Chapter II

MNCs AND TECHNOLOGY TRANSFER IN INDIA

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.