverse; and because Canada would be entering into a^ . free trade agreement with a country much larger than i t s own. Further, itco.uldbe argued that such an agreement would reduce Canada's a b i l i t y to negotiate m u l t i l a t e r a l l y for access to export markets. 6 2 The Commission agreed that i t would be ideal i f Canada c.oulcfaexDand and secure 171 llts access to US markets through m u l t i l a t e r a l rather than b i l a t e r a l negotiations but that had not been possible because forums l i k e GATT had eighty-nine members and t h i r t y other countries maintained a de facto application of GATT rules. This unwieldy decision-making forums. Moreover, non-tariff b a r r i e r s which Canada wanted reduced were often hard to disentangle from a variety of domestic p o l i c i e s which GATT member-States followed. Not only that, GATT i t s e l f had a limited administrative capacity as an i n t e r -national i n s t i t u t i o n and, therefore, the p o s s i b i l i t y of a major breakthough i n the near future were not there. In any case, the major benefit for Canadians of a success-f u l GATT reduction of non-t a r i f f b a r r i e r s would be increased security of access to the US market since Canada's trade relations were mainly with the US. Therefore, the primary objective for Canada, whether through a m u l t i l a t e r a l or a b i l a t e r a l route, was to gain a more secure access to the US lMarket\ • F i n a l l y , the question arose whether Canadians would, through such an agreement, f e e l that they had f i n a l l y abando-ed tfie-ilr_t :radi.txona'lobiective of maintaining a genuinely indepen-dent, p o l i t i c a l . community, c u l t u r a l l y and..socially d i f f e r e n t - . 172 from the US. The Commission f e l t that few Canadians!Xnowi:has-such a concern because over the years, thev had developed a far greater confidence than before about their own c u l t u r a l d istinctiveness and i n the^f distinctiveness of their s o c i a l and p o l i t i c a l i n s t i t u t i o n s . The Other Macdonald Report \ • 64 The Other Macdonald Report, however, f e l t that such an agreement would lead to foreign economic domination and work to the detriment of domestic industry. The reasons given are, f i r s t , that Canadian manufacturing industry enjoyed few comparative advantages over the American industries. Hence, the removal of t a r i f f b a r r i e r s would simply lead to the replacement over time of Canadian manufacturing production by American. The Canadian labour thus released from the manu-facturing sector would be drawn into the resources and the services sectors, or would emigrate, or would just swell the ranks of the unemployed. Secondly, heavy ownership of the US of Canadian industry would r e s u l t i n Canadian pro-duction being relocated i n the US even when the Canadian production.- costs were lower. F i n a l l y , Canadian industry would not develop i n future i n ways b e n e f i c i a l to Canada. The resource sector would be .strengthened at the expensegof^the manufacturing sector which might, y i e l d higher income but which would.nullify 173 e f f o r t s to foster indigenous technology and research and development necessary for Canadian industry. Thus, we see that the debate coninues. Investment Canada and iEil'RA  Purpose The change?, of tone of Investment Canada indicates the change of attitude.. The purpose of Investment Canada i s stated i n section 2: "Recognizing that increased c a p i t a l and technology would benefit Canada, the purpose of this Act i s to encourage investment i n Canada by Canadians and non-Canadians that contributes to economic growth and employ-ment opportunities and to provide for the review of s i g n i -f i c a n t investments i n Canada bv non-Canadians i n order to ensure such benefit to Canada. 6 5 This i s i n contrast to section 2(1) of FIRA which stated that the Act was enacted by the Parliament i n recognition of the,extent to which control of Canadian industry, trade and 'commerce had become acquired by persons other than Canadians and of the e f f e c t of this control on the a b i l i t y of Canadians to maintain e f f e c t i v e control over their economic environment-This had become a matter of national concern. The purpose of this Act was to establish a means by which measures might be taken to ensure that control of Canadians business en-terprises may be acquired by persons other than Canadians who were not already carrying on business i n Canada or 174 whose new businesses in Canada would be unrelated to business already being carried on by them i n Canada only i f i t had been assessed that the acqu i s i t i o n of control foyuthem or the establishment of new businesses by them was l i k e l y to be of s i g n i f i c a n t benefit to Canada. R e s p o n s i b i l i t i e s of the Minister The change of tone i s also evident i n the responsi-b i l i t i e s given to the Minister responsible for the admini-s t r a t i o n of the Act. In addition to his duties of admini-s t r a t i o n and d i r e c t i o n of the Agency established by section 6 of the Act,^ 7 according to section 5 , ^ he i s also supposed to encourage business investment: a s s i s t Canadian business-es to exploit opportunities for investment and technological advancement; and carry out research and analysis r e l a t i n a to demestic and international investineat:;,-, provide invest-ment information services and other investment services to f a c i l i t a t e economic growth i n Canada; and ensure that the n o t i f i c a t i o n and review of investments are carried out in accordance with the Act. The Minister under FIRA had hot been given the task of encouraging foreign investment while at the same time reviewing i t but as Prof. Paterson points out, the two, i n any case c o n f l i c t with each other.^9 It might, according to him, lead to more approvals than were there i n the early years of FIRA, but as Samuel R.Baker7' shows, the approval rate as FIRA evolved, was already more than 96%. The essential character of FIRA was regulatory and not p r o h i b i t i v e . The idea was to ensure that the investments of non-eligible persons met the c r i t e r i a of s i g n i f i c a n t benefit to Canada. Si g n i f i c a n t Benefit In order to assess that s i g n i f i c a n t .^benefit would re s u l t , section 2(2) of FIRA l a i d down fi v e c r i t e r i a : (a) l e v e l and nature of economic a c t i v i t y i n Canada including the eff e c t on 'employment,. , on resource processing, on u t i l i z a t i o n of parts, components and services produced i n Canada, and on exports from Canada; (b) degree and significnace of p a r t i c i p a t i o n by Canadians i n the business enterprise; (c) e f f e c t on productivity, i n d u s t r i a l e f f i c i e n c y , technological development, product innovation and product variety i n Canada: (d) e f f e c t on competition within any industry or industries i n Canada; (e) compatibility of the a c t i v i t y with national i n d u s t r i a l and economic poli c e s . If we compare the c r i t e r i a -jof " s i g n i f i c a n t benefit" with that of "net benefit" i n Investment Canada we f i n d that-section 20 ^ of Investment Canada repeats word for word the f i v e c r i t e r i a l a i d down i n section 2(2) of FIRA 17B and adds one more: "the contribution of the investment of Canada's a b i l i t y to compete i n world markets." Thus, the word " s i g n i f i c a n t " i s omitted. It i s enough i f a "net benefit" results but since the c r i t e r i a applied are the same, there need not always be a great difference in the interpretation of " s i g n i f i c a n t benefit" and "net benefi t." Who can invest without being subjected to the regulatory  mechanism of Investment Canada Investment Canada does not use the words "non-eligible person." Those who are subject to the regulatory scheme of Investment Canada ai?e; non-Canadians. A" non-Canadian i s defined by section 3 as "an i n d i v i d u a l , a government or an agency thereof or an en t i t y that i s not a Canadian". Therefore, we have to f i n d out who i s a Canadian. Section 3 7 2 defines a "Canadian" as (a) a Canadian c i t i z e n ; (b) a permanent resident within the meaning of the Immigration Act, 1976, who has been o r d i n a r i l y resident i n Canada for not more than one year after the time at which he f i r s t became e l i g i b l e to apply for Canadian c i t i z e n s h i p ; (c) Canadian government or i t s agency -- federal or provin- • c i a l ; (d) an en t i t y that i s Canadian controlled as per section 26(1); or (e) a corporation decribed i n section 2 6 (3) . Therefore, a non-Candian, and hence subject to review process would be (a) a person not a Canadian c i t i z e n ; (b) a permanent resident within the meaning of the Immigration A c t 'who has foeo 177 Act who has been o r d i n a r i l y resident i n Canada for more than one year after he f i r s t became e l i g i b l e to apply for Canadian c i t i z e h s h i p ; (c) a government of another country or i t s agency; (d) an ent i t y that i s i n actual fact controlled by non-Canadians; (e) corporation incorporated i n Canada not%eontrolled by Canadians. Who were the npn^e3Jiig|bl|e persons under FIRA? Section 3(1) defined a "hon-eligib'le person" as (a) an i n d i v i d u a l who was neither a Canadian c i t i z e n nor a permanent resident within the meaning of the Immigration Act, 1976. It included: . (i) a permanant resident who has been o r d i n a r i l y resident i n Canada for more than one year after the time he f i r s t became e l i g i b l e to apply for Canadian c i t i z e n s h i p . ( i i ) a) Canadian c i t i z e n who i s not o r d i n a r i l y resident i n '.Canada. b) government or agency of a government of another country; c) a corporation incorporated which i s i n fact controlled by persons described by.(a) and (b) or a group of persons any member of which i s a person described i n (a) or (b) or by another such corporation. Therefore, i f we put alongside the d e f i n i t i o n s of a non-eligble person i n FIRA and a non-Canadian i n Investment  Canada, we f i n d that the only d i s t i n c t i o n i s that under FIRA even a Canadian c i t i z e n was required to be o r d i n a r i l y resident i n Canada which i s not the case under Investment  Canada. Thus, the very same people are subject to the regulatory mechanism of the two l e g i s l a t i o n s . 178 Acquisition of Control 73 Under Section 28(1) of Investment Canada control i s acquired by (a) acqui s i t i o n of voting shares of a cor-poration i n Canada;;, (b) acqtiisi tion o"ff voting interests of an e n t i t y carrying on a Canadian business or which controls d i r e c t l y or i n d i r e c t l y another entity carrying on a Canadian business. Control may be acquired by acqui s i t i o n of a l l or s u b s t a n t i a l l y a l l of the assets used i n carrying on a Canadian business. 74 Under section 28(3), control i s presumed to have b.e*en acguired when the majority of voting interests or the majority of undivided ownership interests i n the voting shares are acquired- i n case of corporation; i f less than a majority but one-third or more of voting shares are required, then unless i t can be established that this does not re s u l t i n control i n fact, i t i s deemed to be an acq u i s i t i o n . But not a l l ijAve-Sitmenits which r e s u l t i n acqui s i t i o n of control by non-Candians of Canadian business are subject to review. They become subject to review under section 75 14 where control i s acquired by acq u i s i t i o n of voting interests i f the value of the gross assets thus acquired i s 5 m i l l i o n d o l l a r s or more; or i f the value of the gross assests of the c o n t r o l l e r and the value of the gross assets acquired amount to more than 50% of the value of the gross 179 assets of the c o n t r o l l e r and the value of the gross assets acquired amount to more than 50% of the value of the gross assets of the entity controlled and the value of the gross assets acquires i s 5 m i l l i o n d o l l a r s or more; or where the value of the gross assets of the c o n t r o l l e r and the controlled amount to 50 m i l l i o n d o l l a r s or more. However, notice of acquisition of control s t i l l needs 7 6 to be given under section 11(b) ' and section 15 provides that an investment which i s not otherwise reviewable becomes reviewable i f (a) i t f a l l s within a prescribed s p e c i f i c type of business a c t i v i t y that, in^the opinion of the Governor i n Council, i s related to Canada's c u l t u r a l heritage or national i d e n t i t y ; and (b) Within twenty-one days after the c e r t i f i c a t e date referred to i n paragraph 13.(1) (a), (i) the Governor i n Council, where he considers iit.in the public interest on the recommend-ation of the Minister, issues an order for the review of the investment, and ( i i ) the Agency sends the non-Canadian making the investment a notice for review. Section 15 must be read with Schedule IV of the Re-gulations respecting investment i n Canada which precribes the specif i c .typesj of business a c t i v i t i e s as: 180 1. Publication, d i s t r i b u t i o n or sale of books, magazines, periodicals or newspapers i n print or machine-readable form, 2. Production, d i s t r i b u t i o n , sale or exhibition of ii films or video products, 3'. Production, d i s t r i b u t i o n , sale or exhibition o,f audio or video music recordings, 4. Publication, d i s t r i b u t i o n or sale of music i n pri n t or machine-readable form. Therefore, exceptional cases can be reviewed only i f they are engaged i n the above a c t i v i t i e s and that too only i f the Minister considers the review to be i n public int e r e s t and the Govern er:/ i n Council so orders within twenty-one days of the date of f i l i n g of the completed notice of the investment. Thus, large number of investments have been taken out of the review process. New Business 7 7 Section 11(a) of Investment Canada talks of "a new Canadian business" which i s subject -to. n o t i f i c a t i o n c r e -quirements but not to review except i n circumstances s p e c i f i e d i n section 15. A "new Canadian business i n r e l a t i o n to a non-Canadian means, under section 3"a business that i s not already being carried on i n Canada by the non-Canadian and that at tbetime of i t s establishment, (a) i s unrelated to any other business being carried on i n Canada by that non-Canadian" . 181 Under Section 3(1) of FIRA a new business meant "as business not previously ca r r i e d on i n Canada by the person or group of person i n r e l a t i o n to which the express-7 8 ion i s relevant." Under section8(2)(a), notice was required by a non-eligible person i f he proposed to es-t a b l i s h a new business and at that time was not carrying 7 9 on any other business i n Canada. Section 8(2)(b) provided for a notice i f the proposed business was related to the business already being carried on. Thus, the requirements under the two l e g i s l a t i o n s are the same with respect to new business, but the important difference i s that whereas a new business was subject to review under FIRA, i t i s not under Investment Canada except i n the c i r -cumstances mentioned above. The Review Process Most severe c r i t i c i s m of FIRA was regarding the pro-blems of implementation i n the review process. The main complaints i n this regard were that s i g n i f i c a n t c r i t e r i a were too vague; i t was not always clear whether an investment was reviewable or not; :and the agency's opinion had < no "binding force; 182 delay; the co n f i d e n t i a l i t y , surrounding the whole process so that no reasons were given i n case of reject i o n and thus no guidelines evolved;third-parfy representions; too detailed an information demanded by the FIR Agency. Investment Canada seeks to remedy some of these problems but. the procedures remain unchanged i n case of many others. The c r i t e r i a for " s i g n i f i c a n t benefit" and "net benefit" are the same except that an additional sub-section has been added i n Investment Canada s p e l l i n g out one more factor to be considered: whether the investment would con-tribute to Canada's a b i l i t y to compete i n world markets. The change from " s i g n i f i c a n t " to "net" may indicate that the , assessment may be less rigorous but not necessarily so. If depends on the interpretation given to i t from time to time by the reviewing agency and, i f anything, makes i t even more ambiguous. Q Q Unlike FIRA, section 37(1) of Investment Canada makes binding Written opinions available to investors on application by them on whether their investment i s review-able or not. Investment Canada also t r i e s to minimise delays by providing time l i m i t s at every step. Accorindg to Se-ts "I ction 17, i n case of a reviewable investment by a non-Canadian, the investor must make an application ; tro^Agency 183 in the manner prescribed and containing the information prescribed i n Schedules II and III of the Regulations. The Agency must send;.the receipt of the application within" f i f t e e n days of receiving the application f a i l i n g which;> the application would be deemed to be received by the Agency complete i n a l l respects. The Minister must com-plete his review within 45 days or within a further period of 30 days after which, i f no notice has been sent by the Agency, the application i s deemed to have been accepted. In case, the Minister thinks thart the investment i s not l i k e l y to r e s u l t i n net benefit to Canada, the applicant w i l l be given another t h i r t y days to make furhter ' ~~ representations. It w i l l be nOticedlthat decision-making on the app-l i c a t i o n has been sh i f t e d t o t a l l y to the Minister. Under FIRA, the decision was -made by the Minister and the Cabinet. As the Macdonald Report points out this "creates a sub-8 2 s t a n t i a l r i s k of ar b i t r a r y action." The Report accepts that the Cabinet i s too busy to examine a l l proposed take-overs" and, therefore, recommends "a q u a s i - j u d i c i a l t r i b -unal to review foreign investment." 8 2 The c o n f i d e n t i a l i t y surrounding the process has been retained and can only heighten the f e e l i n g of a r b i t r a r i n e s s . The Report emphasizes 184 the "need for public proceedings and f u l l public disclosure" and feels that "non-government intervenors should have a chance to argue the issues i n public. Moreover, the tr'ij.— bunal should publish a report that se^tswout the economic, or other, policy reasons for i t s actions."^4 Conclusions Investment Canada reveals a more positive approach to foreign investment than FIRA. A much larger number of investments have been l e f t out of the review process and the procedure for review has been strte:am-l.ii:ned".o A l l this may encourage a greater amount of foreign investment, but the concerns for ownership and control, and more p a r t i -c u l a r l y control, remain the same. The idea i s to en-courage greater investment while, at the same time, retaining f a i r l y strib'-t'-control over foreign d i r e c t invest-ment . In some cases the investor may f i n d himself unable • or unwilling to meet the c r i t e r i a reguired for net benefit to Canada and the government may require some additional elements of benefit i f the investment i s to be allowed. In spite of GATT r u l i n g , section 19(c) does provide for "any written undertakings to Her Majesty i n r i g h t of Canada given by the applicant." ^5 185 Canada given by the a p p l i c a t i o n . " 0 3 In an extreme case, the government may f e e l that Canadian control i s absolutely essential i f , for example, the investment i s in a f i e l d of special public i n t e r e s t such as the c u l t u r a l industries. The government may also discourage subsidiaries of foreign corporations whose only aim i s to d i s t r i b u t e foreign manufactured goods in Canada. Thus, the aim of Investment  C&nada as i t was of FIRA i s e s s e n t i a l l y to d i r e c t the attention;, of foreign investors to Canadian economic p o l i c i e s . The degree of control required for this purpose may vary acc-ording to perceived needs and changes i n economy and accord-ing to p o l i c i e s of d i f f e r e n t governments, but the e s s e n t i a l aim remains unchanged. It has to be also r e a l i s e d that Canada i s not an exception i n putting r e s t r i c t i o n s . The Americans, themselves, have many bar r i e r s to foreign investment. Nicholas J . Patterson in "Canada-US Foreign Investment Regulation: Transparency versus diffusion"86 n a s pointed out the number of r e s t r i c t i o n s the Americans have. When Arabs started doing large p o r t f o l i o investments i n USA, concern .•.was:/.ex-'-pressed by the Congress and i t was suggested that controls should be put on those investments. This resulted i n a report issuedvby US Commerce Department i n 1976 which ran into 9 volumes and 3,000 pages and which showed the number 186 o f r e s t r i c t i o n s t h a t a l r e a d y e x i s t e d on f o r e i g n e r s d o i n g b u s i n e s s and i n v e s t i n g i n USA. N o n - r e s i d e n t a l i e n s a r e p r o h i b i t e d f r o m i n v e s t i n g i n s h i p p i n g , r a d i o , t e l e v i s i o n , t e l e g r a p h , f i s h i n g , a i r t r a n s p o r t a t i o n , h y d r o - e l e c t r i c p ower, a t o m i c e n e r g y and m i n i n g . On t h e o t h e r h a n d , US c o m p a n i e s c o n t r o l o v e r 1 5 % o f Canada's e n t i r e n a t i o n a l t e l e -p 7 phone s y s t e m . H a l c o I n c . owned by a US c i t i z e n h a s l a r g e t r a d e b e t w e e n C a n a d i a n p o r t s . B u t U p p e r /L'akes S h i p p i n g w h i c h h a s a C a n a d i a n owner d o e s n o t h a v e a s i m i l a r t r a d e b e t w e e n US p o r t s . 8 8 R e s t r i c t i o n s a r e w i d e s p r e a d . The o n l y d i f f e r e n c e i s t h a t t h e y h a v e n o t b e e n p u t t o g e t h e r u n d e r one l e g i s l a t i o n a nd t h e r e i s no s i n g l e a g e n c y t o r e -g u l a t e t h e f o r e i g n i n v e s t m e n t . O t h e r c o u n t r i e s , t o o , h a v e s u b s t a n t i a l r e s t r i c t i o n s on d i r e c t f o r e i g n i n v e s t m e n t . J a p a n i s t h e most r e s t r i c t i v e . F r a n c e i s p r o b a b l y t h e most r e s t r i c t i v e i n E u r o p e . I n many c a s e s , t h e B r i t i s h G o v e r n m e n t o b t a i n s " S t a t e m e n t s o f f u t u r e - i n t e n t i o n s " f r o m f o r e i g n i n v e s t o r s and t h e y a r e r e q u i r e d t o p r o v i d e f o r p e r f o r m a n c e ireqifi'-ren\gn't_s»vgoverning l o c a l p r o c u r e m e n t , employment and e x p o r t s . 8 9 FIRA r e p r e s e n t e d an a s p e c t o f C a n a d a ' s s e a r c h f o r n a t i o n a l i d e n t i t y w h i c h f e e l s t h r e a t e n e d when t h e economy i s d o m i n a t e d by f o r e i g n i n v e s t m e n t f r o m one s i n g l e c o u n t r y . 187 T h i s i d e n t i t y i s s o u g h t t o be p r e s e r v e d i n I n v e s t m e n t Canada'- t h r o u g h t h e n e t b e n e f i t c r i t e r i a and t h r o u g h p r o v i s i o n s o f S c h e d u l e I V o f t h e R e g u l a t i o n s r e s p e c t i n g i n v e s t m e n t i n C a n a d a . C a n a d i a n s do n o t s e e any d a n g e r s i n f o r e i g n i n v e s t m e n t . T h i s i s e v i d e n t f r o m t h e way t h e economy h a s d e v e l o p e d t h r o u g h l a r g e i n f l o w s o f f o r e i g n d i r e c t i n v e s t m e n t . When Canadi.an&talki'.Qf; c o n t r o l y . , . _ i t : r : seems l a r g e l y w i t h r e f e r e n c e t o A m e r i c a n i n v e s t m e n t b e c a u s e o f i t s d o m i n a n t c h a r a c t e r and t h e f e e l i n g o f i n s e c u r i t y i t t h e r e b y e n d a n g e r s . 188 Chapter V TOWARDS AN INTERNATIONAL CODE OF CONDUCT Introduction Need for a unive r s a l l y accepted code Unregulated foreign investment as we have seen, can impose costs which can detract from the very purpose of allowing the foreign investment. Excessive mining, for instance, can lead to too rapid a depletion of natural resources. Technology may be supplied at an excessively high cost with r e s t r i c t i o n s on i t s dissemination which may hamper l o c a l i n i t i a t i v e , make the country dependent on another, and hinder the development of s k i l l e d manpower, technicians and research f a c i l i t i e s while at the same time, leading to "brain-drain." It can also r e s u l t i n a branch plant economy and to the production of goods inappropriate for that country. In the case of countries with limited foreign exchange resources, i t can place s t r a i n on the balance of payments. Thus, while there i s an undeniable need for investment, there i s also a need to regulate i-f i n order to maximize i t s benefits and minimize i t s costs. Individual countries have t r i e d to regulate foreign investment according to their perceived needs, but as has been pointed out i n the Reconvened Special Session of the  Commission on Transnational Corporations (17-21 June, 1985), 189 i t has become c l e a r that n a t i o n a l k l e g i s l a t i o n of any one cou-n t r y cannot cope with the- i n t e r n a t i o n a l i s s u e s r a i s e d by the a c t i v i t i e s of the t r a n s n a t i o n a l s . 1 The s i t u a t i o n has been f u r t h e r aggravated because of cor p o r a t e misconduct i n the 1970s such ss i n t e r f e r e n c e i n the i n t e r n a l a f f a i r s of S t a t e s , i l l i c i t payments ad u n e t h i c a l marketing p r a c t i c e ^ . F u r t h e r , r e g u l a t i o n s o l e l y through n a t i o n a l l e g i s l a t u r e s leads of m u l t i o n a t i o n a l s being s u b j e c t e d to s e v e r a l and o f t e n c o n t r a d i c t o r y s e t s of laws. Besides, there have been problem because of n a t i o n a l i z a t i o n . and e x p r o p r i a t i o n of prope r t y and d i s p u t e s p e r t a i n i n g to settlement of claims r e g a r d i n g compensation. E f f o r t s have a l s o been made by v a r i o u s agencies of the United Nations and by i n t e r n a t i o n a l business and labour o r g a n i z a t i o n s to formulate i n t e r n a t i o n a l or r e g i o n a l i n s t -ruments d e a l i n g with standards and p r i n c i p l e s of T r a n s n a t i o n a l c o r p o r a t i o n s . Some of the instruments that have r e s u l t e d are The OECD G u i d e - l i n e s f o r M u l t i o n a t i o n a l E n t e r p r i s e s , The ILO T r i p a r t i t e D e c l a r a t i o n of P r i n c i p l e s concerning  M u l t i n a t i o n a l E n t e r p r i s e s and S o c i a l P o l i c y , the Set of M u l t i l a t e r a l l y Agreed E q u i t a b l e P r i n c i p l e s and Rules f o r the C o n t r o l of Rle-s;t'-Ki:c'.tiye- Business P r a c t i c e s , the D r a f t  I n t e r n a t i o n a l Code of Conduct on the T r a n s f e r of Technology and The I n t e r n a t i o n a l Code of Marketing of B r e a s t - M i l k S u b s t i t u t e s 190 N a t i o n s have a l s o t r i e d t o r e g u l a t e f o r e i g n i n v e s t m e n t t h r o u g h b i l a t e r a l t r e a t i e s . E a ch o f t h e s e e n d e a v o u r s i s n e c e s s a r i l y l i m i t e d i n s c o p e . B i l a t e r a l t r e a t i e s , f o r example, a r e b a s i c a l l y i n v e s t m e n t p r o t e c t i o n t r e a t i e s w h i c h t r y t o e s t a b l i s h t h e t r e a t m e n t t h a t t h e h o s t c o u n t r y w i l l g i v e t o t h e m u l t i n a -t i o n a l s , b u t do n o t a t t h e same t i m e , r e g u l a t e t h e b e h a v i o u r o f m u l t i n a t i o n a l s , hence t h e y a r e n o t b a l a n c e d . M o r e o v e r , w h i l e i n d i v i d u a l c o u n t r i e s may a g r e e t o c l a u s e s l i k e "Prompt, a d e q u a t e and e f f e c t i v e " c o m p e n s a t i o n f o r n a t i o n a l i z a i t o n , t h e y have b e e n s u b j e c t o f much c o n t r o v e r s y i n v a r i o u s i n t e r -n a t i o n a l f o r u m s . For-'th*ese r e a s o n s , a number o f c o u n t r i e s have r e s e r v a t i o n s on b i l a t e r a l t r e a t i e s as r e g u l a t o r y i n -s t r u m e n t s p r o v i d i n g a d e f i n i t i v e s e t t l e m e n t o f c o n t r o v e r s i a l i s s u e s . As Raymond V e r n o n has p o i n t e d o u t : "Thei'Tfundamental d i f f i c u l t y w i t h t h e s e t r e a t i e s i s t h a t t h e y p r o v i d e u n r e a -l i s t i c g u a r a n t e e s f o r t h e f o r e i g n d i r e c t i n v e s t o r , guar^n)tees w h i c h c a n n o t be s u s t a i n e d i n t h e l o n g r u n Any d e v e l o p i n g c o u n t r y t h a t a g r e e s t o s u c h terms c o u l d o n l y be d o i n g so as a g e s t u r e , one t h a t c o u l d s c a r c e l y be e x p e c t e d t o s u r v i v e f o r l o n g i n t h e n o r m a l i n t e r n a l p o l i t i c a l p r o c e s s e s o f most c o u n t r i e s . " 2 191 As far as instruments which have already been adopted at the m u l t i l a t e r a l l e v e l are concerned, they are spe c i a l i z e d in their scope and subject matter. Only the OECD Guidelines deal with almost a l l the aspects of the operations of the multinationals, but then these guidelines are only to be observed by multinationals operating i n OECD countries. The other instruments mentioned before are to be implemented i n a l l countries but are specia l i z e d i n scope. The ne^gotia:bio*a on a code of conduct for transnationals i n the Commission on Transnational Corporations are the only attempt to f o r -mulate a comprehensive m u l t i l a t e r a l code of conduct. The experience of General Agreement on Trade and T a r i f f s and International Monetary fund shows that "the establishment of m u l t i l a t e r a l p o l i c y and i n s t i t u t i o n a l frame-work provides the s t a b i l i t y and p r e d i c t a b i l i t y that f a c i l i -tates international economic co-operation."^ Also, the General Assembly Resolution pertaining to the International Develop-ment Strategy for the Third United Nations Development Decade shows a continued concern for the possible negative effects 4 of transnational corporations. It also expresses the hope that the Code on Transnational Corporations would be adopted expeditiously i n order to eliminate the negative effects of transnational corporations and to promote their positive contributions to the development e f f o r t s of developing co-untries consistent with their national development plans and p r i o r i t i e s . 192 Steps towards formulation of the code Since there was general agreement that a code of conduct should be formulated, the Group of Eminet Persons recommended that the Economic and Social Council should be the main organof the United NationalJ,i responsible for th i s , and that i t should discuss issues related to the oper-ations of multinationals once a year. The Group also proposed that a Commission on Transnational Corporations should be established to aid and advise the Economic and Social Council on issues and problems brought to i t annually r e l a t i n g to transnational corporations. The proposal was endorsed by rthe Secretary General i n the f a l l of 1974 and a Commission on Transnational Corporations was set up with 48 members. The term of o f f i c e i s three years on a staggered basis and elections are held annually which are conducted by the Economic and Social Council. The Group also recommended the establishment of a research and information centre to provide administritive and substantive services to the Commission on Transnational corporations (CTN). Accordingly, an Information and Research Centre (RC) was set up to function under the guidance of the Commission on Transnational Corporations and administ-r a t i v e l y under the Centre on Transnational Corporations ( CTC ) . 5193 The Commission on Transnational Corporations has been meeting annually since 1975. The complete divergence of views between developing and developed countries evident i n ;the ; Report of the Group of Eminent Persons read with the attached comments was also to be seen i n the f i r s t meeting fo the Commission on Transnational Corporations and, often, there was an a i r of confrontation. The Group of 77 representing the Third World countries and a group of Western delegations consisting of France, West Germany, I t a l y , UK and USA sub-mitted lengthy l i s t s of their respective areas of concern.^ While the Group of 77 focussed on the many a c t i v i t i e s and operations of the transnationals and expressed their fears about them, the group of Western delegations was mainly concerned with the relations between the multinationals and the governments of the host countries with respect to issues related to discriminatory treatment of multin;a>tl;ona;lJ-subsidiaries, expropriations, and the type of investment climate p r e v a i l i n g i n developing countries. Repeated discussions gradually led to the narrowing down of the divergence of views t i l l i n 1983 a draft code emerged i n which agreement had been reached on about two-7 thirds of i t s provisions. It was decided early i n the deliberations on the code that the code would consist of six chapters. Ipjreamble and Objectives; Definitions; Major Pr i n c i p l e s and/or Issues Related to the A c t i v i t i e s of Trans-national Corporations; Major P r i n c i p l e s and/or issues 194 Relating to the Treatment of Transnational Corporations; Legal Nature and Scope of the Code; and Implementaiton. It was found that the gap between the opposing positions was too wide to deal immediately with chapters two, f i v e and six, i . e . d e f i n i t i o n s , legal nature and scope of the code; and implementaion. There were more points of agreement with regard to issues under preamble and objectives; treatment of trans-national corporations; and a c t i v i t i e s of transnational cor-porations and, therefore, attempts were made to draft the paragraphs dealing with these areas f i r s t . Areas of International Agreement ,S\Agreement has been reached i n some cases ad  referendum, on the major part of the chapter dealing with the a c t i v i t i e s of Transnational Corporations. (Paragraphs 6-46), on paragraphs dealing with Intergovernmental Corporation (Paragraphs 59-65), and the Implementation of the Code of Con-duct. In the area of c o n f l i c t of j u r i s d i c t i o n , too, agree-ment has been reached. Co-operation with Host States T.here. i s broad agreement that transnational corpora-tions should have respect for the national sovereignty,;, of the host State and \that. each State has a right to exercise i t s p sovereignty within i t s t e r r i t o r y . Transnational corpora-tions are subject to the laws of the host country which has the right to r.:e;g.ullra'te and monitor their a c i t i t i e s . ^ They must carry out their a c t i v i t i e s i n conformity with the develop-ment p o l i c i e s , objectives and p r i o r i t i e s set out by the host country and they must seriously work i n a way that they make a positive contribution to the development i n the host co-. • 10 untries. Contracts must be entered into i n good f a i t h and must normally contain renegotiation clauses. In the absence of these clauses too, transnational corporations should co-operate i n good f a i t h with the government of the host country., td renegotiate where a fundamental change of circumstances has taken p a l c e . 1 1 Paragraphs dealing with transnationals having respect for s o c i a l , and c u l t u r a l objectives, values and "traditions' of the host country; respect for human rights and fundamental freedoms i n the host country; and Orion-interference in the i n -ternal p o l i t i c a l a f f a i r s of the host country have also been agreed upon.-'-2 Paragraph fourteen dealing with non-colla-boration with r a c i s t minority regimes i n Southern A f r i c a has been agreed ad referendum i n the working group but not yet by 13 the Commission. Intergovernmental Co-operation Transnationals should not in t e r f e r e i n intergovern-mental re l a t i o n s and should not request their governments to intervene on their behalf t i l l l o c a l remedies have been 14 exhausted. These provisions have to be read with para-graphs dealing with intergovernmental co-operation which have been agreed upon1.5 States agree that the objectives 196 of the Code can only be achieved through intergovernmental co-operation which should be strengthened both at the i n t e r -national l e v e l and at b i l a t e r a l , regional and inter-regional l e v e l s . States agree that i t i s necessary to exchange i n f o r -mation on measures taken with e f f e c t to the Code and their experience with the Code; to consult on a b i l a t e r a l or multi-l a t e r a l basis as required on matters r e l a t i n g to the Code and i t s application, and i n the development of international agreements and arrangements on issues related to the Code; that States should not use transnational corporations to interf e r e i n the. i n t e r n a l or external a f f a i r s , and f i n a l l y , that States should not intervene on behalf of transnationals t i l l the l o c a l remedies have been exhausted. In any case, the home government should not use any coercive measures not consistent with the Charter of the United Nations and with the Declarations on Pri n c i p l e s of International Law concerning Friendly Relations and Co-operation among States in accordance with the Charter of the United Nations. Ownership and Control With reference to ownership and control, i t has been agreed that transnational corporations should make an e f f o r t to allocate their decision-making power in a way that they can con-tribute to the economic and s o c i a l development of the host countrie .19-7: They should also co-operate with the host governments to meet the national objectives of l o c a l eguity p a r t i c i -pation and of e f f e c t i v e control by the l o c a l partner as determined by equity, contractual terms in non-equity arr-1 7 angements or the laws of the host countries. They should attempt to promote employment and p a r t i c i p a t i o n . i n mana-gement and d i r e c t i o n of the enterprise of adequately q u a l i f i e d nationals of the host country so that their e f f e c t i v e p a r t i c i p a t i o n i s enchanced a t a levels of de-18 cision-making. Not only that, they should contribut§°e 19 to managerial and technical t r a i n i n g of l o c a l nationals. Export Objectives • There i s basic agreement, too, that transnationals should contribute to promotion and d i v e r s i f i c a t i o n of exports and that they should, use available indigenous goods, services and other r e s o u r c e s . 3 0 As has been ment-ioned before, transnationals should also be responsive to requests by host governments to phase over a limited period of time, the r e p a t r i a t i o n of c a p i t a l i n case of disinvest-ment or accumulated p r o f i t s . 2 1 They should not engage i n short-term f i n a n c i a l operations, or manipulate i n t r a - .. . . corporate payments or indulge i n r e s t r i c t i v e trade pract-ices which would have an adverse e f f e c t , - on the ba-22 lance -of-payments position of the host country. In e f f e c t , they should not do anything which would have an adverse impact on the working of l o c a l markets or cjaWse 198 s e r i o u s b a l a n c e - o f - p a y m e n t d i f f i c u l t i e s . T r a n s f e r p r i c i n g t o a v o i d t a x a t i o n o r evade exchange c o n t r o l measures s h o u l d 23 not a l s o be done by t r a n s n a t i o n a l s . Consumer P r o t e c t i o n Agreement has been r e a c h e d on m a t t e r s d e a l i n g w i t h consumer p r o t e c t i o n and e n v i r o n m e n t p r o t e c t i o n where t r a n s -n a t i o n a l s a r e e x p e c t e d t o p e r f o r m t h e i r a c t i v i t i e s i n a c c o r d -ance w i t h r e l e v a n t i n t e r n a t i o n a l s t a n d a r d s so t h a t t h e y do n o t c a u s e i n j u r y t o t h e h e a l t h o r s a f e t y o f t h e consumers o r 24 harm t h e e n v i r o n m e n t . They s h o u l d s u p p l y t o t h e c o m p e tent a u t h o r i t i e s , i f r e q u e s t e d t o do s o , r e l e v a n t i n f o r m a t i o n w i t h r e g a r d t o h e a l t h and s a f e t y p r o t e c t i o n , i n c l u d i n g e x p e r i m e n t a l u s e s and o t h e r r e l a t e d , a s p e c t s ; and p r o h i b i -t i o n s , r e s t r i c t i o n s and w a r n i n g s u s e d on t h o s e p r o d u c t s o r 25 s e r v i c e s i n o t h e r c o u n t r i e s . A p p r o p r i a t e i n f o r m a t i o n a b o u t the c o n t e n t s and p o s s i b l e h a z a r d o u s e f f e c t s o f a p r o d u c t must be g i v e n t o t h e consumer t h r o u g h l a b e l s , a c c u r a t e and 2 6 i n f o r m a t i v e a d v e r t i s i n g . P a c k a g i n g s h o u l d be s a f e . T r a n s -n a t i o n a l s s h o u l d a l s o c o - o p e r a t e w i t h o t h e r i n t e r n a t i o n a l o r g a n i z a t i o n t o d e v e l o p and promote n a t i o n a l and i n t e r n a -t i o n a l s t a n d a r d s f o r p r o t e c t i o n o f t h e h e a l t h and s a f e t y o f c onsumers w h i l e , a t t h e same t i m e , m e e t i n g t h e i r b a s i c n e e d s . 199 S i m i l a r p r o v i s i o n s have b e e n a g r e e d upon w i t h r e s p e c t t o e n v i r o n m e n t p r o t e c t i o n . ? 8 D i s c l o s u r e o f I n f o r m a t i o n P a r a g r a p h s d e a l i n g w i t h d e t a i l e d d i s c l o s u r e o f i n f o r -m a t i o n i n c l u d i n g f i n a n c i a l as w e l l as n o n - f i n a n c i a l i t e m s h ave b e e n a g r e e d u p o n . T h i s i n f o r m a t i o n i s t o be made a v a i l a b l e a n n u a l l y w i t h i n s i x months and n o t l a t e r t h a n t w e l v e months f r o m t h e end o f t h e f i n a n c i a l y e a r o f t h e c o r p o r a t i o n . I n a d d i t i o n , s e m i - a n n u a l summary o f f i n a n c i a l 2 9 i n f o r m a t i o n s h o u l d where a p p r o p r i a t e be a l s o p r o v i d e d . The d e t a i l s o f i n f o r m a t i o n t o be g i v e n a r e s p e l t o u t i n p a r a g r a p h 44. The f o r t y - s i x t h p a r a g r a p h a l s o p r o v i d e s f o r m a k i n g a v a i l a b l e a p p r o p r i a t e i n f o r m a t i o n t o t r a d e u n i o n s o r o t h e r r e p r e s e n t a t i v e s o f e m p l o y e e s i n t h e i r o r g a n i z a t i o n s i n ^ , t h e h o s t c o u n t r i e s t o e n a b l e them t o a s s e s s t h e p e r f o r m -ance o f t h e l o c a l e n t i t y a n d , where a p p r o p r i a t e , o f t h e e n t i t y as a w h o l e . A l l i n f o r m a t i o n g i v e n p u r s u a n t t o t h e s e p a r a -g r a p h s i s s u b j e c t t o a p p r o p r i a t e s a f e g u a r d s s o t h a t no damage 30 i s c a u s e d t o t h e p a r t i e s c o n c e r n e d . C o n f l i c t o f J u r i s d i c t i o n T h e r e h a s b e e n c o n s i d e r a b l e c o n t r o v e r s y on p a r a g r a p h s 55-58 d e a l i n g w i t h c o n f l i c t s o f j u r i s d i c t i o n i n c a s e o f d i s p u t e s . I t was p r o p o s e d t h a t - a t r a n s n a t i o n a l s h o u l d be s u b j e c t t o t h e j u r i s d i c t i o n o f t h e h o s t c o u n t r y ; t h a t i n c a s e o f a d i s p u t e b e t w e e n a S t a t e and a t r a n s n a t a s b n a l . L i . t t . s h o u l d be s e t t l e d b y c o m p e t e n t c o u r t s o r o t h e r a u t h o r i t i e s , 200 o r -by o t h e r a g r e e d means o f d i s p u t e s e t t l e m e n t s u c h as a r b i t r a t i o n ; t h a t p a r t i e s s h o u l d be f r e e t o c h o o s e t h e a p p l i c a b l e l a w and t h e f o r m o f d i s p u t e ^ s v e t t l e m e n t ; and t h a t i n c a s e o f c o n f l i c t o f j u r i s d i c t i o n where more t h a n one S t a t e had j u r i s d i c t i o n o v e r t h e t r a n s n a t i o n a l o r i t s e n t i t i e s , S t a t e s s h o u l d a d o p t m u t u a l l y a c c e p t a b l e p r i n c i p l e s and p r o c e d u r e s f o r t h e - s e t t l e m e n t o f d i s p u t e . I n an e f f o r t t o f i n d a c o n s e n s u s on t h e m a t t e r i t was s u g g e s t e d - - t h a t i s s u e s d e a l i n g w i t h t r a n s n a t i o n a l s b e i n g s u b j e c t t o t h e l a w s and c o u r t s o f t h e h o s t c o u n t r y s h o u l d be d e a l t w i t h e l s e w h e r e i n t h e c o d e . What was a g r e e d upon was t h a t i n c a s e o f c o n f l i c t o f j u r i s d i c t i o n , S t a t e s s h o u l d t r y t o a v o i d s u c h c o n f l i c t s b y n o t e x e r c i s i n g j u r i s d i c t i o n w here i t more p r o p e r l y b e l o n g e d t o a n o t h e r . ^ They s h o u l d a l s o e n d e a v o u r t o a d o p t b i l a t e r a l l y and m u l t i l a t e r a l l y m u t u a l l y a c c e p t a b l e p r i n c i p l e s and p r o c e d u r e s f o r t h e s e t t l e m e n t o f s u c h c o n f l i c t s b a s e d on t h e p r i n c i p l e o f s o v e r e i g n e q u a l i t y a nd on r e s p e c t f o r m u t u a l i n t e r e s t . T h i s was a g r e e d t o i n 1984 a t t h e r e c o n v e n e d s p e c i a l s e s s i o n . I m p l e m e n t a t i o n o f t h e Code I n o r d e r t o e n s u r e and p r o m o t e t h e i m p l e m e n t a t i o n o f t h e Code, the^Sutate^s s h o u l d p u b l i c i z e and d i s s e m i n a t e t h e Code; f o l l o w t h e i m p l e m e n t a t i o n o f t h e Code i n t h e i r t e r r i -t o r i e s ; and r e p o r t t o t h e U n i t e d N a t i o n s C o m m i s s i o n on T r a n s n a t i o n a l C o r p o r a t i o n t h e a c t i o n t a k e n a t t h e n a t i o n a l 201 l e v e l to implement the Code, and the experiences gained from i t s implementation; and do everything else necessary to support the Code. 3 2 It has been agreed that the Commission on Transnational Corporations s h a l l perform the functions of the international i n s t i t u t i o n a l machinery responsible for the implementation of the code and the Centre on Transnational Corporations w i l l act as the Secretariat to the Commission. The Commission s h a l l be the focal point of a l l a c t i v i t i e s concerned with matters i n the Code and s h a l l have 3 3 the following functions. F i r s t , i t s h a l l hold discussions on matters r e l a t i n g to the Code and f a c i l i t a t e intergovernmental consultations on s p e c i f i c issues related to the Code. Second, i t s h a l l p e r i o d i c a l l y assess the implementation of the Code on the basis of the reports submitted by the Governments and on documents submitted by United Nations organizations and speci a l i z e d agencies. The f i r s t assessment i s to take place not e a r l i e r than two years and not l a t e r than three years from the date of adoption of the Code. The second assessment i s to take place two years after the f i r s t assessment and then the p e r i o d i c i t y i s to be determined by the Commission on Transnational Corporations. In case any government wants a c l a r i f i c a t i o n on any provision i n trying to apply i t to a p a r t i c u l a r s i t u a t i o n , the Commission s h a l l provide the 202 c l a r i f i c a t i o n b u t w i t h o u t d r a w i n g c o n c l u s i o n s on t h e c o n -d u c t o f t h e p a r t i e s i n v o l v e d . The C o m m i s s i o n has t o a l s o a n n u a l l y r e p o r t t o t h e G e n e r a l A s s e m b l y on a c t i v i t i e s r e -g r a d i n g i m p l e m e n t a t i o n o f t h e Code and f a c i l i t a t e i n t e r -g o v e r n m e n t a l a g r e e m e n t s and a r r a n g e m e n t s on m a t t e r s r e l a -t i n g t o s p e c i f i c i s s u e s r e l a t e d t o t h e Code. I t i s a l s o r e s p o n s i b l e f o r c o l l e c t i o n and d i s s e m i n a t i o n o f i n f o r m a t i o n r e l a t i n g t o t h e i m p l e m e n t a t i o n o f t h e Code. A r e v i e w o f t h e Code ha s b e e n a g r e e d u p o n , s i x y e a r s a f t e r i t s a d o p t i o n , b u t t h e m o d a l i t i e s o f t h e r e v i e w have n o t b e e n w o r k e d o u t . F u r t h e r d i s c u s s i o n on t h i s s u b j e c t has b e e n d e f e r r e d t i l l i s s u e s l i k e t h e mode o f a d o p t i o n and t h e l e g a l n a t u r e o f t h e Code have b e e n s e t t l e d . O u t s t a n d i n g I s s u e s  P r e a m b l e s and O b j e c t i v e s W i t h r e g a r d t o b o t h t h e p r e a m b l e and o b j e c t i v e s , two b a s i c o p t i o n have emerged d u r i n g t h e d i s c u s s i o n s . One i s t o have a s h o r t f o r m a l p r e a m b l e r e c a l l i n g t h e l e g i s l a t i v e ' - ' h i s t o r y o f t h e Code and t h e work o f t h e o t h e r b o d i e s o f t h e U n i t e d N a t i o n s i n t h i s s p h e r e . The s e c o n d i s t h a t t h e p r e -amble c o u l d i n a d d i t i o n c o n t a i n more s u b s t a n t i v e m a t t e r r e -f l e c t i n g t h e s u b s t a n t i v e p r o v i s i o n s o f t h e Code and t h e p o s i t i v e a n d n e g a t i v e a s p e c t s o f t h e o p e r a t i o n s o f t r a n s -n a t i o n a l s . 2 0 3 S i m i l a r l y , t h e o b j e c t i v e c o u l d r e f l e c t t h e p o s i t i o n o f t h e U n i t e d N a t i o n s as s t a t e d i n i t s I n t e r n a t i o n a l D e velopment S t r a t e g y ; t h e d e s i r e o f t h e S t a t e s t o e s t a b l i s h a mechanism w h i c h would l e a d t o . g r e a t e r c o - o p e r a t i o n among them w i t h r e s p e c t t o t h e a c t i v i t i e s and t r e a t m e n t o f t r a n s n a t i o n a l c o r p o r a t i o n s ; and t h e d e s i r e t o work o u t i n t e r n a t i o n a l s t a n d a r d s and a r r a n g -ements w i t h r e g a r d t o t r a n s n a t i o n a l c o r p o r a t i o n s i n c o - o p e r a t i o n w i t h t h e bodies.- o f t h e U n i t e d N a t i o n s . The s e c o n d o p t i o n i s _ t h a t i n a d d i t i o n t o t h e f o r e g o i n g , t h e statement', o f o b j e c t -i v e s c o u l d a l s o c o n t a i n more s u b s t a n t i v e p r o v i s i o n s r e -f l e c t i n g t h e s u b s t a n t i v e p o r t i o n s o f t h e Code. The o b j e c t i v e s c o u l d a l s o be r e f l e c t e d by r e c a l l i n g t h e D e c l a r a t i o n and Programme o f A c t i o n on a New I n t e r n a t i o n a l E conomic O r d e r ; t h e terms o f r e f e r e n c e f o r t h e work o f t h e work o f t h e c o m m i s s i o n on T r a n s n a t i o n a l C o r p o r a t i o n s , and v a r i o u s r e s o -3 5 l u t i o n s i n t h i s c o n t e x t a d o p t e d f r o m t i m e t o t i m e . D e f i n i t i o n . ' and Scope A l t h o u g h t h e q u e s t i o n o f d e f i n i t i o n and s c o p e o f t r a n s n a t i o n a l c o r p o r a t i o n s has b e en under d i s c u s s i o n s i n c e t h e work began on t h e Code, no s e t t l e m e n t has y e t been r e a c h e d . The OECD G u i d e l i n e s and t h e I n t e r n a t i o n a l L a b o u r O r g a n i z a t i o n i n i t s T r i p a r t i t e D e c l a r a t i o n o f P r i n c i p l e s c o n c e r n i n g Mu-l t i n a t i o n a l E n t e r p r i s e s and S o c i a l P o l i c y d i d n o t a t t e m p t 2 0 4 a p r e c i s e l e g a l " ' . d e f i n i t i o n . T hey b o t h i n c l u d e d e n t e r p r i s e s whose o w n e r s h i p was " p r i v a t e , s t a t e o r m i x e d " and who owned o r c o n t r o l l e d " p r o d u c t i o n , d i s t r i b t u i o n , s e r v i c e s o r o t h e r f a c i l i t i e s o u t s i d e t h e c o u n t r y i n w h i c h t h e y ( w e r e ) b a s e d — The d e g r e e o f autonomy o f e n t i t i e s w i t h i n m u l t i e n a t i o n a l e n t e r p r i s e s i n r e l a t i o n t o e a c h o t h e r v a r i e s w i d e l y f r o m one s u c h e n t e r p r i s e t o a n o t h e r , d e p e n d i n g o n - t h e n a t u r e o f t h e l i n k s b e t w e e n s u c h e n t i t i e s and t h e i r f i e l d o f a c t i v i t y a nd h a v i n g r e g a r d t o t h e g r e a t d i v e r s i t y i n t h e f o r m o f o w n e r s h i p , i n t h e s i z e j i n t h e n a t u r e and l o c a t i o n o f t h e 3 7 o p e r a t i o n s o f t h e e n t e r p r i s e s c o n c e r n e d . " " ' T h u s , b o t h .the;, QECD G u i d e l i n e s and t h e T r i p a r t i t e D e c l a r a t i o n i n c l u d e e n t e r p r i s e s w h i c h a r e S t a t e - o w n e d , p r i v a t e - o w n e d o r w i t h m i x e d o w n e r s h i p . T h e B e l - i s c o g t r o v e r s y on t h i s i s s u e i n t h e Code. T h r e e p o s s i b l e s o l u t i o n s t o t h e p r o b l e m h a v e b e e n c o n s i d e r e d . One i s t h a t a f o o t n o t e t o t h e p r o v i s i o n d e a l i n g w i t h t h e s c o p e o f t h e a p p l i c a t i o n o f t h e Code c o u l d s t a t e t h a t t h e Code a p p l i e d t o a l l e n t e r p r i s e s o r e n t i t i e s o f a l l c o u n t r i e s i r r e s p e c t i v e o f t h e i r o r i g i n and t y p e o f o w n e r s h i p . The s e c o n d i s t h a t t h e C h a i r p e r s o n r o f ;,the C o m m i s s i o n on T r a n s n a t i o n a l C o r p o r a t i o n s s h o u l d s t a t e i n t h e r e p o r t t h a t a l l t h e g r o u p s had c o n f i r m e d t h a t t h e Code w o u l d a p p l y t o e n t e r p r i s e s w h i c h had t h e c h a r a c t e r i s t i c s d e s c r i b e d 205 i n p a r a g r a p h 1 o f t h e Code, and t o a l l o t h e r e n t e r p r i s e s w h i c h o p e r a t e d i n t h e i r c o u n t r i e s . T h i r d , t h a t t h e p r o v i s i o n d e a l i n g w i t h th e s c o p e o f t h e a p p l i c a t i o n o f t h e Code s h o u l d e x p l i c i t l y s t a t e t h a t t h e code a p p l i e d t o a l l e n t e r p r i s e s w hether p r i v a t e l y owned, o r s t a t e - o w n e d o r o f mixed . . 38 o w n e r s h i p . F r e e and u n r e s t r i c t e d t r a n s f e r o f a l l payments r e l a t i n g t o  i n v e s t m e n t s Some d e l e g a t i o n s a r e o f t h e v i e w t h a t t h e Code s h o u l d c o n t a i n a p a r a g r a p h s t a t i n g t h a t t r a n s n a t i o n a l s s h o u l d be p e r m i t t e d t o f r e e l y t r a n s f e r a l l payments r e l a t i n g t o t h e i r i n v e s t m e n t s l i k e income from i n v e s t e d c a p i t a l and t h e r e -p a t r i a t i o n o f t h i s c a p i t a l i n t h e e v e n t o f t h i s i n v e s t m e n t b e i n g t e r m i n a t e d , f e e s f o r l i c e n s i n g and t e c h n i c a l a s s i s t a n c e , r o y a l t i e s and a l l o t h e r s u c h payments. T h i s s h o u l d be w i t h o u t p r e j u d i c e t o p a r a g r a p h 29 o f t h e d r a f t code w h i c h r e c o g n i z e s t h a t t r a n s n a t i o n a l s s h o u l d be r e s p o n s i v e t o t h e r e q u e s t o f h o s t c o u n t r i e s w i t h r e g a r d t o p h a s i n g o f t h e r e p a t r i a t i o n o f c a p i t a l and p r o f i t s and o t h e r payments o v e r a l i m i t e d p e r i o d o f t i m e where o t h e r w i s e t h e r e w o u l d be b a l a n c e - o f -39 payment d i f f i c u l t i e s . Many d e l e g a t i o n s o b j e c t t o t h e i n c l u s i o n o f s u c h a p r o v i s i o n . They f e e l t h a t i f i t has t o be i n c l u d e d i t s h o u l d e x p l i c i t l y s t a t e t h a t t h e t r a n s f e r w o u l d be g o v e r n e d by 40 f o r e i g n exchange laws and r e g u l a t i o n s o f t h e h o s t c o u n t r y . 206 Non-collaboration by transnational corporations with r a c i s t minority regimes in Southern A f r i c a From the beginning of the negotiations on the Code some delegates have advocated that that the Code should contain provisions r e l a t i n g to the a c t i v i t i e s of the trans-nationals and their collaboration with the r a c i s t minority regime i n South A f r i c a . 4 1 Others have condemned apartheid but have raised questions about whether i t i s proper to have such provisions i n the Code. In order . to f a c i l i t a t e the work of the Commission on Transnational Corporations and to give i t guidelines on this subject, the Economic and Social Council adopted a resolution i n 1980 s t a t i n g that the Code should: Deal i n the most e f f e c t i v e and appropriate manner wi't'H the issue of the a c t i v i t i e s of transnational corporations in South A f r i c a and Namibia, recognizing that concern was widely expressed i-JT_the' Commission on Transnational Corp-orations, i n the context of the struggle against apartheid, at the collaboration of transnational cor-porations with the r a c i s t minority regime. 4 2 In addition, since i t s Third Session, the Commission has consistently adopted resolutions pertaining to Southern Af r i c a at i t s annual sessions, but equally co;ris.is:t-erf-tly some major i n d u s t r i a l i z e d countries have either voted negatively on these resolutions or have refrained from voting. 207 It has also been ^proposed that the issue of Southern Afr i c a should also be r e f l e c t e d i n the preamble and i n the Statement of Objectives. In 1983, a;itexit was agreed upon ad referendum but there i s controversy on whether the heading, "Non-collaboration by transnational corporations with r a c i s t minority;-'/ regimes in Southern A f r i c a " i s an i n t e g r a l part 4 3 of the provision or not.- A m a j o r d i f f i c u l t y also seems to be w i t h t h e term " c o l l a b o r a t i o n " and i t s i m p l i c a t i o n s . The term i s not necessarily used pejoratively. It can simply mean co-operation or support of any a c t i v i t y that contributes to the maintaining of the system of apartheid and occuption of 44 Namibia. N a t j 6na4 i z a t i 6 h" T r a n d i t i o n a l l y , interna.tii:6,ri'ai!l.'fciaw prohibited expro-p r i a t i o n of foreign property without compensation by the ex-propriating State. It has been conceded that a sovereign Stater;;'has the right to expropriate foreign property where the expropriation i s for a --public," purpose i s non-discriminatory and 45 has been effected with the due process of law. The develop-ed nations have always demanded compensation which i s prompt, adequate and e f f e c t i v e . Adequate compensation means the f a i r market value of the going concern together with i t s future earning prospects, goodwill and other such intangible factors. Post-war experience shows that compensation has often f a l l e n far below the value claimed, that payments have been deferred *t -2 0 8 and made i n n o n - c o n v e r t i b l e c u r r e n c y . C o n s i d e r a b l e d i f f e r e n -c e s o f o p i n i o n h a v e b e e n t h e r e on w h e t h e r i n t e r n a t i o n a l l a w as i t i s t o d a y r e q u i r e s a S t a t e t o p a y a d e q u a t e c o m p e n s a t i o n t o a l i e n s whose p r o p e r t y i s t a k e n f o r p u b l i c p u r p o s e s w h i c h a r e deemed t o be i m p o r t a n t f o r n a t i o n a l w e l f a r e and w here t h e e x p r o p r i a t i n g S t a t e h a s n o t d i s c r i m i n a t e d b e t w e e n i t s own n a t i o n a l s and a l i e n s . F u r t h e r , a l t h o u g h c l a u s e s p e r t a i n i n g t o p r o m p t , a d e q u a t e and e f f e c t i v e c o m p e n s a t i o n h a v e b e e n i n s e r t e d i n b i l a t e r a l i n v e s t m e n t t r e a t i e s , t h e s e s t a n d a r d s h ave n o t a l w a y s b e e n a c t u a l l y a d h e r e d t o i n p r a c t i c e : * A number o f L a t i n A m e r i c a n c o u n t r i e s h a v e q u e s t i o n e d I. t h e t r a d i t i o n a l i n t e r n a t i o n a l l a w o f S t a t e r e s p o n s i b i l i t y , t h a t i s t h e r i g h t o f a f o r e i g n S t a t e t o p r o t e c t t h e l i f e a nd p r o p e r t y o f i t s n a t i o n a l s i n t h e e v e n t o f t h e h o s t c o u n t r y ' s f a i l u r e t o do so as e x t e n d e d by t h e d e v e l o p e d 46 c o u n t r i e s t o a p p l y t o b u s i n e s s e n t i t i e s . A c c o r d i n g t o t h e t r a d i t i o n a l d o c t r i n e , i t was n o t enough f o r t h e a l i e n s t o be g i v e n t h e same t r e a t m e n t as t h e n a t i o n a l s . An i n t e r -n a t i o n a l minimum s t a n d a r d had t o be met so t h a t no m a t t e r what t r e a t m e n t was g i v e n t o t h e n a t i o n a l s , a l i e n s had t o be t r e a t e d a c c o r d i n g t o t h a t i n t e r n a t i o n a l minimum s t a n d a r d . 209 The C a l v o d o c t r i n e d i s p u t e t h i s t r a d i t i o n a l c o n c e p t by a s s e r t i n g t h a t t h e r e c o u l d be no i n t e r f e r e n c e , d i p l o m a t i c o r by f o r c e , by a n o t h e r S t a t e : - - i n t h e a f f a i r s o f a s o v e r e i g n S t a t e . 4 7 F u r t h e r , a l i e n s were n o t e n t i t l e d t o any r i g h t s and p r i v i l e g e s n o t a v a i l a b l e t o n a t i o n a l s . ' " T h e r e f o r e , b a s e d on t h i s d o c t r i n e , n a t i o n a l c o u r t s ,-had; e x c l u s i v e j u r i s d i c a t i o n i n d i s p u t e s i n v o l v i n g a l i e n s and a l i e n s c o u l d o n l y s e e k r e d r e s s i n n a t i o n a l c o u r t s . The F o r e i g n I n v e s t m e n t Code u n d e r t h e Andean P a c t r e a f f i r m s t h i s p o s i t i o n . Under A r t i c l e 50, m e m b e r - S t a t e s ) c a n n o t a c c o r d t o f o r e i g n i n v e s -t o r s more f a v o u r a b l e ^ t r e a t m e n t than- g i v e n t o t h e i r n a t i o n a l i n v e s t o r s and A r t i c l e 51 p r o h i b i t s i n t e r n a t i o n a l a d j u d i c -48 a t i o n o f i n v e s t m e n t d i s p u t e s . The s o c i a l i s t c o u n t r i e s o f E a s t e r n E u r o p e , t o o , h ave r e j e c t e d t h e t r a d i t i o n a l i d e a o f minimum . i n t e r n a t i o n a l s t a n d -a r d and m a i n t a i n t h a t t h e r e g u l a t i o n o f a l i e n p r o p e r t y f a l l s e x c l u s i v e l y w i t h i n t h p r o v i n c e o f n a t i o n a l l a w . 4 ^ T n e n e w n a t i o n s w h i c h have emerged f r o m c o l o n i a l i s m , a g a i n q u e s t i o n t h e u n i v e r s a l v a l i d i t y and a c c e p t a n c e ; o f t h e p r i n c i p l e s o f i n t e r n a t i o n a l minimum s t a n d a r d b e c a u s e t h e y f e e l t h a t t h e s e p r i n c i p l e s were d e v e l o p e d w i t h o u t t h e i r p a r t i c i p a t i o n o r c o n s e n t and t h a t t h e i r a p p l i c a t i o n l e a d s t o r e s u l t s w h i c h a r e u n j u s t and i n e q u i t a b l e and w h i c h p e r p e t u a t e t h e e x p l o i -t a t i v e c o l o n i a l s y s t e m b e n e f i c a l t o t h e d e v e l o p e d c o u n t r i e s . 210 They i n s i s t that' n a t i o n a l i z a t i o n i s a legitimate exercise of national sovereignty subject to no q u a l i f i c a t i o n s or l i m i t a t i o n s . Acts ,.o"f£ n a t i o n a l i z a t i o n have been inspired by and have, i n turn, inspired General Assembly resolutions pro-claiming "the right of peoples f r e e l y to use and exploit their natural wealth and resources /' inherent i n their 51 sovereignty" and resolutions l i k e "Permanent soverignty over natural resources." 5 2 under this resolution i t was accepted that "appropriate compensation" should be paid on n a t i o n a l i z a i t o n " i n accordance with national and i n t e r -national law", subject to the agreement of States and a l l parties concerned." 5 3 In case of disputes, they should be s e t t l e d by a r b i t r a t i o n or international adjudiction after l o c a l remedies have been exhausted. The developing countries accept this because the idea of prompt, adequate and e f f e c t i v e compensation, has been replaced by "appropriate" compensation'; and i t i s acceptable to developed countries because i t recognizes that compensation i s to be paid i n accordance with national as well as international law. Thus, the position of the developing countries i s as follows: F i r s t , they have a right to nationalize foreign property as an attribute of sovereignty and that the property bias been nationalized i n national i n t e r e s t cannot be challen-ged by anyone. Second, the amount of compensation should 211 n o t e x c e e d t h e n e t book v a l u e o f t h e i n v e s t m e n t and s h o u l d be commensurate w i t h t h e c a p a c i t y o f t h e h o s t government t o pay. T h i r d , t h e h o s t c o u n t r y has t h e r i g h t t o r e g u l a t e t h e e n t r y o f f o r e i g n i n v e s t m e n t and t h e c o n i d t i o n s u n d e r w h i c h t h e i n v e s t m e n t must o p e r a t e . F o u r t h t h e h o s t government c a n g i v e i n c e n t i v e s ' f o r f o r e i g n i n v e s t m e n t and c a n a l s o i m p o s i e A restrictions on i t s o p e r a t i o n s i n k e e p i n g w i t h i t s d e v e l o p m e n t p o l i c e s . F i n a l l y , t h e h o s t government has t h e r i g h t o t n e g o t i a t e t h e c o n t r a c t i n t h e l i g h t o f c h a n g e d c i r c u m s t a n c e s o r t o t a k e u n i l a t e r a l a c t i o n , t h e T O e f f e c t o f w h i c h i s t o m o d i f y t h e c o n t r a c t u a l o r p r o p e r t y r i g h t o f t h e f o r e i g n i n v e s t o r . S i n c e t h e p o s i t i o n s o f d e v e l o p e d and d e v e l o p i n g c o u n t r i e s a r e s t i l l a t v a r i a n c e w i t h r e g a r d t o i s s u e s o f n a t i o n a l i z a t i o n , c o m p e n s a t i o n , and d i s p u t e s e t t l e m e n t , no agreement has been r e a c h e d i n t h e code on c l a u s e s d e a l i n g w i t h t h e s e i s s u e s . However, t h e r e i s agreement t h a t i t i s n e c e s s a r y t o e v o l v e an i n t e r n a t i o n a l p u b l i c p o l i c y f r a m e -work b a l a n c i n g t h e r i g h t s and o b l i g a t i o n s o f t h e p a r t i e s i n v o l v e d . N a t i o n a l T r e a t m e n t : I t has b een r e c o g n i z e d i n a number o f m u l t i l a t e r a l i n s t r u m e n t s t h a t d e v e l o p i n g c o u n t r i e s , b e c a u s e o f t h e i r weaker e c o n o m i c p o s i t i o n s need t o r e c e i v e p r e f e r e n t i a l t r e a t m e n t 212 to help them i n their economic development. 5 4 the idea i s also inherent i n resolutions c a l l i n g for the restructuring of international economic re l a t i o n s between developed and developing countries for the establishment of a new i n t e r -national economic order. In the Set of M u l t i l a t e r a l l y Agreed Equitable P r i n c i p l e s and Rules for the Control of R e s t r i c t i v e Business P r a c t i c e s , i t has been s p e c i f i c a l l y stated: ... developed countries, should take into account i n their r e s t r i c t i v e business practices and development, f i n a n c i a l and trade needs of developing countries, i n p a r t i c u l a r of of the least developed countries, for the purpose e s p e c i a l l y of developing countries i n : (a) Promoting the establishment or development of domestic industries and the economic development of other sectors of the economy, and (b) Encouraging their economic development through regional or global arrangements among developing countries.55 Therefore, i t i s accepted that developing counries can give incentives for the establishment and development of domestic industry and hence can give p r e f e r e n t i a l treat-ment to domestic enterprise over foreign enterprise as long as this does not amount to a denial of j u s t i c e . Even i n the OECD Guidelines, the p r i n c i p l e s of national treatment has been seen as a goal to be s t r i v e d for rather than as an 213 a b s o l u t e o b l i g a t i o n . B e s i d e s , c e r t a i n e x c e p t i o n s t o t h e n a t i o n a l t r e a m t m e n t p r i n c i p l e h a v e b e e n g e n e r a l l y a c c e p t e d f o r . i n s t a n c e , c o n s i d e r a t i o n o f p u b l i c o r d e r and n a t i o n a l s e c u r i t y . I n t h e d r a f t c o d e , a g r e e m e n t on t h e n a t i o n a l t r e a t -ment c l a u s e has y e t t o be w o r k e d o u t . A c o m p r o m i s e f o r m u -l a t i o n p r o v i d e s f o r c e r t a i n s p e c i f i c e x c e p t i o n s t o t h e n a t i o n a l t r e a t m e n t p r i n c i p l e . A p a r t f r o m p u b l i c o r d e r and n a t i o n a l s e c u r i t y , o t h e r e x c e p t i o n s s u g g e s t e d a r e t h a t t r a n s n a t i o n a l c o r p o r a t i o n s s h o u l d n o t c l a i m i n c e n t i v e s a n d c o n c e s s i o n s g i v e n t o d o m e s t i c e n t e r p r i s e t o p r o m o t e s e l f - r e l i a n t d e v e l -opment o r p r o t e c t e s s e n t i a l e c o n o m i c i n t e r e s t s . Some S t a t e s f i n d t h i s f o r m u l a t i o n t o o s w e e p i n g .. A n o t h e r c l a u s e i n t h e f o r m u l a t i o n ; - . s t a t e s t h a t n a t i o n a l t r e a t m e n t w o u l d be a c c o r d e d when'.';the e n t e r p r i s e s o p e r a t e i n c i r c u m s t a n c e s w h i c h a r e s i m i l a r o r i d e n t i c a l - B u t many S t a t e s f e e l t h a t s u c h a f o r m u l a t i o n amounts t o n e g a t i n g t h e v e r y p r i n c i p l e o f n a t i o n a l t r e a t m e n t . S o l u t i o n c o u l d be f o u n d i f a c l e a r s t a t e m e n t i s made on f a i r and e q u i t a b l e t r e a t m e n t o f f o r e i g n e n t e r p r i s e b e c a u s e t h a t may a l l e v i a t e t h e c o n c e r n a b o u t 5 7 d i s c r i m i n a t o r y t r e a t m e n t . D i s p u t e S e t t l e m e n t T r a n s n a t i o n a l s may e n t e r i n t o c o n t r a c t s w i t h t h e g o v e r n m e n t o f t h e h o s t c o u n t r y , w i t h d o m e s t i c e n t e r p r i s e s 214 o r w i t h o t h e r t r a n s n a t i o n a l s . T h e r e i s a d i f f e r e n c e o f o p i n i o n on t h e d i s p u t e s e t t l e m e n t p r o c e s s i n s u c h c o n t r a c t s . On v i e w i s t h a t d i s p u t e s a r i s i n g o u t o f s u c h c o n t r a c t s a r e s u b j e c t t o t h e laws o f t h e h o s t c o u n t r y . A n o t h e r v i e w makes a d i s t i n c t i o n between c o n t r a c t s w i t h t h e Government o r i t s a g e n c i e s and t h o s e w i t h p r i v a t e p a r t i e s . A c c o r d i n g t o t h i s v i e w , when t h e c o n t r a c t i s w i t h a p r i v a t e p a r t y , t h e p a r t i e s s h o u l d be f r e e t o c h o o s e th e law w h i c h w o u l d g o v e r n t h e i r c o n t r a c t and t h e forum f o r t h e 5 8 s e t t l e m e n t o f any d i s p u t e s a r i s i n g o u t o f them. I t i s f e l t by some S t a t e s t h a t i f t h e p a r t i e s a r e l e f t f r e e t o c h o o s e t h e i r own law and forum f o r t h e s e t t l e m e n t o f d i s p u t e s i t would u n dermine t h e h o s t c o u n t r y ' s r i g h t t o r e g u l a t e and m o n i t o r t h e a c t i v i t i e s o f t r a n s n a t i o n a l s o p e r a t i n g i n i t s t e r r i t o r y ; and a l s o o u s t t h e j u r i s d i c t i o n o f i t s c o u r t s i n a l a r g e number o f c a s e s . 5 9 Amont t h e OECD c o u n t r i e s , a d i s p u t e s e t t l e m e n t m a c h i n e r y seems t o be e v o l v i n g i n f o r m a l l y . I n c a s e a t r a n s n a t i o n a l v i o -l a t e s t h e G u i d e l i n e s f o r M u l t i n a t i o n a l E n t e r p r i s e s , a c o m p l a i n t can be l o d g e d w i t h a c o n t a c t p o i n t u s u a l l y i n t h e e x t e r n a l a f f a i r s d e p a r t m e n t . The c o m p l a i n t i s t h e n communicated t o t h e home government o f t h e t r a n s n a t i o n a l . I t i s a method o f b r i n g i n g m o r a l p r e s s u r e t o b e a r on t h e t r a n s n a t i o n a l . S i m i l a r l y , i f t h e UN Code was u n i v e r s a l l y a c c e p t e d , some s u c h mechanism may e v o l v e f o r d i s p u t e s e t t l e m e n t . i N o n - i n t e r f e r e n c e i n i n t e r n a l a f f a i r s I t i s w e l l - e s t a b l i s h e d p r i n c i p l e o f i n t e r n a t i o n a l law t h a t S t a t e s s h o u l d n o t i n t e r f e r e i n t h e a f f a i r s o f o t h e r S t a t e s 215 and, t h e r e f o r e , there i s no c o n t r o v e r s y about the i n c l u s i o n of such a p r o v i s i o n i n the Code. The divergence of views i s on the scope of the p r o v i s i o n . On the one hand, i n t e r f e r e n c e means nothing more than the p e r c e i v e d i n a b i l i t y of State to formulate i t s economic p o l i c i e s because i t f e e l s that i t i s i n a weak b a r g a i n i n g p o s i t i o n compared to some t r a n s n a t i o n a l s which are very powerful because of t h e i r s i z e , resources and economic power. On the other, i t may r e f e r to s u r r e p t i t i o u s a c t i v i t i e s . In view of t h i s , some d e l e g a t i o n s f e e l t h a t the Code should s p e c i f y that t r a n s n a t i o n a l s should not i n d u l g e i n a c t i -v i t i e s that undermine the p o l i t i c a l and s o c i a l systems of the host country and that r e f e r e n c e should be made to i l l e g a l i n t e r -ference and i l l i c i t a c t i v i t i e s as the term " i n t e r n a l a f f a i r s " was too wide i n i t s e l f . Others f e e l that s u b v e r s i v e a c t i v i t i e s formed a category i n themselves and that the concept of non-i n t e r f e r e n c e was wider than t h a t . No agreement has yet been reached. An e f f o r t has been made to combine the two p o i n t s of view and a compromise f o r m u l a t i o n has been suggested but no consensus has as yet emerged.^''' Basi s f o r Concluding Document: Proposal by the Chairmen  of Working Groups I and I I In order to complete the f o r m u l a t i o n of the code of conduct, the Economic and S o c i a l C o u n c i l decided to h o l d a s p e c i a l s e s s i o n of the Commission on T r a n s n a t i o n a l C o r p o r a t i o n s 216 by i t s resolution 1982/68 of 27th October, 1982. The Commission decided to establish two working groups. Working Group lQha:itr;e^3 by the Rapporteur to consider sections - 0 f the draft code dealing with definifcionr.. and scope of app-l i c a t i o n , and the preamble and the objectives. The second Working Group was to be chaired by the Chairman of the Special Session and i t was to consider outstanding issues r e l a t i n q to the treatment of transnational corporations and their a c t i v i t i e s . The Chairman of the two working groups presented a working paper on the basis of extensive discussion of the elements contained i n i t as a possible settlement of the outstanding issues. Many delegations have repeatedly expressed the view that they are w i l l i n g to accept the pro-posals i n the working paper as a compromise solution provided other delegations are w i l l i n g to accept them too. The two Chairmen also f e l t that these proposals represented a delicate balance between the positons of various groups and any major change was l i k e l y to upset the balance. Paragraphs 1 to 3 of the Working Paper dealt with the d e f i n i t i o n of a transnational and scope of application of the Code. A transnational corporation was defined as 2 1 7 an "enterprise,comprising e n t i t i e s i n two or more countries regardless of the legal form and f i e l d of a c t i v i t y of these e n t i t i e s , which operates under a system of decision-making, permitting coherent p o l i c i e s and a common strategy through one or more decision-making centres, i n which the e n t i t i e s are so linked, by ownership or otherwise, that one or more of them may be able to exercise a s i g n i f i c a n t influence over the a c t i v i t i e s of others and, i n p a r t i c u l a r to share knowledge, resources and r e s p o n s i b i l i t i e s with others." 6 3 It was e x p l i c i t l y stated that the Code applies to any enterprise having these c h a r a c t e r i s t i c s regardless of i t s ownership and that i t i s u n i v e r s a l l y applicable ft A and open to adoption by a l l States. As mentioned before, there was broad agreement on the question of States having sovereignty over their natural resources and wealth but there were some reservations on the right of the States to exercise this sovereignty; whether the right should be excercised i n accordance with i n t e r n a t i o a l law or i n accordance with agreements reached by the countries concerned on a b i l a t e r a l and m u l t i l a t e r a l basis. In the proposal, i t has been c l e a r l y stated that transnationals must respect the national sovereignty of the host countries and that each State had the right to exercise i t s permanent sovereignty over i t s natural resources and wealth. 6 5 2 1 8 A g a i n , some S t a t e s h a d s o u g h t t o m o d i f y t h e f o r m u l -a t i o n t h a t t r a n s n a t i o n a l s were s u b j e c t t o t h e j u r i s d i c t i o n ©;£-t h e h o s t c o u n t r y w i t h t h e q u a l i f i c a t i o n , " t o t h e e x t e n t r e g u i r e d b y t h e - n a t i o n a l , l a w o f t h e s e c o u n t r i e s . " The P r o p o s a l r e m o v e s any s u c h q u a l i f i c a t i o n and c l a r i f i e s t h a t t h e t r a n s n a t i o n a l i s s u b j e c t t o t h e j u r i s d i c a t i o n , l a w s , 6 6 r e g u l a t i o n s and a d m i n i s t r a t i v e p r a c t i c e s o f t h e h o s t c o u n t r y . I n t h e n a t i o n a l t r e a t m e n t c l a u s e s , i t i s p r o p o s e d t h a t t r a n s n a t i o n a l s s h o u l d r e c e i v e f a i r and e q u i t a b l e t r e a t -ment i n t h e h o s t c o u n t r i e s . The n a t i o n a l t r e a t m e n t p r i n c i p l e h a s b e e n q u a l i f i e d b y r e q u i r e m e n t s f o r m a i n t a i n i n g p u b l i c o r d e r a n d p r o t e c t i n g n a t i o n a l s e c u r i t y ; v i t a l n a t i o n a l i n t e r e s t s c o n s i s t e n t w i t h s o c i o - e c o n o m i c s y s t e m s as r e f l e c t e d i n n a t i -o n a l const'itb'uticon's and o t h e r l a w s ; and t h e d e c l a r e d d e v e l o p -ment o b j e c t i v e s o f t h e d e v e l o p i n g c o u n t r i e s . ' A l s o , t r a n s n a - ' t i o n a l s s h o u l d be g i v e n t h e same t r e a t m e n t as d o m e s t i c e n t e r -p r i s e s "when t h e c i r c u m s t a n c e s u n d e r w h i c h t h e y o p e r a t e a r e s i m i l a r . " 6 7 W i t h r e s p e c t t o n a t i o n a l i z a t i o n , t h e w o r k i n g p a p e r o n l y a d v o c a t e s payment o f c o m p e n s a t i o n b y t h e S t a t e c o n c e r n e d , ' " i n a c c o r d a n c e w i t h t h e a p p l i c a b l e l e g a l r u l e s . D i s p u t e s b e t w e e n S t a t e s and e n t i t i e s o f t r a n s n a t i o n a l a r e t o be s u b -m i t t e d t o c o m p e t e n t n a t i o n a l c o u r t s o r a u t h o r i t i e s ; b u t 219 i f the parties mutually agree, disputes may be referred 69 to other dispute settlement procedures. Conclusion Therefore, we see that agreement has been reached the on many important issues dealt with in/Code arid on others, possible solutions exist on which agreement i s possible. Also, the need for international regulation of foreign investment has been acknowledged. In the absence of i t , States have t r i e d to resolve the problem through national l e g i s l a t i o n , regional arrangements and b i l a t e r a l investment t r e a t i e s . Certain agencies of the United Nations have also t r i e d to work out codes of conduct regarding issues pertaining to transnational corporations but a l l these e f f o r t s have been limited by scope and subject. In order to make the Code a r e a l i t y , i t has been suggested that paragraphs on which agreement has been reached should be adopted as part of the Code while negotiations should continue cn others. This, however, i s not p r a c t i c a l because the outstanding issues are as v i t a l as nat i o n a l i z a t i o n and compensation, the p r i n c i p l e of national treatment, dispute settlement, what constitutes i n t e r n a l a f f a i r s of a country and the concept of non-interference i n them by transnationals. 2 2 0 In the absence of agreement on such issues, the Code i s not l i k e l y to succeed. Another major obstacle i n the negotiations concerning the Code has been controversy on whether the Code should 70 be a mandatory or a voluntary instrument. The view of United States and other developed i n d u s t r i a l i z e d countries i s that the Code should be voluntary i n character. The developing cuntries, on the other hand, would l i k e the Code to be mandatory. However, i t seems that a decision on the exact nature of the Code i s not as important as agreement on the issues by a l l the parties concerned and their p o l i t i c a l commitment to make the Code e f f e c t i v e through i t s implemen-tation and follow-up procedures. An instrument may be l e g a l l y binding and yet may be viol a t e d with impunity whereas even a voluntary instrument may be e f f e c t i v e i f there i s p o l i t i c a l commitment towards i t . This i s p a r t i c u l a r l y true-in'-.the sphere of international law which, by i t s very nature, cannot have strong enforcement machinery. Besides, the instrument has a greater chance of acceptance i f , to begin with, i t i s voluntary i n nature. It would help to resolve the d i f f i c u l t i e s i n connection with some formulations where there i s agreement on the concepts 221 b e c a u s e t h e n t h e t e x t w o u l d n o t have t o be c o u c h e d i n p r e c i s e l e g a l t e r m s . F o r e x a m p l e , a l l S t a t e s a g r e e t h a t a s o v e r e i g n S t a t e h a s t h e r i g h t t o n a t i o n a l i z e and t h e c o r r e s p o n d i n g d u t y t o p a y c o m p e n s a t i o n . The d i f f i c u l t y l i e s i n e l a b o r a t i n g t h e s t a n d a r d s a c c o r d i n g t o w h i c h t h e c o m p e n s a t i o n has t o be p a i d . A g a i n , a l e g a l l y b i n d i n g Code means t h a t n o t o n l y s h o u l d t h e c o n c e p t b e i n g f o r m u l a t e d be g e n e r a l l y a c c e p t e d and u n i v e r s a l l y a d o p t e d , i t s l a n g u a g e must a l s o . b e s o a g r e e d u p o n . C o n s e n u s h a s h a s a l r e a d y b e e n o b t a i n e d b o t h on t h e c o n c e p t s and t h e l a n g u a g e f o r t w o - t h i r d s o f t h e Code. The a d o p t i o n o f t h e Code s h o u l d n o t be h e l d up b e c a u s e o f c o n -t r o v e r s i e s o f l a n g u a g e w i t h r e g a r d t o t h e r e s t o f t h e one-t h i r d o f t h e Code. M o r e o v e r , i t i s e x t r e m e l y d i f f i c u l t t o o b t a i n c o n -s e n s u s f o r e v e r y p a r a g r a p h i n a c o m p r e h e n s i v e l e g a l l y b i n d i n g c o d e where t h e r e a r e so many s o v e r e i g n S t a t e s w i t h s u c h w i d e l y d i f f e r i n g i n t e r e s t s and t h e i s s u e s b e i n g d e a l t w i t h a r e o f s u c h g r e a t c o m p l e x i t y . I f t h e i n s t r u m e n t w e re t o i n i t i a l l y c o n t a i n g e n e r a l s t a n d a r d s and norms, i t w o u l d be an i m p o r t a n t f i r s t s t e p i n t h e d i r e c t i o n o f i n t e r n a t i o n a l r e g u l a t i o n o f f o r e i g n i n v e s t m e n t and t h e r e w o u l d be room e v o l v i n g t h e more d e t a i l e d i m p l i c a t i o n s o f t h e s e i s s u e s . 222 Also, i t has to be remembered that i t i s not possible to anticipate every s i t u a t i o n that may arise however com-prehensive the Code may be. Other international instruments have also been going through a process evolution. Even national l e g i s l a t i o n involving public policy evolves with time and has to be refined through amendments. The OECD Guidelines have already been formally reviewed twice since their adoption i n 1976. S i m i l a r l y , there are provisions for review in the l i g h t of experience gained i n the T r i p a r t i t e Declaration on Multinational Enterprises and Social Policy and i n the International Code of Marketing of Breast-Milk •Substitutes. Further, i n international law, when certain p r i n c i p l e s become so widely accepted, that they become part of the inte r n a l tonal psyche, they gain the status of custo-mary international law and by themselves acquire a manadatory character. Hence, i f the Code was adopted and given a chance to evolve i t s norms are more l i k e l y to become part of cust-omary international law than i f i t i s not adopted at a l l . 223 CONCLUSION I n t h e p r e c e d i n g c h a p t e r s we h a v e e x a m i n e d t h e f o r e i g n i n v e s t m e n t p e r s p e c t i v e s , p o l i c i e s and l a w s o f a d e v e l o p e d and a d e v e l o p i n g c o u n t r y , v i z . Canada and I n d i a . They i n d i c a t e t h a t f o r e i g n i n v e s t m e n t i s a u s e f u l t o o l f o r a c c e l e r a t i n g t h e p r o c e s s o f g r o w t h and d e v e l o p m e n t . We ha v e s e e n t h a t i n c a s e o f a d e v e l o p i n g c o u n t r y l i k e I n d i a , i t c a n be an i m p o r t a n t means o f a u g m e n t i n g r e s o u r c e s and t e c h n o l o g i c a l c a p a b i l i t i e s . I t c a n a c t as a c a t a l y s t f o r t h e g r o w t h o f i n d i g e n o u s i n d u s t r y , s k i l l e d manpower and e n t r e p r e n e u r s h i p . I t e n c o u r a g e s t h e a d a p t a t i o n o f t e c h n o l o -gy t o l o c a l n e e d s , t h e a d v a n c e m e n t o f r e s e a r c h and t h e d e v e l o p m e n t o f an i n d u s t r i a l c u l t u r e w h i c h i s a p r e r e q u i s i t e f o r e c o n o m i c p r o s p e r i t y . The e x a m i n a t i o n o f Ca n a d a ' s e x p e r i e n c e h a s shown how f o r e i g n i n v e s t m e n t h a s p l a y e d a v i t a l r o l e i n t h e e c o n o m i c d e v e l o p m e n t o f a d e v e l o p e d c o u n t r y . F o r e i g n i n v e s t m e n t h a s been an i m p o r t a n t s o u r c e o f c a p i t a l and know-how, h a s l e d t o t h e e f f i c i e n t e x p l o i t a t i o n o f n a t u r a l r e s o u r c e s and a c c e l e -r a t e d t h e e s t a b l i s h m e n t o f i n d u s t r i a l s t r u c t u r e i n C a n a d a . I n b o t h c o u n t r i e s t h e ne e d h a s been f e l t t o r e g u l a t e f o r e i g n i n v e s t m e n t i n o r d e r t o m a x i m i z e i t s b e n e f i t s and m i n i m i z e i t s c o s t s . 224 Most o f t h e d e v e l o p i n g c o u n t r i e s , b e i n g e r s t w h i l e c o l o n i e s , a r e u n d e r d e v e l o p e d b e c a u s e t h e y h a v e m i s s e d t h e i n d u s t r i a l r e v o l u t i o n . They a r e l a t e c o m e r s t o i n d u s t r i a -l i z a t i o n by a b o u t a h u n d r e d and f i f t y y e a r s . They h a v e t o b r i d g e t h e gap b u t l a c k r e s o u r c e s , t e c h n o l o g y , s k i l l e d manpower, and i n f r a s t r u c t u r e . They n e e d f o r e i g n d i r e c t i n -v e s t m e n t f o r t h e i r e c o n o m i c d e v e l o p m e n t b u t f e e l i n a weak b a r g a i n i n g p o s i t i o n w i t h r e s p e c t t o t r a n s n a t i o n a l s . W h i l e t h e y a r e w e l l aware o f t h e b e n e f i t s o f f o r e i g n d i r e c t i n v e s t -ment, t h e y c a n i l l - a f f o r d t h e c o s t s . Hence, t h e y f i n d i t n e c e s s a r y t o r e g u l a t e f o r e i g n d i r e c t i n v e s t m e n t i n o r d e r t o c h a n n e l i z e i t f o r t h e i r e c o n o m i c d e v e l o p m e n t . At t h e same t i m e t h e y o f f e r i n c e n t i v e s t o a t t r a c t f o r e i g n d i r e c t i n v e s t -ment w h i c h p l a c e an i n t o l e r a b l e b u r d e n on t h e i r e c o n o m i e s . T h i s d e f e a t s t h e v e r y p u r p o s e o f t h e i n v e s t m e n t and l e a d s t o two r e s u l t s : t r a n s n a t i o n a l s a r e s u b j e c t e d t o m u l t i p l e and r o f t e n c o n t r a d i c t o r y l a w s ; t h e s e l a w s s o m e t i m e s c h a n g e a b r u p t l y and a p p a r e n t l y c a p r i c i o u s l y b e c a u s e t h e e c o n o m i e s c a n n o t s u s -t a i n t h e i n c e n t i v e s o f f e r e d . T r a n s n a t i o n a l s o f t e n i n v e s t i n d e v e l o p i n g c o u n t r i e s i n s e a r c h o f new m a r k e t s , c h e a p e r c o s t s o f p r o d u c t i o n , and g r e a t e r p r o f i t s . B e s i d e s , e x p a n d i n g m a r k e t s means more j o b s . By 1 9 7 9 , one US w o r k e r i n t w e n t y was e m p l o y e d i n p r o d u c t i o n o f e x p o r t s f o r t h e t h i r d w o r l d c o u n t r i e s . " ' " When, h o w e v e r , t h e ^ e c o n o m i c and p o l i t i c a l e n v i r o n m e n t i s n o t s t a b l e t h e y 225 c a n be s u b j e c t e d t o u n f a i r e x p r o p r i a t i o n o r n a t i o n a l i z a t i o n . I t , t h e r e f o r e , l i e s i n t h e i n t e r e s t o f b o t h d e v e l o p i n g coun4--t f i e s and t h e t r a n s n a t i o n a l s t o a c c e p t i n t e r n a t i o n a l r e g u l a -t i o n o f f o r e i g n d i r e c t i n v e s t m e n t . I n c a s e o f d e v e l o p e d c o u n t r i e s l i k e Canada and A u s t r a l i a w h i c h a r e " p r i m a r i l y h o s t c o u n t r i e s t o f o r e i g n i n v e s t m e n t " , i t h a s b e e n n e c e s s a r y t o "employ s c r e e n i n g m e c h a n i s m s and r e s t r i c t f o r e i g n i n v o l v e m e n t i n some s e c t o r s f o r c u l t u r a l o r 2 e c o n o m i c r e a s o n s " . I n C a n a d a , t h e m a j o r i t y o f f o r e i g n d i r e c t i n v e s t m e n t i s f r o m USA r e s u l t i n g i n a h i g h p e r c e n t a g e o f o w n e r -s h i p and c o n t r o l o f n o n - f i n a n c i a l C a n a d i a n i n d u s t r y . US i s a l s o C a n a d a ' s l a r g e s t t r a d i n g p a r t n e r . O v e r 7 0 % o f C a n a d a ' s e x p o r t s go t o US a b o u t t h e same p e r c e n t a g e o f i m p o r t s come f r o m US. T h i s makes Canada d e p e n d e n t on US m a r k e t s . B e i n g d e p e n d e n t b o t h f o r i n v e s t m e n t and t r a d e l e a d s t o a f e e l i n g o f i n s e c u r i t y . R e g u l a t i o n o f f o r e i g n d i r e c t i n v e s t m e n t i s e s s e n -t i a l l y c o n c e r n e d w i t h m a i n t a i n i n g an i n d e p e n d e n t c u l t u r a l and e c o n o m i c i d e n t i t y . As was p o i n t e d o u t by Hon. G e r a l d Regan, M i n i s t e r o f S t a t e ( I n t e r n a t i o n a l T r a d e ) , a l l c o u n t r i e s i m p o s e r e s t r i c t i o n s on 3 f o r e i g n i n v e s t m e n t i n s o m e way o r t h e o t h e r . I n USA i t s e l f , f o r e x a m p l e , t h e r e a r e r e s t r i c t i o n s on f o r e i g n i n v e s t m e n t s i n s e c -t o r s l i k e s h i p b u i l d i n g , d r e d g i n g , f i s h i n g , a i r t r a n s p o r t , com-m u n i c a t i o n s , f i n a n c e , n u c l e a r power, m i n i n g and d e f e n c e 226 p r o c u r e m e n t i n d u s t r i e s . B e s i d e s , l a w s r e l a t i n g t o a n t i - . t r u s t and s e c u r i t i e s c a n be u s e d t o p r e v e n t a c q u i s i t i o n s by f o r e i g n e r s when t h e s e a r e n o t i n US i n t e r e s t . R e s t r i c t i o n s i n c o u n t r i e s l i k e US and G r e a t B r i t a i n , w h i c h a r e home c o u n t -r i e s f o r l a r g e p o r t i o n s o f f o r e i g n d i r e c t i n v e s t m e n t , " i n v o l v e c o n s i d e r a t i o n s o f s e c u r i t y and d e f e n c e as w e l l as e c o n o m i c 4 c o n s i d e r a t i o n s " . F r a n c e and J a p a n u s e v a r i o u s a d m i n i s t r a t i v e m e a s u r e s t o p r o t e c t t h e i r t r a d e and i n v e s t m e n t i n t e r e s t s . T h e r e f o r e , r e s t r i c t i v e m e a s u r e s i n v a r y i n g d e g r e e s and f o r m a r e b e i n g u s e d by a l l c o u n t r i e s , w h e t h e r d e v e l o p e d o r d e v e l o p i n g , a l t h o u g h a l l o f them r e c o g n i z e t h e p o t e n t i a l b e n e -f i t s o f a l i b e r a l t r a d e and i n v e s t m e n t e n v i r o n m e n t . I t a l l p o i n t s t o a n e e d f o r u n i v e r s a l l y a g r e e d p r i n c i p l e s and g u i d e -l i n e s w i t h r e g a r d t o f o r e i g n d i r e c t i n v e s t m e n t . The p o s i t i o n has b e e n s u c c i n c t l y s t a t e d by Hon. G e r a l d R e gan: "T h e r e a r e no a b s o l u t e r i g h t s and w r o n g s . T h e r e must, h o w e v e r , be a b a l a n c e o f i n t e r e s t s among s t a t e s t h a t r e c o g n i z e t h e i r n a t i o n a l r e s p o n s i b i l i t i e s and t h e d e s i r a b i l i t y o f a r e l a t i v e l y l i b e r a l i n t e r n a t i o n a l t r a d e and i n v e s t m e n t c l i m a t e . MNEs must commit t h e m s e l v e s t o c o n t r i b u t e t o d e v e l o p m e n t by f o l l o w i n g t h e l a w s and p o l i c i e s o f t h e c o u n t r i e s i n w h i c h t h e y o p e r a t e , and 5 i n t e r n a t i o n a l g u i d e l i n e s . The r e a l i z a t i o n r o f t h e nee d f o r c l e a r g u i d e l i n e s f o r t r a n s n a t i o n a l c o r p o r a t i o n s l e d t o t h e e s t a b l i s h m e n t o f t h e 227 Commission and Centre on Transnational Corporations which began the work of elaborating a code of conduct for trans-national corporations in 1977. The Organization for Econo-mic Cooperation and Development has also developed guidelines for transnational corporations and for the conduct of host governments towards transnational corporations but these guidelines only apply to the OECD countries. The number of host and home countries has been steadily increasing, and the newly-industrialized countries have also a large stake in creating a positive climate for d i r e c t investment. Agreement, as we have seen, has been reached on the major portion of the draft .code workded out by the Commission on Transnational Corporations. Given the p o l i t i c a l w i l l , i t i s possible and desirable to accept t h i s code. However, we must remember that the centre of regulation would s t i l l have to remain national l e g i s l a t i o n . The adoption of the Code could lead to a c t i v i t y at the national l e v e l to make the instrument more e f f e c t i v e . It could i n s p i r e national regulations and p o l i c i e s to secure a greater application of the pr i n c i p l e s agreed upon at the international l e v e l . In fact a provision could be included in the Code i t s e l f to say that States should endeavour to incorporate the p r i n c i p l e s and norms contained in the Code. Universal acceptance of those p r i n c i p l e s coupled with e f f o r t s at the national l e v e l to make them e f f e c t i v e would compel the transnationals to respond, too, and be good corporate c i t i z e n s in accordance with these standards. This would make foreign investment a tr u l y valuable tool for economic development. 228 NOTES INTRODUCTION 1. North-South : A Programme for Survival, The Report  of the Independent Commission on International Development Issues under the Chairmanship of  Willy Brandt, 1980, Pan Books Ltd., p. 18. Henceforth referred to as Brandt Commission Report. 2 . No agreement has been reached on the d e f i n i t i o n and scope of transnational corporations i n the Code of Conduct being worked out by United Nations Commission on Transnational Corporations. The OECD Guidelines and the T r i p a r t i t e Declaration of Principl e s concerning Multinational Enterprises and Social Policy have also not given a precise legal d e f i n i t i o n . 3. Brandt Commission Report, P.32. 4. Statements and Speeches, No.82/80, "Beyond Cancun : Canadian Perspectives on the North-South Dialogue," An Address by the Honourable Mark MacGuigan, Secretary of State for External A f f a i r s , to the Society for International Development, Baltimore, July 21, 1982, External A f f a i r s , Canada, p.3. 5. Ibid. 6 . Ibid . , p.4 . 7. UN Document E/5500/Rev.1, The Impact of Multinational  Corporations on Development and on International  Relations, p. 24. 229 CHAPTER I 1. UN Document ST/ECA/190, Multinational Corporations in  World Development, New York, 1973, p.53. 2. UN Document E/C.10/38, Transnational Corporations in  World Development : A Re-examination, 1978, p.270. 3. Ibid., 4. UN Document ST/ECA/190, p.50. 5. UN Document E/C.10/38, p.90. 6. Hon. Herb Gray, Foreign Direct Investment in Canada, Ottawa, 1972, p.405. From now on referred to as the Gray Report . Also See UN Document ST/ECA/190, p.48. 7. Foreign Ownership and the Structure of Canadian Industry : Report of the Task Force on the Structure of Canadian  Industry, Ottawa, January 1968. Henceforth referred to as Watkins Report. pp.48-51;. pp.310-340. See Also Report to the House : Special Committee Respecting  Canada - U.S. Relations, House of Commons, Second Session, Twenty-eighth Parliament, 1969-1970. Henceforth referred to as Wahn Report, pp.33:70 - 33:78. See Also Gray Report, pp.253-290. 8. Watkins Report, p.49 9. Watkins Report, pp.41-42. See Also Gray Report, pp.158-181. 10. Gray Report, pp.184-208. 11. UN Document ST/ECA/190, p.54. See Also footnote 29. 12. UN Document E/C.10/84, p.12. 13. "Letter from New Delhi", Vol.97 No.34, Far Eastern  Economic Review, Aug.26, 1977, p.70. P.S. Sangal, National and Multinational Companies  Some Legal Issues, Delhi : Bhagwati International Enterprises, 1981, p p . x v i i i - xxv. 230 15. UN Document E/5209/(ESCOR 53rd Session, Supplement No.l). 16. UN Document E/5500/Rev. i ; . Report of the Group of Eminent  Persons to Study the Impact of Multinational Corporations  on Development and on International Relations. From now on referred to as Report, p.38. The Group consisted of the following : L.K. Jhaj (Chairman) India. George Kaham (Vice-Chairman) Tanzania. J . Irwin M i l l e r (Vice-Chairman) USA. Pierre Uri (Vice-Chairman) France. Juan Somavia (Rapporteur) Chile. Eurik Blum -- Yugoslavia. Tore Browaldh -- Sweden. John J. Deutsch -- Canada. Mohamed Diawara - Ivory Coast. John Dunning -- U.K. Antonio Estrany y Gendre -- Argentina. Ahmad Ghozali -- Algeria. J.D. Ivanov -- USSR. Jacob Javits -- USA. Ryutaro Komiya -- Japan. Sicco Mansholt -- Netherlands. Hans Matthoefer — FRG. Mohammad S a d l i - - Indonesia. Hans Schaff(?}err Switzerland. Mario Trindade -- B r a z i l . 17. Ibid p .103 . 18 . Ibid . , pp.44-45 . 19. Ibid. , p. 74 . 20 . Ibid . , p. 79 . 21 . Ibid . , p. 90 . 22. Mr. Ryutaro Komiya, representative from Japan, was at that time Professor of Economics, Tokyo University. 23. Mr. Jacob J a v i t s , representative from USA was at that time a Senator. 24. Mr. Irwin M i l l e r , representative from USA, was at that time Chairman, Cummins Engine Co., Inc. n 25. Mr. Hans S c h a f f n e r , representative from Switzerland, was a former President of the Swiss Confederation and at that time was Vice Chairman of SANDOZ, S.A. 231 26 . 27. 28. 29 . 30 . 31 . 32 . 33 . 34 . 35 . 36 . 37. 38 . 39. 40 . 41 . 42 . 43 . 44 . 45 . 46 . 47. 48 . 49. 50 . 51 . 52 . Report, p.3 6 Ibid . Ibid . Ibid . Ibid . Ibid . Ibid . Ibid . Ibid . Ibid. Ibid . Ibid . Ibid . Ibid . Ibid . Ibid . Ibid. p.104, p.102. pp.3 6 and 37, and p.145 . Ibid., p. 5 7 . Ibid. Ibid., p.5 9. Ibid.. See Also Ibid., p.105. Ibid., p.144 Ibid., p.4 7. Ibid., p.107, p.119. Ibid., p.66, p.67, p.68. Ibid., p.155, and p.130. pp.121-122. pp.83, 84, 85. See Also p.40. p. 87 . p.93 . p.150 . p . 6 7 . p . I l l . p.140 . p.116 . pp.122-123. p.129 . :.151 . 119 . p.117. p.113. p:. P-232 CHAPTER II 1. UN Document E/5500/Rev. 1, Report, p.26. 2. Simon Kuznets, "Reflections on the Economic Growth of Modern Nations," Towards a Theory of Economic Growth, New York : W.W. Norton & C o . r I n c , 1965 r p t . 1968, pp.86-92 . 3. Ibid., pp.112-120. 4. Simon Kuznets, "Present Underdeveloped Countries and Past Growth Patterns", Economic Growth and Structure : Selected  Essays, New York : W.W. Norton & Co. Inc., 1965, pp.176-177. 5. Barbara Ward, "The Decade n-F Development -- A study in Frustration'.', Reshaping the World Economy : Rich and Poor Countries, ed. John A. Pincus, 1968, pp.18-30. Simon Kuznets, Economic Growth and Structure, pp.176-193. 6. Barbara Ward, "The Decade of Development", pp.24-25. 7. Simon Kuznets, "Population and Economic Growth", Population, Capital, and Growth, New York : W.W. Norton & Co. Inc., 1973, pp.1-48. See Also Barbara Ward, "The Decade of Development", pp.25-27. A major theme in the Macdonald Commission Report i s that Canada's domestic market i s too small to sustain i t s economy. It i s , therefore, very important for Canada to ensure assured access to American markets. Report of  the Royal Commission on the Economic Union and Development  Process for Canada, Minister of Supply & Services, 1985. From now on referred to as Macdonald Commission Report. 8. Barbara Ward, "The Decade of Development", p.28. 9. Ibid., p.29. 10. S. Kuznets, Economic Growth and Structure, pp.182-185. 11. Ibid., p.178. 12. S. Kuznets, " Reflections on Economic Growth", pp.95-98. See Also, "Towards a Theory of Economic Growth", pp.24-29, Towards a Theory of Economic Growth. 13. Kuznets, Economic Growth and Structure, p.178. 233 14. Q u o t e d by G l e n W i l l i a m s , Not f o r E x p o r t : Toward a  P o l i t i c a l Economy o f Canada's A r r e s t e d I n d u s t r i a l i z a t i o n , T o r o n t o : M c C l e l l a n d and S t e w a r t L t d . , 1 9 8 3 , p.7. 1 5 . D e n i s S t a i r s and G i l b e r t R. Winham, r e s e a r c h c o - o r d i n a t o r s , Canada and t h e I n t e r n a t i o n a l P o l i t i c a l / E c o n o m i c E n v i r o n m e n t , U n i v . o f T o r o n t o P r e s s , 1 9 8 5 , p . 4 9 . See A l s o M a c d o n a l d C o m m i s s i o n R e p o r t , V o l . 1 1 , p p . 4 0 6 - 4 0 7 . 1 6 . K. L e v i t , S i l e n t S u r r e n d e r , T o r o n t o , M a c m i l l a n , 1 9 7 0 . 17 . G l e n W i l l i a m s , Not f o r E x p o r t , p .7. 18. Q u o t e d by G l e n W i l l i a m s , Not f o r E x p o r t , p.7. 19 . Q u o t e d by W i l l i a m s , p .8. 20. I b i d . , p p . 9 - 1 0 . 2 1 . I b i d . , p . 1 0 . 2 2 . I b i d . , p.9. 2 3 . D e n i s S t a i r s and G i l b e r t R. Winham, Canada and t h e I n t e r n a t i o n a l P o l i t i c a l / E c o n o m i c E n v i r o n m e n t , p .54. 24. Canada - US r e l a t i o n s h a v e b e e n d i s c u s s e d i n t h e W a t k i n s  R e p o r t , Wahn R e p o r t , G ray R e p o r t , and M a c d o n a l d C o m m i s s i o n  R e p o r t . 25 :. . Wahn R e p o r t , p . 3 3 :12 . 26. M a c d o n a l d C o m m i s s i o n R e p o r t , V o l . 1 , pp.237, 2 3 8 . 27. D e n i s S t a i r s and G i l b e r t R. Winham, Canada and t h e I n t e r n a t i o n a l P o l i t i c a l / E c o n o m i c E n v i r o n m e n t , p . 5 3 . 28. I b i d . , p . 5 1 . R o y a l C o m m i s s i o n on C a n a d a ' s E c o n o m i c P r o s p e c t s , November, 1 9 5 7 . From now on r e f e r r e d t o as Gord o n R e p o r t . 234 CHAPTER III 1. Jawaharlal Nehru, The Discovery of India, abridged by CD. Narasimhaiah, New Delhi : Indian Council for Cultural Relations, 1976, p.190. Iv 2. K.S. Shedsankar, The Problem of India, London : Penguin Special, 1940, Quoted by Nehru in The Discovery of India, p.190. 3. Matthew J . Kust, Foreign Enterprise in India : Laws and  P o l i c i e s , University of North Carolina . Press , 1964, p.20. See Also pp.22-23. 4. Ibid., p.24. 5. Nehru, The Discovery of India, p.188. 6. Ibid. 7. Proceedings 1943, Vol. I I I . Federation of Indian Chambers of Commerce and Industry Annual Meeting, Delhi, 27-28 March 1943, p.162. Quoted by Michael Kidron, Foreign Investments in India, Oxford University Press, 1965, p.65. 8. Commerce, 28 November 1942, c i t e d by Kidron, Foreign  Investments i n India, p.66. 9. Eastern Economist, 31 Aug., 1945. Cited by Kidron, p.66. 10. Nabagopal Das, Industrial Enterprise i n India, p. 8 : I t a l i c s in o r i g i n a l . Cited by Kidron, p.67. 11. Eastern Economist, 13 Oct. 1944, p. 413. Cited by Kidron, p.67. 12. Eastern Economist, 12 May 1944, p.727. Cited by Kidron, p.67. 13. Eastern Economist, 6 A p r i l 1945, p.424. Cited by Kidron, p.68 14. Proceedings, 1945, V o l . I l l , p.122. Cited by Kidron, p.68. 15. Eastern Economist, 18 May 1945, p.658. Cited by Kidron, p.68 . 235 •16. Report of the Indian Merchants' Chamber, 1928, Bombay, 1929, p.14. Cited by Kidron, p.69. 17. Eastern Economist, 9 July 1943, p.254. Cited by Kidron, P.69. 18. Manu Subedar, Speech i n the Legi s l a t i v e Assembly, cit e d by Kidron, p.69. 19. Eastern Economist, 18 May 1945, p.642. Cited by Kidron, p. 70. 20. "An Industrial Mission", Path to Prosperity, p.422. Cited by Kidron, p.70. 21. Cited by Kust, Foreign Enterprise in India, p.111. 22. Cited by Kust, Foreign Enterprise in India, pp.63-64. 23. United Nations Economic and Social council, The Impact  of Multinational Corporations on Development and on  International Relations, E/5500/Rev.1, New York, 1974, p.113 . 24. UN Document ST/ECA/190 Multinational Corporations in  World Development, p.48. 25. Simon Kuznets. _ Economic Growth and Structure, London, 1966. 26. Barbara Ward, "The Decade of Development", Reshaping the World Economy : Rich and Poor Countries, ed. John A. . Pincus, 1968. 2 7. Report of the Group of Eminent Persons to Study the Impact of Multinational Corporations on Development and on  International Relations, UN Document E/5500/Rev.l 28. See Kidron, Foreign Investments in India, pp.299-321. See Also Private Foreign Investment i n i t s Relationship to Development, Report by the UNCTAD Secretariat . UNCTAD Document TD/134. 29. J . Eddison, Industrial Development in the Growth of the  Pulp and Paper Industry in India, pp.264-5, Cited by Kidron , p.23. See Also p.24. See Also Transfer of Technology, Report by the UNCTAD Secretariat. UNCTAD Document TD/106. 236 30. Kidron, p.303. 31. The above figures have been taken from Kidron, p.246. 32. Myths and R e a l i t i e s of Foreign Investment i n India, Indian Investment Centre, New Delhi, p.3. 33. Ibid., See Also Survey of Indo-U.S. Collaborations, New Delhi: Federation of Indian Chambers of Commerce, 1984 . 34. Ibid., 35. Kust, Foreign Enterprise i n India, p.55. See Also Kidron, p.305. And see, Private Foreign Investment i n  i t s Relationship to Development : Balance-of-payment effects of private foreign investment in developing  countries : Summary of case studies of India, Iran,  Jamaica and Kenya, Report prepared by Sanjay L a l l , Institute of Economics and S t a t i s t i c s , Oxford, UNCTAD Document TD/134/Supp.1. 36. Report of the Study Team on Leakage of Foreign Exchange  Through Invoice Manipulation, Ministry of Finance, Government of India, 1971. Henceforth referred to as Study Team Report. 3 7. T r i a l and Punishment of Social and Economic Offences, 47th Report of the Law Commission of India. 38. Study Team Report, p.5. 39. See Lok Sabha Debates, 8th Session, Vol.31, August to September, 1973. 40. Statement of Objects and Reasons for FERA, 1973. See Also Statement of Objects and Reasons for FERA, 1947. See R.B. Sethi, Foreign Exchange Regulation Act with Rules,  No t i f i c a t i o n s and Forms, 2nd ed., Allahabad : Law Publishers, 1982. 41. Section 29 of FERA, 1973 : Restrictions on Establishment of Place of Business i n India : (1) (a) carry on in India, or establish in India a branch, o f f i c e or other place of business for carrying on any a c t i v i t y of a trading, commercial or i n d u s t r i a l nature, other than an a c t i v i t y for the carrying on of which permission of the Reserve Bank has been obtained under Section 28; 237 Section 28 of FERA, 1973 : Restrictions on the Appointment of Certain persons and Companies as Agents or Technical or Management Advisers in India. (1) Without prejudice to the provisions of Section 47 and notwithstanding anything contained in any other pro-vision of this Act or the Companies Act, 1956 (1 of 1956), a person resident outside India whether a c i t i z e n of India or not, or a person who i s not a c i t i z e n of India but i s resident in India, or a company (other than a banking company) which i s not incorporated under any law in force in India or in which the non-resident interest i s more than forty percent, or any branch of such company, s h a l l not, except with the general or special permission of the Reserve Bank,--(a) act, or accept appointment, as agent i n India or any person or company, i n the trading or commercial transac-tion of such person or company; or (b) act or accept appointment, as technical or management adviser i n India of any person or company; or (c) permit any trade mark, which he or i t i s e n t i t l e d to use, to be used by any person or company for any d i r e c t or i n d i r e c t consideration. (2) Where any such person or company (including i t s branch) as i s referred to in sub-section (1) acts or accepts appointment as such agent, or technical manage-ment adviser, or permits the use of any such trade mark, without the permission of the Reserve Bank, such acting, appointment or permission, as the case may be, s h a l l be void . (3) Where any such person or company (including i t s branch) as i s referred i n sub-section (1) acts as, or holds the appointment of, any such agent or technical or management adviser as i s referred to in that sub-section at the commencement of this Act, or where a permission for the use of any such trade mark granted by such person or company (including i t s branch) con-tinues to be v a l i d at such commencement, such person or company (including i t s branch) s h a l l , within a period of six months from such commencement or such further period as the Reserve Bank may allow i n t h i s behalf, make an application to the Reserve Bank in such form containing such p a r t i c u l a r s as may be spec i f i e d by the Reserve Bank for permission to continue to act, or to hold the appointment, as such or, as the case may be, to continue to permit the use of any such trade mark. 238 (4 ) On receipt of an application under sub-section (3), the Reserve Bank may, after making such inquiry as i t deems f i t , either allow the application subject to such conditions, i f any, as the Reserve Bank may think f i t to impose, or reject the application : Provided that no application s h a l l be rejected under this sub-section unless the parties who may be affected by such rejection have been given a reasonable opportunity for making a representation in the matter. (5) Where any application has been rejected under sub-section (4), the acting, appointment or permission, as the case may be, s h a l l be void on the expiry of a period of ninety days, or such other l a t e r date as may be speci-f i e d by the Reserve Bank, from the date of receipt by the person or company (including i t s branch) concerned of the communication conveying such r e j e c t i o n . (6) Where no application has been made under sub-section (3) by any such person or company (including i t s branch) as i s referred to in sub-section (1), the Reserve Bank may, by order, d i r e c t such person or company (including i t s branch) to desist from such acting or appointment or, as the case may be, from permitting the use of any such trade mark on the expiry of such period as may be specified in the d i r e c t i o n : Provided that no d i r e c t i o n s h a l l be made under this sub-section unless the parties who may be affected by such d i r e c t i o n have been given a reasonable' opportunity for making a representation in the matter. (7) Where any d i r e c t i o n made under sub-section (6) has not been complied with by any person or company (including i t s branch), then without prejudice any action that may be taken under this Act, the acting, appointment or per-mission as the case may be, s h a l l be void with effect from the expiry of the period sp e c i f i e d i n the d i r e c t i o n . Explanation : For the purposes of th i s section,--(a) "agent" includes any person or company (including i t s branch) who or which buys any goods with a view to s e l l such goods before any processing thereof; (b) "company" means any body corporate and includes a firm or other association of in d i v i d u a l s ; 239 (c) "processing" means any art.or process for producing, preparing or making an a r t i c l e by subjecting any material to a manual, mechanical, chemical, e l e c t r i c a l or any other l i k e operation but does not include any process inci d e n t a l or a n c i l l a r y to the completion of a manufactured product such as d i v i d i n g , pressing, compressing, packing, re-packing, l a b e l l i n g , r e - l a b e l l i n g , branding or the adoption of any such treatment as i s necessary to render such product marketable to the consumer. (d) "technical or management adviser" includes any person or company (including i t s branch) required to tender any technical or management advice, even though the tendering of such advice i s inci d e n t a l to any other services required to be rendered by such person or company. 43. Section 29 (1) (b) of FERA, 1973 : acquire the whole or any part of any undertaking i n India of any person or company carrying on any trade, commerce or industry or purchase the shares in India of any such company. 44. Section 29 (2) (a) and (2)(b) of FERA, 1973 : (a) where any person or company (including . i t s branch) referred to in sub-section (1) car r i e s on any a c t i v i t y referred to in clause (a) of that sub-section at the commencement of th i s Act or has established a branch, o f f i c e or other place of business for the carrying on of such a c t i v i t y at such commencement, then such person or company (including i t s branch) may make an application to the Reserve Bank within a period of six months from such commencement or such further period as the Reserve Bank may allow in this behalf for permission to continue to carry on such a c t i v i t y or to continue the e s t a b l i s h -ment of the branch, o f f i c e o r other placecof business for the carrying on of such-activity, as the case may be. (b) Every application made under clause (a) s h a l l be in such form and contain such p a r t i c u l a r s as may be speci-f i e d by the Reserve Bank. 45. Section 29 (2)(c) of FERA, 1973 : Where any application has been made under clause (a), the Reserve Bank may, after making such inquiry as i t may deem f i t , either allow the application subject to such conditions, i f any, as the Reserve Bank may think f i t to impose or reject the application : Provided that no application s h a l l be rejected under th i s clause unless the parties who may be affected 240 by such reject i o n have been given a reasonable oppor-tunity for making a representation in the matter. 46. Section 29 (2)(d) of FERA, 1973 : Where an application i s rejected by the Reserve Bank under clause (c), the person or company (including i t s branch) concerned s h a l l discontinue such a c t i v i t y or close down the branch, o f f i c e or other place of business established for the carrying on of such a c t i v i t y , as the case may be, on the expiry of a period of ninety days or such other l a t e r date as may be specified by the Reserve Bank from the date of receipt by such person or company (including i t s branch) of the communication conveying such r e j e c t i o n . 47. Section 29 (2)(e) of FERA, 1973 : Where no application has been made under clause (a) by any person or company (including i t s branch), the Reserve Bank may, by order, d i r e c t such person or company (including i t s branch) to discontinue such a c t i v i t y or to close down the branch, o f f i c e or other place of busi-ness established for the carrying on of such a c t i v i t y , as the case may be, on the expiry :of such period as may be spe c i f i e d in the d i r e c t i o n : Provided that no d i r e c t i o n s h a l l be made under th i s clause unless the parties, who may be affected by such d i r e c t i o n , have been given a reasonable opportunity for making a representation intthe matter. 48. Section 29 (3) of FERA, 1973 : Notwithstanding anything contained i n sub-section (2), the Reserve Bank may, having regard t o — (i) the fact that any person or company (including i t s branch), referred to in sub-section (1), i s carrying on any a c t i v i t y referred to in clause (a) of that sub-section at the commencement of thi s Act or has established a branch, o f f i c e or other place of business for the carry-ing on of such a c t i v i t y at such commencement, i n either case, in pursuance of any permission or licence granted by the Central Government, and ( i i ) the nature of the a c t i v i t y which i s being, or intended to be carried on by such person or company (including i t s branch), by order, exempt--241 (a) such person or company (including i t s branch); or (b) r any class of such persons or companies (including t h e i r branches); in r e l a t i o n to such a c t i v i t y as may be speci f i e d in the order, from the operation of the pro-visions of sub-section (2), subject to such conditions as may be spec i f i e d in the order : Provided that Reserve Bank s h a l l not make any order under th i s sub-section in a case where the a c t i v i t y which i s being, or intended to be, carried on i s solely of a trading nature. 49. Section 29 (4) (a) of FERA, 1973 : Where at the commencement of thi s Act any person or company (including i t s branch) referred to in sub-section (1) holds any shares in India of any company referred to in clause (b) of that sub-section , r theh<; such c person tor f company I (including t its: ; branch ) sh a l l , not?foe<: e n t i t l e d r t o continue torhold'such cshares unless before the expiry of a period of six months from such commencement or such further periods as the Reserve Bank may allow in thi s behalf, such person or company (including i t s branch) has made an application to the Reserve Bank i n such form and containing such p a r t i c u l a r s as may be spec i f i e d by the Reserve Bank for permission to continue to hold such shares. 50. Section 29 (4) (b) of FERA, 1973 : Where an application has been made under clause (a), the Reserve Bank may, after making such inquiry as i t may deem f i t , either allow the application subject to such conditions, i f any, as the Reserve Bank may think f i t to impose or reject the application; Provided that no application s h a l l be rejected under thi s clause unless the parties who may be affected by such reject i o n hav.e been given a reasonable opportunity for making a representation in the matter. 51. Section 29 (4) (c) of FERA, 19 73 : Where an application has been rejected under clause (b), or where no application has been made under clause (a), the Reserve Bank may, i f i t i s of opinion that i t i s expedient so to do for the purpose of conserving the foreign exchange, d i r e c t such person or company (including i t s branch) to s e l l or: -procure the sale of such shares : 242 P r o v i d e d t h a t no d i r e c t i o n s h a l l be m a d e / t h i s c l a u s e . u n l e s s n o t i c e o f s u c h d i r e c t i o n f o r a p e r i o d 'of n o t l e s s t h a n n i n e t y d a y s h a s been g i v e n t o t h e p e r s o n o r company ( i n c l u d i n g i t s b r a n c h ) t o t h e a f f e c t e d by s u c h d i r e c t i o n . E x p l a n a t i o n : F o r t h e p u r p o s e s o f t h i s s e c t i o n , "company" means' a n y f b o d y ^ c o r p o r a t e : a n d : i n c l u d e s a f f i r m o r o t h e r ; . a s s o c i a t i o h c o f - i n d i v i d u a l s . 52. G u i d e l i n e s f o r a d m i n i s t e r i n g S e c t i o n 29 o f FERA 1973 : These g u i d e l i n e s w i l l a p p l y t o I n d i a n c o m p a n i e s h a v i n g more t h a n 40% f o r e i g n h o l d i n g s and b r a n c h e s o f f o r e i g n c o m p a n i e s o p e r a t i n g i n I n d i a w h i l e s e e k i n g a p p r o v a l f o r c a r r y i n g on any a c t i v i t y o f a t r a d i n g , c o m m e r c i a l o r i n d u s t r i a l n a t u r e o r f o r s t a r t i n g f r e s h a c t i v i t i e s . T hese w i l l h o w e v e r n o r a p p l y t o n o n - r e s i d e n t s o f I n d i a n o r i g i n who h a v e b e e n a l l o w e d by t h e Government t o make i n v e s t m e n t i n I n d i a on a s p e c i f i c c o n d i t i o n t h a t n e i t h e r t h e c a p i t a l n o r p r o f i t / d i v i d e n t s w i l l be a l l o w e d t o be r e p a t r i a t e d . B r a n c h e s o f f o r e i g n c o m p a n i e s ( e x c e p t A i r l i n e s and S h i p p i n g C o m p a n i e s ) s e e k i n g a p p r o v a l u n d e r t h e F o r e i g n E x c h a n g e R e g u l a t i o n A c t w i l l be a s k e d t o c o n v e r t t h e m s e l v e s i n t o I n d i a n c o m p a n i e s as p e r p o l i c y o f G o v e r n m e n t . T h i s w o u l d be w i t h o u t p r e j u d i c e t o any o t h e r c o n d i t i o n s t h a t may be l a i d down. 53. CATEGORY PROPOSED ACTION I n d u s t r i a l A c t i v i t i e s (a) I n d i a n c o m p a n i e s h a v i n g more t h a n 40% f o r e i g n s h a r e h o l d i n g s and b r a n c h e s o f f o r e i g n c o m p a n i e s e n g a g e d i n t h e p r o -d u c t i o n o f i t e m s s p e c i f i e d i n A p p e n d i x I o f I n d u s t r i a l L i c e n s i n g P o l i c y , F e b r u a r y 1973 o r e n -g a g e d i n a p r e d o m i -n a n t l y e x p o r t o r i e n t e d i n d u s t r y (minimum e x p o r t s b e i n g 60% o f t o t a l p r o d u c t i o n ) . ( i ) Such I n d i a n c o m p a n i e s w i l l be a l l o w e d t o c o n t i n u e on t h e b a s i s o f t h e e x i s t i n g a p p r o v a l s s u b j e c t t o t h e c o n d i t i o n t h a t t h e y w i l l i n c r e a s e , w i t h i n a s p e c i f i e d p e r i o d , I n d i a n p a r t i c i p a t i o n t o n o t l e s s t h a n 26% o f t h e e q u i t y o f t h e company. ( i i ) The b r n a c h e s o f f o r e i g n c o m p a n i e s w i l l be r e q u i r e d t o c o n v e r t t h e m s e l v e s , w i t h i n a s p e c i -f i e d p e r i o d , i n t o I n d i a n c o m p a n i e s w i t h I n d i a n p a r t i c i p a t i o n b e i n g n o t l e s s t h a n 26% o f t h e e q u i t y o f t h e company. 243 ( i i i ) Such companies w i l l be subject to d i l u t i o n formula as and when they come up for -expansion. (b:)" Indian companies having more than 40% foreign shareholding who have been granted an i n d u s t r i a l licence after February 1970 for manufacturing a c t i v i t i e s in the production of items specified in Appendix I of the Industrial Licensing Policy, 1973 or engaged in pre-dominantly export oriented industry (minimum exports being 60% of t o t a l production. (c) Indian companies having more than 40% foreign shareholding and branches of foreign companies having a v a l i d i n -d u s t r i a l licence and engaged in pro-duction of items not-speci f i e d in Appendix I of Industrial Licensing Policy, 1973 but engaged in the manufacturing a c t i v i t i e s which need sophisticated tech-nology . (i) They w i l l be exempt from the provisions of Section 29 subject to the condition that they w i l l increase, within a spec i f i e d period, Indian p a r t i c i p a t i o n to not less than 26% of the equity of the company. (i) The extent of foreign share-holding in the existing Indian companies w i l l be considered on merits of each case subject to the condition that they w i l l i n -crease within a specified period, Indian p a r t i c i p a t i o n to not less than 26% of the equity of the company. ( i i ) The branches of foreign companies w i l l be required to convert themselves within a speci-f i e d period, into Indian companies with Indian p a r t i c i p a t i o n of not less than 26% of the equity of the company. ( i i i ) In determining whether a technology, i s sophisticated or not, Department of Science and Technology w i l l be consulted and consideration w i l l be given, inter a l i a , to aspects such as (i) whether the technology i s used for the manufacture of products which would otherwise necessitate imports; ( i i ) whether the discontinuance of the manufacture of products with 244 (d ) Indian companies having more than 40% foreign shareholding and branches of foreign companies engaged in other manufacturing a c t i -v i t i e s . the technology would have adverse impact on the economy, etc. (i) Such Indian companies w i l l be required to bring down, within a specified period, foreign share-holdings to the l e v e l of 40%. ( i i ) The branches of foreign companies w i l l be required to convert themselves into Indian companies having foreign shares-holding not exceeding 40%, within a spec i f i e d period. ( i i i ) A l t e r natively, they w i l l be required to change, within a speci-f i e d period, t h e i r character from ex i s t i n g manufacturing a c t i v i t i e s to predominantly manufacturing a c t i v i t i e s in the areas s p e c i f i e d in Appendix I of Industrial Licensing Policy, 1973 or to en-gage themselves in predominantly export-oriented industries (mini-mum exports being 60% of t o t a l production). See -.Appendix I. CATEGORY Trading A c t i v i t i e s (a) Indian companies having more than 40% foreign shareholding and branches of foreign companies engaged predominantly in i n t e r n a l trading and commercial a c t i v i t i e s . PROPOSED ACTION (i) No fresh foreign equity p a r t i c i p a t i o n w i l l be permitted. ( i i ) Existing Indian companies w i l l be required to bring down thei r foreign shareholding to 40% within a spec i f i e d period. ( i i i ) The branches of foreign companies w i l l be required to convert themselves into Indian companies having foreign holding not exceeding 40% within a speci f i e d period. iv) In exceptional cases where they had developed expertise, s k i l l s or f a c i l i t i e s ( d i s t r i b u t i o n 245 network, etc.) which are not readi-ly available indigenously and are contributing s i g n i f i c a n t l y to ex-ports, foreign shareholding more than 40% but not exceeding 74% may be allowed depending upon the merits of each case. (v) Alternatively, they w i l l be required to change within a speci-f i e d period, t h e i r character from predominantly trading c a c t i v i t i e s -totpredominantly r manufacturing a c t i v i t i e s in the areas specified in Appendix I of Industrial Licens-ing Policy, 1973 or to engage them-selves in predominantly export oriented Industries (minimum exports being 60% of t o t a l production). (vi) If the above alternatives are not acceptable to them, they w i l l be allowed a reasonable time to wind up th e i r business a c t i v i t i e s i n India. (i) They w i l l not be denied per-mission for i n t e r n a l trading i n respect of essential or associate products in the o v e r a l l interest of the consumers as also of de-velopment of a n c i l l a r i e s provided the a r t i c l e s so traded are function-a l l y related to the company's main manufacturing a c t i v i t i e s and constitute r e l a t i v e l y a small portion of the o v e r a l l a c t i v i t y (not exceeding 25% of ex-factory value of the annual production or Rs.5 crores whichever i s l e s s ) . The approval s h a l l also be subject to the condition that the companies s h a l l not be permitted to use, for internal trade, t h e i r trade marks or brand names in respect of the products not manufactured by them. (b) Manufacturing companies i . e . , Indian companies with more than 40% foreign shareholding and branches of foreign companies engaged i n trading a c t i v i t i e s in respect of products not manufactured by them . 246 CATEGORY Other A c t i v i t i e s PROPOSED ACTION Indian companies having more than 40% foreign shareholding and branches of foreign companies engaged in : (a) Construction A c t i v i t i e s . (b) Plantation A c t i v i t i e s . (i) Indian companies having more than 40% foreign shareholding w i l l be required to bring down the i r foreign shareholding to 40% within a sp e c i f i e d period. ( i i ) In exceptional cases where they have developed such expertise or s k i l l s or technology whichiis not indigenously available, higher foreign shareholding not exceeding 74% of the equity may be allowed. ( i i i ) Branches of foreign com-panies w i l l be required to convert themselves into Indian companies with foreign shareholding not exceeding 40% within a sp e c i f i e d period. (i) Tea plantations w i l l , by and large, be treated at par with manufacturing industries speci-f i e d in Appendix I of Industrial . Licensing Policy, 1973 subject to the condition that they w i l l i n -crease within a specified period Indian p a r t i c i p a t i o n to not less than 26% of the equity of the comapny. ( i i ) Branches of foreign com-panies w i l l be required to convert themselves within a spec i f i e d period, into Indian companies with Indian p a r t i c i p a t i o n being not less than 26% of the equity of the company. 24 7 ( i i i ) Branches of foreign companies engaged in other than tea plantation a c t i v i t i e s w i l l be required to convert themselves into Indian companies with foreign shareholding not exceeding 40% and the Indian companies w i l l be required to bring down the i r foreing shareholding to 40% within a speci-f i e d period. (c) Work Consultancy (i) Technical and Engineering Consul-tants . (i) Indian companies having more than 40% foreign shareholding w i l l be required to bring down the i r foreign shareholding to 40% within a sp e c i f i e d period. ( i i ) Branches of foreign com-panies w i l l be required to convert themselves into Indian companies with foreign shareholding not ex-ceeding 40% within a sp e c i f i e d period. ( i i i ) In exceptional cases, i f they are engaged in such tech-nology or s k i l l s which are i n d i -genously not available, higher foreign shareholding not exceeding 74% of the equity may be allowed on merits. ( i i ) Non-Technical Consultants. (d) Manufacturing companies engaged in consultancy work . (i) So far as the management, f i n a n c i a l and accountancy firms are-concerned and since s u f f i c i e n t indigenous expertise in these spheres i s available in the country, the Indian companies with foreign majority shareholding as well as branches of foreign companies w i l l be required to reduce th e i r foreign shareholding to 40% within a specified period. (i) They w i l l be allowed to act as consultants i n respect of those areas in which they have developed s p e c i a l i s a t i o n . Such f a c i l i t i e s w i l l however not be available 248 to companies predominantly engaged in trading and non-manufacturing a c t i v i t i e s . Explanatory Notes : (i) While giving fresh approvals to the cases in accordance with the above guidelines, aspects such as the research and development programme i n i t i a t e d by the Indian company and st i p u l a t i o n s which r e s t r i c t the transfer of technology from the foreign collaborator to the Indian company, r e s t r i c t i o n s on sub-licensing of technology and s t i p u l a t i o n s for the acquisition of raw materials and components from the foreign collaborator, existing regula-tions i n respect of the patent law, etc., w i l l be borne in mind . ( i i ) Where a company i s engaged in m u l t i - a c t i v i t y opera-tions, a t o t a l view w i l l have to be taken of a l l the a c t i v i t i e s in which a company i s engaged while consider-ing the question of allowing i t to continue to carry on business. The proportion of a c t i v i t y covered by Appendix I of the Industrial Licensing Policy, February 1973 and those f a l l i n g ' o u t s i d e thereof w i l l be a material consi-deration. In such cases, i f a c t i v i t i e s outside Appendix I constitute only a minor part of the t o t a l a c t i v i t i e s (not exceeding 25% of ex-factory value of the annual production or Rs.5 crores whichever i s less) i t w i l l be allowed to continue on the basis of exi s t i n g approvals, provided Indian p a r t i c i p a t i o n i s not less than 26% of the eguity of the company. ( i i i ) While i t w i l l be open to companies primarily f a l l i n g under Clause I (d) "Other manufacturing a c t i v i t i e s " or Clause II (a) "Trading a c t i v i t i e s " to change the i r character and become predominantly manufacturing companies in the areas covered under Appendix I of the Industrial Licensing Policy, February 1973, or other approved cate-gories under Clause I (c), they would have to obtain the re q u i s i t e Industrial Licence and other Government appro-vals i n the normal way, within the framework l a i d down by Government from time to time. (iv) In the case of 100% export-oriented units the foreign equity p a r t i c i p a t i o n of more than 74% may be allowed on merits of each case. After.having reproduced above 'Sections 26 to 29 and the guidelines for administering Section 29, we do not consider i t necessary to discuss Sections 26, 27 and 28 any further. However, Section 29 being the most 249 important Section i h t h e strategy for regulating MNCs, we would l i k e to discuss in some greater d e t a i l . But th i s we s h a l l do with reference to certain dispute-situations which actually arose as a result of attempts to enforce Section 29 of FERA, 1973. 58. See Appendix n . 59. Non-Resident Indians : An Investment Guide, New Delhi : Indian Investment Centre, Dec. 1983. Supplement to Non-Resident Indians, Indian Investment Centre, New York. 60. Investing in India : A Guide to Entrepreneurs, New Delhi: Indian Investment Centre, Dec. 1983. 61. Jayanta Sarkar, "Indians Scout for Shares", Vol.105,. No.35, Far -Eastern Economic Review,' Aug .31, 19 79, pp.95-96. 62. Ibid. 63. "Letter from New Delhi", Vol . 9 7,, t No-. ; 34 c, cFar Eastern  Economic Review, Aug.26, 19 77, p.70. 64. Jayanta Sarkar, "IBM to Close Shop in India", Vol.98, No.49, Far Eastern Economic Review, Dec.9, 1977, pp.48-49. 65. Myths and R e a l i t i e s of Foreign Investment in India, Indian Investment Centre, p.6. 66. Ibid. 67. Ibid. 68. A.I.R. 1981 Sc 1298. Cited by P.S. Sangal, National and  Multinational Companies : Some Legal Issues, Delhi : Bhagwati International Enterprise;, 1981, pp.435-442 . 69. 82 Calcutta Weekly Notes, 712. Cited by P.S. Sangal, National and Multinational Companies, pp.432-435. 70. 57 Reports of Company Cases, 1985, pp.241-440, Escorts  Ltd. and Another vs. Union of India and Others. See Also Chhotu Karadia, The Swraj Paul A f f a i r ; London, Slatecount, 1984. 71. Indian Express, F r i . Dec. 20, 1985, pp.1 and 7. See Also The Economic Times, F r i . Dec.20, 1985, p.5 250 72. Myths and Re a l i t i e s of Foreign Investment in India, p . l 73. Ibid. 74. See Vinay Bharat Ram, Towards a Theory of Import  Substitution, Exchange Rates and Economic Development, Oxford Univeristy Press, 1982. CHAPTER IV 1. See Kari L e v i t t , Silent Surrender: The Multinational  Corporation in Canada, Tpronto : Macmillan of Canada, 1970. D.W. Carr , Recovering Canada ' s Nationhood, Ottawa:, Canada Publishing Company, 1971. I.A. Litvak, C.J. Maule, R.D. Robinson, Dual Loyalty: Canadian-US Business  Arrangements, McGraw-Hill Company of Canada Ltd., 1971. Abraham Rotstein and Gary Lax, ed., Independence: The  Canadian Challenge, Toronto, 1972. W.L. Gordon, Troubled  Canada: The Need for New Domestic P o l i c i e s , McClelland Stewart Ltd., 1961, pp.83-97. John Fayerweather, Foreign  Investment in Canada: Prospect for National Policy, Toronto: Oxford University Press, 1974. 2. William L. Marr, Donald G. Paterson, Canada: An Economic  History, Toronto: Macmillan, 1980, pp.265-301. See Also Wahn Report, Watkins Report, and Gray Report, pp.13-26. 3. Watkins Report, p.6 4. Ibid., p.8. For American Control of Canadian resources and industry, see Wahn Report, pp.33:38-33:44. 5. Watkin's Report, pp.14-21. See Also Gordon Report, pp.35-55; and Wahn Report, p.33:14. 6. Marr and Paterson, Canada: An Economic History, p.292 . 7. Ibid., p.293. 8. Gordon Report, pp.375-440. 9. Studies l i k e the Watkins Report, Wahn Report and the Gray Report. 10. Watkins Report, pp.395-416. 11. Wahn Report, pp.33:90;- 33:102. 251 12 . Gray Report, pp.435-443; 451-501. 13 . Ibid . , p.7 . 14 . Ibid., p.430 • 15 . Ibid. 16 . Ibid., p.440 • 17. Ibid., p.463 • 18 . Ibid., p.441 • 19. Ibid., p.449 See Also pp.433-437. 20 . Ibid., p.439 • 21 . See Also The Honourable Donald S. Macdonald, Industiral Policy Objectives.and A r t i c l e III of GATT: National Ambitions and International Obligations", Vol. 6, No.4, The Canadian Business Law Journal, Aug. 1982, pp.385-407. Andrew James Samet, "The US Response to Canadian Economic Nationalism", Foreign Investment" Review  Law in Canada, James M. Spence, Q.C. and William P. Rosenfeld, Q.C., ed. Toronto: Butterworths, 1984,pp.293-314. Jeff Turner, "Canadian Regulation of Foreign Direct Investment", Vol.23, Np.2, Harvard International Law  Journal, Winter 1983, pp.333-356. 22. A r t i c l e III of General Agreement on T a r i f f s and Trade : National Treatment on Internal Taxation and Regulation: 1.. . The contracting parties recognize that i n t e r n a l taxes and other i n t e r n a l charges, and laws, regulations and re-quirements a f f e c t i n g i n t e r n a l sale, o f f e r i n g for sale, purchase, transportation, d i s t r i b u t i o n or use of products, and i n t e r n a l quantitative regulations reguiring the mixture, processing or use of products in spe c i f i e d amounts or pro-portions, should not be applied to imported or domestic products so as to afford protection to domestic production. 2. The products of the t e r r i t o r y of any contracting party imported into the t e r r i t o r y of any other contracting party s h a l l not be subject, d i r e c t l y or i n d i r e c t l y , to inte r n a l taxes or other i n t e r n a l charges of any kind in excess of those applied, d i r e c t l y or i n d i r e c t l y , to l i k e domestic products. Moreover, no contracting party s h a l l otherwise 252 apply i n t e r n a l taxes or other i n t e r n a l charges to im-ported or domestic products in a manner contrary to the p r i n c i p l e s set forth in paragraph 1. 3. With respect to any existing i n t e r n a l tax which i s inconsistent with the provisions of paragraph 2, but which i s s p e c i f i c a l l y authorized under a trade agreement, in force on A p r i l 10, 1947, in which the import duty on the taxed product i s bound against increase, the con-tra c t i n g party imposing the tax s h a l l be free to post-pone the application of the provisions of paragraph 2 to such tax u n t i l such time as i t can obtain release from the obligations of such trade agreement i n order to permit the increase of such duty to the extent ne-cessary to compensate for the elimination of the protec-t i v e element of the tax. 4. The products of the t e r r i t o r y of anyccontracting party imported into the t e r r i t o r y c o f any other contracting party s h a l l be accorded treatment no less favourable than that accorded to l i k e products of national o r i g i n in respect of a l l alws, regulations and requirements a f f e c t -ing t h e i r i n t e r n a l sale, o f f e r i n g for sale, purchase, transportation, d i s t r i b u t i o n or use. The provisions of t h i s paragraph s h a l l not prevent the application of d i f f e r e n t i a l i n t e r n a l transportation charges which are based exclusively on the economic operation of the means of transport and not on the n a t i o n a l i t y of the product . 5. No contracting party s h a l l establish or maintain any i n t e r n a l quantitative regulation r e l a t i n g to the mixture, processing or use of products in s p e c i f i e d amounts or proportions which requires, d i r e c t l y or i n d i r e c t l y , that any s p e c i f i e d amount or proportion of any product which i s the subject of the regulation must be supplied from domestic sources. Moreover, no contracting party s h a l l otherwise apply i n t e r n a l quantitative regulations in a manner contrary to the p r i n c i p l e s set forth in paragraph 1. 6. The provisions of paragraph 5 s h a l l not apply to any i n t e r n a l quantitative regulation in force in the t e r r i t o r y of any contracting party on July 1, 1939, A p r i l 10, 1947, or March 24, 1948, at the option of that contracting party; Provided that any such regulation which i s contrary to the provisions of paragraph 5 s h a l l not be modified to the detriment of imports and s h a l l be treated as a customs duty for the purpose of negotiation. 7. No i n t e r n a l quantitative regulation r e l a t i n g to the mixture, processing or use of products in s p e c i f i e d . amounts or proportions s h a l l be applied in such a manner 253 as to a l l o c a t e any such amount or p r o p o r t i o n among e x t e r n a l sources of supply. 8. (a) The p r o v i s i o n s of t h i s A r t i c l e s h a l l not apply to laws, r e g u l a t i o n s or requirements governing the p r o cure-ment by governmental agencies of products purchased f o r governmental purposes and not with a view to commercial r e s a l e or with a view to use i n the p r o d u c t i o n of goods f o r commercial s a l e . (b) The p r o v i s i o n s of t h i s A r t i c l e s h a l l not prevent the payment of s u b s i d i e s e x c l u s i v e l y to domestic producers, i n c l u d i n g payments to domestic producers d e r i v e d from the proceeds of i n t e r n a l taxes or charges a p p l i e d c o n s i s t e n t l y with the p r o v i s i o n s of t h i s A r t i c l e and s u b s i d i e s e f f e c t e d through governmental purchases of domestic p r o d u c t s . 9. The c o n t r a c t i n g p a r t i e s r e c o g n i z e that i n t e r n a l maxi-mum p r i c e c o n t r o l measures, even though conforming to the other p r o v i s i o n s of t h i s A r t i c l e , can have e f f e c t s pre-j u d i c i a l to the i n t e r e s t s of c o n t r a c t i n g p a r t i e s s u p p l y i n g imported p r o d u c t s . A c c o r d i n g l y , c o n t r a c t i n g p a r t i e s a p p l y i n g such measures s h a l l take account of the i n t e r e s t s of e x p o r t i n g c o n t r a c t i n g p a r t i e s with a view to a v o i d i n g to the f u l l e s t p r a c t i c a b l e extent such p r e j u d i c i a l e f f e c t s . 10. The p r o v i s i o n s of t h i s A r t i c l e s h a l l not prevent any c o n t r a c t i n g party from e s t a b l i s h i n g or m a i n t a i n i n g i n t e r n a l q u a n t i t a t i v e r e g u l a t i o n s r e l a t i n g to exposed cinematograph f i l m s and meeting the requirements of A r t i c l e IV. A r t i c l e XXIII of GATT N u l l i f i c a t i o n or Impairment 1 . If any c o n t r a c t i n g party should c o n s i d e r than any b e n e f i t a c c r u i n g to i t d i r e c t l y or i n d i r e c t l y under t h i s Agreement i s being n u l l i f i e d or impaired or that the attainment of any o b j e c t i v e of the Agreement i s being impeded as the r e s u l t of (a) the f a i l u r e of another c o n t r a c t i n g party to c a r r y o u t : i t s o b l i g a t i o n s under t h i s Agreement, or (b) the a p p l i c a t i o n by another c o n t r a c t i n g party of any measure, whether or not i t c o n f l i c t s with the p r o v i s i o n s of t h i s Agreement, or (c) the e x i s t e n c e of any other s i t u a t i o n , the c o n t r a c t i n g party may, with a view to the s a t i s f a c t o r y adjustment of the matter, make w r i t t e n r e p r e s e n t a t i o n s or p r o p o s a l s to the other c o n t r a c t i n g party or p a r t i e s which i t c o n s i d e r s 254 to be concerned. Any contracting party thus approached s h a l l give sympathetic consideration to the representa-tions or proposals made to i t . 2. If no sa t i s f a c t o r y adjustment i s effected between the contracting parties concerned within a reasonable time, or i f the d i f f i c u l t y i s of the type described in paragraph 1 (c) of this A r t i c l e , the matter may be referred to the CONTRACTING PARTIES. The CONTRACTING PARTIES s h a l l prompt-ly investigate any matter so referred to them and s h a l l make appropriate recommendations to the contracting parties which they consider to be concerned, or give a r u l i n g on the matter, as appropriate. The CONTRACTING PARTIES may consult with contracting parties, with the Economic and Social Council of the United Nations and with any appro-priate inter-governmental organization in cases where they consider such consultation necessary. If the CON-TRACTING PARTIES consider that theccircumstances are serious enough to j u s t i f y such action, they may authorize a contracting party or parties to suspend the application to any other contracting party or parties of such con-cessions or other obligations under this Agreement as they determine to be appropriate in the circumstances. If the application to any contracting party of any concession or other obligations i s in fact suspended, that contracting party s h a l l then be free, not l a t e r than sixty days after such action i s taken, to give written notice to the Execu-tive Secretary to the CONTRACTING PARTIES of i t s intention to withdraw from th i s Agreement and such withdrawal s h a l l take effect upon the s i x t i e t h day following the day on which such notice i s received by him. A r t i c l e II of OECD Guidelines : National Treatment 1. that Member countries should, consistent with t h e i r needs to maintain public order, to protect t h e i r essen-t i a l security interests and to f u l f i l commitments r e l a t i n g to i nternational peace and security, accord to enterprises operating in the i r t e r r i t o r i e s and owned or controlled d i r e c t l y or i n d i r e c t l y by nationals of anotehr Member country (hereinafter referred to as "Foreign-Controlled Enterprises") treatment under their laws, regulations and administrative practices, consistent with international law and no less favourable than that accorded in l i k e situations to domestic enterprises (hereinafter referred to as "National Treatment"). 2. that Member countries w i l l consider applying "National Treatment" in respect of countries other than Member countries. 255 3. that Member countries w i l l endeavour to ensure that their t e r r i t o r i a l subdivisions apply "National Treatment". 4. that this Declaration does not deal with the right of Member countries to regulate the entry of foreign invest-ment or the other conditions of establishment of foreign enterprises. 25. Hon. Donald S. Macdonald, "Canadian Industrial Policy Objectives and A r t . I l l of GATT", .Vol.6 No.4, The Canadian  Business Law Journal, Aug. 1982, pp.385-407. 26. 113 D.L.R. 3d.. 395 . See Also Kathleen A. Wall, "Dow Jones and Co., Inc. vs. Attorney General of Canada: The Canadian Foreign Investment Review Act", 14 Law and Policy in  International Business, 1982, pp.505-519. 27. Cited by Kathleen A. Wall, p.518. 28. See Richard Shultz, Frank Swedlove and Katherine Swinton, The Cabinet as a Regulatory Body: The Case of the Foreign  Investment Review Act, Working Paper No.6. See Also Canadian Bar Association Brief to the Hon. Herb Gray,  Minister of Industry, Trade and Commerce on the Foreign  Investment Review Act, Sept. 1981, pp.12-17. Now referred to as Canadian Bar Association B r i e f . James M. Spence, Q.C., "FIRA: A Decade of Evolution",^Foreign Investment  Review Law i n Canada, Spence & Rosenfeld ed., Toronto: Butterworths, 1984, pp.315-345. 29. Working paper No.6, pp.64-67. 30 . Ibid . , PP .67 -71 . 31 . Ibid . , PP .71 -79 . 32 . Ibid., PP .80 -81 . 33 . Ibid . , PP • 34 . Ibid., PP .81 -84 . 35. James M. S p e n c e , "FIRA: A Decade o f E v o l u t i o n ' , ' , ' F o r e i g n  I n v e s t m e n t R e v i e w Law i n Ca n a d a , p.318. 36. The n o t e s a c c o m p a n y i n g Mr. G r a y ' s l e t t e r t o t h e C a n a d i a n B a r A s s o c i a t i o n d a t e d M a r c h 2, 1982 i n r e s p o n s e t o t h e C a n a d i a n B a r A s s o c i a t i o n b r i e f . C i t e d by James M. S p e n c e , "FIRA: A Decade o f E v o l u t i o n " , i n F o r e i g n I n v e s t m e n t  R e v i e w Law i n Ca n a d a , p.325. ~ 37. I b i d . 256 38. Ibid., p.325-326. 39. Ibid., p.326. 40. Ibid., 41. Ibid. 42. Ibid., p.320. See Also Canadian Bar Association Brief,,p.5 7. 43. Canadian Bar Association Br e i f , p.58. 44. Ibid., p.16. 45. Ibid., p . 21 . 46. Ibid., p.35. See Also p.25. 4 7. Ibid., p.30. 4 8. Report of the Royal Commission on the Economic Union and  Development Process for Canada, Vol.11, pp.232-242, and Vol.1, pp.323-367. Henceforth referred to as Macdonald  Commission.Report. 49. Daniel Drache and Duncan Cameron, ed., The Other Macdonald Report, Toronto: James Lorimer and Company, 1985, pp.129-135. 50. Kari L e v i t t , Silent Surrender, pp.116-153. 51. Macdonald Commission Report, Vol.11, p.233. 52. Ibid. 53. Ibid., p.235. 54. Ibid., p.235-236. 55. Ibid., p.236-237. 56 . Ibid., p.263. 57. Macdonald Commission Report, Vol.1, p.323-367. 58. Ibid., p.324-325. 59. Ibid., p.325. 60. Ibid., p.332. 257 61. Ibid., p.332-333. 62. Ibid., p.334. 63. Ibid., p.350-357. 64. The Other Macdonald Report, pp.133-134. 65 . Section 2 of _Inyes tmen t Canada Act : Purpose of Act Recognizing that increased c a p i t a l and technology would benefit Canada, the purpose of this Act i s to encourage investment in Canada by Canadians and non-Canadians that contributes to economic growth and em-ployment opportunities and to provide for the review of s i g n i f i c a n t investments in Canada by non-Canadians in order to ensure such benefit to Canada. 66. Section 2 (1) of FIRA: This Act i s enacted by the Parliament of Canada in recognition by Parliament that the extent to which control of Canadian industry, trade and commerce has become ac-quired by persons other than Canadians and the effect there-of on the a b i l i t y of Canadians to maintain e f f e c t i v e control over t h e i r economic environment i s a matter of national concern, and that i t i s therefore expedient to establish a means by which measures may be taken under the authority of Parliament to ensure that, in so far as i s practicable after the enactment of th i s Act, control of Canadian busi-ness enterprises may be acquired by persons other than Canadians, and new businesses may be established in Canada by persons other than Canadians, who are not already carrying on business in Canada or whose new businesses in Canada would be unrelated to the businesses already being carried on by them in Canada, only i f i t has been assessed that the ac q u i s i t i o n of control of those enter-prises or the establishment of those new businesses, as the case may be, by those persons i s or i s l i k e l y to be of s i g n i f i c a n t benefit to Canada, having regard to a l l of the factors to be taken into account under this Act for that purpose. 67. Section 6 of Investment Canada Agency established There i s hereby established an agency, to be known as< Investment Canada, to advise and as s i s t the Minister in exercising his powers and performing his duties under t h i s Act . 258 68. Section 5 of Investment Canada : Duties . and - powers of Minister (1) The Minister s h a l l (a) encourage business investment by such means and in such manner as the Minister deems appropriate; (b) a s s i s t Canadian businesses to exploit opportunities for investment and technological advancement; (c ) carry out research and analysis r e l a t i n g to domestic and international investment; (d) provide investment information services and other investment services to f a c i l i t a t e economic growth in Canada; (e) assist in the development of i n d u s t r i a l and economic p o l i c i e s that affect investment in Canada; (f ) ensure that the n o t i f i c a t i o n and review of invest-ments are carried out in accordance with t h i s Act; and (g) perform a l l other duties required by t h i s Act to be performed by the Minister. Other powers (2) In exercising his powers and performing his duties under th i s Act, the Minister (a) s h a l l , where appropriate, make use of the services and f a c i l i t i e s of other departments, branches or agencies of the Government of Canada; (b) may, with the approval of the Governor in Council, enter into agreements with the government of any province or any agency thereof for the purposes of t h i s Act; and (c) may consult with, and organize conferences of, re-presentatives of industry and labour, p r o v i n c i a l and l o c a l authorities and other interested persons. 69. R.K. Paterson, "Legal Restrictions on Foreign Investment in Canada", Canadian International Trade and Foreign  Investment Law. To be Published. 70. Samuel R. Baker, "Taking the Fear Out of FIRA: Legal Considerations for Investing i n Canada", Regulation of  Foreign Direct Investment in Canada and the United States. 259 71. Section 20 of Investment Canada : For the purposes of section 21, the factors to be taken into account, where relevant, are (a) the effect of the investment on the l e v e l and nature of economic a c t i v i t y in Canada, including, without l i m i t -ing the generality of the foregoing, the effect on employ-ment, on resource processing, on the u t i l i z a t i o n of parts, components and services produced i n Canada and on exports from Canada; (b) the degree and significance of p a r t i c i p a t i o n by Cana-dians in the Canadian business or new Canadian business and in any industry or industries in Canada of which the Canadian business or new Canadian business forms or would form a part; (c) the effect of the investment on productivity, indus-t r i a l e f f i c i e n c y , technological development, product innovation and product variety in Canada; (d) the effect of the investment on competition within any industry or industries in Canada; (e) the compatibility of the investment with national i n d u s t r i a l , economic and c u l t u r a l p o l i c i e s , taking into consideration i n d u s t r i a l , economic and c u l t u r a l policy objectives enunciated by the government or l e g i s l a t u r e of any province l i k e l y to be s i g n i f i c a n t l y affected by the investment; and (f) the contribution of the investment to Canada's a b i l i t y to compete in"world markets. 72 . Section 3 of Investment Canada : Definitions In t h i s Act, "Agency" means Investment Canada established by section 6; "assets" includes tangible and intangible property of any value; "business" includes any undertaking or enterprise capable of generating revenue and carried on in a n t i c i p a t i o n of p r o f i t ; "Canada" includes the t e r r i t o r i a l sea of Canada as deter-mined in accordance with the T e r r i t o r i a l Sea and Fishing Zones Act, the seabed and subsoil therebelow and a l l other areas beyond the t e r r i t o r i a l sea of Canada where Canada has or claims j u r i s d i c t i o n ; 260 "Canadian" means (a) a Canadian c i t i z e n ; (b) a permanent resident with the meaning of the Immi-gration Act, 1976 who has been o r d i n a r i l y resident in Canada for not more than one year after the time at which he f i r s t became e l i g i b l e to apply for Canadian c i t i z e n s h i p ; (c) a Canadian government, whether federal, p r o v i n c i a l or l o c a l , or an- agency thereof, or (d) an entity that i s Canadian-controlled, as determined pursuant to section 26; "Canadian business" means a business carried on in Canada that has (a) a place of business in Canada, (b) an in d i v i d u a l or individuals in Canada who are em-ployed or self-employed in connection with the business, and (c) assets in Canada used in carrying on the business; "corporation" means a body corporate with or without share c a p i t a l ; "entity" means a corporation, partnership, trust or joint venture; "joint venture" means an association of two or more persons or e n t i t i e s , where the relationship among those associated persons or e n t i t i e s does not, under the laws in force in Canada, constitute a corporation, a partner-ship or a trust and where, in the case of an investment to which this "Act applies, a l l the undivided ownership interests in the assets of the Canadian business or in the voting in t e r e s t s of therentity that i s the subject of the investment are or w i l l be owned by a l l the persons or e n t i t i e s that are so associated; "Minister" means such member of the Queen's Privy Council for Canada as i s designated by the Governor i n Council as the Minister for the purposes of thi s Act; "new Canadian business", in r e l a t i o n to a non-Canadian, means a business that i s not already being carried on in Canada by the non-Canadian and that, at the time of i t s establishment, (a) i s unrelated to any other business being carried on in Canada by that non-Canadian, or 261 (b) i s related to another business being carried on i n Canada by that non-Canadian but f a l l s within a prescribed s p e c i f i c type of business a c t i v i t y that, i n the opinion of the Governor in Council, i s related to Canada's c u l -t u r a l heritage or national i d e n t i t y ; "non-Canadian" means an i n d i v i d u a l , a government or an agency thereof or an entity that i s not a Canadian; "own" means b e n e f i c i a l l y own; "person" means an i n d i v i d u a l , a government or an agency thereof or a corporation; "prescribed" means prescribed by the regulations made pursuant to thi s Act; "voting group" means two or more persons who are associa-ted with respect to the exercise of rights attached to voting interests in an entity by contract, business ar-rangement, personal r e l a t i o n s h i p , common control in fact through the ownership of voting i n t e r e s t s , or otherwise, in such a manner that they would o r d i n a r i l y be expected to act together on a continuing basis with respect to the exercise of those r i g h t s ; "voting i n t e r e s t " , with respect (a) a corporation with share c a p i t a l , means a voting share, (b) a corporation without share c a p i t a l , means an owner-ship interest in the assets thereof that e n t i t l e s the owner to rights s i m i l a r to those enjoyed by the owner of a voting share, and (c) a partnership, trust or joint venture, means an ownership interest in the assets thereof that e n t i t l e s the owner to receive a share of the p r o f i t s and to share in the assets on d i s s o l u t i o n ; "voting share" means a share i n the c a p i t a l of a corpora-tion to which i s attached a voting right o r d i n a r i l y exer-cisable at meetings-of shareholders of the corporation and to which i s o r d i n a r i l y attached a right to receive a share of the p r o f i t s , or to share in the assets of the corporation on d i s s o l u t i o n , or both. Section 28 (1) o,f Investment Canada : Acquisition of Control Rules For the purposes of t h i s Act, a non-Canadian acquires 262 control of a Canadian business only by (a) the acquisition of voting shares of a corporation incorporated in Canada carrying on the Canadian business; (b) the acquisition of voting interests of an entity that (i) i s carrying on the~Canadian business, ror (ii:)'controls , d i r e c t l y or i n d i r e c t l y , another entity -••'carryingI on the -Canadian'business , where there i s no acquisition of control of any corporation; (c) the acquisition of a l l or substantially a l l of the assets used in carrying on the Canadian business; or (d) the acquisition of voting interests of an entity that controls, d i r e c t l y or i n d i r e c t l y , an entity i n Canada carrying on the Canadian business, where (i) there i s no acqui s i t i o n of control, d i r e c t l y - o r r i n -d i r e c t l y , of a corporation incorporated elsewhere than in Canada that controls, d i r e c t l y or i n d i r e c t l y , an entity in Canada carrying on the Canadian business, or ( i i ) there i s an acqui s i t i o n of control described in subparagraph ( i ) . Section 28 (3) of Investment Canada : Presumptions respecting acquisition of control :. For the purposes of th i s Act, (a) the acqui s i t i o n of a majority of the voting interests of an entity or of a majority of the undivided ownership interests in the voting shares of an entity that i s a corporation i s deemed to be acquisition of control of that entity; (b) the acquisitionrof less than a majority of the voting i n t e r e s t s of an entity other than a corporation i s deemed not to be acqui s i t i o n of control of that e n t i t y ; (c ) the acquisition of less than a majority but one-third or more of the voting shares of a corporation or of an equivalent undivided ownership interest in the voting shares of the corporation i s presumed to be acquisition of control of that corporation unless i t can be established that, on the acq u i s i t i o n , the corporation i s not controlled in fact by the acquiror through thr ownership of voting shares; and (d) the acqui s i t i o n of less than one-third of the voting shares of a corporation or of an equivalent undivided ownership interest i n the voting shares of the corporation i s deemed not to be acquisition of control of that corpora-t i o n . 263 Section 14 of Inves_tm.en-t. Canada : Review (1 ) The following investments by non-Canadians are re-viewable under th i s Part: (a) an investment to acquire controlrof a Canadian business in any manner described in paragraph 28 ( l ) ( a ) , (b) or (c), where the l i m i t s set out in subsection (3) apply; (b) an investment to acquire control of a Canadian business in the manner described in subparagraph 28 ( l ) ( d ) ( i ) , where the l i m i t s set out in subsection (3) apply; (c) an investment to acquire control of a Canadian business in the manner described in subparagraph 28 ( l ) ( d ) ( i i ) , where the circumstances described in subsection (2) and the l i m i t s set out in subsection (3) apply; and (d) an investment to acquire control of a Canadian business in the manner described i n subparagraph 28 ( l ) ( d ) ( i i ) , where the cirucmstances described in subsection (2) do not apply and the l i m i t s set out in subsection (4) apply. Circumstances (2) The circumstances referred to in paragraphs ( l ) ( c ) and (d) are that the value, calculated in the manner prescribed, of the assets of the entity carrying on the.Canadian busi-ness, and of a l l other e n t i t i e s in Canada, the control of which i s acquired, d i r e c t l y or i n d i r e c t l y , amounts to more than f i f t y per cent of the value, calculated in the manner prescribed, of the assets of a l l e n t i t i e s the control of which i s acquired, d i r e c t l y or i n d i r e c t l y , in the trans-action of which the acqui s i t i o n of control of the Canadian business forms a part. Limits (3) An investment described in paragraph ( l ) ( a ) , (b) or (c) i s reviewable under t h i s Part where the value, c a l -culated in the manner prescribed, of (a) the -assets acquired, in the case where control of a Canadian business i s acquired i n the manner described i n paragraph 2 8 ( l ) ( c ) , or (b) tthe assets of the entity carrying on the Canadian business, and of a l l other e n t i t i e s in Canada, the control of which i s acquired, d i r e c t l y or i n d i r e c t l y , in the case where control of a Canadian business i s acquired in the manner described in paragraph 28 ( l ) ( a ) , (b) or (d), i s f i v e m i l l i o n d o l l a r s or more. 264 Limits (4) An investment described in paragraph (l)(d) i s re-viewable under th i s Part where the value, calculated in the manner prescribed, of the assets of the entity carrying on the Canadian business, and of a l l other e n t i t i e s in Canada, the control of which i s acquired, d i r e c t l y or i n d i r e c t l y , i s f i f t y m i l l i o n d o l l a r s or more . 76. Section 11 (b) of Investment Canada : No t i f i c a t i o n ': . The following investments by non-Canadians are subject to n o t i f i c a t i o n under th i s Part: (b) an investment to acquire control of a Candian busi-ness in any manner described i n subsection 28 (1), unless the investment i s reviewable pursuant to section 14. 77. Section 11 (a) of Investment Canada : The following investments by non-Canadians are subject to n o t i f i c a t i o n under this Part: (a) an investment to establish a new Canadian Business. 78. Section 8 (2) (a) of FIRA: Notice of proposed establishment of new business Every non-eligible person, and every group of per-sons any member of which i s a non-eligible person, that proposes to establish a new business in Canada, s h a l l , (a) i f immediately before the time when the new business i s proposed to be established no other business i s carried on in Canada by that person or group of persons, give notice i n writing to the Agency of such pro-posal in such form and manner and containing such i n f o r -mation as i s prescribed by the regulations. 79. Section 8 (2)(b) of FIRA: Every non-eligible person, and every group of per-sons any member of which i s a non-eligible person, that proposes'to establish a new business in Canada s h a l l , 265 (b) i f each other business carried on in Canada by that person or group of persons immediately before the time referred to i n paragraph (a) i s a business to which the new business would, i f i t were established, be un-related, give notice i n writing to the Agency of such pro-posal in such form and manner and containing such i n f o r -mation as i s prescribed by the regulations. 80. Section 37 (1) of Investment Canada : Where any question arises under th i s Act as to whether an i n d i v i d u a l or an entity i s a Canadian, the Minister s h a l l , on application by or on behalf of the i n d i v i d u a l or ent i t y , forthwith consider the applica-tion and any information and evidence submitted there-with and, unless the Minister concludes that the information and evidence submitted therewith i s not s u f f i c i e n t to enable the Minister to reach an opinion on the question, s h a l l provide the applicant with a written opinion for his guidance. 81. Section 17 of Investment Canada : (1) Where an investment i s reviewable under th i s Part, the non-Canadian making the investment s h a l l , intthe manner prescribed, f i l e an application with the Agency containing such information as i s prescribed. (2) The application required by subsection (1) s h a l l be f i l e d (a) subject to paragraph (b), i n l: the.'case of an invest-ment reviewable pursuant to section 14, at any time prior to the implementation of the investment; (b) in the case of an investment made through an acqui-s i t i o n referred to in subparagraph 28 ( l ) ( d ) ( i i ) or an investment with respect to which a notice referred to in paragraph 16 (2)(a) has been sent, at any time prior to the implementation of the investment or with-in t h i r t y days thereafter; or (c) i n the case of an investment reviewable pursuant to section 15, forthwith on receipt of a notice for review referred to in subparagraph 15 ( b ) ( i i ) . 82. Macdonald Commission Report, Vol.11, P.240. 83. Ibid. 84. Ibid. 266 8 5 . S e c t i o n 19 ( c ) o f I n v e s t m e n t Canada : The Agency s h a l l r e f e r t o t h e M i n i s t e r , f o r t h e p u r -p o s e s r o f s e c t i o n 2 1 , any o f t h e f o l l o w i n g m a t e r i a l r e c e i v e d by t h e Agency i n t h e c o u r s e o f t h e r e v i e w o f an i n v e s t m e n t u n d e r t h i s P a r t ; ( c ) any w r i t t e n u n d e r t a k i n g s t o Her M a j e s t y i n r i g h t o f C a nada g i v e n by t h e a p p l i c a n t . 8 6 . N i c h o l a s J . P a t t e r s o n , "Canada-U.S. F o r e i g n I n v e s t m e n t R e g u l a t i o n : T r a n s p a r e n c y v e r s u s D i f f u s i o n " , R e g u l a t i o n  o f F o r e i g n D i r e c t I n v e s t m e n t i n Canada and t h e U n i t e d  S t a t e s e d . by E a r l H. F r y and Lee H. R a d e b a u g h , p . 5 1 . 8 7 . I b i d . 8 8 . I b i d 89. I b i d . See A l s o W a t k i n s " R e p o r t , pp. See A l s o Wahn R e p o r t , pp. CHAPTER V 1. UN Document E/C.10/1985/S/2, p.6 p a r a 3. 2. E/C.10/1984/8, p.20, f o o t n o t e 6. See A l s o E/C.10/1985/6 . 3. E/C.10/1985/S/2, p.7, p a r a 7. 4. I b i d . , p.6, p a r a 6. G.A. R e s o l u t i o n 3 5/56, p a r a 70. 5. The R e p o r t o f t h e G r o u p o f E m i n e n t P e r s o n s , E / 5 5 0 0 / R e v . 1 , p p . 5 0 - 5 6 ; p p . 6 - 1 3 . 6. E / 5 5 0 0 / R e v . l . A l s o Werner J . F e l d . , M u l t i n a t i o n a l  C o r p o r a t i o n s and UN P o l i t i c s : The Q u e s t f o r Codes o f  C o n d u c t , Pergamon P r e s s , I n c . , 1 9 8 0 , p p . 4 9 - 5 1 . 7. E / C . 1 0 / 1 9 8 3 / S / 5 / R e v . l , E / l 9 8 3 / l 7 / R e v . 1 , Annex. I I , D r a f t U n i t e d N a t i o n s Code o f C o n d u c t on T r a n s n a t i o n a l  C o r p o r a t i o n s . A l l f u r t h e r r e f e r e n c e s t o p a r a g r a p h numbers a r e f r o m t h i s d o c u m e n t , h e n c e f o r t h r e f e r r e d t o a s D r a f t Code. 8. D r a f t Code, p a r a 6. 267 9 . Ibid . , para 8 . 10 . Ibid . , para 9 . 11 . Ibid., para 11. 12 . Ibid., paras 12, 13 and 13 . Ibid . , para 14 . 14 . Ibid., paras 17, 18 and 15 . Ibid., paras 59 - 65 . 16 . Ibid., para 21 . 17. Ibid., para 23 . 18 . Ibid., para 24 . 19 . Ibid., para 25 . 20 . Ibid . , para 28 . 21 . Ibid., para 29 . 22 . Ibid., para 30 . 23 . Ibid. , paras 33- 35 . 24 . Ibid . , para 37. 25 . Ibid . , para 38 . 26 . Ibid., para 39 . 27. Ibid . , para 40 . 28 . Ibid., paras 41- 43 . 29 . Ibid., para 44 . 30 . Ibid . , para 46 . 31. Ibid., para 58. See E/C.10/1985/S/2, p.28, para 83. 32. Draft Code, paras 59-65. 33. Ibid., paras 67-69. 34. Ibid., para 71. 268 35. E/C.10/1985/S/2, p.32-33, paras 95 and 96. 36. Ibid., p.29. Draft Code, paras 1-3. 37. E/C.10/1985/S/2, p.30, para 89. Quoted from Inter-national Labour Organization, T r i p a r t i t e Declaration  of Pr i n c i p l e s Concerning Multinational Enterprises  and Social Policy (1982 ) , para 6. 38. E/C.10/1985/S/2, p.31, para 92. 39. Ibid., p.28, para 84. 40. Ibid., p.29, para 85. 41. Ibid., p.26, para 74. 42.". Ibid., p.26, para 75. 43. Ibid., pp.26-28, paras 74-80. Draft Code, para 14. 44. E/C.10/1985/S/2, pp.27-28. See s p e c i a l l y para 80. 45. Ibid., pp.12-15., paras 24-34. 46. Ibid., pp.15-16, paras 38-41. 47. Ibid., p.16, para 39. 48 . Ibid., para 41. 49. Ibid., p.17, paras 43-45. 50. Ibid., pp.17-18, paras 46-48. 51. Ibid., p.18, para 49. G.A. Resolution 626 (VII) of:\1952 . 52. Ibid. G.A. Resolution 1803 (XVII) of 14 Dec, 1962. 53. G.A. Resolution 1803 (XVII) of 14 Dec.1962, Section 1(d). 54. E/C.10/1985/S/2, p.21, para 55. 55. Ibid., pp.21-22, para 56. 56. Ibid., p.22, para 58. 57. E/C.10/1985/S/2, p.22, para 59. 58. Ibid., para 62. 59. Ibid., para 63. 269 60. Ibid., p.24, para 66. 61. Ibid., p. -257' par a r .70,1 62. Ibid., pp.25-26, paras 72-73 . 63 . E/1983/17/Rev.l ; ppC2-3j'.' E/G;'10./1983/S/5/Rev .1 . 64. Ibid., Annex. IV, "Basis for a Concluding Document: Proposal By the Chairmen of Working Groups I & I I " . This has been referred to as Working Paper. Para 1(a). 65 . Ibid., para 2 . 66 . Ibid . , para 6 . 67. Ibid., para 7. 68. Ibid . , para 49 . 69. Ibid . , para 54 . 70 . Ibid . , para 56 . 71. See Report of the Second Session of the Commission on  Transnational Corporations, March 1-12, 1976. CONCLUSION 1. Brandt Commission Report, p.70. 2. Statements and Speeches No. 83/5. "An Address by the Hon. Gerald Regan, Minister of State (International Trade), to the Bankers' Association for Foreign Trade, San Juan, Puerto Rico, A p r i l 13, 1983. 3 . Ibid . 4. Ibid. 5. Ibid. 270 SELECT READING I . (i) ( i i II STATUTES Canadian Foreign Investment Review Act, 1973-74 Investment Canada Act, 1985 Indian Foreign Exchange Control Act, 1947 Foreign Exchange Regulation Act, 1973 U N DOCUMENTS G.A. Resolution 35/56 G.A. Resolution 626 ( v i i ) G.A. Resolution 1803 (x v i i ) TD/106 . TD/134 TD/134/Supp.1 ST/ECA/190 ST/CTC/6 E/5209-. E/5500/Rev.1 E/C.10/38,. E/C.10/62 E/C.10/79 E/C.10/84 EC/10/AC.2/18 E/1980/40/Rev.l E/1981/49 E/C.10/1982/2 E/C.10/1982/6 E/C.10/1982/19 E/C.10/1983/S/2 E/C.10/1983/S/5 or or E/C.10/75 E/C.10/92 or E/1982/18 or E/1983/17 E/C.10/1983/S/5/Rev.l or E/1983/l7/Rev.1 2 71 E/C.10/1983/14 E/C.10/1983/15 E/C.10/1984/2 E/C.10/1984/S/5 E/C.10/1984/8 E/C.10/1984/13 E/C.10/1984/17 E/C.10/1984/20 E/C.10/1985/2 E/C.10/1985/S/2 E/C;10/1985/3 E/C.10/1985/5 E/C.10/1985/6 E/C.10/1985/16 E/C.10/1985/19 or E/1983/18/Rev.l or E/1984/18 or E/1985/28 I I I . BOOKS AND ARTICLES Arnett, E. James, Robert Reuter, Erro l P. Mendes, "FIRA and the Rule of Law", 62(2,)., The, Canadian,. Bar Review, June 1984, ' 121-145v " Baker, Samuel R., "Taking the Fear Out of FIRA: Legal Considerations for Investing in Canada", Regulation of Foreign Direct Investment in Canada  and the United States, ed. Earl H. Fry and Lee H. Radebaugh, Brigham Young University, David M. Kennedy International Centre, 1983. Barton, Thomas and Lome D. Peterson, "The New Investment Canada Act", Doing Business in Canada and B.C., The Continuing Legal Education Society of B r i t i s h Columbia, Materials prepared for a Continuing Legal Education Seminar held in Vancouver, B.C. on June 24, 1985. Breese, Gerald, Urbanization in Newly Developing Countries, Prentice-Hall Inc., 1966. Behrman, Jack N., Industrial P o l i c i e s : International  Restructuring and Transnationals, Toronto: Lenington Books, 1984. 272 Berle, Adolf A. and Gardiner C. Means, The Modern  Corporation and Private Property, Revised ed. New York: Harcourt, Bruce & World Inc., 1968. Bhagwati, Jagdish N. and T.N. Srinivasan, Foreign  Trade Regimes and Economic Developments: India, A Special Conference Series on Foreign Trade Regimes and Economic Development, National Bureau of Economic Research, New York: 1975. Distributed by Columbia University Press. Bharat Ram, Vinay, Towards a Theory of Import Substi- tution, Exchange Rates and Economic Development, Oxford University Press, 1982. Brandt, Willy, North-South: A Programme for Survival, London: Pan Books, 1980. Bronowski, Jacob, "Science, Ethics and Equality", Vol.8 No.l, Dialogue, 1975, 75-82. Canada - Administration of the Foreign Investment  Review Act, Report of the Panel, General Agreement on T a r i f f s and Trade, L/5504. Canadian Bar Association Breif to the Hon. Herb Gray, Minister of Industry, Trade and Commerce on the  Foreign Investment Review Act, Sept.1981, pp.12-17. Carr, D.W., Recovering Canada's Nationhood, Ottawa: Canada Publishing Company, 1971. Cranston, Ross, "Foreign Investment R e s t r i c t i o n s : Defending Economic Sovereignty i"n Canada, and, ;Australia", Vb 1.14., N o . l H a r v a r d : International Law Journal, ..... Winter 1973'., pp.345-367. Drache, Daniel and Duncan Cameron ed., The Other  Macdonald Report, Toronto: James Lorimer and Co.,1985. Dubashi, Jay, "Industrial Growth: Independent Course", India Today, Jan.15, 1985, p.123. Doing Business in India, Price Waterhouse, 1980. Doing Business in Canada, Price Waterhouse, 1983. 273 Escorts Ltd. and Another vs. Union of India and Others, 57 Reports of Company Cases, 1985, 241-440. Exchange Control, New Delhi: Indian Investment Centre, 1982. Exchange Control F a c i l i t i e s for Investment by Non- Resident Indians, Reserve Bank of India, 1985. Fayerweather, John, Foreign Investment in Canada:  Prospect for National Policy, Toronto: Oxfod University Press, 1974. Foreign Ownership and the Structure of Canadian Industry: Report of the Task Force on the Structure o f C a n a d i a n I n d u s t r y ( W a t k i n s R e p o r t ) , Ottawa, J a n u a r y 1968. Foreign Technology and Investment: A Study of Their  Role in Indi a ' s : I n d u s t r i a l i z a t i o n , New Delhi: National Council of Applied Economic Research, 1971. Foreign Capital and Industrial Growth, Economic and S c i e n t i f i c Research Association India Exchange, Calcutta: The Statesman Commercial Press, October 1977. Foreign Investment in India : Opportunities and Incentives, New Delhi: Indian Investment, 1985. Fry, Earl H. and Lee H. Radebaugh, ed. Regulation of  Foreign Direct Investment i n Canada and the United States, Brigham Yound University, David M. Kennedy International Centre, 1983. Franck, Thomas M., K. Scott Gudgeon, "Foreign Invest-ment in Canada", Vol.50 No.l, New York University Law  Review, 1975, 76-146. Frank, Isaiah, Foreign Enterprise in Developing  Countries: A Supplementary Paper of the Committee for  Economic Development, Baltimore & London: The John Hopkins University Press, 1980. General Agreement on T a r i f f s and Trade, Basic Instru-ments and Selected Documents, Vol.IV, Geneval March 1969. Ghosh, Pradip K., ed., Multi-National Corporations  and Third World Development, Westport, London: Greenwood Press, 1984. 274 Goldberg, Paul M., and Charles P. Kindleberger, "Toward a GATT for Investment : A Proposal for Super-vision of the International Corporation", 2 Law and  Policy in International Business, 1970, 295-325. Gordon, W.L., Troubled Canada: The Need for New  Domestic P o l i c i e s , McClelland and Steward Ltd., 1961. Gray, Hon. Herb, Foreign Direct Investment i n Canada, Ottawa, 1972. Grover, Warrne, "The Investment Canada Act", Vol.10, No.4, Canadian Business Law Journal, Sept.1985,.' , pp.475-482. Gupta, K.R., ed., Issues i n Indian Industry, New Delhi: Atlantic Publishers and Distributors, 1980. Hughes, Graeme C , A Commentary on the Foreign  Investment Review Act, Toronto: The Carswell Co. Ltd., 19 75. Hundred per cent Export Units : F a c i l i t i e s and Incentives, New Delhi, Indian Investment Centre, 1984. Indo-U.S.: Business Opportunities, Future Prospects, New Delhi: Indian Investment Centre, May 1985. International Investment and Multinational Enterprises, Revised ed., Organisation for Economic Co-operation and Development, 1979. Investing in Developing Countries, OECD Publications, Paris. Investing in India: A Guide to Entrepreneurs, New Delhi : Indian Investment Centre, Dec. 1983. Investment Policy for 80 1s : Focus on Industry, New Delhi : Indian Investment Centre, May 1985. Jain, O.P. and Sudershan K. Savara, I n d u s t r i a l i s a t i o n  And Multinationals, New Delhi: Commercial Publications Bureau, 1981. Jha, L.K., North-South Debate, Delhi: Chanakya Publications, 1982. Johansen, Robert C , United States Foreign Aid to  India: A'Case Study of the Impact of US Foreign Policy  on the Prospects for World Order Reform, World Order Studies Program, Occasional Paper No.2, Centre of Inter-national Studies, Woodrow Wilson of Public and Inter-national Studies, Princeton University, Aug. 1975. .2 75 Karadia, Chhotu, The Swraj Paul A f f a i r , London: Slatecount, 1984. Kidron, Michael, Foreign Investments in India, Oxford University Press, 1965. Kumar, Krishna, ed., Transnational Enterprises:  Their Impact on Thrid World Societies and Cultures, Colorado: Westview Press, 1980. Kust, Matthew J., Foreign Enterprise i n India:  Laws and P o l i c i e s , University of North Carolina Press, 1964 . Kuznets, "Notest6n'"the>Take^-0fft" , .vThet Ecohomicsrof Take-Of f ;- into Sustained . Growth , ed . , W.W. Roslow, Macmillan, 1964. Kuznets, Simon, Economic Growth and Structure:  Selected Essays, New York: W.W. Norton & Co. Inc.,1965. Kuznets, Simon, Towards a Theory of Economic Growth, New York: W.W. Norton & Co.. Inc., 1965, rpt . 1968. Kuznets, Population, Capital and Growth, New York: W.W. Norton & Co., Inc., 1973. Lakshmanan, M.S., Economic Development in India, Delhi: Hindustan Publishing Corp., 1974. Langford, J.A., Canadian Foreign Investment Controls, 2nd ed., CCH Canadian Ltd., 1979. "Letter from New Delhi", Vol.97, No.34, Far Eastern  Economic Review, Aug. 26, 19 77. Lev i t t , Kari, Silent Surrender: The Multinational  Corporation in Canada, Toronto: Macmillan of Canada, 1970 . Litvak, I. A., C.J. Maule, R.D. Robinson, Dual Loyalty: Canadian-US Business Arrangements, McGraw-Hill Company of Canada Ltd., 1971. Lok Sabha Debates, 8th Session, Vol.31, August to September, 1973. Macdonald, Hon. Donald S., "Canadian Industrial Policy Objectives and A r t i c l e III of GATT: National Ambitions & International Obligations", Vol.6, No.4, The Canadian  Business Law Journal, Aug. 1982, •• 385-407. 276 MacGuigan, Hon. Mark, "Beyond Cancun : Canadian e r r • .-• Perspectives on the North-South Dialogue", An Address by the Hon. Mark MacGuigan, Secretary of State for External A f f a i r s , to the Society for International Development, Baltimore, July 21, 1982, Statements and Speeches, External A f f a i r s , Canada. Mahajan, Krishan, "Escorts: New PM's Test", The Hindustan Times, Nov. 12, 1984. Marr, William L., Donald G. Paterson, Canada: An  Economic History, Toronto: Macmillan, 1980. Melman, Sofia, Foreign Monopoly Capital in Indian  Economy, New Delhi: People's Publishing House, November, 1963. Menezes J u l i o , "Economic Nationalism", Legal Pers- pectives on Contemporary Social Issues: Decade of  Adjustment, ed. , J u l i o Menezes, Toronto: Butterworth, 1980 . Moore, Wilbert E., The Impact of Industry, Prentice-Hall Inc., 1965. Myths and R e a l i t i e s of Foreign Investment i n India, Indian Investment Centre, New Delhi. Nehru, Jawaharlal, The Discovery of India, abridged by C.D. Narasimhaiah, New Delhi: Indian Council for Cultural Relations, 1976, 190. Ninan.; <-T;. N . "Escorts: Turning the Tables", India Today, Dec.15, 1984, • .134-137. Non-Resident Indians: An Investment Guide, New Delhi: Indian Investment Centre, Dec>:.1983. O'Sullivan, Barry J., "Canada's Foreign Investment Review Act Revisited", Vol.4, No.l, Fordham Inter- national Law Journal, 1980-81, : 175-198. Paterson, R.K. Ping, Ho Kwon, North and South: Poles Apart, Far  Eastern Economic Review, May 2, 1980, 40-44. 27 7 Report to the House: Special Committee Respecting Canada-U.S. Relations, (Wahn Report ) , House of Commons, Second Session, Twenty-Eighth Parliament, 1969-70. Report of the Interdepartmental Task Force on  Foreign Investment, Depts of Treasury and Economic Trade and Development, Financial and Commercial A f f a i r s , Ontario, Nov. 1971. Report of the Study Team on Leakage of Foreign  Exchange Through Invoice Manipulation, Ministry of Finance, Government of India, 1971. Report of the Royal Commission on the Economic Union  and Development Process for Canada, Vols. I, II and III, (Macdonald Commission Report) Minister of Supply and Services, 1985. Rostow, W.W., ed. The Economics of Take-Off into  Sustained Growth, Macmillan, 1964. Rotstein, Abraham and Gary Lax, ed., Independence:  The Canadian Challenge, Toronto; 1972. Royal Commission on Canada's Economic Prospects, (Gordon Report), November, 195 7. Safarian, A.E., Foreign Ownership of Canadian Industry, McGraw-Hill Co. of Canada Ltd., 1966. Samet, Andrew James, "The US Response to Canadian Economic Nationalism", Foreign Investment Review Law  in Canada, James M. Spence, Q.C. and William P. Rosenfeld, Q.C., ed. Toronto: Butterworths, 1984. Sangal, P.S., National and Multinational Companies:  Some Legal Issues, Delhi: Bhagwati International Enterprise; 1981. Sarkar, Jayanta, "IBM to Close Shop in India", Vol.98, No.49, Far Eastern Economic Review, Dec.9, 19 77, PP . 4 8-4 9. Sarkar, Jayanta, "Indians Scout for Shares", Vol.15, No.35, Far Eastern Economic Review, Aug.31,1979,pp.95-96. Sen, S.C., Multinational Corporations in the Develop- ing Countries, Calcutta: Eastern Law House, 1978. Sengupta, S u r a j i t , Business Law in India, Oxford University Press, 1979. 278 Sethi, R.B., Foreign Exchange Regulation Act With  Rules, Not i f i c a t i o n s and Forms, Allahabad: Law Publishers, 1982. Shankar, V. Gauri, Taming the Giants: Transnational  Corporations, New Delhi: Vidya Vahini, June 1980. Shultz, Richard, Frank Swedlove and Katherine Swinton, The Cabinet as a Regulatory Body: The Case of the  Foreign Investment Review Act, Working Paper No. 6, A Paper Prepared for the Economic Council of Canada, Ottawa. Spence, James M., Q.C., William P. Rosenfeld, Q.C., ed., Foreign Investment Review Law in Canada, Toronto: Butterworths, 1984. Spence, James M., "FIRA: A Decade of Evolution", Foreign Investment Review Law in Canada, ed. James M. Spence, Q.C., and William P. Rosenfeld, Q.C., Toronto, Butterworths, 1984. Stai r s , Denis and Gilbert R. Winham, research co-ordinators, Canada and the International P o l i t i c a l /  Economic Environment, University of Toronto Press,1985. Survey of Indo-U.S. Collaborations, New Delhi: Federation of Indian Chambers of Commerce, 1984. Taxes and Incentives: A Guide for Investors 1983-84, New Delhi, Indian Investment Centre, Oct., 1983. Tiwari, M.M., External Resources and Economic Develop-ment in India, Delhi: B.R. Publishing Corp., 1982. Triad and Punishment..of Social and Economic Offences, 4 7th Report of the Law Commissionr'of 'India; '. , ;" T r i p a r t i t e Declaration of Principles Concerning  Multinational Enterprises and Social Policy, International Labour Office, Geneva, 1977. Turner, J e f f , "Canadian Regulation of Foregin Direct Investment", Vol.23, No.2, Harvard International Law  Journal, Winter 1983, pp. 333-356. Wall, Kathleen A., "Dow Jones and Co., Inc. vs.  Attorney General of Canada: The Canadian Foreign Investment Review Act, " 14 Law and Policy in Inter-national Business, 1982, pp.505-519. 279 Wallace, Don, J r . , International Regulation of  Multinational Corporations, New York, Washington, London: Praegar Publications, 1976. Walmsley, John, Handbook of International Joint  Ventures, London: Graham and Trotman, June 1982. Ward, Barbra, "The Decade of Development -- A Study in Frustration", Reshaping the' World Economy: Rich  and Poor Countries, ed. John A. Pincus, 1968. Werner, J . Feld, Multinational Corporations and UN  P o l i t i c s : The Quest for Codes of Conduct, Pergamon Press, 1980. Williams, Glen, Not for Export: Toward a P o l i t i c a l  Economy of Canada's Arrested I n d u s t r i a l i z a t i o n , Toronto: McClelland and Stewart Ltd., 1983. 280 APPENDIX I LIST OF INDUSTRIES INCLUDED IN APPENDIX I TO GOVERNMENT PRESS NOTE DATED 2.2.1973 AS AMENDED SUBSEQUENTLY ON 21.4.1982 : 1. Metallurgical Industries 1. Ferro a l l o y s . 2. Automotive castings, SG iron castings, steel castings r-r and*- steel^ f orgings . 3. Non-ferrous metals and the i r a l l o y s , including • aluminium j f o i l s . 4. Sponge Iron and P e l l e t i s a t i o n . 2. Boilers and Steam Generating Plants. 3. Prime Movers (Other than E l e c t r i c a l Generators) 1. Industrial turbines. 2. Internal combustion engines. 3. Alternate genergy systems l i k e solar, wind etc. and equipment therefor. 4 . Gas/hydro/steam turbines from 20 MW to 60 MW.. „ 4. E l e c t r i c a l Equipment 1. Equipment for transmission and d i s t r i b u t i o n of e l e c t r i c i t y including power and d i s t r i b u t i o n trans-formers, power relays, HT-switch gear synchronous condensers. 2. E l e c t r i c a l motors. 3. E l e c t r i c a l furnaces including i n d u s t r i a l furnaces. 4. X-ray equipment. 5. Electronic components and equipment. 6. Component wires for manufacture of lead-in-wires. 7. Hydro/steam/gas generators from 20.MW to 60IMW. 5. Transportation 1. Mechanised s a i l i n g vessels upto 10,000 DWT including fishing:' trawlers . 2. Ship a n c i l l a r i e s . 3. (1) Commercial vehicles, public transport vehicles including automotive commercial three wheeler jeep type vehicles, i n d u s t r i a l locomotives. (2) Personal transport vehicles; (i) Passenger cars; ( i i ) Automotive two-wheelers, and three wheelers. Regarding two wheelers, on expansion of \ ,281 existing units, subject to an export o b l i -gation of 25% on additional capacity. (3) Specialised automotive components, such as pistons and piston rings, f u e l i n j e c t i o n equipment; auto e l e c t r i c a l s , such as starter motors, generators, spark plugs, rear axle assembly, brake and clutch assembly, tyre/tube valves, wheels, for automobiles and bimetal bearings. Industrial Machinery Industrial machinery including specialised equipment. 1. High performance and high f i d e l i t y i n d u s t r i a l valves as may be s p e c i f i e d by the Ministry of Industry. 2. Centralised l u b r i c a t i o n systems: 3. Gears, gear boxes and couplings. 4. Rolls for paper m i l l s , r o l l s for r o l l i n g m i l l s . 5 . Pollution control equipment. 6. Process equipment for u t i l i s a t i o n of recycling of wastes. 1. Machine tools, including controls and accessories. 2. Ji g s , f i x t u r e s , tools and dies of specialised types and cross land t o o l i n g . 3 . Engineering production adis such as cutting and forming tools, patterns and dies and mining t o o l s . A g r i c u l t u r a l Machinery Tractors. Earthr Moving-Machinery Earth Moving machinery and construction machinery and components thereof. Industrial Instruments Indicating, recordingand regulating devices for pressure, temperature, rate of flow, weights, leve l s and the l i k e . S c i e n t i f i c and Electromedical Instruments and Laboratory Eguipment. Nitrogenous and Phosphatic F e r t i l i s e r s f a l l i n g under (1) Inorganic f e r t i l i z e r s under 1 1 8 - F e r t i l i z e r s ' in the F i r s t Schedule to the I (D&R) Act, 1951. Chemicals (other than f e r t i l i z e r s ) 1. Heavy organic chemicals including petrochemicals. 2. Heavy inorganic chemicals. 282 3. Organic fine chemicals. 4. Synthetic resins and p l a s t i c s . 5. Man-made f i b r e s . 6. Synthetic rubber. 7. Industrial explosives. 8. Technical grade i n s e c t i c i d e s , fungicides, weedicides and the l i k e . 9. Synthetic detergents. 10. Miscellaneous chemicals (for Industrial use only) including--1. Catalysts and Catalyst supports. 2. Photographic chemicals. 3. Rubber chemicals. 4. Polyols . 5. Isocyanates, Urethanes etc. 6. Specia l i t y chemicals for enhanced o i l recovery. 7. Heating f l u i d s . 8. Coal tar d i s t i l l a t i o n and products therefrom. 9. Tonnage plants for the manufacture of i n d u s t r i a l gases. 10. High al t i t u d e breathing oxygen/medical oxygen. 11. Nitrous oxide. 12. Refrigerent gases l i k e l i q u i d notrogen, carbon dioxide, etc. in large volumes. 13. Argon and other rare gases. 14. A l k a l i / a c i d r e s i s t i n g cement compound. 15. Leather chemicals and a u x i l i a r i e s . Drugs and Pharmaceuticals For FERA Drug Companies (a) Drug intermediates from the basic stages for production of high technology bulk drugs. (b) High technology bulk drugs from basic stages and formulations based thereon with an ov e r a l l r a t i o of bulk drug consumption (from own manufacture to formulations from a l l sources of 1:2). For non-FERA MRTP Companies A l l bulk drugs and formulations with an ove r a l l r a t i o of 1:10 between the value of production of bulk drugs and formulations. 1. Paper and Pulp including paper products. 2. Industrial laminates. 1. Automobile tyres and tubes, including automobile tyre tube valves. • 283 3 . 4 . 2 . Rubberised heavy duty i n d u s t r i a l beltings of a l l types. Rubberised conveyor beltings. Rubber reinforced and lined f i r e f i g h t i n g hose pipes. 17. 18 . 19 . 20 . 21. 22 . 23 . 24 . 25 . NOTE Plate Glass 1. Float Glass. 2. Toughened glass i n s u l a t o r s . 3. Glass f i b r e s of a l l types. Ceramics. 1. Refractories. 2. Furnace l i n i n g b r i c k s - a c i d i c , basic and neutral. 3. Ceramic f i b r e s . Cement Products 1. Portland cement. 2. Gypsum boards, wall boards and the l i k e . High technology Reproduction and M u l t i p l i c a t i o n Equipment. Carbon and Carbon Products 1. Graphite electrodes and anodes. 2. Impervious graphite blocks and sheets. Pretensioned High Pressure RCC Pipes. Rubber Machinery. Printing Machinery, 1. Web-fed high speed offset rotary printing machines having output of 30,000 or more impressions per hour. 2. Photo composing/type setting machines. 3. Multi-colour sheet-fed' offset p r inting machines of sizes 18" x 25" and above. 4. High speed Rotogravure printing machines having output of 30,000 or more impressions per hour. Soya Products 1. Soya Texturised Proteins. 2. Soya Protein Isolates. 3. Soya Protein Concentrates. 4. Other Specialised products of Soya Bean. 5. Winterised and Deodorised Refined Soya Bean O i l . :: Items of manufacture reserved for the public sector under Sehedule-A to the Industrial Policy Resolution, 1956 or for production in the small scale sector, as may be n o t i f i e d from time to time, w i l l be excluded from the application of the l i s t . 284 APPENDIX II PRESS NOTE ON 'PROMOTION OF INVESTMENT FROM OED COUNTRIES' (Press Note issued by the Ministry of Finance, Department of Economic A f f a i r s , Government of India on 28 Oct., 1980) Suggestions have been received from time to time that the Government of India could create additional f a c i l i t i e s to promote investment i n the country from O i l Exporting Developing Countries. These countries have large f i n a n c i a l resources. However, opportunities for investment within t h e i r own countries are r e l a t i v e l y limited and they look for investment opportuni-t i e s outside. There i s also the policy that Developing Countries could cooperate among themselves in a mutually b e n e f i c i a l manner. 2. Foreign Investment has been viewed by the Government of India as a vehicle for transfer of technology not indigenously available or to promote export oriented production. While O i l Exporting Developing Countries have substantial surplus f i n a n c i a l resources, they may not have the type of technology which the country needs. It i s , therefore, decided that foreign invest-ment proposals from these countries need not be associated with transfer of technology from the equity holder and that such investments may be of a p o r t f o l i o nature. The idea i s that many p r i o r i t y areas l i k e f e r t i l i s e r s , cement. Petrochemicals, paper and pulp etc. involve large f i n a n c i a l outlays and growth of these sectors could reduce import dependence. In some ventures, there would be scope for export-oriented production catering either to the O i l Exporting Developing Countries or to other, countries in Europe etc. The scope for r a i s i n g forieng currency loans as a res u l t of such a cooperation has also been taken into account by the Government. 3. Within the framework of the investment policy of the Government, i t has been decided to provide the following f a c i l i t i e s : (a) Investment from o i l exporting developing countries may be permitted in new companies even i f i t i s i n the nature of p o r t f o l i o investment. (b) Such investments should not exceed 40 per cent in the equity. (c) The new companies should be export-oriented or should undertake manufacturing a c t i v i t i e s covered under Appendix I of the Industrial Policy of 1973. (d) Investment on the aforesaid pattern may be allowed in hotels. 285 (e) I n v e s t m e n t may a l s o be a l l o w e d i n new h o s p i t a l p r o j e c t and s u c h h o s p i t a l s s h o u l d h a v e a d e q u a t e p r o v i s i o n f o r o u t d o o r and e m e r g e n c y m e d i c a l s e r v i c e t o t h e g e n e r a l p u b l i c and a l s o f o r a minimum p e r c e n t a g e o f o c c u p a n c y by I n d i a n p u b l i c . ( f ) L o a n s s h o u l d a l s o be a l l o w e d t o be r a i s e d a b r o a d f o r s u c h j o i n t v e n t u r e s p r o v i d e d t h e t e r m s a r e r e a s o n a b l e . 4. A p p l i c a t i o n s s e e k i n g t o p r o m o t e I n d i a n v e n t u r e s a v a i l i n g o f t h e s e f a c i l i t i e s may be made t o t h e S e c r e t a r i a t f o r I n d u s -t r i a l A p p r o v a l s i n t h e M i n i s t r y o f I n d u s t r y and a l l s u c h •?. a p p l i c a t i o n s w i l l be d e c i d e d by t h e P r o j e c t A p p r o v a l B o a r d i n a c o m p o s i t e manner. 

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