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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 F O R E I G N D I R E C T I N V E S T M E N T : INDIA  AND  CANADA  BY DR.  KAVITA  A. SHARMA  A T H E S I S S U B M I T T E D I N P A R T I A L F U L F I L M E N T OF THE R E Q U I R E M E N T S  FOR  MASTER  OF  THE DEGREE  OF  LAW  IN THE F A C U L T Y OF  We  accept to  this  thesis  the required  as  LAW  conforming  standard  THE U N I V E R S I T Y OF B R I T I S H February (?)Dr.  Kavita  COLUMBIA  1986  A. S h a r m a , 1 9 8 6  In  presenting  degree freely  at  this  the  available  copying  of  department publication  in  partial  fulfilment  of  the  University  of  British  Columbia,  I  agree  for  this or of  thesis  reference  thesis by  this  for  his  and  scholarly  or  thesis  for  her  of  OCJXKAJ  T h e U n i v e r s i t y o f British 1956 M a i n Mall Vancouver, Canada V6T 1Y3 Date  tk¥r\M.  'EG  Columbia  I further  purposes  gain  shall  that  agree  may  representatives.  financial  permission.  Department  study.  requirements  It not  be  that  the  Library  permission  granted  is  by  understood be  for  allowed  an  advanced  shall for  the that  without  make  it  extensive  head  of  my  copying  or  my  written  i i  ABSTRACT  The ing in  thesis  t o ownership and c o n t r o l two c o u n t r i e s ,  loping is  aim o f t h i s  country  with  a developed  inspite  industry.  A plea  tion of foreign  The have been  tool  costs  and b e n e f i t s  forums t o develop  Persons ing of  Their  comments have been views between The  with  direct  special  a mechanism  made i n v a r i o u s to regulate  UN h a s made t h e m o s t  comprehen-  o f Eminent  recommendations and t h e accompanydiscussed  developing  impact  investment  emphasis •  t h e appointment o f t h e Group  i n 1972.  regula-  t o make i t a  A t t e m p t s have been  investment.  with  resource-  technology and  i n order  1 with  international  effort  The s e c o n d  essentially  of foreign  countries.  sive  base.  o f economic growth and development.  examined i n Chapter  direct  i s a deve-  made f o r i n t e r n a t i o n a l  on d e v e l o p i n g  foreign  The f i r s t  industrial  investment  pertain-  investment  which i s s t i l l  has been  issues  direct  of i t ssophisticated  direct  effective  of foreign  and Canada.  a broad  country  exporting  truly  India  i s t o examine  to highlight  and developed  of colonization  i t sconsequent problems l i k e  countries.  on d e v e l o p i n g formation  countries  of resource-  based  economies has been d i s c u s s e d  i n Chapter  being  a largely  economy  resource-exporting  the divergence  I I .  Canada  inextricably  iii  l i n k e d with USA has s e v e r a l p a r a l l e l s with  developing  countries. In Chapter 3 I have d i s c u s s e d the h i s t o r i c a l background of f o r e i g n d i r e c t investment i n I n d i a and i t s p e r c e i v e d costs.  P r o v i s i o n s of F o r e i g n Exchange R e g u l a t i o n  have been examined to assess foreign direct  Act, 1973  I n d i a ' s attempts to r e g u l a t e  investment.  Chapter 4 has d e a l t with  the r o l e of f o r e i g n d i r e c t  investment i n Canadian economy and i t s p e r c e i v e d c o s t s and benefits.  F o r e i g n Investment Review Act, 1973 and Investment  Canada Act, 1985 have been analysed  to understand Canada's  attempts at r e g u l a t i o n of f o r e i g n d i r e c t The  investment.  D r a f t Code of Conduct produced by the UN  Comission 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 i n Chapter 5.  has been d i s c u s s e d  Areas of i n t e r n a t i o n a l agreement and d i s a g r e e -  ment have been c l a s s i f i e d  and p o s s i b l e s o l u t i o n s seen to make  t h i s a u n i v e r s a l l y acceptable I have concluded a u n i v e r s a l l y acceptable  code.  that i t would be b e n e f i c i a l  to adopt  i n t e r n a t i o n a l code of conduct.  T h i s can e v e n t u a l l y a c q u i r e the f o r c e of customary i n t e r n a t i o n a l law and provide g u i d e l i n e s f o r n a t i o n a l l e g i s l a t i o n to make f o r e i g n d i r e c t investment an e f f e c t i v e t o o l i n economic development.  i v  TABLE OF CONTENTS Page Abstract  i i  Introduction  i  Chapter I : Costs and B e n e f i t s of D i r e c t Investment (i) (ii)  Introduction P o r t f o l i o and  11 12  D i r e c t Investment  Costs of Foreign (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) (xii) (xiii)  Foreign  D i r e c t Investment  15  E x p l o i t a t i o n of Natural Resources Exployment Labour Technology Research and Development I n a p p r o p r i a t e Products Extraterritoriality Intra-Company T r a n s a c t i o n s A d m i n i s t r a t i v e C o n t r o l of the E n t e r p r i s e D i s c l o s u r e of F i n a n c i a l Information Transfer P r i c i n g E f f e c t on C a p i t a l Flow Consumer P r o t e c t i o n Rise of Nationalism I n t e r n a t i o n a l Regulation T r a n s n a t i o n a l s - U.N.  29 of  29  Areas of Agreement of Agreement i n the Recommendations (i) (ii) (iii). (iv) (v)  N a t i o n a l Treatment Non-interference i n i n t e r n a l a f f a i r s host country Labour Standards Consumer'Protection Tax T r e a t i e s Disagreements  (i) (ii) (iii) (iv) (v) (vi) (vii)  15 15 17 18 20 20 20 22 23 24 25 26 28  Guidelines for Multinationals Ownership and C o n t r o l Dispute S i t u a t i o n s Technology Competition, C o n f l i c t s and I n t r a corporate A f f a i r s Screening Process Other Areas of Disagreement  31 of  31 31 32 33 33 34 34 35 38 39 41 43 45  Evaluation  46  Conclusion  52  V  Page Chapter I I : Foreign D i r e c t Perspective  Investment i n  Introduction  54  What i s Development  55  D i f f e r e n c e s Between Developed Developing Countries (i) (ii) (iii) (iv)  C o l o n i z a t i o n and Time of Industrialization Population Technology Psychology  . ,  (i) (ii)-  57 .  Countries  of Canada  Canada, a resource-based I n f l u e n c e of USA  (i) (ii) (iii) (iv) (v) (vi)  country  (i) (ii) (iii) (iv)  64 67 71 77  Foreign  Investment  H i s t o r i c a l Background  79  1949 P o l i c y Statement on Foreign D i r e c t Investment i n I n d i a  86  Costs and B e n e f i t s of F o r e i g n Investment as Perceived i n India  90  Technology D u p l i c a t i o n of Technology E f f o r t s to Augment C a p i t a l Monetary Costs Unemployment Under and O v e r - I n v o i c i n g Foreign Exchange Regulation  (i)  57 60 61 63 67  Conclusion Chapter I I I : India and  ~ :  Problems Faced by Developing S p e c i a l Features  and  S a l i e n t Features  91 94 95 96 98 99 Act,1973  of S e c t i o n 29  Guidelines f o r Administering S.29 of FERA Scope Companies with more than Forty Percent Shareholding Trading A c t i v i t i e s Other A c t i v i t i e s Oil  E x p o r t i n g Developing'Countries  100 101 104 104 105 107 109 110  vi Page Non-Resident Indians and Persons of Indian O r i g i n (i) (ii)  (i) (ii)  D i r e c t Investment P o r t f o l i o Investment  112 113  Free Trade Zones  114  Impact  115  of S.29  Coca-Cola Case IBM Case  117 119  Legal I m p l i c a t i o n s of S.29 and P i v o t a l Role of Reserve Bank of India (i) (ii) (iii)  D i l u t i o n of Equity Holding Reasonable Opportunity to Make a Representation Permission of Reserve Bank of India Conclusions  121 126 128  Investment  F a c t o r s Shaping Canada's Investment Policy  137  Development  138  of Economy i n Canada  B e n e f i t s and Costs  140  Predecessors of FIRA  144  Foreign Investment 1973-74  147  Difficulties  Review Act,  Caused by FIRA  N e g o t i a t i n g Process E x t r a - t e r r i t o r i a l I m p l i c a t i o n s of FIRA S i g n i f i c a n t Benefit C r i t e r i o n Reviewable Investments Delays Third-Party Representations Unwieldiness of the Process Confidentiality Compliance with the Act Other Problems  149 149 151 153 154 154 156 156 157 157 158  FIRA to Investment Canada  158  Report of the Macdonald  162  The Other Macdonald Investment (i) (ii) (iii)  121  131  Chapter IV : Canada and Foreign  (i) (ii) :(iii) (iv) (v) (vi) (vii) (viii) (ix) (x-)  112  Commission  Report  172  Canada and FIRA  173  Purpose R e s p o n s i b i l i t i e s of the M i n i s t e r S i g n i f i c a n t Benefit  173 174 175  vii Page (iv) (v) (vi) (vii)  Who can Invent A c q u i s i t i o n of C o n t r o l New Business The Review Process Conclusions  Chapter  176 178 180 181 184  V : Towards An I n t e r n a t i o n a l Code of Conduct  (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (i) (ii) (iii) (iv) (v) (vi)  Introduction Need f o r a U n i v e r s a l l y accepted code Steps Twoards Formulation of the code Areas of I n t e r n a t i o n a l Agreement Co-operation with Host S t a t e s Intergovernmental Co-operation Ownership and C o n t r o l Export Objectivew Consumer P r o t e c t i o n D i s c l o s u r e of Information C o n f l i c t of J u r i s d i c t i o n Implementation of the Code Outstanding Issues Preambles and O b j e c t i v e s D e f i n i t i o n and Scope N o n - c o l l a b o r a t i o n with r a c i s t regimes i n Southern A f r i c a Nationalization N a t i o n a l Treatment Dispute Settlement Non-interference i n i n t e r n a l a f f a i r s  188 188 192 194 194 195 196 197 198 199 199 200 202 202 203  B a s i s f o r Concluding Document  215  Conclusion  219  Conclusion  22 3  Notes  228  Annexures  2 70  S e l e c t Reading  2 76  206 207 211 213 215  viii  LIST OF TABLES Page  1. Estimated f o r e i g n - c o n t r o l l e d shares of output and employment i n manufacturing, A r g e n t i n a , 1955-1972  16  2. Degree of I n d u s t r i a l i z a t i o n and F i n i s h e d Manufactures as a P r o p o r t i o n of Trade: 1913, 1929, 1955 and 1980.  68  3. T o t a l  75  (cumulative) Investment  4. F o r e i g n Companies i n I n d i a  i n Canada  132  1  INTRODUCTION  Economic interdependence i s an i n d i s p u t a b l e p a r t of modern world economy.  Developing c o u n t r i e s need f o r e i g n  investment and technology f o r r a p i d economic growth and development.  For the developed c o u n t r i e s too, as the Brandt  Commission r e p o r t p o i n t s out, i t i s not a q u e s t i o n of "enlightened c h a r i t y . " ^  I t i s necessary f o r t h e i r own c o n t i -  nued economic growth that the d e v e l o p i n g c o u n t r i e s improve t h e i r purchasing power through i n d u s t r i a l i s a t i o n i n order to p r o v i d e markets f o r the v a l u a b l e imports from the developed c o u n t r i e s and be able to repay t h e i r loans thus maint a i n i n g s t a b l e economic c o n d i t i o n s i n the world. F o r e i g n d i r e c t investment has been r e c o g n i z e d as an important t o o l f o r economic growth and development.  Trans-  n a t i o n a l c o r p o r a t i o n s with t h e i r c a p a c i t y to move c a p i t a l , technology and e n t r e p r e n e u r s h i p are the c h i e f means of f o r e i g n d i r e c t investment. i n t e r n a t i o n a l forums about  There i s no agreement i n v a r i o u s the p r e c i s e l e g a l d e f i n i t i o n and 2  scope 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 .  Broadly speaking,  an e n t e r p r i s e becomes t r a n s n a t i o n a l when i t makes an i n v e s t ment i n another country while i t i s i n c o r p o r a t e d i n one country and i n c l u d e s e n t i t i e s l i k e j o i n t ventures, co-opera-  2  t i v e s and State-owned a c t i v i t i e s . abroad  The d e c i s i o n to i n v e s t  i s taken because of s u p e r i o r business  presented elsewhere  alternatives  which would r e s u l t i n an i n c r e a s e of  p r o f i t s and i n the expansion  and growth of the e n t e r p r i s e .  Hence, i t i s not per se geared  to economic growth and deve-  lopment of that p l a c e and may l e a d to a c o n f l i c t of i n t e r e s t between the host country and the e n t e r p r i s e . The  "package" of product, technology, management,  c a p i t a l and market access brought  by t r a n s n a t i o n a l s can  l e a d to s e v e r a l economic b e n e f i t s f o r the host country, l i k e improvement i n balance of payment p o s i t i o n because of i n c r e a s e i n exports combined with r e d u c t i o n i n imports due  to import s u b s t i t u t i o n ; augmentation  of c a p i t a l r e s o u r -  ces, c r e a t i o n of jobs; access to l a t e s t technology and markets; improvement i n managerial growth of domestic  enterprise;  skills;  a boost to the  and p l e n t i f u l  availability  of consumer goods l e a d i n g to b e t t e r standards of l i v i n g . On the other hand, i t can b r i n g with i t c e r t a i n  costs.  Easy access to markets does not n e c e s s a r i l y mean the best price.  The technology used may not be a p p r o p r i a t e f o r the  host country and consumer goods q u i t e u n s u i t a b l e f o r that economy may be i n t r o d u c e d . logy and managerial  The very ease with which  techno-  s k i l l s can be imported may be a d i s i n -  c e n t i v e f o r the development of indigenous know-how.  Hence,  3 while there i s an i n d i s p u t a b l e need f o r f o r e i g n investment, it  direct  there i s a l s o a need to r e g u l a t e i t so that  can be geared to economic growth and development. Although d i f f e r e n t c o u n t r i e s a t t a c h d i f f e r e n t  degrees of importance  to the c o s t s and b e n e f i t s of f o r e i g n  d i r e c t investment, c e r t a i n p e r c e p t i o n s are common to devel o p i n g c o u n t r i e s and others to developed c o u n t r i e s as a whole, mainly because  the m a j o r i t y of d e v e l o p i n g c o u n t r i e s  have been former c o l o n i e s and have thus missed the indust r i a l revolution.  They are now  t r y i n g to i n d u s t r i a l i z e  long a f t e r the developed c o u n t r i e s and the l o s s of time has had s e r i o u s consequences.  They have been l e f t f a r  behind i n a c q u i r i n g t e c h n i c a l knowledge, the technology a v a i l a b l e i s adapted because  to the needs of i n d u s t r i a l i z e d n a t i o n s  a l l the r e s e a r c h and development has taken p l a c e  there; they are f a c e d with p o p u l a t i o n e x p l o s i o n because of  improved  h e a l t h standards; and they have n e i t h e r the  time nor the r e s o u r c e s and s k i l l to c a t c h up with the indust r i a l i z e d n a t i o n s without h e l p . F o r e i g n d i r e c t investment can be an important means of  acquiring capital,  preneurial s k i l l s ,  technology and managerial and e n t r e -  but, as the Brandt Commission Report  3  recognizes,  the i n d u s t r i a l i z e d n a t i o n s with over n i n e t y  per cent of the world's manufacturing i n d u s t r y from where  4  foreign power to  direct  and  technical  surrender  countries,  especially want  tries ting  foreign  developing efforts  direct  been  foreign Mark  address  Canada  national  have  been  developing direct  their  economies  experience  and  with  Hence,  legislation  Canada have  of  a As  equal a  potencoun-  for  examples  the ownership  formal was  national  regula-  a  their  time, and  to control  are the only  two  s c r e e n i n g agency f o r  stated  by  the Honourable  for External  and  of  legislation  for International  industrialized  and  t h e same  Australia  Secretary of State  to the Society  at  through and  as  respectively  and  regulation  investment.  i s " a t once  The  the d e v e l o p i n g  taken  country  the b e n e f i t s  n a t i o n s which  direct  over  terms  which  reluctant  foreign  corporations.  develops  investment  examined.  from  colonial  fair  economic  are often  decisions.  control  on  immense  investment.  Canada  direct  they  the past  a developed  MacGuigan,  an  of  through  t h e c o s t s by  developed  in  and  foreign  have  and  to maximize  minimise  to lose  transnational  t r y to resolve  have  to b e n e f i t  to treat  situation  and  economic  want  light  able  with  India  of  they  i n the  conflict  over  n o t want  t o be  expertise tial  do  originates  superiority  control  while  investment,  and  investment  Affairs, Development,  resource-based,  sophis-  4 ticated, shares nations  y e t i n some w a y s  "many o f and  under-developed."  the p e r s p e c t i v e s " of  i t s "position  as  a major  the  I t , therefore,  industrialized  exporter  o f raw  materials  5  and net importer of c a p i t a l and  technology i s s i m i l a r to  the s i t u a t i o n of many d e v e l o p i n g c o u n t r i e s . been c h a r a c t e r i z e d both as the world's  Canada has  smallest i n d u s t r i a 5  l i z e d country and as i t s l a r g e s t d e v e l o p i n g country." Since Canada with i t s unique  p o s i t i o n can a p p r e c i a t e both  p o i n t s of view, i t has c o n s i s t e n t l y t r i e d to 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  "conciliate developing  countries."^ I n d i a , a country with a c o l o n i a l past, s t a r t e d t r i a l i z a t i o n only a f t e r independence i n 1947.  indus-  I t has deve-  loped a broad i n d u s t r i a l base by a j u d i c i o u s use of f o r e i g n investment  c h i e f l y as an instrument of t r a n s f e r of  logy while i t has attempted over i t mainly through  to r e t a i n ownership and  e q u i t y ownership.  technocontrol  Ordinarily,  not  more than 40% of e q u i t y h o l d i n g i s allowed to f o r e i g n e r s though where a c e r t a i n technology has been c o n s i d e r e d important f o r the country, higher percentage h o l d i n g even upto  74% has been allowed.  of f o r e i g n e q u i t y Pragmatic  policies  have been evolved f o r the purpose of augmenting f o r e i g n exchange r e s o u r c e s . even upto 100%  E x p o r t - o r i e n t e d i n d u s t r i e s can be  foreign equity holding.  Besides,  investment  schemes have been formulated f o r non-resident Indians f o r o i l e x p o r t i n g d e v e l o p i n g c o u n t r i e s who but not n e c e s s a r i l y the technology.  allowed  have the  and  capital  Hence, I n d i a has  tried  6  to guide f o r e i g n investment i n a way  that i t can p r o v i d e  maximum b e n e f i t s while i t has attempted with a f a i r measure of success.  to r e t a i n  control  Of course, the investment  scheme i s not p e r f e c t and c o l l u s i o n can take p l a c e between the l o c a l p a r t n e r and the t r a n s n a t i o n a l r e s u l t i n g i n economic c o s t s to the country. bly  Besides, the growth c o u l d p o s s i -  have been f a s t e r i f m u l t i n a t i o n a l s had been allowed  f r e e e n t r y , but i t i s a l s o a q u e s t i o n of d e v e l o p i n g i n d i genous i n d u s t r y to ensure economic independence,  cultural  i d e n t i t y and a s t r o n g base f o r f u t u r e growth. The Canadian  experience demonstrates  how  economic  development and r a p i d i n d u s t r i a l i z a t i o n l e a d i n g to high standards of l i v i n g can take p l a c e with the help of f o r e i g n investment.  C a p i t a l f o r i n f r a s t r u c t u r e l i k e the S t . Lawrence  Canal System and the c o n s t r u c t i o n of r a i l w a y s took p l a c e with the help of p o r t f o l i o investment mainly from Great Britain.  D i r e c t investment from USA  took p l a c e i n both  n a t u r a l r e s o u r c e s and i n manufacturing  till  gradually  USA  became the main i n v e s t o r i n Canada and a l s o Canada's main trading partner. Although f o r e i g n investment has brought  obvious  b e n e f i t s to Canada, concern has a l s o been expressed the c o s t s of t h i s investment of  about  like irrevocable depletion  n a t u r a l r e s o u r c e s ; t r u n c a t i o n of i n d u s t r i e s l e a d i n g to  7  a branch p l a n t economy; r e p l i c a t i o n of technology of the parent p l a n t r e s u l t i n g i n l e s s e r r e s e a r c h and development i n Canada; import and export r e s t r i c t i o n s imposed by parent company on i t s s u b s i d i a r i e s ;  and the  t o r i a l e x t e n s i o n of US laws i n Canada.  the  extra-terri-  F u r t h e r , Canada  being a resource-based country and having an economic power l i k e the US  as i t s neighbour,  i t s independent  cultural  has a l s o f e l t concerned  about  identity.  Canada has not been so concerned amount of f o r e i g n investment  about  the  aggregate  as with the l a r g e measure of  r e s u l t i n g non-resident c o n t r o l and t h a t , too, of l a r g e l y one country, the US,  over some of i t s most important  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 .  indus-  T h i s i s not to suggest  that such a c o n t r o l 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 companies c o n t r o l l e d by n o n - r e s i d e n t s may aware of the Canadian  not always be  p o i n t of view and may  s e n s i t i v e and r e s p o n s i v e to Canadian  that  not be  adequately  economic a s p i r a t i o n s .  The e f f o r t has been to maximize the b e n e f i t s of US ments i n Canada by e n s u r i n g that the investment  invest-  i s of  " s i g n i f i c a n t b e n e f i t " f o r m e r l y under FIRA or of "net b e n e f i t " now  under Investment  Canada to Canada and,  to maintain an independent  at the same time,  and separate c u l t u r a l  identity.  P r o t e s t s over the r e s t r i c t i o n s imposed under FIRA and i t s cumbersome procedures  finally  l e d to the enactment of  8  Investment Canada which has c o n s i d e r a b l y l i b e r a l i s e d investment but has s t i l l  tried  to ensure that the i n v e s t -  ment i s of net b e n e f i t to Canada and i n accordance Canadian  p o l i c i e s and  Thus we  foreign  with  aspirations.  see, that though  they are so d i f f e r e n t  from  each other, both I n d i a and Canada have t r i e d to r e g u l a t e f o r e i g n investment a c c o r d i n g to t h e i r own  p e r c e i v e d needs.  In f a c t , r e s t r i c t i o n s on f o r e i g n investment e x i s t i n every country whether o v e r t l y through a s c r e e n i n g agency, or more diffusely in different  statutes.  T h e r e f o r e , economic interdependence fact;  i s an i n e s c a p a b l e  the d e v e l o p i n g c o u n t r i e s cannot be i g n o r e d without  c a u s i n g economic i n s t a b i l i t y ;  and f o r e i g n d i r e c t  investment  can, i f j u d i c i o u s l y used, be a powerful t o o l f o r economic development.  As the s i t u a t i o n i s today, the "home c o u n t r i e s  are concerned with the u n d e s i r a b l e e f f e c t s that  foreign  investments by t r a n s n a t i o n a l s may  have on domestic  ment and on balance of payments.  Most c o u n t r i e s are worried  about i s s u e s of ownership  employ-  and c o n t r o l of key economic s e c t o r s  by f o r e i g n e n t e r p r i s e s , the extent of t h e i r encroachment on t h e i r p o l i t i c a l s o v e r e i g n t y and t h e i r p o s s i b l e i n f l u e n c e on s o c i o - c u l t u r a l v a l u e s . concerned about  Labour  the impact of m u l t i n a t i o n a l  on employment and workers'  adverse  i n t e r e s t s are enterprises  w e l f a r e and on the b a r g a i n i n g  9  s t r e n g t h of trade unions.  Consumer i n t e r e s t s are concerned  about the a p p r o p r i a t e n e s s , q u a l i t y and p r i c e of the goods produced by the 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 .  The 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 themselves are concerned about the p o s s i b l e n a t i o n a l i z a t i o n or e x p r o p r i a t i o n of t h e i r a s s e t s without adequate  compensation  and about r e s t r i c t i v e , u n c l e a r 7  and f r e q u e n t l y changing government p o l i c i e s . "  Therefore,  the need f o r a u n i v e r s a l l y a c c e p t a b l e i n t e r n a t i o n a l code i s obvious by which be safeguarded.  the i n t e r e s t s of a l l the p a r t i e s can  That t h i s need has been f e l t i s apparent  from the e f f o r t s made i n s e v e r a l i n t e r n a t i o n a l forums i n c l u d i n g the UN to formulate such a code. The OECD 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  Enterprises,  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 R e s t r i c t i v e Business P r a c t i c e s , the D r a f t 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 are some of the important instruments that have r e s u l t e d . A l l of these are, however, inadequate because i n scope.  The only e f f o r t  they are l i m i t e d  to formulate a u n i v e r s a l l y accept-  able code of conduct has been made by the UN through 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 meeting a n n u a l l y  10 s i n c e 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 c e r t a i n v i t a l  issues deal-  i n g 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 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 s o a d i f f e r e n c e of o p i n i o n on whether be v o l u n t a r y  or mandatory.  to abandon the e f f o r t s ;  the code  There are three  to wait t i l l  there  There i s should  possibilities: i s agreement  on a l l the remaining i s s u e s , or to adopt the code as i t is.  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 r e q u i r e d before acceptable  s o l u t i o n can be found.  any u n i v e r s a l l y  11  CHAPTER  I  COSTS AND BENEFITS OF FOREIGN DIRECT INVESTMENT  Introduction In the p e r i o d a f t e r the Second World War a dramatic i n c r e a s e i n the number of independent, sovereign, States with  t h e i r own economic a s p i r a t i o n s took p l a c e as  a r e s u l t of d e c o l o n i z a t i o n .  With t h i s the i n t e r n a t i o n a l  system became more complicated, dent.  political  but a l s o more  interdepen-  I n c r e a s i n g l y , i t has been found necessary to f i n d  m u l t i l a t e r a l s o l u t i o n s and i n t h i s context  the importance  of c o - o r d i n a t i o n of economic a c t i v i t y among nations be overlooked.  cannot  T h i s p e r i o d has a l s o witnessed an i n c r e a s e  i n the prominence of f o r e i g n d i r e c t investment p r i m a r i l y through 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 . with  t h e i r a b i l i t y to move c a p i t a l ,  resources  These  corporations,  t e c h n o l o g i c a l and human  round the world, and with  t h e i r a b i l i t y to t r a n s -  f e r t h i s movement i n t o economically  u s e f u l and commercially  profitable activities, stage of world economy.  have become important a c t o r s on the The t r a n s n a t i o n a l c h a r a c t e r of  t h e i r a c t i v i t i e s has emphasized the economic interdependence among  nations.  12 P o r t f o l i o and D i r e c t Investment F o r e i g n investment investment  can take p l a c e e i t h e r as p o r t f o l i o  or as d i r e c t investment.  implications.  P o r t f o l i o investment  The two have d i f f e r e n t r e s u l t s i n the pure  flow of savings from a f o r e i g n country.  Domestic business  or  governments decide that some p r o j e c t , example,  of  a business or the undertaking of a development p r o j e c t ,  i s necessary.  In order to f i n a n c e the undertaking, debt  instruments are s o l d to f o r e i g n e r s .  These debt  may be i n the form of bonds, debentures  instruments  or non-voting  U s u a l l y , the debtor pays an y e a r l y i n t e r e s t of  expansion  shares.  to the purchaser  the s e c u r i t y and the purchaser i s presumed to have pur-  chased  the s e c u r i t y because i t y i e l d e d more than any other  security.  Debt instruments such as these are u s u a l l y f o r  a f i x e d term.  T h e r e f o r e , i n t h i s case the d e c i s i o n with  regard to investment capital.  l i e s with the country r a i s i n g the  Hence, i n p o r t f o l i o investment  the i n v e s t o r does  not a c q u i r e c o n t r o l of the a s s e t s of the i s s u i n g c o r p o r a t i o n . D i r e c t investment  takes p l a c e as a r e s u l t of a d e c i -  c i o n made i n a f o r e i g n country.  F o r e i g n business decides  that a p a r t i c u l a r country presents s u p e r i o r business  alter-  n a t i v e s and, t h e r e f o r e , l o c a t e s i t s business i n that country to  e x p l o i t those o p p o r t u n i t i e s .  who i n i t i a t e  Since i t i s f o r e i g n e r s  the c a p i t a l flow, they a l s o c o n t r o l the r e a l  13 c a p i t a l formation  f i n a n c e d by that i n f l o w .  maintains the c o n t r o l .  Share ownership  The most common form of f o r e i g n  d i r e c t investment i s a s u b s i d i a r y c o r p o r a t i o n i n the host  country, but c o n t r o l l e d by i t s parent i n the  home country. be r e q u i r e d  L e g a l l y , ownership of 51% of the shares would  to c o n t r o l the e n t e r p r i s e , but i t i s w e l l -  e s t a b l i s h e d that a f a r smaller can r e s u l t i n c o n t r o l . corporation  incorporated  percentage of  shareholding  The degree of c o n t r o l by the parent  may vary but even where the s u b s i d i a r y enjoys  a l a r g e degree of autonomy, the head o f f i c e has to be c o n s u l ted at l e a s t on major p o l i c y changes. Increasingly,  f o r e i g n d i r e c t investment i s t a k i n g  the form of j o i n t ventures as many host the developing  countries, especially  c o u n t r i e s , are now i n s i s t i n g  the new b u s i n e s s s 1  that some of  e q u i t y be h e l d by indigenous businessmen.  C o - o p e r a t i v e s and State-owned e n t e r p r i s e s have a l s o been i n c l u d e d under the broad framework of f o r e i g n d i r e c t i n v e s t ment. While f o r e i g n 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 , f o r e i g n d i r e c t investment made by transnational corporations  r e s u l t s not only i n movement  of c a p i t a l but a l s o i n that of technology, and managerial and  enterpreneurial  to new markets.  skills.  Moreover, i t provides  access  Hence, i t i s a powerful instrument of change  14 and can be used f o r economic growth and development. s i n c e f o r e i g n d i r e c t investment,  unlike p o r t f o l i o  But  invest-  ment, s h i f t s the focus of c o n t r o l o u t s i d e the country, i t becomes not only an economic but a l s o a p o l i t i c a l menon.  While  host c o u n t r i e s are concerned  pheno-  with economic  development and growth i n t h e i r own c o u n t r i e s , the goals of t r a n s n a t i o n a l s l i k e of a l l business e n t e r p r i s e s , are p r o f i t and growth.  The d i f f e r e n c e i n o b j e c t i v e suggests  that t h e i r r e s p e c t i v e d e c i s i o n s may not always be i n harmony . Thus, f o r e i g n d i r e c t investment  may be p e r c e i v e d  as b r i n g i n g c o s t s together with b e n e f i t s f o r the host country.  The d e v e l o p i n g c o u n t r i e s with t h e i r weak econo-  mies want the b e n e f i t s of f o r e i g n d i r e c t investment, but t r y to minimize The  the c o s t s through  national  c o s t s of f o r e i g n d i r e c t investment  legislation.  have been d i s c u s s e d  with s p e c i a l r e f e r e n c e to d e v e l o p i n g c o u n t r i e s . these concerns  have a l s o been a matter  Some of  of debate i n Canada  which, b e i n g c h i e f l y a r e s o u r c e - e x p o r t i n g country and a neighbour concerns  to a powerful economy l i k e USA, shares some i n common with d e v e l o p i n g c o u n t r i e s .  evident from  This i s also  the f a c t that Canada u n l i k e most other deve-  loped c o u n t r i e s , has found i t necessary to e s t a b l i s h a s c r e e n i n g agency f o r f o r e i g n d i r e c t  investment.  15 Costs of Foreign  Direct  E x p l o i t a t i o n of Natural The  Investment Resources  e a r l i e s t motivation  to i n v e s t abroad was the  d e s i r e to develop and c o n t r o l the sources of raw m a t e r i a l s . In the second h a l f of the nineteenth century, Europeans and  North American businessmen l a i d  the foundations of many  of today's major 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 m a r i l y with the e x t r a c t i o n , t r a n s p o r t a t i o n of raw m a t e r i a l s . to secure f a i r  The host c o u n t r i e s  be ing  to take place  and p r o c e s s i n g  would n a t u r a l l y want  of raw m a t e r i a l s as  i n their countries.  the o b j e c t i v e of the t r a n s n a t i o n a l a global  pri-  p r i c e s f o r the commodities s o l d and would  a l s o want as much of the p r o c e s s i n g possible  concerned  T h i s may not  corporations  follow-  strategy.'  Employment Transnational  corporations  o f t e n concentrate on high  technology i n d u s t r i e s with c a p i t a l - i n t e n s i v e techniques. Such i n d u s t r i e s may l e a d to the eventual modernization of the i n d u s t r i a l s t r u c t u r e of the host country but may not serve one of the immediate prime requirements, namely, to increase  employment o p p o r t u n i t i e s  because the i n c r e a s e  may  be marginal i n r e l a t i o n to the massive employment problem. As has been pointed  out i n 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 i n  World Development,"^ t h i s problem a r i s e s p a r t i c u l a r l y i n r e l a t i o n to f o r e i g n a f f i l i a t e s  participating i n extractive  16 i n d u s t r i e s which, when operated on a l a r g e s c a l e , highly capital-intensive.  In Venezuela  example, d e s p i t e the importance  and 4.1%  and C h i l e , f o r  of o i l and copper,  employed i n the combined petroleum only 2.3%  The  labour  and mining s e c t o r s  r e s p e c t i v e l y of the t o t a l  a c t i v e p o p u l a t i o n i n 1960.  are  was  economically  following table i n  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 World Development: A 2 Re-examination,  shows that while the estimated  tage of output i n Argentina i n manufacturing from 18% of t o t a l output i n 1955 mated percentage  percen-  has gone up  to 31% i n 1972,  the  of employment remains constant at Table  esti-  11%.  I  Estimated f o r e i g n - c o n t r o l l e d shares of output and employment i n manufacturing, Argentina, 1955-1972  Year  1955 1960 1965 1970 1972  Estimated percentage of output 18 21 26 27 31  Estimated percentage of employment 11 12 11 11 11  Source: United Nations Centre 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 , based on Banco C e n t r a l and Censo I n d u s t r i a l of Argentina i n I n t e r n a t i o n a l Labour O r g a n i s a t i o n , E l impacto de l a s empresas t r a n s n a c i o n a l e s sobre e l empleo y l o s i n g r e s o s : 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 " 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 World Development: A Re-Examination" by United Nations.  17 Also, a c c o r d i n g  to I n t e r n a t i o n a l Labour O r g a n i z a t i o n , the  t o t a l number of people employed by t r a n s n a t i o n a l s i n 1976 i s approximately being  13 to 14 m i l l i o n , with about 2 m i l l i o n 3  employed i n developing  countries.  However, 26% of  the t o t a l stock of f o r e i g n d i r e c t investment was i n developing countries.  From t h i s i t f o l l o w s that about 26% of  t o t a l employment should tries.  a l s o have been i n developing  But t h i s i s not the case as i s evident  coun-  from the  above f i g u r e s . While these e n t e r p r i s e s may not generate l a r g e - s c a l e employment on a n a t i o n a l s c a l e , however, they do generate employment i n s p e c i f i c tion.  l o c a l i t i e s which i s a major a t t r a c -  T h i s i s e s p e c i a l l y true of depressed areas where  the l o c a t i o n of a p l a n t can make a s i g n i f i c a n t to s o l v i n g l o c a l unemployment problems. have t r i e d  contribution  Some c o u n t r i e s  to s o l v e t h i s problem by r a i s i n g percentage of  l o c a l employment by u s i n g p r e c i s e employment programmes or schedules r e q u i r i n g c e r t a i n employment l e v e l s to be reached w i t h i n c e r t a i n time p e r i o d s . have been w r i t t e n i n t o i n i t i a l tional  These requirements  agreements with  transna-  corporations.  Labour The  r e l a t i v e l y high  labour  standards g e n e r a l l y  adopted by f o r e i g n a f f i l i a t e s prove to be a mixed b l e s s i n g .  18 In some cases, the wage r a t e s p a i d by the t r a n s n a t i o n a l s are s e v e r a l times higher than the p r e v a l e n t l o c a l wage r a t e s i n the host c o u n t r i e s l e a d i n g to the c r e a t i o n of e l i t e labour groups.  T e c h n i c a l personnel p r e f e r the  f o r e i g n e n t e r p r i s e over the l o c a l one.  F u r t h e r , 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 u n s k i l l e d labour. The higher wages a l s o g r a d u a l l y tend to be adopted as the n a t i o n a l norm although they may be beyond the means of l e s s - d e v e l o p e d host c o u n t r i e s . Technology A problem with the i m p o r t a t i o n of high  technology  i s that i t may not n e c e s s a r i l y be s u i t a b l e f o r a l e s s developed  country.  Not only t h a t , the host country may  have to pay a very high p r i c e f o r the technology so a c q u i red . Developed c o u n t r i e s serve as both home and host countries,  so the impace of f o r e i g n technology f o r them i s not  as great because technology flows and payments move i n both d i r e c t i o n s . For d e v e l o p i n g c o u n t r i e s , on the other hand, the flow i s predominantly The  or e x c l u s i v e l y i n one d i r e c t i o n .  s i g n i f i c a n c e of t h i s one-sided flow i s i l l u s t r a t e d by  data on s i x d e v e l o p i n g c o u n t r i e s -- Argentina, Colombia,  Brazil,  Mexico, N i g e r i a and S r i Lanka -- i n the 1960's.  Payments made by these c o u n t r i e s f o r patents,  licences,  19 know-how and trademarks amounted to approximately 7% of management and s e r v i c e fees of t h e i r combined exports and to a l i t t l e  more than h a l f of 1% of t h e i r combined gross  domestic product.  The t o t a l cost f o r such payments f o r  t h i r t e e n developing  c o u n t r i e s which accounted f o r 65% of  the t o t a l p o p u l a t i o n  and 56% of the t o t a l gross domestic  product of developing  c o u n t r i e s was estimated at more than  h a l f of the flow of d i r e c t p r i v a t e f o r e i g n investment to developing  countries.^  Transnational  Corporations  i n World Development:  A Re-examination i n d i c a t e s measures taken by s e v e r a l count r i e s to ensure as f a r as p o s s i b l e f a v o u r a b l e  contractual  5  p r o v i s i o n s f o r the l i c e n c e s .  The Foreign  Investment  Board i n I n d i a , f o r example, e x e r c i s e s second-check tions.  In some c o u n t r i e s o f f i c i a l  f o r l i c e n s i n g agreements.  Countries  c r i b e d 3% of net s a l e s as a c e i l i n g ments.  approval  func-  i s required  l i k e Mexico have presl i m i t f o r r o y a l t y pay-  The l i m i t i s a r b i t r a r y but i t ensures that unduly  high r o y a l t y payments are not made.  The q u e s t i o n of  technology payments i s c l o s e l y l i n k e d to the d u r a t i o n of agreements. duration imposed.  A number of c o u n t r i e s have p r e s c r i b e d maximum  periods.  In I n d i a , u s u a l l y a f i v e - y e a r l i m i t i s  Many L a t i n American c o u n t r i e s  l i m i t of 10 years.  impose a maximum  Thus, an e f f o r t has been made to reduce  the c o s t of technology being  acquired.  20 Research and  Development  Foreign  affiliates  do not c a r r y out  t i o n s -- from the o r i g i n a l research all  required  functions research cially  marketing t h e i r goods.  are c a r r i e d out by and  One  the more s o p h i s t i c a t e d aspects,  the f o r e i g n parent.  T h i s may  the f o r e i g n a f f i l i a t e .  developing,  or more of these  the f o r e i g n parent.  development, components and  func-  through to  the aspects of marketing -- necessary f o r  producing and  by  a l l the  Thus,  s e r v i c e s , espe-  may  be c a r r i e d out  l e a d to " t r u n c a t i o n "  These p r a c t i c e s may  be  rational  from the p o i n t of view of the g l o b a l s t r a t e g y of the n a t i o n a l s but dependent on Inappropriate  the host  country may  see  itself  becoming  Products  c a t e r to demands i n high patterns  to s u s t a i n e d  transnationals  income c o u n t r i e s .  Thus, they  of consumption which are not  development and  r i t y of p o p u l a t i o n  conducive  i n developing  countries.  This i s which have  impact on the economy as a whole.  Extraterritoriality The  may  do not b e n e f i t the vast majo-  e s p e c i a l l y true of luxury a r t i c l e s f o r the few little  trans-  the f o r e i g n company.  Many of the products developed by  introduce  of  most apparent cost f o r the host  country of  f o r e i g n ownership r e s u l t s from e x t r a t e r r i t o r i a l i t y  --  21 i n t r u s i o n of j u r i s d i c t i o n of one country i n t o another, or the s u b j e c t i o n of r e s i d e n t s of one country to the laws and p o l i c i e s of another  country.  A d i r e c t investment  subsi-  d i a r y r e s i d e n t i n one country and owned and c o n t r o l l e d by r e s i d e n t s of another  i s a v e h i c l e through which e x t r a -  t e r r i t o r i a l i t y can b e e x e r c i s e d .  In theory t h i s can run  both ways -- the host country can s u b j e c t the parent of the s u b s i d i a r y to i t s own laws i n a d d i t i o n to the s u b s i diary.  But laws of p r o p e r t y and a l s o the f a c t that the  host country i s o f t e n s m a l l e r than the country of o r i g i n , u s u a l l y r e s u l t s i n the home country e x e r c i s i n g 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  u s u a l l y works a g a i n s t the host country. of  extraterri-  The government  the host country, too, sometimes f e e l r e l u c t a n t to pur-  sue p o l i c i e s i n r e s p e c t 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 that are d e s i r a b l e from i t s n a t i o n a l p o i n t of view because of i t s concern f o r r e p e r c u s s i o n s , apparent from  or r e a l ,  the r e a c t i o n s of the home country government.  i n a c t u a l terms, s o v e r e i g n t y , the essence c a p a c i t y to make independent The it  arising  of which i s the  l e g a l d e c i s i o n s , may b e eroded.  s u b s i d i a r y i s i n a d i f f i c u l t p o s i t i o n because  i s expected  behaviour  Thus  to meet the standards of good c o r p o r a t e  i n the host country but i t f i n d s i t i s being  s u b j e c t e d to o v e r l a p p i n g or even d i v e r g e n t  jurisdiction  22 -- l e g a l c o n s t r a i n t s i n the host country and l e g a l s t r a i n t s from each other.  con-  the home country which are i n c o n f l i c t  with  Confronted with two peaks of s o v e r e i g n t y i t g  is likely,  as i s p o i n t e d out i n the Watkins Report,  d e f e r to the higher peak where i t s parent  to  resides.  The p o s i t i o n of the parent i s even more ambiguous. As a c o r p o r a t i o n pursuing p r o f i t and growth, i t i s i n i t s interest  to allow the s u b s i d i a r i e s to comply with  j u r i s d i c t i o n i f possible.  local  However, i t s d i r e c t o r s and  managers are c i t i z e n s of the home country s u b j e c t to the laws of the home country, s h a r i n g i t s o b j e c t i v e s e s p e c i a l l y i n matters  of defence  and f o r e i g n p o l i c y ,  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  the areas i n to occur.  Intra-company T r a n s a c t i o n s I t has been argued  that a l l f i r m s 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 f i r m i s a separate n a t i o n a l e n t e r p r i s e or an a f f i l i a t e of t r a n s n a t i o n a l e n t e r p r i s e . s a r i l y correct.  T h i s i s not neces-  The parent f i r m may expect  the s u b s i d i a r y  to behave i n a way that the g l o b a l p r o f i t s of the t r a n s n a t i o n a l are maximized r a t h e r than the p r o f i t s of the subsidiary i t s e l f .  The i n t e r e s t of the host  however, l i e s i n maximizing  country,  the p r o f i t s of the s u b s i d i a r y  i n i t s domain as i t i s concerned  with the growth of i t s  23 own  economy and  not with the t r a n s n a t i o n a l as a whole.  In some cases t h i s may others  i t may  interest It  may  make l i t t l e d i f f e r e n c e but  make more.  The  parent may  in  find i t in i t s  to l i m i t the s u b s i d i a r y i n i t s freedom to  export.  r e q u i r e that the s u b s i d i a r y s e l l only to i t s a f f i -  l i a t e s or the s u b s i d i a r y may  be r e q u i r e d to observe  market s h a r i n g arrangements made by to the Watkins Report, i t was of f o r e i g n a f f i l i a t e s restrictive policies  the parent.  the  According  found that a l a r g e number  i n Canada were f o l l o w i n g apparently  export-  a r e f l e c t i o n of the market-  ing s t r a t e g i e s of the parent companies which t r y to p r o t e c t 9  export markets f o r themselves or f o r t h e i r  affiliates.  The  parent may  procurement.  The  s u b s i d i a r y may  a l s o impose r e s t r i c t i o n s  to import r a t h e r restrictions country.  be r e q u i r e d  than buy  exist,  But  to buy  on  from a f f i l i a t e  from l o c a l sources.  they may  do not e x i s t  to the advantage of the s u b s i d i a r y , i t may to the host  Where such  not be i n the i n t e r e s t  where such r e s t r i c t i o n s  or  of  host  or work  be of b e n e f i t  country.  Administrative  C o n t r o l of the  Enterprise  Sources of t e n s i o n may  also exist  i n the  t i v e s t r u c t u r e of the t r a n s n a t i o n a l f i r m . going abroad p r e f e r to i n v e s t i n a branch or  administra-  Corporations subsidiary  24  rather  than to go  i n f o r l i c e n s i n g arrangements or  ventures with l o c a l f i r m s .  T h i s i s because they  r e l u c t a n t to share the r e t u r n s  joint  are  that r e s u l t from  their  investment or because they do not want to d i l u t e ownership i n a way  that makes i t more d i f f i c u l t  to maintain c o n t r o l  over the s u b s i d i a r y , or because they want to avoid venience of l e t t i n g o u t s i d e r s have a say i n how should and  be run.  The  host  country may  the  incon-  the f i r m  prefer joint  ventures  l i c e n s i n g agreements which support domestic f i r m s ;  create  p o t e n t i a l areas of growth f o r domestic entrepreneurs i n s p i t e of c e r t a i n i n e f f i c i e n c i e s i n such arrangements; permit host  country to share i n the r e t u r n s ;  host  country has  and  ensure that  the  a v o i c e i n the running of the f i r m so  t h e i r i n t e r e s t s are not  that  jeopardized.  D i s c l o s u r e of F i n a n c i a l Information When the s u b s i d i a r y i s not  an e n t i t y f u l l y  distinct  from the parent, i t can c r e a t e problems with r e s p e c t meaning and  a v a i l a b i l i t y of f i n a n c i a l i n f o r m a t i o n  the operations  of the s u b s i d i a r y .  place between the parent and i n the open market, there may  Since  the s u b s i d i a r y r a t h e r  take  than  scope f o r  a r b i t r a r y v a l u a t i o n of i n t r a - f i r m t r a n s a c t i o n s . three-fourths  about  transactions  be c o n s i d e r a b l e  to  In Canada,  of a l l exports of f o r e i g n a f f i l i a t e s were  accounted f o r by intra-company s a l e s i n 1 9 6 9 . N o t  only  25 t h a t , i n Canada, t h r e e - f o u r t h s affiliates  which amounted to o n e - t h i r d  chases were from other of US a f f i l i a t e s leaves  of the imports of f o r e i g n  affiliates  o r i g i n a t e d i n the home country.  This  a l a r g e scope f o r t r a n s f e r p r i c i n g and a l s o the host  or corporate  to f o r e i g n governmental  policies.  Further,  i n such a s i t u a t i o n , the p u b l i c i s denied  important i n f o r m a t i o n  and the government of the host  country  to decide important p o l i c y matters without adequate  statistics. to the host ing  pur-  and almost a l l the imports  country's economy becomes v u l n e r a b l e  has  of t h e i r t o t a l  Moreover, p r o v i d i n g inadequate  information  country can circumvent n a t i o n a l p o l i c i e s  them i n e f f e c t i v e .  The t r a n s n a t i o n a l c h a r a c t e r  render-  of these  e n t e r p r i s e s enables them to move t h e i r incomes to tax havens. The  s i t u a t i o n i s aggravated by developing  ging i n competitive  i n c e n t i v e s to a t t r a c t f o r e i g n  These i n v o l v e a measure of s a c r i f i c e on the  part of developing host  enga-  g r a n t i n g of tax concessions to t r a n s -  n a t i o n a l s and g i v i n g other investment.  countries  countries  c o u n t r i e s because resources  from poor  are t r a n s f e r r e d to r i c h home c o u n t r i e s  c i n g the b e n e f i t s that flow from the operations  redu-  of the t r a n s -  nationals . Transfer P r i c i n g In t r a n s a c t i o n s between the parent c o r p o r a t i o n and i t s s u b s i d i a r i e s , the normal market f o r c e s do not come i n t o  26  play.  Hence goods and s e r v i c e s i n these t r a n s a c t i o n s can  be o v e r p r i c e d or u n d e r p r i c e d .  Often the flow of techno-  logy from a parent to i t s s u b s i d i a r y i s l i n k e d with the s a l e of i n t e r m e d i a t e products and c a p i t a l goods from the s u b s i d i a r y to the parent.  In such a s i t u a t i o n ,  the techno-  logy may be o v e r p r i c e d and the goods may be u n d e r p r i c e d r e s u l t i n g i n a b e n e f i t to the e n t e r p r i s e as a whole, but l o s s to the host country both i n the p r o f i t s that the s u b s i d i a r y should have earned  and i n t a x .  E f f e c t on C a p i t a l Flow F o r e i g n investment between two c o u n t r i e s . can be imported.  can be seen as movement of c a p i t a l  I f c a p i t a l i s s c a r c e at home, i t  T h e r e f o r e , f o r e i g n c a p i t a l can add to  the country's s t o c k .  F o r e i g n investment  not only provides  c a p i t a l but a l s o f o r e i g n exchange to the extent that the borrowing  country i s s h o r t of f o r e i g n exchange.  But the  cost to the c a p i t a l - i m p o r t i n g country c o n s i s t s of f u t u r e i n t e r e s t s and d i v i d e n d s that i t must pay abroad.  The  s e r v i c i n g of debt and i t s repayment or r e 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 a d j u s t i t s balance of payments to e f f e c t  the t r a n s f e r of funds.  When these adjustments  are made  with d i f f i c u l t y because of f o r e i g n exchange c o n s t r a i n t s , f o r e i g n investment  imposes an a d d i t i o n a l burden on the  27 c a p i t a l importing  country j u s t as i t provided  an a d d i -  t i o n a l b e n e f i t of making f o r e i g n exchange a v a i l a b l e at the time of l o a n . 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  h a l f 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  to the f o r e i g n a f f i l i a t e s  investment accrued  are deducted from that  the net flow i s g e n e r a l l y negative  almost  f o r host  flow,  countries.  Between 1965 and 1970, net f o r e i g n d i r e c t investment i n flow i n t o 43 developing ment income outflow.  c o u n t r i e s was  30% of the i n v e s t -  I f the o i l - p r o d u c i n g c o u n t r i e s i n  the sample are excluded, i n f l o w was 68% of the outflow. Another c a l c u l a t i o n adjusted  f o r petroleum, shows that  between 1964 and 1968, the US and the UK,  representing  80% of t o t a l f o r e i g n d i r e c t investment, r e c e i v e d mately $5.8 b i l l i o n  from developing  ment income and p a i d $3.2 b i l l i o n  countries  in capital  approxi-  i n investflow.^  A 1981 Report of the S e c r e t a r i a t of the Commission on T r a n s n a t i o n a l  Corporations  s i o n that " d e s p i t e  a l s o comes to the c o n c l u -  the c o n s i d e r a b l e  i n v o l v e d , home and host tentative conclusion national corporations  measurement problems  country s t u d i e s p o i n t to the  that d i r e c t investment by t r a n s tends to have a negative  direct  28 e f f e c t on the balance of payments of host  c o u n t r i e s and 12  a p o s i t i v e one on that of home c o u n t r i e s . " In developing  c o u n t r i e s where the supply  exchange i s o f t e n a problem, the excess of t h i s  of f o r e i g n outflow  over i n f l o w has been a f a m i l i a r source of t e n s i o n with the transnationals.  Such t e n s i o n 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 t r a n s n a t i o n a l has operated i n the host  country to an extended p e r i o d of time and where the  outflow of investment income exceeds the i n f l o w of new capital.  The t e n s i o n becomes aggravated i f the t r a n s -  n a t i o n a l i s d e a l i n g with a product which the host does not c o n s i d e r  essential.  country  In I n d i a , f o r example, Coca-  Cola was seen as a c l a s s i c example of m u l t i n a t i o n a l ing  operat-  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 i n d u s t r y and caused an outflow of p r e c i o u s  f o r e i g n exchange i n s t e a d of i n f l o w .  The r e s u l t was that  13 Coca-Cola had to leave i n 1977. Consumer P r o t e c t i o n Another source of t e n s i o n , e s p e c i a l l y i n developing c o u n t r i e s , i s that i n many cases m u l t i n a t i o n a l s have taken advantage of the more l e n i e n t consumer p r o t e c t i o n laws i n these c o u n t r i e s  to s e l l p o t e n t i a l l y harmful or dangerous  products which they c o u l d not s e l l or i n other  developed c o u n t r i e s .  i n t h e i r own c o u n t r i e s Several  cases have been  29 c i t e d by Prof. Sangal i n which drugs have been s o l d i n 14 developing  c o u n t r i e s without adequate warnings.  Rise of N a t i o n a l i s m Finally,  the r o l e of t r a n s n a t i o n a l s and t h e i r  impact  i s a l s o r e l a t e d i n t i m a t e l y to the r i s e of n a t i o n a l i s t i c f e e l i n g s whcih are p a r t i c u l a r l y pronounced i n host loping countries The  that have been under c o l o n i a l r u l e .  mere presence of powerful f o r e i g n e n t e r p r i s e s may  as a reminder of past host  deve-  f o r e i g n domination.  c o u n t r i e s no longer  q u i t e apart  Besides,  serve  many  want to play a p e r i p h e r a l r o l e  from the economic consequences.  I n t e r n a t i o n a l Regulation  of T r a n s n a t i o n a l s  Thus we have seen that 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 can impose c o s t s on the economies of the host country.  Yet, i t i s e q u a l l y true that the t r a n s n a t i o n a l s  have the a b i l i t y to make the hoped f o r new i n t e r n a t i o n a l economic order  a reality.  I t i s , then, a q u e s t i o n of  guidng and r e g u l a t i n g t h e i r a c t i v i t i e s  to maximize the  b e n e f i t s and minimize the c o s t s i n a way that the i n t e r e s t s of a l l concerned p a r t i e s , i n c l u d i n g the t r a n s n a t i o n a l s , are  safeguarded. The  United  Nations Economic and S o c i a l C o u n c i l  unanimously adopted R e s o l u t i o n  1 7 2 K L I I I ) of 2nd J u l y , 1972  30 to e s t a b l i s h a Group of Eminent Persons to i n v e s t i g a t e the impact  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 i n v a r i o u s  n a t i o n a l jurisdictions."*""^  The  recommendations of the  Group of Eminent Persons are important r e s u l t e d i n the establishment  because they  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 to d e a l with the f u l l  range  of i s s u e s r e g a r d i n g 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 work out a u n i v e r s a l l y a c c e p t a b l e d r a f t code of to r e g u l a t e f o r e i g n d i r e c t  to  conduct  investment.  Other attempts have a l s o been made to b r i n g forward  a u n i v e r s a l convention  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 beginning with the Charter of the I n t e r n a t i o n a l Trade O r g a n i z a t i o n signed at Havana i n But  t h i s never came i n t o e f f e c t .  1948.  The OECD 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 are important  in this  context but they are r e s t r i c t e d i n scope s i n c e they only apply to member-countries.  The  recommendations of the  Group of Eminent Persons provide a p o i n t of r e f e r e n c e f o r the work 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 but i f they are read together with the comments of the r e p r e s e n t a t i v e s of some developed  c o u n t r i e s attached to  them, there appears to be an almost between the d e v e l o p i n g and  unbridgeable  gulf  the developed c o u n t r i e s .  31 Areas of Agreement i n the Recommendations N a t i o n a l Treatment: agreed  The  that n a t i o n a l treatment  f o r e i g n investments  should be given to a l l  u n l e s s s p e c i f i c exceptions were made  in national interest. t r a n s n a t i o n a l s had,  members of the Group  16  Mr.  Javits  17  p o i n t e d out that  i n f a c t , played a g r e a t e r r o l e i n  development than had been r e c o g n i z e d and had o f t e n been v i c t i m s of u n f a i r and a r b i t r a r y p o l i c i e s of host  govern-  ments which had r e s o r t e d to n a t i o n a l i s a t i o n without quate compensation. only be f a i r  He s a i d that compensation should  and adequate, but a l s o prompt.  compensation was  ade-  of l i t t l e v a l u e .  some c o u n t r i e s had s e r i o u s balance  Long delayed  While he agreed  that  of payment problems  which c o u l d delay payment of compensation, but he was very sympathetic  to t h i s problem.  not  He s t a t e d that deve-  loped c o u n t r i e s c o u l d h a r d l y be expected long-term  not  to s a n c t i o n s o f t  loans to these c o u n t r i e s i f , i n s t e a d of u s i n g  those loans f o r d e v e l o p i n g new  p r o d u c t i v e c a p a c i t i e s or  i n f r a s t r u c t u r e , they were going to use them f o r n a t i o n a lising  transnational corporation properties.  Their limited  resources of c a p i t a l should make them more c a u t i o u s about u s i n g them f o r a c q u i r i n g ownership over e x i s t i n g a s s e t s . Non-interference country:  The  i n i n t e r n a l a f f a i r s of host  Group condemned s u b v e r s i v e p o l i t i c a l  inter-  32 vention  on the part 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  towards the overthrow or s u b s t i t u t i o n of a host  directed  country's  government or the f o s t e r i n g of i n t e r n a l or i n t e r n a t i o n a l 18 s i t u a t i o n s which would l e a d to such a c t i o n s . c o u n t r i e s were recommended to impose s t r i c t  The host sanctions i n  case of such an e v e n t u a l i t y and the home c o u n t r i e s were urged not to make these s a n c t i o n s investment guarantee schemes. not  i n e f f e c t i v e through  Thus, t r a n s n a t i o n a l s were  to be used by governments to f u r t h e r t h e i r  policy goals.  Both host  their  foreign  and home c o u n t r i e s were c a l l e d  upon to ensure that m u l t i n a t i o n a l s d i d not v i o l a t e the sanctions  imposed by the S e c u r i t y C o u n c i l .  problem about t h i s  recommendation.  Labour Standards: ing  labour  ment.  There was no  In the case of p o l i c i e s  r e l a t i o n s , too, there  Home and host  seems to have been agree-  c o u n t r i e s were asked to c l a r i f y 19  employment o b j e c t i v e s to the t r a n s n a t i o n a l s . of workers d i s p l a c e d because of production by the t r a n s n a t i o n a l s , the home and host provide  concern-  them with f u l l  their  In case  decisions  countries  compensation through general  taken  could budge-  t a r y support, or through s o c i a l s e c u r i t y system or through the establishment  of s o c i a l funds.  fund c o u l d be c r e a t e d  An i n t e r n a t i o n a l s o c i a l  f o r t h i s purpose f o r the use of deve-  l o p i n g c o u n t r i e s without adequate funds. and  A l s o , workers  t h e i r unions were to be i n v o l v e d i n the decision-making  33 process  of t r a n s n a t i o n a l s both at the l o c a l and i n t e r n a -  tional level.  The home and host c o u n t r i e s were a l s o  recommended to allow f r e e entry to u n i o n i s t s from  other  c o u n t r i e s r e p r e s e n t i n g n a t i o n a l or i n t e r n a t i o n a l o r g a n i s a t i o n s engaged i n l e g i t i m a t e i n v e s t i g a t i o n s or other union missions  i n c l u d i n g n e g o t i a t i o n s with  t i o n a l s on b e h a l f of the workers.  the transna-  Transnationals  were  r e q u i r e d to adopt a l l the safeguards and to provide the s p e c i a l working c o n d i t i o n s f o l l o w e d by them i n t h e i r home c o u n t r i e s adapted to the needs i n host c o u n t r i e s to ensure the h e a l t h and s a f e t y of workers. Consumer P r o t e c t i o n : measures r e g a r d i n g should and  There was no c o n t r o v e r s y on  consumer p r o t e c t i o n .  Transnationals  r e v e a l to the host c o u n t r i e s any s a l e s p r o h i b i t i o n s  r e s t r i c t i o n s i n manufacturing imposed by home or by  other host  c o u n t r i e s to p r o t e c t the h e a l t h and s a f e t y of 20  the consumers.  I t was f o r the host  c o u n t r i e s to decide  whether s i m i l a r warnings or r e s t r i c t i o n s should be imposed on the s a l e and manufacture of those products i n t h e i r countries.  S i m i l a r l y , p r o h i b i t i o n s and r e s t r i c t i o n s on  products or t h e i r i n g r e d i e n t s to be imported i n t o host c o u n t r i e s by t r a n s n a t i o n a l s should be made known to them. Tax  Treaties:  Finally,  there seems to have been  l i t t l e disagreement on the recommendation that developed  34  c o u n t r i e s should enter i n t o b i l a t e r a l developing c o u n t r i e s and Experts on Tax the way  tax t r e a t i e s  with  that the work of the Group of  T r e a t i e s should be speeded up to  f o r an i n t e r n a t i o n a l tax agreement.  prepare  21  Disagreements There were other recommendations of the Group with which the r e p r e s e n t a t i v e s of developed  countries l i k e  United S t a t e s , S w i t z e r l a n d and Japan d e f i n i t e l y Mr.  Ryutaro Komiya  22  extreme p o s i t i o n adopted by Mr. M i l l e r of USA Although  24  disagreed.  of Japan, however, d i d not take  and Mr.  Jacob J a v i t s  Hans S c h a f f n e r  25  23  the  and Mr.  Irwin  of S w i t z e r l a n d .  the Group a r r i v e d at these recommendations  consensus, the comments, e s p e c i a l l y those of Mr. and of Mr.  the  J a v i t s emphasize the high degree of  through  Miller  divergence  i n the p o i n t s of view of d e v e l o p i n g and of developed  coun-  tries . Guidelines for Multinationals The Group recommended that host developing c o u n t r i e s should s p e c i f y as p r e c i s e l y as p o s s i b l e what the t i o n a l s were expected  to achieve and  transna-  the c o n d i t i o n s under  2 6  which they were to operate.  They should a l s o i n d i c a t e  the ways i n which they would l i k e the t r a n s n a t i o n a l s to i n t e g r a t e into, the l o c a l economy and f i t i n t o the  overall  35  p r i o r i t i e s of the country. the host  To ensure maximum b e n e f i t to  c o u n t r i e s , the Group recommended that the host  c o u n t r i e s must d e f i n e  the areas i n which they were ready  to accept f o r e i g n investment and c o n d i t i o n s upon which 27  t h i s investment would be allowed. g e n e r a l l y developing  countries  The Group f e l t  should  that  be encouraged to  r e t a i n ownership of t h e i r n a t u r a l resources  and a l s o to  c o n t r o l the use of them. Mr.  J a v i t s disagreed  with these recommendations  because he found them i m p r a c t i c a l and even counter-productive.  The only t h i n g that the government of the host  country, i n h i s o p i n i o n ,  c o u l d do was to e s t a b l i s h  general  g u i d e l i n e s f o r the more d e t a i l e d aspects of t r a n s n a t i o n a l s operations. not  In any case, he f e l t ,  always know best  that governments d i d  or a c t i n the best  i n t e r e s t s of t h e i r  citizens. Ownership and C o n t r o l Most c o u n t r i e s o f t e n sought to c o n t r o l the through l o c a l ownership, of e q u i t y , but m a j o r i t y was  not r e a l l y e s s e n t i a l f o r c o n t r o l .  enterprise ownership  C o n t r o l c o u l d be  e x e r c i s e d by a m i n o r i t y where the m a j o r i t y  of the shares  were h e l d by i n v e s t o r s who had no common purpose and were not  i n t e r e s t e d i n e x e r c i s i n g c o n t r o l ; or i f the views of  36 the m i n o r i t y and of the m a j o r i t y were s i m i l a r .  However,  host c o u n t r i e s c o u l d want a m a j o r i t y s h a r e h o l d i n g not only to  strengthen t h e i r i n f l u e n c e over the p o l i c i e s of the  affiliate, of  but a l s o to secure a l a r g e r share of the p r o f i t s  the c o r p o r a t i o n . The  29  Group f e l t  s h i p as an important  that where the host country saw ownero b j e c t i v e , c o n s i d e r a t i o n should be  g i v e n to the s e t t i n g up of j o i n t ventures.  Alternatively,  host c o u n t r i e s c o u l d make p r o v i s i o n f o r the review  of the  terms of agreemetn on the request of e i t h e r s i d e a f t e r suitable intervals.  Not only t h a t , p r o v i s i o n s c o u l d be  i n c l u d e d i n the i n i t i a l  agreements p e r m i t t i n g the p o s s i b i -  l i t y of r e d u c t i o n over time of the percentage ownership.  But i t was important  of f o r e i g n  that such p r o v i s i o n s be  i n c l u d e d 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 i n c l u s i o n of such  s i o n s would discourage high technology  areas.  many investments  provi^  particularly in  I t c o u l d a l s o encourage transna-  t i o n a l s to t r y to amortize  a l l t h e i r investments  the e a r l y years of the investment  during  r e s u l t i n g i n higher p r i c e s  and more w a s t e f u l development of r e s o u r c e s . ^  3 7  Mr.  S c h a f f n e r of S w i t z e r l a n d 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 s e c t o r s because he f e l t  that the success of a j o i n t  venture  depended l a r g e l y on whether the l o c a l partner c o u l d make 32  any v a l i d c o n t r i b u t i o n  or not.  In c e r t a i n  sophistica-  ted technology i n d u s t r i e s , he c o u l d not because they r e q u i r e d a continuous  flow of t e c h n i c a l a s s i s t a n c e and  innovative services.  T h e r e f o r e , i n such f i e l d s  ventures were uneconomical and uncompetitive. there was  evidence  that j o i n t ventures had  joint Also,  to pay  larger  r o y a l t i e s and fees f o r know-how and management than  the  wholly owned s u b s i d i a r i e s . F u r t h e r , i n many cases, a t r a n s n a t i o n a l d i d not want to open the e q u i t y of i t s a f f i l i a t e because i t d i d not want any i n t e r f e r e n c e i n i t s management.  Moreover, a new  invest-  ment u s u a l l y d i d not have s u b s t a n t i a l p r o f i t s i n the  initial  years of i t s e x i s t e n c e .  The  parent company as the s t o c k -  holder c o u l d accept t h i s because i t was long-term  prospects of i t s a f f i l i a t e .  i n t e r e s t e d i n the The  individual  non-  i n d u s t r i a l s t o c k h o l d e r on the other hand, would want immediate returns.  Again, when p r o f i t s were f i n a l l y  realized,  the parent company might want to r e i n v e s t them while  the  l o c a l s t o c k h o l d e r s might p r e f e r a steady flow of d i v i d e n d s .  38 In f a c t , Mr. Schaffner like  felt  that the parent company would  to keep a l l p o l i c y 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 , others  t r a n s f e r p r i c e s and  i n the hands of i t s own management.  Dispute S i t u a t i o n s In case of d i s p u t e s between the t r a n s n a t i o n a l and the host  countries,  the Group recommended  that home coun33  t r i e s should  r e f r a i n from g e t t i n g i n v o l v e d i n them.  If  s e r i o u s damage to t h e i r n a t i o n a l s was l i k e l y ,  the home  countries  diplomatic  should  representations pressure  confine  themselves to normal  and not use i n t e r n a t i o n a l agencies to exert  on the host  countries.  The host  c o u n t r i e s on t h e i r  p a r t must ensure that whenever assets of a t r a n s n a t i o n a l c o r p o r a t i o n were n a t i o n a l i z e d , f a i r and adequate compensat i o n was given  according  to the due process of the law of  t h e i r c o u n t r i e s or i n accordance with any a r b i t r a t i o n agreement between the p a r t i e s . T h i s recommendation was not acceptable the American r e p r e s e n t a t i v e s to Mr. Komiya of Japan.  to e i t h e r  or to Mr. Hans S c h a f f n e r , or  Both Mr. J a v i t s and Mr. Komiya  found i t e n t i r e l y proper f o r the home country to review i t s a i d 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  should only be taken when a l l other means had  failed.  34  Technology The was  Group recommended that b e f o r e a t r a n s n a t i o n a l  permitted to i n t r o d u c e a p a r t i c u l a r product  domestic  i n the  market, the host government should evaluate i t s  s u i t a b i l i t y f o r l o c a l needs.  Not  only t h a t , the host  c o u n t r i e s should i n s i s t on t r a n s n a t i o n a l s making a reasonable c o n t r i b u t i o n towards product  and process i n n o v a t i o n  so that they c o u l d serve the n a t i o n a l or r e g i o n a l needs. T h e r e f o r e , they should encourage t h e i r a f f i l i a t e s The  technology  so  to under-  take the necessary  research.  developed  should be exported  to others at a p p r o p r i a t e p r i c e s .  Inter-  n a t i o n a l o r g a n i z a t i o n s should a l s o evolve an o v e r a l l regime under which the c o s t of technology  provided by 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 to d e v e l o p i n g c o u n t r i e s c o u l d be The  Group recommended the establishment  reduced.  of a world  patents  or technology bank to which any p u b l i c i n s t i t u t i o n c o u l d donate patents which i t owned or purchased  f o r the purpose  f o r use i n developing c o u n t r i e s .  the Group  suggested  Finally,  that t r a n s n a t i o n a l s were not the only way  importing t e c h n o l o t y .  The  of  developing c o u n t r i e s c o u l d  explore a l t e r n a t i v e means of a c q u i r i n g s u i t a b l e  technology."^  40 Once again, developing  the d i f f e r e n c e i n the p o s i t i o n s of  and developed c o u n t r i e s came s h a r p l y i n t o  focus when Mr. S c h a f f n e r ,  echoing Mr. M i l l e r ,  l e f t no  room f o r d i s c u s s i o n by commenting that i f developing c o u n t r i e s p r e f e r r e d a l t e r n a t i v e ways of a c q u i r i n g technology, the t r a n s n a t i o n a l s 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 p o t e n t i a l tended to be higher  and where  3 6  the r i s k s were much lower.  A p o s s i b l e compromise bet-  ween these two extreme p o s i t i o n s was o f f e r e d by Mr. Komiya by suggesting developing  that lowering  c o u n t r i e s should  the p r i c e of technology f o r not be a major p o i n t of debate.  What was more important was that developing should for  countries  get s u p e r i o r technology, the kind most  appropriate  t h e i r needs and one which b e n e f i t e d them most.  I f the  technology was b e n e f i c i a l even buying i t at a higher was to the advantage of the buyer. inappropriate  price  Buying cheap but  technology would be j u s t a waste of money.  Japan, he pointed  out, had imported a great d e a l of techno-  logy and had p a i d l a r g e sums of r o y a l t y .  Not only  that,  70% of a l l c o n t r a c t s f o r the import of technology had been accompanied by some t e r r i t o r i a l  restrictions.  Yet,  the  b e n e f i t s d e r i v e d from t h i s technology had been f a r g r e a t e r than the l a r g e r o y a l t i e s p a i d f o r .  41 Competition, C o n f l i c t s and Intra-Corporate The ask  Group recommended that host c o u n t r i e s  transnationals  to d e c l a r e  f i c a t i o n of any p o s s i b l e r e s t r i c t i o n s . that host  should  t h e i r import and export  p o l i c i e s and to make c l e a r the extent,  felt  Affairs  duration  and j u s t i -  The Group a l s o  and home governments, through i n t e r n a t i o n a l  agreements, should  p r o h i b i t the market a l l o c a t i o n of  exports by 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  unless  such  allo-  c a t i o n s were e s s e n t i a l f o r other b e n e f i t s to the c o u n t r i e s concerned.  The Group recommended c o u n t r i e s  to group together  of a r e g i o n  to be i n a b e t t e r b a r g a i n i n g  with the t r a n s n a t i o n a l s .  R e s t r i c t i v e clauses  position and market  a l l o c a t i o n s were a s e r i o u s hindrance to the f u l l  flow of  goods and to i n d u s t r i a l r e s t r u c t u r i n g i n that area. there  should  be no such c l a u s e s  r e g i o n a l groups of c o u n t r i e s .  Hence,  at l e a s t w i t h i n the  3 8  R e s t r i c t i v e c l a u s e s were i n c l u d e d by t r a n s n a t i o n a l s not only as p a r t of t h e i r g l o b a l marketing s t r a t e g y but a l s o because of d i f f e r e n t a n t i - t r u s t p r o v i s i o n s i n d i f f e r e n t countries. Group f e l t  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  i t was necessary to adopt an i n t e r n a t i o n a l a n t i -  t r u s t agreement.  Till  such time as an i n t e r n a t i o n a l  agreement c o u l d be worked out, show r e s t r a i n t i n a p p l y i n g  the home c o u n t r i e s  should  their anti-trust policies i f  42 other governments were a f f e c t e d and u n i l a t e r a l a c t i o n should only be taken on a p r o v i s i o n a l b a s i s pending c o n s u l t a t i o n s with  the concerned governments.  F u r t h e r , a l a r g e number of t r a n s a c t i o n s took p l a c e w i t h i n the t r a n s n a t i o n a l s between the a f f i l i a t e s or between the parent  and the s u b s i d i a r i e s which had p o t e n t i a l  for price d i s t o r t i o n s .  Varying degrees of ownership i n  the s u b s i d i a r i e s c o u l d 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 l a r g e . Or a f f i l i a t e s might show a r e d u c t i o n i n p r o f i t s f o r wage bargaining.  T r a n s f e r p r i c i n g may a l s o be a way of a l l o c a -  t i n g markets i f the p r i c e s charged to an a f f i l i a t e made i t s exports tortions,  non-competitive.  In order  to avoid such d i s -  the Group recommended that host and home coun-  t r i e s should enforce  "arm's l e n g t h " p r i c i n g where appro-  . . 34 priate. The  Group recommended i n t e r n a t i o n a l standards of  d i s c l o s u r e , accounting be a hindrance  and r e p o r t i n g which would i n i t s e l f  to manipulations  A l s o , the Group f e l t ,  w i t h i n the t r a n s n a t i o n a l s .  that the p r i n c i p a l  terms of agree-  ments between host governments and t r a n s n a t i o n a l corporat i o n s should be d i s c l o s e d and d e p o s i t e d with  the proposed  c e n t r e f o r i n f o r m a t i o n and r e s e a r c h on t r a n s n a t i o n a l corp o r a t i o n s which c o u l d prepare d i g e s t s and summaries of such  43 information  and make them a v a i l a b l e to c o u n t r i e s to  facilitate  t h e i r working out terms of agreement with  transnationals.^ Mr.  Schaffner,  t i o n s because he f e l t  disagreed  with these recommenda-  that the d i s c l o s u r e of i n f o r m a t i o n  d e s i r e d would normally be w i t h i n  the company's p r i v a t e 41  sphere and not meant f o r p u b l i c e x h i b i t i o n .  Again,  there  were 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  with tens of thousands of  commodities which were s u p p l i e d  to a f f i l i a t e s  e n t i r e world.  There c o u l d be innumerable reasons f o r  p r i c e d i f f e r e n c e s : divergent discount  over the  rebate c l a u s e s ,  market c o n d i t i o n s ,  quantities,  q u a l i t y s p e c i f i c a t i o n s , terms of  payment, i n v o i c e currency, t r a n s a c t i o n l e v e l of the importer, s e r v i c e s rendered i n a d d i t i o n to goods shipped and  others.  out  exhaustive explanations  purpose.  Routine d i s c l o s u r e s of t r a n s f e r p r i c e s withwould not serve any u s e f u l  Besides, many of these elements v a r i e d from day  to day and i t would not be proper or r e a l i s t i c transnationals  to expect  to d i s c l o s e a l l the d e t a i l s .  Screening Process In order to ensure maximum b e n e f i t s f o r the host country the Group recommended the s e t t i n g up of c e n t r a l i z e d negotiating  s e r v i c e s or c o - o r d i n a t i n g  groups to deal  with a l l p r o p o s a l s f o r f o r e i g n investment e s p e c i a l l y from  44 transnationals.  The  n e g o t i a t i n g s e r v i c e s or  i n g groups c o u l d a l s o simultaneously s a l to see  coordinat-  evaluate  the  being  propo-  that a p p r o p r i a t e  technology was  trans- .  J a v i t s disagreed  with the idea of s e t t i n g  ferred.^ Mr. of any  such machinery f o r s c r e e n i n g  and  d i r e c t investments because, he f e l t , c i a l s were not  handling  up  foreign  that government  offi-  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  might opt f o r l a b o u r - i n t e n s i v e  transnationals  and  technology f o r domestic  p o l i t i c a l reasons thereby s h u t t i n g o f f more advanced technology i n f l o w s .  He  a l s o had  reservations  of  the  r i g h t s of governments to discourage or even p r o h i b i t i n some cases the i m p o r t a t i o n  of c e r t a i n products or  l c o a l manufacturing which they considered  their  s o c i a l l y unde-  43 sirable.  Therefore,  i n g process was consider  he d i d not  r e a l l y necessary.  the p o s s i b i l i t y  take expert Mr.  think that any  advice  He,  Schaffner  of course, d i d  that the .-.screening  on t e c h n o l o g i c a l and r e i n f o r c e d Mr.  screen-  agency c o u l d  other  Javits  1  matters. contention  when he contended that nobody c o u l d have h i s bread on both s i d e s .  I f the host  country p r e f e r r e d an  mediate l e v e l of technology, which was but which c r e a t e d  not  not very  buttered  intereconomical  a l a r g e number of jobs, i n s t e a d of h i g h l y  45 c a p i t a l - i n t e n s i v e competitive  automation, i t had already  made a c h o i c e which i n e v i t a b l y excluded competitiveness 44 on the export s i d e . Other Areas of Disagreement Even i n those areas i n which there was agreement, there were a m b i g u i t i e s .  Mr. Komiya f o r i n s t a n c e  found  the recommendations themselves to be c o n t r a d i c t o r y . the q u e s t i o n instance, by  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 f o r  i t was not f o r the home country, as suggested  the Group, but f o r the host  country to r e g u l a t e the 45  behaviour of the m u l t i n a t i o n a l s . Mr.  On  Komiya p o i n t e d  out,  On the one hand,  the Group d i d not want the home  country to govern the behaviour of an a f f i l i a t e  of a t r a n s -  n a t i o n a l once i t was e s t a b l i s h e d i n another country. the other required  On  hand, when the end was d e s i r a b l e , the r e p o r t the home country to e x e r c i s e j u r i s d i c t i o n .  example, home' c o u n t r i e s were r e q u i r e d  to i n s i s t  that  n a t i o n a l s f o l l o w c e r t a i n i n t e r n a t i o n a l l y accepted standards as c o n d i t i o n s of. f o r e i g n investment. also required disregarded  to impose s a n c t i o n s  For trans-  labour  They were  on c o r p o r a t i o n s  that  them; prevent t r a n s n a t i o n a l s from i n v e s t i n g  i n c o u n t r i e s where workers' r i g h t s were not respected; to take s t r i c t  measures a g a i n s t  or i n d u l g i n g in'-other c o r r u p t  their nationals giving bribes p r a c t i c e s i n host  countries;  46 and to u n i l a t e r a l l y p r o h i b i t export of products ted  prohibi-  i n home c o u n t r e i s f o r reasons of consumer p r o t e c t i o n .  But Mr. Komiya argued,  matters concerning labour standards,  labour r e l a t i o n s , consumer p r o t e c t i o n , p o l l u t i o n  control  and punishment f o r b r i b e r y were a l l i n t e r n a l a f f a i r s of the host c o u n t r i e s and should, t h e r e f o r e , be t h e i r diction. lay  juris-  At b e s t , what the home country c o u l d do was to  down v o l u n t a r y g u i d e l i n e s f o r i t s t r a n s n a t i o n a l s .  Evaluation Thus, there were major d i f f e r e n c e s between developed and d e v e l o p i n g c o u n t r i e s i n areas of ownership of  and c o n t r o l  t r a n s n a t i o n a l s , r e g u l a t i o n of products to be  manufactured,  d i s p u t e s e t t l e m e n t process between host c o u n t r i e s and t r a n s n a t i o n a l s , technology t r a n s f e r , r e g u l a t i o n of i n t r a - c o r p o r a t e affairs,  d i s c l o s u r e of i n f o r m a t i o n by t r a n s n a t i o n a l s and  i n the s e t t i n g up of s c r e e n i n g process f o r t r a n s n a t i o n a l s . The of  areas of agreement were n a t i o n a l treatment, use  t r a n s n a t i o n a l s f o r other than economic purposes,  p r o t e c t i o n and labour standards.  consumer  But a l l of these are not  n e c e s s a r i l y matters of top p r i o r i t y concern f o r host countries.  For i n s t a n c e , labour r e l a t i o n s would not be the  most important o b j e c t i v e f o r d e v e l o p i n g c o u n t r i e s . Mr.  Komiya r e a l i s e d , i t was important  As  f o r d e v e l o p i n g coun-  t r i e s , which were mostly overpopulated, to take advantage  of  labour, an important and abundant r e s o u r c e .  They  had to develop and export l a b o u r - i n t e n s i v e products, t a k i n g advantage of low wages i n t h e i r c o u n t r i e s . q u e n t l y , i t was  Conse-  necessary f o r them to keep wages as c l o s e  as p o s s i b l e to l e v e l s commensurate with the standards i n the country.  Artificially  high wages would l i m i t  employ-  ment o p p o r t u n i t i e s i n i n d u s t r y because the country would not be able to a f f o r d i t . Developing c o u n t r i e s had r e a l l y to use low wage labour with h i g h - p r o d u c t i v i t y technology to r e s u l t ,  not  i n high p r o f i t s , but i n low product p r i c e s which would b r i n g more products w i t h i n the reach of average  man  and  r a i s e standards of l i v i n g , or which c o u l d be c o m p e t i t i v e for  exports and thus improve the economy.  e s s e n t i a l f o r governments to ensure  Hence i t was  that e x c e s s i v e l y high  p r o f i t s were not earned by t r a n s n a t i o n a l s because of t h e i r monopolistic The  position.  a t t i t u d e of developed c o u n t r i e s as i t became  e v i d e n t i n the comments of r e p r e s e n t a t i v e s from USA S w i t z e r l a n d was,  that i t was  and  i n the i n t e r e s t of the host  c o u n t r i e s to have t r a n s n a t i o n a l investment  and, t h e r e f o r e ,  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 t h e i r investment  attractive.  48 Taken on the whole, the p o i n t of view of developed countries  seemed to be that host  c o u n t r i e s should  only minimal c o n t r o l at a l l over t r a n s n a t i o n a l s . should  not screen  the investment plans  which they considered  exercise They  f o r the t r a n s n a t i o n a l s ;  s o c i a l l y undesirable.  Guidelines  were s u f f i c i e n t f o r the t r a n s n a t i o n a l s but more d e t a i l e d i n s t r u c t i o n s or c o n t r o l would be p e r c e i v e d  as s u f f o c a t i n g  s u r v e i l l a n c e and as an attempt to reduce the p r o f i t s of the t r a n s n a t i o n a l s which would make investment u n a t t r a c t i v e f o r them. reduction  Terms and c o n d i t i o n s  itself  such as gradual  i n e q u i t y would a l s o be an i n h i b i t i n g f a c t o r .  In any case, the government of the host  country d i d not  always know best or would i t always a c t i n the best i n t e r e s t s of t h e i r people.  Indeed, a very high degree of freedom  was demanded f o r the t r a n s n a t i o n a l s . Mr. Irwin M i l l e r ' s comments made t h i s a t t i t u d e p a r t i c u l a r l y . c l e a r • when he e x p l a i n e d  that t r a n s n a t i o n a l s had  a v a l i d though a l i m i t e d r o l e i n development, and with the exception  of e x t r a c t i v e i n d u s t r i e s , i t was not at a l l c l e a r  that they had been or would be eager to i n v e s t i n developing countries  ^  Many of the recommendations of the Group,  he s a i d , c a l l e d on one  way or another f o r c o n s t r a i n t ,  r e g u l a t i o n or s p e c i a l c o n d i t i o n s  f o r operations  of the  t r a n s n a t i o n a l s and the cumulative e f f e c t of these recommen-  49  dations  would be  he f e l t ,  the c o n t r o l of the t r a n s n a t i o n a l s .  that the developing  that t h e t r a n s n a t i o n a l s in their countries. markets, g r e a t e r  But,  c o u n t r i e s were wrong to assume  were a l l extremely eager to i n v e s t  Developed c o u n t r i e s with t h e i r l a r g e r  per c a p i t a consumption, and  sometimes more  s t a b l e governments, u s u a l l y o f f e r e d more a t t r a c t i v e homes f o r the t r a n s n a t i o n a l s he r e i t e r a t e d , i t was  than developing  countries.  important f o r the host  offer a t t r a c t i v e conditions  f o r entry  Hence,  countries  to  i f they wanted to  a v a i l of the b e n e f i t s of those s p e c i f i c s e r v i c e s which they wanted from the t r a n s n a t i o n a l s . the host  The  bargaining  country l a y mainly i n the q u a l i t y , s i z e and  important the o p p o r t u n i t y , bargaining about how  stabi-  1  l i t y of the market i t o f f e r e d .  position.  The  more a t t r a c t i v e and  the more e f f e c t i v e was  the  Without d e t a i l e d i n s i g h t and  knowledge  a t r a n s n a t i o n a l operated, a host government  not hope to e s t a b l i s h sound p o l i c y and to r e g u l a t e The developing  i m p l i c a t i o n of these comments was  not  attempt  that i f the  c o u n t r i e s wanted the b e n e f i t s which  transnationals  b e t t e r make i t as a t t r a c t i v e  as p o s s i b l e f o r t r a n s n a t i o n a l s the way  so should  could  or c o n t r o l them.  brought with them, they had  And  power of  to i n v e s t i n t h e i r  to make i t a t t r a c t i v e was  countries.  to have the minimum  p o s s i b l e i n t e r f e r e n c e i n the a c t i v i t i e s of the  transnationals.  50 Mr. Schaffner  f u r t h e r r e i n f o r c e d t h i s view by  p o i n t i n g out that i t was wrong to assume that s o p h i s t i cated high-technology manufacturing t r a n s n a t i o n a l s were keen to  i n v e s t i n developing  c o u n t r i e s because of cheap  labour.'  In f a c t , a survey of the investment p o l i c y of US t r a n s n a t i o n a l s showed that they p r e f e r r e d to i n v e s t i n the advanced, more h i g h l y i n d u s t r i a l i z e d higher-wage count r i e s where economic c o n d i t i o n s most c l o s e l y resembled those i n the US.  Cheap labour  advantage which developing n a t i o n a l s d e a l i n g with very branches.  was only a comparative  c o u n t r i e s c o u l d o f f e r to m u l t i specific  labour-intensive  The more c a p i t a l - i n t e n s i v e the i n d u s t r y and the  more advanced the technology, the l e s s j u s t i f i c a t i o n was there *o assume that the.:.transnational had i n v e s t e d i n a p a r t i c u l a r country to take advantage of low labour Labour and land c o s t s were the only  two elements i n the  whole e n t e r p r i s e which were cheaper i n developing but  costs.  countries  these advantages were outweighed by the lower p r o d u c t i -  v i t y of t h i s labour. lower i n developing  Thus, while wages per c a p i t a were countries,  the labour  c o s t per manufac-  tured u n i t and, even more, the o v e r a l l c o s t s per u n i t c o u l d be h i g h e r .  And the v a l i d c r i t e r i o n f o r an e n t e r p r i s e  was the o v e r a l l cost per u n i t and not the per c a p i t a wage. Of course, Mr. Schaffner n a t i o n a l s had i n v e s t e d  d i d not e x p l a i n why the t r a n s -  i n developing  nations  i f there were  51 no b e n e f i t s or i f there were any b e n e f i t s , what those b e n e f i t s were. Mr.  Komiya d i d not take such an extreme p o s i t i o n .  He advocated a s e l e c t i v e approach to f o r e i g n investment and  importation  of technology f o r developing  c o u n t r i e s as 49  an i n t e g r a l part of t h e i r development p o l i c y . and  The degree  kind of government i n t e r v e n t i o n depended on the stage  of development of the country, the area of investment and the kind of technology t r a n s f e r r e d .  Moreover, some coun-  t r i e s , he acknowledged, might p r e f e r a c e r t a i n degree of economic and c u l t u r a l independence even at the c o s t of immediate economic g a i n s .  Short-term l o s s e s because of  r e s t r i c t i v e p o l i c i e s towards the m u l t i n a t i o n a l s might be o f f s e t i n the long run i f they helped to b u i l d up domestic managerial experience and to strengthen of a country's Mr. countries  the s e l f - c o n f i d e n c e  citizens.  Komiya f e l t  that there was no reason f o r host  to 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 with the  m u l t i n a t i o n a l s because no matter how small a sovereign State was, i t r c o u l d always be more "powerful" than the 50 t r a n s n a t i o n a l and thus r e g u l a t e or c o n t r o l i t .  I t could  l a y down c o n d i t i o n s under which the t r a n s n a t i o n a l was to e s t a b l i s h s u b s i d i a r i e s w i t h i n i t s borders, regulate  the o p e r a t i o n s  or r e s t r i c t and  of t r a n s n a t i o n a l s when they were  52  e s t a b l i s h e d , or n a t i o n a l i z e them.  He was,  u n r e a l i s t i c because i t was  these very powers that  members from the USA The  use  and  against  from S w i t z e r l a n d  of these powers, they claimed,  however,  being  were p r o t e s t i n g .  c o u l d make the  investment so u n a t t r a c t i v e that the t r a n s n a t i o n a l s would not  i n v e s t and  hence the host  c o u n t r i e s would be  of the b e n e f i t s that c o u l d accrue from them. developing  c o u n t r i e s c o u l d h a r d l y ignore  expressed by  the r e p r e s e n t a t i v e s  deprived  The  host  these views  of developed  nations  s i n c e the major p a r t of f o r e i g n investment came from developed  countries.  Conclusion The  impression  s e n t a t i v e s from USA  c r e a t e d by  and  the comments of the  Switzerland  was  n a t i o n a l s would be doing the developing by i n v e s t i n g there. t a t i v e was by  not  The  that the  what was  the developed c o u n t r i e s was  countries  generally  that i f the host  c o u n t r i e s wanted the b e n e f i t s from f o r e i g n d i r e c t they had  to go out  p o s i t i o n was  of t h e i r way  taken by Mr.  of Eminet Persons, and  transa  p o s i t i o n of the Japanese  as extreme but  L.K.  to woo Jha,  favour  represenimplied  developing investment,  A more o b j e c t i v e  Chairman of the Group  a l s o the Indian  While he accepted that "the great  it.  repre-  representative.  c o n t r i b u t i o n of m u l t i -  53 national corporations"  c o u l d not be "doubted" i n " r a i s i n g  the l e v e l s of world p r o d u c t i o n . " that i t would be "naive" corporations  He a l s o pointed out  to b e l i e v e that  would go to developing  multinational  countries  i f their  earnings and growth are not as good as they are i n deve52 loped countries..":, developing  In e f f e c t ,  transnationals invest i n  c o u n t r i e s because they f i n d i t commercially a  profitable proposition.  Through t h e i r investments they  also contribute  to the development and economic growth of  host  countries.  developing  What i s r e a l l y necessary i s to devise  p o l i c i e s on  an i n t e r n a t i o n a l l e v e l that can be n e n e f i c i a l to a l l p a r t i e s concerned: the host  countries,  the home c o u n t r i e s  course, to the 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, of  themselves. A l l  concerned can b e n e f i t i f the t r a n s n a t i o n a l s can i n v e s t c o n f i d e n t l y i n the developing tries,  countries  i n t u r n , can have more confidence  of the t r a n s n a t i o n a l s .  and i f these couni n the behaviour  54  CHAPTER II  FOREIGN DIRECT INVESTMENT IN PERSPECTIVE Introduction The divergence of views between developed developing c o u n t r i e s i s mainly because  of two  and  factors:  the m a j o r i t y of d e v e l o p i n g c o u n t r i e s are e r s t w h i l e  colo-  n i e s , and they have missed the i n d u s t r i a l r e v o l u t i o n 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.  I t i s e s s e n t i a l to a p p r e c i a t e  the impact of these f a c t o r s on t h e i r development. Canada i s i n a unique p o s i t i o n .  I t i s a developed  country with a broad i n d u s t r i a l base and h i g h l y cated technology.  At the same time, i t i s e s s e n t i a l l y a  resource e x p o r t i n g country. neighbour,  sophisti-  Besides, i t has a powerful  the U n i t e d S t a t e s , which i s Canada's c h i e f  t r a d i n g p a r t n e r and a l s o i t s main source of f o r e i g n investment.  T h i s makes Canadian  with that of the US and, it.  direct  economy very i n t e r l i n k e d  to a l a r g e extent, dependent on  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 i n s e c u r i t y i n Canada which manifests  55 itself  i n some concerns s i m i l a r to those of d e v e l o p i n g  c o u n t r i e s with regard to f o r e i g n d i r e c t investment.  Thus,  Canada can understand the p o i n t s of view of both the devel o p i n g and the developed The b a s i c problem advantage  countries. i n Canada has been how to take  of the b e n e f i t s emanating  from investment  from  USA w h i l e , at the same time, a c h i e v i n g the o b j e c t s and purposes of an independent, s e l f — r e s p e c t i n g n a t i o n .  The  i s s u e i n I n d i a , as i n a l l d e v e l o p i n g c o u n t r i e s , i s a more economic one.  I t i s the use of development to a t t a i n a  minimum l e v e l of s u b s i s t e n c e f o r m i l l i o n s of people who are s u b j e c t to d a i l y p r i v a t i o n s a f f e c t i n g t h e i r l i v e s and human d i g n i t y more p r o f o u n d l y than any s t a t i s t i c s can show without compromising  the i n t e r e s t s of an independent S t a t e .  What i s Development Three important c r i t e r i a can be used to d e f i n e deve2  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  p o t e n t i a l economic output p o s s i b l e by the a p p l i c a t i o n of e x i s t i n g t e c h n i c a l knowledge because in "social"  of o b s t a c l e s i n h e r e n t  i n s t i t u t e s i n t e r n a l or e x t e r n a l to the country.  In t h i s sense, a l l c o u n t r i e s are "underdeveloped" no country i s able to f u l l y u t i l i z e tial.  I t i s even more d i f f i c u l t  because  i t s p r o d u c t i v e poten-  to do so i n a country as  56  d i v e r s e as I n d i a 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  t u t i o n s l i k e c a s t e coupled with ignorance and  insti-  illiteracy  a l s o prevent the f u l l u t i l i z a t i o n of the a v a i l a b l e economic output.  In t h i s 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 t h i s  sense,  development i s a r e l a t i v e phenomenon and underdevelopment only a q u e s t i o n of degree.  Economic attainment b r i n g s  with i t both economic and p o l i t i c a l power.  T h i s , i n the  comparatively l e s s 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, r e a l or  imaginary.  T h i s phenomenon i s r e f l e c t e d i n the f o r e i g n d i r e c t  invest-  ment p o l i c i e s of Canada.  I t shows Canada's e s s e n t i a l  ing of i n s e c u r i t y with r e s p e c t to USA,  feel-  a much higher and  more powerful neighbouring economy, the s i n g l e most important t r a d i n g p a r t n e r . The u n c e r t a i n t y i n Canada i s not the d e s i r a b i l i t y f o r f o r e i g n d i r e c t investment about  the consequent  by one country. c e r t a i n degree The  about  per se but  c o n t r o l over l a r g e s e c t o r s of economy  Accompanying i t i s the f e a r of l o s i n g a of s o v e r e i g n t y and c u l t u r a l  identity.  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  a c c e p t a b l e standards of l i v i n g  to a l a r g e percentage  of  57  the country's p o p u l a t i o n  who  l i v e i n c o n d i t i o n s of misery  4  and  material deprivation.  These c o n d i t i o n s can only  a l l e v i a t e d by r a p i d i n d u s t r i a l i z a t i o n through the  be  appli-  c a t i o n of technology a v a i l a b l e mainly i n developed countries.  Thus, f a i l u r e to u t i l i z e  the f u l l  technological  p o t e n t i a l f o r economic development does not problem i n developed c o u n t r i e s , but want and  poverty i n developing  r e s u l t s in large scale  countries.  s e r i o u s consequence that developing  face of having  the accompanying techno-  explosion.  Differences  Between Developed and Developing  C o l o n i z a t i o n and  colonized countries  consequences as has  c o u n t r i e s but  The  s i n c e they were not  mic  growth by  like  "southern" econo-  i n command of t h e i r  own  take s e v e r a l v i t a l d e c i s i o n s which  c o u l d have changed the p a t t e r n life.  Most of the  serious  to modernisation by Western i n d u s t r i a l  economies, they c o u l d not  mic  time l o s t had  been demonstrated by w r i t e r s  S. Kuznets.^  mies were i n t r o d u c e d  of today were i n d u s t r i a -  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.  Barbara Ward and  Countries  Time of I n d u s t r i a l i z a t i o n  While the developed nations lizing,  T h i s i s the most  countries  missed the i n d u s t r i a l r e v o l u t i o n and logical  pose a s e r i o u s  They were s t i m u l a t e d  and  q u a l i t y of t h e i r econo-  to the beginnings of econo-  the need of the North A t l a n t i c f o r  raw  58  materials,  t r o p i c a l products and c e r t a i n temperate  supplies.  The world market was, thus,  food  organized to  exchange "southern" primary products f o r "Northern" manuf a c t u r e d goods.  T h i s l e d to the development of the l o c a l  import-export s e c t o r but d i d not have much of an e f f e c t on the r e s t of the economy, because i t was l a r g e l y under foreign control.  For example, t e x t i l e i n d u s t r y which had  t r a d i t i o n a l l y been strong of being  i n I n d i a was c r i p p l e d i n s t e a d  strengthened by the p o l i c y of the B r i t i s h  ment of t a k i n g Indian  cotton  f o r the Lancashire  m i l l s and  b r i n g i n g i n cheap f i n i s h e d c l o t h f o r s a l e i n I n d i a . breakup of t r a d i t i o n a l Indian out  the nineteenth  century  Govern-  i n d u s t r y continued  The  through-  as o l d i n d u s t r i e s of s h i p -  b u i l d i n g , metal working, g l a s s , paper and many t r a d i t i o n a l crafts  suffered. The  initial and  export of  raw m a t e r i a l s  investment r e q u i r e d  to t r a n s p o r t  paid f i r s t  f o r the  to e x t r a c t the raw m a t e r i a l s  them and then whatever purchasing power  they generated was used to buy the manufactured f i n i s h e d products imported through l a r g e Western t r a d i n g companies. What was needed was s t r o n g governmental i n t e r v e n t i o n to modernize a g r i c u l t u r e , m o b i l i z e t i v e t a r i f f s to s t i m u l a t e but  savings  and b u i l d up p r o t e c -  the growth of l o c a l  s i n c e there was no government w i l l  enterprise  to break the bot,tle-  59 necks, the b a r r i e r s to wider modernisation remained. From t h i s p o i n t of view, as Barbara Ward p o i n t s out, I n d i a and Japan present  a s t r i k i n g contrast.^  In  colonial  I n d i a , some i n d u s t r i a l development took place where e n t r e p r e n e u r i a l t a l e n t 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 I n d i a was very  slow  compared to that i n Japan mainly because I n d i a d i d not have political  independence to c a r r y out reforms and s t i m u l a t e  the process of growth.  Japan took important steps f o r  development l i k e reform i n which compensation was given to l a n d l o r d s i n government bonds which c o u l d only be i n v e s ted i n government-established i n d u s t r i e s ; m o b i l i s a t i o n was done of c r e d i t i n country and town; l i t e r a c y d r i v e was undertaken; and the government sponsored overseas t r a i n i n g of personnel.  In I n d i a , on the other  sponsorship of i n d u s t r y , was no e f f o r t  to i n c r e a s e  hand, there was no  land reform was not touched, the general  education,  there  and the  governemnt d i d not even impose a t a r i f f f o r the p r o t e c t i o n of new i n d u s t r y t i l l establishment  1920.  I t was only i n 1947 with the  of an independent government that I n d i a began  to t a c k l e economic problems that Japan had been d e a l i n g with s i n c e 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 r i g h t economic d e c i s i o n s but at l e a s t i t has the  60  p o t e n t i a l to do so.  A c o l o n i a l government has no w i l l to  take these d e c i s i o n s 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 c o l o n i e s a ready source of cheap raw m a t e r i a l s and markets f o r i t s manufactured  goods.  Population The  l a t e i n d u s t r i a l i z a t i o n has had an impact on  population. of  S c i e n t i f i c advances have l e d to the d o u b l i n g  the expectancy  i n the d e v e l o p i n g c o u n t r i e s even with  the moderate h e a l t h measures a v a i l a b l e .  The l i f e  expect-  ancy i n I n d i a , f o r example, was twenty: seven years at the time of independence.  I t i s now, f i f t y  seven  years.  together with the t r a d i t i o n a l r a t e of f e r t i l i t y of  This,  and lowering  i n f a n t m o r t a l i t y has made p o p u l a t i o n a major hurdle i n  any process of modernization o f the economy.  The r a p i d  i n c r e a s e of p o p u l a t i o n because of h e a l t h measures before modernisation i n other spheres has c r e a t e d dilemmas f o r the d e v e l o p i n g world which the A t l a n t i c World avoided.  When growth of p o p u l a t i o n takes p l a c e a f t e r a  breakthrough it  largely  i n t o g r e a t e r mechanisation and p r o d u c t i v i t y ,  a c t s as a spur to f u r t h e r growth because i t s t i m u l a t e s  the economy to f u r t h e r expansion demand.  Technology  to meet the i n c r e a s e i n  has i n c r e a s e d p r o d u c t i v i t y 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 t o g e t h e r .  The  a b i l i t y to consume and the i n c e n t i v e to i n v e s t are not  61 contradictory.  They r e i n f o r c e each other i n the modern  mass-consumption economy. The of  productivity.  technology But  outlook r e v e r s e s when p o p u l a t i o n expands ahead To i n t r o d u c e r a p i d l y changing modern  i n farming  and i n d u s t r y r e q u i r e s g r e a t e r  saving.  longer l i v e s and more months to feed push up consump-  t i o n at the expense of s a v i n g .  In Canada, f o r example,  an i n c r e a s e i n p o p u l a t i o n means l a r g e r markets f o r indus7  trial  output.  In I n d i a , p o p u l a t i o n i s a major  block i n development.  Hence the t i m e - f a c t o r i n i n d u s t r i a -  l i z a t i o n -- i n d u s t r y f i r s t , and  stumbling  i n d u s t r y l a t e r -- has  h e a l t h l a t e r or h e a l t h  a profound  first  impact.  Technology F u r t h e r , technology needs of the developed one of  has developed  world  and  i s not n e c e s s a r i l y the  s u i t a b l e f o r developing c o u n t r i e s . economic r e s e a r c h and of investment  i s c o n f i n e d to developed  a c c o r d i n g to the  c o u n t r i e s who  The  whole weight  i n f u r t h e r research have spent  the time t r y i n g to f i n d l a b o u r - s a v i n g methods of  most of production.  That i s , the e f f o r t has been to s u b s t i t u t e machines f o r manpower. for  In a d d i t i o n , i t i s designed  l a r g e markets.  But  f o r l a r g e u n i t s and  l a r g e s c a l e l a b o u r - s a v i n g methods  are not the most s u i t a b l e f o r developing labour i s abundantly  available.  c o u n t r i e s where  62  T h i s dilemma was because  not f a c e d by the developed  i t i n v e n t e d and adapted  world  technology f o r i t s own  needs as the process of development went on.  The  develop-  i n g c o u n t r i e s have n e i t h e r the time, the r e s o u r c e s nor the knowledge-pool own  needs.  with which to develop technology f o r t h e i r  Technology  be purchased.  a l r e a d y a v a i l a b l e and can  I t i s t h i s technology which  c o u n t r i e s purchase ment p r o c e s s .  i s now  in their effort  Thus advanced  the d e v e l o p i n g  to hasten the develop-  i n d u s t r i a l technology i s o f t e n  used i n c o u n t r i e s where there i s n e i t h e r the market nor the s k i l l s nor the managerial c a p a c i t y and the r e q u i r e d i n f r a s t r u c t u r e to make t h i s technology work s u c c e s s f u l l y . The s i t u a t i o n i s aggravated by the high cost of purchasing t h i s i n a p p r o p r i a t e technology.  I t a l s o leads to  i n the development of i n d u s t r y because up which produce because  imbalance  f a c t o r i e s are s e t  goods which nobody can buy l o c a l l y  they are much too expensive or they are not  either suitable  f o r the l i v i n g c o n d i t i o n s i n that country but which,  because  of inadequate e x p e r t i s e cannot q u a l i t a t i v e l y compete i n the world market. Products which are u s e f u l f o r developed c o u n t r i e s are not n e c e s s a r i l y the ones which are r e q u i r e d by the g  developing countries. If,  Barbara Ward g i v e s an example.  as a cheap by-product of p e t r o - c h e m i c a l s , Western  63  i n d u s t r y can produce  a s u b s t i t u t e f o r b i n d e r twines which  are only h a l f the p r i c e of " s i s a l " ,  the consequences from  the p o i n t of view of p e t r o - c h e m i c a l i n t e r e s t s are b e n e f i c i a l but f o r Tanzania and f o r l a r g e p a r t s of Kenya, i t i s a d i s a s t e r because " s i s a l " i n t h e i r l i m i t e d range  i s an important export f o r them  of e x p o r t s .  Psychology The r e s u l t of being late-comers i s that the aims and ambitions of d e v e l o p i n g c o u n t r i e s tend to be d e t e r mined not by l o c a l experience but by what they can see has been achieved by the developed  countries.  have j u s t a c q u i r e d the means of p o l i t i c a l  C o u n t r i e s which and economic  decision-making want to q u i c k l y command the whole of  range  o p p o r t u n i t i e s which they know the developed c o u n t r i e s 9  a l r e a d y have.  They want to take one"big l e a p forward"  to b r i d g e the gap between t h e i r own r e s t r i c t i o n s and other nations' opportunities.  T h e i r 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-  t i o n was that poverty was the r e s u l t of c o l o n i z a t i o n and that once the c o l o n i a l r u l e was a b o l i s h e d , p r o s p e r i t y would return.  In an average  mind, the f a c t that development process  l a s t s s e v e r a l decades and that i t depends on s e v e r a l i n p u t s i s overlooked or f o r g o t t e n , or viewed  with r e s i s t a n c e and  64  and  resentment.  want and  what hey  t r a t i o n and  can  a c t u a l l y q u i c k l y have causes f r u s -  unrest.  Further, can  T h i s d i s p r o p o r t i o n between what people  as Kuznets p o i n t s out,  the t o t a l economy  only grow as r a p i d l y as the s o c i e t y i s able to  itselt  to i t s continuous expansion.  slow-growing one, of growth and  I f an economy i s a  i t s i n s t i t u t i o n s are geared to a low  accelerated.  But  this requires  the  of o l d customs, t r a d i t i o n s , modes of working  psychological  rate  r e q u i r e s u b s t a n t i a l m o d i f i c a t i o n i f the pace  of growth i s to be breaking  adjust  and  adjustments which the people f i n d hard to  make. Problems faced by developing Kuznets has  countries  demonstrated"'""'" that c o l o n i z a t i o n  consequently the time of i n d u s t r i a l i z a t i o n have the problems faced by developing judge by  countries  increased  today.  l e a d i n g c o u n t r i e s were the United Zealand, the United  world wars,  question  Kingdom, S w i t z e r l a n d ,  countries as do  a r i s e s whether at any  lagged behind any  the developing  we II  the  S t a t e s , Canada, A u s t r a l i a , the  navian c o u n t r i e s , Germany, Netherlands, France and The  If  the p e r " c a p i t a income i n the post-Wordl War  p e r i o d pr i n the p e r i o d between the two  New  and  ScandiBelgium.  p o i n t of time these  l e a d i n g economies of t h e i r  countries  today.  For  the  time  relatively  65  "empty" c o u n t r i e s l i k e the United and  New Zealand, the q u e s t i o n  S t a t e s , Canada, A u s t r a l i a  does not have much  because i t i n v o l v e s only pioneers  relevance  who s u f f e r e d m a t e r i a l  d e p r i v a t i o n s compared to the d e p r i v a t i o n s i n the developi n g c o u n t r i e s today. pioneering  But these hardships  were because of  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 l a r g e , these c o u n t r i e s d i d not much l a g behind the economic l e a d e r s .  Thus, Canada  was developed through f o r e i g n investments from Great and United  States.  Britain  There i s no comparable s i t u a t i o n when  the developed c o u n t r i e s of today had per c a p i t a l  incomes  so f a r behind the economic l e a d e r s of t h e i r time and at such low l e v e l s as do the developing The  c o u n t r i e s of today.  t e c h n o l o g i c a l and economic r e v o l u t i o n s i n most  c o u n t r i e s at the top today dates back to about a century and  a h a l f or to about two c e n t u r i e s .  Thus the o l d e r members  of the European community which are developed today had a long p e r i o d of l e a r n i n g process  which r i p e n e d  them f o r  the i n d u s t r i a l t e c h n o l o g i c a l r e v o l u t i o n and d u r i n g p e r i o d , the p o l i t i c a l  independence and i n i t i a t i v e of these  c o u n t r i e s was preserved. remained o u t s i d e  this  Most developing  the o r b i t of t h i s process  c o u n t r i e s of today of l e a r n i n g ,  missed the i n d u s t r i a l r e v o l u t i o n , and now face the problems of development a f t e r decades i f not c e n t u r i e s of p o l i t i c a l  66  subjugation  which has  have to s t r u g g l e . not  left  a heritage  They have to use  against which they  the a v a i l a b l e knowledge  from a p o s i t i o n of near l e a d e r s h i p where they can  t h i s knowledge to t h e i r own of laggards  science  from the p o s i t i o n  whose i n t e r n a l o r g a n i z a t i o n has  d i s t o r t e d by p o l i t i c a l The  needs but  adapt  o f t e n been  subjection.  essence of development i s the a p p l i c a t i o n of  to problems of economic p r o d u c t i o n  both an a g r i c u l t u r a l and  which produces  i n d u s t r i a l r e v o l u t i o n so that  a g r i c u l t u r a l needs can be met  by a fewer people  the  occupied  12 in i t .  As Kuznets p o i n t s out  i n developing  today, t h r e e - f i f t h s or more of the labour  countries  f o r c e i s occu-  p i e d i n a g r i c u l t u r e whereas only o n e - f i f t h or l e s s i s occupied i n developed c o u n t r i e s . or a century  and  We  have to go back a  a h a l f when t h r e e - f i f t h s of the  f o r c e i n developed c o u n t r i e s of today was culture.  Not  around 1850 according  to US  i n developing  to $300.  estimates i n 1949,  c o u n t r i e s was  per c a p i t a income i n developing t h i r d to o n e - s i x t h  of what was  p r e s e n t l y developed c o u n t r i e s  in agricountries  At constant  the per  $30-$60.  labour  occupied  only t h a t , the per c a p i t a i n these  ranged from $150  century  prices,  c a p i t a income  Thus, i n 1949,  c o u n t r i e s was  about  the one-  the per c a p i t a income of i n the 1850s.  Therefore,  the developed c o u n t r i e s of today were economically  several  67 13 times  b e t t e r o f f than  Special  Features  of  the  and  I n d i a as  a developing cerns  a major those  d i s c u s s e d above  to  p a r t of  exist  r e p r e s e n t a t i v e s of  country.  similar  c o u n t r i e s of  today.  Canada  The'differences Canada  developing  a developed  However, Canada s h a r e s  those  of developing  i t s exports  of developing  between  are  some  con-  c o u n t r i e s because  s t i l l  c o u n t r i e s or  and  resource-based  "semi-industrial"  like coun-  14 tries,  as  it  feelings  has  powerful Canada, 1  tional  Alfred  Maizels calls of  insecurity  economy i n the resource-based  As  has  to other  despite  the  Auto  the  c o u n t r i e s which e x p o r t s , was  because  to  the  most  USA.  country  developed  Pact  also  neighbour  i n Canada  and  countries.  became aware and w i t h US, relied  still  on  the  Canada's  a s m a l l p r o p o r t i o n of  Canada's p o l i c y - m a k e r s  of  world,  been p o i n t e d out  contains only  compared  50%  being  and  P o l i t i c a l / E c o n o m i c Environment,  exports  loped  them;  By  predominantly  merchandise  finished the  goods an  goods  mid-1960s,  concerned  Canada, u n l i k e finished  Interna-  that  other  deve-  f o r at  exporter  least  of  raw 15  and  semi-processed  Some w r i t e r s  went  industrialized  goods r a t h e r than to  the  extent  under-developed  of  of  finished  calling  country.  Canada  goods. a"rich  68 I n d u s t r i a l i z a t i o n has been a s s o c i a t e d with  econo-  mic development because i t leads to an i n c r e a s e i n labour p r o d u c t i v i t y and i n r e a l incomes. enhances trade p o t e n t i a l .  I n d u s t r i a l growth a l s o  Thus, the i n d u s t r i a l growth r a t e s  of v a r i o u s c o u n t r i e s can be measured by t h e i r share of world export market i n manufactures. a h i g h - l e v e l of manufactured exports  According  to W i l l i a m s ,  i s a characteristic  of economic development whereas an export s t r u c t u r e c o n s i s t i n g l a r g e l y of primary manufactured products  products  and i n t e r m e d i a t e or semi-  i n d i c a t e s underdevelopment.  Alfred  18 Maizels trial,  -..has d i v i d e d c o u n t r i e s i n t o three groups: induss e m i - i n d u s t r i a l , and n o n - i n d u s t r i a l , based on the  value of t h e i r p r o d u c t i o n of manufactured goods per head and  the p r o p o r t i o n of manufactured goods i n t h e i r  The  f o l l o w i n g t a b l e shows the export  exports.  performance of coun-  t r i e s as c l a s s i f i e d by M a i z e l s : Table I I .Degree of I n d u s t r i a l i z a t i o n and F i n i s h e d Manufactures as a P r o p o r t i o n of Trade: 1913, 1929, 1955, and 1980 ( p e r c e n t of t o t a l trade)  1913 I n d u s t r i a l Countries Japan Italy Germany(Federal) Sweden  31 31 46 23  Exports 1929 1955 43 41 54 26  64 47 65 33  Imports 1980  1980  71 61 60 53  11 28 34 45  Table I I contd.  69  Table  I I (contd...)  2 1 5 8 44 5  United States Great B r i t a i n France Canada  Semi-industrial India Brazil Argentina Australia Turkey Non-industrial Egypt Zaire Burma  -k -k  *  Countries 1 3  3 7 4 9 4 7 1 4  4 8 62 3 8 1 1  5 5 5 3  2 0 0 2  19  3 1 . 0  23**  3 3 3 5  8 9 5 9  27**  0.4  2 2 * * *  2 9 * * *  -  0.4  14**  49**  _  6.0 0.4  10 7***  54 39***  Countries -  -  3 . 0  4 . 0 * * *  3 5 * * *  -  0 . 8  0 . 6 * *  4 8 * *  -  0 . 4  0 . 3 *  5 5 *  *k ~k ~k  1976  1 9 7 8  Source:  Glen W i l l i a m s , Not f o r E x p o r t : Towards 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 , Toronto: McClelland and Steward, 1 9 8 3 .  As  t h etable  shed  the is  shows,  manufactures  exports. cent  1 9 7 9  account  for at least  I n t h es e m i - i n d u s t r i a l  of exports  consist  non-industrial less  i n t h ei n d u s t r i a l i z e d c o u n t r i e s  countries,  of their  countries,  t h eshare  total  1 0 to 2 5 per  o f f i n i s h e d manufactures;  and i n  o f manufactures  than 1 0 % . A c o r o l l a r y t o the proposition  of  half  fini-  f i n i s h e d manufactures  indicate  high  that  high  exports  levels of industria-  70 lization,  suggested by M a i z e l s i s that the l a r g e r indus-  t r i a l c o u n t r i e s are l e s s dependent on imports of manuf a c t u r e s than the s m a l l e r i n d u s t r i a l c o u n t r i e s and  the  19 s e m i - i n d u s t r i a l and n o n - i n d u s t r i a l c o u n t r i e s .  All  i n d u s t r i a l c o u n t r i e s except Canada, as shown i n the  table,  have p o s i t i v e trade balances i n f i n i s h e d p r o d u c t s .  Even  i n 1984, 42.1%  Canadian  exports of f i n i s h e d products account f o r  of t o t a l exports w e l l below the d e s i r e d 50%.  Not  only t h a t , 66% of t o t a l imports by Canada are of f i n i s h e d manufactures. 20 A f u r t h e r p o i n t has been made by W i l l i a m s . f e e l s that Auto Pact exchanges can be l e f t  He  out from Canada'  e x t e r n a l trade p i c t u r e when i t i s seen as an i n d i c a t o r of a n a t i o n ' s a b i l i t y to compete i n d u s t r i a l l y w i t h i n the world economy.  Export of manufactures  Automative 1954,  was  s t i m u l a t e d by  Products Trade Agreement with USA  automobiles  and p a r t s comprised  exports but i n 1984,  the  i n 1965.  In  of o n l y 1% of Canada'  they account f o r 26.5%.  As a r e s u l t ,  the t o t a l exports of f i n i s h e d products jumped to 38% i n 1970s.  Even i n 1984,  when 42.1%  f i n s i h e d products, automobiles  of t o t a l exports was  of  and p a r t s c o n s i s t e d of  26.4% 21 T h i s leaves Canada " i n the company of B r a z i l and India .' Of course, as W i l l i a m s accepts, there are other elements 1  like  " r e l a t i v e l y high value of Canada's per c a p i t a  produc-  22 tion"  which p l a c e s i t among i n d u s t r i a l n a t i o n s r a t h e r  71 than s e m i - i n d u s t r i a l n a t i o n s .  But the f a c t that Canada  i s e s s e n t i a l l y a resource-based some concerns  country does make i t share  with developing c o u n t r i e s .  Many e x p l a n a t i o n s have been g i v e n f o r Canada's weak export performance i n the manufacturing comparative  sector l i k e :  trade advantages i n resources r a t h e r 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 f o r e i g n c o n t r o l over i n d u s t r y ; p r o t e c t i v e t a r i f f which p r o t e c t e d Canadian manufactures unable i n world markets; small domestic  policies  to compete  market which i s a h i n d r a -  nce to economies of s c a l e ; and  the i n t e r l i n k i n g of Canadian  economy to a f a r more powerful  economy which has r e l e g a t e d 23  Canada to "a resource h i n t e r l a n d r o l e . " very f a c t o r s which, as we  These are  the  s h a l l see l a t e r , which have been  c i t e d as c o s t s that Canadian economy has p a i d f o r the high degree of f o r e i g n d i r e c t I n f l u e n c e of  investment.  USA  C h i e f l y because of g e o g r a p h i c a l p r o x i m i t y , i t i s but n a t u r a l that the r e l a t i o n s h i p between Canada and  US  i s probably c l o s e r than between any other two c o u n t r i e s i n the world and  the impact  S t a t e s , the more powerful  of the i n f l u e n c e of the United  neighbour,  extends i n t o  virtually  24 every aspect of the n a t i o n a l l i f e of Canada.  People  have  s e 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 c l i m a t e and topography.  There are p e r s o n a l and f a m i l y  connections across the border. culture, in religion;  There i s s i m i l a r i t y i n  i n the p r o f e s s i o n s , i n b u s i n e s s , i n  labour, i n education and i n the a r t s . S t r e t c h i n g p a r a l l e l with US i t was  l o g i c a l and almost  across the Continent,  i n e v i t a b l e i n many ways f o r  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 25  US.  As has been p o i n t e d out i n the Wahn Report,  Canada  n a t u r a l l y drew upon the c a p i t a l of the United S t a t e s , t h e i r people and  their s k i l l s  i n i t s development.  For example,  i n coping with the communication and t r a n s p o r t a t i o n 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 e x a c t l y i n the Canadian case a good many years l a t e r .  The  techniques  used f o r d e v e l o p i n g the b i g and g r e a t l y s p 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 i n d u s t r i e s , mining and o t h e r s , were copied e x a c t l y from what had been done e a r l i e r i n US. In areas of pulp and paper,  mining,  i r o n ore, o i l and  and potash, vast amounts of c a p i t a l and high s k i l l s had  to be  developed  and used.  gas,  technical  At the same time,  very l a r g e markets were needed i f they were g o i n g to be successful.  73 The requirements of the United S t a t e s , a f t e r Second World War, of  especially  opened up l a r g e markets f o r many  these items which made i t p o s s i b l e to develop these  huge i n d u s t r i e s i n Canada.  Thus, a l l the r e q u i r e d  ingre-  d i e n t s f o r development -- l a r g e markets, f i n a n c e , management, a p p l i c a t i o n of technology -- were a v a i l a b l e i n the United S t a t e s which n a t u r a l l y l e d to a very l a r g e amount of cal  American p a r t i c i p a t i o n i n Canadian economy. and s c i e n t i f i c  World War  pre-eminence of USA  has l e f t  The  techni-  a f t e r the Second  i t s impact over the i n d u s t r i e s of the  whole world because the essence of development a f t e r the Second World War  has been the r a p i d expansion of s c i e n c e  and technology and i t s a p p l i c a t i o n to i n d u s t r y . being so c l o s e to USA, on i t s own  inevitably felt  i n d u s t r i a l developments.  Canada  the impact of t h i s  Of course,  together  with technology came investment and management s k i l l s but the  fundamental f a c t o r was predominance i n t e c h n o l o g i c a l  and s c i e n t i f i c USA  areas.  i s a n a t u r a l market f o r Canada  made i t Canada's b i g g e s t t r a d i n g p a r t n e r .  and t h i s has The trade bet-  ween the two c o u n t r i e s i s the l a r g e s t between c o u n t r i e s i n the world. has been of v i t a l  any two  Access to the US c a p i t a l  market  importance to the Canadian economy and  p r i v a t e US investment has played and continues to p l a y a  74 s i g n i f i c a n t r o l e i n Canadian  growth.  There are no  two  c o u n t r i e s i n the world between which economic r e l a t i o n s are more massive  and more a l l - e m b r a c i n g than they are  between Canada and USA.  Each country i s the other's c h i e f  customer. The m a j o r i t y of Canada's exports go to USA, m a j o r i t y of imports to Canada come from USA.  and  The two-way  trade between the two c o u n t r i e s has i n c r e a s e d and decreased over the years. Canada accounted they are s t i l l  from  72%.  72.4%  1984, Report  76.3%  not  imports from USA  of t o t a l imports.  In  accounted  increase. f o r 59.8%  In 1954,  into  1984,  However, exports from Canada to  have shown a remarkable exports to USA  In 1954,  the  USA  Canadian  of t o t a l e x p o r t s .  of Canada's t o t a l exports go to USA.  26  In The  of the Macdonald Commission focuses on the impor-  tance of access to the American market f o r Canada's economic growth and p l e a f o r f r e e r trade with US  turns mainly  on t h i s argument. Not only are there c l o s e trade t i e s between Canada and USA,  the major p o r t i o n of investment  comes from USA. USA  i n Canada a l s o  As can be seen from the t a b l e s below,  i s the s i n g l e l a r g e s t i n v e s t o r i n Canada and  f o r over 50% of f o r e i g n investment.  The  second  accounts largest  75 investment  i s by UK -- about 10% -- which i s f a r l e s s than  that of USA. Table I I I TOTAL (CUMULATIVE) INVESTMENT IN CANADA: IN PERCENT: BY COUNTRIES The USA The UK West Germany Japan France Sweden Switzerland Italy,  '-  Over About Less than Less than Less than Less than Less than Less than  TOTAL (CUMULATIVE) INVESTMENT AS OF END OF 1984 Direct C$  Tax Havens  The USA 48. 6 The UK 5. 3 West Germany 1. 7 Japan 603 France 812 Sweden 322 Swi t z e r l a n d 816 Italy 62 The Netherlands 1. 1 Belgium & Luxemburg 481 Norway 322 ( The Bahamas 122 ( Bermuda 662  Approximate T o t a l :  Source:  Investment  billion billion billion million million million million million billion million million million million  60.7 b i l l i o n  Canada, Ottawa.  50% 10% 10% 10% 10% 10% 10% 10%  IN CANADA  Foreign-controlled C$ 64 8.6 2. 7 611 1. 8 385 1. 3 126 1. 8 1. 6 385 168 415  billion billion billion million billion million billion million billion billion million million million  83.8 b i l l i o n  76 Thus, USA  i s a very important f a c t o r 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  p o i n t e d out i n the Report of the Macdonald Commission, the f a c t that USA dominates Canada's trade p i c t u r e i s extremely s i g n i f i c a n t f o r Canada because Canada i s a f a r more tradedependent country than USA.  About 20% of e v e r y t h i n g pro-  duced i n Canada i s s o l d to USA while the comparable f i g u r e i s only 2% or l e s s .  f o r USA  27 Thus, the l a r g e degree of  US investment i n Canada and prominence of trade with has l e d to a f e e l i n g of dependence on US markets.  USA  The  third  28 option p o l i c y the dependence.  enunciated i n 1972 was an e f f o r t  to l e s s e n  What i t meant was that Canada must t r y  to maximize i t s economic b e n e f i t s but at the same time, reduce i t s r e l i a n c e on United States by d i v e r s i f y i n g i t s markets.  The p o l i c y , however,  d i d not have much success  and the r e p o r t of the Macdonald Commission accepts that s i n c e dependence on American markets i s i n e v i t a b l e , attempt should be made to secure f i r m access to them. In the f i e l d of investment, too, the c o s t s of f o r e i g n d i r e c t investment, p a r t i c u l a r l y of investment from one s i n g l e country were brought to widespread p u b l i c  atten-  t i o n by the Royal Commission on Canada's Economic Prospects 29 c h a i r e d by Walter Gordon,  c o n s t i t u t e d i n 1955 and which  t a b l e d i t s r e p o r t i n l a t e 1957.  These were even more f o r c e -  77  f u l l y h i g h l i g h t e d subsequently by the Watkins Wahn Report  and by the Gray Report.  Report,  The cumulative  e f f e c t of these r e p o r t s was the enactment of the F o r e i g n Investment Review Act and of the establishment of the F o r e i g n Investment Review Agency.  A change of outlook has  again taken p l a c e as i s evident from s s i o n Report  the Macdonald Commi-  and the enactment of Investment Canada A c t .  Conclusion Thus, the d i f f e r e n c e i n outlook between  developed  c o u n t r i e s and d e v e l o p i n g c o u n t r i e s stems d i r e c t l y from the s t a t e of t h e i r economic development.  While  development  i n some r e s p e c t s 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 --  f o r the d e v e l o p i n g c o u n t r i e s i t i s e s s e n t i a l l y a q u e s t i o n of r a i s i n g the standard of l i v i n g to acceptable l e v e l s f o r the vast m a j o r i t y of t h e i r p o p u l a t i o n s .  The d e v e l o p i n g  c o u n t r i e s , because of c o l o n i z a t i o n and consequent l a c k of i n d u s t r i a l i z a t i o n and t e c h n i c a l know-how are t r y i n g to make up f o r the l o s t  time.  They are working a g a i n s t tremendous  odds i n t r y i n g to a c c e l e r a t e the process of development l i k e l a c k of r e s o u r c e s , technology,  infra-structure,  skilled  manpower, and p s y c h o l o g i c a l pressures emanating from the c o l o n i a l experience.  F o r e i g n d i r e c t investment  f o r these  c o u n t r i e s i s a means of economic development and has to  78  be r e g u l a t e d to maximize b e n e f i t s from i t . Canada i s a developed country with a high per c a p i t a income, broad i n d u s t r i a l base, technology, but i t i s s t i l l  and s o p h i s t i c a t e d  a r e s o u r c e - e x p o r t i n g country.  F u r t h e r , i t lake not only a l a r g e domestic  market but a l s o  assured access to any other l a r g e market.  Being next to  a powerful economy l i k e USA, Canada's bulk of trade i s n a t u r a l l y with USA. from USA.  The m a j o r i t y of investment,  too, comes  Thus, USA p l a y s a v i t a l r o l e i n Canada's economy  causing a f e e l i n g of dependence and i n s e c 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 r e g u l a t e s f o r e i g n d i r e c t  invest-  ment to prevent the most important s e c t o r s of i t s economy from becoming l a r g e l y f o r e i g n owned and c o n t r o l l e d ; and to maintain i t s own economic and c u l t u r a l  independence.  79  CHAPTER I I I  INDIA AND FOREIGN INVESTMENT  The p o l i c y towards f o r e i g n investment has been shaped  i n I n d i a keeping the f o l l o w i n g f a c t o r s i n mind:  s c a r c i t y of f o r e i g n exchange r e s o u r c e s which n e c e s s i t a tes a j u d i c i o u s use of the a v a i l a b l e exchange i n s e c t o r s c o n s i d e r e d e s s e n t i a l f o r development; the need f o r technology and, t h e r e f o r e , the u t i l i s a t i o n of f o r e i g n exchange r e s o u r c e s f o r t r a n s f e r of technology; the perc e p t i o n that i t i s necessary to have a broad  industrial  base i f the needs of a very l a r g e p o p u l a t i o n are to be met;  and the f i r m c o n v i c t i o n to be s e l f - r e l i a n t s t r e n g -  thened by the c o l o n i a l experience which brought home the n e c e s s i t y of d e v e l o p i n g indigenous know-how, man-power, e n t r e n e u r s h i p and managerial  skilled  skills.  H i s t o r i c a l Background In 1947, when I n d i a became independent, the sears of c o l o n i a l e x p l o i t a t i o n .  she bore  I n d i a had been con-  quered b e f o r e the B r i t i s h came to I n d i a , but those invaders had "made themselves always  remained  part of her l i f e " . " ' "  alien.  The B r i t i s h  Before the B r i t i s h r u l e "she had  never l o s t her independence,  never been enslaved.  That  80  i s to say, she had never been drawn i n t o a p o l i t i c a l and economic  system whose centre  s i d e her s o i l , which was,  of g r a v i t y l a y out-  never been subjected  to a r u l i n g c l a s s  and which remained, permanently a l i e n i n 2  o r i g i n and c h a r a c t e r " .  Having t h i s sense of a l i e n a t i o n ,  the B r i t i s h remained not an i n t e g r a l p a r t of India but c o l o n i a l masters t r y i n g to e x t r a c t what they c o u l d  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 g a i n momentum i n England, heavy d u t i e s were imposed  on Indian  t e x t i l e s to p r o t e c t  m i l l s of Manchester and P a i s l e y but there was  the  no c o r r e s -  ponding duty on E n g l i s h c l o t h exported to I n d i a .  The  r e s u l t was  was  ruined.  that Indian  t e x t i l e i n d u s t r y of Bengal  I f I n d i a had been an independent country, she  would have imposed p r o h i b i t i v e d u t i e s on E n g l i s h c l o t h which, of course, she now  c o u l d not do.  Those  i n d u s t r i e s which were not i n competition i n d u s t r i e s and which were needed to B r i t i s h  with  to supply  raw  allied British materials  i n d u s t r i e s were encouraged e s p e c i a l l y s e r i c u l -  ture and i n d i g o . The East  I n d i a Company had been s t a r t e d with the  o b j e c t of c a r r y i n g Indian s p i c e s from the East demand f o r them.  manufactured goods as w e l l as  to Europe where there was  With the development  a great  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  c l o s e d to  Indian products and Indian markets were opened up f o r B r i t i s h manufactures.  Since East I n d i a Company had a  monopoly i n Indian export b u s i n e s s , t h i s a f f e c t e d other f o r e i g n markets a l s o .  exclusion  D u t i e s were impo-  sed which prevented the flow of goods i n the country itself  too.  T h i s l e d to the c o l l a p s e not o n l y of the  t r a d i t i o n a l l y s t r o n g Indian t e x t i l e i n d u s t r y but other t r a d i t i o n a l  also  industries.  4 Kust  argues that as long as technology was  dent on human and animal power, I n d i a was manufacturer  i n the world because  depen-  the formost  she had developed a  socio-economic o r g a n i s a t i o n and had p e r f e c t e d human skills  and techniques f o r the purpose.  s o c i e t y was  static,  But Indian  and j u s t as China and the Arab  world,  which had not s u f f e r e d s i m i l a r economic r u l e , c o u l d not adapt to changing t e c h n o l o g i c a l i n n o v a t i o n , I n d i a not have been able to adapt e i t h e r .  might  Nehru concedes  that  t h i s c o l l a p s e might have been i n e v i t a b l e as a l l t r a d i t i o n a l techniques became outmoded, but at the same time, p o i n t s out that no attempt was  made to apply new  techni-  5  ques t o c l n d i a .  In f a c t , every attempt was  vent t h i s from happening.  Machinery  made to pre-  c o u l d not be  impor-  ted i n t o I n d i a without heavy d u t i e s , thus c r e a t i n g a l u c r a t i v e market f o r B r i t i s h goods and at the same time  82  l e a d i n g to unemployment and  poverty.  that the duty on machinery was  I t was  removed.  only i n  I t l e d to  1860  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 I n d i a became an " a g r i c u l t u r a l colony raw  material  to i n d u s t r i a l England and  supplying  p r o v i d i n g a market  f o r England's i n d u s t r i a l goods." The  a r t i s a n c l a s s , deprived  of t h e i r  employment were d r i v e n to the land but support them.  traditional  the land c o u l d  not  Poverty grew while i t l e d to an ever-grow-  i n g d i s p r o p o r t i o n between a g r i c u l t u r e and  industry.  a g r i c u l t u r e became i n c r e a s i n g l y the s o l e occupation people, land holdings  became more and  With poverty, the small  land holdings  As of  the  more fragmented. too o f t e n passed i n t o  the hands of unscrupulous money-lenders so that the number of l a n d l e s s l a b o u r e r s I t was that  anything  in India.  The  increased r a p i d l y .  not u n t i l  the end  of nineteenth  century  resembling modern i n d u s t r y began to develop B r i t i s h emphasized e x p o r t - o r i e n t e d  industries  of primary products l i k e i n d i g o , tea, j u t e , manganese, mica and  o t h e r s , but had  t r i e s l i k e i r o n and  no i n t e r e s t i n developing s t e e l , chemicals, and  Indians to a c q u i r e ,  indus-  machine making.  They p r e f e r r e d to export these to I n d i a and i n d u s t r i e s r e q u i r e d c a p i t a l and  basic  since  know-how d i f f i c u l t  they remained under-developed.  these for 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 r a i l w a y s and  c o a l p r o d u c t i o n to run the r a i l w a y s , were developed these products.  to move  I n d i a p a i d a heavy p r i c e f o r 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 c a p a c i t y to i n d u s t r i a l i s e can be seen her attempts  to do so i n s p i t e of a c t i v e  Cotton t e x t i l e i n d u s t r y was developed  discouragement.  by Indians with  ment and t e c h n i c a l a s s i s t a n c e from England. were i n two minds about i t . ted  a g a i n s t i t , the B r i t i s h  While  from  The B r i t i s h  Lancashire m i l l s  t e x t i l e machinery  equip-  agita-  manufacturers  favoured i t s growth because i t served to promote t h e i r exports. was  One of the e a r l y founders of t e x t i l e i n d u s t r y  Jamshedjee T a t a , a name that was l a t e r to become f o r e -  most i n Indian business and i n d u s t r y .  Jamshedjee Tata a l s o  e s t a b l i s h e d a s t e e l m i l l f o r I n d i a , and i t s success was due  to American t e c h n i c a l a s s i s t a n c e .  By World War I I ,  I n d i a , with the e x c e p t i o n of Japan, had the foremost industry i n Asia.  steel  I t was, however, the only example of  heavy i n d u s t r y i n I n d i a .  The c o 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 l e a d e r -  ship.  Indian business l e a d e r s although committee to f r e e  e n t e r p r i s e became wary of f o r e i g n investment. M. Chinpy  S i r Rahimtoola  i n the name of Indian Merchant's A s s o c i a t i o n  went to the extent of demanding r e 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 I n d i a "with the help of our  accumu-  7  lated  [ s t e r l i n g ] balances." Convinced that "powerful i n t e r e s t s " were  abroad f o r the purpose of t h r o t t l i n g f u r t h e r  "operating  industriali-  g  s a t i o n of t h i s country"; cut and  that "there was  a plan -- c l e a r -  thorough -- to prevent the i n d u s t r i a l i s a t i o n  of  9  t h i s country i n the post-war p e r i o d " ; p o l i c y was  opposed to any  c o n t r o l l e d and  managed by  that  "British  r a p i d growth of heavy i n d u s t r i e s Indians."^  be r i d of B r i t i s h c o n t r o l .  They were keen to  At the same time, there  a l s o a r e a l i s a t i o n that I n d i a ' s i n a world of giants.""'""'"  and  The  i n d u s t r i e s were "pygmies  demand was  that  "post-war  i n d u s t r i a l development of I n d i a e s p e c i a l l y i n key t r i e s " would "be both i n r e s p e c t The  the e x c l u s i v e sphere of Indian 12 of ownership and c o n t r o l . "  h o s t i l i t y manifested i t s e l f  t i o n to f o r e i g n companies i n c o r p o r a t e d delegates voiced  at the eighteenth  i n India.  that "the  opposiThe  Annual Meeting of the FICCI  number of f o r e i g n companies i n c o r p o r a t e d out  indus-  enterprise  i n vehement  t h e i r resentment at the r a p i d i n c r e a s e  pointed  was  i n the  i n India  s o - c a l l e d India L i m i t e d  and  companies  are r e a l l y f o r e i g n companies [ t h a t ] have e s t a b l i s h e d themselves i n t h i s country  ...  and  ... monopolised most  of the l a r g e r i n d u s t r i e s which should  otherwise have been  85 i n our hands." concluded:  13  "The  The  A s s o c i a t i o n of Indian I n d u s t r i e s  remedy a g a i n s t such c o r p o r a t i o n s being  set up i n the f u t u r e i s a c l e a r s t r a i g h t s u r g i c a l t i o n , namely to d e l e t e the  opera-  ... a c t i o n s i n the Government 14  of I n d i a Act [ a l l o w i n g t h e i r f o r m a t i o n ] " .  The  Indian  Merchants' Chamber warned that " I n d i a would p r e f e r to go without  i n d u s t r i a l development r a t h e r than allow  the 15  c r e a t i o n of new  East I n d i a Companies i n t h i s  From the above statements we that Indian business was capital. business  The  should not assume  unanimously h o s t i l e to f o r e i g n  degree of h o s t i l i t y v a r i e d a c c o r d i n g to  i n t e r e s t s of v a r i o u s groups.  unanimity  country."  on one  There was,  however,  p o i n t : Indians must be e f f e c t i v e l y  ved i n Indian business  and i n d u s t r y .  the Indian Merchants" Chamber had  As e a r l y as  invol1928,  proposed that the  Western Indian Match Company be r e g i s t e r e d i n I n d i a with t h r e e - q u a r t e r s of i t s c a p i t a l h e l d l o c a l l y and 16 q u a r t e r s of i t s d i r e c t o r s I n d i a n . World War, if  continued  Even d u r i n g the Second  f o r e i g n investment  the b a s i c c o n d i t i o n s were s a t i s f i e d :  be a c o n d i t i o n of the establishment  three-  seemed  acceptable  " I t should  of f o r e i g n companies  i n I n d i a that they should have ... Indian c a p i t a l Indian r e p r e s e n t a t i o n on the board  ...  of management 17 arrangement f o r the t r a i n i n g of t e c h n i c i a n s . "  and [and]  86 In 1945, when an o f f i c i a l l y - s p o n s o r e d Indian industrial  Mission  l e d 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" f o r e i g n and domestic b i g b u s i n e s s .  between  I t was at the same  time r e c o g n i z e d that there would have to be " a l l i a n c e s , 19 agreements and c o n t r a c t s "  between f o r e i g n 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 c o s t much l e s s i f f o r e i g n  and  f i n a n c i a l c o - o p e r a t i o n c o u l d be o b t a i n e d .  technical I t was,  however, r e i t e r a t e d "that under no circumstances would India  allow the c o n t r o l of new i n d u s t r i e s to be e x e r c i s e d  by non-Indians. 1949 P o l i c y Statement on F o r e i g n The  first  major p o l i c y statement on f o r e i g n  ment was made by Prime M i n i s t e r 6, 1949.  D i r e c t Investment i n I n d i a invest-  Jawaharlal Nehru on A p r i l  I t r e f l e c t s on the one hand the government's  acceptance of the need f o r f o r e i g n investmetn f o r industrial  and economic development and on the other, the c o n v i c -  t i o n that e f f e c t i v e c o n t r o l must remain i n Indian hands. The  following conditions  out  i n the Statement:  f o r f o r e i g n investment were s e t  21  there would be no d i s c r i m i n a t i o n  i n the t r e a t -  ment of domestic and f o r e i g n e n t e r p r i s e 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 c y of the country. f o r e i g n e n t e r p r i s e would be p e r m i t t e d to earn p r o f i t s , s u b j e c t only to r e g u l a t i o n s common to all. 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 n a t u r a l l y depend on the f o r e i g n exchange if  situation.  f o r e i g n i n t e r e s t s came to be c o m p u l s o r i l y  a c q u i r e d , compensation w i l l be p a i d on a f a i r and e q u i t a b l e b a s i s and reasonable  facilities  w i l l be provided f o r the remittance of proceeds. the major i n t e r e s t i n the ownership and e f f e c t i v e c o n t r o l of an undertaking should, as a r u l e , be i n Indian hands. Indians should be t r a i n e d and employed i n managerial and t e c h n i c a l posts as q u i c k l y as possible. An i l l u s t r a t i v e  list  of i n d u s t r i e s i n which f o r e i g n  was p a r t i c u l a r l y welcome was a l s o p u b l i s h e d .  capital  88  The  first  four c o n d i t i o n s r e f l e c t a d e s i r e to  encourage f o r e i g n investment by promising n a t i o n a l t r e a t ment; f r e e 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 f o r e i g n exchange problems; and f a i r and  e q u i t a b l e compensation i n case of n a t i o n a l i z a t i o n together with f a c i l i t i e s determination  f o r remittance of proceeds.  The  to f o l l o w an independent economic p o l i c y  i s r e f l e c t e d i n : t h e d e s i r e to keep the ownership and c o n t r o l of f o r e i g n investment i n Indian hands and i n the perceived  need to develop l o c a l entrepreneurship,  skilled  manpower and managerial t a l e n t . The  F i r s t Five-year  Plan f u r t h e r e l a b o r a t e d  p r i n c i p l e s t a t e d by Mr. Nehru along which f o r e i g n  on the enter-  p r i s e was to be encouraged i n I n d i a . In view of the f a c t that the investment of f o r e i g n capital necessitates  the u t i l i z a t i o n of indigenous  resour-  ces and a l s o that the best use of f o r e i g n c a p i t a l i s as a c a t a l y t i c agent f o r drawing f o r t h l a r g e resources f o r domestic investments, i t i s d e s i r a b l e that such i n v e s t ment should The  be c h a n n e l l e d  i n t o f i e l d s of high  broad p r i n c i p l e to be f o l l o w e d  ment should production  be permitted  priority.  i s that f o r e i g n i n v e s t -  i n sphered where new l i n e s of  are to be developed or where s p e c i a l types of  experience and t e c h n i c a l s k i l l  are r e q u i r e d or where the  89  volume of domestic p r o d u c t i o n i s small i n r e l a t i o n  to  demand and  there i s no reasonable  indigenous  i n d u s t r y can expand at a s u f f i c i e n t l y r a p i d  pace.  system of j o i n t e n t e r p r i s e s under which a  The  e x p e c t a t i o n that the  number of f o r e i g n concerns have e s t a b l i s h e d new  indus-  t r i e s i n the country i n c o l l a b o r a t i o n with Indian trialists of  appears to be s u i t a b l e f o r s e c u r i n g employment  equity c a p i t a l .  Agreements f o r such j o i n t  t i o n between f o r e i g n and  participa-  Indian concerns should be  j e c t to approval of Government.  The  sub-  share of n a t i o n a l  c a p i t a l i n j o i n t e n t e r p r i s e s , the f a c i l i t i e s  f o r the  t r a i n i n g of Indians, the d i s c l o s u r e of patented to  indus-  processes  Indian a s s o c i a t e s , e t c . are matters whcih have to be  decided with due  regard to the f a c t s of each p a r t i c u l a r  22 case. T h e r e f o r e , 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 d e s i r e d but only to the extent needed. a t t i t u d e s have been an i n t e g r a l p a r t of p o l i c i e s f o r e i g n investment The  These towards  i n India.  p o l i c y of i n v i t i n g f o r e i g n investment  in selec23  ted  f i e l d s was  once again s t a t e d by Mr.  L.K.  Jha,  the  Indian r e p r e s e n t a t i v e and Chairman of the Group of Eminent Persons,  but,  as he p o i n t e d out, being s e l e c t i v e d i d not  n e c e s s a r i l y mean being r e s t r i c t i v e or b i a s e d a g a i n s t m u l t i -  90 nationals.  I t would be naive  would go to developing earnings and tries.  s i n c e developing they must woo ing  countries  growth were not  I t i s , he f e l t ,  to b e l i e v e that i f their  opportunities,  as good as i n developed coun-  too s i m p l i s t i c  a view to take that  c o u n t r i e s need c a p i t a l and  p r i v a t e investment.  f o r e i g n exchange,  I n f a c t , i f the  c o u n t r i e s make the r i g h t choices  consideration  multinationals  develop-  a f t e r taking into  a l l the a l t e r n a t i v e s , the r e l a t i o n s h i p they  forge with the m u l t i n a t i o n a l s w i l l be a more s t a b l e one.  a more healthy  An a n a l y s i s of p e r c e i v e d  costs  and and  b e n e f i t s of f o r e i g n investment i n I n d i a would v a l i d a t e a selective  approach.  Costs and  B e n e f i t s of F o r e i g n  in  Investment as  Perceived  India I t i s g e n e r a l l y accepted that f o r e i g n d i r e c t i n v e s t -  ment b r i n g s Its  some obvious advantages to a developing  importance has been recognized  by  the United  Nations.  In the A c t i o n Programme of the General Assembly f o r Second United  Nation's Development Decade i t was  "Developing c o u n t r i e s w i l l adopt a p p r o p r i a t e inviting,  s t i m u l a t i n g and  making use  country.  the  said  measures f o r  of f o r e i g n p r i v a t e  c a p i t a l , - t a k i n g i n t o account the areas i n which such c a p i t a l should  be  sought and b e a r i n g  i n mind the importance f o r  i t s a t t r a c t i o n of c o n d i t i o n s conducive to s u s t a i n e d  deve-  91 lopment.  Developed c o u n t r i e s , on t h e i r p a r t , w i l l  consider  adopting f u r t h e r measures to encourage the flow of p r i v a t e 24  c a p i t a l to developing  countries."  The  multinational  entrepreneurship  are the c h i e f means of f o r e i g n d i r e c t  investment.  together  But  with these b e n e f i t s they b r i n g  with them c e r t a i n c o s t s . Many of the c o s t s to developing d i r e c t investment p o i n t e d  c o u n t r i e s of f o r e i g n  out by w r i t e r s l i k e Simon Kuznets  26  and  Barbara Ward  and  voiced  i n the Report of the Group  27  of Eminent Persons  have been confirmed i n the  Indian  28  experience as can be seen from Kidron's  detailed analysis  of the c o s t s of f o r e i g n investment to I n d i a . Technology I t i s argued i n support of f o r e i g n investment i t b r i n g s with i t much needed managerial and skills  at l i t t l e  or no e x t r a c o s t .  to t h i s i s that research conducted abroad and fees and  other  technical  However, the other  Through t h e i r production  The  and  l o c a l i n v e s t o r i s assigned  s p e c i a l i z e d range of f u n c t i o n s does not  take  place.  royalties,  Even then they are not a v a i l a b l e  p o l i c i e s i n v e s t i n g firms t r y to keep a c o n t i n u i n g of the know-how.  side  development are i n v a r i a b l y  have to be p a i d f o r through  payments.  inttheir entirety.  and  that  and  staffing control a narrowly  so a d i f f u s i o n of  skills  92  An under-developed  country has to use the most  p r o d u c t i v e techniques a v a i l a b l e i n order to r a i s e i t s c a p a c i t y to save and i n v e s t . ted  Technology  has to be impor-  f o r the p r o d u c t i o n of c e r t a i n items, but not a l l  techniques are e q u a l l y s u i t a b l e . technology without developed  By wholly importing a  adapting i t to l o c a l needs, an under-  country can saddle i t s e l f with equipment which  r e q u i r e s too s o p h i s t i c a t e d a network of s e r v i c i n g and ancillary  industries. 29  As has been p o i n t e d out by Eddison, foreign-made equipment was imported planned  often  i n I n d i a which was  and c o n s t r u c t e d f o r use under t o t a l l y  different  c o n d i t i o n s , f o r p r o c e s s i n g d i f f e r e n t kinds of raw materi a l s and with d i f f e r e n t grades  of chemicals.  More h i g h l y  t r a i n e d workers than those found i n I n d i a were supposed tq  handle i t .  Hence, the equipment o f t e n 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 f o r which i t was designed. many of these imported mechanical  conveyors  u n i t s had automatic  designed  be e c o n o m i c a l l y j u s t i f i e d  Further,  devices and  i n t o them which c o u l d o n l y  i n c o u n t r i e s where labour c o s t s  were much higher than i n I n d i a . Moreover, i n many cases, not only was the equipment u n s u i t a b l e but i t a l s o c o s t  1 5 - 2 0 %  more than i n i t s country  93  of o r i g i n because of f r e i g h t , h a n d l i n g and duty charges. The s u p p l i e r s ,  too, f o l l o w e d m o n o p o l i s t i c p r i c i n g  poli-  c i e s t a k i n g advantage of the l i m i t e d options a v a i l a b l e to the country.  There was no domestic machine p r o d u c t i o n  and the country was t r y i n g to get the best d e a l p o s s i b l e . There were machines  i n the paper i n d u s t r y f o r example from  B r i t a i n , Germany, Belgium, Sweden, America, Canada and Japan with no s a l e s and s e r v i c e o r g a n i z a t i o n i n the country. In many cases, i m p o r t a t i o n of equipment the development  of a n c i l l a r y i n d u s t r i e s .  automobiles, f o r example,  inhibited  In the case of  as most of automobile engines  were assembled or manufactured with f o r e i g n  collaboration,  p a r t s l i k e p i s t o n s , p i s t o n r i n g s , and others had to conform to the d e s i g n and s p e c i f i c a t i o n s of the overseas manufact u r e r s of engines and had to be approved by them. T a r i f f Commission  The  recommended that p i s t o n s of the r e q u i r e d  s p e c i f i c a t i o n s should be produced i n I n d i a and o b t a i n e d by i n d i v i d u a l automobile f i r m s from Indian sources. But t h i s d i d not make much progress because the i n d i v i d u a l f i r m s had to f i r s t get t h e i r products approved from foreign collaborators. frequent changes  When f o r e i g n a s s o c i a t e s  their  introduced  i n s p e c i f i c a t i o n s the Indian manufacturers  had to conform to them at c o n s i d e r a b l e cost to themselves and l i t t l e b e n e f i t o the consumers.  Besides, some manu-  f a c t u r e r s p r e f e r r e d imported m a t e r i a l s even when these  94 were i n d i g e n o u s l y a v a i l a b l e at reasonable p r i c e s .  Thus,  the development of a n c i l l a r y i n d u s t r i e s was slow. Of course, f a c t o r s l i k e the g e n e r a l l a c k of i n d i ^ genous equipment, s c a r c i t y of managers, l a c k of s k i l l e d labour and others l e d to l a r g e imports from abroad but the f a c t a l s o i s that the f o r e i g n i n v e s t o r normally has a d i r e c t i n t e r e s t i n s u p p l y i n g equipment and know-how; i s almost always i n charge of the t e c h n i c a l o p e r a t i o n s of the j o i n t venture; i s not very keen to import s k i l l s or development i n f o r m a t i o n , and may not want to i n t r o d u c e equipment that can be e a s i l y c o p i e d .  Hence, i n s t e a d of  making e f f o r t s towards import s u b s t i t u t i o n , he over-imports. D u p l i c a t i o n of Technology The d e s i r e to import technology at a f a s t pace produced  two r e s u l t s : the i n d u s t r y became i m p o r t - o r i e n t e d  as opposed to development of indigenous know-how; and the s i t u a t i o n became aggravated by the f o r e i g n  collaborator's  r e l u c t a n c e to g i v e the complete  International  know-how.  g i a n t s n a t u r a l l y t r i e d to take advantage of t h e i r l o g i c a l monopoly.  techno-  L o c a l p r i v a t e c a p i t a l was discouraged  from d e v e l o p i n g r e s e a r c h i n i n d u s t r y because the government seemed so keen to import  technology.  95  The  emphasis on  l o c a l i n i t i a t i v e can f i r m had  imported technology  be  seen by  inhibiting  an example.  An  Indian  completed arrangements to manufacture b a l l 30  bearings and and  roller-bearings.  Machinery had  been c o p i e d  t r i a l s completed when news came of c o l l a b o r a t i o n  another f i r m with a w e l l difficult  i t would be  known brand, the  known f o r e i g n  to compete with an  of i t s trade mark.  Thus, the  to purchase s u p e r f l o u s r i g h t s and duplicated  within  c o m p e t i t i v e and  Knowing  the  acquire  Indian f i r m was  through  t e c h n i c a l know-how by  forced  technique  was  additional,  c o s t l y purchases abroad r a t h e r  d i s s e m i n a t i o n of the  techni-  f i r m only to  a l s o the  Indian i n d u s t r y  how  internationally  f i r m entered i n t o an agreement f o r  c a l c o l l a b o r a t i o n with another f o r e i g n the use  firm.  by  the  than through original  importer. E f f o r t s to Augment C a p i t a l In i t s a n x i e t y to augment' i t s f o r e i g n  exchange  r e s o u r c e s , investment's were allowed i n l o w - p r i o r i t y on promise of export of a p r o p o r t i o n bring  i n a quantity  spheres  of the product or  of f o r e i g n exchange.  I t l e d to  to  insis-  tence on c o l l a b o r a t i o n with f o r e i g n c a p i t a l as a normal precondition  to o b t a i n i n g  sions  t r a n s f e r of know-how were t o l e r a t e d .  i n the  were set up by  a licence.  Restrictive  proviPlants  the government which were very c a p i t a l -  96 i n t e n s i v e thus imposing plants.  a s i m i l a r s t r u c t u r e on  private  F u r t h e r , f o r e i g n experts were i n v i t e d at p r o h i -  b i t i v e fees when e q u a l l y s u i t a b l e or even more s u i t a b l e l o c a l ones were a v a i l a b l e .  In many cases, f o r e i g n  were a v a i l a b l e only i f the f o r e i g n design was and f o r e i g n consultancy was  also  credits taken  accepted.  Monetary Costs Various s t u d i e s of f o r e i g n investment  i n post-  independence I n d i a have p o i n t e d out that f o r e i g n investment  i s expensive  private  f o r a country l i k e I n d i a .  Accord-  i n g to a few s t u d i e s of the Reserve Bank, the American f i r m s were e a r n i n g an average 12.8%  i n 1955  both years. two  of 13.5%  and  a f t e r tax compared with 10-12% at home i n B r i t i s h f i r m s earned  years compared with 8-9%  between 6 and  of net worth i n 1953  11.9%  at home-.  and  9.5%  i n the  Thus, p r o f i t s were  35% higher i n I n d i a than at home f o r these  31 fxrms.  To t h i s has  l i c e n c e s and such  to be added high c o s t of know-how,  like.  S t u d i e s made by US Departmetn of Commerce, Federat i o n of Indian Chamber of Commerce and Industry and  Indo-  American Chamber of Commerce show that f o r e i g n  investment  i n I n d i a i s as p r o f i t a b l e as f o r e i g n investment  i n indus-  t r i a l l y developed  nations.  A FICCI study d e a l i n g with  t w e n t y - f i v e l a r g e p u b l i c l i m i t e d Indo-UK ventures, with  97 a minimum c a p i t a l investment of Rs.5 that between 1975  and 1980,  m i l l i o n revealed  the t o t a l a s s e t s of these  companies rose by an average r a t e of 14.2%, the net s a l e s i n c r e a s e d by 14%,  p r o f i t s a f t e r tax were 20.4%, net  p r o f i t s as percentage of net worth i n c r e a s e d from to 17.1%  14.1%  and d i v i d e n d s as percentage of share c a p i t a l 32  i n c r e a s e d from 12.3%  to 14.9%.  A study of Indo-American  Chamber of Commerce of  34 Indo-US ventures f o r the p e r i o d of 1973 a compound annual growth r a t e of 18%; tax 20.3%; d i v i d e n d s were 14.8%  to 1981  net p r o f i t s  showed after  and r e t a i n e d earnings were  22.8%. Another  study conducted by US Department of Commerce shows  that US companies i n I n d i a have earned b e t t e r r e t u r n s than 34 those o p e r a t i n g i n some advanced  c o u n t r i e s l i k e Canada.  The high p r o f i t s are because  of the p r o t e c t i o n g i v e n  by the government to i t s i n d u s t r i e s whethercforeign or d o m e s t i c a l l y owned.  The expensive nature of f o r e i g n e q u i t y 35  investment has been demonstrated  thus by Kust.  i n g to h i s f i g u r e s , i t i s p o s s i b l e to get a 400% on equity, investment and high  i n ten y e a r s .  Accordreturn  The r a p i d r a t e of growth  r a t e of d i v i d e n d s do not c r e a t e a problem  as domestic e q u i t y investment i s concerned.  But  as f a r  foreign  98  e q u i t y investment does pose a problem.  I n d i a , as a  p o l i c y , allows f r e e remittance of p r o f i t s and of c a p i t a l gains to f o r e i g n e n t e r p r i s e .  repatriation  Therefore, f o r  every d o l l a r i n v e s t e d , the r e t u r n i n ten years can be five dollars.  On the other hand, a one-year  upto  loan at 6%  i n t e r e s t would r e q u i r e a f o r e i g n exchange repaymetn of f o r every $1.  I t i s argued  that earnings on f o r e i g n  are r e i n v e s t e d and thus b e n e f i t  the economy.  i n rupees generate the p o t e n t i a l 5:1 gation.  But  profits obli-  the f o r e i g n  exchange repayment burden would be $2 f o r every $1 i n ten y e a r s .  capital  f o r e i g n exchange  Even i f the i n t e r e s t r a t e i s 10%,  $1.60  Such a burden which i s i n c u r r e d by  invested foreign  e q u i t y investment i s o n l y j u s t i f i e d when the investment b r i n g s with i t c a p i t a l goods and technology needed by the country. Unemployment F o r e i g n investments are c a p i t a l - i n t e n s i v e and has a dampening e f f e c t on the c r e a t i o n of new they may  be more e f f i c i e n t  jobs.  tries,  But  and so t h e i r p a t t e r n i s f o l l o w e d  by indigenous f i r m s thereby i n c r e a s i n g the o v e r a l l of j o b s .  this  loss  When such investments are i n consumer goods indus-  two c o n t r a r y processes are set i n motion.  producers are weakened because  Traditonal  of mass p r o d u c t i o n of cheap  goods so g r a d u a l l y they become unemployed.  On the other  hand, t e c h n o l o g i c a l l y - i n t e n s i v e investments i n modern indus-  99 trial  s e c t o r push up s k i l l e d wage r a t e s and so b u i l d up  f u r t h e r pressure i n favour of c a p i t a l - i n t e n s i v e , d i s p l a c i n g investmetn.  labour-  Thus, a small number of people  become high wage earners while at the same time, ment i n c r e a s e s i n the towns.  unemploy-  The d i s p l a c e d r u r a l  labour  which had b e f o r e been engaged i n the p r o d u c t i o n of t r a d i t i o n a l goods a l s o migrates  to towns, being d i s p l a c e d from  t h e i r t r a d i t i o n a l employment  and adds to the unemployed  work f o r c e which makes the s i t u a t i o n e x p l o s i v e . Under and O v e r - I n v o i c i n g The value of many investments  was i n f l a t e d by mark-  i n g up the p r i c e s of goods or m a t e r i a l s or s e r v i c e s s u p p l i e d as investment reasons:  i n kind.  T h i s was done mainly  f o r two  a f o r e i g n c o l l a b o r a t o r might want to  the "necessary"  import  content  exaggerate  of the p r o j e c t so that he  c o u l d 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 r e v e a l h i s 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 h i s other payments.  to leakage  of f o r e i g n exchange which the country cannot  afford.  T h i s leads  T h i s was the s u b j e c t of a study on the Leakage 36  of F o r e i g n Exchange through  Invoice Manipulation  which  was c o n s i d e r e d b e f o r e the enactment of F o r e i g n Exchange R e g u l a t i o n Act, 1973.  100 F o r e i g n Exchange R e g u l a t i o n ACt, 1973  (FERA, 19 73)  Exchange c o n t r o l was f i r s t s e t up i n I n d i a i n 1939 as the  a war measure to conserve and d i r e c t to the best uses l i m i t e d supply of f o r e i g n exchange a v a i l a b l e .  The  exchange c o n t r o l was made e f f e c t i v e through a s e r i e s of r u l e s under the Defence of I n d i a Act, 1939.  These r u l e s  e x p i r e d on 30th of September, 1946, but were r e t a i n e d i n f o r c e f o r another s i x months.  However,  s i n c e i t was  felt  that the shortage of f o r e i g n exchange would continue, i t became necessary to continue the system of exchange c o n t r o l . Thus, the F o r e i g n Exchange R e g u l a t i o n Act was enacted on March 25, 1947, to continue the exchange c o n t r o l s . The F o r e i g n Exchange R e g u l a t i o n , 1947, had to be amended from time to time to meet the changing needs. was f i n a l l y f e l t  It  necessary to have c l e a r p r o v i s i o n s to regu-  l a t e the e n t r y of f o r e i g n c a p i t a l which would i n c o r p o r a t e Government's p o l i c y with regard to f o r e i g n  investment.  As mentioned b e f o r e , at the time of e n a c t i n g , FERA, 1973, the  Government  took i n t o account the r e p o r t of the study  team which s t u d i e d the q u e s t i o n of the Leakage of F o r e i g n Exchange through Invoice M a n i p u l a t i o n . it  I t a l s o had before  the 47th Report of the Law Commission on the T r i a l and 37  Punishment of S o c i a l and Economic Offences.  101 The problems as s t a t e d by the study team was  the  l o s s of f o r e i g n exchange, which the country c o u l d i l l a f f o r d , through i n v o i c e manipulation, smuggling, and nest-eggs of  abroad.  The  travel  study team estimated that  f o r e i g n exchange per year was  approximately 240  loss  million  38 dollars.  Most members of Parliament f e l t 39  a gross under-estimate.  One  that t h i s  was  of the main o b j e c t s of the  F o r e i g n Exchange R e g u l a t i o n Act, 1973  was  "to r e g u l a t e the  e n t r y of f o r e i g n c a p i t a l i n the form of branches cerns with s u b s t a n t i a l n o n - r e s i d e n t i n t e r e s t  and  con40  i n them..."  T h i s was done mainly by s e c t i o n 29 of the Act. S a l i e n t Features of S e c t i o n 29 According to s e c t i o n 2 9 ( 1 ) ( i i i ) ,  ( i ) any  person  r e s i d e n t o u t s i d e I n d i a whether a c i t i z e n of I n d i a or not, or  ( i i ) any person r e s i d e n t i n I n d i a but not a c i t i z e n of  I n d i a , or ( i i i ) a company other than a banking company not i n c o r p o r a t e d i n I n d i a ; or ( i v ) a company i n which the nonr e s i d e n t i n t e r e s t i s more than 40% or (v) any branch of such a company; cannot, except with the g e n e r a l or s p e c i a l permission of the Reserve Bank c a r r y on i n I n d i a , or establish for  i n I n d i a a branch, o f f i c e or other p l a c e of b u s i n e s s c a r r y i n g on any a c t i v i t y of a : t r a d i n g , commercial  or  i n d u s t r i a l nature other than an a c t i v i t y f o r the c a r r y i n g  102 on of which permission  of the Reserve Bank has been 42  obtained  under S e c t i o n 28.  The  above-mentioned category  of "persons" cannot  43 under S e c t i o n 29(1)(b) any undertaking  acquire  the whole or any p a r t of  i n I n d i a of any person or company c a r r y i n g  on any trade, commerce or purchase the shares i n I n d i a of any  such company except with  the permission  of the Reserve  Bank. Those."persons" who had a l r e a d y e s t a b l i s h e d " b u s i nesses" of the kind mentioned i n S e c t i o n 29(1) were under 44 S e c t i o n 29(2)  r e q u i r e d to apply  f o r permission  from the  Reserve Bank to c a r r y on the a c t i v i t y w i t h i n s i x months or such f u r t h e r p e r i o d of time as may be allowed  by the  Reserve Bank w i t h i n s i x months of the commencement  of the  Act. The  Reserve Bank can a f t e r making such e n q u i r i e s  as i t may deem f i t , it  either reject  the a p p l i c a t i o n or allow  s u b j e c t to such c o n d i t i o n s , i f any, as i t may think f i t  to impose. However, no a p p l i c a t i o n can be r e j e c t e d without g i v i n g the-concerned p a r t i e s a reasonable 45 making a r e p r e s e n t a t i o n  i n the matter.  opportunity f o r  103 Where an a p p l i c a t i o n i s r e j e c t e d by the Reserve Bank, the concerned  p a r t y i s to d i s c o n t i n u e the a c t i v i t y  w i t h i n n i n e t y days or such other l a t e r date as may be s p e c i f i e d by the Reserve Bank from the communication conveying  the date of r e c e i p t of  the r e j e c t i o n . ^ 4  Where no a p p l i c a t i o n had been made f o r p e r m i s s i o n to continue the " a c t i v i t y " w i t h i n s i x months of commencement of the Act, the Reserve Bank may d i r e c t the d i s c o n t i n u a t i o n of c l o s u r e of the a c t i v i t y w i t h i n a p e r i o d s p e c i 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 c o u l d be made without g i v i n g the concerned  party  47 a reasonable o p p o r t u n i t y to make a r e p r e s e n t a t i o n . The Reserve Bank may exempt some "persons"  from the  n e c e s s i t y of seeking p e r m i s s i o n to c a r r y on an " a c t i v i t y " or to commence i t f o r which p e r m i s s i o n or l i c e n c e has been granted by the C e n t r a l Government before the commencement of the Act, p r o v i d e d the a c t i v i t y i s not " s o l e l y of a t r a d ..48  ing  nature." Where any such  "person"  r e f e r r e d to i n S e c t i o n 29(1)  h e l d any shares of any undertaking i n I n d i a c a r r y i n g on any t r a d e , commerce or i n d u s t r y then w i t h i n s i x months from the commencement  of t h i s Act or any f u r t h e r p e r i o d of time  s p e c i f i e d by the Reserve Bank, permission has to be obtained from  the Reserve Bank b e f o r e these shares can continue to  be h e l d .  4 9  104  The Reserve Bank can on a p p l i c a t i o n and a f t e r maki n g such  i n q u i r i e s as i t may deem f i t ,  give p e r m i s s i o n to  hold the shares s u b j e c t to such c o n d i t i o n s i f any as i t may think f i t to impose.  Or the Reserve Bank may r e j e c t  the a p l i c a t i o n but not without a reasonable  g i v i n g the concerned  parties  o p p o r t u n i t y to make a r e p r e s e n t a t i o n i n the  50  matter. Where no a p p l i c a t i o n has been made seeking  permission  to h o l d the shares, the Reserve Bank may d i r e c t the "person" to s e l l or procure it  necessary  the s a l e of those shares i f i t c o n s i d e r s  f o r the purpose of c o n s e r v i n g f o r e i g n exchange.  But no such d i r e c t i o n can be g i v e n to the "person"  unless  a n o t i c e of such a d i r e c t i o n has been g i v e n to the person f o r a p e r i o d at l e a s t n i n e t y days.^"*" Thus, the Reserve Bank has been g i v e n very wide powers f o r r e g u l a t i n g the m u l t i n a t i o n a l s . to the e x e c u t i v e without danger.  But such wide powers  g u i d e l i n e s can be fraught with  Hence, S e c t i o n 29 cannot be read without  rate guidelines f o r i t s  the elabo-  implementation..  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 of FERA, 1973 Scope:  The G u i d e l i n e s apply to Indian companies  having more than 4 0 %  f o r e i g n h o l d i n g s and branches of f o r e i g n  companies o p e r a t i n g i n I n d i a and seeking approval f o r c a r r y -  105 i n g on any a c t i v i t y of a t r a d i n g , commercial or industrial  nature  or 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 .  l i n e s do not apply to investments Indian o r i g i n provided  The Guide-  made by non-resident of  that they do not r e p a t r i a t e e i t h e r 52  c a p i t a l or p r o f i t s or d i v i d e n d s . Companies with more than F o r t y Percent  Shareholding:  In case of Indian companies which have more than 40% f o r e i g n s h a r e h o l d i n g and branches of f o r e i g n companeis which are engaged-in p r o d u c t i o n of items  s p e c i f i e d i n Appendix I of  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 of February i n a predominantly  1973 or are engaged  e x p o r t - o r i e n t e d i n d u s t r y , i . e . at l e a s t  60% of t h e i r t o t a l p r o d u c t i o n i s f o r export, f o l l o w i n g courses  one of the  of a c t i o n i s to be f o l l o w e d with  to them. They can be allowed  to continue provided  regard they  i n c r e a s e the Indian p a r t i c i p a t i o n to not l e s s than 26% of the e q u i t y w i t h i n s p e c i f i e d time. panies were r e q u i r e d to convert  Branches of f o r e i g n com-  themselves i n t o Indian com-  panies with at l e a s t 26% Indian e q u i t y p a r t i c i p a t i o n w i t h i n a s p e c i f i e d p e r i o d of time.  Such companies are to be s u b j e c t  to d i l u t i o n formula when they came up f o r examination. Those Indian companies which had more than 40% f o r e i g n s h a r e h o l d i n g but which had been granted a f t e r February  industrial  1970 f o r manufacture of items  licence  specified in 54  Appendix I of the 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 , 1973  , or  at l e a s t 60% of whose p r o d u c t i o n was f o r exports, were exempt  106  from s e c t i o n 29 s u b j e c t to the c o n d i t i o n that w i t h i n a s p e c i f i e d p e r i o d , the company would have Indian  parti-  c i p a t i o n of at l e a s t 26% of the e q u i t y of the company. The extent  of f o r e i g n h o l d i n g i n case of Indian  companies with more than 40% f o r e i g n s h a r e h o l d i n g branches of f o r e i g n companies with v a l i d engaged i n the p r o d u c t i o n  and  industrial licence,  of an item not s p e c i f i e d i n  Appendix I of the 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 , 1 9 7 3 , but engaged i n manufacturing a c t i v i t i e s r e q u i r i n g s o p h i s t i c a t e d technology are to be c o n s i d e r e d  i n d i v i d u a l l y s u b j e c t to  the c o n d i t i o n that w i t h i n a s p e c i f i e d p e r i o d the Indian p a r t i c i p a t i o n i s brought up to at l e a s t 26% of the e q u i t y of the company. The branches of f o r e i g n companies are r e q u i r e d to convert  themselves i n t o Indian companies and b r i n g the  Indian p a r t i c i p a t i o n to at l e a s t 26% of the e q u i t y of the company w i t h i n a s p e c i f i e d In determining cated, course,  holding  period.  whether the technology i s s o p h i s t i -  the Department of Science  and Technology i s , of  be c o n s u l t e d but a l s o c o n s i d e r a t i o n 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 d i s c o n t i n u a t i o n of the manufacture of that  107 product  would have an adverse Indian companies having  impact on the company. more than 40% f o r e i g n share-  h o l d i n g and branches of f o r e i g n companies engaged i n ofher manufacturing  a c t i v i t i e s would be r e q u i r e d to b r i n g down  the f o r e i g n s h a r e h o l d i n g to the l e v e l of 40% or l e s s w i t h i n a specified period.  Branches of f o r e i g n companies would  be r e q u i r e d to convert  themselves i n t o Indian companies  with f o r e i g n s h a r e h o l d i n g not exceeding period.  40% w i t h i n a s p e c i f i e d  A l t e r n a t i v e l y , they c o u l d change t h e i r  character  w i t h i n a s p e c i f i e d p e r i o d and s h i f t to manufacturing  acti-  v i t i e s s p e c i f i e d i n Appendix I of the 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 , 1973 or become predominantly  e x p o r t - o r i e n t e d , that  is,  production.  export  Trading  at l e a s t 60% of the t o t a l  Activities"^ Indian companies with more than 40% f o r e i g n share-  h o l d i n g or branches of f o r e i g n companies engaged predomin a n t l y i n i n t e r n a l t r a d i n g and commercial a c t i v i t i e s , the course  of a c t i o n would be as f o l l o w s : No f r e s h f o r e i g n e q u i t y  p a r t i c i p a t i o n would be p e r m i t t e d .  The Indian companies  would have to b r i n g down t h e i r f o r e i g n s h a r e h o l d i n g to 40% within a specified period.  The branches of f o r e i g n compa-  n i e s would be r e q u i r e d to convert  themselves i n t o  Indian  companies with not more than 40% f o r e i g n s h a r e h o l d i n g w i t h i n a specified period.  In cases where the company had  108  developed e x p e r t i s e , s k i l l s or f a c i l i t i e s  like a distribu-  t i o n network which were not a v a i l a b l e r e a d i l y i n d i g e n o u s l y and were c o n t r i b u t i n g s i g n i f i c a n t l y to e x p o r t s , f o r e i g n s h a r e h o l d i n g of more than 40% but not exceeding be allowed depending  74% c o u l d  on the merits of each case.  A l t e r n a t i v e l y , w i t h i n a s p e c i f i e d p e r i o d , they c o u l d change t h e i r c h a r a c t e r from predominantly t r a d i n g  activi-  t i e s to predominantly manufacturing a c t i v i t i e s i n areas s p e c i f i e d i n Appendix I of I n d u s t r i a l L i c e n c i n g P o l i c y of 1973,  or engage themselves  i n predominantly e x p o r t - o r i e n t e d  i n d u s t r i e s e x p o r t i n g at l e a s t 60% of t h e i r p r o d u c t i o n . In case none of these o p t i o n s were a c c e p t a b l e , the company would be allowed to wind up w i t h i n a reasonable time. Where there were manufacturing Indian companies with more than 40% f o r e i g n s h a r e h o l d i n g or branches  of f o r e i g n  companies engaged i n t r a d i n g a c t i v i t i e s i n r e s p e c t of products not manufactured  by them, they would not be denied p e r m i s s i o n  to continue the i n t e r n a l trade of those products, p r o v i d e d the a r t i c l e s so traded were f u n c t i o n a l l y r e l a t e d 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 s m a l l p o r t i o n of the o v e r a l l a c t i v i t y .  The  companies c o u l d not use t h e i r trade marks or brand names  109  i n r e s p e c t of products  i n t e r n a l l y traded by them but  not  manufactured by them. 56 Other  Activities Companies engaged i n c o n s t r u c t i o n a c t i v i t i e s  and  consultancy work, Indian companies have to b r i n g down f o r e i g n s h a r e h o l d i n g to not more than 40%.  Branches of  f o r e i g n companies have to convert themselves to Indian companies with not more than 40% f o r e i g n s h a r e h o l d i n g .  In  e x c e p t i o n a l cases, the higher f o r e i g n s h a r e h o l d i n g not exceeding  74% c o u l d be allowed.  Tea p l a n t a t i o n s would be  t r e a t e d at par with manufacturing  industries specified i n  Appendix I of 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 , 1973, to the c o n d i t i o n that Indian p a r t i c i p a t i o n was than 26% of the e q u i t y of the company.  subject  not  less  Branches of f o r e i g n  companies would have to convert themselves to Indian companies with at l e a s t 26% Indian e q u i t y p a r t i c i p a t i o n . 57 The E x p l a n a t o r y Notes  clarify  that i n g i v i n g  approvals, aspects such as r e s e a r c h and development ted by the Indian company, s t i p u l a t i o n s which t r a n s f e r of technology  fresh  initia-  restrict  from the f o r e i g n c o l l a b o r a t o r to  the Indian company, r e s t r i c t i o n s on s u b - l i c e n s i n g of logy and s t i p u l a t i o n s f o r the a c q u i s i t i o n of raw and components from the f o r e i g n c o l l a b o r a t o r s and r e g u l a t i o n s i n r e s p e c t of patent law are to be  techno-  materials existing  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 c o n s i d e r e d while g i v i n g i t permiss i o n to continue to do i t s b u s i n e s s . their  a c t i v i t i e s would s t i l l  ces f o r the new  activities.  Companies  changing  need to get i n d u s t r i a l Companies with 100%  licen-  export-  o r i e n t e d u n i t s c o u l d be allowed more than 74% f o r e i g n e q u i t y depending  on the merits of each  case.  Thus, the import of s e c t i o n 29 read together with the g u i d e l i n e s i s that the normal c e i l i n g ownership percentage -- upto  was  40% of the t o t a l  of e q u i t y ownership  74% o f even 100%  for foreign equity  equity c a p i t a l .  A higher  by the f o r e i g n e r  investor  -- can be allowed i f the venture  i s i n a s e c t o r which i s c o n s i d e r e d extremely important or which i s l a r g e l y or wholly e x p o r t - o r i e n t e d . the country has to f i n d  Therefore,  a venture very e s s e n t i a l f o r i t s  development or the venture must pay f o r i t s e l f before f o r e i g n e r ownership  i s allowed.  has to be c o n t r i b u t e d by way  The  through  foreign  of cash without being  exports  share linked  to imports or machinery and equipment or payment of knowhow,  trade-marks  or brand names.  O i l E x p o r t i n g Developing C o u n t r i e s Realities  of l i m i t a t i o n  of f o r e i n g exchange resources  have l e d the government to evolve methods of augmenting  I l l  these r e s o u r c e s .  T h i s has been done by encouraging  invest-  ments by O i l Developing C o u n t r i e s , by non-resident Indians and by persons of Indian, and by a c t i v e l y promoting F o r e i g n investment  i n I n d i a has been seen  as a v e h i c l e f o r t r a n s f e r of technology. g e n e r a l l y speaking, f o r e i g n investment t r a n s f e r of technology was  exports.  mainly  So upto  1980,  not accompanied by  not allowed but the need f o r  c a p i t a l and f o r e i g n exchange l e d to the r e l a x a t i o n of t h i s p o l i c y with r e s p e c t to O i l E x p o r t i n g Developing C o u n t r i e s (OEDC).  A press note i s s u e d on October  28, 1980  by  Ministry  58 of Finance  allowed OED  e q u i t y of new  ventures without being l i n k e d to t r a n s f e r  of technology.  c o u n t r i e s to i n v e s t upto 40% i n  That i s because these c o u n t r i e s have l a r g e  f i n a n c i a l resources but may needed f o r I n d i a . lizers,  not have the type of technology  Investment  i n p r i o r i t y areas l i k e  cement, p e t r o c h e m i c a l s , paper  ferti-  and pulp and others  i n v o l v e l a r g e f i n a n c i a l o u t l a y s but t h e i r development leads to g r e a t e r s e l f - s u f f i c i e n c y and even encourages Within the framework of investment, can i n v e s t upto 40% i n the e q u i t y of new  exports.  the OED c o u n t r i e s  or e s t a b l i s h e d  companies, but these companies should e i t h e r be exporto r i e n t e d or should undertake  manufacturing  activities  under Appendix I of I n d u s t r i a l P o l i c y of 1973.  covered  Investment  of t h i s nature i s a l s o allowed i n h o t e l s and h o s p i t a l s  on  112 the c o n d i t i o n that the hospital.: m u s t h a v e adequate p r o v i s i o n s f o r o u t - p a t i e n t and emergency medical s e r v i c e to the g e n e r a l p u b l i c and should provide f o r a minimum  percentage  of occupancy by Indians. Non-Resident Indians and Persons Another  of Indian O r i g i n  e x c e p t i o n to the p o l i c y of f o r e i g n  invest-  ment l i n k e d with t r a n s f e r 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 s t a y abroad f o r employment or b u s i n e s s , 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 a c q u i r e d f o r e i g n  citizen-  s h i p . Very l i b e r a l f a c i l i t i e s have been g i v e n to them to i n v e s t i n i n d u s t r y i n I n d i a with the p r i o r approval of the Reserve  Bank of I n d i a . 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 i n v e s t i n any new or e x i s t i n g company i n which the nonr e s i d e n t i n t e r e s t i s not more than 40% with f u l l t i o n b e n e f i t s . The investment or otherwise.  repatria-  can be through p u b l i c i s s u e s  In case the investment  i s i n a private  limited  company or i n a p u b l i c l i m i t e d company where c a p i t a l i s r a i s e d other than through  the i s s u e of prospectus, non-  r e s i d e n t s can i n v e s t upto 40% of the new c a p i t a l i s s u e s  113 s u b j e c t to a c e i l i n g of Rs.4 m i l l i o n . They can i n v e s t upto 14% of the e q u i t y c a p i t a l of a company i n any i n d u s t r y l i s t e d i n Appendix  I to the  M i n i s t r y of I n d u s t r y Press Note dated 2nd February, 1973 as amended on 21st A p r i l ,  1982.  Such an investment can  a l s o be made i n h o t e l i n d u s t r y and i n e x p o r t - o r i e n t e d industries . Portfolio  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 vided (ii)  r e p a t r i a t i o n b e n e f i t s pro-  ( i ) shares are purchased through stock exchange; i n any one company the non-resident i n v e s t o r does not  exceed 1% of p a i d up e q u i t y c a p i t a l of the company; and (iii)  payment f o r the investment i s made e i t h e r by f r e s h  investment  from abroad or from funds i n the i n v e s t o r ' s non-  r e s i d e n t e x t e r n a l account.  There i s , however, a l i m i t of  5% on the h o l d i n g s allowed to n o n - r e s i d e n t s of Indian o r i g i n i n the Indian companies bought  through the stock exchange  with or without r e p a t r i a t i o n b e n e f i t s .  Beyond 5%, p r i o r  approval of Reserve Bank i s necessary. I f investment i s d e s i r e d without r i g h t of r e p a t r i a t i o n , i t c o u l d go upto 100% of the i s s u e d c a p i t a l of a company p r o v i d e d payments are made from abroad or from the non-resident e x t e r n a l 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 and persons  a v a i l a b l e to non-resident Indians  of Indian o r i g i n are a v a i l a b l e to overseas com-  panies, p a r t n e r s h i p f i r m s , t r u s t s , r e g i s t e r e d  societies  and other c o r p o r a t e bodies i n which the ownership  interest  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  effort  to augment f o r e i g n exchange resources 60  i s seen i n the establishment of f r e e trade zones. such zones have been e s t a b l i s h e d i n I n d i a , one  Two  i n Kandla  and i n the State of G u j a r a t , known as the Kandla Free Zone (KAFTZ) and another at Santa Cruz  Trade  (Bombay) known as  the Santa Cruz Export P r o c e s s i n g Zone (SEEPZ).  Four more  f r e e trade zones are b e i n g set up i n the S t a t e s of West Bengal, Tamil Nadu, UP and K e r a l a .  They w i l l be i n F a l t a ,  Madras, NOIDA and Cochin r e s p e c t i v e l y .  Industrial  units  i n these zones are meant to be wholly e x p o r t - o r i e n t e d u n i t s though the Government has allowed these u n i t s as an a d d i t i o n a l i n c e n t i v e , to s e l l  25% of t h e i r output i n domestic  market. Investment  f a c i l i t i e s and i n c e n t i v e s are a v a i l a b l e  i n these zones l i k e s i m p l i f i e d procedures  and s i n g l e p o i n t  of c l e a r a n c e ; no import d u t i e s or import l i c e n c e r e q u i r e d  115 f o r c a p i t a l goods, raw m a t e r i a l s , components and other items imported f o r export p r o c e s s i n g ; products  manufactured  i n these zonea are exempt from C e n t r a l E x c i s e d u t i e s and other l e v i e s ;  a l l goods s u p p l i e d to these zones from the  r e s t of the country are t r e a t e d as exports and are e l i g i b l e f o r export b e n e f i t s g i v e n to the s u p p l i e r . complete  tax holiday i s g i v e n to u n i t s i n these zones f o r  a p e r i o d of f i v e years. persons  In a d d i t i o n ,  I n d i a n s , non-resident Indians,  of Indian o r i g i n and f o r e i g n e r s , can a l l i n v e s t  i n these zones.  F o r e i g n u n i t s with 100% f o r e i g n owned  e q u i t y or j o i n t ventures with m a j o r i t y f o r e i g n e q u i t y can be p e r m i t t e d i a n these zones. p u r e l y t r a d i n g and commercial  In KAFTZ, investments i n a c t i v i t i e s i s also permitted.  P r o v i s i o n s which p r o h i b i t f o r e i g n investment  i n certain  types of i n d u s t r i e s where f o r e i g n know-how and c a p i t a l are not c o n s i d e r e d necessary, do not apply to KAFTZ.  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 i s allowed from  these  zones. Impact of S e c t i o n 29 FERA, 1973, and e s p e c i a l l y s e c t i o n 29, l e d to uncert a i n t i e s i n the c l i m a t e of investment  to begin with, but  out of 877 FERA companies o n l y Coca-Cola move out.  and IBM chose to  However, the unloading of shares by the FERA  companies seems to have l e d to some unexpected  and u n i n t e n -  61 ded r e s u l t s .  F a r E a s t e r n Economic Review  reported a  116 a scramble men  f o r shares of FERA companies by Indian b u s i n e s s -  abroad.  l o c a l man,  The g e n e r a l modus operandi was a foreign c i t i z e n ,  to have a l o y a l  to i n c o r p o r a t e a company  abroad or to take m a j o r i t y shares i n a f o r e i g n company which acts as a f r o n t o r g a n i s a t i o n to buy the shares of the FERA company.  The f i n a n c i n g i s done by the Indian businessman  by o v e r - i n v o i c i n g and u n d e r - i n v o i c i n g of imports and e x p o r t s . 62 Another r e p o r t i n the Far E a s t e r n Economic Review  focussed  on the t u s s l e among b u s i n e s s houses f o r c o n t r o l of these FERA companies.  Many major business groups wanted the shares  t r a n s f e r r e d en b l o c while most of the companies opted f o r p u b l i c i s s u e of shares.  They f e l t  that once these houses  got a t o e h o l d i n the company, they would expand t h e i r  control.  A l s o , they d i d not want to l e t them i n t o t h e i r e x e c u t i v e management.  Of course, the p u b l i c i s s u e d i d not  guarantee  that the b i g business houses would not get a h o l d but at l e a s t i t made i t harder. The requirements the c a p i t a l market.  of s e c t i o n 29 c e r t a i n l y b r i g h t e n e d  The FERA companies, as they came to  be c a l l e d , were faced with the o p t i o n s (1) t r a n s f e r the r e q u i r e d shares to the Indian s h a r e h o l d e r s , or (2) i s s u e 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 s h a r e h o l d i n g by the end of 1978. Many came out with p u b l i c i s s u e s .  But a l a r g e number of  117 them chose to a l l o t  a f i x e d number of shares to 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 s l i k e the Unit T r u s t of India and L i f e Insurance C o r p o r a t i o n  of I n d i a .  They f e l t  would make the companies more secure a g a i n s t  that  this  any d r a s t i c  government a c t i o n . jCoca^Cola  Case  Coca-Cola Export Promotion C o r p o r a t i o n ,  100% Ameri-  63 can-owned, chose to wind up. i t s e q u i t y holdings  I t r e f u s e d both, to d i l u t e  and to t r a n s f e r i t s t e c h n i c a l know-how  to Indian b o t t l e r s .  When n o t i c e was served  to i t under  FERA, i t s headquarter i n A t l a n t a , Georgia, responded with an  o f f e r - " to reduce i t s e q u i t y i n i t s Indian  subsidiary  to the l e v e l r e q u i r e d , but i n s i s t e d that i t had to maintain an A m e r i c a n - c o n t r o l l e d  l i a i s o n o f f i c e to p r o t e c t i t s trade  s e c r e t s and to ensure the q u a l i t y of the b o t t l e d d r i n k s sold.  These c o n d i t i o n s were not acceptable  to I n d i a , because  they v i o l a t e d the g u i d e l i n e s s e t down f o r t r a n s f e r of technology to I n d i a a c c o r d i n g be  to which t e c h n i c a l know-how must  f u l l y imparted to an Indian  company which i s to take  over the f o r e i g n concern. Coca-Cola understandably d i d not want to share i t s "concentrate" countries  with o t h e r s .  I t would be r u i n e d i n other  a l l over the world.  George Fernandes, the then  M i n i s t e r f o r I n d u s t r i e s , 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 m u l t i n a t i o n a l o p e r a t i n g i n low p r i o r i t y but high p r o f i t ing  area, s t i f f l i n g  indigenous i n d u s t r y and  caus-  an outflow of p r e c i o u s f o r e i g n exchange i n s t e a d of i n f l o w .  A few years b e f o r e Coca-Cola  a c t u a l l y wound up,  the  govern-  ment had been c u t t i n g back i t s import l i c e n c e s which are l i n k e d with export performance. Coca-Cola  Between 1958  s a i d that i t earned o n l y R s . l l l  USS12.6 m i l l i o n ) from exports;.: were down to only Rs.180,000.  In 1977, The  I n d i a i n 1950s with an investment cash, machinery and p l a n t .  and  1976,  million  (about  the export  company was  sales  set up i n  of about Rs.660,000 i n  B o t t l i n g companies were set  up by p r i v a t e Indian i n v e s t o r s a l l over the country so that Coca-Cola 1974,  captured 10% of the market.  i t r e m i t t e d Rs.68.7 m i l l i o n to US  Between 1958  i n f o r e i g n exchange  through imports, p r o f i t s , home o f f i c e expenses and charges.  and  service  I t a p p l i e d 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  p e r i o d had been Rs.99.2 m i l l i o n so that there had been an outflow of f o r e i g n 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. subsequent a new  development.  T h i s has been proved  The departure of Coca-Cola  era of growth i n domestic  soft-drink  by heralded  manufacturing.  119  of  IBM  Case  The  second  FERA was  f o r e i g n concern  the US computer g i a n t I n t e r n a t i o n a l Business  Machines (IBM). ^  I t d i d not want the m a j o r i t y c o n t r o l  6  of  that wound up because  i t s marketing  Under FERA 1973,  and maintenance to pass i n t o Indian hands. IBM  was  e q u i t y h o l d i n g from 100%  r e q u i r e d to reduce  i t s foreign  to 40% by o f f e r i n g shares  locally.  But g i v i n g concessions to New  D e l h i might break i t s mono-  poly i n other c o u n t r i e s .  t r i e d hard to r e t a i n i t s  Indian c o n n e c t i o n . an IBM  out maintenance.  IBM  I t suggested  that any company importing  machine should have the o p t i o n to e i t h e r  wholly owned IBM  split  IBM  IBM  choosing  o f f - s h o o t of some o u t s i d e agency to c a r r y The other compromise suggested was  I n d i a i n t o two  companies -- one of them with  ownership c a r r y i n g on export, marketing  and the other, a 40% IBM  h o l d i n g i n charge  computers.  IBM  100%  and maintenance, of the company's  s e r v i c e bureaux which process data from c l i e n t s who have t h e i r own  to  do  not  a l s o o f f e r e d to support  the  growing t e c h n o l o g i c a l development i n I n d i a by s e t t i n g  up  a r e s e a r c h c e n t r e and a f a c i l i t y f o r assembling  and  i n t e g r a t e d c i r c u i t s cards and a measurement and  analysis  l a b o r a t o r y f o r e l e c t r o n i c components. be operated by government agencies. IBM s e l e c t e d IBM  testing  Both u n i t s were to a l s o agreed  to make  patents a v a i l a b l e to Indian o r g a n i s a t i o n s .  120 The  o f f e r was  a t t r a c t i v e but  the Indian  i n s i s t e d that requirements of FERA had pointed Ltd.,  out  (ICL)  to 40%. IBM  government  to be met.  It  that the B r i t i s h - b a s e d I n t e r n a t i o n a l Computers had  agreed to b r i n g down i t s e q u i t y  holding  While Coca-Cola i s a l o w - p r i o r i t y consumer item,  i s a major f o r c e i n high  technology f i e l d .  were r a i s e d about how  f a r t h i s a c t i o n was  with a d m i n i s t r a t i o n ' s  avowed p o l i c y of f o r e i g n investment  and  in  Qeustions conformity  c o l l a b o r a t i o n i n s e l e c t e d f i e l d s where f o r e i g n techno-  logy and  know-how were needed.  out  that i t had  All  i t had  But  the government  n e i t h e r asked Coca-Cola nor  i n s i s t e d upon was  IBM  to  pointed go.  that requirements of FERA  be  met. There were some important b e n e f i t s d e r i v e d FERA.  Many companies which were r e q u i r e d  from  to d i l u t e t h e i r 65  holdings  d i v e r s i f i e d i n t o other  areas.  WIMCO,  a subsi-  d i a r y of a Swedish Company manufacturing s a f e t y matches, f o r example, a f t e r d i l u t i o n to 40%  foreign equity  diversified  i n t o manufacturing paper, chemicals, marine products, processing  of  f r u i t s and  vegetables.  I t a l s o began promo-  t i n g p r o j e c t s to produce high q u a l i t y seeds and Indian  seedlings 66  f o r quick  growing t r e e s .  which was  once a s u b s i d i a r y of B r i t i s h America Tobacco,  was  The  and  Tobacco Company,  o r i g i n a l l y only manufacturing c i g a r e t t e s but  diversified  121 a f t e r d i l u t i o n to p r o d u c t i o n and  c o n s t r u c t i n g a c h a i n of luxury h o t e l s .  still and  of paper, marine products Hindustan  Lever,  67  h o l d i n g 51% of f o r e i g n e q u i t y d i v e r s i f i e d from soaps  vegetable  o i l s to chemicals l i k e phosphoric a c i d , caus-  t i c soda, p e s t i c i d e s , g e l a t i n e and o t h e r s .  Thus, by the  a p p l i c a t i o n of FERA, 1973, the manufacturing was  strengthe-  ned . Legal I m p l i c a t i o n s  of S e c t i o n 29 and P i v o t a l Role  of Reserve Bank of i n d i a D i l u t i o n of E q u i t y Holding:  The i m p l i c a t i o n s of  d i l u t i o n of e q u i t y h o l d i n g came to the f o r e i n the Needle 68 I n d u s t r i e s Case.  In t h i s case,  the f o r e i g n  shareholder  t r i e d to circumvent the d i l u t i o n of e q u i t y p r o v i s i o n s of FERA and, i f that was not p o s s i b l e , to delay  the d i l u t i o n  of i t s e q u i t y h o l d i n g f o r as long as p o s s i b l e .  While the  Coca-Cola and IBM cases t e s t e d the p o l i t i c a l w i l l to implement FERA, Needle I n d u s t r i e s Case was a t e s t case i n court to see how s t r i c t l y  these p r o v i s i o n s would be enforced by  the'judiciary. Needle I n d u s t r i e s incorporated  i n I n d i a under the Indian Companies A c t . I t  had been i n c o r p o r a t e d of Needle I n d u s t i r e s Studley).  (India) L t d . (NIIL) was a company  Since  i n J u l y 1949 as a wholly-owned s u b s i d i a r y (India) L t d . , Studley,  England (NI  then a number of changes had taken p l a c e  i n the share ownership of the company so that by 1973  122 60% of NIIL was owned h a l f by Coats and h a l f by Newey. The  remaining  40% were i n Indian hands mainly  with  Devagnanam group. With the coming of FERA i n t o f o r c e on 1st January 1974,  NIIL was r e q u i r e d to b r i n g down i t s non-resident  i n t e r e s t from 60% to 40%.  Some e f f o r t s at disinvestment  were made but they d i d not succeed  so i t was decided at  the meeting of Board of D i r e c t o r s to i s s u e r i g h t s i n order to d i l u t e f o r e i g n e q u i t y h o l d i n g .  shares  Rights  shares  means an i s s u e of new shares by a company which are then o f f e r e d on f a v o u r a b l e terms to the e x i s t i n g of the company. Directors,  At another  shareholders  meeting of the Board of  the whole of the new i s s u e of shares was a l l o -  t t e d to the Indian s h a r e h o l d e r s . Devagnanam group.  The m a j o r i t y went to the  T h i s l e d to the r e d u c t i o n of f o r e i g n  s h a r e h o l d i n g to approximately s h a r e h o l d i n g to about 60%.  40% and an i n c r e a s e of Indian  NIIL then sent a l e t t e r  to the  Reserve Bank i n f o r m i n g i t that the d i l u t i o n of f o r e i g n e q u i t y h o l d i n g had been done. The  Holding Co., i n a p e t i t i o n i n High Court a l l e g e d  that the Indian d i r e c t o r s had abused t h e i r f i d u c i a r y  posi-  t i o n i n the company by i s s u i n g the shares at par ant a l l o t t i n g the shares e x c l u s i v e l y to Indian s h a r e h o l d e r s . thus acted malafide i n order to g a i n i l l e g a l  They  advantage f o r  123 themselves.  I t was  a l s o a l l e g e d that Devagnanam d e l i b e r a -  t e l y delayed i n sending to the Holding Company the ings of the meeting at which i t was  proceed-  decided to i s s u e shares  at par; he a l s o d e l i b e r a t e l y delayed i n g i v i n g n o t i c e of the meeting i n which the r i g h t s shares were to be The Madras High Court upheld the D i v i s i o n Bench on appeal.  allotted.  the c o n t e n t i o n as d i d  The Supreme Court, however,  came to the c o n c l u s i o n that Devagnanam and h i s group had acted i n the best i n t e r e s t s of NIIL i n the matter of shares. They were under a l e g a l compulsion shares.  of i s s u e  to i s s u e r i g h t s  In view of the p r o v i s i o n s of s e c t i o n 29 of FERA,  even i f the o f f e r of the r i g h t s shares was  made to the  ing Company, i t c o u l d not have been accepted by i t .  Hold-  Further,  the Holding Company a l s o c o u l d not have renounced i t s p o r t i o n of the shares i n favour of any other person because the a r t i c l e s of a s s o c i a t i o n of the company negated  the  r i g h t of r e n u n c i a t i o n . It was  contended  on b e h a l f of the Holding Company  that non-compliance with the c o n d i t i n r e g a r d i n g the d i l u tion ofnon-resident i n t e r e s t within i t s s t i p u l a t e d period could not have r e s u l t e d i n the RBI  d i r e c t i n g NIIL to c l o s e  down i t s business or not to c a r r y on i t s b u s i n e s s . a l s o argued  It  that non-compliance with c o n d i t i o n s imposed  was  124 for  p e r m i s s i o n to c a r r y on i t s business would not have  exposed the Indian d i r e c t o r s to any p e n a l t i e s or t i e s and that there was power to revoke  liabili-  no p r o v i s i o n which gave RBI  the permission once granted.  any  Therefore,  even i f the c o n d i t i o n s s u b j e c t to which the p e r m i s s i o n granted were not f u l f i l l e d , to  c l o s e down.  the business c o u l d not be made  It;cwas argued  ness which the RBI  that c l o s i n g down a b u s i -  had at f i r s t allowed would have s e r i o u s  consequences, p u b l i c and p r i v a t e . given to RBI  was  Why  no power had been  to r e q u i r e the b u s i n e s s to be d i s c o n t i n u e d  even i f the c o n d i t i o n s were not f u l f i l l e d .  Where an  appli-  c a t i o n under s e c t i o n 29(4)(a) f o r p e r m i s s i o n to continue to  h o l d shares was  to  d i r e c t n o n - r e s i d e n t s to s e l l  to be s o l d .  r e j e c t e d , s e c t i o n 29(4)(c) enabled  T h i s was  t h e i r shares or cause them  the only power that RBI  a c o n d i t i o n imposed under s e c t i o n 29(2) The Supreme Court f e l t these c o n t e n t i o n s .  The RBI  itself  was  unable  had where  not  fulfilled.  to accept  gave permission to NIIL to  c a r r y on i t s business s u b j e c t to c e r t a i n c o n d i t i o n s . of  theose c o n d i t i o n s may  or  importance,  RBI  Each  not have been of the same r i g o u r  e.g. c o n d i t i o n r e g a r d i n g submission  of  q u a r t e r l y r e p o r t s i n d i c a t i n g the progress made i n implement i n g the other conditons c o u l d reasonably be r e l a x e d by condonation  of l a t e f i l i n g .  But the d i l u t i o n of non-resident  125 i n t e r e s t i n the e q u i t y c a p i t a l of the company to a l e v e l not exceeding 40% w i t h i n a p e r i o d of one of r e c e i p t of l e t t e r was A permission  qranted  year from the date  the very essence of the matter.  s u b j e c t to the c o n d i t i o n that such  d i l u t i o n s h a l l be a f f e c t e d would cease a u t o m a t i c a l l y non-compliance with  the c o n d i t i o n at the end  of the  on stipu-  l a t e d p e r i o d or the extended p e r i o d as the case may I f the Holding  Company's arguments were accepted,  the g r a n t i n g of a c o n d i t i o n a l permission empty r i t u a l .  Whether or not  c o n d i t i o n , i t would s t i l l I t was  be.  would become an  the company performed  the  be f r e e to c a r r y on i t s b u s i n e s s .  argued that the only s a n c t i o n a v a i l a b l e to RBI  was  that i t c o u l d compel or cause the s a l e of the excess nonr e s i d e n t i n t e r e s t i n the e q u i t y h o l d i n g of the company under s e c t i o n 2 9 ( 4 ) ( c ) . provide  T h i s s e c t i o n , however, d i d not  non-performance of c o n d i t i o n s imposed under s e c t i o n  29(2)(c).  S e c t i o n 29(4)(c)  provided  for a situation in  which an a p p l i c a t i o n f o r h o l d i n g shares was was  not made.  r e j e c t e d or  I f the c o n d i t i o n s upon which permission  c a r r y on business  were not c a r r i e d out,  could be that the business  should  the only  not be allowed  to  sanction to con-  tinue . Thus, u n l i k e corporate the f o r e i g n shareholder  g i a n t s l i k e IBM  and  Coca-Cola,  i n the Needle I n d u s t r i e s case  tried  126 to see i f i t c o u l d circumvent  the p r o v i s i o n s of FERA.  The  d e c i s i o n of the Supreme Court i n d i c a t e s that the Court determined  to ensure  s t r i c t compliance  was  with FERA as the .  whole t h r u s t of the Indian p o l i c y towards f o r e i g n  direct  , •!  investment was  that the ownership should be kept as f a r  as p o s s i b l e i n Indian hands. Reasonable Opportunity, to Make a R e p r e s e n t a t i o n The  p r o v i s i o n s of FERA g i v e very wide powers to the  Reserve Bank of I n d i a as a r e g u l a t o r y body of f o r e i g n investment.  In order to ensure  direct  that these powers are not  abused, s e c t i o n 29 r e q u i r e s that no a p p l i c a t i o n can  be  r e j e c t e d without g i v i n g the a p p l i c a n t a reasonable o p p o r t u n i t y to r e p r e s e n t . 69 In Apee j ay ( P ) L t d . , v s ^ Union ojE I n d i a ,  the  peti-  t i o n e r company entered i n t o an agreement with Ludlow Jute Company L t d . , a non-resident company, to purchase i n I n d i a . According to the Agreement, Messrs.  i t s assets  Ludlow were  to work as c a r e t a k e r f o r the p e t i t i o n e r company from March, 1977,  and the p e t i t i o n e r company was  31st  to get the r e q u i -  s i t e p e r m i s s i o n under FERA and any other r u l e s and r e g u l a tions i n force. The Reserve Bank of I n d i a d i r e c t e d the p e t i t i o n e r to  take c l e a r a n c e from  the Government of I n d i a f o r the  127 proposal Apejay  of Messrs.  (P) L t d . The G o v e r n m e n t ,  approve  to  the applicant  held  that  Government usurped  the  so t h a t ,  Bank  must be g i v e n  decision  had given  under s e c t i o n  representations. on g r o u n d s t h a t  that  the reasons given  by  p o l i c y or expediency.  application  the case.  decision.  were  Hence,  High  to exercise to the Central  Government had  by the Reserve no r e a s o n s  Bank.  f o rrejection  29 t o e n a b l e  The a p p l i c a n t  the parties could  no r e a s o n s h a d b e e n  d i d not, therefore,  consideration  opoortunity  the Calcutta  the parties  challenge  recorded;  i r r e l e v a n t , o r were  The a p p r o v a l  s a t i s f a c t i o n o r otherwise objective  case,  had f a i l e d  t o be e x e r c i s e d  or  of  a reasonable  i n e f f e c t , the Central  t h e Government  make t h e i r  o f FERA, 1 9 7 3 , b e f o r e  i s r e j e c t e d by the Reserve  In this  the Reserve  t h e powers  Further,  to  29(2)(c)  powers because i thad r e f e r r e d  which  business to  on a p p l i c a t i o n , d i d n o t  must be g i v e n  make a r e p r e s e n t a t i o n .  Court its  to Section  application f o r permission  Bank,  their  t h e Agreement. According  any  Ludlow t o t r a n s f e r  coloured  o r r e j e c t i o n o f an  depend on t h e s u b j e c t i v e  o f t h e a u t h o r i t i e s , b u t on an  taking  i n t o account  the Calcutta  High  Court  a l l aspects s e t aside the  128 Permission of Reserve Bank of I n d i a The Needle I n d u s t r i e s Case and  the Apeejay Case  e s t a b l i s h e d the Reserve Bank of I n d i a as the c h i e f r e g u l a tor  of f o r e i g n d i r e c t investment  i n India.  The  Supreme  Court i n i t s i n t e r p r e t a t i o n of s e c t i o n 29 i n these cases a l s o i n d i c a t e d a d e t e r m i n a t i o n  to ensure  two  strict 70  compliance  with i t s p r o v i s i o n s .  In the Swraj Paul Case  the q u e s t i o n arose at what p o i n t of time was  the f o r e i g n  i n v e s t o r r e q u i r e d to take the p e r m i s s i o n of the Reserve Bank; b e f o r e the purchase or a f t e r the purchase of Swraj Paul, a business magnate of Indian  shares.  origin  s t a t i o n e d i n London, bought shares i n the names of  thir-  teen f o r e i g n companies of E s c o r t s (7.29% of the p a i d up c a p i t a l ) and  1,040,000 DCM  shares  p a i d up c a p i t a l ) i n March 1983 brokers.  The  these two  companies.  (12.95% of the company's  through  R.B.  & Co.,  stock-  aim seems to have been to take c o n t r o l of The  a p p l i c a t i o n s f o r permission to  purchase of these shares under s e c t i o n 29 of FERA were r e c e i v e d by the Reserve Bank a f t e r the shares had been purchased  i n March, but the permission  obtained even by August 1983. obtained on September 18,  1983.  to do so had not been  The p e r m i s s i o n was  only  The D i r e c t o r s of E s c o r t s  r e f u s e d to t r a n s f e r the shares i n June 1983.  On o b t a i n i n g  the p e r m i s s i o n from the Reserve Bank of I n d i a , R.B.  &  Co.  129 requested  the  board  the i r r e f u s a l Corporation  to  persuade  the  to  Paul.  an  what  the  use  d i r e c t o r s of  9,  1984,  over  the  Act,  i t could  to  only  doing  anything  the  right  fer  of  i n no  of  Life  Insurance  The  investor  of  FERA  to get  purchase  of  shares  to  shares  to  requisition-  of  Escorts  purpose",  nine  of  the  for  on  namely,  fifteen  nominees of  financial  said,  amounted  to  could  not  Under i t s  do.  i t s own  prevent  and  Escorts  i t held  taking  investments  the  company  The  court  from  upheld  to  register  as  illegal  D i r e c t o r s at  the  transthe  instance  Corporation. Court  i t was prior  (EGM)  D i r e c t o r s not  Paul  Bombay H i g h  29(l_)_(b) o f  or  to  t r a n s f e r the  public policy.  to Swraj  9 part-time  oust  LIC  the  judgement d e l i v e r e d  to p r o t e c t  Board  of  to  court  danger,  i t s best  "collateral  the  act  institution,  meeting  them w i t h  the  against  the  shares  removal  replace  company w h i c h  were  a  reconsider  Insurance  i t resorted  in a  strength  This,  which  the  called  i t s voting and  Court  to  to  Life  tried  Escorts  When i t f a i l e d ,  institutions.  the  in Escorts,  Bombay H i g h  directors  of  shares.  extra-ordinary general  November to  the  Escorts  (LIC), a public financial  shareholder  ing  d i r e c t o r s of  register  majority  Swraj  of  also  mandatory  permission i n an  held for a of  Indian  the  that  under  section  non-resident Reserve  company.  Bank  Hence,  for Escorts  130 were p r o h i b i t e d from r e g i s t e r i n g the t r a n s f e r of shares i n q u e s t i o n  and were j u s t i f i e d  i n law  the  in refus-  i n g r e g i s t r a t i o n of the t r a n s f e r of those shares. Times of I n d i a  of November 12,  1984,  Court's judgement a s t e r n indictment  found i n Bombay High of government's brazen  b i d to promote a take-over of E s c o r t s and Capro group oc companies c o n t r o l l e d by Mr. The  The  of DCM  by  the  Swraj Paul.  Supreme Court, i n i t s judgement of December  19, 71  1985, The  set aside the judgement of the Bombay High Court.  Supreme Court h e l d that the permission  of the Reserve  Bank of I n d i a r e q u i r e d by s e c t i o n 29 of FERA c o u l d ex-post f a c t o and  conditional.  n i e s whose more than 60% Indian  A l s o , that f o r e i g n compa-  shares were owned by persons of  n a t i o n a l i t y or o r i g i n c o u l d a v a i l of the  under investment schemes f o r non-resident the same group of shareholders companies. of I n d i a was mission  The  facilities  Indians even i f  f i g u r e d i n the d i f f e r e n t  Court f u r t h e r h e l d that the Reserve Bank  not g u i l t y of any  mala f i d e s i n g r a n t i n g  to Swraj Paul's Caparo Group of Companies.  a l s o not g u i l t y of not ssion.  be  The  applying  It  i t s mind i n g r a n t i n g  Union Government, too, was  absolved  perwas  permi-  of mala  fides. Thus, the Supreme Court once again  established  Reserve Bank of I n d i a as the main r e g u l a t o r y  agency of  the  131 f o r e i g n d i r e c t investment  under FERA.  not be l i g h t l y o v e r r u l e d .  I t s decisions could  T h i s judgement of the Supreme  Court i s an attempt to c r e a t e s t a b i l i t y i n investment  environ-  ment.  their  Otherwise,  companies would be tempted to f i g h t  c o r p o r a t e b a t t l e s i n the c o u r t u s i n g p r o v i s i o n s of FERA which c o u l d l e a d to an u n c e r t a i n investment  climate.  Whereas i n the Needle I n d u s t r i e s case the Supreme Court had shown a d e t e r m i n a t i o n  to ensure compliance  of the f o r e i g n  i n v e s t o r was not thwarted  by the Indian b u s i n e s s , the pro-  v i s i o n s of FERA c o u l d not be used by the Indian i n v e s t o r to prevent  the e n t r y of the f o r e i g n i n v e s t o r .  Conclusions In I n d i a , f o r e i g n investment  has been mainly  upon as a v e h i c l e f o r t r a n s f e r of technology the country.  The technology  looked  r e q u i r e d by  i s needed to develop  the indus-  t r i a l base of the country i n order to make l e s s dependent on e x t e r n a l resources and become more s e l f - r e l i a n t . f o r e i g n investment  i s regarded  as an important  That  means of  a c h i e v i n g t h i s o b j e c t i v e i s e v i d e n t by the f a c t that more than  7,000 f o r e i g n companies have entered i n t o  agreements with Indian f i r m s f o r investment  collaboration  and t r a n s f e r  72 of technology  s i n c e 1957.  FERA, 1973, has encouraged c o l l a b o r a t i o n as opposed i.  to the establishment  of s u b s i d i a r i e s and branches of f o r e i g n  132 firms.  By  o r d i n a r i l y " l i m i t i n g the  j o i n t venture to f o r t y per the p o l i c y o b j e c t i v e s  cent, i t has  sought to achieve  share i n the  a l s o given them an e f f e c t i v e say  made the  in a  of the Government of I n d i a .  given Indians an e q u i t a b l e  c o n t r o l of the  foreign equity  at the  more aware and  n a t i o n a l economic p o l i c i e s and  It  i n the management  investment while i t has  foreign investor  profits.  It  aspirations.  l e d , as we  and  thus to the s t r e n g t h e n i n g of i n d u s t r y  and  same time  Further,  FERA 1973,  acquired  in  d i l u t e t h e i r equity  h o l d i n g s and  and  the  some n o t o r i e t y c h i e f l y  But  because of the  to  Coca-Cola  f i g u r e s show that FERA 1973,  not been an unduly major hurdle i n way The  it  India.  because the e x i s t i n g f o r e i g n companies were r e q u i r e d  ment.  the  have seen, to expansion and d i v e r s i f i c a t i o n  Initially,  cases.  has  r e s p o n s i v e to  has  IBM  has  of f o r e i g n  has  invest-  number of f o r e i g n companies which have entered  i n t o agreement with Indian firms during  the  last five  years 72  has  increased  Thus we  as can  be seen from the f o l l o w i n g Table IV Cos . 267 526 389 590 673  1979 1980 1981 1982 1983 (Foreign Companies i n India) can say that FERA has not been unduly  table:  restrictive.  133 F u r t h e r , the approach rigid.  of the government has not been  A higher percentage of e q u i t y has been allowed i n  s o p h i s t i c a t e d high technology areas and i n e x p o r t - o r i e n t e d industries. 100%  In case 100% e x p o r t - o r i e n t e d companies, even  f o r e i g n e q u i t y can be allowed.  Investment  schemes  l i k e those f o r OED c o u n t r i e s and non-resident Indians together with the e s t a b l i s h m e n t of f r e e trade zones with investment f a c i l i t i e s show an e f f o r t  to r a i s e  c a p i t a l without l o s i n g s i g h t of p o l i c y  liberal  foreign  objectives.  The encouragement of the c o l l a b o r a t i o n p a t t e r n as opposed to the s u b s i d i a r y p a t t e r n has a l s o made these ventures a c t as c a t a l y s t s to the development of l o c a l 73 enterprise.  C o l l a b o r a t i o n can be i n the form of one-time  purchase of know-how where the drawings  and s p e c i f i c a t i o n s  are handed over to the l o c a l n a t i o n a l s f o r a f e e . i n v o l v e s some t r a i n i n g f o r the l o c a l s .  I t also  I t i s , then, upto  the l o c a l n a t i o n a l s to develop t h e i r i n d u s t r y as r a p i d l y as p o s s i b l e so as to reduce t h e i r dependence on the supply of f o r e i g n components.  I f t h i s development i s slow, the  f o r e i g n p a r t y b e n e f i t s because f o r the components.  i f can charge monopoly p r i c e  The c o l l a b o r a t i o n p a t t e r n has the advan-  tage that the l o c a l manufacturer  tries  to develop  alternate  indigenous sources of supply i n s t e a d of paying the p r i c e demanded.  The product so developed may not come to world  standards f o r a time but i f there i s a l a r g e enough domestic  134  market are  to support  high,  rapid  together  import  develops. the  the local with  Both  these  foreign the  large  investor  triate  and p u l l  so  market  as there  India,  on r e d u c i n g  often are  been pointed  chances  tion place  the local  tutes  because  investor  partner  initially  i sprofitable.  When  there  tries  holding  investor  i swilling  I t has  collaborations  the multinational  When s u c h  a collusion  substitutes  that  t o do  are high.  may n o t b e w i l l i n g  t o ensure  as under  i s not perfect.  i n joint  a l o tof e f f o r t to develop also  to repalarge  pattern  these  i sa  i s i n India, the  the equity  partner.  The i n t e r e s t o f  has a  o f c o l l u s i o n between  and i t s l o c a l  takes  out that  participa-  seen,  the foreign  t h e FERA  equity  t o d i v e r s i t y than  and d i v e r s i f y because h i sr e t u r n s  course,  and hence  and i f there  a s we h a v e  and investment  29 o f F E R A ,  Of  it  out.  i n India  investor.  i s i n the p r o f i t s market  alternative  r e l a t i o n s h i p between t h e  i s more l i k e l y  an i n s i s t e n c e  section  t h e government f o r  be t h r o u g h  an on-going  investor  i fh i s prices  industry.  and t h e l o c a l  investor  domestic  from  are present  can also  enough d o m e s t i c  foreign  is  implies  foreign  factors  of indigenous  Collaboration which  pressure  even  s u b s t i t u t i o n , the indigenous  development  tion  manufacturer  them. such  there corporatakes  to develop  substi-  a r e c o s t l i e r and The  foreign  a substitution  135 does not grounds close  take of  to  place  q u a l i t y or  marginal  manufacturer. local  by  opposing  trial  than  i s also  for  the  this  through  saved  can  used  a question  Growth  of  balanced  market which  It  to  has  been  exchange have plant  and  that  sometimes  equipment  of  But  might then  s u i t s the  other  clamour  is usually  the  i n such  a case  were a l l o w e d  growth.  for  provided.  in  econo-  growth  is  free in  the  because  indus-  entry  the  of  of  initially  It i s possible  in India  foreign  development  but  present to  a  follow  sizeable  manufacturer  from  shortages  foreign  export.  argued led  that  Indian  obsolete  companies  design.  The  multinationals  h a v e b e e n more modern and there  and  local  created.  foregoing  i f s u b s i d i a r i e s of  technology rapid.  also  course,  s u b s t i t u t i o n i f the  insulates  pressure  components  substitute  for  on  i t s own  a positive role  import  be  product  develop because  are  play  collaboration pattern  immediate  of  local  in India,  i f multinationals  future  domestic  is  can  infrastructure.  slower it  which  the  i n t e r e s t groups  development so  This,  develop  Multinationals  exchange  supplying  Counter-pressures  government p r o t e c t i o n  mic  by  costs.  manufacturers  Thus,  r e j e c t i n g the  may  not  had  of to  import  contention been  involved  production  have d e v e l o p e d  the  more  healthy  136 self-confidence  to absorb  where n e c e s s a r y  within  genous  facilities.  foreign  know-how a n d  the framework  improvise  of e x i s t i n g  indi-  137  Chapter IV CANADA AND FOREIGN INVESTMENT F a c t o r s shaping Canada's F o r e i g n Investment  Policy  Canada, being b a s i c a l l y a resource based country with a l a r g e US investment which i s of fundamental  importance  to i t s economy, shares some of the concerns of d e v e l o p i n g c o u n t r i e s due to a b a s i c sense of i n s e c u r i t y  vis-a-vis  USA, which i s a f r i e n d l y but a much l a r g e r and more powerf u l neighbour.  Over and over again, the f e a r has been ex-  pressed that s i n c e non-resident c o n t r o l i s c e n t r e d mainly i n one country., namely, the US, the Canadian  economy w i l l  g r a d u a l l y become so i n t e g r a t e d with US economy that i t might e v e n t u a l l y l e a d to economic domination and even l o s s of p o l i t i c a l ind'enpence" " Canada has a l s o been concerned with 1  c o s t s l i k e d e p l e t i o n of i t s n a t u r a l r e s o u r c e s ; b i a s e s i n t r o duced  i n the i n d u s t r i a l development; t r u n c a t i o n of i n d u s t r i e s  and t h e i r s t u n t e d growth; t r a n s f e r p r i c i n g ; e x t e r n a l i n f l u e n c e s on p u b l i c p o l i c y l i k e export and import  restric-  t i o n s on s u b s i d i a r i e s and e x t r a - t e r r i t o r i a l e x t e n s i o n of US laws i n Canada. The e f f o r t has been to reap the b e n e f i t s of US investment, minimize maintain an independent  the c o s t s , and- at the same time,  identity.  138  Development  o f Economy i n Canada  Canada's e c o n o m i c  through of  foreign  investment.  S t . Lawrence C a n a l  took  place with was  was  mainly  imported  and  more i n v e s t m e n t  in  changed  Canada was  Great  Britain  investment  and  Foreign or  about  $15.9 in  40%  1964.  Of  debt. by  USA.  from  direct  and  US  1900,  After  and  more  of the  1926,  most o f p o r t f o l i o  After  1945,  the  capital  1900  remained  Between 1910  building  Initially,  i n the form  still  invested  the  primarily  of r a i l w a y s a l l  Before  new largest however,  investment  countries other i n Canada, b u t  than  the  major  USA.  investment  grew from  long-term  accounted  $2.7  investment  or about/60% of f o r e i g n  this,  like  1926,  also  of f o r e i g n  billion  USA  place  capital.  Britain.  Grea£ B r i t a i n  USA  remains  Great  came from  and  from  taken  projects  investment.  from  of p o r t f o l i o  the r o l e s  has  System, c o n s t r u c t i o n  portfolio  investment.  supplier  Major  the h e l p o f f o r e i g n  investment  direct  development 2  billion  i n 1945  long-term  f o r 12.9  to  investment  billion  or  80%,  3 while  UK  f o r an  Foreign in  Canada  natural of 38%  ownership  $1.9  and  billion  control  or  gas,  i n 1926  and  mining  and  manufacturing t o 54%  i n 1963  even more from  35%  12%.  of c o r p o r a t i o n s l o c a t e d  i s concentrated i n manufacturing  Canadian  creased  additional  smelting.  petroleum  Foreign  ownership  increased substantai11y and  foreign  i n 1926  control i n -  t o 60%  in  and  1963.  from  139  Foreign  ownership and c o n t r o l 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% i n the same p e r i o d f o r control. natural  In a d d i t i o n s u b s t a n t i a l petroleum and gas i n d u s t r y  has developed and has absorbed  large  amount of f o r e i q n c a p i t a l . In 1963, o i l and n a t u r a l gas i n d u s t r y was 64% f o r e i g n owned and 74% f o r e i g n Ownership and c o n t r o l by US r e s i d e n t s since  1926.  controlled.  increased  substantially  US ownership of the above i n d u s t r i e s rose from  19%  to 28% while ownership by other n o n - r e s i d e n t s f e l l  18%  to 7%.  The c o n t r o l i n c r e a s e d  from  from 15% to 27% while  c o n t r o l by other no:n-re.sidents-rose from 2% to 7%. Within the manufacturing s e c t o r  there were, c e r t a i n  i n d u s t r i e s where f o r e i g n c o n t r o l was very high and i n a l l such cases ownership was mainly by US r e s i d e n t s . foreigners  In 1963  c o n t r o l l e d 9 7% of the c a p i t a l employed in{,:.tbe  manufacture of automobiles> and p a r t s ,  97% i n rubber, 75%  i n chemicals and 77% i n e l e c t r i c a l apparatus.  The c o r r e s -  pondina f i g u r e s f o r US c o n t r o l were 97%, 54% and 66%. Not  only;was f o r e i g n e a u i t v c a p i t a l  concentrated  i n c e r t a i n i n d u s t r i e s , but i t was a l s o c o n c e n t r a t e d i n l a r g e corporation::! o with a s s e t s  greater  In 1963, there were 414  corporations  than $25 m i l l i o n each and with  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  assets  or 53%  140  of  the t o t a l were i n f i r m s which were more than 50% owned  by non-residents .lin'-fi-rms wl'th a s s e t s of l e s s 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  a s s e s t s i n these f i r m s were i n f i r m s more than 50% owned by n o n - r e s i d e n t s .  Therefore,  more non-resident  invest-  ment was i n l a r g e c o p o r a t i o n s , which, because of t h e i r s i z e , c o u l d e x e r c i s e great economic power and c o n t r o l 4 the market. B e n e f i t s and Costs The b e n e f i t s of f o r e i g n d i r e c t investment i n d i s p u t a b l e to the Canadian economy.  5  Foreign d i r e c t i n -  vestment was accompanied by flow of technology preneurship.  have been  and e n t r e -  I t i n c r e a s e d p r o d u c t i o n which i n turn l e d to  new investment,  domestic and f o r e i g n .  T h i s l e d to an a d d i -  t i o n to Canadian income and p a r t of that i n c r e a s e went to labour.  Indirectly,  the Canadian economy b e n e f i t e d by  t e c h n o l o g i c a l t r a n s f e r which l a t e r became a v a i l a b l e to domestic entrepreneurs.  But d i r e c t f o r e i g n  imposed c o s t s on Canadian economy. d i r e c t investment  The major p a r t of US  was i n manufacturing  Often, US d i r e c t investment  investment  firms.  occurred because there  was a r e l a t i v e l y high r a t e of growth i n a p a r t i c u l a r s e c t o r of  the economy -- to begin with e x p l o i t a t i o n of n a t u r a l  resources. investment of  In the 1890s there was a l a r g e amount of American i n mining companies because of the r a p i d r a t e  growth of output  i n the newly d i s c o v e r e d mines.  141  Between O c t o b e r were f o r m e d American natural  them.  stimuli  of  ensuring  their  exchange r a t e s  in  Canada, b u t  in  USA.  This  Company w h i c h operating Jersey.^ located nickel  was  there.  only  i n t o Canadian  of  them  stable  p r i c e s , there large  to an  was  manufacturing  concompany  remain Nickel  firms  located  in  New  r e f i n e r y was i n the  already copper-  i t s refinery capacity f r u s t r a t e d attempts capacity.  resource  no  two  major company  This  industry  i t s own  would  other  trade  International  initial  and  lower..  any  a mining  capacity  sectors  to c o n t r o l r e s o u r c e s  a flow  be  merger o f  their  manufacturing  simple  controlling  had  r e f i n e r y was  Britain.  expansion  by  This  case of  other  to  to r e c o g n i z e  could  the  British  large  develop  there  from  When  f o r b a r r i e r s to  tariffs.  because  The  i n Great  attempt  seem  except  happened i n the  stimulate  an  not  i n Canada. T h e i r This  companies  resources - at  supply  i t s main r e f i n i n g  sprange  Mining  responding  natural  steady  example,  i n d u s t r y was  located  and  US  i n Canada f o r e x p l o i t a t i o n o f  obtaining  boundaries  For  35  Canadian companies.  These companies d i d  sequences.  on  52  1895,  t h e y were o f t e n  .t  international like  to  were c r e a t e d  resources,  and  December  compared  firms  economic costs  and  i n US  reason  and at  Further, was  thereby  to  relatively  f o r these  i n Canada.  often  firms  was  to  since based ensure low to  and  142  Even when manufacturing over manufacturing  develops  large foreign  control  i n d u s t r i e s can lead to c e r t a i n b i a s e s .  When the parent company, f o r example, i s l o c a t e d  elsewhere,  it  r e s e a r c h and  i s u s u a l l y the parent company that undertakes  development.  While i t may be more e f f i c i e n t  as a whole to import new technology through it  f o r the economy multinationals,  i s necessary to develop one's own r e s e a r c h and technology  because when n e i t h e r the parent company rfor the branch i s ' d o m e s t i c a l l y c o n t r o l l e d , i f f o r some reason the new t e c h nology i s not r e a d i l y a v a i l a b l e , i n d u s t r i e s can be dampened.  the emergence of high-tech  I t can a l s o l e a d to " b r a i n -  d r a i n " , that i s , s k i l l e d s c i e n t i s t s and t e c h n o c r a t s can move out of the country to other c o u n t r i e s where there are better research  facilities.  Also, when one country becomes a major i n v e s t o r i n another country, the two economies get i n e x t r i c a b l y  tied  together, the case, f o r example, of Canada and USA and t h i s i s bound to a f f e c t tariffs,  the s m a l l e r economy.  f o r example, had a g r e a t  industry.  The US  i n f l u e n c e on Canadian  They were very low f o r i n d u s t r i a l m a t e r i a l s i n  t h e i r raw form or i n an e a r l y stage of p r o c e s s i n g and became p r o g r e s s i v e l y higher on goods at a more advanced stage of manufacture. not produce base metals,  The r e s u l t was that Canada c o u l d  f i n e paper e c o n o m i c a l l y and export i t to USA; too, c o u l d not be sent i n a more h i g h l y  refined  143  or f a b r i c a t e d form to US; and Canada c o u l d  not compete i n  the US markets with some of the chemicals that could be produced from o i l and n a t u r a l gas.  There was, thus a  s t u n t i n g e f f e c t of the US t a r i f f s on Canadian  industry.  Again, i n the 1960s f o r c e d r e p a t r i a t i o n of placed  a s t r a i n on Canada's economy which was  r e l a t e d to Canada's f o r e i g n indebtedness. there  dividends  directly  When i n a d d i t i o n  i s p o r t f o l i o invesment, too, the i n t e r e s t payments  have a l s o to be made no matter what the s t a t e of economy. The t h i r d problem i s the l o s s of tax revenue which may occur because of the presence of a l a r g e number of s u b s i 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 c u l t to take r e g u l a t o r y  action.  The s u b s i d i a r i e s s e l l to  other s u b s i d i a r i e s or to the parent across boundary.  Multinationals  diffi-  the n a t i o n a l  pay tax on t h e i r p r o f i t s i n Canada  but by t r a n s f e r p r i c i n g or manipulating the c o s t of s e r v i c e s provided, p r o f i t s can be t r a n s f e r r e d to places  where corporate  p r o f i t s tax r a t e i s lower, that i s to tax havens. and  more d i v e r s i f i e d  can be l o s t i n taxes, i s also  the m u l t i n a t i o n a l  The l a r g e r  investment, the more  so that the economy s u f f e r s and c o n t r o l  lost. The l a s t c o s t and the most d i f f i c u l t  i s perceived  as l o s s of s o v e r e i g n t y  to a r t i c u l a t e  over p u b l i c p o l i c y ,  that i s , the a b i l i t y to take d e c i s i o n s  i n national interest  unhampered by the i n f l u e n c e 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  with the Enemy Act that i t has US-owned companies and are r e q u i r e d  e x t r a t e r r i t o r i a l power over  elsewhere and  in their a c t i v i t i e s  that these companies  to conform to US  law.  Act i s b e l i e v e d to have f o r c e d many U S - c o n t r o l l e d to forego  Trading  The  companies  p o t e n t i a l export s a l e s to many c o u n t r i e s with whom  Canada has  f u l l and  c o r d i a l diplomatic  relations.  Similarly,  exports.of  c e r t a i n goods which c o n t a i n  a high-tech  component  i s p r o h i b i t e d to c e r t a i n c o u n t r i e s . tify  It i s d i f f i c u l t  the monetary l o s s i n such cases,  but  to quan-  i t can be  politi-  c a l l y r a t h e r embarrassing f o r the host government. another aspect  of the same problem i s that economic i n t e g r a -  t i o n o f t e n leads  to c u l t u r a l i n t e g r a t i o n , e s p e c i a l l y i n a  case l i k e Canada and t i o n s , language and and where USA  Further,  USA  where s o c i a l and  cultural  institu-  r e l i g i o u s b e l i e f s are a l r e a d y s i m i l a r ,  i s f a r more dominant than Canada.  Predecessors of FIRA The  Royal Commission on Canada's Economic Prospects  c h a i r e d by Walter Gordon, which was  constituted in  and  f i r s t brought to  t a b l e d i t s r e p o r t in. l a t e 1957,  1955 the  n o t i c e of the Canadian people the degree of f o r e i g n c o n t r o l over Canadian economy and  i t s consequent c o s t s . 9  s t u d i e s i n t e n s i f i e d the p u b l i c concern. was  that both f e d e r a l and  to r e g u l a t e  and  The  g  Subsequent  result  p r o v i n c i a l governments  tried  monitor the n o n - r e s i d e n t - c o n t r o l l e d  firms.  145  The  i d e a was  to prevent the i n c r e a s e i n f o r e i g n con-  c e n t r a t i o n r a t h e r than to f o r c e i t s d e c l i n e . was  l e g i s l a t i o n by which key  The  result  s e c t o r i n d u s t r i e s were to  be kept i n Canadian hands. The  Watkins Report, 1968,  of f o r e i g n o p e r a t i o n s  provided  i n Canada and  Canadian economic n a t i o n a l i s m .  launched a new  I t showed a great  f o r 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 mitted  a fresh analysis  concern  laws being  to Canada through the m u l t i n a t i o n a l s and  The  t r i a t e Canadian business  to buy  T h i s was  agency to survey and multionationals  e g u i t y i n and  to be coupled screen  i n Canada.  1 1  with  of Canada thus  repa-  the c r e a t i o n of  investments and 10  operations  export an of  As a r e s u l t Canada Development  Wahn Report i n 1970  more r a d i c a l .  national  c o u l d be i n c r e a s e d and  Corporation-was e s t a b l i s h e d i n  and was  It also  so that Canadian managment s k i l l s  c o u l d be imp'royedV: , 9 l o c a l R&D  The  country's  r e p o r t recommended establishment  Development C o r p o r a t i o n  expanded.  dis-  whether f o r e i g n i n v e s t o r s c u l d not be r e q u i r e d to  guarantee g r e a t e r b e n e f i t s to the host economy.  trans-  their  couragement of g r e a t e r Canadian e n t e r p r e n e u r s h i p . questioned  era of  1971. b u i l t on the Watkins Report  I t c a l l e d f o r an eventual  transfer  to Canadian m a j o r i t y ownership of a l l f i r m s o p e r a t i n g  in  Canada, m a j o r i t y Canadian r e p r e s e n t a t i o n 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 f o r e i g n borrowing i n Canadian market, appointment of gowerinment t r u s t e e to e x e r c i s e v o t i n g r i g h t s of foreign-owned shares of  any  146  company a f f e c t e d by e x t r a - t e r r i t o r i a l law.  New  Mines and by  Resources concerning new  equity p a r t i c i p a t i o n  f o r e i g n i n v e s t o r s i n both resource e x p l o i t a t i o n and  the  i n Canada of primary products?=  In March 1970,  the government assigned  task of b r i n g i n g forward proposals  policy for i t s consideration.  i n 1972,  but  i t was  on  Herbert Gray,  f o r e i g n investment  A working group was  to prepare background m a t e r i a l published  1  g u i d e l i n e s were i s s u e d by Department of Energy,  processing  the  a s s e r t i o n s of f o r e i g n  set  to a s s i s t . I t s r e p o r t asserted  a statement of government p o l i c y nor  that i t was  up was  not  d i d the government  endorse a l l aspects of the a n a l y s i s contained  in i t .  r e p o r t recommended a mechanism of f o r e i g n investment  The screen-  12 i n g agency; not  found the  'key  sector'  approach u s e f u l ,  f l e x i b l e enough; the f i x e d - r u l e approach  Canadianization  of a percentage of e q u i t y  assurance that the Canadian p o i n t ed and  requiring?  insufficient  of view would:,be> r e s p e c t -  to i n v o l v e u n j u s t i f i a b l e c o s t s .  I t favoured  t i n y of a l l f o r e i g n takeovers of Canadian f i r m s and all  new  investments as w e l l as of u n r e l a t e d  a l s o favouredrs.GJr ;e;e:n in;g of l i c e n s i n g arrangements, :  1  venture agreements and management c o n t r a c t s foreign  firms.  scruof  expansion of  f o r e i g n c o n t r o l l e d companies e s t a b l i s h e d i n Canada.  Canadian and  but  between  It  joint  147 The  o b j e c t was  to ensure that new  enter Canada only on terms f a v o u r a b l e reviewing  investment would  to Canada.  In  the f o l l o w i n g f a c t o r s were to be taken i n t o  consideration:  nature  of the i n v e s t o r ' s product  r e l a t i o n s h i p of the s u b s i d i a r y to the parent to i t s i n t e r n a t i o n a l a f f i l i a t e s ; plans f o r R&D;  source  Canadianization  of raw  m a t e r i a l s and  of personnel,  c a p i t a l s t r u c t u r e and  sources  managers and  company to be  and  employed;  components; the  directors;  of f i n a n c i n g ; and degree of  p r o c e s s i n g of primary products. seen i n the context  technology  line;  These f a c t o r s had  to be  of c o n t r i b u t i o n to p r o d u c t i v i t y 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 c o m p a t i b i l i t y with government's i n d u s t r i a l p o l i c y ; i t s c o n t r i b u t i o n to n a t i o n a l l e v e l of economic a c t i v i t y employment; i t s g e o g r a p h i c a l competitive  and  l o c a t i o n i n Canada and i t s  impact.  F o r e i g n Investment Review Act, 1973-74 F o r e i g n Investment Review Act was Rfeport.  I t was  not simply  f a t h e r e d by  the Gray  a matter of e l i m i n a t i n g the  c o s t s of f o r e i g n investment.  I f f o r e i g n investmetn  perceived  only r e s u l t e d  i n c o s t s 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 p l a y  14 an important Therefore,  r o l e i n Canada's economic development."  the b e n e f i t s had  to be enhanced and  c o s t s minimized.  148  F u r t h e r , the c o s t s and b e n e f i t s had t o be c o n s i d e r e d not i n g e n e r a l but with r e f e r e n c e 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 b r i n g benefits  to Canada.  While approving a p a r t i c u l a r  the a u t h o r i t i e s were supposed f o r e i g n f i r m s "to improve direct investment". comprehensive  16  investment,  to " n e g o t i a t e " with the  net b e n e f i t s from proposed  foreign  But the Gray Report r e c o g n i z e d , that a  i n t e r v e n t i o n was  not p o s s i b l e "on grounds of 17  both enonomic p o l i c y and a d m i n i s t r a t i v e f e a s i b i l i t y " . Thus, only a s e l e c t i v e i n t e r v e n t i o n was on the "economic s i g n i f i c a n c e "  1 8  recommended based  of the investment. I t was 19  a l s o emphasized  that "general p o l i c y instruments"  be evolved and the approach  ought  to be f l e x i b l e , : keeping  i n mind that very d e f i n i t e b e n e f i t s came from d i r e c t investment. from  "new  had to  foreign  Thus, Canada should not be c l o s e d o f f  developments i n technology and management e l s e -  where" and from  "access to some f o r e i g n markets f o r c e r t a i n  products." The Act i t s e l f was  f a i r l y moderate i n that i t d i d not  apply to e x i s t i n g f o r e i g n b u s i n e s s i n Canada and i t s expansion i n t o r e l a t e d a c t i v i t y  or to i t s reinvestment  of p r o f i t s i n t o r e l a t e d a c t i v i t y . of f o r e i g n d i r e c t investment.'  T h i s i s a major source  I t a l s o d i d not prevent  foreign  business from buying i n t o other businesses i n Canada a s . l o n g as t h i s d i d not r e s u l t i n a c q u i s i t i o n of c o n t r o l over b u s i n e s s e s .  149  Even  i f a foreign  business  in  Canada;  or expand  or  acquire  control  over  another  not prohibited  from  doing  was to  that  ensure to  effect that  Canada.  some  Negotiating  agency sign  or  t o GATT  enforceable  was  that  imposing  and  Artcile  XXIII  a contracting content  because  favoured.  I t had to g i v e process  American  notice  i n order  i n significant  to  benefit  investors,  found  i n 1982 1  that  .was m a k i n g  like  buying  t o commit  the products  Canadian  production^,''?  of their  products  i n Canada  on t r a d e .  Article  to products  party.  investors  of their  T h e US  conditionsi^feviolated  o f GATT.  t h e FIRA  amount  restrictions  111(4)  imported  The American  requirements  made  panel  undertakings  some  such  treatment  were :slniost  i n Canada, i t  negotiating role  exporting a specific  not — d i s t r i b u t i n g  local  resulted  i n Canada;  FIRA  invits  i n severe  III  by  complained  resulted  of  so.  business  Process  i n Canada,  national  a new  with Act. caused  legally  goods,  business  a review  Investors, chiefly  Difficulties  to start  unrelated business  and undergo  i t sa c t i v i t y  problems  USA  into  wanted  o t which themselves  of domestic  which  position  Article III 2  from  provides f o r  2  the  agrument  the foreign  territory  was  that  the  investors  iolated - Article producers  were  thereby  150  A l t e r n a t i v e l y , even i f A r t i c l e I I I or any other specific XXIII ^ 2  p r o v i s i o n of GATT was not v i o l a t e d , u n d e r  members c o u l d complain a g a i n s t measures which had  the e f f e c t fit.  Article  of " n u l l i f y i n g " or " i m p a i r i n g "  any t r e a t y bene-  I t was a l l e g e d that commitments made by non-Canadian  i n v e s t o r s under FIRA c o u l d undermine b e n e f i t s which the US expected to r e c e i v e a f t e r t a r i f f tiated  concessions  were nego-  under the t r e a t y . Further,  the American agrument was that by r e g u i r i n g  an American c o r p o r a t i o n i n Canada to i n c r e a s e i t s exports and  decrease i t s imports,  and  i n c r e a s e d US imports from Canada which was d e t r i -  mental to USA. they would serve cularly effect  i t reduced US exports  A l s o , i f s u c h _ p o l i c i e s were l e f t as p r e c e d e n t s  f o r other nations  the l e s s developed c o u n t r i e s thus having  Americans a l s o argued that such  contravened A r t i c l e I I  2  4  partia detrimental  The answer to that was  that the D e c l a r a t i o n was only a p o l i t i c a l document and, t h e r e f o r e , i t s c o n t r a v e n t i o n sanctions.  Further,  undertaking  of the OECD agreed upon by:;, the  governments of member-countries.  high  unchallenged,  on American investment throughout the world. The  legal  to Canada  and not a l e g a l c o u l d b r i n g no  i n view of the e x t r a o r d i n a r y  l e v e l f o r e i g n ownership and 'control i n Canada,  151 Canada had made r e s e r v a t i o n s before c l a r a t i o n by which i t had "continued  accepting  the De-  to r e t a i n i t s r i g h t 25  to take measures a f f e c t i n g f o r e i g n i n v e s t o r s . " The  GATT panel r u l e d that the undertakings  being  taken from f o r e i n g i n v e s t o r s by the FIR Agency was a g a i n s t the p r o v i s i o n s of GATT.  T h i s was a v i c t o r y f o r the US i h i i t s  e f f o r t s to prompt the r e l a x a t i o n of FIRA requirement. the same time, the panel r u l e d i n favour it  At  of Canada when  d i d not f i n d any v i o l a t i o n of the GATT p r o v i s i o n s i n  r e q u i r i n g f o r e i g n i n v e s t o r s to undertake to i n c r e a s e exports from t h e i r Canadian  their  operations.  E x t r a - t e r r i t o r i a l i m p l i c a t i o n s of FIRA The being  American f e e l i n g was that t h e i r business was  t r e a t e d 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. T h i s came to the f o r e i n the Dow Jones case.  Dow Jones & Co. Inc. was a p u b l i c l y - h e l d US con-  cern engaged i n d i v e r s e communication a c t i v i t i e s . D. Irwin puhlisher  (irwin-US),  a l s o a US C o r p o r a t i o n ,  was a major book  and Irwin-Dorsey L t d . was i t s wholly-owned Canadian  subsidiary.  Dow Jones, which had acquired  -interest i n Irwin-US, decided  to acquire  that d i r e c t i o n , Dow Jones i n c o r p o r a t e d poration  Richard  Jones caused RDI to merge with Irwin-US.  e x i s t as a corporate  it.  As a step i n  RDI Inc.,  as i t s wholly owned s u b s i d i a r y .  merger RDI a c q u i r e d  a substantial  a US c o r -  In 1975, Dow As a r e s u l t of the  Irwin-Dorsey and Irwin-US ceased to entity.  152  The  purpose of s t u c t u r i n g 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 t h e i r stock on a t a x - f r e e b a s i s f o r shares of Dow Jones and not avoid the FIRA review. Since  the merger came o s t e n s i b l y withicitthe scope •_  FIRA, Dow Jones submitted i t s investment proposal agency but r e s e r v e d  to the  f o r i t s e l f t'he r i g h t to contest - F-IRA-! s  j u r i d s i c t i o n to review i t .  The Agency r e f u s e d  to approve  the t r a n s a c t i o n 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 b e n e f i t t e s t . trial  d i v i s i o n of the F e d e r a l  Dow Jones sued i n the  Court of Canada  contesting  FIRA s j u r i s d i c t i o n to review the t r a n s a c t i o n . 1  The  trial  c o u r t h e l d that the agency had the j u r i s -  d i c t i o n to review the t r a n s a c t i o n .  The a p p e l l a t e  division,  on appeal by Dow Jones, upheld the d e c i s i o n of the t r i a l court.  Dow Jones then appealed to the Supreme Court of  Canada which r e f u s e d The  to hear the case.  i s s u e r a i s e d i n the Dow Jones case that FIRA  c o u l d not a c t e x t r a - t e r r i t o r i a l l y as that would be a v i o l a t i o n of i n t e r n a t i o n a l law was s k i r t e d by-.the c o u r t when i t s a i d that FIRA only purported to r e g u l a t e the a c q 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 c o u r t r u l e d  that  the Act d i d not have an 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 in  t h i s case.  In d i c t a ,  the c o u r t i n d i c a t e d that even i f  153  an 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 wSS would s t i l l  i n v o l v e d , the Act  be v a l i d because the Parliament c o u l d 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 f o c u s s i n g on the p a r t i c u l a r case of Irwin-Dorsey,  the c o u r t  avoided examining  by  Dow  the i n t e r n a t i o n a l  law i s s u e r a i s e d  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 t r e a t e d u n f a i r l y by e x t r a - t e r r i t o r i a l o p e r a t i o n of FIRA. put i t . "  the  As oneT'Commentator  [ t ] h i s i s p r e c i s e l y the k i n d of i n t e r f e r e n c e  which the Canadian  Government would r e s e n t were a f o r e i g n  government to attempt  to l e g i s l a t e i n what would be  as a domestic transadt'iionvin Canada."  regarded  ^7  Significant Benefit Criterion The felt  Act was  f u r t h e r c r i t i c i s e d because the i n v e s t o r s  that .the standard f o r determining wh'et-frea: an  would be of s i g n i f i c a n t b e n e f i t  investment  to Canada or not was  vague.  T h i s hindered the n e g o t i a t i n g process and made i t more d i f f i c u l t . 28  The Commissioners of FIRA p o i n t e d out that i n v e s t -  t o r s were more l i k e l y to agree  to undertakings  i f they under-  stood that these undertakings were r e q u i r e d 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 s c r e e n i n g process appeared  totally  arbitrary,  154  The of  problem the  is,  was  compounded by  guidelines  the  vestor  FIRA who  officials  was  Reviewable To  were  the  fact  that  majority  internal  to  had  guidelines while  expected  the  to  the  the  follow  government.  them d i d  That  the  in-  not.  Investments make m a t t e r s  worse,  i t was  not  always  clear  29 whether  a particular  investment  Many p o t e n t i a l i n v e s t o r s if  their  planned  or  not.  The  had  no  legal  binding  section. give  a  Under  legally  "non-eligible The  opinion  all  material  of  the  person"  years.  and  was  opinion  not  and  the  the  to  find  agency  reviewable  on  but as  only  a  remained i f the  created  as  this  said  unnecessary  opinion under  M i n i s t e r who  could  an  i n v e s t o r was  a  two  the  for  reviewable.  years  time  that  that  the-Minister  the  the  Minister for  agency  under  t r a n s a c t i o n was  unchanged  out  a guideline"  whether  been d i s c l o s e d at  reviewable,  this  not.  only  i t was  whether on  or  opinion  act  opinion  binding  Hence even  action  4(1)  or  f a c t s had  opinion  an  i t could  binding  reviewable  w o u l d be  agency gave  section  was  approached  investment  Act  was  of  provided the  period  of  a particular  was  not  giving two trans-  bound by  that  uncertainty.  Delays The of  time  vided  situation  i t took  was  to get  further aggravated a decision.  f o r deemed a p p r o v a l  Minister  and  cabinet  i f no  within  Section  d e c i s i o n was  sixty  days.  by  the  13  of  length FIRA  t a k e n by  prothe  155  But  the  M i n i s t e r d i d not n e c e s s a r i l y have to come to a 30  d e c i s i o n w i t h i n those s i x t y days.  He c o u l d inform the  a p p l i c a n t by n o t i c e i n w r i t i n g that the a p p l i c a n t had the r i g h t to submit "such r e p r e s e n t a t i o n s  i n connection  with the matter has he or they see f i t . "  Thus, i n s t e a d  of automatic approval,  such a n o t i c e was sent  review p e r i o d c o u l d be prolonged The delay.  indefinitely.  concerned p a r t i e s blamed each other  f o r the  The agency blamed the a p p l i c a n t s f o r being  slow and u n w i l l i n g to provide while the i n v e s t o r s f e l t and  and then the  the r e q u i r e d  very  information  that the agency was too demanding  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 s t a t u r o t y c r i t e r i a of " s i g n f i c a n t b e n i f t " were vague so that they d i d 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 p r o v i n c i a l governments and f e d e r a l departments were too slow i n g i v i n g t h e i r o p i n i o n s  on the--  proposed investment which the agency was s t a t u t o r i l y required  to take i n t o .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  p r o v i s i o n s forbade  the agency to d i s c l o s e the  name of the a p p l i c a n t or the Canadian business be a c q u i r e d .  proposed to  Hence, t h i r d - p a r t y r e p r e s e n t a t i o n s were us-  u a l l y the r e s u l t of rumours heard by a competitor ployee  groups. ^  The r e p r e s e n t a t i o n s c o u l d al^sepbe by  members of parliament Secrecy  r e l a y i n g a concern from a c o n s t i t u e n t .  p r o v i s i o n s a l s o made i t d i f f i c u l t  informations  or em-  to get r e l e v a n t  i n response to tfresre r e p r e s e n t a t i o n s because : :  the agency c o u l d not even r e v e a l that a p a r t i c u l a r appl i c a t i o n was being reviewed. not respond to the questions he was not aware of t h e i r Unwieldiness The  r a i s e d and c l a r i f y  d e c i s i o n was to be made by the Cabinet.  i t worked out to about s i x t e e n cases  it  a year had to  i t was a time-consuming process  M i n i s t e r as w e l l as f o r the Cabinet. ^  cussion.  them because  existence.  that about e i g h t hundred cases  be d e a l t with,  Cabinet  the a p p l i c a n t c o u l d  of the Process  final  Considering  Further,  out of which a t l e a s t  As " bas been p o i n t e d out, ;  per week . f o r the  four r e g u i r e d d e t a i l e d d i s -  Since each case had to be decided  left little  f o r the  individually,  time f o r e v o l v i n g p o l i c y g u i d e l i n e s .  157  Confidentiality I f an a p p l i c a t i o n was  disallowed,  no reasons were  33 given.  A l l that was  failed  s a i d was  that the a p p l i c a t i o n had  to meet the s i g n i f i c a n t b e n e f i t t e s t .  gave the d i s c r e t i o n to the M i n i s t e r to give  The  statute  information  on undertakings except where the M i n i s t e r f e l t  that such  a d i s c l o s u r e would not serve  respect  to the a d m i n i s t r a t i o n affect very  any  purpose  of the Act and  would  the a p p l i c a n t i n h i s b u s i n e s s .  little  information  precedents to guide him iveness  and  prejudicially  Since  d i s c l o s e d , a new  of the Act'-became  Compliance with the  with  there  a p p l i c a n t had  the e v a l u a t i o n of the  no  effect-  difficult.  Act  Under s e c t i o n < • •] 5 , the M i n i s t e r could order i g a t i o n s to f i n d out whether the terms and crucial  was  to the approval  invest-  conditions  of the investment were being  resp-  34 ected.  Of course, i t was  conceded even i n the Gray Report  that an i n v e s t o r c o u l d not : be h e l d r e s p o n s i b l e :  compliance i f the market c o n d i t i o n s changed.  f o r non-  But  the  M i n i s t e r seemed to have u n l i m i t e d d i s c r e t i o n i n determi n i n g whether the market c o n d i t i o n s had  changed.  a l s o not c l e a r that upon such a d e t e r m i n a t i o n , i f M i n i s t e r decided he had  to modify the  to take f r e s h c a b i n e t  It  was  the  terms of agreement^whether  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  faithfully  the  158  the Act was  being  the designated  complied with by  M i n i s t e r and  the  the i n v e s t o r and  by  cabinet.  Other Problems F i n a l l y , US  i n v e s t o r s claimed  a p p l i c a b l e to a company's extension of business,  they f e l t  that s i n c e FIRA  was  i n t o an u n r e l a t e d  area  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 t h e i r  undertakings.-^  FIRA to Investment Canada In view of the d i f f i c u l t i e s  faced by  the  the government showed a w i l l i n g n e s s to streamline The  notes accompanying Mr.  Gray.'f| l e t t e r  Bar  A s s o c i a t i o n i n d i c a t e d that g u i d e l i n e s c o u l d  investors, procedures.  to the Canadian be'issued  on a " r e g u l a r i n d u s t r y s e c t o r b a s i s to i n d i c a t e the manner i n which the c a b i n e t  or Review Agency i s i n t e r p r e t i n g the  significant benefit c r i t e r i a  i n the l i g h t of changing  economic c o n d i t i o n s  and  i t was  that these g u i d e l i n e s c o u l d not  pointed  out,  deal with a l l the proposals  impact on  d i f f e r e n t f a c t s present  even w i t h i n  business being  government p o l i c y " although really  in different  the same i n d u s t r y l i k e the s t a t e of  acquired,  the impact on competition,  t e c h n o l o g i c a l advancement and  s a i d that whenever the Act was procedure c o u l d be provided  others.  The  the notes  amended, a p r e - n o t i f i c a t i o n  f o r and  i n t e r p r e t a t i o n notes  159  could be i s s u e d r e g u l a r l y to s o l v e problems of i n t e r p r e tation.  3 6  In vestment  June 1982,  the t h r e s h o l d f o r review f o r new i n -  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  r a i s e d from 2 m i l l i o n  i n gross a s s e t s and 100 employees to 5 m i l l i o n  dollars  dollars  and 200 employees. ^ F u r t h e r , i f a f o r e i g n - c o n t r o l l e d 3  Canadian company was of  a c q u i r e d because  of the a c q u i s i t i o n  i t s parent or of another f o r e i g n c o n t r o l l e d company/  then the t h r e s h o l d f o r 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 a s s e t s and 600  em-  38 ployees.  The s m a l l b u s i n e s s investments were not be  s u b j e c t e d to f u l l  review procedure, u n l e s s they r a i s e d . f  important p o l i c y i s s u e s .  Only the "key elements  investment p r o p o s a l " were to be- "examined.  The  decision-making process even i n the case of 39 review procedure was to be s i m p l i f i e d . On August .: 23, 1982, announced by Mr.  of the  internal  full  three f u r t h e r measures were  Gray to s t r e a m l i n e procedures:  (1)  the issuance of i n t e r p r e t a t i o n notes c o v e r i n g certain legal issues;  (2)  the i n s t i t u t i o n of a formal p o l i c y on the p r o v i s i o n of o p i n i o n s by F o r e i g n Investment . Review Agency on l e g a l q u e s t i o n s Concerning the a p p l i c a t i o n of the Act; and '  (3)  the i n t r o d u c t i o n of changes to the R e g u l a t i o n s 40 and the forms f o r f i l i n g n o t i c e .  160  Finally,  i n October 1982,  Mr.  Mr.  Lumley as M i n i s t e r of Industry,  and  the M i n i s t e r r e s p o n s i b l e  Foreign  Gray was  replaced  Trade and  Commerce  f o r FIRA.  Investment Review Agency was  The  was  a "safe place  to expand and  to do business";  modernize."  1  Commissioner  a l s o changed.  moves were an attempt to r e a s s u r e i n v e s t o r s  it.  These  ^that i t was  "safe  41  l i n e procedures, there was  no move to reform the  Even the Canadian Bar  c r i t i c i z i n g FIRA, had  of  that Canada  While the government showed a w i l l i n g n e s s  framework.  by  a few  Association,  p o s i t i v e things  I t accepted that the Review Agency had  to streamstatutory  while  to say ensured  f o r e i g n investment conformed to the economic p o l i c y i v e s of both the f e d e r a l and  about that object-  the p r o v i n c i a l governments.  Because of the Agency's involvement i n t e r n a t i o n a l product mandates had  been secured f o r Canadian made goods and  the amount spent on research  and  development had  creased; Canadian-owned technology had  been i n -  imporved; there  increased  Canadian),; p a r t i c i p a t i o n i n management and  s h i p ; and  new  v i c e s had  been e s t a b l i s h e d .  Bar  s u p p l i e r i n d u s t r i e s and  A s s o c i a t i o n d i d not  Act but  4 2  services;  consultative  Therefore,  the  was  ownerser-  Canadian  recommend the a b o l i t i o n of  the  a change of approach which would p r o j e c t 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 " p o s i t i v e f a c t o r s which, i f met  w i l l enable f o r e i g n i v e s t o r s to be more s u c c e s s f u l i n Canada .... f o r e i g n investment review must be a p o s i t i v e „ 43 experience." ^  J  To make the experience a pofei.tivey one, the Canadian Bar  A s s o c i a t i o n recommended s e v e r a l changes i n the i n v e s t -  ment review law.  The most important were issuance  of guide-  l i n e s on i n d u s t r y s e c t o r b a s i s to i n d i c a t e how the s i g n i f i c a n t b e n e f i t t e s t would be a p p l i e d while at the same time, keeping a f l e x i b l e a p p r o a c h . was ' recommended to apply  44  A p r e - n o t i f i c a t i o n procedure  to a l l new businesses and take-over  n o t i c e s below meaningful t h r e s h o l d  level.  The t h r e s h o l d  l e v e l s were to s h a r p l y increase'^ so that only the important investments came under the review procedure and thus c o u l d 4S  be  thoroughly reviewed.  the i n f o r m a t i o n  flow  government p o l i c i e s ,  Emphasis was placed  on i n c r e a s i n g  so that a p p l i c a n t s would know the the s t a t u s of t h e i r a p p l i c a t i o n , the time  i t would take to get a d e c i s i o n and the agency's d i s p o s i t o n towards them. ^ T h i r d p a r t y i n t e r v e n t i o n s were e i t h e r to be 4  eliminated  or i f allowed, then a system was r e q u i r e d ' whereby  the a p p l i c a n t c o u l d a l s o respond to them. ^ F i n a l l y , 4  i t was f e l t  that emphasis should  s h i p as on e v o l v i n g methods' f ° cipation.  r  not be so much on ownergreater  Canadian  parti-  162 Report of the Macdonald  Commission  The change of a t t i t u d e and mood i s r e f l e c t e d i n the r e p o r t of the Macdonald  Commission which  recommends  l i b e r a l i z a t i o n of laws p e r t a i n i n g to f o r e i g n  investment  i n s p i t e of a c c e p t i n g that there i s a r a t h e r high degree of non-resident c o n t r o l over Canadian economy and sees f r e e trade with USA as a means of encouraging investment 48 both domestic and American. i n the Macdonald  The p o i n t of view expressed  Commission Report has been r e p u d i a t e d 49  by the Other Macdonald  Report.  In r e a l i t y ,  i t i s the 50  o l d debate of " n a t i o n a l i s m " versus " c o n t i n e n t a l i s m . " I t i s only a q u e s t i o n of which pragmatic economic  s i d e i s dominant because of  realities.  According to the f i g u r e s i n the Macdonald  Commission  51 report,  i n 1982 f o r e i g n companies h e l d 49% c o n t r o l i n  Canadian manufacturing, 45% i n petroleum and n a t u r a l gas, 43% i n mining and s m e l t i n g ; and 26% i n a l l other i n d u s t r i e s i n c l u d i n g a g r i c u l t u r e and f i n a n c e .  Firms c o n t r o l l e d i n the  United S t a t e s owned most of these l a r g e f o r e i g n h o l d i n g s and accounted f o r about 80% of the f o r e i g n d i r e c t investment i n Canada.  The Commission accepted that few other  economies,  apart from those of A u s t r a l i a , Belgium and I r e l a n d , had as much as 40% of t h e i r manufacturing c a p i t a l i n companies owned by n o n - r e s i d e n t s .  I t a l y , France, West Germany and the United  163  Kingdom had about  20% to 30% of t h e i r economies f o r e i g n owned;  Sweden and Norway about 10%, and the U n i t e d S t a t e s and Japan about 5%. However, the Commissioners  p o i n t e d out, the inward  flow of f o r e i g n d i r e c t investment had decreased from the 1960s.  Canada's share of g l o b a l d i r e c t investment had  f a l l e n from 16% i n the e a r l y 1960s to 3% i n the l a t e 1970s and then to a negative f i g u r e i n the e a r l y 1980s.  In s p i t e  of that Canada's stock of f o r e i g n investment remains because  of reinvestment of p r o f i t s by f o r e i g n  companies.  high  controlled  T h e r e f o r e , f o r e i g n m u l t i n a t i o n a l would continue  to p l a y an important r o l e i n Canada's economy. As the Report p o i n t s out, s u b s t a n t i a l b e n e f i t s accrue from inward c a p i t a l flows and these b e n e f i t s are likely  to i n c r e a s e i n f u t u r e .  The Canadian  e s p e c i a l l y gains c o n s i d e r a b l e revenue  Government  by t a x i n g gains which  can be a t t r i b u t e d to f o r e i g n investment: between 1.5% 52 and 2.5% of the gross n a t i o n a l product.  Even more  impor-  tant, f o r e i g n investment i s seen as a major v e h i c l e f o r v a l u a b l e technology, managerial know-how and e n t r e p r e n e u r s h i p . I t i s r e c o g n i z e d that Canadian p o l i c i e s should not impede the flow of these elements.  When a f o r e i g n i n v e s t o r has  164  e q u i t y ownership i n an e n t e r p r i s e , i t provides t i v e to apply  the ideas and processes  an i n c e n -  i n that e n t e r p r i s e .  L i c e n s i n g i s not as e f f i c i e n t because the l i c e n c e f e e i s much higher  and the innovator  i s tempted to take h i s ideas  to c o u n t r i e s where he can get more a d v a n t a g e o u s The  Report t r i e s  to r e p u d i a t e  . terms  the arguments of those  f a v o u r i n g more s t r i n g e n t c o n t r o l over f o r e i g n investment. For example, there i s the argument that m u l t i n a t i o n a l f o l l o w i n g a g l o b a l strategy;do rial  and research  businesses;  activities  not conduct as many manage-  as comparble Canadian c o n t r o l l e d  that they import more than they export;  some s u b s i d i a r i e s are e s t a b l i s h e d only to serve  and that  the domestic  market which leads to t r u n c a t i o n because the s u b s i d i a r i e s do not t r y to break out of the r e l a t i v e l y market to compete i n the world market. out that there i s l i t t l e  small domestic  The r e p o r t  evidence to show that  points  extensive  f o r e i g n c o n t r o l leads to these d e f i c i e n c i e s i n i n d u s t r y . ^ 5  While the d o m e s t i c a l l y c o n t r o l l e d f i r m s may spend more on research  and development, but the p r o d u c t i v i t y of f o r e i g n -  c o n t r o l l e d f i r m s was more. f i r m s may be importing  Again, the f o r e i g n c o n t r o l l e d  more because s u i t a b l e " i n p u t s " or  components may not be a v a i l a b l e i n Canada or may not be competitive  i n p r i c e or q u a l i t y with  imports.  Besides,  trunc-  a c t i o n r e s u l t e d from the N a t i o n a l P o l i c y of 1879, the relatively  small s i z e of the domestic market and the t a r i f f  165  and  non-tariff  Canada.  barriers  Hence,  mentioned  i t could  deficiencies  by;' i h e t r a d i n g  created  n o t be s a i d  were  that  partners  of  the above-  because of extensive  foreign  control. Again, firms  i s that  control the  policies  rolled taken and  them  firms  argument  i ti s difficult since  they  o f t h e home are likely  affect  national  decisions  example,  US-owned  imposed national  policy disputes  b y t h e US security  territorial  likely  t o be more to-preserve  security.  earnings  have  The C a n a d i a n  responsive cultural  often  to  cont-  t o measures autonomy  firms  i n Canada.  encourage multinationals a t home.  had t o choose  For to  Also,  between  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 .  arisen  government reasons;  application  government to  t o be r e s p o n s i v e  and t o expand  have  demands  5 4  controlled  American tax p o l i c i e s  o f American-owned  subsidiaries  competing Besides,  their  foreign  f o r the host  government.  American tax laws  repatriate  against  a r e more  by t h e government  preserve  laws.  another  on t r a d e  restrictions  on t h e i t r s u b s i d i a r i e s f o r  and on t h e a t t e m p t e d  o f US  anti-trust  extra-  a n d o;ther  regulatory  166  The is  t h i r d argument f o r r e g u l a t i n g f o r e i g n investment  that f o r e i g n m u l t i n a t i o n a l s o f t e n r e s t r i c t  the a u t h o r i t y of  t h e i r s u b s i d i a r i e s to export or to export with  innovative  55 techniques.  But,  the Commission f i n d s l i t t l e  to support t h i s c l a i m i n Canada. to determine the m o t i v a t i o n tions.  Besides,  evidence  i t is difficult  of the management i n many s i t u a -  There i s some evidence that f o r e i g n c o n t o r l l e d firms  i n manufacturing and  n a t u r a l resource  s e c t o r s tend to  favour  e s t a b l i s h e d s u p p l i e r s i n t h e i r home c o u n t r i e s over Canadian f i r m s o f f e r i n g goods of comparable q u a l i t y at prices.  competitive  S i m i l a r l y , managers of m u l t i n a t i o n a l s may  resist  g i v i n g the Canadian s u b s i d i a r i e s a world product mandate that i s , the manadate to produce p a r t i c u l a r as the s o l e corpoate source of supply because  products^  f o r world markets^  they want to maintain c o n t r o l 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 e x i s t , some form of government r e g u l a t i o n i s recommended.  But  the r e p o r t emphasizes that the extent  government i n t e r v e n t i o n that i s there i n F o r e i g n Regulation is  Act i s not r e q u i r e d .  of  Investment  Hence Investment Canada Act  favoured. The  Commission a l s o b e l i e v e s that the same tax  r e g u l a t o r y p o l i c i e s should  and  govern f o r e i g n c o n t r o l l e d firms  which r e g u l a t e demestic firms except where c u l t u r a l  and  167  n a t i o n a l s e c u r i t y i n t e r e s t s demand otherwise. p r i n c i p l e of n a t i o n a l treatment  The  or n o n - d i s c r i m i n a t i o n a g a i n s t  f o r e i g n f i r m s had emerged as customary r u l e of i n t e r n a t i o n a l l a w and had been accepted by Canada i n 1976 by g i v i n g  formal  assent to the O r g a n i z a t i o n f o r Economic Co-operation and Development's D e c l a r a t i o n on I n t e r n a t i o n a l Investment and Multinational Enterprises. treatment  f o r domestic  The OECD r e c o g n i z e d that equal  and f o r e i g n c o n t r o l l e d f i r m s d i d  not preclude r e g u l a t o r y instruments" which would ensure  that  f o r e i g n c o n t r o l l e d f i r m s d i d not take d e c i s i o n s adverse to national interests.  The c o n v e n t i o n . a l s o a u t h o r i z e d p r i o r  s c r e e n i n g of f o r e i g n i n v e s t o r s and imposing  of s p e c i a l  c o n d i t i o n s with regard to performanee.undertakin'g  i n case  of f o r e i g n c o n t r o l l e d f i r m s t a k i n g over an e x i s t i n g busi n e s s or beginning a new b u s i n e s s . Apart from  l i b e r a l i z a t i o n of investment  laws, the  Macdonald Commission a l s o sees f r e e trade with the US as another i n Canada.  means of i n c r e a s i n g investment  and p r o d u c t i o n  I t i s accepted t h a t an important aspect of  trade i n Canada i s the dependence on a s i n g l e market, t h a t of the US.  national  I n s e c u r i t y of access to t h i s  market because of n o n - t a r i f f b a r r i e r s c r e a t e s unc e r t a i n t i e s which thwart i n Canada.  r a t i o n a l i z a t i o n of p r o d u c t i o n  Besides, a f r e e access to the American market  would a l s o 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 . access  to the US  necessary  Insecure  market prevents f i r m s from making  the  long-term investments i n p l a n t , technology  human r e s o u r c e s . ^  Also, f r e e trade would provide  to those areas where US "employes,, t a r i f f  and  access  and n o n - t a r i f f  b a r r i e r s l i k e Jon some s t e e l products'-and products i n the petro-chemical would  not  sector.  T h i s , i n the view of the Commission,  i n c r e a s e the dependence of Canada on USA  would lead to g r e a t e r d i v e r s i t y i n economic and  but  trade r e -  lations . Free trade would r e s u l t i n enhancement of  product-  i v i t y because of the i n c r e a s e i n the economies of s c a l e which would i n c r e a s e competitiveness uring s e c t o r .  5 9  i n the manufact-  T h i s would l e a d to s p e c i a l i z a t i o n  r a t i o n a l i z a t i o n of Canadian production.2, and  and  The r e s t r u c t u r i n g  r a t i o n a l i z a t i o n i n Canadian i n d u s t r y would i n c r e a s e  competitiveness  of Canadian f i r m s with  i n t u r n , mean a g r e a t e r a b i l i t y  f i r m s which would,  to s u r v i v e i n a more com-  p e t i t i v e g l o b a l trade environment. more c o m p e t i t i v e  US  the  Ultimately, creating a  domestic i n d u s t r y would g i v e r i s e  to more  jobs.Ji-and thus reduce unemployment. I t would enable ,w Canadian f i r m s to eo:ncentrate-.on t h e i r most e f f i c i e n t proi\ d u c t i o n l i n e s thus lengthening p r o d u c t i o n runs and f u r t h e r  169  lowering c o s t s . increase consumers  The r e s u l t i n g expansion of trade would  the v a r i e t y of products a v a i l a b l e to Canadian because although Canadian i n d u s t r y might  produce fewer types of each product, more types o v e r a l l would be a v a i l a b l e to c'ons.umens because of i n c r e a s e d The more e f f i c i e n t  i n d u s t r y would i n c r e a s e  trade.  Canada's  advantage over t h i r d c o u n t r i e s both i n the US market and i n the markets of the t h i r d c o u n t r i e s .  Thus, removal Q f ^ c b a r r i e r s  would r e s u l t i n lower c o s t s , higher wages and incomes  and  increased  output of the economy i n g e n e r a l because of  increased  and more secure access to American markets. Removal  of Canadian t a r i f f s would i n c r e a s e domestic c o m p e t i t i v e f o r c e s and compel r a t i o n a l i z a t i o n of domestic i n d u s t r y . Removal of f o r e i g n - t r a d e b a r r i e r s would f a c i l i t a t e dian p e n e t r a t i o n  of f o r e i g n markets p e r m i t t i n g  of s c a l e to be more f u l l y  Cana-  economies  exploited.  I t c o u l d be argued that removal of b a r r i e r s might induce s i g n i f i c a n t  amount of investment to leave Canada  because p r o t e c t i o n has encouraged these firms to i n v e s t i n Canada r a t h e r than to s e r v i c e Canadian markets from abroad.^  The Commission  accepts that i f Canada were to  reduce i t s b a r r i e r s u n i l a t e r a l l y ,  i n v e s t o r s would  have  l e s s i n c e n t i v e to remain but i f US a l s o withdrew i t s  170  barriers,  then f i r m s which were p r e v i o u s l y  from i n v e s t i n g i n Canada because of US  discouraged  trade b a r r i e r s  could enter Canada and produce f o r both the and  American  the Canadian market. The  second argument a g a i n s t f r e e trade c o u l d be  that  p r o t e c t i o n provided a,stimulus  to manufacturing i n d u s t r y .  The  that while u n i l a t e r a l move  Commission again accepted  towards f r e e trade c o u l d reduce the s i z e of manufacturing i n d u s t r y , but ''bilataral.. free') trade c o u l d produce a erent s i t u a t i o n . Increased  p e n e t r a t i o n of markets abroad  would i n i t s e l f be a stimulus would o f f s e t  diff-  to i n c r e a s e d p r o d u c t i o n  which  the r e d u c t i o n caused by removal of p r o t e c t i o n .  However, as t h i s would r e s u l t i n the r a t i o n a l i z a t i o n  of  Canadian i n d u s t r y , c e r t a i n d i s r u p t i o n s would take p l a c e f o r labour  and other  f a c t o r s of  would be more d i f f i c u l t  ..production.  These d i s r u p t i o n s  f o r Canada than f o r (.other- d e v e l -  oped economies because the Canadian economy was  spatially  more d i v e r s e ; and because Canada would be e n t e r i n g i n t o a^. f r e e trade agreement with a country  much l a r g e r than i t s  own. F u r t h e r , i t c o . u l d b e argued that such an agreement would reduce Canada's a b i l i t y to n e g o t i a t e for  access  to export  markets.  62  The  multilaterally  Commission agreed  that i t would be i d e a l 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 r a t h e r than  b i l a t e r a l n e g o t i a t i o n s but that had not been p o s s i b l e because forums l i k e GATT had e i g h t y - n i n e members and t h i r t y other c o u n t r i e s maintained rules.  a de f a c t o a p p l i c a t i o n of GATT  T h i s unwieldy decision-making  forums.  Moreover,  n o n - t a r i f f b a r r i e r s which Canada wanted reduced were o f t e n hard  to d i s e n t a n g l e from a v a r i e t y of domestic  which GATT member-States f o l l o w e d .  policies  Not only t h a t , GATT  i t s e l f had a l i m i t e d a d m i n i s t r a t i v e c a p a c i t y as an i n t e r n a t i o n a l i n s t i t u t i o n and, t h e r e f o r e , the p o s s i b i l i t y of a major breakthough i n the near f u t u r e were not t h e r e . In any case, ful  the major b e n e f i t f o r Canadians of a success-  GATT r e d u c t i o n o f n o n - t a r i f f b a r r i e r s would be i n c r e a s e d  s e c u r i t y of access  to the US market s i n c e Canada's trade  r e l a t i o n s were mainly with  the US.  Therefore,  the primary  o b j e c t i v e f o r 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\ • Finally,  the q u e s t i o n  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 m a i n t a i n i n g :  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  such a concern because far  that few  Canadians Xnowi:has!  over the years, thev had developed a  g r e a t e r confidence than b e f o r e about t h e i r own  cultural  d i s t i n c t i v e n e s s and i n the^f d i s t i n c t i v e n e s s of t h e i r and p o l i t i c a l  social  institutions.  The Other Macdonald  Report  \• The Other Macdonald  Report,  64  however, f e l t  that  such an agreement would l e a d to f o r e i g n economic domination and work to the detriment of domestic i n d u s t r y . g i v e n are, f i r s t ,  The  reasons  that Canadian manufacturing i n d u s t r y enjoyed  few comparative advantages  over the American  Hence, the removal of t a r i f f  industries.  b a r r i e r s would simply l e a d to the  replacement over time of Canadian manufacturing p r o d u c t i o n by American. The Canadian  labour thus r e l e a s e d from the manu-  f a c t u r i n g s e c t o r would be drawn i n t o the r e s o u r c e s and the s e r v i c e s s e c t o r s , or would emigrate, or would j u s t the of  ranks of the unemployed.  Secondly, heavy  swell  ownership  the US of Canadian i n d u s t r y would r e s u l t i n Canadian pro-  d u c t i o n b e i n g r e l o c a t e d i n the US even when the Canadian production.- c o s t s were lower. not  F i n a l l y , Canadian i n d u s t r y would  develop i n f u t u r e i n ways b e n e f i c i a l to Canada.  s e c t o r would be .strengthened at the expensegof^the s e c t o r which might, y i e l d higher income but which  The resource manufacturing  would.nullify  173  e f f o r t s to f o s t e r indigenous technology and r e s e a r c h development  necessary f o r Canadian i n d u s t r y .  Thus,  and we  see that the debate coninues. Investment Canada and iEil'RA Purpose The change?, of tone of Investment Canada i n d i c a t e s the change of attitude..  The purpose of Investment Canada  i s s t a t e d i n s e c t i o n 2:  "Recognizing that i n c r e a s e d  capital  and technology would b e n e f i t Canada, the purpose of t h i s Act i s to encourage investment i n Canada by Canadians and non-Canadians  that c o n t r i b u t e s to economic growth and employ-  ment o p p o r t u n i t i e s and to p r o v i d e f o r the review of s i g n i f i c a n t investments i n Canada bv non-Canadians ensure such b e n e f i t  to C a n a d a .  65  i n order to  T h i s i s i n c o n t r a s t to  s e c t i o n 2(1) of FIRA which s t a t e d that the Act was enacted by the Parliament i n r e c o g n i t i o n of the,extent to which c o n t r o l of Canadian i n d u s t r y , trade and 'commerce had become a c q u i r e d by persons other than Canadians and of the e f f e c t of t h i s c o n t r o l on the a b i l i t y of Canadians to maintain e f f e c t i v e c o n t r o l over t h e i r economic  environment-  T h i s had become a matter of n a t i o n a l concern.  The  of t h i s Act was  purpose  to e s t a b l i s h a means b y which measures might  be taken to ensure that c o n t r o l of Canadians b u s i n e s s ent e r p r i s e s may be a c q u i r e d by persons other than Canadians who  were not a l r e a d y c a r r y i n g on b u s i n e s s i n Canada or  174  whose new  businesses  i n Canada would be u n r e l a t e d to b u s i n e s s  a l r e a d y b e i n g c a r r i e d on by them i n Canada o n l y i f i t had been assessed or  that the a c q u i s i t i o n of c o n t r o l foyuthem  the establishment  likely  of new  businesses by them  to be of s i g n i f i c a n t b e n e f i t  was  to Canada.  R e s p o n s i b i l i t i e s of the M i n i s t e r The  change of tone i s a l s o evident i n the r e s p o n s i -  b i l i t i e s g i v e n to the M i n i s t e r r e s p o n s i b l e f o r the  admini-  s t r a t i o n of the Act.  admini-  In a d d i t i o n to h i s d u t i e s of  s t r a t i o n and d i r e c t i o n of the Agency e s t a b l i s h e d by s e c t i o n 6 of the A c t , ^  7  a c c o r d i n g to s e c t i o n 5 , ^  to encourage business investment:  he i s a l s o supposed  a s s i s t Canadian b u s i n e s s -  es to e x p l o i t o p p o r t u n i t i e s f o r investment  and t e c h n o l o g i c a l  advancement; and c a r r y out r e s e a r c h and a n a l y s i s r e l a t i n a to demestic  and  i n t e r n a t i o n a l investineat:;,-, provide  ment i n f o r m a t i o n s e r v i c e s and other investment to  facilitate  services  economic growth i n Canada; and ensure  the n o t i f i c a t i o n i n accordance  and review of investments  with the Act.  The  are c a r r i e d  foreign  had  Paterson  i n any case c o n f l i c t with each  I t might, a c c o r d i n g to him,  out  investment  while at the same time reviewing i t but as P r o f . the two,  that  M i n i s t e r under FIRA  hot been g i v e n the task of encouraging  p o i n t s out,  invest-  l e a d to more approvals  other.^9 than  were there i n the e a r l y years of FIRA, but as Samuel R.Baker ' 7  shows, the approval r a t e as FIRA evolved, was already more than 96%. The e s s e n t i a l c h a r a c t e r and  not p r o h i b i t i v e .  of FIRA was  regulatory  The idea was to ensure that the  investments of n o n - e l i g i b l e persons met the c r i t e r i a of s i g n i f i c a n t b e n e f i t to Canada. Significant  Benefit  In order to assess that s i g n i f i c a n t .^benefit would r e s u l t , s e c t i o n 2(2) of FIRA l a i d down f i v e (a)  criteria:  l e v e l and nature of economic a c t i v i t y i n Canada i n c l u d i n g the e f f e c t on 'employment,. , on resource processing, and  on u t i l i z a t i o n of p a r t s ,  components  s e r v i c e s produced i n Canada, and on exports  from Canada; (b)  degree and s i g n i f i c n a c e of p a r t i c i p a t i o n by Canadians i n the business e n t e r p r i s e ;  (c)  e f f e c t on p r o d u c t i v i t y , i n d u s t r i a l e f f i c i e n c y , t e c h n o l o g i c a l development, product i n n o v a t i o n and product v a r i e t y i n Canada:  (d)  e f f e c t on competition w i t h i n any i n d u s t r y or i n d u s t r i e s i n Canada;  (e)  c o m p a t i b i l i t y of the a c t i v i t y with i n d u s t r i a l and economic p o l i c e s .  national  I f we compare the c r i t e r i a -jof " s i g n i f i c a n t b e n e f i t " with that of "net b e n e f i t " i n Investment Canada we f i n d t h a t - s e c t i o n 20 ^  of Investment Canada repeats word f o r  word the f i v e c r i t e r i a  l a i d down i n s e c t i o n 2(2) of FIRA  17B  and adds one more: "the c o n t r i b u t i o n of the investment of Canada's a b i l i t y to compete i n world markets." Thus, if  I t i s enough  a "net b e n e f i t " r e s u l t s but s i n c e the c r i t e r i a  are in  the word " s i g n i f i c a n t " i s omitted.  the same, there need not always be a great  applied  difference  the i n t e r p r e t a t i o n of " s i g n i f i c a n t b e n e f i t " and "net  benefi t." Who  can i n v e s t without b e i n g subjected  to the  regulatory  mechanism of Investment Canada Investment Canada does not use the words " n o n - e l i g i b l e person." Those who  are s u b j e c t  of Investment Canada i s defined  3  7 2  defines  ai?e; non-Canadians.  not  1976,  A" non-Canadian  or an e n t i t y that i s not a Canadian".  we have to f i n d out who  i s a Canadian.  Section  a "Canadian" as (a) a Canadian c i t i z e n ;  a permanent r e s i d e n t w i t h i n Act,  scheme  by s e c t i o n 3 as "an i n d i v i d u a l , a government  or an agency thereof Therefore,  to the r e g u l a t o r y  who  the meaning of the Immigration  has been o r d i n a r i l y r e s i d e n t  i n Canada f o r  more than one year a f t e r the time at which he  became e l i g i b l e  (b)  first  to apply f o r Canadian c i t i z e n s h i p ; (c)  Canadian government or i t s agency -- f e d e r a l or p r o v i n - • cial;  (d) an e n t i t y that i s Canadian c o n t r o l l e d as per  s e c t i o n 26(1); or (e) a c o r p o r a t i o n 26(3)  decribed  i n section  .  Therefore,  a non-Candian,  and hence s u b j e c t  to review  process would be (a) a person not a Canadian c i t i z e n ; a permanent r e s i d e n t w i t h i n Act  'who h a s foeo  (b)  the meaning of the Immigration  177  Act who has been o r d i n a r i l y r e s i d e n t i n Canada f o r more than one year  a f t e r he f i r s t  Canadian c i t i z e h s h i p ;  became e l i g i b l e  to apply f o r  (c) a government of another  country  or i t s agency; (d) an e n t i t y that i s i n a c t u a l f a c t c o n t r o l l e d by non-Canadians; (e) c o r p o r a t i o n i n c o r p o r a t e d i n Canada not%eontrolled by Canadians. Who were the npn^e3Jiig|bl|e persons under FIRA? 3(1)  Section  d e f i n e d a "hon-eligib'le person" as (a) an i n d i v i d u a l  who was n e i t h e r a Canadian c i t i z e n nor a permanent r e s i d e n t w i t h i n the meaning of the Immigration Act, 1976.  I t included:  . (i)  a permanant r e s i d e n t who has been o r d i n a r i l y r e s i d e n t i n Canada f o r more than one year a f t e r the time he f i r s t became e l i g i b l e to apply f o r Canadian c i t i z e n s h i p .  (ii)  a) Canadian c i t i z e n who i s not o r d i n a r i l y r e s i d e n t i n '.Canada. b) government or agency of a government of another country; c) a c o r p o r a t i o n i n c o r p o r a t e d which i s i n f a c t c o n t r o l l e d by persons d e s c r i b e d by.(a) and (b) or a group of persons any member of which i s a person d e s c r i b e d i n (a) or (b) or by another such c o r p o r a t i o n .  Therefore,  i f we put a l o n g s i d e  the d e f i n i t i o n s of  a n o n - e l i g b l e 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 r e q u i r e d to be o r d i n a r i l y  r e s i d e n t i n Canada which i s not the case under Investment Canada.  Thus, the very same people are s u b j e c t to the  r e g u l a t o r y mechanism of the two l e g i s l a t i o n s .  178  Acquisition  of C o n t r o l  Under S e c t i o n 28(1)  73  of Investment Canada  i s a c q u i r e d by (a) a c q u i s i t i o n  of v o t i n g  shares of a c o r -  p o r a t i o n i n Canada;;, (b) a c q t i i s i t i o n o"ff v o t i n g an e n t i t y c a r r y i n g  i n t e r e s t s of  on a Canadian b u s i n e s s or which  d i r e c t l y or i n d i r e c t l y another e n t i t y c a r r y i n g business.  controls  on a Canadian  C o n t r o l may be a c q u i r e d by a c q u i s i t i o n  or s u b s t a n t i a l l y  control  of a l l  a l l of the a s s e t s used i n c a r r y i n g  on a  Canadian b u s i n e s s . 74 Under s e c t i o n  28(3),  control  a c g u i r e d when the m a j o r i t y of v o t i n g of u n d i v i d e d ownership i n t e r e s t s  i s presumed to have b.e*en interests  or the m a j o r i t y  i n the v o t i n g  shares are  acquired- i n case of c o r p o r a t i o n ; i f l e s s than a m a j o r i t y but  o n e - t h i r d or more of v o t i n g  unless i t can be e s t a b l i s h e d control  shares are r e q u i r e d ,  that  then  t h i s does not r e s u l t i n  i n f a c t , i t i s deemed to be an a c q u i s i t i o n . But  of c o n t r o l to review.  not a l l ijAve-Sitmenits which r e s u l t i n a c q u i s i t i o n by non-Candians of Canadian b u s i n e s s are s u b j e c t They become s u b j e c t  to review under  section  75 14  where c o n t r o l  interests is  i s a c q u i r e d by a c q u i s i t i o n  of v o t i n g  i f the v a l u e of the gross a s s e t s thus a c q u i r e d  5 million dollars  or more; or i f the value of the gross  a s s e s t s of the c o n t r o l l e r  and the value of the gross assets  a c q u i r e d amount to more than 50% of the value of the gross  179  a s s e t s of the c o n t r o l l e r and the value of the gross a s s e t s acquired amount to more than 50% of the value of the gross a s s e t s of the e n t i t y c o n t r o l l e d and the value of the gross a s s e t s a c q u i r e s 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 a s s e t s of the c o n t r o l l e r and  the  c o n t r o l l e d amount to 50 m i l l i o n d o l l a r s or more. However, n o t i c e of a c q u i s i t i o n of c o n t r o l s t i l l  needs  76  to be given under s e c t i o n 11(b) ' and s e c t i o n 15 p r o v i d e s that an investment  which i s not otherwise reviewable becomes  reviewable i f (a) i t falls business Governor cultural (b)  w i t h i n a p r e s c r i b e d s p e c i f i c type of a c t i v i t y t h a t , i n ^ t h e o p i n i o n of the i n C o u n c i l , i s r e l a t e d to Canada's h e r i t a g e or n a t i o n a l i d e n t i t y ; and  Within twenty-one days a f t e r the c e r t i f i c a t e date r e f e r r e d to i n paragraph 13.(1) ( a ) , (i)  (ii)  the Governor i n C o u n c i l , where he c o n s i d e r s iit.in the p u b l i c i n t e r e s t on the recommenda t i o n of the M i n i s t e r , i s s u e s an order f o r the review of the investment, and the Agency sends the non-Canadian making the investment  a n o t i c e f o r review.  S e c t i o n 15 must be read with Schedule g u l a t i o n s r e s p e c t i n g investment  IV of the  Re-  i n Canada which p r e c r i b e s  the s p e c i f i c .typesj of business a c t i v i t i e s  as:  180  1.  P u b l i c a t i o n , d i s t r i b u t i o n or s a l e of books, magazines, p e r i o d i c a l s or newspapers i n p r i n t or machine-readable form,  2.  Production, d i s t r i b u t i o n ,  ii  s a l e or e x h i b i t i o n of  f i l m s or video products, 3'.  P r o d u c t i o n , d i s t r i b u t i o n , s a l e or e x h i b i t i o n o,f audio or video music r e c o r d i n g s ,  4.  P u b l i c a t i o n , d i s t r i b u t i o n or s a l e of music i n p r i n t or machine-readable  form.  T h e r e f o r e , e x c e p t i o n a l cases can be reviewed o n l y i f they are engaged i n the above a c t i v i t i e s and that too only if  the M i n i s t e r c o n s i d e r s the review to be i n p u b l i c  interest  and the Govern er:/ i n C o u n c i l so orders w i t h i n twenty-one days of the date of f i l i n g of the completed investment.  n o t i c e of the  Thus, l a r g e number of investments have been  taken out of the review p r o c e s s . New Business 77 S e c t i o n 11(a)  of Investment  Canada t a l k s of "a  new Canadian b u s i n e s s " which i s s u b j e c t -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  i n s e c t i o n 15.  specified  A "new Canadian b u s i n e s s i n r e l a t i o n to a  non-Canadian means, under s e c t i o n 3"a b u s i n e s s that i s not a l r e a d y being c a r r i e d on i n Canada by the non-Canadian and that at t b e t i m e of i t s e s t a b l i s h m e n t , (a) i s u n r e l a t e d to any other b u s i n e s s being c a r r i e d on i n Canada by that nonCanadian" .  181  Under S e c t i o n 3(1) of FIRA a new  business meant  "as business not p r e v i o u s l y c a r r i e d on i n Canada by person or group of person  the  i n r e l a t i o n to which the express78  ion i s r e l e v a n t . "  Under s e c t i o n 8 ( 2 ) ( a ) ,  n o t i c e was  r e q u i r e d by a n o n - e l i g i b l e person i f he proposed t a b l i s h a new  business and at that time was  on any other business i n Canada.  carrying 79 S e c t i o n 8(2)(b)  p r o v i d e d f o r a n o t i c e i f the proposed the business a l r e a d y being c a r r i e d Thus, the requirements same with r e s p e c t to new i s that whereas a new  to es-  not  business was  r e l a t e d to  on.  under the two  l e g i s l a t i o n s are the  b u s i n e s s , but the important  business was  difference  s u b j e c t to review under  FIRA, i t i s not under Investment Canada except i n the  cir-  cumstances mentioned above. The Review Process Most severe c r i t i c i s m of FIRA was blems of implementation complaints  r e g a r d i n g the pro-  i n the review p r o c e s s .  The  main  i n t h i s 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 c l e a r whether an investment  was  reviewable or not; and the agency's o p i n i o n had < no "binding f o r c e ; :  182  delay; the c o n f i d e n t i a l i t y , surrounding the whole process so that no reasons were g i v e n i n case of r e j e c t i o n and  thus  no g u i d e l i n e s e v o l v e d ; t h i r d - p a r f y r e p r e s e n t i o n s ; too d e t a i l e d an i n f o r m a t i o n demanded by the FIR Agency. Investment seeks to remedy some of these problems  Canada  but. the procedures  remain unchanged i n case of many o t h e r s . The c r i t e r i a  f o r " s i g n i f i c a n t b e n e f i t " and "net  b e n e f i t " are the same except that an a d d i t i o n a l s u b - s e c t i o n has been added i n Investment  Canada s p e l l i n g out one more  f a c t o r to be c o n s i d e r e d : whether the investment would cont r i b u t e to Canada's a b i l i t y  to compete i n world  The change from " s i g n i f i c a n t " , assessment  may  to "net" may  markets.  i n d i c a t e that the  be l e s s r i g o r o u s but not n e c e s s a r i l y so.  I f depends on the i n t e r p r e t a t i o n g i v e n to i t from time to time by the r e v i e w i n g agency  and, i f anything, makes i t even  more ambiguous. Q Q  U n l i k e FIRA, s e c t i o n 37(1)  of Investment  Canada  makes b i n d i n g W r i t t e n o p i n i o n s a v a i l a b l e to i n v e s t o r s on a p p l i c a t i o n by them on whether t h e i r investment i s reviewable or not.  Investment  Canada a l s o t r i e s  by p r o v i d i n g time l i m i t s at every s t e p . ts  to minimise delays  A c c o r i n d g to S e -  "I  c t i o n 17,  i n case of a reviewable investment by a non-  Canadian,  the i n v e s t o r must make an a p p l i c a t i o n tro^Agency ;  183  i n the manner p r e s c r i b e d prescribed The  and c o n t a i n i n g  the i n f o r m a t i o n  i n Schedules I I and I I I of the R e g u l a t i o n s .  Agency must send;.the r e c e i p t of the a p p l i c a t i o n within"  f i f t e e n days of r e c e i v i n g the a p p l i c a t i o n f a i l i n g which;> the a p p l i c a t i o n would be deemed to be r e c e i v e d by the Agency complete i n a l l r e s p e c t s . p l e t e h i s review w i t h i n  The M i n i s t e r must com-  45 days or w i t h i n a f u r t h e r  period  of 30 days a f t e r which, i f no n o t i c e has been sent by the Agency, the a p p l i c a t i o n i s deemed to have been accepted. In case, the M i n i s t e r  t h i n k s thart the investment i s not  l i k e l y to r e s u l t i n net b e n e f i t to Canada, the a p p l i c a n t w i l l be given  another t h i r t y days to make f u r h t e r ' ~~  representations. I t w i l l be n O t i c e d l t h a t  decision-making on the app-  l i c a t i o n has been s h i f t e d t o t a l l y to the M i n i s t e r .  Under  FIRA, the d e c i s i o n was -made by the M i n i s t e r and the C a b i n e t . As the Macdonald Report p o i n t s  out t h i s "creates  a sub-  82 s t a n t i a l r i s k of a r b i t r a r y a c t i o n . "  The Report accepts  that the Cabinet i s too busy to examine a l l proposed takeovers" and, t h e r e f o r e , unal  recommends "a q u a s i - j u d i c i a l t r i b -  to review f o r e i g n i n v e s t m e n t . "  82  The c o n f i d e n t i a l i t y  surrounding the process has been r e t a i n e d 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 f o r p u b l i c proceedings and  and  f e e l s that  full  public  "non-government i n t e r v e n o r s  chance to argue the bunal should p u b l i s h  issues  in public.  a report  should have a  Moreover, the  that se^tswout the  or other, p o l i c y reasons f o r i t s  disclosure"  tr'ij.—  economic,  actions."^4  Conclusions Investment Canada r e v e a l s  a more p o s i t i v e approach  to f o r e i g n investment than FIRA.  A much l a r g e r number of  investments have been l e f t  out  the procedure f o r review has may  encourage a g r e a t e r  review process  amount of f o r e i g n investment,  c u l a r l y c o n t r o l , remain the  and  been strte:am-l.ii:ned".o A l l t h i s  the concerns f o r ownership and  courage g r e a t e r  of the  c o n t r o l , and  same.  The  idea  but  more p a r t i i s to  en-  investment while, at the same time,  r e t a i n i n g f a i r l y strib'-t'-control over f o r e i g n d i r e c t i n v e s t ment . In some cases the or u n w i l l i n g to Canada and  to meet the  investor  may  criteria  reguired  the government may  elements of b e n e f i t i f the  f i n d himself  require  f o r net  unable • benefit  some a d d i t i o n a l  investment i s to be  allowed.  In s p i t e of GATT r u l i n g , s e c t i o n  19(c)  "any  Majesty i n r i g h t of  written  undertakings to Her  Canada g i v e n by  the  applicant."  ^5  does p r o v i d e f o r  185  Canada g i v e n by  the  the government may  application."  0 3  In an extreme case,  f e e l that Canadian c o n t r o l i s  e s s e n t i a l i f , f o r example, the  investment i s i n a  of s p e c i a l p u b l i c i n t e r e s t such as the The  government may  corporations  aim  Thus, the aim  of Investment  degree of c o n t r o l r e q u i r e d to p e r c e i v e d  needs and  the  to Canadian economic p o l i c i e s . f o r t h i s purpose may  vary acc-  changes i n economy and  accord-  i n g to p o l i c i e s of d i f f e r e n t governments, but aim  foreign  of FIRA i s e s s e n t i a l l y to d i r e c t  attention;, of f o r e i g n i n v e s t o r s  ording  cultural industries.  i s to d i s t r i b u t e f o r e i g n  manufactured goods i n Canada.  The  field  a l s o discourage s u b s i d i a r i e s of  whose only  C&nada as i t was  absolutely  the  essential  remains unchanged. I t has  to be  a l s o r e a l i s e d that Canada i s not  exception i n p u t t i n g  restrictions.  The  Americans, themselves,  have many b a r r i e r s to f o r e i g n investment. i n "Canada-US Foreign  n a s  Americans have.  pointed  should be report  the Congress and put  on  i t was  out  the  number  When Arabs s t a r t e d  doing l a r g e p o r t f o l i o investments i n USA, pressed by  Nicholas J . Patterson  Investment R e g u l a t i o n :  Transparency versus d i f f u s i o n " 8 6 of r e s t r i c t i o n s the  an  concern .•.was:/.ex-'-  suggested that  controls  those investments. T h i s r e s u l t e d i n a  issuedvby US  i n t o 9 volumes and  Commerce Department i n 1976 3,000 pages and  which  which showed the  ran  number  186  of  restrictions  business  and  that  investing  prohibited  from  telegraph,  fishing,  power,  atomic  companies  already existed  investing  control p 7  Halco  between Canadian  which  has  a Canadian  difference  i s that  one  legislation  gulate  the  direct  15%  On  But  Restrictions have not  t h e r e i s no  television,  other entire  hand,  citizen  have  t o o , have  substantial  Japan  i s the  cases,  the  Government o b t a i n s "Statements  provide  procurement, FIRA national is  foreign  investors  f o r performance employment  by  which  foreign  and  restrictive.  i n Europe.  they  are  In of  many  future  required  ireqifi'-ren\gn't_s»vgoverning  and  r e p r e s e n t e d an  identity  dominated  most r e s t r i c t i v e  most  the  to  under  restrictions  i s probably  from  only  to r e -  France  -intentions"  trade The  together  agency  large  Shipping  widespread.  single  tele-  investment.  investment.  British  has  a similar  been put  US  national  U p p e r /L'akes  are  are  hydro-electric  a US  not  doing  aliens  radio,  the  Canada's  owner does  countries,  foreign  of  ports.  they  and  foreign  Other on  8 8  i n shipping,  I n c . owned by  trade  ports.  Non-resident  and m i n i n g .  over  b e t w e e n US  foreigners  a i r transportation,  energy  phone s y s t e m .  i n USA.  on  local  exports.89 aspect  feels  of Canada's s e a r c h  t h r e a t e n e d when t h e  investment  from  one  single  for  economy country.  187  This  identity  i s sought  Canada'- t h r o u g h  t o be p r e s e r v e d i n  the net benefit  criteria  Investment  and  provisions  of Schedule  IV o f t h e R e g u l a t i o n s  investment  i n Canada.  Canadians  in  investment.  foreign  economy has d e v e l o p e d direct  investment.  seems l a r g e l y  This through  i t s dominant  it  thereby  respecting  do n o t s e e a n y  i s e v i d e n t from large  inflows  dangers  t h e way t h e of  foreign  When C a n a d i . a n & t a l k i ' . Q f ; c o n t r o l y . , . _ i t : :  w i t h r e f e r e n c e t o American  of  through  c h a r a c t e r and t h e f e e l i n g  endangers.  r  investment of  because  insecurity  188  Chapter V  TOWARDS AN INTERNATIONAL CODE OF CONDUCT  Introduction Need f o r a u n i v e r s a l l y accepted  code  Unregulated f o r e i g n investment as we have seen, can impose c o s t s which can d e t r a c t from the very purpose of a l l o w i n g the f o r e i g n investment.  Excessive  mining, f o r  i n s t a n c e , can l e a d to too r a p i d a d e p l e t i o n of n a t u r a l resources.  Technology may be s u p p l i e d at an e x c e s s i v e l y  high c o s t with r e s t r i c t i o n s on i t s d i s s e m i n a t i o n may hamper l o c a l i n i t i a t i v e , on another, and hinder  make the country  f a c i l i t i e s while  l e a d i n g to " b r a i n - d r a i n . "  at the same time,  of goods  inappropriate  In the case of c o u n t r i e s with  f o r e i g n exchange r e s o u r c e s , Thus, while  manpower,  I t can a l s o r e s u l t i n a branch  p l a n t economy and to the p r o d u c t i o n  of payments.  dependent  the development of s k i l l e d  t e c h n i c i a n s and r e s e a r c h  f o r that country.  which  limited  i t can p l a c e s t r a i n on the balance  there i s an undeniable need f o r  investment, there i s a l s o a need to r e g u l a t e i-f i n order to maximize i t s b e n e f i t s and minimize i t s c o s t s . I n d i v i d u a l c o u n t r i e s have t r i e d to r e g u l a t e f o r e i g n investment a c c o r d i n g been p o i n t e d  to t h e i r p e r c e i v e d  needs, but as has  out i n the Reconvened S p e c i a l Session  Commission on T r a n s n a t i o n a l  Corporations  of the  (17-21 June, 1985),  189  it  has become c l e a r t h a t  ntry  c a n n o t cope w i t h  activities further in of  n a t i o n a l k l e g i s l a t i o n o f any one c o u -  the- i n t e r n a t i o n a l i s s u 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 b e e n  aggravated because o f c o r p o r a t e  t h e 1970s s u c h s s i n t e r f e r e n c e States,  Further,  illicit  s o l e l y through  leads  of multionationals  being  often  contradictory  o f laws.  sets  misconduct  i n the i n t e r n a l  payments ad u n e t h i c a l  regulation  r a i s e d by t h e  affairs  marketing  practice^.  national legislatures  subjected  t o s e v e r a l and  Besides,  there  have b e e n  p r o b l e m b e c a u s e o f 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 o f property  and d i s p u t e s  regarding  United  have a l s o been made b y v a r i o u s  Nations  organizations  corporations.  with  The  ILO T r i p a r t i t e  Multilaterally Control  that  have  f o rMultionational  Declaration  Enterprises  and l a b o u r  and p r i n c i p l e s o f  Some o f t h e i n s t r u m e n t s  The OECD G u i d e - l i n e s  Multinational  agencies of  i n t e r n a t i o n a l or r e g i o n a l  standards  are  inst-  Transnational  resulted  Enterprises,  of P r i n c i p l e s  concerning  and S o c i a l P o l i c y , t h e S e t o f  Agreed E q u i t a b l e  P r i n c i p l e s and R u l e s f o r  o f Rle-s;t'-Ki:c'.tiye- B u s i n e s s P r a c t i c e s , the  I n t e r n a t i o n a l Code o f C o n d u c t and  of claims  and by i n t e r n a t i o n a l b u s i n e s s  to formulate  ruments d e a l i n g  the  to settlement  compensation.  Efforts the  pertaining  on t h e T r a n s f e r  The I n t e r n a t i o n a l Code o f M a r k e t i n g  Draft  of Technology  of Breast-Milk  Substitutes  190  Nations  have  bilateral  treatment tionals,  protection that  been  they  c o u n t r i e s may  s u b j e c t o f much  forums.  struments  which  will  agree  with  these  guarantees cannot  be  developing  Vernon  doing  so as a g e s t u r e ,  to  survive f o r long  i n the normal  of  most  2  countries."  one  that  inter-  of countries  as r e g u l a t o r yi n -  settlement  i s that  be  "Prompt,  i n various  a number  treaties  agrees  like  for nationalizaiton,  of  out: they  direct  sustained i n the long that  behaviour  Moreover,  to clauses  controversy  f o r the foreign  country  regulate the  has p o i n t e d  treaties  the  to the multina-  are not balanced.  For-'th*ese r e a s o n s ,  As Raymond  limited i n  are basically  give  time,  providing a definitive  difficulty listic  through  t r y to establish  compensation  r e s e r v a t i o n s on b i l a t e r a l  issues.  which  country  hence  and e f f e c t i v e "  national  investment  i s necessarily  f o r example,  treaties  the host  individual  have  have  endeavours  b u t d o n o t a t t h e same  adequate they  to regulate foreign  treaties,  multinationals,  while  Any  of these  Bilateral  investment  of  tried  treaties.  Each scope.  also  controversial  "Thei'Tfundamental provide  investor,  unreaguar^n)tees  run  t o such could  terms  scarcely  internal  could be  political  only  expected processes  191  As f a r as instruments  which have a l r e a d y 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 s p e c i a l i z e d  i n t h e i r scope and s u b j e c t matter.  the OECD G u i d e l i n e s  d e a l with almost  Only  a l l the aspects of the o p e r a t i o n s of the  m u l t i n a t i o n a l s , but then these g u i d e l i n e s are only to be observed The  by m u l t i n a t i o n a l s o p e r a t i n g i n OECD c o u n t r i e s .  other instruments  mentioned b e f o r e are to be implemented  i n a l l c o u n t r i e s but are s p e c i a l i z e d i n scope. The ne^gotia:bio*a on a code of conduct  f o r t r a n s n a t i o n a l s i n 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 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 I n t e r n a t i o n a l 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  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  frame-  facili-  t a t e s i n t e r n a t i o n a l economic c o - o p e r a t i o n . " ^ A l s o , the General Assembly R e s o l u t i o n p e r t a i n i n g to the I n t e r n a t i o n a l Development S t r a t e g y f o r the T h i r d United Nations Development Decade shows a continued concern  f o r the p o s s i b l e negative  effects  4  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 .  I t a l s o expresses  the hope  that the Code 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 would be adopted e x p e d i t i o u s l y i n order to e l i m i n a t e the negative  effects  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 and to promote t h e i r  positive  c o n t r i b u t i o n s to the development e f f o r t s of developing cou n t r i e s c o n s i s t e n t with t h e i r n a t i o n a l development plans and  priorities.  192  Steps towards f o r m u l a t i o n of the code Since there was g e n e r a l conduct should be formulated,  agreement that a code of the Group of Eminet Persons  recommended that the Economic and S o c i a l C o u n c i l  should  be the main o r g a n o f the United National ,i r e s p o n s i b l e f o r J  this,  and t h a t i t should d i s c u s s i s s u e s r e l a t e d to the oper-  a t i o n s of m u l t i n a t i o n a l s once a year.  The Group a l s o proposed  that a 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  should be  e s t a b l i s h e d to a i d and advise the Economic and S o c i a l  Council  on i s s u e s and problems brought to i t a n n u a l l y r e l a t i n g to transnational corporations. r t h e S e c r e t a r y General  i n the f a l l  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 The  The p r o p o s a l was endorsed by of 1974 and a Commission  was s e t up with  48 members.  term of o f f i c e i s three years on a staggered  b a s i s and  e l e c t i o n s are h e l d a n n u a l l y which are conducted by the Economic and S o c i a l C o u n c i l . The  Group a l s o recommended the establishment  of a  r e s e a r c h and i n f o r m a t i o n c e n t r e to provide a d m i n i s t r i t i v e and  s u b s t a n t i v e s e r v i c e s to the Commission on T r a n s n a t i o n a l  corporations  (CTN).  Accordingly,  an Information  and Research  Centre (RC) was s e t up to f u n c t i o n under the guidance 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 r a t i v e l y under the Centre on T r a n s n a t i o n a l ( CTC ) . 5  and administCorporations  193  The  Commission on T r a n s n a t i o n a l  been meeting a n n u a l l y  s i n c e 1975.  of views between developing  and  The  Corporations complete  has  divergence  developed c o u n t r i e s  i n ;the ; Report of the Group of Eminent Persons read the attached fo  comments was  a l s o to be  the Commission on T r a n s n a t i o n a l  there was  the T h i r d World c o u n t r i e s and  The  lengthy  lists  a group of Western  representing  delegations USA  expressed t h e i r  about them, the group of Western d e l e g a t i o n s  and  often,  sub-  on the many 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 and  concerned with  and  meeting  of t h e i r r e s p e c t i v e areas of concern.^  While the Group of 77 focussed operations  and,  Group of 77  c o n s i s t i n g of France, West Germany, I t a l y , UK mitted  with  seen i n the f i r s t  Corporations  an a i r of c o n f r o n t a t i o n .  evident  the r e l a t i o n s between the  the governments of the host  was  and fears  mainly  multinationals  c o u n t r i e s with  respect  to  i s s u e s r e l a t e d to d i s c r i m i n a t o r y treatment of multin;a>tl;ona;lJs u b s i d i a r i e s , e x p r o p r i a t i o n s , and c l i m a t e p r e v a i l i n g i n developing  the type of investment countries.  Repeated d i s c u s s i o n s g r a d u a l l y l e d to the down of the divergence  of views t i l l  i n 1983  narrowing  a d r a f t code  emerged i n which agreement had been reached on about 7 t h i r d s of i t s p r o v i s i o n s .  I t was  decided  two-  e a r l y i n the  d e l i b e r a t i o n s on the code that the code would c o n s i s t of six  chapters.  Ipjreamble and  P r i n c i p l e s and/or Issues national Corporations;  O b j e c t i v e s ; D e f i n i t i o n s ; Major  Related  to the A c t i v i t i e s of Trans-  Major P r i n c i p l e s and/or i s s u e s  194  R e l a t i n g to the Treatment of T r a n s n a t i o n a l Legal Nature and was  Scope of the Code; and  found that the gap  Implementaiton.  between the opposing p o s i t i o n s  too wide to d e a l immediately with chapters i.e. definitions, implementaion.  Corporations;  l e g a l nature  and  two,  It  was  f i v e and s i x ,  scope of the code;  and  There were more p o i n t s of agreement with  regard  to i s s u e s under preamble and o b j e c t i v e s ; treatment 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 ; and p o r a t i o n s and,  a c t i v i t i e s of t r a n s n a t i o n a l c o r -  t h e r e f o r e , attempts were made to d r a f t  paragraphs d e a l i n g with  these  areas  the  first.  Areas of I n t e r n a t i o n a l Agreement ,S\Agreement has been reached i n some cases referendum, on the major part of the chapter a c t i v i t i 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 .  duct.  In the  d e a l i n g with  the  (Paragraphs 6-46),  on paragraphs d e a l i n g with Intergovernmental (Paragraphs 59-65), and  ad  Corporation  the Implementation of the Code of Con-  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 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 should have r e s p e c t f o r the n a t i o n a l sovereignty,;, the host State and \that. each State has  of  a r i g h t to e x e r c i s e i t s  p  sovereignty within i t s t e r r i t o r y .  Transnational  corpora-  t i o n s are s u b j e c t to the laws of the host country which the r i g h t  to r.:e;g.ulla'te and r  monitor t h e i r a c i t i t i e s . ^  must c a r r y out t h e i r a c t i v i t i e s i n conformity ment  with  has  They the  develop-  p o l i c i e s , o b j e c t i v e s and p r i o r i t i e s s e t out by the host country and they must s e r i o u s l y work i n a way that they make a p o s i t i v e c o n t r i b u t i o n to the development i n the host cou n t.r i• e s . 10 C o n t r a c t s must be entered i n t o i n good f a i t h and must normally c o n t a i n r e n e g o t i a t i o n c l a u s e s . of these c l a u s e s  In the absence  too, 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 should co-  operate i n good f a i t h with the government of the host country., td r e n e g o t i a t e where a fundamental change of circumstances has taken p a l c e .  1 1  Paragraphs for s o c i a l ,  d e a l i n g with t r a n s n a t i o n a l s having r e s p e c t  and c u l t u r a l o b j e c t i v e s , values and " t r a d i t i o n s ' of  the host country; r e s p e c t f o r human r i g h t s and fundamental freedoms i n the host country; and Orion-interference i n the i n ternal p o l i t i c a l agreed upon.-'-  2  a f f a i r s of the host country have a l s o been Paragraph  f o u r t e e n d e a l i n g with n o n - c o l l a -  b o r a t i o n with r a c i s t m i n o r i t y regimes i n Southern been agreed  A f r i c a has  ad referendum i n the working group but not yet by 13  the Commission. Intergovernmental  Co-operation  T r a n s n a t i o n a l s should not i n t e r f e r e i n i n t e r g o v e r n mental r e l a t i o n s and should not request t h e i r governments to i n t e r v e n e on t h e i r b e h a l f t i l l  l o c a l remedies have been  14 exhausted.  These p r o v i s i o n s have to be read with para-  graphs d e a l i n g with intergovernmental c o - o p e r a t i o n which have been agreed upon . 1  5  S t a t e s agree  that the o b j e c t i v e s  196 of the Code can o n l y be achieved through  intergovernmental  c o - o p e r a t i o n which should be strengthened both at the i n t e r n a t i o n a l l e v e l and at b i l a t e r a l , levels.  S t a t e s agree  r e g i o n a l and i n t e r - r e g i o n a l  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 t h e i r experience with the Code; to c o n s u l t on a b i l a t e r a l or m u l t i l a t e r a l b a s i s as r e q u i r e d on matters  relating  to the Code  and i t s a p p l i c a t i o n , and i n the development of i n t e r n a t i o n a l agreements and arrangements on i s s u e s r e l a t e d to the Code; that S t a t e s should not use 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 to i n t e r f e r e i n the. i n t e r n a l or e x t e r n a l a f f a i r s ,  and f i n a l l y ,  that S t a t e s should not i n t e r v e n e on b e h a l f of t r a n s n a t i o n a l s till  the l o c a l remedies have been exhausted.  In any case,  the home government should not use any c o e r c i v e measures not c o n s i s t e n t with the Charter of the United Nations and with the D e c l a r a t i o n s on P r i n c i p l e s of I n t e r n a t i o n a l Law concerning F r i e n d l y R e l a t i o n s and Co-operation among S t a t e s i n accordance  with the Charter of the United Nations.  Ownership and C o n t r o l With r e f e r e n c e to ownership and c o n t r o l , i t has been agreed  that 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 should make an e f f o r t to  a l l o c a t e t h e i r decision-making  power i n a way that they can con-  t r i b u t e to the economic and s o c i a l development of the host c o u n t r i e  .19-7:  They should a l s o co-operate  with the host governments to  meet the n a t i o n a l o b j e c t i v e s of l o c a l e g u i t y p a r t i c i p a t i o n and of e f f e c t i v e c o n t r o l by the l o c a l partner determined  by e q u i t y , c o n t r a c t u a l terms i n non-equity  as arr-  17 angements or the laws of the host c o u n t r i e s .  They should  attempt to promote employment and p a r t i c i p a t i o n . i n management and d i r e c t i o n of the e n t e r p r i s e of  adequately  q u a l i f i e d n a t i o n a l s of the host country so that t h e i r 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  l e v e l s of  de-  18 cision-making.  Not only t h a t , they should contribut§°e 19  to managerial  and  t e c h n i c a l t r a i n i n g of l o c a l n a t i o n a l s .  Export O b j e c t i v e s • There i s b a s i c agreement, too, that t r a n s n a t i o n a l s should c o n t r i b u t e 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 a v a i l a b l e  goods, s e r v i c e s and other r e s o u r c e s .  3 0  indigenous  As has been ment-  ioned b e f o r e , t r a n s n a t i o n a l s should a l s o be r e s p o n s i v e to requests by host governments to phase over a l i m i t e d p e r i o d 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 d i s i n v e s t -  ment or accumulated p r o f i t s . short-term  2 1  They should not engage i n  f i n a n c i a l o p e r a t i o n s , or manipulate  c o r p o r a t e payments or indulge i n r e s t r i c t i v e i c e s which would have an adverse  effect,  intra-  .. . .  trade p r a c t -  - on the ba22  lance -of-payments p o s i t i o n of the host country.  In  effect,  they should not do anything which would have an  adverse  impact  on the working of l o c a l markets or cjaWse  198  serious to  balance-of-payment  avoid  not  also  Consumer  taxation be  done  protection  ance  relevant  cause  transnationals.  has  are  not  exchange  Transfer  control  pricing  measures  should  23  Protection  nationals with  evade  by  Agreement consumer  or  difficulties.  been and  expected  injury  reached  on  environment to  perform  matters  protection  their  the  health  or  where  activities  i n t e r n a t i o n a l standards  to  dealing  safety  so  of  trans-  in  that  the  with  accord-  they  do  consumers  or  24  harm  the  environment.  authorities, with  regard  experimental tions,  They  i f requested to  health  uses  and  restrictions  and  to  do  safety  other  and  should so,  supply  to  relevant  protection,  used  on  competent  information including  related, aspects;  warnings  the  and  those  prohibi-  products  or  25  services the be  in  contents given  to  other and the  countries. possible  consumer  Appropriate  hazardous through  information  e f f e c t s of  labels,  a  about  product  accurate  must  and 2 6  informative nationals  should  organization tional  advertising.  to  standards  consumers  while,  also  co-operate  develop for at  Packaging  and  the  same  with  promote  protection  should  of  time,  be  other  health  meeting  Trans-  international  national the  safe.  and and  their  internasafety basic  of  needs.  199  Similar  p r o v i s i o n s have been  environment Disclosure  protection.? of  dealing with  have been  agreed  available  annually  months  corporation.  respect  to  8  including financial  twelve  upon w i t h  Information  Paragraphs mation  agreed  as w e l l as n o n - f i n a n c i a l  upon. T h i s  from  d e t a i l e d d i s c l o s u r e of  information  w i t h i n s i x months  i s t o be  In a d d i t i o n , semi-annual  year  items  made  and n o t l a t e r  the end o f t h e f i n a n c i a l  infor-  than  of the  summary o f  financial 29  information  should  The  of information  details  paragraph making other  44.  The  countries  a whole.  graphs  caused  Conflict  subject case  I t was  and, where  be  given  to appropriate  to trade  the  appropriate,  safeguards 30  unions  or  organizations  to assess  pursuant  for  perform-  of the  to these so t h a t  entity  parano  damage  concerned.  considerable  conflicts proposed  settled  between  controversy  of j u r i s d i c t i o n  that-a  to the j u r i s d i c t i o n  of a dispute  .should  entity  has been  dealing with  disputes.  also provides  Jurisdiction  There 55-58  information  them  provided.  are s p e l t out i n  paragraph  to enable  to the p a r t i e s of  also  of employees i n t h e i r  A l linformation  i s subject  be  t o be g i v e n  forty-sixth  representatives  ance o f t h e l o c a l  is  appropriate  available appropriate  in^,the host  as  where  paragraphs  i n case  of  transnational should  of the host  a State  on  country;  be  that i n  and a transnatasbnal.Li.tt  by competent c o u r t s  or other  authorities,  200  o r -by o t h e r  agreed  arbitration;  means o f  that parties  applicable  law  in  conflict  case  had  of  and  jurisdiction  should  adopt  an  of  be  the  acceptable  to  laws  find  a consensus  courts  of  elsewhere  i n the  code.  try  to  of  such  conflict  conflicts  of  endeavour  acceptable such and  to  by  on  1984  based  respect  at  the  In of  the  Code;  and on  reconvened of  order  tories;  and  the  and  State States  procedures  matter  country  W h a t was  exercising  to  another.^  for  i t  was  should  agreed  upon  States  should  jurisdiction They  should  multilaterally  f o r the of  settlement  sovereign  This  was  mutually  agreed  of  equality to  in  session.  Code and  promote publicize  implementation to  the  not  interest.  special  to ensure  report  Transnational  host  principle  C o d e , the^Sutate^s s h o u l d f o l l o w the  the  procedures  the  f o r mutual  Implementation  on  a d o p t b i l a t e r a l l y and  principles  conflicts  one  i t s entities,  jurisdiction,  w h e r e i t more p r o p e r l y b e l o n g e d also  that  transnationals being  and  that i n case  more t h a n  principles  the  avoid  where  t r a n s n a t i o n a l or  subject  was  the  dispute.  effort  dealt with  f r e e to choose  as  v  that issues dealing with  be  such  d i s p u t e ^ s e t t l e m e n t ; and  suggested-to  settlement  jurisdiction  over  of  should  form  of  mutually  the-settlement In  the  dispute  the  Corporation  United the  of  the  the  implementation  and  disseminate  Code i n t h e i r  Nations  Commission  a c t i o n taken  at  the terri-  on  the n a t i o n a l  201  level its to  to implement the Code, and the experiences gained  implementation;  and do e v e r y t h i n g e l s e  support the C o d e .  32  I t has been agreed  necessary that 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 s h a l l perform of for  from  the f u n c t i o n s  the i n t e r n a t i o n a l i n s t i t u t i o n a l machinery r e s p o n s i b l e the implementation  of the code and the Centre  Transnational Corporations w i l l  on  act as the S e c r e t a r i a t to  the Commission. The Commission s h a l l be the f o c a l p o i n t 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 33 the f o l l o w i n g f u n c t i o n s .  First,  i t s h a l l h o l d d i s c u s s i o n s 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  c o n s u l t a t i o n s on s p e c i f i c i s s u e s r e l a t e d to the Code. it  s h a l l p e r i o d i c a l l y assess the implementation  Second,  of the Code on  the b a s i s of the r e p o r t s submitted by the Governments and  on  documents submitted by United Nations o r g a n i z a t i o n s and s p e c i a l i z e d agencies. not e a r l i e r  than two  The  first  assessment i s to take p l a c e  years and not l a t e r than three years  from the date of adoption of the Code. is  to take p l a c e two  The  years a f t e r the f i r s t  the p e r i o d i c i t y i s to be determined Transnational Corporations.  second  assessment  assessment and  by the Commission on  In case any government wants  a c l a r i f i c a t i o n on any p r o v i s i o n i n t r y i n g to apply i t to a particular situation,  the Commission s h a l l p r o v i d e the  then  202  clarification duct  but without  of the p a r t i e s i n v o l v e d .  annually grading  report  ting  relating  issues  deferred  Outstanding Preambles  have  and  Further  agreed  information  upon,  s i x years  of the review  d i s c u s s i o n on  like  of  Code.  but the m o d a l i t i e s  issues  I t i s also  and d i s s e m i n a t i o n of the  rela-  this  have  subject  t h e mode o f a d o p t i o n  has  and  the  t h e p r e a m b l e and o b j e c t i v e s ,  two  settled.  Objectives  regard  option  have  to both emerged  formal  Nations could  during  the d i s c u s s i o n s .  preamble r e c a l l i n g  o f t h e Code and i n this  t h e work sphere.  the substantive  positive  and n e g a t i v e  One  bodies  second i s that  more s u b s t a n t i v e  of the operations  of the  the  pre-  matter r e -  p r o v i s i o n s o f t h e Code and  aspects  i s to  the legislative'-'  of the other The  i n addition contain  flecting  nationals .  also  Issues  a short  United  to  facilitate inter-  t o t h e Code.  o f t h e Code have been  With  history  amble  t i l l  nature  basic  related  o f t h e Code has been  i t s adoption,  legal  con-  A s s e m b l y on a c t i v i t i e s r e -  to the implementation  been worked o u t .  been  the  Commission has  o f t h e Code and  for collection  A review after  on  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  to s p e c i f i c  responsible  conclusions  The  to the General  implementation  governmental  not  drawing  of  the trans-  203  Similarly, the  United  Strategy; which to and  ements  in  ives  objective  could  stated  i t s International  of  the  in  States  and  to  treatment  work  regard  to  out  United  addition  to  the  foregoing,  the  also  be  reflected  Programme  of  Action  the  of  reference  terms  more  substantive  commission  on  lutions  this  on  a  mechanism  them  with  the  The  and  in  second  option  statement', o f provisions  reobjectives  Code.  recalling  the  Declaration  The  I n t e r n a t i o n a l Economic  Transnational  of  is  object-  the  work  arrang-  co-operation  of  the  respect  corporations;  corporations  substantive  New  for  among  of  Development  establish a  Nations.  portions by  position  transnational  transnational  contain  the  i n t e r n a t i o n a l standards  the  flecting  to  of  of  also  reflect  to.greater co-operation  bodies.-  could  could  lead  with  as  desire  desire  the  _that  the  activities  the  with  Nations  would  the  the  the  Corporations,  work and  and Order;  of  the  various  reso-  35  in  D e f i n i t i o n . ' and Although  context  adopted  from  time  the  question  of  definition  corporations  has  work  the  settlement  The in  on  Code,  OECD G u i d e l i n e s i t s Tripartite  ltinational  time.  Scope  transnational began  to  and  no the  and  under has  scope  discussion yet  been  I n t e r n a t i o n a l Labour  Declaration  Enterprises  been  and  of  Principles  Social  of since  reached.  Organization  concerning  Policy did  not  the  Mu-  attempt  204  a  precise  legal"'.definition  w h o s e o w n e r s h i p was owned o r other  The  national  outside  degree of  enterprises  widely  from  nature  of  one  the  activity of  "private, state  controlled "production,  facilities  based—  and  having  operations  of  regard  sizejin  or  with  on  in  the  have been  provision  or  entities  type  of  apply  of  that  that to  on  the the  enterprises  and are  their  on-the  field  of  i n the  form  l o c a t i o n of  the  One  i s that the  i s that  cogtroversy  solutions a  to  footnote  a p p l i c a t i o n of to  the  Corporations  groups  had  confirmed  which  had  the  the  to  the  the  a l l enterprises  i r r e s p e c t i v e of  second  Tripartite  TheBel-is  possible  of  the  State-owned,  Three  Code a p p l i e d  Transnational  a l l the  which  scope  a l l countries The  and  ownership.  Code.  with  ownership.  Commission report  state  mixed  multie  varies  diversity  nature  (were)  depending  and  or  3 7 concerned."" '  considered.  dealing  Code c o u l d  the  they  within  another,  great  who  services  other  entities  the  enterprises  private-owned  problem  to  each  enterprises  and  i n which  .the;, QECD G u i d e l i n e s  include  issue  to  mixed"  entities to  such  enterprises  Thus, both Declaration  autonomy of  between  or  country  enterprise  i n the the  the  included  distribtuion,  in relation  such  links  ownership,  this  . They both  their  origin  Chairpersonrof  should that  state  the  characteristics  Code  in  and ;,the the  would  described  205 in  paragraph  which  1  of  the  operated  in  their  dealing  with  explicitly whether  state  scope that  . .  and  and  to  a l l other  countries. of  the  the  p r i v a t e l y owned,  that  a p p l i c a t i o n of  code or  Third,  enterprises  applied  to  state-owned  the  a l l  or  the  provision  Code  should  enterprises  of  mixed  38  ownership. Free  the  Code,  unrestricted  transfer  of  a l l payments  relating  to  investments Some d e l e g a t i o n s contain  a  permitted  being  of  paragraph  stating  to  transfer  investments patriation  are  freely like  of  this  terminated,  royalties  and  prejudice  to  income  fees  for  a l l other paragraph  that  from  capital  view  that  invested the  event  of  payments. the  transnationals  should  be  responsive  to  host  countries  regard  to  phasing  the  of  capital  period  of  and time  profits where  and  other  otherwise  of  payments  there  re-  investment assistance,  should  the  be  without  recognizes  request  of  repatriation  over  would  their  the  which  that  with  and  be  to  technical  code  should  should  this  This  draft  Code  relating  capital  l i c e n s i n g and  of  the  transnationals  a l l payments  in  such 29  the  be  a  limited  balance-of-  39 payment  difficulties. Many d e l e g a t i o n s  object  to  the  provision.  They  feel  that  explicitly  state  that  the  transfer  exchange  laws  and  regulations  foreign  i f i t has  i n c l u s i o n of to  would of  be  such  included  be the  governed host  i t  a should  by  country.  40  206  Non-collaboration  by  transnational corporations  with  racist  m i n o r i t y regimes i n Southern A f r i c a From the b e g i n n i n g of the n e g o t i a t i o n s some delegates  on the Code  have advocated that that the Code  should  c o n t a i n p r o v i s i o n s r e l a t i n g to the a c t i v i t i e s of the n a t i o n a l s and  t h e i r c o l l a b o r a t i o n with the r a c i s t  regime i n South A f r i c a . but  4 1  have r a i s e d questions  Others have condemned  trans-  minority  apartheid  about whether i t i s proper to have  such p r o v i s i o n s i n the Code. In order . to f a c i l i t a t e Transnational subject, i n 1980  Corporations  the Economic and  and  the work of the Commission to give i t g u i d e l i n e s on  on  this  S o c i a l C o u n c i l adopted a r e s o l u t i o n  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 a p p r o p r i a t e manner wi't'H the i s s u e of the a c t i v i t i 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 i n South A f r i c a and Namibia, r e c o g n i z i n g that concern was widely expressed i-JT_the' Commission on T r a n s n a t i o n a l Corpo r a t i o n s , i n the context of the s t r u g g l e a g a i n s t a p a r t h e i d , at the c o l l a b o r a t i o n of t r a n s n a t i o n a l corp o r a t i o n s with the r a c i s t m i n o r i t y r e g i m e . 4 2  In a d d i t i o n , s i n c e i t s T h i r d Session, has  the  c o n s i s t e n t l y adopted r e s o l u t i o n s p e r t a i n i n g to Southern  A f r i c a at i t s annual s e s s i o n s , but  e q u a l l y co;ris.is t-erf-tly some  major i n d u s t r i a l i z e d c o u n t r i e s have e i t h e r voted on  Commission  :  negatively  these r e s o l u t i o n s or have r e f r a i n e d from v o t i n g .  207  I t has a l s o been ^proposed that the i s s u e of Southern A f r i c a should a l s o be r e f l e c t e d i n the preamble and i n the Statement of O b j e c t i v e s . referendum but  In 1983, a;itexit was  agreed  there i s c o n t r o v e r s y on whether the  upon ad heading,  " N o n - c o l l a b o r a t i o n by 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 with minority;-'/ regimes i n Southern A f r i c a "  racist  i s an i n t e g r a l p a r t  43 of the p r o v i s i o n or not.be  with  the  term  A  m a  jor  d i f f i c u l t y a l s o seems  " c o l l a b o r a t i o n " and  i t s implications.  term i s not n e c e s s a r i l y used p e j o r a t i v e l y . c o - o p e r a t i o n or support  of any  to  activity  The  I t can simply mean  that c o n t r i b u t e s to  the m a i n t a i n i n g of the system of a p a r t h e i d 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'a !l.'fciaw p r o h i b i t e d expro:  ,  i  p r i a t i o n of f o r e i g n p r o p e r t y without propriating State.  compensation by the  ex-  I t has been conceded that a sovereign  Stater;;'has the r i g h t to e x p r o p r i a t e f o r e i g n property where the e x p r o p r i a t i o n i s f o r a --public," purpose i s n o n - d i s c r i m i n a t o r y 45 has been e f f e c t e d with the due  process  of law.  The  develop-  ed n a t i o n s have always demanded compensation which i s prompt, adequate and e f f e c t i v e .  Adequate compensation means the  market value of the going concern earning prospects, Post-war experience  g o o d w i l l and  together  fair  with i t s f u t u r e  other such i n t a n g i b l e f a c t o r s .  shows that compensation has o f t e n f a l l e n  f a r below the value claimed,  that payments have been d e f e r r e d  and  208 *t -  and  made i n n o n - c o n v e r t i b l e  ces  of  opinion  as  i t i s today  to  aliens  deemed  have been  important State  nationals  aliens.  and  prompt,  not  Further,  and  always been a c t u a l l y  the  traditional  that and  i s the property  country's  investment  Latin  of  of  adhered  law  so  as  the  i t s  own  pertaining  have  these  in  are  been  standards  practice:*  c o u n t r i e s have q u e s t i o n e d of  State  a foreign State  t o do  to  which  where  clauses  treaties,  responsibility,  to p r o t e c t  i t s n a t i o n a l s i n the  failure  and  compensation  American  international  right  although  law  compensation  f o r p u b l i c purposes  effective  have  number o f  adequate  d i s c r i m i n a t e d between  in bilateral  A  t o pay  differen-  international  for national welfare  has  adequate  Considerable  whether  i s taken  inserted not  on  requires a State  expropriating  to  there  whose p r o p e r t y  t o be  currency.  event  extended  by  of  the  the  the  life  host  developed  46 countries the  given  national  be  apply  traditional  t o be  what  to  entities.  d o c t r i n e , i t was  the  same t r e a t m e n t  minimum  treatment  to business  standard  was  given  treated according  to  had to  as  enough  the  t o be  the  that  not  According f o r the  nationals.  met  so  that  aliens  An no  nationals, aliens  international  to  intermatter  had  minimum  to standard.  I.  209  The  Calvo  doctrine  by  asserting  that  or  by  by  force,  State. and  there  this  in  disputes  doctrine,  redress under  Article tors  national  involving  affairs  entitled  and  aliens  to  a  any  The  Foreign this  could  sovereign rights  position.  accord  prohibits  only  based  seek  Investment  to  ^ t r e a t m e n t than- g i v e n 51  of  diplomatic  nationals.'" Therefore,  reaffirms  Article  concept  interference,  the  member-States) cannot  and  traditional  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  courts.  more f a v o u r a b l e  investors  to  aliens  Andean P a c t  50,  no  State:--in  available  in national the  be  this  a l i e n s were not  p r i v i l e g e s not  on  could  another  Further,  4 7  dispute  to  Code  Under  foreign  inves-  their  national  international  adjudic-  48 ation  of  investment  The rejected ard  and  socialist the  the of  are  that  within  which  universal  have  th  idea  the  and  of  from  that  unjust  and  inequitable  of  national  acceptance; of  law. ^ 4  the  because  without  c o l o n i a l system  which  benefical  to  again  have  falls n  e  w  question  feel  that  their participation to  perpetuate the  T n e  stand-  principles  they  t h e i r a p p l i c a t i o n leads and  too,  a l i e n property  colonialism,  p r i n c i p l e s were d e v e l o p e d and  Europe,  minimum . i n t e r n a t i o n a l  standard  consent  tative  of  Eastern  regulation  emerged  validity  of  province  i n t e r n a t i o n a l minimum  these or  countries  traditional  maintain  exclusively nations  disputes.  results the  developed  which  exploicountries.  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 l e g i t i m a t e  of n a t i o n a l s o v e r e i g n t y  subject  exercise  to no q u a l i f i c a t i o n s or  limitations. Acts ,.o"f n a t i o n a l i z a t i o n have been i n s p i r e d by  and  £  have, i n turn, i n s p i r e d General Assembly r e s o l u t i o n s claiming  "the  r i g h t of peoples f r e e l y to use  t h e i r n a t u r a l wealth and  r e s o u r c e s /'  and  inherent  pro-  exploit  in their  51 sovereignty"  and  resolutions like  over n a t u r a l r e s o u r c e s . "  5 2  accepted that " a p p r o p r i a t e  "Permanent  soverignty  under t h i s r e s o l u t i o n i t compensation" should be  was paid  on n a t i o n a l i z a i t o n " i n accordance with n a t i o n a l and n a t i o n a l law",  subject  parties concerned." be  53  to the agreement of States In case of d i s p u t e s ,  and a l l  they should  s e t t l e d by a r b i t r a t i o n or i n t e r n a t i o n a l a d j u d i c t i o n  a f t e r l o c a l remedies have been exhausted. countries and  inter-  The  developing  accept t h i s because the idea of prompt, adequate  e f f e c t i v e compensation, has  compensation'; and  been r e p l a c e d  by  i t i s acceptable to developed  because i t recognizes  "appropriate" countries  that compensation i s to be p a i d i n  accordance with n a t i o n a l as w e l l as i n t e r n a t i o n a l  law.  Thus, the p o s i t i o n of the d e v e l o p i n g c o u n t r i e s as f o l l o w s : F i r s t , property bias  ged  they have a r i g h t to n a t i o n a l i z e f o r e i g n  as an a t t r i b u t e of s o v e r e i g n t y and  that the  been n a t i o n a l i z e d i n n a t i o n a l i n t e r e s t cannot be by  anyone.  is  property challen-  Second, the amount of compensation should  211 not  exceed  the  net  book  be  commensurate  with  to  pay.  the  the  Third,  entry  which  of  the  can  has  host  foreign  can  right  changed  the  host  country  the  right  must  has and  on  negotiate or  to  to  the  foreign  regulate under  host  investment  the  contract in  take  should  government  conidtions  Finally,  the  and  i t s operations  polices.  circumstances  the  operate .Fourth  give incentives'for  ot  investment the  investment  i t s development the  of  c a p a c i t y of  imposieArestrictions  also  with  the  investment  government  value  keeping  host  the  unilateral  in  and  government  light  action,  of the  TO  effect right  of of  which the  foreign  Since countries  i s to  the  are  agreement with is  has  these  work  at  been  to  balancing  of  variance  reached  in  However,  evolve the  property  c o n t r a c t u a l or  developed  compensation,  issues.  necessary  the  investor.  positions  s t i l l  nationalization,  modify  an  rights  with and  the  dispute on  to  issues  of  settlement, clauses  i s agreement  international and  developing  regard  code  there  and  public  no  dealing  that i t policy  frame-  obligations  of  the  parties  in  of  multilateral  involved. National It  Treatment: has  instruments weaker  been  that  economic  recognized  developing positions  a  number  c o u n t r i e s , because  need  to  of  their  receive preferential  treatment  212 to help them i n t h e i r economic d e v e l o p m e n t .  54  a l s o i n h e r e n t i n r e s o l u t i o n s c a l l i n g f o r the  the i d e a i s restructuring  of i n t e r n a t i o n a l economic r e l a t i o n s between developed developing c o u n t r i e s f o r the establishment n a t i o n a l economic order.  In the Set of  Agreed E q u i t a b l e P r i n c i p l e s and Rules R e s t r i c t i v e Business  of a new  and inter-  Multilaterally  f o r the C o n t r o l of  P r a c t i c e s , i t has been  specifically  stated: ... developed  c o u n t r i e s , should take i n t o account  r e s t r i c t i v e business p r a c t i c e s and development, and  i n their  financial  trade needs of developing c o u n t r i e s , i n p a r t i c u l a r  of the l e a s t developed  of  c o u n t r i e s , f o r the purpose e s p e c i a l l y  of d e v e l o p i n g c o u n t r i e s i n : (a)  Promoting the establishment i n d u s t r i e s and  or development of  domestic  the economic development of other s e c t o r s  of the economy, and (b)  Encouraging t h e i r economic development through r e g i o n a l or g l o b a l arrangements among developing c o u n t r i e s . 5 5 T h e r e f o r e , i t i s accepted  that d e v e l o p i n g  can g i v e i n c e n t i v e s f o r the establishment of domestic  and  counries  development  i n d u s t r y and hence can g i v e p r e f e r e n t i a l  ment to domestic  treat-  e n t e r p r i s e over f o r e i g n e n t e r p r i s e as long  as t h i s does not amount to a d e n i a l of j u s t i c e .  Even i n  the OECD G u i d e l i n e s , the p r i n c i p l e s of n a t i o n a l treatment has been seen as a goal to be s t r i v e d f o r r a t h e r than as an  213  absolute  obligation.  national  treamtment  for.instance,  Besides,  principle  c e r t a i n exceptions  to the  have been g e n e r a l l y  c o n s i d e r a t i o n of p u b l i c order  accepted  and n a t i o n a l  securi ty. In  the d r a f t code,agreement  ment c l a u s e lation  has y e t t o be worked  provides  principle.  security,  other  given  should  to domestic  the  this  a  p u b l i c order  too sweeping that  or identicalamounts  because  concessions  interests.  .. A n o t h e r  that  the very  feel  States  would be  and e q u i t a b l e  that  which  such  principle of  be f o u n d  may a l l e v i a t e  Some  i n circumstances  B u t many S t a t e s  Solution could  devel-  clause i n  n a t i o n a l treatment  to negating  i s made o n f a i r  enterprise  to the national  transnational  i n c e n t i v e s and  e s s e n t i a l economic  treatment.  statement  formu-  and n a t i o n a l  are that  when'.';the e n t e r p r i s e s o p e r a t e  formulation  A compromise exceptions  suggested  treat-  e n t e r p r i s e t o promote s e l f - r e l i a n t  formulation  similar  national  from  not claim  formulation;-. states  accorded are  Apart  exceptions  opment o r p r o t e c t find  out.  f o rcertain specific  treatment  corporations  on t h e n a t i o n a l  i fa clear  treatment  the concern  of foreign about  57 discriminatory Dispute  treatment.  Settlement Transnationals  government  of the host  may e n t e r  into  contracts  country,  with  domestic  with the enterprises  214 or  with  on  the  is  that  the  other dispute  between  is  of  the  arising host  private a  which  would  process out  the  parties.  private  There  of  country.  contracts with  with  law  settlement  disputes  laws  with  transnationals.  Another  govern  to  makes  view,  should  c o n t r a c t and  be  the  opinion  On  view  subject a  to  distinction  i t s agencies  this  parties  their  view or  of  contracts.  c o n t r a c t s are  Government  the  difference  i n such  such  According  party,  is a  and  when  the  free  to  forum  those  contract choose  for  the  the  58 settlement It free  to  and  seems  to  be  lates  the  UN for  cases.  The of  was  dispute  of  the  a  host  jurisdiction  contact  In  point  on  the  case  a  left  settlement right  to  of  regulate in i t s  i t s courts  in  a  Enterprises, a in  the  communicated It  is a  some  method  such  machinery  transnational vio-  transnational.  accepted,  complaint  external  to of  the  affairs  home  bringing  Similarly, mechanism  may  i f  the  evolve  i  in internal  not  are  settlement  usually  i s then  settlement.  should  of  dispute  affairs  is well-established principle  States  the  country's  for Multinational  universally  for  parties  transnationals operating  countries, a  bear  them.  i f the  forum  transnational.  to  of  5 9  complaint  the  Non-interference  that  OECD  with  pressure  It  oust  and the  out  that  evolving informally.  lodged  Code  also  the  department.  moral  law  undermine  Guidelines  government  own  arising States  activities  of  Amont  some  their  the  number  be  by  i t would  territory;  can  disputes  is felt  monitor  large  any  choose  disputes and  of  interfere  in  the  of  international  affairs  of  other  law States  215 and,  therefore,  of  such  on  the  i s no  a p r o v i s i o n i n the scope of  means n o t h i n g formulate in  there  the  Code.  provision.  more t h a n  the  very  On  the  the  perceived  one  the  of views i s  of S t a t e  i t feels  that  to  i t is  t o some t r a n s n a t i o n a l s  their  i t may  inclusion  hand, i n t e r f e r e n c e  inability  because  because of other,  about  divergence  p o s i t i o n compared  powerful  e c o n o m i c power.  The On  i t s economic p o l i c i e s  a weak b a r g a i n i n g  which are  controversy  size,  refer  resources  and  to s u r r e p t i t i o u s  activities. In view of  this,  should  s p e c i f y that  vities  t h a t undermine  host  country  and  the  illicit  was  wide i n i t s e l f . a category was  reached.  effort  view and  wider has  as  Others  In o r d e r the  the  feel  than  that.  not  be  that  No  in  acti-  systems of  "internal subversive  the  the  the  two  inter-  affairs" activities  concept  agreement has  been made t o combine has  Code  made t o i l l e g a l  term  that  the  indulge  social  of  non-  yet  been  points  been s u g g e s t e d but  Document: P r o p o s a l  o f W o r k i n g G r o u p s I and  special  as  that  of  no  y e t emerged.^'''  f o r Concluding  conduct,  should  a compromise f o r m u l a t i o n  c o n s e n s u s has  Basis  activities  and  i n t h e m s e l v e s and  interference An  political  that reference  and  formed  feel  t r a n s n a t i o n a l s should  ference too  some d e l e g a t i o n s  E c o n o m i c and the  the  Chairmen  II  to complete  s e s s i o n of  by  the  formulation  Social  Commission  Council on  of  the  decided  code  to h o l d  Transnational  of a  Corporations  216  by i t s r e s o l u t i o n 1982/68 of 27th October,  1982.  The  Commission decided to e s t a b l i s h  two working groups.  Group lQha:itr e^3 by the Rapporteur  to c o n s i d e r s e c t i o n s - f  ;  Working 0  the d r a f t code d e a l i n g with definifcionr.. and scope of application,  and  the preamble and the o b j e c t i v e s .  Working Group was  the treatment  second  to be c h a i r e d by the Chairman of the S p e c i a l  Session and i t was to  The  to c o n s i d e r outstanding i s s u e s r e l a t i n q  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 and  their  activities. The Chairman of the two working groups presented a working paper on the b a s i s of e x t e n s i v e d i s c u s s i o n of the elements contained i n i t as a p o s s i b l e settlement of the o u t s t a n d i n g i s s u e s . expressed  Many d e l e g a t i o n s have r e p e a t e d l y  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 s o l u t i o n provided other d e l e g a t i o n s are w i l l i n g to accept them too. Chairmen a l s o f e l t  The  two  that these p r o p o s a l s represented a d e l i c a t e  balance between the p o s i t o n s of v a r i o u s groups and any major change was  likely  to upset  the balance.  Paragraphs 1 to 3 of the Working Paper d e a l t with the d e f i n i t i o n of a t r a n s n a t i o n a l and scope of a p p l i c a t i o n of  the Code.  A t r a n s n a t i o n a l c o r p o r a t i o n was  d e f i n e d as  217  an " e n t e r p r i s e , c o m p r i s i n g  e n t i t i e s i n two  r e g a r d l e s s of the l e g a l form and e n t i t i e s , which operates  f i e l d of a c t i v i t y of  p o l i c i e s and  or more decision-making  a common s t r a t e g y  c e n t r e s , i n which  e n t i t i e s are so l i n k e d , by ownership or otherwise, one  or more of them may  knowledge, resources  others." to any  6 3  I t was  that  in particular  and r e s p o n s i b i l i t i e s  with  e x p l i c i t l y s t a t e d that the Code a p p l i e s  e n t e r p r i s e having  of  i t s ownership and  and  open to adoption  these c h a r a c t e r i s t i c s  regardless  that i t i s u n i v e r s a l l y a p p l i c a b l e ft  by a l l S t a t e s .  As mentioned b e f o r e ,  there was  the q u e s t i o n of S t a t e s having resources  the  be able to e x e r c i s e a s i g n i f i c a n t  i n f l u e n c e over the a c t i v i t i e s of others and, to share  these  under a system of d e c i s i o n -  making, p e r m i t t i n g coherent through one  or more c o u n t r i e s  and wealth but  A  broad agreement on  s o v e r e i g n t y over t h e i r n a t u r a l  there were some r e s e r v a t i o n s on  the r i g h t of the States to e x e r c i s e t h i s  sovereignty;  whether the r i g h t should be e x c e r c i s e d i n accordance with internatioal by  law or i n accordance with agreements reached  the c o u n t r i e s concerned on a b i l a t e r a l and  basis.  multilateral  In the p r o p o s a l , i t has been c l e a r l y s t a t e d that  t r a n s n a t i o n a l s must r e s p e c t the n a t i o n a l s o v e r e i g n t y  of  the host c o u n t r i e s and  to  that each State had  the r i g h t  e x e r c i s e i t s permanent s o v e r e i g n t y over i t s n a t u r a l resources  and  wealth.  6 5  218  Again, ation the  that  host  some S t a t e s  transnationals  country  with  to modify  were s u b j e c t  by the -national,  Proposal  removes  law of these  i s subject  formul-  "to the  ©;£-  extent  countries."  any such q u a l i f i c a t i o n  transnational  the  to the j u r i s d i c t i o n  the q u a l i f i c a t i o n ,  reguired  the  had sought  The  and c l a r i f i e s  to the j u r i s d i c a t i o n ,  that  laws, 66  regulations In  and a d m i n i s t r a t i v e  the national  that  transnationals  ment  i n the host  has  order  should  with  receive  tionals prises are  should  "in  treat-  treatment p r i n c i p l e public  national  interests  as r e f l e c t e d i n n a t i -  and t h e d e c l a r e d countries.  develop-  'Also,  transna-'  t h e same t r e a t m e n t a s d o m e s t i c  "when t h e c i r c u m s t a n c e s  under which  they  enter-  operate  similar."67 With  only  laws;  of the developing be g i v e n  and e q u i t a b l e  f o r maintaining  systems  country.  i t i s proposed  security; vital  socio-economic  ment o b j e c t i v e s  fair  The n a t i o n a l  national  o n a l const'itb'uticon's a n d o t h e r  of the host  clauses,  by requirements  and p r o t e c t i n g  consistent  treatment  countries.  been q u a l i f i e d  practices  respect  advocates accordance  between mitted  States  to n a t i o n a l i z a t i o n , the working  payment o f c o m p e n s a t i o n by t h e S t a t e with  the applicable  and e n t i t i e s  t o competent  national  legal  concerned,'  r u l e s . D i s p u t e s  of transnational courts  paper  a r e t o be  or authorities; but  sub-  219  if  the p a r t i e s mutually agree, d i s p u t e s  may be r e f e r r e d 69  to other d i s p u t e  settlement procedures.  Conclusion Therefore,  we see that agreement has been reached the  on many important i s s u e s d e a l t with in/Code arid on others, p o s s i b l e s o l u t i o n s e x i s t on which agreement i s p o s s i b l e . Also,  the need 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 of  investment has been acknowledged. States  have t r i e d to r e s o l v e  In the absence of i t ,  the problem through  l e g i s l a t i o n , r e g i o n a l arrangements and b i l a t e r a l t r e a t i e s . C e r t a i n agencies of the United  corporations  national investment  Nations have a l s o  t r i e d to work out codes of conduct r e g a r d i n g to t r a n s n a t i o n a l  foreign  issues  pertaining  but a l l these e f f o r t s have  been l i m i t e d by scope and s u b j e c t . 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 p a r t of the Code while should continue cn o t h e r s .  T h i s , however, i s not p r a c t i c a l  because the o u t s t a n d i n g i s s u e s are as v i t a l and  negotiations  as n a t i o n a l i z a t i o n  compensation, the p r i n c i p l e of n a t i o n a l treatment,  dispute  s e t t l e m e n t , what c o n s t i t u t e s i n t e r n a l a f f a i r s of a country and  the concept of n o n - i n t e r f e r e n c e  i n them by t r a n s n a t i o n a l s .  220  In the absence of agreement on such i s s u e s , the Code i s not l i k e l y  to succeed.  Another major o b s t a c l e i n the n e g o t i a t i o n s concerning the Code has been c o n t r o v e r s y on whether the Code should 70  be a mandatory or a v o l u n t a r y instrument. United S t a t e s and other developed  The view of  i n d u s t r i a l i z e d countries  i s that the Code should be v o l u n t a r y i n c h a r a c t e r .  The  developing c u n t r i e s , on the other hand, would l i k e the Code to be mandatory.  However, i t seems that a d e c i s i o n on the  exact nature of the Code i s not as important on the i s s u e s by a l l the p a r t i e s concerned commitment  and t h e i r  to make the Code e f f e c t i v e through  t a t i o n and follow-up procedures.  as agreement political  i t s implemen-  An instrument  may be l e g a l l y  b i n d i n g and yet may be v i o l a t e d with impunity whereas even a v o l u n t a r y instrument commitment sphere  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  towards i t . T h i s i s p a r t i c u l a r l y true-in'-.the  of i n t e r n a t i o n a l law which, by i t s very nature,  cannot  have s t r o n g enforcement machinery. Besides, the instrument acceptance  has a g r e a t e r chance of  i f , to begin with, i t i s v o l u n t a r y i n nature.  I t would h e l p to r e s o l v e the d i f f i c u l t i e s  i n connection  with some f o r m u l a t i o n s where there i s agreement on the concepts  221  because  then  the  t e x t would  legal  terms.  For  State  has  right  duty the be  the  t o pay  standards  t o be  to n a t i o n a l i z e The  agree  and  the  difficulty the  couched  in precise  that a  sovereign  corresponding lies  in elaborating  according  to which  c o m p e n s a t i o n has  a  b i n d i n g Code means t h a t n o t  to  paid.  should  the  and  adoption  of  troversies  sensus  of  the  the  has  language  Code s h o u l d  not  be  regard  paragraph  there  differing  are  such  are  so  the  rest  agreed  on  the  Code.  because  of  first  step  and  the  of  The  of  con-  the  one-  standards i n the  States  obtain  with  norms,  direction and  there  i m p l i c a t i o n s of  of  binding  such  dealt  instrument  and  con-  legally  issues being  I f the  f o r e i g n investment more d e t a i l e d  to  i n a comprehensive  complexity.  contain general  important  difficult  many s o v e r e i g n  interests  great  the  to  so  Code.  f o r every  evolving  h e l d up  both  the  only  accepted  must a l s o . b e  f o r two-thirds of  i t i s extremely  regulation  generally  a l r e a d y been o b t a i n e d  Moreover,  initially  be  i t s language  language with  widely  an  formulated  adopted,  the  of  code where  of  being  Consenus has  concepts  third  legally  concept  universally  upon.  be  have  a l l States  compensation.  Again,  and  example,  not  were  with to  i t would international  w o u l d be these  room  issues.  222  Also, i t has to be remembered that i t i s not p o s s i b l e to a n t i c i p a t e every s i t u a t i o n that may a r i s e however comprehensive the Code may be.  Other i n t e r n a t i o n a l instruments  have a l s o been going through a process e v o l u t i o n .  Even  n a t i o n a l l e g i s l a t i o n i n v o l v i n g p u b l i c p o l i c y evolves time and has to be r e f i n e d through amendments. Guidelines  with  The OECD  have a l r e a d y been f o r m a l l y reviewed twice s i n c e  t h e i r adoption i n 1976.  S i m i l a r l y , there  are p r o v i s i o n s  f o r review i n the l i g h t of experience gained i n the T r i p a r t i t e Declaration and  on 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  i n the I n t e r n a t i o n a l Code of Marketing of  •Substitutes. F u r t h e r ,  Breast-Milk  i n i n t e r n a t i o n a l law, when c e r t a i n  p r i n c i p l e s become so widely accepted, that they become p a r t of the i n t e r n a l t o n a l psyche, they g a i n the s t a t u s of customary i n t e r n a t i o n a l law and by themselves a c q u i r e character. to evolve  a manadatory  Hence, i f the Code was adopted and given  a chance  i t s norms are more l i k e l y to become p a r t of c u s t -  omary i n t e r n a t i o n a l law than i f i t i s not adopted at a l l .  223 CONCLUSION  In  the preceding  investment and  perspectives,  a developing  indicate  that  accelerating have seen it  chapters  i n case  c a n be an i m p o r t a n t  technological  and laws  v i z . Canada  investment  the process  that  the growth  policies  country,  foreign  we h a v e e x a m i n e d  industry,  I t encourages  gy  t h e advancement  needs,  development for  The foreign  been  investment  In  efficient  costs.  like  resources  India, and  manpower and  the adaptation of technoloof research  culture  which  source  a vital  country.  and t h e  i s a  prerequisite  of c a p i t a l  i n order  investment  has  has l e d t o  resources  and  structure  i n Canada.  has been f e l t  t o maximize  how  i n t h e economic  and know-how,  of i n d u s t r i a l  t h e need  role  h a s shown  Foreign  e x p l o i t a t i o n of natural  countries  investment its  has played  the establishment  both  skilled  o f Canada's e x p e r i e n c e  of a developed  an i m p o r t a n t  rated  country  We  prosperity.  examination  development  the  o f an i n d u s t r i a l  economic  tool f o r  I t c a n a c t as a c a t a l y s t f o r  entrepreneurship. to local  They  and d e v e l o p m e n t .  means o f a u g m e n t i n g  of indigenous  developed  and I n d i a .  of a developing  capabilities.  of a  i s a useful  of growth  the foreign  to regulate  i t s benefits  and  accele-  foreign  minimize  Most o f t h e d e v e l o p i n g colonies,  are underdeveloped  industrial lization bridge  ment, t h e y necessary  and f i f t y  resources,  p o s i t i o n with  they  ment w h i c h  offer  incentives  place  the very  purpose  Transnationals  greater  direct  Hence, they investment  profits.  invest-  find i t to  A t t h e same direct  invest-  economies. and l e a d s  to multiple  and r  sometimes change the economies  to  abruptly  cannot  sus-  offered.  often  o f new m a r k e t s ,  invest  cheaper  Besides,  By  1 9 7 9 , o n e US w o r k e r  of  exports  i n developing  of production,  and  expanding  m a r k e t s means  more  world  and p o l i t i c a l  countries  costs  i n twenty  f o r the third  the^ economic  laws  While  i n order  on t h e i r  are subjected  these  i n a weak  direct  of the investment  c a p r i c i o u s l y because  the incentives  search  laws;  directi n -  but f e e l  of foreign  an i n t o l e r a b l e b u r d e n  contradictory  apparently  tain  skilled  foreign  to attract foreign  results: transnationals  and  They have t o  to transnationals.  the costs.  foreign  to industria-  i t f o r t h e i r economic development.  defeats  often  have missed t h e  technology,  aware o f t h e b e n e f i t s  to regulate  224 erstwhile  years.  They need  respect  can i l l - a f f o r d  channelize  two  they  f o r t h e i r economic development  are well  This  a hundred  being  are latecomers  and i n f r a s t r u c t u r e .  bargaining  time  because  They  the gap but l a c k  manpower,  they  revolution.  by a b o u t  vestment  countries,  was e m p l o y e d  countries."'"  environment  in  When,  in  jobs.  production however,  i s not stable  they  225  can  be s u b j e c t e d t o u n f a i r  It,  therefore,  tfies tion  i n the interest  and t h e t r a n s n a t i o n a l s of foreign  In which it  lies  expropriation  case  direct  restrict  foreign  of both  t o accept  countries  host  has been n e c e s s a r y  nationalization. d e v e l o p i n g coun4--  international  regula-  investment.  of developed  are "primarily  or  like  countries  t o "employ  involvement  Canada  and  to foreign  Australia  investment",  s c r e e n i n g mechanisms and  i n some s e c t o r s f o r c u l t u r a l  or  2 economic  reasons".  investment  i s from  ship  and c o n t r o l  also  Canada's  In Canada, USA r e s u l t i n g  US.  largest  trading  both  insecurity.  partner.  direct  percentage  o f owner-  industry.  US i s  Over  t h e same p e r c e n t a g e  f o r investment  70%of  Canada's  of imports  come  o n US m a r k e t s .  Being  and t r a d e l e a d s t o a f e e l i n g  Regulation of foreign  concerned  economic As  Canadian  T h i s makes Canada d e p e n d e n t  dependent  tially  i n a high  of non-financial  e x p o r t s g o t o US a b o u t from  the majority of foreign  direct  investment  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  of  i s essen-  cultural  and  identity.  was p o i n t e d o u t by Hon. G e r a l d R e g a n ,  (International  Trade),  a l l countries  Minister  of State  impose r e s t r i c t i o n s  on  3  foreign  investment  example, tors  like  i n s o m e way o r t h e o t h e r .  there are restrictions shipbuilding,  munications,  finance,  on f o r e i g n  dredging, fishing,  n u c l e a r power, m i n i n g  I n USA  itself, for  investments  i n sec-  a i rtransport, and  defence  com-  226 procurement trust  when t h e s e  countries  ries  Besides,  laws r e l a t i n g  and s e c u r i t i e s c a n be u s e d  foreigners in  industries.  like  f o rlarge  considerations  t o prevent  a c q u i s i t i o n s by  a r e n o t i n US i n t e r e s t .  US a n d G r e a t  portions  Britain,  of foreign  of security  to anti- .  Restrictions  which  a r e home  d i r e c t investment,  and d e f e n c e  as w e l l  count"involve  as economic  4  considerations". measures  to protect  Therefore, form  developing,  lines has no  used  although  of a liberal  points  t o a need with  been  regard  themselves  measures  international  a l l o f them  trade  recognize  I ta l l  Regan:  The p o s i t i o n "There a r e  There must, however, be a  and i n v e s t m e n t  guidelines.  bene-  p r i n c i p l e s and g u i d e -  by Hon. G e r a l d  that  recognize  climate.  i n which  their  of a relatively  t o development  of the countries  the potential  d i r e c t investment.  and t h e d e s i r a b i l i t y  trade  d e g r e e s and  environment.  f o ru n i v e r s a l l y agreed to foreign  administrative  whether developed or  and i n v e s t m e n t  they  liberal  MNEs m u s t  by f o l l o w i n g  national  commit  the laws  o p e r a t e , and  5  r e a l i z a t i o n r o f t h e need  transnational  i n varying  by a l l c o u n t r i e s ,  to contribute  policies  use various  and investment i n t e r e s t s .  o f i n t e r e s t s among s t a t e s  international  The  trade  r i g h t s and wrongs.  responsibilities  and  their  succinctly stated  absolute  balance  and Japan  restrictive  are being  fits  France  corporations  f o rclear guidelines f o r  l e dt o the establishment  of the  227 Commission and Centre on T r a n s n a t i o n a l  Corporations  which  began the work of e l a b o r a t i n g a code of conduct f o r t r a n s national corporations  i n 1977.  The O r g a n i z a t i o n  f o r Econo-  mic Cooperation and Development has a l s o developed for  transnational corporations  and f o r the conduct of host  governments towards 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 g u i d e l i n e s only host  apply  guidelines  to the OECD c o u n t r i e s .  but these The number of  and home c o u n t r i e s has been s t e a d i l y i n c r e a s i n g , and the  n e w l y - i n d u s t r i a l i z e d c o u n t r i e s have a l s o a l a r g e stake i n creating a p o s i t i v e climate  f o r d i r e c t investment.  Agreement, as we have seen, has been reached on the major p o r t i o n of the d r a f t .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 is  p o s s i b l e and d e s i r a b l e to accept t h i s code. However, we must remember that the centre  of r e g u l a t i o n would s t i l l  remain n a t i o n a l l e g i s l a t i o n .  have to  The adoption of the Code could  lead to a c t i v i t y  at the n a t i o n a l l e v e l to make the instrument  more e f f e c t i v e .  I t could  i n s p i r e n a t i o n a l r e g u l a t i o n s and  p o l i c i e s to secure a g r e a t e r  a p p l i c a t i o n of the p r i n c i p l e s  agreed upon at the i n t e r n a t i o n a l l e v e l . could be i n c l u d e d  i n the Code i t s e l f  endeavour to i n c o r p o r a t e the Code.  In f a c t  a provision  to say that States  should  the p r i n c i p l e s and norms contained i n  U n i v e r s a l acceptance of those p r i n c i p l e s coupled  with e f f o r t s at the n a t i o n a l l e v e l to make them e f f e c t i v e would compel the t r a n s n a t i o n a l s to respond, t o o , and be good c i t i z e n s i n accordance with these standards. f o r e i g n investment a t r u l y v a l u a b l e  corporate  This would make  t o o l f o r economic development.  228  NOTES  INTRODUCTION 1.  North-South : A Programme f o r S u r v i v a l , The Report of the Independent Commission on I n t e r n a t i o n a l Development Issues under the Chairmanship of W i l l y Brandt, 1980, Pan Books L t d . , p. 18. Henceforth r e f e r r e d 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 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 the Code of Conduct being worked out by United Nations 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 . The OECD G u i d e l i n e s and the 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 have a l s o not given a p r e c i s e legal definition.  3.  Brandt Commission Report, P.32.  4.  Statements and Speeches, No.82/80, "Beyond Cancun : Canadian P e r s p e c t i v e s on the North-South Dialogue," An Address by the Honourable Mark MacGuigan, S e c r e t a r y of State f o r E x t e r n a l A f f a i r s , to the S o c i e t y f o r I n t e r n a t i o n a l Development, Baltimore, J u l y 21, 1982, E x t e r n a l A f f a i r s , Canada, p.3.  5.  Ibid.  6.  I b i d . , p.4 .  7.  UN Document E/5500/Rev.1, The Impact of 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 on Development and on I n t e r n a t i o n a l Relations, p. 24.  229  CHAPTER I 1.  UN Document ST/ECA/190, M u l t i n a t i o n a l Corporations i n World Development, New York, 1973, p.53.  2.  UN Document E/C.10/38, T r a n s n a t i o n a l Corporations i n 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 D i r e c t Investment i n Canada, Ottawa, 1972, p.405. From now on r e f e r r e d to as the Gray Report . Also See  7.  UN  Document  ST/ECA/190,  p.48.  Foreign Ownership and the S t r u c t u r e of Canadian Industry : Report of the Task Force on the S t r u c t u r e of Canadian Industry, Ottawa, January 1968. Henceforth r e f e r r e d to as Watkins Report. pp.48-51;. pp.310-340. See Also Report to the House : S p e c i a l Committee Respecting Canada - U.S. R e l a t i o n s , House of Commons, Second Session, Twenty-eighth Parliament, 1969-1970. Henceforth r e f e r r e d 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,  12.  UN Document  13.  " L e t t e r from New D e l h i " , Vol.97 No.34, Far Eastern Economic Review, Aug.26, 1977, p.70.  E/C.10/84,  p.54.  See Also footnote 29.  p.12.  P.S. Sangal, N a t i o n a l and M u l t i n a t i o n a l Companies Some Legal Issues, D e l h i : Bhagwati I n t e r n a t i o n a l 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 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 on Development and on I n t e r n a t i o n a l R e l a t i o n s . From now on r e f e r r e d to as Report, p.38. The Group c o n s i s t e d of the following : L.K. Jhaj (Chairman) India. George Kaham (Vice-Chairman) Tanzania. J . Irwin M i l l e r (Vice-Chairman) USA. P i e r r e U r i (Vice-Chairman) France. Juan Somavia (Rapporteur) C h i l e . Eurik Blum -- Y u g o s l a v i a . Tore Browaldh -- Sweden. John J . Deutsch -- Canada. Mohamed Diawara - Ivory Coast. John Dunning -- U.K. Antonio Estrany y Gendre -- A r g e n t i n a . Ahmad G h o z a l i -- A l g e r i a . J.D. Ivanov -- USSR. Jacob J a v i t s -- 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  18 .  I b i d . , pp.44-45 .  19.  I b i d . , p. 74 .  20 .  Ibid . , p. 79 .  21 .  Ibid . , p. 90 .  22.  Mr. Ryutaro Komiya, r e p r e s e n t a t i v e from Japan, was at that time P r o f e s s o r of Economics, Tokyo U n i v e r s i t y .  23.  Mr. Jacob J a v i t s , r e p r e s e n t a t i v e from USA time a Senator.  24.  Mr. Irwin M i l l e r , r e p r e s e n t a t i v e from USA, time Chairman, Cummins Engine Co., Inc.  25.  Mr. Hans S c h a f f n e r , r e p r e s e n t a t i v e from S w i t z e r l a n d , was a former P r e s i d e n t of the Swiss C o n f e d e r a t i o n and at that time was Vice Chairman of SANDOZ, S.A.  p .103 .  was was  at that at that  n  231  26 .  Report, p.3 6  27.  I b i d . , p. 5 7 .  28.  Ibid.  29 .  I b i d . , p.5 9.  30 .  Ibid..  31 .  Ibid.,  p.105.  32 .  Ibid.,  p.144 and  33 .  I b i d . , p.4 7.  34 .  I b i d . , p.107, p.119.  35 .  I b i d . , p.66, p.67, p.68.  36 .  I b i d . , p.155, and p.130.  37.  Ibid .  pp.121-122.  38 .  Ibid .  pp.83, 84, 85.  39.  Ibid .  p. 87 .  40 .  Ibid .  p.93 .  41 .  Ibid .  p.150 .  42 .  Ibid .  p . 67 .  43 .  Ibid .  p.Ill .  44 .  Ibid .  p.140 .  45 .  Ibid.  p.116 .  46 .  Ibid .  pp.122-123.  47.  Ibid .  p.129 .  48 .  Ibid .  :.151 . p:.  49.  Ibid .  P- 119 .  50 .  Ibid .  p.117.  51 .  Ibid .  p.113.  52 .  Ibid.  p.104, p.102.  See Also pp.3 6 and 37,  p.145 .  See Also p.40.  232 CHAPTER  II  1.  UN Document  E/5500/Rev. 1,  Report,  p.26.  2.  Simon Kuznets, " R e f l e c t i o n s on the Economic Growth of Modern Nations," Towards a Theory of Economic Growth, New York : W.W. Norton & C o . I n c , 1965 r p t . 1968, pp.86-92 . r  3.  Ibid.,  pp.112-120.  4.  Simon Kuznets, "Present Underdeveloped Countries and Past Growth P a t t e r n s " , Economic Growth and S t r u c t u r e : Selected Essays, New York : W.W. Norton & Co. Inc., 1965, pp.176-177.  5.  Barbara Ward, "The Decade n-F Development -- A study i n Frustration'.', Reshaping the World Economy : Rich and Poor Countries, ed. John A. Pincus, 1968, pp.18-30. Simon Kuznets, Economic Growth and S t r u c t u r e ,  pp.176-193.  6.  Barbara Ward, "The Decade of Development", pp.24-25.  7.  Simon Kuznets, "Population and Economic Growth", P o p u l a t i o n , C a p i t a l , 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 i n the Macdonald Commission Report i s that Canada's domestic market i s too small to s u s t a i n i t s economy. It i s , t h e r e f o r e , very important f o r Canada to ensure assured access to American markets. Report of the Royal Commission on the Economic Union and Development Process f o r Canada, M i n i s t e r of Supply & S e r v i c e s , 1985. From now on r e f e r r e d to as Macdonald Commission Report.  8.  Barbara Ward, "The Decade of Development", p.28.  9.  I b i d . , p.29.  10.  S. Kuznets, Economic Growth and S t r u c t u r e ,  11.  Ibid.,  12.  S. Kuznets,  pp.182-185.  p.178. " R e f l e c t i o n s 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 S t r u c t u r e ,  p.178.  233 14.  Quoted by Glen 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 Industrialization, Toronto : M c C l e l l a n d and Stewart L t d . , 1983,p.7.  15.  Denis S t a i r s a n d G i l b e r t R. W i n h a m , 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 , Univ. o f Toronto Press, 1985, p.49. See  Also  Macdonald Commission  Toronto,  pp.406-407.  K. L e v i t ,  17.  Glen  18.  Quoted  by Glen  19.  Quoted  by W i l l i a m s , p.8.  20.  Ibid.,  21.  I b i d . , p.10.  22.  I b i d . , p.9.  23.  D e n i s S t a i r s a n d G i l b e r t R. W i n h a m , C a n a d a a n d 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 Environment, p.54.  24.  C a n a d a - 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 r a y R e p o r t , a n d M a c d o n a l d C o m m i s s i o n Report .  25 . .  Wahn R e p o r t , p . 3 3 :12 .  26.  Macdonald Commission  27.  D e n i s S t a i r s a n d G i l b e r t R. W i n h a m , 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 Environment, p.53.  28.  I b i d . , p.51.  Williams,  Surrender,  Vol.11,  16.  :  Silent  Report,  Not f o r E x p o r t , Williams,  Macmillan, 1970.  p.7.  Not f o r E x p o r t , p.7.  pp.9-10.  Report,  Vol.1,  pp.237, 238.  R o y a l Commission on Canada's Economic N o v e m b e r , 1 9 5 7 . F r o m now o n r e f e r r e d  Prospects, t o as Gordon  Report.  234 CHAPTER I I I  1.  Jawaharlal Nehru, The Discovery of I n d i a , abridged by C D . Narasimhaiah, New D e l h i : Indian C o u n c i l f o r C u l t u r a l R e l a t i o n s , 1976, p.190.  2.  K.S. Shedsankar, The Problem of I n d i a , London : Penguin S p e c i a l , 1940, Quoted by Nehru i n The Discovery of I n d i a , p.190. Matthew J . Kust, Foreign E n t e r p r i s e i n I n d i a : Laws and P o l i c i e s , U n i v e r s i t y of North C a r o l i n a . Press , 1964, p.20.  Iv  3.  See  Also pp.22-23.  4.  Ibid.,  p.24.  5.  Nehru, The  6.  Ibid.  7.  Proceedings 1943, V o l . I I I . F e d e r a t i o n of Indian Chambers of Commerce and Industry Annual Meeting, D e l h i , 27-28 March 1943, p.162. Quoted by Michael Kidron, Foreign Investments i n I n d i a , Oxford U n i v e r s i t y Press, 1965, p.65.  8.  Commerce, 28 November 1942, Investments i n I n d i a , p.66.  9.  Eastern Economist, 31 Aug.,  Discovery of I n d i a , p.188.  c i t e d by Kidron, 1945.  Foreign  C i t e d by Kidron,  p.66.  10.  Nabagopal Das, I n d u s t r i a l E n t e r p r i s e i n I n d i a , p. 8 : Italics in original. C i t e d by Kidron, p.67.  11.  Eastern Economist, 13 Oct. 1944, Kidron, p.67.  12.  Eastern Economist, 12 May  13.  Eastern Economist, 6 A p r i l 1945,  14.  Proceedings,  15.  Eastern Economist, 18 May p.68 .  1945,  1944,  Vol.Ill,  p. 413.  by  p.727. C i t e d by Kidron, p.424. C i t e d by Kidron,  p.122.  1945,  Cited  C i t e d by Kidron,  p.658.  C i t e d by  p.67. p.68  p.68.  Kidron,  235 •16.  Report of the Indian Merchants' Chamber, 1928, Bombay, 1929, p.14. C i t e d by Kidron, p.69.  17.  Eastern Economist, 9 J u l y 1943, p.254. P.69.  18.  Manu Subedar, Speech i n the L e g i s l a t i v e Assembly, c i t e d by Kidron, p.69.  19.  Eastern Economist, 18 May 1945, p.642. p. 70.  20.  "An I n d u s t r i a l M i s s i o n " , Path to P r o s p e r i t y , p.422. C i t e d by Kidron, p.70.  21.  C i t e d by Kust, Foreign E n t e r p r i s e i n I n d i a , p.111.  22.  C i t e d by Kust, Foreign E n t e r p r i s e i n I n d i a ,  23.  United Nations Economic and S o c i a l c o u n c i l , The Impact of 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 on Development and on I n t e r n a t i o n a l R e l a t i o n s , E/5500/Rev.1, New York, 1974, p.113 .  24.  UN Document ST/ECA/190 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 i n World Development, p.48.  25.  Simon Kuznets. London, 1966.  26.  Barbara Ward, "The Decade of Development", Reshaping the World Economy : Rich and Poor C o u n t r i e s , ed. John A. . Pincus, 1968.  2 7.  Report of the Group of Eminent Persons to Study the Impact of M u l t i n a t i o n a l Corporations on Development and on I n t e r n a t i o n a l R e l a t i o n s , UN Document E/5500/Rev.l  28.  See Kidron, Foreign Investments i n I n d i a ,  _  C i t e d by Kidron,  C i t e d by Kidron,  pp.63-64.  Economic Growth and S t r u c t u r e ,  pp.299-321.  See Also P r i v a t e Foreign Investment i n i t s R e l a t i o n s h i p to Development, Report by the UNCTAD S e c r e t a r i a t . UNCTAD Document TD/134. 29.  J . Eddison, I n d u s t r i a l Development i n the Growth of the Pulp and Paper Industry i n I n d i a , pp.264-5, C i t e d by Kidron , p.23. See Also p.24. See Also T r a n s f e r of Technology, Report by the UNCTAD S e c r e t a r i a t . UNCTAD Document TD/106.  236  30.  Kidron, p.303.  31.  The  32.  Myths and R e a l i t i e s of Foreign Investment i n I n d i a , Indian Investment Centre, New D e l h i , p.3.  33.  I b i d . , See Also Survey of Indo-U.S. C o l l a b o r a t i o n s , New D e l h i : F e d e r a t i o n of Indian Chambers of Commerce, 1984 .  34.  Ibid.,  35.  Kust, Foreign E n t e r p r i s e i n I n d i a , p.55. See Also Kidron, p.305. And see, P r i v a t e Foreign Investment i n i t s R e l a t i o n s h i p to Development : Balance-of-payment e f f e c t s of p r i v a t e f o r e i g n investment i n d e v e l o p i n g c o u n t r i e s : Summary of case s t u d i e s of I n d i a , Iran, Jamaica and Kenya, Report prepared by Sanjay L a l l , I n s t i t u t e 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, M i n i s t r y of Finance, Government of I n d i a , 1971. Henceforth r e f e r r e d to as Study Team Report.  3 7.  T r i a l and Punishment of S o c i a l and Economic 47th Report of the Law Commission of I n d i a .  38.  Study Team Report,  39.  See Lok Sabha Debates, 8th Session, Vol.31, September, 1973.  August to  40.  Statement of Objects and  1973.  See  above f i g u r e s have been taken from Kidron, p.246.  p.5.  Reasons f o r FERA,  Also Statement of Objects  and  Reasons f o r FERA,  See R.B. S e t h i , Foreign Exchange Regulation N o t i f i c a t i o n s and Forms, 2nd ed., Allahabad Law P u b l i s h e r s , 1982. 41.  Offences,  S e c t i o n 29 of FERA, 1973 : R e s t r i c t i o n s on of Place of Business i n India :  Act with :  1947. Rules,  Establishment  (1) (a) c a r r y on i n I n d i a , or e s t a b l i s h i n India a branch, o f f i c e or other place of business f o r c a r r y i n g on any a c t i v i t y of a t r a d i n g , commercial or i n d u s t r i a l nature, other than an a c t i v i t y f o r the c a r r y i n g on of which permission of the Reserve Bank has been obtained under S e c t i o n 28;  237  S e c t i o n 28 of FERA, 1973 : R e s t r i c t i o n s on the Appointment of C e r t a i n persons and Companies as Agents or T e c h n i c a l or Management A d v i s e r s in India. (1) Without p r e j u d i c e to the p r o v i s i o n s of S e c t i o n 47 and n o t w i t h s t a n d i n g anything contained i n any other prov i s i o n of t h i s Act or the Companies Act, 1956 (1 of 1956), a person r e s i d e n t o u t s i d e I n d i a 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 I n d i a but i s r e s i d e n t i n I n d i a , or a company (other than a banking company) which i s not i n c o r p o r a t e d under any law i n f o r c e i n I n d i a or i n which the non-resident i n t e r e s t i s more than f o r t y percent, or any branch of such company, s h a l l not, except with the g e n e r a l or s p e c i a l permission of the Reserve Bank,-(a) a c t , or accept appointment, as agent i n India or any person or company, i n the t r a d i n g or commercial t r a n s a c t i o n of such person or company; or (b) act or accept appointment, as t e c h n i c a l or management a d v i s e r i n I n d i a 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 f o r any d i r e c t or i n d i r e c t c o n s i d e r a t i o n . (2) Where any such person or company ( i n c l u d i n g i t s branch) as i s r e f e r r e d to i n s u b - s e c t i o n (1) acts or accepts appointment as such agent, or t e c h n i c a l management a d v i s e r , or permits the use of any such trade mark, without the p e r m i s s i o n of the Reserve Bank, such a c t i n g , appointment or p e r m i s s i o n , as the case may be, s h a l l be void . (3) Where any such person or company ( i n c l u d i n g i t s branch) as i s r e f e r r e d i n s u b - s e c t i o n (1) acts as, or holds the appointment o f , any such agent or t e c h n i c a l or management a d v i s e r as i s r e f e r r e d to i n that subs e c t i o n at the commencement of t h i s Act, or where a permission f o r the use of any such trade mark granted by such person or company ( i n c l u d i n g i t s branch) cont i n u e s to be v a l i d at such commencement, such person or company ( i n c l u d i n g i t s branch) s h a l l , w i t h i n a p e r i o d of s i x months from such commencement or such f u r t h e r p e r i o d as the Reserve Bank may allow i n t h i s b e h a l f , make an a p p l i c a t i o n to the Reserve Bank i n such form c o n t a i n i n g such p a r t i c u l a r s as may be s p e c i f i e d by the Reserve Bank f o r p e r m i s s i o n to continue to a c t , or to hold the appointment, as such o r , as the case may be, to continue to permit the use of any such trade mark.  238  (4 ) On r e c e i p t of an a p p l i c a t i o n under the Reserve Bank may, a f t e r making such deems f i t , e i t h e r allow the a p p l i c a t i o n c o n d i t i o n s , i f any, as the Reserve Bank impose, or r e j e c t the a p p l i c a t i o n :  s u b - s e c t i o n (3), i n q u i r y as i t subject to such may think f i t to  Provided that no a p p l i c a t i o n s h a l l be r e j e c t e d under t h i s s u b - s e c t i o n u n l e s s the p a r t i e s who may be a f f e c t e d by such r e j e c t i o n have been g i v e n a reasonable o p p o r t u n i t y f o r making a r e p r e s e n t a t i o n i n the matter. (5) Where any a p p l i c a t i o n has been r e j e c t e d under subs e c t i o n (4), the a c t i n g , appointment or p e r m i s s i o n , as the case may be, s h a l l be void on the e x p i r y of a p e r i o d of n i n e t y days, or such other l a t e r date as may be s p e c i f i e d by the Reserve Bank, from the date of r e c e i p t by the person or company ( i n c l u d i n g i t s branch) concerned of the communication conveying such r e j e c t i o n . (6) Where no a p p l i c a t i o n has been made under s u b - s e c t i o n (3) by any such person or company ( i n c l u d i n g i t s branch) as i s r e f e r r e d to i n s u b - s e c t i o n (1), the Reserve Bank may, by order, d i r e c t such person or company ( i n c l u d i n g i t s branch) to d e s i s t from such a c t i n g or appointment o r , as the case may be, from p e r m i t t i n g the use of any such trade mark on the e x p i r y of such p e r i o d as may be s p e c i f i e d i n 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 t h i s s u b - s e c t i o n u n l e s s the p a r t i e s who may be a f f e c t e d by such d i r e c t i o n have been g i v e n a reasonable' o p p o r t u n i t y f o r making a r e p r e s e n t a t i o n i n the matter. (7) Where any d i r e c t i o n made under s u b - s e c t i o n (6) has not been complied with by any person or company ( i n c l u d i n g i t s branch), then without p r e j u d i c e any a c t i o n that may be taken under t h i s Act, the a c t i n g , appointment or permission as the case may be, s h a l l be v o i d with e f f e c t from the e x p i r y of the p e r i o d s p e c i f i e d i n the d i r e c t i o n . Explanation  :  For the purposes of t h i s  section,--  (a) "agent" i n c l u d e s any person or company ( i n c l u d i n g i t s branch) who or which buys any goods with a view to s e l l such goods b e f o r e any p r o c e s s i n g t h e r e o f ; (b) "company" means any body c o r p o r a t e and i n c l u d e s a f i r m or other a s s o c i a t i o n of i n d i v i d u a l s ;  239 (c) " p r o c e s s i n g " means any a r t . o r process f o r producing, p r e p a r i n g or making an a r t i c l e by s u b j e c t i n g any m a t e r i a l to a manual, mechanical, c h e m i c a l , e l e c t r i c a l or any other l i k e o p e r a t i o n but does not i n c l u d e any process i n c i 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 , p r e s s i n g , compressing, packing, r e 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) " t e c h n i c a l or management a d v i s e r " i n c l u d e s any person or company ( i n c l u d i n g i t s branch) r e q u i r e d to tender any t e c h n i c a l or management a d v i c e , even though the t e n d e r i n g of such advice i s i n c i d e n t a l to any other s e r v i c e s r e q u i r e d to be rendered by such person or company. 43.  S e c t i o n 29  (1) (b) of FERA, 1973  :  a c q u i r e the whole or any part of any undertaking i n India of any person or company c a r r y i n g on any t r a d e , commerce or i n d u s t r y or purchase the shares i n I n d i a of any such company. 44.  S e c t i o n 29  (2) (a) and  (2)(b) of FERA, 1973  :  (a) where any person or company ( i n c l u d i n g . i t s branch) r e f e r r e d to i n s u b - s e c t i o n (1) c a r r i e s on any a c t i v i t y r e f e r r e d to i n c l a u s e (a) of that s u b - s e c t i o n at the commencement of t h i s Act or has e s t a b l i s h e d a branch, o f f i c e or other p l a c e of b u s i n e s s f o r the c a r r y i n g on of such a c t i v i t y at such commencement, then such person or company ( i n c l u d i n g i t s branch) may make an a p p l i c a t i o n to the Reserve Bank w i t h i n a p e r i o d of s i x months from such commencement or such f u r t h e r p e r i o d as the Reserve Bank may allow i n t h i s b e h a l f f o r p e r m i s s i o n to continue to c a r r y 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 p l a c e c o f b u s i n e s s f o r the c a r r y i n g on of s u c h - a c t i v i t y , as the case may be. (b) Every a p p l i c a t i o n made under c l a u s e (a) s h a l l be i n such form and c o n t a i n such p a r t i c u l a r s as may be s p e c i f i e d by the Reserve Bank. 45.  S e c t i o n 29  (2)(c) of FERA, 1973  :  Where any a p p l i c a t i o n has been made under c l a u s e (a), the Reserve Bank may, a f t e r making such i n q u i r y as i t may deem f i t , e i t h e r allow the a p p l i c a t i o n s u b j e c t to such c o n d i t i o n s , i f any, as the Reserve Bank may think f i t to impose or r e j e c t the a p p l i c a t i o n : Provided that no a p p l i c a t i o n s h a l l be r e j e c t e d under t h i s c l a u s e u n l e s s the p a r t i e s who may be a f f e c t e d  240 by such r e j e c t i o n have been g i v e n a reasonable opport u n i t y f o r making a r e p r e s e n t a t i o n i n the matter. 46.  S e c t i o n 29 (2)(d) of FERA, 1973 : Where an a p p l i c a t i o n i s r e j e c t e d by the Reserve Bank under c l a u s e ( c ) , the person or company ( i n c l u d i n g i t s branch) concerned s h a l l d i s c o n t i n u e such a c t i v i t y or c l o s e down the branch, o f f i c e or other p l a c e of b u s i n e s s e s t a b l i s h e d f o r the c a r r y i n g on of such a c t i v i t y , as the case may be, on the e x p i r y of a p e r i o d of n i n e t y days or such other l a t e r date as may be s p e c i f i e d by the Reserve Bank from the date of r e c e i p t by such person or company ( i n c l u d i n g i t s branch) of the communication conveying such r e j e c t i o n .  47.  S e c t i o n 29 (2)(e) of FERA, 1973 : Where no a p p l i c a t i o n has been made under c l a u s e (a) by any person or company ( i n c l u d i n g i t s branch), the Reserve Bank may, by order, d i r e c t such person or company ( i n c l u d i n g i t s branch) to d i s c o n t i n u e such a c t i v i t y or to c l o s e down the branch, o f f i c e or other p l a c e of b u s i ness e s t a b l i s h e d f o r the c a r r y i n g on of such a c t i v i t y , as the case may be, on the e x p i r y o f such p e r i o d as may be s p e c i f i e d i n 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 t h i s c l a u s e u n l e s s the p a r t i e s , who may be a f f e c t e d by such d i r e c t i o n , have been g i v e n a reasonable o p p o r t u n i t y f o r making a r e p r e s e n t a t i o n i n t t h e matter. 48.  S e c t i o n 29 (3) of FERA, 1973 : Notwithstanding anything contained i n s u b - s e c t i o n (2), the Reserve Bank may, having regard t o — (i) the f a c t that any person or company ( i n c l u d i n g i t s branch), r e f e r r e d t o i n s u b - s e c t i o n (1), i s c a r r y i n g on any a c t i v i t y r e f e r r e d to i n c l a u s e (a) of that s u b - s e c t i o n at the commencement of t h i s Act or has e s t a b l i s h e d a branch, o f f i c e or other p l a c e of b u s i n e s s f o r the c a r r y i n g on of such a c t i v i t y at such commencement, i n e i t h e r case, i n pursuance of any p e r m i s s i o n or l i c e n c e granted by the C e n t r a l Government, and (ii) the nature of the a c t i v i t y which i s being, or intended to be c a r r i e d on by such person or company ( i n c l u d i n g i t s branch), by order, exempt--  241  (a)  such person or company  ( i n c l u d i n g i t s branch); or  (b) any c l a s s of such persons or companies ( i n c l u d i n g t h e i r b r a n c h e s ) ; i n r e l a t i o n t o such a c t i v i t y as may be s p e c i f i e d i n the order, from the o p e r a t i o n of the prov i s i o n s of s u b - s e c t i o n ( 2 ) , subject to such c o n d i t i o n s as may be s p e c i f i e d i n the order : r  Provided that Reserve Bank s h a l l not make any order under t h i s s u b - s e c t i o n i n a case where the a c t i v i t y which i s being, or intended to be, c a r r i e d on i s s o l e l y of a trading nature. 49.  S e c t i o n 29 (4) (a) of FERA, 1973 : Where at the commencement of t h i s Act any person or company ( i n c l u d i n g i t s branch) r e f e r r e d to i n s u b - s e c t i o n (1) holds any shares i n India of any company r e f e r r e d to i n c l a u s e (b) of that s u b - s e c t i o n , r theh<; s u c h person tor f company I ( i n c l u d i n g t i t s : branch ) s h a l l , not?foe<: e n t i t l e d r t o continue t o r h o l d ' s u c h s h a r e s u n l e s s b e f o r e the e x p i r y of a p e r i o d of s i x months from such commencement or such f u r t h e r p e r i o d s as the Reserve Bank may allow i n t h i s b e h a l f , such person or company ( i n c l u d i n g i t s branch) has made an a p p l i c a t i o n to the Reserve Bank i n such form and c o n t a i n i n g such p a r t i c u l a r s as may be s p e c i f i e d by the Reserve Bank f o r p e r m i s s i o n to continue to hold such shares. c  ;  c  50.  S e c t i o n 29 (4) (b) of FERA, 1973 : Where an a p p l i c a t i o n has been made under c l a u s e ( a ) , the Reserve Bank may, a f t e r making such i n q u i r y as i t may deem f i t , e i t h e r allow the a p p l i c a t i o n s u b j e c t to such c o n d i t i o n s , i f any, as the Reserve Bank may think f i t to impose or r e j e c t the a p p l i c a t i o n ; Provided that no a p p l i c a t i o n s h a l l be r e j e c t e d under t h i s c l a u s e u n l e s s the p a r t i e s who may be a f f e c t e d by such r e j e c t i o n hav.e been g i v e n a reasonable o p p o r t u n i t y f o r making a r e p r e s e n t a t i o n i n the matter.  51.  S e c t i o n 29 (4) (c) of FERA, 19 73 : Where an a p p l i c a t i o n has been r e j e c t e d under c l a u s e ( b ) , or where no a p p l i c a t i o n has been made under c l a u s e ( a ) , the Reserve Bank may, i f i t i s of o p i n i o n that i t i s expedient so to do f o r the purpose of c o n s e r v i n g the f o r e i g n exchange, d i r e c t such person or company ( i n c l u d i n g i t s branch) t o s e l l or: procure the s a l e 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 such d i r e c t i o n . Explanation : For the purposes of t h i s s e c t i o n , " c o m p a n y " 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 affirm o r other;. 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.  Guidelines  f o r administering  Section  29 o f FERA  1973  :  These g u i d e l i n e s w i l l apply t o I n d i a n companies h a v i n g m o r e t h a n 40% f o r e i g n h o l d i n g s a n d b r a n c h e s o f f o r e i g n companies o p e r a t i n g i n I n d i a while seeking approval 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 nature or f o r s t a r t i n g fresh a c t i v i t i e s . These w i l l however 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 b y t h e G o v e r n m e n t 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 the 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 repatriated. B r a n c h e s o f f o r e i g n companies (except A i r l i n e s and S h i p p i n g Companies) s e e k i n g a p p r o v a l under t h e F o r e i g n Exchange 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 Indian companies as p e r p o l i c y o f Government. This would b e w i t h o u t p r e j u d i c e t o a n y o t h e r c o n d i t i o n s t h a t may b e l a i d down. 53.  CATEGORY Industrial  PROPOSED  ACTION  Activities  (a) Indian companies h a v i n g m o r e t h a n 40% foreign shareholdings and b r a n c h e s o f f o r e i g n companies engaged i n t h e p r o duction of items s p e c i f i e d i n Appendix I of Industrial Licensing Policy, F e b r u a r y 1973 o r e n gaged i n a predominantly export oriented i n d u s t r y (minimum e x p o r t s b e i n g 60% o f total production).  (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 of t h e e x i s t i n g approvals subject to t h e c o n d i t i o n t h a t they will increase, within a specified period, Indian p a r t i c i p a t i o n to not less t h a n 26% o f t h e e q u i t y o f t h e company. (ii) 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 convert themselves, 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 Indian companies with Indian p a r t i c i p a t i o n being n o t l e s s t h a n 26% o f t h e e q u i t y of t h e company.  243  (iii) Such companies w i l l be subject to d i l u t i o n formula as and when they come up f o r expansion. (i) They w i l l be exempt from the (b:)" Indian companies p r o v i s i o n s of S e c t i o n 29 s u b j e c t having more than 40% to the c o n d i t i o n that they w i l l foreign shareholding increase, within a specified who have been granted p e r i o d , Indian p a r t i c i p a t i o n to an i n d u s t r i a l l i c e n c e not l e s s than 26% of the e q u i t y a f t e r February 1970 of the company. f o r manufacturing a c t i v i t i e s i n the p r o d u c t i o n of items s p e c i f i e d i n Appendix I of the 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 , 1973 or engaged i n predominantly export oriented industry (minimum exports being 60% of t o t a l p r o d u c t i o n . (c) Indian companies having more than 40% foreign shareholding and branches of f o r e i g n companies having a v a l i d i n dustrial licence and engaged i n prod u c t i o n of items nots p e c i f i e d i n Appendix I of I n d u s t r i a l Licensing Policy, 1973 but engaged i n the manufacturing a c t i v i t i e s which need sophisticated technology .  (i) The extent of f o r e i g n shareh o l d i n g i n the e x i s t i n g Indian companies w i l l be c o n s i d e r e d on m e r i t s of each case s u b j e c t to the c o n d i t i o n that they w i l l i n crease w i t h i n a s p e c i f i e d p e r i o d , Indian p a r t i c i p a t i o n to not l e s s than 26% of the e q u i t y of the company. (ii) The branches of f o r e i g n companies w i l l be r e q u i r e d to convert themselves 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 Indian companies with Indian p a r t i c i p a t i o n of not l e s s than 26% of the e q u i t y of the company. (iii) In determining whether a technology, i s s o p h i s t i c a t e d or not, Department of Science and Technology w i l l be c o n s u l t e d and c o n s i d e r a t i o n w i l l be g i v e n , i n t e r a l i a , to aspects such as ( i ) whether the technology i s used f o r the manufacture of products which would otherwise n e c e s s i t a t e imports; ( i i ) whether the d i s c o n t i n u a n c e of the manufacture of products with  244 the technology would have adverse impact on the economy, e t c . (d ) Indian companies having more than 40% foreign shareholding and branches of f o r e i g n companies engaged i n other manufacturing a c t i vities.  (i) Such Indian companies w i l l be r e q u i r e d to b r i n g down, w i t h i n a s p e c i f i e d p e r i o d , f o r e i g n shareh o l d i n g s to the l e v e l of 40%. (ii) The branches of f o r e i g n companies w i l l be r e q u i r e d to convert themselves i n t o Indian companies having f o r e i g n sharesh o l d i n g not exceeding 40%, within a specified period. (iii) A l t e r n a t i v e l y , they w i l l be r e q u i r e d to change, w i t h i n a specif i e d p e r i o d , t h e i r c h a r a c t e r from e x 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 i n the areas s p e c i f i e d i n Appendix I of 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 , 1973 or to engage themselves i n predominantly e x p o r t - o r i e n t e d i n d u s t r i e s (minimum exports being 60% of t o t a l production).  See -.Appendix I . CATEGORY Trading  PROPOSED  ACTION  Activities  (a) Indian companies having more than 40% foreign shareholding and branches of f o r e i g n companies engaged predominantly in i n t e r n a l trading and commercial activities.  (i) No f r e s h f o r e i g n e q u i t y p a r t i c i p a t i o n w i l l be p e r m i t t e d . (ii) E x i s t i n g Indian companies w i l l be r e q u i r e d to b r i n g down t h e i r f o r e i g n s h a r e h o l d i n g to 40% within a specified period. (iii) The branches of f o r e i g n companies w i l l be r e q u i r e d to convert themselves i n t o Indian companies having f o r e i g n h o l d i n g not exceeding 40% w i t h i n a specified period. iv) In e x c e p t i o n a l cases where they had developed e x p e r t i s e , 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, e t c . ) which are not r e a d i l y a v a i l a b l e i n d i g e n o u s l y and are c o n t r i b u t i n g s i g n i f i c a n t l y to exp o r t s , f o r e i g n s h a r e h o l d i n g more than 40% but not exceeding 74% may be allowed depending upon the merits of each case. (v) A l t e r n a t i v e l y , they w i l l be r e q u i r e d to change w i t h i n a s p e c i f i e d p e r i o d , t h e i r c h a r a c t e r from predominantly t r a d i n g c a c t i v i t i e s t o t p r e d o m i n a n t l y manufacturing a c t i v i t i e s i n the areas s p e c i f i e d i n Appendix I of 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 , 1973 or to engage thems e l v e s i n predominantly export o r i e n t e d I n d u s t r i e s (minimum exports being 60% of t o t a l p r o d u c t i o n ) . r  (vi) If the above a l t e r n a t i v e s are not acceptable to them, they w i l l be allowed a reasonable time to wind up t h e i r business a c t i v i t i e s in India. (b) Manufacturing companies i . e . , Indian companies with more than 40% foreign shareholding and branches of f o r e i g n companies engaged i n t r a d i n g a c t i v i t i e s i n respect of products not manufactured by them .  (i) They w i l l not be denied permission f o r i n t e r n a l trading i n r e s p e c t of e s s e n t i a l or a s s o c i a t e products i n the o v e r a l l i n t e r e s t of the consumers as a l s o of development 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 f u n c t i o n a l l y r e l a t e d to the company's main manufacturing a c t i v i t i e s and c o n s t i t u t e r e l a t i v e l y a small p o r t i o n of the o v e r a l l a c t i v i t y (not exceeding 25% of e x - f a c t o r y value of the annual p r o d u c t i o n or Rs.5 c r o r e s whichever i s l e s s ) . The approval s h a l l a l s o be s u b j e c t to the c o n d i t i o n that the companies s h a l l not be permitted to use, f o r i n t e r n a l trade, t h e i r trade marks or brand names i n r e s p e c t of the products not manufactured by them.  246  PROPOSED  CATEGORY Other  ACTION  Activities  Indian companies having more than 40% foreign shareholding and branches of f o r e i g n companies engaged i n : (a) C o n s t r u c t i o n Activities.  (i) Indian companies having more than 40% f o r e i g n s h a r e h o l d i n g w i l l be r e q u i r e d to b r i n g down t h e i r f o r e i g n s h a r e h o l d i n g to 40% w i t h i n a specified period. (ii) In e x c e p t i o n a l cases where they have developed such e x p e r t i s e or s k i l l s or technology w h i c h i i s not i n d i g e n o u s l y a v a i l a b l e , higher f o r e i g n s h a r e h o l d i n g not exceeding 74% of the e q u i t y may be allowed. (iii) Branches of f o r e i g n companies w i l l be r e q u i r e d to convert themselves i n t o Indian companies with f o r e i g n s h a r e h o l d i n g not exceeding 40% w i t h i n a s p e c i f i e d period.  (b) P l a n t a t i o n Activities.  (i) Tea p l a n t a t i o n s w i l l , by and l a r g e , be t r e a t e d at par with manufacturing i n d u s t r i e s s p e c i f i e d i n Appendix I of 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 , 1973 s u b j e c t to the c o n d i t i o n that they w i l l i n crease w i t h i n a s p e c i f i e d p e r i o d Indian p a r t i c i p a t i o n to not l e s s than 26% of the e q u i t y of the comapny. (ii) Branches of f o r e i g n companies w i l l be r e q u i r e d to convert themselves 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 Indian companies with Indian p a r t i c i p a t i o n being not l e s s than 26% of the e q u i t y of the company.  24 7 (iii) Branches of f o r e i g n companies engaged i n other than tea p l a n t a t i o n a c t i v i t i e s w i l l be r e q u i r e d to convert themselves i n t o Indian companies with f o r e i g n s h a r e h o l d i n g not exceeding 40% and the Indian companies w i l l be r e q u i r e d to b r i n g down t h e i r f o r e i n g s h a r e h o l d i n g to 40% w i t h i n a s p e c i fied period. (c) Consultancy Work (i) T e c h n i c a l and Engineering Consultants .  (i) Indian companies having more than 40% f o r e i g n s h a r e h o l d i n g w i l l be r e q u i r e d to b r i n g down t h e i r f o r e i g n s h a r e h o l d i n g to 40% w i t h i n a specified period. (ii) Branches of f o r e i g n companies w i l l be r e q u i r e d to convert themselves i n t o Indian companies with f o r e i g n s h a r e h o l d i n g not exceeding 40% w i t h i n a s p e c i f i e d period. (iii) In e x c e p t i o n a l cases, i f they are engaged i n such t e c h nology or s k i l l s which are i n d i genously not a v a i l a b l e , higher f o r e i g n s h a r e h o l d i n g not exceeding 74% of the e q u i t y may be allowed on m e r i t s .  (ii) Non-Technical Consultants.  (i) So f a r as the management, f i n a n c i a l and accountancy f i r m s are-concerned and s i n c e s u f f i c i e n t indigenous e x p e r t i s e i n these spheres i s a v a i l a b l e i n the country, the Indian companies with f o r e i g n m a j o r i t y s h a r e h o l d i n g as w e l l as branches of f o r e i g n companies w i l l be r e q u i r e d to reduce t h e i r f o r e i g n s h a r e h o l d i n g to 40% w i t h i n a specified period.  (d) Manufacturing companies engaged i n consultancy work .  (i) They w i l l be allowed to act as c o n s u l t a n t s i n r e s p e c t of those areas i n which they have developed specialisation. Such f a c i l i t i e s w i l l however not be a v a i l a b l e  248 to companies predominantly engaged i n t r a d i n g and nonmanufacturing a c t i v i t i e s . Explanatory Notes : ( i ) While g i v i n g f r e s h approvals to the cases i n accordance with the above g u i d e l i n e s , aspects such as the r e s e a r c h and development programme i n i t i a t e d by the Indian company and s t i p u l a t i o n s which r e s t r i c t the t r a n s f e r of technology from the f o r e i g n c o l l a b o r a t o r to the Indian company, r e s t r i c t i o n s on s u b - l i c e n s i n g of technology and s t i p u l a t i o n s f o r the a c q u i s i t i o n of raw m a t e r i a l s and components from the f o r e i g n c o l l a b o r a t o r , e x i s t i n g r e g u l a t i o n s i n r e s p e c t of the patent law, e t c . , w i l l be borne i n mind . (ii) Where a company i s engaged i n m u l t i - a c t i v i t y operat i o n s , 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 i n which a company i s engaged while c o n s i d e r ing the q u e s t i o n of a l l o w i n g i t to continue to c a r r y on business. The p r o p o r t i o n of a c t i v i t y covered by Appendix I of the 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 , February 1973 and those f a l l i n g ' o u t s i d e t h e r e o f w i l l be a m a t e r i a l c o n s i deration. In such cases, i f a c t i v i t i e s o u t s i d e Appendix I c o n s t i t u t e 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 e x - f a c t o r y value of the annual p r o d u c t i o n or Rs.5 c r o r e s whichever i s l e s s ) i t w i l l be allowed to continue on the b a s i s of e x i s t i n g a p p r o v a l s , provided Indian p a r t i c i p a t i o n i s not l e s s than 26% of the e g u i t y of the company. (iii) While i t w i l l be open to companies p r i m a r i l y 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 t h e i r c h a r a c t e r and become predominantly manufacturing companies i n the areas covered under Appendix I of the 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 , February 1973, or other approved c a t e g o r i e s under Clause I ( c ) , they would have to o b t a i n the r e q u i s i t e I n d u s t r i a l Licence and other Government approv a l s i n the normal way, w i t h i n the framework l a i d down by Government from time to time. (iv) In the case of 100% e x p o r t - o r i e n t e d u n i t s the f o r e i g n e q u i t y p a r t i c i p a t i o n of more than 74% may be allowed on m e r i t s of each case. A f t e r . h a v i n g reproduced above 'Sections 26 to 29 and the 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, we do not c o n s i d e r i t necessary to d i s c u s s S e c t i o n s 26, 27 and 28 any f u r t h e r . However, S e c t i o n 29 being the most  249 important S e c t i o n i h t h e s t r a t e g y f o r r e g u l a t i n g MNCs, we would l i k e to d i s c u s s i n some g r e a t e r d e t a i l . But t h i s we s h a l l do with r e f e r e n c e to c e r t a i n d i s p u t e s i t u a t i o n s which a c t u a l l y arose as a r e s u l t of attempts to enforce S e c t i o n 29 of FERA, 1973. Appendix  n .  58.  See  59.  Non-Resident Indians : An Investment Guide, New D e l h i : Indian Investment Centre, Dec. 1983. Supplement to Non-Resident Indians, Indian Investment Centre, New York.  60.  I n v e s t i n g i n India : A Guide to Entrepreneurs, Indian Investment Centre, Dec. 1983.  61.  Jayanta Sarkar, "Indians Scout f o r Shares", Vol.105,. No.35, Far -Eastern Economic Review,' Aug .31, 19 79, pp.95-96.  62.  Ibid.  63.  " L e t t e r from New D e l h i " , Vol . 9 7,, t No-. ; 34 c, cFar Economic Review, Aug.26, 19 77, p.70.  64.  Jayanta Sarkar, "IBM to Close Shop i n I n d i a " , 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 i n I n d i a , Indian Investment Centre, p.6.  66.  Ibid.  67.  Ibid.  68.  A.I.R. 1981 Sc 1298. C i t e d by P.S. Sangal, N a t i o n a l M u l t i n a t i o n a l Companies : Some Legal Issues, D e l h i : Bhagwati I n t e r n a t i o n a l Enterprise;, 1981, pp.435-442 .  69.  82 C a l c u t t a Weekly Notes, 712. C i t e d by P.S. Sangal, N a t i o n a l and M u l t i n a t i o n a l Companies, pp.432-435.  70.  57 Reports of Company Cases, 1985, pp.241-440, E s c o r t s L t d . and Another vs. Union of India and Others. See Also Chhotu Karadia, The S l a t e c o u n t , 1984.  71.  Indian Express, See  Also The  F r i . Dec.  20,  New  Swraj Paul A f f a i r ; 1985,  pp.1  and  Delhi:  Eastern  London,  7.  Economic Times, F r i . Dec.20, 1985,  and  p.5  250 72.  Myths and R e a l i t i e s of Foreign Investment  73.  Ibid.  74.  See Vinay Bharat Ram, Towards a Theory of Import S u b s t i t u t i o n , Exchange Rates and Economic Development, Oxford U n i v e r i s t y Press, 1982.  CHAPTER  i n India, p . l  IV  1.  See K a r i L e v i t t , S i l e n t Surrender: The M u l t i n a t i o n a l C o r p o r a t i o n i n Canada, Tpronto : Macmillan of Canada, 1970. D.W. Carr , Recovering Canada ' s Nationhood, Ottawa:, Canada P u b l i s h i n g Company, 1971. I.A. L i t v a k , C . J . Maule, R.D. Robinson, Dual L o y a l t y : Canadian-US Business Arrangements, McGraw-Hill Company of Canada L t d . , 1971. Abraham R o t s t e i n and Gary Lax, ed., Independence: The Canadian Challenge, Toronto, 1972. W.L. Gordon, Troubled Canada: The Need f o r New Domestic P o l i c i e s , M c C l e l l a n d Stewart L t d . , 1961, pp.83-97. John Fayerweather, Foreign Investment i n Canada: Prospect f o r N a t i o n a l P o l i c y , Toronto: Oxford U n i v e r s i t y Press, 1974.  2.  W i l l i a m L. Marr, Donald G. Paterson, Canada: An Economic H i s t o r y , Toronto: Macmillan, 1980, pp.265-301. See Also Wahn Report, Watkins Report, and Gray Report, pp.13-26.  3.  Watkins  4.  I b i d . , p.8. For American C o n t r o l of Canadian r e s o u r c e s and i n d u s t r y , 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  7.  I b i d . , p.293.  8.  Gordon Report,  9.  S t u d i e s l i k e the Watkins Report, Wahn Report and the Gray Report.  Report, p.6  H i s t o r y , p.292 .  pp.375-440.  10.  Watkins Report,  pp.395-416.  11.  Wahn Report, pp.33:90;- 33:102.  251 12 .  Gray Report, pp.435-443; 451-501.  13 .  I b i d . , p.7 .  14 .  Ibid.,  15 .  Ibid.  16 .  p.430  •  Ibid.,  p.440  •  17.  Ibid.,  p.463  •  18 .  Ibid.,  p.441  •  19.  Ibid.,  p.449  20 .  I b i d . , p.439  21 .  See Also The Honourable Donald S. Macdonald, I n d u s t i r a l P o l i c y Objectives.and A r t i c l e I I I of GATT: N a t i o n a l Ambitions and I n t e r n a t i o n a l O b l i g a t i o n s " , V o l . 6, No.4, The Canadian Business Law J o u r n a l , Aug. 1982, pp.385-407. Andrew James Samet, "The US Response to Canadian Economic Nationalism", Foreign Investment" Review Law i n Canada, James M. Spence, Q.C. and William P. Rosenfeld, Q.C., ed. Toronto: Butterworths, 1984,pp.293-314. J e f f Turner, "Canadian Regulation of Foreign D i r e c t Investment", Vol.23, Np.2, Harvard I n t e r n a t i o n a l Law J o u r n a l , Winter 1983, pp.333-356.  22.  Article  See  Also pp.433-437.  •  I I I of General Agreement on T a r i f f s and Trade :  National  Treatment on I n t e r n a l Taxation  and  Regulation:  1.. . The c o n t r a c t i n g p a r t i e s recognize that i n t e r n a l taxes and other i n t e r n a l charges, and laws, r e g u l a t i o n s and r e quirements a f f e c t i n g i n t e r n a l s a l e , o f f e r i n g f o r s a l e , purchase, t r a n s p o r t a t i o n , 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 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 g u i r i n g the mixture, p r o c e s s i n g or use of products i n s p e c i f i e d amounts or prop o r t i o n s , should not be a p p l i e d to imported or domestic products so as to a f f o r d p r o t e c t i o n to domestic p r o d u c t i o n . 2. The products of the t e r r i t o r y of any c o n t r a c t i n g party imported i n t o the t e r r i t o r y of any other c o n t r a c t i n g party s h a l l not be s u b j e c t , d i r e c t l y or i n d i r e c t l y , to i n t e r n a l taxes or other i n t e r n a l charges of any kind i n excess of those a p p l i e d , 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 c o n t r a c t i n g 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 imported or domestic products i n a manner c o n t r a r y to the p r i n c i p l e s set f o r t h i n paragraph 1. 3. With respect to any e x i s t i n g i n t e r n a l tax which i s i n c o n s i s t e n t with the p r o v i s i o n s of paragraph 2, but which i s s p e c i f i c a l l y a u t h o r i z e d under a trade agreement, i n f o r c e on A p r i l 10, 1947, i n which the import duty on the taxed product i s bound against i n c r e a s e , the cont r a c t i n g party imposing the tax s h a l l be f r e e to postpone the a p p l i c a t i o n of the p r o v i s i o n s of paragraph 2 to such tax u n t i l such time as i t can o b t a i n r e l e a s e from the o b l i g a t i o n s of such trade agreement i n order to permit the i n c r e a s e of such duty to the extent necessary to compensate f o r the e l i m i n a t i o n of the p r o t e c t i v e element of the tax. 4. The products of the t e r r i t o r y of a n y c c o n t r a c t i n g party imported i n t o the t e r r i t o r y c o f any other c o n t r a c t i n g party s h a l l be accorded treatment no l e s s f a v o u r a b l e than that accorded to l i k e products of n a t i o n a l o r i g i n i n respect of a l l alws, r e g u l a t i o n s and requirements a f f e c t i n g t h e i r i n t e r n a l s a l e , o f f e r i n g f o r s a l e , purchase, t r a n s p o r t a t i o n , d i s t r i b u t i o n or use. The p r o v i s i o n s of t h i s paragraph s h a l l not prevent the a p p l i c a t i o n of d i f f e r e n t i a l i n t e r n a l t r a n s p o r t a t i o n charges which are based e x c l u s i v e l y on the economic o p e r a t i o n of the means of t r a n s p o r t and not on the n a t i o n a l i t y of the product . 5. No c o n t r a c t i n g party s h a l l e s t a b l i s h or maintain any 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 r e l a t i n g to the mixture, p r o c e s s i n g or use of products i n s p e c i f i e d amounts or p r o p o r t i o n s which r e q u i r e s , 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 p r o p o r t i o n of any product which i s the subject of the r e g u l a t i o n must be s u p p l i e d from domestic sources. Moreover, no c o n t r a c t i n g party s h a l l otherwise apply 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 i n a manner c o n t r a r y to the p r i n c i p l e s set f o r t h i n paragraph 1. 6. The p r o v i s i o n s of paragraph 5 s h a l l not apply to any 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 i n f o r c e i n the t e r r i t o r y of any c o n t r a c t i n g party on J u l y 1, 1939, A p r i l 10, 1947, or March 24, 1948, at the option of that c o n t r a c t i n g party; Provided that any such r e g u l a t i o n which i s c o n t r a r y to the p r o v i s i o n s of paragraph 5 s h a l l not be modified to the detriment of imports and s h a l l be t r e a t e d as a customs duty f o r the purpose of n e g o t i a t i o n . 7. No 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 r e l a t i n g to the mixture, p r o c e s s i n g or use of products i n s p e c i f i e d . amounts or p r o p o r t i o n s s h a l l be a p p l i e d i n such a manner  253 as t o a l l o c a t e any s u c h amount o r e x t e r n a l sources of s u p p l y .  proportion  among  8. (a) The p r o v i s i o n s o f t h i s A r t i c l e s h a l l not a p p l y t o laws, r e g u l a t i o n s or r e q u i r e m e n t s g o v e r n i n g the p r o c u r e ment by g o v e r n m e n t a l a g e n c i e s o f p r o d u c t s p u r c h a s e d f o r g o v e r n m e n t a l p u r p o s e s and not w i t h a v i e w t o c o m m e r c i a l r e s a l e o r w i t h a v i e w t o use i n t h e p r o d u c t i o n o f goods f o r commercial s a l e . (b) The p r o v i s i o n s o f t h i s A r t i c l e s h a l l not p r e v e n t t h e payment o f s u b s i d i e s e x c l u s i v e l y t o d o m e s t i c p r o d u c e r s , i n c l u d i n g payments t o d o m e s t i c p r o d u c e r s d e r i v e d from t h e proceeds of i n t e r n a l t a x e s or charges a p p l i e d c o n s i s t e n t l y w i t h t h e p r o v i s i o n s o f 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 products. 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 t h a t i n t e r n a l m a x i mum p r i c e c o n t r o l m e a s u r e s , even t h o u g h c o n f o r m i n g t o t h e o t h e r p r o v i s i o n s o f t h i s A r t i c l e , can have e f f e c t s p r e 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 products. Accordingly, contracting parties 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 w i t h 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 e x t e n t 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 o f t h i s A r t i c l e s h a l l not p r e v e n t any c o n t r a c t i n g p a r t y 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 m e e t i n g t h e r e q u i r e m e n t s o f A r t i c l e IV. Article  X X I I I of  GATT  Nullification  or  Impairment  1 . I f any c o n t r a c t i n g p a r t y s h o u l d c o n s i d e r t h a n 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 b e i n g n u l l i f i e d o r i m p a i r e d o r t h a t t h e a t t a i n m e n t o f any o b j e c t i v e of t h e Agreement i s b e i n g impeded as t h e r e s u l t o f (a) the f a i l u r e of another c o n t r a c t i n g p a r t y o u t : i t s o b l i g a t i o n s u n d e r t h i s Agreement, o r (b) t h e a p p l i c a t i o n by measure, w h e t h e r o r not o f t h i s Agreement, o r  to  carry  a n o t h e r c o n t r a c t i n g p a r t y o f any i t c o n f l i c t s w i t h the p r o v i s i o n s  (c) t h e e x i s t e n c e o f any o t h e r s i t u a t i o n , t h e c o n t r a c t i n g p a r t y may, w i t h a view to the s a t i s f a c t o r y adjustment of t h e m a t t e r , make w r i t t e n r e p r e s e n t a t i o n s o r p r o p o s a l s to the o t h e r c o n t r a c t i n g p a r t y 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 c o n t r a c t i n g party thus approached s h a l l g i v e sympathetic c o n s i d e r a t i o n to the r e p r e s e n t a t i o n s or proposals made to i t . 2. I f no s a t i s f a c t o r y adjustment i s e f f e c t e d between the c o n t r a c t i n g p a r t i e s concerned w i t h i n a reasonable time, or i f the d i f f i c u l t y i s of the type d e s c r i b e d i n paragraph 1 (c) of t h i s A r t i c l e , the matter may be r e f e r r e d to the CONTRACTING PARTIES. The CONTRACTING PARTIES s h a l l promptl y i n v e s t i g a t e any matter so r e f e r r e d to them and s h a l l make a p p r o p r i a t e recommendations to the c o n t r a c t i n g p a r t i e s which they c o n s i d e r to be concerned, or g i v e a r u l i n g on the matter, as a p p r o p r i a t e . The CONTRACTING PARTIES may c o n s u l t with c o n t r a c t i n g p a r t i e s , with the Economic and S o c i a l C o u n c i l of the United Nations and with any approp r i a t e inter-governmental o r g a n i z a t i o n i n cases where they c o n s i d e r such c o n s u l t a t i o n necessary. I f the CONTRACTING PARTIES c o n s i d e r that theccircumstances are s e r i o u s enough to j u s t i f y such a c t i o n , they may a u t h o r i z e a c o n t r a c t i n g party or p a r t i e s to suspend the a p p l i c a t i o n to any other c o n t r a c t i n g party or p a r t i e s of such conc e s s i o n s or other o b l i g a t i o n s under t h i s Agreement as they determine to be a p p r o p r i a t e i n the c i r c u m s t a n c e s . I f the a p p l i c a t i o n to any c o n t r a c t i n g party of any concession or other o b l i g a t i o n s i s i n f a c t suspended, that c o n t r a c t i n g party s h a l l then be f r e e , not l a t e r than s i x t y days a f t e r such a c t i o n i s taken, to g i v e w r i t t e n n o t i c e to the Execut i v e Secretary to the CONTRACTING PARTIES of i t s i n t e n t i o n to withdraw from t h i s Agreement and such withdrawal s h a l l take e f f e c t upon the s i x t i e t h day f o l l o w i n g the day on which such n o t i c e i s r e c e i v e d by him. Article  I I of OECD G u i d e l i n e s National  :  Treatment  1. that Member c o u n t r i e s should, c o n s i s t e n t with t h e i r needs to maintain p u b l i c order, to p r o t e c t t h e i r essent i a l s e c u r i t y i n t e r e s t s and to f u l f i l commitments r e l a t i n g to i n t e r n a t i o n a l peace and s e c u r i t y , accord to e n t e r p r i s e s o p e r a t i n g i n t h e i r t e r r i t o r i e s and owned or c o n t r o l l e d d i r e c t l y or i n d i r e c t l y by n a t i o n a l s of anotehr Member country ( h e r e i n a f t e r r e f e r r e d to as " F o r e i g n - C o n t r o l l e d E n t e r p r i s e s " ) treatment under t h e i r laws, 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 , c o n s i s t e n t with i n t e r n a t i o n a l law and no l e s s f a v o u r a b l e than that accorded i n l i k e s i t u a t i o n s to domestic e n t e r p r i s e s ( h e r e i n a f t e r r e f e r r e d to as "National Treatment"). 2. that Member c o u n t r i e s w i l l c o n s i d e r a p p l y i n g "National Treatment" i n r e s p e c t of c o u n t r i e s other than Member countries.  255 3. that Member c o u n t r i e s w i l l endeavour to ensure that t h e i r t e r r i t o r i a l s u b d i v i s i o n s apply "National Treatment". 4. that t h i s D e c l a r a t i o n does not d e a l with the r i g h t of Member c o u n t r i e s to r e g u l a t e the entry of f o r e i g n i n v e s t ment or the other c o n d i t i o n s of establishment of f o r e i g n enterprises. 25.  Hon. Donald S. Macdonald, "Canadian I n d u s t r i a l P o l i c y O b j e c t i v e s and A r t . I l l of GATT", .Vol.6 No.4, The Canadian Business Law J o u r n a l , Aug. 1982, pp.385-407.  26.  113 D.L.R. 3d.. 395 . See Also Kathleen A. Wall, "Dow Jones and Co., Inc. v s . Attorney General of Canada: The Canadian Foreign Investment Review Act", 14 Law and P o l i c y i n I n t e r n a t i o n a l Business, 1982, pp.505-519.  27.  C i t e d by Kathleen A. Wall,  28.  See Richard S h u l t z , 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 A s s o c i a t i o n B r i e f to the Hon. Herb Gray, M i n i s t e r of Industry, Trade and Commerce on the F o r e i g n Investment Review Act, Sept. 1981, pp.12-17. Now r e f e r r e d to as Canadian Bar A s s o c i a t i o n B r i e f . James M. Spence, Q.C., "FIRA: A Decade of E v o l u t i o n " , ^ F o r e i g n Investment Review Law i n Canada, Spence & Rosenfeld ed., Toronto: Butterworths, 1984, pp.315-345.  29.  Working paper No.6, pp.64-67.  30 .  I b i d . , PP .67-71 .  31 .  I b i d . , PP .71 -79 .  32 .  I b i d . , PP .80 -81 .  33 .  I b i d . , PP  34 .  I b i d . , PP .81 -84 .  35.  J a m e s M. S p e n c e , " F I R A : A D e c a d e 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 L a w i n C a 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 Canadian Bar A s s o c i a t i o n b r i e f . C i t e d b y J a m e s 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 L a w i n C a n a d a , p.325. ~  37.  Ibid .  p.518.  •  256 38.  Ibid.,  p.325-326.  39.  Ibid.,  p.326.  40.  Ibid.,  41.  Ibid.  42.  I b i d . , p.320.  43.  Canadian Bar A s s o c i a t i o n B r e i f , p.58.  44.  I b i d . , p.16.  45.  I b i d . , p . 21 .  46.  I b i d . , p.35.  4 7.  I b i d . , p.30.  4 8.  Report of the Royal Commission on the Economic Union and Development Process f o r Canada, Vol.11, pp.232-242, and Vol.1, pp.323-367. Henceforth r e f e r r e d to as Macdonald Commission.Report.  49.  D a n i e l Drache and Duncan Cameron, ed., The Other Macdonald Report, Toronto: James Lorimer and Company, 1985, pp.129-135.  50.  K a r i L e v i t t , S i l e n t Surrender, pp.116-153.  51.  Macdonald Commission Report, Vol.11, p.233.  52.  Ibid.  53.  I b i d . , 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.  I b i d . , p.332.  See Also Canadian Bar A s s o c i a t i o n Brief,,p.5 7.  See Also p.25.  257  61.  Ibid.,  p.332-333.  62.  I b i d . , p.334.  63.  Ibid.,  64.  The Other Macdonald  65 .  S e c t i o n 2 of _Inyes tmen t Canada Act :  p.350-357.  Purpose  Report, pp.133-134.  of Act  Recognizing that i n c r e a s e d c a p i t a l and technology would b e n e f i t Canada, the purpose of t h i s Act i s to encourage investment i n Canada by Canadians and nonCanadians that c o n t r i b u t e s to economic growth and employment o p p o r t u n i t i e s and to provide f o r the review of s i g n i f i c a n t investments i n Canada by non-Canadians i n order to ensure such b e n e f i t to Canada. 66.  S e c t i o n 2 (1) of FIRA: This Act i s enacted by the Parliament of Canada i n r e c o g n i t i o n by Parliament that the extent to which c o n t r o l of Canadian i n d u s t r y , trade and commerce has become acq u i r e d by persons other than Canadians and the e f f e c t t h e r e of on the a b i l i t y of Canadians to maintain e f f e c t i v e c o n t r o l over t h e i r economic environment i s a matter of n a t i o n a l concern, and that i t i s t h e r e f o r e expedient to e s t a b l i s h a means by which measures may be taken under the a u t h o r i t y of Parliament to ensure t h a t , i n so f a r as i s p r a c t i c a b l e a f t e r the enactment of t h i s Act, c o n t r o l of Canadian b u s i ness e n t e r p r i s e s may be a c q u i r e d by persons other than Canadians, and new b u s i n e s s e s may be e s t a b l i s h e d i n Canada by persons other than Canadians, who are not a l r e a d y c a r r y i n g on b u s i n e s s i n Canada or whose new b u s i n e s s e s i n Canada would be u n r e l a t e d to the b u s i n e s s e s a l r e a d y being c a r r i e d on by them i n Canada, only i f i t has been assessed that the a c q u i s i t i o n of c o n t r o l of those e n t e r p r i s e s or the establishment of those new b u s i n e s s e s , 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 b e n e f i t to Canada, having regard to a l l of the f a c t o r s to be taken i n t o account under t h i s Act f o r that purpose.  67.  S e c t i o n 6 of Investment  Canada  Agency e s t a b l i s h e d There i s hereby e s t a b l i s h e d an agency, to be known as< Investment Canada, to advise and a s s i s t the M i n i s t e r i n e x e r c i s i n g h i s powers and performing h i s d u t i e s under t h i s Act .  258 68.  S e c t i o n 5 of Investment Canada : Duties . and - powers of M i n i s t e r (1) The  Minister shall  (a) encourage business investment by such means and i n such manner as the M i n i s t e r deems a p p r o p r i a t e ; (b) a s s i s t Canadian businesses to e x p l o i t o p p o r t u n i t i e s f o r investment and t e c h n o l o g i c a l advancement; (c ) c a r r y out r e s e a r c h and a n a l y s i s r e l a t i n g to domestic and i n t e r n a t i o n a l investment; (d) provide investment i n f o r m a t i o n s e r v i c e s and other investment s e r v i c e s to f a c i l i t a t e economic growth i n Canada; (e) a s s i s t i n the development of i n d u s t r i a l and p o l i c i e s that a f f e c t investment i n Canada;  economic  (f ) ensure that the n o t i f i c a t i o n and review of i n v e s t ments are c a r r i e d out i n accordance with t h i s Act; and (g) perform a l l other d u t i e s r e q u i r e d by t h i s Act to be performed by the M i n i s t e r . Other powers (2) In e x e r c i s i n g h i s powers and under t h i s Act, the M i n i s t e r  performing  his duties  (a) s h a l l , where a p p r o p r i a t e , make use of the s e r v i c e s 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 i n C o u n c i l , enter i n t o agreements with the government of any province or any agency t h e r e o f f o r the purposes of t h i s Act; and (c) may c o n s u l t with, and organize conferences o f , r e p r e s e n t a t i v e s of i n d u s t r y and labour, p r o v i n c i a l and l o c a l a u t h o r i t i e s and other i n t e r e s t e d persons. 69.  R.K. Paterson, "Legal R e s t r i c t i o n s on Foreign Investment i n Canada", Canadian I n t e r n a t i o n a l Trade and Foreign Investment Law. To be P u b l i s h e d .  70.  Samuel R. Baker, "Taking the Fear Out of FIRA: Legal C o n s i d e r a t i o n s f o r I n v e s t i n g i n Canada", Regulation of Foreign D i r e c t Investment i n Canada and the United S t a t e s .  259 71.  Section  20 of Investment Canada :  For the purposes of s e c t i o n 21, the f a c t o r s to be i n t o account, where r e l e v a n t , are  taken  (a) the e f f e c t of the investment on the l e v e l and nature of economic a c t i v i t y i n Canada, i n c l u d i n g , without l i m i t ing the g e n e r a l i t y of the f o r e g o i n g , the e f f e c t on employment, on resource p r o c e s s i n g , on the u t i l i z a t i o n of p a r t s , components and s e r v i c e s produced i n Canada and on exports from Canada; (b) the degree and s i g n i f i c a n c e of p a r t i c i p a t i o n by Canadians i n the Canadian business or new Canadian business and i n any i n d u s t r y or i n d u s t r i e s i n Canada of which the Canadian business or new Canadian business forms or would form a p a r t ; (c) the e f f e c t of the investment on p r o d u c t i v i t y , indust r i a l e f f i c i e n c y , t e c h n o l o g i c a l development, product i n n o v a t i o n and product v a r i e t y i n Canada; (d) the e f f e c t of the investment on competition any i n d u s t r y or i n d u s t r i e s i n Canada;  within  (e) the c o m p a t i b i l i t y of the investment with n a t i o n a l 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 , t a k i n g i n t o c o n s i d e r a t i o n 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 y o b j e c t i v e s 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 a f f e c t e d by the investment; and (f) the c o n t r i b u t i o n 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 e s t a b l i s h e d by s e c t i o n "assets" includes any value;  t a n g i b l e and  i n t a n g i b l e property  6;  of  "business" i n c l u d e s any undertaking or e n t e r p r i s e capable of g e n e r a t i n g revenue and c a r r i e d on i n a n t i c i p a t i o n of profit; "Canada" i n c l u d e s the t e r r i t o r i a l sea of Canada as d e t e r mined i n accordance with the T e r r i t o r i a l Sea and F i s h i n g Zones Act, the seabed and s u b s o i l 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  citizen;  (b) a permanent r e s i d e n t with the meaning of the Immig r a t i o n Act, 1976 who has been o r d i n a r i l y r e s i d e n t i n Canada f o r not more than one year a f t e r the time at which he f i r s t became e l i g i b l e to apply f o r Canadian c i t i z e n s h i p ; (c) a Canadian government, whether f e d e r a l , p r o v i n c i a l or l o c a l , or an- agency t h e r e o f , or (d) an e n t i t y that i s C a n a d i a n - c o n t r o l l e d , as determined pursuant to s e c t i o n 26; "Canadian b u s i n e s s " means a business c a r r i e d on i n Canada that has (a) a p l a c e of business i n Canada, (b) an i n d i v i d u a l or i n d i v i d u a l s i n Canada who are employed or self-employed i n connection with the b u s i n e s s , and (c) a s s e t s i n Canada used  i n c a r r y i n g on the b u s i n e s s ;  " c o r p o r a t i o n " means a body c o r p o r a t e with or without share c a p i t a l ; " e n t i t y " means a c o r p o r a t i o n , p a r t n e r s h i p , t r u s t or j o i n t venture; " j o i n t venture" means an a s s o c i a t i o n of two or more persons or e n t i t i e s , where the r e l a t i o n s h i p among those a s s o c i a t e d persons or e n t i t i e s does not, under the laws i n f o r c e i n Canada, c o n s t i t u t e a c o r p o r a t i o n , a p a r t n e r s h i p or a t r u s t and where, i n the case of an investment to which t h i s "Act a p p l i e s , a l l the u n d i v i d e d ownership i n t e r e s t s i n the a s s e t s of the Canadian business or i n the v o t i n g i n t e r e s t s of t h e r e n t i t y that i s the s u b j e c t 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 a s s o c i a t e d ; " M i n i s t e r " means such member of the Queen's P r i v y C o u n c i l f o r Canada as i s designated by the Governor i n C o u n c i l as the M i n i s t e r f o r the purposes of t h i s Act; "new Canadian b u s i n e s s " , i n r e l a t i o n to a non-Canadian, means a business that i s not already being c a r r i e d on i n Canada by the non-Canadian and t h a t , at the time of i t s establishment, (a) i s u n r e l a t e d to any other business being c a r r i e d on i n Canada by that non-Canadian, or  261 (b) i s r e l a t e d to another business being c a r r i e d on i n Canada by that non-Canadian but f a l l s w i t h i n a p r e s c r i b e d s p e c i f i c type of business a c t i v i t y t h a t , i n the o p i n i o n of the Governor i n C o u n c i l , i s r e l a t e d to Canada's c u l t u r a l h e r i t a g e or n a t i o n a l 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 e n t i t y 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 c o r p o r a t i o n ; " p r e s c r i b e d " means p r e s c r i b e d pursuant to t h i s Act;  by the r e g u l a t i o n s made  "voting group" means two or more persons who are a s s o c i a ted with r e s p e c t to the e x e r c i s e of r i g h t s attached to v o t i n g i n t e r e s t s i n an e n t i t y by c o n t r a c t , business a r rangement, personal r e l a t i o n s h i p , common c o n t r o l i n f a c t through the ownership of v o t i n g i n t e r e s t s , or otherwise, i n such a manner that they would o r d i n a r i l y be expected to act together on a c o n t i n u i n g b a s i s with r e s p e c t to the e x e r c i s e of those r i g h t s ; "voting i n t e r e s t " , with (a) a c o r p o r a t i o n share,  respect  with share c a p i t a l , means a v o t i n g  (b) a c o r p o r a t i o n without share c a p i t a l , means an owners h i p i n t e r e s t i n the assets thereof that e n t i t l e s the owner to r i g h t s s i m i l a r to those enjoyed by the owner of a v o t i n g share, and (c) a p a r t n e r s h i p , t r u s t or j o i n t venture, means an ownership i n t e r e s t i n the assets thereof that e n t i t l e s the owner to r e c e i v e a share of the p r o f i t s and to share i n the a s s e t s 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 c o r p o r a t i o n to which i s attached a v o t i n g r i g h t o r d i n a r i l y exerc i s a b l e at meetings-of shareholders of the c o r p o r a t i o n and to which i s o r d i n a r i l y attached a r i g h t to r e c e i v e a share of the p r o f i t s , or to share i n the assets of the c o r p o r a t i o n on d i s s o l u t i o n , or both. Section  28 (1) o,f Investment Canada : A c q u i s i t i o n of C o n t r o l  Rules  For the purposes of t h i s Act, a non-Canadian  acquires  262 control  of a Canadian business only by  (a) the a c q u i s i t i o n of v o t i n g shares of a c o r p o r a t i o n i n c o r p o r a t e d i n Canada c a r r y i n g on the Canadian b u s i n e s s ; (b) the a c q u i s i t i o n (i) i s carrying  of v o t i n g  i n t e r e s t s of an e n t i t y  that  on the~Canadian b u s i n e s s , ror  ( i i : ) ' c o n t r o l s , d i r e c t l y or i n d i r e c t l y , another e n t i t y -••'carryingI on t h e C a n a d i a n ' b u s i n e s s , -  where there i s no a c q u i s i t i o n  of c o n t r o l  of any  corporation;  (c) the a c q u i 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 c a r r y i n g on the Canadian b u s i n e s s ; or (d) the a c q u i s i t i o n of v o t i n g i n t e r e s t s of an e n t i t y that c o n t r o l s , d i r e c t l y or i n d i r e c t l y , an e n t i t y i n Canada c a r r y i n g on the Canadian b u s i n e s s , where ( i ) there i s no a c q u i s i t i o n of c o n t r o l , d i r e c t l y - o r r i n d i r e c t l y , of a c o r p o r a t i o n i n c o r p o r a t e d elsewhere than i n Canada that c o n t r o l s , d i r e c t l y or i n d i r e c t l y , an e n t i t y i n Canada c a r r y i n g on the Canadian b u s i n e s s , or ( i i ) there i s an a c q u i s i t i o n of c o n t r o l d e s c r i b e d i n subparagraph ( i ) . S e c t i o n 28 (3) of Investment Canada : Presumptions r e s p e c t i n g  a c q u i s i t i o n of c o n t r o l  :. For the purposes of t h i s Act, (a) the a c q u i s i t i o n of a m a j o r i t y of the v o t i n g i n t e r e s t s of an e n t i t y or of a m a j o r i t y of the u n d i v i d e d ownership i n t e r e s t s i n the v o t i n g shares of an e n t i t y that i s a c o r p o r a t i o n i s deemed to be a c q u i s i t i o n of c o n t r o l of that e n t i t y ; (b) the a c q u i s i t i o n r o f l e s s than a m a j o r i t y of the v o t i n g i n t e r e s t s of an e n t i t y other than a c o r p o r a t i o n i s deemed not to be a c q u i s i t i o n of c o n t r o l of that e n t i t y ; (c ) the a c q u i s i t i o n of l e s s than a m a j o r i t y but o n e - t h i r d or more of the v o t i n g shares of a c o r p o r a t i o n or of an e q u i v a l e n t u n d i v i d e d ownership i n t e r e s t i n the v o t i n g shares of the c o r p o r a t i o n i s presumed to be a c q u i s i t i o n of c o n t r o l of that c o r p o r a t i o n u n l e s s i t can be e s t a b l i s h e d t h a t , on the a c q u i s i t i o n , the c o r p o r a t i o n i s not c o n t r o l l e d i n f a c t by the a c q u i r o r through t h r ownership of v o t i n g shares; and (d) the a c q u i s i t i o n of l e s s than o n e - t h i r d of the v o t i n g shares of a c o r p o r a t i o n or of an e q u i v a l e n t u n d i v i d e d ownership i n t e r e s t i n the v o t i n g shares of the c o r p o r a t i o n i s deemed not to be a c q u i s i t i o n of c o n t r o l of that c o r p o r a tion.  263 S e c t i o n 14 of Inves_tm.en-t. Canada : Review (1 ) The f o l l o w i n g investments by non-Canadians are r e viewable under t h i s P a r t : (a) an investment to acquire c o n t r o l r o f a Canadian business i n any manner d e s c r i b e d i n paragraph 28 ( l ) ( a ) , (b) or ( c ) , where the l i m i t s s e t out i n s u b s e c t i o n (3) apply; (b) an investment to acquire c o n t r o l of a Canadian business i n the manner d e s c r i b e d i n subparagraph 28 ( l ) ( d ) ( i ) , where the l i m i t s s e t out i n s u b s e c t i o n (3) apply; (c) an investment to acquire c o n t r o l of a Canadian business i n the manner d e s c r i b e d i n subparagraph 28 ( l ) ( d ) ( i i ) , where the circumstances d e s c r i b e d i n s u b s e c t i o n (2) and the l i m i t s s e t out i n s u b s e c t i o n (3) apply; and (d) an investment to acquire c o n t r o l of a Canadian business i n the manner d e s c r i b e d i n subparagraph 28 ( l ) ( d ) ( i i ) , where the cirucmstances d e s c r i b e d i n s u b s e c t i o n (2) do not apply and the l i m i t s set out i n s u b s e c t i o n (4) apply. Circumstances (2) The circumstances r e f e r r e d to i n paragraphs ( l ) ( c ) and (d) are that the value, c a l c u l a t e d i n the manner p r e s c r i b e d , of the a s s e t s of the e n t i t y c a r r y i n g on the.Canadian b u s i ness, and of a l l other e n t i t i e s i n Canada, the c o n t r o l of which i s a c q u i r e d , 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, c a l c u l a t e d i n the manner p r e s c r i b e d , of the a s s e t s of a l l e n t i t i e s the c o n t r o l of which i s a c q u i r e d , d i r e c t l y or i n d i r e c t l y , i n the t r a n s a c t i o n of which the a c q u i s i t i o n of c o n t r o l of the Canadian business forms a p a r t . Limits (3) An investment d e s c r i b e d i n paragraph ( l ) ( a ) , (b) or (c) i s reviewable under t h i s Part where the value, c a l c u l a t e d i n the manner p r e s c r i b e d , of (a) t h e a s s e t s a c q u i r e d , i n the case where c o n t r o l of a Canadian business i s acquired i n the manner d e s c r i b e d i n paragraph 2 8 ( l ) ( c ) , or -  (b) tthe a s s e t s of the e n t i t y c a r r y i n g on the Canadian b u s i n e s s , and of a l l other e n t i t i e s i n Canada, the c o n t r o l of which i s a c q u i r e d , d i r e c t l y or i n d i r e c t l y , i n the case where c o n t r o l of a Canadian business i s acquired i n the manner d e s c r i b e d i n 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 d e s c r i b e d i n paragraph ( l ) ( d ) i s r e viewable under t h i s Part where the value, c a l c u l a t e d i n the manner p r e s c r i b e d , of the a s s e t s of the e n t i t y c a r r y i n g on the Canadian b u s i n e s s , and of a l l other e n t i t i e s i n Canada, the c o n t r o l of which i s a c q u i r e d , 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.  S e c t i o n 11 (b) of Investment  Canada :  Notification ': . The f o l l o w i n g investments by non-Canadians are s u b j e c t to n o t i f i c a t i o n under t h i s P a r t : (b) an investment to a c q u i r e c o n t r o l of a Candian b u s i ness i n any manner d e s c r i b e d i n s u b s e c t i o n 28 (1), u n l e s s the investment i s reviewable pursuant to s e c t i o n 14. 77.  S e c t i o n 11 (a) of Investment  Canada :  The f o l l o w i n g investments by non-Canadians are s u b j e c t to n o t i f i c a t i o n under t h i s P a r t : (a) an investment 78.  to e s t a b l i s h a new Canadian  Business.  S e c t i o n 8 (2) (a) of FIRA: Notice of proposed  establishment of new business  Every n o n - e l i g i b l e person, and every group of persons any member of which i s a n o n - e l i g i b l e person, that proposes to e s t a b l i s h a new b u s i n e s s i n Canada, shall, (a) i f immediately before the time when the new b u s i n e s s i s proposed to be e s t a b l i s h e d no other b u s i n e s s i s c a r r i e d on i n Canada by that person or group of persons, g i v e n o t i c e i n w r i t i n g to the Agency of such proposal i n such form and manner and c o n t a i n i n g such i n f o r mation as i s p r e s c r i b e d by the r e g u l a t i o n s . 79.  S e c t i o n 8 (2)(b) of FIRA: Every n o n - e l i g i b l e person, and every group of persons any member of which i s a n o n - e l i g i b l e person, that proposes'to e s t a b l i s h a new b u s i n e s s i n Canada shall,  265 (b) i f each other b u s i n e s s c a r r i e d on i n Canada by that person or group of persons immediately b e f o r e the time r e f e r r e d to i n paragraph (a) i s a b u s i n e s s to which the new b u s i n e s s would, i f i t were e s t a b l i s h e d , be unrelated, g i v e n o t i c e i n w r i t i n g to the Agency of such prop o s a l i n such form and manner and c o n t a i n i n g such i n f o r mation as i s p r e s c r i b e d by the r e g u l a t i o n s . 80.  S e c t i o n 37  (1) of Investment  Canada :  Where any q u e s t i o n a r i s e s under t h i s Act as to whether an i n d i v i d u a l or an e n t i t y i s a Canadian, the M i n i s t e r s h a l l , on a p p l i c a t i o n by or on b e h a l f of the i n d i v i d u a l or e n t i t y , f o r t h w i t h c o n s i d e r the a p p l i c a t i o n and any i n f o r m a t i o n and evidence submitted t h e r e with and, u n l e s s the M i n i s t e r concludes that the i n f o r m a t i o n and evidence submitted t h e r e w i t h i s not s u f f i c i e n t to enable the M i n i s t e r to reach an o p i n i o n on the q u e s t i o n , s h a l l provide the a p p l i c a n t with a w r i t t e n o p i n i o n f o r h i s guidance. 81.  S e c t i o n 17 of Investment  Canada :  (1) Where an investment i s reviewable under t h i s Part, the non-Canadian making the investment s h a l l , i n t t h e manner p r e s c r i b e d , f i l e an a p p l i c a t i o n with the Agency c o n t a i n i n g such i n f o r m a t i o n as i s p r e s c r i b e d . (2) The a p p l i c a t i o n r e q u i r e d by s u b s e c t i o n (1) s h a l l be f i l e d (a) s u b j e c t to paragraph (b), i n l: the.'case of an i n v e s t ment reviewable pursuant to s e c t i o n 14, at any time p r i o r to the implementation of the investment; (b) i n the case of an investment made through an a c q u i s i t i o n r e f e r r e d to i n subparagraph 28 ( l ) ( d ) ( i i ) or an investment with r e s p e c t to which a n o t i c e r e f e r r e d to i n paragraph 16 (2)(a) has been sent, at any time p r i o r to the implementation of the investment or w i t h i n t h i r t y days t h e r e a f t e r ; or (c) i n the case of an investment reviewable pursuant to s e c t i o n 15, f o r t h w i t h on r e c e i p t of a n o t i c e f o r review r e f e r r e d to i n subparagraph 15 ( b ) ( i i ) . 82.  Macdonald  83.  Ibid.  84.  Ibid.  Commission Report, Vol.11, P.240.  266  85.  Section  19  (c) of Investment  Canada  :  The A g e n c y 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 21, 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 o f Canada g i v e n by t h e a p p l i c a n t . 86.  i n right  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 Regulation: Transparency versus D i f f u s i o n " , Regulation of 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 . b y E a r l H. F r y a n d L e e H. R a d e b a u g h , p . 5 1 .  87.  Ibid.  88 .  Ibid  89.  Ibid. See A l s o W a t k i n s " R e p o r t , S e e A l s o Wahn R e p o r t , p p .  pp.  CHAPTER  V  1.  UN  Document  2.  E/C.10/1984/8, p.20, f o o t n o t e See A l s o E/C.10/1985/6 .  3.  E/C.10/1985/S/2,  p.7,  4.  Ibid.,  6.  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 E/5500/Rev.1, pp.50-56; pp.6-13.  6.  E/5500/Rev.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 a n d UN P o l i t i c s : T h e Q u e s t f o r C o d e s o f C o n d u c t , Pergamon P r e s s , I n c . , 1980, pp.49-51.  7.  E/C.10/1983/S/5/Rev.l, E/l983/l7/Rev.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 Corporations. A l lf u r t h e r references to paragraph numbers a r e from t h i s document, h e n c e f o r t h r e f e r r e d t o as D r a f t Code.  8.  Draft  E/C.10/1985/S/2,  p.6, p a r a  Code,  para  6.  para G.A.  p.6  para  3.  6.  7. Resolution  35/56, para  70.  Persons,  267 9.  I b i d . , para 8 .  10 .  Ibid . , para 9 .  11 .  I b i d . , para 11.  12 .  I b i d . , paras 12, 13 and  13 .  I b i d . , para 14 .  14 .  I b i d . , paras 17, 18 and  15 .  I b i d . , paras 59 - 65 .  16 .  I b i d . , para 21 .  17.  I b i d . , para 23 .  18 .  I b i d . , para 24 .  19 .  I b i d . , para 25 .  20 .  I b i d . , para 28 .  21 .  I b i d . , para 29 .  22 .  I b i d . , para 30 .  23 .  I b i d . , paras 33- 35 .  24 .  I b i d . , para 37.  25 .  I b i d . , para 38 .  26 .  I b i d . , para 39 .  27.  I b i d . , para 40 .  28 .  I b i d . , paras 41- 43 .  29 .  I b i d . , para 44 .  30 .  I b i d . , para 46 .  31.  I b i d . , para 58.  32.  Draft Code, paras 59-65.  33.  I b i d . , paras 67-69.  34.  I b i d . , para 71.  See E/C.10/1985/S/2,  p.28, para 83.  268 35.  E/C.10/1985/S/2, p.32-33, paras 95 and 96.  36.  I b i d . , p.29.  37.  E/C.10/1985/S/2, p.30, para 89. Quoted from I n t e r n a t i o n a l Labour O r g a n i z a t i o n , 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 (1982 ) , para 6.  38.  E/C.10/1985/S/2, p.31, para 92.  39.  I b i d . , p.28, para 84.  40.  I b i d . , p.29, para 85.  41.  I b i d . , p.26, para 74.  42.".  I b i d . , p.26, para 75.  43.  I b i d . , pp.26-28, paras 74-80.  44.  E/C.10/1985/S/2, pp.27-28.  45.  I b i d . , pp.12-15., paras 24-34.  46.  I b i d . , pp.15-16, paras 38-41.  47.  I b i d . , p.16, para 39.  48 .  I b i d . , para 41.  49.  Ibid.,  50.  I b i d . , pp.17-18, paras 46-48.  51.  I b i d . , p.18, para 49.  52.  Ibid.  53.  G.A. R e s o l u t i o n 1803  54.  E/C.10/1985/S/2, p.21, para 55.  55.  I b i d . , pp.21-22, para 56.  56.  I b i d . , p.22, para 58.  57.  E/C.10/1985/S/2, p.22, para 59.  58.  I b i d . , para 62.  59.  I b i d . , para 63.  Draft Code, paras 1-3.  Draft Code, para 14.  See s p e c i a l l y para 80.  p.17, paras 43-45.  G.A. R e s o l u t i o n 626 (VII) of:\1952 .  G.A. R e s o l u t i o n 1803 (XVII) of 14 D e c , 1962. (XVII) of 14 Dec.1962, S e c t i o n 1 ( d ) .  269 60.  I b i d . , p.24,  para  66.  61.  I b i d . , p. -25 ' par a r .70,1  62.  I b i d . , pp.25-26, paras  63 .  E/1983/17/Rev.l ; ppC2-3j'.' E/G;'10./1983/S/5/Rev .1 .  64.  I b i d . , Annex. IV, "Basis f o r a Concluding Document: Proposal By the Chairmen of Working Groups I & I I " . This has been r e f e r r e d to as Working Paper. Para 1 ( a ) .  65 .  I b i d . , para 2 .  66 .  I b i d . , para 6 .  67.  I b i d . , para 7.  68.  Ibid . , para 49 .  69.  I b i d . , para 54 .  70 .  I b i d . , para 56 .  71.  See Report of the Second Session 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 , March 1-12, 1976.  7  72-73 .  CONCLUSION 1.  Brandt  Commission Report,  p.70.  2.  Statements and Speeches No. 83/5. "An Address by the Hon. Gerald Regan, M i n i s t e r of State ( I n t e r n a t i o n a l Trade), to the Bankers' A s s o c i a t i o n f o r F o r e i g n Trade, San Juan, Puerto Rico, A p r i l 13, 1983.  3.  Ibid .  4.  Ibid.  5.  Ibid.  270  SELECT I.  STATUTES  (i)  Canadian Foreign  Investment Review Act, 1973-74  Investment (ii  READING  Canada Act, 1985  Indian Foreign Exchange C o n t r o l Act, 1947 Foreign Exchange Regulation  II  U N  Act, 1973  DOCUMENTS  G.A. R e s o l u t i o n  35/56  G.A. R e s o l u t i o n  626 ( v i i )  G.A. R e s o l u t i o n 1803  (xvii)  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  or  E/C.10/75  E/1981/49  or  E/C.10/92  or  E/1982/18  or  E/1983/17  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  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  or  E/1983/18/Rev.l  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  or  E/1984/18  or  E/1985/28  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  I I I . BOOKS AND ARTICLES  Arnett, E. James, Robert Reuter, E r r o 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 C o n s i d e r a t i o n s f o r I n v e s t i n g i n Canada", Regulation of Foreign D i r e c t Investment i n Canada and the United S t a t e s , ed. E a r l H. Fry and Lee H. Radebaugh, Brigham Young U n i v e r s i t y , David M. Kennedy I n t e r n a t i o n a l Centre, 1983. Barton, Thomas and Lome D. Peterson, "The New Investment Canada Act", Doing Business i n Canada and B.C., The C o n t i n u i n g Legal Education S o c i e t y of B r i t i s h Columbia, M a t e r i a l s prepared f o r a C o n t i n u i n g Legal Education Seminar h e l d i n Vancouver, B.C. on June 24, 1985. Breese, Gerald, U r b a n i z a t i o n i n Newly Developing C o u n t r i e s , P r e n t i c e - H a l l Inc., 1966. Behrman, Jack N., I n d u s t r i a l P o l i c i e s : I n t e r n a t i o n a l R e s t r u c t u r i n g and T r a n s n a t i o n a l s , Toronto: Lenington Books, 1984.  272  B e r l e , Adolf A. and Gardiner C. Means, The Modern C o r p o r a t i o n and P r i v a t e Property, Revised ed. New York: Harcourt, Bruce & World Inc., 1968. Bhagwati, J a g d i s h N. and T.N. S r i n i v a s a n , Foreign Trade Regimes and Economic Developments: I n d i a , A S p e c i a l Conference S e r i e s on Foreign Trade Regimes and Economic Development, N a t i o n a l Bureau of Economic Research, New York: 1975. D i s t r i b u t e d by Columbia University Press. Bharat Ram, Vinay, Towards a Theory of Import S u b s t i t u t i o n , Exchange Rates and Economic Development, Oxford U n i v e r s i t y Press, 1982. Brandt, W i l l y , North-South: A Programme f o r S u r v i v a l , London: Pan Books, 1980. Bronowski, Jacob, "Science, E t h i c s and Vol.8 No.l, Dialogue, 1975, 75-82.  Equality",  Canada - A d m i n i s t r a t i o n 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 A s s o c i a t i o n B r e i f to the Hon. Herb Gray, M i n i s t e r of I n d u s t r y , Trade and Commerce on the Foreign Investment Review Act, Sept.1981, pp.12-17. Carr, D.W., Recovering Canada's Nationhood, Canada P u b l i s h i n g Company, 1971.  Ottawa:  Cranston, Ross, "Foreign Investment R e s t r i c t i o n s : Defending Economic Sovereignty i"n Canada, and, ; A u s t r a l i a " , Vb 1.14., N o . l H a r v a r d : I n t e r n a t i o n a l Law J o u r n a l , ..... Winter 1973'., pp.345-367. Drache, D a n i e l and Duncan Cameron ed., The Other Macdonald Report, Toronto: James Lorimer and Co.,1985. Dubashi, Jay, " I n d u s t r i a l Growth: Independent India Today, Jan.15, 1985, p.123. Doing Business i n I n d i a , P r i c e Waterhouse, Doing Business i n Canada, P r i c e Waterhouse,  Course",  1980. 1983.  273  E s c o r t s L t d . and Another v s . Union of India and 57 Reports of Company Cases, 1985, 241-440. Exchange C o n t r o l , New 1982.  D e l h i : Indian  Investment  Others, Centre,  Exchange C o n t r o l F a c i l i t i e s f o r Investment by NonResident Indians, Reserve Bank of I n d i a , 1985. Fayerweather, John, Foreign Investment i n Canada: Prospect f o r N a t i o n a l P o l i c y , Toronto: Oxfod U n i v e r s i t y Press, 1974. Foreign Ownership and the S t r u c t u r e of Canadian Industry: Report of the Task Force on the S t r u c t u r e of  Canadian  Industry  (Watkins  Report),  Ottawa,  January  1968.  Foreign Technology and Investment