The Changing Role of Foreign Direct Investment in Microfinance Capital - Case Study Example

International Business Law Globalization has led to expansion of business organizations to different parts of the world in order to deliver productsand services. According to Adesola (n.d) businesses change in their organization and strategy as they become more international. As these businesses enter new market with entirely new culture and policies, these companies become multinational companies as they operate in more than one country and have to face the challenge of adapting to diverse legal environments. MNC’s have become important actors in this new world economy as the multinational companies have grown from 7000 in 1970 to 70000 companies with 690,000 subsidiaries in 2005. Multinational companies not only dominated the world market but also influenced the economy and politics due to their ability to operate efficiently on a world scale, moving people, money and information around the world with little restriction. It is indicated by Amnesty that growing number of businesses operates across boundaries in ways that exceed regulatory capacities of any national system (Schouten, 2007)1. As businesses organizations have become more complex, their interaction with business partners, governments, international organizations and groups in society grow as their operations develop in different locations. In view of the ever increasing expansion of the business organizations and growth in the number of multinational companies, it was thought essential to formulate universal business law so as to govern the business organizations, their services and making it mandatory for the businesses to follow the norms, policies, rules and regulations of the country (Adesola, n.d)2. United Nations Commission on International Trade Law (UNCITRAL) was established by General Assembly in 1966 which helped in recognizing the disparities in national laws governing international trade that impeded the flow of trade. The UNCITRAL played an active role in reducing the obstacles and mandated the member countries to further the progressive harmonization and unification of the law of international trade (UNCITRAL, 2010)3. UNCITRAL’s endeavor was towards creating a universal law so that businesses do not get obstructed by the national laws. However the present paper critically examines the challenges and opportunities facing developing states within the complex global institutions and legal construct of World Trade Organization and discussing the changing directions for foreign investment law in the global economy. A) Challenges and Opportunities for Developing States Fasan (2003) states that the legalization of the world trade rules and the establishment of WTO put an end to the old style preferential treatment to the developing nations whereas the creation mandates both developed and developing nations to comply with the GATT/WTO rules which are very intrusive and impose substantial implementation costs.4 International Law can be defined as the body of rules applicable to the conduct of nations in their relationships with other nations, the conduct of nations in their relationships with individuals and rules of international or intergovernmental, organizations (Schaffer et al, 2008)5. Companies have to face legal challenges with the national laws existing within the country that practice bureaucracy not favorable on the business sector. Japan’s policy of patronizing Japanese products created difficulties to the foreign traders to penetrate the Japanese market. It was only after Japan joined the trend of globalization opening the national market for foreign traders to enter the business sectors in Japan (Peterpan, 2002)6. Global trade law requires all the member countries to strictly abide by the rules and regulations of UNCITRAL which was formulated to help the businesses to carry out their operations effectively in other nations. Developing countries entering the international market will have to get acquainted with the knowledge of international legal systems. UNCITRAL laid trading laws pertaining to electronic commerce, principles of commercial contracts, international sale and procurement of goods, transport, payment and security, other commercial contracts like financial leasing, property rights, arbitration and insolvency (Magnus, 2004)7. World Trade Organization, an area of international law provides dispute resolution system and Shaffer (2006) states that developing countries generally face three primary challenges which include (i) a relative lack of legal expertise in WTO law and the capacity to organize information concerning trade barriers and opportunities to challenge them; (ii) constrained financial resources to carry out the international legal proceedings which is very costly and (iii) fear of political and economic pressure from members exercising market power. Article XII of WTO restricts to safeguard the balance of payments in order to secure the external financial position and its balance of payments so as to avoid unnecessary damage to the commercial or economic threats to any of the contracting party. The main challenge for the developing countries in the global trade law is that of dispute settlement as Article IV of WTO lays down the principles of consultation and procedures for dispute settlement which is long process and involves high cost (http://www.wto.org).8. It is evident from the dispute settlement between developing countries, Argentina and Chile, wherein legal expenses were more than normal and dispute settlement was long process because they possessed scarce human skills and financial resources (Tussie and Delich, 2010)9. The global trade law provides golden opportunity to carry trade outside its national boundaries and allow the international companies to operate their business. The UNCITRAL’s model law on electronic commerce was formulated so as to ensure legal security in context of widest possible use of automated data processing in international trade which was developed keeping in mind the interests of developing nations. The WTO agreements include numerous provisions giving developing and least developed countries special rights and extra leniency. The General Agreement on Tariffs and Trade (GATT) has a special section (Part 4) which includes the provision on the concept of non reciprocity in trade negotiation between developed and developing nations. The WTO agreements provide extra time to developing countries to fulfill their commitments, increase their trading opportunities through greater market access. The WTO also has special provision to assist the developing countries in their legal battle for dispute settlements with contracting party which is offered by WTO’s Training and Technical Cooperation Institute (http://www.wto.org)10. Political risks in any international trade include interference with operations, economic instability, currency repatriation, currency inconvertibility and contact repudiation (www.witiger.com)11. Kumar (2002) states that political risks that can confront international trade apart from aforementioned threat are change of government which happens frequently in democratic nation. As such was the case during US elections when most of the BPO’s were closing their operations so that employment could be provided to US citizens.12 Political decisions have always affected international trade in one way or the other and world trade organizations is the agency that takes care about the issue. Politically, the powerful can exploit power imbalances and rhetorically rationalize their actions in non power based terms. The political clout of developed nations may threaten the developing countries to withdraw preferential tariff benefits resulting in declining faith in the efficacy of trade measure (Sampson and Chambers, 2008)13. In order to avert the risks, political, legal and economical, the International Chamber of Commerce formulated rules known as INCOTERMS so that trading terms are not misunderstood through standardization of trading terms which has to be obliged the buyer and seller in order to bear the costs involved in trade International Chamber of Commerce, 1999)14 B) Changing Directions for Foreign Investment Law in the Global Economy Waelde (2000) stated that the contemporary situation is one of an acceleration of the globalization process, of regional and multilateral economic integration, of privatization, liberalization and deregulation, of an international environmental and social values export.15 Sornarajah (2010) stated that few areas of international law excite as much controversy as the law relating to foreign investment. The ability of the developing to exercise their collective influence on shaping the law shifted dramatically towards the end of the twentieth century. The acceptance of an ‘open door’ policy by China and the success of small Asian states like Hong Kong and Singapore that had developed through liberal attitudes of foreign investment provided the path for other developing states. The inflow of FDI resulted in competition among the developing states resulting in WTO coming into foray liberalizing international trade as well as foreign investment.16 Foreign Investment plays an important role in the country’s economic development that is why it was felt necessary to establish a legal regime while not prejudicing State’s essential interests. After critical review of Burger’s (n.d.17) article detailing the FDI process in India, it is evident the foreign direct investments are necessary for the economic development. Capital flows have always played an important role in the process of globalization wherein liberalization and deregulation have contributed strongly to a surge in FDI flows (WTO Report, 2008). The foreign direct investment law of India specifies certain polices with regard to various industries, products and services. The Ministry of Commerce and Industry (2003) provides that all industrial undertakings are exempt from obtaining an industrial license barring few exceptions.18 Burger (n.d) further mentioned that foreign investment in India is divided into three categories wherein 100% foreign investment is permitted, second are those industries in which foreign investment is permitted with limited percentage and third wherein the investment is prohibited. There is evidence of change in paradigm shift with regard to functions of foreign investment law as the location policy permits foreign controlled companies to operate in certain sectors with special license or locate within 25 kilometers which has changed to 3 sectors. The law also mentions the prerequisite of obtain environment clearance from the controlling agency for setting up an industrial project which is set aside by Burger (n.d.) stating that permissions can be sought from the Indian government through influence within the administration giving an hint of the level of corruption in Indian administration. Other than the Indian policies, the FDI is changing is most of the economies. Harrington (2006) mentioned that changing role of foreign direct investment in microfinance capital due to the profitability in microfinance sector. Countries that prevented the foreign banks to invest in the country have formulated polices to pave the way to international banks, considered as leaders in the industry to conduct business.19 Invest Bulgaria reported highest foreign direct investment which was due to breakdown of FDI by sectors and a review in terms of the capacity of attracting funds in tourism, real estate and service sectors (Koinova, 2008)20. International trade is integral to the process of globalization and governments in most economies have opened their markets to international companies keeping on making adjustments to their foreign investment policies so as to attract maximum investors boosting the GDP of the country (WTO Report, 2008).21 Countries are adapting to change making whatever changes as possible to satisfy the investors so that it generates employment along with economic development apart from human development. It is evident through the review of Indian foreign investment law and Burger’s article that Indian administration has changed most of its investment policies giving wild card entry to the business aspirants to operate on Indian soil as well as boosting the GDP of the nation. Conclusion Globalization has benefited the world economy but concern has intensified about its potentially disruptive and disadvantageous consequences (WTO Report, 2008). International trade law allows the nations to make policies that would allow the international companies to enter the domestic market and do business. The global trade law requires the member country to comply by the principles of UNCITRAL and WTO Trade Policy smooth functioning trade activities. The international trade law provides numerous opportunities to the developing nations with preferential trading activities, legal assistance, training and counseling on arbitration and financial assistance also. However dispute settlement is one area considered as a challenge due to its long process of settlement. In regard to foreign investment law, change is the theme of present circumstances due to the importance of providing employment to the unemployed in developing countries, economic growth and development. Globalization has resulted in inflow of foreign investment enticing the governments of developing nations to adjust their FDI policies to allow the MNC to conduct business. References 1. Adesola, Sola (n.d) Introduction and Multinational Enterprise, U51064 International Business Law, Oxford Brookes University, Business School. 2. Burger, E.S. (n.d.) Foreign Direct Investment in India, Foreign Investment. 3. Developing Countries, How the WTO deals with the special needs of an increasingly important group, http://www.wto.org/english/thewto_e/whatis_e/tif_e/utw_chap6_e.pdf 4. Fasan, Olu (2003) Global Trade Law: Challenges and Options for Africa, Journal of African Law, Vol, 47, No.2, pp.143-173 5. Harrington, B (2006) The Changing Role of Foreign Direct Investment in Microfinance Capital and Measurement of Financial and Social Performance, Doing Good Work meets Commercial Enterprise, Mennonite Economic Development Association, Canada, 6. International Chamber of Commerce (1999) Incoterms 2000 ICC official rules for the interpretation of trade terms : entry into force January 1, 2000, John Wiley and Sons,US 7. Koinova, E (2008) Change of policy on foreign direct investment, the sofia echo, http://sofiaecho.com 8. Kumar,V (2002) Political Risk In International Trade, Helium, http://www.helium.com 9. Magnus, Ulrich (2004) Global trade law: international business law of the United Nations and UNIDROIT; collection of UNCITRALs and UNIDROITs conventions, model acts, guides and principles, Sellier European law publication, Europe 10. Ministry of Commerce and Industry (2003) Manual on Foreign Direct Investment in India – Policy and Procedures, SIA, India 11. Peterpan, (2002) Political Risk In International Trade, Helium, http://www.helium.com 12. Political Risk, Witiger, http://www.witiger.com 13. Sampson G.P. and Chambers W.B (2008) Developing Countries and the WTO – Policy Approaches, United Nations University, Hong Kong 14. Schaffer, R, Agusti, F and Earle B (2008) International Business Law and Its Environment, Cengage Learning, US 15. Schouten, E.M.J. (2007) Defining the social corporate social responsibility of business from international law, Managerial Law, Vol.49, No.1/2, pp.16-36. 16. Sornarajah, M (2010) The International Law on Foreign Investment, Ed.3, Cambridge University Press, US 17. Tussie, D and Delich, V (2010) Dispute Settlement between Developing countries: Argentina and Chilean Price Brands, Managing the Challenges of WTO Participation, WTO, http://www.wto.org/english/res_e/booksp_e/casestudies_e/case1_e.htm 18. UNCITRAL (2010) Origin, Mandate and Composition of UNCITRAL, United Nations Commission on International Trade Law, http://www.uncitral.org/uncitral/en/about/origin.html 19. Waelde Thomas (2000) Changing Directions for International Investment law in the Global Economy – An Overview of selected issues, Vol 4-2, Abstract, CEPMLP. http://www.dundee.ac.uk/cepmlp/journal/html/vol4/vol4-2.html 20. World Trade Organization, Uruguay Round Agreement – Understanding on rules and procedures governing the settlement of disputes, http://www.wto.org/ 21. WTO Report, (2008) Trade in Globalizing World, WTO, http://www.wto.org Read More