chapter ii mncs and technology transfer in...
TRANSCRIPT
99
In the International Development Strategy for the
Second United Nations Development Decade (1971-81)'
Chapter on Science and Technology, the General Assembly
stipulated:
Developed and developing countries and competent international organizations will draw up and implement a programme for promoting the transfer bf technology to developing countries, which include, interalia, the revie-w of interna tiol).al conventions on pateQt, the identification and reduction of ob,stacles to . the ~ trnsfer of technology to d~veloping countri;es, facilitating th~ titilization of : technology transferred to _<!_eveloping countries in such a manner so as to assist these countries in attaining their trade · and ·development objectives, the development of technology sui ted to the productive structure of developing countries and measures to accelerate the development of indigenous technology.
At its sixth special session (1974), the General
Assembly declared the establishment of a New International
Economic Order and rec6~mended:
Giving to the developing countries access to the achievements of Modern Science and Technology and promoting the transfer of technology and the creation of· indigenous technology for £he-~enefit of th~ deVeloping countries, in forms and in acco:rdance with proced~res 2 which are sui ted to their econom1es.
1. UN International Development Strategy, Action programme of the General Assembly for the Second United Nations Development Decade, Sale no.E.71.11.A.2, 1970.
2. "Declaration on the Establishment of Economic Order," General Assembly 3201 - (S-VITI), 2 May 1974.
New International Resolution, A/RES/
100
The following year, the General Assembly, at its
Seventh Special Session, devoted a whole chapter to
Science and Technology in its resolution on "Development
and International Co-operation". 3 It stressed the
need to strengthen the scientific and technological infra-
structure of developing countries, and establish an
industrial technological information bank, and an inter-
national centre for th~ exchange of technical information.
Developing countries l!rgued that they were unable to
bargain effectively with suppliers that technology was
too costly and that the terms of the arrangements were too
restricti.ve. The draft international code of conduct on
the Transfer of Technology has still not been 4 approved.
Although preparation and negotiation of a draft code has
continued through the fifth session of the United Nations
Conference on an international code of conduct on the
Transfer of Technology (November 1983) there appears to
be little prospect of agreement in the near future.
3. "Development and Interna tiona 1 Co-operation, " General Assembly Resolution:; A/RES/3362 (S-VII ),·September 19, 1975.
4. Dennis Thompson, "The UNCTAD Code of Transfer of Technology," Journal of World Trade Law (Geneva) vol.16 no.4, July/Augustl982. UNCTAD held a general conference, 6-30 June 1983, and prior to the meeting, Third World countries called on the Conference to improve data on technology transfe~ ind to explore the possibility of drafting international standards on marketing, promotion, distribution, trade and technology in pharmaceuticals. The United States and other developed nations were criticized for not participating sufficiently in efforts to speed en technology trans fer to developing countries.
101
In addition, a number of Multinational Conferences
sponsored by various UN agencies and International
Organisations have focused on regional technology transfer
problems. 5 The UN agency United Nations Industrial
Development Corporation (UNIDO), for example, is attempt-
ing to establish a system for monitoring technology
flows in developing nations, through its Technology
Exchange System and its Technological Advisory Services. 6
The more narrowly defined efforts of UNIDO and other
specialized UN agencies have contributed to a greater
understanding by developing ' countries of the problems
of technology transfer, particularly the legal issues.
An attempt is also made to review international
conventions on patents and trade marks and to improve
7 the transparency of the industrial property market. These
recommendations can be regarded as a basis for establish-
ing, within the New International Economic Order, a
5. United Nations Economic Commission for Western Asia. ( ECWA) has attempted to improve understanding of problems related to . technology tTansfer in various manufacturing sectors of this region's developing nations.
6h United Nations Industrial Development Organisation (UN I DO) Secretariat, "Overview of Selected Problems of Technology Transfer to Developing Countries," UNIDO/LES Joint Meeting on Problems of Licensing into Developing Countires, (Vienna), June 22, 1982.
7. For a full background on these efforts see United Nations Conference on Trade and Development ( UNCTAD) Documents TD/B/C.6/AC.3/2 and 3/3 containing reports respectively on The Revision of the Paris Convention for the ProtectfOrl of Industria-l-Property and The Impact of Trademarks on the Development Process of Developing Countries;-seealso Document TD/L.112, May 27, 1976; TD/B/C.6/AC.3/2, June 28, 1977; and TD/B/C.6/AC.3/3, June 29, 1977.
102
New Scientific and Technology Order whereby the present
technological dependence of developing countries would
be replaced by a technological independence, as a means
to support and strengthen political independence.
To achieve these programmes it is necessary to transfer
technologi~s and also to adopt them to the particular
conditions of developing countries.
Technology can be transferred by licensing agreemeRt
or through the medium of the Mul tina tiona! Corporations
either by the use of existing multinational facilities
or investment in a new facility in a foreign coun.try.
Licensing agreements, 8 which do not require any border
- crossing capital or foreign ownership of industrial
installations, have been successful vehicles for large
numbers of patent and technological know-how transfers.
Another method of technology transfer is through means
of collaboration agreements between domestic companies
with Multinational Companies.
The questions relating to transfer of technology
are at the centre of the debate for a New International
Economic Order ( N I EO).
items at UNCTAD VII. 9
It was one of the main agenda
The UN Conference on Science
~nd Technology for Development (UNCSTD) had focussed
8. UNCTAD, Joint Ventures as ~ Channel of Technology (New York), 1990, pp. R. C. Mascarenhas, Technology Trans fer (Boulder, Colorado) 1982, pp.16-18.
for the Transfer -- --9-10. See also and Development
9. "Technology and Economic on Trade and January 1989,
A Determinant Oof Interna tiona! Trade Development," United Nations Conference Development Bulletin (Geneva), no. 249, pp.3-4.
103
on it. The unequal distribution of power and influence
between north and south is largely an outcome of tech-
nological inequalities. The developed countries mono-
polize the power of technology, while technological
progress has been made in all spheres of economic acti vi-
ties in the last three decades in the developed countries,
thus providing a solid potential for improving the
well being of all peoples. The fact remains that "the
benefits of technological progress are not shared equitab~
by all members of the international community. •• 10
The New Interna tio'nal Economic Order (NIEO)
declaration does not dispute the role of foreign invest-
ment in the growth process. But the organisational
structure and the operational features of foreign enter-
prise are resented. 11 The MNCs have been a source
of technology transfer to .the LDCs, which is the key
element in the process of economic ·development in the
developing countries. They play a catalyst role in
the generation, application and the transfer of technology
across the 12 globe. They benefi't the host country
10. UN General Assembly, Declaration on the Establishment of ~ New International Economic Or~~r,3201(S-VI), ~1a_y 1974
11. V.N. Balasubramanyam, The UNCTAD Arguments Economy (Oxford) vol.1,
"Transfer of Technology: in Perspective", The World October, 1977, pp.42-46.
12. "TNC and Technology Transfer to Developing Countries," CTC Reporter (New York, N.Y.) no.26, Autumn
1988, p.21.
104
through bringing with them the much required capital,
managerial and technical skills and creating employment
13 opportunities to the local people. Few other insti tu-
tios have the required capital, trained personnel and
managerial capacity to transfer technology, to tap
interna tiortal money markets and to integrate developing
countries. The problems faced in the process · of such
transfer relates to certain institutional characteristics
of the MNCs. Commenting on the role of MNCs in the
economies of the developing countries, Singh14 states: I
"Transna tiona! Corporations continue to play .a very important role in the flow of foreign direct investment (FDI) and in supply of technology and technological services to developing countries. If enterprises, with at least one affiliate, were categorized as MNCs, nearly 11000 parent companies located in developed market economy (DME) countries had over 82000 foreign affiliates, of which 21000 were located in developing countries .... The estimated flow of FDI from DMEs to developing countries increased from $13.5 billion in 1979."
The beginning of the 1980s had witnessed a stagnat--
ion of commercial technology fiows, particularly to
the developing countries. The main reason of this
slow down is the behaviour of imports of technology
13. Vo, Han X., "The Role of Transnationals in Technology Transfer," Economic Impact (Washington,D.C., )no.60, 1987,pp.38-46.
14. R. K. Singh, "The Role of Transnational Corporations: Implications for Economics and Technical Cooperations among Developing Countries", Development and Peace (Baudapest), vol.3, 1982, p.41.
105
.embodied in capital goods which had actually declined
by 10 per cent in the developing countries between
period 1981 to 1986, as compared with the period 1970 ·
to 1981. The slow down intensity as well as its direction
differed among geographical and economic situation
of the developing countries and the outcome of a combinatbn
of factors - debt accumulation an burden of debt servicing
fall in commodity prices, high interest rates. . . that
had put a brake on the ability of the developing countries
to maintain the level of import of technology through
capital goods during the 1980s. 15 Their conceptual
and empirical analysis of the transfer of technology
process indicates that the forms employed for transferring
proprietary and non-proprietary technologies as well
as the terms and conditions by which the transfer takes
place. have serious debi 1 ita ting effects on the economies
of 'developing countries, 16 more particularly on their
perpetual state of technological dependence on the
developed countries.
15. "Technology A Determinant of International Trade and Economic Development," United Nations Conference on Trade and Development Bulletin (Geneva), no.249, January 1989, P:6
16. United Nations Conference on Trade and Development (UNCTAD), Guidelines for the Study of the Transfer of Technology to Developing Countries (1972); See also UNCTAD, Major Issues ·Arising from the Transfer of Technology to Developing Countries (1975); See also UNCTAD, Transfer of Technology: Report by the UNCTAD Secretariat, TD/106, Corr.l; and UNCTAD, on Some Implications of Technology Transfer for Trade, Growth and Distribution in Developing Countries
106 ,,
The developing countries had expressed their
arguments in number of international forums regarding
the transfer of technologies to them. This had been
well s~mmarized in a workshop report issued by the
National Research Council. 17
(a) The. cost of technology, especially as manifested
in the form of direct foreign investment by
MNCs, is too high.
(b) The international patent system excessively
impedes efforts by developing nations to acquire
industrial technology.
(c) The technology is not appropriate to the relative
factor endowments of the importing nations,
the technology being too capital intensive.
(d) MNCs engage in "unfair" practices, including
the creation of artificial barriers prev~nting
the entry of local entrepreneurs in indus'tries
in which "fair" conditions would otherwise have
prevailed and which would have enabled them
to compete successfully.
Other allegations include environmental and
cultural in appropriateness of foreign technologies
17. National Research Council, the US Economic (Washington ?,:).
Technology, Trade and D.C.), 1978, pp.124-
107
MNCs unwillingness to invest in local Research and
18 Development and to build national capabilities, share
their world markets, involve local skilled labour and
managerial expertise, exploitation of cheap labour and
raw materials and high repatriation of profits to the
home base for reinvestment and growth.
More recently, two other issues relating to tech-
nology transfer have also come to: (a) the appropriateness
of the technology being transferred, 19 (b) the availabili-
ty and cost to the purchaser, the technological assimila-
tion and learning effects and their capability to produce
technology .· 20 As far as the cost of technology in world
18. Dimitri Geormides, Transfer of Technology by Multinational Corportions vol.1 and 2 (Paris),1977, pp.67-68.
19. cf : Non-Marxist writers define 1 appropriateness 1 in terms of the material aspects of the techniques concerned either narrowly in terms of factor propor- · tions by neo-classicals, .. or more broadly to include additional variables such as the scale of production and the. type of pvoducts produced. According to the nee-fundamentalists such as Emmanuel, the most appropriate technology is generally the most advanced, technology. The nee-imperialist writers go further in posing the question 1 Appropriate from whom? 1 and conclude that only a socialist technology is approp-riate for Third World countries. · Rhys ,Jenkins, Transnational Corporations and Uneven Development (London 1987), pp.67-72; See also E.F. Schumachar, Small is Beautiful (New York, N.Y.), 1973, chs. 2-3.
20. Lynn Kreiger Mytelka, "Licensing and Technology Dependence in the Andean Group," World Development (Oxford} vol.6, 1978, p.447.
108
markets is co~cerned, the problem derives from the
fact "oligopali~ically organized MNCs are the principal
owners and sellers of industrial technology in market
in which many of the purchasers are badly informed
and thus.with a ~inimum bargaining strength. This cost is
very difficult :o measure since one cannot easily isolate
one aspect of MNC firms' activities. 21 The direct
financial cost2~ of technology transfer is reflected in
the payments remitted abroad in various forms. The
remittances abroad on account of these direct costs
have been on the increase. Also, there are a number of
"indirect" and .. real" costs for example, transfer pricing,
profits on capitalization of know-how, excessive use of
expatriate persons, etc. The evidence on extensive use of
transfer prici::lg by the MNCs to secure international
income flows ~ave been found in various studies in
L t . A . ,.23 a 1n mer1ca. Several UNCTAD studies on technology
21. G.Helleiner, "The Role of MNCs in the LDCs Trade in Techno~ogy.~ World Development (Oxford), vol.3~ April 1975, pp.86-90.
22. cf: OECD has estimated that the total direct cost of technology :o Third World countries in the early 1980s came to aro~nd dollar 3 billion. Francis Stewart, Technology and Underdevelopment (London, 1978). ch.5; See also M. Casson, Alternatives to the Multinational Enterprise (London,1979),pp.19-20
23. C. Vaitsos, Inter-Country Income Diustribution and Transnational Enterprises (Oxford, 1974), pp.320-28.
109
transfer also collected information on the incidence
of restrictive practives 24 in technology contracts. As
early as 1968, the payments made for technology by
the LDCs amounted to dollar 1500 million. 25 It was also
estimated for a sample of LDCs that such payments were
0.47 per cent of their GOP; 25 per cent of official
aid flows and 56 per cent of capital inflows on account of
private foreign investment. These payments impose
very heavy balance of payments burden upon the LDCs.
The UNCTAD also pointed out that besides direct
payment, technology imports also involve 1 hidden 1 cost
relating to over-pricing of intermediate inputs and equip-
ment supplied by technology exports. The MNCs also
admit these practices, which help to facilitate transfer
of funds in view of restriction on royalty rates and
24. cf Individually and collectively TNCs act in order to restrict competition in various ways. Individually they impose restrictive clauses on subsidiaries and licenses . through technology contracts; These include tiing inputs of raw materials, machinery etc.·, to the technology supplier or restricting exports in order to divide world markets. Collectively they form cartels or engage in informal collusion through market sharing agreements or the allocation of spheres of influence. Rhys Jenkins, n.19, pp.24-25; See also C.Vaitsos,n.23, p. 42; See also UNCTAD, Major Issues Arising from the Transfer of Technology to Developing Countries, TD/B/ AC.II/Rev. 2, 1975.
25. OECD 1978.
World Research and Development Survey (Paris,
110
26 divided payments. The monopoly rent for technological
development is safeguard world-wide by the international
patent system. According to a 1975 UNCTAD study, 94 per
cent of the world's patent rights are owned by juridicial
entities of developed countries and on 6 per cent by those
of the LDCs. Even of the 6 per cent registered in
the LDCs, about 85 per cent of patent are owned by
MNCs of the US, Germany, France and United Kingdom. Only
1 per cent of all the patents registered world-wide
are owned by LDC firms. 27 The same level of concentra t-
' ion is there in world production of capital goods.
In 1970, world production. of engineering and electrical
goods had a distribution pattern as follows: 3.1 per cent
was produced by te LDCs, 36 per cent by COMECON and
60.3 per cent by the OECD. In the context of their pat-
tern · of technology . production and utilization, the
NIEO called for a new technological order based on
improving the conditions of technology transfer. In the
developing countries the transfer of technology is exogen-
ous, having been developed in and for the developed
countries in a different environment physically, organisa-
t ionally and economically· may not be appropriate to the
26. S.M. Robbins and R.Stobaugh, Money in Multinational Enterprises (London, 1974), Ch.V.
27. Vaitsos, n.23, pp.320-8.
111
developing countries. This exogem clearly raises quest-
ions abount suitability (or appropriateness) of the
technology developed in the developed countries, both in
terms of nature of products and the methods of production
associated with the processes (example the capital-
intensity of the processes). In addition, the exogenous
has implications for the relative power of the developed
and developing countries, imposing an all-embracing tech-
nological dependence on developing countries, which not
only has consequences for the process of technology, its
make, price and characteristics, but may also cause
other forms of dependence, including financial, managerial
and socio-cultural. During the last few decades, the
developing countries focussed on four different areas re-
lating to transfer of technololgy.
(a) The initial focus was on the issue of choice of
technology (COT). The basic concern for the develop-
ing countries was the select ion of techn,ologies from
the available 1 technology shelf. 128 This required
28. A.E.Kahns, "Investment Criteria in Development Programs, ... in Quarterly Journal of Economics(Cambridge) vol.65, no.l, February 1951; . For a lucid analysis of efficiency and optimality in choice of techniques, s~e A.K.Sen, "Choice of Technology: A Critical Survey of a Class of Debates in UNIDO", Planning for Advanced Skills and Technologies, Industrial Planning and Programming Series (New York, N.Y.) no.3, 1969;W.Galanson and H. Lei benstei n, "Investment Criteria, Productivity and Economic Development", Quarterly Journal of Economics (Cambridge), vol.69, August 1955; M. Dobb, "Second Thoughts on Capital Intensity of Investment," Review of Economic Studies (Oxford), vol. 24, 1956-57, pp.60-64.
112
identification of the range of technologies available
consideration of their characteristics, which
technologies would best meet the needs of developing
countries, and the changes in policies required in
order to bring about the desired choices. The issue
of appropriate technology was associ a ted with
choice of technology. On the one hand, there
were those who believed that many of the technologies
recently developed in the North were appropriate for
the South becuase of their implications for resource
use, organization and patterns of consumption. On
the other hand, was a belief that only the latest
technology would enable developing countries to catch
up with the developed countries.
(b) The other focus of interest was on terms of techno-
logy transfer. This had been a subject of interest
to those who have been associ a ted with the Andean
pact. 29 The UNCTAD has also focussed on this aspect.
The need for rapid technology trans.fer from the
north was recognized. But it was widely felt (and
backed up by recent empirical work) that the terms of
29. UNCTAD, "Legislation and Regulations of Technology Transfer: Empirical Analysis of Their Effects in Selected Countries," The Implementation of Transfer of Technology Regulations : A Preliminary Analysis of the Experience of Latin America, India and Philippines, (Geneva) TD/B/C/6/55, 1980.
113
the transfer were onerous4 The policy question was,
how should the modalities of transfer be devised,
which would eliminate or minimize the monopolistic
rents that were being levied by the· MNCs.
(c) A third concern was the urgent need for developing
countries to build up their technological capability.
Economists such as Katz, Westphal and Sanjaya Lall
have emphasized on this. 30 Those who hold this
focus do not question the need for modern technology,
nor are they concerned with the price at which
it is acquired. They believe that "catching. up"
requires modern technology and the price of its
acquisition is a rather trivial matter. But true
catch-up cannot be attained without technologi·cal
mastery, which is necessary to enable countries to
use the technology efficiently·· and to ·compete in world
markets. They illustrate th~ model with the economic
miracle of Japan which had imported technology on a
massive scale, paying little attention to issues of
appropriateness or price. · The Japanese devoted
30. J.Katz, ''Domestic Technological Innovations and Dynamic Comparative Advantage," Journal of Development Economics (Amsterdam), April 1984, p.28; Westphal and Y. Rhee, "A Micro· Econometric Investigation· of Choice of Technology, u .Journal of Development Economic, September 1973, p.36; Sanjaya Lall, · "Less Developed Countries and Private Foreign Direct Investment: A Review Article," World Development (Oxford), 1974, pp.2, 4 and 5.
114
considerable internal resources to the mastering of
the technology which was acquired and this led to
their emergence an economic power.
(d) The rapid rate of Technical Change (TC) in . recent
years especially in micro-electronics, is the most
recent concern of those working on technology
issues. What is the nature of this TC and its
implication on the international division of
labour, on power, dependence, on international
organisation of production on consumption patterns
and use of resources in developing countries? What
policies should developing countries adopt in the
face of these new trends? Should they 'opt-out'
altogether, or try to compete in production and
use of micro-electronics, or adopt some intermedi-
ate strategy?
There is a considerate ambiguity surrounding the
use of the term 'technology'. In the popular usage, it
is understood simply as the know-how of producing a good
or service. In a broader sense, it also encompasses such
elements as management and marketing skills. Technology,
therefore, assumes many forms: "Hardware" embodied in
machinery and equipment, "Software" such as blueprints or
operating manuals and "Services" in a variety of areas
31 (for example, products design or quality control).
31. "TNC and Technology Transfer to Developing Countries," CTC Reporter, no.26, Autumn 1988, p.21.
115
At the conceptual level there is a presumption that
technology is just knowledge, which is ideologically
neutral, cumulative in growth, transnational in origin and
transmittable across national frontiers. But technology
is not just simply an abstract knowledge. It is a combi-
nation of equipment, ski 11 and knowledge. It comprised
of different kinds of skills and of information. Techno-
logy is also vested with private property rights and
hence is not just freely transferred. Further, there are
biases in the development of technology. Characteristics
of technology are influenced by the economic and social
conditions in the economy in which it is developed. Income
levels, resource availabilities, the system of production
organisation, etc., are different in the countries
of the north and the south, and as such the transfer of
technology tends to be inappropriate to the needs and
d . t. f th d 1 . . t . 32 con 1 1ons o e eve op1ng coun r1es. Technology has
many characterisations of public goods, and as a consequ-
ence of it, the marginal cost of its transfer is very low
as compared to the initial cost of its development. Hence
the commercialization of technology involves imposing
restrictions, legal and institutional, rendering the
technology-market highly imperfect. The trade relation-
ships in the technology should be seen within the framework
32. Francis Stewart, Technology and Underdevelopment (Boulder, Colorado, 1977), chapter III, pp.47-49.
116
33 of Emmanuel's "unequal exchange", rather than as "arms
length" transactions in the conventional comparative cost
34 framework. There exists considerable scope for abuse
by the sellers and there is always potential for bargain-
ing on the part of buyers in settling the price. The
transfer of technology through traditional channels by
suppliers has not proved e.ffecti ve in closing the techno-
logy gap between north and south. Instead, the process
had led to patterns of assymetics. 35 Indiscriminate
import of technology involved high costs, inhibited
learning effects and accentuated technological depend-
ence. 36 Many countries which initially had introduced
a host of tax incentives to attract foreign investment
began to regulate and monitor the import on external
resources including technology by policy intervention.
The developing countries as a group also explored policies
and institutional modalities for the regulation and
harmonisation of the terms of technology transfer. There
have also been international initiatives to negotiate a
33. Emmanuel, "Unequal Exchange," Monthly Review Press (New york, N.Y.), 1972, pp.60-66.
34. Vaitsos, n.23, pp.320-8.
35. UNCTAD, Technological Dependence: Its Nature and Consequences, 1975, TD/190, chapter 1.
36. For example, on Indian situation, see Michael Kidron, Foreign Investment in India (Oxford, 1965), pp.239-42; See also K.K.Subrahmanian, Import of Capital and Technology (New Delhi, 1972), p.231.
117
code of conduct with respect to TNCs and the transfer of
technology.·
Transfer of Technology: Conceptual Analysis
Technology transfer to the developing country is a
complex process that occurs primarily in the commercial
market place through transactions· between suppliers and
recipients. In the developing countries, governments and
public enterprises along with domestic firms are primary
recipients. On the supplier side, while governments of
developed countries influence civilian ~echnology transfer
through various policies and assistance programmes, the
major participants are Multinational Corporations.
Analysis of technology transfer poses some difficult
questions: how is commercial technology transfer distin
guished from trade and how extensive have technology
transfers, in contrast to trade, been to the developing
countries during the past decade; what factors affect
the ability
technology;
of recipients to use or "absorb"
what factors il1fl uence flows of
imported
technology
between supplier and recipients in the developing coun
tries; what choices do recipients and suppliers face as
they engage in technology transactions?
T~chnology is the knowledge needed to design,
create, or implement a production process or the services
related to the process. Technology is the specific
application of scientific and technical knowledge to the
118
37. pro~uction of goods and services. Technology transfer,
therefore, is a process involving at least two parties,
whereby the recipient attains an improved capability to
design products or to operate a production facility
or a service system. Technology transfer involves:
(a) technology trade - the provision of technology by a
supplier to a recipient through commercial trans-
actions.
(b) technology absorption - the use of that technology
by the recipient; e.g., in operating and maintaining
a m~nufacturing facility.
Since technology transfer ·involves scientific and
technical knowledge required for these specific operations
it differs from the general dissemination of scientific
information. For technology transfer to occur, a variety
of transactions must take place. These transactions
include the sale of industrial rights, provision of
training, technical and management services, designs,
plans and documents alongwi th the supply of equipment
needed to operate and maintain a complex industrial
or service system. Generally these transactions take
37. "Technology Transfer : Definition and Measurement,"· in Technology and East-West Trade (Washington D.C.), OTAISC-101, 1979, pp.99-105.
119
place in the commercial market-place and· also through
government supported economic assistance programs
and government to government technical co-operation
programs.
A commercial transaction (for instance the sale of
a turn key plant) indicates only that successful technolo-
gy transfer might have taken place. The teaching and
learning required for technology absorption generally
takes place over a period of time. For the process of
technology transfer to occur between supplier and recip-
ient countries, it is necessary to bridge a considerable
"technological distance," and this bridging usually takes
place gradually. 38 Technology transfer occurs through
technology trade but should be distinguished from it. If
the recipient merely purchases equipment but is unable to •
use it, technology trade has· ,occurred but no absorption
has taken place. In such a case, only part of the
. process of technology transfer has been completed. If the
·recipient countries fully absorbs. the technology, the
capability to operate and maintaining it and further would
be able to design and produce new products, then the
transfer of technology takes place.
38. For a discussion of characteristics of Technology Transfer between Developed and Developing Countries, see Organization for Economic Co-operation and Developmenty (OECD), North/South Technology Transfer (Paris), 1981, p.24.
120
Technology transfer normally occurs in the context
of a particular enterprise, project, or industrial
sector. In order to determine the level of capability
that has been developed (the extent of technology absorp
tion) 39 it is therefore necessary to examine the effects
on technology transfer in the particular productive enter
prise. Although numerous factors - for instance na tiona!
development plans, labour, education, investment .and
trade policies, etc., are affected by various transfers,
but the. effects in the productive enterprise or sector
receiving the technology are most important indica tors of I
the extent of transfer of technology in recipient dev~lop-
ing countries.
39. c.f. Technology absorption is the capability of the user or receiver to adopt, assimilate, and master the technology. This depends on a variety of factors, such as : 1. The ·nature of the techpology package which the seller and buyer have entered into, which basically is an agreement to provide a range of information and services in return for payments ~ade. 2. The overall technology policy and the instruments available in its environment to support the enterprise in its attempt to absorb the technology.·~ 3. The ability of the enterprise to understand and apply the basic principles and techniques embodied in the technology. Jack Baron son, "Should United States Restrain Export of Sophisticated Technology," The Wall Street Journal (The Asian Edition) cited in M. C. Bettignie, "The Management of Technology Transfer : Can it be Learnt," Impact of Science and Technology 28 (1978), p. 325 See also R.C.Mascarenhas, Technology Transfer and Development (Boulder, Colorado, 1982), p.83.
121
Technology Transfer : Policy Issues
Technology transfer, from the perspective of
a policy maker, holds tremendous promise but also poten
tial problems. The opportunities and the pitfalls
are particularly salient when technology flows from
developed to developing nations; the stakes are high for
recipient developing governments initiating new and
highly visible projects involving the introduction of
sophisticated technology imported from abroad. Sometimes
for the suppliers, potential losses include growing
resentment about projects that have failed, which may in
certain cases, jeopardize foreign relations with suppliers.
Technology transfers raise difficult choices for
policy makers in recipient and supplier countries because
it is impossible to anticipate all the future consequences
of such transfers, or to trace the effects such transfers
in the past. Simply because technology transfer normally
occurs in the context of economic development projects, it
can be viewed as a facet of the development process. And·
also it effects the other· trends such as urbanization,
economic growth, improvement in living standards,political
and social change as such, it is generally difficult to
distinguish the discrete side effects of technology trans
fer at the national level.
The potential gains and losses differ with respec
tive recipient developing country and supplier developed
country - whether they be governments, private enterprises
122
organizations, or individuals - inevitably evaluate the
costs and benefits of particular technology transfers in
different ways. 40 Recipients and suppliers alike
forced to make choices ia a context of inadequater
information, experience and capacity for anticipating
results - may seek to maximize political and other goals
rather than ensuring the success of technology transfer.
Different policies adopted by different recipient count-
ries affect the transfer. of technology which results in
political compromises, foreign policy aims and social
values.
The recipient developing countries are faced with a
specific characteristic of technology which according to
Arrow 41 . is the 1 information paradox. 1 The recipient
country is often unce~tain as to the choice ai t should
make in the commodities which it intends to buy. In order
to make a rational choice, it should have proper in forma-
tion about the commodity, and when the commodity itself is
information, then the recipient country is faced with a
problem as it needs information about its commodity (in
40. For a discussion of National Perspectives on Technology Transfer, see Joseph S.Szliowicy,ed., Technology and International Affairs (New York, N.Y., 1981), pp. 60-72; See also Henry N. Nav, Technology Transfer and US Foreign Policy (New York, N.Y., 1976),pp.43-52.
41. K. Arrow, "Economic Welfare and the Allocation of Resources for Invention," in The Rate and Direction of Inventive Activity : Economic and Social Factors, National Bureau of Economic Research Special Conference Series No.13 (Princeton), 1962.
123
other words technology) which is 'information.' Since both
are often the same thing, this uncertainty of the buyer is
almost inevitable in the technology market.
To
problem is
recipient developing
the selection of
countries,
technologies
a critical
needed to
attain development objectives. Technology transfer "work"
for the recipient only if the recipient knows what to ask
for and if the foreign supplier is willing to provide it.
The disappointment with MNC~ in technology transfer
often results when, the recipient does not posses the know
ledge or experience needed to define r~quirements. In such
cases. the foreigi supplier may meet its obligations,
but the level and type of transfer may not meet recipi
ent's expectation.
Theoretically, technology selection should fit in
which a broad range of policy concerns: economic growth,
international trade and environmental, labour and social
policies. However, because ' policies are rarely well
defined and consistent across these areas, the problem of
selection of technologies is much significant in recipient
developing countries. Policy makers in different countries
may reach different conslusions about .what technologies
are most appropriate," even if the· national resources are
comparable. Considerable attention has been paid to the
potential uses of intermediate, ·small scale and labour
intensive technologies by developing countries.
124
Technologies have been defined by theorists
as "Inappropriate" for a number of reasons such as
failure to utilize local materials, to adapt to local
markets, or to introduce sui table scale of production. 42
However in practice, policy makers determine the appropr-
ia te mix of technologies; and long-term environmental,
social and other effects are· often insufficiently con-
sidered by recipient developing countries.
Technology transfer also involves the r·ela tionship
between · private and public sectors in the developing
countries The respective government plays an important
role in formulating various policies thereby influencing
the private sector. The public sector such as Ministries
of Health and Telecommunication, Steel Plants, etc.,
usually require imported technologies. The concerned
g()vernment ·usually plans and implements technology
transfer to its public sector.
Successful transfer implies a deg~ee of operational
efficiency that is in. certain· cases constrained by the
presence of a large bureaucratic public sector. Such
problems can be traced to the prevailing of high govern-
ment salary scale and security job which draw qualified
technical people from the private sector. Due to the
operation of public sector and having the patronage
42. Simon Teitel, "On the Concept of Appropriate Technology for Less Industrialized Countries",in Technological Forecasting and Social Changes (New York, N.Y.),vol.2, 1978, pp.349-69.
125
of respective government of its efficiency and productive-
ness, the private sector is side lined in the economy.
This occurs in the "socialist pattern of mixed economy"
developing countries. The transfer of technologies takes
place without its proper utilization in the required
sectors of the economy.
Technology tra.nsfer at the national level requires
building an institutional infrastructure. This is needed
to incorporate technical, commercial, managerial, finan-
cial and Research and Development so that the technical
know-how would finally reach the main users. Firms in the
recipient developing countries often have limited abili-
ties to diagnose problems or to select and fully utilize
technologies. As a result, operations and maintenance
of facilities are often neglected and equipment is
under uti 1 ized or even wasted. A local technical and
managerial infrastructure is ihus essential for technology
transfer. 43
Technology Transfer by Multi-National Corporations : The Case of India
India's strategy of development enunciated under
various five years plans had specifically laid importance
43. Harvey W. Wallender, Technology Transfer and Management in the Developing Countries (Cambridge 1979),p.6.
126
on technology. The technology strategy in India is
carried out of the self-reliance objective, which implies
first the capacity for autonomous decision-making and
implementation in technology matters and second, the
utilisation of a mix of foreign and indigenous sources
'for the accumulation of technological capacity and
its 'absorption. Towards attaining this strategy, India
followed a pol icy of 11 selective regulation 11 of the trans-
fer of technology. The policy meant administrative
scrutiny and screening of every import of technological
cases, considering its characteristics and consequences :
i.e. mechanisms and terms of transfer and the impact on
balance of payments, local technological development and
over all development as such.
Technology transfer can be either vertical or
horizontal. Vertical transfer is generally internal to
the enterprise and takes place by th~ incorporation of new
scientific knowledge- from the idea stage to its final
development. H6rizontal transfer involves the transfer of
proven and tested technology from one industry or country
44 to be adopted modified or applied in another country.
Though vertical transfer of technology may be the
ultimate goal for all recipients of technology, who wish
to achieve self-reliance, the process can be more e f fee-
tively achieved by laying greater emphasis on horizontal
44. Frank Bradbury,Transfer Processes in Technical Changes (The Netherlands, 1978), p.5.
127
transfer· in the early stages of development. Technology
transfer from developed to developing countries which is
mostly horizontal can take place in one or a combination
of various ways as outlined below :
(a) Flow of books, journals and published literature.
(b) Movement of people between countries including migra-
tion and return of immigrants.
(c) Foreign investment and associ a ted transfer of know-
ledge and equipment.
(d) Import of machinery and equipment.
(e) Technical co-operation programmes (Multilaterial, .
bilateral official and private.
(f) Licensing know-how, patents and trade marks.
Most of the countries adopt all the above methods
in the technology transfer. In order to analyse the
relat~ve importanc€ of different methods in quantitati\l·e
terms, case studies have been initiated by the United
Nations Economic and Social Council 'in developing count'
ries ·with relatively advanced stage in their industrial
. 45 development and experience. The data is expected to
45. UNCTAD has done work on transfer of technology aspects and the development perspectives. See, for example,
, the Report of the Meeting of Governmental Experts on the Trans fer, Application and Development of Techno~ in the Food Processing Sector, (TD/B/C.6/78 - TO/ B/C.6/A C.6/7), 1-10 June 1982; The Capital Goods Sector in Develo~ing Countries: Technology Issues and Policy Options UNCTAD/IT/78), 1985, sales No.E.85 11.0.4; Technology Issues in the Capital Goods Sector:
128
provide useful basis for elucidating similar problems, in
other developing countries and in formulating industrial
policy guidelines.
To a large extent India follows a horizontai
transfer of technology which involves various types of
technology transfer and the governmental policies of
Indian Government to regulate the flow of technology.
Types of Technology
In discussing transfer of technology it is necessary
to broadly classify the types of technology and to dtstin-
guish the categories of technological knowledge. Techno-
logical knowledge covers all three, technological hardware
(equipment, tools etc.), technological soft-ware (process
and product know-how) and technological hardware (manag-
erial, organisational, marketing skills). Within this
! Case Study of Tunisia, study prepared by Mr. R. Tiberghien at the · request of the UNCTAD Secretariat
· (UNCTAD/TT/53), · 1982; The Diffusion of Electronics Technology in the Capital Goods Sector_:_ The Yugoslav Case, study prepared by Pr·ofessor Loj ze Socan in cooperation with the UNCTAD Secretariat (UNCTAD/TT /67), 1986; Technology Issues in the Capital Goods Sector: ! Case Study of Leading· Machinery Producers in India, study prepared by the Sardar Patel Institute of Economic and Social Research, Ahmedabad, India, with the co-operation of the UNCTAD Secretariat (UNCTAD/TT/55), t983; The Diffusion of Electronics Technology in the Capital Goods Sector: The Argentinian Case, study prepared by the Centre on Transnational Economy (Buenos Aires) in co-operation with the UNCTAD Secretariat (UNCTAD/TT/66), 1985; Technology and Development Perspectives of the Metalworks and Engineering Industries in Sierra Leone (UNCTAD/TT/75), 1986. See also UniTed Nations Economic and Social Counci 1, 45th Session, E/4597, October 1968.
129
broad category we need to distinguish
knowledge into:
technological
(a) General knowledge: which is publicly available.
(b) Industry specific: knowledge which is necessary to
produce a product or to manage a process and which is
generally known within an industry.
(c) System speci fie: knowledge for the production of ·a
specific product.
(d) Firm specific: knowledge to produce a product or to
manage a process which is owned or contained within a .
specific firm.
(e) On going problem-solving capability know-how which
results from experience and its necessary to solve
production process problents. 46
In distinguishing the types of technological knowl
edge which help us to identify the different types of
proprietary technology that can be acquired and the
difficulties involved in absorbing each. The technologi-
cal knowledge 'that is generally transacted as proprietary
knowledge in the form of patents, trade marks, etc., is
firm specific and syst~m specific knowledge.
Another aspect of transfer of technology relates to
the classification of technology of core and ancillary
technology. Core technology which is central to the
46. Wallcnder, n.43, p.98.
130
manufacturing process allows little flexibility to shift
from capital to labour intensive methods of production.
Ancillary operations involves the process of handling,
movements, storage, packaging etc. , that there is great
flexibility for labour intensive operations. 4 7 Core
technology is central and specifiG to the manufacturing
process and is complex. It is generally patented or. is
controlled by a few firms. Ancillary technology is less
complex and ·is common to several industries. It is
embodied in equipment, rna terials or engineering services.
The distinction relates to the case and time required to I
acquire, make or generate the technology. The distinction
between the two is that core technology is capital inten-
si ve and ancillary technology 1 ike transport, handling,
storage and packaging which are amenable to varying
levels of labour intensive methods. 48
4 7. Gustav, Ranis, "Appropriate Technology: Obstacles and Opportunities," and Howard Peck, "Technology .and Employment: Constraints on Optimal Perfor111ance, 11 in Samuel M.Rosenblatt, ed., Technology and Economic Development: ! R~alistic Technology (Boulder, Colorado 1979), pp.29-32; see also Lawrence J.White, ·~~ppropriate Factor Proportions for Manufacturing in Less Developed Countries: A Survey of Evidence, 11 in Austin Robinson, ed., Appropriate Technologies for Third World Developments (London, 1979), pp.300-41.
48. UNCTAD V, Technology Planning in Developing Countries (Manila, 1979), TD/238/Supp.I, p.3.
131
Determinants of Transfer of Technology
The mechanisms for technology transfer depends on
the needs and motives of the supplier and recipients
countries. Both the parties to the transaction are
sometimes governed by the policies and the regulations
prevalent in their respective countries. Within these
constraints both the parties seek option that are likely
to maximise their adva~tages and to the extent prefer
alternative modes for selling or acquiring the technology.
These options range from the exporting of the product or
machines, direct investment a turnkey project or a
licence arrangement. In such joint venture or even a
bargaining situation the crucial determi-nants would be:
(a) The monopolistic or competitive situation in which
both the sector and the buyer of technology are placed.
(b) Alternate markets to both the supplier and
(c) Availability of information on alternative
technology particularly for the rycipient
respective costs and benefits.
recipient.
sources of
and their
(d) The prevalence of regulatory mechanisms in host
developed countries which lay down ground rules for
such transfer of technology.
The above factors assume· equality between the parties in
the bargaining situation. In reality the situation is
more lopsided because the reci pi en t developing countries
132
due to their weak bargaining power and urge in acquiring
technology allow the dominant role of supplier developed
countries in bargaining process of transfer of technology.
This takes place in the initial process of development in
the least developing countries.
As the recipient developing country gains in
experience and acquire knowledge of· the technology, the
process is likely to be one of lesser inequality between
the two parties. In other words, as the industry moves
from a lower stage to a higher stage of capability and
its absorption process, it is likely to adopt a different
Set of strategies for acquiring the technology. Underly-
ing this hypothesis is the assumption that there is a
positive progression and that both parties (supplier and
r~cipient) are willing to maximise the gains in a bargain-
ing situation. In this situation, the supplier of the
technology would naturally exploit his market position
· .. and accordingly prefer to export. If supplier experience
restrictions on such export, the supplier then ·chooses to
adopt a policy ot Direct Invelment or joint venture with
licensing as his final alternative. 49 Since the develop-
ing countries in their initial stages of development are
49. Howard Davies, "Technology Transfer Through Commercial Transactions," Journal of Industrial Economics (Oxford), vol.26, 1977, pp.165-7.
133
dependent on capital, expertise and information, they may
prefer to enter into collaboration in the form of a joint
venture or a turnkey project where all three aspects of
technological knowledge are available in a package.
On the contrary, if the recipient of the technology
gas acquired sufficient skills in choosing the right type
of technology and has the bargaining ability, he might
prefer a "licensing arrangement" where an unpackaged
transfer will allow for a selective purchase of technology·
which could be either capital goods, expertise or informa
tion.
.'Owing to a . variety of determinants, the most
common of technology transfer is the licence agreement.
This situation arises when the recipient developing
countries have limited technological capability, and are
dependent on· technology suppliers. Developing recipient
countries enter into b-road-based technical collaboration
in which the licence to manufacture a product i!5 one
element. The collaboration agre~ment usually includes
extensive arrangements for technical assistance to help
the buyer of te'chnology to learn the process of manufac-
ture. In certain cases this may extend to a turnkey
project. The variation between a turnkey project and a
1 icence agreement is distinguished by Jack Baronson as
134
"implanting operational technology" and "importing techni-
cal capabilities" to duplicate that technology respec-
50 tively.
A licence may be defined "as an agreement by which
the licenser extends to the licensee a limited right to
make use or sell the licensed object, usually for a
consideration or a royalty". 51 Under such an agreement
there are two aspects:
. ( i) Granting the right of manufacture of a speicific
process or product; and
(ii) the process of putting the licence into operation.
Generally the technical collaboration agreements cover
both aspects, i.e., the licensing and the technical
services. When obtaining such know-how through licensing,
either a.n outright purchase may be made or the agreement
may decide upon the continu.ing association of the licenser
and licensee. Outright purchase provides a limited
involvement with the licenser while the continuing
association provides a more comprehensive transfer of
technology. This is a continuing relationship and this
50. Jack BaronsonJ Technology and the Multinationals (Toronto, Lexington, 1978), p.15.
51. UNIDO, National Approaches to the Technology, Development and Transfer Services No.1 (New York, 1978), p.5.
Acquisition of of Technology,
135
agreement provides for the licensee sole rights in the
area, the right to use brand names as trademarks and
technical assistance in establishing the product or
process.
The marketing of such licences is seen as an alter-
.. native to direct investment, either when foreign invest-
ment is not welcome in some countries or when such
an investment would involve risk .for the investors. For
the developing, licensing provides both a wider range of
options and greater opportunities for learning by doing,
as well as avoiding the risk of external control over the
economy. While deciding on a licence agreement as a
form of technology transfer, both supplier and recipient coun-
. tries of technology see several pay-offs to the suppliers,
which can be illustrated as follows:
1. The earning of addi tiona!. income from technologies·
which are at the end of their product life in the
domestic markets.
2. The opportunity to experiment . with a technology which
has yet to be proven.
3. In certain cases to gain the goodwill of the host
country governments and to obtain some publicity. 52
To the recipients:
52. Dennis Goulet, The Uncertain Promise: i!!_ Technology Transfer (Washington,
Value Conflicts 1977), ch.III.
136
1. The acquisition of ready-made technology is often
easier than investment in research and development.
2. The opportunity to procure up-to-date technology in
some cases.
3. Scope for unpackaging the technology can be built into
the agreement.
The real payoffs to either parties would ultimately
depend upon the technology package. It is during the
process of bargaining either parties seek advantages,
depending upon the needs of motives of suppliers.
Howard Davies classified licences into limited, intermedi-
ate and comprehensive packages depending on the amount of
assistance sought and disclosed by the· parties t·o the
53 agreement. By adopting licensing as a strategy of·
acquiring technology the developing countries are likely
to retard or discourage indigenous· generation of techno-
logy, thus contradicting a basic objective of development
self-rel,iance.
The UNCTAD guidelines for the import 'of technology
clearly prefers licensing to foreign private investment.
However, in distinguishing between simple direct transac-
t ion, process package transaction and project packages,
several constraints associated with each of these options
53. Daviesr n.45, pp.169-70.
137
have been noted. 54 Its assessment of the various alter-
natives varies from the view point of MNCs whose
objectives while transfer of technology are primarily
motivated by business interests. On the other handJ the
recipient countries through their regulatory agency adopt-
ing social evaluation see such transfers from a
national point of view. In Japan where the import
of technology·has been regula ted, the buyer of technology
is required to satisfy the government that specific
request has taken into consideration from the business and
' t. 1 . t f . 55 na 1ona po1n s o v1ew.
It is important for developing countries to assess
their needs and their goals of development in order to
successfully transfer technology under existing condi t-
ions. Technology assessment provides an analytical
tool to assist in the process. It helps to examine
the consequences or impact, of a particular technology on
its development within a given socio-economic environment.
It also provides information insight and guidelines qn
choice of technology.
,54. UNCTAD, Handbook on the Acquisition of Technology by Developing Countries (New York), 1978, pp.8-10.
55. Terutoma Ozawa, Japan's Technological Chalffinge to the West, 1950-74; Motivation and Accomplishment(Cambridge 1974), p.20.
138
EVOLUTION 0~ INDIA'S FOREIGN PRIVATE INVESTMENT POLICIES·
India's Industrial Investment Policy governing
foreign and domestic investments is contained under the
guidelines of the Industrial Policy Resolution of 1948 56 '
the Industrial Policy of 1956, 57 the Industrial Licensing
Policy of· 197~, 58 197759 and the Industrial Policy
of 1990. 60
56. Constituent Assembly of India, Legislative Debates, vol.l, no.l, 6 April, 1948, cols.3296-7.
57. India, Lok Sabha, Debates, vol.4, no.54, 30 April 1956 cols.6690-9.
58. Press Note dated 2nd February, 1973 of Indust.rial Policy allows future growth to foreign companies in the 19 industries listed in appendix I of the policy and in export-orient industries. See in UNCTC National Legislation and Regulations regulating to Tran$na tional Corporations (New York), 1983. See also in Government of India, Guidelines for Industries 1979, pp.6-9.
59. Industrial Policy Statement, Lok Sabha, DebateS) Six Series, vol.9, no.27, December 23, 1977, pp.229-300.
60. Union Industries Minister, Mr. Aj it Singh's announcement of "New Industrial Policy" on 31st May, 1990
··Monthly Newsletter, Indian Investment Centre (New Delhi) vol.27, no.6, 1990, pp.64-65 and 70. See also in "Text of the New Industrial Policy, Economic Times (New Delhi), June 2, 1990, p.6; also reproduced in SBI Monthly Review (Bombay) June 1990, p.296.
139
The Industrial Policy Resolution of 1956, while
reserving 17 industries, 12 for the public sector61 and
11 further industries to become gradually _state owned,
assures the MNCs that there would not be any kind of rest-
riction on the remittances of profits, or withdrawal of
investment subject to the existing normal exchange restri-
ctions. It also fully guarantees that in case a foreign
firm is to be compulsorily acquired, the government would
provide reasonable compensation according to the national
laws.
In J.969, however, a more restrictive, selective
and comprehensive approach was adopted. The government
had issued three illustrative lists of industries specify-
ing the roles allotted . to foreign capital in each group.
61. c.f. Government classified industries into three categories : First. category are industries, the future development of which will be the exclusive responsibilities of the state which includes 17 groups of industries. Second category consists of industries which will be progressively state owned and in which the state will generally take initiative in establishing new undertakings, but in which private enterprises will also be expected to supplement the effort of the state which includes 12 grotips of industries. Third category includes all the remaining industries and their future development has been left to the i n i t ia t i v e and en t e r p r i s e of the p r i vat e sector w h i c h includes the rest of the group of industries. Government of India, Ministry of Industry, Department of Industrial Development Report,198!":•-86,New Delhi p. 15.
140
The first list enumerated industries where foreign invest-
ment would be permitted with or without t~chnical collabo-
ration; the second list contained those whee_e only foreign
technical collaboration and not investment, would be
permitted, and the third list comprised those where
no foreign participation, neither financial nor technical,
would be considered. 62 The existing foreign controlled
companies had come under the purview of the new Monopolies
and Restrictive Trade Practices Act (MRTP Act), promulga-
ted in 1969, and subsequently, the MRTP Rules were
·issued in 197o. 63 The Industrial Licensing Policy
of 1973 allows future growth and expansion to foreign
companies as well as to domestic companies in the 19
. d t . 1 . t d . d . 64 f 1n us r1es 1s e 1n appen 1x o the policy and in
export-oriented Industries. After the enactment of
the FERA the foreign equity is ordinarily per~issible upto
40 per cent in a new company, but higher equity is permis-
sible in exceptional circumstances. There also exists an
· 62. The three lists are included as appendixes A.4-A.6, in H.P.Aggarwa1, Business Collaboration in India (New Delhi, 1979).
63. Government of India, Ministry of Law, Just ice and
64.
Company Affairs, The Monopolies and Restrictive Trade Practices Act, Rules and Regulations,(New Delhi),1977; See also in United Nations Centre for Transnational Corporations(.U·NCTC), National Legislation and Regulations Relating to Transnational Corporations(New York),· 1983, pp.62-64.
The list was appended to a document government's decisions on industrial February 2, 1973; Government of India, Industries, (1979) Section II, pp.6-9.
introducing the policy, dated Guidelines for
141
illustrative list of industries65 in which foreign techno-
logical collaboration is allowed on payment of royalty or
technical fees by domestic companies.
The Industrial policy statement of 1980 makes
available to both foreign and domestic companies in a
large number of priority industries certain facilities for
automatic growth and for regularization of capacity built
in excess of the licensed capacity. Apart from these
three policy documents, there is the Industries (Develop-
ment and Regulation) Act of 1951 66 ' th.e main legal
instrument under which any significant industrial invest-
ment by either foreign or domestic company need a prior
industrial licence from the Central Government. Addition
ally, under the Sections of· 28 and 2967 of the Foreign
Exchange Regulation Act, any company in which non-resident
65. Committee on Public Undertakings (1975-76) (Fifth Lok Sabha), 89th Report, n.5o. pp.6-7.
66. c: f. : Under the provisions of the Industrial Development Act, it is obligatory for all manuf~turing
companies to obtain written permission from the government for (i) establishing a new industrial undertaking; ( i i) taking up the manufacture of a new article; (iii) substantially expanding the capacity of an industrial undertaking and (iv) changing the location of an existing manufacturing unit. For more details see Government of India, Guidelines for Industries (1979), Section I, p.5; See also in Jaya Narayan Vyas, Planning an Industrial Unit (New Delhi, 1985), pp.20-21.
67. Among the many provisions of the Foreign Exchange Regulation Act 1973, which at tempt to regulate the activites of MNCs, the notable sections are 26, 27, 28 and 29. Sect ion 29 gives wide powers to the RBI to regulate the activities of MNCs with foreign equity exceeding 40 per cent. For details see in UNCTC, National Legislation and Regulations Relating to Transnational Corporation (New York), 1983, op.57-58. ;also see in Nabhi Kumar Jain, Manual o:>U·abo~tion··and Foreigners (New Delhi, 1988), pp.15-23.
142
share holding is in excess of 40 per cent is subject
to some sort of regulation in respect of future expansion
and internal domestic trading. Ordinarily such companies
are required to have the major proportion of their turn-
over covered by the 19 priority ·industries. In order to
attract the foreign investment from the oil-exporting
developing countries, the government enunciated a signifi-
cant change in its foreign investment policy. The
government had decided that foreign investment from the
Oil Exporting Developing Countries (OEDC) 68 need not be
associated with the transfer of technology from the equity
holder, but such investments upto 40 per cent of the
equity may be of portfolio nature in new companies when
engaged in certain specified industries or activities. The
Industries (De~elopment and Regulation) Act of 1951,
provides for the development and regulation of industries
through licensing and registration of new industrial
undertakings, expansion and di~ersification of industries
called the "Scheduled Industries." The Act also empowers
the government of India to exe~pt certain industries from
the operation of the Act under certain circumstances, such
as small-seale operation involving less than 30 mi 11 ion
68. K.V. Iyer and L.K.Kumar, Foreign Collaboration in Industry Policies and Procedures (New Delhi, 1985), vol. 1, pp. EPI -43, Press Note dated July 28, 1980, Government of India, Ministry of Finance, Department of Economic Affairs, New Delhi.
143
rupees in land, building and machinery; those using
technology developed by national laboratories and medium
sized operations that do not require imported raw material
capital goods or foreign participation. Subsequent f~ci
lities were made by the former government which had set up
"Fast Track Mecltariism"69 in the Ministry of- Finance to
invite the foreign investment with slight modification in
the existing legislation through a special Ministerial
Committee. comprising of representatives from the Minist-
ries of Finance, Industry and External Affairs . under the
Chairmanship of Joint Secretary (Investments). This
committee takes up matters of policy procedure and
specific problems of foreign investors and pursues
them with the concerned ministries and departments. The
forme~ government had spelt out that the government policy
on foreign investment would still be practised on selec-
tive basis with the participation of ceiling on foreign
equity investment of 40 per cent and a higher percentage
gener.ally cons ide red for areas of high technology and
69. This mechanism provides a focal point for. discussing problems, investment related issues and for speci fie individual problems of companies, Monthly Newsletter, Indian Investment Centre, vol.26, no.10, October 25, 1989, p.112.
144
t . t t. 70 expor or1en a 1on. The former Prime Minister in his
inaugural speech had acknowledged the political role of
foreign investment towards its contribution to modernise
the economy and make it more competitive internationally
with having marketing links with the rest of the countries
Further1 former Prime Minister Mr. V. P. Singh had stressed
that,. "we do not propose to follow an open door policy of
eliminating all restrictions on foreign investment. We
will continue to be selective. There are certain areas of
the economy where we feel foreign investment is not neces-
sary. But there are large areas where it is welcome. As
a general role foreign investment should be limited to 40
per cent of equity. However, we are prepared to consider
high levels of equity investment in areas of high techno
logy or where there is a strong export orientation. " 71
The former government where considering was· of making the
policy more transparent and ensuring speedier. decision
regarding foreign equity participation, and would try to
70. Text of the speech delivered by Mr.Arif Mohammed Khari, Union Minister of Energy and Civil Aviation of 1990 Annual Meeting of the World Economic Forum at Da vos, Switzerland, 1-7 February, 1970, Reproduced in Monthly Newsletter, Indian Investment Centre, vol.26, no.2, February 25, 1990, p.16; see also in "Foreign Direct Investment in India", Reserve Bank of India' Bulletin, (Bombay), April 1990, pp. 259-60.
71. Excerpts from the inaugural speech of Mr. V.P.Singh, former Prime Minister of India, at the National Meeting on India, organised by the World Economic Forum and the Confederation of Engineering Industry (CEI) on 9th April 1990 at New Delhi. Reproduced in Monthly Newsletter, Indian Investment Centre, vol.27, no.5, May 25 1990, p.55.
145
ensure that approvals for equity investment
below 40 per cent are given on a near automatic basis. 72
UNCTC round table conference on "Foreign Direct Investment
and Transfer of Technology in India" was held on 15th and
16th March, 1990 in New Delhi. The Conference was
co-sponsored by the Indian Investment Centre, Federation
of Indian Chambers of Commerce and Industry, Associated
Chambers of Commerce and Industry of India and Confedera-
tioOn of Engineering Industry. Senior representatives of
twenty five foreign companies participated. Fifty
Indian companies were represented at the senior level.
Mr. R.N.Malhotra, Governor of RBI, Mr.A.N.Varma,Secretary
of Ministry of Industry, Mr. G.Balakrishnan, Executive
Director of Indian Investment Centre, had attended
the Conference. The then Union Finance Minister, Prof.·
Madhu Danda va te had made the inaugural speech with an
opening statement by Mr. Peter Hansen, Executive . Director
of UNCTC. The foreign participants pointed out the various
procedural difficulties they had to face for investing in
India and urged the government for simplification of pro-
cedures and removal of unnecessary control and to increase
~he present equity holding of 40 per cent to 51 per cent
amendment of FERA/MRTP Act. 73
72. Reproduced in "Liberation Lobby's At tempted Coup", B.M., in Economic and Political Weekly, (New Delhi),. vol.25, no.23, June 9, 1990, pp.1237-38.
73. Monthly Newsletter, Indian Investment Centre, vol.27, no.3, March 25, 1990, p.35.
146
Screening and monitoring of Foreign Investment
Applications for foreign investment are filed with
the Secretariat for Industrial Approvals (SIA) 74 within
the Ministry of Industry, which transmits the applications
to the departments concerned for comment, consolidates
them and submits a report to the Foreign Investment Board
(FIB). 75 The FIB (Foreign Investment Board)is the central
agency that screens foreign participation proposals. It
is composed of senior government officials in charge of
the departments of economic affairs, industry, commerce,
science and technology, • I
techn1cal development, legal and
company affairs and of the planning commission. The Board
is normally expected to render a final decision within 120
days from reeipt of an application.
74. Government of India, Press Note dated October 31,1973. Reproduced in Government of India, Ministry of ·Industry and Civil Supplies, Guidelines for Industries 1976-1977, (New Delhi), 1976, pp.82-84. See also UNCTC, National Legislation and Regulations Relating to Transnational Corporations (New York), 1983, p.57.
75. Iyer and Kumar, no.68, pp.EFP-9. FIB was set up on December 1, 1968 .. c. f.: The FIB was assigned the following jurisdiction "All the cases of foreign investment and collaboration will fall within jurisdiction of the Board. Even where the primary responsibility rests with the administra-
'tive ministry, the Board will have Supervisory ftmction in respect of the disposal of all applications and may deal with any individual application in the Board itself."
14~.
The Project Approval Board (PAB) 76 oversees and
co-ordinates the operation of the industrial approval
system. It also deals with a foreign investment proposal
when such a proposal is submitted as part of a composite
application seeking clearance in respect of several
things, such as industry licensing and foreign collabora-
tion simultaneously. The Indian government allows
foreign equity investment only if it is part of a foreign
technology acquisition proposal. Hence, FIB scrutinizes
whether the technology is needed and is appropriate . to
Indian conditions, whether the technology supplier has a
reputation and whether the terms and conditions are reason-
able. Foreign equity participation is more of an exception
than the rule, since outright purchase of technology
through lump-sum payments or limited duration royalty
arrangements, or, both are preferred to equity participation.
In determining the foreign investment either in the
form of technological collaboration or technological-cum-
fina,ncial collaboration, the following considerations are
taken into account:
(a) The status of the industry in the country.
(b) The need for further development and growth , of
the industry.
76. Jay Narayan Vyas, Planning an Industrial Unit (New Delhi, 1985), pp. 38-39.
148'
(c) The nature of the technology required and its level of
sophistication.
(d) The benefits to be derived from the continued associa-
tion of the foreign collaboration with the Indian
company.
(e) The possibility of sustained export of the products of
77 the technology to the world market.
The main requisites for Foreign Investment are as
follows:
I. An industrial licence under the Industries(Development
and Regulation) Act of 1951 issued by SIA upon application
filed in the form prescribed under the Registration and
Licensing of Industrial undertaking Rules 1952. Such a
licence is necessary, regardless of the amount of capital
involved for new investments in or expansions of the
following :
(i) foreign-controlled companies that is, subsidiaries
with more than 40 per cent foreign equity or a branch (ii)
undertakings whose assets exceed Rupees 200 millions
(iii) dominant undertakings as defined in the Monopolies
and Restrictive Trade Practices Act of 1969 (iv)industries
1 i sted in Schedule A of the Industrial Policy Resolution
of 1956 (v) specified industries including coal, power-
loom textiles, roller flour milling, oil seed crushing,
77. Text of the speech delivered by Mr.Arif Mohammed Khan, n.70, p.58.
149
matches, mill foods; alcoholic beverages; industrial gases,
leather hydro-genated vegetable oils; and AAC/ACSR conduc-
tors (vi) industries reserved for the small scale sector
(vii) operations requiring foreign exchange in excess of
Rupees 1. 5 million or 10 per cent of ex-factory value of
annual production of imported raw materials in any
one year, or, import of components in any one year after
th f t . 78 ree years o opera 1on.
While pending compliance· with other requirements
and conditions, foreign companies cail secure a letter of
intent (a provisional licence) that is valid for one year
and provides government approval of the project and autho-
rizes the foreign company to arrange for financing,
technical collaboration and other details within a
specified time.
II. Approval by FIB of the terms of the foreign invest-
ment (or collabora~ion) with the Indian partners.
The FIB considers two main points in approving a foreign
investment, namely, the percentage of foreign ownership
and the value to be assigned to the non..:cash equity cont-
ribution (e.g., technical know-how and services). Foreign
Exchange Regulation Act ( FERA) limits foreign, equity
participation to a maximum of 40 per cent except for
companies engaged in the "core industries" or which are
78. Ibid, p.58.
150
export-oriented, or companies which bring in new technology
non-cash contributions, such as patents, technical
know-how and services which are valued on a case-to-
case basis when they are exchanged for equity. The appro-
val of foreign investment (or collaboration) is valid for a
period of six months from date of issue. A copy of
the foreign investment- (or collaboration) agreement, as
approved by the Indian 79 government and signed by the
collaborating parties, is transmitted to the Reserve Bank
of India through the Ministry of Finance (Department of I
Economic Affairs) on the basis of which remittances to the
foreign investor (or collaborator) are authorized by the
Reserve Bank.
III. After a firm has obtained an Industrial Licen6e and
FIB approval, it may need the consent of the Controller of
Capital Issues for issue of a capital stock·. (or a no
objection certificate) under the capital issues (Control
Act ~f 1947), if the is~ue exceeds Rupees 2.5 million or a
take over is involved.
IV. Reserve Bank's approval is needed to issue securi-
ties to a foreign company in order to remit earnings and
repatriate capital.
79. UNCTC, National Legislation and Regulations Relating to Transnational Corporations (New York), vol.4, 1986, p.187.
151
V. If the equipment and machinery are to be imported
the Controller of Imports and Exports must issue importing
licences under the Imports and Exports (Control) Act of
1947.
VI. In certain cases, it is necessary for foreign
investor (or collaborator) to secure licences from state
and local government·s for land rental, electricity and
power rights. 80
In order to monitor the foreign investments, the
industrial policy statement of 24th July, 1980 had propo
sed the establishment of a data bank81 by which agencies
connected with the issue of letters of Intent and indust-
rial licences can follow up the progress of the various
licensed registered investment schemes.
Technology Transfer and Restricting Business Practices
India has no special law governing the transfer of
technology. Foreign investment (or collaboration) is the
channel through which the transfer of advanced and
sophisticated technology is made. Owing to the restrict-
ions on foreign ownership and expansions, most inter-
80. UNCTC,National Legislation and Regulations Relating to Transnational Corporations (New York), 1983,. p.59.
81. Annual Report 89/90, Department of Scientific and Industrial Research (Ministry of Science and Technology) p.62; c.f.: National Council of Applied Economic Research (NCAER) has complied and computerized data upto 1989 regarding the basic information of Indian foreign companies, products, duration of collaborations, nature and amount of payments involved,etc.
152
national companies are satisfied with licensing their
products in India. The procedure for approval of 1 icens-
ing agreements involving foreign equity or royalty
remittances abroad is the same as that for the approval of
foreign investment (or collaboration) involving foreign
capital, with the licensee filling the application
for licensing and technical assistance arrangements that
do not involve any foreign equity and whose cash royalties
and fees are within the established legal ceilings are
decided by the concerned administrative ministries. 82
Thus, the agreements relating to fertilizers and pesti-
cides are approved by the Ministry of Chemicals and
Fertilizers; those pertaining to mining, by the Ministry
of Steel and Mines; those involving industrial equipment,
by the Ministry of Industry; and those relating to elect-
ronics, by the Ministry of Electronics. Agreements
involving the royalty and fee remittance are reviewed by
the Reserve Bank of India and the Foreign Investment Board
(FIB).
MNCs Investment in India
The transfer of technologies by MNCs to the deve-
loping countries involves many forms of transfer.
Among these are Foreign Direct Investment (FDI) joint
82. UNCTC, National Legislation and Regulations Relating to Transnational Corporations (New York, 1983), p.65.
153
ventures, licensing, franchising, management contracts,
marketing contracts, technical service contracts and
international contracts. While the first two are distin-
guished by equity participation byMNCs, the others
generally do not involve such participation. However an
overlap of arrangements is often practised (for example,
joint ventures in combination with management contracts. 83
0 riginally, the MNCs prefer Foreign Direct Investment
( FDI) as the mode of transfer. Due to the various
investment legislation by the developing countries the
MNCs prefer to transfer the technology apart from Foreign
Direct investment. (FDI) by various other externalised
forms (that is, joint ventures and non-equity forms, in
the developing countries). 84
MNCs ~NVESTMENT IN INDIA
The MNCs operate in India mainly in two ways:
83. UNCTC, Transnational Corporations ih World Development: Third Survey, United Nations, 1983, sales no.E, 83. 11.A, 14, p.46; see also OECD, International Techno!Qgy Licensing: Survey Results, Paris, May 1987, pp.60-64.
84. For a detailed d icusion, see UNCTC, Transnational Corporations and Technology Transfer: Effects and Policy Issues, United Nations, 1987, sales no.E.87, 11.A.4, pp.17-29.
154
(a) Through the establishment of a place of business 85
i.e., a branch in India, and
(b) Through an I d . b . d. 86 n 1an su s1 1ary, i.e., a company
incorporated in India under the Companies Act, 1956 or
any earlier Companies Act.
Company Act
The subsidiaries have functioned either through
(a) collaboratlon in subsidiaries
(b) collaboration with minority capital
(c) participated through technical collaboration
85. The relevant section namely section 591 of the Companies Act 1956 reads as follows: 591(1) section 592 to 692, both inclusive, shall apply to all foreign companies that is to say, companies falling under the following two classes, namely; (a) Companies incorporated outside India which, after the commencement of the Act, established a place of business with India; and (b) Companies incorporated outside India which have, before the commencement of this Act, established a place of business with Iqdia at the commencement of this Act.
86. Section IV of the Companies Act 1956, says: 4 (1) For the purposes of this Act, · a Company shall, subject to the provisions of sub-section (2) be deemed to be a subsidiary of another if, but only if, (a) that other controls the composition of its Board of Directors, or; that other (i) Whether the first mentioned Company is an existing
Company in the respect of which holders of preference shares issued be fore the commencement of this Act have the same voting rights in all respects as the holders of equity shares, exercises or controls more than half the total voting power of such Company;
(i i) where the first mentioned compaoy is any other company, holds more than half in n9rmal value of its equity share capital, or
(iii) the first mentioned company is subsidiary of any company which is that other's subsidiary.
155
In order to increase the flow of capital and
technology transfer, foreign collaborations were allowed
in sopistica ted and high priority areas, in export
oriented or import substitution, manufacturing or for
enabling indigenous industry to update existing technology
in India to meet efficiently domestic requirements
and to become competitive in the export market. Foreign
Investment is viewed as a vehicle for transfer of techno
logy~ The normal ceiling for foreign investment is 40 per
cent of the total capital but a higher percentage of
foreign equity can be considered in priority industries if
the technology is sophisticated and not available in the
country, or, if the venture is largely export oriented
foreign equity of higher levels can also be considered on
the merits of specified projects on 100 per cent export
oriented units. In the case of foreign equity share upto
100 per cent, the foreign capital share should be fully
contributed by way of cash without being linked to tied
imports of machinery and equipments
how, trade markets e. tc. payment
royalty or lumpsum payments.
or payment
in the form
Foreign Investment Through Subsidiaries
for· know
of annual
Historically, Foreign Investment in India was
mostly associated with subsidiaries of MNCs. A subsidiary
is a company incorporated in India (rupee capital) in the
hand.s of a single foreign company. The implementation of
156
Foreign Exchange Regulation Act (FERA) was basically
designed as a mandatory measure to achieve the industria-
lisation of wholly owned foreign companies.
According to the Foreign Exchange Regulation
Act ( FERA) guidelines, the principal rule was that all
branch~s of foreign companies· operating in India should
convert themselves inte Indian Companies with at least 60
per cent local equity participation. Furthermore, all
foreign subsidiaries should bring down the foreign
equity share to 40 per cent or less per cent. Exceptions I
to these rules were, however, companies exporting at least
60 per cent of their total production. Such companies could
retain foreign equity shares above 40 per cent. The guide-
lines originally provided for only two. levels of foreign
equity, namely, 74 per cent and 40 per cent. Later, in
order to be more flexible, the government decided to
introduce a level of 51 per cent. This level of foreign
equity was permitted in cases. where the company had a
turnover of at least 60 per cent in core sector activities .,··
and exporte~ at least 10 per cent of their production. The
same level of 51 per cent was applicable to the companies
exporting at least 40 per cent of their production, irres-
pective of the share of core sector activities. In extreme
cases of 100 per cent export oriented units, the foreign
157
87 equity share could even increase to 100 per cent.
MNCs Investment in Lndia -Countrywise Description
The number of foreign subsidiaries has been
constantly declining in the past to the provision of FERA.
From a total of 77 subsidaries as on 31.3.1985, the number
declined to 74 during 1985-86 since 3 foreign subsidiaries
ceased to do so. 88 But with the identification of
4 more companies as foreign subsidiaries during 1985-86,
the number rose to 78 as on 31.3.1986. During 1986-8789
companies ceased to be subsidiaries of foreign I ' compan1es
due to dilution of shareholding of the foreign holding
companies while only one company had become subsidiary of
a foreign company during the year under review, thus
registering a downward trend in the terms of number to 71
as on 31st March; 1987. During 1987-88, six companies
ceased to be subsidiaries of foreign companies mainly
87. c. f. These guidelines wiil apply to· Indian Companies having more than 40 per cent foreign holdings and branches of foreign companies operating in India while seeking approval for carrying on any activity of a trading, commercial or industrial nature or for starting fresh activities. P.S. Sangal, National ~nd Multinational Companies:Some Legal Issues (Bombay, 1981), pp.424-32.
88. Company News and Notes (New Delhi), vol~25, no.7,1990, pp.l-2.
89. Ibid, vol.26, no.7, October 1988, p.l.
NO. OF FOREIGN SlTBSIDIARIES OPERATING IN INDIA (1 985 - 1988)
40
(f) w [£
30 ~ Q Vi IIJ :J (f)
u_ 0 20 0 z
10
U.K U.S.A 'S'ZERLANDW.GERMANY SWEDEN CANADA PANAMA. HONGKONG LIBERIA
I:Z:2] 31 .3.85 COUNTRY OF INCORPOR.A.TlON OF HOLDING CO.
!S:Sl 31.3.86 (ill 31.3.87 ~ 31.3.88
158
again due to dilution of share holding of the foreign
companies to less than 50 per cent, bringing the total
number of these companies down to 65.90
(See Table 2.1)
foreign subsidiaries of UK based companies registered a
Table 2. 1
Number of Foreign Subsidiaries Operating in India (1985-88)
Sl. Country of Incorpora- As On As On As On As On No. · tion of the holding 31.3.85 31.3.86 31.3.87 31.3.88
Company
1. U.K.(a) Wholly owned subsidiaries
(b) Others
Total
2. USA (a) Wholly owned subsidiaries
(b) Others
Total
3. Switzerland
4. West Germany
5. Sweden
6. Canada
7. Panama
8. Hong Kong
9. Liberia
Grand Total
14
34
48
3
11
14
5
4
3
2
1
77
Source Department of Company Affairs.
90. Ibid, vol.27, no.7, p.l.
13 11 12
36 33 29
49 44 41
3 2 1
12 10 9
15 12 10
4 4 4
4 4 4
3 3 3
1 1
1 1 1
1 1 1
1 1
78 71 65
159
down ward trend from 44 as on 31.3.87 to 41 as on 31.3.88.
Similarly, the number of USA based companies had also
declined form 12 to 10 during the same period. The
UK based companies Constituted 63.08 per cent of the
total number of subsidiaries while USA based companies
accounted for 15.39 per cent as on .31. 3.1988. These two
companies alone put t-ogether accounted· for 78.47 per cent
of the total number of foreign subsidiaries operating in
India as on 31.3.1988.
Table2.2 shows the distribution of • branches of foreign
companies according to their industrial activity.
It would be seen that as on 31.3.1986, 15 out of the 78
foreign subsidiaries were engaged in tea industry. 91 The
next large concentration was in Commerce group in which 11
foreign subsidiaries were engaged. The remaining 52
companies were dispersed in various activities, of which
44 were in manufacturing and processing activities. A
compa-rison between the number of foreign subsidiaries as
on 31.3.1985 and 31.3.1986 shows that two companies en
gaged in Tea Plantations and one each engaged in the manu
facturing of chemicals and Electronic goods were added to
the list of foreign subsidiaries and one company in the
pharmaceutical industry ceased to be foreign subsidiary
during the year under review. 92 In 1987, the total number
91. Ibid, vol.25, no.3, September 1987, pp.2-3.
92. Ibid.
DISTRIBUTION OF FOREIGN SUBSIDIARIES
V'J w
~ 0 Vi tD :::) V'J
u.. 0 . 0 z
35
30
25
20
15
10
5
fZ2::1 31.3.85
IN INDIA (198!5 - 1 988)
AGRI MINING PROCESSING CONST. COMMERCE COMMUNITY PERSONAL
lSSJ 31.3.86 INDUSTRY
IZ2Zl 31.3.87 ~ 31.3.88
160
Table 2_d
The Distribution of Foreign Subsidiaries in India {1985-1988}
Sl. Industry Number of Subsidiaries as on No. 31.3.85 31.3.86 31.3.87 31.3.88
1. Agriculture and Allied 13 15 14 14 activities of which (i) Tea 13 . 15 14 14
2. Mining and Quarrying 1 1 1
3. Processingand .. Manufacturing 44 44 40 36 of which
i) Motor Vehicles and -Parts 1 1 1 1
ii) Manufacture of electrical 9 9 10 10
iii) Manufacture of explosive 1 1 1 1 and fireworks
iv) Manufacture of Aluminium Ware 2 2 2
v) Medical and Pharmaceuticals 9 8 5 4 prep.
vi) Cosmetics and Toilet prep. 2 2 2 2
vii) Miscellaneous 21 18
4. Construction 1 1 1 1
5. Commerce (Trade and Finance) 12 11 10 10
6. CommUnity and Business Services 4 4 3 3
7. Personal and Other Services 2 2 2 1
Total 57 57 73 65
of foreign subsidiaries witnessed a continuous fall to 40
and further to 36 in 1988 in the main industrial group -
"Processing and Manufacturing." 93 Of the 65 foreign subsidi-
aries as on 31.3.1988, 14 were engaged in tea industry followed
93. Ibid, vol.27, no.7, January 1990, p.2.
161
by "Commerce Group" in which 10 foreign subsidiaries were
engaged. Six companies
(b) Aluminium ware (2),
(1), (d) Machinery goods
engaged in (a) Coal Mining (1),
(c) Medical and Pharmaceuticals
( 1) and (e) personal and other
Services (1) ceased to be subSidiaries during 1987-88 due
to diluti~n of foreign equity capital to below 50 per cent
in these companies.
A study into the extent of foreign share holdings
in Indian subsidiaries reveals that while two . companies
reduced their foreign share holding during 1985-86 to
below 50 per cent resulting into the companies ceasing to
be foreign subsidiaries, the extent of foreign share hold
ings in the companies which still continue to be foreign
subsidiaries increased marginally from 54.6 per cent as on
31.3.1985 to 55.4 per cent as on 31.3.1986, as the four
companies which were identified as foreign subsidiaries
had relatively large foreign share holding. The analysis
shows that there was an increase in the foreig11 share
holding during 1985-86 in the case of subsidiaries
of UK and Switzerland based companies. Further, the
inclusion of one subsidiary of Hongkong based company in
the 1 i st has a 1 so resulted in the increase in the overa 11
foreign share holding. 94 The foreign equity participation
was in the range of 50-70 per cent in the case of half of
94. Ibid, vol.25, no.3, September 1987, p.2.
162
the foreign subsidiaries ( 39 out of 78 companies) and in
the range of 70-80 per cent in the case of slightly more
than one fourth (twenty one companies). Sixteen companies
representing 21 per cent of the total number of foreign
subsidiaries, were wholly owned by their foreign princi-
pals as on 31.3.1986. These were relatively small
sized companies. The~r paid-up capital and Assets accoun
-ted for only 0. 29 per -cent each of the respective para-
meters of all- the for_eign subsidiaries. The extent of
foreign shareholdings in the foreign subsidiaries was
55.4 per cent as on 31st March 1987 showing no chance
compared to the previous year, and the,re by revmling a
marginal increase in the case of subsidiaries of UK and
USA based companies. As regards the range of foreign
equity participation, the analysis reveals that there were
13 wholly owned foreign subsidiaries as on 31st March 1987
accounting for 18.31 per cent of the total number of
foreign subsidiaries. There were also 35 foreign subsidi-
aries having foreign equity in the range of 50 to 70 per
cent and another 21 foreign subsidiaries in the range of
70 per cent to 80 per cent. On the other hand there were
only 2 foreign subsidiaries having foreign equity in the
95 range of 80 per cent to 100 per cent.
95. Ibid, vol.26, no.7, pp.l-2.
EQUITY HOLDING BY FOREIGN COMPANIES
U.K. U.S.A S'ZRLAND W.GERMANY SWEDEN CANADA PANA~~A HONGKONG LIBERIA
tz::zJ 31 .3.85 COUNTRY OF INCORPORATION
cs:sJ 31.3.86 ~ 31.3.87 ~ 31.3.88
163
Table 2.3 shows the equity holding by foreign
companies as compared to 55.40 per cent as on 31.3.1987,
and the extent of foreign share holding in Indian subsi-
diaries was only 55.1 per cent as on 31.3.1988. There was
Table 2.3
Equity Holding by Foreign Companies
Country of Percentage Share of Foreign Holding Com-Incorporation of panies in Paid-up Capital of Indian the foreign Subsidiaries as on holding Company 31.3.1985 31.3.1986 31.3.1987 31.3.1988
UK 55.1 55.1 56.2 55.1
USA 56.1 56.1 57.4 57.5
Switzerland 56.3 62.5 62.5 59.1
West Germany 51.1 51.1 51.1 51.2
Sweden 52.3 52.3 52.0 52.0
Canada 50.5 50.5 50.5
Panama 59.9 59.9 59.7 60.0
Hong Kong 76.6 76.6 76.0
Liberia 68.9 75.6
Average 54.6 55.4 55.4 55.1
Source: Department of Company Affairs.
also a marginal fall in the foreign share holdings during
1987-88 in the case of subsidiaries of UK based companies
while in the case of USA based companies, the percentage
of foreign holding slightly improved. Besides, in
164
the case of one Liberian company, there was a noticeable
increase in the foreign share holdings to more than
5 per cent during the year under review. As regards the
range of foreign equity participation, the analysis
revals that there were 13 wholly foreign subsidiaries as
on 31st March 1988 accounting for 20.0 per cent of
the total number of foreign subsidiaries. There w~re also
31 foreign s_ubsidiarie~ having foreign equity in the range
of 50 per cent to 70 per cent and another 21 foreign
subsidiaries in the range of 70 per cent to 80 per cent
(see Table2.3). 96
B. (i) Number of Foreign Collaborations Approved, Selected Countries, 1970-88
The countrywi~e break-up of the collaborations
approved with major MNCs home countries is shown in figure
I. The table reveals fluctuations and patterns for most
of the countries similar to those observed with respect to
the total number of collaborations. The significant
increase of the Japanese firms towards the .number of its
agreement rose steadily after 1981. The closer scrutiny
of the individual agreements indicates that the fluctua-
tions may be attributed to a comparatively small number of
' technical-cum-financial collaborations,while the continued
increase in the number of agreements concluded, reflects a
96. Ibid, vol.27, no.7, pp.l-2.
165
predominant preference among Japanese firms for non-
financial forms of . 97 cooperation. Product wise,
the area test number of collaboration agreements has been
authorised in respect of industrial machinery followed by
electrical equipment and chemicals other than fertilizers.
A cross tabulation of major countrywise and productwise
break up reveals that the collaborations have been concen-
tra ted in sectors which are technology intensive even by
international standards. 98
(ii) Number of Foreign Collaborati~ns Approved and their Distribution Between Technical and Financial Collaborations
After the enactment of FERA AND MRTP Act there had
been a steady increase of approvals involving more
than 151 millions from 1984 onwards. In 1988 the total
financial collaboration amount had .been 282.0 mi 11 ions.
The foreign collaborators had viewed the Indian economic
environment less attractive than other developing count-
ries. This was ~ainly due to redtapism and delay and -the
ceiling of 40 per cent of foreign equity holding.
97. Based on Information in Indian Investment Directory of Foreign Collaborations in India Japan '(New Delhi, 1987), vol.4 A (1981-84).
Centre, India/
98. Sharif Mohamed, "Multinationals in Indian Big Bus iness," Journal of Development Economics, vol.13, pp. 45-48; See also L. Hoffman, "Technology Transfer and Investment European Community and India," Joint Report on the European Community I India Project on the Problems and Perspectives of the Transfer of Technology Between Firms in the European Community and India (Berlin), 1984, p.2.
NO. OF FOREIGN COLLABOR~'-\ TIONS APPR0\7ED SELECTED COUI'JTRIES 1970.,.-t39
200 ~- I'"
190
180
170
160
150
- v f -t
~ ---
[/) 140 z 0 130 ~ 120 a:: 0 110 ID
5 100 ..J 0 90 0
- ,.
- •' .•
.... ·
~ - '
-' l -
'.' ' - • •' ' '
lJ... 80 - f. ' I
' 0
0 70 - ,·'
z 60 -50 -· '
40 -30 - '
20
10
0
- f.; I'-
~ ~ ~ § ~ ~ -~ '
- .. '
~ '
' -
1970197119 721973197 4197519761977197819791 980198119821.98 31984 i 9851986198 719881989
YEARS .. lZ:ZJ IJ S.A.
J7777] rR,~ ~r .... ;:
(I) z 0
~ ~ 0
~ 8 u.:. 0
0 z
NO. OF FOREIGN COLLABORATIONS APPROVED SELECTED COUNTRIES 1970-89
120 ~------------------------------------------------------------------~
110 -
100-
90 -
eo -
70 -
60 -
50 -
40-
30 -
I
....... ~
l""i'-. vr--;....
V"-~ /
V"-/ I
70 71 72 73 74 75 76 77 78 79 80 81 82- 83 84 85 86 87 88 89
lZ:Z) ITALY YEARS
(:s:sJ SWISS ~ JAPAN
Year
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
166
Table 2.i_
Number of Foreign Collaborations Approved, Selected Countries, 1970-1989
USA UK FRG France I t a 1 y 3.vi tzer lan::l
33 39 36 7 8 13
43 55 42 16 4 14
62 38 49 14 8 15
48 53 60 13 5 10
79 59 71 22 16 33
55 54 59 13 10 27
69 54 58 17 8 22
54 59 55 14 10 23
59 61 58 21 13 18
48 63 55 17 16 14
125 110 100 24 25 38
85 79 74 23 18 26
110 107 110 28 37 41
135 119 129 40 30 47
147 126 132 38 37 30
197 147 180 61 56 42
189 130 183 39 58 32
196 122 149 44 50 31
191 134 178 42 53 41 '
127 66 112
Source: Indian Investment Centre.
Japan
15
35
27
38
28
23
10
20
28
12
34
27
51
58
78
108
111
71
96
62
VI z 0
~ 0
~ d 0
z (!)
w a:: f2 "'-0 . 0 z
NO. OF FOREIGN COLLABORATIONS APPROVED AND THEIR DISTRIBUTION BETWEEN TECHNICAL AND FINANCIAL COLLABORATIONS
800~------------------------------------------------------~
700
600.
!500
400
300
200
100
1981 1982 1983
I2:ZJ TECHNICAL
1984
YEAR
1985 1986
[SSJ FINANCIAL
1987 1988
167
Table 2.5
Sectors of Concentration in India's Foreign Collaboration by Major Countries
USA UK FRG FRANCE ITALY SWITZERLAND JAPAN
Electronics X X X
Industrial Machinery X X X X
Auto Auxilliaries X X
Chemicals X X X X
Machine Tools X X X
Tele Communications X
Source: Indian Investment Centre.
Table 2.6
Number bf Foreign Collaborations Approved and Their Distribution Between Technical and Financial Collaborations
Financial
S.No. Year Technical Financial Total Rs. Per-centage
1. 1981 332 57 389 15 2. 1982 477 113 590 19 3. 1983 544 129 673 19 4. 1984 601 151 752 20 5. 1985 786 238 1024 23 6. 1986 717 240 957 25 7. 1987 610 242 852 28 8. 1988 644 282 926 30
Total for 8 Years 4711 1452 6163 24
Source: Indian Investment Centre.
X
X X
X
X
Foreign Invest-ment(Rs. Million}
109 628 619
1130 1261 107Q 1077 2398
8292
V) z 0
·~ ~ 0
~ ....J
8 Lr.. 0
0 z
MAIN AREAS OF FOREIGN COLLABORATIONS APPROVALS DURING 1985' -90
210 ~--------------------------~------------------------------, 200 190 180 170 160 150 1 +O 130 120
110 100
90 80 70 60
50 40
30 20 10
0 ~~~~~-U~~~~~~~~~--~~~~--~~~~~~~~~
1984-85 1985-86 1986-87 1987-88 1988-89 1989-90
fZZ] ELEC CSSI IND. YEARL.._ ~ CHEM ~ CERA
If) z 0
~ a:: 0
~ ()
Lt.. 0
0 z
MAIN AREAS OF FOREIGN COLLABORATIONS APPROVALS DURING 1985-90
400
300
250
200
150
100
~0
1984-85 1985-86 1986-87 1987-88 1988-89 1989-90
YEARS LZZI IND .. cs::SJ MACH. ~ METAL ~ OTH
Tab1e2.7
Ma-in Areas of Foreign Collaboration AJ2J2rovals During 1985-90
Electrical Industrial Chemical Ceramics Industrial Machines Metal Other Total Year Equipment Machinery (other Investment Tools Indus- Indus- No. of
than tries tries Approvals fertili-zers
P2 ~22 ~32 ~42 ~52 C62 C72 C82 C92 P02
:! II:!.:!
1984-85 157 138 69 15 56 34 26 257 752 ......
1985-86 205 152 69 27 52 32 53 434 1024 0)
CXl
1986-87 175 108 107 20 20 13 45 469 957
1987-88 183 133 84 18 47 10 29 349 853
1988-89 183 141 96 20 43 21 27 395 926
1989-90 99 59 66 18 35 9 30 252 605
TOTAL 1022 731 491 118 253 119 210 2156 5117
Source: Compiled by the Scholar from Annual Re12ort, Ministry of Industries.
0 0 0 t<J -t>-
U.S.A.
U.K.
F.G.R.
Japan
Switzerland
France
Italy
~ ( Nether lands ~ ~ Austria 8 ~
c...
Sweden
~ J 1-i
trJ (/l
Denmark
Canada
Belgium
G.D.R.
Czech,oslovakia
Finland
Yugoslavia
Hungary
Poland
NO. OF FOREIGN COLlABORATIONS (Thous~nds)
0 {1'1
0 01 t'J -t>- {Jl 01
N t<J t<J
N .. -t>-
I
~ 0 ~ M H
c;l z 0 0
~r {_~
~> 8td ~0 ~~ ~> 0~ 'H
I jj 0 ,_ z (;)z U)UJ. Ul '-.,)
~~ -.J~
1:j
~ 0 < trj tJ tJj
K!
Other Countrie~--------------~~~----------------------------------~
169
Table 2.8
Foreign Collaborations Approved by Major Countries During 1957-87
S.No. Country (Numbers)
1. United States of Amercia 2280
2. United Kingdom 2284
3. Federal Republic of Germany 2058
4. Japan 1041
5. Switzerland 613
6. France 569
7. Italy 490
8. Sweden 243
9. Netherlands 212
10. Austria 114
11. Denmark 109
12. Canada 97
13. Belgium 92
14. German Democratic Republic 169
15. Czechoslovakia 96
16. Finland 41
17. Yugoslavia 32
18. Hungary 54
19. Poland 41
20. Other Countries 835
Source: Indian Investment Centre.
Ul z 0
~ 0 Q)
~ (.)
I.&. 0
0 z
NO. OF FOREIGN COLLABORATION AGREEMENTS
700
600
~00
400
JOO
200
100
APPROVED DURING 1970 -88
70 71 72 73 74 7~ 76 77 78 79 80 81 82 83 84 85 86 87 88
YEARS 0 FINANCIAL + TECHNICAL
170
Table 2.9
Number of Foreign Collaboration Agreements AJ2J2roved 1970-1988
Cases Involving Cases Involv- Total Year Financial ing Technical Number of
Participation Participation cases a22roved
1970 32 151 183
1971 46 199 245
1972 3Q_ 221 257 '
1973 :3-4_ 23~ 265
1974 55 304 359
1975 40' 231 271
1976 39 238 277
1977 27 240 267
1978 44 263 307
1979 32 235 267
1980 6$ 461 526
1981 57 332 389
1982 113· 477 590
1983 129 544 673
1984 151 601 752
1985 238 786 1024
1986 240 717 957
1987 242 610 852
1988 282 644 926
Source: Indian Investment Centre.
MAJOR DEVELOPED COUNTRYWISE BREAKUP OF FOREIGN INV. APPROVED DURING 1981-90
2.6
2.4
2.2
2
1.8
- 1.6 VI-J: "'
~§ 1.4 en z :)
1.2 - 0 .~
VII-~- 1 ........
0.8
0.6
0.4
0.2
0
USA FRG JAPAN FRANCE UK ITALY
IZZI 80-81 cs:sl 81-82 COUNTRY ~ 82-83 ~ 83-84
MAJOR DEVELOPED COUNTRYWISE BREAKUP
-(1)-J: 01
~§ z ~ - 0
·.f:. (1)1-a::--
12
11
10
9
a
7
6
4
2
1
~ 84-85
OF FOREIGN INV. APPROVED DURING 1981 -90
USA FRG
[SSJ 8~-86
JAPAN
COUNTRY ~ 86-87
FRANCE UK
~ 87-88
ITALY
~ 88-89
Table 2.10
Major Developed Countrywise Break-up of Foreign Investment Approved During 1981-90
{Ru12ees in lakhs2
1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 Total
U.S.A 224.80 503.29 1389.21 894.97 3992.49 2936.91' 2951.49 9713.73 6215.59 28822.48
F.R.G. 541.74 353.45 484.23 284.49 1180.80 2015.73 986.92 3099.90 12032.85 20980.11
Japan 64.50 2511.18 1607.70 615.22 1567.62 561.61 690.62 1742.58 877.93 10238.96
France 62.00 '258.03 79.50 121.80· 235.50 204.82 535.35 1177.97 845.69 3520.66 .....
U.K. 71. 18 165.44 980.10 181.26 370.65 771.53 845. 10 1390.75 3295.40 8071.41 ....:j .....
Italy 4.00 398.90 115.00 77.00 694.75 232.95 297.07 2786.74 690.44 5296.85
Source: Annual Reports, Ministry ~f Industries.
172
YOD~S OF TECHNOLOGY TRANSFER IN INDIA
There are a variety of different formal and infor-
mal, or direct and indirect mechanism through which
technology is 99 transferred. The mechanism of formal
transfer is generally differentiated according to the
. d.egree of packing, . tl1.e most packaged being the direct
forei.gn. inves-tment .. and least the direct purchase of
machinery ldesig;n or. b¥:::.. hiring directly. foreign technicians.
The import of techno~)?gy is a tightl~ knit "bundle" of
elements consisting of product designs,' process know-how,
technology embodying inputs, skills, patents, trade mark
and other marketirig rights accompariied by ownership
capital and management as in a foreign subsidiary gives
the technology suppli~.r the absolute control. This form
,of· import of technology may entail relatively higher cost
to the host developing country. Transfer of technology
takes place largely through the licensing of patent and
other rights to industrial property, together with
agreements for sale of know-how, international: transac-
tions take place on a wide scale, and although most·
transfers take place between the developed countries
themselves, it is understood that 10 per cent occur
between developed and developing countries.
99. C. Cooper and F. Sercovich, Channe 1 s and Meehan ism for Transfer of Technology from Developed Countries ( New York , N . Y . , 19 7 9) , no . T 0 I A C I 11 - 5 , p p . 3 0- 3 5 .
173
In the Indian context, three formal mechanisms of
transfer can be distinguished based on the descending
degree of packaging and foreign control, viz., (i) foreign
direct investment (branches and subsidiaries), (ii) joint
ventures . with foreign minority participation, and
(iii) wholly-owned Indian Enterprises with foreign techni-
cal collaboration~ The first two types obviously involve
foreign financial investment along with technology
transfer.. The Indian policy approach, as stated earlier,
has become over time to block increasingly foreign owner-
ship control and to import technology in less packaged .
forms such as outright purchase of technology, import of
design and drawings and consul tancy servl.ces on merits,
rather than methods that involve ongoing relationship of
dependence.. As can be seen from Table 11, those cases
involving financial participation in the total approvals
declined over time, especially with the enactment of
Foreign Exchange Regulation Act, which required foreign
enterprises in Indi~ to reduce their ownership stake up to
40 pE~r cent or less except in the case of sophistica t'ed
areas of technology, or, where the technologies are
available only from few sources in the world or where t_he
operation is primarily for export markets. Thus, a
number of foreign majority owned companies were converted
into joint ventures. Foreign minority participation and
fresh foreign investment was generally allowed to get
174
Table 2.11
Number of Foreign Collaboration Agreements
Total Number Cases Involv- Financial
Year of Cases ing foreign Collaborations
Approved Capital Percentage Participation Total Approval
1948-55 284 1956 82 1957 81 --1958 103 1959 150 1960 380 1961 . 403 --- 165 41.0 ·-
1962 298 124 42.0 1963 298 115 39.0 1964 403' 123 31.0 1965 241 71 30.0 1966 202 49 24.0 1967 182 62 34.0 1968 131 30 23.0 1969 134 29 22.0 1970 183 32 17.0 1971 245 46 19.0 1972 257 36 14.0 1973 265 34 13.0 1974 352 55 16.0 1975 277 40 14.0 1976 282 39 14.0 1977 267 27 10.0 1978 307 44 14.0 1979' 267 32 12.0 1980 526 76 14·. 0 1981 389 56 14.0 1982 591 115 19.0 1983 673 129 19.0 1984 754 151 20.0 1985 1024 238 23.0 1986 958 240 25.0 1987 852 242 28.0 1988 926 282 30.0
Source: Indian Investment Centre.
175
established as joint ventures with foreign minority
participation. The number of foreign branches at opera t-
ion declined from 561 in 1969-80 to 315 by 1980 and simi-
larly, foreign subsidiaries declined in number from 223 in
1969-70 to 125 by 1979-80. 100
In short, technological collaboration agreements
became the major formal mechanism . for the transfer
of technology. The total collaboration cases approved by
the Government from 1957 up to the end of December 1987
numbered 11470. These collaboration agreements have taken
different forms depending upon the terms of the transfer
of technology.
The first category may cover arrangements under
which parent foreign companies transfer technology
to their branches in India. This form of transfer of
technology, however, does not form part of collaboration
agreements. In such agreements, transfer from. the
parent company to a branch is implicit rather than
'1 ... t 101 exp 1c1 •.
The second category of the mode of technology
transfer is covered by cases in which foreign multi-
national corporations have their subsidiaries incorporated
in India, with majority or sometimes cent per cent. equity
100. Company News and Note, September 1982.
101. United Nations Conference on Trade and Development, 'A Report by the Secretariat,' An International Code of Conduct on Transfer of Technology (New York), sales no.E.75.D.15, 1975.
176
holdings. So
would transfer
it is obvious that
its technology to
parent multinational
its subsidiary in
India which occurs in implicit form.
The difference between the first and second
category is that, in the latter case, the parent company's
subsiqiary is incorporated in India, and is treated as a
company. under the Indian Company Law. In the first
case, howe ver, a branch is not in corpora ted in India but
is trea t'ed as a business C()!lnection of the parent multi
national company operating under Indian laws. These cate
gories of companies had hitherto been comparatively
free from the control of the Indian Laws, but now they
come under the provisions of Income-Tax Laws of 1961 and
the Foreign Exchange Regulation Act of 1973.
The third type of technology . import arrangement
involves a collaboration agreement between Indian and
foreign collaborators.
(a) Technical-cum-financial collaborations under
technology suppliers are treated
of creditors. These technology
normally invest in cash, but
as partners
suppliers
are allowed
shares in lieu of payment for technology.
which
instead
do not
equity
(b) Pure technical collaborations under which technology
is imported under debt arrangements from foreign
collaborators.
177
The fourth type of arrangement is the collaboration
under which a foreign party extends assistance in the
form of loan and equity capital combining the above(a) and
(b) under third type referred above.
The fifth type of arrangement denotes a technical
collaboration between foreign and domestic firms, which
covers a variety of i terns either by the,msel ves or together
with equity participation~ These agreements referred to
the acquisition of patents and licences or other forms
of production and technical know-how, including drawings I
and specification; and/or to arrangements for pre-invest-
ment. services, plant construction and problem-solving
processes. Thus, technical collaboration agreements refer
to the purchase of patents and licences and the whole
"array" of pre and post-construction ,services, and depend
on specific nature of know-how imported under the blanket
title of "technical collaboration agreements." The
period and quan~um of payment depends upon the quality and
depth of the imported technology.
The aforesaidis abrief discussion of the conceptual
and policy issues relating to transfer of technology by
the MNCs. The modes and methods of technology transfer in
Indian context, especially the licensing and collaboration
agreements have been hlghlighted. The next ch~pter car-
ries this discussion further by identifying and describing
the institutional channels laid dow~ by the government for
promoting technology generation, transfer and its absorption.