The changing multinational corporation -- a nation state's relationship : the case of IBM in India

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FACULTY WORKING
PAPER NO. 1332

THE LIBRARY OF THE

MAY ? y

AJNIVl:

The Changing Multinational Corporation — A Nation
State's Relationship: The Case of IBM in India

Anant R. Negandhi
Aspy P. Palia

College of Commerce and Business Administration
Bureau of Economic and Business Research
University of IJIinois, Urbana-Champaign

BEBR

FACULTY WORKING PAPER NO. 1332
College of Commerce and Business Administration
University of Illinois at Urbana-Champaign
February 1987

The Changing Multinational Corporation — A Nation
State's Relationship: The Case of IBM in India

Anant R. Negandhi, Professor
Department of Business Administration

Aspy P. Palia
University of Hawaii at Manoa

The Changing Multinational Corporation — A Nation State's Relationship:

The Case Of I.B.M. in India

Abstract

During 1977, IBM was asked to withdraw from India due to their un-
willingness to comply with the Foreign Exchange Regulation Act (FERA)
of 1973. However, with (1) the recent signing of a Memorandum of Under-
standing between the U.S. and India, (2) the easing of trade restrictions
by the Government of India against foreign firms, (3) the declining value
of the U.S. dollar, (4) the slump in the U.S. computer market, (5) the
rapid growth in the Indian computer market, and (6) changes in other
environmental factors, IBM is again actively seeking and securing new
business. In recent months, IBM has secured a number of large contracts,
and is on the verge of reentry into the burgeoning Indian computer market

The purpose of this study is to examine the underlying factors that
influence both the divorce and reunification between host governments and
the multinational corporation. The study, conducted through personal
interviews with the chief executives of IBM, government officials, and
other knowledgeable persons, examines the socio-political aspects of
FERA and its implications for the multinationals in India and elsewhere
in developing countries.

The- Changing Multinational Corporation — A Nation State's
Relati onship s : The Case of I.B.M. of Ind i a

Introduction

Conflict between multinational corporations and host-country govern-
ments has attained an added dimension in recent years. Changes in the
international business environment have led to significant alterations
and, in some instances, reversal of past policies by both multinational
corporations and host-country governments. Studies of multinational
corporation-host country government conflict, therefore, need to reflect
the significance of change as an underlying explanatory factor in pre-
dicting the policy-response modes of multinational corporations and host
country governments.

The major players during the early stages in the evolution of multi-
national corporations were U.S. multinational corporations and host
country governments. However, since the 1970s, European and Japanese
multinational corporations and state-owned enterprises have entered the
international business arena. These newcomers to the international
business scene provide host country governments with alternative means
to secure managerial and technological know-how, capital, and market
network. The availability of alternative methods to fulfill national
goals, in line with existing national priorities, has reduced the level
of dependence of host country governments on U.S. multinational corpora-
tions .

This paper deals with the changing scene in the bargaining position
of multinational corporations and host country governments by exploring

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the case of IBM's withdrawal from India. The events that led to the
withdrawal of IBM from the Indian market in 1977, the changes in bar-
gaining positions, and the reinstatement of a close working relationship
in recent months, are classic illustrations of the pervasive impact of
the international business environment on both the multinational corpora-
tion and the host country government.

Increasing Potential for Conflict

Since the 1970s, multinational corporations have come under increas-
ing fire from various sources. At home, they are accused of exporting
jobs and technology. Overseas, they are accused of exploiting local
labor, and demanding excessively high royalty payments for obsolete
technology and patents. In addition, multinational corporations are
accused of using monopolistic power to crush competition, and of gain-
ing favorable rates for large financial credits, thereby competing for
scarce capital with the domestic industry.

In response to these perceived abuses of the multinational corpora-
tion's monopoly power, host country governments have sought to exercise
control over multinational corporations operating under their jurisdic-
tion. While host country governments attempt to create a favorable
investment climate in line with their priorities and objectives, they
simultaneously impose numerous regulations on the multinational corpora-
tions' operations to exercise control and to assert their national
sovereignty. Varying degrees of regulations to control the affairs of
multinational corporations have occurred in the form of nondiscrimina-
tory interference, discriminatory interference, discriminatory sanctions,
or wealth deprivation.

-3-

Faced with host country government regulations, the multinational
corporations' response, in each case, is based on their assessment of
the situation and the stakes involved. In certain instances, they
comply with the imposed regulations and fall in line with host country
government objectives for national development. At other times, they
exert their influence and negotiate with the host country government to
resolve the potential conflict. In yet other instances, they assert
their independence and either prevail over the host country government
or close down their operations and withdraw from the host country.

This inconsistent behavior on the part of both multinational cor-
porations and host country governments leads to instability and uncer-
tainty and increases the potential for misunderstanding and conflict.
Furthermore, the potential for conflict between multinational corpora-
tions and host country governments is magnified by the growing variety
and magnitude of host country government regulations on multinational
corporations .

This study explores the underlying reasons that influence both
divorce and reunification between multinational corporations and host
country governments. The study identifies the reasons for different
policy prescriptions on the part of host country governments and covers
the differing strategic response modes on the part of multinational
corporations. A better understanding of the fundamental causes of con-
flict and the potential for divorce between the multinational corpora-
tions and host country governments are necessary to explore alternative
policies to reduce the potential for conflict and divorce.

-4-

The sources and underlying reasons of conflict between multinational
corporations and their external publics, including home- and host-
country governments, competing firms, labor, etc., have been the subject

2
of increasing attention. The literature is replete with references to

the political, social, cultural, economic, and legal forces as sources

of tension and conflict between the multinational corporations and

3

their external publics. Furthermore, the creation of international

agencies and international codes of conduct for the multinational cor-
porations have been suggested as possible policy measures to achieve

4
conflict resolution.

A recent study investigated the nature, causes and intensity of
conflicts arising between multinational corporations and nation states.
The three main conflicting issues were found to be equity participation,
control by local nationals, and transfer pricing. Interference with
political processes and socio-cultural norms within the host countries
were found to be less important. Socio-cultural adaptation by multi-
national corporations was earlier considered to be of primary importance,
The study concluded that the economic issues of equity participation,
management control, expansion of exports, reduction of imports, and use
of local inputs, have currently assumed primary importance as reasons
for tension and conflicts between multinational corporations and host
countries .

However, static analysis is no longer sufficient to capture the
essence of multinational corporation-host country government conflict
which takes place in an international business environment marked by

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rapid change. Indeed, the only permanent thing in the prevailing com-
plex, dynamic, and uncertain international business environment is
change. Both multinational corporations and host country governments
find it necessary to cope with the accelerating pace of change. In
certain instances, the changing international business environment has
led to the emergence of new priorities and the modification or reversal
of past policies. These dramatic changes in host country government
policies and/or multinational corporation responses can be captured
using dynamic analyses.

Dynamic analysis can highlight the importance of changes in the
international business environment as underlying causal variables in
understanding multinational corporation-host country government conflict,
The framing or revision of policies by host country governments, and the
formulation or revision of business strategies by multinational corpora-
tions, can be shown to depend upon these environmental changes.

IBM Withdrawal
During 1977, IBM was asked to withdraw from India due to its un-
willingness to comply with the Foreign Exchange Regulation Act (FERA)
of 1973. Earlier, IBM commenced operations in India in 1952, with long
term objectives of growth and increasing market share in the world com-
puter and information systems market through an improved competitive
stance. During a period of 25 years, IBM made total profits of approxi-
mately U.S. $5 million on a total investment of $8 million. Total re-
mittable profits, at the time of phasing out its operations in 1970,
were approximately $10 million. These profits included a net asset
value of approximately $5 million.

-6-

This poor performance was largely attributed to several factors,
including compensation of approximately $7.5 million paid to employees
and assets sold at less than book value. Other factors included a high
rate of effective taxation of 80% to 85% as well as low rates of depre-
ciation on equipment. IBM-India operations constituted only 0.06% of
IBM Corporation's total business. IBM's activities in India during this
period and the events leading to the IBM-India withdrawal are summarized
in Appendix A.

During this period, the Government of India (GOI) alleged that a
large number of foreign-owned and foreign-controlled corporations operat-
ing in India were making excessively high gross revenues and before-tax
profits. Further, the repatriation of large amounts of capital by the
multinational corporations constituted a serious drain on India's scarce
foreign exchange reserves. The GOI contended that the multinational
corporations were using monopolistic power to stifle competition in the
Indian market. In addition, the multinational corporations, according
to the GOI, gained favorable rates for large financial credits, thereby
competing with domestic firms for scarce capital. Finally, the GOI per-
ceived that the multinational corporations were transferring obsolete
technology or current technology of minor importance for developmental
purposes.

Surveying the industrial scene, the GOI found that most foreign
direct investment had occurred in the consumer goods sector. These
ventures yielded high rates of profit and required simple technology
which could be furnished by domestic entrepreneurs.

-7-

Based on these findings, the GOI formulated its own priorities with
regard to the country's development. With an abundance of natural re-
sources and a large supply of low-cost skilled labor, India provided the
multinational corporations with a large, untapped market and opportunity
to enhance their international competitiveness.

Taking stock of its developmental priorities and increased bargain-
ing strength, the GOI formulated its desire to influence the course of
foreign direct investment in India. The primary objective was to ensure
that foreign direct investment in India would fall in line with the
nation's developmental priorities. The means adopted to achieve this
objective was the Foreign Exchange Regulation Act (FERA) legislated on
January 1, 1974.

Foreign Exchange Regualtion Act — The FERA affected all foreign com-
panies with foreign equity exceeding 40 percent. According to FERA,
four levels of foreign equity participation were permitted. First, all
trading companies engaged in purely commercial activities as well as
manufacturing enterprises utilizing "non-sophisticated" technology,
were required to reduce their foreign equity to 40 percent. Second,
"high technology" companies, utilizing "sophisticated" technology
and/or engaging in "special" activities, as designated by the GOI, were
permitted to retain a foreign equity holding of 74 percent. A third
intermediate level of 51 percent foreign equity was established for
multi-activity companies engaged in both sophisticated technology fields
and other commercial and trading activities. The fourth level of 100
percent foreign equity was permitted only in those instances where
foreign firms were engaged in purely export activities.

The FERA applied to companies already established in India, regard-
less of the terms and conditions of agreement under which operations had
commenced in India. This act was considered very restrictive by foreign
firms. The Indian authorities, on the other hand, perceived the FERA
as liberal, since it permitted foreign equity of 51 percent and as much
as 74 percent in certain instances. These were cases where existing
enterprises in India were using or in the process of importing sophisti-
cated technology. The GOI pointed to the tea companies, which were per-
mitted to retain foreign equity to 74 percent as proof of the liberal
nature of FERA.

IBM was operating in India as a branch of IBM World Trade Corpora-
tion and came under the purview of the FERA. Under the FERA, every
foreign company was required to apply to the Reserve Bank of India for
a "carry on business license." At this time the foreign firms were
required to furnish a summary of the financial details of the business
over the preceding few years.

The bulk of resources of IBM's operations in India (70 percent to
80 percent of total revenue) at the time resulted from (1) purely
commercial/trading activities such as leasing of data processing machines;
(2) operations of IBM's service bureaus, wherein customers utilized IBM
machines and were provided with IBM services; and (3) "unsophisticated"
technology operations such as IBM's card manufacturing program. However,
leasing of IBM data processing machines included maintenance, systems
engineering, education, and other services.

Reserve Bank of India Preliminary Determination — The Reserve Bank of
India analyzed IBM's activities and past financial details, based upon

-9-

the FERA guidelines, and concluded that IBM-India had to dilute its
foreign equity to 40 percent. The official notification from the
Reserve Bank of India, requiring IBM-India to dilute its foreign equity
to 40 percent in two years, was received by IBM in November 1975.

The GOI alleged that IBM was (1) importing second hand machines
(IBM 1401 computer systems) into India at extremely low old book values
capitalized through the inter-company billing price system, (2) recon-
ditioning these machines, and then (3) either selling them at IBM's
standardized worldwide sale prices or leasing them at IBM's standard-
ized worldwide lease rental rates. IBM-India, according to the GOI,
was reaping very high profits from the sale or lease of these obsolete
machines. Furthermore, IBM was repatriating these profits without pro-
viding transfer of any sophisticated technology.

The GOI further contended that additional hidden profits had been
repatriated with the parent company. From the standpoint of IBM, how-
ever, these hidden profits were called headquarter expenses and were
treated by the IBM system as a legitimate expense. These headquarter
expenses were apportioned in all revenue earning countries, and re-
flected (1) administrative overhead expenses, (2) research and develop-
ment expenditures, and (3) other overhead expenditures incurred by the
parent organization. This headquarter expense was based upon revenue
of particular IBM affiliates. It was true that India had not directly
benefited from the research and development by virtue of its contribu-
tion to IBM's headquarter expenses. However, it was equally true that
IBM-India had the potential to sell any and all of the new products at
the time they were introduced by IBM. Thus the concept for charging

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headquarter expenses to IBM-India was for the right to receive and not
for what was actually received and sold.

Even though the profits of IBM-India and several other IBM affili-
ates were poor, the parent company considered long term growth, market
share, and a world-wide competitive stance of primary importance. IBM-
India's revenue of $20 million was only 0.1 percent of IBM's worldwide
revenues, and to this extent, the loss of IBM-India operations did not
constitute a major blow to the health and well-being of the IBM Corpora-
tion.

IBM Counter-Proposal — In response to the Reserve Bank of India notifica-
tion of November 1975, IBM submitted a formal counter-proposal to the
Reserve Bank of India in April 1976. IBM's proposal essentially involved
the division of its activities in India into two companies — one with a
foreign equity holding of 40 percent, and the other with 100 percent
foreign equity.

The proposal envisaged segregation of the activities of its four
data centers, located in Bombay, Calcutta, Madras, and New Delhi, from
the rest of the business activities. The data centers were to be incor-
porated into an Indian company in which IBM's equity would be 40 percent.
These data centers were equipped with IBM equipment and provided facili-
ties and services to a large number of users, whose requirements did not
justify the leasing or outright purchase of a data processing system.
The employees involved with these data centers were to be transferred to
the new company. The proposed 40 percent IBM equity participation would
ensure the continuity of business activities and facilitate the transfer

-11-

of employees. This aspect of IBM's proposal was in conformity with FERA
guidelines.

The 100-percent foreign equity company, proposed by IBM, would
engage in exports, the supply of computer systems, and the provision of
services. IBM proposed to convert its existing manufacturing activity
into 100-percent export by March 1978. In addition, IBM planned to
export a contemporary-technology computer peripheral and to diversify
the range of its exports of parts, sub-assemblies, and accessories. An
export target of $11.25 million per year was set, and the "added value"
in India was expected to exceed 55 percent. IBM intended to continue
its local supplier development activities in an effort to maximize indi-
genous content and technology transfer.

Recognizing considerable software development and computer systems
consulting skills in India, IBM proposed to establish a Competence
Center in India to undertake such projects for export. IBM planned to
develop software and provide high-skill services, such as systems engi-
neering and education to overseas IBM companies and their customers,
primarily in South East Asia. An export target of $1,125 million per
year was set. The "added value" in India was expected to exceed 90 per-
cent, owing to significant contribution of professional skills, rather
than materials, to such projects. IBM was prepared to sub-contract a
substantial part of software development work related to export projects

to assist in the enhancement of computer systems in India.

IBM requested permission to sell imported computer systems in India
through its Indian subsidiary, where user requirements could not be ful-
filled by indigenously manufactured equipment and where a demonstrated

-12-

need existed to import equipment. The GOI had evolved comprehensive
procedures to procure such equipment. It was expected that imported
computer systems would be installed in key sectors of the economy — in
priority industries like steel, energy, transportation, and defense.
These computer systems were required to assist in the national research
and development effort.

IBM's intent here was to maximize the quantum of effort in India.
Professionals from IBM-India were to perform tasks such as evaluation
of equipment requirements, computer system configuration, software
selection, proposal preparation, user education, pre-installation plan-
ning, systems engineering assistance, installation, equipment warranty,
and post-warranty services. Only manufacture and shipment of the equip-
ment would require overseas support. Consequently, the rupee (Indian
currency unit) element of the price would have been significant and
scarce foreign exchange would have been saved. Foreign exchange remit-
tances would have been restricted to only that component of the price
designed to reimburse the manufacturing plants for the computer system
and its spares.

Under the proposed method, foreign exchange remittances were
expected to reach approximately 40% of the comparable remittance if the
computer system was directly procured overseas. Furthermore, the prin-
cipal profits from such a system sale would have accrued to IBM-India,
and, consequently, would have generated additional tax revenues for the
Indian exchequer.

To ensure conformity with FERA, IBM offered to phase out its leas-
ing activity by selling equipment on lease to Indian users at a reduced

-13-

price and then to cease leasing equipment. Prior to that time, revenues
from leasing had constituted approximately 50 percent of IBM-India's
gross " revenues. Furthermore, IBM offered to terminate the manufacture
of data processing equipment for the local market by March 1978 and to
restrict its manufacturing operations henceforth to 100-percent export.

In addition, IBM offered to make available its patents to Indian
organizations and to establish facilities for the assembly and computer
testing of integrated circuit cards. Moreover, they proposed to estab-
lish a laboratory for the measurement and analysis of electrical and
electronic components and to establish a Scientific Center. This
Scientific Center was to be equipped with a large computer system, pro-
vided by IBM, and staffed by scientists from the government, univer-
sities, research bodies, and IBM. The proposed Indian Scientific Center
would undertake research projects in the areas of flood control or
analysis of remotely sensed data transmitted by the earth's resources
satellite on geology, mineral exploration, forestation, etc. This would
assist the GOI in developing and exploiting natural resources.

Lastly, IBM requested the non-exclusive right to offer maintenance
services to existing and potential users of IBM equipment. Maintenance
service was considered an important marketing advantage and the most
important reason why customers bought IBM equipment. However, this re-
quest was in conflict with the Computer Maintenance Corporation, set up
by the GOI, to undertake maintenance of all imported computer systems
except those maintained by the users themselves. Once the Computer
Maintenance Corporation was set up, maintenance would no longer be
considered a sophisticated or high technology activity. As a result,

-14-

permission could no longer be granted to a 100-percent foreign equity
company to undertake this activity.

The IBM proposal was submitted to the GOI in April 1976 and
vigorously followed up by the staff of IBM-India during the ensuing
months. However, the Chairman of the IBM Corporation did not partici-
pate in any of the negotiations. The proposal underwent the scrutiny
of the FERA Committee, under the chairmanship of the Secretary of the
Ministry of Finance, Department of Economic Affairs.

Reserve Bank of India Final Determination — Initially it appeared as
though IBM's proposal was viewed in a favorable light. The first con-
tact with the Prime Minister's office was made in April 1977, when IBM
officials received a favorable reception. However, in July 1977, a
meeting with Prime Minister Morarji Desni revealed that no exception in
IBM's case was possible. The decision was formally communicated to IBM
in November 1977. IBM received the final order from the Reserve Bank
of India to reduce its foreign equity holding to 40%, as per the FERA
guidelines, in order to continue its business operations in India.

Rather than allowing minority Indian shareholding in its manufac-
turing, sales and maintenance operations, IBM Corporation reluctantly
decided to phase out its operations from India in November 1977. In
order to ensure continuity of service to its customers, IBM entered
into an agreement with Computer Maintenance Corporation, selling it all
IBM parts used in maintenance, and all the tools and test equipment.
Another group of 200 employees set up a private limited Indian company —
International Data Management Private Limited, and bought all the com-
puting centers and card manufacturing facilities from IBM. IBM ceased
operations in India on May 21, 1978.

-15-

The Changing Scene

In recent years, the GOI has set new priorities with regard to the
development and modernization of Indian industry through rapid develop-
ment of the electronics sector in general, and the computer industry in
particular. The new computer policy, which features import liberaliza-
tion and other radical measures, was announced on November 19, 1984.

The first objective of the new rationalized computer policy, ini-
tiated by the Department of Electronics (DOE), enables the manufacture
of computers in India, based on the latest technology, at internationally-
competitive prices. The objective is to progressively increase the indi-
genous content of these computers. The second objective is to simplify
existing procedures to enable the computer users to obtain computers
that meet their requirements, either from indigenous sources or from
overseas. The third objective is to promote the appropriate applica-
tions of computers, which are the catalysts for overall economic and
industrial development.

Specific measures to broaden the production base include reduction
of duty on certain raw materials for the production of peripherals from
75 percent to 5 percent. Imports of know-how and design, drawings for
the production of computers, computer-based systems and peripherals,
have been liberalized. The duty on peripherals not indigenously avail-
able and not likely to be available in the near future, has been reduced
from 75 percent to 25 percent. The production of systems and sub-svstems,
on an OEM basis, has been encouraged to achieve higher scales in produc-
tion. Restrictions on production capacity have been removed, and up to
40 percent foreign equity participation has been permitted to attract
firms with the latest computer technology.

-16-

Import procedures have been simplified to reduce delays in the
procurement of computer systems not currently manufactured in the
country. The duty on computers not available in the country has been
reduced from 135 percent to 60 percent. However, a high duty has been
proposed for user organizations that wish to import computer systems of
a capacity similar to those available in the country.

As a result of this policy, India, which is one of Asia's biggest
computer markets, spent approximately $255 million on data processing
equipment last year, and the market is estimated to grow to $1.4 billion
by 1990. Both the current size and future growth prospects of the com-
puter market in India have attracted a large number of overseas manufac-
turers. Moreover, production in the computer, control and instrumenta-
tion sector of the electronics industry has risen from a level of Rs .
3290 million (approximately U.S. $300 million) in 1983 to Rs . 4270
million (approximately U.S. $400 million) in 1984, registering a growth
rate of about 30 percent.

Estimates of annual production, sharing between public and private
sector, and requirement of capital goods investment for electronics
during the Seventh Five Year Plan are indicated in Tables 1 and 2. A
total outlay of Rs . 1056 million (approximately U.S. $100 million) for
DOE programs has been approved against a proposed outlay of Rs . 2576
million (approximately U.S. $225 million). A firm step will be taken
towards futuristic technology programs through the Fifth Generation
Super-Mini Computer Design Program and the Computer Mainframe Program.

The total production of electronics in India in 1984 was of the or-
der of Rs . 18,900 million (approximately U.S. $1,800 million), compared

-17-

to Rs. 13,600 million (approximately U.S. $1,300 million) in 1983, and
Rs. 12,050 million (approximately U.S. $1,200 million) in 1982. The
growth rate of production in the electronics industry climbed from a
modest 12.9 percent during the previous year to a substantial 39 per-
cent. Sector-wise production of electronics during the previous three
years is given in Table 3.

The electronics industry in India has grown through domestic demand
as well as the import substitution effort. However, increasing empha-
sis is now being placed on creating exportable surpluses and promoting
electronic products and services in overseas markets. Details of the
number of units approved during 1984 and investments and anticipated
exports likely to be generated during the subsequent five years are
indicated in Table 4.

Eighty-four proposals for import of computers, costing more than
$50,000, were approved during the calendar year 1984. Major applica-
tions for which these computers were cleared for import included process
control, data acquisition, computer aided design and management, message
switching, research and development, meteorology, railway freight and
reservations, defense, and space research.

Some of the major projects supported by the DOE include computeriza-
tion of passenger reservations and freight information systems for the
Indian railways. Suitable computers and computer-based systems have
been recommended for the steel information system of the Steel Authority
of India and the automation system for the seventh blast furnace of the
Bhilai Steel Plant. In the oil sector, the evaluation of the computer
system requirement by the Oil and Natural Gas Commission for seismic
processing activities has been completed.

-18-

Recent events which have triggered IBM's reentry into the Indian
market include the signing of a Memorandum of Understanding between the
U.S. and India, which has reassured the U.S. government that India would
not pass imported U.S. technology on to Russia. Further, the restric-
tions by the GOI against foreign firms, which led to the withdrawal of
IBM from the Indian market in 1978, have been eased.

Other changes that have led to the formulation of new priorities
and the modification of past policies include the plunging U.S. dollar,
which increases the international competitiveness of U.S. manufactured
goods. The saturation and slump in the U.S. computer market and the
maturing of some overseas computer markets, have induced computer manu-
facturers to seek new overseas markets for both offensive and defensive
strategic purposes.

The availability of a vast pool of skilled labor and software skills
at relatively low wages has led many computer manufacturers to consider
setting up manufacturing facilities in India to serve both domestic and
export markets in the region.

In response to the above trends, IBM has reentered the Indian market
and captured some lucrative contracts. In recent months, IBM, working
offshore Australia, has secured contracts for computer systems for the
Indian railroads, oil and gas consortium, and set up a national data
communications network.

The first contract IBM signed was with the Oil and Natural Gas Com-
mission for the System 4300. This award was made by the Department of
Trade and Industry, the same agency that was responsible for IBM's
withdrawal from India in 1978.

-19-

Three IBM-4300 host computer systems have been selected for the
INDONET project, India's largest integrated data network, in view of
the high priority assigned to INDONET for software export. These three
machines have been ordered for centers in Bombay, Calcutta, and Madras.
This network is expected to stretch out over another 27 nodes and a
possibility of further contracts for IBM.

IBM has also finalized contracts for India's train reservation
system, which is being developed by the Computer Maintenance Corpora-
tion and is based on IBM-4300s. One system has already been delivered
and another seven are on order.

Other organizations have opted for IBM equipment. The private-
sector computer company Tata Burroughs and Computer Maintenance Cor-
poration have each ordered a System 4300. An IBM System 38 is being
installed at Bombay's National Hospital, and a System 3083 is being
delivered to the Fireman's Fund Insurance Co. in Madras.

Finally, the computerization of Indian banks, all of which are
nationalized, is another vast project that IBM is pursuing vigorously.
IBM is bidding on all three levels of the envisioned system — branch,
regional, and head office. About 6,000 branches are involved, and the
G0I has already issued implementation deadlines and encouraged banks to
buy equipment tailored to a common specification. Here too, IBM has a
head start since the tender calls for twenty-five main frame "IBM 4381-
type machines."

Despite speculation to the contrary, at the present time IBM insists
that its activity in India is limited to off-shore marketing, and that

~20-

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°nShip b««e„ nulti 'ear liJ"«rati0„ of

"""try g0Vet Th ""^-Monal corporatlon

„ . The relative h and host

""«« corporations and h "»rRaln£ng posUion

dn« host COnnr- f " ™Uiti-

::;«• ■— - ,„ .,„:;;:"- - - «,, ...

;q77 hls st"dv of m ntern3tional

1977 and its r ' 0t the TBM ^ithw,

xcs reentry i lLr)orawal f»-^

fn -u cent months <?,- iJ1cua ln

ln Che interna stresses the *m

•-"iai business „ . ' rCance of nh

S^Legic rp en^ronment in ex. . Chan^e

glc ^sponse modes Gaining

,OVpr °f m,,Itlnation^ y and

«°vernments LJ-onal corporal-^

10ns and host n

n°St country

/ne increase

aSXng ^Piexitv of h •
chan^ ±„ - business DrnKi

nt. S """"^ BUSIness .

nat1'^ — rations to mo "^ "-^ '-C . ,

° move up the str,h . multi-

rateRIC Planning

g c°Ptinuum, set

20 A

FIGURE 1

PHASES IN THE EVOLUTION OF STRATEGIC DECISION MAKING

Eff«ctlven«s»of
Strategic Dtetsien
Making

c
e

w
U

c

Value

Splim

• Annual budgets

• functional locus

Multi-year budgets

Phase 1

Financial Planning

Phase?

Forecast Sited
Planning

•Thorough situation
analysis and
competitive
assessments

• WeM-defined
strategic framework

•Strategically focused
organisation

■Supportive value
system and climate

Phase 3

ilernally Oriented
Planning

Phasea

Strategic
Manegemeni

•Meet budget

•Predict the future 'Think strategically 'Create the futum

Source: F. Gluck, S. Kaufman and A. Walleck, "The Four Phases of Strategic
Management," The Journal of Business Strategy, Vol. 2, No. 3,
Winter 1982, pp. 9-21.

-21-

9
forth by Gluck, Kaufman, and Walleck. The four phases in the evolu-
tion of strategic decision making are depicted in Figure 1. As indi-
cated there, the purpose of financial planning (phase 1) is to meet the
budget, and that it involves annual budgeting and a functional focus.
The purpose of forecast-based planning (phase 2) is to predict the future
which involves multi-year budgets, strategic gap analysis, and a "static"
allocation of resources. Strategic thinking is the purpose of exter-
nally oriented planning (phase 3). This stage requires a thorough
situation analysis and competitive assessment, evaluation of strategic
alternatives, and "dynamic" allocation of resources. Finally, the pur-
pose of strategic management (phase 4) is to create the future through
a well-defined strategic framework, a strategically focused organization,
widespread strategic thinking capability, a coherent reinforcement of
management processes, and a supportive value system and climate.

Much of the strategic planning of American, European, and Japanese
multinational corporations is concentrated on phases 1 and 2. Onlv
to a limited extent do Japanese multinational corporations undertake
planning at phase 3, involving environment scanning and a competitive

assessment. By and large, planning has been used as a control device

12
rather than as an assessment of the future.

Overall, multinational corporations have not paid much attention to

environmental scanning. For example, Keegan, in his interviews with 50

executives of 13 U.S. multinational corporations, reported that very

few companies were using systematic methods for information scanning.

"Computer-based systems were not found... and even traditional manual

systems of information retrieval were hardly significant as factors in

-22-

day— to-day information gathering." The majority of the companies used
personal sources ("word of mouth"), for gathering environmental infor-
mation.

Similarly, Fahey and King's study of 12 large American firms re-
vealed that environmental scanning was not a well-established corporate
function. Their other conclusions were (1) environmental scanning was
not a well-established corporate function; (2) very few companies

gathered useful information on political regulatory conditions; and (3)

14
most of the firms relied on ad hoc methods.

Given the dynamic international business environment we face today,
multinational corporations need to make a quantum leap from financial
planning (phase 1) and forecast-based planning (phase 2) to externally-
oriented planning (phase 3), and move towards strategic management
(phase 4). Strategic planning in multinational corporations should
begin with a thorough situation analysis of the business environment,
the competitive situation, and competitive strategies. The strategic
plans of multinational corporations should include in-depth analvsis of
these factors while keeping track of trends and changes in the inter-
national business arena through environmental scanning.

-23-

REFERENCES

1. David K. Eiteman and Arthur I. Stonehill, Multinational Business
Finance (Reading, Mass.: Addison-Wesley , 1973).

2. Jack N. Behrman, "The Multinational Enterprise and Nation States:
The Shifting Balance of Power," in: Ashok Kapoor and Phillip D.
Grub (eds.), The Multinational Enterprise in Transition (Princeton:
Darwin Press, 1972).

3. John Fayerweather , "Nationalism and the Multinational Firm," in:
Ashok Kapoor and Phillip D. Grub (eds.), The Multinational Enter-
prise in Transition (Princeton: Darwin Press, 1972), pp. 339-353.

4. Raymond Vernon, Storm Over The Multinationals: The Real Issues
(Cambridge: Harvard University Press, 1977).

5. Anant R. Negandhi and B. R. Baliga, Quest for Survival and Growth:
A Comparative Study of American, European, and Japanese Multi-
nationals (New York: Praeger, 1979).

6. "One Year of The Policy: Promises in Perspective," Dataquest ,
December 1985, pp. 40-61.

7. Department of Electronics, Government of India, Annual Report
1984-85 (New Delhi, India: DOE, 1985).

8. Maggie McLening, "Big Blue Tiptoes Into India," Datamation,
December 1985, pp. 55-58.

9. Frederick Gluck, Stephen Kaufman, and A. Steven Walleck, "The Four
Phases of Strategic Management," The Journal of Business Strategy,
Vol. 2, No. 3, Winter 1982, pp. 9-21.

10. George Steiner, Strategic Planning (New York: Free Press, 1979),
p. 3.

-24-

11. Toyohiro Kono, "Long Range Planning — Japan-USA: A Comparative
Study," Long Range Planning, Vol. 9, October 1976, pp. 61-71.

12. Anant R. Negandhi and Martin K. Welge , Beyond Theory Z (Greenwich:
JAI Press, 1984), Chapter 3, pp. 47-53.

13. Warren J. Keegan, "Multinational Scanning: A Study of the Infor-
mation Sources Utilized by Headquarters Executives in Multinational
Companies," Administrative Science Quarterly, Vol. 19, No. 3,
September 1974, pp. 411-421.

14. Liam Fahey and W. R. King, "Environmental Scanning for Corporate
Planning," Business Horizons, August 1977.

D/443

APPENDIX A

IBM's Activities in India

Date Activities

1955 IBM first opened offices in India.

October 1967 Industrial license (IL) for 1401 series computers

received.

April 1968 Application for IL to manufacture 67 System 360

computers submitted.
GOI questioned IBM's policy of operating on wholly-
owned basis.

May 1968 IBM Vice President explained IBM's policy to GOI.

IBM offered to have Advisory Board in IBM- India
operations. IBM volunteered to retain 40% of ATN
profits for reinvestment in India during the IL
period .

September 1968 Modified proposal for Systems 360, submitted in line

with customer demands for equipment.
Proposal covering specialty electric motors, wire

contact relays, cables and cable harnesses submitted
IBM VP explained that capital participation is not

possible because of implications of its worldwide

act ivi ties .
IL for Systems 360 not forthcoming.

January 1969 IBM offered to submit a phased manufacturing program

within six months of receipt of Industrial License.

IBM offered to re-export all 360 equipment and manu-
factured goods in the event the manufacturing pro-
gram is not accepted.

IBM World Trade Corporation's Chairman offered two
overseas research scholarships per year to Indian
nationals .

Two research scholarships granted in 1969.

Indigenous content in 029 punch machine, manufactured
for export, rose to 57%.

October 1969 IBM VP offered complete technical data, diagrams,

and possible indigenous content specifications to
Indian vendor nominated by GOI.
IBM offered to manufacture special air defense com-
puters in India by sub-contracting activity to
Bharat Electronics, Ltd., a GOI undertaking.
IBM offered to reduce its export utilization and to
contribute 15% thereof to India's foreign exchange
reserves.

Date

January 1970

January 1, 1974

November 1975

April 197ft

April 1977

July 1977
November 1977

IBM's Activities in India
( continued)

Activities

IBM offered to manufacture specified ancillary com-
puter units for sale to Indian organizations for
incorporation in computers manufactured by them.

IBM advised 001 it was exploring manufacture of type-
writers in India for export.

Despite repeated offers, clarifications, supplementary
offers, IL for Systems 360 did not materialize.

GOI introduced Foreign Exchange Regulation Act (FERA).

All trading companies engaged in purely commercial
activities and manufacturing enterprises using "non-
sophisticated" technology required to reduce foreign
equity to 40%.

"High technology" companies, using "sophisticated"
technology and/or engaged in "special" activities
as designated by GOI, permitted to retain foreign
equity holding of 74%.

Multi-activity companies, engaged in both sophisti-
cated technology fields and other commercial and
trading activities, permitted to retain foreign
equity holding of 51%.

Enterprises engaged purely in export activities per-
mitted to have foreign equity holding of 100%.

FERA only applied to firms already established in India,

GOI rendered decision on nature of technology used
solely on basis of India's capabilities and needs.

IBM received official notification from Reserve Bank
of India (RBI) requiring it to dilute its foreign
equity to 40% within 2 years.

IBM submitted formal counter-proposal involving the
division of its activities in India into two com-
panies, one with a foreign equity holding of 40%,
and the other with 100% foreign equity.

First contact with the Prime Minister's office made
by IBM officials. Favorable reception.

Meeting with Prime Minister Morarj i Desai
tion to FERA possible in IBM's case.

No excep-

IBM received final order from RBI to reduce foreign
equity holding to 40% as per FERA guidelines to
continue business operations in India.

IBM reluctantly decided to phase out its operations
in India.

May 21, 1978

IBM ceased operations in India,

TABLE 1

Estimates of Yearwise Electronics Production Envisaged
During the Seventh Plan 1985-QQ (in Rs . million)

S.No. Sector

1985-86 1986-87 1987-88 1988-89 1989-90 Total

1. Components

2. Consumer Electronics

3. Communication
3.1 Broadcasting

4. Aerospace & Defense

5. Central Instrumenta-
tion & Industrial
Electronics

6. Computers & Office
Equipment

4800

8700

9700

14000

21000

56200

7300

9000

12000

15500

20000

63800

6000

9000

13300

20500

31000

80000

800

1000

1400

1900

2400

7500

3750

4150

4800

5100

5400

23200

6000

7800

10600

14600

20100

59100

2000

2900

4300

6500

8700

<-'■+

400

Total

30650

405 50

56300

78100 108600 314200

Source: Department of Electronics, Government of India. Annual Report 1984-
1985.

TABLE 2

Estimated Production/Investment Sharing Between
Public Sector and Private Sector 1985-90 (in Rs . million)

S.No. Sector

Public

Private

Percent- Produc- Invest-
age tion ment

Percent- Produc- Invest-
age tion ment

1. Components

2. Consumer Electronics

3. Communication
3.1 Broadcasting

4. Aerospace & Defense

5. Central Instrumenta-
tion & Industrial
Electronics

6. Computers & Office
Equipment

40

22480

3200

60

33720

4800

20

12760

400

80

51040

1100

80

64000

6000

20

16000

1500

90

6750

450

10

750

50

90

20880

2400

10

2320

300

40

23640

2230

60

35460

2230

30

7320 1100

70

17080 1100

Total

157830 15800

156370 11] 00

Source: Department of Electronics, Government of India. Annual Report 1984-
1985.

TABLE 3

Production of Electronic Equipment and Components
(in Rs . million)

S.No. Sector Calendar Year Production

1982 1983 1984

1. Consumer Electronics

2. Communication & Broadcasting Equipment

3. Aerospace and Defense Equipment

4. Computer, Control and Instrumentation

5. Electronic Components

6. SEEPZ

3370

3300

5870

2550

2700

3205

1085

1260

1490

2420

3290

4270

2140

2300

3030

485

750

1035

Total 12050 13600 18900

Source: Department of Electronics, Government of India. Annual Report 1984-
1985.

TABLE 4

Investment In Capital Goods and Estimated Export Earnings
in Next Five Years (100% Export Units Approved During 1984)

S.No. Sector No. of Investment Estimated

Units in Capital Export in

Goods Five Years

(in Rs . (in Rs .

Millions) Millions)

1. Consumer Electronics 2

2. Computer Control and Instrumentation 5

3. Communication and Equipment 1

4. Components 15

5. Computer Software 13

Total 36 405.39 7298.67

Source: Department of Electronics, Government of India. Annual Report 198A-
1985.

5.25

130.47

22.00

1502.74

2.68

1266.50

171.21

2914.59

204.25

1484.37

HECKMAN

BINDERY INC.

DEC 95

,. ™ §>H. MANCHESTER,
iBound-To-Pleasf' '^DIANA 46962