Chapter I

INTRODUCTION: THE POWER OF MNCs

1

One of the most s i gni f ican t developments of the

post World War I I . era has been the growth and global

proliferation of the Multinational Corporations (MNCs).

Different States have responded to the emergence of MNCs

with mixed feelings, largely because they have been found

difficult to be controlled oy them. They have the capa-

city of undermining the autonomy and independence of the

State, while they are also at the same time potent agents

of social, economic and political changes. 1

There is no widespread agreement on a precise

definition of the term MNCs. 2 Raymond Vernon says,

"the term 1 Multinational Corporation 1 is sometimes confusing

1. cf. : "The Multinational Corporation is among other things, a private "government" often richer in assets and more populous in stock holders and employees than are some of the nation states in which it carries on fts business. It is simultaneously a "citizen" of several nation states, owing obedience to their laws and paying them taxes, yet. having its· own objectives and being responsive to a management located in a foreign nation. Small wonder that some critics see in it an irresponsible instrument of private econo­mic power, or of economic "imperialism" by its home country. Others view it as an international carrier of advanced management science and technology, an agent for the global transmission of cultural values which bring closer the day when a common set of ideals will unite mankind. Neil H. Jacoby, "The Multinational Corporation," Center Magazine (Kentucky), vol.3, no.3, May 1970,p.37.

2. For an excellent treatment of this subject see Yair Aharoni, "On the Definition of a Multinational Firm," The Quarterly Review of Economics and Business (Illinios), vol.11, no.3, Autumn 1971, pp.27-37.

2

and always imprecise, but what I have in mind here

is simply a cluster of corporations of diverse nationality

joined together by ties of common ownership and responsive

' 3 to a common management strategy". According to Perlmutter,

TNC is a firm that, "Operates and conducts its manufactur-

ing, marketing, researching, administrative, financial and

accounting operation~ across seveial nations''. 4

Similarly David E. Linienthal says, "Many large and

even medium-sized American Corporations are already

operating in other countries. By operating I do not mean

merely that they have a financial stake, like a portfolio

investment, ·in business in other countries than their

own, nor do I refer only to sales agencies or distributors.

I have particularly in mind industrial or commercial

operations abroad which directly involve corporate manag-

erial responsibility. Such Corporations which have

their home in one country but which operate and live under

the laws and customs of _the other countries as well I

suggest be called Multinational Corporations". 5 More

3. Raymond Vethon, "Economic Sovereignty at Affairs (New York, N.Y.), vol.7, no.l, p.ll4.

Bay," Foreign October 1968,

4. Howard V. Perlmutter, "Emerging East West Ventures: The Transideological Enterprise," Columbia Journal of World Business (Columbia), . vol.4, no.l, 1969, pp.9-18.

5. David E. Linienthal, "Management of the Multinational Corporation," in Mel ven Anshen and G. L. Bach, eds. , Management and Corporations (New York, N.Y., 1985), p.119.

3

'Transnational Corporation' (TNC) has become

popular when referring to MNCs, with a view to emphasize

on the transnational and non-governmental character of

these corporations. The term TNC is more popular in the

UN circles. . The UN also established a commission on

Transnational Corporations in 1975. 6

During the last decade the MNCs have become

increasingly a subject of controversy. While the academic

treatment of MNCs used to be mostly the domain of business

and administrative specialists and economists, scholars in

other disciplines espe~ially political science, have

turned their attention to the impact MNCs have on national

government decision making as also on the working on

international system. To place the MNCs in perspective,

a few facts ·about MNCs may be mentioned at this stage:

In 1986, the total value of Foreign Direct Invest-

ment (FDI) was some $700 billion accounted for by approxi­

mately 20, 000 TNCs with more than ·100, 000 affi 1 ia tes

world-wide.

6. cf.: The UN Economic and Social Council (ECOSOC) initiated actions leading to the Group of eminent persons study of MNCs and later followed up its re­commendations by creating the UN Commission on Trans­national Corporations (TNCs). John M.Kline, International Codes and Multinational Business (Connecticut, 1985), p. 59; see also, United Nations, Economic and Social Council, Commission on Transnational Corporations, Report on the Second Session (1-12 March 1976), Supplement no.5 (E/5782,E/C. 10/16), 1976; United Nations, Economic and Social Council, Commission on Transnational Corporations, Secretariat, Information on Transnational Corporations, Preliminary Report (E/C.10/11), 23 January 1976.

4

About fifty TNCs account for approximately half of

the total stock of Foreign Direct Investment.

Investment expenditures by TNCs in

ates were about $50 billion annually in

foreign affili­

the mid 1980s.

Over 95 per cent of these expenditures originate in

the developed countries and about three quarters are

channelled to other developed countries. The United

States is the largest. source as well as the largest

recipient of Foreign Direct Investment.

TNCs operate in all economic sectors at first

primarily in minerals, energy and agriculture than

in manufacturing and now especially in services.

In many developed and developing countries, TNCs

account for substantial shares in key industries.

Approxima.tely one-third of world trade is intra­

firm trade between different aff.ilia tes of the same TNC.

Transnational banks have become the major conduit

for the international flow of finance capital.

More than two thirds of world payments fdr transfer

of technology also take place within the network of the

same TNCs.

The terms such as company, corporation, firm, and

enterprise have been used synonymously.

5

The companies7 in oligopolistic industries are more

likely to seek entry into foreign markets because they

find it difficult to increase their domestic share

of the ~arket. Their growth is al~o limited by the growth

. of domestic market. Such companies, therefore, begin to

seek opportunities for selling their products in foreign

markets. 8

Companies may be motivated to venture abroad within

a framework of a strategy which seeks 'to continue their

business reputation, advanced technology and managerial

know-how available to them with low ~ost production inputs

such as labour, capital and raw rna terials available in a

foreign host country. A greater number of American

companies have established manufacturing facilities in

Europe, Asia and Latin America for this reason. 9

Another motive tl:\a t serves as an incentive for

expanding operations abroad is the need to diversify

product lines and to shield the company from business

cyclical of ups and downs in the domestic economy, strikes

or threats to its sources of supply. It has been reported

7. Jack N.Behrman, Some Patterns in the Rise of the Multi­national Enterpii"S'e, Research --:-pij?"er 18 (Chapel Hi 11, North Caroline, 1968), p.6.

8. Ibid., p.7.

9. Policy Aspects of Foreign Investments ~ U.S. Mul tina­tiona! Corporations (Washington,D.C., 1972), p.15.

6

that large United States MNCs have at times been able to

supply their domestic requirements by importing components

from their overseas plants. 10 According to Raymond Vernon,

a large number of United States' Companies have establi-

shed manufacturing plants abroad not on the basis of their

technological strategy, but on the value of their trade

name or trade mark. 11 Companies such as Coca Cola, Heinz,

IBM, ·Corn Product have brand names that are prestigous

even in markets that are quite ' far away from their

sources of product ion. Companies that control brand

names of this type generally establish manufacturing

facilities abroad in order to exploit the value of their

brands. The nearness to raw materials also play a

role in the spread of MNCs. For instance, companies such

as Campbell Soup, Nestle, Unilever and Genera,! Foods had

to locate their production. units near the source of raw

materials. Tomotoes and other vegetables that are used in

making different varieties of soups have to be used soon

after they are picked. Milk needed for making ice

cream and chocolates gets spoi 1 t if shipped over long

distances. MNCs producing sophisticated items after

investing a lot on extensive research and development work

try to seek markets abroad to compensate themselves for

the expenditure incurred in evolving a product.

10. Ibid., p.15.

11. Raymond Vernon, The Economic Environment of Interna­tional Business (Englewood Cliffs,N.J., 1972), p.204.

7

Governments of both developed and developing

countries have to cop'e with the enormous power of MNCs.

But the problems faced by both countrtes differ in nature.

Also, the political conditions in which policy responses

are made to MNC challenges vary. In both cases, however,

the basic issue is to .weigh the anticipated economic

benefits from the opera t'ions of MNCs against security

concerns, economic and social goals. In the developed

. countries, this also means efforts to reconcile conflict-

ing interests of various domestic groups that might be

affected by the activities of MNCs. This may lead to

serious internal and external strain like governmental

actions in France against potential take overs of French

electronics firms in the 1960s 12 as well as recurrent

Canadian displeasure with United States domination of

many of their industries; 13 Developed countries due to

their stabl~ governments which are democratically elected

are more likely to manage relations with MNCs. The MNCs

too can participate in the political process and can press

their interests in legislative and administrative councils.

Governments in these countries usually possess the techni-

cal and administrative expertise to evaluate current

costs related to broad governmental goals. This often

leads to appropriate control of MNCs.

12. Werner J.Feld, Non-Governmental Forces and Politics (New York,N.Y., 1972), pp.84-91.

13. Ibid., pp.92-94.

World

8

The problems are more complex in developing coun-

tries. In the first place, a symmetry in the economic

power between MNCs and most of the developing countries is

awesome and produces great and generally justified

anxieties regarding governmental autonomy in policy

choices. Since the political leadership in many third

world countries remains preoccupied with nation-building,

any efforts being perceived as impairment of sovereignty

is regarded as a threat to this proces~ by leaders and

general public. Considering the MNCs well known capabi-

l 't f t f. . . 14 h' h 11 th 1 y or rans er-pr1c1ng w 1c a ows em to manipul-

ate profits across national boundaries and take them in a

subsidiary located in a country with the lowest tax system,

and hold the bargaining chip of transfer of technology,

it is obvious that such negotiations requi~~ a' high level

of skill on the part of government representatives which

the developing countries lack considerably. These factors

have placed many developing countries in a difficult

dilemma. They need the economic, technological, financial

and managerial resources which the MNCs have to offer

but they fear that the political cost of taking advantage

of these resources is too great.

14. David Colman and Frederick Nixson, Economics of Change in Less Developed Countries (Oxford, 1978), p.227.

9

MNCs in International Relations

The operation of MNCs has often genera ted tensions

with the governments and peoples of host countries as well

as with their home governments. As a corporate citizen of

many nations, MNCs daily confront conflicts between

divergent national policies, economic and social systems

and values. As carriers of technology and cultural

changes, they provoke critical reactions from governments

who view them as potential disturbers of economic plans. 15

Criticism of MNCs focuses on issues relating to local

manpower, natural resources, policies of the home-state,

the national interests of host state, centralization of

managerial decision making at headquarters, location of

advanced research in the home-state, insensitivity of

MNCs to local laws and customs, investment behaviour that I

destablizes host nation economies and political support

by the home state. 'The group of eminent 16 persons

15. Jack N. Behrman, National Interests and the Mul tina­tiona! Enterprise (Englewood Cliffs, N.J. , 1970), p. 71.

16 .. cf:-In response to demands by a number of governments, powerful labour union federations, certain non-govern­mental groups, and even some MNCs, the United Nations Economic and Social Council in Resolution 1721. (LIII), adopted unanimously on July 2, 1972, requested Secretary General to appoint a group of eminent persons ... to study the role of Multinational Corpora­tions and their impact on process of development, especially that of the developing countries and also their implications for international relations to formulate conclusions which may possibly be used by Governments in making their sovereign decisions regarding national policy in this respect and to submit recommendations for appropriate action. The resolution further requested the Secretary General to

10

appointed by the UN Secretary General on 2 July 1972

focused on the impact of MNCs on international relations,

highlighting the way the MNCs have used their financial

resources and economic influence to intervene in the

political and governmental affairs of host countries, to

bribe governmental officials and, in general, to lobby

aggressively for their interests using all the leverages

t th . d" 1 17 a e1r 1sposa . The Eminent Group came out with two

' recommendations:

The group unequivocally condemned subversive

political intervention on the part of MNCs aiming at

overthrow of host country's government or the fostering

of internal or international situations which pave the way

from such subversive actions. The Group recommended

that, in such an eventuality, host countries should impose

submit the report of the group, "together with his own comments and Economic and Social Council at its 57th Session." 1) The group consisted of representatives from Western industrialized, developing, and .Communist countries. 2) The group was aided by a comprehensive study prepared by the Department of Economic and Social Affairs of the United Nations Secretariat entitled 'Multinational Corporation in World Development' which furnished data, analyzed the problem and discussed various proposals for action. Relevant documents prepared by the United Nation Conference on Trade and Development (UNCTAD) and the International Labour Office were also available to the group. In addition, more detailed studies on the transfer of technology, taxation and investment codes were prepared for the use of the group. The group held hearings deliberated from September 1973 to March 1974 and issued its report and recommen­dation in Summer of 1974.

17. Charles T.Goodsell, American Corporations and Peruvian Politics (Cambridge, 1974), pp.87-106; see also the Department of State News Release, 5 March 1976, entitled International Problems of Bribery.

11

strict sanctions in accordance with due process of law.

And at the same time, the home countries are advised to

consider ways of ensuring that their investment guarantee

schemes do not make these sanctions ineffective. 18

The Group recommended that host countries should

clearly define the permissible public activities of the

affiliates of MNCs and also prescribe sanctions against

infringements.

International Patent System

The recent interest in patents has been fostered by

revised or novel conceptions regarding industrial property

legislation in few developing countries, 19 while efforts

are being made at international level particularly the

activities of UNCTAD. 20 A report published on this

18. cf: Sicco Mansholt, a member of the group, recommended that the sanctions imposed in accordance with due process of law of the host country may include ex­propriation without compensation. United Nations Department of Economic and Social Affairs, The Impact of Multinational Corporations on Development and on International Relations ( E I 5500 I Rev.1., STIESAI6), 1974, p.46.

19. See for example, Decision 85 of the Commission of the Andean Pact. An earlier and progressive legislation in this area was undertaken by the Government of India in 1959.

20. See the resolution adopted at the Third Session of the Inter-governmental Group on Transfer of Technology of UNCTAD, 15-26 July 1974. The resolution mainly states the need for a revision of the patent sys tern and it was adopted by twenty eight votes in favour of (almost all developing countries), one against and eleven absentations (all developed economies). Also on 1st September 1975 the Group of Government Experts on the Role of the Patent System in the Transfer of

12

subject by the UNCTAD Secretariat concluded the following:

The available evidence suggests that the international patent system is not in its present form, proving to be of benefit to the developing countries, and that it is instead having a negative effect on their development. (Also) •.• patent laws and practices of developing countries, following international standards, have legalized an anomalous situation which has come to act as a reverse· system of preferences granted to a foreign patent ho~der

21in the market of developing coun­

tr1es.

Similar conclusions were reached by the Group of

77. 22 World Intellectual Property Organization (WIP0) 23 I

Technology of the Trade and Development Board of UNCTAD commenced its activities in Geneva to discuss the necessary material for the revision of the inter­national patent system.

21. United Nations Conference on Trade . and Development (UNCTAD), Report of the Patent System in the Transfer of Technology to Developing Countries, Report prepared jointly by the United Nations Department of Economic and Social Affairs, the UNCTAD Secretariat and the International Bureau of the World Intellectual Property Organization (Geneva, 1975), pp. 2 and 28.

22. Statement presented by Argentina on behalf ·of the Group of 77 in UNCTAD on 12. September 1975.

23. The WIPO Permanent Committee for the Acquisition by Developing Countries of Technology Related to Indus­trial Property was convened in March 1974, to consider the revision of the 1965 BIRPI Model Law for develop­ing countries on inventions and knowhow. A draft prE:!pared by WIPO on this matter included provision on contractual 1 icences, knowhow, the state control of certain contracts, transfer of technology patents and industrial development patents. A second meeting of the working group on the Model Law was scheduled for the end of May 1975 to consider issues on pa tentabi­lity, right to patent, rights under patents and annual fees and compulsory 1 icences. A few months earlier, in February 1975, WI PO organized a meeting dedicated to the revision of the Paris Convention.

13

had followed a different approach to the revision of the

patent sys tern. In all these efforts, the debates and

possible conclusions to be reached on substantive issues

relating to the ·political economy of· patents may be

against the legal provisions which are appropriate

to developing countries. The content and wording of such

provisions require careful analysis since the legal

language used need not reflect or . .achieve the policy

objectives pursued through the revision of patent legisla-

tions. The developing countries are more concerned with

elements of patent system stated below:

(a) Legal principles and commitments contained in:

i) .the Paris Convention of 1883 and its amendments

introduced through various subsequent confer-

ences,

ii) the pertinent provisions on patents included in

the Model Law for Developing Countries on Inven-

tions which was draft~d in 1964 by the organiza­

tio~ presently known as WIPo. 24

(b) promotional activitl.es related to the advancement

and strengthening of the principles of the patent

system as undertaken by WIPO and other specialized

institutions and the influence that this has had

on national legislation and practices in Third

World.

24. The original name of WIPO was the United International Bureau for the Protection of Intellectual Property (BIRPI).

14

(c) Conceptual basis of· the relevance of, and the

repercusions on economic development of the

privileges granted through patents.

The efforts taken by the developing countries to

revise the patent system ·constitute a formidable task.

They can only attempt to correct domestically-the economic

distortion caused by its own national patent system. At . -

the international level, fundamental changes cannot be

expected from WIPO, given its past performance and links

with the present structure of the patent system. The

role of an organisation like UNCTAD, though, can be of

certain significance, both in disseminating information

and adequate analysis on the subject as well as in consti-

tuting on appropriate forum for seriously revising

the patent structure, or even for creating a common basis

by which countries (both developing and many industria-

l i zed ones) can opt out of the present patent system.

Indian Patent and Design Act of 1911 was based on

the British patent Act of 1907, which ~as amended in 1930

to bring it up-to-date with the British Patent Act 1991.

This Act continued to govern patent in India till 197o25

25. cf:. The Patent Act 1970 (Act XXXIX of 1970) The Gazette of India Extraordinary Part I I, Sect ion I. The Act was passed by Parliament and received the assent of the President on 19 September 1970, and had come into effect. Narayanan, P., Patent Law (Eastern Law House, 1985), p .10.

15

with minor amendments. which were effected in 1950. After

its independence, the Indian government considered

it imperative to amend the laws of patent and appointed

·a number of enquiry committees. A Bill based on the first

enquiry committee report was introduced in 1953 which

later lapsed due to the dissolution of the first Lok

Sabha. The Second Committee was appointed in 1957, which

submitted its report in 1959. The Government introduced

the Patent Bill in 1965 based on the recommendations of

the Second report. It was again allowed to lapse due to

the dissolutiori of the third Lok Sabha. The Bill was

again introduced in the fourth Lok Sabha in August, 1967,

but it was delayed due to the · dialatory parliamentary

procedures and was finally passed in 1970. . The present

Patent Act contains more stringent provisions and grants

wider powers to. the Government to regulate the grant of . '

.Patents in India than the previous Act of 1911. The

present Act limits the terms and duration of the patent. 26

It provides for the grant of a compulsory licence after

the expiry of three years from the grant of the patent. 27

Certain patents, detailed in Section 87, are deemed to be

endorsed with the words "Licence of Rights". 28 On the

26. Section 53(1) of the Indian Patent and Design Act.

27. Ibid., Section 84(1).

28. Ibid., Section 141, "Licence of Rights means that any applicant can claim a licence to work the Patent as a matter of right. See also in "Standards and Principles Concerning the Availability, Scope and Use of Trade Related Intellectual Property ·Rights," Economy and Trade (New Delhi), July-August 1989, pp.16-17.

16

expiry of three years, this licence provides for a lower

rate of royalty, viz., 4 per cent. 29 Under this Act,

the governrnen t may also acquire patents for its own use,

though in the event of any dispute the rna tter · may be

referred to a High Court.

The new Act also makes provision for the exarnina-

tion and registration of Patent agents and for control

over their profession, which is deem-ed to be necessary

because of the technical nature of specialisation of their

work. Regarding the food i terns and medicines, the Act is I

apparently more strict for it prescribes a lower rate of

royalty; and makes it impossible for the patent holder to

use the patent law to block competition for more than a

1 . . t d . d f t. 30 1rn1 e per1o o 1rne. It confers sweeping powers on

the government to use any patented process, or, import

any patented article, if it is necessary to do so in the

interest of the public. The financial contributions of

MNCs as ~ell as of others to interest groups should be

regulated and disclosed.

Special 301 on Intellectual Property

India is much concerned with the Bush Adrninistra-

t ion's decision towards the U.S. Trade Bi 11 and its

29. United Nat ions Centre on Transnational Corporations (UNCTC), National Legislation and Regulations Relating to Transnational Corporations (New York, 1983),p.66.

30. United Nations Conference on Trade and Deve'loprnent (UNCTAD), Joint Ventures as a Channel for the Transfer of Technology (New York, 1990), p.75.

17

provisions. The 1 301 1 sections have attracted the

attention, particularly of the countries which have been

identified as priori ties for unfair trade investigations.

Under this Act, Section 301 gives the United States Trade

Representative (USTR) broad authority to retaliate,

subject to the direction of the present retaliatory

measures which may include increased tariffs, quotas on

imports, restriction or fees on servi~es, withdrawal from

a trade agreement or other appropriate action.

The Special 301 provisions on the intellectual

property protection identifies th6se countries that

(1) (a) deny fair and effective property protection of

intellectual property rights, or

(b) deny fair and equitable market access to United

States persons that rely on intellectual

property protection. (The law defines this as

the denial of access, through the use of

measures which ( i) are a violation of interna-

tional law of agreement to which the United

States and the country are · a party, or

(ii) constitute discriminatory non-tariff trade

barriers).

( 2) determine which of those countries so identified

I • • t t • · 1 31 are pr1or1 y coun r1es .

31. cf: Priority countries under Special 301 are only those countries whose policies are th~ most onerous or egregious, and have the greatest adverse impact (actual or potential) on relevant US products. More­over, countries may not be identified. as priorities if

18

The U.S. 1991 Na tiona! Trade Estimates Report on

Foreign Trade Barriers had presented to the Congress on

1 April 1991, that India's patent protection is weak and

has especially adverse effects on U.S. pharmaceutical

. d h . 1 f. 32 compan1es an c em1ca 1rms.

Proc~sses for ma~ing such substances are patentable

subject matter but the patent term for these processes is

limited to the shorter of five years from patent grant or

seven years from patent filing. This is usually less than

the time needed to obtain regulatory approval to market

the product. Further, the existence of stringent compul-

sory licensing provisions have the potential to render

patent protection virtually meaningless. There are broad

'licenses of right' that automatically apply to patents

for food and . drugs. Indian Policy Guidelines normally

limit recurring royalty payments, including patent licens-

ing payments to 8 per cent of the selling price (net of

.if they are entering into goodfai th negotiations or making significant progress in bilateral or mul tila­teral negotiations to provide adequate and effective intellectual property protection. US Omnibus Trade and Competitiveness Act 1988, "The 301 Clause," Ind-USA (New Delhi), Inaugural issue, 1989, p.1,2.

32. cf: India's patent acts prohibit patents for any invention claiming substances. intended for use or capable for being used as a food, medicine or drug or relating to substances prepared or produced by chemi­cal processes. Many US invented drugs are widely reproduced since patent protect ion is not available. Hindustan Times (New Delhi), 25 May 1991.

19

certain taxes and purchases). Royalties and lumpsum

payments are taxed at a 30 per cent rate. 33

India had been resisting the pressure of the deve-

loped countries to include patent laws in the negotiation

of General Agreement of Tariff and Trade (GATT) 34 rules.

The Indian experts argue that Indian Patent Act 1970 is a

historic document and a classic model to promote indus-

trial development process in.the developing countries. It

strikes a fair balance between the private and public

interests to promote competitiveness in the industry.

Further they argue that there is nothing very special or

unique about the Indian Patent Act 1970 since most of the

provisions introduced in this Act had precedents in the

patent laws of the developed countries in their early

phases of industrialisation. In a statement of the

National Working Group on Patent Laws (NWGPL), its Chainmm

Dr. Niyanand said the tract record of th·ese· MNCs would

indicate that they bave been exploiting consumers all over

the world including the USA and accused the MNCs for

33. Ibid. Also see, US Omnibus Trade . and Competitiveness Act 1988, n.31, pp.14-15.

34. cf: Although 14 developing countries are presently with India, in the near future they may depart from their present 'position if adequate concessions are offered in other areas. Times of India, 28 November 1990.

20

influencing the Bush Administration to name. India under

35 the Super 301 clause.

The former Chandrasekhar Government had initiated

changes in the existing Patents Act to meet a part

of the demands made by the United States Administration

for effective protection of their intellectual property

. ht 36 r1g s.

Another anxiety of many countries hosting affili-

a tes of MNCs is the use of these units as tools for the

achievement of foreign policy goals of , the homes states.

It has been claimed that MNCs have not only used their

power in the politics of the home state to obtain foreign

policies that are favourable to corporate interests, but

have also at times, sought governmental support for their

opposition to unfavourable regimes in host states.

Further arguments ar~ made that:

U.S. investments in underdeveloped countries are a primary determinant of US foreign policies towards' these countries. The results... are foreign policies that are protective both of these investments and of opportunities for their future expansion, which, therefore, are profoundly counter­revolutionary in their intent, and which

35. cf: The Statement said, India cannot afford the libe­ral import regime being advocated by the USA and can ill-afford to indiscriminately open up the economy further and allow MNCs to swamp the small units which have provided bulk of the employment opportunities in the industrial sector. Times of India, 11 May 1990.

36. cf: Dr. Subramanian Swamy, has ~ta}5en the position that the chapges in the patents Act to be suggested by the Committee of Secretaries wi 11 be referred to the Select Committee of the tenth Lok Sabha. Ibid.

21

undertake foreign interventions an<i.3f1ili tary alliances in pursuit of these ends.

In certain cases this may lead to the exertion of great

influence and even pressure on host governments to change

their foreign policy orientations and attitudes. In other

instances, however, MNCs may also be used to bolster or

supplement foreign aid operations of the present govern- .

ment. Generally MNC affiliates operate in developed

countries in the interest of their own economic objectives,

although these objectives may sometimes be restricted by

__j- patent-government laws such ,as the Trading with Enemy

~ Act of the United States. 38

t0

::r: l-

To ensure against any undesirable effects in the

context, the group recommended that:

37. James R.Kurth, "The Multinational Corporation, U.S.: Foreign Policy and the Less Developed Countries," in Abdul A. Said and Luiz R.Simmons, eds., The New Sovereigns: Multinational Corporations as Wor~Powers (Englewood Cliffs, N.J., 1975), pp.143-4.

'

38. Trading with the Enemy Act of 1917 States: It shall be unlawful - (a) For any person in the United States ... to trade, or atte~pt to trade, either directly or indirectly, with, to, or from, or for, or on account of, or on behalf, or for the benefit of any other person, with knowledge or reasonable cause to believe that such other person is an enemy or ally of enemy, or is conducting of taking part in such trade, directly or indirectly, for or on account of, or for the benefit of, ·an e.nemy of ally of an enemy." U.S. United States Code (1958 ed.), vol.X, Title 50-War and National Defence and Tables (Washington,1959), pp.84-89.

THESIS 338.880954

H176 Mu

1111111111111111111111111 TH3744

....,.,.. .. ~""

~r- ,r; ~~ ~.t.t~ N1

22

the Economic and Social Council... shall call upon coun-

tries not to use Multinational Corporations and their

affiliates as instruments for the attainment of foreign

policy goals. 39

Another cause for tension between the host and home

governments relates to nationalization of MNCs - plants

and other fac i 1 i ties in host countries. The amount of

c.ompensa tion to be paid and the manner j.n which it should

be determined are the main points of dispute. According

to the recommendations of the group, host countries should

ensure that the compensation is fair and adequate and that

it should b~ determined according to the prevailing law

of the country concerned. Arbitration arrangements worked

out prior to cases of nationalization should be taken into

account.

Finally, an important recommendation of the

group suggested that home and host countries should

explore, with the h~lp of appropriate United Nation

bodies, the possibility of concluding an international

agreement regulating the issue. of extra t·erri tory of

jurisdiction. This is especially important in the case

of anti-tTust legislation. Such an agreement would be

helpful to avoid misunde~standings and recriminations.

39. United Nations Department of Economic and Social Affairs, The Impact of Multinational Corporations on Development and on International Relations (E/5500/ Rev.l., ST/ESA/6), 1974, p.47.

23

THIRD WORLD CONCERNS: ECONOMIC, SOCIAL AND POLITICAL

During the last decade the Multinational Corpora-

tions (MNCs) have become increasingly a subject of contro-

versy. There is little doubt t.ha t the economic power and

financial muscle of MNCs have presented challenges to

the autonomy and independence of governments of developing

nations. But the specific effects of MNC operations on

the existing international economic and political system

are a matter of debate, as is evident from the scrutiny of

the large number of studies undertaken in the subject. 40

While the governments of both developed and developing

countries have to cope with the enormous power of MNCs,

the problems as perceived by the governmental leaders of

the two types of countries differ in substance and

intensity. These problems are much more complex in the

developing world. 41 Since the political leadership in

many third world countries remains pre-occupied with

economic development and nation building, ·any potential

impairment of sovereignty is perceived as a threat to

this process by the leaders and general public alike. In

40. For a review of the 1 i tera ture, see Elizabeth Crump Hansen, Theoretical Perspectives on the Multinational Corporation: ~Synthesis (Paper presented at the 1976 Annual· Meeting of the International Studies Associa­tioh, Toronto, Canada, 27 February 1976).

41. It has become fashionable to identify also a fourth and perhaps fifth world depending on the economic status of a particular less developed country. The poorest of them belongs to the last category.

24

~ddition, the political leadership m~y uall fear th~~ its

position of authority and prestige could be undermined.

Indigenous domestic enterprises are not eager to see the

establishment of competing MNC subsidiaries which might

produce better, yet low-priced goods, and whose economic

strength might be able to preempt the loan resources of

local banks, thereby severely reducing their own borrowing

opportunities. Hence, pressures are exerted on the

respective host governments to oppose the entry of

MNC subsidiaries. Majority of developing countries lack

governmental experts to negotiate with the highly sophi-

sticated representatives of MNCs either to bargain out an

agreement on the establishment of a new subsidiary or to

set up effective policies to control the activities of

MNCs. For instance, it is well known that the MNCs

are capable for . transfer-pricing, which allows them to

manipulate profits across national boundaries and take

them in a subsidiary located in a country with the lowest

ta.x system, and, their abi 1 i ty to withhold technologies

that might be badly needed by the host government. It is

obvious that such negotiations require a high level

f k . 11 th t f t t t. 42 o s 1 on e par. o governmen represen a 1ves. By

effective economic, poli t·i ~al and cultural dominance for

42. Sanjaya Lall, "Transfer-pricing by Multinational Manu­facturing Firms," Oxford Bulletin of Economic and Statistics (Oxford), vol.35, August 1973, pp.173-95.

25

certain countries, notably the United States over the

remainder of the world, multinational corporations

have redistributed wealth (as prescribed by third world

. nations) from underdeveloped periphery to the center of

industrial power and decision making. 43 Chile is a case

in point. It illustrates the expropriation of wealth by

MNCs. Chile traditionally relied on the export of a

single raw material (copper comprises approximately 80 per

cent of Chile's export). Foreign firms penetrated

and domina ted Chile's economy and repatriated profits out

of Chile. From 1945 to the early 1970s, American firms

remitted $7.2 billion from Chile while providing only

. 44 $1 billion in capital. Developing countries perceive

multinational corporations as perpetuating the dependency

of the Third World on industrialized nations, even with

the passing of formal colonial relationship after World

War II. Critics of Mf:l'Cs, using the dependency framework,

warn that participation in the world capitalist system

of trade~ investment and organization ~f production

43. John Gal tung, "A Structural Theory of Imperialism,."

44.

Journal of Peace Research (New York), vo1.13, 1971, p. 81; Paul Baran, The Political Economy of Growth (New York), 1968, chs.5-7; Thomas · E.Weisskopf, "Capital ism, Underdevelopment and Future of the Poor Countries," in Jagdish N. Bhagwa ti, ed., Economics and World Order from the 1970s to 1990s (New York, N.Y. , 1972)' pp. 43-75. -

Steven Rosen, "The Open Door Imperative and U.S. Foreign Policy," in Steven Rosen and James R.Kurth, eds., Testing: Theories of Economic Imperialism (Lexington, 1974), p.125.

26

creates an international polarization between the sophi-

sticated industrialized countries in the center of

the system and the developing nations at the periphery

of the system. The needs of industries in the Center set '

the order of priorities. Income, status, power and

consumption patterns radiate from the multinational

corporations headquartered in world cities located in

the Center of the capitalist system. Dependency theorists

divide the world outside the capitalist center into two

levels - an intermediate stage and the periphery. One

step below the corporation headquarters in world cities

are the plants located in the lesser cities at the

periphery of the center or at the core of the periphery

which manage the day to day activities of the firm. These

lesser cities adjust to the commands emanating from the

upper echelons and engage in production and distribution

of goods. Finally, at the periphery, nations produce raw

rna terials needed by the center and carry out certain

phases of industrial production under foreign control.

The expansion of MNCs according to the dependency '

theory shaped the growth and development of the world

capitalist system. MNCs with their integra ted vertical

hieratchical structure, control their far flung operations

according .to a globa 1 strategy without regard to the

interest of developing countries. Under the theory of

27

45 dependency, the growth of the developing countries

occurs as a reflex of the expansionist drive of MNC and

the economic system of the home countries. The level of

business concentration changes along three 1 ines as the

world divides between the center and the periphery; by

trading partner, by commodity and by type of activity.

The center has .. many trading partners, whereas a country

in the periphery generally establishes trade relationships

with only one or two nat ions. The ·-center produces and

trades in a diversified range of products, while the

periphery concentrates on a few primary exports to

pay for its imports of capital intensive high skill

activities with significant spin off effects in other

areas. The periphery on the other hand, concentrates on

labour intensive, low ski 11 activities with a 1 imi ted

spin off thrust.

Economic Factors

Economic problems are the main focus of the depend-

ency theory. Developing countries have declining terms of

45. A vast literatur~ on the issue of Third World depend­ency has evolved during the last few years. For example, the entire issue of International Organiza­tion (Cambridge), vol.32, Winter 1978, is devoted to dependency and dependence with five articles focusing on theoretical aspects and four dealing with regional problems. See also Richard B. Fagan, "Studying Latin American Politics: Some Implications of a Dependence Approach," La tin American Research Review (Pittsburgh), 12, 1977, pp.3-26; Robert R.Kaufman, Harry I.Chermotsky and Daniel S.Geller, "A Preliminary Test of the Theory of Dependence, " Comparative Politics (New York), 7, April 1975, pp.303-30; Benjamin Cohen, The Question of Imperialism (New York, N.Y., 1973), which is a _critical analysis of depend­ency theory; and Theodore Moran, Multinational Corpora-tions and the Politics oj Dependence (Princeton,N.J., 1974).

28

trade and are plundered by firms engaged in the extraction

of raw rna terials. Reliance on foreign technology yields

technological dependency and places the local domestic

firms in an un~air competitive position. Acquisition of

local domestic firms by MNCs lays the basis for foreign

control over a nation's industrial b~se. MNCs also gain

control over the fragile financial and capital markets

of developing countries . The operation of MNCs in the

. raw rna terial and manufacturing fields generates 11 excess 11

profits, which the MNCs repatriate· to their home countries,

adversely affecting the host state's balance of payments. . I

This leads to the weakening of a country.' s capacity to

develop its local capital markets and its capacity to

create an independent technological base.

Raw Materials, Terms of Trade and Resentment

Developing couQ. tries repeatedly allege that their

respective raw material and commodity exports face declin-'

i ng terms of trade. Terms of tra'de deteriorate when the

prices of improved goods in developing countries rise

faster than the prices enjoyed by the exports from such

countries. The prices of developing raw rna terial and

commodity exports have failed to keep pace with the

upward. rise in the price of manufactured goods from

developed countries. In support of the theory of dec 1 in-

ing terms of trade, a study by the Secretariat of the

29

United Nations Conference on Trade and Development

(UNCTAD) indicates that between 1953 and 1972 the terms of

trade total value of community covered, which included

about two-thirds of the total value of commodity exports

excluding petroleum, declined on average about 2. 2 per

cent 46 annually. The report concluded: "The analysis

presented in ... this note would appear to establish fairly

conclusively that the net barter- terms of trade of

a larger number of primary commodities, accounting

for the bulk of the commodity exports (excluding petroleum)

of developing countries, have deteriorated substantially

over the last 25 years". 47 .The ownership and exploitation

of agricultural land and natural resources by MNCs enraged

developing nations. MNCs engaged in the extraction of

raw rna terials were viewed as drawing non-renewable

resources too. rapidly from the soil, seeking only high

profits and lacking any interest in balanced local deve­

lopment.48 Considerable skepticism pervaded by developing

nations regarding the value returned to such nations by

46. United Nations, Conference on Trade and Development, Secretariat, Terms of Trade 'of Developing Countries: Note ~ the UNCTAD Secretariat (UNCTAD/CD/M.SC.60, GE, 75-46608) -

47. Ibid., p.14.

48. Paul Baran, Political Economy of Growth (New York,N.Y. 1968), p.197. See also Peter B.Evans, "National Auto­nomy and Economic Development: Critical Perspectives on Multinational Corporations in Poor Countries," in Robert O.Keohone and Joseph S.Nye, eds., Transnational Relations and World Politics (Cambridge, 1973),

pp.325-42.

30

by direct investment in mineral extraction.

The Manufacturing Operations of Multinational Corporations

The developing countries in 1950 had switched to

new strategies namely encouragement of MNCs in manufactur-

ing industries in an effort to reduce their dependency on

the import of manufactured goods. In turn the MNCs

exacerbated the economic plight of developing countries by

adopting various methods to repatriate their profits

through transfer pricing and various restrictive business

practices, the transfer of inappropriate technology, lack

of local research and development which had an adverse

impact on economic development of developing countries.

One of the factors having aroused the greatest apprehen-

sian of developing countries about the activities of

MNCs subsidiaries operating within their territories has

.been intra firm transfer-pricing. In order to raise

global profits, prices on intra firm transfers of goods

produced in different countries, or, on the fees set for

technology (patents, licences) charged to subsidiary

across national boundaries are set artificially in such

a way as to take advantage of the lowest taxes in

countries involved and the most favourable currency

exchange rates, profits can be increased further by the

purposeful search for low-tax countries in which to

establish production and assembly facilities. In certain

cases, under priced products may be shipped to a tax-

31

heaven country such as Bahamas and re-exported with highly

inflated prices to a third country for final sale. The

result is of tax revenue. The revenue would have occurred

had transactions been made between independent buyers and

sellers.

Transfer Pricing

Intra firm transactions between parent and its

subsidiaries enable MNCs to maximise its overall profits.

These infra firm exchanges replace the market transactions

and enable multinational firms to evade many of the checks

on corporate behaviour provided by laws enacted by the

49 host country. Intra firm transactions take a number of

forms which include:

i) Locating profits in a subsidiary in a country with

low tax rates (conversely restricting profits where

taxes are higher) in turn redUcing a MNC total tax

burden on its worldwide operations.

i i) Withdrawing funds from a given . subsidiary (for

instance, in the ·face of 1 imi ts on the repatriation

of profits or the expectation of foreign exchange

losses if a country devalues its currency) by

increasing prices on the goods sold to that

49. William M.Carley, "Profits Probes: Investigations Beset Multinational Firms with Stress on Pricing," Wall Street Journal (New York), 19 December 1974, p.1; Sanjay Lall, "Transfer Pricing by Multinational Manufacturing Firms," Oxford Bulletin of Economics and Statistics,vol.:E,August 1973, pp.173-195:"

32

iii) Financing a subsidiary by reducing prices on goods

sold to it by other subsidiaries or the parent in

a multinational corporation.

Other transfer pricing techniques include the

allocation of overhead and joint costs (such .. as explora....:

tion, research and development and advertising) and over-

pricing the plant and equipment used to set up or expand

a foreign facility. 50 The impact of- transfer pricing on

a developing country is that a subsidiary located in such

a country must pay higher prices for imports, especially i

for so-called intermediate goods. These intra firm

transactional techniques, particularly the reduction · of

prices of exported i terns, may produce a loss of taxes

and foreign exchange earnings for a developing . country.

A number of studies indicate that MNCs generally

engage in transfer piicing in developing countries. MNCs

usually overprice the goods imported by developing

countries and underprice the export items produced by such

nations. Barnet and Muller studies in La1;in America had

indicated an overpricing of a wide range of pharmaceutical

imports in Colombia by global firms, 155 per cent above

50. Sidney M. Robbins and Robert B. Stobough, Money in the Multinational Enterprise: ~ Study of Financial Policy (New York, N~Y., 1973), p.91. See also Sanjaya Lall, "Transfer-pricing by Multinational Manufacturing Firms," Oxford Bulletin of Economic and Statistics

vol.:E,August 1973, pp.173-95.

33

world market prices in 1968 and 87 per cent in 1967-1970,

as compaV€d with a 19 per cent overpricing on the products

imported by locally owned firms. Selected rubber imports

were overpriced by 44 per cent in comparison with zero

overpricing by local firms. Some chemical imports

by subsidiaries of global firms were overpriced by 25 per

cent and electrical components by 54 per cent. For

eleven of the fourteen foreign firms surveyed in Colombia

in 1966 and 1967,. the profits accruing from overpricing

exceeded the declared profits. The Colombian pharmaceuti-

cal industry in 1968 reported that profits comprised

3.4 per cent of the effective return, royalties 14

per cent and overpricing 82.6 per cent. 51 In similar

pattern of overpricing, imported items pervaded the

foreign subsidiaries of the drug companies in other Latin

American countries. In the Ghilean Pharmaceutical

industry, imports by foreign subsidiaries were overpriced

by range of 30-500 per cent and· in Peru, by a factor of

20-300 per .cent. 52 Conversely, foreign subsidiaries of

51. United Nations Conference on Trade and Development (UNCTAD), Board of the Cartagena Agreement, Policies Relating to Technology of the Countries of the Andean Pact: Their Foundations (TD/107), 29 Pecember 1971, pp. 128-9; Ronald Muller, "The Multinational Corpora­tion and the Underdevelopment of the Third World," in Charles K.Wilber, ed., The Political Economy of Development and Underdevelopment (New York, N.Y.,1973) pp.143-4.

52. United Nat ions Conference on Trade and Development, Policies Relating to Technology of the Countries of the Andean Pact: Their Foundations (TD/107/Corr.l~ 21 March 1972, para 128-9.

34

MNCs in Colombia under priced a number of export products,

including timber, processed fish and precious metals. 53

Another study of La tin American countries during

the 1966-69 period suggests that MNCs underpriced exports

f th · b · d · · b of 40 per cent. 54 · rom e1r su s1 1ar1es y an average

Despite this evidence one expert noted: "It is practically

beyond question that MNCs manipulate internal price

relations so as to locate their profits either in the

country of the parent company or in countries where .

taxes are lowest". 55 A report by the United Nations Group I

of eminent persons studying the impact of MNCs estimated

that more than one-quarter of the value of all internatio-

nal trade is in goods of an intra group 56 character.

Additional intra corporate transactions occur in services,

research and development and administrative functions.

53. United Nations Conference on Trade and Development, Policies Relating to Technology (TD/107), pp.128-9.

54. Ronald Muller and Richard Morgenstern, "Multinational Corporations and Balance of Payments on LDCs: An Economic Analysis of Export Pricing Behaviour," KYKLOS (Basil, ·switzerland), ~ol.27, 1974,pp.304-21.

55. Fernand Braun, "International Control from the Stand­point of the European Economic Community," in Don Wallace, ed., Iritefnitional Control 6f Investment: The Dusseldorf Conference on Multinational Corporations (New York,N.Y., 1974), p.54.

56. United Na i ions, Department of Economic and Social Affairs, The Impact of Multinational Corporations on Development and on International Relations (E/5500/ Rev.l, ST/ESA/6), 1974, p.88.

35

The group of eminent persons concluded, "The scope for

price manipulation is therefore quite extensive". 57 In

the past the MNCs have possessed, and probably in the

future they will possess the balance of advantage regard-

ing transfer pricing. Governments in the developing

countries face number of difficulties in controlling

intra firm transactions. As George Ball recently stated,

"Though the host government can insist on seeing the books

of the local subsidiary, it cannot examine the books of

the parent and even if it could not have the highly

trained manpower to make informed reallocations of earn-

ings ~nd costs." 58 Doubts exist as to the ability

of a nation to gain sufficient knowledge and to administer

the laws and regulations controlling transfer pricing in

non-corrupt manner. It is difficult to establish an

arm's length price for goods, especially in oligopolistic

markets for complex products. Sophisticated intra firm

transactional techniques, such as the ability to juggle

royalty and management fees and other overhead costs,

may become more prevalent.

57. Ibid., p.89.

58. George W. Ball, "The Relations of the Multinational Corporations to th~ 'Host' State," in George W. Ball, ed., Global Companies: ·The Political Economy of World Business (Englewood Cliffs, N.J., 1975), p.65.

36

Restrictive Business Practices

During the post-World War II era, the developing

countries encouraged foreign direct investment in manu-

facturing plants that would produce import substitute

items. These industries required, however, additional

imports in the form of ca.pi tal goods, plant and equipment

and raw rna terials. Lack of effective demand at large in

host-state market had impeded profitability. Developing

countries had to penetrate the markets in other countries

by exporting items to earn vitally needed foreign exchange I

and to absorb excess plan capacity. The export restric-

tions imposed by the headquarters of MNCs over foreign

subsidiaries tended to block the strategy of developing

countries. The existence of export r~strictions contribu-

ted to a relatively poor performance by the subsidiaries

of United States Corporations in Latin America. Manufac-

turing affiliates in Latin America exported less than 10

per cent of their total sales, while in Europe, American

subsidiaries averaged 25 per cent of their total sales. 59

The imposition of restrictive business practices including

export constraints by MNCs on their foreign subsidiaries

appears pervasive. A study by the Andean Common Market

focusing on 400 transfer of technology contracts revealed

59. David Belli, "Sales of Foreign Affil~ates of US Firms, 1961-65, 1967 and 1968," Survey of Current Business, (Washington,D.C.), vol.50,0ctober 1970, pp.18-20.

37

that approximately 81 per cent of such contracts prohibi-

ted the use of the transferred technology for producing

export goods. An analysis of 451 contracts by the

country showed the following prohibitions on exports:

Bolivia, 77 per cent of the contracts, Colombia 77 per

cent, Chi la 73 per cent, Ecuador 7 5 per cent and Peru 89

per cent. Overall different industries that figured

were as follows: Textiles 88 per ce_g.t of the contracts,

Pharmaceuticals 89 per cent, Chemicals 78 per cent, and

Food and beverages 73 per cent. The contracts surveyed

also contained a high percentage of exports restrictions,

for example, to certain countries or areas. Two thirds of

the technology contracts in Bolivia, Colombia, Ecuador

and Peru, which the Andean Group analysed, also had tie in

clauses requiring the purchase of intermediate and

capital goods from the same source as the know-how. 60

Other studies by the United Nations Conference on Trade

and Development have indica ted the extent of restrictive

t. 61 prac 1ces. For ip.stance, one study indica ted that 40

· per cent of the technical collaboration agreements between

foreign corporations and public and private firms in India

60. U.N.Conference on Trade and Development, Policies Relating to Technology (TD/107) and (TD/107 Corr.1), paras 128-9.

61. John M.Kline, International Codes and Multinational Business: Setting Guidelines for International Busi­ness Operations (Westport, Connecticut, 1985), pp.65-66.

38

contained export restrictions. 62 Sixty-five per cent of

the contracts analyzed in a Philippines study embodied

provisions restricting 63 exports. The parent entity

desires to control the knowledge it disseminates and the

management of its affiliates. The global headquarters

uses export market allocation to preserve its distribution

channels and network. Firms producing highly specialized·

industrial products cannot completely avoid export

restrictions and the economic conditions in various

nations may require such measures. Defenders of MNCs

point out that export restrictions may stem from cost-

raising import substitution policies and maintenance of

an over-valued currency by Third World nat ions. 64 A

developing country seeks manufacturing plants for import

and export purposes, reliance on the foreign subsidiaries

of MNCs which creates a number of problems including the

appropriateness of technology transferred, types of

products produced, local employment possibilities, lack of

research and development and a variety of impediments

imposed by the existing patent system .. In assessing the

employment picture, the Department of Economic and Social

62·. United Nations Conference on Trade and Development, Restrictions on Exports in Foreign Collaboration Agreements in India (TD/B/389), 1971.

63. United Nations Conference on Trade and Development, Secretariat, Restrictive Business Practices (TD/122/ Supp.1), 7 January 1972, pp.38-49.

64. Harry G. Johnson, "Multinational Corporation as a Development Agent," Columbia Journal of World Business vol.5, May-June 1970, pp.25, 29.

39

Affairs of the United Nations stated, "On the whole the

net employment impact on the host countries is positive

since extreme cases of destruction of local industries

and wholesale displacement of labour are rare". 65 Another

view exists that MNCs transfer sophisticated technology

that is irrelevant to the needs of developing countries,

thereby further stunting a nation's capacity for self-

sustaining growth. The technology employed in manufactur-

ing facilities of subsidiaries may also reduce job opport-

unities in economies characterized by unemployment rates

in excess of 30 per cent. Underemployment is also exten-'

sive. Migrants from the country side to the cities swell

an already redundant urban labour force. 66 An assessment

of 257 manufacturing firms in Latin America indicated that

subsidiaries of MNCs used one-half the number of employees

per $10,000 of sales as do local domestic firms. 67 MNCs,

because of their self-interest and existence of small size

market in the developing countries have a reluctance to

65. United Nations, Department of Economic and Social Affairs, Multinational Corporations in World Develop­ment (ST/ECA/190), 1973, p.52.

66. United Nations, Department of Economic and Social Affairs, Summary of the Hearings Before the Group of Eminent Persons to Study the Impact of Multinational Corporations on Development and on International Relations (ST/ESA/15), 1974, pp.397-404; Raul Prebisch Change and Development _ La tin America's Great Task (New York, N.Y., 1971), pp.30-31; Ronald Muller, "The Mul tina tiona 1 Corporation and the Underdevelopment," in Charles K.Wilber, ed., The Political Economy of Development and Underdevelopment (New York, N.Y.,1973) pp.132-5.

67. Ibid., p.133.

40

modify or adapt existing policies, practices, products or

social problem-solving technology capable of producing

cheap basic goods. For instance, American firms were

reluctant to concentrate on small, efficient cars (or mass

transit vehicles) to meet the transportation requirements

of developing countries. Even after the introduction of

small cars in Latin America, parent corporations required

their subsidiaries to concentrate the bulk of their

advertising on larger more profitable vehicles. General

Motors finally began assembling a low-cost basic transpor-

ta tion vehicle in Ecuador, the Philippines and Malaysia.

General motors Vauxhall plant in the United Kingdom

supplied the required engines, transmissions, suspension,

rear axle and steering systems for this vehicle. Ford

assembles in the Philippines for sale in the Asia-Pacific

region, a multipurpose vehicle with its power train

supplied by high-volume Ford plants. Apparently~ auto

manufacturers have given little thought to the production

of mass transit vehicle for Third World Nations. 68

Impact on Industrial Organization Patt~rns

The presence of MNCs in developing countries may

increase economic concentration and produce a loss of

68. Organization of American States, Executive Secretariat for Economic and Social Affairs, Sectoral Transnational Enterprises in Latin America: motive Industry (SG/Ser.G.42/3), pp.16-17, also U.N.Department of Economic and Social Summary of Hearings, p.87.

Study of The Auto-

20; see Affairs,

41

local domestic entrepreneurial opportunities. The

developing countries express the fear that foreic;n

industrial dominance and control of key industries exist.

Among the 500 largest manufacturing firms in Brazil,

foreign subsidiaries controlled 37 per cent of the

total output; MNCs owned 100 per cent of that nation's

auto and tyre production, 67 per cent of the machinery

output and 68 per cent of the electrical appliance

machinery output; MNCs controlled 59 out of the 100

largest manufacturing concerns. In Mexico, 100 per cent

of the output in rubber product transportation rna terials

was foreign controlled with 75 per cent of industrial,

chemical and tobacco industries under foreign control. In

pre-Allende Chile, in each of seven key industries from

one to three foreign firms controlled at least 51 per cent

of production. 69 As one expert concluded, "The world

level of concentration is much higher than it would be if

foreign investment and domestic mergers.were restricted":o

Foreign subsidiaries thwart local competition in various

ways. Affilia~es of multinational firms have grown by

68. UN Department of the Economic and Social Affairs, Multinational Corporations, pp.20-21; Muller, n.66, p. 130; .Jon a than Kandell, "Braz i 1 ians Vo:l ce Growing Fear of Dominance by Multi nat ion a ls," New York Times, 26 January 1976, p.35.

70. Stephen Hymer, "The Efficiency (Contradictions) of Multinational Corporations," American Economic Review (Nashville, TN);nlJ:r), May 1970, p.443.

42

acquiring firms in the main sectors of a country's private

71 economy. For instance, more than one-third of the

direct private investment by American firms in Peru

and Colombia during the period 1958 to 1967 involved the

. . t. f l l f. 72 acqu1s1 1on o oca 1rms.

Impact on the Balance of Payments

Multinational Corporations also place a drain on a

nation's balance of payment by repatriation of profits

generated by foreign subsidiaries and charges for patents,

trademarks, licenses, know-how, management; and service

fees. Between 1960 and 1968 American· multinational firms

repatriated 79 per cent of their net profits form La tin

American operations, while from 1965 to 1968, 52 per cent

of profits genera ted by the manufacturing subsidiaries of

United States firms operating in Latin America were

repatriated to the parent ' . 73

corporat1ons. A .study

of 13. developing countries that represent 65 per cent of

the population and 56 per cent of the total gross national

71. Louis Turner, Multi national Companies and the Third Wotld (New York, N.Y., 1973), pp. 49-50. See also Carlos F.Diaz Alejandro, "Direct Foreign Investment in La tin America, II in Charles P. Kindleberger, ed., The International Corporation: A Symposium (Cambridge, 1970), p.331.

72. Constantino Vai tsos, 11 Commen t, II in Don Wallace, ed., International Control of Investment: The Dussel­dorf Conference on Multi nat ion a l Corporations (New York, N.Y., 1974), p.129.

73. Richard J. Barnet and Ronald E. Muller, Global Reach: The Power of Multinational Corporations (New York,N.Y. 1974), p.160.

43

product of all Third World nat ions showed the tot a 1 cost

in the late 1960s for patents, licenses, trademarks, know-

how, management and services fees to be in excess of

$105 billion per year, or more than half the amount. of

direct private investment in these developing countries.

The costs for these i terns grew at the rate of 20 per cent

per year, thereby absorbing an ever-increasing share of

t . 74 expor earn1ngs. The net result is an outflow of funds

from Third World nations. According to one estimate,

between 1946 and 1967, for each dollar entering La tin

America, an amount approximating $2.7 was negotiated. 75

Between 1965 and 1970, the net investment inflow of 43

developing countries was 30 per cent of the outflow. 76

This deficit has been a source of tension between MNC

subsidiary and developing countries, especially when local

MNC operations have been carried on for several years

without inflow of new capital. There are other factors

that have impacts on the balance of payment of developing

countries like the export restrictions set by the MNCs to

suit their own objectives or tied 7'7 purchases. Such

7 4. UNCTAD, Trans fer of Technology (TO 1106), 10 November 1971.

75. Theontonio Dos Santos, "The Structure of Dependence," American EconQmic Review,vol.OO,May 1970, p.234.

76. UN, Department of Economic and Social Affairs, Multi­nat ion a 1 Corporations in World Development ( ST I ECA 1 190), 1973, p.54.

77. Tied purchases are acquisitions of goods or services, including techno logy which an af fi 1 ia te has to make from the parent company or from another affiliate.

44

activities may reduce undesirable competition among the

affiliates, but at the same time they damage the prospects

of the host country for the expansion of exports from its

territory. Another

goods imported from

important factor is overpricing of

an MNC affiliate outside the host

country, and under pricing of products manufactured in

the host country by the affiliate when exported to a

third affiliate abroad. This creates problems in third

world towards balance of payments.

Cultural and Social Factors

The MNCs shape and distort the prevailing cultural

patterns in the, host countries. The Westernis·a tion,

particularly the Americanized tendencies in cultural

changes pose a devastating challenge to cultural integrity

of third worlds MNCs transmit the values and life styles

of global capitalism of developed countries. The elite in

the developing countries start following the consumption

pat tern of deve lop.ed countries. By imitating Western

'consumption patterns, the elite create a

others at tempt to

subsidiary adopt

established by the

copy. Local employees

pattern

of a

that

MNCs

a

and ~mployees. The

lifestyle modelled on the image

its executives parent corporation,

ethic of consumption soon pervades

45

11 . t' f . t 78 a maJOr sec 1ons o soc1e y. Generally, MNCs reproduce

the products and ideas existing in the developed countries.

This creates an urge for the local domestic firms to

follow the taste and consumption patterns of MNCs in order

to cater to the consumption need of the . mass of citizens

in developing countries, which runs quite contrary to

the basic needs of consumption pattern of developing

countries in order to suivive the competitive market. For

instance, let us illustrate this with reference to MNC-

genera ted social needs and the consequent profi t-ori en ted

production. The manufacture and sales of automobiles in . '

a developing country absorbs resources, manpower (which

can be better uti 1 i zed for mass transportation) and at

the same time, creates environmental problems and leads to

the import of petroleum which, in situations when it is

not available and refined locally, increases the nation's

balance of payment difficulties. MNCs. have successfully

marketed (through advertisement) food products such as

soft drinks that provide little nutritional value and

drain the disposable income of individuals who can· hardly

afford to waste money. Processed food and beverages are

78 .. Peter B. Evans, "National Autonomy and Economic Deve­lopment: Critical Perspectives on Multinational Corporations in Poor Countries," in Robert 0. Keohane and Joseph S. Nye', eos. , Transitional Relations and World Politics (Cambridge, 1973), pp.332-5. See also Barnet and Muller, n.73, pp.172-84.

46

now replacing the local nutrition and traditional food

habits among the developing countries. The over zealous

promotion of processed foods in developing countries

diverts a significant portion of a family's income to

these i terns and creates severe health hazards among the

poor. 79 This happens in greater number among the poor

when the use of processed foods is not accompanied by

required changes in habits and ways of doing things.

For example, the probabiii ty of an over-dilution and more

economical way of utilization of processed milk food for

children leads to inadequate inta~e of nutrients by

children further leading to ·malnutrition, illness and

higher rates of mortality. Unhygienic pattern of serving

the processed milk in contaminated bottles further

promotes bad health and illness among children. The stiff

advertisement and market1ng tactics of MNCs in a way mould

·the consumer pattern which creates . demand for goods and

services of MNCs. Barnet and. Muller contended, that the

"advertiser is like a friend who tells you about all the

wonderful things in the world that you did not even know

existed". 80 A loss of national control over communications

79. Robert- J. Ledogar, US Food and Drug Mul tina tions in La tin America: Hungry for Profits, with an in traduc­tion by Ralph Nader (New York,N.Y., 1975), ch.9; see also D.B.Jelliffe, "Commerciogenic Malnutrition?" in Nutrition Review (Toronto), vol.30, September 1972, pp.199-205.

80. Barnet and Muller, n.73, p.176.

47

media may result from the domination of consumption

patterns by MNCs.

Television and radio carry messages designed to

stimulate conumption. Motion pictures and television

create the image of Western society and its value the

thrill of violence and consumption. Global advertising

firms, particularly American advertising agencies, account

for an increasingly larger proportion of advertising in

developing nations. 81 The harmful impact of marketing and

sales technique may be seen in the shift from local

beverages (or local soft drinks) to international brand

names. Likewise, the spread of 400 Kentucky fried chicken

outlets (a division of the American firm Heublein, Inc.)

to 30 countries, and the international activity of

McDonald's and Burger King (Pillsbury Co), evidences the

world wide proliferation of American "Culture". 82 The

cultural colonization by MNCs undermines self-images in

developing countries. Instead of basic food, health and

housing needs, the ·consumption pattern fostered by foreign

81. Herbert Schiller, Mass Communication and Americans (New York, N.Y., 1969), pp.80-85; see also Alan Wells, Picture Tube Imperialism: The Impact of US Television on Latin America (Maryknoll, N.Y., 1972), pp.145-8.

82. Herbert Schiller, "Madison Avenue Imperialism," in Transaction (Ottawa), March-April 1971, p.55; James A. Field, "Transnationalism and the New Tribe," in International Organisation, vol.25, Summer 197l,p.353; David Osterberg and Fouad Ajami, "The Multinational Corporation: Expanding the Frontiers of World Politics," in Journal of Conflict Resolution (London), vol.15, December 1971,-pp.457-68.

48

direct investment stimulates wrong appetites and leads to

misallocation of resources, and contributes to a world

wide homogenization of life style and values.

Political Factors

Conflicts and tensions often characterize the MNCs

host government relations. As corporate citizens of many

nations, MNCs are confronted with divergent national

policies, economic and social systems and values. As

agents of technological and cultural changes they na tur­

ally provoke diverse reactions in host countries. The

criticism of MNCs has generally focused on the drain of

local manpower or natural resources to the disadvantage of

the host nation. At times there is also a conflict

between the national interests of host and home countries

often due to over-centralization of managerial deci sian·

making in the home country. Other areas of conflict are

location of advanced research in home countries, the

insensi ti vi ty of ,home country's management of local laws

and dustoms, investment behaviour that destabilizes foreign

economies and political support to politically active

groups and parties in the host state.

Since both the home and the host states seek to

utilize the MNCs for their own objectives, basic question

of jurisdiction and sovereignty arise in MNC-host state

49

relations. The parent state at times enacts regulations

that seek to hasten and enlarge the repatriation of

profits and management fees from the subsidiary. They may

also hinder and restrict the outflow of new capital for

investment. Other issues relate to different objectives

of parent and host states regarding trade, domestic

employment, currency stability, national security,

Research and Development efforts and foreign policy

concerns. Parent states and host states may also clash as

a result of their attempts to influence the behaviour

of 'MNCs. The policies of Peru, Bolivia, Chile and Cuba

to nationalize US business enterprises in their countries

had a negative effect on the relation between these

countries and the United States. The MNCs, in addition,

as a source of conflicting relations between parent and

host states, may also be a vehicle by which host or parent

countries try to influence one another. The well known

ITT-CIA collaboration against the Allende government in

Chile underlines that the MNCs may be used as vehicle for

US foreign policy efforts.

The fear is that MNCs may serve as foreign policy

conduits. The reverse is that the host state attempts to

influence the parent state through MNCs. In response to

President Nixon's August 1971 Declaration of imposing

10 per cent import surcharge, many US firms with subsidia­

ries in Latin America loudly decried and sought the rapid

50

repea 1 of the measure s i nee Latin America was already

running a trade deficit with the parent home state. There

are similar indications of Arab States attempting to

influence US and Western policies towards the Middle East

problems through the agency of MNCs. The impact of MNCs

also becomes evident in competition promotion of MNCs by

different home states. For instance, the expansion and

success of American-based MNCs has ied to a number

of European states to counteract these challenges by

rationalizing and consolidating their own

compete with foreign firms. The parent

some cases seek to ensure the success

companies to

governments in

of their own

MNCs by actively supporting them to the detriment of

MNCs belonging to a different nationality.

Developing countries are generally characterized

by fragile economic structure with a weak political base,

an underdeveloped and sometimes traditional, governmental

and legal systems and, by the absence of competent,

independent and knowledgeable managerial experts. There

exists vast economic differences between the rich and the

poor. The rich belonging to developing countries tend to

identify with Western p~tterns of lifestyle. Thus

MNCs create client groups whose interests, privileges and

status derive from their ties with foreign firms. These

client groups have a vested interest in_ perpetuating the

51

predominen t posit ion of MNCs in local economy. In a

political process characterized by a lack of widespread

participation, the ability of MNCs to isolate national

elite from the masses enables them to undermine national

political autonomy and to erode national identity. 83 The

other situation is different when the traditional elite

is in power. Other observers reject this pessimistic

view of "close tie" with local elite groups. A study of

foreign copper companies and their alleged regime irr Chile

from 1955 to 1970 indicates that leaders of the tradi-

tiona~ upper classes in Chile did not oppose, and in some

instances, led the movement to restrict the activities of

foreign copper 84 producers. Local firms competing with

foreign subsidiaries have perceived their own independent

economic interests, and generally sought to limit the

activities of MNCs. Nationalistic bureaucrats have tended

to make increa~ing demands on foreign interests to garner

additional governmental revenues. 85

83. Andre G. Frank, Capi ta'Lism and Underdevelopment in Latin America (New York,N.Y., 1967), pp.281-318; Paul Baran, The Political Economy of Growth (New York, N.Y., 1968), p.153; Evans, n.78, pp.339-340.

84. Theodore H. Moran, Multi nat ion a l Corporations and the Politics of Dependence: Copper in Chile (Princeton, N . .J., 1974), pp.172-215; see alsoby the same author, "The Alliance for Progress and the Foreign Copper Companies and Their Local Conservative Allies in Chile

1955-1970," in Inter-American Economic Affairs (Washington), vol.25, Spring 1972, pp.3-24.

85. Raymond Vernon, Sovereignty at~ The Multinational Spread of US Enterprise (New York, N.Y., 1971), pp.197-200.

52

Certain MNCs have attempted to subvert a nation's

political process by more direct means than the promotion

of consumer society. Internal stability which makes the

developing countries penetrable and weak had attracted

the MNCs to intervene in domestic affairs of host-develop­

ing countries. For instance, in Chile prior to and under

the regime of President Salvador Allende, MNCs had sought

to subvert the national political process by supporting

and collaborating with forces hostile to a legitimately

constituted government. On . other occasions, MNCs have

sought to utilize their broad financial power to develop

close and favourable relationships with government

officials, though various means including bribery and

corporate funds had been used to support particular

political parties.

Nationalisation

The activities of MNCs in the past had revived the

spirit of nationalism in the develo.t?ing cou.ntries. The

revival of nationalism his resulted in numerous instances

of expropriation of foreign firms in developing countries.

Por instance in Chile, President Salvador Allende natio­

na 1 i zed the big copper mines formerly run by Anaconda

Corporation, Kennecott Copper Mines Corporation and Cerro

Corporation- all US based MNCs with combined book value

53

of $270.7 million. 86 The trend towards take over of

foreign firms is strongest in the Andean block comprising

Chile, Bolivia, Peru, Ecuador and Colombia. On 30 June

1971, the block had made effective stiff foreign invest-

ment code calling for a fade-out of US investments

into minority status within 15 to 20 years. By the end of

1974, foreign-owned banks, advertising agencies, publica-

tions, broadcasting stations, internal transportation

companies and retail companies had to sell 80 per cent of

their holdings to domestic interests. 87 All foreign owned

communications have been nationalized in Argentina,

Colombia, Venezuela, Panama, Guatemala, Mexico, Costa Rica,

El Salvador, Chile, Ecuador, Brazil, Peru and Paraguay.

In certain cases, governments have decided that the

corporations' profits over the years have adequately

compensated them for their investments. In certain

countries, although substantial compensation was provided

for the confiscated property, the funds could not be taken

abroad. ITT has bu i 1 t a hote 1 in Peru with its property

compensation which it could not repatriate. 88 In India,

R6. "Copper Pays High Price for Nationalism," Business Week (New York, N.Y.), 21 August 1971, p.28.

R7. "Learning to Live with Expropriation," Business Week, 10 July 1971, p.34.

RR. "Argentina Taking Over Communications New York Times, 20 September 1970, p.15.

Industry,"

54

due to the domestic political pressure, the intense

lobbying in Parliament by local soft drink producers had

forced Coca-cola to wind up during the Janata regime. In

Zambia, President Kenneth Kaunda who was a long time

opponent of nationalisation of Zambia's copper industry

was hard pressed by the tribal mi 1 i tan ts who. had been

agitating for nationalization of copper industry. Anglo-

American Corporation and Roan Selection Trust, finally

89 had been nationalized by President Kenneth Kaunda.

Many developing countries that had recently become

independent have often been suspicious of MNCs. They

looked upon them as the last remnants of colonialism.

They viewed the foreign investment as synonymous with

imperialist exploitation by the capitalistic countries.

After having experienced the trauma of colonialism which

instilled in them a fear of foreign capital as ~omethi ng

inherently evil, it was used for the exploitation of

resources that, in the view, belong to the people of their

, countries.

THIRD WORLD RESPONSES AND STRATEGIES

The developing countries have come to realize that

they should evolve a realist i'c approach towards MNCs.

Venezuela's President Carlos Andres Perez, aptly expressed

89. "A Friendly Take Over in the Copperbelt," Business Week, 22 August 1970, p.24.

55

the view of many Third World leaders in declaring, "Today,

industrialized nations must share decision-making with us.

We believe in interdependency, but interdependence

among equals rather than an interdependence in which there

are subordinates". 90

I The spirit of nationalism and a

great awareness of the costs and benefits of MNCs have

spurred a more activist posit ion in developing countries.

Pursuit of economic and political object~ves evolved

through three phases: bargaining with MNCs on benefits

enjoyed by them; strengthening national legislation; and

finally, formulating regional' programmes. The goal of

all these strategies has been the same in the developing

countries namely, disassembling the package - the organi-

zation, management, technology and access to markets

possessed by MNCs and capturing excess oligopoly profits.

The host nations hoped that increased loca 1 ownership

would promote development by encouraging entrepreneurship

and demand for MNC products and technology inc 1 ud i ng

marketing methods.

During most of the post World War I I era, the

bargaining of developing countries with MNCs had a sense

of weakness and a lack of experience. Lack of knowledge

relating to the imp11ct of MNCs on a nation 1 s economic,

90. Interview with Venezuela 1 s President Carlos Andres Perez, "What the Third World Wants, " Business Week, no.2402, 13 October 1975, p.56.

56

cultural and political life, and a lack of requisite

technical and administrative skills thwarted efforts to

assess the impact of MNCs and to regulate and control

their activities. Governments of developing countries

acquired the expertise by training nationals in negotia-

tion, taxation, accounting and production, by hiring top

rank international lawyers, accountants and economists and

other academicians and by employing both foreign and

local industrialists, as well as personnel from State

Corporations and advisors from international institu-

t. 91 lOllS. Moving from a more enlightened position and a

growing supply of or access to trained personnel, count-

ries commenced rudimentary assessments of the costs and

benefits of MNCs. 92 The develtiping countries became

aware of the excessive costs of the package traditionally

provided by the manufacturing subsidiaries of MNCs. They

observed that firms transferred inappropriate modes of

technology and adversely affected economic and cultural

pattern by minimizing employment possibilities, d~scourag-

ing local entrepreneurs and stimulating consumption. Many

91. UN, Department of Economic and Social Affairs, The Impact of Corporations on Development and on In terna­tional Relations (E/5500/Rev.l, ST/EST/6), 1974, p.32; see also Theodore H.Moran, "The Theory of Internatio­nal Exploitation in Large Natural Resource Invest­ments," in Rosen and Kurth, eds., n.44, pp.l68-9.

92. Paul Streeten, "Costs and Benefits of Multinational Enterprises in Less Developed Countries," in John H. Dunning, ed., Multinational Enterprise (London, 1971), p.248.

57

other factors also improved the host nat ions bargaining

position. Competition by labour-intensive industries for

new sources of cheap labour benefitted developing coun­

tries. The growing and expanding markets in the develop­

ing countries also worked to make these areas more attrac­

tive to the MNCs.

In the process of intensive bargaining with MNCs,

the developing countries pursued two informal paths:

(a) The host countries imposed and collected higher

taxes and other fees and restricted the financial and

operating policies of existing foreign subsidiaries in

manufacturing units. But the increased complexity of

industrial processes and products lends an esoteric

character to manufacturing activities. The regenerative

nature of man uf act uri ng operations, as opposed to the

extra active activities in the raw material sector,

rendered the

93 pressures.

former less vulnerable to

Faced with these difficulties

governmental

regarding the

regulation of established manufacturing operations, the

dev~loping nations turned to controlling the entry of new

foreign firms into domestic markets as their primary

regulatory strategy.

(b) In the process of negotiating with the foreign

firms, the host countries had a number of firms which

could supply the required types of technologies. This

enhanced developing countries' bargaining capacity. The

93. Vernon, n.8~, p.106.

58

other technique used by the developing countries included

competitive bidding, encouraging new foreign competitors

to challenge established manufacturing operations, and

providing local domestic firms with capital and other

forms of assi~tance to prevent key industries from

falling under foreign domination. They also took advant­

age of the economic and technical ·assistance provided by

centrally planned economies which had sought new partners

and foreign investment towards the development.

The MNCs had adopted new strategies to counter the

new bargaining strategies by developing

MNCs from United. States, Japan and the

countries. The

Western countries

formed new oligopolies to prevent the host nation from

playing off firms from different home countries. Further

the MNCs headquartered in different nations could conspire

to upset the strategy of competitive bidding. In order to

strengthen their bargaining skills, the developing

countries turned to legislation to extract a larger share

of the profits, jobs, mar~ets, technology and managerial

ski 11 controlled by MNCs. The legislation pursued three

basic strategies: (a) limiting the entry of foreign firms

by preserving certain areas for local firms and by

nationalization of key sectors of the economy, (b) requir­

ing local participation in the ownership, management or

r:nntrol of existing and/or new foreign subsidiaries, and

(r:) controlling the transfer of technology through the

59

registration of technology contracts and/or governmental

evaluation and approval of such contracts.

With a view to controlling MNCs, the developing

countries adopted screening foreign investment and

permitting entry only on stringent conditions agreed to

at the outset of the contract. Host nations modelled

their requirements on the Japanese foreign investment

laws. To achieve self sufficiency and sound economic

development, Japan, commencing in 1950, screened foreign

direct investment and permitted only those investments

that could make a positive contribution to the Japanese

94 economy. With the dramatic resurgence of the Japanese

economy over the past quarter century, Japan gradually

relaxed its foreign investment restrictions. The Japanese

example inspired nationally oriented leaders 1n developing

countries to delineate by legislation, general guidelines

subject in each case, to an assessment by an administra-

tive agency covering the activities of MNCs in a number

of areas, including the industries which are opened for

foreign investment. The terms included through screening

are ownership patterns in foreign subsidiaries, rest ric-

94. M.Y.Yoshino, "Japan as Host to the International Corporation," in Kindleberger, ed., n.71, pp.345-69; See also Nori taka Kobayoshi, "Foreign Investment in Japan, " in Isaiah Litvak and Christopher Maule, eds. , Foreign Investment: The Experience of Host Countries (New York,N.Y., 1970), pp.123-60.

60

tions on the remittance of profits, transfer pricing and

other business practices regarded as harmful. A general

pattern has evolved in developing nations. Certain

economic activities, such as transportation, communica-

tions, banking and insurance are reserved solely for

domestic enterprises. In other areas of economic activity,

the developing countries welcome new foreign investment

but mandated local participation by public or private

sector, or, a specified percentage of the ownership of a

foreign subsidiary. Legislation usually covers both new

and foreign investments and take overs of existing local

f. 95 1rms. For instance, Mexican legisl8: tion exemplifies

the trend to delimit the industries in which foreign

firms can invest and to regulate the ownership position

of MNCs. 96 India favours technical colloaboration

agreements with foreign corporation, but without any

foreign ownership or with a minority ownership position.

The Indian Government has permitted foreign majority

ownership in fields where India has made little industrial

progress, where the cost of imported equipment remains

high, or, where export poss i bi 1 i ties stand to reduce the

95. "The World Economy: Tension with Host Countries: New Era for Multinations," Business Week, no.2338, 6 July 19 7 4 , p p . 7 3 -7 4 ; "M.u 1 tin at ion a~ Find the Going Rougher," Business Week, no. 2389, 14 July 1975, p. 64.

96. Rosemary Warrett, "Mexico: Drawing in the Foreign Investment," in Columbia Journal Business, vol.9, Spring 1974, pp.87-88.

Reins of of World

61

strain on the country's foreign exchange resources. For

example, when IBM set up a subsidiary in India, the

Company insisted on and obtained a 100 per cent ownership

position because of the complex nature of the industry

d th t t . b th C t . 97 Th an e expor guaran ees g1ven y e orpora 1on. e

transf~r of . technology and intra firm pricing have

come under increasing scrutiny and regulation by develop-

ing countries. Governments have sought more information

about the different components of the technology package

which the MNCs provide. From their studies, developing

nations have concluded that the global firms levy, what

are regarded as "exhorbi tant" charges for the technology

transferred to their controlled subsidiaries or to local

domestic firms. Beyond the assessment of the cost

benefit ratios of foreign technology may doom nation-

states to a low status role in the ptesent world system.

The national legislation has led to increased knowledge

and better use of technology transfer problem in the

third world.

The governments of developing countries also moved

to the area of controlling transfer pricing. Host nations

have spot-checked areas most vulnerable to manipulation

97. Phiroze B.Medhora, "Foreign Investment in India," in Litvak amd Maule, eds., n.94, pp.25-31.

62

and have used current infractions as grounds for re-

opening back tax returns. By enlarging the share of local

equity held in a foreign subsidiary, it hoped that

nationals, with the requisite business abilities and time,

will monitor intra firm pricing arrangements. Developing

nations have also imposed other restrictions on MNC,

including requi!ements that nationals comprise a specified

percentage of subsidiary's personnel, its management

team and its board of directors. Limits have been

imposed on profits, repatriation and local borrowing by

foreign affiliates of global gia~s. 98

United Nations System and Responses to MNCs

Responses in the UN to MNCs have a wide-ranging

and potentially far-re~ching effect. By the late 1960s

interest within the UN system on .foreign direct investment

and MNCs had become totally enmeshed with the broader

issues of economic development and 'North-South' relations. '

In May 1974, two General Assembly resolutions sponsor~d by

the developing nations affirmed the principle of permanent

na tiona! sovereignty over natural resources and demanded

that the developed nations assist in financing Third World

Development. The first resolution lead to the Declaration

98. Raymond Vernon, "Future of the Multinational Enter­prise," in Kindleberger; ed., n.71, pp.391-2; see also United Nations Department of Economics and Social Affairs, Summary Hearings, p.162.

63

on the Establishment of a New International Economic

Order (NIEO), designed to bridge the economic gap between

the developed and developing nations. "Programme of

Action on the Establishment of a New International Econo-

mic Order" set out proposals for trade commodities, the

International Monetary System, strengthening the UN System

for enhanced international economic co-operation, indus-

trializa tion and technology transfer and transportation

for the regulation of MNCs.

United Nations Conference on Trade and Development(UNCTAD)

In 1964, UN Conference on Trade and Development

had been formed in order to help the developing nations

expand their trade and increase their resources for self-

sustained growth. At UNCTAD III, May 1972, a resolution

asserted the right of developing countries to take

measures to ensure that foreign capital operates to

advance national development, including limits on the

repatriation of profits by MNCs. In October 1972, a

resolution asserted the sovereignty of states over

their nat ion a 1 resources and right of states to nat iona-:-

1 i ze foreign property in order to regain control over

these resources. International Code of Conduct on the

Transfer of Technology prepared by the UNCTAD Secretariat

at the adjournment of the first resumed session of the

UNCTAD Conference in March 1979 consisted of a preamble

64

and ten chapters. There is agreement on some chapters.

But there are still major outstanding issues that remain

unsolved, namely, ( i) the issue of the legal character of

the code, ( i i) the concept of international transfer of

technology which will govern the scope of application

of the code, (iii) the scope of the practices to be

restricted by the code and ( i v) the question of the

applicable law and the settlement of disputes.

United Nations Industrial Development Corporation (UNIDO)

Another early response to the MNC

the establishment of the UN Industrial

issue was

Development

Organisation in 1967. UNIDO' s utility to the developing

countries stemmed from the assistance it offered in

attracting foreign investors, while ensuring that the

terms. of entry and the operations of those investors

remained consistent with the host's national goals. It

helped developing nations to publicize investment opport-

unities and to formulate incentive schemes. UNIDO II

the Second General Conference in 1975 - adopted the Lima

Declaration on Industrial Development and Cooperation

which contained much of the issues of UNIDO.

International Labour Organisation (ILO)

ILO's interest in MNCs emerged initially out of

its broader commitments in social policy. A meeting of

experts in October 1972, focused on studies relating to

65

employment implications of MNCs activities, the contribu­

tion of MNCs to human resources development problems

relating to collective bargaining by labour in MNCs and

their subsidiaries, and specific labour and social policy

problems in particular industries. A Tripartite Advisory

Committee on the Relationship of MNCs and social policy

met in May 1976. The Committee recommended that the ILO

should prepare Tripartite Declaration of principles

concerning MNCs and social policy. It specified that the

declaration mould be non-mandatory, should not dis.crimin­

a te against the MNCs, should effect all MNCs and should

respect national sovereignty. The Advisory Committee

continued to meet, and placed before ILO governing body

in 1977, "a Draft Declaration of Principles Concerning

Multinational Enterprises and Social Pol icy". The

Governing Body adopted the draft principles on November

1977 and stated that their purpose was to guide ·govern­

ments, MNCs, Trade Unions and Employer Associations on

measures aimed at social progress. It acknowledges the

importance of MNCs in national economies and benefits

gained by both home and host countries. The hope is to

encourage the positive contributions and resolve, or,

minimize the difficulties.

The Economic and Social Council (ECOSOC)

In the United Nations System, attention on the MNCs

66

as a global political phenomenon has been focused most

clearly in the UN Economic and Social Council (ECOSOC).

The Council's involvement in MNC issue began in July

1972, when a developing nation accused a MNC of political

interference. ECOSOC, by an unanimous resolution,

requested the UN Secretary General to initiate a study on

the role of MNCs in world development and to appoint a

group of "eminent persons", from both developed and

developing countries and of various backgrounds, to

examine the impact of MNCs on world development and

international relations.

considered the overall

The report of

impact of MNCs

Eminent Persons

and specific

issue such as control, ownership, financial flows, balance

of payments, C'.ompeti ti on, market struc-::ure, technology,

employment, consumer protection, taxation and transfer

pricing. The report stressed the establishment of a

permanent commission at the UN to deal with MNC issues on

a comprehensive and continuing basis and creation of a

center within the . UN Secretariat to conduct research,

collect and disseminate information, provide technical

assistance to developing nations and to assist the commis­

sion. In 1974 ECOSOC established a Commission on Trans­

national Corporations which set up a Centre on Transna­

tional Corporations (CTC).

The number of Commission members is now 48 and the

term of office is three years on a staggered basis.

67

Election of members by ECOSOC takes place annually. In

addition to the Commission, the group recommended the

establishment of an Information and Research Centre on

MNCs. Its chief task was the provision of substantive and

administrative services to the Commission. In view of the

continuing and broad range of activities and the expertise

required, it was felt .that the provision of such services

could pe more efficiently organised in a unit especially

designed for this purpose. Another reason for this added

unit was the pivotal role of information and research in

the work of the proposed Commission.' Information

and Research C~nter (IRC) under the administrative

auspices of the United Nations Centre on Transnational

Corporation (CTC) was established in November 1975.

Code of Conduct

The adoption of a code of conduct to control and

regulate the activities of MNCs is one of the main elements

in the establishing of a New International Economic 99 order.

99. General Assembly Resolution 3202 (S-VI) cf: Section V States Regulation and Control Over the Activities of Transnational Corporations. All efforts should be made to forrQulate, adopt and implement an internatio­nal Code of Conduct for transnational corporations: (a) To prevent interference in the internal affairs of the countries where they operate and their collaborat­ing with racist regimes and colonial administrations; (b) To regulate their activities in host countries, to eliminate restrictive business practices and to con­form to the national development plans and objectives of developing countries, and in this context facili t­ate, as necessary, the review and revision of previ­ously concluded arrangements; (c) To bring about assistance, transfer of technology

68

Since 1975, this task has been carried out mainly by the

United Nat ions Centre of Transnational Corporations. 100

Under the supervision of the Commission on Transnational

Corporations, an inter-governmental body composing of 48

countries was established by the Economic and Social

Council (ECOSOC) in resolution 1913 (LVIII) . 101 During

its Second Session which was held from 1-12 March 1976,

the Commission on Transnational Corporations decided that

the formulation of the Code of Conduct should be given the

and management skills to developing countries on equitable and favourable terms; (d) To regulate the repatriation of the profits accruing from their operations, taking into account the legitimate interests of all parties concerned; (e) To promote reinvestment of their profits in developing countries.

100. The United Nations Centre on Transnational Corpora­tions was established by the Economic and Social Council in Resolution 1908 (LVII) of 1975.

1C 1. In addition to the work on the formulating of a Code of Conduct on TNCs, which is envisaged as the Umbrella Code, complementary efforts ~re being .made towards· elaborating codes and other international arrangements touching on (but not excl usi ve.ly) specific aspects of the operations of TNCs. Examples are: ·the Triparta te Declaration of principles concerning Multinational Enterprises and Social Policy adopted by.' ILO governing body on 6 November 1972. The Code of Conduct on the transfer of techno­logy being negotiated by UNCTAD, the set of Mul tila­terally Agreed Egui table Principles and Rules for the control of Restrictive Business Practices adopted by the United Nations General Assembly in Resolution 35/63 of 5 December 1980; the Code of Conduct on the Promotion and Marketing of Infant Formula adopted at the WHO Conference; and the work being done on international standards of accounting and reporting in the inter-governmental working group on International Standard of Accounting and Reporting within the framework of the commission on Transnatio­nal Corporations. For further discussion of these efforts, see Norbert Horn, ed., Legal Problems of Codes of Conduct for Multinational Enterprises, 1980.

69

highest priority among its various tasks. 102 For this

purpose it established an inter-governmental working group

to assist it in the formulation of the code.

The Commission on Transnational Corporations had

originally assigned the working group to finalize a draft

code of conduct at the commission's fourth session in

1978. Due to the complexity of the task, the working

group was unable to finalize the submit the draft on Code

of Conduct. Consequently the Commission, at its various

sessions, subsequently extended the life of working group

in order to enable it to complete its task.

In its course for formulating the code of conduct,

the working group adopted a step-by-step approach towards

this procedure. All sections of the Code have gone

through several stages of discussion and formulation more

or less simultaneously. Several documents were prepared

by the United Nat ions Centre on Transnational Corpora­

, 103 tions after having general discussiors by the working·

group. The Chairman of the Working Group had evolved a

102. Commission on Transnational Corporations, "Report on the Second Session," 1-12 March 1976, Document E/5782, p.7.

103. For a discussion of the process of elaborating ·the Code, see "The Code of Conduct: Towards Intensive Negotiations," CTC Reporter, Autumn 1979, p.8.

70

a tentative outline of the Code 104 which was

an nota ted after further discussions with the

tentatively

105 Group.

The annotated outline was further elaborated with the

incorporation of elements emerging in the subsequent

discussions amongst the delegates in the working group.

On the basis of these "common elements", the chairman of

the working group pr~sented a document containing first

tentative, and later more definite, "Formulations by the

' 106 Chairman" on all the parts of Code of Conduct.

The Group of 77 proposals had been incorporated

' during the drafting of "concluded provision" on the Code

of Conduct which had taken place at the Ninth Session of

the Working Group. At the last session of the working

104. The main background documents ·are: "Commission on Transnational Corporations," "International Codes and Regional Arrangements Relating to Transna ti_onal Corporations" (Document E/C/10/9 and Add.1): "Trans­national Corporations: Issue Involved in the. Formu­lation of a Code of Conduct," (Document E/C.10/l8 and Corr. 1); "Transnational Corporations: Views and Proposals of States on a Code of States on a Code of Conduct". (Document 'E/C. 10/19 and Add 1) and "Transnational Corporations: Views and Proposals of Non-governmental Interests on a Code of ·Conduct" (Document E/C 10'/~0 and Add. 1).

105. See Commission onTransnational Corporations, "Report of the Working Group on its Third Session," 10-14 January 1977, E/C, 10/31, 4 May 1977.

106. See Inter-governmental Working Group on a Code of Conduct, "Tentative Annotation of a Code of Conduct," Working paper No.1-5, prepared in the Course of the Second Session of the Working Group, 18-22 Apri 1 1977.

71

group, under the Chairmanship of Tunisia, India and

Venezuela, proposals have been elaborated on all sections

of the Code of Conduct and consolidated in working paper

number 21 entitled "Draft Code of Conduct for· Transna tio-

nal Corporations proposed by Venezuela on behalf of the

Group of 77". 107

The substantive scope and structure of the code,

which has now taken more or less definite shape, is as .

follows: a preamble, Chapter I on the ob.)ecti ves of the

code, Chapter II on definitions and scope of applications,

Chapter I I I on the activities of transnational corpora-

tion~ Chapter IV on the treatment of transnational corpo-

rations, and Chapter V on implementation and institutional

machinery.

The Working Group has so far held 14 . 108 sess1ons.

While most of the substantive part of the draft code had

been negotiated, the introductory part, which includes the

preamble, the objectives, ·definitions and scope of appl i-

cation of the code of conduct and provisions regarding

implementatiori have not yet been concluded.

107. The Chairman's formulations for the Code contained in Working 1979), Working Paper No.17 (3 Paper No.16 (11 February 1981), 14 ( 21 March 1980), and Annex 10/79.

various sections of Paper 10 ( 7 November April 1981), Working Document E/C 10/AC.2/ II of Documents E/C.

108. The Report on the Fourteen Sessions of the Working Group which reflects the results of the work so far done is contained in Document E/C. 10/79, 8 June 1981.

72

Expropriation

In the early 1970s there had been a_ period of

confrontation in which the relationship between the host

countries and MNCs had rapidly deteriorated. The build up

to a confrontation coincided with the emergence of

a number of developing countries from colonial states. In

certain countries the activities of· MNCs were seen as

a threat or potential threat to sovereignty and throughout

the developing world there was much scepticism about the

benefits of foreign direct investment. Those negative

·perceptions were particularly evident in the context of

natural resource projects. The old-style concessions

often granted in a colonial or neo-colonial setting seemed

unfair to many developing countries ..

The UNCTC commissioned a study on the national iza~

tion of foreign affiliates or branches by the developing

countries and data on expropriations in 79 developing

countries was collected from 1960. to 1979 and covered

563 acts of expropria tl.on. This study revealed a gradual

increase in the take-overs annually throughout the 1960s,

rising sharply during the 1970s and touching a peak in

1975. (For details see Table 1.1).

A follow-up study for UNCTC for the period 1980 to

1985 showed clearly that expropriations maintained a

fairly constant but very low level through 1985 as is seen

in Table 1.1.

Year

1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

.1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

TOTAL

73

Table 1.1

Expropriation Acts by Year

Number of acts

6

8

8

11

22

14

5

25

13

24

48

51

56

30

68

83

40

15

15

17

5

4

1

3

1

1

574a

Percentage of total

1.0

1.4

1.4

1.9

3.8

2.4

: 0. 9 .

: 4. 4

2.3

-4.2

8.4

8.9

9.8

5.2

11.8

:14.5

7.0

2.6

2.6

2.9

0.9

0.7

0.2

0.5

0.2

0.2

100.0b

Number of countries expropriating

5

5

5

7

10

11

3

8

8

14

18

20

30

20

29

28

14

13

8

13

5

2

1

3

1

1

Sources: Data for 1960 to 1979 are from Kobrin (1984,p.333) (unpublished). For the data for 1980-1985, see Michael Minor, The Expropriation of Foreign Direct investment in Developing Countries: Trends from 1980-1985 (unpublished).

(a) The dates are mis-sing for four acts; (b) Error due to· rounding.

74

Table 1.1 illustrates a marked rise during the

early 1970s and a sharp decline thereafter, clearly

showing that the expropriation activity during 1980 to

1985 is the lowest for the entire 26-year period.

Over the last decade there has been a significant

change in the relationship between developing countries

and MNCs. Before the tide began to turn in the second

half of 1970s, there had been a period of confrontation

in which the relationship between host ~ountries and MNCs

had deteriorated rapidly. Confrontation was particularly

evident in the extractive industries and led to the

expropriation of many mining and oil companies. The mood

today is different and much of the tension has gone out

of the relationship between government and MNCs. In a

positive context, the change is also evidenced by the

growing acceptance of international arbitration for

dispute settlement in major investment agreements. In

the na turai resources. sector, ·the changing relationship

between governments of host countries and MNCs have

contributed to a more pragmatic attitude towards contract

-terms. For instance; this is evident in petroleum

projects. Contracts and licences now contain provisions

which are designed to take account of changing circumst-

ances. In manufacturing also there is evidence of change.

Host countries are now less concerned with the abrasive

issue of equity ownership. The focus now is on maximizing

·' 75

exports and making use of local resources.

Settlement of Investment Disputes and Investment Insurance

Important developments have occurred with respect

to procedures and institutions for the settlement of

disputes. arising in connection with investments.· It is

generally acGepted that the courts and tribunals of host

countries possess jurisdiction over the dispute arising

in their territories. - Since, however; disputes related

to major investments may raise delicate political questions

as well as difficult technical problems, investors usually

favour having the option of international arbitration.

The issue is not free from controversy particularly in

view of the approach of many Latin American states, that

international arbitration in such circumstances infringe

upon the national sovereignty of the host states. Most

other countries, however, accept voluntary arbitration as

a legitimate method for the settlement of investment

d'i spu tes.

The establishment of convention on the settlement

of I nves tmen t Disputes between states and nationals of

other states ( 1 9 6 5 ) ,was or i g i n a ll y sponsored and is now

administrated by the World Bank. Proceedings under the

convention are of course, intended to settle disputes and

76

not to establish general principles and standards for

private foreign investment.

The work of the United Nations Commission on

International Trade Law (UNCITRAL) is also relevant in

this connection, although its scope covers an area much

broader than investment-related disputes. UNCITRAL has

· adopted a set of Arb-itration Rules ( 1976) supplemented

later by Conciliation Rules (1980)~ Investors are

provided with a compiete range of voluntary procedures

for the settlement of international commercial disputes.

' These Rules were further complemented by the text of a

model law on International Commercial Arbitration adopted

in 1985 by UNCITRAL and offered by General Assembly to

states for their consideration with a view to its adoption

as national legislation. The Model law is intended to

provide a flexible yet fair and technically adequate

framework for the settlement of international commercial

disputes, a subj~c,t which is neglected in most national

legislation on commercial arbitration, and which is

usually focused on domestic disputes. The World Bank

proposed and rapidly proceeded to. adopt a convention

on the creation of a Multilateral Investment Guarantee

Agency (MIGA) remarkable for its flexibility as well as

the breadth of its concerns. MIGA will guarantee private

investments in developing countries against non-commercial

risks (currency transfer, expropriation, breach of

77

contract, war and civil disturbances as

commercial risks, if agreed upon by the

host country and approved by a special

Agency's board). Each host country may

well as any non­

investor and the

majority by the

1 imi t the risks

against which guarantees are issued for investment in

its terri tory. Before issuing a guarantee, the Agency

must satisfy itself as to the economic soundness and the

contribution to development of the investment, as to its

being made in compliance with the host country's law and

consistency with the country's development objectives

and priorities, and as to investment conditions in

the host country, including the availability of fair and

equitable treatment and legal protection for the invest­

ment. It is further provided in the convention establish­

ing the Agency that approval by the Governments of the .

host countries is necessary before a guarantee contract

can be issued.

MNCs and Non-Aligned Movement

I~ May 1974, the General Assembly adopted the

Declaration on the Establishment of a New International

Economic Order plus a programme of Action

t ion ( Resolutions 3201 and 3202 ( S- VI) ,

for implementa­

which offered a

comprehensive plan for revamping traditional international

relations and thereby affecting MNC practices and activi­

ties. These developments were in line with the recommen­

dations of the 1973 Algiers Summit of Non-Aligned countries.

78

Earlier still, in the conference of Foreign Ministers of

Non-Aligned countries held in George Town in August 1972,

the N0n-Aligned nations for the first time took note of

the activities of MNCs. The Conference declared:

In analysing the problem of economic deve­lopment and political independence, the Conference denounces the practices and activities of transnational corporations some of which violated the sovereignty of

. developing countries. The .. non-aligned countries condemn such practices and activities of transnational corporations which invariabiy impair the principle of non-intervention and self dete·rmination of the peoples, and at the same time issue a call that such activities be syste­matically denounced in world public opinion.

The same conference of Foreign Ministers had

constituted. and appointed a committee having experts from

non-aligned countries to formulate a draft of criteria,

techniques and procedures •hich would make foreign private

investment subserve the objectives of national development

and which would govern the adoption of a common approach

to private investment and to revise mechanisms for

collecting and exchanging information among the member

state of non-aligneB countries on the operations of

transnational corporations. It would, therefore, not be

inappropriate to say that it was the concerted move of

the non-aligned countries, and in response to demands by

a number of governments, powerful labour union federations,

certain non-governmental groups, United Nations Economic

and Social Council in Resolution 1721 (LIII), adopted

79

unanimbusly on 2 July 1972, request~d the Secretary

General to appoint a group of Eminent Persons to study the

role of multinational corporations and their impact on

the process of development, specially that of the develop­

ing countries, and also their implications for internatio­

nal relations to formulate conclusions which may possibly

be used by governments in making their sovereign decisions

regarding national policy in this respect, and to submit

recommendations for appropriate action. The report stated

that many serious national and international problems

caused by MNCs operations stem from the rapidly growing

internationalization of production; during the last two

decades, foreign invetments of MNCs and the resulting

production of goods have been growing twice as fast as

world GNP. Because of this trend during the last two

decades and the peculiar nature of MNCs of crossing

borders with little impunity, the

following as the main concerns

of the group.

report identified the

of the de 1 i bera t ion

Home countries are concerned about the undesirable

effects that foreign invetment by MNCs may have on

domestic employment and the balance of payments, and about

the capacity of such corporations to alter the normal

play of competition. Host countries are concerned about

the ownership and control of key economic sectors by

80

foreign enterprises, the excessive cost to the domestic

economy which their operations may entail, the extent to

which they may encroach upon political sovereignty and

their possible adverse influence of socio-cultural

values. Labour interests are concerned about the impact

of multinational corporations on employment and workers'

welfare and on the bargaining strength of trade unions.

MNC interests are concerned about the possible nationali-

za tion or expropria tiori of their assets without adequate.

·.compensation,. and abouf restrictive and. frequently chang-

. t 1. . 109 1ng governmen po 1c1es. Raymorrl Vernon in 1973 had

stated that in the presence of these multinational

corporations, the sovereign states were feeling naked and

that the sense of nakedness and dependence had produced

only inhibited responses and changed the tune to say that

any suppression of these enterprises would prove costly

to the national interests of many tountries.

The Colombo Conference of Non-Aligned countries

held in August 1976 declared:

... that the heads of state and government of non-aligned countries once again denounce the unacceptable policies and practices of transnational corporations which, motivated by exploitative profits, exhaust the resources, distort the economies, and infringe the right of peoples of self­determination, and frequently resort to bribery and other undesirable practices and subordinate the developing countries to the industrialized countries.

109. United Nations, Department of Economic and Social Affairs, The Impact of Multinational Corporations on Development and 2!!. International Relations ( E/ 5500 I Rev.1, ST/ESA/6), 1974, p.26.

81

At the conference of the Non-Aligned countries held

in Havana in September 1979, the non-aligned countries

reviewed the function of transnational corporations in

the non-aligned and other developing countries

once again declared:

denounced the unacceptable policies and practices of transnational corporations which, motivated by exploi ta ti ve profits., exhaust the res.ources, distort the economies, and infringe the sovereignty' of (the)

. developing countries, violate the principle of non-interference in the affairs of .•. states infringe the right of peoples

·'to self-determirtation, and frequ~ntly resort to bribery, corruption and other undesirable practices, 9ubordinate the developing countries to (the) industrialized countries.

and

This is almost a reproduction of the proceeding of

the earlier conference of 1976. The only difference at

the Havana Conference was that it had passed another

resolution concerning the fifth commission meeting

and working group pr6cedures held at New York on 14-29 May

1979, to urge the completion of Code of Conduct, in order

to provide the international community with legal instru-

ment with which to control and regulate .. the activities

of these corporations in accordance with the objectives

and aspirations of developing countries. The non-aligned

had repeatedly only used strong language to condemn the

activities· of transnational corporations, but they

never had the political will to adopt any kind of solution

to the problem. The Group 77 along with the five leading

industrialized countries had analysed and forwarded their

82

areas of concern during the second commission session,

held in Lima 1976 conducted by the Commission on Trans-

national Corporations. Ins pi te of this, the non-aligned

countries had shown an apparent lack of keenness in

formulating firm measures for a practical control of the

activities of these MNCs.

This may be due ... to the following reasons: (a) the

conflict of interests within the non-aligned group itself

which, as is well known, consists of countries at varyin~

stages of · development. -.-and even non-development; (b) the

desire of each country in the group to get the better of

the rest by a get-rich-quick programme driving them to

roll out a red carpet welcome to MNCs, which alone

possess the necessary technology tools to help them in

attaining that objective; and (c) the looseness of the

character of the non-aligned movement, which functions

more or less as a club organizing annual conference for

airing views and passing resolutions and nothing more.

THE CASE OF INDIA: CONCERNS, RESPONSES AND STRATEGI£S

Concerns

Multinational Corporations have come under severe

attack in the developing countries. Their power over the

technology, finance, capital and labour markets in deve-

loping had caused much concern in the Third World. As

Ikenna Nzimiro says:

83

... where foreign Mul~inational Corporations invade a country, and where this invasion is accepted by a ruling class that is pre­disposed to the capitalist ideology of the bourgeoisie who control these corporations, such a ~oun11~ faces political and economic insecur1ty.

This concern was further stated in the fifth

conference of Heads of State of Non-Aligned countries

which Sirimavo R.D.Bandaranaike had inaugurated. 111

India had to undergo the negative effects of the

MNCs during the last few decades. During the earlier US

Senate hearings, certain MNCs had admitted having made

donations to political parties in host countries as part

of their business deals. Michael C. Jenson writes in an

article in International Herald Tribune, that forty

American Companies operating in India had liaison officers

to bribe Indian officials whenever the need comes. "These

companies made donations to political parties .... :" 112 An

Indian member of Parliament, Vidya Prakash Dutt, expressed

concern at the report and had Said in the house that I IIi t

110. !kenna Nz imi ro, "The Political and Social Impl ica­tions of Multinational Corporations in Nigeria," in Carl Widstrand, ed., Multinational Firms in Africa (Dakar, 1975), p.210.

111. Sirima vo R. 0. Bandaranaike, Inaugural Address, Colombo Summit: Documents and Selected Speeches of the Fifth Conference of Heads of State of Government of Non-Aligned Countries, Colombo, Sri Lanka, 16-19 August 1976 (New Delhi, 1976), p.36.

112. Michael C.Jenson, "US Firms Justify Bribery Abroad as a Common practice," in International Herald Tribune (Paris), 6 May 1975, p.3.

84

is also a question of the dignity of political parties

especially when they say that political parties are gett-

ing their finances from such sources 11•

113 Another

member, Sardar Swaran Singh Sokin, had said that, 11 Mul ti-

national Companies are corrupting our officials and

legislators. They secretly give donations to political

parties 11• 114 · For inst~nce, it is a well known fact that

Martin. Burn Limited had contributed Rs .10, 70,000 to the

Congress party during i961-63. 115 In the state ·election

in Gujarat the Multinational Drug Companies operating in

:India had dona ted large sums to the Congress Party for

fighting the elections in 1975. During the sixth general

election held in 1977, Phillips India Limited, Ashok

Leyland Lind ted, Lucas TVS Limited, Namdang Tea Company

(India) Limited, Larson and Toubro Limited, Indian Oxygen

Limited, Floechest Dyes and Chemicals Limited, Ceat Tyres

of India limited and Gold frey dona ted rupees one lakh or

more each during 1975-76 to various political parties

through payments for advertisements in souvenirs and .,·

bulletins of various Pblitical parties. 116

113. India, Rajya Sabha, Debates, vol.XCII, no.14, 14 May 1975, col.8.

114. India, Lok Sabha, Debates, vol.LX, no.25, 15 April 1976, col.226.

115. Gopal Krishan, "One Party Dominance Development and Trends: Perspectives, 11 in Supplement to Indian Journal of Public Administration (New Delhi), vol.12, no.1, January-March 1966, p.18.

116. Times of India, 8 September 1977.

85

MNCs had successfully managed to maintain lobbies

within the host country to obtain more concessions

for their business. For instance, in India, Joytirmoy

Basu had observed in Lok Sabha 117 and had urged the

government to institute an enquiry because the dignity of

the parliament and lobbies in parliament were involved. 118

In certain developing countries the MNCs influence

the domestic politics of the toncerned host country

through newspapers and other form of mass media propoganda.

For instance in Chile, ITT had made all efforts to prevent

Allende coming into power. The progra~me prepared to

defeat Allende reads, "urge the key European press through

our contacts there, to get the story of what ··disaste-r

could fall on Chile, if Allende and Company wins this

country". 119 Mrs. Gandhi, in her address to the Ministerial

117. cf: To start with, this Coca-Cola Corporation what a powerful lobby they maintain in this capital. I will give you one or two examples. They have thrown a lunch party, anticipating that there ~ill b~ a debate where people of importance, both politicians and members of the pre~s were invited and after a sumptuous lunch they were all presented with a transistor each and it took place right.in the Oberoi Intercontinental, Room No.999, etc., referred· to the Lok Sabha, Debates, vol.XXXVI, no.17, 14 March 1974.

118. India, Rajya Sabha, Debates, vol.XCII, no.14, 14 May 1975, coL8.

119. US Senate, Committee on Foreign Relations, Sub­Committee on Multinational Corporations, Multinatio­nal Corporation on the International Telephone and Telegraph Company and Chile, 1970-71 and United States Foreign pol icy, Part I, 93rd Congress (Washington, 1973), p.13.

86

Conference of Non-Aligned countries in New Delhi in July

1976 on the news agencies pool, had stated her view:

The media of the powerful countries want to depict the governments of their erstwhile colonies as inept and corrupt, and their people as yearning for the good old days. To a large extent there is a deliberate purpose. Leaders, who uphold their national interests and resist the blendishments of Multina~ional Corporations and agencies, are denigrated . and .. their 12bmage falsified in every conce1vable way.

- -The MNCs had- manipulated their accounts and

evade local domestic-' taxes in --certain cases. Various

methods 1 ike head office expenses, technical know-how,

excess depreciation, tax avoidance on various pleas were

employed in the host countries. A detailed examination of

these methods of tax a voidance has been undertaken by

Parliament public Accounts Committee121 in India. Another

method of tax avoidance through under voicing and over

voicing of Import and Export Bills had been practised by

certain MNCs in India. For instance, Bri tania Biscuit

Company and International Business Machines had employed

it while importing ma,¢hines into India. A Parliamentary . -~

Committee which had --:lnvestiga ted the·; case of Bri tania

Biscuit Company point~d out

120. Inaugural Address by Indira Gandhi, Prime Minister of India, in "Ministerial Conference of Non-Aligned Countries on the Press Agency Pool," held in New Delhi, 8-13 July 1976.

121. Public Accounts Committee (1975-76), Fifth Lok Sabha, 187th Report, 1975, pp.15-16, 48-53, 90-94.

87

... the company might have over invoiced or under invoiced its machinery while importing them and since the company was producing a lot more than their 1 icensed capacity there was also a possi bi 1 i ty that the actual production had not been faithfully reflected in the books of accounts resulting in less collection of excise ~~2ies and avoidance of income tax as well".

Commenting on a similar practice adopted by Inter-

national Business Machines, the Parliamentary Committe

said:

In view. of the apparently huge margin between the cost as shown in declarations to the customs authorities and the cost as charged from users including governm~nt department, it is strange that government could not collect the relevant information required by the Committee. On their own admission, the Central Board of Excise and Customs had been aware of the fact that, 'IBM having relationship with their foreign associates were in a better position to import' 'As is' machines by under invoicing them. and charge high margin of 12grofi t b9 selling those machines in India ..

The Committee further stated that:

There is more than evidence that the Multi­na tionals in the field of computers and data processing equipment such as IBM with its . near monopoly position in India, have defrauded the country of enormous revenues by resorting to various unfair practices like transfer pricing under the garb of inter-company billing system, misuse of import entitlements, e:xaggera ted claims of depreciation devi~~pment rebate, head

·office expenses, etc.

122. Ibid., pp.15-16.

123. Public Accounts Committee (1975-76), Fifth Lok Sabha, 221st Report,'1976, p.274.

124. Ibid., p.257.

88

The operation of MNCs in certain cases had resorted

to transfer pricing in Indian economy. According to

H.N.Mukherjee, "Transfer pricing is a device to get

around any ceiling of profit remittances prescribed by

the host states; a device to reduce liabilities to

countries whose currency is weakening; a device to beat -

down labour demand for..c- high wages;. a device to increase

payments t_o shareholde-rs at home and de~rease the . payment

to share holders in ___ host countries; , it is a device

to check the revenue o1:- the host country; it is a device

to deprive a host country of higher export earnings; it

is a device to hasten devaluation of currency on account

of continued adverse balance of payment engineered

by methods with which our people have not perhaps even the

expertise to find out. " 125 Few MNCs had resorted to this

practice. For instance, International· Business Machines

(IBM) during 1961-71, had remitted over Rs. 4 crores worth

profits126 abroad by i~porting old machinery and obsolete

gadgets which had no market value anywhere in th~ world~~7

Rouche, a multinational drug company' operating in India,

had charged an exorbitant price of Rs .13, 246 per kilogram

125. India, Lok Sabha,. Debates, vol.LX, no.25, 15 April 1976, col.208.

89

for librium and Rs.27,870 per kilogram for valium,

while the Drug Controller put the price of these drugs at

128 Rs.380 and Rs.426 per kilogram respectively.

Barnet and Muller observe that the MNCs tend to

transfer obsolete technology to underdeveloped countries. 129

This had peen confirmed by a report of the Indian Parlia­

ment proce'edings iq cases of few MNCs operating in India.

For instance, the public accounts committee in

221st Report observed:

The Committee was informed that scores of IBM machines having no book values were in circulation earning machines rentals at fixed rates. It was further revealed that while IBM recovered, for most of the machines depreciation based on 4 years life, such machines lasted for many years. Another interesting feature of these rental machines was that most of them had already served elsewhere in other developed countries, the best part of their useful lives. When they became obsolete in those countries and therefore scrapped, such machines were being imported into' India on an 'AS IS' basis, refurbished and circulated as rental machl~5s earning revenues at fantastic rates.

its

In ·a similar case the findings of the Hathi

Committee's report on the Drugs and Pharmaceutical

Industry on transfer of technology by MNCs to India are

quoted:

128. India, Lok Sabha, Debates, vol.LX, no.25, 15 April 1976, col.209.

129. Barnet and Muller, n.73, p.164.

130. India, Public Accounts Committee (1975-76), Fifth Lok Sabha, 221st Report, 1976, p.90.

90

Other points to remember.. . are ( 1) introduc­tion of technology of basic drugs newly into the Ind.ian subsidiary does not occur free since for most of such introduction additio­nal payments have nevertheless to be made notwithstanding equity interests, and (2) the overseas firms choose to permit flow of such technology to india as . will serve the interest of the parent firms. Rarely new and novel _ technology is permitted to flow either free or even on payment. Most technologies that flow from parent firms into the Indian . subsidiaries or partners are, in fact,- well establishing all over the world for the last 15~20 ye,rs and could as well have 'been imported into· the country w~thoy~ 1 taking ~esource to equity participa-t1on. ,: . •

A rP.oort of tJ~e ReservP. Bank , of India indicates

that only 80 of 197 subsidiaries of MNCs had independent

research department in 1969-70. 132 According to certain

critics, these researches undertaken by MNCs were only to

enhance t-heir sale and increase their commercial profits

through various investment incentives offered by host

developing countries .

. Responses and Strategies

The Government of India had evolved different

;investment policies to encourage the foreign direct

investment. The foreign enterprise has been assured of

non-discriminatory treatment on par with Indian domestic

131. India, Ministry of Petroleum and Chemicals, Committee on Drugs and Pharmaceutical Industry, Report 1975 (New Delhi, 1975), p.95.

132. Reserve Bank of Indian Industry: 1974), p.133.

India, Foreign Collaboration in Second Survey Report 1974 (Bombay

91

enterprise within the sectors open to foreign participa-

tion. Nevertheless 1 the government to a certain extent

contributed in reducing the country's dependence on MNCs

by duplicating and replacing their activities through

establishment and enlargement of public sector undertak-

ings. For instance 1 after the independence, the oi 1

industry in India had been overwhelmingly with private

foreign companies. A few MNCs completely domina ted the

industry. The government attempted to change this si tua­

tion through negotiations wit& the Corporations concerning

renewal of the oil refinery agreements dating back to

the colonial period. But the corporations managed to

pressurize the government into concluding new agreements

which did not basically affect the positions of the multi-

t . 1 . 1 . 133 na 1ona 01 compan1es. In the late 1950s the Soviet

Union offered to supply about half of India's crude oil

imports at a price substantially below the one charged

by the international oil companies< which was offered on

' a barter basis. The promulgation of the Industrial Policy

Resolution in 1956 contained the development of m:i,neral

oils exclusively to the host government. The government

133. Michael Tanyer, The Political Economy of Internatio­nal Oi 1 and the Underdeveloped Countries (Boston, 1970), pp.170-8; See also P.J.Eldridge, The Politics of Foreign Aid in India (London,· 1969), Appendix 5; See also Veda vall i, Private Foreign Investment and Economic Development: ! Case Study of Petroleum in India (Cambridge, 1976).

92

had set up public sector enterprises in the oil industry,

notably the Oil and Natural Gas Commission (ONGC) in 1955

and Indian oil Company in 1959. By 1973, the refineries

in the public sector accounted for about 56 per cent of

the processed crude oil, and the market share of the

Indian Oil Corporation reached 60 per 134 cent. The

ultimate outcome of the confrontation over oil was .:::

an almost complete elilJ!ination of the ~ajor oil companies . . ···•

·In 1976; · their asset$ were finally t:aken over by the

government and as a result the entire·; oil industry came . .,. . .

under government control. A similar approach was applied

accordingly to other industries in order to break the

oligopolistic control of MNCs. Nevertheless the Indian

government had successfully employed the corporate

strategies.

The government bad invested hugely on the economic

infrastructure in the country. It had provided better

transportation and communication in the country along

with availability of energy. More than 35 per cent of

all public se6tor outlays were allocated ~to these

134. Over the same period, ONGC carried out a successful programme of explora. tion for crude oi 1 in India, largely with assistance from the Soviet Union and Eastern European countries. The most promising oil bearing structure discovered by the mid-1970s was the off-shore 'Bombay High'. Oil from this source started flowing to the refineries in 1976, ONGC kept Bombay High for itself allowing foreign companies to participate only in the exploration of less promising oil deposits.

93

sectors during the period from 1951 to 1984, thus provid-

ing both foreign and domestic capital with greatly

improved infrastructural facilities. Many export process-

ing zones had been developed with the objective of attrac-

ting foreign investments and foreign technical collabora-

tions with a view to expand exports. The government had

consistently offered foreign enterprises a number of

incentives. They include depreciation allowances, tax

holidays, tax exemptions, priority access to credit,

foreign exchange, import of equipment and subsidiaries.

The incentives have been available to foreign firms

. engaged in priority industries, regional development of

backward and non-industry areas, exports, transfer of

technology and local research and development. 135 The

. Indian government's policies had been a· general increase

in the country's attractiveness.

After tne independence, the Indian government had

declared that, as a. rule, the major interest in ownership

and effective control should always be in Indian hands. 136

135. A Summary of the incentive schemes as revised up to the mid 1970s is given in UN,ECOSOC, National Legis­lation and Regulations Relating to Transnational Corporations (New York, 1978), Table 8.4, p.120f. A more elaborate review including recent changes, is presented in UN Centre on Transnational Corporations, National legislation ... 1983, ibid., pp.56-81. See also Indian investment Centre, Taxes and Inceqti ves: A Guide for Investors 1979-80 (New Delhi, 1979); Indian Investment Centre, Investing in India: A Guide to Entrepreneurs (New Delhi, 1987).

136. Government of India, "Industrial Pol icy (1948) in Constituent Assembly of India, Debate~, vol.5, no.1, 6 April 1948.

Resolution," Legislative

94

The same pol icy resolution, however, also stated that

participation of foreign capital and enterprise ... will be

of value to the rapid industrialisation of the country.

In the subsequent years the Indian government announced

its willingness to accept joint venture with majority

foreign ownership, in addition to a series of tax conces-

. d th . t. 137 s1ons an o er 1ncen 1ves. By 1964, the government

went even further in order to accommodate foreign capital,

the MNCs . . 138

in part1cul~r. In 1969, however, a more

restrictive, selective and comprehenpive approach was

adopted. The government issued three illustrative

lists of industries specifying the roles allotted to

foreign capital in each group. The first list enumerated

industries where foreign investment would be permitted

with or without technical collaboration. The second list

contained those .where only foreign technical collaboration

and not investment would be permitted, and the third list

comprised those where no foreign participation, neither

financial nor technic.al would be considered . 139 Many

137. Michael Kidron, Foreign investment in India (London, 1965), pp.3-4 ..

138. For a brief survey of the the evolution of the policy towards foreign private investments, see the Joint CTC/ESCAP Unit on Transnational Corporations, Monito­ring .and Regulating Transnational Corporations in India (Bangkok, 1980), Ch.1.

139. The three lists are included as appendixes A.4-A.6. in H.P.Agrawal, Business Collaboration in India (New Delhi, 1979). Later, another illustrative list was added. It contained industries where foreign collaboration would not normally be permitted except on merits. All these lists were replaced in 1978 by an illustrative list of industries where no foreign collaboration, financial or technical was considered necessary. See ibid., p.668 ff.

95

foreign controlled companies came under the purview of

the new Monopolies and Restrictive Trade Practices

Act (MRTP Act), promulgated in 1969, and the MRTP Rules

issued in 1970. 140 This act had affected the activities

of several MNCs in the country.

In 1973, Foreign Exchange Regulation Act (FERA) 141

was promulgated which had come to force on 1 January 1974.

According to these guidelines, the principal rule was that

all branches of foreign companies operating in India

should covert themselves into Indian companies with at

least 60 per cent local equity participation. Further,

all subsidiaries of foreign companies should bring down

the foreign equity share to 40 per cent or less.

India had initiated control of technology transfers

just after independence. The declared policy was to

promote indigenous technological research and development

appropriate to the factor endowment prevai 1 i ng in the

140. cf: Government of India, Ministry of Law, Justi6e and Company Affairs, The Monopolies and Restrictive Trade Practices Act, Rules and Regulations (New Delhi,1977) For a concise review, see also UNCTAD, Control in India of Restrictive Business Practices (prepared by H.P.Paranjape) (Geneva, 1978).

141. cf: Section 29 of this Act referred directly to the operations of TNCs in India. According to the Sect ion, a 11 non-banking foreign branches and subsidiaries with foreign equity exceeding 40 per cent had to obtain permission from the Reserve Bank of India to carry on with business. They also had to obtain permission to establish new undertakings, to purchase shares in existing companies, or to acquire wholly or partly any other qompany. Guidelines for administering this section of FERA were announced in December 1973, and later amended in 1976 in Agrawal, n.l39, chapter 3 and relevant appendices; and the joint CTC/ESCAP Unit, Monitoring and Regulat­ing ... , n.l38, chapter III.

142 country. Technical

96

collaborations with foreign

companies were envisaged only when the technological

know-how in question could not be obtained from any source

within the country. This policy proved very difficult to

implement. The basis for indigenous technological

research and development was extremely narrow right after

the independence. The government was forced to pursue

very liberal policies towards imp~rt of technology

and foreign collabora~io.n agreements. This had led to

over-importation of foreign technology in the form of

import of technology already existing in the country, and

in the form of import of the same technology under

different brand names. The long term goal of promoting

technological self-reliance had remained the same within

the new framework. But the emphasis had been shifted

from the question of indigenous availa:bili ty to that of

the necessity for c6ntinued inflow of technology in

143 sophisticated and high priority areas. The subsequent

new policies were designed to channel imports of technology

fnto specific areas where, (i) sophist~cated technology is

required; (ii) critical production gaps exist; (iii) there

is a potential for increasing exports.

142. V.P.Chitale, Foreign Technology in India (New Delhi, 1973), p.82.

1-13. The quotations are from the statement on Industrial Policy presented to Parliament on 23 December 1977. See Government of India, Guidelines for Industries (1979), Section I, p.22.

97

The new guidelines of the subsequent policies also

focus on how to bring down the costs of the necessary

technological imports. The government prefers outright

purchase of the technology. Only when the feasibility

does not exist, does the Indian Importer consider royalty

payments. The guidelines specify both maximum payment as

a percentage of the value of production and maximum

duration of collaboration agreements. 144 As a corollary

to the cost factor, high priority is assigned to unpackag-

ing of imported technology in order to ensure that only

the essential constituents of· a technology package are

. t d 145 1mpor e .

Thus, it can be said by way of conclusion, that the

developing countries are fully aware of the profit maximi-

zation and business strategy of MNCs operation. But due

to the desperate need to solve their economic problems,

the developing countries cannot overlook the useful role

of MNCs, and hence they have developed a love and hate

relationship with them. The present trend towards

market economies has made the MNCs more attractive to

144. A comparative study of the policies pursued in India, Latin America and the Philippines has been published by UNCTAD under the title, The Implementation of Transfer of Technology Regulations: A Preliminary Analysis of the Experience of Latin America, India and Philippines (Geneva, 1980).

145. A review of India's policy is provided in S.L.Kapur, Problems Regarding Import (Vienna, 1982).

for importing technology Policy, Procedures and

of Technology Qy India

98

the developing countries than in

doubt, the developing countries

the recent past. No

through their active

participation in the UN and its bodies, and through their

respective legislative regulations, are at the same time

trying to check the negative aspects of MNCs operations.

The next chapter deals with such regulatory mechanism (in

the specific context of technology transfer) meant to

contain the activities of MNCs within t~e national frame­

work of development.