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AguileraPowerPoint Presentation: World Market Principal Motives for Int’l Expansion Locations Economies Economies of Scale Economies of Scope To seek lower production factor costs To expand sales and production volume To exploit proprietary assetsForms of FDI: Forms of FDI Ownership Wholly owned operations Green-field investment Full acquisition Partially owned operations Partial acquisition Joint venture Relatedness Horizontal FDI Vertical FDI Unrelated diversificationForms of FDI: Ownership: Host Country Home Country Forms of FDI: Ownership MNE New Entity Local Firm Joint Venture Full Acquisition (i.e., 100%) Green Field 100% Owned Partial Acquisition (e.g., 50%) Ownership = s% Ownership = (1 - s)%The Form of FDI: Acquisitions versus Green-Fields: The Form of FDI: Acquisitions versus Green-Fields The majority of investments is in the form of mergers and acquisitions: Represents about 77% of all flows in developed countries. Represent about 33% of all flows in developing countries. Fewer target firms. Why the preference for mergers and acquisitions? Quicker to execute. Foreign firms have valuable strategic assets. Believe they can increase the efficiency of the acquired firm.Entry Decision Making Under Uncertainty: Trade-off Between Flexibility and Commitment: Entry Decision Making Under Uncertainty: Trade-off Between Flexibility and Commitment Timing: When is a good time to enter? Potential gain from waiting Cost of delay Scale of entry Small scale: Establish a foothold to learn Large scale: Acquire first mover advantage Speed of expansion: How fast to grow? Value of learning Preemption of competitors Constraints of internal resources Mode Some modes have more flexibility embedded Some modes reduce resource requirementsChoice of Market Entry Mode: Choice of Market Entry ModeValue Chain of an MNE: Marketing and Sales Production R&D Company Infrastructure Organization, Coordination & HRM Value Chain of an MNE Innovative Capabilities Advanced Technology & Know-How Industry-Specific Marketing Expertise Local expertise : marketing, government relations, etc.Typical Value Chain of a Local Firm: Marketing and Sales Production R&D Company Infrastructure Organization, Coordination & HRM Typical Value Chain of a Local Firm Imitative Capabilities Older Technology and Know-How Country-Specific Marketing Expertise What may the MNE desire from a local firm? Complementary resources Not necessarily strength in every areaComplementarity of Resources: Complementarity of Resources Local Firm’s Resources Imitating capabilities Older technology and know-how Country-specific marketing expertise Country specific organization skills MNE’s Resources Innovative capabilities Advanced technology and know-how Industry-specific marketing expertise Organization structure and systemsGoing it Alone: Export: Going it Alone: Export HOME COUNTRY HOST COUNTRY Export of Goods MNE Revenues CustomersGoing it Alone: Export: Going it Alone: Export Advantages Low initial investment Reach customers quickly Complete control over production Benefit of learning for future expansion Disadvantages Potential costs of trade barriers Transportation cost Tariffs and quotas Foregoes potential location economies Difficult to respond to customer needs well When Is Export Appropriate? Low trade barriers Home location has cost advantage Customization not crucialLicensing Agreement: Licensing Agreement Local Firm Licensing of Technology HOME COUNTRY HOST COUNTRY MNE Fees and RoyaltiesLicensing Agreement: Licensing Agreement Advantages Low initial investment Avoids trade barriers Potential for utilizing location economies Access to local knowledge Easier to respond to customer needs Disadvantages Lack of control over operations Difficulty in transferring tacit knowledge Negotiation of a transfer price Monitoring transfer outcome Potential for creating a competitor When Is Licensing Appropriate? Well codified knowledge Strong property rights regime Location advantageForeign Acquisition: Foreign Acquisition Local Firm Investment HOME COUNTRY HOST COUNTRY MNE ProfitForeign Acquisition: Foreign Acquisition Advantages Access to target’s local knowledge Control over foreign operations Control over own technology Disadvantages Uncertainty about target’s value Difficulty in “absorbing” acquired assets Infeasible if local market for corporate control is underdeveloped When Is Acquisition Appropriate? Developed market for corporate control Acquirer has high “absorptive” capacity High synergyGreenfield vs. Acquisition: Greenfield vs. Acquisition Greenfield Acquisition + + = =Going it Alone: “Green Field” Entry: Going it Alone: “Green Field” Entry New Subsidiary Company Investment HOME COUNTRY HOST COUNTRY MNE ProfitGoing it Alone: “Green Field” Entry: Going it Alone: “Green Field” Entry Advantages Normally feasible Avoids risk of overpayment Avoids problem of integration Still retains full control Disadvantages Slower startup Requires knowledge of foreign management High risk and high commitment When Is “Green Field” Entry Appropriate? Lack of proper acquisition target In-house local expertise Embedded competitive advantageManagement Contract: Management Contract Management Fees Local Firm Technological Inputs HOME COUNTRY HOST COUNTRY Profit MNE Wholly-Owned Subsidiary Managerial ServiceManagement Contract: Management Contract Advantages Access to local management skills Avoids buying unwanted assets Retains strategic control Disadvantages Potential incentive problem Potential adverse selection problem How do you know the competencies of the manager? When Is a Management Contract Appropriate? Manager has a reputation to protect Hotels Consulting companies Performance-based contract provides no perverse incentivesJoint Venture: Joint Venture Joint Venture Company Inputs MNE Local Firm HOME COUNTRY HOST COUNTRY Inputs Share of Profit Share of ProfitJoint Venture: Joint Venture Advantages Access to partner’s local knowledge Reduction of concern about overpayment Both parties have some performance incentives Significant control over operation Disadvantages Potential loss of proprietary knowledge Potential conflicts between partners Neither partner has full performance incentive Neither partner has full control When Is a Joint Venture Appropriate? Both partners contribute hard-to-measure inputs Large expected mutual gains in the long-run Trade secrets can be walled offCommon Market Entry Modes: Common Market Entry Modes Joint Venture Company Licensing Acquisition Joint Venturing Local Firm New Subsidiary Company “Green Field” Entry HOME COUNTRY HOST COUNTRY Export MNEFDI in INDIA: FDI in INDIAEvolution of Economic Liberalization: Luthra & Luthra Law Offices 26 Evolution of Economic LiberalizationPhases of Indian Economy 1947-1980: Luthra & Luthra Law Offices 27 Phases of Indian Economy 1947-1980 Command and Control Economy Allocation of resources by the Government (budgetary grants) Government took active part in setting priorities for the economy Self-Reliance was the buzz word Nationalisation of Banks Limited scope for private participationPhases of Indian Economy 1991-2000: Luthra & Luthra Law Offices 28 Phases of Indian Economy 1991-2000 Liberalization and Globalization of Indian Economy Increased emphasis on private sector participation Limited extent of FDI participation Gradual improvement in the enabling environmentPhases of Indian Economy post 2000: Luthra & Luthra Law Offices 29 Phases of Indian Economy post 2000 Political Coalitions have started providing stable governments Government to get out of owning and managing businesses: Disinvestment Policy Gradual relaxation in the FDI PolicyProgressive Liberalisation : Luthra & Luthra Law Offices 30 Progressive Liberalisation Pre-1991 FDI was allowed selectively up to 40% under FERA This period was dominated by the Congress party 1991 35 high priority industry groups were placed on the Automatic Route for FDI up to 51% Minority Congress government: Initiated economic reforms in a big way 1997 Automatic Route expanded to 111 high priority industry groups up to 100%/ 74%/ 51%/50% United Front Government: Inclusive of ‘left parties’, was perceived as traditionally opposed to FDI, but continued with the reforms. 2000 All sectors placed on the Automatic Route for FDI except for a small negative list BJP coalition government:(coalition of Left and Right wing parties) was traditionally seen as opposed to FDI, but continued with economic reforms. Post 2000 Many new sectors opened to FDI; viz., insurance (26%), integrated townships (100%), mass rapid transit systems (100%), defence industry (26%), tea plantations (100%), print media (26%). Sectoral caps in many other sectors relaxed; BJP coalition government: pursued reforms vigorously and initiated second generation reforms.Consensus on Economic Liberalisation: Luthra & Luthra Law Offices 31 Consensus on Economic Liberalisation Change in perception Indian Business Houses Government Legal Framework: shift from a Positive List to a Negative List (FERA FEMA) Gradually all sectors moving to ‘ Choice ’ and ‘ Competition ’ (Multiple Player Model)Present Picture: Luthra & Luthra Law Offices 32 Present Picture India: Fourth largest economy in terms of Purchasing Power Parity Tenth most industrialized economy GDP growth rate of 8.1% - Second highest in the world. Considerable improvement in FDI inflows FII inflows: For the period, July 2003 – Jan 2004 FII inflow has exceeded USD 7 bn, which is more than the cumulative FII inflow in the last five years. Still a big gap between India and ChinaEntry Process & Entry Strategies: Luthra & Luthra Law Offices 33 Entry Process & Entry StrategiesThe Industrial Policy: Luthra & Luthra Law Offices 34 The Industrial Policy Industrial Licensing All Industrial undertakings exempt from obtaining an industrial license to manufacture, except for: Industries reserved for the Public Sector Industries retained under compulsory licensing Items of manufacture reserved for the Small Scale Sector If the proposal attracts locational restriction Industrial Entrepreneur MemorandumThe Industrial Policy: Luthra & Luthra Law Offices 35 The Industrial Policy Industries reserved for the Public Sector: (1) Atomic Energy and (2) Railway Transport Compulsory licensing needed in the following industries: Distillation and brewing of alcoholic drinks Cigars and cigarettes and manufactured tobacco substitutes Electronic aerospace and defence equipment of all types Industrial explosives including detonating fuses, safety fuses, gun powder, nitrocellulose and matches Certain hazardous chemicalsThe Industrial Policy: Luthra & Luthra Law Offices 36 The Industrial Policy Locational Policy Industrial undertakings are free to select the location Location to be 25 km away from any city with a million strong population Exceptions: When located in an area designated as an “Industrial Area” before the 25 th July, 1991. Electronics, Computer Software and Printing (and any other industry which may be notified in future as ‘non polluting industry’).The Industrial Policy: Luthra & Luthra Law Offices 37 The Industrial Policy Small Scale Industries Suitable for Foreign Investment? Cap on Investment in fixed assets (plant and machinery) is Rs. 10 million (approx. SGD 3,70,000 ) Not more than 24 per cent of total equity can be held by any industrial undertaking either foreign or domestic Upon such equity exceeding 24% the SSI status is lost. Carry-on-Business (COB) Licence required. Various items reserved exclusively for SSIs.The Entry Process: Luthra & Luthra Law Offices 38 The Entry Process . Automatic Route Prior Permission Investing in India General rule Inform RBI within 30 days of inflow/issue of shares Pricing: FEMA Regulations Unlisted – CCI Listed – SEBI Cap of Rs. 600 Crore ( approx SGD 222 million) By exception Approval of Foreign Investment Promotion Board needed. Decision generally within 4-6 weeksThe Entry Process: Automatic Route: Luthra & Luthra Law Offices 39 The Entry Process: Automatic Route All items/activities for FDI investment up to 100% fall under the Automatic Route except the following: All proposals that require an Industrial Licence . All proposals in which the foreign collaborator has a previous venture/ tie up in India . All proposals relating to acquisition of existing shares in an existing Indian Company by a foreign investor. All proposals falling outside notified sectoral policy/ caps or under sectors in which FDI is not permitted.The Entry Process: Government Approval: Luthra & Luthra Law Offices 40 The Entry Process: Government Approval FIPB Approval For all activities, which are not covered under the Automatic Route Composite approvals involving foreign investment/ foreign technical collaboration Published Transparent Guidelines vs. Earlier Case by Case Approach Downstream InvestmentSubsequent Investment in the same or allied field: Luthra & Luthra Law Offices 41 Subsequent Investment in the same or allied field Press Note 18 No Automatic Route for FDI and/or technology collaboration for those who have or had any previous joint venture/technology transfer/ trade mark agreement in the same or allied field. Same field : Four digit NIC 1987 Code Allied field : Three digit NIC 1987 Code. IT Sector & International Financial Institutions exempted. New Trend: FIPB examines objections by the earlier partner objectively.Acquisition of shares in a Listed Company: Luthra & Luthra Law Offices 42 Acquisition of shares in a Listed Company Takeover Code Acquisition of more than specified equity stakes would entail public offer Pricing: Average of 26 weeks or 2 weeks, whichever is higher No takeover of management before completion of Takeover Code formalitiesOther modes of Foreign Direct Investment : Luthra & Luthra Law Offices 43 Other modes of Foreign Direct Investment GDR, ADR, FCCB Indian Companies allowed to raise equity capital in the international market through the issue of GDRs/ ADRs/FCCBs. No ceiling on investmentOther modes of Foreign Direct Investment: Luthra & Luthra Law Offices 44 Other modes of Foreign Direct Investment GDR, ADR, FCCB (Contd.) No end-use restrictions on GDR/ ADR/ FCCB issue proceeds Except Investment in real estate Stock markets. Government clearance required when sectoral cap is exceeded, or for a project not falling under Automatic Route. 25% of the FCCB proceeds can be used for general corporate restructuring.Foreign Technology Collaboration: Luthra & Luthra Law Offices 45 Foreign Technology Collaboration Foreign technology collaborations are permitted either through the automatic route or by the Government. Policy for Automatic Approval To all industries for foreign technology collaboration agreements, irrespective of the extent of foreign equity in the shareholding, subject to: The lump sum payments not exceeding US $ 2 Million;Foreign Technology Collaboration: Luthra & Luthra Law Offices 46 Foreign Technology Collaboration Policy for Automatic approval (contd.) Royalty payable being limited to 5 per cent for domestic sales and 8 per cent for exports, subject to a total payment of 8 per cent on sales No restriction on the duration of the royalty payments The aforesaid royalty limits are net of taxes and are calculated according to standard conditions.Foreign Technology Collaboration: Luthra & Luthra Law Offices 47 Foreign Technology Collaboration Policy for Automatic approval (contd.) Payment of royalty up to 2% for exports and 1% for domestic sales is allowed under automatic route on use of trademarks and brand name of the foreign collaborator without technology transfer . Registration of FC Agreement with RBI.The Entry Strategy: Luthra & Luthra Law Offices 48 The Entry Strategy Forms in which Business can be conducted in India Wholly owned subsidiary Joint Venture Company Branch Office Project Office India Presence: Liaison OfficeThe Entry Strategy: Joint Venture Company: Luthra & Luthra Law Offices 49 The Entry Strategy: Joint Venture Company Advantages Limited liability Market Penetration Local Partner’s Expertise and Experience Vital Considerations Choice of Joint Venture Partner Due DiligenceThe Entry Strategy: Joint Venture Company: Luthra & Luthra Law Offices 50 The Entry Strategy: Joint Venture Company Vital Considerations (Contd.) Clearly defined agreement Terms of the Shareholders’ Agreement should be reflected in the Articles of the Company. Share Transfer Restriction in a Public Limited Company Disproportionate voting Rights: Veto Non-competeThe Entry Strategy: Joint Venture Company: Luthra & Luthra Law Offices 51 The Entry Strategy: Joint Venture Company Vital Considerations (Contd.) Agreement for future issue of share capital Dispute Resolution Non-disclosure of confidential information post terminationThe Entry Strategy: Branch Office: Luthra & Luthra Law Offices 52 The Entry Strategy: Branch Office Purpose/Viability of a Branch Office Represent the business interest of foreign company For the purpose of execution of the Project Project Office is in the nature of a Branch Office set up for a particular project.The Entry Strategy: Branch Office: Luthra & Luthra Law Offices 53 The Entry Strategy: Branch Office Permissible activities for a Branch Office Export/Import of goods Professional or Consultancy Services Carrying out research work in which the parent company is engaged Promoting technical or financial collaborations between Indian Companies and parent or overseas group companiesThe Entry Strategy: Branch Office: Luthra & Luthra Law Offices 54 The Entry Strategy: Branch Office Permissible activities (Contd.) Representing the parent company in India and acting as Buying and Selling Agent Rendering Technical Support to the products supplied by parent/group companies. Foreign Airlines/ Shipping Companies Issue: Project/ Branch Office – Permanent EstablishmentThe Entry Strategy: Liaison Office: Luthra & Luthra Law Offices 55 The Entry Strategy: Liaison Office Liaison office for Promotion of business interest ; spreading awareness of company’s products; explore opportunities; work as channel of communication etc. Cannot carry on any commercial, trading or industrial activity or earn any income in India Is required to maintain itself out of inward remittances received from abroad through normal banking channels.The Entry Strategy: Luthra & Luthra Law Offices 56 The Entry Strategy Branch Office/Liaison Office can be set up only with prior RBI approval Profit of the Branch or Surplus of the project after completion can be remitted, after payment of all applicable taxes in IndiaExit Issues: Luthra & Luthra Law Offices 57 Exit Issues Transfer of shares from non-resident to non-resident does not require RBI approval for pricing Transfer of shares from non-resident to resident does not require any FIPB Approval, though RBI approval is required for pricing Pricing as per FEMA – listed and unlisted securities RBI permission not required if sale through Stock Exchange Mauritius Route: Capital Gain AdvantageLegal Structures facilitating FDI: Luthra & Luthra Law Offices 58 Legal Structures facilitating FDIFacilitating FDI in India: Luthra & Luthra Law Offices 59 Facilitating FDI in India Emergence of Independent Regulators: Electricity, Telecom, Insurance, Capital Market and Competition Law Ensuring level playing field vis-à-vis Government Corporations and inter se private players Expertise in the subject matter involved Expeditious resolution of disputeFacilitating FDI in India: Luthra & Luthra Law Offices 60 Facilitating FDI in India Emergence of Independent Regulators (Contd.) Regulators under consideration: Petroleum, Railways, Information and Broadcasting Regulator to curb Anti-Competitive Practices Government DirectivesFacilitating FDI in India: Luthra & Luthra Law Offices 61 Facilitating FDI in India Labour laws – a more contractual approach. Move towards: hire and fire Progressive use of discretionary executive powers Permissions granted for closure of unviable units Inspections only upon workers’ grievances Voluntary Retirement Schemes EPZs, SEZs etc may be exempted from application of certain labour laws Amendment to Industrial Disputes Act under consideration Amendment to Contract Labour (Regulation & Abolition) Act, 1970 under consideration.Investment Incentives : Luthra & Luthra Law Offices 62 Investment IncentivesIncentives for investment in Telecom Sector: Luthra & Luthra Law Offices 63 Incentives for investment in Telecom Sector Movement towards technology neutral Unified Licensing Regime Permission for Inter-Circle & Intra-Circle Mergers Exemplary growth in teledensity, subscriber base etc. Companies commencing operations before 31 st March, 2004, would enjoy tax benefits: 100% deduction for first five years 30% deduction for next five years Exemption from tax on i nterest income and long term capital gains in certain cases Import duty rates have been reduced for various telecom equipmentInvestment Incentive for IT Industry: Luthra & Luthra Law Offices 64 Investment Incentive for IT Industry Software companies have a ten year tax holiday on their export income In 1998 the Government set up a new Ministry of Information Technology The Information Technology Act, 2000 was passed to tackle cyber crimes and facilitate e-commerceIncentives for Investment in Power Sector: Luthra & Luthra Law Offices 65 Incentives for Investment in Power Sector New Legal Regime: Electricity Act, 2003 The Act provides for: Multiple Buyer Model, Independent Regulatory Body, Open Access, Power Trading as an independent business, delicensing of generation 100% FDI Automatic Route in: Hydro-electric power plants; Coal/lignite based thermal power plants; Oil/gas based thermal power plants.Incentives for Investment in Power Sector: Luthra & Luthra Law Offices 66 Incentives for Investment in Power Sector Other investment incentives: New Power Projects eligible for 100% tax holiday in any block of ten years, within first fifteen years of operation. The Deadline for income tax exemption for new power projects extended from 2006 to 2012. Various indirect tax incentives: Concessional rate of import duties Special project import scheme Deemed export benefit for certain categories of power projects.Reforms in Financial Sector: Luthra & Luthra Law Offices 67 Reforms in Financial Sector FIIs allowed in Capital Market, can invest both in Debt and Equity FDI cap in private sector banks raised to 74% 10% cap on voting rights The Mutual Fund market is also open now to foreign players. Equity issue pricing is market determinedFDI in Real Estate: Policy & Issues: Luthra & Luthra Law Offices 68 FDI in Real Estate: Policy & Issues Press Note 4 (2002 Series) 100% FDI under Automatic Route PERMITTED FOR Integrated Townships, subject to following conditions: Foreign company to be registered as Indian company under Companies Act, 1956 Core Business - Integrated Township Development with a successful track record. Minimum area of development: 100 acres as per local bylaws/rules. In absence of such by laws/rules, minimum of 2000 dwelling houses for about 10,000 population to be developed by the investor. Conditions post acceptance of FDI proposal Minimum capitalization norms Upfront payment Minimum lock-in period Time bound completion of projectFDI in Hotel and Tourism:Policy and Issues: Luthra & Luthra Law Offices 69 FDI in Hotel and Tourism:Policy and Issues 100% FDI under Automatic Route “Hotel” includes Restaurant, beach resorts and other tourist complexes providing accommodation and/or Catering “Tourism related industries” includes travel agencies, tour operating agencies, units providing facilities for cultural, adventure and wild life experience to tourists; surface, air and water transport facilities to tourists; leisure, entertainment, amusement, sports and health units for tourists and Convention/ Seminar units and organizations. Automatic approval for Technical, Consultancy, Marketing, Publicity, Managerial services subject to specified limits.Conclusion: Luthra & Luthra Law Offices 70 Conclusion Economics occupies centre stage in 2004 elections Rising expectations; rising prosperity Legal regime: more stable and predictable Bureaucracy: changing with the times The Future beckonsThank You: Luthra & Luthra Law Offices 71 Thank You You do not have the permission to view this presentation. In order to view it, please contact the author of the presentation.