Foreign capital and Collaboration

21/05/2020 0 By indiafreenotes

A country needs natural resources, adequate levels of savings, latest technical know how, skilled human resources etc. for economic development.  Compared to developed countries, developing countries are deficit of  these resources. Lack of resources and skilled labor forces may prompt them to seek assistance from economically well developed countries. Assistance may be in the form of either technical knowledge or investments and very often, both. It may be through collaborations with foreign countries or private companies.  In India, such collaborations have always been predominant from the time of independence itself. Government has always welcomed such foreign investments with some restrictions giving new paths of co-operation. Also, its policy has undergone several changes since independence. Foreign investment policy has a direct impact on inflow of foreign money, skills and knowledge.

What are the merits of foreign capital?

No doubt, a developing country like India has many reasons to welcome fund inflows that can play an important role in the economic development of our nation.

  1. Some natural resources may go unnoticed or unexploited in the absence of technology. So, welcoming new ideas can help in the effective use of resources and prevent them from going to the waste.
  2. Also, new technologies can help in upgrading present techniques giving more result thus saving man power, money and time.
  3. When new technologies are welcomed, employment opportunities also are created. So, it gives many employment opportunities, particularly to new professionals with new ideas. So, skilled labor force can be used in a better way.
  4. They can supply domestic savings and capital formation thereby accelerating the investment rate for the economic development of the country.
  5. New technologies can bring new markets and marketing experts too, thus helping to sell Indian goods in international markets for good prices.
  6. Backbone of development of a country, of course, is agriculture and industry. Foreign capital can provide infrastructure for both. 

Foreign investment policy in India

Investment policy of India can be broadly classified into two periods – 1948-1990 and 1991 onward. Till 1990, there were only restricted policies and regulated inflows. But from 1991 onward, India witnessed liberalization of foreign investment laws.

The restrictive period – 1948-1990

At First, the policy of independent India was reflected in Industrial Policy Resolution (IPR) which fully accepted the participation of foreign capital, particularly with new technology ideas to promote industrialization in our country. But certain regulations were also attached which required ownership and control in Indian hands. In 1949, the then Prime Minister of India, Pt. Jawahar Lal Nehru made a statement in constituent assembly bringing three major issues namely, no discrimination between foreign and Indian enterprises, fair compensation to foreign investors if need arises for the nationalization of a foreign enterprise and also allowed them to remit profits if foreign exchange position allowed. Also, foreign collaborations were encouraged in those industries which required large capital investments, production skills and processes, export industries and those which were needed for country’s development as a whole. Also, foreign collaborations with equity participation were appreciated which led to the sharp increase in its number. Thus, country witnessed outflow of profits, dividends, and royalties which led to foreign exchange crisis in the late sixties.

Foreign Exchange Regulation Act (FERA) of 1973 is an act to consolidate and amend laws regulating transactions indirectly affecting foreign exchange payments, currency exchange and conservation and utilization of foreign exchange resources of the country. It included all non-banking companies and branches with more than 40% foreign participation. During late seventies, India realized its poor technology and products as compared with other nations. This was partially due to a highly protected local markets and MNCs. However, Industrial Policy Statements of 1980 and 1982 gave a liberalization of licensing rules and some exemptions under FERA.

Liberalization period- 1991 onwards

Introduction of new industrial policy in 1991 led to many radical changes in foreign investment policy. To promote foreign funds and investments, many restrictions were removed and encouragement like tax exemptions also given. It virtually welcomed foreign investors to almost every sector of India, even renting foreign participation with advanced technologies and adding new skills. Unlike in the past, our country is promoting international business and investments even through Government delegations visiting other countries. They are trying to attract foreign investors to invest, seeing it as a part of industrialization and exchange of new ideas, skills and better use of resources, both human and non-human.

India’s foreign investment policy has come a long way since 1947. Though they were warmly welcomed at first to promote rapid industrialization and foreign fund, certain restrictions and selections were made later. But, since India’s technology did not improve as years passed by and conditions only worsened more, further liberalization of foreign policy became necessary to attract more investors to India. But often a question is raised as to whether foreign technology and investments help India in long run or adversely affect our economy.  But everyone agrees that India is far behind in the proper utilization of resources and skilled people purely depending on foreign technology a lot. While many developing countries like Japan and China are coming forward with many innovative ideas, we are just depending on them, thinking how can we import their commodities at cheap rates and market it here, fooling ordinary man. Disputes won’t send by adding a single point or two. 

Need for Foreign Collaboration:

Lack of capital is a serious handicap in the way of economic development of underdeveloped countries. The internal resources are not sufficient, so they have to rely on foreign capital in the initial stages of their development. The pace of economic development primarily depends upon the rate of capital formation. But in the underdeveloped countries the per capita real income being very low, the rate of saving investment is very low.

Therefore, these countries are obliged to depend upon external sources of capital for initiating them process of economic development.

External capital cards in the form of (i) direct business investment commonly called, private foreign capital and (ii) international loans and grants more commonly known as foreign aid or external assistance.

Contribution of Foreign Capital:

The underdeveloped countries are always capital scarce countries and that is a perpetual need of capital for economic development projects. The degree of dependence on foreign capital depends on the extent to which domestic resources could be mentioned. India has required foreign capital to speed up economic growth.

There was considerable opposition to the use of foreign capital in India. This was mainly due to the political role it played in the past. The colonial empires of the 19th and 20th centuries were built by European countries on the basis of trade and identity. The Government of India at one time was subjected to the pressure of foreign companies and foreign government.

Arguments in Favour of Foreign Capital:

India is a developing country, and has adopted the path of economic planning for growth. Her natural resources and labour force are in abundance but there is lack of capital. Our technological knowledge is outdated and industrial productivity is very low under these circumstances, the importance of foreign capital increases.

This can be explained as under:

  1. Encouragement to Domestic Savings:

In a developing country like India the level of domestic savings is low because of low income of the people. Naturally it suffers from scarcity of investment and in this way is caught in the vicious circle of poverty. With the help of foreign capital, the savings and investments can be pushed up.

  1. Proper Exploitation of Natural Resources:

India possesses abundant natural resources but due to lack of technological knowhow and capital, the natural resources cannot be properly exploited. Thus it is necessary that the help of foreign capital is sought in order to accelerate the pace of economic development.

  1. Availability of Foreign Technology and Managerial Techniques:

Developing countries also lack new technology and modern scientific managerial techniques. With the help of foreign capital these can also be gained. This process is essential for the economic development of the country.

Establishment of Basic and Key Industries:

Basic and capital intensive industries cannot be set up for want of sufficient capital. The domestic capital is shy and does not come forward. Thus foreign capital can easily contribute to the development of such industries. Economic history of India is an evidence that foreign capital has played a vital role in the establishment of basic and key industries.

Helpful in Accelerating the Pace of Economic Development:

To accelerate the pace of economic development the policy of comprehensive economic planning has to be followed. Its need cannot be met with domestic reasons. Thus foreign capital becomes essential in boosting the level of capital formation.

Arguments against Foreign Capital:

  1. Obsolete Machines of Technology:

Foreign capital is responsible for obsolete machines and technology being passed on to Indian partners by the foreign collaborations.

  1. Dependence on Foreign Countries:

Foreign collaboration has made Indian industries dependent to a considerable extent on imports and intermediate goods and parts of machinery. It has destroyed self-reliance.

  1. Foreign capital offer Prize Posts and superior jobs to their own nationals. They disregard the claims of highly qualified Indians and thus follow the policy of discrimination.
  2. Foreign capital derives the industrial profits out of the country. This may lead to the exhaustion of country’s valuable resources and the progressive impoverishment of the country.
  3. Foreign capital and enterprise brings about economic development by the foreigners. Economic domination may entail political domination in some form. Foreign capital may thus give rise to vested interests which may oppose the political and economic advancement of the country.
  4. Foreign capital bound to beat to great dependence on foreign countries. This may, it is apprehended, impede the attainment of socialist pattern of society.
  5. Foreign capital can prove highly prejudicial to national defence if have and key industries are monopolized by the foreigners.

These are the disadvantages that accrue to the country from the use of foreign capital. But in spite of strong reaction in the country against the import of foreign capital we have to consider our need to foreign capital in the light of requirements of a backward country like India.

Dangers of Private Foreign Capital:

From the Indian experience since her independence, the following dangers of private foreign capital operating in India (through their Indian collaborators) have come to be noticed:

  1. Foreign companies from the West European countries and from the United States are generally reluctant to enter into collaboration with public sector companies (i.e. Government companies) in India, mostly on ideological grounds. If insisted to do so, they would rather not come to India than offer their participation with the Public Sector Indian companies.
  2. In certain areas of industrial production, Indian technology is fairly well developed. Collaboration with foreign companies in low priority areas like cosmetics and luxury goods has only meant duplication of technology which is unnecessary and often costly. Indian companies or entrepreneurs have the necessary technology in such low priority industries which means any collaboration in such areas is superfluous.
  3. The rate of return on initial foreign investments in India is very high, making it possible to return the entire amount of foreign investment within 2 to 4 years. It is, therefore, argued that unless foreign collaboration agreements help to increase India’s exports and result in decrease in dependence on foreign countries for imports, outflow of foreign exchange might far outweigh initial gain from foreign collaboration agreements.
  4. Often technology that is passed on by private foreign collaborators of Indian partners is obsolete on not appropriate to Indian conditions; often import of capital equipment was far in excess of India’s requirements. Thus, technology appropriate to Indian conditions or development of such technology in Indian itself through collaboration with foreign companies has not become possible to any very great extent.
  5. It is noted that royalty payments and fees for technical services rendered by foreigners all result in increasing claims on India’s foreign exchange earnings and reserves which are relatively small in relation to the country’s requirements. One estimate is that total outgoings due to private foreign collaboration agreements were more than the inflow of foreign capital. For example, Coca Cola with a small investment of foreign currency used to send abroad many times that amount annually by way of profit until permission to continue its activities was refused to the country.

The same is true of the US oil companies like of ESSO and Caltex. For example, the ESSO with an investment of Rs. 30 crore (with Indian holdings of only Rs. 57 lakh) took away from India profit (in foreign currency) of Rs. 83 crore during 1968 to 1970 only.

  1. On the whole, the impact of foreign private collaboration on India’s balance of payments has not been favourable. The main reason for his has been the substantially high level of imports consequent on foreign collaboration agreements as compared to the low level of exports, such foreign collaborations hardly adding to India’s export earnings.

For long under the private foreign collaboration agreements, as excessive number of technicians, often not suitable to Indian conditions were sent to India and designs and machines were not suitable to Indian conditions; but under the agreements, they were imposed on India.

  1. There is also the myth of the policy of Indianisation. Under Section 29(1) of the Foreign Exchange Regulation Act, all foreign companies are required to dilute their ownership to 74 per cent and under Section 29(2) of the FERA, the Indian branches of foreign companies are to be converted into Indian companies with non­resident share in equity capital not exceeding 40 per cent.

It is observed that the dilution of equity form 100 per cent to 74 per cent (or from 100 per cent to 40 per cent) has hardly made any difference to the drain of foreign exchange from India to foreign countries in which the head offices of foreign collaborations are situated.

It is observed, for example, that Ponds and Warren Tea were able to send home net worth of their company’s investment every two years. In the case of Colgate-Palmolive, the highest limit of profit was 89 per cent which meant that the entire net worth of assets invested in India was repatriated within less than 14 months.

The new issues of such companies are excessively oversubscribed on the pretext of broadening the Indian of these companies are able to raise plenty of local capital and the Indian Shareholders with their personal interest only in view and in dividend, provided support to the functioning of multinational companies whenever the bogey of expropriation was raised in Indian Parliament.

It was not the existing equity capital that was shared with India national, but the new equity that was issued to Indians. The Indian shareholders were scattered all over India and even if they wanted, they could not take any concerted action against the policies of the company. In fact, Indian shareholders were only interested in dividend and hardly took any interest in the functioning of the company. Thus, the domination of foreign collaborators continued unabated in India.

The myth of Indianisation can be exposed by the fact that foreign partners or the parent companies in their collaboration agreement retained the absolute power of appointing chairman and managing directors of their Indian subsidiaries even when the dilution of shareholdings was brought down to 25 per cent.

It is also observed that by adopting the practice of wide dispersal of equity holdings and ownership rights, the foreign collaborators have also significantly blunted Indian people’s opposition to multinational foreign companies with subsidiaries in India while repaying very high returns on their investments.

It may be said that garb or covering of Indianisation is being cleverly exploited by many foreign multinational companies to convert the business environment in India in their favour and thus continue to make and transfer home enormous profits made in India annually.

Michael Kidron has estimated that during 1948 to 1961, foreign companies as a whole had taken out of India total funds worth three times their investments in India. It may be said that the situation did not change much during the 1970s.

  1. Instead of allowing foreign private capital and its participation on a selective basis and only in the case of essential capital equipment and other essential inputs, foreign collaboration agreements were permitted out of overenthusiasm to bring foreign capital into India into lines of production of commodities such as chewing gum, cosmetics, boot-polish, cigarettes, hotels and so on.

Though government assumed powers under the FERA, no concrete results have followed and foreign companies continue to make enormous profit in India and remit them to their mother countries as before.