11

CHAPTER

274Business Environment in Nepal

Chapter 11 Global Business Environment275

Introduction

The global marketplace is now in transition. The global economy is undergoing through the process of extensive and rapid transformation. Integrated global markets now challenge domestic businesses operating in protected national economy. Competition has grown manifold and many global players contest the global market. National borders are becoming increasingly irrelevant as globalization, liberalization, and privatization take place. This has led to a growing mobility of the worlds businesses and capital markets.

Globalization has, thus, become one of the important strategic issues for managers today. Many forces, both external and internal, are driving businesses to globalize by expanding and coordinating their participation in foreign markets. Once a business decides to go international, many issues emerge that need to be properly understood and addressed. Among the crucial issues today are: global trade, foreign direct investment, multinational companies, and the WTO. All these have implications for businesses. Hence, the emergence of an open global environment and the reduction of barriers to the free flow of goods, services, and investment have become important concerns for global business community.

As managers operate in this complex global environment, they confront forces that differ from country to country. The emerging managerial complexities, therefore, need to be properly understood and examined. Hence, this chapter deals with the emerging global business environment with particular reference to globalization, foreign direct investment, multinational companies, and the World Trade Organization.

Concept of Globalization

Globalization means different things to different people. The three important perspectives on globalization are as follows:

To a business executive, globalization refers to a strategy of crossing national boundaries through globalized production and marketing networks. Deregulation, privatization, trade liberalization, protection of property rights, promotion of foreign direct investment, opportunities for strategic alliances, and the like go along with this concept of globalization. To an economist, globalization refers to an economic interdependence between countries covering increased trade, technology, labour, and capital flows. Perhaps the two most important aspects of economic globalization relate to the changing nature of the production process and the internationalization of financial institutions. To a political scientist, globalization refers to an integration of a global community in terms of ideas, norms, and values. Globalization means the creation of a world government, or cartels of governments (e.g. WTO, World Bank, IMF) which regulate the relationships among governments and guarantees the rights arising from social and economic globalization.

Because of these differences in perspectives, globalization has been defined in many different ways. The following are the widely used definitions of globalization:

Globalization is a free movement of goods, services, people, capital, and information across national boundaries.

Globalization is a process by which an activity or undertaking becomes worldwide in scope.

Globalization is a process of integration of the world as one market.

From these definitions, it is clear that globalization leads to an integrated global economy. The process of globalization ultimately converts the huge globe into a small global village. It is the process of transformation of local and regional phenomena into global ones. The growing economic interdependence of countries worldwide through increasing volume and variety of cross-border transactions in goods and services and integrated markets would ultimately blur the national economic boundaries.

Increased globalization creates both opportunities and threats for nations. Opportunities for nations arise because the international market is open for them. They can export their goods and services to the international market without much restriction. Threats of globalization exist for nations because foreign goods, services, capital, and technology enter their domestic markets. This free entry of foreign goods and services might affect their domestic industries. Therefore, the biggest threat is that of competition.

The developed and developing countries view globalization differently. The developed countries relate globalization to free market economy and expanding consumer markets. On the other hand, the developing countries relate globalization essentially to liberalization and privatization. The three important mechanisms adopted by developing countries to attain globalization are: (i) open economy, (ii) liberalization, and (iii) privatization.

Globalization has been expanding at a very high speed. Many countries have freed their industries and trade, and have eliminated state monopolies of business. As a result, the flow of goods, services, technology, and capital has been growing across the globe. Thus, these liberal policies of the governments have pushed the entire world to one big free trade zone, a world without borders. Globalization has provided many opportunities to countries to raise the level of their productive efficiency and competitiveness and participate more actively in the global economy. Thus, a global economy is in the making. There are countless indicators that illustrate how goods, capital and people have become more globalized (IMF, 2008):

The value of trade (goods and services) as a percentage of world GDP increased from 42.1 percent in 1980 to 67.2 percent in 2010.

Foreign direct investment increased from 6.5 percent of world GDP in 1980 to 30.3 in 2010.

The stock of international claims (primarily bank loans), as a percentage of world GDP, increased from roughly 10 percent in 1980 to 47 percent in 2010.

The number of minutes spent on cross-border telephone calls, on a per-capita basis, increased from 7.3 percent in 1980 to 33.8 percent in 2010.

The number of foreign workers has increased from 78 million people (2.4 percent of the world population) in 1965 to 208 million people (3.2 percent of the world population) in 1910.

Nature of Globalization

Globalization is a multi-dimensional process. It has four important dimensions economic, cultural, political, and environmental. The process of globalization is thus a combination of these forces. A brief description of these forms of globalization is as follows:

Economic Globalization

Economic influence is the most obvious part of globalization. Economic globalization is contributed by liberalization, deregulation, privatization, and declining costs of transport and communication. This form of globalization indicates increased global inter-linkages of the markets in goods, services, capital, trade, and finance.

Economic globalization has speeded up in the recent past. A free-trade doctrine removes the barriers to the flow of goods between countries. The formation of the World Trade Organization (WTO) and many regional trading blocs has given impetus to this process. Multinational companies are another force to boost up economic globalization.

Cultural Globalization

Different countries have different sets of national beliefs, values and norms. The expanding process of globalization has brought these cultural diversities together to form a global culture. Advances in communications, television networks, transportation technologies have been reducing the barriers of distance and culture. Interactions across boundaries lead to the mixing of cultures.

Over the last several years, global communications have been revolutionized by developments in satellites, digital switching, and optical fibre telephone lines. As a result of such developments, reliable system of communication is now possible with nearly any location in the world. The growth of commercial jet travel has reduced the time it takes to get from one location to another.

This has a tremendous impact on the flow of tourists across the globe. Television programs have made people aware of other cultures and languages. These have reduced the cultural distance between countries. Multinational companies have promoted a certain kind of consumerist culture, in which standard commodities, promoted by global marketing campaigns, create similar lifestyles. The process of globalization has also increased mutual understanding, peaceful coexistence, and learning from each others experiences.

Political Globalization

Nations today are more inter-dependent. They are joining hands to participate in creating macro-political framework for development. There are exchanges of views and experiences between nations regarding the establishment of good governance system, legal system, human rights, free media, property rights, decentralized pattern of governance, relatively free access to state information, and so on.

The regional grouping of nations has promoted the integration further and created pressure for democracy and human rights. Because of these global influences, the political system worldwide made a shift away from command and mixed economies to the free-market model. Globalization thus expands the global linkages, the organization of social life on a global scale, and the growth of a global consciousness, hence to the consolidation of world society.

Environmental Globalization

The globe today is facing unprecedented problems of global warming, depletion of the ozone layer, acute loss of bio-diversity, and trans-border pollution. In fact, ecological problems like floods, soil erosion, water pollution, air pollution, acid rain, and global warming cross-national borders without hindrance. To prevent any further degradation of global ecology, the world community is actively engaged in preventing the growing problem of environment.

Today, world attention has been drawn toward conservation of environment, harnessing water resources, and judicious use of non-renewable resources. The world community is, therefore, trying to encourage countries to understand these global environmental issues and adopt legal and other measures to protect the environment.

Categories of Globalization

Over the years, the pace of global interaction has become much faster and dramatic because of unprecedented advancements in technology, communications, science, transport and industry. These developments have promoted international business. The international business is composed of four main categories: (i) world trade, (ii) portfolio investment, (iii) direct investment, and (iv) multinational enterprises. A brief description of these dimensions of international business is given below:

World Trade

The oldest form of international business is trading of merchandise. Consumers in one country buy goods, which are produced in another country. This is a common phenomenon. Most of the world trade today is among the industrialized countries. World trade is mostly made up of manufactured goods.

The service trade has also been rapidly increasing during recent years. Export business is beneficial for a country not only in terms of trade, but also because it creates export-related jobs. With the growing integration of the world economy, world trade would also increase.

In fact, expansion of world trade itself has been made easier by the following two things:

Technological changes in transport, global network of banking and insurance, and information flows have made it possible to undertake world trade more quickly.

A number of international and regional agreements or arrangements have been established to promote and coordinate world trade.

Portfolio Investment

International portfolio investment is also known as indirect foreign investment. Portfolio investment is the second main type of globalization. It is the purchase of foreign securities in the form of stocks, bonds, or commercial papers to obtain a return on that investment in the form of dividends, interests, or capital gains.

Acquiring foreign stocks and bonds does not confer managerial control of a foreign enterprise on the buyer. Rather, the international portfolio investor is a creditor whose main concern is a decent return on his or her investment. Therefore, the capital flow is greatly affected by relative interest rates and strong currency values, which result in high return for the investors.

Foreign Direct Investment

Foreign direct investment (FDI) is the long-term capital investment. It involves acquisitions by domestic firms of foreign-based factories or any other types of business firms. The investor, thus, enjoys managerial control over the assets of the acquired firm. Direct investment may be financed in a number of ways other than through capital movements.

Foreign investments may be financed by borrowing locally, by reinvesting foreign earnings, by the sale to foreign affiliate of non-financial assets such as technology, or through funds generated by licensing fees and payments for management services to the parent company.

Multinational Companies

FDI is an important vehicle for the birth and growth of multinational companies. A multinational company encompasses both domestic and overseas operations. It is called multinational because it operates across national boundaries. However, its focus is on foreign markets.

A multinational company, thus, has all the components of the definition of globalization and international business discussed above. Being multinational in scope and activity, such firms also encounter wide-ranging socio-cultural, political, and legal problems while operating in many different countries.

Business firms go for multinational operations as part of their business strategy mainly because of three reasons:

They get access to more markets and customers.

They can create better brand by way of expansion so that the acceptance at home market also increases.

There would be a saturation point in the domestic business.

Methods of Globalization

There are a number of methods for globalization of business. In each method, there is a choice of strategies to follow. These strategies are sometimes referred to as foreign market entry strategies. If the international business strategy is to be successful, a business firm must carefully analyze the advantages and disadvantages of different entry methods before deciding on its approaches. A brief account of some of the methods of globalization is as follows:

Exporting

The most widely used and common method of doing business internationally is exporting. A direct export operation is a direct sale by a manufacturer to an overseas customer. Indirect exporting involves selling through an intermediary. Exporting is preferable when the cost of production in the home country is substantially lower than producing goods in foreign markets. Therefore, business firms having cost advantage would like to export their products to foreign markets instead of investing in production facilities there. Exporting is, thus, the first stage in the evolution of international business.

Exporting is the best alternative under a given set of conditions. It is the least complex global operations. However, there are some factors, which make exporting less attractive than other alternatives. For example, policies of some governments discriminate against import. In some cases, imports are even banned. There may also be hostility against imports. In these situations, exporting strategy may not be effective.

Licensing and Franchising

Licensing and franchising are important entry and expansion methods beyond exporting. Through these methods, the companies can expand their business. They are strategies that can be used by themselves or in conjunction with export activities. Earnings come to the company through fees and royalties. Under a licensing agreement, one firm permits another to use its intellectual property for compensation designed as royalty. The recipient firm is the licensee. Licensing therefore can also be called the export of intangibles. Today, many Western companies have been extensively using licensing and franchising practices. One of the growing trends in international business today has been trademark licensing. This has become a substantial source of worldwide revenue.

Licensing offers rapid entry into a foreign market. Under international licensing, a business firm can contractually assign the rights to certain technical know-how, design, intellectual property, patents, copyrights, brand names, and the like to a foreign company in return for royalty. In many countries, law regulates such fees or royalties. At times, a licensing agreement may be of cross-licensing type wherein there is mutual exchange of knowledge and/or patents.

In a cross-licensing arrangement, a cash payment may or may not be involved. The advantage of licensing is that the licenser does not have to bear the development costs associated with opening up in a foreign country. The licensee bears the costs.

Franchising is a special form of licensing in which a parent company (the franchiser) grants another independent entity (the franchisee) the right to do business in a prescribed manner. The franchisee buys an established marketing package without the risks of product acceptance, market testing, etc. The franchiser gets foreign market entry at minimum cost, plus a local entrepreneur.

The privilege may be the right to sell the parent companys product, to use its name, to adopt its methods, or to copy its symbols, trademarks and architecture. One of the common forms of franchising involves the franchiser supplying some ingredients for finished products, like Coca-Cola supplying the syrup to the bottlers. Hilton Hotels might sell a franchise to a local company in Nepal to operate hotels under the Hilton name.

Fully Owned Manufacturing Facilities

Bigger corporations establish their own factories abroad. This strategy has some advantages. The corporation owning the factory has full control over production and quality. There is also no risk of developing potential competitors as in the case of licensing and contract manufacturing. However, there may be some problems while operating in a foreign country.

The government may impose restrictions on the use of desired technology. Similarly, constraints such as lack of skilled manpower, infrastructural facilities, production bottlenecks, raw material supply etc. may also be encountered. Above all, the corporation may have to invest a lot in terms of financial and managerial resources to operate the plant in its fullest capacity.

Joint Ventures

A joint venture is a partnership in which the domestic firm and the foreign firm negotiate tie-ups involving one or more of the following: equity, transfer of technology, investment, production and marketing. In some cases, there are more than two parties involved. In the widest sense, any form of association, which implies collaboration, is a joint venture.

The arrangements define responsibilities for performance, accountability and profit sharing. The marketing arrangements can be made either fully or partially. Joint ventures can spread costs, mitigate risks, offer knowledge and details of local market and ease market entry. There are laws regulating joint ventures, which might require specified percentage of equity by the local partner. Joint venture is a very common strategy of entering the foreign market.

Mergers and Acquisitions

The most extensive form of participation in global markets is 100 percent ownership, which may be achieved by start-up, merger or acquisition. This requires the greatest commitment of capital and managerial effort and offers the fullest means of participating in a market.

Mergers and Acquisitions (M&A) have been very important market entry or expansion strategies. During the 1980s, many Japanese, Korean and Taiwanese companies had made massive M&A in the US and Europe.

Strategic Alliances

Various terms are used to describe the linkages between firms to jointly pursue a common goal, such as collaborative agreements, strategic alliances, and global strategic partnerships. Strategic alliances also open up possibilities for any firm to expand globally.

The alliances existing between firms have some important characteristics. First, they involve contractual, rather than equity, arrangements. Second, ownership is not clear-cut; it is sometimes difficult to identify company boundaries. Third, they involve forms of technology transfer by other means than the establishment of subsidiaries.

Strategic alliances have been rapidly increasing. Such alliances have been very popular among service sector industries. The big airlines like Lufthansa, Singapore Airlines, Thai International, Korean Airlines, etc. have formed strategic alliances with other airlines. Similarly, many hotels across the world are strategically linked with each other. Even in educational institutions, there are strategic alliances.

The globalization strategies such as exporting, licensing, joint ventures, mergers and acquisitions, strategic alliances, etc. are in fact points along a continuum. These are alternative strategies or tools for global market entry and expansion. There are many possible combinations of these alternatives. The choice of an appropriate strategy is, however, a complex task. There is always an element of risk and uncertainty involved in international business.

Changing Global Business Scenario

The globalization process has given rise to trans-border production networks. The big companies located in developed countries are now employing global strategies including worldwide sourcing of materials and locating activities in many different countries. The world business today is going through the following major changes in the nature of operations:

Globalized Production

The production activities are now moving out of the developed countries. They are now being taking place in many developing countries. In 1950, the US alone accounted for more than half of the worlds economic output. In 2010, its share was down to less than one-fifth. Today, many big Western companies have more employees and customers in developing countries than in the developed ones. The cheaper labour in developing countries gives them a sharp advantage in many of the repetitive tasks required by mass production.

Manufacturing is, thus, changing in both rich and poor countries. Its various stages are becoming separated and dispersed. Manufacturing is not being done under one roof or inside one factory. It is, thus, becoming a genuinely international affair.

Global Outsourcing

Global outsourcing is the process by which organizations purchase inputs from other organizations throughout the world. This way, the organization can lower its production cost and improve the quality of its products. To take advantage of national differences in the cost and quality of resources, such as labour and raw materials, a car manufacturer might build engines in one country, body in another, brakes in a third, and buy other components from hundreds of global suppliers.

Global Offshoring

Offshoring describes the relocation of a company of a business process from one country to another typically an operational process, such as manufacturing, or supporting processes. The terms are used in several different ways. They are sometimes used broadly to include substitution of a service from any foreign source for a service formerly produced internally to the firm. Offshoring can be seen in the context of either production offshoring or service offshoring. China, Taiwan, Viet Nam, Malaysia have emerged as prominent destinations for production offshoring. India has now been emerging as an important destination for service offshoring as it has a large pool of English speaking people and technically proficient manpower. The economic logic of offshoring is to reduce the cost and gain competitiveness.

Shift from Manufacturing to Services

Over the years, service sector has flourished in the developed countries. The balance of economic activity in developed countries is now swinging from manufacturing to services. In the US, UK, and Japan, the proportion of workers in manufacturing has declined considerably during the last two decades.

For most of todays developed countries, there was indeed a period when economic success was synonymous with manufacturing. Success in manufacturing was linked to geographical power and superiority. Manufacturing was associated with more growth, better-paid jobs, better export earnings, and greater technological progress than any other economic activity.

Today, the scenario has changed. Service sector in developed countries has grown very fast as the manufacturing work moved out of the country. Service jobs have now become better paid and more interesting compared to factory jobs. Services are now growing fast as a component of international trade, encouraged by widespread deregulation.

Global Corporations

Global corporations, with very large size and scale of activities, have now been growing. These corporations look at the whole world as one market. They manufacture, conduct research, raise capital, and buy supplies wherever they can do the job best. They keep in touch with technology and market trends all around the world. National boundaries and regulations tend to be irrelevant for such corporations.

These trends indicate, deindustrialization of the West. The American factories today use parts manufactured by the factories in many other countries. By 2010, 16 percent of IBMs employees were non-Americans. Whirlpool, a leading supplier of domestic appliances in the US, made most of its products in Mexico and Europe. It reduced its American workforce by 10 percent.

The General Electric was the biggest private sector operating in Singapore. The American-owned factories employed over 115,000 Singaporeans to make parts of electronic and other goods to be shipped to the US. By 2010, about a fifth of the total output of the US firms was being produced by non-Americans outside the US.

Impact of Globalization

Increasing globalization has many effects and consequences on an individual business firm as well as the national economy. These effects are both positive and negative. We can identify five major effects of globalization.

Liberalized International Trade

The volume of world trade has been growing at a faster rate. This indicates that trade has been liberalized throughout the globe. The lowering of barriers to trade has created enormous opportunities for business firms to expand the market for their goods and services through export.

For some business firms, free trade might be a threat because this increases head-to-head competition. Thus, liberalized trade regime is both an opportunity and a threat to business firms. In such a regime, only more efficient players can survive.

Import Penetration

Liberalized imports allow foreign goods and services to penetrate into the domestic market. This has wide ranging impacts on domestic business. The domestic business firms have to compete with the imported goods and services. Many local firms go out of business because they cannot compete with the imported goods and services. Thus, if the local business firms are inefficient, liberalized imports have serious negative effects on domestic market.

Foreign Direct Investment

Foreign direct investment (FDI) is now playing an ever-increasing role in the global economy. Companies invest in overseas operations. FDI is an important source of bringing in capital and technology in a country. It has a positive impact on the economic growth of host countries.

Improvement in productivity, technology transfer, research and development expansion, and promotion of exports are areas of the benefits a host country can expect from FDI. The developing countries in particular have been making extra efforts to create an environment, which is conducive for attracting such an investment.

Multinational Companies

Multinational companies (MNCs) are now spread far and wide. They transfer capital, technology, human resources, and information from one market to another. Liberalization and privatization policies encourage such companies to operate in a host country. MNCs, thus, look for countries that offer favourable government policy, sizeable market, and cheap labour. Therefore, the countries with stable government, stable economy, sizeable market, and cheap labour can attract MNCs.

These MNCs can have very positive effects on the economy because they provide employment, use local resources, and pay excise and other taxes to the government. MNCs can have effects on local business houses. Their system rules, policies, and operations become the standard for the local business firms, which is difficult for them to meet.

Competitive Environment

Home markets are under attack from foreign competitors. This is not only true with less developed countries. Even the developed countries like USA, UK, and Japan are now facing competition from foreign goods and services. The global competitive environment is becoming a much tougher place in which to do business.

Workforce Diversity

Globalization has affected workforce demographics. Todays workforces are characterized by greater diversity in terms of age, gender, ethnic and racial backgrounds, and a variety of other demographic factors. In fact, management of diversity has become one of the primary issues of 21st century business.

Multinational Companies

Origin of MNCsMultinational business is not a new phenomenon. Many business firms of the West operated in many parts of the world from the very beginning of the modern era. Multinational business got boost particularly during the colonial era. Business firms of the Western countries focused on each colonys exports and imports on their home countries. Their purpose was to suppress any colonial production that competed with products of the mother country. These colonial-type firms have been extinct since 1960.

During the beginning of the twentieth century, many big-sized business firms emerged in the US, UK, and West Europe. Some examples of such firms are Singer Sewing Machine, General Electric, Fiat, Kodak, IT&T, Ciba, Imperial Chemicals, Ford, Nestle, Siemens, and Uniliver. Some of these companies started to invest in overseas manufacturing facilities. Other companies expanded their business overseas. But the rush to operate internationally started during the 1960s.

This resulted in substantial direct investment of Western countries in foreign manufacturing facilities. In the 1960s, firms like banks, insurance companies, marketing consultants, and the like expanded overseas. Thus, after 1960s, multinational companies became quite common.

In the 1970s, the pattern reversed. Big business houses of Asian countries started investing in the Western countries, mainly in the US. As a result, many Japanese, Korean, Taiwanese, Chinese, and Indian companies started their operations in the Western countries. Thus, the most dramatic developments of the 20th century had been the expansion of MNCs across the world.

Today, the presence of MNCs is widespread. Their importance has been growing in the world economy. Really speaking, the MNCs have become the primary engines for globalization of economic activities. It is not surprising, therefore, that the MNCs, as they are called, are seen as one of the major features of the current world economy.

Meaning and Concept

A multinational company is generally defined as a company engaged in producing and selling goods or services in more than one country. It ordinarily consists of a parent company located in the home country and at least three or four subsidiaries in other countries. There is a high degree of strategic integration among these units. Some MNCs have more than 100 subsidiaries scattered around the world. The following are some definitions of a multinational company:

Robock and Simonds (1983)

MNC is a large corporation with operations and divisions spread over several countries but controlled by a central headquarters.

Steers, Ungson, and Mowday (1985)

MNC is a firm that views each of its businesses around the world as virtually independent in serving the national market in which it is situated.Ball and McCulloch (1985)

MNC is an organization which produces in, and obtains the factors of production from multip]le countries for the purpose of furthering overall enterprise benefit.

Sundaram and Balck (1997)

MNC is an enterprise that carries out transactions in or between two sovereign entities, operating under a system of decision making permitting influence over resources and capabilities, where the transactions are subject to influence by factors exogenous to the home country environment of the MNC.

The above definitions point out the following elements of a MNC:

A large corporation with operations spread over several countries.

Business enterprises with huge resources and potentiality.

The headquarters of a MNC coordinates the production or marketing facilities.

The subsidiaries are virtually independent in serving the national markets in which they are situated.

The factors of production are obtained from multiple countries and sources.

Some Facts about MNCs

The role and importance of MNCs have been growing in the world economy. Their scales and operational networks have also increased considerably over the years. These can be assessed from the following facts:

There are approximately 69,000 MNCs around the world today. These MNCs control over 195,000 foreign affiliates.

It is estimated that roughly half of all cross-border corporate assets are accounted for just by the top 100 MNCs. The top 300 MNCs control 25 percent of all the worlds productive assets.

About half of 69,000 MNCs are American, British, Japanese, German, and Swiss.

The largest 1000 MNCs in the world had combined assets of about US$ 25 trillion, annual revenue of about US$ 8 trillion, and a market value of about US$ 7 trillion.

Global trade in goods and services account for about US$ 28.4 trillion. Firms that can be characterized as MNCs now conduct almost half of world trade.

The financial size of many MNCs is much bigger than the GDP of the great majority of countries.

A list of top 20 MNCs with their annual revenues, profits and overall global ranking is presented in Table 11.1.

Table 11.1Ranking of World's Largest Corporation

Rank

2010CompanyRevenues($millions)Profits($millions)

1Wal-Mart Stores 408,214.014,335.0

2Exxon Mobil 284,650.019,280.0

3Chevron 163,527.010,483.0

4General Electric 156,779.011,025.0

5Bank of America Corp. 150,450.06,276.0

6Conoco Phillips 139,515.04,858.0

7AT&T 123,018.012,535.0

8Ford Motor 118,308.02,717.0

9J.P. Morgan Chase & Co. 115,632.011,728.0

10Hewlett-Packard 114,552.07,660.0

11Berkshire Hathaway 112,493.08,055.0

12Citigroup 108,785.0-1,606.0

13Verizon Communications 107,808.03,651.0

14McKesson 106,632.0823.0

15General Motors 104,589.0N.A.

16American International Group 103,189.0-10,949.0

17Cardinal Health 99,612.91,151.6

18CVS Caremark 98,729.03,696.0

19Wells Fargo 98,636.012,275.0

20International Business Machines 95,758.013,425.

Source: Global 500, 2010.Types of MNCs

The MNCs are of various types. Similarly their purposes are also different. Shapiro (1996) explains the taxonomy of the MNCs as follows:

Raw Material Seekers

The earliest MNCs mostly operated as raw material seekers. Those MNCs operated in different parts of the world depending upon the availability of raw materials for their production. The best and cheapest raw materials were bought from local suppliers, processed the raw materials locally, and shipped them to the home country to be used for production. The aim of those early companies of colonial period was to exploit raw materials that could be found overseas.

The modern-day MNCs dealing with raw materials are multinational oil, gas, and mining companies. Large oil companies such as British Petroleum and Standard Oil, and hard-mineral companies such as International Nickel, Anaconda Copper, and Kennecott Copper are some examples of modern-day MNCs seeking raw materials internationally.

Market Seekers

The market seeker is the modern form of MNC that goes overseas to produce and sell in foreign markets. This is the most common type of MNC. Examples include IBM, Volkswagen, and Uniliver. These MNCs operate in different countries.

More recently, Japanese and Korean firms have begun investing in different countries, including the US and West Europe. Sometimes, the import restrictions imposed by a country encourage a MNC to operate in that country itself.

Cost Minimizers

These are a fairly recent category of firms doing business internationally. These firms seek out and invest in lower-cost production sites overseas (for example, Hong Kong, Taiwan, China, India, Malaysia, and Thailand) to remain cost competitive both at home and abroad. Many of these firms are in electronics industry. Examples include Texas Instruments, Atari, and Zenith.

Advantages of MNCs

There are some benefits of MNCs. MNCs are an invaluable dynamic force today. They are the instruments for wider distribution of capital, technology, and employment. The important arguments in favour of MNCs are as follows:

MNCs promote the investment climate in the host country. This ultimately leads to increase in income and employment.

Technology transfer is a major constraint for developing countries. MNCs have been working as the main vehicles for technology transfer in these countries.

The impact of the presence of MNCs is also felt in managerial development in the host countries. Professional management and use of appropriate management techniques are associated with MNCs. The local industries can, thus, learn these management practices from MNCs.

The host countries can increase their exports through the activities of MNCs. At the same time, as the MNCs produce goods within the countries, the import requirements are also reduced. This helps the host countries in improving their balance of payments position.

As the MNCs have global networks of manufacturing and distribution, they help equalize the cost of factors of production around the world.

One of the crucial resources enjoyed by MNCs is knowledge. MNCs, by using their efficient research and development systems can make significant contribution to inventions and innovations.

MNCs also have positive impact on domestic enterprises. To support their own operations, the MNCs may encourage and assist domestic suppliers. Many smaller business activities may flourish around the MNCs.

With the presence of MNCs, a competitive environment emerges. This helps in breaking domestic monopolies.

Disadvantages of MNCs

MNCs have, however, been subject to a number of criticisms. Some of the criticisms against MNCs are as follows:

MNCs deploy inappropriate technology in developing countries. If MNCs deploy technologies, which are capital-intensive and use little labour, they are bringing to the developing countries a technology, which is inappropriate to their needs. Developing a new, more labour-intensive technology may be unprofitable for the MNCs. In short, the MNCs may act as agents to spread dependency upon developed countries.

MNCs are criticized for remitting profits from developing countries to the home country. Countries already short of capital must, thus, endure a further flow back to the developed world. The developed world also criticizes MNCs for exporting capital and jobs to the Third World, slowing growth and reducing the number of jobs in the home country.

MNCs, because of their size and competitive strength, may destroy competitive environment in the country. They regain monopoly powers. MNCs may also undermine the national economic autonomy and priorities of the host country.

MNCs may also be engaged in and interfere with the politics of the countries in which they operate. The tremendous power that the MNCs possess may be misused. They may also go against the national interest of the country in which they do business.

Although MNCs claim that they bring capital into the host country, in practice it seems that they bring little capital into host country. Most subsidiaries of MNCs are apparently created to mobilize capital, locally. They hardly bring in funds from the parent company.

Transfer pricing is also an issue associated with MNCs. MNCs are often charged that they avoid taxes by manipulating prices on intra-company transactions. An extremely high price may be paid by a subsidiary to a parent company for machinery or a process supplied by it. This reduces the taxable profits of the subsidiary.

When foreign investments compete with home investment, profits in domestic industries fall, leading to a fall in domestic saving.

MNCs have been accused of an attitude of discrimination against employment of local nationals in high-salary jobs and against local transport, insurance, or credit organizations.

MNCs have become the world reality today. It is not just possible to negate their existence and influence. It is, however, necessary for the host countries to monitor and regulate their activities. It is suggested that the host countries should try to weaken the hold of any one MNC by inviting in more, particularly if they are of a different national origin.

MNCs too are vulnerable commercially. Competition puts them in pressure. The functioning of many MNCs within the same country reduces the risk for the host country of being influenced by any one MNC and dictating its terms.

Perhaps the most useful contribution made by MNCs is the one, which could not be easily fulfilled by the governments in less-developed countries. This is the function of transferring to developing countries the production of goods, which require large quantities of low-cost labour.

Low-cost labour is one commodity, which less-developed countries possess in abundance. If developing countries are ever to progress economically, they must be allowed to capitalize on this natural advantage.

Foreign Direct Investment

Foreign Direct Investments (FDI) is the international movement of capital for specific investment purposes. Such investments are made for the purpose of actively controlling property, assets, or companies located in host countries. Business organizations undertake FDI to expand foreign markets or gain access to supplies of resources or finished products. FDI occurs when overseas companies set-up or purchase operations in another country.

FDI can be categorized into three components: equity capital, reinvested earnings, and intra-company loans. Equity capital comprises of the shares of companies in countries foreign to that of the investor. Reinvested earning includes the earning not distributed to shareholders but reinvested into the company. Intra-company loan relate to financial transactions between a parent company and its affiliates. FDI thus may take many forms, including:

Purchase of existing assets in a foreign company.

New investment in property like land and building.

Participation in a joint venture with a local partner.

Mergers and acquisition activities

Why do companies engage in FDI? There are a number of reasons:

To access new overseas markets or better serve existing markets.

To take advantage of lower manufacturing and wage costs.

To access new technology and skills particularly in R&D.

To locate a business function near clusters of similar or related companies.

Low saving, low investment, and low capital formation characterize a developing country. Such a country obviously looks for an external source to fill its resource gap. The following are some direct benefits of FDI:

A developing country, suffers from lack of capital and advanced technology. FDI is an important source of bringing in capital and technology in a country.

FDI has a positive impact on the economic growth of host countries. Improvement in productivity, technology transfer, research and development expansion, and promotion of exports are some of the benefits a host country can expect from FDI.

FDI also infuses competitive corporate culture and technical skills, which are equally important factors for industrial development.

A developing country often needs to import raw materials that are not available domestically. The country needs foreign currency to pay for imports. FDI can be of great help in this respect.

When a MNC sets up its subsidiary in a developing country, the parent company also transfers its work system, management concepts and skills to its subsidiary. Hence the host country benefits from such transfer of management skills.

Thus, the countries, both developed and developing, have been attracting FDI by offering several incentive packages and concessions to foreign investors. The developing countries in particular have been making extra efforts to create an environment, which is conducive for attracting such an investment. In order to attract FDI on a large scale, the governments have taken several steps to remove the barriers and irritants, which hinder the inflow of investment. The details of the global FDI are presented in Table 11.2.

Table 11.2Global FDI 2005-2007

US$ in MillionGroup of Economics FDI Inflows

200520062007

World95869714110181833324

Developed Economies 6112839408611247635

Europe505473599327848527

North America131740299466341494

Other Developed Countries-259304206957615

Developing Economics316444412990499747

Africa294594575452982

Latin America and the Caribbean7641292945126266

Asia and Oceania210572274291320498

South, East, and South-east Asia167404208902247840

Least Developed Countries71421281613375

Source: UNCTAD, 2008.

The economic crisis slashed global FDI flows by about 40% in 2009, affecting all economies, sectors, and forms of investment. Mergers and acquisitions in high-income economies contracted the quickest after the 2007 subprime mortgage crisis in the United States contributed to banking and fiscal crises in Western Europe and Japan. The contagion gradually spread, affecting new investment in emerging markets and developing economies. Developing economies fared marginally better during the crisis. FDI in developing economies fell 35% in 2009, compared with 41% in high-income economies. With the global recession receding somewhat, FDI will likely recover in the near future. Most indicators signal that FDI will be higher in 2010 than in 2009.

The share of LDCs in the global FDI is very small. In 1980, the share of these countries in the global FDI was US$ 3 billion. In 2008, this increased to US$ 50 billion. Among the developing countries, countries like China, Egypt, Brazil, Mexico, Malaysia, Argentina, Russia, and so on take the higher share. The share of the South Asian countries is very negligible. The FDI inflow in South Asian countries is given in Table 11.3.

Table 11.3FDI to South and Southeast Asia

US$ in Million

Region200520062007

South Asia12,13625,78030,620

Afghanistan

273242288

Bangladesh 845793666

Bhutan9678

India7,60619,66222,950

Maldives91415

Nepal2-76

Pakistan2,2014,2735,333

Sri Lanka272480529

South-east Asia39,09151,24360,514

Brunei289434184

Cambodia381483867

Indonesia 8,3374,9146,928

Laos28187324

Malaysia3,9676,0488,403

Philippines 1,8542,9212,928

Singapore13,93024,74324,137

Thailand8,0489,0109,575

Viet Nam2,0212,3606,739

China 72,40672,71583,521

Source: UNCTAD, 2008.

Cross-regional comparisons indicate that South Asias share of total FDI to developing countries is relatively very small. The share of the South Asian countries in the global FDI was only US$ 31 billion in 2008. Of this too, India has taken about 75 percent. So far India, Pakistan and Sri Lanka are the largest percipients of FDI in South Asia. The other South Asian countries like Nepal, Maldives and Bhutan have not been able to attract enough FDI despite several economic reforms and incentives.

All of the countries in South Asia tried to encourage FDI more aggressively in the 1990s, by making changes in their macroeconomic policies along with FDI and trade policies. As discussed in Chapter 13, most of these countries have liberalized equity restrictions on FDI in the service sector. One hundred percent equity is allowed in many service sectors.

Of the limited FDI coming to South Asia, the manufacturing, energy and service sectors occupy the lions share. A relatively small portion of FDI has gone to export-oriented sectors. These trends suggest that South Asia may be benefiting proportionately less from the trend toward the globalization of production.

South Asia relies on external resources for its economic development. With the decline in foreign aid, there is an emphasis on the role of FDI and foreign portfolio investment as channels of non-debt creating flows of external resources. However, a number of challenges remain. Structural weaknesses, institutional bottlenecks, political movements, narrow nationalism and mutual mistrust are some of the factors that explain the failure of the region to exploit possibilities.

FDI in Nepal

The inflow of FDI in Nepal began in the early 1980s through the gradual opening up of the economy. From 1980 to 1989, FDI inflows to Nepal were minimal with an annual average of US$ 500,000. FDI inflow showed a distinct acceleration during the 1990s averaging US$ 11 million per annum during 1990-2000, picking at US$ 23 million in 1997 (UNCTAD, 2006). This was primarily due to Nepal's more liberal trade policies, which comprised tariff rate reductions, the introduction of a duty drawback scheme, adoption of a current account convertibility system and liberalization of the exchange rate regime.

A reversal in the rising trend took place from the beginning of the 2000s. Despite these efforts, the FDI inflow to Nepal started declining (Table 14.6). During 1986-1990, it was US$ 1.9 million, which rose to US$ 19.3 million in 2001. In 2007, FDI inflow to Nepal further declined to US$ 6 million. Its share of South Asias FDI was thus only 0.05 percent. These figures suggest underlying apprehensions and lack of investor confidence with the existing state of affairs.

By the end of 2009-10, a total of 1,898 industries were allowed to set up under FDI. These industries had an FDI worth Rs.58 billion and provided employment to 144,513 individuals. The industry-wise distribution of these foreign ventures is given in Table 11.4. Most of these FDI projects are of small size and are for joint venture because of non-commercial risks.

Table 11.5 indicates country-wise investments. China has its investments in 58 industries, India in 27, South Korea in 20, UK in 6, USA in 10, Germany in 4, Australia in 5, Netherlands in 3 and Japan in 4. These industries are supposed to receive a total capital worth Rs.9.10 billion with employment of a total of 7,848 individuals. Table 11.4Industries permitted for foreign investment till 200910Value in Million Rs.

Industry TypeNumberTotal Project CostTotal Fixed CapitalForeign InvestmentEmployment Creation (No.)

Industrial Production 373751.53420.92605.41994

Service Industry 72976.0760.4906.13205

Tourism Industry 501035.2929.4717.51537

Construction120.015.720.036

Energy 59961.19765.14747.0493

Agro-based 210.08.610.069

Mining 4100.087.994.0514

Total 17115853.814988.09100.07848

Source: Economic Survey, 2011.Table 11.5Foreign Investment by countries in Fiscal Year 2010/11

S.N.CountriesNo. of IndustriesS.N.CountriesNo. of Industries

1.India 2711.Russia2

2.China 5812.New Zealand 2

3.Japan 413.Australia 5

4.USA 1014.Denmark 2

5.UK 615.Mauritius 2

6.South Korea 2016.Canada 2

7.Bangladesh 217.France 2

8.Germany 418.Turkey 2

9.Singapore 219.Others 16

10.The Netherlands 3Total 171

Reasons for the Poor Inflow of FDI in Nepal

Sanjel (2007) and Gautam (2010) have summarized the causes of this poor state of affairs of FDI in Nepal in the following words:

The government has announced FITTA, 1992 to attract foreign investment. The Act is not clear on the definition of foreign investments and technology transfers. It has yet to modify foreign exchange regulations and tax policies.

Production base is limited due to non-availability and poor access to mineral, forestry and other natural resources.

Recent political disturbances have even threatened bilateral and multilateral development projects. With growing political instability, the government has failed to control it. The disturbances have instead spread throughout the country. This is a serious problem in attracting FDI.

Social tension and unrest are likely to grow due to rising unemployment among youths. Markets flourish when there is peace, not in the midst of war and unrest. Nepalese economy has vast potential to grow. It needs foreign capital, which in the presence of political instability and social unrest would shy away.

The recent approval of the Indian Government to allow its citizens to invest up to IC 600 million in Nepal, without prior approval, has opened new opportunities for foreign investment in medium scale ventures. But the likely investment areas are yet to be explored.

There is absence of long-term business plan and strategies backed by proper information and R&D systems.

There is lack of proper monitoring and supervision of the registered foreign projects. Most of such projects exist only in name. They have not yet started their project construction and operations.

Although the Government is open to FDI, implementation of its policies is often distorted by bureaucratic delays and inefficiency.

Many foreign investors in Nepal are individuals rather than corporate entities. As there is no strict rule to register only foreign companies, any individual can apply and get registration of the projects in Nepal. Such projects are never started; the purpose of the individuals is simply to get their stay extended in Nepal.

The above analysis indicates that Nepal has yet to appear in the global FDI map. It has not been able to meet the necessary minimum preconditions for FDI. Nepal has a long way to go to make the environment investor friendly. A developed stock exchange, full convertibility of foreign exchange or free mobility of capital and easy repatriation of profits and deregulation are some of the preconditions for FDI. These preconditions are yet to be fully achieved in Nepal.

At the same time, political instability and social disturbances have affected the joint venture projects already operating in Nepal. Some of such undertakings have been withdrawing their capital. For instance, the French shareholders have withdrawn their capital from the Nepal Indosuez Bank. Similarly, the Kodak Company and Colgate-Palmolive have closed down their factories at Hetauda. Many of the Indian businessmen running garment and carpet factories in Nepal have also closed down their operations. These recent developments appearing in the Nepalese business scenario have been a big set back to the ongoing efforts of the government to attract foreign investment.

The Government has now constituted the Board of Investment under the chairmanship of the Prime Minister. The purpose of this body is to create a favourable environment in the country including policy and legal reforms for domestic as well as foreign investment. The safety of investment would also be the prime concern of this body. The Government has also announced that a Monitoring Unit would be created in the Office of the Prime Minister to supervise and monitor the investment climate in the country.

We should bear in mind that not all types of foreign investment contribute to income and employment generation. The Government should be selective about FDI. While taking the decision about FDI, the Government should not discriminate against domestic investors. The industries using FDI should also be evaluated in terms of their potential to create employment, promote exports, transfer technology and encourage human development-friendly activities. The industries having market prospects in India and other SAARC countries have to be promoted. The extended South Asian market after the implementation of SAFTA needs to be kept into consideration in providing public support to new industries.

World Trade Organization (WTO)

The World Trade Organization (WTO) is an international body dealing with the rules of trade between nations. It has started functioning from January 1, 1995. On April 23, 2004, Nepal also got its membership. Many countries are currently negotiating for their accession. These include a number of developing countries. The membership of WTO currently stands at 153 countries, representing more than 97 percent of the world's population, and 30 observers, most seeking membership.

GATT was established as an international forum in 1948 by 23 signatories. Its purpose was to ensure non-discrimination, transparent procedures, the settlement of disputes, and the participation of less developed countries in international trade.

GATT was not originally intended to be an international organization. Rather it was to be a multilateral treaty designed to operate under the International Trade Organization (ITO). However, because the ITO never came into being, the GATT became the governing body for settlement of international trade disputes. Gradually it evolved into an institution that sponsored various successful rounds of international trade negotiations. One of the objectives of GATT was to create a World Trade Organization (WTO). The actual establishment of the WTO, however, was long delayed due to a variety of factors.

The latest GATT negotiations, called the Uruguay Round, were initiated in 1987. The main thrust of negotiations had become the sharpening of dispute-settlement rules and the integration of the trade and investment areas that were outside of the GATT. The governments represented in these negotiations gave their consent and political backing to the formation of the WTO.

Later in 1994, the Final Act was signed in a Ministerial Meeting held at Marrakesh, Morocco. Thus, after many years of negotiations, a new accord was finally ratified in early 1995. A new institution called WTO thus supplanted the GATT in 1995. The establishment of the WTO aims at integrating the world economy by cutting down the barriers in trade and investment flows. WTO now administers international trade and investment accords.

Objectives of WTO

The purpose of the WTO is to promote free trade by persuading countries to abolish import tariffs and other barriers. It also ensures that global trade commences smoothly, freely and predictably. It creates and embodies the legal ground rules for global trading among member nations and thus offers a system for international commerce. WTO has three main objectives. In fact, these are the reiterations of the objectives of GATT:

Raising standard of living and incomes, promoting full employment, expanding production and trade, and optimum utilization of worlds resources.

Introducing sustainable development a concept, which envisages that development and environment can go together.

Taking positive steps to ensure that developing countries, especially the least developed countries (LDCs), secure a better share of growth in trade.

Functions of the WTO

The major functions of the WTO as envisaged in its Charter are as follows:

Administer and implement the trade agreements.

Act as a forum for multilateral trade negotiations.

Seek to resolve trade disputes.

Oversee national trade policies.

Cooperate with other international institutions involved in global economic policy making.

Maintain trade related database. Members are required to notify in detail various trade measures and statistics.

Act as a watchdog of international trade, constantly examining the trade regimes of individual members.

Act as a management consultant for world trade.

Provide technical assistance and training for developing countries.

Trade liberalization has thus been the main focus of the WTO. It has given due attention to investments and issues of broader economic cooperation making it a global platform for integration. It is envisaged that elimination of barriers in trade and investment would integrate the world economy. This mechanism will ultimately generate growth and encourage competitive activities benefiting the mankind across the globe.

The WTO provisions have reduced the scope for bilateral preferential arrangements. However, such arrangements can be maintained at regional level. Hence, within the scope of WTO, the importance and relevance of regional groupings have been accepted and recognized. It is argued that regionalism is the logical first phase in the creation of a smoothly functioning multilateral trading system.

Main Principles of the WTO

As an international institution to regulate trade and investment, the WTO is based on the following fundamental principles:Fair Competition and Non-discrimination

WTO stands for open, fair and undistorted competition. The basic aim of WTO is to liberalize world trade and create conditions of competition that are fair and equitable by encouraging countries to reduce tariffs and remove other barriers which distort competition and international trade relations by requiring them to apply a harmonized set of rules. Thus, trade without discrimination is the fundamental principle of WTO.

Transparency

WTO also aims to attain transparency in world trade. Member countries are required to publish their respective trade policies, laws, regulations, judicial decisions and administrative ruling. Similarly, their provisions regarding valuation of products, rates of duty, taxes and other charges affecting sale, distribution, transportation, insurance etc. must be known to other member countries. This helps the exporters plan their trade.

Treatment for LDCs

The WTO system classifies countries deserving preferential treatment into four groups: (i) least-developed countries, (ii) developing countries, (iii) net-food importing countries, and

(iv) countries in the process of transformation into a market economy.

WTO recognizes the special needs of developing countries in terms of the implementation of various agreements under it. The developing countries, and especially the least-developed among them, are given transition periods to adjust to the new situation.

In addition, a ministerial decision on measures in favour of least-developed countries allows them extra flexibility in implementing the WTO agreements. It also calls for enhanced market access conditions for less-developed countries and seeks from the developed countries increased technical assistance for them.

MFN Treatment

The main principle of the WTO is that it should promote trade without discrimination. A country should not discriminate between its trading partners. All of them must be granted most-favoured-nation (MFN) status. This means that every time a member country lowers a trade barrier or opens to a market, it needs to extend the benefits to all trading partners.

Similarly, it should not discriminate between its own and foreign goods and services. They are to be accorded the national treatment. The national treatment clause of the WTO requires that once goods have entered a market, they must be treated no less favourably than the equivalent domestically produced goods.

Free Trade Principle

Protection and perpetual government subsidies lead to inefficiency supplying consumers with outdated and unattractive products. Ultimately, factories close and jobs are lost, despite protection and subsidies. Hence, the member countries should emphasize on open trade and concentrate on what they can produce best. Bigger markets will help these countries produce more and reap economies of scale.

Rule-based Trading System

The basic principle of WTO is rule-based trading system. To attain this, WTO sets and enforces rules necessary for conducting world trade fairly. This helps in opening trade between countries.

Competitive Principle

WTO seeks to protect consumer interest by promoting competition among trading members. Removal or reduction of tariffs and subsidies will expose locally produced goods and services to imported ones. The local products need to compete with imports.

Environment Protection

The preamble of the WTO agreement refers to the protection of environment. It emphasizes on sustainable development and the need to preserve environment. Various agreements contain provisions to protect human, animal, and plant life, their health and the overall environment.

WTO Agreements

WTO is a set of agreements that create legally binding rights and obligations for all member countries. Similarly, the commitments of the member countries provide an agreed degree of openness of domestic markets to imported goods and services. The agreements and commitments have been negotiated multilaterally and agreed by all WTO members. The WTO agreements cover goods, services and intellectual property. They spell out the principles of liberalization and the permitted exceptions. These agreements include individual countrys commitments to lower customs tariffs and other trade barriers, and to open and keep open service markets. The agreements and commitments of member nations must be ratified by their parliaments.

The WTO Agreement is a comprehensive document. It contains 29 individual legal texts, covering a wide spectrum of areas. Added to these, there are more than 25 additional Ministerial Declarations, which spell out further obligations and commitments for WTO members. There are two types of agreements: multilateral and plurilateral.

Multilateral agreements are binding for all members. They are globally applicable. Plurilateral agreements have a small group of signatories with shared interest in a specific sector.

Most legal instruments of the WTO system are lengthy and complex. These legal instruments and other major provisions are contained in the Final Act. This Act deals with the following key subjects:

General Agreement on Trade and Tariff (GATT)

The GATT is the WTOs principal rule-book for trade in goods. Since 1995, the updated GATT has become the WTOs umbrella agreement for trade in goods. It has annexes dealing with specific issues such as state trading, product standards, subsidies, and actions taken against dumping. The GATT rules follow four fundamental principles:

Consultation. Member countries should consult one another in matters of trade and trade-related problems. A stable basis of trade. A stable and predictable basis for trade is provided under the rules. Protection through tariffs. Protection to home industries can be provided only through customs tariff and not through any means to make the extent of protection clear to make competition possible. Trade without discrimination. A country granting an advantage to one non-GATT party must grant the same advantage to other member countries. Exceptions to this basic rule are allowed only in the case regional trading arrangements and the developing countries.

Even though the rules with GATT are complex, they are based on a few simple rules divided into the following three basic categories:

Basic rules. The three basic rules of GATT are: (i) MFN treatment, (ii) national treatment, and (iii) protection through tariffs. Rules applicable at the border. The above three basic rules are complemented by rules applicable to imported and exported goods at the border. They include: (i) procedure for import licensing, (ii) the determination of value, (iii) the application of mandatory standards, and (iv) the application of sanitary and phytosanitary measures. Rules governing contingency protection measures. Contingency measures can be applied in two situations: (i) safeguard actions taken to provide the industries a breathing space to raise their competitive position, and (ii) anti-dumping duties.

The basic aim of GATT is to liberalize world trade and create conditions of competition that are fair and equitable by encouraging member countries to reduce tariffs and remove other barriers, which distort competition. Trade without discrimination is the fundamental principle of GATT. GATT has detailed annexes dealing with sectors such as agriculture, textiles, and with specific issues such as state trading.

General Agreement on Trade in Services (GATS)

The GATS aims at promoting the economic growth of all trading partners and the development of developing countries by expanded trade in services under the conditions of transparency and progressive liberalization. The GATS applies to any service in any sector except services supplied in the exercise of government authority.

Services cover a wide range of economic activity from banking, insurance and telecommunications to recreation, culture and sporting services. The business firms of member countries looking to do business abroad can now enjoy the same principles of freer and fairer trade that originally applied to trade in goods. The basic principles of GATS are the following:

All services are to be governed by GATS.

MFN treatment applies to all services.

National treatment applies in the areas where commitments are made.

The national regulations should be transparent.

International payment should not be restricted.

Progressive liberalization through further negotiations.

WTO members have to make individual commitments under GATS starting which of their services sectors they are willing to open to foreign competition. The obligations that the framework imposes on member countries can be broadly divided into two categories:

General multilateral principles. This includes general concepts, principles, rules and procedures applying to all measures affecting trade in services. Specified negotiated obligations. These obligations are commitments applying to those service sectors listed in a member countrys schedule. Every member country gives its sector-by-sector commitments to liberalize trade in services.

GATS is now taking shape firmly. It has thus become an extremely important segment of multilateral trading regime.

Trade-related Intellectual Property Rights (TRIPS)

The rules in the TRIPS agreement cover specific areas - copyrights, patents, trademarks, geographical names used to identify products, industrial designs, integrated circuits, layout designs, and undisclosed information such as trade secrets. Thus, WTO intellectual property agreements amount to rules for trade and investment in ideas and creativity.

TRIPS agreements state how intellectual property should be protected when international trade is involved. The agreement on TRIPS lays down minimum standards of protection, which countries must provide for intellectual property rights. This agreement provides rules specifying the detailed obligations on governments to provide effective means of action by any right holder, foreign or domestic, to secure the enforcement of his or her rights.

Technical Barriers to Trade (TBT)

Countries often require that imported goods must conform to the manufacturing standards they have adopted. Such mandatory standards and the administrative procedures used for their enforcement are known as technical regulations. These regulations are adopted by countries for the protection of the health and safety of people using such products and preservation of the environment.

The basic aim of this agreement is to ensure that technical regulations and standards are not formulated and applied so as to create unnecessary barriers to trade. For this, the agreement requires countries to base their technical regulations on international standards.

A big problem faced by enterprises in promoting their export trade is the lack of information on the standards on health and sanitary regulations applicable to their products in target market. To help these enterprises, the agreement requires each member country to establish inquiry points from which information can be obtained.

This agreement requires WTO members to apply technical regulations affecting industrial products fairly and transparently. Technical regulations should embody international standards and should be designed to restrict trade as little as possible. Members are required to notify others when developing new technical regulations that may affect WTO members exports.

Trade-related Investment Measures (TRIMS)

WTO is also concerned with the removal of various controls imposed on the inflow of foreign capital into the third world countries. This measure helps MNCs as they will be treated as national companies. The TRIMS text provides that foreign capital would not be discriminated by the member countries. The foreign capital gets equal treatment at par with domestic capital. TRIMS agreement puts restrictions on the actions of the member countries as follows:

No restriction should be imposed on foreign capital.

No discrimination should be made between the foreign investor and the domestic investor.

There should be no restrictions on any area of investment.

There should be no limit on the quantum of foreign investment.

There should be no force on foreign investors to use domestic products or materials.

Export of the part of the final product should not be made mandatory.

No restriction should be imposed on repatriation of dividend, interest and royalty will be removed.

Anti-dumping Measures

WTO allows members to apply anti-dumping measures. Such measures can be imposed on imports, if such dumped imports cause injury to a domestic industry. WTO provides procedures to be followed in initiating and conducting anti-dumping investigations. Anti-dumping measures can imposed as a defence against dumped imports. These measures can be of the following types:

Tariff duty

Import quota

Import embargo

Voluntary export restraint

Sanitary and Phytosanitary Measures (SPS)

This agreement requires WTO members to apply their domestic regulations on food, plant, and animal sanitation fairly and transparently to imported products. The imported agricultural products have to meet the regulations of the importing country. Such regulations are adopted by countries to protect:

Human or animal life from food-borne risks.

Human health from animal or plant-carried diseases.

Animals and plants from pests and diseases.

In order to assure that sanitary and phytosanitary regulations do not cause unnecessary barriers to trade, the agreement requires countries to base them on scientific principles. Such regulations should also be based on international standards.

Dispute Settlement

WTO makes rule for resolving trade disputes. Countries bring disputes to the WTO if they think their rights under the agreement are being infringed. Judgments by especially-appointed independent experts are based on interpretations of the agreement or individual countrys commitments.

WTO system encourages countries to settle their differences through consultation. Failing that they can follow a carefully mapped out, stage-by-stage procedure that includes the possibility of a ruling panel of experts, and the chance to appeal the ruling on legal grounds.

WTO improved dispute settlement procedures compared with those of GATT. These improvements include:

Near automaticity of establishment of panels and adoption of their reported.

Precise deadlines for every step of the panel process.

Policy Reviews

The trade policy review mechanisms are also developed by WTO. The purpose is to improve transparency, to create a greater understanding of the policies that countries are adopting, and to assess their impact. Many members also see these reviews as constructive feedback on their policies. All WTO members must undergo periodic scrutiny, each review containing reports by the country concerned and the WTO Secretariat.

Member countries are under an obligation to ensure that their national legislation, regulations and procedures are in full conformity with the provisions of these Agreements. The resulting harmonization by all countries of rules and regulations applicable to trade in goods and services facilitate trade.

The harmonized rules also help ensure that national regulations do not create unnecessary barriers to trade and that the sudden imposition of high tariffs or other barriers to trade does not disrupt a countrys exports.

Structure of the WTO

The WTO structure comprises conferences, councils, committees and other bodies. The structure is shown in Figure 11.1. The head office of the WTO is in Geneva, Switzerland. This office is headed by the Director General.

The highest body governing the WTO is its Ministerial Conference. This body is composed of the representatives of all WTO members. It meets every two years and is empowered to make decisions on all matters under any of the multilateral trade agreements. The General Council is composed of all the WTO members. This Council is required to report to the Ministerial Conference. Under the Council, there are two important bodies. WTO has three other important councils. The Council for Trade in Goods overseas the implementation and functioning of all the agreements covering trade in goods.

Figure 11.1

Organization Structure of WTO

The Council for Trade in Services and Trade-related aspects. The Council for Intellectual Property Rights has responsibilities for the related WTO agreements. There are a number of subsidiary bodies of the WTO, which perform the day-to-day activities. The Dispute Settlement Body looks after the dispute settlement procedures The Trade Policy Review Body conducts regular reviews of trade policies of individual WTO members.

There are other committees assist the General Council in its functioning. These are as follows:

The Committee on Trade and Development is concerned with issues relating to the developing countries and especially the least-developed countries. The Committee on Balance of Payments is responsible for consultations among WTO members and countries, which resort to trade restrictive measures in order to cope with their balance of payments difficulties. The Committee on Budget, Finance and Administration deals with the issues relating to WTOs financing and budget.

Benefits of the WTO Trading System

Why should countries like Nepal join WTO? WTO trading system benefits the member countries in many different ways. The following is the highlight of such benefits:

A system based on rules rather than power. This makes the trading system smoother. The principle of non-discrimination built into the WTO agreements avoids the complexity. Freer trade cuts the cost of living. Protection is expensive. It raises prices. The WTO system lowers trade barriers. This results in reduced cost of production, reduced prices, and ultimately a lower cost of living. The system helps promote peace. The WTO system creates international confidence and cooperation. Negotiations among member countries lead to agreements by consensus. The system allows dispute to be handled constructively. WTO procedures focus on rules. Once a ruling has been made, countries concentrate on trying to comply with the rules. It gives consumers more choice and a broader range of qualities to choose from. Open markets, lowered tariffs, and non-discrimination provide the consumers with more choice and quality. Trade raises incomes. Non-restricted trade clearly increases incomes. Resources are available to the government to redistribute the benefits from those who gain the most. Trade stimulates economic growth, and that can be good news for employment. Trade clearly has the potential to create jobs. There are factual evidences that lower barriers have been good for employment. The basic principles make the system economically efficient, and they cut costs. Sourcing system is practiced. This would become more efficient and would cost less. The system shields governments from narrow interests. The WTO system helps governments take a more balanced view of trade policy. The system encourages good governance. WTO agreements can also help reduce corruptions and bad governance. Transparency, clearer criteria for regulations, and non-discrimination help reduce the scope for arbitrary decision-making and cheating.

WTO and Nepal

Nepals Membership

Nepal got the membership of the WTO on April 23, 2004. Nepal had applied for the membership of GATT in 1989. This application of membership was made in view of the trade and transit problems with India at that time. But Nepals interest in membership waned after the Nepal-India Trade Treaty was successfully negotiated in 1991.

Nepal started the process of economic reforms in the early 1990s. These reforms were essential to acquire the membership of WTO. As a result of this reform initiation, Nepal was given the observer status in 1993. Nepal participated in the final meetings of the Uruguay Round.

Nepal presented its formal application to accede to WTO in December 1995. It submitted its Memorandum of the Foreign Trades Regime in 1998. After three rounds of working party meetings during 2000-2003, Nepal finally was granted the membership in the Cancun Conference. Thus, Nepals membership was the result of its efforts of fourteen long years.

Nepals Commitments

While seeking the membership of WTO, the countries have to go through a series of negotiations. They have to agree to commitments and determine conditions. Once these initial negotiations are completed, negotiations are then held at multilateral level.

The subject of these multilateral negotiations and conditions reflect how far Nepal will open its market with respect to: (i) consumption abroad, (ii) cross-border supply, (iii) market access, and (iv) presence of natural person along with the issues of national treatment.

Nepal entered into bilateral agreements with USA, Canada, EU, Australia, New Zealand, Japan and India. The composite negotiations and agreements then formed the basis of total commitments of Nepal.

After these negotiations and agreements, WTO and Nepal finally agreed at Geneva to all the conditions and commitments. In all these negotiations, Nepal had presented its strong case to allow it greater flexibility being a least developed country.

Nepals commitments can be grouped into two broad types: (i) general commitments, and (ii) specific commitments.

General Commitments

General commitments are applicable to all sectors. These commitments are mainly the commitments applicable to all cases. These are not negotiable in any way. These commitments include the following:

National treatment to all member countries. This means that no discrimination will be made between products and services. Nepal has committed to extend market access to all, both exports and imports. Non-discriminations among member countries. This means that equal treatment or most favoured nation treatment will be extended to all. Nepal has put no limitation on national treatment on foreign investment with the following exceptions:

This commitment will, however, not apply on items requiring the approval of the Department of Industry. Incentives and subsidies provided if any will be available only to wholly owned Nepalese enterprises.

The other restriction is placed on selling and buying of real estate by foreigners.

There will be transparency in all aspects. Nepal has fully committed to fulfill all transparency requirements. Commitment to foreign investment. Nepal has committed to provide its decision within 30 days of the sate of application for investment. Such investments will not be withheld except in case of failure to meet environmental standards. This commitment of Nepal indicates its openness to foreign investment. The supply of services by an existing supplier will not be made more restrictive than they exist at the time of Nepals accession to WTO. Nepal has also committed to repatriation of investment in foreign currency. This includes the payments made in the form of shares, equity investment, foreign loan, and technology transfers. Tariff bindings. Nepal has committed to bind its tariff at certain levels. Nepal negotiated an average tariff binding of 42 percent on agricultural products and around 24 percent on industrial goods. A maximum tariff rate up to 5 percent will be applied on daily consumption items. Regulatory reforms. Nepal has also committed to a timetable of legislative reforms required to comply with WTO rules. Nepal has agreed to the following legislative plan of action:

Nepal will progressively implement the Agreement on Customs Valuation starting from 1 January 2007.

Nepal will implement fully the provisions of the Agreement on Sanitary and Phytosanitary Measures by 1 January 2007.

Nepal will progressively implement the Agreement on Technical Barriers to Trade by 1 January 2007.

Nepal has committed to prepare and implement the new Industrial Property Act no later than 1 January 2006.

Specific Commitments

Nepal agreed specific commitments in 11 service sectors, revealing its clear belief in the benefits of liberalization as an engine for economic growth and prosperity. These sectors include business, communication, construction, education, environmental, financial services, health, tourism, and transport. The service sectors, which are opened are such, which would add value to Nepal or in such cases where not much may exist now in the domestic front. They are not, therefore, expected to pose serious threats to domestic suppliers. However, these commitments may pose some challenges to already existing operations.

Nepal has made specific commitments very cautiously. The main features of these specific commitments in the service sector are as follows:

Nepal will provide market access through commercial presence only. This means that all entities will have to create a commercial presence before availing Nepalese market.

There will be no restrictions generally in cross-border supply and consumption abroad. For the latter, however, the foreign exchange limitations have been continued.

Natural persons will not be allowed to operate except as specified (e.g. sales persons, those coming for feasibility studies and as managers and specialists). The number of such persons is limited to 15 percent of local employees. Only medical doctors are allowed to operate up to one year as natural persons.

Nepal has been able to extract concessions like providing incentives and subsidies, if any, only to wholly owned Nepalese organizations. Nepal can take preventive measures in case the foreign investors affect domestic activities.

Most of Nepals commitments relate to liberalization in cross-border supply of services, consumption of services abroad, and, with some restrictions, on foreign commercial presence. Economic and political considerations make liberalizing services trade considerably more complicated than goods trade liberalization. However, greater access to foreign providers of business services will