11

236 Business Environment in Nepal
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.
!lobalization has, thus, become one of the important strategic issues for
managers today. "any forces, both external and internal, are driving
businesses to globalize by expanding and coordinating their participation in
foreign markets. #nce a business decides to go international, many issues
emerge that need to be properly understood and addressed. $mong the
crucial issues today are% global trade, foreign direct investment, multinational
companies, and the &T#. $ll these have implications for businesses. 'ence,
the emergence of an open global environment and the reduction of barriers to
the free (ow of goods, services, and investment have become important
concerns for global business community.
$s managers operate in this complex global environment, they confront
forces that di)er from country to country. The emerging managerial
complexities, therefore, need to be properly understood and examined.
'ence, this chapter deals with the emerging global business environment
with particular reference to globalization, foreign direct investment,
multinational companies, and the &orld Trade #rganization.
Concept of Globalization
!lobalization means di)erent things to di)erent 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. *eregulation, 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 (ows. +erhaps the two most important aspects of economic
globalization relate to the changing nature of the production process
and the internationalization of ,nancial institutions.
To a political scientist, globalization refers to an integration of a global
community in terms of ideas, norms, and values. !lobalization means
the creation of a world government, or cartels of governments -e.g.
&T#, &orld .ank, I"/0 which regulate the relationships among
governments and guarantees the rights arising from social and
economic globalization.
.ecause of these di)erences in perspectives, globalization has been
de,ned in many di)erent ways. The following are the widely used de,nitions
of globalization%
!lobalization is a free movement of goods, services, people, capital,
and information across national boundaries.
!lobalization is a process by which an activity or undertaking becomes
worldwide in scope.
!lobalization is a process of integration of the world as one market.
/rom these de,nitions, 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 cross1border transactions in goods and services and integrated
markets would ultimately blur the national economic boundaries.
Increased globalization creates both opportunities and threats for nations.
#pportunities 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 a)ect their domestic
industries. Therefore, the biggest threat is that of competition.
The developed and developing countries view globalization di)erently. The
developed countries relate globalization to free market economy and
expanding consumer markets. #n 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.
!lobalization has been expanding at a very high speed. "any countries
have freed their industries and trade, and have eliminated state monopolies
of business. $s a result, the (ow of goods, services, technology, and capital
has been growing across the globe. Thus, these liberal policies of the
Chapter 22 Global Business Environment 238
governments have pushed the entire world to one big free trade zone, a world
without borders. !lobalization has provided many opportunities to countries
to raise the level of their productive e3ciency 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 -I"/, 45560%
The value of trade -goods and services0 as a percentage of world !*+
increased from 74.2 percent in 2865 to 9:.4 percent in 4525.
/oreign direct investment increased from 9.; percent of world !*+ in
2865 to <5.< in 4525.
The stock of international claims -primarily bank loans0, as a
percentage of world !*+, increased from roughly 25 percent in 2865
to 7: percent in 4525.
The number of minutes spent on cross1border telephone calls, on a
per1capita basis, increased from :.< percent in 2865 to <<.6 percent in
4525.
The number of foreign workers has increased from :6 million people
-4.7 percent of the world population0 in 289; to 456 million people -<.4
percent of the world population0 in 2825.
Nature of Globalization
!lobalization is a multi1dimensional process. It has four important dimensions
= economic, cultural, political, and environmental. The process of globalization
is thus a combination of these forces. $ brief description of these forms of
globalization is as follows%
Economic Globalization
>conomic in(uence is the most obvious part of globalization. >conomic
globalization is contributed by liberalization, deregulation, privatization, and
declining costs of transport and communication. This form of globalization
indicates increased global inter1linkages of the markets in goods, services,
capital, trade, and ,nance.
>conomic globalization has speeded up in the recent past. $ free1trade
doctrine removes the barriers to the (ow of goods between countries. The
formation of the &orld Trade #rganization -&T#0 and many regional trading
blocs has given impetus to this process. "ultinational companies are another
force to boost up economic globalization.
Cultural Globalization
*i)erent countries have di)erent sets of national beliefs, values and norms.
The expanding process of globalization has brought these cultural diversities
together to form a global culture. $dvances in communications, television
networks, transportation technologies have been reducing the barriers of
distance and culture. Interactions across boundaries lead to the mixing of
cultures.
#ver the last several years, global communications have been
revolutionized by developments in satellites, digital switching, and optical
,bre telephone lines. $s a result of such developments, reliable system of
communication is now possible with nearly any location in the world. The
growth of commercial ?et travel has reduced the time it takes to get from one
location to another.
This has a tremendous impact on the (ow of tourists across the globe.
Television programs have made people aware of other cultures and
languages. These have reduced the cultural distance between countries.
"ultinational 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 inter1dependent. They are ?oining hands to participate
in creating macro1political 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. .ecause of these global
in(uences, the political system worldwide made a shift away from command
and mixed economies to the free1market model. !lobalization 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 bio1diversity, and trans1border
pollution. In fact, ecological problems like (oods, soil erosion, water pollution,
air pollution, acid rain, and global warming cross1national 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 ?udicious use of non1renewable
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
#ver 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. $ 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. "ost of the world trade today is among the
industrialized countries. &orld trade is mostly made up of manufactured
goods.
The service trade has also been rapidly increasing during recent years.
>xport business is bene,cial for a country not only in terms of trade, but also
because it creates export1related ?obs. &ith 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 (ows have made it possible to undertake
world trade more @uickly.
$ 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. +ortfolio 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.
$c@uiring foreign stocks and bonds does not confer managerial control of
a foreign enterprise on the buyer. Aather, the international portfolio investor
is a creditor whose main concern is a decent return on his or her investment.
Therefore, the capital (ow is greatly a)ected by relative interest rates and
strong currency values, which result in high return for the investors.
Foreign Direct Investment
/oreign direct investment -/*I0 is the long1term capital investment. It involves
ac@uisitions by domestic ,rms of foreign1based factories or any other types of
business ,rms. The investor, thus, en?oys managerial control over the assets
of the ac@uired ,rm. *irect investment may be ,nanced in a number of ways
other than through capital movements.
/oreign investments may be ,nanced by borrowing locally, by reinvesting
foreign earnings, by the sale to foreign a3liate of non1,nancial assets such as
technology, or through funds generated by licensing fees and payments for
management services to the parent company.
Multinational Companies
/*I is an important vehicle for the birth and growth of multinational
companies. $ multinational company encompasses both domestic and
overseas operations. It is called multinational because it operates across
national boundaries. 'owever, its focus is on foreign markets.
$ multinational company, thus, has all the components of the de,nition of
globalization and international business discussed above. .eing multinational
in scope and activity, such ,rms also encounter wide1ranging socio1cultural,
political, and legal problems while operating in many di)erent countries.
.usiness ,rms 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 Bbrand by way of expansion so that the
acceptance at home market also increases.
There would be a saturation point in the domestic business.
Metods 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 Cforeign market entry strategiesD. If the international business
strategy is to be successful, a business ,rm must carefully analyze the
advantages and disadvantages of di)erent entry methods before deciding on
its approaches. $ brief account of some of the methods of globalization is as
follows%
E!porting
The most widely used and common method of doing business internationally
is exporting. $ direct export operation is a direct sale by a manufacturer to an
overseas customer. Indirect exporting involves selling through an
intermediary. >xporting is preferable when the cost of production in the home
country is substantially lower than producing goods in foreign markets.
Therefore, business ,rms having cost advantage would like to export their
products to foreign markets instead of investing in production facilities there.
>xporting is, thus, the ,rst stage in the evolution of international business.
>xporting is the best alternative under a given set of conditions. It is the
least complex global operations. 'owever, there are some factors, which
make exporting less attractive than other alternatives. /or 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 e)ective.
"icensing and Francising
Eicensing 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
con?unction with export activities. >arnings come to the company through
fees and royalties. Fnder a licensing agreement, one ,rm permits another to
use its intellectual property for compensation designed as royalty. The
recipient ,rm is the licensee. Eicensing therefore can also be called the
export of intangibles. Today, many &estern companies have been extensively
using licensing and franchising practices. #ne of the growing trends in
international business today has been trademark licensing. This has become
a substantial source of worldwide revenue.
Eicensing o)ers rapid entry into a foreign market. Fnder international
licensing, a business ,rm can contractually assign the rights to certain
technical know1how, 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. $t times, a licensing
agreement may be of cross1licensing type wherein there is mutual exchange
of knowledge andGor patents.
In a cross1licensing 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.
/ranchising is a special form of licensing in which a parent company -the
franchiser0 grants another independent entity -the franchisee0 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. #ne of the common forms of franchising involves the franchiser
supplying some ingredients for ,nished products, like Coca1Cola supplying the
syrup to the bottlers. 'ilton 'otels might sell a franchise to a local company
in Nepal to operate hotels under the 'ilton name.
Full# $%ned Manufacturing Facilities
.igger corporations establish their own factories abroad. This strategy has
some advantages. The corporation owning the factory has full control over
production and @uality. There is also no risk of developing potential
competitors as in the case of licensing and contract manufacturing. 'owever,
there may be some problems while operating in a foreign country.
The government may impose restrictions on the use of desired technology.
Himilarly, constraints such as lack of skilled manpower, infrastructural
facilities, production bottlenecks, raw material supply etc. may also be
encountered. $bove all, the corporation may have to invest a lot in terms of
,nancial and managerial resources to operate the plant in its fullest capacity.
&oint 'entures
$ ?oint venture is a partnership in which the domestic ,rm and the foreign
,rm negotiate tie1ups involving one or more of the following% e@uity, 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 ?oint venture.
The arrangements de,ne responsibilities for performance, accountability
and pro,t sharing. The marketing arrangements can be made either fully or
partially. Ioint ventures can spread costs, mitigate risks, o)er knowledge and
details of local market and ease market entry. There are laws regulating ?oint
ventures, which might re@uire speci,ed percentage of e@uity by the local
partner. Ioint venture is a very common strategy of entering the foreign
market.
Mergers and (c)uisitions
The most extensive form of participation in global markets is 255 percent
ownership, which may be achieved by start1up, merger or ac@uisition. This
re@uires the greatest commitment of capital and managerial e)ort and o)ers
the fullest means of participating in a market.
"ergers and $c@uisitions -"J$0 have been very important market entry or
expansion strategies. *uring the 2865s, many Iapanese, Korean and
Taiwanese companies had made massive "J$ in the FH and >urope.
*trategic (lliances
Larious terms are used to describe the linkages between ,rms to ?ointly
pursue a common goal, such as collaborative agreements, strategic alliances,
and global strategic partnerships. Htrategic alliances also open up possibilities
for any ,rm to expand globally.
The alliances existing between ,rms have some important characteristics.
/irst, they involve contractual, rather than e@uity, arrangements. Hecond,
ownership is not clear1cutM it is sometimes di3cult to identify company
CboundariesD. Third, they involve forms of technology transfer by other
means than the establishment of subsidiaries.
Htrategic alliances have been rapidly increasing. Huch alliances have been
very popular among service sector industries. The big airlines like Eufthansa,
Hingapore $irlines, Thai International, Korean $irlines, etc. have formed
strategic alliances with other airlines. Himilarly, many hotels across the world
are strategically linked with each other. >ven in educational institutions, there
are strategic alliances.
The globalization strategies such as exporting, licensing, ?oint ventures,
mergers and ac@uisitions, 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.
Canging Global +usiness *cenario
The globalization process has given rise to trans1border production networks.
The big companies located in developed countries are now employing global
strategies including worldwide sourcing of materials and locating activities in
many di)erent countries. The world business today is going through the
following ma?or 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 28;5, the
FH alone accounted for more than half of the worlds economic output. In
4525, its share was down to less than one1,fth. Today, many big &estern
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 re@uired by mass
production.
"anufacturing is, thus, changing in both rich and poor countries. Its
various stages are becoming separated and dispersed. "anufacturing is not
being done under one roof or inside one factory. It is, thus, becoming a
genuinely international a)air.
Global $utsourcing
!lobal 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 @uality of its products. To take
advantage of national di)erences in the cost and @uality 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 $ffsoring
#)shoring 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
di)erent ways. They are sometimes used broadly to include substitution of a
service from any foreign source for a service formerly produced internally to
the ,rm. #)shoring can be seen in the context of either production o)shoring
or service o)shoring. China, Taiwan, Liet Nam, "alaysia have emerged as
prominent destinations for production o)shoring. India has now been
emerging as an important destination for service o)shoring as it has a large
pool of >nglish speaking people and technically pro,cient manpower. The
economic logic of o)shoring is to reduce the cost and gain competitiveness.
*ift from Manufacturing to *ervices
#ver the years, service sector has (ourished in the developed countries. The
balance of economic activity in developed countries is now swinging from
manufacturing to services. In the FH, FK, and Iapan, the proportion of workers
in manufacturing has declined considerably during the last two decades.
/or most of todays developed countries, there was indeed a period when
economic success was synonymous with manufacturing. Huccess in
manufacturing was linked to geographical power and superiority.
"anufacturing was associated with more growth, better1paid ?obs, better
export earnings, and greater technological progress than any other economic
activity.
Today, the scenario has changed. Hervice sector in developed countries
has grown very fast as the manufacturing work moved out of the country.
Hervice ?obs have now become better paid and more interesting compared to
factory ?obs. Hervices are now growing fast as a component of international
trade, encouraged by widespread deregulation.
Global Corporations
!lobal 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 ?ob 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, Cdeindustrialization of the &estD. The $merican
factories today use parts manufactured by the factories in many other
countries. .y 4525, 29 percent of I."s employees were non1$mericans.
&hirlpool, a leading supplier of domestic appliances in the FH, made most of
its products in "exico and >urope. It reduced its $merican workforce by 25
percent.
The !eneral >lectric was the biggest private sector operating in
Hingapore. The $merican1owned factories employed over 22;,555
Hingaporeans to make parts of electronic and other goods to be shipped to
the FH. .y 4525, about a ,fth of the total output of the FH ,rms was being
produced by non1$mericans outside the FH.
Impact of Globalization
Increasing globalization has many e)ects and conse@uences on an individual
business ,rm as well as the national economy. These e)ects are both positive
and negative. &e can identify ,ve ma?or e)ects of globalization.
"iberalized 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 ,rms to expand the
market for their goods and services through export.
/or some business ,rms, free trade might be a threat because this
increases head1to1head competition. Thus, liberalized trade regime is both an
opportunity and a threat to business ,rms. In such a regime, only more
e3cient players can survive.
Import Penetration
Eiberalized imports allow foreign goods and services to penetrate into the
domestic market. This has wide ranging impacts on domestic business. The
domestic business ,rms have to compete with the imported goods and
services. "any local ,rms go out of business because they cannot compete
with the imported goods and services. Thus, if the local business ,rms are
ine3cient, liberalized imports have serious negative e)ects on domestic
market.
/oreign direct investment -/*I0 is now playing an ever1increasing role in the
global economy. Companies invest in overseas operations. /*I 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 bene,ts a
host country can expect from /*I. The developing countries in particular have
been making extra e)orts to create an environment, which is conducive for
attracting such an investment.
"ultinational companies -"NCs0 are now spread far and wide. They transfer
capital, technology, human resources, and information from one market to
another. Eiberalization and privatization policies encourage such companies
to operate in a host country. "NCs, thus, look for countries that o)er
favourable government policy, sizeable market, and cheap labour. Therefore,
the countries with stable government, stable economy, sizeable market, and
cheap labour can attract "NCs.
These "NCs can have very positive e)ects on the economy because they
provide employment, use local resources, and pay excise and other taxes to
the government. "NCs can have e)ects on local business houses. Their
system rules, policies, and operations become the standard for the local
business ,rms, which is di3cult for them to meet.
Competitive Environment
'ome markets are under attack from foreign competitors. This is not only true
with less developed countries. >ven the developed countries like FH$, FK,
and Iapan are now facing competition from foreign goods and services. The
global competitive environment is becoming a much tougher place in which
to do business.
Wor,force Diversit#
!lobalization has a)ected 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 42
st
century business.
$rigin of MNCs
"ultinational business is not a new phenomenon. "any business ,rms of the
&est operated in many parts of the world from the very beginning of the
modern era. "ultinational business got boost particularly during the colonial
era. .usiness ,rms of the &estern 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
colonial1type ,rms have been extinct since 2895.
*uring the beginning of the twentieth century, many big1sized business
,rms emerged in the FH, FK, and &est >urope. Home examples of such ,rms
are Hinger Hewing "achine, !eneral >lectric, /iat, Kodak, ITJT, Ciba, Imperial
Chemicals, /ord, Nestle, Hiemens, and Fniliver. Home of these companies
started to invest in overseas manufacturing facilities. #ther companies
expanded their business overseas. .ut the rush to operate internationally
started during the 2895s.
This resulted in substantial direct investment of &estern countries in
foreign manufacturing facilities. In the 2895s, ,rms like banks, insurance
companies, marketing consultants, and the like expanded overseas. Thus,
after 2895s, multinational companies became @uite common.
In the 28:5s, the pattern reversed. .ig business houses of $sian countries
started investing in the &estern countries, mainly in the FH. $s a result, many
Iapanese, Korean, Taiwanese, Chinese, and Indian companies started their
operations in the &estern countries. Thus, the most dramatic developments
of the 45th century had been the expansion of "NCs across the world.
Today, the presence of "NCs is widespread. Their importance has been
growing in the world economy. Aeally speaking, the "NCs have become the
primary engines for globalization of economic activities. It is not surprising,
therefore, that the "NCs, as they are called, are seen as one of the ma?or
features of the current world economy.
Meaning and Concept
$ multinational company is generally de,ned 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. Home "NCs have more than 255 subsidiaries
scattered around the world. The following are some de,nitions 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 o!da" (1985)
MNC is a rm that views each o! its businesses around
the world as virtually independent in serving the national
mar"et in which it is situated.
#a$$ and c%&$$oc' (1985)
MNC is an organi#ation which produces in$ and obtains
the !actors o! production !rom multip%le countries !or the
purpose o! !urthering overall enterprise benet.
S&ndaram and #a$ck (1997)
MNC is an enterprise that carries out transactions in or
between two sovereign entities$ operating under a system
o! decision ma"ing permitting in&uence over resources
and capabilities$ where the transactions are sub'ect to
in&uence by !actors e(ogenous to the home country
environment o! the MNC.
The above de,nitions point out the following elements of a "NC%
$ large corporation with operations spread over several countries.
.usiness enterprises with huge resources and potentiality.
The head@uarters of a "NC 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.
*ome Facts about MNCs
The role and importance of "NCs 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 98,555 "NCs around the world today. These
"NCs control over 28;,555 foreign a3liates.
It is estimated that roughly half of all cross1border corporate assets are
accounted for ?ust by the top 255 "NCs. The top <55 "NCs control 4;
percent of all the worlds productive assets.
$bout half of 98,555 "NCs are $merican, .ritish, Iapanese, !erman,
and Hwiss.
The largest 2555 "NCs in the world had combined assets of about FHN
4; trillion, annual revenue of about FHN 6 trillion, and a market value
of about FHN : trillion.
!lobal trade in goods and services account for about FHN 46.7 trillion.
/irms that can be characterized as "NCs now conduct almost half of
world trade.
The ,nancial size of many "NCs is much bigger than the !*+ of the
great ma?ority of countries.
$ list of top 45 "NCs with their annual revenues, pro,ts and overall global
ranking is presented in Table 22.2.
(ab$e 11)1
Ranking of World's Largest Corporation
Rank
2010
%om*an" Re+en&es
(, mi$$ions)
-ro.ts
(, mi$$ions)
2 &al1"art Htores 756,427.5 27,<<;.5
4 >xxon "obil 467,9;5.5 28,465.5
< Chevron 29<,;4:.5 25,76<.5
7 !eneral >lectric 2;9,::8.5 22,54;.5
; .ank of $merica Corp. 2;5,7;5.5 9,4:9.5
9 Conoco +hillips 2<8,;2;.5 7,6;6.5
: $TJT 24<,526.5 24,;<;.5
6 /ord "otor 226,<56.5 4,:2:.5
8 I.+. "organ Chase J Co. 22;,9<4.5 22,:46.5
25 'ewlett1+ackard 227,;;4.5 :,995.5
22 .erkshire 'athaway 224,78<.5 6,5;;.5
24 Citigroup 256,:6;.5 12,959.5
2< Lerizon Communications 25:,656.5 <,9;2.5
27 "cKesson 259,9<4.5 64<.5
2; !eneral "otors 257,;68.5 N.$.
29 $merican International !roup 25<,268.5 125,878.5
2: Cardinal 'ealth 88,924.8 2,2;2.9
26 CLH Caremark 86,:48.5 <,989.5
28 &ells /argo 86,9<9.5 24,4:;.5
45 International .usiness "achines 8;,:;6.5 2<,74;.
Source: Global !!" #!$!%
T#pes of MNCs
The "NCs are of various types. Himilarly their purposes are also di)erent.
Hhapiro -28890 explains the taxonomy of the "NCs as follows%
)aw Material *ee"ers
The earliest "NCs mostly operated as raw material seekers. Those "NCs
operated in di)erent 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 modern1day "NCs dealing with raw materials are multinational oil,
gas, and mining companies. Earge oil companies such as .ritish +etroleum
and Htandard #il, and hard1mineral companies such as International Nickel,
$naconda Copper, and Kennecott Copper are some examples of modern1day
"NCs seeking raw materials internationally.
Mar"et *ee"ers
The market seeker is the modern form of "NC that goes overseas to produce
and sell in foreign markets. This is the most common type of "NC. >xamples
include I.", Lolkswagen, and Fniliver. These "NCs operate in di)erent
countries.
"ore recently, Iapanese and Korean ,rms have begun investing in
di)erent countries, including the FH and &est >urope. Hometimes, the import
restrictions imposed by a country encourage a "NC to operate in that country
itself.
Cost Minimi#ers
These are a fairly recent category of ,rms doing business internationally.
These ,rms seek out and invest in lower1cost production sites overseas -for
example, 'ong Kong, Taiwan, China, India, "alaysia, and Thailand0 to remain
cost competitive both at home and abroad. "any of these ,rms are in
electronics industry. >xamples include Texas Instruments, $tari, and Oenith.
(dvantages of MNCs
There are some bene,ts of "NCs. "NCs are an invaluable dynamic force
today. They are the instruments for wider distribution of capital, technology,
and employment. The important arguments in favour of "NCs are as follows%
"NCs promote the investment climate in the host country. This
ultimately leads to increase in income and employment.
Technology transfer is a ma?or constraint for developing countries.
"NCs have been working as the main vehicles for technology transfer
in these countries.
The impact of the presence of "NCs is also felt in managerial
development in the host countries. +rofessional management and use
of appropriate management techni@ues are associated with "NCs. The
local industries can, thus, learn these management practices from
"NCs.
The host countries can increase their exports through the activities of
"NCs. $t the same time, as the "NCs produce goods within the
countries, the import re@uirements are also reduced. This helps the
host countries in improving their balance of payments position.
$s the "NCs have global networks of manufacturing and distribution,
they help e@ualize the cost of factors of production around the world.
#ne of the crucial resources en?oyed by "NCs is CknowledgeD. "NCs,
by using their e3cient research and development systems can make
signi,cant contribution to inventions and innovations.
"NCs also have positive impact on domestic enterprises. To support
their own operations, the "NCs may encourage and assist domestic
suppliers. "any smaller business activities may (ourish around the
"NCs.
&ith the presence of "NCs, a competitive environment emerges. This
helps in breaking domestic monopolies.
Disadvantages of MNCs
"NCs have, however, been sub?ect to a number of criticisms. Home of the
criticisms against "NCs are as follows%
"NCs deploy inappropriate technology in developing countries. If
"NCs deploy technologies, which are capital1intensive and use little
labour, they are bringing to the developing countries a technology,
which is inappropriate to their needs. *eveloping a new, more labour1
intensive technology may be unpro,table for the "NCs. In short, the
"NCs may act as agents to spread CdependencyD upon developed
countries.
"NCs are criticized for remitting pro,ts from developing countries to
the home country. Countries already short of capital must, thus,
endure a further (ow back to the developed world. The developed
world also criticizes "NCs for exporting capital and ?obs to the Third
&orld, slowing growth and reducing the number of ?obs in the home
country.
"NCs, because of their size and competitive strength, may destroy
competitive environment in the country. They regain monopoly
powers. "NCs may also undermine the national economic autonomy
and priorities of the host country.
"NCs may also be engaged in and interfere with the politics of the
countries in which they operate. The tremendous power that the "NCs
possess may be misused. They may also go against the national
interest of the country in which they do business.
$lthough "NCs claim that they bring capital into the host country, in
practice it seems that they bring little capital into host country. "ost
subsidiaries of "NCs are apparently created to mobilize capital, locally.
They hardly bring in funds from the parent company.
Transfer pricing is also an issue associated with "NCs. "NCs are often
charged that they avoid taxes by manipulating prices on intra1
company transactions. $n extremely high Bprice may be paid by a
subsidiary to a parent company for machinery or a process supplied by
it. This reduces the taxable pro,ts of the subsidiary.
&hen foreign investments compete with home investment, pro,ts in
domestic industries fall, leading to a fall in domestic saving.
"NCs have been accused of an attitude of discrimination against
employment of local nationals in high1salary ?obs and against local
transport, insurance, or credit organizations.
"NCs have become the world reality today. It is not ?ust possible to negate
their existence and in(uence. 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 "NC by inviting in more, particularly
if they are of a di)erent national origin.
"NCs too are vulnerable commercially. Competition puts them in pressure.
The functioning of many "NCs within the same country reduces the risk for
the host country of being in(uenced by any one "NC and dictating its terms.
+erhaps the most useful contribution made by "NCs is the one, which
could not be easily ful,lled by the governments in less1developed countries.
This is the function of transferring to developing countries the production of
goods, which re@uire large @uantities of low1cost labour.
Eow1cost labour is one commodity, which less1developed countries
possess in abundance. If developing countries are ever to progress
economically, they must be allowed to capitalize on this Cnatural advantageD.
/oreign *irect Investments -/*I0 is the international movement of capital for
speci,c investment purposes. Huch investments are made for the purpose of
actively controlling property, assets, or companies located in host countries.
.usiness organizations undertake /*I to expand foreign markets or gain
access to supplies of resources or ,nished products. /*I occurs when
overseas companies set1up or purchase operations in another country.
/*I can be categorized into three components% e@uity capital, reinvested
earnings, and intra1company loans. &'uit( 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. )ntra*compan( loan relate to ,nancial transactions between a
parent company and its a3liates. /*I thus may take many forms, including%
+urchase of existing assets in a foreign company.
New investment in property like land and building.
+articipation in a ?oint venture with a local partner.
"ergers and ac@uisition activities
&hy do companies engage in /*IP 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 AJ*.
To locate a business function near clusters of similar or related
companies.
Eow saving, low investment, and low capital formation characterize a
developing country. Huch a country obviously looks for an external source to
,ll its resource gap. The following are some direct bene,ts of /*I%
$ developing country, su)ers from lack of capital and advanced
technology. /*I is an important source of bringing in capital and
technology in a country.
/*I 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
bene,ts a host country can expect from /*I.
/*I also infuses competitive corporate culture and technical skills,
which are e@ually important factors for industrial development.
$ developing country often needs to import raw materials that are not
available domestically. The country needs foreign currency to pay for
imports. /*I can be of great help in this respect.
&hen a "NC sets up its subsidiary in a developing country, the parent
company also transfers its work system, management concepts and
skills to its subsidiary. 'ence the host country bene,ts from such
transfer of management skills.
Thus, the countries, both developed and developing, have been attracting
/*I by o)ering several incentive packages and concessions to foreign
investors. The developing countries in particular have been making extra
e)orts to create an environment, which is conducive for attracting such an
investment. In order to attract /*I on a large scale, the governments have
taken several steps to remove the barriers and irritants, which hinder the
in(ow of investment. The details of the global /*I are presented in Table 22.4.
(ab$e 11)2
Global +,) #!!*#!!-
FHN in "illion
/ro&* o0 1conomics
234 4n5o!s
2005 2006 2007
6or$d 958697 141101
8
183332
4
,eveloped &conomies 92246< 875692 247:9<;
>urope ;5;7:< ;88<4: 676;4:
North $merica 2<2:75 488799 <72787
#ther *eveloped Countries 14;8<5 74598 ;:92;
,eveloping &conomics <29777 724885 788:7:
$frica 487;8 7;:;7 ;4864
Eatin $merica and the Caribbean :9724 8487; 249499
$sia and #ceania 425;:4 4:7482 <45786
Houth, >ast, and Houth1east $sia 29:757 456854 47:675
Least ,eveloped Countries :274 24629 2<<:;
Source: ./C01," #!!2%
The economic crisis slashed global /*I (ows by about 75Q in 4558,
a)ecting all economies, sectors, and forms of investment. "ergers and
ac@uisitions in high1income economies contracted the @uickest after the 455:
subprime mortgage crisis in the Fnited Htates contributed to banking and
,scal crises in &estern >urope and Iapan. The contagion gradually spread,
a)ecting new investment in emerging markets and developing economies.
*eveloping economies fared marginally better during the crisis. /*I in
developing economies fell <;Q in 4558, compared with 72Q in high1income
economies. &ith the global recession receding somewhat, /*I will likely
recover in the near future. "ost indicators signal that /*I will be higher in
4525 than in 4558.
The share of E*Cs in the global /*I is very small. In 2865, the share of
these countries in the global /*I was FHN < billion. In 4556, this increased to
FHN ;5 billion. $mong the developing countries, countries like China, >gypt,
.razil, "exico, "alaysia, $rgentina, Aussia, and so on take the higher share.
The share of the Houth $sian countries is very negligible. The /*I in(ow in
Houth $sian countries is given in Table 22.<.
(ab$e 11)3
+,) to Sout3 and Sout3east 1sia
FHN in "illion
Region 2005 2006 2007
So&t' 7sia 12,136 25,780 30,620
$fghanistan 4:< 474 466
.angladesh 67; :8< 999
.hutan 8 9 :6
India :,959 28,994 44,8;5
"aldives 8 27 2;
Nepal 4 1: 9
+akistan 4,452 7,4:< ;,<<<
Hri Eanka 4:4 765 ;48
So&t'8east 7sia 39,091 51,243 60,514
.runei 468 7<7 267
Cambodia <62 76< 69:
Indonesia 6,<<: 7,827 9,846
Eaos 46 26: <47
"alaysia <,89: 9,576 6,75<
+hilippines 2,6;7 4,842 4,846
Hingapore 2<,8<5 47,:7< 47,2<:
Thailand 6,576 8,525 8,;:;
Liet Nam 4,542 4,<95 9,:<8
%'ina 72,406 72,715 83,521
Source: ./C01," #!!2%
Cross1regional comparisons indicate that Houth $sias share of total /*I to
developing countries is relatively very small. The share of the Houth $sian
countries in the global /*I was only FHN <2 billion in 4556. #f this too, India
has taken about :; percent. Ho far India, +akistan and Hri Eanka are the
largest percipients of /*I in Houth $sia. The other Houth $sian countries like
Nepal, "aldives and .hutan have not been able to attract enough /*I despite
several economic reforms and incentives.
$ll of the countries in Houth $sia tried to encourage /*I more aggressively
in the 2885s, by making changes in their macroeconomic policies along with
/*I and trade policies. $s discussed in Chapter 2<, most of these countries
have liberalized e@uity restrictions on /*I in the service sector. #ne hundred
percent e@uity is allowed in many service sectors.
#f the limited /*I coming to Houth $sia, the manufacturing, energy and
service sectors occupy the lions share. $ relatively small portion of /*I has
gone to export1oriented sectors. These trends suggest that Houth $sia may be
bene,ting proportionately less from the trend toward the globalization of
production.
Houth $sia relies on external resources for its economic development.
&ith the decline in foreign aid, there is an emphasis on the role of /*I and
foreign portfolio investment as channels of non1debt creating (ows of external
resources. 'owever, a number of challenges remain. Htructural weaknesses,
institutional bottlenecks, political movements, narrow nationalism and mutual
mistrust are some of the factors that explain the failure of the region to
exploit possibilities.
FDI in Nepal
The in(ow of /*I in Nepal began in the early 2865s through the gradual
opening up of the economy. /rom 2865 to 2868, /*I in(ows to Nepal were
minimal with an annual average of FHN ;55,555. /*I in(ow showed a distinct
acceleration during the 2885s averaging FHN 22 million per annum during
288514555, picking at FHN 4< million in 288: -FNCT$*, 45590. This was
primarily due to NepalRs more liberal trade policies, which comprised tari)
rate reductions, the introduction of a duty drawback scheme, adoption of a
current account convertibility system and liberalization of the exchange rate
regime.
$ reversal in the rising trend took place from the beginning of the 4555s.
*espite these e)orts, the /*I in(ow to Nepal started declining -Table 27.90.
*uring 286912885, it was FHN 2.8 million, which rose to FHN 28.< million in
4552. In 455:, /*I in(ow to Nepal further declined to FHN 9 million. Its share
of Houth $sias /*I was thus only 5.5; percent. These ,gures suggest
underlying apprehensions and lack of investor con,dence with the existing
state of a)airs.
.y the end of 4558125, a total of 2,686 industries were allowed to set up
under /*I. These industries had an /*I worth As.;6 billion and provided
employment to 277,;2< individuals. The industry1wise distribution of these
foreign ventures is given in Table 22.7. "ost of these /*I pro?ects are of small
size and are for ?oint venture because of non1commercial risks.
Table 22.; indicates country1wise investments. China has its investments
in ;6 industries, India in 4:, Houth Korea in 45, FK in 9, FH$ in 25, !ermany in
7, $ustralia in ;, Netherlands in < and Iapan in 7. These industries are
supposed to receive a total capital worth As.8.25 billion with employment of a
total of :,676 individuals.
(ab$e 11)4
)ndustries permitted for foreign investment till #!!45$!
Lalue in "illion As.
4nd&str" ("*e 9&mber (ota$
-ro:ect
%ost
(ota$ 2i;ed
%a*ita$
2oreign
4n+estment
1m*$o"men
t
%reation
(9o))
Industrial +roduction <: <:;2.; <745.8 495;.7 2887
Hervice Industry :4 8:9.5 :95.7 859.2 <45;
Tourism Industry ;5 25<;.4 848.7 :2:.; 2;<:
Construction 2 45.5 2;.: 45.5 <9
>nergy ; 8892.2 8:9;.2 7:7:.5 78<
$gro1based 4 25.5 6.9 25.5 98
"ining 7 255.5 6:.8 87.5 ;27
(ota$ 171 15853)8 14988)0 9100)0 7848
Source: &conomic Surve(" #!$$%
(ab$e 11)5
+oreign )nvestment b( countries in +iscal 6ear #!$!7$$
S)9) %o&ntries 9o) o0
4nd&stries
S)9) %o&ntries 9o) o0
4nd&stries
2. India 4: 22. Aussia 4
4. China ;6 24. New Oealand 4
<. Iapan 7 2<. $ustralia ;
7. FH$ 25 27. *enmark 4
;. FK 9 2;. "auritius 4
9. Houth Korea 45 29. Canada 4
:. .angladesh 4 2:. /rance 4
6. !ermany 7 26. Turkey 4
8. Hingapore 4 28. #thers 29
25. The Netherlands < (ota$ 171
-easons for te Poor Inflo% of FDI in Nepal
Han?el -455:0 and !autam -45250 have summarized the causes of this poor
state of a)airs of /*I in Nepal in the following words%
The government has announced /ITT$, 2884 to attract foreign
investment. The $ct is not clear on the de,nition of foreign
investments and technology transfers. It has yet to modify foreign
exchange regulations and tax policies.
+roduction base is limited due to non1availability and poor access to
mineral, forestry and other natural resources.
Aecent political disturbances have even threatened bilateral and
multilateral development pro?ects. &ith 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
/*I.
Hocial tension and unrest are likely to grow due to rising
unemployment among youths. "arkets (ourish 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 !overnment to allow its citizens to
invest up to IC 955 million in Nepal, without prior approval, has opened
new opportunities for foreign investment in medium scale ventures.
.ut the likely investment areas are yet to be explored.
There is absence of long1term business plan and strategies backed by
proper information and AJ* systems.
There is lack of proper monitoring and supervision of the registered
foreign pro?ects. "ost of such pro?ects exist only in name. They have
not yet started their pro?ect construction and operations.
$lthough the !overnment is open to /*I, implementation of its policies
is often distorted by bureaucratic delays and ine3ciency.
"any foreign investors in Nepal are individuals rather than corporate
entities. $s there is no strict rule to register only foreign companies,
any individual can apply and get registration of the pro?ects in Nepal.
Huch pro?ects are never startedM 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
/*I map. It has not been able to meet the necessary minimum preconditions
for /*I. Nepal has a long way to go to make the environment investor friendly.
$ developed stock exchange, full convertibility of foreign exchange or free
mobility of capital and easy repatriation of pro,ts and deregulation are some
of the preconditions for /*I. These preconditions are yet to be fully achieved
in Nepal.
$t the same time, political instability and social disturbances have
a)ected the ?oint venture pro?ects already operating in Nepal. Home of such
undertakings have been withdrawing their capital. /or instance, the /rench
shareholders have withdrawn their capital from the Nepal Indosuez .ank.
Himilarly, the Kodak Company and Colgate1+almolive have closed down their
factories at 'etauda. "any 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 e)orts of the government to attract foreign
investment.
The !overnment has now constituted the .oard of Investment under the
chairmanship of the +rime "inister. 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 !overnment has also announced that
a "onitoring Fnit would be created in the #3ce of the +rime "inister to
supervise and monitor the investment climate in the country.
&e should bear in mind that not all types of foreign investment contribute
to income and employment generation. The !overnment should be selective
about /*I. &hile taking the decision about /*I, the !overnment should not
discriminate against domestic investors. The industries using /*I should also
be evaluated in terms of their potential to create employment, promote
exports, transfer technology and encourage human development1friendly
activities. The industries having market prospects in India and other H$$AC
countries have to be promoted. The extended Houth $sian market after the
implementation of H$/T$ needs to be kept into consideration in providing
public support to new industries.
World Trade $rganization .WT$/
The &orld Trade #rganization -&T#0 is an international body dealing with the
rules of trade between nations. It has started functioning from Ianuary 2,
288;. #n $pril 4<, 4557, Nepal also got its membership. "any countries are
currently negotiating for their accession. These include a number of
developing countries. The membership of &T# currently stands at 2;<
countries, representing more than 8: percent of the worldRs population, and
<5 observers, most seeking membership.
!$TT was established as an international forum in 2876 by 4< signatories.
Its purpose was to ensure non1discrimination, transparent procedures, the
settlement of disputes, and the participation of less developed countries in
international trade.
!$TT was not originally intended to be an international organization.
Aather it was to be a multilateral treaty designed to operate under the
International Trade #rganization -IT#0. 'owever, because the IT# never came
into being, the !$TT became the governing body for settlement of
international trade disputes. !radually it evolved into an institution that
sponsored various successful rounds of international trade negotiations. #ne
of the ob?ectives of !$TT was to create a &orld Trade #rganization -&T#0.
The actual establishment of the &T#, however, was long delayed due to a
variety of factors.
The latest !$TT negotiations, called the Fruguay Aound, were initiated in
286:. The main thrust of negotiations had become the sharpening of dispute1
settlement rules and the integration of the trade and investment areas that
were outside of the !$TT. The governments represented in these negotiations
gave their consent and political backing to the formation of the &T#.
Eater in 2887, the /inal $ct was signed in a "inisterial "eeting held at
"arrakesh, "orocco. Thus, after many years of negotiations, a new accord
was ,nally rati,ed in early 288;. $ new institution called &T# thus
supplanted the !$TT in 288;. The establishment of the &T# aims at
integrating the world economy by cutting down the barriers in trade and
investment (ows. &T# now administers international trade and investment
accords.
$b0ectives of WT$
The purpose of the &T# is to promote free trade by persuading countries to
abolish import tari)s 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 o)ers a
system for international commerce. &T# has three main ob?ectives. In fact,
these are the reiterations of the ob?ectives of !$TT%
Aaising standard of living and incomes, promoting full employment,
expanding production and trade, and optimum utilization of worlds
resources.
Introducing sustainable development = a concept, which envisages
that development and environment can go together.
Taking positive steps to ensure that developing countries, especially
the least developed countries -E*Cs0, secure a better share of growth
in trade.
Functions of te WT$
The ma?or functions of the &T# as envisaged in its Charter are as follows%
$dminister and implement the trade agreements.
$ct as a forum for multilateral trade negotiations.
Heek to resolve trade disputes.
#versee national trade policies.
Cooperate with other international institutions involved in global
economic policy making.
"aintain trade related database. "embers are re@uired to notify in
detail various trade measures and statistics.
$ct as a watchdog of international trade, constantly examining the
trade regimes of individual members.
$ct as a management consultant for world trade.
+rovide technical assistance and training for developing countries.
Trade liberalization has thus been the main focus of the &T#. It has given
due attention to investments and issues of broader economic cooperation
making it a global platform for integration. It is envisaged that elimination of
barriers in trade and investment would integrate the world economy. This
mechanism will ultimately generate growth and encourage competitive
activities bene,ting the mankind across the globe.
The &T# provisions have reduced the scope for bilateral preferential
arrangements. 'owever, such arrangements can be maintained at regional
level. 'ence, within the scope of &T#, the importance and relevance of
regional groupings have been accepted and recognized. It is argued that
regionalism is the logical ,rst phase in the creation of a smoothly functioning
multilateral trading system.
Main Principles of te WT$
$s an international institution to regulate trade and investment, the &T# is
based on the following fundamental principles%
Fair Competition and Non1discrimination
&T# stands for open, fair and undistorted competition. The basic aim of &T#
is to liberalize world trade and create conditions of competition that are fair
and e@uitable by encouraging countries to reduce tari)s and remove other
barriers which distort competition and international trade relations by
re@uiring them to apply a harmonized set of rules. Thus, trade without
discrimination is the fundamental principle of &T#.
Transparenc#
&T# also aims to attain transparency in world trade. "ember countries are
re@uired to publish their respective trade policies, laws, regulations, ?udicial
decisions and administrative ruling. Himilarly, their provisions regarding
valuation of products, rates of duty, taxes and other charges a)ecting sale,
distribution, transportation, insurance etc. must be known to other member
countries. This helps the exporters plan their trade.
Treatment for "DCs
The &T# system classi,es countries deserving preferential treatment into
four groups%
(i) least1developed countries, (ii) developing countries, (iii) net1food importing
countries, and
(iv) countries in the process of transformation into a market economy.
&T# recognizes the special needs of developing countries in terms of the
implementation of various agreements under it. The developing countries,
and especially the least1developed among them, are given transition periods
to ad?ust to the new situation.
In addition, a ministerial decision on measures in favour of least1
developed countries allows them extra (exibility in implementing the &T#
agreements. It also calls for enhanced market access conditions for less1
developed countries and seeks from the developed countries increased
technical assistance for them.
MFN Treatment
The main principle of the &T# is that it should promote trade without
discrimination. $ country should not discriminate between its trading
partners. $ll of them must be granted most1favoured1nation -"/N0 status.
This means that every time a member country lowers a trade barrier or opens
to a market, it needs to extend the bene,ts to all trading partners.
Himilarly, it should not discriminate between its own and foreign goods
and services. They are to be accorded the Cnational treatmentD. The national
treatment clause of the &T# re@uires that once goods have entered a
market, they must be treated no less favourably than the e@uivalent
domestically produced goods.
Free Trade Principle
+rotection and perpetual government subsidies lead to ine3ciency supplying
consumers with outdated and unattractive products. Fltimately, factories
close and ?obs are lost, despite protection and subsidies. 'ence, the member
countries should emphasize on open trade and concentrate on what they can
produce best. .igger markets will help these countries produce more and
reap economies of scale.
-ule1based Trading *#stem
The basic principle of &T# is rule1based trading system. To attain this, &T#
sets and enforces rules necessary for conducting world trade fairly. This helps
in opening trade between countries.
Competitive Principle
&T# seeks to protect consumer interest by promoting competition among
trading members. Aemoval or reduction of tari)s and subsidies will expose
locally produced goods and services to imported ones. The local products
need to compete with imports.
Environment Protection
The preamble of the &T# agreement refers to the protection of environment.
It emphasizes on sustainable development and the need to preserve
environment. Larious agreements contain provisions to protect human,
animal, and plant life, their health and the overall environment.
WT$ (greements
&T# is a set of agreements that create legally binding rights and obligations
for all member countries. Himilarly, 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 &T# members. The &T#
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 tari)s and other
trade barriers, and to open and keep open service markets. The agreements
and commitments of member nations must be rati,ed by their parliaments.
The &T# $greement is a comprehensive document. It contains 48
individual legal texts, covering a wide spectrum of areas. $dded to these,
there are more than 4; additional "inisterial *eclarations, which spell out
further obligations and commitments for &T# members. There are two types
of agreements% multilateral and plurilateral.
8ultilateral agreements are binding for all members. They are globally
applicable.
9lurilateral agreements have a small group of signatories with shared
interest in a speci,c sector.
"ost legal instruments of the &T# system are lengthy and complex.
These legal instruments and other ma?or provisions are contained in the /inal
$ct. This $ct deals with the following key sub?ects%
General (greement on Trade and Tariff .G(TT/
The !$TT is the &T#s principal rule1book for trade in goods. Hince 288;, the
updated !$TT has become the &T#s umbrella agreement for trade in goods.
It has annexes dealing with speci,c issues such as state trading, product
standards, subsidies, and actions taken against dumping. The !$TT rules
follow four fundamental principles%
Consultation) "ember countries should consult one another in matters
of trade and trade1related problems.
+ stable basis o! trade) $ stable and predictable basis for trade is
provided under the rules.
,rotection through tari-s) +rotection to home industries can be
provided only through customs tari) and not through any means to make
the extent of protection clear to make competition possible.
.rade without discrimination) $ country granting an advantage to one
non1!$TT party must grant the same advantage to other member
countries. >xceptions to this basic rule are allowed only in the case
regional trading arrangements and the developing countries.
>ven though the rules with !$TT are complex, they are based on a few
simple rules divided into the following three basic categories%
Basic rules) The three basic rules of !$TT are% (i) "/N treatment, (ii)
national treatment, and (iii) protection through tari)s.
)ules applicable at the border) The above three basic rules are
complemented by rules applicable to imported and exported goods at the
border. They include% (i) procedure for import licensing, (ii) the
determination of value, (iii) the application of mandatory standards, and
(iv) the application of sanitary and phytosanitary measures.
)ules governing contingency protection measures) Contingency
measures can be applied in two situations% (i) safeguard actions taken to
provide the industries a breathing space to raise their competitive
position, and (ii) anti1dumping duties.
The basic aim of !$TT is to liberalize world trade and create conditions of
competition that are fair and e@uitable by encouraging member countries to
reduce tari)s and remove other barriers, which distort competition. Trade
without discrimination is the fundamental principle of !$TT. !$TT has detailed
annexes dealing with sectors such as agriculture, textiles, and with speci,c
issues such as state trading.
General (greement on Trade in *ervices .G(T*/
The !$TH aims at promoting the economic growth of all trading partners and
the development of developing countries by expanded trade in services under
the conditions of transparency and progressive liberalization. The !$TH
applies to any service in any sector except services supplied in the exercise of
government authority.
Hervices cover a wide range of economic activity from banking, insurance
and telecommunications to recreation, culture and sporting services. The
business ,rms of member countries looking to do business abroad can now
en?oy the same principles of freer and fairer trade that originally applied to
trade in goods. The basic principles of !$TH are the following%
$ll services are to be governed by !$TH.
"/N 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.
+rogressive liberalization through further negotiations.
&T# members have to make individual commitments under !$TH starting
which of their services sectors they are willing to open to foreign competition.
The obligations that the framework imposes on member countries can be
broadly divided into two categories%
General multilateral principles) This includes general concepts,
principles, rules and procedures applying to all measures a)ecting trade
in services.
*pecied negotiated obligations) These obligations are commitments
applying to those service sectors listed in a member countrys schedule.
>very member country gives its sector1by1sector commitments to
liberalize trade in services.
!$TH is now taking shape ,rmly. It has thus become an extremely
important segment of multilateral trading regime.
Trade1related Intellectual Propert# -igts .T-IP*/
The rules in the TAI+H agreement cover speci,c areas 1 copyrights, patents,
trademarks, geographical names used to identify products, industrial designs,
integrated circuits, layout designs, and undisclosed information such as trade
secrets. Thus, &T# intellectual property agreements amount to rules for
trade and investment in ideas and creativity.
TAI+H agreements state how Cintellectual propertyD should be protected
when international trade is involved. The agreement on TAI+H 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 e)ective means of action by
any right holder, foreign or domestic, to secure the enforcement of his or her
rights.
Tecnical +arriers to Trade .T+T/
Countries often re@uire that imported goods must conform to the
manufacturing standards they have adopted. Huch mandatory standards and
the administrative procedures used for their enforcement are known as
Ctechnical regulationsD. 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. /or this, the agreement re@uires countries to base their
technical regulations on international standards.
$ 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 re@uires each member country to establish in@uiry points from
which information can be obtained.
This agreement re@uires &T# members to apply technical regulations
a)ecting industrial products fairly and transparently. Technical regulations
should embody international standards and should be designed to restrict
trade as little as possible. "embers are re@uired to notify others when
developing new technical regulations that may a)ect &T# members exports.
Trade1related Investment Measures .T-IM*/
&T# is also concerned with the removal of various controls imposed on the
in(ow of foreign capital into the third world countries. This measure helps
"NCs as they will be treated as national companies. The TAI"H text provides
that foreign capital would not be discriminated by the member countries. The
foreign capital gets e@ual treatment at par with domestic capital. TAI"H
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 @uantum of foreign investment.
There should be no force on foreign investors to use domestic products
or materials.
>xport of the part of the ,nal product should not be made mandatory.
No restriction should be imposed on repatriation of dividend, interest
and royalty will be removed.
(nti1dumping Measures
&T# allows members to apply anti1dumping measures. Huch measures can
be imposed on imports, if such dumped imports cause in?ury to a domestic
industry. &T# provides procedures to be followed in initiating and conducting
anti1dumping investigations. $nti1dumping measures can imposed as a
defence against dumped imports. These measures can be of the following
types%
Tari) duty
Import @uota
Import embargo
Loluntary export restraint
*anitar# and P#tosanitar# Measures .*P*/
This agreement re@uires &T# 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. Huch regulations are adopted by countries to protect%
'uman or animal life from food1borne risks.
'uman health from animal or plant1carried diseases.
$nimals and plants from pests and diseases.
In order to assure that sanitary and phytosanitary regulations do not
cause unnecessary barriers to trade, the agreement re@uires countries to
base them on Cscienti,c principlesD. Huch regulations should also be based on
international standards.
Dispute *ettlement
&T# makes rule for resolving trade disputes. Countries bring disputes to the
&T# if they think their rights under the agreement are being infringed.
Iudgments by especially1appointed independent experts are based on
interpretations of the agreement or individual countrys commitments.
&T# system encourages countries to settle their di)erences through
consultation. /ailing that they can follow a carefully mapped out, stage1by1
stage procedure that includes the possibility of a ruling panel of experts, and
the chance to appeal the ruling on legal grounds.
&T# improved dispute settlement procedures compared with those of
!$TT. These improvements include%
Near automaticity of establishment of panels and adoption of their
reported.
+recise deadlines for every step of the panel process.
Polic# -evie%s
The trade policy review mechanisms are also developed by &T#. The purpose
is to improve transparency, to create a greater understanding of the policies
that countries are adopting, and to assess their impact. "any members also
see these reviews as constructive feedback on their policies. $ll &T#
members must undergo periodic scrutiny, each review containing reports by
the country concerned and the &T# Hecretariat.
"ember countries are under an obligation to ensure that their national
legislation, regulations and procedures are in full conformity with the
provisions of these $greements. The resulting harmonization by all countries
of rules and regulations applicable to trade in goods and services facilitate
trade.
The harmonized rules also help ensure that national regulations do not
create unnecessary barriers to trade and that the sudden imposition of high
tari)s or other barriers to trade does not disrupt a countrys exports.
*tructure of te WT$
The &T# structure comprises conferences, councils, committees and other
bodies. The structure is shown in /igure 22.2. The head o3ce of the &T# is in
!eneva, Hwitzerland. This o3ce is headed by the *irector !eneral.
The highest body governing the &T# is its 8inisterial Conference. This
body is composed of the representatives of all &T# 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 &T# members. This
Council is re@uired to report to the "inisterial Conference. Fnder the
Council, there are two important bodies. &T# has three other
important councils.
The Council for 0rade in Goods overseas the implementation and
functioning of all the agreements covering trade in goods.
2ig&re 11)1
:rgani;ation Structure of W0:
The Council for 0rade in Services and Trade1related aspects.
The Council for )ntellectual 9ropert( Rig3ts has responsibilities for the
related &T# agreements.
There are a number of subsidiary bodies of the &T#, which perform
the day1to1day activities.
The ,ispute Settlement <od( looks after the dispute settlement
procedures
The 0rade 9olic( Revie= <od( conducts regular reviews of trade
policies of individual &T# members.
There are other committees assist the !eneral Council in its functioning.
These are as follows%
The Committee on 0rade and ,evelopment is concerned with issues
relating to the developing countries and especially the least1developed
countries.
The Committee on <alance of 9a(ments is responsible for
consultations among &T# members and countries, which resort to
trade restrictive measures in order to cope with their balance of
payments di3culties.
The Committee on <udget" +inance and 1dministration deals with the
issues relating to &T#s ,nancing and budget.
+enefits of te WT$ Trading *#stem
&hy should countries like Nepal ?oin &T#P &T# trading system bene,ts the
member countries in many di)erent ways. The following is the highlight of
such bene,ts%
+ system based on rules rather than power. This makes the trading
system smoother. The principle of non1discrimination built into the &T#
agreements avoids the complexity.
/reer trade cuts the cost o! living) +rotection is expensive. It raises
prices. The &T# system lowers trade barriers. This results in reduced cost
of production, reduced prices, and ultimately a lower cost of living.
.he system helps promote peace) The &T# system creates
international con,dence and cooperation. Negotiations among member
countries lead to agreements by consensus.
.he system allows dispute to be handled constructively) &T#
procedures focus on rules. #nce a ruling has been made, countries
concentrate on trying to comply with the rules.
0t gives consumers more choice and a broader range o! qualities
to choose !rom. #pen markets, lowered tari)s, and non1discrimination
provide the consumers with more choice and @uality.
.rade raises incomes) Non1restricted trade clearly increases incomes.
Aesources are available to the government to redistribute the bene,ts
from those who gain the most.
.rade stimulates economic growth$ and that can be good news !or
employment. Trade clearly has the potential to create ?obs. There are
factual evidences that lower barriers have been good for employment.
.he basic principles ma"e the system economically e1cient$ and
they cut costs. Hourcing system is practiced. This would become more
e3cient and would cost less.
.he system shields governments !rom narrow interests) The &T#
system helps governments take a more balanced view of trade policy.
.he system encourages good governance) &T# agreements can also
help reduce corruptions and bad governance. Transparency, clearer
criteria for regulations, and non1discrimination help reduce the scope for
arbitrary decision1making and cheating.
WT$ and Nepal
Nepal2s Membersip
Nepal got the membership of the &T# on $pril 4<, 4557. Nepal had applied
for the membership of !$TT in 2868. This application of membership was
made in view of the trade and transit problems with India at that time. .ut
Nepals interest in membership waned after the Nepal1India Trade Treaty was
successfully negotiated in 2882.
Nepal started the process of economic reforms in the early 2885s. These
reforms were essential to ac@uire the membership of &T#. $s a result of this
reform initiation, Nepal was given the observer status in 288<. Nepal
participated in the ,nal meetings of the Fruguay Aound.
Nepal presented its formal application to accede to &T# in *ecember
288;. It submitted its "emorandum of the /oreign Trades Aegime in 2886.
$fter three rounds of working party meetings during 45551455<, Nepal ,nally
was granted the membership in the Cancun Conference. Thus, Nepals
membership was the result of its e)orts of fourteen long years.
Nepal2s Commitments
&hile seeking the membership of &T#, the countries have to go through a
series of negotiations. They have to agree to commitments and determine
conditions. #nce these initial negotiations are completed, negotiations are
then held at multilateral level.
The sub?ect of these multilateral negotiations and conditions re(ect how
far Nepal will open its market with respect to% (i) consumption abroad, (ii)
cross1border supply, (iii) market access, and (iv) presence of natural person
along with the issues of national treatment.
Nepal entered into bilateral agreements with FH$, Canada, >F, $ustralia,
New Oealand, Iapan and India. The composite negotiations and agreements
then formed the basis of total commitments of Nepal.
$fter these negotiations and agreements, &T# and Nepal ,nally agreed at
!eneva to all the conditions and commitments. In all these negotiations,
Nepal had presented its strong case to allow it greater (exibility being a least
developed country.
Nepals commitments can be grouped into two broad types% (i) general
commitments, and (ii) speci,c commitments.
General Commitments
!eneral 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.
Non2discriminations among member countries) This means that
e@ual treatment or Cmost favoured nationD 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 re@uiring the
approval of the *epartment 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.
.here will be transparency in all aspects) Nepal has fully committed
to ful,ll all transparency re@uirements.
Commitment to !oreign investment) Nepal has committed to provide
its decision within <5 days of the sate of application for investment. Huch
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 &T#.
Nepal has also committed to repatriation o! investment in !oreign
currency. This includes the payments made in the form of shares, e@uity
investment, foreign loan, and technology transfers.
.ari- bindings) Nepal has committed to bind its tari) at certain levels.
Nepal negotiated an average tari) binding of 74 percent on agricultural
products and around 47 percent on industrial goods. $ maximum tari)
rate up to ; percent will be applied on daily consumption items.
)egulatory re!orms) Nepal has also committed to a timetable of
legislative reforms re@uired to comply with &T# rules. Nepal has agreed
to the following legislative plan of action%
Nepal will progressively implement the $greement on Customs
Laluation starting from 2 Ianuary 455:.
Nepal will implement fully the provisions of the $greement on Hanitary
and +hytosanitary "easures by 2 Ianuary 455:.
Nepal will progressively implement the $greement on Technical
.arriers to Trade by 2 Ianuary 455:.
Nepal has committed to prepare and implement the new Industrial
+roperty $ct no later than 2 Ianuary 4559.
*pecific Commitments
Nepal agreed speci,c commitments in 22 service sectors, revealing its clear
belief in the bene,ts of liberalization as an engine for economic growth and
prosperity. These sectors include business, communication, construction,
education, environmental, ,nancial 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. 'owever, these commitments may pose some challenges to
already existing operations.
Nepal has made speci,c commitments very cautiously. The main features
of these speci,c 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 cross1border supply and
consumption abroad. /or the latter, however, the foreign exchange
limitations have been continued.
Natural persons will not be allowed to operate except as speci,ed -e.g.
sales persons, those coming for feasibility studies and as managers
and specialists0. The number of such persons is limited to 2; percent
of local employees. #nly 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
a)ect domestic activities.
"ost of Nepals commitments relate to liberalization in cross1border
supply of services, consumption of services abroad, and, with some
restrictions, on foreign commercial presence. >conomic and political
considerations make liberalizing services trade considerably more
complicated than goods trade liberalization. 'owever, greater access to
foreign providers of business services will help Nepalese ,rms reduce costs
and identify new foreign markets.
Membersip3 $pportunities and Treats
&ith the &T# membership, Nepal has entered into the world economy. This
represents more than 85 percent of the global trade. The important bene,ts
to Nepal of &T# membership will be as follows%
There is now the guarantee that Nepal will get the Cmost favoured
nationD status from all the member countries.
Nepal will now have assured market access and transit rights.
Nepal will also have access to &T# dispute settlement procedures and
legal recourse to contest undesirable trade policies imposed upon it.
Nepals membership is also expected to discipline its own government
in pursuing committed policies.
Nepals membership is further expected to enhance transparency and
reduce uncertainty to trade and investment environment.
Nepals membership will provide opportunity to indulge in multilateral
trade negotiations.
This membership will give Nepal a seat at the negotiating table,
allowing it to contribute to the debate on the future shape of the world
trading system.
There are challenges as well. These challenges accompany &T#
membership. The ma?or challenges for Nepal are as follows%
*omestic industries will face greater competition. "ultinational
companies are sure to dominate the domestic market both in goods
and services sectors.
The !overnment will face the ,scal1ad?ustment cost of ,nding new
import surcharges introduced since 4555, which &T# members have
asked to eliminate as a condition of accession.
The cost of negotiation and transaction too are expected to put
pressure on least developed countries like Nepal.
Nepal will have to bear the burden of implementing trade1related
regulatory rules. This will re@uire signi,cant investment in
administrative capacity, legal reforms, and institution building.
&ith liberalization of the service sector, it is essential for Nepal to
undertake internal reforms to be able to match with global standards.
'owever, due to the critical shortage of reliable information about this
sector, it is di3cult to design action plans to enhance the
competitiveness and e)ectiveness of this sector.
Nepalese products or services are not competitive in terms of price,
@uality, and delivery schedule. 'ence, there is hardly any chance for
such products to ,nd international market.
Nepals political economy is not stable. The prevailing system of
coalition governance is not conducive for prompt and e)ective
changes and their implementation.
Keeping in view these challenges, Nepal may not bene,t from the &T#
membership unless it creates an environment to promote its business sector.
There are some sectors like tourism and information technology in which
Nepal can have advantageous position. Huch sectors thus need to be
identi,ed and promoted.
Implications of te WT$ Membersip
Nepal cannot remain isolated from the world community. It cannot remain
una)ected by global trends either. /or a small country like Nepal,
globalization becomes even more important. The bigger countries have larger
economies. They are less dependent on the outside world. The developing
countries have much to gain from regional and international trade. This fact
has already been proved by the experiences of the Houtheast $sian countries.
&hat would be the possible implications on the economy of Nepal
following its membership to the &T#P The provisions of the &T# and the
areas of ma?or concern to Nepal are as follows%
&T#s ,rst re@uirement is trade liberalization. There can be no barriers
to trade. *iscrimination between the products of domestic and foreign
,rms is not allowed. Nepal has already moved in this direction.
'owever, the tari) rates will have to be within the framework of &T#
directives.
$gricultural subsidy is another area of concern to member countries.
&T# provisions re@uire members to convert import @uotas into bound
tari)s, reduce export subsidies and levels of domestic support for
agricultural products. /ollowing these should not have large e)ects on
Nepals agricultural policy. /irst, much of Nepals agricultural trade is
conducted with India on a reciprocal, duty1free basis, and would be
una)ected by &T# membership. Hecond, Nepal does not provide
signi,cant agricultural subsidies. The total agricultural subsidies
amounted to about 2.< percent of the agricultural !*+. The share of
government expenditure on agriculture has come down from 2;
percent to 25 percent in 4557. Third, there is no restriction on the
spending of the government on agricultural research, rural
development, etc. Thus, there is no pressure on Nepal to reduce many
tari) rates on agriculture.
The member countries cannot provide export subsidies to their
exporters and industries. Nepal does not provide any direct export
subsidy to its export1oriented industries.
Intellectual property right on seeds and plants is another area of
Nepals concern. Nepals bio1diversity makes it rich in (ora and fauna.
Its concern, therefore, is to safeguard the patent and property rights
on these native plants and seeds. 'owever, getting such patents and
property rights is a long and expensive process. $ thorough study and
research on each of the plants or seed to defend the claim for property
right or patent is re@uired. The existing acts and regulations relating to
patent and copyright will also be re@uired to be amended.
Fnder the market access principle of &T#, a minimum of < percent of
the total consumption of food is re@uired to be imported from outside.
This would open the market of developed countries for the products of
developing countries.
Nepals trade and foreign exchange regime are already @uite liberal.
Its economic and trade policies are more or less in conformity with the
provisions of the &T#. 'owever, some of the laws will have to be
amended.
Improvements in trade and investment policies will be re@uired to
stimulate exports, private sector activity, and economic growth. To
take advantage of emerging opportunities through its membership in
&T#, Nepal needs to improve its production capability and
competitiveness. &ithout attaining these, Nepals products cannot
stand in the international market.
Importing countries now re@uire exporters to guarantee that their
products are free of pests, disease, and pesticide residues. If Nepal is
to meet these standards, its exporters must meet these H+H measures
adopted by &T# in agricultural and horticultural products.
The present provisions in Nepal fall short of conformity with TAI+H in
several areas. /or example, current patent law grants protection for
only seven yearsM TAI+H re@uires 451year patent terms. Himilarly, in
Nepal there is no provision for protection of integrated circuit
topographies, geographical indications, and some other re@uirements
of TAI+H agreement. Thus, much work remains to be done to achieve
compliance.
The opening up of the service sector will no doubt put Nepal in the
map of worlds service exports. 'owever, Nepal being in early stage of
service sector development would face many problems against
international competition. "any of Nepals service sector enterprises
are vulnerable against competition. $s the economy is not in good
shape right now, such competition would weaken this sector even
further.
Nepal will have to change its regulatory structure as a result of
accession to &T#. Larious prevailing laws such as the Eabour $ct,
/ITT$, Industrial >nterprise $ct, Telecom $ct, .anking and /inancial
Companies $ct, etc. need to be amended in conformity with the &T#
rules. Home new laws also need to be enacted in areas of electronic
transactions, ICT, and the like.
Nepal being a least developed country can en?oy certain preferential
tari) rights on a non1reciprocal basis. The E*Cs can also get waivers
and special treatment. &T# also does not restrict the member1
countries of any regional bloc in providing di)erential treatment.
'ence, the membership of Nepal in &T# will have no substantial
negative implication for its regional and special agreements.
Hervice sector trade is crucial for Nepal. Its long1term economic growth
and sustainability depend on the development of this sector. 'owever,
Nepal does not have any well thought1out policy governing the service
sector trade. *ue to lack of experience, it still remains undecided as to
which sector to be promoted or opened to international market. Nepal
lags behind even in identifying the international market where it could
sell its service products.
NepalRs ma?or concern is to facilitate and encourage the freer global
mobility of its people for employment. $ ma?or portion of NepalRs !*+
comes from remittances. 'ence, NepalRs concern is to make service
trade arrangements even more liberal and organized to enable its
manpower to be mobile and take the employment opportunities
available to them outside Nepal.
*ummar# of 4e# Points
&ith globalization and the advent of the
knowledge1based economy, borders and
boundaries have weakened, resulting in a
freer (ow of information, expertise and,
ultimately, economic opportunities. The
whole economic landscape has changedM
business ,rms, and indeed nations have
had to change the way they do their
businesses and run their economies.
Competition is ,erce and intense.
The decade of 2885s witnessed
unprecedented economic activities around
the globe. The aspirations of many nation1
states to attain more democracy, more
freedom, more trade, more opportunity,
and more prosperity were achieved.
"any developing countries were able
to attract substantial amount of foreign
direct investment. *ue to higher growth
rate and increase in the per capita income,
the consumer boom has been most
conspicuous. Hervice industries have also
shown spectacular growth throughout the
globe.
Today, the importance of international
trade and multinational companies has
been growing in the world economy. #ver
the past decade, the level of global trade
and investment has reached
unprecedented heights, and more
countries than ever are integrating into
global economic networks. "N>s have
become the primary engine for
globalization of economic activities. "N>s
have, however, been sub?ect to a number
of criticisms. +articular concern has been
expressed about the relationship between
"N>s and the host countries.
Nepal has not been able to meet the
necessary minimum preconditions for
foreign direct investment. +olitical
instability and social and political
disturbances have e)ected the ?oint
venture pro?ects already operating in the
country. The international events have also
e)ected the business environment in
Nepal.
Nepal is now the member of &T#.
&T# can be a possible forum for weaker
and poor countries to represent their
interest. $t the same time, Nepal being a
least developed country can en?oy certain
preferential tari) rights on a non1reciprocal
basis. To take advantage of &T#
membership, Nepal should increase its
exportable items, which can compete in
the international market. #nly through
careful and strategic planning that Nepal
can get answers to what to do and where
to concentrate.
5uestions and -evie% (ctivities
1) *e,ne globalization. &hat are the
di)erent forms of globalizationP !ive
your assessment on the global
economic boom of the 2885s.
2) *e,ne international business. &hat are
the di)erent components of
international businessP
3) *e,ne multinational companies. &hat
are the problems associated with
multinational companiesP
4) +oint out, in brief, the emerging global
environmental trends. &hat is the
impact of these environmental forces
on Nepalese businessP
5) In view of the international business
trends, what is your assessment of the
opportunities and threats to Nepalese
businessP
6) >xamine the current state of /*I in
Nepal. &hat should be done to
increase /*I in NepalP
7) >xamine the role of &T# in regulating
international trade. &hat bene,ts will
Nepal get from the membership of the
&T#P &hat are the special provisions
made for the least1developed
countriesP
8) *escribe the main principles of the
&T#. &hat, in your opinion, would be
the implications of Nepals
membership of the &T# for its
economyP
9) &hat is the di)erence, if any, between
a ?oint venture and a strategic
allianceP
10)Is /*I in Nepal necessaryP >xplain the
policy of !overnment of Nepal towards
foreign investment.
11)>xplain the features of the &T#
agreement. &hat is the role of the
&T# in settling disputes regarding
trade policies of any countryP
12)>xplain the features of globalization.
$nalyze the steps taken by
!overnment of Nepal to globalize the
economy.
13) *iscuss the arguments for and against
Nepals membership of &T#.
*elected -eferences
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<usiness: S(stem" &nvironments and
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$cademic +ublishers.
Khatiwada, S. A. -28880. C!lobalization,
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+rioritiesD, /epal>s +oreign 9olic(:
)ssues and :ptions. Kathmandu%
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"ichale, L.+. -45590. Globali;ation"
Liberali;ation and Strategic
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"ICH -45570. /epal: 0rade and
Competitiveness Stud(. Kathmandu%
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Han?el, N.+. -455:0. $ Aeview of the Htatus
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Higdel, .. J Neupane, '.+. -455;0.
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$siaD, &conomic )ntegration in Sout3
1sia. Kathmandu% Nepal Aastra .ank.
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*evelopments. !eneva% &T#

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236 Business Environment in Nepal

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