What is Turn-Key Project? What are its advantages and disadvantages?

In terms of a foreign market entry strategy, there are 6 different modes of entry that a company can use; exporting, turnkey projects, licensing, franchising, establishing joint ventures with a hostcountry firm, or setting up a wholly owned subsidiary in the host county. Each method of entry has their advantages and disadvantages, and companies need to weigh the reasons carefully A turnkey project is method for a foreign company was to export its process and technology to other countries by building a plant in that country. The company hires a contractor in the desired country that they want to create an operation. In terms of technical scope the turnkey contractor is responsible for the design, construction and installation of a new plant and in some cases the maintenance of the plant as well. It is called a turnkey project because at the completion of the contract, the foreign company gives the key to the project and it is ready for operation. Turnkey projects are most typical in companies that specialize in expensive, complex production technologies, such as the chemical, pharmaceutical, petroleum refining and metal refining industries. While, there are advantages for these types of companies, there are also risks. Advantages of turnkey projects : This is the best way of earning greater economic returns from that asset. Obtain returns from knowhow about a complex process. Government restrictions may limit other options therefore; this strategy is best in case where FDI is limited by government. (Middle East countries and petroleum refining.) Lower risk if unstable economic/political situation in country Disadvantages of turnkey projects : The firm that enters into the turnkey deal will have no long-term interest in the foreign country. Less potential to profit from success of plant. Creating a competitor by transferring the technical know-how to a foreign firm. Give away technological know-how to potential competitor

Prof TMK

IMBA

IB

MSCAS

Page

How is WTO different from GATT? Describe the Organizational Structure of WTO and explain the role of India in WTO. The World Trade Organization is an international organization which was created for the liberalization of international trade. The World Trade Organization came into existence on January 1st, 1995 and it is the successor to General Agreement on Trade and Tariffs (GATT). The World trade organization deals with the rules of trade between nations at a global level. WTO is responsible for implementing new trade agreements. All the member countries of WTO have to follow the trade agreement as decided by the WTO. Structure of the WTO: Highest Level: Ministerial Conference The Ministerial Conference is the top most body of the WTO, which meets in every two years. It brings together all the members of WTO. Second Level: General Council The General Counsel of the WTO is the highest level decision making body in Geneva, which meets regularly to carry out the functions of WTO. Third Level: Councils for Trade The Workings of GATT, which covers international trade in goods, are the responsibility of the Council of Trade. Fourth Level: Subsidiary Bodies There are subsidiary bodies under the various councils dealing with specific subjects such as agriculture, subsidies, market access etc. Benefits of WTO It helps promote peace and prosperity across the globe. Disputes are settled amicably. Rules bring about greater discipline in trade negotiations, thereby reducing inequalities to a large extent. Free trade reduces the cost of living and increases household income. Companies have greater access to markets and consumers have wider range of products to choose from. Good governance accelerates economic growth India and WTO India is one of the founding members of WTO along with 134 other countries. India's participation in an increasingly rule based system for governance of International trade, will ultimately lead to better prosperity for the nation. Various trade disputes of India with other nations have been settled through WTO. India has also played an important part in the effective formulation of major trade policies. By being a member of WTO several countries are now trading with India, thus giving a boost to production, employment, standard of living and an opportunity to maximize the use of the worlds resources.

Prof TMK

IMBA

IB

MSCAS

Page

Foreign Direct Investment (FDI)

Foreign Direct Investment (FDI) is normally defined as a form of investment made in order to gain unwavering and long-lasting interest in enterprises that are operated outside of the economy of the shareholder/ depositor. In FDI, there is a parent enterprise and a foreign associate, which unites to form a Multinational Corporation (MNC). In order to be deemed as a FDI, the investment must give the parent enterprise power and control over its foreign affiliate. Foreign Direct Investment in India In India, Foreign Direct Investment Policy allows for investment only in case of the following form of investments: Through financial alliance Through joint schemes and technical alliance Through capital markets, via Euro issues Through private placements or preferential allotments Foreign Direct Investment in India is not allowed under the following industrial sectors: Arms and ammunition Atomic Energy Coal and lignite Rail Transport Mining of metals like iron, manganese, chrome, gypsum, sulfur, gold, diamonds, copper, zinc A foreign company can commence operations in India by incorporating a company under the Companies Act,1956 through Joint Ventures; or Wholly Owned Subsidiaries Foreign equity in such Indian companies can be up to 100% depending on the requirements of the investor, subject to equity caps in respect of the area of activities under the Foreign Direct Investment (FDI) policy. Details of the FDI policy, sectoral equity caps & procedures can be obtained from Department of Industrial Policy & Promotion, Government of India FDI in India across Different Sectors Hotel & Tourism Hotels include restaurants, beach resorts and business ventures providing accommodation and food facilities to tourist. Tourism would include travel agencies, tour operators, transport facilities, leisure, entertainment, amusement, sports and health units. 100 per cent FDI is permitted for this sector through the automatic route. Trading For trading companies 100 per cent FDI is allowed for Exports Bulk Imports Cash and Carry wholesale trading. Power For business activities in power sector like electricity generation, transmission and distribution other than atomic plants the FDI allowed is up to 100 per cent.
Prof TMK IMBA IB MSCAS

Page

Drugs & Pharmaceuticals For the production of drugs and pharmaceutical a FDI of 100 per cent is allowed, subject to the fact that the venture does not attract compulsory licensing, does not involve use of recombinant DNA technology. Private Banking FDI of 49 per cent is allowed in the Banking sector through the automatic route provided the investment adheres to guidelines issued by RBI. Insurance Sector For the Insurance sector FDI allowed is 26 per cent through the automatic route on condition of getting license from Insurance Regulatory and Development Authority (IRDA). Telecommunication For basic, cellular, value added services and mobile personal communications by satellite, FDI is 49 per cent. For ISPs with gateways, radio-paging and end to end bandwidth, FDI is allowed up to 74 per cent. But any FDI above 49 per cent would require government approval. Foreign companies can also to set up wholly-owned subsidiary in sectors where 100% foreign direct investment is permitted under the FDI policy. Business Processing Outsourcing FDI of 100 per cent is permitted provided such investments satisfy certain prerequisites. NRI's and OCB's They can have direct investment in industry, trade and infrastructure Up to 100 per cent equity is allowed in the following sectors 34 High Priority Industry Groups Export Trading Companies Hotels and Tourism-related Projects Hospitals, Diagnostic Centers Shipping Deep Sea Fishing Oil Exploration Power Housing and Real Estate Development Highways, Bridges and Ports Sick Industrial Units Industries Requiring Compulsory Licensing Industries Reserved for Small Scale Sector

Prof TMK

IMBA

IB

MSCAS

Page