LEARNING TO INDUSTRIALIZE

Also by Sanjaya La/1

PRIVATE FOREIGN MANUFACTURING INVESTMENT AND MULTINATIONAL CORPORATIONS: An Annotated Biblio­graphy

FOREIGN INVESTMENT, TRANSNA TIONALS AND DEVELOPING COUNTRIES (with Paul Streeten)

THE GROWTH OF THE PHARMACEUTICAL INDUSTRY IN DEVELOPING COUNTRIES

THE MULTINATIONAL CORPORATION: Nine Essays DEVELOPING COUNTRIES IN THE INTERNATIONAL

ECONOMY: Selected Papers DEVELOPING COUNTRIES AS EXPORTERS OF TECHNOLOGY THE NEW MULTINATIONALS: The Spread of Third World

Enterprises (with E. K. Y. Chen, J. Katz, B. Kosacoff and A. Villela) MULTINATIONALS, TECHNOLOGY AND EXPORTS THEORY AND REALITY IN DEVELOPMENT: Essays in Honour

of Paul Streeten (editor with Frances Stewart)

Learning to Industrialize

The Acquisition of Technological Capability by India

Sanjaya Lall University Lecturer in Development Economics Institute of Economics and Statistics and Fellow, Green College, Oxford

M MACMILLAN PRESS

© Sanjaya Lall 1987

All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright Act 1956 (as amended), or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 7 Ridgmount Street, London WClE 7AE.

Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages.

First published 1987

Published by THE MACMILLAN PRESS LTD Houndmills, Basingstoke, Hampshire RG2l 2XS and London Companies and representatives throughout the world

British Library Cataloguing in Publication Data Lall, Sanjaya Learning to industrialize: the acquisition of technological capability by India. I. Technological innovations- India 2. India -Industries I. Title 338.4'567'0954 HD45 ISBN 978-0-333-43376-8 ISBN 978-1-349-18798-0 (eBook) DOl 10.1007/978-1-349-18798-0

The World Bank does not accept responsibility for the views and interpretations in this book, which are those of the author and should not be attributed to the World Bank or to its affiliated organisations. The findings and conclusions are the results of research supported by the Bank; they do not necessarily represent official policy of the Bank. The designations employed and the presentation of material in this document are solely for the convenience of the reader.

With love and hope to Maya and Priya, our daughters

Contents

List of Abbreviations Preface and Introduction

1 The Analytical Framework

1.1 What is 'technological capability'? 1.2 What TC comprises 1.3 How TC may arise 1.4 Costs and benefits of TC 1.5 Conclusions: some limitations

2 The Policy Setting

2.1 Introduction 2.2 Trade policies 2.3 Industrial policies 2.4 Science and technology policies

3 The Sample Background

3.1 Introduction 3.2 Manufacturing firms 3.3 Consultants

4 Cement

4.1 Technological background 4.2 Cement manufacturing in India 4.3 TC in a cement manufacturer 4.4 TC in two cement equipment firms 4.5 TC in a consultant 4.6 Conclusions

5 Steel

5.1 Technological background 5.2 Iron and steel manufacturing in India 5.3 TC in the public sector plants 5.4 TC in a private sector plant 5.5 Two metallurgical consultants 5.6 Conclusions

vii

ix xi

1

1 3

11 20 21

23 23 24 29 32

38

38 39 50

52 52 53 57 63 69 73

75

75 77 85 93

100 108

viii Contents

6 Textiles

6.1 Technological background 6.2 The textile industry in India 6.3 Textile machinery production in India 6.4 TC in two leading textile producers 6.5 TC in two textile equipment manufacturers 6.6 TC in a small consultant 6. 7 Conclusions

7 Special Case Studies

7.1 Hindustan Machine Tools 7.2 Bharat Heavy Electricals Limited 7.3 Hindustan Lever: a multinational affiliate 7.4 Bajaj 7.5 TELCO 7.6 Engineers India Limited 7.7 Summary and Conclusions 7.8 Appendix: BHEL's list of technology exports

110

110 111 119 121 127 139 141

144 144 152 161 170 175 183 188 191

8 India's Acquisition of Technological Capability: A Synthesis 193

8.1 Introduction 8.2 The technological setting 8.3 Some constraints on the three industries 8.4 Technological capabilities in the three sectors 8.5 The special case studies 8.6 Consultancy enterprises 8.7 Achievements and failures

193 195 197 200 217 224 226

9 Conclusions: General Implications for Industrialization 230

9.1 Introduction 9.2 Significance of technological learning 9.3 Nature of the learning process 9.4 Limits to TC in developing countries 9.5 Impact of government policies

Notes

References

Index

230 230 233 238 239

242

242

250

List of Abbreviations Names of Firms (In Alphabetical Order)

Manufacturers

ACC ABL Bajaj BD BHEL HL HMT LMW Reliance SAIL Star TELCO TIS CO WIL

Consultants

Bhagwati DC Dastur ElL MECON

Associated Cement Companies Limited Associated Babcock Limited Bajaj Auto Limited Bombay Dyeing and Manufacturing Company Limited Bharat Heavy Electricals Limited Hindustan Lever Limited Hindustan Machine Tools Limited Lakshmi Machine Works Limited Reliance Textile Industries Limited Steel Authority of India Limited Star Industrial and Textile Enterprises Limited Tata Engineering and Locomotive Company Limited Tata Iron and Steel Company Limited· Walchandnagar Industries Limited

Bhagwati Associates (Private) Limited Development Consultants (Private) Limited M.N. Dastur and Company (Private) Limited Engineers India Limited Metallurgical and Engineering Consultants Limited

Other Acronyms

CSIR FERA MNC MRTP NIC QC R&D RM

Council of Scientific and Industrial Research Foreign Exchange Regulation Act Multinational Corporation Monopoly and Restrictive Trade Practices Act Newly Industrializing Country Quality Control Research and Development Raw Material

ix

x List of Abbreviations

S&T Science and Technology TC Technological Capability TE Technology Exports TNC Transnational Company

Preface and Introduction

The ability to understand, deploy and improve upon technology is the essence of industrial development. This has been long accepted for the industrially developed countries. The significance of technological progress for developing countries has not, however, been properly appreciated. Perhaps it has been assumed that it is relatively easy for industrial late-comers to learn techniques which have been fully assimilated elsehere. Perhaps it is due to the neglect of 'minor innovation' which characterizes the study of technology more gener­ally.

Whatever the explanation, it is becoming clear with recent research that technological development in the Third World is an important, complex, and highly differentiated phenomenon. It is important because it constitutes the basis of successful industrial growth by the NICs (newly industrializing countries), as revealed by their produc­tivity increases or penetration of international markets. It is complex in that it is neither easy nor automatic. It requires not just a base of skilled technical manpower, but deliberate, often risky, strategies of investing in learning and innovating. It is differentiated because it is highly sensitive to the economic policy environment. As such, differ­ent developing countries show very different rates of technological competence, and different degrees of success in exploiting that com­petence in industrial development.

This book is concerned with the acquisition of technological capabilities in India. It draws upon the findings of a research project on 'The Acquisition of Technological Capability', financed by the World Bank. The project (RPO 672-48) was directed by Carl Dahl­man and Larry Westphal, and covered four newly-industrializing countries. Apart from India, these were South Korea, Brazil and Mexico. The research started in 1982 and spanned nearly three years. There was an earlier phase of this project which covered exports of technology. The findings of this phase were published under my editorship in the May/June 1984 issue of World Development.

Each country was studied by different researchers, following a similar methodology and using identical questionnaires. Each covered four common industries- cement, iron and steel, pulp and paper, and textiles- but also included particular case studies which appeared to be of special interest in terms of technological development. The

xi

xii Preface and Introduction

Indian study initially covered 22 enterprises in total, 16 manufactur­ing firms and 6 consulting engineers. For the purposes of this book, the pulp and paper industry was dropped, since many of its findings were similar to those of the other industries. Thus, this book deals with the experience of 14 manufacturers and 5 consultants.

The book falls into three parts. The first comprises chapters I to 3, and provides the background to the study. Chapter I sets out the analytical framework: the concepts used in the study may not be familiar to many economists, and so merit explanation. Chapter 2 describes the policy setting in which technological development took place. Not very surprisingly, policy interventions in a highly regulated economy like India's assume disproportionate significance in deter­mining the pace, nature and success of technological development. A brief chapter cannot deal fully with the intricacies of Indian policies, but some understanding is essential to the exposition of the detailed micro-studies. Chapter 3 gives some background information on the sample firms.

The next 4 chapters present the findings on technological develop­ment. Chapters 4 to 6, dealing in turn with cement, steel and textiles, begin with a thumbnail sketch of recent technological developments and government policy in the relevant sector. They go on to analyze how technological capabilities were developed, why they succeeded or failed, and how they compare with world technological levels. Chapter 7, on special case studies, has a slightly different format. Relevant policies and technological factors are described as part of the analysis of each firm's experience.

Chapters 8 and 9 attempt to synthesize these findings and draw implications of wider relevance. The reader who is interested in the broad themes of technological and industrial development can com­bine these chapters with the analytical framework (chapter 1) and the conclusions to the industry chapters to capture the essence of the study. The detailed industry studies have a wealth of findings which the general student of industrialization should find of interest.

One of the lightest of burdens a researcher carries is to acknowledge the many debts he has accumulated during the preparation of a study. The foremost debt in this case is institutional. The Development Research Department of the World Bank sponsored the fieldwork on which this book is based, and generously gave permission for me to use the findings for publication in this form. However, the Bank bears no responsibility for the views expressed here.

The evolution of my thinking on Indian technological development

Preface and Introduction xiii

was influenced greatly by interaction with the researchers responsible for the other country studies. Alice Amsden and Linsu Kim (who jointly worked on South Korea) and Francisco Sercovich (on Brazil) provided many valuable insights. Carl Dahlman, who studied Mexico and was the project coordinator at the World Bank, and Larry Westphal, Chief of the Bank's Productivity Division, where this project was launched, were a constant source of stimulus, encourage­ment and comment. The success of the entire project in this relatively uncharted territory is due largely to their endeavours. Needless to say, none of these people is responsible for the interpretations I have placed on the evidence from India.

Simon Teitel of the Inter American Development Bank, which participated in sponsoring the Brazil study, was among the first economists who recognized the significance of indigenous technologi­cal effort in developing countries. His perceptive criticisms were very helpful in clarifying ideas and concepts. In the early stages of the project, Jorge Katz, a pioneer in research on firm-level technological change in Latin America, gave advice and guidance. The analytical framework testifies to the extent to which I drew upon the ideas of these scholars.

A number of people helped with the execution of the India project in its various phases. Rajiv Kumar, Ritu Kumar and Mohammad Saqib provided research assistance in India. Hamid Alavi at the World Bank collected background industrial data on all the countries studied. The Delhi office of the World Bank gave access to some of its documents and helped in conducting some of the fieldwork. The Indian Council for Research on International Economic Relations, New Delhi, was my base for a sabbatical year when I worked on this project (and others). To everyone who worked there, and in particular its Chairman, K. B. Lall, my thanks. Ashok Desai, who knows more about Indian technology than anyone else, gave generously of his ideas and knowledge.

I also wish to express my gratitude to all those in the Indian government and business enterprises who spent their precious time to further the interests of research. It would not be appropriate to name them here individually. However, their cooperation and candour­and, at times, their warm hospitality- was vital for this study. The benefits for me went far beyond the requirement of the research project. They included a far better understanding of the working of the Indian industrial system, of its richness and vitality and, sadly, of its frustrations and wastes. At a personal level, they encompassed

xiv Preface and Introduction

opportunities to visit and learn about the country of my birth after a long absence from it. I hope that this study, critical though it is of Indian policies on industrialization, will assist others in the under­standing of one aspect of the complex economics of that country.

Over the years that this project has run, a great deal of secretarial effort has gone into typing (and retyping) the various drafts. My grateful thanks are due to Gillian Coates, Caroline Wise, Caroline Baldwin, Melanie Mather, Sybil Owen and Nicola Ralph at the Institute of Economics and Statistics in Oxford, to Deepa Sachdeva and Rajini Mathur at the Indian Council for Research on Inter­national Economic Relations in New Delhi, and to Diane Bayus at the World Bank.

Finally, the constant encouragement and moral support which my wife, knowingly, and our children, unwittingly, provided were the bulwark without which this effort would not have come to fruition.

SANJAYA LALL